ch078

Chapter 7Supply Chain Management

Chapter 7: Supply Chain Management

Introduction


Palm Inc.During the year 2000, Palm Inc. was selling every PDA (computerized Personal Digital Assistant) that wasnt nailed down.In the last few years, Palm has developed a strategic supply chain management function.They have gone from doing business with hundreds of suppliers to developing deep relationships with only a few suppliers


Palm Inc. continuedThe secret to driving the cost so low was working closely with their suppliers to hit tight cost targets for the display, the processor, the memory, the battery, and the mechanicals.The result of their new strategic emphasis on supply chain management has been a 20-30 percent reduction in materials costs and a 27 percent reduction in overall costs, an increase in inventory turns from 3 to 22, and a 30 percent increase in profit margins.


B2B Networks and Private ExchangesB2B Online MarketplacesPrivate ExchangesHPAce HardwareIBM


B2B Online Internet MarketplacesWhen the Internet revolution began, a number of organizations rushed to establish B2B online marketplaces for entire industries including steel, automobile manufacturing, and electronics. More recently, however, a number of firms including HP, IBM, and Wal-Mart created their own private exchanges (also called corporate marketplaces).


B2B Online Internet Marketplaces continuedThese links allow the parties to collaborate and manage the supply chain in real time. Ace Hardware provides another example. Ace's motivation for the development of its system was the desire to manage its inventory more efficiently and be able to collaborate with suppliers in real time.


B2B Online Internet Marketplaces continuedAce used its supply chain management software to link the computer systems located in its 14 distribution centers with nine suppliers. IBM's system provides links to over 20,000 of its suppliers.IBM further estimates that it realized almost $400 million in savings that year due to the increased efficiency of its Web-based procurement system.


Dell ComputerDirect ModelUse of Information Technologyprovides suppliers with access to Dells inventoriesMinimum Inventory Levels


Dell ComputerClassic case in supply chain management.Established in 1984, Dell experienced supply problems in 1993 and thereupon completely redesigned its supply chain process along the lines of what its founder, Michael Dell, called the direct model. Between 1993 and 1998, Dell's earnings subsequently grew at 65 percent per year.


Dell Computer continuedDell's supply chain redesign was based on the following elements. First, Dell sells directly to customers, eliminating the wholesaler and retailer.Second, Dell also takes advantage of new information technologies in their communications with suppliers who can access Dell's component inventories, production plans, and forecasts in real time and thus keep their production precisely matched to Dell's needs. Third, Dell deliberately maintains absolute minimum inventory levels at every stage of production, averaging 4 days overall


Supply Chain Management CrusadeFocus is on entire value chainIncludeslean productionJITTQMpurchasingproduct/service design


Defining Supply Chain ManagementCoordination and integration of all supply chain activities into seamless process.Enables organizations to plan and collaborate across supply chain.Goal is to deliver right product to right place at right time in order to maximize profit.


Strategic Advantages of Supply ChainSupply chain management includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between its environment.Goal of supply chain management is to integrate the entire process of satisfying the customers needs all along the supply chain.


Strategic Advantages of Supply Chain Management continuedSupply chain costs often represent 50% or more of total operating costsFirms that have implemented supply chain managementHave 45% supply chain cost advantage50% lower inventory17% faster delivery of final productLarger market shares and higher customer loyalty


Supply Chain StrategySupply chain strategy needs to be tailored to meet the needs of its customers which isnt always the lowest cost.In situations where the goods are basic commodities with standard benefits (food, home supplies, standard clothing), then cost reduction will be the focus. In fashion goods, timeliness should be the focus of the supply chain.


Strategic Need for Supply Chain Management Total supply chain costs represent better than half, and in some cases three-quarters, of the total operating expenses for most organizations.The broader concept of the supply chain includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between it and its environment.


Strategic Need for Supply Chain Management continuedAs organizations have continued to adopt more efficient production techniques such as lean manufacturing, total quality management, inventory reduction techniques to reduce costs and improve the quality, functionality, and speed of delivery of their products and services to customers, the costs and delays of procuring the requisite inputs and distributing the resulting goods and services are taking a greater and greater fraction of the total cost and time.


Other Factors Driving Need to Better Manage Supply ChainIncreasing global competitionOutsourcingE-commerceShorter life cycles Greater supply chain complexity


Measures of Supply Chain Performance Lower inventories, will be reflected in less need for working capital (WC) and a higher return on asset (ROA) ratio.Lower cost to carry these inventories will be seen in a reduced cost of goods sold (CGS), and thus a higher contribution margin, return on sales (ROS), and operating income.


Operations-Oriented Measures Performance measures related to inventory reduction:First we calculate the aggregate inventory value (at cost) on average for the year (AAIV):

AAIV = raw materials + work-in-process + finished goods% Assets in Inventories = AAIV/total assetsAnother inventory measure is the inventory turnover (or turns, as it is sometimes called):Inventory turnover (turns) = annual cost of goods sold/AAIV


Supply Chain Design The supply chain consists of the network of organizations that supply inputs to the business unit, the business unit itself, and the customer network.


The Supply Chain


Logistics


LogisticsPlanning and controlling efficient, effective flows of goods, services, and information from one point to another.


The Bullwhip EffectEach segment further down the whip goes faster than the one above it.Same effect often observed in supply chains.


Transportation


Modes of Transportation and RoutingWaterRailTruckAir


Factors to Consider in Transportation DecisionsCost per unit shippedAbility to fill the transporting vehicleTotal shipment costSafety of contentsShipping timeAvailability of insurancePerishability

Difficulty of arranging shipmentDelivery accommodationsSeasonal considerationsConsolidation possibilitiesSize of product


LocationBesides distributing outputs to customers by transporting them, if there is a facilitating good, we can also locate where our customers can easily obtain them. Advances in information and telecommunications technology have allowed some pure service organizations (i.e., those without a facilitating good) to reach their recipients through phone, cable, the Internet, or microwave links.


Trade-offs Between Transportation and Location Processing Natural ResourcesLarge loss in size or weight during processingHigh economies of scale existRaw material is perishableImmobile Outputs


Processing Natural Resources Organizations that process natural or basic resources as raw materials or other essential inputs to obtain their outputs will locate near their resource if one of the following conditions holds:There is a large loss in size or weight during processing.High economies of scale exist for the product.The raw material is perishable.


Immobile Outputs The outputs of some organizations may be relatively immobile, such as dams, roads, buildings, and bridges. The organization locates itself at the construction site and transports all required inputs to that location


Distribution Requirements Planning The distribution process is illustrated on the next slide where retailers order from local warehouses, the warehouses are supplied from regional centers, and the regional centers draw from the central distribution facility, which gets its inventory directly from the factory.


Distribution Requirements Planning (DRP)


Purchasing/Procurement


PurchasingActivities to reliably obtain materials by the time they are needed in the product supply process.Important considerations include price, quality, lead times, and reliability.Manufacturing organizations spend an average of 55 percent of revenue for outside materials and services.These same organizations spend only 6 percent on labor and 3 percent on overhead.


Purchasing Versus ProcurementPurchasing implies a monetary transaction.

Procurement is simply the responsibility for acquiring the goods and services the organization needs.


Potential for Lowering Cost and Increasing Profits Total sales = $10,000,000 Purchased materials = 7,000,000 Labor and salaries = 2,000,000 Overhead = 500,000 Profit = 500,000


To Double Profits ...Increase sales by 100 percentIncrease selling price by 5 percentDecrease labor and salaries by 25 percentDecrease overhead by 100 percentDecrease purchase cost by 7.1 percent


JIT and PurchasingWidespread use of JIT has increased importance of purchasing and procurement since delays in the receipt of materials will stop a JIT program dead in its tracks.


Differences Between Purchasing by Individuals and OrganizationsOrganizations purchase larger volumes and dollar amounts.Organization may be larger than its suppliers.Very few suppliers exist for certain organizational goods, whereas many typically exist for consumer goods.Certain discounts may be available to organizations.


Value Analysis A special responsibility of purchasing, or purchasing working jointly with engineering/design and operations (and sometimes even the supplier), is to regularly evaluate the function of purchased items or services, especially those that are expensive or used in high volumes. The goal is to either reduce the cost of the item or improve its performance.


Key Elements of Effective PurchasingThey leverage their buying power.They commit to a small number of dependable suppliers.They work with and help their suppliers reduce total cost.


Supplier Management


Supplier Selection and Vendor Analysis Characteristics of a good supplier are: Deliveries are made on time and are of the quality and in the quantity specified.Prices are fair, and efforts are made to hold or reduce the price.

Able to react to unforeseen changes.Supplier continually improves products and services.Supplier is willing to share information and be an important link in the supply chain.


Supplier Relationships In the past, most customers purchased from the lowest bidders who could meet their quality and delivery needs.Customers are seeking a closer, more cooperative relationship with their suppliers.


Supplier Certification and Audits Sole-sourcing arrangements are becoming virtual partnerships with the customer.This means longer-term relationships.Suppliers are being certified or qualified so that their shipments do not need to be inspected by the customerthe items go directly to the production line.


Outsourcing and Global Sourcing Outsourcing is the process of contracting with external suppliers for goods and services that were formally provided internally.Global sourcing is an important aspect of supply chain outsourcing strategy and we see it occurring more and more.


Primary Reasons Outsourcing Occurring1. The fall of communism and the economic insulation it had maintained.2. The advent of telecommunications and computer technology that physically allowed work that previously had to be done locally or regionally to now be conducted overseas. Outsourcing in general is a major strategic element of SCM these days, not just for production materials but for a wide range of services as well.


The Role of Information Technology in Supply Chain Management


Role of Information TechnologyIn the not-too-distant past, the primary means of communication between members of a supply chain was paper. One problem with paper-based systems has been the time and money that is wasted re-keying the same information into different computer systems. Much of this problem has been solved with UPC and RFID being used extensively.


Role of Information TechnologyMore and more computing power is becoming available for less and less money, hence it is becoming omnipresent, appearing everywhere we go and in everything we buy.Growth of networks.As a result the growth of computers, which support networks, and networks that support peoples needs (business transactions, communication, blogging, etc.), has exploded.


Electronic Business (e-business) is the use of electronic information technology to help various groups of business people communicate and conduct business transactions. Three primary advantages:enhanced productivity and reduced costs Speedcreation of new value opportunities


E-CommerceTraditional means of communication was paperElectronic commerce is a term used to describe a variety of approaches for conducting business in a paperless environmentElectronic Data Interchange (EDI)Bar Coding and ScanningDatabasesEmailElectronic funds transferInternetPoint of sale terminalsERP systemsRFID


InternetThe most significant information technology development for supply chain management.The Web will be the global infrastructure for electronic commerce.The Web will allow various forms of purchasing fulfillment to take place, from placing electronic catalogues on a Web site to holding joint purchasing bazaars, exchanges, and auction marketplaces involving massive amounts of materials


Intranets Web-based networks that allow all employees of a firm to intercommunicate.They are usually firewall protected and use existing Internet technologies to create portals for company-specific information and communication, such as newsletters, training, human resource information and forms, product information, and so on.


Extranets Private networks to allow the organization to securely interact with external parties. They use Internet protocols and public telecommunication systems to work with external vendors, suppliers, dealers, customers, and so on.


Customer Relationship Management (CRM) SystemsDesigned to collect and interpret customer-based data.CRM systems provide comprehensive customer data so the firm can provide better customer service and design and offer the most appropriate products and services for them.


Enterprise Resource Planning (ERP) Systems Facilitate communication throughout the supply chain and over the Internet. The ERP system embodies much more than just the supply chain, it also includes all the electronic information concerning the various parts of the firm.


Successful Supply Chain Management The basic requirements for successful supply chain management are trustworthy partners, good communication, appropriate performance measures, and competent managers with vision.


Examples of Visionary SCM Innovations Dells direct model and Palms strategic sourcing.

Wal-Marts cross-docking technique of off-loading goods from incoming trucks at a warehouse directly into outbound distribution trucks instead of being placed into inventory.delayed differentiation where final modules are either inventoried for last-minute assembly to customer order, or differentiating features are added to the final product upon receipt of the customers order.


Examples of Visionary SCM Innovations continuedSport Obermeyers and Hewlett-Packards postponement approach to delayed differentiation where variety and customization is delayed until as late in the production process as possible, sometimes even arranging with the carrier to perform the final customization (called channel assembly).


CopyrightCopyright 2006John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.


ch078

Documents

Transcript of ch078