mgt3303 michel leseure supply chain management mgt3303 reading: chapter 7

MGT3303Michel Leseure

Supply Chain Management

MGT3303

Reading: Chapter 7


Learning Objectives

• Understand the meaning and importance of supply chains

• Understand the strategic issues in supply chain management

• Understand the operational challenges, solutions, and techniques of supply chain operations


Example of a Supply Chain

1. Suppliers2. Manufacturer3. Wholesalers 4. Retailers, e-commerce


ExampleDirection of flow of demand

Direction of flow of product

Tier-II Suppliers

Tier-I Suppliers

Manufacturers

Distribution Centers

Retailers Customers

E-tailers

Typical Supply Chain Structure


Supply Chain

Customers

ManufacturingSuppliers

Warehousing


Supply Chain Examples

It takes a box of cereal 3+ months from factory to supermarket.

Efficient Consumer Response (ECR) initiative - estimates $30 billion opportunity by streamlining grocery supply chain

Matching supply and demand: “Boeing lost $2.6 billion in Oct. 97 due to raw

material, internal, and supplier shortages…” (W.S.J., 10-23-97)

Supply chain management is closely tied to strategic partnerships and logistics

Cross-docking logistics & inventory practices at Walmart helped them beat Kmart)



• Efficiently integrating suppliers, manufacturers, warehouses, and customers so that products are produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.– every player in the system has to be considered

– minimize costs across the system

– efficient integration includes all activities from strategic to operational level

– information flow is upstream (from retailer to supplier), but product flow goes downstream

• Notion of Demand Chain Management



SupplyChain

Management

Supply Chain Design

Supplier Selection

Purchasing

Relationship Management

Logistical Management

SupplyChain

Performance


Key Issues in Supply Chain Management

• Dependence– customers depend on suppliers in terms of

punctuality of delivery, quality, reliability, etc.– How can this dependence be managed?

• Relationship/Trust– By opposition to a contractual relationship– What is a good approach?

• Effectiveness/Productivity– Supply chain performance– Comparative advantage– Key issue of responsibility/equity


Key Issues in Supply Chain Management

• Integration– How can one co-ordinate independent

companies with:• Secretive corporate cultures

• An orientation toward competition

• Different perceptions of operations (i.e. inventory)

• Bargaining power• System dynamics:

– Bullwhip effect


Bullwhip Effect

Demand propagates from the lower levels of the supply chain (consumer end) to the upper levels (supplier end).

Unfortunately, variability does the same and is amplified by each echelon of the chain. Terms for this include

Information distortion Bullwhip Effect

Modest movement at the whip handle (representing consumer demand fluctuations) leads to wild swings at the whip’s tip (demand experienced by the supplier). Bullwhip cracks are loud because of the Doppler effect (e.g. as seen visibly in a boat’s wake) which generates a small sonic boom as the whip tip breaks the sound barrier at about 800 mph. The supply chain bullwhip crack can be heard through bankruptcy filings as vulnerable suppliers and manufacturers experience deadly cash flow variability.


Procter & Gamble

P&G Pampers disposable diapers - best selling product

sales of the product at retail stores were fluctuating, but the variabilities were not excessive. Reason & data suggest that diaper sales should be fairly constant because birth rate is constant over a year!

orders placed by the distributors to P&G exhibited a much greater variability

P&G orders to supplier, 3M, had even greater swings and variability!


The Bullwhip Effect


Causes of the Bullwhip Effect

Demand Forecast Updating Order Batching Price Fluctuations & Promotions Shortage Gaming (Inflated orders during

shortages) Others:

Long lead times (increase variability) Ineffective IT or lack of partnerships keep everyone

starved for real, consistent information


Current Trends in Supply Chain Management

• Strategic Sourcing (Single sourcing)– Reduction of the number of suppliers– Centralisation and optimisation of data/decisions– Virtual communities

• Strategic alliances– long term commitment, open book, profit sharing,

exchange of workers

• Integration of linkages:– Project managers– EDI, Internet– ERP with SAP


Supply Chain System Design

• Several management decision models• Extensions of the traditional accounting

make or buy decision frameworks

SuppliersPerform ance

ExternalEnvironm entInterna l

Perform ance

M ake orBuy D ecision

Perform anceIm provem ent

Interna lExternal

Benchm ark


Transaction Cost Theory

AssetSpecific ity

Frequency

TransactionU ncerta in ty

G overnanceS tructureD ecision

M in im iseTrasaction

C osts

BoundedR ationality

& O pportun ism


Core Competencies Theory

C om petenciesC haracteristics

IndustryS tructure

& Supply Base

C oreC om petency

D ecision

S trateg icC om petitiveness

FutureEvolution

w ith inIndustry


Supply Chain System Design

C om petenciesPotentia l

(order w inner/qualifier)

C om petitivePressure

S trateg icR isk

O utsourc ing D ecis ions

G overnance D ecis ion

C o-ord ina tion R equ irem ent

S ystem D esign D ecis ions

Strateg icR ole

Im pact onC om petitive

Position(R ivalry)

C urrentP ractices

M arketS ignals

U niqueness

O utsourcingD ecis ion

(R eta in in terna lly vs.O utsource)

To co-ord inationrequ irem ent

TransactionC osts

N eed forAdaptation

AssetSpecific ity

C o-ord inationR equirem ent

P rocessM aturity

Know ledgeC ontro l

Frequency

Econom ies o fSca le

Econom ies o fScope

U ncerta inty

SpecificD esign

C haracteristics

R isk inexchange

rela tionsh ip

C ustom erIn tegrity

C ustom erC o-ord ination

N eeds S trateg icVulnerability

InventoryPolicy

D em andVola tility

Supply BaseC haracteristics

Politica l, legal, &environm enta l

factors

Inte

nsit

y of

rel

atio

nshi

p

H igh

Low

P ro po rtio ns o f wo rk ca rried out inte rna lly 00% 100%

P erip hera l ac tiv ity, no b enef itin ret a in ing it.

T he market is challen g ing

Extreme imp o rtanc eand co re co mp etence.

C oop erate w itho ut ab and o ning the ac tiv ity

C ap ac ity subco ntrac ting in cas e o f high d em andif the mark et d eliver

required c harac teris t ic s .

Ab and on partly and b uild s trong relat io ns h ip .M arket less challeng in g

No s trategicimp o rtanc e and c halle ng in gmark et

arm’s length imp erso naltransac tio ns

inte ns ive fo rm o f coo peratio n

P 1

P 3

P 4

P 2

Results in theelaboration of a co-ord ination trajectory

diagram

C o-ord inationR equirem ent(Tra jectory)

C om petitivePressure

O utsourcingC osts

C ostFeasib ility

C ostBenefits

fromO utsoucing

Investm entPerform ance

G overnanceD ecis ion

M arketH ierachy

Hybrid

To system designdecisions

AcquisitionC ost In terna l

P roductionC ost

Externa lF inancia l

Perform ance

Interna lR eturn

on investm ent

C apita lR ation ing

F ixed vs.variab le

costs

O utsourcingTactic

Activ ity i

D em andon System

Portfo lioS tructuring

D ecis ion

Classify activities perclusters

TieringD ecis ions

Should governancebe direct or m ediated

O rganisationD ecis ions

ExistingO rganisation

& C ulture

BusinessP lanningD ecis ions

PurchasingM anagem ent

SystemD esign

Purchasingorganisation


Logistical Management

• The operational management of the supply chain• Similar in most respect to standard operations

management– Quality management, planning and scheduling, etc.– But increased importance of co-ordination

• Role of IT systems, especially ERP

– Looking for optimal solutions and practices– Unique features:

• Standardisation and specifications• Purchasing management / Procurement

– E-procurement• Transportation Management


Specifications

• The task of detailing precisely the characteristics of the product/service to be purchased

• Usually as an appendix to a contract– Strict legal liability – not such thing as a

fuzzy specification

• Use of standards reduce the cost of specifications

• An example of a transaction cost


Procurement


Purchasing Management

• How should problems/delays be dealt with?– Penalties– Increased communication, collaboration– Switch supplier– Multiple sourcing


Transportation Management

• Network design– More a strategic issue

• Mode selection– Which mode of transport

• Rail, air, road, water, etc.

– Which routes• Transportation method


SCM – Part III

Transportation Method


Transportation Method

500

800

700

500

400

900

200

*

*

*

*

*

*

*

Belgium

Germany

Netherlands

The Hague

Amsterdam

Antwerp

Nancy

Liege

Tilburg

Leipzig

Miles

100500

Source

Destination


Transportation CostsTo Destination

From Origin Leipzig Nancy Liege TilburgAmsterdam 120 130 41 59.5Antwerp 61 40 100 110The Hague 102.5 90 122 42

Unit transportation costs from harbors to plants

Minimize the transportation costs involved in

moving the motors from the harbors to the

plants


Transportation Model

Autopower Transportation ModelUnit Cost From/To Leipzig Nancy Liege Tilburg

Amsterdam 120.0$ 130.0$ 41.0$ 59.5$ Antwerp 61.0$ 40.0$ 100.0$ 110.0$ The Hague 102.5$ 90.0$ 122.0$ 42.0$

Shipments From/To Leipzig Nancy Liege Tilburg Total Available

Amsterdam - - - - - 500Antwerp - - - - - 700The Hague - - - - - 800Total - - - - - Required 400 900 200 500

Total Cost From/To Leipzig Nancy Liege Tilburg Total

Amsterdam -$ -$ -$ -$ -$ Antwerp -$ -$ -$ -$ -$ The Hague -$ -$ -$ -$ -$ Total -$ -$ -$ -$ -$


Building a Solver Model

• Tools | Solver…– Set Target Cell: The cell holding the value

you want to minimize (cost) or maximize (revenue)

– Equal to: • Choose Max to maximize or Min to minimize this

– By Changing Cells: The cells or variables the model is allowed to adjust

In the Transportation spreadsheet that’s G19 - the total transportation cost

In the Transportation spreadsheet we choose Min to minimize transport cost

In the Transportation spreadsheet that is C9:F11 - the Shipment volumes


Building a Solver Model

• Subject to the Constraints: – The constraints that limit the choices of the values

of the adjustable cells

– Click on Add• Cell Reference is a cell that holds a value calculated from

the adjustables

• Constraint is a cell that holds a value that constraints the Cell Reference.

• <=, =, => is the sense of the constraint. Choose one

In the Transportation spreadsheet for example, G9 is the total volume shipped out of Amsterdam

In the Transportation spreadsheet for example, H9 is the total volume we can ship out of Amsterdam

<= in this case. Don’t ship more than we have in AMS


What are the constraints?• Supply Constraints

– Amsterdam: G9 <= H9– Antwerp: G10 <= H10– The Hague: G11 <= H11

• Demand Constraints– Leipzig: C12 => C13– Nancy: D12 => D13– Liege: E12 => E13– Tilburg: F12 => F13

Short cut: G9:G11 <= H9:H11

Short cut: C12:F12 => C13:F13

C12 is the total volume shipped to Leipzig

G9 is the total volume shipped from Amsterdam


The Model


SolutionTransportation Model

Unit Cost From/To Leipzig Nancy Liege TilburgAmsterdam 120.0$ 130.0$ 41.0$ 59.5$ Antwerp 61.0$ 40.0$ 100.0$ 110.0$ The Hague 102.5$ 90.0$ 122.0$ 42.0$

Shipments

From/To Leipzig Nancy Liege Tilburg Total AvailableAmsterdam - - 200 300 500 500Antwerp - 700 - - 700 700The Hague 400 200 - 200 800 800Total 400 900 200 500 2,000 Required 400 900 200 500

Total Cost

From/To Leipzig Nancy Liege Tilburg TotalAmsterdam -$ -$ 8,200.00$ 17,850.00$ 26,050.00$

Antwerp -$ 28,000.00$ -$ -$ 28,000.00$

The Hague 41,000.00$ 18,000.00$ -$ 8,400.00$ 67,400.00$

Total 41,000.00$ 46,000.00$ 8,200.00$ 26,250.00$ 121,450.00$


Suggested Homework

• How developed are supply chain management practices in Morocco? Describe:– The extent to which outsourcing takes place– The state of the art of logistical and transportation

management– The factors that hinder transportation management

effectiveness

• Is transaction cost theory relevant in the case of Morocco?

• Problem 7-1, p. 313

mgt3303 michel leseure supply chain management mgt3303 reading: chapter 7

Documents

mgt3303 michel leseure

supply chain consumer

importance of supply

kmart slide

ecommerce slide

suppliers warehousing

bullwhip effect slide

suppliers tier