reid & sanders, operations management © wiley 2002 supply chain management 4 c h a p t e r

Reid & Sanders, Operations Management© Wiley 2002

Supply Chain Management 4C H A P T E R


Learning Objectives

• Describe supply chains and SCM• Describe the bullwhip effect• Describe SCM factors• Describe the role of vertical integration• Solve insourcing or outsourcing problems• Describe the role of purchasing in SCM• Describe the role of information sharing in SCM• Describe the technologies used in information sharing• Describe how to implement SCM• Describe the role of warehouses in supply chains• Describe trends in SCM


What is a Supply Chain?

• A network of activities that deliver a finished product or service to the customer.– The connected links of external suppliers,

internal processes, and external distributors.


Components of a Typical Supply Chain

ExternalSuppliers

InternalFunctions

ExternalDistributors

INFORMATION


A Basic Supply Chain


Supply Chain Management

• Supply Chain Management entails:– Coordinating the movement of goods and

delivery of services. – Sharing information between members of

the supply chain. • For example: sales, forecasts, promotional

campaigns, and inventory levels.


Supply Chain for

Milk Products


External Suppliers

• External suppliers provide the necessary raw materials, services, and component parts.

• Purchased materials & services frequently represent 50% (or more) of the costs of goods sold.

• Suppliers are frequently members of several supply chains – often in different roles.


External Suppliers

• Tier one suppliers:– Directly supplies materials or services to the firm that

does business with the final customer

• Tier two suppliers:– Provides materials or services to tier one suppliers

• Tier three suppliers:– Providers materials or services to tier two suppliers


Internal Functions

• Vary by industry & firm, but might include:– Processing– Purchasing– Production Planning & Control– Quality Assurance– Shipping


Logistics & Distribution

• Logistics: getting the right material to the right place at the right time in the right quantity:– Traffic Management:

• The selection, scheduling & control of carriers (e.g.: trucks & rail) for both incoming & outgoing materials & products

– Distribution Management: • The packaging, storing & handling of products in transit

to the end-user.


Information Sharing

• Supply chain partners can benefit by sharing information on sales, demand forecasts, inventory levels & marketing campaigns

• Inaccurate or distorted information leads to the Bullwhip Effect


Typical Information Flow


The Bullwhip Effect

• If information isn’t shared, everyone has to guess what is going on downstream.

• Guessing wrong leads to too much or too little inventory:– If too much, firms hold off buying more until

inventories fall (leading suppliers to think demand has fallen).

– If too little, firms demand a rush order & order more than usual to avoid being caught short in the future (leading suppliers to think demand has risen).


The Bullwhip Effect

• Farther away from the customer, the quality of information gets worse & worse as supply chain members base their guesses on the bad guesses of their partners.

• The result is increasingly inefficient inventory management, manufacturing, & logistics


Short-Circuit the Bullwhip

• Make information transparent:– Use Electronic Data Interchange (EDI) to support

Just-In-Time supplier replenishment– Use bar codes & electronic scanning to capture &

share point-of-sale data

• Eliminate wholesale price promotions & quantity discounts

• Allocate scarce items in proportion to past sales to avoid attempts to ‘game’ the system


Electronic Data Interchange

• The most common method of using computer-to-computer links to exchange data between supply chain partners in a standardized format.

• Benefits include:– Quick transfer of information– Reduced paperwork & administration– Improved data accuracy & tracking capability


Vertical Integration

• A measure of how much of the supply chain is controlled by the manufacturer.– Backward integration:

• Acquiring control of raw material suppliers.

– Forward integration: • Acquiring control of distribution channels.


Outsourcing

• Entails paying third-party suppliers to provide raw materials and services, rather than making them in-house.

• Outsourcing is increasing as many firms try to focus their internal operations on what they do best.


Whether to Outsource?

• What volume is required?• Are items of similar quality available in the

marketplace?• Is long-term demand for the item stable?• Is the item critical to success of the firm?• Does the item represent a core competency

of the firm?


Breakeven Analysis

QVCFCQVCFC

QVCFCTC

QVCFCTC

MakeMakeBuyBuy

MakeMakeMake

BuyBuyBuy

:PointceIndifferen

:InsourcingofCostTotal

:gOutsourcinofCostTotal


Example: The Bagel Shop

• Bill & Nancy plan to open a small bagel shop.– The local baker has offered to sell them bagels at

40 cents each. However, they will need to invest $1,000 in bread racks to transport the bagels back & forth from the bakery to their store.

– Alternatively, they can bake the bagels at their store for 15 cents each if they invest $15,00 in kitchen equipment.

– They expect to sell 60,000 bagels each year.

• What should they do?


Example Solved

Interpretation: – They anticipate selling 60,000 bagels (greater

than the indifference point of 56,000).– Therefore, make the bagels in-house.

000,56:

15.0$000,15$40.0$000,1$

QQ

QQ

QVCFCQVCFC MakeMakeBuyBuy

forSolve

:nCalculatio PointceIndifferen


Developing a Supply Base

• How to chose between suppliers?

• One supplier or many per item?

• Whether to partner with suppliers?


Criteria for Choosing Suppliers

• Cost:– Cost per unit & transaction costs

• Quality:– Conformance to specifications

• On-time delivery:– Speed & predictability


Arguments for One Supplier per Item

• May only be one practical source for the item – Patent issues, geography, or quality considerations)

• The supply chain is integrated to support JIT or EDI– Making multiple suppliers impractical

• Availability of quantity discounts• Supplier may be more responsive if it’s guaranteed all

your business for the item• Contract might bind you to using only one supplier• Deliveries may be scheduled more easily


Arguments for Multiple Suppliers per Item

• No single supplier may have sufficient capacity• Competition may result in better pricing or service• Multiple suppliers spreads the risk of supply chain

interruption• Eliminates purchaser’s dependence on a single

source of supply• Provides greater volume flexibility• Government regulation may require multiple suppliers

– Antitrust issues

• Allows testing new suppliers without risking a complete disruption of material flow


Partnering with Suppliers

• Involves developing a long-term, mutually-beneficial relationship:– Requires trust to share information, risk,

opportunities, & investing in compatible technology

– Work together to reduce waste and inefficiency & develop new products

– Agree to share the gains


The Role of Warehouses

• General Warehouses: – Used for long-term storage of goods

• Distribution Warehouses:– Transportation consolidation:

• Consolidate LTL into TL deliveries

– Product mixing & blending:• Group multiple items from various suppliers

– Improve service:• Reduced response time• Allow for last-minute customization


Future Challenges

• Household Replenishment:– Fulfilling consumer demand at the point of

use (the home).– Often called ‘the last mile’ problem.

• Freeze Point Delay (Postponement):– Last minute customization to provide

exactly what the consumer wants while maintaining very small inventories


The End

Copyright © 2002 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United State Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or 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.

reid & sanders, operations management © wiley 2002 supply chain management 4 c h a p t e r

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