1 SUPPLY CHAIN MANAGEMENT Chapter 15 MIS 373

1 SUPPLY CHAIN MANAGEMENT Chapter 15 MIS 373: Basic Operations Management

LEARNING OBJECTIVES • After this lecture, students will be able to 1. 2. 3. 4. Explain the terms supply chain and logistics Discuss the importance of supply chain management Describe what bullwhip effect is Explain the causes and remedies for the bullwhip effect MIS 373: Basic Operations Management 2

STARBUCKS GLOBAL SUPPLY CHAIN • [You. Tube] A Behind the Scenes Look at Starbucks Global Supply Chain

SUPPLY CHAIN • Supply Chain: • the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service • Sometimes referred to as value chains • Value is added as goods and services progress through the chain. • Logistics: • the part of a supply chain involved with the forward and reverse flow of goods, services, cash, and information. MIS 373: Basic Operations Management 4

TYPICAL SUPPLY CHAINS Supplier Storage Manufact uring Storage Distributor Retailer Customer Supplier Storage Service Customer Supplier • Every business organization is part of at least one supply chain, and many are part of multiple supply chains MIS 373: Basic Operations Management 5

SUPPLY CHAIN MANAGEMENT • Supply Chain Management (SCM) • The strategic coordination of business functions within a business organization and throughout its supply chain for the purpose of integrating supply and demand management • Supply: • From the beginning of the chain to the internal operations of the organization • Demand: • From the organization's output delivery to its immediate customer to the final customer in the chain MIS 373: Basic Operations Management 6

SUPPLY CHAIN MANAGEMENT • Supply chain strategy alignment • Aligning supply and distribution strategies with organizational strategy. • Deciding on the degree to which outsourcing will be employed. • Network configuration • Determining the number and location of suppliers, warehouses, production/operations facilities, distribution centers. MIS 373: Basic Operations Management 7

WHY SO MUCH INTEREST IN SCM? • As manufacturing becomes more efficient (or is outsourced), companies look for ways to reduce costs • Several significant success stories. Efficient SCM gives Walmart & others an important edge • Web-based models for supply chains: • Online retailers • B 2 B business models. MIS 373: Basic Operations Management 8

KEY SCM ISSUES • The goal of SCM is to match supply to demand as effectively and efficiently as possible • Key issues: • • • Determining appropriate levels of outsourcing Managing procurement Managing suppliers Managing customer relationships Being able to quickly identify problems and respond to them • Managing risk MIS 373: Basic Operations Management 9

FLOW MANAGEMENT • Three types of flow management • Product and service flow • Involves movement of goods and services from suppliers to customers as well as handling customer service needs and product returns • Information flow • Involves sharing forecasts and sales data, transmitting orders, tracking shipments, and updating order status • Financial flow • involves credit terms, payments, and consignment and title ownership arrangements MIS 373: Basic Operations Management 10

OUTSOURCING • Transfer or contracting (non productive) internal activities (process) to outside vendors • e. g. : IT, accounting, legal, logistics • Utilize the efficiency that comes with specialization • Make-or-Buy analysis MIS 373: Basic Operations Management 11

BENEFITS & RISKS OF OUTSOURCING • Benefits: • • Lower prices may result from lower labor costs The ability of the organization to focus on its core strengths Permits the conversion of some fixed costs to variable costs It can free up capital to address other needs Some risks can be shifted to the supplier The ability to take advantage of a supplier’s expertise Makes it easier to expand outside of the home country • Risks • • • Inflexibility due to longer lead times Increased transportation costs Language and cultural differences Loss of jobs Loss of control Lower productivity Loss of business knowledge Knowledge transfer and intellectual property concerns Increased effort required to manage the supply chain MIS 373: Basic Operations Management 12

SUPPLY CHAIN RISKS • Supply Chain Risks • Supply chain disruption • Natural disasters • Supplier problems • Quality issues • Another form of disruption that may disrupt supplies and lead to product recalls, liability claims, and negative publicity • Loss of control of sensitive information • If suppliers divulge sensitive information to competitors, it can weaken a firm’s competitive position MIS 373: Basic Operations Management 13

RISK MANAGEMENT • Risk management • Involves identifying risks, assessing their likelihood of occurring and their potential impact and then developing strategies for addressing those risks. • Strategies for addressing risk include: • Risk avoidance • Risk reduction • Risk sharing • Key elements of successful risk management include: • Know your suppliers • Provide supply chain visibility • Develop event-response capability MIS 373: Basic Operations Management 14

GLOBAL SUPPLY CHAINS • Global supply chains • Product design often uses inputs from around the world • Some manufacturing and service activities are outsourced to countries where labor and/or materials costs are lower • Products are sold globally • Complexities • • • Language and cultural differences Currency fluctuations Political instability Increasing transportation costs and lead times Increased need for trust amongst supply chain partners MIS 373: Basic Operations Management 15

MANAGEMENT RESPONSIBILITY: TACTICAL AND OPERATIONAL • Tactical • • • Forecasting Sourcing Operations Planning Managing inventory Transportation planning Collaborating MIS 373: Basic Operations Management • Operational • • Scheduling Receiving Transforming Order fulfilling Managing inventory Shipping Information sharing Controlling 16

SUPPLIER MANAGEMENT • Vendor analysis • Evaluating the sources of supply in terms of price, quality, reputation, and service • Supplier audit • A means of keeping current on suppliers’ production (or service) capabilities, quality and delivery problems and resolutions, and performance on other criteria • Supplier certification • Involves a detailed examination of a supplier’s policies and capabilities • The process verifies the supplier meets or exceeds the requirements of a buyer MIS 373: Basic Operations Management 17

SUPPLIER RELATIONSHIP MANAGEMENT • Type of relationship is often governed by the duration of the trading relationship • Short-term • Oftentimes involves competitive bidding • Minimal interaction • Medium-term • Often involves an ongoing relationship • Long-term • Often involves greater cooperation that evolves into a partnership MIS 373: Basic Operations Management 18

CHOOSING SUPPLIERS • Quality and quality assurance • Procedures for quality assurance and quality control • Flexibility • For changes in delivery schedules, quantity, product or service changes • Location • Nearby? • Price • Competitiveness, willingness to negotiate, cooperate to reduce prices • Reputation and Financial Stability • Supplier reputation, its financial stability • Lead times and on-time delivery • Procedures to assure on-time delivery and problem correction • Other accounts • Dependence on other customers and their priority MIS 373: Basic Operations Management 19

SUPPLIER PARTNERSHIPS • More organizations are seeking to establish partnerships with others in their supply chain: • Fewer suppliers, long term relationships, sharing of information (forecasts, sales data, problem alerts), cooperation in planning • Benefits: • improved operations: higher quality, increased delivery speed and reliability, lower inventories, lower costs, higher profits. Higher supplier flexibility in accepting changes (delivery schedules, quality, quantity), suppliers can help in identifying problems and offer suggestions Aspect Adversary Partner Number of suppliers Many; play one against the others One or a few Length of relationship May be brief Long-term Low price Major consideration Moderately important Reliability May not be high High Openness Low High Quality May be unreliable; buyer inspects At the source; vendor certified Volume of business May be low due to many suppliers High Flexibility Relatively low Relatively high Location Widely dispersed Nearness is important for short lead 20 time and quick service MIS 373: Basic Operations Management

STRATEGIC SCM • Information technology • Integrating systems and sharing information (forecasts, inventory status, shipments etc. ) throughout the SC. • Strategic partnerships • Choice of partners, level of partnership. • Distribution strategy • Centralized or decentralized distribution. In-house distribution or third-party logistics. • Uncertainty and risk reduction • Identifying potential risks and deciding on acceptable risk level. • Capacity planning • Assessing long term capacity needs and the degree of flexibility • Products and services • New products and services selection and design. MIS 373: Basic Operations Management 21

LOGISTICS • Logistics • The part of the SC involved with the forward and reverse flow of goods, services, cash, and information. • Logistics Management • Management of : • • inbound and outbound transportation material handling Warehousing Inventory order fulfillment and distribution third party logistics reverse logistics (return from customers) MIS 373: Basic Operations Management 22

INVENTORY MANAGEMENT • Inventory issues in SCM • Inventory location • Centralized inventories • Lower overall inventory, lower cost, lower stock-out risk • Decentralized inventories • Faster delivery, lower shipping cost • Inventory velocity • The speed at which goods move through a supply chain • The greater the velocity the lower the holding cost and the faster orders are fulfilled and goods are turned into cash. • The bullwhip effect • Inventory oscillations that become increasingly larger looking backward through the supply chain MIS 373: Basic Operations Management 23

CREATING AN EFFECTIVE SUPPLY CHAIN • It begins with strategic sourcing • Analyzing the procurement process to lower costs by reducing waste and non-value-added activities, increase profits, reduce risks, and improve supplier performance • There must be • Trust • Effective communication • Information velocity • Supply chain visibility • Event management capability • Performance metrics MIS 373: Basic Operations Management 24

TRADE-OFFS 1. Lot-size-inventory trade-off • Large lot sizes yield benefits in terms of quantity discounts and lower annual setup costs, but it increases the amount of safety stock (and inventory carrying costs) carried by suppliers 2. Inventory-transportation cost trade-off • Suppliers prefer to ship full truckloads instead of partial loads to spread shipping costs over as many units as possible. This leads to greater holding costs for customers • Cross-docking • A technique whereby goods arriving at a warehouse from a supplier are unloaded from the suppliers truck and loaded onto outbound truck, thereby avoiding warehouse storage MIS 373: Basic Operations Management 25

TRADE-OFFS 3. Lead time-transportation costs trade-off • Suppliers like to ship in full loads, but waiting for sufficient orders and/or production to achieve a full load may increase lead time 4. Product variety-inventory trade-off • Greater product variety usually means smaller lot sizes and higher setup costs, as well as higher transportation and inventory management costs • Delayed differentiation • Production of standard components and subassemblies which are held until late in the process to add differentiating features MIS 373: Basic Operations Management 26

TRADE-OFFS 5. Cost-customer service trade-off • Producing and shipping in large lots reduces costs, but increases lead time • Disintermediation • Reducing one or more steps in a supply chain by cutting out one or more intermediaries MIS 373: Basic Operations Management 27

THE BULLWHIP EFFECT • First noticed by P&G executives examining the order patterns for Pampers disposable diapers. • Although the customer demand is pretty steady, they noticed that order variation increased dramatically as one moved from retailers to distributors to the factory.

BULLWHIP EFFECT PROBLEMS • High demand fluctuations. • Variation in demand along the supply chain requires: • Shipment capacity • Production capacity • Inventory capacity to cope with peaks. • Most of the time this capacity will be idle. • There’s significant cost and investments attached! • Low service level (backorders) • High cost • In the end: high overall cost in the supply chain MIS 373: Basic Operations Management 29

BULLWHIP EFFECT - CAUSES • Information (lack of) • Game simulates SC with low levels of trust, where little information is shared among the parties • Only order amounts are perpetuated up the supply chain; information about customer demand is lost upstream. • Without actual customer demand data, all forecasts rely solely on the incoming orders at each stage of the SC. • SC structure • The longer the lead time the stronger the bullwhip effect (the reorder point is calculated by multiplying the forecasted demand by the lead time plus the safety stock) • Local optimization • Local individual cost optimization, and a lack of cooperation • Ordering involves fix cost. There is an incentive for individual players to hold back and only place aggregate/batch orders. This aggravates the problem of demand forecasting as little information about actual demand is conveyed. MIS 373: Basic Operations Management 30

MITIGATING THE BULLWHIP EFFECT • Good supply chain management can overcome the bullwhip effect: 1. Information sharing • Replenishment based on need • Vendor-managed inventory • Vendors monitor goods and replenish retail inventories when supplies are low • Lower ordering costs 2. Short lead times 3. Cooperation • Competition is now supply chain against supply chain and Network against network MIS 373: Basic Operations Management 31

ORDER FULFILLMENT • Order fulfillment refers to the processes involved in responding to customer orders. • Engineer-to-Order (ETO) • Products are designed and built according to customer specifications. This approach is frequently used for large-scale construction projects, custom homebuilding, home remodeling, and for products made in job shops. • Make-to-Order (MTO) • A standard product design is used, but production of the final product is linked to the final customer's specifications. This approach is used by aircraft manufacturers such as Boeing. Fulfillment time is generally less than with ETO fulfillment, but still fairly long. • Assemble-to-Order (ATO) • Products are assembled to customer specifications from a stock of standard and modular components. Computer manufacturers such as Dell operate using this approach. Fulfillment times are fairly short, often a week or less. • Make-to-Stock (MTS) • Production is based on a forecast, and products are sold to the customer from finished goods stock. This approach is used in department stores and supermarkets. The order fulfillment time is immediate. MIS 373: Basic Operations Management 32

SMALL BUSINESSES • Small businesses do not always give adequate attention to their supply chains. • Three aspects of supply chain management that are often of concern to small businesses are: 1. Inventory management 2. Reducing risks 3. International trade • Why the three are of concern to small businesses? • How to mitigate the concerns? MIS 373: Basic Operations Management 33

SUPPLY CHAIN PERFORMANCE MEASURES • Financial • • Return on assets Cost Cash flow Profits • Suppliers • • Quality On-time delivery Cooperation Flexibility • Operations • Inventory • Average value • Turnover • Weeks of supply • Order fulfillment • Order accuracy • Time to fill orders • % of orders delivered on time • Customers • Customer satisfaction • % of customer complaints • Productivity • Quality MIS 373: Basic Operations Management 34

MANAGING RETURNS • Products are returned to companies or third-party handlers for a variety of reasons, and in a variety of conditions. Among them are the following: • • Defective products Recalled products Obsolete products Unsold products returned from retailers Parts replaced in the field Items for recycling Waste • In the US, the annual value of returns is estimated to be in the neighborhood of $100 billion MIS 373: Basic Operations Management 35

MANAGING RETURNS • Reverse logistics is the process of physically transporting returned items. • This involves either retrieving items from the field or moving items from the point of return to a facility where they will be inspected and sorted and then transporting to their final destination. • Two key elements of managing returns • Gatekeeping oversees the acceptance of returned goods with the intent of reducing the cost of returns by screening returns at the point of entry into the system and refusing to accept goods that should not be returned or goods that are returned to the wrong destination. • Avoidance refers to finding ways to minimize the number of items that are returned. MIS 373: Basic Operations Management 36

TRENDS IN SCM • Trends affecting supply chain design and management: • Measuring supply chain performance • Incorporating economic metrics into decisions (e. g. , inventory velocity, inventory turnover) • “Greening” the supply chain • Redesigning products and services to reduce pollution from transportation, choosing “green” suppliers, managing returns, end -of-life programs (e. g. , appliances) • Re-evaluating outsourcing • Reconsidering outsourcing due to long lead time, increased transportation costs, language, culture, job loss, control loss, lower productivity, loss of ability to perform work internally, loss of business knowledge, management efforts. MIS 373: Basic Operations Management 37

TRENDS IN SCM • Trends affecting supply chain design and management: • Integrating IT • Real time data to enhance strategic planning, control costs, measure quality and productivity, respond quickly to problems, improve SC operations • Managing risks • Identifying risks, assessing likelihood of occurrence, potential impacts, prioritizing, developing management strategies (avoidance, reduction, transference). • Adopting lean principles • Eliminating non value-added processes, using “pull” systems to improve product flow, using fewer suppliers, continuous improvement. MIS 373: Basic Operations Management 38

OPERATIONS STRATEGY • Effective supply chains are necessary for organizational success • Requires integration of all aspects of the chain • Supplier relationships are a critical component of supply chain strategy • Lean operations to improve supply chain success • Future Supply Chains MIS 373: Basic Operations Management 39

EXERCISE: CONCEPT MAP • Work with a partner or two and develop a concept map based on the following two articles about supply chain: • Don't Let Your Supply Chain Control Your Business • Don't Tweak your Supply Chain--Rethink It End to End • Concept Map Examples

KEY POINTS • Supply chains are a vital part of every business organization and need to be managed effectively to achieve a balance of supply and demand. • There a number of trade-offs to be made by supply chain managers. • Effective supply chains involve trust, communication, a rapid, two-way flow of information, visibility, and event-response capability. • Among important trends in supply chain management are measuring ROI, “greening” the supply chain, reevaluating outsourcing, integrating IT, managing risks, and adopting lean principles. MIS 373: Basic Operations Management 41