Supply Chain Management MGT 3303 Reading Chapter 7

Supply Chain Management MGT 3303 Reading: Chapter 7 MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure

Example of a Supply Chain 1. 2. 3. 4. Suppliers Manufacturer Wholesalers Retailers, e-commerce MGT 3303 Michel Leseure

Example Direction of flow of demand Tier-II Suppliers Tier-I Suppliers Direction of flow of product Manufacturers Distribution Centers Retailers Customers E-tailers Typical Supply Chain Structure MGT 3303 Michel Leseure

Supply Chain Suppliers Manufacturing Warehousing Customers MGT 3303 Michel Leseure

MGT 3303 Michel Leseure

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) MGT 3303 Michel Leseure

Supply Chain Management • 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 MGT 3303 Michel Leseure

Supply Chain Management Supply Chain Design Supplier Selection Purchasing Supply Chain Management Supply Chain Performance Relationship Management Logistical Management MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure

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. MGT 3303 Michel Leseure

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, 3 M, had even greater swings and variability! MGT 3303 Michel Leseure

The Bullwhip Effect MGT 3303 Michel Leseure

The Bullwhip Effect MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure

Supply Chain System Design • Several management decision models • Extensions of the traditional accounting make or buy decision frameworks MGT 3303 Michel Leseure

Transaction Cost Theory MGT 3303 Michel Leseure

Core Competencies Theory MGT 3303 Michel Leseure

Supply Chain System Design MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure

Procurement MGT 3303 Michel Leseure

MGT 3303 Michel Leseure

Purchasing Management • How should problems/delays be dealt with? – – Penalties Increased communication, collaboration Switch supplier Multiple sourcing MGT 3303 Michel Leseure

Transportation Management • Network design – More a strategic issue • Mode selection – Which mode of transport • Rail, air, road, water, etc. – Which routes • Transportation method MGT 3303 Michel Leseure

SCM – Part III Transportation Method MGT 3303 Michel Leseure

Transportation Method Netherlands Source Amsterdam 50 800 * Tilburg 0 50 * Antwer 700 p 0 * Belgium. Liege 20 0 The Hague * * * 50 * Leipzig 40 0 Nancy 90 0 Miles 0 Destination Germany 100 MGT 3303 Michel Leseure

Transportation Costs Unit transportation costs from harbors to plants Minimize the transportation costs involved in moving the motors from the harbors to the plants MGT 3303 Michel Leseure

Transportation Model MGT 3303 Michel Leseure

Building a Solver Model • Tools | Solver… In the Transportation spreadsheet that’s G 19 - the total transportation cost – Set Target Cell: The cell holding the value you want to minimize (cost) or maximize (revenue) In the Transportation spreadsheet we choose Min to minimize transport cost – 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 is C 9: F 11 - the Shipment volumes MGT 3303 Michel Leseure

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 In the Transportation spreadsheet for example, G 9 is the total volume shipped out of Amsterdam • Constraint is a cell that holds a value that constraints the Cell Reference. In the Transportation spreadsheet for example, H 9 is the total volume we can ship out of Amsterdam • <=, =, => is the sense of the constraint. Choose one <= in this case. Don’t ship more than we have in AMS MGT 3303 Michel Leseure

What are the constraints? • Supply Constraints G 9 is the total – Amsterdam: G 9 <= H 9 volume shipped – Antwerp: G 10 <= H 10 from Amsterdam – The Hague: G 11 <= H 11 Short cut: • Demand Constraints G 9: G 11 <= H 9: H 11 – Leipzig: C 12 => C 13 – Nancy: D 12 => D 13 C 12 is the total – Liege: E 12 => E 13 volume shipped to – Tilburg: F 12 => F 13 Leipzig Short cut: C 12: F 12 => C 13: F 13 MGT 3303 Michel Leseure

The Model MGT 3303 Michel Leseure

Solution MGT 3303 Michel Leseure

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 MGT 3303 Michel Leseure