mangement – Never – DO TOMORROW What you can DO TODAY ———————— PROCRASTINATION – is the THIEF OF TIME 1 11

mangement

– Never –
DO TOMORROW
What you can
DO TODAY
————————
PROCRASTINATION
– is the
THIEF OF TIME

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Supply Chain Management
Chapter 11

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Learning Objectives
When you complete this chapter you should be able to:
Explain the terms supply chain and logistics
Discuss the importance of supply chain management
Explain SCM risks
Explain SCM sourcing strategies
Describe what bullwhip effect is
Explain the causes and remedies for the bullwhip effect

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Supply-Chain Management
The objective of supply chain management is to structure the supply chain to maximize its competitive advantage and benefits to the ultimate consumer
The goal of SCM is to match supply to demand as effectively and efficiently as possible

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Supply Chain Management (SCM) Strategic Importance
SCM is a global network of activities that supply a firm with goods and services (discussed in chapter 1).
SCM describes the coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer. Thus, a supply chain includes:
Suppliers; manufacturers and/or service providers; and distributors, wholesalers, and/or retailers who deliver the product and/or service to the final customer.
SCM is a discipline that came about as companies began to see the supply chain as one entity, rather than separate pieces of a puzzle.

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Why so much interest in SCM?
Companies look for ways to reduce costs
Several significant success stories. Efficient SCM gives Starbucks & ZARA an important edge.

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SCM
The supply chain consists of five main components:
Suppliers
Manufacturers
Distributors
Retailers
Customers

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Supply Chain Components

Every business organization is part of at least one supply chain, and many are part of multiple supply chains
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Complex Supply Chain
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Key SCM Issues
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

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Supply Chain Management

TABLE 11.2 How Corporate Strategy Impacts Supply Chain Decisions

LOW COST STRATEGY RESPONSE STRATEGY DIFFERENTIATION STRATEGY

Primary supplier selection criteria Cost Capacity
Speed
Flexibility Product development skills
Willing to share information
Jointly and rapidly develop products

Supply chain inventory Minimize inventory to hold down costs Use buffer stocks to ensure speedy supply Minimize inventory to avoid product obsolescence

Distribution network
Inexpensive transportation
Sell through discount distributors/
retailers Fast transportation
Provide premium customer service Gather and communicate market research data
Knowledgeable sales staff

Product design characteristics Maximize performance
Minimize cost Low setup time
Rapid production ramp-up Modular design to aid product differentiation

FYI

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Supply Chain Five Basic Operational Functions:

The Supply Chain Operations Reference (SCOR) model used to evaluate and compare supply chain activities and performance.
SCOR model could be a valuable tool as you consider how your companys suppliers meet your business and management expectations.

Plan
Source
Make
Deliver
Return

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The SCOR Model for Supply Chain Strategic Decisions
The SCOR model describes the business processes required to satisfy a customers demands. It also helps to explain the processes along the entire supply chain and provides a basis for how to improve those processes.

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Benefits of Using the SCOR Model
The SCOR process can go into many levels of process detail to help a company analyze its supply chain.
It gives companies an idea of how advanced its supply chain is.
The process helps companies understand how the 5 steps repeat over and over again between suppliers, the company, and customers. Each step is a link in the supply chain that is critical in getting a product successfully along each level.

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Supply Chain Five Basic Operational Functions:

FYI

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Plan

Production planning, replenishment, or new product launches
Assess all supply chain resources (resources being people material equipment activities and information)
Aggregate and prioritize demand requirements (these demand requirements are generated by the customer)
Plan inventory, distribution, production, and raw materials
Plan capacity for all products in distribution channels

The objective is to develop a strategy to balance the resources with these demands requirements

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Source
This step involves any processes that procure goods or services in order to meet a demand (real or planned).
Material acquisitions and sourcing infrastructure are examined to determine how to manage the supplier network, inventory, supplier performance, and agreements.

This stage should help you plan on when to receive and transfer a product in the supply chain.

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Make
In order to meet planned or actual demand, this is the process in which a product is transformed to its final state.
This step is particularly important in the manufacturing and distribution industries, and helps to answer the questions of:
Make-to-order (JIT) or Make-to-stock (forecast)
The make part of the process includes production activities, packaging, and releasing the product.

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Deliver
Any process that involves getting the product out, from order management and warehousing, to distribution and transportation.

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Return
This final step focuses on all products that are returned or received, for any reason.
Organizations must be prepared to handle the return of defective products, containers, and packaging

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Benefits of Supply Chain Management
Lower inventories
Higher productivity
Greater flexibility
Shorter lead times
Greater customer loyalty
Lead Time is:
The total time a customer must wait to receive a product after requesting the product or service.
In service sectors, it is the time from the beginning of the process to the end (e.g., from when a patient arrives until he or she leaves the hospital).

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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 reveal sensitive information to competitors, it can weaken a firms competitive position
Supply chain complexity
Language and cultural differences
Currency fluctuations
Political instability

FYI

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Sourcing Issues
Make-or-buy decisions
Choosing between obtaining products and services externally as opposed to producing them internally
Outsourcing
Transferring activities that traditionally been internal to external suppliers

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Benefits of Outsourcing
Lower prices may result from lower labor costs
The ability of the organization to focus on its core strengths
It can free up capital to address other needs
Some risks can be shifted to the supplier (such as inventory)
The ability to take advantage of a suppliers expertise
Makes it easier to expand outside of the home country

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Risks of Outsourcing
Inflexibility due to longer lead times
Increased transportation costs
Language and cultural differences
Lower productivity
Loss of business knowledge
Knowledge transfer and intellectual property concerns
Increased effort required to manage the supply chain

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SCM Sourcing Strategies
Many suppliers
Few suppliers
Vertical integration
Keiretsu networks

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Many Suppliers
Commonly used for commodity products (Mass Production)
Purchasing is typically based on price
Suppliers compete with one another to offer the best price.
Good strategy for companies who are competing on cost leadership.

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Few Suppliers
(long term relationship)
Buyer forms longer term relationships with fewer suppliers
Suppliers more willing to participate in JIT programs and contribute design and technological expertise
Cost of changing suppliers is huge
Good strategy for companies who are competing on response.

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Vertical Integration (VI)
Vertical integration is when a company controls more than one stage of the supply chain (supplier, manufacturing, distribution, and retail). That’s the process businesses use to turn raw material into a product and get it to the consumer. A company vertically integrates when it controls two or more of these stages.
Developing the ability to produce goods or services previously purchased.

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Vertical Integration (VI)
Vertical Integration may be:
Forward vertical integration
Or backward vertical integration
Forward VI, Towards The Customers A company tends toward forward vertical integration when it controls distribution centers and retailers where its products are sold
Backward VI, Towards Suppliers A company exhibits backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. For example, a coffee shop may own a Coffee Farm
VI can improve cost, quality, delivery, and inventory but requires capital, managerial skills, and demand

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Vertical Integration
Figure 11.2

Raw material (suppliers)

Backward integration Coffee Farm Chipmakers In house production

Current transformation Starbucks Apple Zara

Forward integration Retail stores
Retail stores

Finished goods (customers)

Vertical Integration Examples of Vertical Integration

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Is Netflix adopting vertical integration?
If so,
what type of vertical integration?
Backward or Forward?

FYI

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Keiretsu Networks
A middle ground between few suppliers and vertical integration
Supplier becomes part of the company coalition
Often provide financial support for suppliers through ownership or loans
Members expect long-term relationships and provide technical expertise and stable deliveries
May extend through several levels of the supply chain

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Managing the Integrated Supply Chain
Inventory is the key component of supply chains. The elements of inventory management relate to:
The location of the supply chain
The speed at which inventory moves through the supply chain
The effects of demand variability .

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Managing the Integrated Supply Chain
Supply chains can generally be categorized as:
Forecast-driven (push): which pushes the manufactured products to end consumers
Demand-driven (pull): which waits for an order before manufacturing begins.
While forecast-driven supply chains run the risk of over- or understocking, demand-driven supply chains may not be able to meet demand in time.
A resilient supply chain is one that, in principle, is demand-driven but includes certain push components to overcome the challenges that come with being demand-driven. Thus, the most efficient supply chains are those that are primarily demand-driven but include some forecast-driven components.

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Managing the Integrated Supply Chain
Inventory velocity is defined as the rate at which goods move through a supply chain.

Without careful management, demand variations can cause inventory fluctuations. This leads to the concept called the Bullwhip Effect which is another part of inventory management that has to be paid great attention to.

The greater the velocity, the lower the holding costs.

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Bullwhip Effect
The Bullwhip effect causes members of the supply chain to overreact to change in demand at the retail level.
Bullwhip effect occurs when orders are relayed through the supply chain with fluctuations increasing at each step from retailers, to distributors, to wholesalers, to manufacturer.

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Bullwhip Effect

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Bullwhip Effect

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In November 2019 MBS Jacket Caught So Much Online Attention
That Its Now Become A Trend!
The jacket quickly
SOLD OUT
on Farfetch!
Can this create a Bullwhip?

Bullwhip Effect

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Mitigation of the Bullwhip Effect
Accurate pull data, by sharing Point-of-Sales (POS) information so that each member of the chain can schedule effectively (prober communication)
Lot size reduction, shipping, discounts (total annual volume rather than size of individual shipments.)
Proper forecast method
Implementing lean system or JIT.
Vendor managed inventory (VMI) let the actual supplier keeps control of the inventories for businesses and does the replenishing for them

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Mitigation of the Bullwhip Effect
Postponement withholds modification as long as possible
Bennetton leaves a portion of each style of its sweater white so that they be dyed the color the market is demanding at the last possible moment.
HP modified the printer its power cord, its packaging and documentation so that only the power cord and documentation needed to be added at the final distribution point. Now HP could ship the basic printer anywhere in the world

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Suppliers Selection
Supply chain management deals with the important aspect of operations management that relates to the reliability and effectiveness of a supply chain.
An organization must make vital decisions in regards to choosing suppliers, suppliers selection can be done through:
Vendor Analysis
Supplier Audit
Supplier Certification

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Suppliers Selection
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 performance on other criteria.

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Suppliers Selection
Supplier Certification
Involves a detailed examination of a suppliers policies and capabilities
The process verifies the supplier meets or exceeds the requirements of a buyer.
Starbucks established its Coffee and Farmer Equity (CAFE) sustainability standards to ensure the growth of high-quality coffee.

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Choosing Suppliers
Quality and quality assurance
Procedures for quality assurance and quality control (ISO 9000)
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
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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:
Higher quality
Faster delivery
Lower inventories
Lower costs
Higher supplier flexibility in accepting changes (delivery schedules, quality, quantity)
Suppliers can help in identifying problems and offer suggestions

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Supplier Partnerships

Aspect Adversary (many suppliers) Partner (few suppliers)

Number of suppliers Many; play one against the others One or a few

Length of relationship Short 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 Relatively not important Nearness is important for short lead time and quick service

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Ethics and Sustainable Supply Chain Management
Personal ethics
Critical to long-term success of an organization
Supply chains particularly susceptible
Ethics within the supply chain
Ethical behavior regarding the environment

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Institute for Supply Management Principles and Standards
Promote and uphold responsibilities to one’s employer; positive supplier and customer relationships; sustainability and social responsibility; protection of confidential and proprietary information; applicable laws, regulations, and trade agreements; and development of professional competence
Avoid perceived impropriety; conflicts of interest; behaviors that negatively influence supply chain decisions; and improper reciprocal agreements
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ISM Ethical Standards
PERCEIVED IMPROPRIETY. Prevent the intent and appearance of unethical or compromising conduct in relationships, actions and communications
CONFLICTS OF INTEREST. Ensure that any personal, business or other activity do not conflict with the lawful interests of your employer
ISSUES OF INFLUENCE. Avoid behaviors or actions that may negatively influence, or appear to influence, supply management decisions
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ISM Ethical Standards
RESPONSIBILITIES TO YOUR EMPLOYER. Uphold fiduciary and other responsibilities using reasonable care and granted authority to deliver value to your employer
SUPPLIER AND CUSTOMER RELATIONSHIPS. Promote positive supplier and customer relationships
SUSTAINABILITY AND SOCIAL RESPONSIBILITY. Champion social responsibility and sustainability practices in supply management
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ISM Ethical Standards
CONFIDENTIAL AND PROPRIETARY INFORMATION. Protect confidential and proprietary information
RECIPROCITY. Avoid improper reciprocal agreements
APPLICABLE LAWS, REGULATIONS AND TRADE AGREEMENTS. Know and obey the letter and spirit of laws, regulations and trade agreements applicable to supply management
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ISM Ethical Standards
PROFESSIONAL COMPETENCE. Develop skills, expand knowledge and conduct business that demonstrates competence and promotes the supply management profession
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Zara Masters the Art of Retail

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Bullwhip

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SCM: Starbucks

https://www.youtube.com/watch?v=ElYNhGbOTOQ (Plan, Source, Make, Deliver)

https://www.youtube.com/watch?v=ijRgTalA0v0 SCM Starbucks

http://www.supplychainquarterly.com/topics/Procurement/scq201004starbucks/

http://www.supplychain247.com/article/behind_the_scenes_at_starbucks_supply_chain_operations

https://www.blurgroup.com/blogs/supplier-diversity/starbucks-supply-chain-management/

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Inventory Management
Chapter 12

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Learning Objectives
When you complete this chapter you should be able to:
Conduct an ABC analysis
Explain and use cycle counting
Explain and use the EOQ model
Compute a reorder point
Explain and use the quantity discount model

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Inventory Management
The objective of inventory management is to strike a balance between inventory investment and customer service

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Importance of Inventory
One of the most expensive assets of many companies representing as much as 50% of total invested capital
Less inventory lowers costs but increases chances of running out
More inventory raises costs but always keeps customers happy but it can damage your business!!!

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Functions of Inventory
Inventory can serve several functions that add flexibility to a firms operations. The four functions of inventory are:
To provide a selection of goods for anticipated demand and to separate the firm from fluctuations in demand.
To decouple or separate various parts of the production process. For example, if a firms supplies fluctuate, extra inventory may be necessary to decouple the production process from suppliers.
To take advantage of quantity discounts
To hedge against inflation and upward price changes

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Types of Inventory
Raw material
Purchased but not processed
Work-in-process (WIP)
Undergone some change but not completed
Finished goods
Completed product awaiting shipment

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The Material Flow Cycle
Figure 12.1
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time

Cycle time
95% 5%

FYI

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Inventory Management at Amazon.com
Amazon.com started as a virtual retailer no inventory, no warehouses, no overhead just computers taking orders to be filled by others
Growth has forced Amazon.com to become a world leader in warehousing and inventory management
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Inventory Management at Amazon.com
Each order is assigned by computer to the closest distribution center that has the product(s)
A flow meister at each distribution center assigns work crews
Technology helps workers pick the correct items from the shelves with almost no errors
Items are placed in crates on a conveyor, bar code scanners scan each item 15 times to virtually eliminate errors
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Inventory Management at Amazon.com
Crates arrive at central point where items are boxed and labeled with new bar code
Gift wrapping is done by hand at 30 packages per hour
Completed boxes are packed, taped, weighed and labeled before leaving warehouse in a truck
Order arrives at customer within 1 – 2 days
FYI

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Managing Inventory
How inventory items can be classified and monitored?
ABC analysis
How accurate inventory records can be maintained?
Record accuracy
Cycle counting

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ABC Analysis
ABC analysis is an inventory categorization method which consists in dividing items into three categories (A, B, C) based on annual dollar volume:
Class A – high annual dollar volume
Class B – medium annual dollar volume
Class C – low annual dollar volume
This method aims to draw managers attention on the critical few (A-items) not on the trivial many (C-items).
Used to establish policies that focus on the few critical parts and not the many trivial ones (Based on Pareto Principle, 80/20)

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ABC Classes
The ABC approach states that a company should rate items from A to C, basing its ratings on the following rules:
A-items About 20% of the items account for about 70-80% of the dollar usage.
B-items 30% of the items account for about 15-25% of the dollar usage.
C-items About 50% of the items account for about 5% of the dollar usage.

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The ABC analysis
The annual consumption value is calculated with the formula:

(Annual demand) x (item cost per unit)

Through this categorization, the supply manager can identify inventory hot spots, and separate them from the rest of the items, especially those that are numerous but not that profitable.

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4 Steps for the classification of items:
Find out the unit cost and the usage of each material over a given period;
Multiply the unit cost by the estimated annual usage to obtain the net value;
List out all the items and arrange them in the descending value (Annual Value);
Accumulate value and add up number of items and calculate percentage on total inventory in value and in number

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ABC analysis
How to Interpret the Data

Percentage of items Percentage value of annual dollar volume Action

Class A items About 20% About 70-80% Close day to day control

Class B items About 30% About 15-25% of total value Regular review

Class C items About 50% About 5% Infrequent review

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ABC Analysis

A Items

80
70
60
50
40
30
20
10
0
Percentage of inventory items

C Items

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ABC Analysis
ABC ANALYSIS FOR A CHIP ANUFACTURER

Silicon Chips, Inc., maker of superfast DRAM chips, wants to categorize its 10 major inventory items
using ABC analysis.

APPROACH ABC analysis organizes the items on an annual dollar-volume basis. Shown below (in columns 14) are the 10 items (identified by stock numbers), their annual demands, and unit costs.

SOLUTION Annual dollar volume is computed in column 5, along with the percentage of the total represented by each item in column 6. Column 7 groups the 10 items into A, B, and C categories.

INSIGHT The breakdown into A, B, and C categories is not hard and fast. The objective is to try to separate the important from the unimportant.

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ABC Analysis

ABC Calculation

(1) (2) (3) (4) (5) (6) (7)

ITEM STOCK NUMBER PERCENT OF NUMBER OF ITEMS STOCKED ANNUAL VOLUME (UNITS) x UNIT COST = Annual $ usage
% $ usage CLASS

#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A

#11526 500 154.00 77,000 33.2% A

#12760 1,550 17.00 26,350 11.3% B

#10867 30% 350 42.86 15,001 6.4% B

#10500 1,000 12.50 12,500 5.4% B

#12572 600 14.17 8,502 3.7% C

#14075 2,000 .60 1,200 .5% C

#01036 50% 100 8.50 850 .4% C

#01307 1,200 .42 504 .2% C

#10572 250 .60 150 .1% C

8,550 $232,057 100.0%

72%
23%

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ABC Analysis
Policies employed may include
More emphasis on supplier development for A items
Tighter physical inventory control for
A items and should be stored in more secure area.
The accuracy of inventory records for A items should be verified more frequently
More care in forecasting A items

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Example: classify the following items according to ABC analysis

Item number Unit cost Annual demand

101 5 48,000

102 11 2,000

103 15 300

104 8

Related Questions:

Related questions