Chapter 10

Supply Chain Management

Strategy and Design

Learning Outcomes
Distinguish between supply chains and value
chains;
Explain, with reference to particular firms and
industries, the significance of supply chains in
the twenty-first century competitive landscape;
Discuss the requisite conditions for effective
supply chain management and, specifically, how
supply chain uncertainty could be dealt with;
Describe how contemporary information
technology creates the enabling platform upon
which effective supply chains could be built;
Copyright 2011 John Wiley & Sons, Inc.

10-2

Learning Outcomes
Elaborate upon the critical elements that must
be set in place to establish optimal supply chain
integration and to put forward illustrative
examples from both manufacturing enterprises
and firms providing services;
Identify the SCOR performance metrics and to
explain the underlying rationale for each one;

Copyright 2011 John Wiley & Sons, Inc.

10-3

Supply Chains
All facilities, functions, and activities associated
with flow and transformation of goods and
services from raw materials to customer, as well
as the associated information flows
An integrated group of processes to source,
make, and deliver products

Copyright 2011 John Wiley & Sons, Inc.

10-4

The Supply Chain Figure10.1

Copyright 2011 John Wiley & Sons, Inc.

10-5

Supply Chain for Denim Jeans

Figure 10.2a

Copyright 2011 John Wiley & Sons, Inc.

10-6

Supply Chain for Denim Jeans (cont.)

Figure 10.2b

Copyright 2011 John Wiley & Sons, Inc.

10-7

Supply Chain Processes

Copyright 2011 John Wiley & Sons, Inc.

10-8

Supply Chain for Service Providers

More difficult than manufacturing
Does not focus on the flow of physical goods
Focuses on human resources and support
services
More compact and less extended

Copyright 2011 John Wiley & Sons, Inc.

10-9

Value Chains
Value chain
every step from raw materials to the eventual end
user
ultimate goal is delivery of maximum value to the
end user

Supply chain
activities that get raw materials and subassemblies
into manufacturing operation
ultimate goal is same as that of value chain

Copyright 2011 John Wiley & Sons, Inc.

10-10

Value Chains
Demand chain
increase value for any part or all of chain

Terms are used interchangeably

Value
creation of value for customer is important aspect of
supply chain management

Copyright 2011 John Wiley & Sons, Inc.

10-11

Supply Chain Management (SCM)

Managing flow of information through supply chain
in order to attain the level of synchronization that
will make it more responsive to customer needs
while lowering costs
Keys to effective SCM

information
communication
cooperation
trust

Copyright 2011 John Wiley & Sons, Inc.

10-12

Supply Chain
Uncertainty and Inventory
A major objective of SCM:
respond to uncertainty in customer demand without
creating costly excess inventory

Negative effects of uncertainty

lateness
incomplete orders

Inventory
insurance against supply chain uncertainty

Copyright 2011 John Wiley & Sons, Inc.

10-13

Supply Chain
Uncertainty and Inventory
Factors that contribute to uncertainty

inaccurate demand forecasting

long variable lead times
late deliveries
incomplete shipments
product changes
batch ordering
price fluctuations and discounts
inflated orders

Copyright 2011 John Wiley & Sons, Inc.

10-14

Bullwhip Effect
Occurs when slight demand variability is
magnified as information moves back upstream

Copyright 2011 John Wiley & Sons, Inc.

10-15

Risk Pooling
Risks are aggregated to reduce the impact of
individual risks
Combine inventories from multiple locations into one
Reduce parts and product variability, thereby reducing
the number of product components
Create flexible capacity

Copyright 2011 John Wiley & Sons, Inc.

10-16

Green Supply Chains

Sustainability
Meeting present needs without compromising the
ability of future generations to meet their needs
Sustaining human and social resources
It can be cost effective and profitable
Can provide impetus for product and process
innovations
Impetus comes from downstream in the supply
chain and moves upstream to suppliers

Copyright 2011 John Wiley & Sons, Inc.

10-17

Sustainability and Quality Management

Reducing waste through quality programs helps
achieve sustainability goals
Improving fuel efficiency of vehicles
Telecommuting
Eco-friendly packing materials
Energy-efficient facilities

Copyright 2011 John Wiley & Sons, Inc.

10-18

Information Technology:
A Supply Chain Enabler
Information links all aspects of supply chain
E-business
replacement of physical business processes with
electronic ones

Electronic data interchange (EDI)

a computer-to-computer exchange of business
documents

Bar code and point-of-sale

data creates an instantaneous computer record of a
sale

Copyright 2011 John Wiley & Sons, Inc.

10-19

IT: Supply Chain Enabler

Radio frequency identification (RFID)
technology can send product data from an item to a
reader via radio waves

Internet
allows companies to communicate with suppliers,
customers, shippers and other businesses around the
world instantaneously

Build-to-order (BTO)
direct-sell-to-customers model via the Internet;
extensive communication with suppliers and customer

Copyright 2011 John Wiley & Sons, Inc.

10-20

10

Supply Chain Enablers

Copyright 2011 John Wiley & Sons, Inc.

10-21

E-Business & Supply Chain Management

Savings due to lower transaction costs

Reduction of intermediary roles
Shorter supply chain response times
Wider presence and increased visibility
Greater choices & more info for customers
Improved service
Collection & analysis of huge amounts of customer
data & preferences
Access to global markets, suppliers & distribution
channels

Copyright 2011 John Wiley & Sons, Inc.

10-22

11

Electronic Data Interchange

Computer-to-computer exchange of documents in
a standard format
Purchasing, shipping and receiving
Improve customer service
Reduce paperwork
Increase productivity
Improve billing and cost efficiency
Reduce bullwhip effect through information
sharing
Copyright 2011 John Wiley & Sons, Inc.

10-23

Bar Codes

Automated data collection system

Bar code contains identifying information
Provide instantaneous tracking information
Checkout scanners create point-of-sale data
Update inventory records
Identify trends
Order material
Schedule orders
Plan deliveries

Copyright 2011 John Wiley & Sons, Inc.

10-24

12

Radio Frequency Identification (RFID)

Use radio waves to transfer data from chip to a
reader
Provides complete visibility of product location
Continuous inventory monitoring
Reduce labor to manage inventory
Reduce inventory costs
RFID is not standardized yet
Difficult to track between systems

Copyright 2011 John Wiley & Sons, Inc.

10-25

RFID Capabilities

Copyright 2011 John Wiley & Sons, Inc.

10-26

13

RFID Capabilities

Copyright 2011 John Wiley & Sons, Inc.

10-27

Supply Chain Integration

Share information among supply chain members

Reduced bullwhip effect

Early problem detection
Faster response
Builds trust and confidence

Collaborative planning, forecasting, replenishment,

and design

Reduced bullwhip effect

Lower costs (material, logistics, operating, etc.)
Higher capacity utilization
Improved customer service levels

Copyright 2011 John Wiley & Sons, Inc.

10-28

14

Supply Chain Integration

Coordinated workflow, production and operations,
procurement

Production efficiencies
Fast response
Improved service
Quicker to market

Adopt new business models and technologies

Penetration of new markets

Creation of new products
Improved efficiency
Mass customization

Copyright 2011 John Wiley & Sons, Inc.

10-29

Collaborative Planning, Forecasting,

and Replenishment (CPFR)
Two or more companies in a supply chain to
synchronize their demand forecasts into a single
plan to meet customer demand
Parties electronically exchange

past sales trends

point-of-sale data
on-hand inventory
scheduled promotions
forecasts

Copyright 2011 John Wiley & Sons, Inc.

10-30

15

SCM Software
Enterprise resource planning (ERP)
software that integrates the components of a
company by sharing and organizing
information and data

Copyright 2011 John Wiley & Sons, Inc.

10-31

Measuring Supply Chain Performance

Metrics used to measure supply chain performance
Inventory turnover

Inventory turns

Cost of goods sold

Average aggregate value of inventory

Total value (at cost) of inventory

Average aggregate value of inventory
(average inventory for item i ) (unit value item i )

Copyright 2011 John Wiley & Sons, Inc.

10-32

16

Measuring Supply Chain Performance

Days of supply

Days of supply

Average aggregate value of inventory

(Cost of goods sold)/(365 days)

Fill rate: fraction of orders filled by a distribution center

within a specific time period

Copyright 2011 John Wiley & Sons, Inc.

10-33

Computing Key Performance Indicators

Copyright 2011 John Wiley & Sons, Inc.

10-34

17

Process Control and SCOR

Process Control
not only for manufacturing operations
can be used in any processes of supply chain

Supply Chain Operations Reference (SCOR)

a cross industry supply chain diagnostic tool
maintained by the Supply Chain Council

Copyright 2011 John Wiley & Sons, Inc.

10-35

SCOR Model Processes

Copyright 2011 John Wiley & Sons, Inc.

10-36

18

SCOR Performance Metrics

Copyright 2011 John Wiley & Sons, Inc.

10-37

Copyright 2011 John Wiley & Sons, Inc.

All rights reserved. Reproduction or translation of this
work beyond that permitted in section 117 of the 1976
United States Copyright Act without express permission
of the copyright owner is unlawful. Request for further
information should be addressed to the Permission
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 herein.

Copyright 2011 John Wiley & Sons, Inc.

10-38

19