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D. Anthony Chevers
Lecture #6 – Supply Chain
 Definitions & Purpose
 Current Trends & Challenges in SCM
 Creating an Effective Supply Chain
 Supply Chain Management Software
 Measures of SC Performance
 Discussion Questions

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Lecture 8 – Supply Chain Management |
Supply Chain Management
Supply Chain Management...
An introduction

Lecture 8 – Supply Chain Management | 3

 The Supply Chain

Suppliers
C
Tier 2
Suppliers
Retailers
U
Tier 1

Distributors
S
Manufacturing
T
Inbound Logistics
O
Operations M
Outbound Logistics
E
R
Information S
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 A Simplified View of
(Bozarth, 2005)
Supply Chain
Anheuser-Busch’s
Second-Tier First-Tier
Supplier Supplier Distributor Retailer

Ball Anheuser-Busch
Final
Alcoa M&M Meijer Customers
Corporation

Upstream Downstream

Alcoa =Mining;
Ball =Al cans;
M&M =Wholesaler;
Transportation Companies Meijer =Retailer

Lecture 8 – Supply Chain Management | 5

 Supply Chain...
 Supply chain:
chain The network of services,
material, and information flows that link a firm’s
customer relationship, order fulfillment, and
supplier relationship processes to those of its
supplier and customers.
 Supply chain management:
management Developing a
strategy to organize, control, and motivate the
resources involved in the flow of services and
materials within the supply chain.
 Supply chain strategy:
strategy Designing a firm’s
supply chain to meet the competitive priorities
of the firm’s operations strategy.

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 The Organisation & SCM
 Supply Chain Management means transforming a
company’s "supply chain" into an optimally efficient,
customer-satisfying process, where the effectiveness
of the whole supply chain is more important than the
effectiveness of each individual department.

“The whole is more than the sum of the parts”

 Has to manage the process of planning, implementing

and controlling efficient cost effective, effective flow
and storage of goods, services and related information
from point of origin to point if consumption for the
purpose of the conforming to customer requirements.
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 Michael Dell Speaks
“People look at Dell and they see the
customer-facing aspects of the direct
business model, the one-to-one relation
ships. What is not really understood is
that behind these relationships lies the Michael Dell
entire value chain:
invention, development, design, manufacturing,
logistics, service, delivery, sales. The value created for
our customers is a function of integrating all those
things.”
Source: Technology Review, July/August 2001

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 Michael Dell Speaks
Thus, SCM can be viewed as a total system
approach to managing the entire flow of
information, materials, and services from raw-
material suppliers through factories and
warehouses to the end customer.

Supply Chain Management

Suppliers’
Supplier Direct Producer Distributor Final
Suppliers Customer

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 Current Trends and
Challenges in the SCM
 Increasing variety of products
 Decreasing product life cycles
 Increasingly demanding customers
 Fragmentation of Supply Chain Ownership:
vertical vs. virtual integration
 Globalization and Market Segmentation

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 Elements of SCM

Element Typical Issues

Customers Determining what customers want
Forecasting Predicting quantity and timing of demand
Design Incorporating customer wants, mfg., and time
Processing Controlling quality, scheduling work
Inventory Meeting demand while managing inventory costs
Purchasing Evaluating suppliers and supporting operations
Suppliers Monitoring supplier quality, delivery, and relations
Location Determining location of facilities
Logistics Deciding how to best move and store materials

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 Creating an Effective
Supply Chain
1. Develop strategic objectives and tactics
2. Integrate and coordinate activities in the
internal supply chain
3. Coordinate activities with suppliers with
customers
4. Coordinate planning and execution across the
supply chain
5. Form strategic partnerships

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 Supply Chain Dynamics
Supply chain dynamics can wreak havoc
on supply chain performance measures
Actions of downstream supply chain members
can affect the operations of upstream members

The bullwhip affect: The phenomenon in

supply chains whereby ordering patterns
experience increasing variance as you
proceed in the chain
The bullwhip effect is the uncertainty
caused from distorted information flowing up
and down the supply chain
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 Results of the bullwhip
effect
 Excess inventories  Lost customer
 Problems with quality service
 Increased raw  Lengthened lead
material costs time
 Overtime expenses  Lost sales
 Increased shipping  Unnecessary
costs adjusted capacity
 Lower revenues

 Stock-outs and backlogs mean

lost sales, as customers take
their business elsewhere

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 Solving the Bullwhip
dilemma
 Improve communication along the supply chain.
• Retailers notifying firms upstream of sales promotions will help
clarify demand signals from consumers
• Improved information will improve demand forecasts upstream
in the supply chain.

 Improve sources of forecast data

• Firms can use data from Point of Sale computer systems to
derive data from forecasting
• Firms along the supply chain can use EDI systems to retrieve
data on items that are legitimately being purchased by
customers.

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 Solving the Bullwhip
dilemma
 Work with firms upstream and downstream in the
supply chain
• Create smaller order increments to decrease time between
orders. Order processing will become closer to real-time.
• Work to develop consistent pricing of products to avoid
demand fluctuations from the sale of inexpensive products.

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 Keys to Effective SCM (Russell, 2003)

 Information
• Rapid flow of information among customers, suppliers,
distributors & producers
 Communication
• Effective communication between suppliers and customers &
share same goals
 Cooperation
 Trust
• Able to count on the quality & timeliness of the products and
services of their suppliers

Some firms attempt to manage their SC by vertically integrating – owning

& controlling all the different stages along the SC. E.g. McDonald’s
restaurant in Moscow own and operate own farms, food processing
plants and delivery system

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 Information in the SC
 Information links all aspects of the SC
 Computers and information technology (IT)
allows real-time, on-line communication
throughout the SC.
 Technologies that enables the efficient flow of
products and services through the SC are
referred to as “enablers” & IT has become the
most important enabler

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 IT Provided Functions ->
(Russell, 2003)
Improvements
 Centralized coordination of information flows
 Integration of transportation, distribution, ordering &
production
 Direct access to both domestic & global transportation
and distribution channels
 Locating and tracking the movement of every item in
the SC
 Consolidation of purchasing from all suppliers
 Inter-company & intra-company information access
 Data interchange
 Data acquisition at the point of origin and point of sale
 Instantaneous updating of inventory levels in real time
 IT Applications – E-Business, EDI, Bar coding,
Internet & WWW

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 Applications
 E-Business
• The replacement of physical business processes with
electronic ones. Example – Spirit Airline in Jamaica
 Electronic data interchange (EDI)
• A computer-to-computer exchange of business documents
 Point of sale (POS)
• Data creates an instantaneous computer record of sale
 Internet
• Provides instant, global access to an extraordinary number of
organizations, individuals and information sources. It has a big
impact on SC and changing the nature of doing business. It
enables trading partners to collaborate and provide visibility in
a manner that is relatively easy to implement.
 Intranets
• Computer networks within an organization
 Extranets
• Intranets connected to the Internet
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 E-Procurement
 It is direct purchase from suppliers over the
Internet
 It is part of the business-to-business (B2B)
commerce being conducted on the Internet,
in which buyers make purchases directly
from suppliers through their Web sites, by
using software packages or through e-
marketplaces (B2B), e-hubs and trading
exchanges
 Stats – In 2000 General Electric made over
US$4b in purchases from suppliers over the
Internet
 Benefits – Lower transaction costs, lower
prices, reduced labour costs, faster ordering
& delivery times
 Cons?
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 Distribution (Russell, 2003)

 Order fulfillment
• The process of ensuring on-time delivery of an
order (Russell, 2003)
 Logistics
• The transportation and distribution of goods and
services (Russell, 2003)
 Logistics management
• An approach that seeks efficiency of operations
through the integration of all material acquisition,
movement and storage activities (Heizer, 2004).

The most important factor in transportation and

distribution is SPEED (Russell, 2003)
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 Warehouse Management
Systems (WMS)
 An automated system that runs the day-to-day
operations of a distribution center
 Includes the following features
• Transportation management
• Order management; Yard management
• Labor management; W/H optimization
 Distribution outsourcing allows a company to
focus on its core competencies and can lower
inventory and reduce costs

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 Transportation
 Transportation tends to fall through the SCM cracks,
receiving less attention than it should
 It can be a significant SC cost
 Transportation costs can be as much as 20% of total
production costs & run as high as 6% of revenue
 Freight transportation costs in the US are approx.
US$500 billion per year, which is about 6% of GDP
 Domestic freight by all modes increased 65% between
1970 – 1995
 Retail firms primarily involved in the distribution of
goods – L.L. Bean & Amozon.com [12m packages/yr]

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 SCM Software
Applications
 Enterprise Resource Planning (ERP)
• Software that connects the components of a
company by sharing and organizing information and
data
 It transforms transactional data like sales into
useful information that supports business
decisions in other parts of the company.

 SAP was the first ERP software provider and is

the largest

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 Software application that have been adapted
to work on the web
 Allows a company to reach out to its
customers and business partners along its
supply chain
 Benefits
• Improved efficiencies; Improved productivity
• Enhanced easy access to information
• Enhanced the decision making process, etc.

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 ERP (Bozart, 2005)

Applications with a common technological platform

and built-in integration ...

Finance Accounting Marketing Sales Operations Purchasing

...can share a common

Centralized set of data
database

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ERP Application Modules (Ritzman, 2005)

Back-Office Processes Front-Office Processes

ERP System

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 Measures of SC
(Ritzman, 2005)
Performance
 Inventory Measures
• Average aggregate inventory value (AAIV)
AAIV = [(# of units of item A on hand)(Value
of each unit of item A)] + [(# of units of item
B on hand)(Value of each unit of item B)]
• Weeks of supply (WOS)
WOS = AAIV / Weekly sales (at cost)
• Inventory turnover (IT)
IT = Annual sales / AAIV
 Process Measures

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 Process Measures (Ritzman, 2005)

SUPPLY-CHAIN PROCESS MEASURES

Customer Relationships Order Fulfilment Supplier Relationship
 Percent orders taken  Percent of incomplete  Percent of suppliers’
accurately orders shipped deliveries on time
 Time to complete the  Percent of orders  Suppliers’ lead times
order-placement shipped on time  Percent defects in
process  Time to fulfill the order purchased materials
 Customer satisfaction  Percent of returned and services
with the order- items or botched  Cost of purchased
placement process services materials and services
 Cost to produce the
item or service
 Customer satisfaction
with the order-fulfillment
process

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 Links to Financial
(Ritzman, 2005)
Measures

 Return on assets
 Working capital
 Cost of goods sold
 Total revenue
 Cash flow

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 Summary
 SCM is one of the most important, strategic aspects of
operations management because it encompasses so
many related functions.
 Whom to buy materials from, how to transport goods &
services, and how to distribute them in the most cost-
effective, timely manner constitutes much of an
organization’s strategic planning.
 Contracting with the wrong supplier can result in poor
quality materials & late deliveries
 Selecting the wrong mode of transportation or carrier
can mean late deliveries to customers that will require
high, costly inventories to offset.
 Others?

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 Discussion Question #1
 Define the strategic goals of supply chain
management, and indicate how each element of a
supply chain (purchasing, production, inventory,
transportation and distribution) has an impact on these
goals.

 One of your friends states that “operations

management and supply chain management are
primarily of interest to manufacturing firms.” Is this true
or false? Give some examples to support your answer.

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 Discussion Question #2
DaimlerChrysler and General Motors vigorously compete
with each other in many automobile and truck markets.
When Jose Ignacio Lopez was vice president of
purchasing for GM, he made it very clear that his buyers
were not to accept luncheon invitations from suppliers.

Thomas Stalcamp, head of purchasing for Chrysler

before to take suppliers to lunch. Rationalize these two
directives in light of supply-chain design and
management.

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 Discussion Question #3
Under the Defense Industry Initiative on Business Ethics
and Conduct, 46 contractors agreed to establish internal
codes of ethics, to conduct training sessions and to report
suspected abuses.

(a) Is this initiative an example of moving toward

competitive or cooperative supplier relations?

(b) Suppose that you are a defense contracts manager.

You have a friend in the military whom you have known
for 20 years. As a gesture of friendship, she offers useful
inside information about a competing contractor’s bid.
What would you do if your company were part of the
industry’s ethics project? What would you do if your
company were not part of it?

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NEXT LECTURE:
Facility Location

D. Anthony Chevers

delroy.chevers@uwimona.edu.jm
DOMS, Room #28

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