Module 11-530

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Supply Chain Management

Chapter 15

15-‹#›

You should be able to:

LO 15.1 Explain the terms supply chain and logistics

LO 15.2 Name the key aspects of supply chain management

LO 15.3 List, and briefly explain, current trends in supply chain management

LO 15.4 Outline the benefits and risks related to outsourcing

LO 15.5 Explain what the main supply chain risks are, and what businesses can do to minimize those risks

LO 15.6 Describe some of the complexities related to global supply chains

LO 15.7 Briefly describe the ethical issues in supply chains and the key steps companies can take to avoid ethical problems

LO 15.8 Describe the three concerns of small businesses related to the supply chain and suggest ways to manage those concerns

LO 15.9 List several strategic, tactical, and operational responsibilities related to managing the supply chain

LO 15.10 Discuss procurement in terms of the purchasing interfaces, the purchasing cycle, ethics, and centralized versus decentralized decision making

LO 15.11 Briefly describe the key aspects of supplier management

LO 15.12 Discuss the logistics aspects of supply chain management, including RFID technology

LO 15.13 Discuss the issues involved in managing returns

LO 15.14 Describe some of the challenges in creating an effective supply chain and some of the trade-offs involved

Chapter 15: Learning Objectives

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Supply chain:

The sequence of organizations — their facilities, functions, and activities — that are involved in producing and delivering a product or service

Logistics:

The part of a supply chain involved with the forward and reverse flow of goods, services, cash, and information

Supply Chain

LO 15.1

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Typical Supply Chains

LO 15.1

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The sequence of the supply chain begins with basic suppliers and extends all the way to the final customer

Warehouses

Factories

Processing centers

Distribution centers

Retail outlets

Offices

Facilities

LO 15.1

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Supply chain functions and activities

Forecasting

Purchasing

Inventory management

Information management

Quality assurance

Scheduling

Production and delivery

Customer service

Functions and Activities

LO 15.1

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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 Chain Management

LO 15.2

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SCM managers

People at various levels of the organization who are responsible for managing supply and demand both within and across business organizations

Involved with planning and coordinating activities

Sourcing and procurement of materials and services

Transformation activities

Logistics

SCM Managers

LO 15.2

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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

Key Aspects of SCM

LO 15.2

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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

Flow Management

LO 15.2

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Trends affecting supply chain design and management:

Measuring supply chain ROI

“Greening” the supply chain

Re-evaluating outsourcing

Integrating IT

Adopting lean principles

Managing risks

Trends in SCM

LO 15.3

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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

Benefits & Risks of Outsourcing

LO 15.4

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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 divulge sensitive information to competitors, it can weaken a firm’s competitive position

Supply Chain Risks

LO 15.5

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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

Risk Management

LO 15.5

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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

Global Supply Chains

LO 15.6

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Examples:

Bribing government or company officials to secure permits or favorable status

“Exporting smokestacks” to developing countries

Claiming a “green” supply chain when the level of “green” is only minimal

Ignoring health, safety, and environmental standards

Violating basic worker rights

Mislabeling the country of origin

Selling products abroad that are banned at home

Dealing with ethical issues:

Develop an ethical supply chain code of behavior

Monitor supply chain activities

Choose suppliers that have a reputation for good ethical behavior

Incorporate compliance with labor standards in supplier contracts

Address any ethical problems that arise swiftly

SCM Ethical Issues

LO 15.7

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Three small business SCM concerns:

Inventory management

Carry extra inventory as a way to avoid shortages due to supply chain interruption

Have backups for delivery from suppliers and to customers

Reducing risks

Use only reliable suppliers

Determine which suppliers are critical and get to know them and any challenges they have

Measure supplier performance

Recognize warning signs of supplier issues

Have plans in place to manage supply chain problems

International trade

Work with someone who has expertise to help oversee foreign suppliers

Set expectations for demand and timing

Do not rely on a single supplier

Build goodwill to help in negotiations and resolving any problem that arise

Consider using domestic suppliers if the risks of working with foreign suppliers are prohibitive

Small Business Concerns

LO 15.8

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Management Responsibilities

Aspects of management responsibility:

Legal

Being knowledgeable about laws and regulations of the countries where supply chains exist

Obeying laws and operating to conform to regulations

Economic

Supplying products and services to meet demand as efficiently as possible

Ethical

Conducting business in ways that are consistent with the moral standards of society

LO 15.9

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Management Responsibility: Strategic

Certain strategic responsibilities have a major impact on the success of both supply chain management and the business itself:

Supply chain strategy alignment

Network configuration

Information technology

Products and services

Capacity planning

Strategic partnerships

Distribution strategy

Uncertainty and risk reduction

LO 15.9

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Tactical

Forecasting

Sourcing

Operations planning

Managing inventory

Transportation planning

Collaborating

Scheduling

Receiving

Transforming

Order fulfilling

Managing inventory

Shipping

Information sharing

Controlling

Management Responsibility: Tactical and Operational

Operational

LO 15.9

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The purchasing department is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service.

The goal of procurement

Develop and implement purchasing plans for products and services that support operations strategies

Procurement

LO 15.10

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Purchasing Interfaces

LO 15.10

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Duties of Purchasing

Identifying sources of supply

Negotiating contracts

Maintaining a database of suppliers

Obtaining goods and services

Managing suppliers

LO 15.10

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The main steps:

Purchasing receives the requisition

Purchasing selects a supplier

Purchasing places the order with a vendor

Monitoring orders

Receiving orders

The Purchasing Cycle

LO 15.10

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Supplier Management

Choosing suppliers

Supplier audits

Supplier certification

Supplier relationship management

Supplier partnerships

CPFR (collaborative planning, forecasting, and replenishment)

Strategic partnering

LO 15.11

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Vendor Analysis, Supplier Audits, and Supplier Certification

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

LO 15.11

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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

Supplier Relationship Management

LO 15.11

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Strategic Partnering

Two or more business organizations that have complementary products or services join so that each may realize a strategic benefit

Example:

When a supplier agrees to hold inventory for a customer in return for a long-term commitment

The customer’s inventory holding cost is reduced and the supplier is relieved of the costs that would be needed to continually find new customers

LO 15.11

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Contrasting Supplier Relationships

LO 15.11

Aspect	Adversary	Partner
Number of suppliers	Many; play one off 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 times and quick service

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Logistics

Refers to the movement of materials, services, cash, and information in a supply chain

Movements within a facility

Incoming shipments

Outgoing shipments

LO 15.12

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Movement Within a Facility

LO 15.12

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Traffic management

Overseeing the shipment of incoming and outgoing goods

Handles schedules and decisions on shipping method and times, taking into account:

Costs of shipping alternatives

Government regulations

Needs of the organization

Shipping delays or disruptions

Incoming and Outgoing Shipments

LO 15.12

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Radio frequency identification (RFID)

A technology that uses radio waves to identify objects, such as goods in supply chains

Similar to barcodes but

Are able to convey much more information

Do not require line-of-sight for reading

Do not need to be read one at a time

Has the ability to:

Increase supply chain visibility

Improve inventory management

Improve quality control

Enhance relationships with suppliers and customers

Tracking Goods: RFID

LO 15.12

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3-PL

Third-party logistics (3-PL)

The outsourcing of logistics management

Includes

Warehousing and distribution

Potential benefits include taking advantage of:

The specialists’ knowledge

Their well-developed information system

Their ability to obtain more favorable shipping rates

LO 15.12

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Reverse logistics

The process of transporting returned items

Products are returned to companies or third party handlers for a variety of reasons and in a variety of conditions

Elements of return management

Gatekeeping

Screening returned goods to prevent incorrect acceptance of goods

Avoidance

Finding ways to minimize the number of items that are returned

Managing Returns

LO 15.13

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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

Creating an Effective Supply Chain

LO 15.14

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Challenges

Barriers to integration of organizations

Getting top management on board

Dealing with trade-offs

Small businesses

Variability and uncertainty

Response time

LO 15.14

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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

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

Trade-Offs

LO 15.14

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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

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

Trade-Offs (cont.)

LO 15.14

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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

Trade-Offs (cont.)

LO 15.14

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