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- 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

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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 company’s 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 customer’s 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:

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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 firm’s competitive position

Supply chain complexity

Language and cultural differences

Currency fluctuations

Political instability

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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 supplier’s 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?

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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 It’s 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 supplier’s 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

https://youtu.be/qhCM0F81vEg

https://www.youtube.com/watch?v=I8_gmYNCQ1g&list=PLQQrEJuJbVzddxf_T7Kw1oG9qldGpwjVs&index=106&t=18s

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Bullwhip

https://www.youtube.com/watch?v=lUCeHBk37kM

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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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