operations management 3
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chap_015.docChapter 11 - Supply Chain Management
Chapter 15 - Supply Chain Management
CHapter 15
supply chain management
Teaching Notes
It is important to emphasize that Supply Chain Management involves the entire range of production and distribution processes. Students need to understand the trade offs involved in supply chain function related to JIT, inventory management purchasing and delivery lead times and quality.
Supply Chain Management requires a broad view of the entire flow from purchasing to final delivery to the customer. Supply Chain Management is becoming increasingly more important due to the following factors:
1. Implementation of JIT systems.
2. Emphasis in reduction in inventories.
3. Emphasis in reduced order cycles and reduced lead times.
4. Continuous and rapid change in products and product designs (shorter product life cycles).
5. Shorter product introduction and product development times.
The importance of Supply Chain Management can not be underestimated because it ensures that the right materials are at the right place at the right time at a minimal cost and maximum quantity.
In addition, supply chain management requires very careful coordination of activities between various business organizations on the chain. Integration of databases and sharing key pieces of information among the different business organizations on the supply chain not only provides timely and valuable information to companies on the supply chain, but also assists in improving the trust and the overall relationship between suppliers and their customers.
The term supply chain management has emerged in the mid-1980s and gained popularity in the 1990s. In the new millennium, it is continuing to gain interest at a rapid rate. Even though the term, supply chain management (SCM) is fairly new, the concepts and problems involved in SCM are not. However, many of these problems and their solutions are integrated within and between firms in the context of managing the flow of products and related information. Thus, supply chain management involves efficient integration of suppliers, manufacturers, distributors and customers in the production and distribution of goods and services.
Purchasing is the process of obtaining products, parts, supplies and materials from an outside source of supply. Recently, due to increased emphasis of outsourcing, the importance of purchasing has substantially increased. The purchasing function includes identifying the supply pool, negotiating prices and terms of the purchase, placing and receiving orders, quality assurance, material handling and storage of received shipments. One of the very important responsibilities of purchasers is communication and coordination with suppliers and possibly suppliers’ suppliers—especially in the areas of scheduling and forecasting to reduce the chance of excess inventories, stockouts and late deliveries. In addition, purchasing works closely with production planning and control and sales to ensure that the desired product is available at the right location at the right time in the right quantity.
In order to eliminate confusion, it is a good idea to let the students know that there are alternative names used in the area of purchasing. Depending on the environment and the relative position of the firm on the supply chain, acquisition of materials is identified by different terms. While the manufacturers of materials, parts, components and finished products generally refer to acquisition of materials from outside sources as purchasing, distributors and retailers call the same function buying, while others in government and military refer to it as procurement.
Reading: E-Procurement at IBM
1. IBM was able to reduce its procurement costs by sending purchase orders, receiving invoices and paying suppliers by using the World Wide Web as its transaction processing network. Much of the savings came from eliminating intermediaries—IBM was able to eliminate intermediaries because the Internet allowed IBM to work with multiple tiers of suppliers simultaneously.
2. The speed and ease of using the Internet allowed IBM to form partnerships with small suppliers even though many of these small suppliers were supplying IBM with a small volume, specialized, one-time-only purchase.
3. In addition to cost reduction, IBM’s other main reason for switching to Web-based procurement was forming strong long-term supplier partnerships. The Internet allows IBM to collaborate with its suppliers over issues related to scheduling, inventories and forecasting.
4. The use of an Internet procurement process reduces mistakes that occur during manual recording and processing because manual entry and processing requires typing or writing prices, part numbers, etc. on multiple documents. On the other hand, Web based procurement automatically generates most transaction documents to process all procurement transactions and contains computerized checks to catch entry errors.
5. IBM developed a Web-based portal to provide a single entry point to the company Web site instead of having suppliers connect to the needed areas with separate URLs based on their specific needs. Most large companies like IBM have multiple types of relationships and interfaces with suppliers involving quality, purchasing, engineering and other dimensions of the business. Having a single entry point for suppliers makes the communication process easier and increases the speed of the supply chain. Speedy communication between suppliers and IBM is very important, especially during the product development stage due to the short life cycle of most electronic products.
Reading: Rise of the 3PL:
1. The larger companies are more likely to outsource than their smaller counterparts because they are in a better position to afford the outsourcing and they have the staff and the system necessary to deal with outsourcing. In addition, the economies of scale can become a factor because larger companies will tend to outsource larger volumes, thus resulting in possible savings on per unit cost and procurement. In addition, larger companies may use outsourcing to a larger degree than their smaller counterparts because it will give them the time to concentrate on their core competencies whereas the smaller company will not have the expertise in core competencies due to the size disadvantage.
2. The technology is very important to the 3PL decision because the companies that utilize the third party logistics providers expect them to supply them with a certain level of IT sophistication. The technology also enables the third party logistics to scale their operations without incurring additional overhead, assets and other costs, which allows them to do more with less.
Answers to Discussion and Review Questions
1. Supply chain is a sequence of organizations, their facilities, functions and activities that are involved in producing and delivering a product or service. The chain begins with suppliers of raw materials and extends all the way to the final customer.
2. The factors that make it desirable to manage a supply chain include increasing:
a. Need to improve operations
b. Levels of outsourcing
c. Transportation and distribution costs
d. Competitive pressures
e. Globalization
f. Complexity of supply chains
g. Importance of e-commerce
The potential benefits of effective management of a supply chain include lower inventories, higher profits, improved customer loyalty, shorter manufacturing and production lead times, higher productivity and improved ability to respond to fluctuations in demand.
3. Elements of supply chain management consist of customers, forecasting, design, processing, inventory, purchasing, suppliers, location and logistics.
4. Strategic issues in supply chain management include determining the number, location and capacity of facilities, deciding whether to make or buy a product.
Tactical issues in supply chain management involve policies and procedures related to procurement, processing, purchasing, logistics, inventory and quality.
Operational issues in supply chain management are related to production planning and control which involves scheduling of workforce, machinery, production, deliveries and distribution of goods or services.
5. Bullwhip effect is the increase of inventories on a supply chain starting at the end of a supply chain with the final customer and working backwards towards the initial supplier (supplier of raw materials). The main reason for the occurrence of this phenomenon is the lumpiness and variability of demand at different stages of the supply chain. In order to protect themselves from the uncertainties resulting from lumpy and variable demand, suppliers carry larger amounts of inventory as safety stock. As the need for carrying inventory increases, the batch or order size also progressively increases on the supply chain from customers all the way back to initial suppliers. Setup time reduction methods and CONWIP (constant work-in-process) systems can alleviate the bullwhip effect because these methods generate smaller batch sizes, which result in smaller quantities of inventory.
6. The purchasing function is becoming more important in supply chain management because of the following factors:
a. As a result of increased outsourcing, the cost of materials is higher than cost of labor for many end items.
b. The requirements of JIT and lean production include smaller lot sizes, high quality goods, precise, correct timing of deliveries and correct quantity. In order to ensure that all of the above take place, the purchasing function assumes greater responsibility in managing the supply chain.
c. Increased globalization involves international suppliers, joint venture agreements and other forms of global supplier-customer partnerships, which require significant participation of the purchasing department.
7. Inventory velocity refers to the rate at which the inventory (material) goes through the system. The faster the inventory moves through the system, the better it is because the quick movement of materials not only results in lower inventory costs but also faster delivery and service to customers.
Information velocity refers to the speed at which information is transferred within a supply chain. The higher the information velocity, the better it is because quick two-way flow of information results in faster decision-making on the supply chain.
8. Strategic partnering involves two or more business organizations with complimentary products or services to join together so that each partner gains a strategic benefit. For example, the retail buyer may be able to purchase certain products at a lower price from a supplier provided that it also purchases other complimentary products that the supplier produces.
9. E-commerce had a profound and a dramatic effect on supply chain management. The reasons for this influence include buying on the Internet, both B to C (business-to-consumer) and B to B (business-to-business), the utilization of e-mail, electronic data interchange, electronic shipment and electronic order tracking, and promotion of products and services through company Web sites.
10. See Table 16–2 for a comprehensive list of advantages of e-business.
11. See Table 16–5 for a comprehensive list of problems and the associated trade-offs in designing and managing a supply chain.
12. Reverse logistics refers to the management of returned merchandise. It usually involves screening items to reject items that aren’t returnable, then sorting those that are according to whether they can be repackaged and sold as is, need rework, need to be scrapped, etc., in order to extract as much value as possible.
13. Supply chain visibility involves a major trading partner to connect any part of a company’s supply chain to access data in real time on inventory levels, shipment status and similar key information. This type of information sharing allows companies to prepare for future actions of their trading partners. For example, assume that a customer on the supply chain has a low level of inventory and an extremely high level of future orders and forecasted demand. Supply chain visibility will allow a company supplying this customer to look at their customer’s inventory records and forecast information, and realize that high level of customer orders will be coming in the future and begin planning production and capacity requirements accordingly. This type of monitoring of suppliers’ and customers’ records enable companies to be proactive and react to situations before a problem develops.
14. Purchasing managers plan, coordinate and direct negotiation of purchase contracts, supplier selection, supplier certification, supplier partnerships, outsourcing, interface between purchasing and other functions, value analysis, monitoring the placement, progress and reception of orders.
15. Purchasing is closely integrated with many of the other business functions. For example, when parts or materials are purchased, Purchasing is responsible to notify Accounting so that Accounting can process the payment. Accounting is also responsible for many of the record keeping activities related to the purchasing function, such as processing of checks, purchase orders, invoices, inventory transactions, etc.
“Design and Engineering” informs “Purchasing” about product specifications, changes in product design and new material needs. Purchasing also communicates similar information to Design and Engineering about new products in the market place. The two departments (Purchasing and Design) work together to establish product specifications to reduce the cost of the item.
16. RFID tags provide an improved way to track shipments, and therefore, improve supply chain visibility. That, in turn, will lead to better decision making all up and down the supply chain.
17. Organizational placement of the purchasing function as well as the level of centralization is a strategic decision.
Centralized Purchasing: A single purchasing department handles all purchasing and related functions.
Advantages of centralization include:
a. The ability to obtain quantity discounts due to large volume generated.
b. More attention from suppliers due to high volume.
c. The ability to maintain a specialized staff who can concentrate on a selected few items consistent with their background and expertise.
Decentralized Purchasing: Individual departments are responsible for their own purchasing requirements.
Advantages of decentralization include:
a. The ability to respond to “local” or “department specific” needs.
b. The flexibility to obtain quicker service and deliveries.
c. Less paper work and bureaucracy.
18. Vendor Analysis: Studying various key characteristics of potential suppliers in order to select dependable, reliable, competent, progressive sources of supply. In vendor analysis, the criteria used in choosing among alternative suppliers include quality, lead time, on-time delivery, and price.
19. Supplier Certification: It is the process of approving suppliers in order to place them on a firm’s “certified” list. It involves site visits, contacting the supplier’s other customers for information and reference, credit checks, and financial statement analysis. This can be very important because unreliable suppliers who don’t deliver on time as well as suppliers that deliver products with unacceptable quality could cause many problems for a firm.
20. Suppliers should be viewed as outside partners who can contribute to the long-term success of the firm rather than as adversaries. The strategy of single sourcing (purchasing all parts of a given kind from a single supplier), and utilizing local suppliers will assist in strengthening the relationship with the suppliers and reduce the number of suppliers. Viewing suppliers as outside partners can also improve supplier flexibility in terms of their ability to handle changes in the date and the quantity of delivery schedules and changes in product specifications. Choosing suppliers only on the basis of price, and continuously switching them is very detrimental to the long-term success of the firm.
21. Crossdocking avoids the costs associated with warehousing, including moving goods in and out of the warehouse, plus holding costs. It also gets goods to customers more quickly.
Taking Stock
1. When information is shared with other organizations on the supply chain, it allows companies to better plan their manufacturing, inventories and promotions. However, sharing information with other companies can make a company vulnerable because it allows other companies to have access to its records. Competitors may be able to access the information and use it to strategically position themselves against the company.
2. The manager of supply chain operations, vice president of Logistics, transportation, purchasing, and production may have to be involved depending on the level of complexity of the supply chain operations. Of course, the cost of the software may be a factor and if so the finance department will also have to be involved.
3. Three different ways the technology has improved the ability of the firm to manage supply chains:
a. The ability to integrate the databases of different firms to allow faster and easier access to information by trading partners.
b. The ability to use fax, e-mail, teleconferencing and other forms of advanced communication systems to allow companies to exchange information and ideas quicker and more efficiently.
c. Utilization of computers and specifically e-commerce and e-business to generate more business for a firm. See Table 16–2 for a comprehensive list of benefits for utilizing e-commerce to improve supply chains.
Critical Thinking Exercise
1. There are many factors critical for a successful supply chain operation. In the following section, we will explain why certain factors are very important in the implementation of successful supply chain operations.
Integrated Technology: As the technology becomes more integrated it becomes easier for trading partners on the supply chain to share information.
Information Sharing: This is a crucial aspect of successful supply chain operation because it allows companies to share information so that they can prevent problems form occurring on the supply chain. For example, timely information sharing about a significant increase in demand will prevent shortages from occurring because companies on the chain will be able to react to the increase in demand in a timely fashion.
Trust among trading partners: It is essential for trading partners to trust each other and feel confident that partners share similar goals and that they will take actions that are mutually beneficial. Without a good, trusting relationship between trading partners all of the systems (inventory, purchasing, accounting, manufacturing, etc.) cannot function effectively. The interpersonal relationships are vital in developing trust between organizations. Openness with the other party allows each party to feel comfortable with each other so that they can share problems or information. In addition, if sufficient trust is developed between the parties, one party will protect the rights and interests of the second party to others. As the trust between the parties increases through repeated personal interactions between the parties, it will ultimately lead to a certain bond between the individuals and their organizations. By appointing the best people not only savvy about the technical aspects of the supply chain operations but who also have interpersonal skills to maintain a positive relationship with suppliers or customers will be very beneficial to the long-term successful management of the supply chain operations of the firm.
Real time information availability: If the information is not available on a real time basis, transactions and communications between companies on the supply chain will be very slow and will result in a decrease in the firm’s ability to develop, manufacture and distribute products. The quick exchange of information on the supply chain is vital because IT infrastructures are quite complex, consisting of many communication networks, databases and operating systems that contain a wealth of information. Finding the right piece of information and making it readily available to the appropriate parties on a real time basis becomes a crucial aspect of successful supply chain operations.
Event management capability: Event management is the ability to detect and respond to unplanned events such as a delayed shipment or stockout of certain inventory items. This is crucial in supply chain management because more than likely, things will go wrong on the supply chain and corrective actions must be taken. If there is no process for dealing with situations that deviate from the original plan, the company will either take too long to get organized to respond or there will be chaos in trying to resolve the problem.
Purchasing: Purchasing is responsible for obtaining materials, parts, supplies and services needed to produce a product or provide a service. Purchasing is very important to a firm because for a manufacturing firm, 60% of the cost of finished goods sold come from purchased materials. Of course the percentage of purchased inventories are much higher for retail and whole sale companies. However, the importance of purchasing to supply chain management far exceeds the percentage of the cost of goods sold. The quality of goods and services and timing of the deliveries are very important factors in determining the success of the supply chain.
2. Doing so would reasonably involve becoming well versed in many different operations. Getting up to speed would require time, new people, training, adding resources, and adding new managers. Companies who specialize in various aspects of a supply chain are typically better able to handle those activities (e.g., 3PLs). And unless demand was steady over time, instead of say intermittent or seasonal, operating certain portions of a supply chain would be extremely inefficient. Most certainly, this would put a business at a competitive disadvantage.
3. On the plus side, it reduces or removes any environmental issues caused by the outsourced process. However, it is likely that the issues have simply been outsourced as well, and perhaps to a worse degree if there are fewer environmental regulations in the foreign country.
4. Student answers will vary.
Memo Writing Exercises
1. Consolidated Delivery and Logistics Inc. is one of the major competitors in the delivery and distribution industry. The firm’s Web site URL is http://www.cdl.net
The main services of the company include ground services, air services and technological information. Air services include next flight out, international air, and heavy freight. Ground services include a host of options. While some of the options are actual distribution options, others are software systems designed to improve the supply chain activities and operations. The technological information section of the Web site simply provides information about various logistics and supply chain technologies not provided by CD&L, including Bar Code Scanning Technologies, EDI Client Communication Systems, Route Planning Systems and Distribution Management Systems.
2. The Operations Management Center provides a few magazines and journals with many appropriate articles dealing with Supply Chain Management. These journals are provided under the category OM publications and under the subcategory of Logistics and Supply Chain Management. The relevant journals and magazines listed on this site include the following: Logistics Management and Distribution Report, Supply Chain Management Review, Materials Management and Distribution, and Modern Purchasing. However, I would recommend Supply Chain Management Review because the articles are relatively short, very relevant and the journal is easy to read. The URL for the journal is http://www.mhhe.com/business/opsci/pom/ .
3. After reading this chapter, students should be able to understand the importance of purchasing in the context of the entire business organization. They should also be able to appreciate the interface between purchasing and other functions of the firm such as accounting and engineering. In addition, students should become familiar with basic functions of purchasing and the factors affecting various purchasing related decisions.
4. Outsourcing has recently increased because it allows the companies to take advantage of an outside supplier to provide materials, parts or services better, cheaper and more efficiently. The outsourced supplier is also able to provide more expertise and knowledge. In addition, outsourcing provides additional flexibility to perform other functions and frees up capacity that can potentially be used in producing other parts or components.
5. Strategic partnering generally offers benefits to both partners. For example, strategic partnering allows a start-up or new company (firm A) to venture into new areas to take advantage of the partnering companies’ (firm B) resources. Firm B also benefits by the specialized work performed by firm A.
Strategic partnering may reduce purchasing, transportation, production, inventory costs, product development and manufacturing lead time. It may also assist in improving product design, quality, customer service and provide the opportunity to introduce new products or services.
Solutions
1. H = $10 per item per year (2,000 item) = $20,000 per year.
D = 3 days
Incremental holding cost = $20,000 (3/365) = $164.38
This exceeds the savings that would result by using 5-day freight. Therefore, use 2-day freight.
2. H = .30(80 boxes)($200 per box) = $4,800
2-day analysis:
d = 1 day
Savings = $40
Incremental holding cost = H
÷
ø
ö
ç
è
æ
365
d
= $4,800
÷
ø
ö
ç
è
æ
365
1
= $13.15
Net savings = $40 – $13.15 = $26.85
6-day analysis
d = 5 days
Savings = $120
Incremental holding cost = H
÷
ø
ö
ç
è
æ
365
d
= $4,800
÷
ø
ö
ç
è
æ
365
5
= $65.75
Net savings = $120 – $67.75 = $54.25
Thus, the 6-day alternative would yield the greater savings.
3. H = .35 (300 boxes) ($140 per box) (1/365 days) = $40.274
Cost = FC + dH
|
A |
B |
||
|
Option |
Cost |
Option |
Cost |
|
2 days |
$580.55 |
2 days |
$605.55 |
|
3 days |
580.82 |
4 days |
611.10 |
|
9 days |
762.46 |
7 days |
691.92 |
Ship 2-day using A.
Case: MasterTag
1. The key benefit relates to customer satisfaction by more closely matching supply with demand which stems from delaying shipment of tags until demand is known, and then shipping tags directly to the growers.
2. When MasterTag considers implementing their supply chain management plan, the potential benefits they hope to gain are most likely to be greater customer satisfaction, advantages over the competition, reduced lead times and “leaner” operations. Benefits of effective supply chain management include lower inventories, lower costs, higher productivity, greater agility, shorter lead times, higher profits, and greater customer loyalty. The most significant downside MasterTag should consider before implementing supply chain management includes possible trust issues with partners. Successful supply chain management requires integration of all aspects of the supply chain. This requires trust and a willingness to cooperate to achieve common goals. Coordination and information sharing are critical to the effective operation of a supply chain. In fact, MasterTag should be very selective in allowing customers to participate in this program due to the potential trust issues with partners, especially any financial or forward sales information. Another issue may relate to dealing directly with the growers because that will involve new relationships, and there are many more growers than there are seed companies, which will require additional packaging and shipping of tags.
Case: B&L Inc.
There is a solid opportunity here for Brian Wilson, assuming that the numbers from Mike Carr and Mayes are accurate. However, this does not mean that B&L should outsource the bracket, at least not away. After checking the numbers with Mike Carr and Mayes, Brian might want to dig into process improvement opportunities before committing to outsourcing. For example, the case indicates that B&L is not getting full benefit from the eight station burn table machine. The threat of moving production out to a supplier might create some interest in the plant to changing the process to reduce costs. Either way, Brian might want to satisfy manufacturing that he gave them a fair chance to look at the process and its costs before pulling the business.
This case requires some quantitative analysis if the students are going to develop a meaningful analysis. First, let’s take a look at the cost data for the outrigger bracket. The case indicates that B&L produces 40 trailers per year, which suggests that it needs 800 brackets annually, assuming 20 brackets per trailer. B&L estimated its bracket costs at $150.10 each, for a total annual cost of $120,080. It is certainly worthwhile for Brian Wilson and Alisson Beals to spend some time on this project.
Exhibit 1 in the case provides the data from the controller, Mike Carr, and the detail from the quote from Mayes. Note the inconsistencies between the prices from Mayes and B&L’s costs. Which raises the issue of the accuracy of the prices/costs. It suggests that either B&L doesn’t have a good handle on its costs or Mayes has made some mistakes in their bid. It would be worthwhile to follow-up on this issue with the controller, Mike Carr, and with Mayes. Students should be prepared to show how they intend to reconcile the inconsistencies. It would be useful to get more information, such as material and direct labor costs. Likely the material costs represent the bulk of the costs for the four subassembly parts.
Exhibit TN 1 provides analysis of the costs from the exhibit in the case, incorporating the fixed and variable components of B&L’s costs. This analysis indicates a difference of $11.89 per part, or potential savings of $9,512 per year or 8 percent of the total current cost. Outsourcing T-69 alone would produce savings of 17.66 each or 800 x $17.66 = $14,128 in savings per year. The lack of detail regarding the various cost components of each component and the final assembly makes this a frustrating analysis.
Part T-69 is an interesting example. Maybe most of the benefit of outsourcing can be obtained by having Mayes produce T-69. This is the gray zone in make or buy referred to by the text. Sometimes the better solution lies between 100 percent make and 100 percent buy. If $17.66 in variable cost can be saved on T-69 then this would represent 800 x $17.66 = $14,128 in savings. The lack of detail regarding the various cost components of each component and the final assembly makes this a frustrating analysis.
Lot Sizing and Inventory
The case infers that B&L’s manufacturing and assembly operations do a pretty good job synchronizing their inventories and B&L carries very little finished inventory as a result. However, the case also suggests that Brian Wilson had to establish a lot size quantity in the event that Mayes was chosen as the source for the bracket. In any event, it would appear that finished component inventories for the outrigger bracket would be increasing.
There is sufficient information in the case for the students to calculate the EOQ. The following is provided in the case:
D = 800
i = 20 percent
C = $108.2
S = $75 Please note this $75 is highly suspicious. Is this all variable cost?
brackets
74.5
EOQ
(108.2)
.20
(75)
(800)
2
EOQ
iC
2DS
EOQ
=
=
=
Before going any further, it must be made clear this situation breaks at least one of the underlying assumptions of the EOQ formula, constant demand. However, the EOQ formula is fairly robust and should provide a reasonable estimate of the appropriate order quantity.
The EOQ calculation suggests an order quantity of 75 brackets. Brian might want to adjust this slightly to match the 80 units needed for four trailers. Assuming an average inventory of 40 units, the carrying costs would be $865.60 (40 × $108.20 × 0.20) and the order costs would be $750 (10 orders at $75), for a total cost of $1,615.60.
For T-69 alone the EOQ would be
180
(108.2)
.20
(75)
(800)
2
=
=
EOQ
TEACHING STRATEGY
The class can start with a discussion of the motivation for the outsourcing. Touch on the annual costs of the bracket and what might be a reasonable cost savings to justify moving production to Mayes. For example, would you move it for a savings of 1 percent? How about 10 percent?
Next, look at the costs and prices in the exhibit in the case. Press the students on the inconsistencies and what they might do about it. A statement like this might be appropriate: “Just because someone gives you a number, should you trust it?”
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