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Supply Chain Integration

Chapter 14

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What is Supply Chain Integration?

Supply Chain Integration

The effective coordination of supply chain processes though the seamless flow of information up and down the supply chain.

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Supply Chain Integration

Upstream

Tier 3

Tier 2

Tier 1

Downstream

Information flows

Cash flows

Tomato suppliers

Tomato paste factories

Tomato grading stations

Retail sales

Consumers

Ketchup factory

Figure 14.1

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Supply Chain Disruptions

External Causes

Environmental Disruptions

Supply Chain Complexity

Loss of Major Accounts

Loss of Supply

Customer-Induced Volume Changes

Service and Product Mix Changes

Late Deliveries

Underfilled Shipments

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Supply Chain Disruptions

Internal Causes

Internally Generated Shortages

Quality Failures

Poor Supply Chain Visibility

Engineering Changes

Order Batching

New Service or Production Introductions

Service or Product Promotions

Information Errors

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Supply Chain Dynamics

Bullwhip Effect

The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the chain.

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Supply Chain Dynamics

The Bullwhip Effect

9,000

7,000

5,000

3,000

Order quantity

Month of April

Day 1

Day 30

Day 1

Day 30

Day 1

Day 30

Day 1

Day 30

Consumers’ daily demands

Retailers’ daily orders to manufacturer

Manufacturer’s weekly orders to package supplier

Package supplier’s weekly orders to cardboard supplier

Figure 14.2

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Integrated Supply Chains

External Supply Chain Linkages

First-Tier Supplier

Service/Product Provider

Support Processes

External Suppliers

Support Processes

Supplier relationship process

New service/ product development process

Order fulfillment process

Business-to-business (B2B) customer relationship process

External Consumers

Supplier relationship process

New service/ product development process

Order fulfillment process

Business-to-business (B2B) customer relationship process

Business-to-consumer (B2C) customer relationship process

Figure 14.3

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Integrated Supply Chains

SCOR (Supply Chain Operations Reference) Model

Plan

Source (purchasing)

Make (manufacturing)

Delivery

Return (returned product)

12 - 09

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SCOR Model

Figure 14.4

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New Service/Product Development

Design

Analysis

Development

Full Launch

Service or product not profitable

Need to rethink the new offering or production process

Post-launch review

Figure 14.5

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12- 12

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Supplier Relationship Process

Supplier selection

Material costs

Annual material costs = pD

Freight costs

Inventory costs

Cycle inventory = Q/2

Pipeline inventory = L

Annual inventory costs = (Q/2 + L) H

Administrative costs

Total Annual Cost =

pD + Freight costs + (Q/2 + L) H + administrative costs.

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Example 14.1

Compton Electronics manufactures laptops for major computer manufacturers. A key element of the laptop is the keyboard. Compton has identified three potential suppliers for the keyboard, each located in a different part of the world. Important cost considerations are the price per keyboard, freight costs, inventory costs, and contract administrative costs. The annual requirements for the keyboard are 300,000 units. Assume Compton has 250 business days a year. Managers have acquired the following data for each supplier.

Which supplier provides the lowest annual total cost to Compton?

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Example 14.1

Annual Freight Costs
	Shipping Quantity (units/shipment)
Supplier	10,000	20,000	30,000
Belfast	$380,000	$260,000	$237,000
Hong Kong	$615,000	$547,000	$470,000
Shreveport	$285,000	$240,000	$200,000

Keyboard Costs and Shipping Lead Times

Supplier	Price/Unit	Annual Inventory Carrying Cost/Unit	Shipping Lead Time (days)	Administrative Costs
Belfast	$100	$20.00	15	$180,000
Hong Kong	$96	$19.20	25	$300,000
Shreveport	$99	$19.80	5	$150,000

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Example 14.1

The average requirements per day are:

Total Annual Cost =

pD + Freight costs + (Q/2 + dL)H + Administrative costs

d =

300,000/250 = 1,200 keyboards

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Example 14.1

BELFAST: Q = 10,000 units.

Material costs = pD =

Freight costs = $380,000

Administrative costs = $180,000

Total Annual Cost =

= (10,000 units/2 + 1200 units/day(15 days))$20/unit/year

= $460,000

= $31,020,000

$30,000,000 + $380,000 + $460,000 + $180,000

= $30,000,000

($100/unit)(300,000 units)

Inventory costs = (cycle inventory + pipeline inventory)H

= (Q/2 + L)H

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The total costs for all three shipping quantity options are similarly calculated and are contained in the following table.

Example 14.1

Total Annual Costs for the Keyboard Suppliers
	Shipping Quantity
Supplier	10,000	20,000	30,000
Belfast
Hong Kong
Shreveport

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The total costs for all three shipping quantity options are similarly calculated and are contained in the following table.

Example 14.1

Total Annual Costs for the Keyboard Suppliers
	Shipping Quantity
Supplier	10,000	20,000	30,000
Belfast
Hong Kong
Shreveport

$31,020,000

$31,000,000

$31,077,000

$30,352,800

$30,406,800

$30,465,800

$30,387,000

$30,415,000

$30,434,000

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Green Purchasing

Green purchasing – The process of identifying, assessing, and managing the flow of environmental waste and finding ways to reduce it and minimize its impact on the environment.

Choose environmentally conscious suppliers.

Use and substantiate claims such as green, biodegradable, natural, and recycled.

Use sustainability as criteria for certification.

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Example 14.2

The management of Compton Electronics has done a total cost analysis for three international suppliers of keyboards (see Example 14.1). Compton also considers on-time delivery, consistent quality, and environmental stewardship in its selection process. Each criterion is given a weight (total of 100 points), and each supplier is given a score (1 = poor, 10 = excellent) on each criterion. The data are shown in the following table.

		Score
Criterion	Weight	Belfast	Hong Kong	Shreveport
Total Cost	25	5	8	9
On-Time Delivery	30	9	6	7
Consistent Quality	30	8	9	6
Environment	15	9	6	8

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Example 14.2

Belfast =

(25  5) + (30  9) + (30  8) + (15  9) = 770

Hong Kong =

(25  8) + (30  6) + (30  9) + (15  6) = 740

Shreveport =

(25  9) + (30  7) + (30  6) + (15  8) = 735

Preferred

For example, the Belfast weighted score is:

The weighted score for each supplier is calculated by multiplying the weight by the score for each criterion and arriving at a total.

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Supplier Relationship Process

Design collaboration

Early supplier involvement

Presourcing

Value analysis

Negotiation

Competitive orientation

Cooperative orientation

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Supplier Relationship Process

Buying

Electronic Data Interchange (EDI)

Catalog Hubs

Exchanges

Auctions

Locus of Control

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Supplier Relationship Process

Information Exchange

Radio Frequency Identification (RFID)

Vendor-Managed Inventories (VMI)

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Using Information Systems to Achieve Competitive Advantage

Supermarkets and large retail stores such as Walmart use sales data captured at the checkout counter to determine which items have sold and need to be reordered. Walmart’s continuous replenishment system (also known as Vendor Managed Inventory – VMI) transmits orders to restock directly to its suppliers (wrong). The system enables Walmart to keep costs low while fine-tuning its merchandise to meet customer demands.

Supplier Relationship Process

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Build a competitive advantage that helps to build the business while driving down costs.

Improve customer satisfaction – drives additional sales.

Provides more detailed data, closer to the point of actual demand, to help develop better production and inventory plans/forecasts, ultimately leading to lower inventories at the manufacturer.

Reduces lead-time from “order to delivery” (the order fulfillment process) and provides an additional set of eyes to manage the customer’s inventory that will ultimately lead to lower inventories at the retailer and manufacturer.

Transfers responsibility of retailer inventory management to the vendor.

Improve the business relationship between the two trading partners.

VMI’s Objectives

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Customer Benefits

Reduces and balances inventory levels

Improves cash flow

More productive use of the Buyers time

Improves service level to distribution centers and stores, reducing out of stocks

Reduces administrative costs

Warehouse efficiencies (reduced space requirements, less product handling, stabilize staffing/reduce overtime)

Reduce damage/unsaleables

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Improve reliability (on time deliveries)

Shorter lead-time/cycle-time

Higher truckload utilization

Increased volume

Increased profitability

Dedicated Single Point of Contact (SPOC)

Preferential treatment on order fulfillment, product allocations, shipments

Customer Benefits (continued)

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Supplier/Manufacturer Benefits

Reduces and balances inventory levels

Shorter lead-time/cycle-time

Higher truckload utilization

Improves cash flow, increases sales and profitability

Improves “perfect order” %

Increases service level to distribution centers and stores, reducing out of stocks (reliability) – increasing sales

Warehouse efficiencies (reduced space requirements, less product handling, stabilize staffing/reduce overtime)

Reduce damage/unsaleables

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VMI Performance Measures

Inventory levels ($, weeks on hand, turns)

On time deliveries

Order/case completeness

Out of stocks/cuts to stores (increased reaction time)

Communication (problems before they happen, special promotions, etc.)

Perfect orders – on-time, complete and billed accurately

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VMI – Combined With Consignment

Who knows what consignment is?

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Consignment Concept

Customer pays based on scan data (actual sales) versus receipt of goods

Customer builds trust in inventory control capabilities of supplier

Customer no longer needs to manage inventory on a daily/weekly basis

Eliminates 2% terms discount (2% 10, net 30)

Eliminate invoicing

Customer required to be Vendor Managed Inventory (VMI), Electronic Funds Transfer (EFT) capable

Incents efficient behaviors

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Consignment Timeline

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Radio Frequency Tags

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Order Fulfillment Process

Customer Demand Planning

Supply Planning

Production

Logistics

Ownership

Facility location

Mode selection

Capacity level

Cross-docking

The Perfect Order

On-Time

Complete

Billed Accurately

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Example 14.3

Tower Distributors provides logistical services to local manufacturers. Tower picks up products from the manufacturers, takes them to its distribution center, and then assembles shipments to retailers in the region. Tower needs to build a new distribution center; consequently, it needs to make a decision on how many trucks to have. The monthly amortized capital cost of ownership is $2,100 per truck. Operating variable costs are $1 per mile for each truck owned by Tower. If capacity is exceeded in any month, Tower can rent trucks at $2 per mile. Each truck Tower owns can be used 10,000 miles per month. The requirements for the trucks, however, are uncertain. Managers have estimated the following probabilities for several possible demand levels and corresponding fleet sizes.

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Example 14.3

If Tower Distributors wants to minimize the expected cost of operations, how many trucks should it have?

Requirements (miles/month)	100,000	150,000	200,000	250,000
Fleet Size (trucks)	10	15	20	25
Probability	0.2	0.3	0.4	0.1

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Example 4.3

C = monthly capital cost of ownership + variable operating cost per month + rental costs if needed

C(100,000 miles/month) =

C(150,000 miles/month) =

C(200,000 miles/month) =

C(250,000 miles/month) =

($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) = $121,000

($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(150,000 miles – 100,000 miles)

= $221,000

($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(200,000 miles – 100,000 miles)

= $321,000

($2,100/truck)(10 trucks) + ($1/mile)(100,000 miles) + ($2 rent/mile)(250,000 miles – 100,000 miles)

= $421,000

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Example 14.3

Next, calculate the expected value for the 10 truck fleet size alternative as follows:

Expected Value (10 trucks) =

Using similar logic, we can calculate the expected costs for each of the other fleet-size options:

Expected Value (15 trucks) =

Expected Value (20 trucks) =

Expected Value (25 trucks) =

0.2($121,000) + 0.3($221,000) + 0.4($321,000) + 0.1($421,000) = $261,000

0.2($131,500) + 0.3($181,500) + 0.4($281,500) + 0.1($381,000) = $231,500

0.2($142,000) + 0.3($192,000) + 0.4($242,000) + 0.1($342,000) = $217,000

0.2($152,500) + 0.3($202,500) + 0.4($252,500) + 0.1($302,500) = $222,500

The preferred option is 20 trucks.

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The Customer Relationship Process

Marketing

Business-to-Consumer Systems

Business-to-Business Systems

Order Placement

Cost Reduction

Revenue Flow Increase

Global Access

Pricing Flexibility

Customer Service

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Supply Chain Risk Management

The practice of managing the risk of any factor or event that can materially disrupt a supply chain, whether within a single firm or across multiple firms.

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Operational Risks – Threats to the effective flow of materials, services, and products in a supply chain

Strategic Alignment

Upstream/Downstream Supply Chain Integration

Visibility

Flexibility and Redundancy

Short Replenishment Lead Times

Small Order Lot Sizes

Rationing Short Supplies

Everyday low pricing (EDLP)

Cooperation and Trustworthiness

Supply Chain Risk Management

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Financial Risks – Threats to the financial flows in a supply chain, such as prices, costs, and profits.

Low Cost Hopping

Hedging

Production Shifting

Futures Contract

Supply Chain Risk Management

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Security Risks - Threats to a supply chain that could potentially damage stakeholders, facilities, or operations.

Access Control

Physical Security

Shipping and Receiving

Transportation Service Provider

ISO 28000

Supply Chain Risk Management

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Performance Measures

Customer Relationship	Order Fulfillment	Supplier Relationship
Percent of orders taken accurately Time to complete the order placement process Customer satisfaction with the order placement process Customer’s evaluation of firm’s environmental stewardship Percent of business lost because of supply chain disruptions	Percent of incomplete orders shipped Percent of orders shipped on-time Time to fulfill the order Percent of botched services or returned items Cost to produce the service or item Customer satisfaction with the order fulfillment process Inventory levels of work-in-process and finished goods Amount of greenhouse gasses emitted into the air Number of security breaches	Percent of suppliers’ deliveries on-time Suppliers’ lead times Percent defects in services and purchased materials Cost of services and purchased materials Inventory levels of supplies and purchased components Evaluation of suppliers’ collaboration on streamlining and waste conversion Amount of transfer of environmental technologies to suppliers

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Performance measures

Costs

Time

Quality

Environmental impact

Revenues – How?

Levers for Improved Supply Chain Performance

12 - 47

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Revenues

Improved quality

Improved customer service

Perfect orders (on-time + complete + billed accurately

Lower costs leading to lower prices

Efficient behaviors (order as we make from where we make)

Levers for Improved Supply Chain Performance

12 - 48

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Solved Problem 1

Eagle Electric Repair is a repair facility for several major electronic appliance manufactures. Eagle wants to find a low-cost supplier for an electric relay switch used in many appliances. The annual requirements for the relay switch (D) are 100,000 units. Eagle operates 250 days a year. The following data are available for two suppliers. Kramer and Sunrise, for the part:

Freight Costs
Shipping Quantity (Q)
Supplier	2,000	10,000	Price/Unit (p)	Carrying Cost/Unit (H)	Lead Time (L)(days)	Administrative Costs
Kramer	$30,000	$20,000	$5.00	$1.00	5	$10,000
Sunrise	$28,000	$18,000	$4.90	$0.98	9	$11,000

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Solved Problem 1

The daily requirements for the relay switch are:

100,000/250 = 400 units

d =

We must calculate the total annual costs

for each alternative:

Total annual cost = Material costs + Freight costs + Inventory costs + Administrative costs

= pD + Freight costs + (Q/2 + dL) H + Administrative costs

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Solved Problem 1

Kramer

Q = 2,000:

Q = 10,000:

The analysis reveals that using Sunrise and a shipping quantity of 10,000 units will yield the lowest annual total costs.

Sunrise

Q = 2,000:

Q = 10,000:

($5.00)(100,000) + $30,000 + (2,000/2 + 400(5))($1) + $10,000

= $543,000

($5.00)(100,000) + $20,000 + (10,000/2 + 400(5))($1) + $10,000

= $537,000

($4.90)(100,000) + $28,000 + (2,000/2 + 400(9))($0.98) + $11,000

= $533,508

(4.90)(100,000) + $18,000 + (10,000/2 + 400(9))($0.98) + $11,000

= $527,428

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Solved Problem 2

Eagle Electric Repair wants to select a supplier based on total annual cost, consistent quality, and delivery speed. The following table shows the weights management assigned to each criterion (total of 100 points) and the scores assigned to each supplier (Excellent = 5, Poor = 1).

		Scores
Criterion	Weight	Kramer	Sunrise
Total annual cost	30	4	5
Consistent quality	40	3	4
Delivery speed	30	5	3

Which supplier should Eagle select, given these criteria and scores?

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Solved Problem 2

Using the preference matrix approach, the weighted scores for each supplier are:

		Scores
Criterion	Weight	Kramer	Sunrise
Total annual cost	30	4	5
Consistent quality	40	3	4
Delivery speed	30	5	3

WSKramer =

WSSunrise =

(30  4) + (40  3) + (30  5) = 390

(30  5) + (40  4) + (30  3) = 400

Preferred

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Solved Problem 3

Schneider Logistics Company has built a new warehouse in Columbus, Ohio, to facilitate the consolidation of freight shipments to customers in the region. How many teams of dock workers should he hire to handle the cross docking operations and the other warehouse activities? Each team costs $5,000 a week in wages and overhead. Extra capacity can be subcontracted at a cost of $8,000 a team per week. Each team can satisfy 200 labor hours of work a week. Management has estimated the following probabilities for the requirements:

Requirements (hours/wk)	200	400	600
Number of teams	1	2	3
Probability	0.20	0.50	0.30

How many teams should Schneider hire?

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Solved Problem 3

We use the expected value decision rule by first computing the cost for each option for each possible level of requirements and then using the probabilities to determine the expected value for each option. The option with the lowest expected cost is the one Schneider will implement. We demonstrate the approach using the “one team” in-house option.

One Team In-House

C(200) =

C(400) =

C(600) =

Expected Value =

0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800

$5,000 + $8,000 + $8,000 = $21,000

$5,000 + $8,000 = $13,000

$5,000

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Solved Problem 3

A table of the complete results is below.

Weekly Labor Requirements
In-House	200 hrs	400 hrs	600 hrs	Expected Value
One team
Two teams
Three teams

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Solved Problem 3

A table of the complete results is below.

Based on the expected value decision rule,

Schneider should employ two teams at the warehouse.

$5,000

$13,000

$21,000

$13,800

$10,000

$18,000

$12,400

$15,000

Weekly Labor Requirements
In-House	200 hrs	400 hrs	600 hrs	Expected Value
One team
Two teams
Three teams

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010203040506012Days

Order To Payment Cycle Comparison

Order GeneratedOrder AcquiredOrder ShippedOrder Recieved1st Case Moved1st PaymentLast Case MovedLast Payment

Average

Payment

Average

Payment

Chart1

1	1	3	1		19		26
1		3	1	5	1	5	1

Average Payment

Order Generated

Order Acquired

Order Shipped

Order Recieved

1st Case Moved

1st Payment

Last Case Moved

Last Payment

Days

Order To Payment Cycle Comparison

Sheet1

	non con	consignment
order genrated	1	1
order acquired	1
order shipped	3	3
order received	1	1
first case moved		5
first EFT payment	19	1
last case moved		5
last EFT payment	26	1
total	51	17

For Prof. MGK Only

Chart1

Sheet1

Sheet2

Sheet3