OPERATION & QUALITY MANAGEMENT 2

MBALN-670 Operations Management

Title of the topic Supply Chain Management

Topic’s learning objectives

1. Identify and critique the strategic frameworks of operations and quality

management within a global business environment. 2. Comprehensive knowledge of the main concept and methods related to

designing and managing operations and supply chains. 3. Systematic application of a range of fundamental operational improvement

concepts. 4. Critically evaluate the role of operations within different business models /

functions..

Introduction A supply chain is the network of activities that delivers a finished product or service

to the customer. These include sourcing raw materials and parts, manufacturing and

assembling the products, warehousing, order entry and tracking, distribution through

the channels, and delivery to the customer. This section looks at how supply chain

activities tie in with the rest of the organisation, what impact it has and how is it

managed.

At the beginning of the chain are the external suppliers who supply and transport raw

materials and components to the manufacturers. Manufacturers transform these

materials into finished products that are shipped either to the manufacturer's own

distribution centres or to wholesalers. Next, the product is shipped to retailers who

sell the product to the customer. Goods flow from the beginning of the chain through

the manufacturing process to the customer. Relevant information flows back and

forth among members of the supply chain.

Supply chain management is the vital business function that coordinates and

manages all the activities of the supply chain linking suppliers, transporters, internal

departments, third-party companies, and information systems. Supply chain

management for manufacturers entails

• Coordinating the movement of goods through the supply chain from suppliers to

manufacturers to distributors to the final customers

• Sharing relevant information such as sales forecasts, sales data, and

promotional campaigns among members of the chain

A prime example of operations management (OM), supply chain management

provides the company with a sustainable, competitive advantage, such as quick

response time, low cost, state-of-the-art quality design, or operational flexibility.

Dell Computer Corporation is a good example of a company using its supply chain to

achieve a sustainable competitive advantage. Quick delivery of customized

computers at prices 10–15 percent lower than the industry standard is Dell's

competitive advantage. A customized Dell computer can be en route to the customer

within 36 hours. This quick response allows Dell to reduce its inventory level to

approximately 13 days of supply compared to Compaq's 25 days of supply. Dell

achieves this in part through its warehousing plan. Most of the components Dell uses

are warehoused within 15 minutes travel time to an assembly plant. Dell does not

order components at its Austin, Texas, facility; instead, suppliers restock

warehouses as needed, and Dell is billed for items only after they are shipped. The

result is better value for the customer.

Case Study Warburtons Supply Chain. This case study can be found in the VLE.

Learning Material

A Traditional Supply Chain Information Flow

Supply Chain Management (SCM) across the Organisation

SCM changes the way companies do business.

 Accounting shares SCM benefits due to inventory level decreases

 Marketing benefits by improved customer service levels

 Information systems are critical for information sharing through PSO data,

EDI, RFID, the Internet, intranet, and extranets

 Purchasing is responsible for sourcing materials

 Operations use timely demand information to more effectively plan production

schedules

Components of a Supply Chain for a Manufacturer

A company's supply chain structure has three components: external suppliers,

internal functions of the company, and external distributors.

External suppliers include the dairy farmer, cardboard container manufacturer, label

company, plastic container manufacturer, paper mill, chemical processing plant,

lumber company, and chemical extraction plant. Internal functions include the

processing of the raw milk into consumer dairy products and packaging and labelling

dairy products for distribution to retail grocery outlets. The external distributors

transport finished products from the manufacturer to retail grocers, where the

products are sold to the customer. The supply chain includes every activity from

collecting the raw milk, producing the consumer dairy products, packaging the dairy

products, distributing the packaged dairy products to retail grocers, to selling the

finished dairy products to the customer.

Let's look at each component of the supply chain in detail.

External Suppliers

Dairy products manufacturing involves several companies. The dairy products are

packaged either in cardboard or plastic containers made by tier one suppliers. Note

that any supplier that provides materials directly to the processing facility is

designated as a tier one supplier (in this case, the dairy farm, the cardboard

container manufacturer, the label company, and the plastic container manufacturer).

The paper mill and the chemical processing plant are tier two suppliers because they

directly supply tier one suppliers but do not directly supply the packaging operation.

The lumber company that provides wood to the paper mill is a tier three supplier, as

is the chemical extraction plant that supplies raw materials to the chemical

processing plant.

Companies put substantial effort into developing the external supplier portion of the

supply chain because the cost of materials might represent 50–60 percent or even

more of the cost of goods sold. A company is typically involved in a number of supply

chains and often in different roles. In the supply chain for the plastics container

manufacturer, the chemical plant is now a tier one supplier and the chemical

extraction facility is a tier two supplier. Even though the plastics container

manufacturer was a tier one supplier to the milk processing facility, the plastic

container manufacturer still has its own unique supply chain. Now consider the

supply chain for a retail grocer: the tier one suppliers are providers of packaged

consumer products, and the grocer has no external distributors because the

customers buy directly from the store. As you can see, supply chains come in all

shapes and sizes.

Remember that tier one suppliers (the cardboard container manufacturer, dairy farm,

label company, and plastics container manufacturer) directly supply the consumer

product manufacturer (packaged dairy products), whereas tier two suppliers (paper

mill and chemical processing plant) directly supply tier one suppliers. To summarize:

supply chains are a series of linked suppliers and customers in which each customer

is a supplier to another part of the chain until the product is delivered to the final

customer.

Internal Functions

Internal functions in, for example, a dairy products supply chain are as follows:

• Processing, which converts raw milk into dairy products and packages these

products for distribution to retail grocery outlets.

• Purchasing, which selects appropriate suppliers, ensures that suppliers perform

up to expectations, administers contracts, and develops and maintains good

supplier relationships.

• Production planning and control, which schedules the processing of raw milk

into dairy products.

• Quality assurance, which oversees the quality of the dairy products.

• Shipping, which selects external carriers and/or a private fleet to transport the

product from the manufacturing facility to its destination.

External Distributors

External distributors transport finished products to the appropriate locations for

eventual sale to customers. Logistics managers are responsible for managing the

movement of products between locations. Logistics includes traffic management and

distribution management. Traffic management is the selection and monitoring of

external carriers (trucking companies, airlines, railroads, shipping companies, and

couriers) or internal fleets of carriers. Distribution management is the packaging,

storing, and handling of products at receiving docks, warehouses, and retail outlets.

Next, we will look at a common challenge to supply chain managers called the

bullwhip effect.

The Bullwhip Effect

Sharing product demand information between members of a supply chain is critical.

However, inaccurate or distorted information can travel through the chain like a

bullwhip uncoiling. The bullwhip effect, as this is called, causes erratic

replenishment orders placed on different levels in the supply chain that have no

apparent link to final product demand. The results are excessive inventory

investment, poor customer service levels, ineffective transportation use, misused

manufacturing capacity, and lost revenues. We will discuss the causes of the

bullwhip effect, and how they send inaccurate or distorted information down the

supply chain. First, however, let's look at the traditional supply chain, and follow the

product demand information flow from the final seller back to the manufacturer of the

product:

1. The final seller periodically places replenishment orders with the next level of

the supply chain, which could be a local distributor. The timing and order

quantity— for example, monthly orders in varying amounts—are determined by

the final seller. The timing and quantity can be fixed or variable.

2. The local distributor has many customers (final sellers) placing replenishment

orders. Each final seller uses it own product demand estimates and quantity

rules. Based on these replenishment orders, the local distributor places

replenishment orders with its supplier, which could be a regional distribution

center (RDC).

3. As before, the customers (the local distributors) determine the timing and

quantity of orders placed with the RDC. Each RDC periodically places orders

based on demand at the RDC by ordering from the manufacturer of the

finished good.

4. In turn, the manufacturer develops plans and schedules production orders

based on orders from the RDCs. The manufacturer does not know what the

demand is for the finished good by the final customer but knows only what the

RDCs order.

The greater the number of levels in the supply chain, the further away the

manufacturer is from final customer demand. Since suppliers in the chain do not

know what customer demand is or when a replenishment order might arrive,

suppliers stockpile inventory.

Causes of the Bullwhip Effect

The causes of the bullwhip effect are demand forecast updating, order batching,

price fluctuation, and rationing and gaming. Let's look at each of these causes.

Each member in the supply chain, beginning with the retailers, does demand

forecast updating with every inventory review. Based on actual demand, the retailers

update their demand forecast. The retailers review their current inventory level and,

based on their inventory policies, determine whether a replenishment order is

needed. The wholesalers repeat the process. Note that the demand is from the

retailers' inventory replenishments and may not reflect actual customer demand at

the retail level. The wholesalers update their demand forecast and place appropriate

replenishment orders with the distribution centers. The distributors repeat the

process, updating their demand forecasts based on demand from the wholesalers.

The distributors review their inventory levels and place the appropriate orders with

the manufacturer. These orders are determined by the inventory policies at the

distributors. Orders placed with the manufacturer end up replenishing each level in

the supply chain rather than being directly linked to end-customer demand.

A company does order batching when, instead of placing replenishment orders right

after each unit is sold, it waits some period of time, sums up the number of units

sold, and then places the order. This changes constant product demand to lumpy

demand— a situation where certain levels in the supply chain experience periods of

no demand. Order batching policies amplify variability in order timing and size.

Price fluctuations cause companies to buy products before they need them. Price

fluctuations follow special promotions like price discounts, quantity discounts,

coupons, and rebates. Each of these price fluctuations affects the replenishment

orders placed in the supply system. When prices are lower, members of the supply

chain tend to buy in larger quantities. When prices increase, order quantities

decrease. Price fluctuations create more demand variability within the supply chain.

Rationing and shortage gaming result when demand exceeds supply and products

are rationed to members of the supply chain. Knowing that the manufacturer will

ration items, customers within the supply chain often exaggerate their needs. For

example, if you know the company is supplying only 50 percent of the order quantity,

you double the order size. If you really need 100 pieces, you order 200 so you are

sure to get what you need. Such game-playing distorts true demand information in

the system.

Counteracting the Bullwhip Effect

Here are four ways of counteracting the bullwhip effect:

1. Change the way suppliers forecast product demand by making this information

from the final-seller level available to all levels of the supply chain. This allows

all levels to use the same product demand information when making

replenishment decisions. Companies can do this by collecting point-of-sale

(POS) information, a function available on most cash registers.

2. Eliminate order batching. Companies typically use large order batches

because of the relatively high cost of placing an order. Supply chain partners

can reduce ordering costs by using electronic data interchange (EDI) to

transmit information. Lower ordering costs eliminate the need for batch orders.

3. Stabilize prices. Manufacturers can eliminate incentives for retail forward

buying by creating a uniform wholesale pricing policy. In the grocery industry,

for example, major manufacturers use an everyday low-price policy or a value-

pricing strategy to discourage forward buying.

4. Eliminate gaming. Instead of filling an order based on a set percentage,

manufacturers can allocate products in proportion to past sales records.

Customers then have no incentive to order a larger quantity to get the quantity

they need.

Major Issues Affecting SQM

 Information technology – enablers include the Internet, Web, EDI, intranets

and extranets, bar code scanners, and point-of-sales demand information

 E-commerce and e-business – uses internet and web to transact business

 Business-to-business (B2B) E-commerce – businesses selling to and buying

from other businesses

 Business-to-Business (B2B) Evolution:

 Automated order entry systems started in 1970’s

 Electronic Data Interchange (EDI) started in the 1970’s

 Electronic Storefronts emerged in the 1990’s

 Net Marketplaces emerged in the late 1990’s

Benefits of B2B E-Commerce

 Lower procurement administrative costs,

 Low-cost access to global suppliers

 Lower inventory investment due to price transparency/reduced

response time

 Better product quality because of increased cooperation between

buyers and sellers, especially during the product design and

development

Business-to-Consumer (B2C) E-Commerce - on-line businesses sell to individual

consumers:

Types of E Commerce

o Advertising Revenue Model – Provides users w/information on services &

products; provides opportunity for suppliers to advertise

o Subscription Revenue Model – Web site charges a subscription fee for access

to the site

o Transaction Fee Model – Company receives a fee for executing a transaction

o Sales Revenue Model – A means of selling goods, information, or service

directly to customers

o Affiliate Revenue Model – Companies receive a referral fee for directing

business to an affiliate

o Intranets – An organization’s internal networks

o Extranets – Intranets linked to the Internet for suppliers and customers to

interact within their system.

 SCM must consider the following trends, improved capabilities, & realities:

 Consumer Expectations and Competition – power has shifted to the

consumer

 Globalization – capitalize on emerging markets

 Government Regulations and E-Commerce – issues of Internet

government regulations

 Green Supply Chain Management – recycling, sustainable eco-

efficiency, and waste minimization

 Managing extensive global supply chains introduces many

complications

 Infrastructure issues like transportation, communication, lack of

skilled labor, & scarce local material supplies

Role of purchasing

 The purchasing dept plays important role in SCM and is responsible for:

 Selecting suppliers

 Negotiating and administering long-term contracts

 Monitoring supplier performance

 Placing orders to suppliers

 Developing a responsible supplier base

Videos

Video 3 - This Video gives a clear definition of supply chain management. Very

interesting and easy to watch. This website also have further videos that might be of

interest.

http://wpcarey.asu.edu/supply-chain-management-degrees/videos

http://www.youtube.com/watch?v=Mi1QBxVjZAw

Keep an eye out for any videos, articles or podcasts by Professor Richard Wilding of

Cranfield University. He specialises in Supply Chain Management.

Video 4 – Discusses with you what Agile is and how this can improve your supply

chain.

http://www.youtube.com/watch?v=OJflDE6OaSc

If you have itunes

http://itunes.apple.com/us/itunes-u/supply-chain-management-video/id471495701

Supply chain and logistics management by Cranfield University

http://itunes.apple.com/us/itunes-u/supply-chain-logistics-

management/id447339850?mt=10

Cloud Supply Chain – New Innovation.

This is the concept behind a set of supply-chain solutions being offered by

companies such as E2open Inc. and GT Nexus. These platforms, hosted on the

cloud, enable partners to establish a set of rules that allow certain constituents to

see information relevant to them. Unlike a typical closed system, the universe of

collaborators can be opened to include financial institutions, logistics providers, and

even governmental and regulatory agencies. To Read the rest of this article from

http://www.operationsmanager.com/headline/cloud-supply-chain/ accessed

20/09/2012

Article from Institute of Supply Management

http://www.ism.ws/content.cfm?ItemNumber=21660

Discussion Question

Describe the impact of e-commerce on operations management. Identify the

challenges posed by e-commerce on operations management

Further Reading The Institute of Supply Management has a great website with a vast amount of

information. Their magazine is online and has some free content.

www.ism.ws

Think Theory 2

(Take a pen and write down your answer. As soon as you finish thinking and writing,

check at the end of the topic overview for feedback)

1. How do supply chains for service organizations differ from supply chains for

manufacturing organizations?

Material Sources

1. Reid R., Operations Management, 4 th

Edition, 2011, Wiley Publishers

2. Additional Web Resources for this chapter Nummi (New United Motor

Manufacturing, Inc.), www.nummi.org IBM, www.ibm.com/us Institute for Supply

Management, www.ISM.ws www.manufacturingiscool.com

3. http://www.operationsmanager.com/headline/cloud-supply-chain/ accessed

20/09/2012

Think Theory 2 Ideas

How do supply chains for service organizations differ from supply chains for manufacturing organizations?

Service supply chains typically do not include external suppliers. In addition, the tier

one supplier is a company that produces the final packaged product. Manufacturing

supply chains typically include a greater variety of links in the chain in terms of the

types of companies. Manufacturers have external suppliers in the different tiers, as

well as processing operations.

Topic’s summary

 Every organization is part of a supply chain, either as a customer or as a

supplier. Supply chains include all the processes needed to make a finished

product. SCM is the integration and coordination of these efforts.

 The bullwhip effect distorts product demand information passed between

levels of the supply chain. The more levels that exist, the more distortion that

is possible.

 Supply chains for service organizations can have external suppliers, internal

processes and external distributors.

 Many issues affect supply chain management. The Internet, the WEB, EDI,

intranets, extranets, bar-code scanners, and POS data are SCM enablers.

 B2B and B2C electronic commerce enable supply chain management. Net

marketplaces bring together thousands or suppliers and customers. Allowing

for efficient sourcing and lower transaction costs.

 Global supply chains increase geographic distances between members,

causing greater uncertainty in delivery times.

 Government regulation affects SCM on several levels.

 Green SCM focuses on the environment and the processes in the SC that

affect the environment.

 Purchasing has a major role in SCM. Purchasing is involved in sourcing

decisions and developing strategic long-term partnerships.

 Sourcing is critical in establishing a solid, responsive supplier base.

 Companies make insourcing and outsourcing decisions. These make-or-buy

decisions are based on financial and strategic criteria.

 Partnerships require sharing information, risks, technologies, and

opportunities. Impact, intimacy, and vision are critical to successful

partnering.

 Ethics in supply management is an ongoing concern. Since buyers are in a

position to influence or award business, it is imperative that buyers avoid any

appearance of unethical behavior or conflict of interest.

 Supply chain distribution requires effective warehousing operations. The

warehouses provide transportation, consolidation, product mixing, and

service.

 Implementing SCM usually begins with the manufacturer integrating internal

processes first. The, the company tries to integrate the external suppliers.

The last step is integrating the external distributors.

 A company needs to evaluate the performance of its supply chain. Regular

performance metrics (ROI, profitability, market share, customer service levels,

etc.) and other measures that reflect the objectives of the SC are used.

 The emergence of net marketplaces has significantly affected SCM. As

supply chains become longer, it is likely that supply chain velocity will

decrease. It is possible that a more strategic and integrated approach is

needed to advance SCM to the next level.

Assignment 1:

All of the following questions are to be attempted.

Maximum word count: 2000 words

Type of assignment: Essay

Start: Week 2

Finish: Week 2

Learning Outcome Assessed: 1,2,3

Supply Chain Management at Cruise International, Inc.

Familiarise yourself with Cruise International Inc (CII)

Your assignment for this week is to attempt chapter 4 questions on Supply

Chain Management.

You will be an intern for Cruise International, Inc. (CII). The company competes in

the cruise industry in the small-ship, medium-ship, and large-ship markets. Your

internship begins in a few weeks. Bob Bristol, your immediate boss, has asked you

to become familiar with the cruise industry and its basic markets, industry and its

competitive environment.

Bob Bristol, your boss at Cruise International, Inc., just called to tell you that he was

impressed with your progress thus far in familiarizing yourself with operations at CII-

both the strategic details pertaining to its mission, competitive priorities, etc. and the

specific details concerning its services and processes. He tells you that, with all the

buzz about supply chain management (SCM) that you hear these days, CII is

actively interested in exploring how different SCM concepts and techniques could be

used in their operations. Maintaining an adequate, assured supply of a variety of

mechanical equipment, entertainment equipment, retail merchandise, food products,

and supplies for maintaining the ship is critical to CII. Meghan Willoughby, Chief

Purser aboard the Friendly Seas I, has a couple of specific assignments that you will

work on later. But for now, Meghan would like a concise research report for the top

management team addressing SCM issues relevant to CII.

"Leila Jensen liked your write-up on the CII service package and delivery system.

Meghan Willoughby wants you to prepare a similar report addressing SCM issues

relevant to CII. Senior Administrators at CII are actively involved in exploring how

SCM concepts and techniques could be adopted in their operations. Prepare a

concise report addressing the specific questions that Meghan has put together for

you. I look forward to receiving your report, which I am sure will provide insight for

SC applications at CII."

1. Provide a comprehensive explanation of the essential concepts of SCM and

explain to what extent SCM is applicable to a service operation such as CII.

2. Evaluate how partnering with some of the suppliers could benefit CII. What

issues should CII consider when developing partnerships?

Purchasing, a major function in SCM, is critical in the cruise line industry. Critique

the potential conflicts of interest or ethical issues facing the purchasing function.

Guidelines for assignment  This is an individual assignment  Ground your answer in relevant theory  Plagiarism and reproduction of someone else’s work as your own will be

penalized  Make use of references, where appropriate – Use Harvard or APA

referencing method.  Late submission implies a deduction of 10 marks per day  Structural elements should include an introduction, main body, and a

conclusion  Weight – 40%