Supply Chain

Management

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 Course Outline
► Supply Chain Management
► Supply Chain Performance: Achieving
Strategic Fit and Scope
► Forecasting
► Inventory management
► Facility selection
► Logistics
► Transportation
► Aggregate planning
► JIT, TPS, and Lean Operations
► Case studies 11 - 2
Supply Chain Management

Understanding the Supply Chain

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 Darden’s Supply Chain

► Largest publicly traded casual dining company

in the world

► Serves over 400 million meals annually in

more than 1,900 restaurants in the US and
Canada

► Annual sales of flagship brands totals $6

billion 11 - 4
 Darden’s Supply Chain

▶ Sources food from five continents and

thousands of suppliers

▶ Four distinct supply chains

▶ Over $2 billion spent annually in supply

chains

▶ Competitive advantage achieved through

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superior supply chain
A Supply Chain for Beer

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Stages of and Automotive Supply Chain

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Four Flows in Supply Chain

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 What is Supply-Chain Management

❖ All stages involved, directly or indirectly, in fulfilling a

customer request

❖ Includes manufacturers, suppliers, transporters,

warehouses, retailers, and customers

❖ Within each company, the supply chain includes all

functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)
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 Supply-Chain Management
❖ Customer is an integral part of the supply chain
❖ Includes movement of products from suppliers to
manufacturers to distributors, but also includes movement
of information, funds, and products in both directions
❖ Probably more accurate to use the term “supply network”
or “supply web”
❖ Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
❖ All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
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 Supply-Chain Management
Objective

The objective of supply chain management is

to coordinate activities within the supply chain
to maximize the supply chain’s competitive
advantage and benefits to the ultimate
consumer

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 Supply Chain Costs as a Percentage of Sales
INDUSTRY % PURCHASED
Automobiles 67
Beverages 52

Supply Chemical
Food
62
60
Chain Lumber 61

Costs Metals
Paper
65
55
Petroleum 79
Restaurants 35
Transportation 62

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 Decision Phases of a Supply Chain
Supply chain strategy or design
Supply chain planning
Supply chain operation

© 2007 Pearson Education 1-14

 Supply Chain Strategy or Design
▶ Decisions about the structure of the supply chain and what
processes each stage will perform
▶ Strategic supply chain decisions
▶ Locations and capacities of facilities
▶ Products to be made or stored at various locations
▶ Modes of transportation
▶ Information systems
▶ Supply chain design must support strategic objectives
▶ Supply chain design decisions are long-term and expensive
to reverse – must take into account market uncertainty
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 Supply Chain vs Sales Strategy
Hau Lee Furniture
▶ 60% of sales $ in supply chain
▶ Current gross profit = $10,000
▶ Increase profits to $15,000 (50%)
CURRENT SUPPLY CHAIN SALES
SITUATION STRATEGY STRATEGY
Sales $100,000 $100,000 $125,000

Cost of materials $60,000 (60%) $55,000 (55%) $75,000 (60%)

Production costs $20,000 (20%) $20,000 (20%) $25,000 (20%)

Fixed costs $10,000 (10%) $10,000 (10%) $10,000 (8%)

Profit $10,000 (10%) $15,000 (15%) $15,000 (12%)

If Hau wants to double the original gross profits (from $10,000 to

$20,000), what would be required of the supply chain and sales
strategies? [Answer: Supply chain strategy = 16.7% reduction in
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material costs; sales strategy = 50% increase in sales
 Supply Chain Management – Strategy
How Corporate Strategy Impacts Supply Chain Decisions
LOW COST RESPONSE DIFFERENTIATION
STRATEGY STRATEGY STRATEGY

Primary supplier • Cost • Capacity • Product development skills

selection criteria • Speed • Willing to share information
• Flexibility • Jointly and rapidly develop
products

Supply chain • Minimize • Use buffer stocks to • Minimize inventory to avoid

inventory inventory to hold ensure speedy product obsolescence
down costs supply

Distribution network • Inexpensive • Fast transportation • Gather and communicate

transportation • Provide premium market research data
• Sell through customer service • Knowledgeable sales staff
discount
distributors/retaile
rs

Product design • Maximize • Low setup time • Modular design to aid

characteristics performance • Rapid production product differentiation
• Minimize cost ramp-up

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 Supply Chain Planning

▶ Definition of a set of policies that govern short-term

operations
▶ Fixed by the supply configuration from previous phase
▶ Starts with a forecast of demand in the coming year

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 Supply Chain Planning

▶ Planning decisions:
▶ Which markets will be supplied from which locations
▶ Planned buildup of inventories
▶ Subcontracting, backup locations
▶ Timing and size of market promotions
▶ Must consider in planning decisions demand uncertainty,
exchange rates, competition over the time horizon

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 Supply Chain Operations
▶ Time horizon is weekly or daily
▶ Decisions regarding individual customer orders
▶ Supply chain configuration is fixed and operating policies
are determined
▶ Goal is to implement the operating policies as effectively as
possible
▶ Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an order
to a particular shipment, set delivery schedules, place
replenishment orders
▶ Much less uncertainty (short time horizon) 11 - 20
 Process View of a Supply Chain
▶ Processes in a supply chain are divided into a series of
cycles, each performed at the interfaces between two
successive supply chain stages

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle Manufacturer

Procurement Cycle Supplier

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 Process View of a Supply Chain
▶ Each cycle occurs at the interface between two successive
stages
▶ Customer order cycle (customer-retailer)
▶ Replenishment cycle (retailer-distributor)
▶ Manufacturing cycle (distributor-manufacturer)
▶ Procurement cycle (manufacturer-supplier)
▶ Cycle view clearly defines processes involved and the
owners of each process.
▶ Specifies the roles and responsibilities of each member
and the desired outcome of each process.
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Establishing Sustainability in Supply
Chains

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 Systems View
Managers may find that their decisions regarding sustainability
improve when they take a systems view. This means looking at a
product’s life from design to disposal, including all the resources
required. Recognizing that both raw materials and human resources
are subsystems of any production process may provide a helpful
perspective. Similarly, the product or service itself is a small part of
much larger social, economic, and environmental systems. Indeed,
managers need to understand the inputs and interfaces between the
interacting systems and identify how changes in one system affect
others. For example, hiring or laying off employees can be expected to
have morale implications for internal systems (within an organization),
as well as socioeconomic implications for external systems. Similarly,
dumping chemicals down the drain has implications on systems
beyond the firm. Once managers understand that the systems
immediately under their control have interactions with systems below
them and above them, more informed judgments regarding
sustainability can be made
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 Commons
Many inputs to a production system have market prices, but others
do not. Those that do not are those held by the public, or in the
common . Resources held in the common are often misallocated.
Examples include depletion of fish in international waters and
polluted air and waterways. The attitude seems to be that just a little
more fishing or a little more pollution will not matter, or the adverse
results may be perceived as someone else’s problem. Society is still
groping for solutions for use of those resources in the common . The
answer is slowly being found in a number of ways: (1) moving some
of the common to private property (e.g., selling radio frequency
spectrum), (2) allocation of rights (e.g., establishing fishing
boundaries), and (3) allocation of yield (e.g., only a given quantity
of fish can be harvested). As managers understand the issues of the
commons , they have further insight about sustainability and the
obligation of caring for the commons

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 3 Ps and 3 Rs
▶ 3 Ps
▶ People
▶ Planet
▶ Profit
▶ 3 Rs
▶ Recycle
▶ Reuse
▶ Reduce

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 Establishing Sustainability in Supply
Chains
▶ Return or reverse logistics
▶ Sending returned products back up the supply chain
for resale, repair, reuse, remanufacture, recycling, or
disposal

▶ Closed-loop supply chain

▶ Proactive design of a supply chain that tries to
optimize all forward and reverse flows

▶ Prepares for returns prior to product introduction

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 Establishing Sustainability in Supply
Chains

Management Challenges of Reverse Logistics

ISSUE FORWARD LOGISTICS REVERSE LOGISTICS
Forecasting Relatively straightforward More uncertain
Product quality Uniform Not uniform
Product packaging Uniform Often damaged
Pricing Relatively uniform Dependent on many factors
Speed Often very important Often not a priority
Distribution costs Easily visible Less directly visible
Inventory management Consistent Not consistent

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 Sourcing Issues
▶ Make-or-buy vs. outsourcing

▶ Choosing between obtaining products and services

externally as opposed to producing them internally

▶ Outsourcing

▶ Transfer traditional internal activities and resources to

outside vendors

▶ Efficiency in specialization

▶ Focus on core competencies

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 Six Sourcing Strategies

▶ Many suppliers

▶ Few suppliers

▶ Vertical integration

▶ Joint ventures

▶ Keiretsu networks

▶ Virtual companies

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 Many Suppliers

▶ Commonly used for commodity products

▶ Purchasing is typically based on price

▶ Suppliers compete with one another

▶ Supplier is responsible for technology, expertise,

forecasting, cost, quality, and delivery

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 Few Suppliers
▶ Buyer forms longer term relationships with fewer suppliers

▶ Create value through economies of scale and learning curve

improvements

▶ Suppliers more willing to participate in JIT programs and

contribute design and technological expertise

▶ Cost of changing suppliers is huge

▶ Trade secrets and other alliances

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 Vertical Integration
Vertical Integration Examples of Vertical Integration

Raw material
Tree Harvesting
(suppliers)

Backward integration Chipmakers Pulpmaking

Current International
Pepsi Apple
transformation Paper

End-User Paper
Forward integration Bottling Retail stores
Conversion

Finished goods
(customers)

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 Vertical Integration

▶ Developing the ability to produce goods or service

previously purchased

▶ Integration may be forward, towards the customer, or

backward, towards suppliers

▶ Can improve cost, quality, and inventory but requires

capital, managerial skills, and demand

▶ Risky in industries with rapid technological change

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 Joint Ventures
▶ Formal collaboration

❖ Enhance skills

❖ Secure supply

❖ Reduce costs

▶ Cooperation without diluting brand or conceding

competitive advantage (Daimler – BMW)

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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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 Virtual Companies

▶ Rely on a variety of supplier relationships to provide

services on demand

▶ Fluid organizational boundaries that allow the creation of

unique enterprises to meet changing market demands

▶ Relationships may be short- or long-term

▶ Exceptionally lean performance, low capital investment,

flexibility, and speed

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 Pull/Push view of a Supply Chain

▶ Processes in a supply chain are divided into two

categories depending on whether they are executed in
response to a customer order (pull) or in anticipation of a
customer order (push)

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 Push/Pull View of Supply Chains

Procurement, Customer Order

Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
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 Push/Pull View of
Supply Chain Processes
▶ Supply chain processes fall into one of two categories
depending on the timing of their execution relative to
customer demand

▶ Pull: execution is initiated in response to a customer

order (reactive)

▶ Push: execution is initiated in anticipation of customer

orders (speculative)

▶ Push/pull boundary separates push processes from pull

processes 11 - 40
 Push/Pull View of
Supply Chain Processes

▶ Useful in considering strategic decisions relating to

supply chain design – more global view of how supply
chain processes relate to customer orders

▶ The relative proportion of push and pull processes can

have an impact on supply chain performance

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These five options give leverage to organizations to adjust their
manufacturing (supply chain) with respect to the market demand
“Buy-to order” is only suitable where product varieties are high and
customer can wait for some time for order to be delivered. This point also
discourages keeping high inventory stock
“Make-to-order” focuses towards similar types of products basing on same
raw material and lead-time is also high in this case
“Assemble-to-order” is next stage of manufacturing. Leverage is achieved
through postponement and customization. This option is seriously
threatened by overstock / obsolescence
The final two stages deal with ultimate delivery of standard products and
this stage is at utmost risk, due to its serious dependence on forecast
accuracy and entire inventory is at serious risk of being out-of-
stock/overstock/obsolescence
Much supply line choice moves towards right side, more standardized and
stable operation (Lean) will be suitable for an organization to operate. On
the other hand, much supply line choice moves to upstream Agile
operations are recommended to meet the customer demands with
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acceptable delivery speed and reliability
 Supply Chain Risk
▶ More reliance on supply chains means more risk

▶ Fewer suppliers increase dependence

▶ Compounded by globalization and logistical complexity

▶ Vendor reliability and quality risks

▶ Political and currency risks

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 Risk and Mitigation Tactics

▶ Research and assess possible risks

▶ Innovative planning

▶ Reduce potential disruptions

▶ Prepare responses for negative events

▶ Flexible, secure supply chains

▶ Diversified supplier base

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 Risk and Mitigation Tactics

Supply Chain Risks and Tactics

RISK RISK REDUCTION TACTICS EXAMPLE
Supplier Use multiple suppliers; McDonald’s planned its supply
failure to effective contracts with chain 6 years before its opening
deliver penalties; subcontractors on in Russia. Every plant—bakery,
retainer; pre-planning meat, chicken, fish, and lettuce—
is closely monitored to ensure
strong links

Supplier Careful supplier selection, Darden Restaurants has placed

quality training, certification, and extensive controls, including
failure monitoring third-party audits, on supplier
processes and logistics to
ensure constant monitoring and
reduction of risk

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 Risk and Mitigation Tactics
Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Logistics Multiple/redundant Walmart, with its own trucking
delays or transportation modes fleet and numerous distribution
damage and warehouses; secure centers located throughout the
packaging; effective contracts U.S., finds alternative origins and
with penalties delivery routes bypassing
problem areas

Distribution Careful selection, monitoring, Toyota trains its dealers around

and effective contracts with the world, invoking principles of
penalties the Toyota Production System to
help dealers improve customer
service, used-car logistics, and
body and paint operations

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 Risk and Mitigation Tactics
Supply Chain Risks and Tactics

RISK RISK REDUCTION TACTICS EXAMPLE

Information Redundant databases; secure Boeing utilizes a state-of-the-art
loss or IT systems; training of supply international communication
distortion chain partners on the proper system that transmits
interpretations and uses of engineering, scheduling, and
information logistics data to Boeing facilities
and suppliers worldwide

Political Political risk insurance; cross- Hard Rock Café reduces

country diversification; political risk by franchising and
franchising and licensing licensing, rather than owning,
when the political and cultural
barriers seem significant

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 Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Economic Hedging to combat exchange Honda and Nissan are
rate risk; purchasing contracts moving more manufacturing
that address price fluctuations out of Japan as the exchange
rate for the yen makes
Japanese-made autos more
expensive.

Natural Insurance; alternate sourcing; Toyota, after its experience

catastrophes cross-country diversification with fires, earthquakes, and
tsunamis, now attempts to
have at least two suppliers,
each in a different
geographical region, for each
component.

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 Risk and Mitigation Tactics
Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Theft, Insurance; patent protection; Domestic Port Radiation
vandalism, security measures including Initiative: The U.S.
and terrorism RFID and GPS; diversification government has set up
radiation portal monitors that
scan nearly all imported
containers for radiation.

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 Security and JIT
▶ Shipments get misrouted, stolen, damaged, or excessively
delayed

▶ Technological innovations are improving security and

inventory management

▶ Location, motion sensors, broken seals, temperature

▶ Tracking can help expedite shipments

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 Managing the Integrated Supply Chain

▶ Issues

▶ Local optimization can magnify fluctuations

▶ Incentives push merchandise into the supply

chain for sales that have not occurred

▶ Large lots reduce shipping costs but increase

inventory holding and do not reflect actual sales

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 Managing the Integrated Supply Chain
▶ Opportunities

▶ Accurate “pull” data, shared information

▶ Lot size reduction, shipping, discounts, reduced

ordering costs

▶ Single stage control of replenishment

▶ Single supply chain member responsible for

ordering

▶ Vendor managed inventory (VMI)

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 Managing the Integrated Supply Chain

▶ Opportunities

▶ Collaborative planning, forecasting, and

replenishment (CPFR) through the supply chain

▶ Blanket orders against which actual orders are

released

▶ Standardization

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 Managing the Integrated Supply Chain

▶ Opportunities

▶ Postponement withholds modification as long as

possible

▶ Electronic ordering and funds transfer speed

transactions and reduce paperwork

▶ Drop shipping and special packaging bypasses the

seller and reduces costs

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 Building the Supply Base

▶ Supplier evaluation

▶ Finding potential suppliers

▶ Determine likelihood of their becoming good suppliers

▶ Supplier certification

1. Qualification

2. Education

3. Certification

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 Building the Supply Base
▶ Supplier development

▶ Integrate the supplier into the system

▶ Quality requirements

▶ Product specifications

▶ Schedules and delivery

▶ Procurement policies

▶ Training

▶ Engineering and production help

▶ Information transfer procedures

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 Building the Supply Base
▶ Negotiation
▶ A significant element in purchasing
▶ Highly valued skills
▶ Cost-based price model
▶ Supplier opens books
▶ Market-based price model
▶ Based on published, auction, or indexed prices
▶ Competitive bidding
▶ Common policy for many purchases
▶ Does not generally foster long-term relationships
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 Building the Supply Base
▶ Contracting

▶ Share risks, benefits, create incentives

▶ Centralized purchasing

▶ Leverage volume

▶ Develop specialized staff

▶ Develop supplier relationships

▶ Maintain professional control

▶ Devote resources to selection and negotiation

▶ Reduce duplication of tasks

▶ Promote standardization 11 - 59
 Building the Supply Base
▶ e-Procurement

▶ Speeds purchasing, reduces costs, integrates supply

chain

▶ Online catalogs and exchanges

▶ Standard items or industry-specific web sites

▶ Online auctions

▶ Low barriers to entry

▶ Reverse auctions for buyers

▶ Price not always the most important factor

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 Logistics Management

▶ Objective is to obtain efficient operations through the

integration of all material acquisition, movement, and
storage activities

▶ Is a frequent candidate for outsourcing

▶ Allows competitive advantage to be gained through reduced

costs and improved customer service

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 Shipping Systems
▶ Trucking

▶ Moves the vast majority of manufactured goods

▶ Chief advantage is flexibility

▶ Railroads

▶ Capable of carrying large loads

▶ Little flexibility

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 Shipping Systems
▶ Airfreight

▶ Fast and flexible for light loads

▶ May be expensive

▶ Waterways

▶ Typically used for bulky, low-value cargo

▶ Used when shipping cost is more important than speed

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 Shipping Systems
▶ Pipelines

▶ Used for transporting oil, gas, and other chemical

products

▶ Multimodal

▶ Combines shipping methods

▶ Common, especially in international shipments

▶ Aided by standardized containers

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 Cost and Speed of Shipments

▶ Faster shipping is generally more expensive than

slower shipping

▶ Faster methods tend to involve smaller shipment sizes

while slower methods involve very large shipment
sizes

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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
1. PERCEIVED IMPROPRIETY. Prevent the intent and
appearance of unethical or compromising conduct in
relationships, actions and communications

2. CONFLICTS OF INTEREST. Ensure that any personal,

business or other activity do not conflict with the lawful
interests of your employer

3. 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
4. RESPONSIBILITIES TO YOUR EMPLOYER. Uphold
fiduciary and other responsibilities using reasonable care
and granted authority to deliver value to your employer

5. SUPPLIER AND CUSTOMER RELATIONSHIPS. Promote

positive supplier and customer relationships

6. SUSTAINABILITY AND SOCIAL RESPONSIBILITY.

Champion social responsibility and sustainability practices
in supply management

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 ISM Ethical Standards

7. CONFIDENTIAL AND PROPRIETARY INFORMATION.

Protect confidential and proprietary information

8. RECIPROCITY. Avoid improper reciprocal agreements

9. 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
10. PROFESSIONAL COMPETENCE. Develop skills,
expand knowledge and conduct business that
demonstrates competence and promotes the supply
management profession

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