Course Name: Inventory Management Topic 6: Supply Chain Management Objectives At the end of this topic, you will

be able to: ! ! ! ! describe a supply chain and identify the flow of materials, information, order and cash between the component parties in the chain. identify Supply Chain Performance explain the key issues in supply chain management define the Bullwhip Effect and discuss extensively the various innovative solutions to counteract it. identify the important tools for coping with demand and supply uncertainty.

Abstract Supply chain management is a hot topic in business today. The idea is to apply a total systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer. The term supply chain comes from a picture of how organizations are linked together as viewed from a particular company. This topic begins with the definition of supply chain than followed by developing some terminology that will be useful for measuring supply chain performance; then we look to the key issues and the bullwhip effect in supply chain. Following this, we describe strategies that are important to large companies operating in global markets. These strategies involve outsourcing of work and postponing assembly in the supply chain. 6.1. Introduction In todays highly competitive and dynamic markets, customers are driving the new dimensions of business: choice, convenience and control. They want more choices, mass customization, faster delivery, on-time delivery, flexible ways to make procurement, and low inventory exposure. These high expectations from the customers have forced business enterprises to invest in, and focus attention on their supply chain. This, together with the advancement in transportation and communication technologies, has resulted in a great improvement in the continuous evolution of the supply chain and of the systems to manage it.

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6.2. What is Supply Chain Management? Supply chain management is a typical supply chain, as illustrated by the graphic below.

Figure 6.1: Typical Supply Chain

A typical supply chain is an integration of the activities that procure raw materials, transform them into intermediate goods & final products, and deliver them through a distribution system to the customers. These activities include the traditional purchasing function plus many other activities that are important to the relationship between suppliers and distributors. The supply chain consists of suppliers, manufacturing plants, warehouses, distribution centers, and retail outlets, as well as raw materials, work-in-process inventory, and finished products that flow between the facilities. Supply chain management includes determining: 1. Transportation vendors 2. Credit and cash transfers 3. Suppliers 4. Distributors and banks 5. Accounts payable and receivable 6. Warehousing and inventory levels 7. Order fulfillment, and 8. Sharing customer, forecasting, and production information.

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All the activities in supply chain management are aimed to achieve two major objectives: 1. To reduce cost or waste The cost or waste need to be reduced is including waiting time, transportation cost, inventory cost and also the reject rate. 2. To maximize the value to the ultimate customers. Value is refer to multifunction product, service after sale, fast delivery, good customer service, promotion, competitive price, good quality, product warranty and others. Definition of Supply Chain Management Supply chain management is defined as the management approaches used to integrate suppliers, manufacturers, warehouses, and retail stores, so that products are manufactured and distributed at the right quantity, to the right customers, and at the right time, with the objectives of minimizing the whole system costs while satisfying customer requirements. However, it is difficult to efficiently integrate the whole supply chain and the main reasons are:

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Measuring Supply Chain Performances Two common measures to evaluate supply chain efficiency are inventory turnover and weeksof-supply. These essentially measure the same thing and mathematically are the inverse of one another. Details are provided in the table below.

Example: Inventory Turnover Calculation Dell Computer reported the following information in its 1999 annual report:

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The inventory turnover calculation is:

The weeks of supply calculation is:

6.3. Key Issues in Supply Chain Management There are several key issues in supply chain management, as explained below. i) Inventory Management Imagine a supermarket that keeps an inventory of a specific product and when the customer demand changes over time, the supermarket can use only historical data to predict the demand. The supermarkets objective is to decide at what point to reorder a new batch of product, and how much to order so as to minimize inventory ordering and holding costs. Basically, there are a couple of concerns that need to be thought through. In the first place, why should a retailer keep inventory? Is it due to the fluctuations of the customer demand or some other reasons? If it is due to the uncertainty in customer demand, is there anything we can do to reduce it? How frequently should we order and what is the quantity that we should order? And, what inventory turnover ratio should be used? ii) Distribution Strategies Wal-Marts success highlights the importance of a particular distribution strategy referred to as cross docking. The following is the success story of Wal-Mart:

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In 1979 Kmart was one of the leading companies in the retail industry, with 1891 stores and average revenues per store of US$7.25 million. At that time, Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those Kmart stores. Within 10 years, Wal-Mart had transformed itself into a major player in the retail industry. In 1992 it had the highest sales per square foot and the highest inventory turnover and operating profit of any discount retailer. Today, Wal-Mart is the largest and highest profit-making retailer in the world. How did Wal-Mart do it? The starting point was to focus on satisfying customer needs. Wal-Mart's goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. This was done by using a logistics technique known as cross docking. In this strategy, goods are continuously delivered to WalMart's warehouses from where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Mart's cost of sales significantly and made it possible to offer everyday low prices to their customers.

These are the questions regarding distribution strategies: Which strategy should a company use the cross-docking strategy, the classical distribution strategy in which inventory is kept at the warehouses, or direct shipping, a strategy in which items are shipped from suppliers directly to store. iii) Supply Chain Integration and Strategic Partnering As discussed earlier, it is not easy to integrate the supply chain due to its dynamic and conflicting objectives employed by different partners. However, in todays competitive markets, most companies are forced to integrate their supply chain and engage in strategic partnering. This pressure comes from both their customers and their supply chain partners. Information sharing and operational planning are the keys to a successfully integrated supply chain. Important considerations are: ! ! ! ! ! What information should be shared? How should it be used? How does information affect the design and operation of the supply chain? What level of integration is needed within the organization and with external partners? What types of partnerships can be implemented?

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iv) Product Design Effective design plays a critical role in the supply chain. Some designs may increase inventory holding or transportation costs relative to other designs, while other designs may result in shorter manufacturing lead-time. Important considerations related to product design are: ! Is it worthwhile to redesign your products just to reduce your logistics costs or supply chain lead-time? ! Is it possible to leverage product design to compensate for uncertainty in customer demand? ! Can all these savings resulting from product design be quantified? ! New concepts such as mass customization are increasingly popular. What role does supply chain management play in the successful implementation of these concepts? v) Information Technology and Decision Support System Information technology is a critical enabler of effective supply chain management. Indeed, much of the current interest in supply chain management is motivated by the opportunities brought about by the abundance of data and the savings that can be achieved through analysis of these data. The primary issue in supply chain management is not whether data can be received, but what data should be transferred; that is, which data are significant for supply chain management and which data can be safely ignored? Some pertinent issues in applying information technology to supply chain management are: ! How should the data be analyzed and used? What is the impact of the Internet? ! What is the role of electronic commerce? ! Since information technology and decision-support systems are both available, can these technologies be viewed as the main tools used to achieve competitive advantage in the market? ! If they can, then what is preventing others from using the same technology? vi) Customer Value Customer value is the measure of a company's contribution to its customer, based on the entire range of products, services, and intangibles. In recent years, this measure has superseded measures such as quality and customer satisfaction. Obviously, effective supply chain management is critical if a firm wishes to fulfill customer needs and provide value. Some critical

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Course Name: Inventory Management Topic 6: Supply Chain Management issues relating to customer value are: ! How is customer value measured? ! How is information technology used to enhance customer value in the supply chain? ! How does supply chain management contribute to customer value? ! How do the latest trends in customer value, such as development of relationships and experiences, affect supply chain management? 6.4. The Bullwhip Effect

Figure 6.2: Typical Order Patterns in Supply Chain Management

The above figure shows that typical order patterns faced by each node in a supply chain that consists of a manufacturer, a wholesaler, and a retailer. The retailers orders to the wholesaler display greater variability than the end-consumer sales; the wholesaler's orders to the manufacturer show even more oscillations; and, finally, the manufacturer's orders to its suppliers are the most volatile. This phenomenon of variability magnification as we move from the customer to the producer in the supply chain is often referred to as the bullwhip effect. The effect indicates a lack of synchronization among supply chain members. Even a slight change in consumer sales ripples backward in the form of magnified oscillations upstream, resembling the result of a flick of a bullwhip handles. Because the supply patterns do not match the demand patterns, inventory accumulates at various stages, and shortages and delays occur at others. This bullwhip effect has been observed by many firms in numerous industries, including Campbell Soup and Procter & Gamble in consumer products; Hewlett Packard, IBM, and Motorola in electronics; General Motors in automobiles; and Eli Lilly in pharmaceuticals. Since variability in orders placed by the retailer is significantly higher than variability in customer demand, the wholesaler is forced to carry more safety stock than the retailer or else to maintain a

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Course Name: Inventory Management Topic 6: Supply Chain Management higher capacity than the retailer in order to meet the same service level as the retailer. This analysis can be carried over to the distributor as well as the factory, resulting in even higher inventory levels and therefore higher costs. Definition of Bullwhip Effect The bullwhip effect is a phenomenon characterized by the fact that the flows of material and information in a supply chain do not correspond with the demand of the consumer although the consumers demand is decisive for the supply chain. The bullwhip effect is defined as the growing variance of the supply chain members order quantities comparative to the variance of the consumers demand. If the bullwhip effect occurs in a supply chain, the flows of material and information will be disturbed. The aim of supply chain management to meet the consumers demand in a cost-effective way cannot be reached. The potential benefits of supply chain management remain unused. It is important to identify techniques and tools that will allow us to control the bullwhip effect; that is, to control the increase in variability in the supply chain. For this purpose, we need to first understand the following main factors contributing to the increase in variability in the supply chain:

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6.5. How to Counteract The Bullwhip Effect From the discussions above, it can be seen that the "Bullwhip Effect" is counter-productive. Supply chain managers have to develop some innovative solutions to counteract this. Counteracts for the bullwhip effect are as below: i) Information Sharing Bullwhip effects result from members from different supply chain stages/levels processing the demand input from their immediate downstream member in their forecasting scheme. One remedy to the repetitive processing of demand data in a supply chain is to make demand data at a downstream site available to the upstream site. Therefore, both sites can use the same set of raw data. For example, the point-of-sale (POS) data of convenience stores are available to their suppliers. Transferring pas data from the retailer to its supplier can help reduce lead times significantly because the supplier can anticipate an incoming order by studying the pas data. However, even if all the supply chain partners are using the same set of raw data to forecast, there is still variability in the demand order placed with the upstream partners. To counteract this issue, the upstream partners can take control of the re-supply or replenishment from the upstream to downstream partners. In this kind of arrangement, the upstream partners would have access to the demand and inventory data at the downstream site and update the necessary forecasts and replenishment data for the downstream partners. This practice is known as vendor-managed inventory (VMI) or a continuous replenishment program (CRP). Many companies such as M&M, Seagate, P&G, Wal-Mart and Flextronics use either VMI or CRP. Another approach is to get the demand information directly from the end customers. One good example is Dell Computers' "Direct Model", which sell all their computers directly to the end customers without going through the distribution channel. Example: Dells Direct Business Model
Michael Dell started a computer business in his dormitory room in 1984 with this simple insight: He could bypass the dealer channel through-which personal computers were being sold and instead sell directly to customers and build their personal computers (PCs) to order. This idea, now called the direct business model, eliminated the cost of inventory and the reselling expenses. The model had other benefits that were not apparent when Dell founded his company, Dell Computer Corporation. "You actually get to have a relationship with the customer," Michael Dell explains, "and this creates valuable information which, in turn, allows us to leverage our relationships with both suppliers and customers. Couple that information with technology, and you have the infrastructure to revolutionize the fundamental business models of major global companies. "

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Dell computer's model involves building computers based on components that are available in the market. The decision not to manufacture the computer components has relieved Dell of the burden of owning assets, research and development risks, and managing a large number of employees. Spreading the development and manufacturing risk among several suppliers allowed Dell to grow much faster than if these functions were perform inside the company. Dell's use of technology and information to blur the traditional boundaries in the supply chain between suppliers, manufacturers, and end users, has been named virtual integration. In a traditional computer company such as Digital Computer, processes were vertically integrated, with all the research, development, manufacturing, and distribution capabilities in-house. This allowed for a high level of communication and ability to develop products based on the company's interaction with its clients. The disadvantage was the high risk and costs of development and the ownership of assets in a volatile industry. To achieve the advantages of an integrated company, Dell treats suppliers and service providers as if they were inside the company. Their systems are linked in real time to Dell's system and their employees participate in design teams and product launches. Technology enhances the economic incentives to collaborate because it makes it possible to share design databases and methodologies and speed the time to market. Dell measure inventory velocity, the reciprocal of the average amount of time a product spends in inventory. For this purpose, each component is marked with a date stamp. Accumulating inventory in the fast moving PC industry is a high-risk proposition since the components can become obsolete very quickly. In some cases, such as Sony monitors, Dell does not keep any inventory but has UPS or Airborne Express pick up the monitors from Sony's Mexican factory, the computer from Dell's Austin, Texas facility, and then match and deliver them to the customers. Dell suppliers benefit from the real-time information about demand and a commitment from Dell for a certain level of purchases. The results are impressive. While Compaq, IBM, and Hewlett-Packard all announced plans in late 1998 to emulate portion of Dell's business model, with various build-to-order plans, all have has difficulty in making the transition. Most are moving to a target inventory level of four weeks, while Dell maintain just eight days of inventory, allowing it to turn over inventory 46 times a year. On the customer side, Dell has segmented its customer base so that it can offer value-added services to different customers. Dell configures PCs and supports them for large customers. It will also load standard software and place asset stickers on the machine based on customer requests. For some clients, Dell has on-site team that assists in PC purchasing and servicing. "The whole idea behind virtual integration is that it lets you meet customers' needs faster and more efficiently than any other model." Furthermore, it allows Dell to be efficient and responsive to change at the same time. By spending time with customers and following technological trends, Dell tries to be a few steps ahead of change, and even create and shape it. [Reference: Magretta, J. "The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell." Harvard Business Review, March-April 1998.]

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ii) Electronic Data Interchange (EDI) Lead-time can significantly cause the "bullwhip effect". Lead times typically include two portions: ! ! Order lead-time is the time it takes to produce and ship the item. Information lead-time is the time it takes to process an order.

This distinction is important because order lead-time can be reduced through the use of cross docking and JIT implementation while information lead-time can be reduced through the use of EDI (electronic data interchange). EDI has gained its popularity in the 1990s. The following chart shows its popularity in the consumer products industry in United States.
EDI Usage in Consumer Products Industry

[Source: The Economist, vol.334, 1995]

iii) Break Order Batches Companies need to devise strategies that break the order into smaller batches or replenishment the supply more frequently. One of the reasons why order batches are large or order-frequencies low is the relatively high cost of placing an order and replenishing it. EDI can reduce the cost of paperwork and administration in generating an order. Using EDI, some companies are able to perform paperless ordering, which is fast and accurate, and

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Course Name: Inventory Management Topic 6: Supply Chain Management therefore allowing their customers to order more frequently. Another reason for large order batches is the cost of transportation. The differences in the costs of full truckloads and less-than-truckloads are so much that companies find it more economical to order full truckloads, even though this leads to infrequent replenishment and higher inventory holding. In order to solve this problem, companies such as P&G give discounts to its distributors that are willing to order mixed-SKU (stock-keeping unit) loads of any of its products. Using third-party logistics companies (3PL) also helps make small batch replenishments economical. By consolidating loads from multiple suppliers located near each other, a company can realize full truckload economies without the batches coming from the same supplier. Definitely there are additional costs incurred by engaging the third-party logistics companies, but the savings often outweigh the costs. Therefore, when customers spread their periodic orders or replenishments evenly over time, they can help reduce the negative effect of order batching. iv) Stabilize Prices The easiest way to control bullwhip effect caused by price fluctuations is to reduce both the frequency and the level of wholesale price discounting and trade promotion. This will reduce forward buying. The manufacturer can reduce the incentives for retail forward buying by establishing a uniform wholesale pricing policy, which is commonly known as everyday low price (EDLP). At the same time, retailers and distributors can negotiate with their suppliers for everyday low cost (EDLC). Apart from that, activity-based costing (ABC) systems enable companies to recognize the excessive costs of forward buying. ABC systems can provide the accounting of the costs of inventory, storage, special handling, and transportation that previously were hidden and which often outweigh the benefits of promotions. v) Avoid Shortage Gaming When a supplier faces a shortage, instead of allocating products based on orders, it can allocate in proportion to past sale records. Customers then have no incentive to exaggerate their orders.

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Course Name: Inventory Management Topic 6: Supply Chain Management Customers will usually play the "shortage game" during shortage peaks when customers have little data on the manufacturers' supply situation. One solution is to share the capacity and inventory information. This will help reduce customers' worry and lessen their need to engage in this gaming. However, sharing such information is not enough when there is a real shortage in the market. Some manufacturers work with customers to place order well ahead of the peak sales season. Thus, the manufacturer can adjust production capacity or scheduling with better knowledge of the product demand. Finally, the generous return policies that manufacturers offer retailers make things worse. Without a penalty, retailers will continue to exaggerate their needs and later cancel orders. Currently, a lot of computer manufacturers are beginning to enforce stricter return and cancellation policies. We have discussed that bullwhip effect is not easy to overcome. However, the key to the integration of the different supply chain stages is information. Through better understanding of the causes of the bullwhip effect, we would be able to counteract the effects more effectively because the choice is clear, either we find a way to conquer the bullwhip effect or it paralyzes us. vi) Supply Chain Strategy Demand and supply uncertainty is a good framework for understanding supply chain strategy. Innovative products with unpredictable demand and an evolving supply process face a major challenge. Because of shorter and shorter product life cycles, the pressure for dynamically adjusting and adopting a companys supply chain strategy is great. In the following we explore the concepts of outsourcing, global sourcing, mass customization, and postponement. These are important tools for coping with demand and supply uncertainty. vii) Outsourcing What is outsourcing? Outsourcing is the act of moving some of a firm's internal activities and decision responsibility to outside providers. The terms of the agreement are established in a contract. Outsourcing goes beyond the more common purchasing and consulting contracts because not only are the activities transferred, but also resources that make the activities occur, including people, facilities, equipment, technology, and other assets, are transferred. The responsibilities for making decisions over certain elements of the activities are transferred, as well. Taking complete

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Course Name: Inventory Management Topic 6: Supply Chain Management responsibility for this is a specialty of contract manufacturers such as Flextronics and Solectron. In the electronics industry, for example, such contract manufacturers, many of whom manage the full supply chain, even including distribution and repair, perform 11% of manufacturing. Why company decides to outsource? The reasons why a company decides to outsource can vary greatly. Outsourcing allows a firm to focus on activities that represent its core competencies. Thus, the company can create a competitive advantage while reducing cost. An entire function may be outsourced, or some elements of an activity may be outsourced, with the rest kept in-house. For example, some of the elements of information technology may be strategic, some may be critical, and a third party may perform some less expensively. Identifying a function as a potential outsourcing target, and then breaking that function into its components, allows decision makers to determine which activities are strategic or critical and should remain in-house and which can be outsourced like commodities. As an example, outsourcing the logistics function in operation. Below are the six important reasons to outsource and the benefits.
Reasons & Benefits to Outsource 1. Organizationally-Driven Reasons # # Enhance effectiveness by focusing on do best. Increase flexibility to meet changing conditions, demand for products and and technologies. Transform the organization. Increase product and service value, satisfaction, and shareholder value. what you business services, 2. Improvement-Driven Reasons
$ $ $

# #

customer

$ $ $

Improve operating performance (increase quality and productivity, shorten cycle times, and so on). Obtain expertise, skills and technologies that are not otherwise available. Improve management and control. Improve risk management. Acquire innovative ideas. Improve credibility and image by associating with superior providers.

3. Financially-Driven Reasons % % Reduce investments in assets and free up these resources for other purposes. Generate cash by transferring assets to the provider.

4. Revenue-Driven Reasons o o Gain market access and business opportunities through the providers network. Accelerate expansion by tapping into the providers developed capacity, processes, and systems. Expand sales and production capacity during periods when such expansion cannot be financed. Commercially exploit existing skills.

o o 5. Cost-Driven Reasons ! Reduce costs through superior provider performance and the providers lower cost

6. Employee-Driven Reasons Give employees a stronger career path. Increase commitment and energy in non-core

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! structure. Turn fixed costs into variable costs. areas.

Global sourcing We are in the middle of a major change in the global economy. Great opportunities are available because of the collapse of communism in the Eastern Bloc, the issuance of the Euro currency, and new markets in Turkey, India, South Africa, and so on. We have seen the results of agreements such as the North American Free Trade Agreement and the General Agreement on Tariffs and Trade. China is a huge market and is now a powerful trading partner. The Breakthrough Box titled "Supply Chain Management, Hong Kong Style" gives great insight into how global sourcing works in the quickly changing and competitive fashion industry. Managers face an interesting predicament. Lets take the example of Nike, the maker of highquality tennis shoes. For Nike a key raw material is leather, which is available from many sources around the world. The lowest-cost leather, though, might be available in South America while the least expensive labor is in China, locations that are on opposite sides of the globe. These locations are far removed from the major markets for the shoes in the United States, Europe, and Japan. To make matters worse, those customers in the United States, Europe, and Japan do not even agree on what they want. Companies that face such diverse sourcing, production, and distribution decisions need to weigh the costs associated with materials, transportation, production, warehousing, and distribution to develop a comprehensive network designed to minimize costs. Of course, this network must be designed with consideration of outsourcing alternatives as described earlier in this topic. 6.6. Mass Customization Definition of Mass Customization The term mass customization has been used to describe the ability of a company to deliver highly customized products and services to different customers around the world. The key to mass customizing effectively is postponing the task of differentiating a product for a specific customer until the latest possible point in the supply network. In order to do this, companies must rethink and integrate the designs of their products, the processes used to make and deliver those products, and the configuration of the entire supply network. By adopting such a comprehensive approach, companies can operate at maximum efficiency and quickly meet customers orders with a minimum amount of inventory.

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Principles of Effective Mass Customization Program As explained in the graphic below.

How to make an effective mass customization program successful? Making decisions like these is not easy. It involves people from at least five areas of the company: marketing, research and development, manufacturing, distribution, and finance. These five groups must play the following roles to support an effective mass customization program:

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! ! !

Marketing must determine the extent to which mass customization is needed to fulfill customers requirements. Research and development must redesign the product so that it can be customized at the most efficient point in the supply network. Manufacturing and distribution must coordinate both the supply and redesign of materials and situate manufacturing or assembly processes in the most efficient locations. Finance must provide activity-based cost information and financial analyses of the alternatives.

Each group at any company has its own measures of performance. Marketing, for example, is evaluated on revenue growth, research and development on a products functionality and the cost of its components, and manufacturing and distribution on the cost of assembling and delivering a product to the customer. The different measures focus the groups on different objectives. Marketing wants to offer as many product options as possible to attract more customers; research and development wants to offer the product with the greatest possible functionality at the lowest possible cost; and manufacturing and distribution want to make one product at a stable volume. If the groups are not properly coordinated, their attempts to optimize their own performance may hurt the companys ability to create the most efficient supply network that can deliver a customized product at the lowest cost. Negotiations among these groups are critical, with the goal being to decide to do what is best for the company as a whole. A supply chain links all of the stages together from raw materials through production to the consumer. The supply chain is coordinated with an electronic information system. Many options define the logic of these systems; in all cases, the frequency and speed of communicating information through the chain has a great effect on inventory levels, efficiencies, and costs. Managing the supply chain is being shifted, to a large extent, to the vendor. Purchasing contracts are now tied to delivery schedules. Electronic information flow has shifted routine activities to the vendor by allowing direct access to point-of-sales data and giving responsibility for forecasting and delivery of product directly to the vendor. Today such relationships tend to be long-term, but one can speculate whether the relationships will be long-term in the future.

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Summary In this topic, you have learnt: A typical supply chain consists of the followings: a. Suppliers; b. Manufacturers; c. Warehouse & Distribution Centers; d. Customers; e. Material Costs; f. Manufacturing Costs; g. Transportation Costs; and h. Inventory Costs. Supply chain management includes determining: a. Transportation vendors; b. Credit and cash transfers; c. Suppliers; d. Distributors and banks; e. Accounts payable and receivable; f. Warehousing and inventory levels; g. Order fulfillment; and h. Sharing customer, forecasting, and production information. Activities in supply chain management are aimed to achieve two major objectives, which are: a. To reduce cost or waste; and b. To maximize the value to the ultimate customers. Supply chain management is defined as the management approaches used to integrate suppliers, manufacturers, warehouses, and retail stores. It is difficult to efficiently integrate the whole supply chain because of these two reasons: a) Different parties in the supply chain may have different and conflicting objectives; and

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Course Name: Inventory Management Topic 6: Supply Chain Management b) The supply chain has evolved rapidly over time and supplier relationships have also changed drastically. Supply chain performance can be measured using inventory turnover or weeks of supply. There are a number of key issues in supply chain management, which are: a) Inventory management; b) Distribution strategies; c) Supply chain integration and strategic partnering; d) Product design; e) Information technology and decision-support systems; and f) Customer value.

The bullwhip effect is defined as the growing variance of the supply chain members order quantities comparative to the variance of the consumers demand.

There are several factors contributing to the increase in variability in supply chain, and they are: a) Demand forecasting; b) Lead-time; c) Order batching; d) Price fluctuations; and e) Shortage gaming / inflated orders.

Counteracts for the bullwhip effect are as follow: a) Information sharing; b) Electronic data interchange; c) Break order batches; d) Stabilize prices; e) Avoid shortage gaming; f) Supply chain strategy; and g) Outsourcing.

The term mass customization has been used to describe the ability of a company to deliver highly customized products and services to different customers around the world.

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There are three principles of effective mass customization program, which are: a) Principle 1: A product should be designed so it consists of independent modules that can be assembled into different forms of the product easily and inexpensively; b) Principle 2: Manufacturing and service processes should be designed so that they consist of independent modules that can be moved or rearranged easily to support different distribution network designs. c) Principle 3: The supply network-the positioning of inventory and the location, number, and structure of service, manufacturing, and distribution facilities-should be designed to provide two capabilities. First, it must be able to supply the basic product to the facilities performing the customization in a cost-effective manner. Second, it must have the flexibility and the responsiveness to take individual customers' orders and deliver the finished, customized well quickly.

These five groups must play the following roles to support an effective mass customization program: o Marketing must determine the extent to which mass customization is needed to fulfill customers requirements. o Research and development must redesign the product so that it can be customized at the most efficient point in the supply network. o Manufacturing and distribution must coordinate both the supply and redesign of materials and situate manufacturing or assembly processes in the most efficient locations. o Finance must provide activity-based cost information and financial analyses of the alternatives.

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Additional Readings: Links: The Bullwhip Effect http://www.logistik-management.info/Leser_Abonnenten/Abstracts/Heft1_04_engl.htm The Beer Distribution Game: A simulation of a supply chain. http://www.beergame.lim.ethz.ch A very brief article on supply chain management. http://www.inventorysolutions.org/def_scm.htm Learn all about inventory turnover. http://retail.articleinsider.com/69335_inventory_turnover.html Top Inventory Turnover Directory http://www.inventory-directory.com/1/inventory-turnover.html ! Mass Customization: The Proactive Management of Variety http://www.build-to-order-consulting.com/mc.htm

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CROSSWORD PUZZLE TOPIC 6: SUPPLY CHAIN MANAGEMENT

1 2 3

4 5 6 8 10 11 7 9

12 13

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I N F N F L B A U T L E L D OW H M I A P X I M I N T Z E N A

O R M

O U T N S T O U R C I N E G R

B L E R

A T I O N S N A O S T P O N E M E N T E I T R U E S T C U F U H I P Y R E A M M S I N N P T N O G R R G V E M P L O Y E E E V A R E V E N U E M C M O A T E E R F I N A N C E T

ACROSS 1 _____ sharing and operational planning are the keys to a successful integrated supply chain. 4 Process _____ is the term used to describe delay of the process step that differentiates the product to as late in the supply chain as possible. 7 [Average aggregate inventory value / cost of goods sold] 52 weeks: This is a form ula for weeks-ofsupply. True / F alse. 11 Bullwhip effects result from m em bers from different supply chain stages processing the dem and input from their im m ediate _____ m em ber in their forecasting schem e. 13 Increase com m itm ent and energy in non-core areas is one of the elem ents of _____-driven reasons. 14 The cost of goods sold is the annual xost for a com pany to produce the goods or services provided to custom ers, and is som etim es referred to as

the cost of _____. 16 Supply chain m anagem ent is defined as the m anagem ent approaches used to _____ suppliers, m anufacturers, warehouse and retail stores. 17 These groups play im portant roles to support an effective m ass custom ization program : m arketing, research, m anufacturing and _____. 18 Inform ation technology is a critical _____ of effective SCM. DOWN 1 Shortage gam ing or _____ orders is one of the factors contributing to the increase in variability in supply chain. 2 Inform ation lead-tim e can be reduced through the use of electronic data _____ (EDI). 3 In SCM, products are m anufactured and sidtributed at the right quantity, to the right custom ers, and at the right tim e, with the objectives of m inim izing the whole system costs while _____ custom er

requirem ents. 5 The _____ effect is defined as the growing variance of the supply chain m em ber's order quantities com parative to the variance of the consum er's dem and. If the bullwhip effect occurs in a supply chain, the flows of m aterial and inform ation will be disturbed. 6 _____ is the act of m oving som e of a firm 's internal activities and decision responsibility to outside providers. 8 There are two com m on m easures to evaluate supply chain efficiency: inventory _____ and weeks-of-supply. 9 VMI or CRP is a situation where the _____ partners would have access to the dem and and inventory data at the downstream site and update the necessary forecasts and replenishm ent data for the downstream partner. 10 O btain expertise, skills and technologies that are not otherwise available is one of the elem ents of _____driven reasons. 12 All activities in SCM are aim ed to achieve two m ajor objectives: to reduce cost or waste and to _____ the value to the ultim ate custom ers. 15 O utsourcing allows a firm to focus on activities that represent its _____ com petencies.