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Supply Chain Management

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OBJECTIVES

Supply chain management

Bullwhip effect

Supply chain collaboration and coordination

Measuring supply chain performance

Inventory turnover, weeks of supply
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Supply Chain

A supply chain is an interrelated series of

processes within a firm and across different
firms that produces and delivers goods and
services to the end customers
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Supply Chain (Contd)

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Supply Chain Management

Supply chain management (SCM) is a total

systems approach to managing the entire
flow of materials, services, and information
throughout the supply chain
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SCM Responsibilities

Supply chain strategy and design

Developing supply chain strategies
Supply network design
Number of facilities and their locations and
capacities
Sourcing decisions
Make/buy decisions, number of suppliers, supplier
selection
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SCM Responsibilities (Contd)

Supply chain planning and operations

Demand forecasting
Supply chain planning
Planning on production, inventory, and distribution
throughout the supply chain to meet demands
Transportation planning and management
Inventory planning and management
Supply chain collaboration and coordination
Managing order fulfillment processes
Supply Produce Distribute Sell
Information technology for SCM
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Bullwhip Effect

The bullwhip effect refers to the phenomenon

that the variability in order quantities
increases as we move up the supply chain

Manufacturer Wholesaler Retailer

Time Time Time

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Causes of the Bullwhip Effect

Behavioral causes
Overreaction to demand changes
Failure to understand the impact of their
decisions on the supply chain
Non-behavioral (i.e., systematic) causes
Demand forecast updating
Order batching
Price fluctuation
Rationing and shortage gaming
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Supply Chain Collaboration and

Coordination
Supply chain collaboration
Working with supply chain partners to improve supply
chain performance
e.g.) Implementation of VMI
Supply chain coordination
Coordinating conflicts of interests between supply chain
partners to maximize supply chain performance
e.g.) Use of supply contracts such as buy-back, quantity
discount, and revenue sharing
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Vendor-Managed Inventory (VMI)

Traditionally, the customer (e.g., retailer,

distributor, or manufacturer) manages her own
inventory and places orders with the supplier, who
in turn fulfils the customer orders
In vendor-managed inventory (VMI), the supplier
manages the inventory at the customer and
decides when and how much to replenish
Industry examples
Wal-Mart and Proctor & Gamble
Costco and Kimberly-Clark
Campbells Soup and its retailers
Barilla and its distributors
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Benefits of VMI

Benefits of VMI to the customer

Reduction of administrative costs for managing
inventory and placing orders
Lower inventory and fewer stockouts
Benefits of VMI to the supplier
Access to the sales and inventory data at the customer
More flexibility in production and delivery
Better utilization of resources
Reduction of production and delivery costs
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Collaborative Planning, Forecasting,

and Replenishment (CPFR)

Collaborative planning, forecasting, and

replenishment (CPFR) is a process model used to
coordinate demand forecasting, production
planning, and inventory replenishment between
supply chain partners
CPFR uses a cyclic and iterative approach to
derive consensus forecasts
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Measuring Supply Chain

Performance

Inventory measures
Inventory turnover
Weeks of supply
Service level

Delivery leadtime

On-time delivery

Forecast accuracy
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Inventory Turnover

Inventory turnover is the ratio of annual cost

of goods sold to average inventory value

Annual cost of goods sold

Inventory turnover
Average inventory value

How many times does the current level of inventory

go through the system in a year?
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Weeks of Supply

Weeks of supply measures how many weeks

of supply the firm has

Average inventory value

Weeks of supply
Annual cost of goods sold 52
Average inventory value
52
Annual cost of goods sold
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Example: Inventory Measures

Suppose a companys new annual report

claims that their costs of goods sold for
the year is $160 million and their total
average inventory is worth $35 million.
What is this years inventory turnover?
How many weeks of supply does the
company have?
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Example: Inventory Measures (Contd)

Annual cost of goods sold

Inventory turnover
Average inventory value
$160 / $35
4.57

Average inventory value

Weeks of supply 52
Annual cost of goods sold
($35 / $160) 52
11.38