Supply-Chain

Management

1
Creation of Inventory
Input flow of materials

Inventory level

Scrap flow

Figure 11.1 Output flow of materials

2
Inventory at Different
Stocking Points
• At Suppliers: Raw materials
• Within manufacturing plant: Raw
materials, Work in Process & Finished
goods
• At distributors: Finished goods
• At retailers: Finished goods

3
 What is Supply-Chain Management?

• Supply-chain is a term that describes how

organizations (suppliers, manufacturers,
distributors, and customers) are linked
together.
• Supply-chain management is a total system
approach to managing the entire flow of
information, materials, and services from
raw-material suppliers through factories
and warehouses to the end customer.

4
Supply
Chain

5
 Supply
Chain

Tier 3

Legend Supplier of services Supplier of materials

Figure 11.3 6
 Supply
Chain

Tier 2

Tier 3

Legend Supplier of services Supplier of materials

Figure 11.3 7
 Supply
Chain

Tier 1

Tier 2

Tier 3

Legend Supplier of services Supplier of materials

Figure 11.3 8
 Supply
Chain
Manufacturer

Tier 1

Tier 2

Tier 3

Legend Supplier of services Supplier of materials

Figure 11.3 9
 Supply
Chain Distribution
center
Distribution
center

Manufacturer

Tier 1

Tier 2

Tier 3

Legend Supplier of services Supplier of materials

Figure 11.3 10
 Supply Customer Customer Customer Customer

Chain Distribution
center
Distribution
center

Manufacturer

Tier 1

Tier 2

Tier 3

Legend Supplier of services Supplier of materials

Figure 11.3 11
Supply
Chain

12
 Supply
Chain

Facility Electric
Electric Janitorial Programming Office Fuel
maintenance energy
transformers services services supplies supplies
services backup power

Figure 11.4 13
 Supply
Chain

Electric
power utility

Facility Electric
Electric Janitorial Programming Office Fuel
maintenance energy
transformers services services supplies supplies
services backup power

Figure 11.4 14
 Supply
Chain
Home Commercial Other electric
customers customers utilities

Electric
power utility

Facility Electric
Electric Janitorial Programming Office Fuel
maintenance energy
transformers services services supplies supplies
services backup power

Figure 11.4 15
Supply Chain
• The interconnected set of linkages between
suppliers of materials and services that
spans the transformation of raw materials
into products and services and delivers
them to a firm’s customers is known as the
supply chain.
– Three things flow in a supply chain
• Value: from suppliers to consumers
• Information: in both directions
• Finance: from consumers to suppliers

16
 Supply Chain Management
• SCM seeks to synchronize a firm’s functions
with those of its suppliers to match the flow
of materials, services & information with
customer demand
• Basic purpose is to control inventory by
managing the flow of materials
• Common to manufacturing & service
organizations
• Percentage of income used for buying
materials & services
– Manufacturing – 60%
– Service – 30%
17
 Supply Chain Management
• A large proportion of income is used to buy
raw materials & services
• Companies can reap benefit (profit) by a
small percentage of reduction in the cost of
materials or cost of procuring them
• Main reason of SCM becoming a key
competitive advantage
– SCM has strategic implications because many
companies have used SCM to achieve
competitive priorities

18
 Supply Chain Management
• Supply chain is influenced by two types
of uncertainties
– Supply-side uncertainty
– Demand side uncertainty
• Managing supply chain is in effect
managing these two types of
uncertainties

19
Integrated Supply Chain

• In order to have smooth flow of materials all

the components of a supply chain must be
seamlessly integrated
• Integrated supply chain can be established by
facilitating sharing of information
between members in advance
• Overall cost of a supply chain can be reduced
only if
– It is an integrated supply chain
– Total view (end-to-end) is taken

20
 Integrated Supply Chain
Phase 1:
Independent
supply-chain Suppliers Purchasing Production Distribution Customers
entities

Figure 11.5 21
 Integrated Supply Chain
Phase 1:
Independent
supply-chain Suppliers Purchasing Production Distribution Customers
entities

Phase 2:
Internal Suppliers Purchasing Production Distribution Customers
integration

Internal supply chain

Materials management department

Figure 11.5 22
 Integrated Supply Chain
Phase 1:
Independent
supply-chain Suppliers Purchasing Production Distribution Customers
entities

Phase 2:
Internal Suppliers Purchasing Production Distribution Customers
integration

Internal supply chain

Materials management department

Phase 3: Internal
Supply-chain Suppliers supply Customers
integration chain

Integrated supply chain

Figure 11.5 23
Materials Management

24
Materials Management

Purchasing
domain of
responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

Figure 25
11.6
Materials Management

Purchasing
domain of
responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

Figure 26
11.6
Materials Management
FG storage

Transformation
process and WIP
storage

Purchasing
domain of
responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

RM storage
Figure 27
11.6
Materials Management

FG storage

Transformation
process and
WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

Figure 28
11.6
Materials Management

FG storage

Production domain
of responsibility
Transformation
process and
WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

Figure 29
11.6
Materials Management

FG storage

Transformation
Production domain process and
of responsibility WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

Figure 30
11.6
Materials Management
Supermarket A Supermarket B
distribution center distribution center

Distribution FG storage
domain of Transportation
responsibility services supplier

Transformation
Production domain process and
of responsibility WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

Figure 31
11.6
Materials Management
Supermarket A Supermarket B
distribution center distribution center

Distribution
Transportation
domain of
services supplier
responsibility

FG storage

Transformation
Production domain process and
of responsibility WIP storage

Purchasing
domain of
RM storage responsibility

Chocolate Maintenance
Egg Sugar Flour
chips services
supplier supplier supplier
supplier supplier

Figure 32
11.6
Material Management & SCM
• Purchasing
– Responsible for working with suppliers to ensure desired
flow of inward materials & services
– Also responsible for storage of raw material inventory
• Production control
– How much to produce?
– When to produce?
– With which material, machine & people?
• Distribution
– Responsible for outward flow of materials
– Finished goods inventory & selection of transporters
• Material Management decisions have major
cumulative effect on the profitability of the firm
–

33
 Integrated Supply Chain
• Firms should use a seamless information & control
system from purchasing to distribution integrating
marketing, finance, accounts & operations
• Internal supply chain is extended to integrate external
supply chain
• Firms to change focus from product or service
orientation to customer orientation
• Instead of reacting to customer demands, firms
should work with customers so that both can
benefit from improved flow of materials & services
• Similarly suppliers should be involved at the early
stage of product developments & future
requirements are shared with suppliers

34
 Purchasing
• Management of acquisition process
• Involves five steps
– Recognize a need
– Select suppliers
– Place the order
– Track the order
– Receive the order

35
 Supplier Selection
• For supplier evaluation criteria start from the
competitive priorities of the customer
segments to be served – Service firms in
food items: On-time delivery & consistent
quality
• Selecting a new supplier: Price, Quality &
Delivery
– Low Price: Will reduce cost – firms spent
sizeable amount in buying inputs
– Quality: Hidden cost of poor quality can be
enormous
– Delivery: On-time delivery can reduce the
inventory level
• 36
 Supplier Certification
• Verify that a potential supplier has the
capabilities of meeting the
expectations of the buying firm
• Supplier can help the firm in meeting
the competitive priorities of the
customer segments that the firm has
targeted to serve

37
 Supplier Relation
• Nature of relations maintained with
suppliers can affect the quality,
timeliness & price of the firm’s
products or services
• Two orientations
– Competitive
– Cooperative

38
 Supplier Relation - Competitive
• Views negotiations between buyer & seller as
a zero sum game – one’s gain is other’s
loss
• Buyer tries to
– Beat price down to minimum level
– Push demand as high as possible during boom
time
– Reduce demand to almost zero during
recession
• Party having maximum clout wins
• Clout: Buyer will have clout if the quantity
bought is substantial percentage of the
supplier sale; plus
– Product is standard
– Many suppliers are available 39
 Supplier Relation -
Cooperative
• Long term commitment
• Jointly improve quality
• Support from buyer to improve managerial
skills, technical skills & capacity
• Few suppliers
• As order volume increases supplier gains
repeatability – results in lower cost
• Large & long term contract helps supplier to
plan long term

40
 Sole sourcing
• Risky – any problem in supplier’s
company may disrupt the production
• Less opportunity to bargain a good
price
• Advantage – reduces complexity


41
Inventory Measures

42
 Inventory Measures
Average inventory = $2 million
Cost of goods sold = $10 million
52 business weeks per year

Example 11.1 43
 Inventory Measures
Average inventory = $2 million
Cost of goods sold = $10 million
52 business weeks per year

Rs 2 million
Weeks of supply = (Rs 10 million)/(52 weeks) = 10.4 weeks

Example 11.1 44
 Inventory Measures
Average inventory = $2 million
Cost of goods sold = $10 million
52 business weeks per year

Rs 2 million
Weeks of supply = (Rs 10 million)/(52 weeks) = 10.4 weeks

Rs 10 million
Inventory turns = Rs2 million = 5 turns/year

Example 11.1 45
Inventory Measures

46
Supply-Chain Process Measures

• Operational Measures linked to financial

measures
– Aggregate inventory value –Current asset
– Weeks of supply – Working capital
– Inventory turnover – Contribution margin
– Production & material costs – Contribution
margin
– Percentage defects – Contribution margin
– Supplier lead time – Working capital


47
Supply-Chain Process Measures

• Financial measures
– Current asset
– Working capital
– Contribution margin

48
Supply-Chain Process Measures

49
Table 11.1
Supply-Chain Process Measures
Order Placement
q
qPercent orders taken
accurately
qTime to complete the
order-placement
process
qCustomer
satisfaction with
the order-
placement process

50
Table 11.1
Supply-Chain Process Measures
Order Placement Order Fulfillment
q q
qPercent orders taken qPercent of incomplete
accurately orders shipped
qTime to complete the qPercent of orders
order-placement shipped on time
process qTime to fulfill the order
qCustomer qPercent of returned
satisfaction with items or botched
the order- services
placement process qCost to produce the
item or service
qCustomer satisfaction
with the order-
fulfillment process

51
Table 11.1
Supply-Chain Process Measures
Order Placement Order Fulfillment Purchasing
q q q
qPercent orders taken qPercent of incomplete qPercent of suppliers’
accurately orders shipped deliveries on time
qTime to complete the qPercent of orders qSuppliers’ lead times
order-placement shipped on time qPercent defects in
process qTime to fulfill the order purchased
qCustomer qPercent of returned materials and
satisfaction with items or botched services
the order- services qCost of purchased
placement process qCost to produce the materials and
item or service services
qCustomer satisfaction
with the order-
fulfillment process

52
Table 11.1
Supply-Chain Environments

53
 Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and
Responsive Supply Chains

54
 Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and
Responsive Supply Chains

Factor

Demand

Competitive
priorities

New-product
introduction
Contribution
margins
Product variety

55
 Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and
Responsive Supply Chains

Factor Efficient Supply Chains

Demand Predictable; low

forecast errors
Competitive Low cost; consistent
priorities quality; on-time
delivery

New-product Infrequent
introduction
Contribution Low
margins
Product variety Low

56
 Supply-Chain Environments
Table 11.2 Environments Best Suited for Efficient and
Responsive Supply Chains

Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable; low Unpredictable; high

forecast errors forecast errors
Competitive Low cost; consistent Development speed; fast
priorities quality; on-time delivery times;
delivery customization; volume
flexibility; high-
performance design
quality
New-product Infrequent Frequent
introduction
Contribution Low High
margins
Product variety Low High

57
Supply-Chain Design

58
Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

59
 Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

Factor

Operations
strategy

Capacity
cushion
Inventory
investment
Lead time

Supplier
selection

60
 Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

Factor Efficient Supply Chains

Operations Make-to-stock or
strategy standardized services;
emphasize high
volume, standardized
products, or services
Capacity Low
cushion
Inventory Low; enable high
investment inventory turns
Lead time Shorten, but do not
increase costs
Supplier Emphasize low prices;
selection consistent quality; on-
time delivery

61
 Supply-Chain Design
Table 11.3 Design Features for Efficient and Responsive Supply Chains

Factor Efficient Supply Chains Responsive Supply Chains

Operations Make-to-stock or Assemble-to-order, make-

strategy standardized services; to-order, or customized
emphasize high services; emphasize
volume, standardized product or service
products, or services variety
Capacity Low High
cushion
Inventory Low; enable high As needed to enable fast
investment inventory turns delivery time
Lead time Shorten, but do not Shorten aggressively
increase costs
Supplier Emphasize low prices; Emphasize fast delivery
selection consistent quality; on- time; customization;
time delivery volume flexibility; high-
performance design quality
62
Supply-Chain Dynamics

63
Supply-Chain Dynamics
Customer Customer

Firm A

(a)
Figure 11.8
64
Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

(a)
Figure 11.8
65
Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

Firm C

(a)
Figure 11.8
66
Supply-Chain Dynamics
Customer Customer

Materials requirements
Firm A

Firm B

Firm C
Time
(a) (b)
Figure 11.8
67
Supply-Chain Dynamics
Customer Customer

Materials requirements
Firm A

Firm B Firm A

Firm C
Time
(a) (b)
Figure 11.8
68
Supply-Chain Dynamics
Customer Customer

Materials requirements
Firm C
Firm A

Firm B Firm A

Firm C
Time
(a) (b)
Figure 11.8
69