Chapter 11 - Introduction to Supply Chain Management (SCM) PDF

# MGOC20 - Operations Management ## Chapter 11 - Introduction to Supply Chain Management (SCM) ### 1. Introduction SCM is the integration of the activities that procure materials and services, transform them into intermediate goods and final products, and deliver them through a distribution system....

# MGOC20 - Operations Management ## Chapter 11 - Introduction to Supply Chain Management (SCM) ### 1. Introduction SCM is the integration of the activities that procure materials and services, transform them into intermediate goods and final products, and deliver them through a distribution system. ### A supply chain for beer A diagram of a supply chain for beer, with the following components * **Farm:** * Scheduling information * Order and cash flow * **Hops/Grains:** * Market research data * Design Data * **Can Manufacturing:** * S3, S2, S1 (Tier 3, 2, and 1 suppliers) * **Bottle Manufacturing:** * S3, S2, S1 (Tier 3, 2, and 1 suppliers) * **Brewer:** * Material flow, $1.18 * **Hops, Grain:** * $0.34 * **Distributor:** * Sam's Grocery, $3.36 * **Sam's Grocery:** * $4.62, 6340-mL, $6.99 beers * **Customer:** * Credit Flow, Ideas and Design to satisfy the end customers **FIGURE 11.1 A Supply Chain for Beer** The supply chain includes all the interactions among suppliers, manufacturers, distributors, and customers. The chain includes transportation, scheduling information, cash and credit transfers, as well as ideas, designs, and material transfers. Even can and bottle manufacturers have their own tiers of suppliers providing components such as lids, labels, packing containers, etc. (Costs are approximate and include substantial taxes.) ### Important SCM activities include determining 1. Transportation vendors 2. Credit and cash transfers, accounts payable and receivable 3. Suppliers & distributors 4. Warehousing and inventory 5. Order fulfillment 6. Sharing customer, forecasting, and production information ### How Supply Chain Decisions Impact Strategy The supply chain must support the company's strategy. * If you want roses that are fresh, build a supply chain base on response. * If you want to be a low-cost provider, build a supply chain that should have the ability to design low-cost products that meet functional requirements, minimize inventory, and drive down lead times. * If you want to have a strategy of offering unique/customized/differentiated products, build a supply chain to support innovation and minimize inventory obsolescence. ### Managing the Supply Chain There are significant management issues in controlling a supply chain involving many independent organizations. Success begins with Mutual agreement on goals, followed by mutual trust and continues with compatible organizational cultures. #### Mutual agreement on goals Partners in the chain must appreciate that the only entity that puts money into a supply chain is the end customer. Therefore, establishing a mutual understanding of the mission, strategy, and goals of participating organizations is essential. #### Mutual Trust Members of the chain must enter into relationship that shares info. Supplier relationship more likely to be successful if risk and cost savings are shared – and activities such as end-customer research, sales analysis, forecasting, and production planning are joint activities.....all built on mutual trust. #### Compatible organizational cultures Positive relationship between purchasing and supplying organizations that comes with compatible cultures can be a real advantage to make the supply chain run smoothly. ### Long-term partnering with few suppliers * Buyer forms longer term relationships with fewer suppliers. * Create value through economies of scale and learning curve improvements. * Suppliers are more willing to participate in JIT programs and contribute design and technological expertise. **Video: Arnold Palmer Hospital's Supply Chain** ### 2. The Bullwhip Effect & Ways to Reduce its Effect #### Bullwhip effect * Occurs as orders are relayed from retailers, to distributors, to wholesaler to manufacturers, with fluctuations increasing at each step in the sequence. * The "bullwhip" fluctuations in the chain increases costs associated with inventory. * Proctor and Gamble found that although the use of Pampers diapers was steady and retail-store orders had little fluctuation, as orders moved through the chain, fluctuations increased. A diagram of a supply chain showing the bullwhip effect: * **Manufacturer:** Increase production by 40 * **Wholesaler:** Increase purchase by 30 * **Distributor:** Increase purchasing by 25 * **Retailer:** Increase purchasing by 20 units #### How to deal with above Issues? 1. **Accurate "pull” (demand / sales) data** Accurate pull data can be generated by sharing Point of Sales (POS) info so that each member of the chain can schedule effectively. A diagram of the chain highlighting the use of POS: * **mfg:** Can access POS * **whole:** * **dist:** * **retailer:** POS, cash register 2. **Single stage control of replenishment** Designating a member in the chain as responsible for monitoring and managing inventory in the supply chain based on the “pull” from the end user. This removes distorted information and multiple forecasts that create the bullwhip effect. A diagram of the chain indicating a single-stage control of replenishment: * **mfg:** Share * **whole:** Share, Forecast, production planning for every one * **dist:** Share * **retailer:** POS, provide access 3. **Collaborative planning, forecasting, and replenishment (CPFR)** With CPFR, members of the chain share planning, forecasting and inventory information. Promotion, advertising, forecasting and timing of shipments are all included in the plan in a concerted effort to drive down inventory and related costs. A diagram of the chain showing collaborative planning, forecasting and replenishment (CPFR): * **mfg:** * **whole:** * **dist:** * **retailer:** Joint Forecast & Production planning, send member 4. **Drop shipping and special packaging** Drop shipping means the supplier will ship directly to the end customer, rather than to the seller, saving both time and reshipping costs. **Example – Dell Computers** * Dell computer has decided that is core competence is not in stocking peripherals, but in assembling PCs. * If you order a PC from Dell, with a printer and perhaps other components, the computer comes from Dell, but the other items will be drop shipped directly from the manufacturer. A diagram showing the drop shipping process: * **HP:** printers * **receiving:** * **Dell:** PC + printer, shipping warehouse * **drop shipping:** * **Dell:** * **HP:** printer 5. **Channel assembly** Channel assembly sends individual components and modules, rather than finished products, to the distributor. The distributor then assembles, tests and ships. Channel assembly treats distributors more as manufacturing partners than as distributors. With this strategy, finished-goods inventory is reduced because units are built to shorter, more accurate forecast making market response better with lower investment. A diagram showing the difference between no channel assembly and channel assembly: * **No channel assembly:** * **HP:** manufacture, model A, model B, forecast 6A, 10B * **Distributor:** 6A, 10B, 2A left in inventory, not enough B to sell * **Retailer:** Best buy, demand 4A, 12B * **Channel assembly:** * **HP:** Parts * **Distributor:** assemble, 4A, 12B * **Retailer:** Best buy, orders, 4A, 12B 6. **Vendor managed inventory (VMI)** The use of a local supplier (usually a distributor) to maintain inventory for the manufacturer or retailer. The supplier delivers directly to purchaser's using department rather than to a receiving dock or stockroom. These systems work without the immediate direction of purchaser. **Example of VMI for retailer** A diagram of a retailer using vendor managed inventory: * **Gillet:** Send blades, receiving, with VMI, Gillet delivers directly to shelve * **Walmart store:** Stock Room, shelf in store **Example of VMI for Manufacturer** A diagram of a manufacturer using vendor managed inventory: * **Supplier:** Send parts, receiving, with VMI, supplier brings parts directly to production line * **Manufacturing Plant:** Storage Area, production line **Video 11.2 - Supply Chain Management at Regal Marine** ***VMI - Periodic Review Systems*** Smaller retailers such as drugstores use this system when ordering items such as shampoo, tooth paste, etc. Vendors will make periodic visits – every few weeks or every month and count the inventory for their product. An order will be placed to bring the inventory back to the target/desire level. Under this system, the vendor bundles many small, low-cost items into a single order and delivery to save costs. A diagram showing the effect of periodic review cycles on inventory on hand: * **Target:** * **Inventory on-hand:** A line graph that shows the fluctuating inventory on-hand, with peaks and valleys in the stock levels. From the top of each peak down, an "Q" is marked to represent the quantity ordered. * **Lead Time (L):** * **Safety Stock:** * **t(b) order receipt:** **Order Quantity = (amount sold between visits & lead time) + (desired safety stock) – (inventory in stock)** **Q = d (t₁ + L) + zo a √t♭ + L − I** * **Q = order quantity** * **t = the fixed time between orders** * **L = lead time** * **d = average daily demand** * **σ₁ = standard deviation of daily demand** * **I = inventory in stock** * **z = value from normal table, eg. 80% service level means P(Z ≤ z ) = 0.8 gives z = 0.84** **Example** The KVS Pharmacy stocks a popular brand of over-the-counter flu and cold medicine. The average demand for the medicine is 6 packages/day, with a standard deviation of 1.2 packages. A vendor for the pharmaceutical company checks KVS 's stock every 60 days. During one visit, the store had 128 packages in stock. The lead time to receive an order is 5 days. **(a) Determine order size for this order that will enable KVS to maintain a 95% service level.** **Q=dCtb+L)+z6dVtb+L - I** **95/ service level PC2≤2) = 0.95 → : 2 = 1.645** **Q=6(60+5)+1.645 (1.2)√60+5 - 128** **= 278** **(b) Suppose the vendor visits once a week and lead time is 2 days. During one visit, the store had 60 packages in stock. Determine the order size to maintain a 90% service level.** **90% service: PC2≤2) = 0.9 → : 2 = 1.285** **Q=6 (7+2)+1.285C1.2)√7+2-60** **= 7.626** ### 4. Logistics Management & 3PL Procurement activities may be combined with various shipping, warehousing, and inventory activities to form a logistics system. When logistics issues are significant or expensive, many firms opt for outsourcing the logistics function. #### Third-Party Logistics Third-Party Logistics are companies that provide logistics services to other companies. May provide warehousing, assembly, testing, shipping, customs clearance service. 3PL often have tracking technology that reduces transportation losses and supports delivery schedules that adhere to precise delivery windows. Competitive advantage is found via both reduced costs and improved customer service. ### 6. Measuring Supply-Chain Performance #### Supply Chain Operations Reference (SCOR) ***Performance Attribute*** | ***Performance Metric*** | ***Definition*** -------|-------|------- Supply chain delivery reliability | Fill rate | Percentage of orders delivered on time and in full to the customer Supply chain delivery reliability | Delivery performance | Percentage of orders shipped within 24 hours of order receipt Supply chain delivery reliability | Perfect order fulfillment | Percentage of orders delivered on time and in full, perfectly matched with order with no errors Supply chain responsiveness | Order fulfillment lead time | Number of days from order receipt to customer delivery Supply chain responsiveness | Supply chain response time | Number of days for the supply chain to respond to an unplanned significant change in demand without a cost penalty Supply chain flexibility | Production flexibility | Number of days to achieve an unplanned 20% change in orders without a cost penalty Supply chain cost | Supply chain management costs | The direct and indirect cost to plan, source and deliver products and services Supply chain cost | Cost of goods sold | The direct cost of material and labor to produce a product or service Supply chain cost | Value-added productivity | Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee Supply chain cost | Warranty/return processing cost | Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory Supply chain asset management efficiency | Cash-to-cash cycle time | The number of days that cash is tied up as working capital Supply chain asset management efficiency | Inventory days of supply | The number of days that cash is tied up as inventory Supply chain asset management efficiency | Asset turns | Revenue divided by total assets including working capital and fixed assets **Source: Table 10.2 – “Operations Management” by Russell, Taylor, Castillo, Vidyarthi** #### Metrics for assets committed to inventory Percent invested in inventory = (total inventory investment / total assets) x 100 **Inventory turnover = cost of goods sold / inventory investment** **Weeks of supply = inventory investment / (annual cost of goods sold / 52 weeks)** **Example** PepsiCo Inc. manufacturer and distributor of drinks, Frito-Lay, and Quaker Foods provides the following in its 2005 annual report (shown here in $ billions). Determine PepsiCo's turnover and weeks of supply. * **Net revenue:** $32.5 * **Cost of goods sold:** $14.2 * **Inventory:** * **Raw material inventory:** $.74 * **Work-in-process inventory:** $.11 * **Finished goods inventory:** $.84 * **Total inventory investment:** $1.69 **inventory turnover = $14.2/$1.69** **= 8.4 Cnumber of orders/year)** **$1.69** **weeks of supply = ($14.2/52)** **= 6.19 weeks** **Video 11.3 - Darden's Global Supply Chain**