7. Supply Chain Management (SCM)

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7. Supply Chain Management (SCM)
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Supply Chain Management

• Integration of the activities that procure
  materials and services, transform them into
  intermediate goods and the final product, and
  deliver them to customers
• Competition is no longer between companies it is
  between supply chains

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A Sample Supply Chain
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Supply Chain Strategies

• Negotiating with many suppliers
• Long term partnering with few suppliers
• Vertical integration
• Keiretsu (affiliated chain)

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Many Suppliers

• Commonly used for commodity products many
  sources per item
• Adversarial short term relationship
• Infrequent large lots
• Purchasing is typically based on price -
  suppliers are pitted against one another

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Few Suppliers

• Longer term stable relationships
• Partnership - JIT programs, design and
  technological contribution
• High quality and possibly low price
• Frequent small lots
• Cost of changing suppliers is huge

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Vertical Integration

• Ability to produce goods or service previously
  purchased make or buy decisions
• Integration may be forward, towards the customer,
  or backward, towards suppliers
• Can improve cost, quality, and inventory but
  requires major financial commitment
• Hard to do all things well

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Vertical Integration
Raw material (suppliers) Iron ore Silicon Farming

Backward integration Steel

Current transformation Automobiles Integrated circuits Flour milling

Forward integration Distribution systems Circuit boards

Finished goods (customers) Dealers Computers Watches Calculators Baked goods
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Keiretsu Networks (affiliated chain)

• 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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Make or Buy Decisions
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Make or Buy Decisions
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Issues in SCM

• Local optimization - focusing on local profit or
  cost minimization based on limited knowledge
• Incentives (sales incentives, quantity discounts,
  quotas, and promotions) - push merchandise prior
  to sale
• Large lots - low unit cost but do not reflect
  sales
• Bullwhip effect - stable demand becomes lumpy
  orders through the supply chain

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Opportunities in SCM

• Accurate pull data
• Lot size reduction
• Single stage control of replenishment
• Vendor managed inventory
• Standardization
• Electronic ordering and funds transfer

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Example
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Vendor Evaluation
Criteria Weights Scores (1-5) Weight x Score
Engineering/research .20 5 1.0
Production/process capability .15 4 .6
Distribution/delivery capability .05 4 .2
Quality systems and performance .10 2 .2
Facilities/location .05 2 .1
Financial and managerial strength (stability and cost structure) .15 4 .6
Information systems (ERP) .10 2 .2
Integrity (compliance/ethics) .20 5 1.0
Total 1.00 3.9
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Supply Chain Performance

• Inventory Investment
• Total Inventory / Total Assets 100
• Example
• Inventory 11.4 billion, Assets 44.4 billion
• Inventory investment 11.4/44/4100 25.7

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Supply Chain Performance

• Inventory Turnover
• Cost of Goods Sold / Total Inventory
• Example
• Inventory Turnover 14.2 / 1.69 8.4

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Supply Chain Performance
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Network Design in a Supply Chain

• Facility location
• Capacity allocation
• Market and supply allocation

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One week order response time - 1 Distribution
Center
Customer
DC
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5 day order response time - 2 Distribution Centers
Customer
DC
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3 day order response time - 5 Distribution Centers
Customer
DC
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Next day order response time - 13 Distribution
Centers
Customer
DC
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Same day order response time - 26 Distribution
Centers
Customer
DC
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Cost vs. Number
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Conventional Network
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Tailored Network
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Network/Location Decisions

• Long-term decisions
• Decisions made infrequently
• Decision greatly affects both fixed and variable
  costs
• Once committed to a location, many resource and
  cost issues are difficult to change

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Critical Factors to Consider

• Proximity to raw materials and customers
• Labor, availability, costs
• Land/construction costs
• Government incentives and fiscal policies
• Corporate desires
• Environmental regulations

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Methods of Evaluating Locations

• Factor Rating Method
• Locational Break-Even Analysis
• Center of Gravity Method
• Transportation Method

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Factor Rating method

• Most widely used location technique
• Develop a list of relevant factors
• Assign a weight to each factor
• Score each location for each factor
• Multiply score by weights for each factor for
  each location

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Example
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Locational Break Even Analysis

• Method of cost-volume analysis used for
  industrial locations
• Determine fixed and variable costs for each
  location
• Plot the cost for each location
• Select location with lowest total cost for
  expected production volume

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Example
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Example
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Center of Gravity Method

• Find location of distribution center that
  minimizes distribution costs
• Consider location of markets, volume of goods
  shipped to those markets, and shipping cost (or
  distance)
• Place existing locations on a coordinate grid
• Calculate X and Y coordinates for center of
  gravity

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Center of Gravity Method
Computation of center
Evaluation of potential locations
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Example
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Example
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Example
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Transportation Model

• Find amount to be shipped from several points of
  supply to several points of demand
• Solution will minimize total production and
  shipping costs

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Transportation Model
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Location Strategy
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Location Strategy
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Location Strategy
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Video Case Study
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Beer Game

• Was the game realistic?
• Did you blame your customers or vendors?
• Who is responsible for the performance?
• Why not ship them directly from the factory to
  the retailer?
• What was the real demand?
• Why are there big fluctuations?
• Can we use some inventory policies?