CLASSROOM OPENER GREAT BUSINESS DECISIONS – Michael Dell Decides to Sell PCs Directly to Consumers and Built-to-Order Michael Dell decided that to be successful in the PC business and to gain a significant competitive advantage he would bypass the dealer channel through which personal computers were being sold. Dell developed and deployed their own channel for manufacturing and selling PCs. This personal channel eliminated the reseller markups and large inventory expenses and allowed Dell to operate with lower costs than anyone in the industry, which led to higher profit margins. Michael Dell understood that consumers were getting smarter and that customer service abilities were becoming more sophisticated. Beginning with telephone sales, and then moving to Internet sales, Dell bypassed retailers and targeted corporate accounts. Dell understood that tailoring products to meet specific requirements of large accounts could be accomplished not only more cheaply, but also more effectively without an intermediary. Dell boasts sales of $12.3 billion and is the world’s number one direct-sales computer vendor. The company’s Web site currently generates over half of its orders. Everybody in the industry is trying to imitate Dell’s strategy.
10.1 List and describe the components of a typical supply chain The components of a typical supply chain include: Supplier’s supplier, Supplier, Manufacturer, Distributor, Retailer, Customer, Customer’s Customer 10.2 Define the relationship between decision making and supply chain management SCM enhances decision making. Collecting, analyzing, and distributing transactional information to all relevant parties, SCM systems help all the different entities in the supply chain work together more effectively. SCM systems provide dynamic holistic views of organizations. Users can “drill down” into detailed analyses of supply chain activities in a process analogous to DSS. Without SCM systems, organizations would be unable to make accurate and timely decisions regarding their supply chain. 10.3 Describe the four changes resulting from advances in IT that are driving supply chains Although people have been talking about the integrated supply chain for a long time, it has only been recently that advances in information technology have made it possible to bring the idea to life and truly integrate the supply chain. Visibility, consumer behavior, competition, and speed are a few of the changes resulting from advances in information technology that are driving supply chains 10.4 Summarize the best practices for implementing a successful supply chain management system The following are the SCM industry best practices: Make the sale to suppliers - A large part of any SCM system extends beyond the organization to the suppliers. Since the organization has very little control over anything external to itself, these pieces are typically the most complicated. Be sure suppliers are on board with the benefits that the SCM system will provide to ease SCM implementation difficulties. Wean employees off traditional business practices - If the organization cannot convince people that using the SCM software is worthwhile, the employees will probably find a way around using the software. Ensure the SCM system supports the organizational goals - Be sure to select SCM software that supports organizational goals and strategies Deploy in Incremental phases and measure and communicate success - Designing the deployment of the SCM system in incremental phases is the most successful deployment method. The BIG BANG approach – implementing everything at once – fails 90 percent of the time. Be future oriented - An SCM system, like all systems, must scale to meet future demands.
This chapter takes a look at extending an organization through SCM and discusses: The reasons for SCM’s explosive growth Using SCM to enhance decision making SCM success factors Traditional SCM thinking involved “I buy from my suppliers, I sell to my customers.” Today, organizations are quickly realizing the tremendous value they can gain from having visibility throughout their supply chain Knowing immediately what is transacting at the customer end of the supply chain, instead of waiting days or weeks for this information to flow upstream, allows the organization to react immediately Best Buy checks inventory levels at each of its 750 stores across North America as often as every half-hour
Collecting, analyzing, and distributing transactional information to all relevant parties, SCM systems help all the different entities in the supply chain work together more effectively SCM has significantly improved companies’ forecasting abilities over the last few years Businesses today have access to modeling and simulation tools, algorithms, and applications that can combine information from multiple sources to build forecasts for days, weeks, and months in advance
CLASSROOM EXERCISE Supply Chaining Break your students into groups and ask them to design a supply chain for an organization of their choice Ask your students to try to choose an organization that is currently experiencing supply chain issues, perhaps an organization where the student has had recent issues, such as not receiving an order, receiving an incorrect order, or receiving someone else's order Be sure to have them list the names of the suppliers, manufacturers, distributors, retailers, and customers Ask the students to identify one or two areas where the organization can improve its supply chain Have each group present their supply chains to the class along with their recommendations for improvement
Best Buy checks inventory levels at each of its 750 stores in North America as often as every half-hour with its SCM system, taking much of the guesswork out of inventory replenishment Supply chain management improves ways for companies to find the raw components they need to make a product or service, manufacture that product or service, and deliver it to customers Plan – This is the strategic portion of supply chain management. A company must have a plan for managing all the resources that go toward meeting customer demand for products or services. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers. Source – Companies must carefully choose reliable suppliers that will deliver goods and services required for making products. Companies must also develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships. Make – This is the step where companies manufacture their products or services. This can include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. This is by far the most metric-intensive portion of the supply chain, measuring quality levels, production output, and worker productivity. Deliver – This step is commonly referred to as logistics. Logistics is the set of processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers. During this step, companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments. Return – This is typically the most problematic step in the supply chain. Companies must create a network for receiving defective and excess products and support customers who have problems with delivered products.
Considerable evidence shows that this type of supply chain integration results in superior supply chain capabilities and profits. CLASSROOM EXERCISE Near Beer Supply Chain Game This is an excellent exercise for students who are just learning about the supply chain. http://www.forio.com/nearbeer.htm
Information technology – only recently have advances in IT made it possible to bring the idea of a truly integrated supply chain to life Visibility – more visible models of different ways to do things in the supply chain have emerged. High visibility in the supply chain is changing industries, as Wal-Mart demonstrated Consumer behavior – companies must respond to demanding customers through supply chain enhancements Competition – increased competition makes any organization that is ignoring its supply chain at risk of becoming obsolete Speed – as the pace of business increases through electronic media, an organization's supply chain must respond efficiently, accurately, and quickly
Visibility – more visible models of different ways to do things in the supply chain have emerged. High visibility in the supply chain is changing industries, as Wal-Mart demonstrated Supply chain visibility allows organizations to eliminate the bullwhip effect To explain the bullwhip effect to your students discuss a product that demand does not change, such as diapers. The need for diapers is constant, it does not increase at Christmas or in the summer, diapers are in demand all year long. The number of newborn babies determines diaper demand, and that number is constant. Retailers order diapers from distributors when their inventory level falls below a certain level, they might order a few extra just to be safe Distributors order diapers from manufacturers when their inventory level falls below a certain level, they might order a few extra just to be safe Manufacturers order diapers from suppliers when their inventory level falls below a certain level, they might order a few extra just to be safe Eventually the one or two extra boxes ordered from a few retailers becomes several thousand boxes for the manufacturer. This is the bullwhip effect, a small ripple at one end makes a large wave at the other end of the whip.
Once an organization understands customer demand and its effect on the supply chain it can begin to estimate the impact that its supply chain will have on its customers and ultimately the organizations performance
SCP and SCE both increase a company’s ability to compete SCP depends entirely on information for its accuracy SCE can be as simple as electronically routing orders from a manufacturer to a supplier
Ask your students to determine the different types of information flows that would be represented in an SCP system Ask your students to determine the different types of payment flows that would be represented in an SCE system
Why is information speed critical in a supply chain? If the information arrives three dates late, chances are high that managers have already made decisions based on current information that might have been inaccurate Information timeliness is critical IT is an enabler of information timeliness CLASSROOM EXERCISE Designing a Digital Dashboard for an SCM System Digital dashboards offer an effective and efficient way to view enterprisewide information at near real-time. According to Nucleus Research, there is a direct correlation between use of digital dashboards and a company’s return on investment (ROI), hence all executives should be using or pushing the development of digital dashboards to monitor and analyze organizational operations. Break your students into groups and ask them to develop a digital dashboard for the CEO of a transportation company. Be sure your students have addressed all of the following in their digital dashboard: Inventory Materials Demand/Supply Sales Supplier’s supplier Supplier Manufacturer Distributor Retailer Customer Customer’s Customer
The seven principles highlighted in the figure run counter to previous built-in functional thinking of how companies organize, operate, and serve customers Dell computers offers one of the best examples of an extremely successful SCM system Dell’s highly efficient build-to-order business model enabled it to deliver customized computer systems quickly The U.S. government has even sent individuals to study Dell’s supply chain when determining ways to supply troops during wars If your students find themselves in the position of implementing an SCM, be sure they study Dell as an example of exactly what to do when building and implementing an SCM system
Studying industry best practices is an excellent way to improve SCM implementation success A large part of any SCM system extends beyond the organization to the suppliers. Since the organization has very little control over anything external to itself, these pieces are typically the most complicated to build, develop, and implement. Be sure suppliers are on board with the benefits that the SCM system will provide to ease SCM implementation difficulties If the organization cannot convince people that using the SCM software is worthwhile, the employees will probably find a way to continue performing their job without using the software Be sure to select SCM software that supports organizational goals and strategies Designing the deployment of the SCM system in incremental phases is the most successful deployment method. The BIG BANG approach – implementing everything all at once – fails 90 percent of the time An SCM system, like all systems, must scale to meet future demands
The role of SCM is evolving, and it is not uncommon for suppliers to be involved in product development and for distributors to act as consultants in brand marketing CLASSROOM EXERCISE SCM Again Break your students into groups and ask them to identify how each of the “Top reasons executives are using SCM to manage extended enterprises” in the Figure is supported by an SCM system For example, how does SCM help an organization control costs and save costs? Ans: Organizations gain visibility into their supply chains through an SCM system. This allows them to identify such things as inefficient and ineffective business process. Fixing these processes helps the organization control costs and save money. The answers to these questions will vary, and the goal of the activity is for students to understand the many different benefits an organization can gain through an SCM system
Discuss the Apple computer example Apple Computer initially distributed its business operations over 16 legacy applications Apple quickly realized that it needed a new business model centered around an integrated supply chain to drive performance efficiencies Apple devised an implementation strategy that focused on specific SCM functions including finance, sales, distribution, and manufacturing The new business model included: Build-to-order and configure-to-order manufacturing capabilities (similar to Dell) Web-enabled configure-to-order order entry and order status Real-time credit card authorization Available-to-promise and rules-based allocations Integration to advanced planning systems
CLASSROOM EXERCISE Driving SCM Break your students into groups and ask them to research each of the above companies and how they are using SCM to drive their business operations Have your students present their findings to the class
1. Would you need supply chain management systems in a virtual world such as Second Life? Why or why not? Answers to this question will vary. Some companies will need the supply chain if they are selling items produced by other companies. If the company is operating independently it might not have a need for a supply chain. It will depend on the business if the company will need an SCM system. 2. How could a real company augment its supply chain management system through Second Life? A company could create a virtual office where it could talk with its real customers. It could gain feedback on performance, show customers virtual operations of real-world operations, build customer relationships, and even manage its customer service through Second Life. 3. If you were an apparel company, such as Nike or REI, what would your virtual SCM system look like? Create a drawing of this system and be sure to include all upstream and downstream participants? Answers to this question will vary, sample SCM diagrams answer provided in the IM.
1. Describe how an SCM system can help a distributor such as Anheuser-Busch make its supply chain more effective and efficient. An SCM system can help make a distributor more effective by tracking, monitoring, and analyzing inventory throughout the entire supply chain. An SCM system can trigger the production of a product for a manufacturer, determine where to transport the finished product through a specific distribution company to a particular supplier, and can even recommend the optimal location for the product at the supplier’s store. A good SCM system will know exactly when a customer purchases a product from a supplier, and will automatically request product replacement from the manufacturer. This drives efficiency and effectiveness since inventory levels throughout the entire supply chain can be operated by just-in-time. 2. SCM is experiencing explosive growth. Explain why this statement is true using BudNet as an example. An SCM can help an organization: Control costs and improve saving Improve productivity Reduce inventory Improve visibility Reduce process cycle times Improve quality Maintain and gain a competitive advantage 3. Evaluate BudNet’s effect on each of the five factors that are driving SCM success. There are five factors that are contributing to the explosive growth of SCM. (1) IT, (2) Visibility, (3) Consumer behavior, (4) Competition, (5) Speed. BudNet is using these factors to control quality, improve productivity, and ultimately increase revenues. Anheuser-Busch uses BudNet to constantly adjust production levels, fine-tune marketing campaigns, change marketing strategies, design promotions to suit the ethnic makeup of its markets, detect rivals and competition, and define product placement and pricing strategies.
1. Chapter 10 Extending the Organization – Supply Chain ManagementMcGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, All Rights Reserved
2. Learning Outcomes10.1 List and describe the components of a typical supply chain10.2 Define the relationship between decision making and supply chain management10.3 Describe the four changes resulting from advances in IT that are driving supply chains10.4 Summarize the best practices for implementing a successful supply chain management system 10-2
3. Supply Chain Management• The average company spends nearly half of every dollar that it earns on production• In the past, companies focused primarily on manufacturing and quality improvements to influence their supply chains 10-3
4. Basics of Supply Chain• The supply chain has three main links: 1. Materials flow from suppliers and their “upstream” suppliers at all levels 2. Transformation of materials into semifinished and finished products through the organization’s own production process 3. Distribution of products to customers and their “downstream” customers at all levels 10-4
5. Basics of Supply Chain• Organizations must embrace technologies that can effectively manage supply chains 10-5
6. Basics of Supply Chain 10-6
7. Information Technology’s Role in the Supply Chain• IT’s primary role is to create integrations or tight process and information linkages between functions within a firm 10-7
8. Information Technology’s Role in the Supply Chain Factors Driving SCM 10-8
9. Visibility• Supply chain visibility – the ability to view all areas up and down the supply chain• Bullwhip effect – occurs when distorted product demand information passes from one entity to the next throughout the supply chain 10-9
10. Consumer Behavior• Companies can respond faster and more effectively to consumer demands through supply chain enhances• Demand planning software – generates demand forecasts using statistical tools and forecasting techniques 10-10
11. Competition• Supply chain planning (SCP) software– uses advanced mathematical algorithms to improve the flow and efficiency of the supply chain• Supply chain execution (SCE) software – automates the different steps and stages of the supply chain 10-11
12. Competition• SCP and SCE in the supply chain 10-12
13. Speed• Three factors fostering speed 10-13
15. Supply Chain Management Success Factors• SCM industry best practices include: 1. Make the sale to suppliers 2. Wean employees off traditional business practices 3. Ensure the SCM system supports the organizational goals 4. Deploy in incremental phases and measure and communicate success 5. Be future oriented 10-15
16. SCM Success Stories• Top reasons why more and more executives are turning to SCM to manage their extended enterprises 10-16
17. SCM Success Stories• Numerous decision support systems (DSSs) are being built to assist decision makers in the design and operation of integrated supply chains• DSSs allow managers to examine performance and relationships over the supply chain and among: – Suppliers – Manufacturers – Distributors – Other factors that optimize supply chain performance 10-17
18. SCM Success Stories 10-18
19. OPENING CASE STUDY QUESTIONS Second Life1. Would you need supply chain management systems in a virtual world such as Second Life? Why or why not?2. How could a real company augment its supply chain management system through Second Life?3. If you were an apparel company, such as Nike or REI, what would your virtual SCM system look like? Create a drawing of this system and be sure to include all upstream and downstream participants?10-19
20. CHAPTER TEN CASE BudNet• Anheuser-Busch’s top-secret nationwide data network, BudNet, knows every time a six-pack moves off of a store shelf• Information is entered into BudNet nightly from several thousand Anheuser-Busch distributors and sales representatives• Anheuser-Busch has made a deadly accurate science out of determining what beer lovers are buying, as well as when, where, and why 10-20
21. Chapter Ten Case Questions1. Describe how an SCM system can help a distributor such as Anheuser-Busch make its supply chain more effective and efficient2. SCM is experiencing explosive growth. Explain why this statement is true using BudNet as an example3. Evaluate BudNet’s effect on each of the five factors that are driving SCM success 10-21