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Supply-Chain Management Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements. SCM, is a strategic weapon that seeks to synchronize a firm’s functions and those of its suppliers to match the flow of materials, services, and information with customer demand
Supply Chain Supplier of materials Supplier of services Tier 1 Tier 3 Tier 2 Legend Customer Customer Customer Customer Distribution center Distribution center Manufacturer
Inventory – is a stock of materials used to satisfy customer demand or support the production of goods and services
The three categories of inventories are raw materials (RM), work-in-process (WIP), and finished goods (FG).
Manufacturers spend 60% of sales on purchased materials and services, and service providers spend as much as 40%. The management of materials flows is therefore important from a cost perspective alone.
Backward integration – firm controls upstream toward the sources of raw materials and parts. Can ensure its priority with the supplier and lead efforts to improve efficiency and productivity in managing flow of materials.
What is difficult with backward integration?
Write agreements with first-tier suppliers that hold them accountable for the performance of their suppliers (2 nd and 3 rd tier)
Supplier selection—three criteria often used are price, quality, and delivery.
Supplier certification—typically involves visits by cross-functional teams to do an in-depth evaluation of the supplier’s processes.
Competitive orientation—a zero sum game. The purpose is to drive costs down to the minimum level. Power in the supply chain relates to the purchasing clout a firm has.
Cooperative orientation—a partnership between buyers and sellers. This orientation implies long-term commitments, joint work on quality and buyer support of infrastructure. Typically, fewer suppliers are needed in this arrangement.
Average aggregate inventory value—the total value of all items held in inventory for a firm. The value is expressed at cost (as opposed to price) to avoid the differences that occur in prices over time. This measure is used in two other important measures.
Weeks of supply—average aggregate inventory value divided by weekly sales (at cost). From an inventory cost perspective, the lower the weeks of supply, the better.
Inventory turns—annual sales (at cost) divided by the average aggregate inventory value. The greater the turns, the lower the average inventory levels.
Inventory Measures Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year Weeks of supply = = 10.4 weeks $2 million ($10 million)/(52 weeks)
Inventory Measures Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year Weeks of supply = = 10.4 weeks $2 million ($10 million)/(52 weeks) Inventory turns = = 5 turns/year $10 million $2 million
Percent defects in purchased materials and services
Cost of purchased materials and services
Percent of incomplete orders shipped
Percent of orders shipped on time
Time to fulfill the order
Percent of returned items or botched services
Cost to produce the item or service
Customer satisfaction with the order-fulfillment process
Percent orders taken accurately
Time to complete the order-placement process
Customer satisfaction with the order-placement process
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
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
Supply-Chain Dynamics (a) Firm C Firm A Customer Customer Firm A Firm B Firm C Time (b) Figure 11.8 Materials requirements