2. 10 – 2
Supply Chain IntegrationSupply Chain Integration
The effective coordination of supply chain
processes through the seamless flow of
information up and down the supply chain
A river that flows from raw material
suppliers to consumers
Upstream
Downstream
Mitigating the effects of supply chain
disruptions
4. 10 – 4
Supply Chain DynamicsSupply Chain Dynamics
Bullwhip effect
Upstream members must react to the demand
Slightest change in customer demand can
ripple through the entire chain
External causes
Internal causes
5. 10 – 5
Supply Chain DynamicsSupply Chain Dynamics
Consumers’
daily
demands
Retailers’ daily
orders to
manufacturer
Manufacturer’s
weekly orders to
package supplier
Package supplier’s
weekly orders to
cardboard supplier
9,000
7,000
5,000
3,000
0
Orderquantity
Month of April
Day 1 Day 30 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30
Figure 10.2 – Supply Chain Dynamics for Facial Tissue
6. 10 – 6
Supply Chain DynamicsSupply Chain Dynamics
Integrated supply chains
High degree of functional and organizational
integration minimizes disruptions
Integration must include linkages between the
firm, its suppliers, and its customers
SCOR model
Plan
Source
Make
Deliver
Return
7. 10 – 7
Supply Chain DynamicsSupply Chain Dynamics
First-Tier Supplier Service/Product Provider
Support Processes
ExternalSuppliers
Support Processes
Supplier
relationship
process
New service/
product
development
process
Order
fulfillment
process
Business-
to-business
(B2B)
customer
relationship
process
ExternalConsumers
Supplier
relationship
process
New service/
product
development
process
Order
fulfillment
process
Business-
to-business
(B2B)
customer
relationship
process
Figure 10.3 – External Supply Chain Linkages
8. 10 – 8
New Service or Product DevelopmentNew Service or Product Development
Design
Analysis
Development
Full Launch
Service or
product not
profitable
Need to rethink
the new offering
or production
process
Post-launch
review
Figure 10.4 – New Service/Product Development Process
10. 10 – 10
Supplier Relationship ProcessSupplier Relationship Process
ual Cost = pD + Freight costs
+ (Q/2 + dL)H
+ Administrative costs
The total annual cost for a supplier is the
sum of these costs:
Other supplier selection criteria
Green purchasing
Supplier certification and evaluation
11. 10 – 11
Total Cost AnalysisTotal Cost Analysis
EXAMPLE 10.1
Compton Electronics manufactures laptops for major computer
manufacturers. A key element of the laptop is the keyboard.
Compton has identified three potential suppliers for the
keyboard, each located in a different part of the world.
Important cost considerations are the price per keyboard,
freight costs, inventory costs, and contract administrative
costs. The annual requirements for the keyboard are 300,000
units. Assume Compton has 250 business days a year.
Managers have acquired the following data for each supplier.
Which supplier provides the lowest annual total cost to
Compton?
12. 10 – 12
Total Cost AnalysisTotal Cost Analysis
Annual Freight Costs
Shipping Quantity (units/shipment)
Supplier 10,000 20,000 30,000
Belfast $380,000 $260,000 $237,000
Hong Kong $615,000 $547,000 $470,000
Shreveport $285,000 $240,000 $200,000
Keyboard Costs and Shipping Lead Times
Annual Inventory Shipping Administrative
Supplier Price/Unit Carrying Cost/Unit Lead Time (days) Costs
Belfast $100 $20.00 15 $180.000
Hong Kong $96 $19.20 25 $300.000
Shreveport $99 $19.80 5 $150.000
13. 10 – 13
Total Cost AnalysisTotal Cost Analysis
SOLUTION
The average requirements per day are
Each option must be evaluated with consideration for the
shipping quantity using the following equation:
ual Cost = Material costs + Freight costs
+ Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL)H + Administrative costs
d = 300,000/250 = 1,200 keyboards
14. 10 – 14
Total Cost AnalysisTotal Cost Analysis
For example, consider the Belfast option for a shipping quantity
of Q = 10,000 units. The costs are
aterial costs = pD =
reight costs = $380,000
nistrative costs = $180,000
Annual Cost =
= (10,000 units/2
+ 1200 units/day(15 days))$20/unit/year
= $460,000
= $31,020,000
$30,000,000 + $380,000
+ $460,000 + $180,000
= $30,000,000
($100/unit)(300,000 units)
nventory costs = (cycle inventory + pipeline inventory)H
= (Q/2 + dL)H
15. 10 – 15
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Total Cost AnalysisTotal Cost Analysis
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast
Hong Kong
Shreveport
16. 10 – 16
Total Annual Costs for the Keyboard Suppliers
Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast
Hong Kong
Shreveport
The total costs for all three shipping quantity options are
similarly calculated and are contained in the following table.
Total Cost AnalysisTotal Cost Analysis
$30,387,000 $30,415,000 $30,434,000
$31,020,000 $31,000,000 $31,077,000
$30,352,800 $30,406,800 $30,465,800
17. 10 – 17
Application 10.1Application 10.1
ABC Electric Repair is a repair facility for several major
electronic appliance manufactures. ABC wants to find a low-
cost supplier for an electric relay switch used in many
appliances. The annual requirements for the relay switch (D)
are 100,000 units. ABC operates 250 days a year. The following
data are available for two suppliers. Kramer and Sunrise, for
the part:
Freight Costs
Shipping Quantity (Q)
Supplier 2,000 10,000
Price/Unit
(p)
Carrying
Cost/Unit
(H)
Lead Time
(L)(days)
Administrative
Costs
Kramer $30,000 $20,000 $5.00 $1.00 5 $10,000
Sunrise $28,000 $18,000 $4.90 $0.98 9 $11,000
18. 10 – 18
Application 10.1Application 10.1
SOLUTION
The daily requirements for the relay switch are:
100,000/250 = 400 unitsd =
We must calculate the total annual costs for each alternative:
nual cost = Material costs + Freight costs
+ Inventory costs + Administrative costs
= pD + Freight costs + (Q/2 + dL)H
+ Administrative costs
19. 10 – 19
Application 10.1Application 10.1
mer
2,000:
10,000:
The analysis reveals that using Sunrise and a shipping quantity
of 10,000 units will yield the lowest annual total costs.
rise
2,000:
10,000:
($5.00)(100,000) + $30,000
+ (2,000/2 + 400(5))($1) + $10,000 = $543,000
($5.00)(100,000) + $20,000
+ (10,000/2 + 400(5))($1) + $10,000 = $537,000
($4.90)(100,000) + $28,000
+ (2,000/2 + 400(9))($0.98) + $11,000 = $538,508
(4.90)(100,000) + $18,000
+ (10,000/2 + 400(9))($0.98) + $11,000 = $527,428
20. 10 – 20
Using a Performance MatrixUsing a Performance Matrix
The management of Compton Electronics has done a total cost
analysis for three international suppliers of keyboards (see
Example 10.1). Compton also considers on-time delivery,
consistent quality, and environmental stewardship in its
selection process. Each criterion is given a weight (total of 100
points), and each supplier is given a score (1 = poor, 10 =
excellent) on each criterion. The data are shown in the
following table.
Score
Criterion Weight Belfast Hong Kong Shreveport
Total Cost 25 5 8 9
On-Time Delivery 30 9 6 7
Consistent Quality 30 8 9 6
Environment 15 9 6 8
21. 10 – 21
Using a Performance MatrixUsing a Performance Matrix
SOLUTION
The weighted score for
each supplier is calculated
by multiplying the weight
by the score for each
criterion and arriving at a
total. For example, the
Belfast weighted score is
Score
Criterion Weight Belfast
Hong
Kong
Shreveport
Total Cost 25 5 8 9
On-Time
Delivery
30 9 6 7
Consistent
Quality
30 8 9 6
Environment 15 9 6 8
WS =
Similarly, the weighted score for Hong Kong is 740, and for
Shreveport, 735. Consequently, Belfast is the preferred
supplier.
(25 × 5) + (30 × 9) + (30 × 8) + (15 × 9) = 770
22. 10 – 22
Application 10.2Application 10.2
ABC Electric Repair wants to select a supplier based on total
annual cost, consistent quality, and delivery speed. The
following table shows the weights management assigned to
each criterion (total of 100 points) and the scores assigned to
each supplier (Excellent = 5, Poor = 1).
Scores
Criterion Weight Kramer Sunrise
Total annual cost 30 4 5
Consistent quality 40 3 4
Delivery speed 30 5 3
Which supplier should ABC select, given these criteria
and scores?
23. 10 – 23
Application 10.2Application 10.2
SOLUTION
Using the preference matrix
approach, the weighted scores
for each supplier are:
Scores
Criterion Weight Kramer Sunrise
Total annual
cost
30 4 5
Consistent
quality
40 3 4
Delivery
speed
30 5 3
WSKramer =
WSSunrise =
Based on the weighted scores, ABC should select Sunrise
even though delivery speed performance would be better
with Kramer.
(30 × 4) + (40 × 3) + (30 × 5) = 390
(30 × 5) + (40 × 4) + (30 × 3) = 400
24. 10 – 24
Supplier Relationship ProcessSupplier Relationship Process
Design collaboration
Early supplier involvement
Presourcing
Value analysis
Negotiation
Obtain an effective contract that meets the
price, quality, and delivery requirements
Competitive orientation
Cooperative orientation
25. 10 – 25
Supplier Relationship ProcessSupplier Relationship Process
Buying
Procurement of the service or material from
the supplier
e-purchasing
Loss of control
Information exchange
Radio frequency identification (RFID)
Vendor managed inventories (VMI)
27. 10 – 27
4
Kitting
8
Delivery
7 Boxing
and shipping
Order Fulfillment ProcessOrder Fulfillment Process
6 Testing and
system integration
3
Traveler Sheet
2
JIT Inventory
1 (d) Direct
relationship sales
1 (a)
Web site
1 (b)
Voice-to-voice
1 (c)
Face-to-face
5 Assemble
to order
Figure 10.5 – Dell’s Order Fulfillment Process
28. 10 – 28
Using Expected ValueUsing Expected Value
EXAMPLE 10.3
Tower Distributors provides logistical services to local
manufacturers. Tower picks up products from the
manufacturers, takes them to its distribution center, and then
assembles shipments to retailers in the region. Tower needs to
build a new distribution center; consequently, it needs to make
a decision on how many trucks to have. The monthly amortized
capital cost of ownership is $2,100 per truck. Operating variable
costs are $1 per mile for each truck owned by Tower. If capacity
is exceeded in any month, Tower can rent trucks at $2 per mile.
Each truck Tower owns can be used 10,000 miles per month.
The requirements for the trucks, however, are uncertain.
Managers have estimated the following probabilities for several
possible demand levels and corresponding fleet sizes.
29. 10 – 29
Using Expected ValueUsing Expected Value
Notice that the sum of the probabilities must equal 1.0. If Tower
Distributors wants to minimize the expected cost of operations,
how many trucks should it have?
Requirements (miles/month) 100,000 150,000 200,000 250,000
Fleet Size (trucks) 10 15 20 25
Probability 0.2 0.3 0.4 0.1
30. 10 – 30
Using Expected ValueUsing Expected Value
SOLUTION
We use the expected value decision rule to evaluate the
alternative fleet sizes where we want to minimize the expected
monthly cost. To begin, the monthly cost, C, must be
determined for each possible combination of fleet size and
requirements. The cost will depend on whether additional
capacity must be rented for the month. For example, consider
the 10 truck fleet size alternative, which represents a capacity
of 100,000 miles per month.
31. 10 – 31
Using Expected ValueUsing Expected Value
C = monthly capital cost of ownership
+ variable operating cost per month + rental costs if needed
C(100,000 miles/month) =
C(150,000 miles/month) =
C(200,000 miles/month) =
C(250,000 miles/month) =
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles) = $121,000
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(150,000 miles – 100,000 miles)
= $221,000
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(200,000 miles – 100,000 miles)
= $321,000
($2,100/truck)(10 trucks)
+ ($1/mile)(100,000 miles)
+ ($2 rent/mile)(250,000 miles – 100,000 miles)
= $421,000
32. 10 – 32
Using Expected ValueUsing Expected Value
Next, calculate the expected value for the 10 truck fleet size alternative
as follows:
Expected Value (10 trucks) =
Using similar logic, we can calculate the expected costs for each of
the other fleet-size options:
Expected Value (15 trucks) =
Expected Value (20 trucks) =
Expected Value (25 trucks) =
0.2($121,000) + 0.3($221,000)
+ 0.4($321,000) + 0.1($421,000) = $261,000
0.2($131,500) + 0.3($181,500)
+ 0.4($281,500) + 0.1($381,000) = $231,500
0.2($142,000) + 0.3($192,000)
+ 0.4($242,000) + 0.1($342,000) = $217,000
0.2($152,500) + 0.3($302,500)
+ 0.4($252,500) + 0.1($302,500) = $222,500
33. 10 – 33
Application 10.3Application 10.3
Schneider Logistics Company has built a new warehouse in
Columbus, Ohio, to facilitate the consolidation of freight
shipments to customers in the region. How many teams of
dock workers he should hire to handle the cross docking
operations and the other warehouse activities? Each team
costs $5,000 a week in wages and overhead. Extra capacity can
be subcontracted at a cost of $8,000 a team per week. Each
team can satisfy 200 labor hours of work a week. Management
has estimated the following probabilities for the requirements:
Requirements (hours/wk) 200 400 600
Number of teams 1 2 3
Probability 0.20 0.50 0.30
How many teams should Schneider hire?
34. 10 – 34
Application 10.3Application 10.3
SOLUTION
We use the expected value decision rule by first computing the
cost for each option for each possible level of requirements
and then using the probabilities to determine the expected
value for each option. The option with the lowest expected cost
is the one Schneider will implement. We demonstrate the
approach using the “one team” in-house option.
One Team In-House
C(200) =
C(400) =
C(600) =
Expected Value
(One Team) = 0.20($5,000) + 0.50($13,000) + 0.30($21,000) = $13,800
$5,000 + $8,000 + $8,000 = $21,000
$5,000 + $8,000 = $13,000
$5,000
35. 10 – 35
Application 10.3Application 10.3
A table of the complete results is below.
Weekly Labor Requirements
In-House 200 hrs 400 hrs 600 hrs Expected Value
One team
Two teams
Three teams
36. 10 – 36
Application 10.3Application 10.3
A table of the complete results is below.
Based on the expected value decision rule, Schneider should
employ two teams at the warehouse.
$5,000 $13,000 $21,000 $13,800
$10,000 $10,000 $18,000 $12,400
$15,000 $15,000 $15,000 $15,000
Weekly Labor Requirements
In-House 200 hrs 400 hrs 600 hrs Expected Value
One team
Two teams
Three teams
37. 10 – 37
The Customer Relationship ProcessThe Customer Relationship Process
Customer relationship management
(CRM) programs identify, attract, and
build relationships with customers
Marketing
Electronic commerce (e-commerce)
Business-to-Consumer (B2C) systems
Business-to-Business (B2B) systems
38. 10 – 38
The Customer Relationship ProcessThe Customer Relationship Process
Customer service
Helps customers with answers to
questions, resolves problems, and,
provides general information
Call centers
Order placement
Execute a sale, register the specifics,
confirm acceptance, and track progress
Internet provides advantage
39. 10 – 39
The levers
Sharing data
Collaborative activities
Reduce replenishment lead times
Reduce order lot sizes
Ration short supplies
Use everyday low pricing (EDLP)
Be cooperative and trustworthy
Levers for Improved Supply ChainLevers for Improved Supply Chain
PerformancePerformance
40. 10 – 40
Performance measures
Costs
Time
Quality
Environmental impact
Levers for Improved Supply ChainLevers for Improved Supply Chain
PerformancePerformance
41. 10 – 41
Performance MeasuresPerformance Measures
TABLE 10.1 | SUPPLY CHAIN PROCESS MEASURES
Customer Relationship Order Fulfillment Supplier Relationship
Percent of orders taken
accurately
Time to complete the
order placement process
Customer satisfaction
with the order placement
process
Customer’s evaluation of
firm’s environmental
stewardship
Percent of incomplete
orders shipped
Percent of orders shipped
on-time
Time to fulfill the order
Percent of botched
services or returned items
Cost to produce the
service or item
Customer satisfaction
with the order fulfillment
process
Inventory levels of work-
in-process and finished
goods
Amount of greenhouse
gasses emitted into the air
Percent of suppliers’
deliveries on-time
Suppliers’ lead times
Percent defects in
services and purchased
materials
Cost of services and
purchased materials
Inventory levels of
supplies and purchased
components
Evaluation of supplier’s
collaboration on
streamlining and waste
conversion
Amount of transfer of
environmental
technologies to suppliers
42. 10 – 42
Supply Chains and the EnvironmentSupply Chains and the Environment
Sustainability
Environmental stewardship
Environmental protection
Productivity improvement
Risk minimization
Innovation
Reverse logistics
Planning, implementing, and controlling flows
from consumption back to origin
Closed-loop supply chain
43. 10 – 43
Closed Loop Supply ChainClosed Loop Supply Chain
Waste
disposal
Recycle parts
and materials
Remanufacture
Direct reuse Repair
Product information
Forward logistics flow
Reverse logistics flow
Returns
processor
Figure 10.6 – Flows in a Closed-Loop Supply Chain
CustomersDistribution/RetailersProduction process
New service/product
development process
