1. Supply Chains & SCM
 A supply chain is the network of all the activities involved in
delivering a finished product/service to the customer
Sourcing of: raw materials, assembly, warehousing, order entry,
distribution, delivery
 Supply Chain Management is the vital business function that
coordinates all of the network links
Coordinates movement of goods through supply chain from suppliers
to manufacturers to distributors
Promotes information sharing along chain like forecasts, sales data, &
promotions
1

2. Components of a Supply Chain
External Suppliers– source of raw material
Tier one supplier supplies directly to the processor
Tier two supplier supplies directly to tier one
Tier three supplier supplies directly to tier two
Internal Functions include – processing functions
Processing, purchasing, planning, quality, shipping
External Distributors transport finished products to
appropriate locations
Logistics managers are responsible for traffic management and
distribution management
2

3. Components of a Supply Chain
External Distributors transport finished products to
appropriate locations
Logistics managers are responsible for managing the movement
of products between locations. Includes;
 traffic management – arranging the method of shipment for both
incoming and outgoing products or material
 distribution management – movement of material from manufacturer to
the customer
3

4. A Basic Supply Chain
4

5. The Bullwhip Effect
 Bullwhip effect - the inaccurate or distorted demand information
created in the supply chain
 Causes are generated by:
demand forecasting updating,
order batching,
price fluctuations,
rationing and
gaming
5

6. The Bullwhip Effect
Counteracting the Effect:
Change the way suppliers forecast product demand by making
this information available at all levels of the supply chain
Share real demand information (POS terminals)
Eliminate order batching
Stabilize pricing
Eliminate gaming
6

7. Issues Affecting Supply Chain
Management
Information technology – enablers include the Internet,
Web, EDI, intranets and extranets, bar code scanners, and
point-of-sales demand information
E-commerce and e-business – uses internet and web to
transact business
Two types of e-commerce are
Business-to-business (B2B) and
Business-to-consumer (B2C)
7

8. SCM Factors
SCM must consider the following trends, improved
capabilities, & realities:
Consumer Expectations and Competition – power has
shifted to the consumer
Globalization – capitalize on emerging markets
Government Regulations and E-Commerce – issues of
Internet government regulations
Environment Implications of E-Commerce – recycling,
sustainable eco-efficiency, and waste minimization
8

9. Global SCM Factors
Managing extensive global supply chains introduces
many complications
Geographically dispersed members - increase replenishment
transit times and inventory investment
Forecasting accuracy complicated by longer lead times and
different operating practices
Exchange rates fluctuate, inflation can be high
Infrastructure issues like transportation, communication, lack of
skilled labor, & scarce local material supplies
Product proliferation created by the need to customize products
for each market
9

10. Sourcing Issues
 Which products to produce in-house and which are provided by
other supply chain members
 Vertical integration – a measure of how much of the supply chain
is owned by the manufacturer
 Backward integration – owning or controlling of sources of raw material and
component parts
 Forward integration – owning or control the channels of distribution
 Vertical integration related to levels of insourcing or outsourcing
products or services
10

11. Insourcing vs. Outsourcing
What questions need to be asked before sourcing
decisions are made?
Is product/service technology critical to firm’s success?
Is product/service a core competency?
Is it something your company must do to survive?
11

12. Make or Buy Analysis
Analysis will look at the expected sales levels and cost of
internal operations vs. cost of purchasing the product or
service
Total Cost of Outsourcing :
TC Buy = FC Buy + (VC Buy × Q )
Total Cost of Insourcing :
TC Make = FCMake + (VCMake × Q )
Indifference Point :
FC Buy + (VC Buy × Q ) = FCMake + (VC Make × Q )
12

13. Example: Make-or-Buy analysis- Mary and Sue, have decided to open a bagel shop. Their first
decision is whether they should make the bagels on-site or by the bagels from a local bakery.
If they buy from the local bakery they will need airtight containers at a fixed cost of
$1000 annually. They can buy the bagels for $0.40 each. If they make the bagels in-
house they will need a small kitchen at a fixed cost of $15,000 annually. It will cost
them $0.15 per bagel to make. The believe they will sell 60,000 bagels.
 Mary and Sue wants to know if they should make or buy
the bagels.
 FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
 $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)
 Q = 56,000 bagels
 Since the costs are equal at 56,000 bagels and Mary and
Sue expect to use 60,000 bagels, they should make the
bagels in-house
13

14. The Role of Purchasing
Purchasing role has attained increased
importance since material costs represent 50-
60% of cost of goods sold
Ethics considerations is a constant concern
Developing supplier relationships is essential
Determining how many suppliers to use
Developing partnerships
14

15. Critical Factors in Successful
Partnership Relations
Critical factors in successful partnering include;
Impact – attaining levels of productivity and competitiveness
that are not possible through normal supplier relationships
Intimacy – working relationship between two partners
Vision – the mission or objectives of the partnership
15

16. Critical Factors in Successful
Partnership Relations
Have a long-term orientation Share a common vision
Are strategic in nature Share short/long term plans
Share information Driven by end-customer needs
Share risks and opportunities
Benefits of Partnering
Early supplier involvement (ESI) in the design process
Using supplier expertise to develop and share cost improvements and
eliminate costly processes
Shorten time to market
16

17. Integrated SCM
 Implementing integrated SCM requires:
 Analyzing the whole supply chain
 Starting by integrating internal functions first
 Integrating external suppliers through partnerships
 Manufacturer’s Goals  Supplier’s Goals
 Reduce costs  Increase sales volume
 Reduce duplication of effort  Increase customer
 Improve quality loyalty
 Reduce lead time  Reduce cost
 Implement cost reduction program  Improve demand data
 Involve suppliers early  Improve profitability
 Reduce time to market
© 2007 Wiley 17

18. Supply Chain Measurements
Measuring supply chain performance
Traditional measures include;
 Return on investment
 Profitability
 Market share
 Revenue growth
Additional measures
 Customer service levels
 Inventory turns
 Weeks of supply
 Inventory obsolescence
18 © 2007 Wiley

19. Supply Chain Performance
Measurement
Customer demands for better-quality requires company’s
to develop ways to measure improvements
Some measurements include
Warranty costs
 Products returned
Cost reductions allowed because of product defects
Company response times
Transaction costs
19 © 2007 Wiley

20. Current Trends in SCM
Increased use of electronic marketplace such as
E-distributors – independently owned net marketplaces having catalogs
representing thousands of suppliers and designed for spot purchases
E-purchasing – companies that connect on-line MRO suppliers to
business who pay fees to join the market, usually for long-term
contractual purchasing
20 © 2007 Wiley

21. Current Trends in SCM - continued
Increased use of electronic marketplace such as
Value chain management – automation of a firm’s purchasing or selling
processes
Exchanges – marketplace that focuses on spot requirements of large
firms in a single industry
Industry consortia – industry-owned markets that enable buyers to
purchase direct inputs from a limited set of invited suppliers
Decreased supply chain velocity due to greater distances with
greater uncertainty and generally less efficient.
21 © 2007 Wiley

22. SCM Across the Organization
 SCM changes the way companies do business.
 Accounting shares SCM benefits due to inventory level decreases
 Marketing benefits by improved customer service levels
 Information systems are critical for information sharing through,
the Internet, intranet, and extranets
 Purchasing is responsible for sourcing materials
 Operations use timely demand information to more effectively
plan production schedules
22 © 2007 Wiley

23. The Retail Industry
Brick-and-mortar companies establish virtual retail
stores
Wal-Mart, K-Mart, Barnes & Noble, Circuit City
An effective approach - hybrid stocking strategy
High volume/fast moving products for local storage
Low volume/slow moving products for browsing and purchase
on line (risk pooling)
Danger of channel conflict

24. Existing Channels for Business
Product information
Physical stores, EDO, catalogs, face to face,
Order placement
Physical store, EDI, phone, fax, face to face,
Order tracking
EDI, phone, fax, …
Order fulfillment
Customer pick up, physical delivery

25. Potential Revenue Opportunities
from E-Business
Direct sales to customers
24 hour access for order placement
Information aggregation
Information sharing in supply chain
Flexibility on pricing and promotion
Price and service discrimination
Faster time to market

26. Potential Cost Opportunities from
E-Business
Direct customer contact for manufacturers
Coordination in the supply chain
Customer participation
Postpone product differentiation to after order is placed
Reduce facility costs
Geographical centralization and resulting reduction in
inventories

27. Basic evaluation framework
How does going online impact revenues?
How does going online impact costs?
Facility (site + personnel)
Inventory
Transportation
Information
Should the e-commerce channel position itself for
efficiency or responsiveness?
Who in the supply chain can extract most value?
Is the value to existing players or new entrants?

28. The Computer Industry: Dell on-line
Customer Order and
Customer Order and
Manufacturing Cycle Manufacturing Cycle
Procurement cycle
Procurement Cycle
PUSH PROCESSES PULL PROCESSES
Customer
Order Arrives
Dell Supply Chain Cycles

29. Potential opportunities exploited by Dell
Revenue opportunities
24 hour access for order placement
Direct sales
Providing customization and large selection information
Flexibility on pricing and promotion
Faster time to market
Efficient funds transfer - reduce working capital
Revenue negatives
Longer response time than store and no help with selection

30. Potential opportunities exploited by Dell
Cost opportunities
Direct sales eliminating intermediary
Customer participation: Call center & catalog costs
Information sharing in supply chain
Reduce facility costs
Geographical Centralization and reduced inventories
Postpone product differentiation to after order is placed using
product platforms and common components
Outbound transportation costs increase

31. Retailing: Amazon.com
Customer Customer
Pull Pull
Amazon Retail Store
Distributor Warehouse (?)
Publisher Publisher
Amazon Supply Chain Bookstore Supply Chain

32. Potential opportunities exploited by Amazon
Revenue opportunities
24 hour access for order placement
Providing large selection and other information
Attract customers who do not want to go to store
Flexibility on pricing
Efficient funds transfer
Revenue negatives
Intermediary (distributor) reduces margin
Longer response time than bookstore

33. Potential opportunities exploited by
Amazon
Cost opportunities
Reduce facility costs
Geographical centralization and reduced inventories: Most
effective for low volume, hard to forecast books, least effective
for high volume best sellers
Cost increases
Outbound transportation costs increase
Handling cost increase

34. How should bookstore chains
react?
An on line channel allows it to match Amazon’s revenue
advantages
Use a hybrid approach in stocking and pricing
High volume books for local storage
Low volume books for browsing and purchase on line
Pricing varies by delivery and pick up option

35. Grocery on-line
Customer Customer
Supermarket
Online Grocer
Warehouse (?)
Manufacturer Manufacturer
On-Line Supply Chain Supermarket Supply Chain

36. Potential opportunities for on line
grocer
Revenue opportunities
Attract customers who do not want to go to supermarket
Out of town customers for specialty items
Menus and other value added
Cost opportunities
Reduced facility costs (sites as well as checkout clerks)
Inventory savings from centralization (primarily for slow
moving, specialty items)

37. Added costs for online grocer
Additional outbound transportation cost: Have to cover the
last mile to the customer
Additional picking and packing costs

38. What accounts for Wal-Mart’s
remarkable success
 A focus on satisfying customer needs
 providing customers access to goods when and where they want them
 cost structures that enable competitive pricing
 This was achieved by way the company replenished inventory the
centerpiece of its strategy.
 Wal-Mart employed a logistics technique known as cross-docking
 goods are continuously delivered to warehouses where they are dispatched
to stores without ever sitting in inventory.
 This strategy reduced Wal-Mart’s cost of sales significantly and
made it possible to offer everyday low prices to their customers.

39. Characteristics of Cross-
Docking:
Goods spend at most 48 hours in the warehouse
Cross Docking avoids inventory and handling costs,
Wal-Mart delivers about 85% of its goods through its
warehouse system, compared to about 50% for Kmart
Stores trigger orders for products.