Title: 7. Supply Chain Management (SCM)
17. Supply Chain Management (SCM)
2Supply 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
3A Sample Supply Chain
4Supply Chain Strategies
- Negotiating with many suppliers
- Long term partnering with few suppliers
- Vertical integration
- Keiretsu (affiliated chain)
5Many 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
6Few 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
7Vertical 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
8Vertical 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
9Keiretsu 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
10Make or Buy Decisions
11Make or Buy Decisions
12Issues 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
13Opportunities in SCM
- Accurate pull data
- Lot size reduction
- Single stage control of replenishment
- Vendor managed inventory
- Standardization
- Electronic ordering and funds transfer
14Example
15Vendor 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
16Supply 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
17Supply Chain Performance
- Inventory Turnover
- Cost of Goods Sold / Total Inventory
- Example
- Inventory Turnover 14.2 / 1.69 8.4
18Supply Chain Performance
19Network Design in a Supply Chain
- Facility location
- Capacity allocation
- Market and supply allocation
20One week order response time - 1 Distribution
Center
Customer
DC
215 day order response time - 2 Distribution Centers
Customer
DC
223 day order response time - 5 Distribution Centers
Customer
DC
23Next day order response time - 13 Distribution
Centers
Customer
DC
24Same day order response time - 26 Distribution
Centers
Customer
DC
25Cost vs. Number
26Conventional Network
27Tailored Network
28Network/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
29Critical Factors to Consider
- Proximity to raw materials and customers
- Labor, availability, costs
- Land/construction costs
- Government incentives and fiscal policies
- Corporate desires
- Environmental regulations
30Methods of Evaluating Locations
- Factor Rating Method
- Locational Break-Even Analysis
- Center of Gravity Method
- Transportation Method
31Factor 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
32Example
33Locational 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
34Example
35Example
36Center 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
37Center of Gravity Method
Computation of center
Evaluation of potential locations
38Example
39Example
40Example
41Transportation Model
- Find amount to be shipped from several points of
supply to several points of demand - Solution will minimize total production and
shipping costs
42Transportation Model
43Location Strategy
44Location Strategy
45Location Strategy
46Video Case Study
47Beer 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?