1. Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.
Beni AsllaniBeni Asllani
University of Tennessee at ChattanoogaUniversity of Tennessee at Chattanooga
Supply Chain ManagementSupply Chain Management
Operations Management - 5th
EditionOperations Management - 5th
Edition
Chapter 10Chapter 10
Roberta Russell & Bernard W. Taylor, IIIRoberta Russell & Bernard W. Taylor, III

2. Copyright 2006 John Wiley & Sons, Inc. 10-2
Lecture OutlineLecture Outline
 Supply Chain Management
 Information Technology: A Supply Chain
Enabler
 Supply Chain Integration
 Suppliers

3. Copyright 2006 John Wiley & Sons, Inc. 10-3
Lecture Outline (cont.)Lecture Outline (cont.)
 E-Procurement
 Distribution
 Supply Chain Management Software
 Measuring Supply Chain Performance
 Global Supply Chain

4. Copyright 2006 John Wiley & Sons, Inc. 10-4
Supply ChainSupply Chain
 All facilities, functions, activities,All facilities, functions, activities,
associated with flow and transformationassociated with flow and transformation
of goods and services from raw materialsof goods and services from raw materials
to customer, as well as the associatedto customer, as well as the associated
information flowsinformation flows
 An integrated group of processes toAn integrated group of processes to
“source,” “make,” and “deliver” products“source,” “make,” and “deliver” products

5. Copyright 2006 John Wiley & Sons, Inc. 10-5
Supply Chain IllustrationSupply Chain Illustration

6. Copyright 2006 John Wiley & Sons, Inc. 10-6
SupplySupply
ChainChain
forfor
DenimDenim
JeansJeans

7. Copyright 2006 John Wiley & Sons, Inc. 10-7
SupplySupply
ChainChain
forfor
DenimDenim
JeansJeans
(cont.)(cont.)

8. Copyright 2006 John Wiley & Sons, Inc. 10-8
Supply Chain ProcessesSupply Chain Processes

9. Copyright 2006 John Wiley & Sons, Inc. 10-9
Supply Chain for ServiceSupply Chain for Service
ProvidersProviders
 More difficult than manufacturingMore difficult than manufacturing
 Does not focus on the flow of physical goodsDoes not focus on the flow of physical goods
 Focuses on human resources and supportFocuses on human resources and support
servicesservices
 More compact and less extendedMore compact and less extended

10. Copyright 2006 John Wiley & Sons, Inc. 10-10
Value vs. Supply ChainValue vs. Supply Chain
 Value chain
 every step from raw materials to the eventual end
user
 ultimate goal is delivery of maximum value to the
end user
 Supply chain
 activities that get raw materials and subassemblies
into manufacturing operation
 Terms are used interchangeably

11. Copyright 2006 John Wiley & Sons, Inc. 10-11
Supply Chain
Management (SCM)
 Managing flow of information through supply
chain in order to attain the level of
synchronization that will make it more
responsive to customer needs while lowering
costs
 Keys to effective SCM
 information
 communication
 cooperation
 trust

12. Copyright 2006 John Wiley & Sons, Inc. 10-12
Supply Chain UncertaintySupply Chain Uncertainty
 One goal in SCM:
 respond to uncertainty in
customer demand
without creating costly
excess inventory
 Negative effects of
uncertainty
 lateness
 incomplete orders
 Inventory
 insurance against supply
chain uncertainty
 Factors that contribute to
uncertainty
 inaccurate demand
forecasting
 long variable lead times
 late deliveries
 incomplete shipments
 product changes batch
ordering
 price fluctuations and
discounts
 inflated orders

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Bullwhip EffectBullwhip Effect
Occurs when slight demand variability is magnified as information
moves back upstream

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Information Technology: A Supply
Chain Enabler
 Information links all aspects
of supply chain
 E-business
 replacement of physical
business processes with
electronic ones
 Electronic data interchange
(EDI)
 a computer-to-computer
exchange of business
documents
 Bar code and point-of-sale
 data creates an
instantaneous computer
record of a sale
 Radio frequency identification
(RFID)
 technology can send product
data from an item to a reader
via radio waves
 Internet
 allows companies to
communicate with suppliers,
customers, shippers and
other businesses around the
world, instantaneously

15. Copyright 2006 John Wiley & Sons, Inc. 10-15
E-business and Supply Chain
 Cost savings and price reductions
 Reduction or elimination of the role of
intermediaries
 Shortening supply chain response and
transaction times
 Gaining a wider presence and increased
visibility for companies
 Greater choices and more information for
customers

16. Copyright 2006 John Wiley & Sons, Inc. 10-16
E-business and Supply Chain
(cont.)
 Improved service as a result of instant
accessibility to services
 Collection and analysis of voluminous amounts
of customer data and preferences
 Creation of virtual companies
 Leveling playing field for small companies
 Gaining global access to markets, suppliers,
and distribution channels

17. Copyright 2006 John Wiley & Sons, Inc. 10-17
Supply Chain Evolution atSupply Chain Evolution at
NabiscoNabisco
Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.

18. Copyright 2006 John Wiley & Sons, Inc. 10-18
Supply Chain Evolution atSupply Chain Evolution at
Nabisco (cont.)Nabisco (cont.)
Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.

19. Copyright 2006 John Wiley & Sons, Inc. 10-19
Supply Chain Evolution atSupply Chain Evolution at
Nabisco (cont.)Nabisco (cont.)
Source: F. Keenan, “Logistics Gets a Little Respect,” Business Week (November 20, 2000), pp. 112–115.

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RFID CapabilitiesRFID Capabilities

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RFID Capabilities (cont.)RFID Capabilities (cont.)

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Build-to-order cars overBuild-to-order cars over
the Internetthe Internet

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 Customer sales
 Production
 Distribution
 Customer
relationship
 Customer sales
 Production
 Distribution
 Customer
relationship
 Push—sell from
inventory stock
 Goal of even and
stable production
 Mass approach
 Dealer-owned
E-Automotive
E-automotive Supply ChainE-automotive Supply Chain
 Pull—build-to-order
 Focus on customer
demand, respond with
supply chain flexibility
 Fast, reliable, and
customized to get cars
to specific customer
location
 Shared by dealers and
manufacturers
Automotive
Past
Supply Chain
Processes

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 Managing
uncertainty
 Procurement
 Product
design
 Managing
uncertainty
 Procurement
 Product
design
 Large car
inventory at
dealers
 Batch-oriented;
dealers order
based on
allocations
 Complex
products don’t
match customer
needs
E-Automotive
E-automotive Supply Chain (cont.)E-automotive Supply Chain (cont.)
 Small inventories with
shared information and
strategically placed parts
inventories
 Orders made in real time
based on available-to-
promise information
 Simplified products based on
better information about what
customers want
Automotive
Past
Supply
Chain
Processes

25. Copyright 2006 John Wiley & Sons, Inc. 10-25
Supply Chain IntegrationSupply Chain Integration
 Information sharing among supply chain
members
 Reduced bullwhip effect
 Early problem detection
 Faster response
 Builds trust and confidence
 Collaborative planning, forecasting,
replenishment, and design
 Reduced bullwhip effect
 Lower Costs (material, logistics, operating, etc.)
 Higher capacity utilization
 Improved customer service levels

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 Coordinated workflow, production and
operations, procurement
 Production efficiencies
 Fast response
 Improved service
 Quicker to market
 Adopt new business models and
technologies
 Penetration of new markets
 Creation of new products
 Improved efficiency
 Mass customization
Supply Chain Integration (cont.)Supply Chain Integration (cont.)

27. Copyright 2006 John Wiley & Sons, Inc. 10-27
Collaborative Planning,Collaborative Planning,
Forecasting, and ReplenishmentForecasting, and Replenishment
 Process for two or more companies in a
supply chain to synchronize their
demand forecasts into a single plan to
meet customer demand
 Parties electronically exchange
 past sales trends
 point-of-sale data
 on-hand inventory
 scheduled promotions
 forecasts

28. Copyright 2006 John Wiley & Sons, Inc. 10-28
SuppliersSuppliers
 Procurement
 purchase of goods and services from suppliers
 On-demand (direct response) delivery
 requires supplier to deliver goods when
demanded by customer
 Continuous replenishment
 supplying orders in a short period of time
according to a predetermined schedule
 Cross-enterprise teams coordinate
processes between company and supplier

29. Copyright 2006 John Wiley & Sons, Inc. 10-29
OutsourcingOutsourcing
 Sourcing
 selection of suppliers
 Outsourcing
 purchase of goods and services from an
outside supplier
 Core competencies
 what a company does best
 Single sourcing
 a company purchases goods and services
from only a few (or one) suppliers

30. Copyright 2006 John Wiley & Sons, Inc. 10-30
Original Equipment
Manufacturer
(OEM)
Maintenance
Repair and
Operation (MPO)
Corporate
Services

31. Copyright 2006 John Wiley & Sons, Inc. 10-31
E-ProcurementE-Procurement
 Direct purchase from suppliers over the
Internet
 Direct products go directly into production
process a product, indirect products not
 E-marketplaces
 web sites where companies and suppliers conduct
business-to-business activities
 Reverse auction
 a company posts orders on the Internet for
suppliers to bid on

32. Copyright 2006 John Wiley & Sons, Inc. 10-32
Online Sourcing/ Procurement
Process

33. Copyright 2006 John Wiley & Sons, Inc. 10-33
Online Sourcing/ Procurement
Process (cont.)

34. Copyright 2006 John Wiley & Sons, Inc. 10-34
Online Sourcing/ Procurement
Process (cont.)

35. Copyright 2006 John Wiley & Sons, Inc. 10-35
Source: Adapted from Garrison Wieland for “Wal-Mart’s
Supply Chain,” Harvard Business Review 70(2; March–April
1992), pp. 60–71.
Relationship between Facilities and Functions
along the Wal-Mart Supply Chain

36. Copyright 2006 John Wiley & Sons, Inc. 10-36
DistributionDistribution
 Encompasses all channels, processes, andEncompasses all channels, processes, and
functions, including warehousing andfunctions, including warehousing and
transportation, that a product passes on itstransportation, that a product passes on its
way to final customerway to final customer
 Often called logisticsOften called logistics
 LogisticsLogistics
 transportation and distribution of goodstransportation and distribution of goods
and servicesand services
 Driving force today is speedDriving force today is speed
 Particularly important for Internet dot-comsParticularly important for Internet dot-coms

37. Copyright 2006 John Wiley & Sons, Inc. 10-37
Amazon.com

38. Copyright 2006 John Wiley & Sons, Inc. 10-38
Distribution Centers (DC)Distribution Centers (DC)
and Warehousingand Warehousing
 DCs are some of the largest businessDCs are some of the largest business
facilities in the United Statesfacilities in the United States
 Trend is for more frequent orders inTrend is for more frequent orders in
smaller quantitiessmaller quantities
 Flow-through facilities and automatedFlow-through facilities and automated
material handlingmaterial handling
 PostponementPostponement
 final assembly and product configurationfinal assembly and product configuration
may be done at the DCmay be done at the DC

39. Copyright 2006 John Wiley & Sons, Inc. 10-39
Warehouse ManagementWarehouse Management
SystemsSystems
 Highly automated system that runs day-to-dayHighly automated system that runs day-to-day
operations of a DCoperations of a DC
 Controls item putaway, picking, packing, andControls item putaway, picking, packing, and
shippingshipping
 FeaturesFeatures
 transportation managementtransportation management
 order managementorder management
 yard managementyard management
 labor managementlabor management
 warehouse optimizationwarehouse optimization

40. Copyright 2006 John Wiley & Sons, Inc. 10-40
A WMS

41. Copyright 2006 John Wiley & Sons, Inc. 10-41
Vendor-Managed InventoryVendor-Managed Inventory
 Manufacturers generate orders, not distributors orManufacturers generate orders, not distributors or
retailersretailers
 Stocking information is accessed using EDIStocking information is accessed using EDI
 A first step towards supply chain collaborationA first step towards supply chain collaboration
 Increased speed, reduced errors, and improvedIncreased speed, reduced errors, and improved
serviceservice

42. Copyright 2006 John Wiley & Sons, Inc. 10-42
Collaborative Logistics andCollaborative Logistics and
Distribution OutsourcingDistribution Outsourcing
 Collaborative planning, forecasting, andCollaborative planning, forecasting, and
replenishment create greater economies ofreplenishment create greater economies of
scalescale
 Internet-based exchange of data andInternet-based exchange of data and
informationinformation
 Significant decrease in inventory levels andSignificant decrease in inventory levels and
more efficient logisticsmore efficient logistics
 Companies focus on core competenciesCompanies focus on core competencies

43. Copyright 2006 John Wiley & Sons, Inc. 10-43
TransportationTransportation
 Rail
 low-value, high-density, bulk
products, raw materials,
intermodal containers
 not as economical for small
loads, slower, less flexible
than trucking
 Trucking
 main mode of freight
transport in U.S.
 small loads, point-to-point
service, flexible
 More reliable, less damage
than rails; more expensive
than rails for long distance

44. Copyright 2006 John Wiley & Sons, Inc. 10-44
Transportation (cont.)Transportation (cont.)
Air
 most expensive and fastest, mode of
freight transport
 lightweight, small packages <500 lbs
 high-value, perishable and critical
goods
 less theft
Package Delivery
 small packages
 fast and reliable
 increased with e-Business
 primary shipping mode for Internet
companies

45. Copyright 2006 John Wiley & Sons, Inc. 10-45
Transportation (cont.)Transportation (cont.)
Water
 low-cost shipping mode
 primary means of international shipping
 U.S. waterways
 slowest shipping mode
Intermodal
 combines several modes of shipping-
truck, water and rail
 key component is containers
Pipeline
 transport oil and products in liquid form
 high capital cost, economical use
 long life and low operating cost

46. Copyright 2006 John Wiley & Sons, Inc. 10-46
Internet TransportationInternet Transportation
ExchangesExchanges
 Bring together shippers andBring together shippers and
carrierscarriers
 Initial contact, negotiations,Initial contact, negotiations,
auctionsauctions
 ExamplesExamples
www.nte.comwww.nte.com
www.freightquote.comwww.freightquote.com

47. Copyright 2006 John Wiley & Sons, Inc. 10-47
SCM SoftwareSCM Software
 Enterprise Resource Planning (ERP)
 software that integrates components of a
company by sharing and organizing
information and data
 SAP was first ERP software
 mySAP.com
 web enabled modules that allow collaboration
between companies along the supply chain

48. Copyright 2006 John Wiley & Sons, Inc. 10-48
Linking Supply Chain with SAP

49. Copyright 2006 John Wiley & Sons, Inc. 10-49
Measuring Supply Chain
Performance
 Key performance indicators
 inventory turnover
 cost of annual sales per inventory unit
 inventory days of supply
 total value of all items being held in inventory
 fill rate
 fraction of orders filled by a distribution center within
a specific time period

50. Copyright 2006 John Wiley & Sons, Inc. 10-50
Inventory turns =Inventory turns =
Average aggregate value of inventoryAverage aggregate value of inventory
Cost of goods soldCost of goods sold
Average aggregate value of inventory =Average aggregate value of inventory =
==(average inventory for item(average inventory for item ii)) X (unit value itemX (unit value item ii))
Days of supply =Days of supply =
(Costs of goods sold)/(365 days)(Costs of goods sold)/(365 days)
Average aggregate value of inventoryAverage aggregate value of inventory
Key Performance Indicators

51. Copyright 2006 John Wiley & Sons, Inc. 10-51
Key Performance Indicators:
Example
Inventory turns =Inventory turns =
$34,416,000$34,416,000
$425, 000, 000$425, 000, 000
Days of supply =Days of supply =
($425,000,000)/(365)($425,000,000)/(365)
$34,416,000$34,416,000
= 12.3= 12.3
= 29.6= 29.6
1. Cost of goods sold: $425 million
2. Production materials and parts: $4,629,000
3. Work-in-process: $17,465,000
4. Finished goods: $12,322,000
5. Total average aggregate value of inventory (2+3+4): $34,416,000

52. Copyright 2006 John Wiley & Sons, Inc. 10-52
Other Measures of Supply ChainOther Measures of Supply Chain
PerformancePerformance
 Process ControlProcess Control
 used to monitor and control any process inused to monitor and control any process in
supply chainsupply chain
 Supply Chain Operations ReferenceSupply Chain Operations Reference
(SCOR)(SCOR)
 establish targets to achieve “best in class”establish targets to achieve “best in class”
performanceperformance

53. Copyright 2006 John Wiley & Sons, Inc. 10-53
SCOR Model ProcessesSCOR Model Processes
Plan
Develop a course
of action that best
meets sourcing,
production and
delivery
requirements
Source
Procure goods
and services to
meet planned
or actual
demand
Make
Transform
product to a
finished state to
meet planned
or actual
demand
Deliver
Provide products
to meet demand,
including order
management,
transportation
and distribution
Return
Return
products,
post-delivery
customer
support

54. Copyright 2006 John Wiley & Sons, Inc. 10-54
Number of days to achieve an unplanned
20% change in orders without a cost
penalty
Production
flexibility
Number of days for supply chain to
respond to an unplanned significant
change in demand without a cost penalty
Supply chain
response time
Supply Chain
Flexibility
Number of days from order receipt to
customer delivery
Order fulfillment
lead time
Supply Chain
Responsivenes
s
Percentage of orders delivered on time
and in full, perfectly matched with order
with no errors
Perfect order
fulfillment
Percentage of orders shipped within24
hours of order receipt
Fill rate
Percentage of orders delivered on time
and in full to the customer
Delivery
performance
Supply Chain
Delivery
Reliability
DefinitionPerformanc
e Metric
Performanc
e Attribute
SCOR: Customer FacingSCOR: Customer Facing

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DefinitionPerformanc
e Metric
Performanc
e Attribute
SCOR: Internal FacingSCOR: Internal Facing
Revenue divided by total assets including working
capital and fixed assets
Asset turns
Number of days that cash is tied up as inventoryInventory days of
supply
Number of days that cash is tied up as working
capital
Cash-to-cash
cycle time
Supply Chain
Asset
Management
Efficiency
Direct and indirect costs associated with returns
including defective, planned maintenance and
excess inventory
Warranty/returns
processing cost
Direct material cost subtracted from revenue and
divided by the number of employees, similar to
sales per employee
Value-added
productivity
Direct cost of material and labor to produce a
product or service
Cost of goods
sold
Direct and indirect cost to plan, source and deliver
products and services
Supply chain
management cost
Supply Chain
Cost

56. Copyright 2006 John Wiley & Sons, Inc. 10-56
Global Supply ChainGlobal Supply Chain
 To compete globally requires anTo compete globally requires an
effective supply chaineffective supply chain
 Information technology is anInformation technology is an
“enabler” of global trade“enabler” of global trade
 Nations form trading groupsNations form trading groups
 No tariffs or dutiesNo tariffs or duties

57. Copyright 2006 John Wiley & Sons, Inc. 10-57
Obstacles to Global ChainObstacles to Global Chain
TransactionsTransactions
 Increased documentation for invoices, cargo
insurance, letters of credit, ocean bills of lading
or air waybills, and inspections
 Ever changing regulations that vary from
country to country that govern the import and
export of goods
 Trade groups, tariffs, duties, and landing costs
 Limited shipping modes
 Differences in communication technology and
availability

58. Copyright 2006 John Wiley & Sons, Inc. 10-58
Obstacles to Global ChainObstacles to Global Chain
Transactions (cont.)Transactions (cont.)
 Different business practices as well as language
barriers
 Government codes and reporting requirements that
vary from country to country
 Numerous players, including forwarding agents,
custom house brokers, financial institutions, insurance
providers, multiple transportation carriers, and
government agencies
 Since 9/11, numerous security regulations and
requirements

59. Copyright 2006 John Wiley & Sons, Inc. 10-59
Duties and TariffsDuties and Tariffs
 Proliferation of trade agreementsProliferation of trade agreements
 Group members charge uniform tariffsGroup members charge uniform tariffs
 Member nations have a competitiveMember nations have a competitive
advantage within the groupadvantage within the group
 Trade specialists
include freight forwarders, customs
house brokers, export packers, and
export management and trading
companies

60. Copyright 2006 John Wiley & Sons, Inc. 10-60
Duties and Tariffs (cont.)Duties and Tariffs (cont.)
APECAPEC
ASEANASEAN
ANZCERTAANZCERTA
FTAAFTAA
NAFTANAFTA
CALMCALM
ATPAATPA
MERCOSURMERCOSUR
TAFTATAFTA

61. Copyright 2006 John Wiley & Sons, Inc. 10-61
Landed CostLanded Cost
 Total cost of producing, storing, andTotal cost of producing, storing, and
transporting a product to the site oftransporting a product to the site of
consumption or another portconsumption or another port
 Value added tax (VAT)
 an indirect tax assessed on the increase in value of
a good at any stage of production process from
raw material to final product
 Clicker shock
 Occurs when an ordered is placed with a company
that does not have the capability to calculate landed
cost

62. Copyright 2006 John Wiley & Sons, Inc. 10-62
Web-based International TradeWeb-based International Trade
Logistic SystemsLogistic Systems
 International trade logistics web-based software
systems reduce obstacles to global trade
 convert language and currency
 provide information on tariffs, duties, and customs processes
 attach appropriate weights, measurements, and unit prices to
individual products ordered over the Web
 incorporate transportation costs and conversion rates
 calculate shipping costs online while a company enters an
order
 track global shipments

63. Copyright 2006 John Wiley & Sons, Inc. 10-63
Recent Trends in Globalization forRecent Trends in Globalization for
U.S. CompaniesU.S. Companies
 Two significant changesTwo significant changes
 passage of NAFTApassage of NAFTA
 admission of China in WTOadmission of China in WTO
 Electronic IndustryElectronic Industry
 70% of cost is in components70% of cost is in components
 major supply chains have moved to Chinamajor supply chains have moved to China
 Proliferation of counterfeit partsProliferation of counterfeit parts

64. Copyright 2006 John Wiley & Sons, Inc. 10-64
Effects of 9/11 on Global ChainsEffects of 9/11 on Global Chains
 Increase security measuresIncrease security measures
 added time to supply chain schedulesadded time to supply chain schedules
 Increased supply chain costsIncreased supply chain costs
 24 hours rules for “risk screening”24 hours rules for “risk screening”
 extended documentationextended documentation
 extend time by 3-4 daysextend time by 3-4 days
 Inventory levels have increased 5%Inventory levels have increased 5%
 Other costsOther costs include:
 new people, technologies, equipment, surveillance,
communication, and security systems, and training necessary
for screening at airports and seaports around the world

65. Copyright 2006 John Wiley & Sons, Inc. 10-65
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.
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