Chapter 15 MIS 373 Basic Operations Management Learning Objectives After this lecture students will be able to Explain the terms supply chain and logistics Discuss the importance of supply chain management ID: 183634
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Supply Chain Management
Chapter 15
MIS 373: Basic Operations ManagementSlide2
Learning Objectives
After this lecture, students will be able to
Explain the terms supply chain and logistics
Discuss the importance of supply chain management
Describe what bullwhip effect is
Explain the causes and remedies for the bullwhip effect
MIS 373: Basic Operations Management
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Starbucks Global Supply Chain
[YouTube]
A Behind the Scenes Look at Starbucks Global Supply ChainSlide4
Supply Chain
Supply Chain:the sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or
serviceSometimes referred to as value chains
Value is added as goods and services progress through the chain.
Logistics:
the part of a supply chain involved with the forward and reverse flow of goods, services, cash, and information.MIS 373: Basic Operations Management
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Typical Supply Chains
MIS 373: Basic Operations Management
Supplier
Supplier
Supplier
Storage
Manufacturing
Storage
Distributor
Customer
Retailer
Supplier
Supplier
Supplier
Storage
Service
Customer
Every business organization is part of at least one supply chain, and many are part of multiple supply chains
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Supply Chain Management
Supply Chain Management (SCM)
The strategic coordination of business functions within a business organization and throughout its supply chain for the purpose of integrating
supply and demand management
Supply:
From the beginning of the chain to the internal operations of the organizationDemand:From the organization's output delivery to its immediate customer to the final customer in the chainMIS 373: Basic Operations Management
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Supply Chain Management
Supply chain strategy alignment
Aligning supply and distribution strategies with organizational strategy. Deciding on the degree to which outsourcing will be employed.Network configuration
Determining the number and location of suppliers, warehouses, production/operations facilities, distribution centers.
MIS 373: Basic Operations Management
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Why so much interest in
SCM?As manufacturing becomes more efficient (or is outsourced), companies look for ways to reduce costs
Several significant success stories. Efficient SCM gives Walmart & others an important edgeWeb-based models for supply chains:
Online retailers
B2B business models.
MIS 373: Basic Operations Management8Slide9
Key SCM Issues
The goal of SCM is to match supply to demand as effectively and efficiently as possible
Key issues:Determining appropriate levels of outsourcingManaging procurement
Managing
suppliers
Managing customer relationshipsBeing able to quickly identify problems and respond to themManaging riskMIS 373: Basic Operations Management
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Flow Management
Three types of flow managementProduct and service flowInvolves movement of goods and services from suppliers to customers as well as handling customer service needs and product returns
Information flowInvolves sharing forecasts and sales data, transmitting orders, tracking shipments, and updating order status
Financial flow
involves credit terms, payments, and consignment and title ownership arrangements
MIS 373: Basic Operations Management10Slide11
Outsourcing
Transfer or contracting (non productive) internal activities (process) to outside vendorse.g.: IT, accounting, legal, logistics
Utilize the efficiency that comes with specializationMake-or-Buy analysis
MIS 373: Basic Operations Management
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Benefits & Risks of Outsourcing
Benefits:Lower prices may result from lower labor costsThe ability of the organization to focus on its core strengths
Permits the conversion of some fixed costs to variable costsIt can free up capital to address other needsSome risks can be shifted to the supplier
The ability to take advantage of a supplier’s expertise
Makes it easier to expand outside of the home country
RisksInflexibility due to longer lead timesIncreased transportation costsLanguage and cultural differencesLoss of jobsLoss of controlLower productivityLoss of business knowledgeKnowledge transfer and intellectual property concernsIncreased effort required to manage the supply chain
MIS 373: Basic Operations Management
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Supply Chain Risks
Supply Chain RisksSupply chain disruptionNatural disasters
Supplier problemsQuality issuesAnother form of disruption that may disrupt supplies and lead to product recalls, liability claims, and negative publicity
Loss of control of sensitive information
If suppliers divulge sensitive information to competitors, it can weaken a firm’s competitive position
MIS 373: Basic Operations Management13Slide14
Risk Management
Risk managementInvolves identifying risks, assessing their likelihood of occurring and their potential impact and then developing strategies for addressing those risks.
Strategies for addressing risk include:Risk avoidanceRisk reductionRisk sharing
Key elements of successful risk management include:
Know your suppliers
Provide supply chain visibilityDevelop event-response capabilityMIS 373: Basic Operations Management14Slide15
Global Supply Chains
Global supply chainsProduct design often uses inputs from around the worldSome manufacturing and service activities are outsourced to countries where labor and/or materials costs are lower
Products are sold globallyComplexitiesLanguage and cultural differencesCurrency fluctuations
Political instability
Increasing transportation costs and lead times
Increased need for trust amongst supply chain partnersMIS 373: Basic Operations Management15Slide16
Management Responsibility:Tactical and Operational
Tactical
ForecastingSourcingOperations PlanningManaging inventory
Transportation planning
Collaborating
OperationalSchedulingReceivingTransformingOrder fulfillingManaging inventoryShipping
Information sharingControlling
MIS 373: Basic Operations Management
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Supplier Management
Vendor analysisEvaluating the sources of supply in terms of price, quality, reputation, and serviceSupplier audit
A means of keeping current on suppliers’ production (or service) capabilities, quality and delivery problems and resolutions, and performance on other criteriaSupplier certificationInvolves a detailed examination of a supplier’s policies and capabilities
The process verifies the supplier meets or exceeds the requirements of a buyer
MIS 373: Basic Operations Management
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Supplier Relationship Management
Type of relationship is often governed by the duration of the trading relationshipShort-termOftentimes involves competitive bidding
Minimal interactionMedium-termOften involves an ongoing relationship
Long-term
Often involves greater cooperation that evolves into a partnership
MIS 373: Basic Operations Management18Slide19
Choosing Suppliers
Quality and quality assurance
Procedures for quality assurance and quality controlFlexibilityFor changes in delivery schedules, quantity, product or service changesLocationNearby?
Price
Competitiveness, willingness to negotiate, cooperate to reduce prices
Reputation and Financial StabilitySupplier reputation, its financial stabilityLead times and on-time deliveryProcedures to assure on-time delivery and problem correctionOther accountsDependence on other customers and their priorityMIS 373: Basic Operations Management
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Supplier Partnerships
More organizations are seeking to establish
partnerships with others in their supply chain:Fewer suppliers, long term relationships, sharing of information (forecasts, sales data, problem alerts), cooperation in planningBenefits:
improved operations
: higher quality, increased delivery speed and reliability, lower inventories, lower costs, higher profits. Higher supplier flexibility in accepting changes (delivery schedules, quality, quantity), suppliers can help in identifying problems and offer suggestions
MIS 373: Basic Operations Management
Aspect
Adversary
Partner
Number of suppliersMany; play one against the othersOne or a few
Length of relationship
May be brief
Long-term
Low price
Major consideration
Moderately important
Reliability
May
not be high
High
Openness
Low
High
Quality
May be unreliable; buyer inspects
At the source; vendor certified
Volume of business
May be low due
to many suppliers
High
Flexibility
Relatively low
Relatively high
Location
Widely dispersed
Nearness is important for short lead time and quick service
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Strategic SCM
Information technology
Integrating systems and sharing information (forecasts, inventory status, shipments etc.) throughout the SC.Strategic partnershipsChoice of partners, level of partnership.
Distribution strategy
Centralized or decentralized distribution. In-house distribution or third-party logistics.
Uncertainty and risk reductionIdentifying potential risks and deciding on acceptable risk level.Capacity planningAssessing long term capacity needs and the degree of flexibilityProducts and servicesNew products and services selection and design.
MIS 373: Basic Operations Management
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Logistics
Logistics
The part of the SC involved with the forward and reverse flow of goods, services, cash, and information.Logistics ManagementManagement of :
inbound and outbound transportation
material handling
WarehousingInventoryorder fulfillment and distributionthird party logisticsreverse logistics (return from customers)MIS 373: Basic Operations Management
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Inventory Management
Inventory issues in SCM
Inventory locationCentralized inventoriesLower overall inventory, lower cost, lower stock-out riskDecentralized inventories
Faster delivery, lower shipping cost
Inventory velocity
The speed at which goods move through a supply chainThe greater the velocity the lower the holding cost and the faster orders are fulfilled and goods are turned into cash.The bullwhip effectInventory oscillations that become increasingly larger looking backward through the supply chainMIS 373: Basic Operations Management
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Creating an Effective Supply Chain
It begins with strategic sourcingAnalyzing the procurement process to lower costs by reducing waste and non-value-added activities, increase profits, reduce risks, and improve supplier performance
There must beTrustEffective communicationInformation velocity
Supply chain visibility
Event management capability
Performance metricsMIS 373: Basic Operations Management24Slide25
Trade-Offs
Lot-size-inventory trade-offLarge lot sizes yield benefits in terms of quantity discounts and lower annual setup costs, but it increases the amount of safety stock (and inventory carrying costs) carried by
suppliersInventory-transportation cost trade-off
Suppliers prefer to ship full truckloads instead of partial loads to spread shipping costs over as many units as possible. This leads to greater holding costs for customers
Cross-docking
A technique whereby goods arriving at a warehouse from a supplier are unloaded from the suppliers truck and loaded onto outbound truck, thereby avoiding warehouse storage MIS 373: Basic Operations Management
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Trade-Offs
Lead time-transportation costs trade-offSuppliers like to ship in full loads, but waiting for sufficient orders and/or production to achieve a full load may increase lead
timeProduct variety-inventory trade-off
Greater product variety usually means smaller lot sizes and higher setup costs, as well as higher transportation and inventory management costs
Delayed differentiation
Production of standard components and subassemblies which are held until late in the process to add differentiating featuresMIS 373: Basic Operations Management26Slide27
Trade-Offs
Cost-customer service trade-offProducing and shipping in large lots reduces costs, but increases lead time
DisintermediationReducing one or more steps in a supply chain by cutting out one or more intermediaries
MIS 373: Basic Operations Management
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The Bullwhip Effect
First noticed by P&G executives examining the order patterns for Pampers disposable diapers.
Although the customer demand is pretty steady, they noticed that order variation increased dramatically as one moved from retailers to distributors to the factory. Slide29
Bullwhip Effect - Problems
MIS 373: Basic Operations Management
High demand fluctuations. Variation in demand along the supply chain requires:Shipment capacityProduction capacity to cope with peaks.
Inventory capacity
Most of the time this capacity will be idle.There’s significant cost and investments attached!Low service level (backorders)High costIn the end: high overall cost in the supply chain
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Bullwhip Effect - Causes
Information (lack of)Game simulates SC with low levels of trust, where little information is shared among the parties
Only order amounts are perpetuated up the supply chain; information about customer demand is lost upstream. Without actual customer demand data, all forecasts rely solely on the incoming orders at each stage of the SC.
SC structure
The longer the lead time the stronger the bullwhip effect (the reorder point is calculated by multiplying the forecasted demand by the lead time plus the safety stock)
Local optimizationLocal individual cost optimization, and a lack of cooperationOrdering involves fix cost. There is an incentive for individual players to hold back and only place aggregate/batch orders. This aggravates the problem of demand forecasting as little information about actual demand is conveyed.
MIS 373: Basic Operations Management
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Mitigating the Bullwhip Effect
Good supply chain management can overcome the bullwhip effect:
Information sharingReplenishment based on needVendor-managed inventoryVendors monitor goods and replenish retail inventories when supplies are low
Lower ordering costs
Short lead times
CooperationCompetition is now supply chain against supply chain and Network against networkMIS 373: Basic Operations Management
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Order fulfillment
Order fulfillment refers to the processes involved in responding to customer orders
.Engineer-to-Order
(ETO
)
Products are designed and built according to customer specifications. This approach is frequently used for large-scale construction projects, custom homebuilding, home remodeling, and for products made in job shops. Make-to-Order (MTO)A standard product design is used, but production of the final product is linked to the final customer's specifications. This approach is used by aircraft manufacturers such as Boeing. Fulfillment time is generally less than with ETO fulfillment, but still fairly long
.Assemble-to-Order (ATO)
Products
are assembled to customer specifications from a stock of standard and modular components. Computer manufacturers such as Dell operate using this approach. Fulfillment times are fairly short, often a week or less
.Make-to-Stock (MTS)Production is based on a forecast, and products are sold to the customer from finished goods stock. This approach is used in department stores and supermarkets. The order fulfillment time is immediate. MIS 373: Basic Operations Management32Slide33
SMALL BUSINESSES
Small businesses do not always give adequate attention to their supply chains.
Three aspects of supply chain management that are often of concern to small businesses are:Inventory management
Reducing
risks
International tradeWhy the three are of concern to small businesses?How to mitigate the concerns?MIS 373: Basic Operations Management
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Supply Chain Performance Measures
FinancialReturn on assetsCost
Cash flowProfits SuppliersQualityOn-time delivery
Cooperation
Flexibility
OperationsProductivityQuality InventoryAverage valueTurnoverWeeks of supplyOrder fulfillmentOrder accuracy
Time to fill orders% of orders delivered on timeCustomers
Customer satisfaction
% of customer complaints
MIS 373: Basic Operations Management34Slide35
Managing Returns
Products are returned to companies or third-party handlers for a variety of reasons, and in a variety of conditions. Among them are the following:
Defective productsRecalled products
Obsolete
products
Unsold products returned from retailersParts replaced in the fieldItems for recyclingWasteIn the US, the annual value of returns is estimated to be in the neighborhood of $100 billion
MIS 373: Basic Operations Management
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Managing Returns
Reverse logistics
is the process of physically transporting returned items. This
involves either retrieving items from the field or moving items from the point of return to a facility where they will be inspected and sorted and then transporting to their final destination
.
Two key elements of managing returnsGatekeeping oversees the acceptance of returned goods with the intent of reducing the cost of returns by screening returns at the point of entry into the system and refusing to accept goods that should not be returned or goods that are returned to the wrong destination
.Avoidance
refers to finding ways to minimize the number of items that are returned.
MIS 373: Basic Operations Management36Slide37
Trends in SCM
Trends affecting supply chain design and management:
Measuring supply chain performanceIncorporating economic metrics into decisions (e.g., inventory velocity, inventory turnover)
“Greening” the supply chain
Redesigning products and services to reduce pollution from transportation, choosing “green” suppliers, managing returns, end-of-life programs (e.g., appliances)
Re-evaluating outsourcingReconsidering outsourcing due to long lead time, increased transportation costs, language, culture, job loss, control loss, lower productivity, loss of ability to perform work internally, loss of business knowledge, management efforts.
MIS 373: Basic Operations Management
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Trends in SCM
Trends affecting supply chain design and management:Integrating IT
Real time data to enhance strategic planning, control costs, measure quality and productivity, respond quickly to problems, improve SC operationsManaging risks
Identifying risks, assessing likelihood of occurrence, potential impacts, prioritizing, developing management strategies (avoidance, reduction, transference).
Adopting lean principles
Eliminating non value-added processes, using “pull” systems to improve product flow, using fewer suppliers, continuous improvement.MIS 373: Basic Operations Management
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Operations Strategy
Effective supply chains are necessary for organizational success
Requires integration of all aspects of the chainSupplier relationships are a critical component of supply chain strategy
Lean operations
to improve supply chain success
Future Supply ChainsMIS 373: Basic Operations Management39Slide40
Exercise: Concept Map
Work with a partner or two and develop a concept map based on the following two articles about
supply chain:
Don't
Let Your Supply Chain Control Your
Business
Don't Tweak your Supply Chain--Rethink It End to End
Concept Map ExamplesSlide41
Key Points
Supply chains are a vital part of every business organization and need to be managed effectively to achieve a balance of supply and demand.There are a number of trade-offs to be made by supply chain managers.
Effective supply chains involve trust, communication, a rapid, two-way flow of information, visibility, and event-response capability.Among important trends in supply chain management are measuring ROI, “greening” the supply chain, reevaluating outsourcing, integrating IT, managing risks, and adopting lean principles.
MIS 373: Basic Operations Management
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