Supply Chain Management

Supply chain – network of facilities, functions and activities involved in producing and
delivering products or services

Supply chain management

- Coordination – of the movement of goods through the supply chain

- Control of information such as sales data, sales forecasts, promotions and inventory

Tiers of suppliers

- Tier 1 – Company B supplies your company A

o Ex. Secondary packaging
- Tier 2 – Company C supplies goods to the company B that go in a good that company B
supplies to company A
o Ex. Label manufacturing
- Tier 3 – supplies company C the goods needed to manufacture the good for Company B
o Ex. Paper manufacturer

e-Supply chains – real time and faster

Side effect of globalization – people setup subsidiaries to get domiciled to the country laws

RFID

Logistics

- Intermodal – multiple modes

- Highway – flexible
- Rail or water – low cost
- Pipeline – high volume low cost
- Air – fast

Distribution management – proximity to customers, business climate, quality of labor,

infrastructure

3PL – 3rd part logistics – outsourcing freight consolidation and distribution activities

Purchasing

Order requisition (demand) > supplier selection > placing an order > monitoring order >
receiving order
Sourcing

Single source – quantity discount, more responsive, frequent deliveries, high quality, better
relation, support JIT

- Not enough capacity, government regulations

Multiple suppliers – competitive pricing, spreading risks, low dependence, volume flexibility,
easier to test new supplier

- Order is too small, high ordering cost

Highly efficient – 95% single, 5% back up or 90/10

Key factors - #, quality, time

Bullwhip effect – increasing distortion of information along the supply chain

- Customer demand gets distorted as information reaches suppliers

Contributing factors

- Batch ordering, high ordering costs, free return policy

- Promotions, pricing leads to forward buy
- No visibility of end demand, inaccurate forecast
- Long lead time, localized reaction
- Mistrust, conflict of interest

Solutions to bullwhip

- Traditional “solution” – increase inventory

- Modern approach:
o Examine contributing factors
o Improve the supply chain metrics
o Understand the supply chain relationships: interdependent, systematic and goal
sharing
 Improve coordination, communication and collaboration
- Counteracting the bullwhip effect
o POS
o Eliminate batch ordering
o Uniform wholesale pricing police – “everyday low prices”

Supply chain strategies

- Plant direct shipping – from manufacturer to retailer

 - Cross docking – goods move from one loading dock to another without being stored as an
inventory
- 150 mile radius – 3hr shipping

Postponement – customization of the product as late as possible

Vendor managed inventory – let the vendor manage ordering

Virtual integration – allows suppliers to access critical information in real time

- Point of sale data shared with supplier

Vertical integration – control entire chain

CPFR – Collaborative planning forecasting and replenishment

- Requires guidelines for information sharing

o Operating agreement – what and who does it
- Voluntary inter-industry commerce standards – VICS
- Builds collaborative and strategic relationships

Inventory management

WIP – most expensive inventory

Safety stock – buffer against uncertainties – just incase

Hedge inventory – to protect against future events – bet/gamble

MRO – maintenance, repair and operating inventory – to support general operations

Decoupling – WIP items waiting for the next tep

Q and P system

- Q system – reorder fixed Q whenever inventory falls below a reorder point R

o Continuous review system- reviews inventory each time a withdrawal occurs
o Time varies
- P system – reorder after a fixed time period P
o Reviews inventory periodically
o Order quantity varies
- Q is better in terms of responsiveness, average inventory level and administrative cost

ABC system – inventory classification system

 - A – 5-15% of units 70-80% of $ value, high priority – tight control
- B – 30% of units 15% of $ value, moderate priority – regular attention
- C - 50-60% of units 5-10% of $ value, low priority – simple control

Inventory management costs

- Ordering (set up) costs – fixed costs incurred whenever order is placed
- Holding (carrying) costs – cost to keep inventory – interest, depreciation, spoilage,
insurance
- Shortage (stockout) costs – costs of not being able to meet customer demand
o Most expensive due to loss of future sale

Economic order quantity – EOQ

Assumptions – demand is independent, known and constant

- Supply is certain and received all at once in a batch

- Lead time is known and constant
o Time between order is placed and received
- Cost information is fixed and constant
- No shortages and no back orders
2𝐷𝐶0
- 𝐸𝑂𝑄 = √ 𝐶𝐻

o CH – holding cost
o CO – ordering cost
o D annual demand
𝐷 𝑄
- 𝑇𝐶 = 𝐶𝑂 (𝑄 ) + 𝐶𝐻 ( 2 )

𝐷 𝑄
Quantity discount model = 𝑇𝐶 = 𝐶𝑂 (𝑄 ) + 𝐶𝐻 ( 2 ) + 𝑃𝐷

- P per unit price

Service level – probability of a stock out

Forecasting