Chapter 15- Supply Chain Management

Supply Chain (Value Chain) the sequence

of organizations their facilities, functions,
and activities that are involved in
producing and delivering a product or
service. Value is added as goods and
services progress through the chain. Typical
Supply Chains: every business is part of at
least one supply chain, many are part of
multiple supply chains:
- Suppliers storage manufacturing
storagedistributor retailer customer
- Suppliers storage service customer
Supply Chain Mgmt. (SCM) 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 organization
Demand: from the organizations output
delivery to its immediate customer to the
final customer in the chain Interest in SCM:
manufacturing becomes more efficient (or
outsourced), companies look for ways to
reduce costs, Web-based models, online
retailers, B2B business models Goal: match
supply to demand as effectively and
efficiently as possible
Key SCM Issues: Determining appropriate
levels of outsourcing, managing
procurement, Managing suppliers, customer
relationships, risk, Being able to quickly
identify problems and respond to them
Outsourcing: transfer or contracting (nonproductive) internal activities (process) to
outside vendors (ex: IT, ACCT, Logistics),
utilize the efficiency that comes with
specialization, make-or-buy analysis.
Supplier Relationship Management: type
of relationship is often governed by the
duration of the trading relationship: short
term contracts: involve competitive
bidding, minimal interaction medium term:
ongoing relationship long term: greater
cooperation that evolves into a partnership.
Choosing Suppliers: quality and quality
assurance: procedures for quality assurance
and quality control flexibility: for changes in
delivery schedules, quantity, product, or
service changes location: nearby? Price:
competitiveness, willingness to negotiatie,
cooperate to reduce prices reputation and
financial stability: supplier reputation their
financial stability other accounts:
dependence on other customers and their
priority
Supplier Partnerships: more orgs. 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 planning benefits:
improved operations: higher quality,
increased delivery speed and reliability,
lower inventories, lower costs, higher profits.
Higher supplier flexibility in accepting
changes (delivery schedules, quality, and
quantity), suppliers can help in identifying
problems and offer suggestions many of
the benefits go to the buyer, while
much of the investment falls on the
supplier

Supply Chain Management: 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. Information technology:
Integrating systems and sharing information
(forecasts, inventory status, shipments etc.)
throughout the SC.
Strategic partnerships Choice of partners,
level of partnership. Distribution strategy
Centralized or decentralized distribution. Inhouse distribution or third-party logistics.
Uncertainty and risk reduction
Identifying potential risks and deciding on
acceptable risk level. Capacity planning
Assessing long term capacity needs and the
degree of flexibility Products and services
new products and services selection and
design. Logistics- the part of the supply
chain involved with the forward and reverse
flow of goods, services, cash, and
information: mgmt. of inbound & outbound
transportation, material handling,
warehousing, inventory, order fulfillment &
distribution, 3rd party logistics, reverse
logistics (return from customer)
Inventory Management- Issues in SCM
inventory location centralized inventory
(lower overall inventory, lower cost, lower
stock-out risk), decentralized inventory
(faster delivery, lower shipping cost)
inventory velocity (the speed at which
goods move through a supply chain, the
greater the velocity the lower the holding
cost and the faster orders are fulfilled and
goods are turned into cash, bullwhip effect:
inventory oscillations that become
increasingly larger looking backward through
the supply chain
Transportation problem: finding the
lowest cost plan for distributing stocks from
multiple origins (supply points) to multiple
destination.
Model: Information Requirements
information requirements 1. A list of the
origins and their supply quantity (capacity)
per period 2. A list of the destination their
demand per period 3. The unit cost of
shipping items from each origin to each
destination Assumptions: transportation
model assumptions: 1. the items to be
shipped are homogeneous 2. Shipping cost
per unit is the same regardless of the
number of units shipped 3. There is only one
route or mode of transportation used
between each origin and destination
Minimum Cell Cost (greedy) Heuristic: 1.
Search for the minimum unit cost 2. Place
min (demand, supply) 3. Erase row/column
corresponding to min (demand, supply) 4.
Subtract min (demand, supply) from paired

row/column 5. Stop when all columns and

rows are saturated (then repeat)
Transportation Model: Applications:
location decisions compare location
alternatives in terms of their impact cost on
the total distribution costs for the system,
Involves working through a separate model
for each location being considered,
production planning, capacity planning,
transshipment
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.
Problems of bullwhip effect-low service
level (backorders) high inventory levels, high
cost, high demand fluctuations (variation in
demand along the SC requires: shipment
capacity, production capacity, inventory
capacity *to cope with peaks) most of the
time will be idle, cost and investments
attached in the end high overall cost in
supply chain
BW 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 optimization
Local individual cost optimization, and a lack
of cooperation. Ordering 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.
Mitigating the BW Effect Good supply
chain management can overcome the
bullwhip effect:
Information sharing: Replenishment based
on need: (Vendor-managed inventory
Vendors monitor goods and replenish retail
inventories when supplies are low), Lower
ordering costs
Short lead times, Cooperation
competition is now supply chain against
supply chain and network against network
Trends in SCM: measuring supply chain
performance incorporating economic
metrics into decisions (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 (appliances), reevaluating outsourcing- 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, integrating IT - Real
time data to enhance strategic planning,
control costs, measure quality and
productivity, respond quickly to problems,
improve SC operations , managing risksidentifying 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
Operations Strategy: effective supply
chains are necessary for organizational
success requires integration of all aspects
of the chain, supplier relationships are a
critical component of supply chain strategy,
lean operations to improve supply chain
success
Choosing the alternative: H = ($ per unit)
(total items)
Then multiply by your holding cost = (H)
(days/365)
This will give you your net savings
Chapter 14 Lean Operations & JIT
Lean operations: A philosophy that
encompasses every aspect of the process,
from design to after the sale of a product. -Pursues a system that functions with minimal
levels of inventory, waste, space and
transactions.-- A flexible system of operation
that uses considerably less resources
(activities, people, inventory, space) than a
traditional system
Targets: greater productivity, lower costs,
shorter cycle times, higher quality Three
basic elements: demand when driven,
focus on waste reduction, culture that is
dedicated to excellence and continuous
improvement
Lean systems Goal-Achieve a system that
matches supply to customer demand; supply
is synchronized to meet customer demand in
a smooth, uninterrupted flow; a balanced
system
Leann Supporting Goals eliminate
disruptions -Poor quality (lean systems do
not carry extra inventory), equipment
breakdowns, schedule changes, late
deliveries, make the system flexible- mix of
products, levels of output, require reducing
setup times and lead times; eliminate waste
& exces. Inv.
Waste: Represents unproductive resources
Seven sources of waste in lean systems:
1. Inventory Idle resource, requires space,
cost
2. Overproduction Overuse of
manufacturing resources 3. Waiting time
Require space, WIP
4. Unnecessary transporting Handling
cost
5. Processing waste Unnecessary
production steps, scrap, paperwork,
redundancy 6. Inefficient work methods
Reduced productivity, increased scrap,
increased WIP 7. Product defects Rework
costs, customer dissatisfaction
Building blocks Product design, Process
Design (fail-safe methods, production
flexibility, manufacturing cells),
Personnel/Organizational elements (workers
as assets, cost accounting, cross-trained
workers), Manufacturing planning and
Control (level loading, visual systems, pull
systems)
Product Design 4 elements- standard
parts, modular design, highly capable
systems with quality built in, concurrent
engineering
Process Design 7 aspects

-Small lot sizes, goal: reduce lot size as

much as possible (ideal size is 1)
BENEFITS: reduced in process inventory
(lower carrying costs, less storage),
inspection & rework costs are lower when
problems with quality occur, permits greater
flexibility in scheduling = better response to
customer demands, less inventory to work
off before implementing product
improvements, increased visibility of
problems, increased ease of balancing
operations (ideal size is 1)

-set up and reduction: small lot sizes and

changing product mixes require frequent
setups unless these are quick and
inexpensive they can be prohibitive, setup
time reduction requires deliberate
improvement efforts workers are trained to
do their own setups single-minute
exchange of die (SMED)-a system for
reducing changeover time
-Quality improvement: quality defects
during the process can disrupt the orderly
flow of work, focus on finding and eliminating
the causes of problems- autonomation
(jidoka)-automatic detection of defects
during production. 1, one mechanism for
detecting defects when they occur 2,
another for stopping production to correct
the cause of the defects (immediate
attention to the problem)
-A balanced system: line balancing helps
to achieve rapid work flow, work assigned to
each workstation must not exceed cycle time
(Takt time)- cycle time needed to match
customer demand for final product, referred
to as the heartbeat of a lean system,
determine the net time available per shift, if
there is more than one shift per day multiply
the net time by the number of shifts,
compute the takt time by dividing net
available time by demand, minimizes WIP
inventory.
-Inventory storage: lean systems are
designed to min. inventory (waste),
inventories are buffers that tend to cover up
recurring problems that are never resolved
because they are not obvious and the
presence of inventory makes them seem less
serious, lean approach is to gradually reduce
inventories in order to uncover problems
then resolve them: Advantages: lower
carrying cost, less space, less dependence
on buffers, less rework, less need use current
inventory before implementing design
improvements Risks: no safety stock,
opportunity loss when problems arise
Manufacturing Planning & Control
(MPC)
-Push system: work is pushed to the next
station as it is completed (without regard to
the next stations readiness), work may pile
up at workstations that fall behind schedule
-Pull systems: work moves in response to
demand from the next stage in the process,
a workstation pulls output from the
preceding workstation as it is needed, output
of the final operation is pulled by customer
demand or the master schedule: require
steady flow of reparative work, large
variations in volume, product mix, or product
design will undermine the system
communication: moves backward through
the system from station to station: each
workstation (customer) communicates its
need for more work to the preceding

workstation (supplier) (assures that supply =

demand) work moves just in time for the
next operation, flow of work is coordinated,
accumulation of excessive inventories is
avoided.
-Visual systems: Kanban (signal/visible
record): card or device that communicates
demand for work or materials from the
preceding station, paperless production
control system, authority to pull, or produce,
comes from a downstream process
Kanban: card is affixed to each container,
when a workstation needs to replenish its
supply of parts, a worker withdraws on
container, each container holds a
predetermined quantity, the worker removes
the kanban card from the container, posts it
and takes the container to the workstation,
the posted card is picked up by a stock
person who replenishes the stock with
another container, etc.
N= total number of containers
(1 card/container)
D = planned usage rate of
using work center. T=average waiting time
for replenishment of parts + average
production time for a container of parts (this
is in hours so 75 minutes / 60 minutes =
1.25 hours
X= policy variable set by mgmt. that reflects
possible inefficiency in the system (closer to
0 the more efficient the system) C= capacity
of standard container (should be 10% of
daily usage of the part)
Close Vendor Relationships: relatively
small number of suppliers, closer
relationships with (certified) vendors
expected to provide frequent, small
deliveries of high-quality goods, the burden
of ensuring component quality is shifted to
the vendor, local suppliers are preferred in
order to reduce lead time (of small frequent
deliveries), ideally the suppliers themselves
will be operating under JIT, the suppliers
become a part of an extended integrated JIT
system
Workers as Assets: well-trained and
motivated workers are the heart of the lean
system, they are given greater authority to
make decisions but more is expected of
them cross-trained workers workers are
trained to perform several parts of a process
and operate a variety of machines, facilitates
flexibility, helps in line balancing
Continuous Improvement: workers in lean
systems have greater responsibility for
quality, and they are expected to be involved
in problem solving and continuous
improvement lean workers receive training
in: statistical process control, quality
improvement, problem solving. Teams of
workers and managers who routinely work
on problems, problem solving culture:
workers are encouraged to report problems
and potential problems
Lean Services: In service the focus is often
on the time needed to perform the service speed is often the order winner - Provide
services when they are needed - Lean
benefits can be achieved in the following
ways: Eliminate disruptions
(Avoid having service providers also answer
phones) Make system flexible (Train
workers to handle more variety) Reduce
setup and lead times
(Estimate what parts and tools are frequently
needed and have them on hand)

Eliminate waste (Eliminate errors and

duplicate work) Minimize WIP (Orders
waiting to be processed, calls waiting to be
answered, packages waiting for delivery,
truck waiting to be loaded/unloaded etc.)
Simplify the process (Self-service systems
such as in retail, ATMs, vending machines,
service systems)
Transitioning to Lean Systems: 1. Make
sure top management is committed and that
they know what will be required 2. Decide
which parts/processes will need the most
effort to convert 3. Obtain support and
cooperation of workers, reassure workers
that their jobs are secure 4. Begin by trying
to reduce setup times while maintaining the
current system 5. Gradually convert
operations, begin at the end and work
backwards, at each stage, make sure the
conversation has been successful before
moving on 6. Convert suppliers to JIT, narrow
the list of vendors 7. Prepare for obstacles
Obstacles to conversion: 1. Management
may not be fully committed or willing to
devote the necessary resources to
conversion 2. Workers/management may not
be cooperative. Management losses control
as more responsibility is shifted to the
workers. Workers have increased
responsibility. 3. It can be difficult to change
the organizational culture to one consistent

with the lean philosophy 4. Suppliers may

resist: Not enough assistance from buyer to
perform transformation, Uneasy about long
term commitment to buyer, Small frequent
deliveries may be difficult, Burden of quality
control, Frequent engineering changes that
may result from buyers lean improvements
Downside of a Lean System: Substantial
time and cost required for a successful
conversion, Resources needed to achieve
high level of quality and to function on a
tight schedule, Ability to respond quickly to
problems as they arise, Commitment to
continuous improvement.
Benefits: reduced waste (inventory levels,
scrap and rework, space requirements), high
quality, flexibility, reduced lead times,
increased productivity and equipment
utilization Risks: absence of buffers
(personal, inventory) to fall back on if
something goes wrong, possible loss off sale
and lost customers
Lean vs. traditional philosophies