Chapter 9

Supply Chain
Management: Managing
Business to Business
Interactions

McGraw­Hill/Irwin ©The McGraw­Hill Companies, Inc. 2008
 Learning Objectives

• Explain the motivating forces behind the adoption of supply chain management
(SCM).
• List examples of how customer actions affect suppliers and how supplier
• actions affect customers.
• Explain the seven critical decision areas of SCM.
• Describe the decisions that constitute the logistics network configuration.
• Describe an example of a supply chain and identify points of interaction
• between buyers and suppliers.
• Explain the pros and cons of outsourcing supply chain services.
• Explain the bullwhip effect and its possible causes.
• Describe risk pooling and the implications it has for distribution networks.
• Explain the current trend affecting supply chain management.

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Generic Supply Chain

Supply Chain –
Encompasses all
activities associated with
the flow and
transformation of goods
from the raw material
stage (extraction) through
to the end user, as well
as the associated
information flows.
Material and information
flow both up and down
the supply chain.

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 The Motivating Forces

• Increasing competition to meet customer expectations

for value
• Recognition that customer decisions and actions often
dictate costs and limitations for suppliers.
• Recognition that supplier decisions and actions often
dictate costs and limitations for customers.
• Increased potential for timely communication and
feedback brought about by technological advances.

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 Motivating Forces: Supply Savings
Example
• U.S. businesses spend 20-30% of revenue acquiring
goods from outside suppliers
• Purchase cost savings have strong impact on bottom
line.
In this example,
if the business
saves just 6% in
supply costs
($432,000), profit
will increase by
45%.

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 Motivating Forces: Increased Competition

• Increased global competition forces companies to stretch

and add value.
• Businesses, focused on core competencies and
outsourcing, need closer relationships with firms they
outsource to.
• Adding value by:
– Reducing inventory throughout supply chain.
– Improving timeliness and reliability of deliveries.
– Working with suppliers to improve their product and service quality.
– Communicating and cooperating in general.

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 Motivating Forces:
The Impact of Customers on Suppliers

• Customers and suppliers have traditionally been

adversarial - “Us-against-them” attitude.
• Bullwhip effect – The increasing variability of
demand as one moves upstream in supply chain.
– Variability of demand increases costs. Hard to plan, hard to
produce efficiently, need for larger inventories.

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 Motivating Forces:
The Impact of Suppliers on Customers

• Many possible events can have negative impact on

customers (missed delivery due dates, defective
products...)
• Customers increase inventory to protect against
supplier unreliability.
• Correct placement of inventory in a supply chain
improves performance, reduces cost, and reduces
impact of disruptions.

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 Motivating Forces:
Technological Advances

• The Internet provides a means of having immediate

access to information, enabling integrated decision
making.
• Rather than attempt to forecast demand, a supplier
can view customers’ production schedules and
eliminate forecasting.

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 Supply Chain Management Decisions

• Strategic Alliances
• Inventory Management
• Cooperative product design
• Information management
• Standardization
• Electronic commerce

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 Supply Chain Management Components:
Strategic Alliances

• A balance between commitment to low prices and commitment

to the relationship is needed

Exhibit 10.4 Supplier Relationship Matrix

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 Supply Chain Management Components:
Strategic Alliances

• Develop alliances rather than just hiring suppliers.

– Relationships create opportunity for communication
– Communication enhances productivity improvement
There are
significant
costs to
switching
suppliers

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 Supply Chain Management Decisions: Inventory
Management

• Information is used to help make decisions at all

supply chain levels.
• How many to order? When? What are the risks? How
much safety stock? Where should inventory be held?
• There are two fundamental questions: When shouuld
we reorder? and How many?
• Increasing use of retail-supplier partnerships
– Vendor managed inventory (VMI)

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 Supply Chain Management Components:
Cooperative Product Design

• Make sure components from multiple suppliers can

be assembled.
• Gain insight from your suppliers
– Improve products
– Reduce costs
– Reduce time

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 Supply Chain Management Components:
Information Management

Three information management decisions related to

supply chain management
• What data should be collected?
• How should it be stored?
• With whom should it be shared?

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 Supply Chain Management Components:
Information Management

• Traditional supply chain: Forecasts based on different

data. Contributes to the bullwhip effect, excess
inventory, and stockouts.

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 Supply Chain Management Components:
Information Management

• Improved approaches enabled by technology to

collect, store and communicate data
– Collaborative planning, forecasting, and replenishment
(CPFR) – Approach to demand planning in which partners
negotiate and agree on a plan for meeting demand

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 Supply Chain Management Components:
Standardization

• Long-term relationships drive businesses to make

their processes compatible
• Standardizing processes makes for higher levels of
productivity

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 Supply Chain Management Components:
Electronic Commerce

• Electronic commerce contributes to time reduction

– Electronic cash transfers speed up the cash-to-cash cycle
– Electronic order processing makes continuous replenishment
much more economical
• Online auctions/reverse auctions

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 A Typical Example of Supply Chain
Management: Pacers

• Pacers shoes sold

through national
chains of athletic
shoe stores.
– Fabrication and assembly
are done at the same plant.
– They purchase raw
materials (leather, foam,
laces, etc.) from a variety of
suppliers.

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 A Typical Example of Supply Chain
Management: Pacers

What are the implications of a customer’s decision to

have a promotion four months in the future?

• Pacers must revise the demand forecast

– Effect of promotions harder to forecast
– Must account for “post-promotion lag” in demand
– Need to know when retailer needs the inventory, not date
when promotion starts.

• Which distribution center should Pacers ship to?

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 A Typical Example of Supply Chain
Management: Pacers

What are the implications?

When we’ve picked a distribution center, we need to
pick a manufacturing facility.
– Is there enough capacity at that facility, or will we be forced to produce
elsewhere?
– Will the promotion disrupt the production pattern?
– When should we fulfilling the order? The sooner we start the less capacity
will be a problem, but the longer inventory will have to be held

Results of all these decisions are largely dictated by the

distribution network configuration, inventory
management, and distribution strategy.

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 A Typical Example of Supply Chain
Management: Pacers

• Moving further up the chain:

– Do we have enough raw material transportation and storage capacity at the
chosen manufacturing facility?
– Will we have to use multiple transportation channels?
– How would that impact our manufacturing schedules?
– Can our suppliers handle these additional orders?
– Can our suppliers’ suppliers handle it? Will our suppliers run short on raw
materials?

If something goes wrong at any point, the order is at risk

of being late. Standardization, information
management, and electronic commerce determine the
efficiency of these interactions.
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 The Supply Function

• Supply Activities
– Recognition of a need
– Description of the need
– Identification and analysis of possible sources
– Supplier selection and determination of terms
– Preparation and placement of a purchase order
– Follow-up or expediting of the order

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 Sourcing Decisions: Channel Selection

• Make versus buy, and how to buy.

• The more strategically important the item, the more it
makes sense to ally with a supplier for it.
• Low priority items should be purchased
independently.

• Exchanges are another possible channel.

– Pooled purchases on an exchange can result in cost savings.
– Give sellers access to more buyers

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 Sourcing Decisions:
Outsourcing Supply Chain Activities

• Supply chain activities, especially warehousing and

transportation, are complex
– Many businesses choose to outsource these functions.

• Third party logistics provider (3PL)

– A provider of logistics services such as warehousing or transportation logistics.

• Outsourcing to a 3PL is primarily done to improve

quality, because many companies cannot afford to invest
in the expertise and technology required to do so.
– Drawback is loss of control.

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 Supply Chain Management Components:
Information Management

• Extending the customer end

– Potential to increase size of markets
– Distribution network often forced to be different
– Lack of technology infrastructure could inhibit utilization of information
and communication capabilities
• Extending the supplier end
– Technology infrastructure problems
– Cooperation and formation of strategic partnerships hampered by distance
and cultural differences
– Difficulties in policy, procedure, and product standardization

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 A Closer Look at the Bullwhip Effect

• As you go up a supply chain, demand increases in

variability.

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 A Closer Look at the Bullwhip Effect: Causes

• Demand forecast updating

– Orders from suppliers must meet demand and fill safety stocks. The longer
the lead times, the more uncertain demand is and the more safety stock is
held
• Order batching
– Because of high transaction costs, orders are batched together, causing
“lumpy” demand. Suppliers similarly allow demand to accumulate before
releasing orders
• Price fluctuation
– Businesses often buy before they need to, and in larger amounts, because
suppliers offer pricing advantages
• Rationing and shortage gaming
– Fear of supply shortages drives businesses to order in larger quantities than
they need
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 A Closer Look at the Bullwhip Effect: Impact

• Impact on cost, quality, and timeliness

– Spiking demand patterns puts businesses in ‘feast-or-famine’ mode. Not
good for productivity
– High inventory costs
– High inventory increases time for an innovation to get to market
– Mismatch between demand and design capacity results in increased cost per
unit, whether demand is higher or lower than capacity
– May cause low demand period layoffs, decreasing the quality of the
workforce as employees leave for more stable jobs
– Long cash-to-cash cycles and diminishing financial returns

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A Closer Look at the Bullwhip Effect: Solutions

• Increase information supplied by businesses to their

suppliers—link to point of sale (POS)
• Eliminate price discounts (everyday low pricing)
• Reduce order transaction costs
• Very frequent deliveries of small quantities
(continuous replenishment)

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 A Closer Look at Risk Pooling

• Uncertainty associated with customer demand must

be accommodated through inventory safety stocks.
• If retailers are supplied from a central warehouse
rather than hold their own inventory, safety stocks
would be less because aggregated variability would
be less. High demand at one place would cancel out
low demand at another place.
• The savings from this must be compared to the costs
of facility modification and changes in transportation.

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 Supply Chain Performance

• There are tradeoffs that may bring performance

measurements into conflict
– Batch size/inventory cost tradeoff
– Transportation costs/inventory cost tradeoff
– Customer service/inventory cost tradeoff
– Lead time/warehousing cost tradeoff

• The perfect order is one that arrives on time as

promised, is of the correct quantity, is not damaged,
and also includes all of the agreed-upon services.

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 Trends in Supply Chain Management

• Trading Communities
• Optimization Modeling
• Radio-Frequency Identification (RFID)
• Supply Chain Security

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