SPRING 2016-2017: Chapter 7: Supply Chain and Logistics Management

Supply Chain Management; Chapter 7
Department of Business Administration
SPRING 2016-2017
Chapter 7: Supply Chain and Logistics Management
MGMT 405, POM, 2014/15. Lec Notes Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
Outline: What You Will Learn . . .
Define supply chain and logistics management

Discuss the nature and importance supply chain and
logistics management
Discuss the goal of the Supply Chain Management.
Discuss the Value Chain
Describe fhe five major Supply Chain drivers
Define Global Supply Chain
Discuss the concept of Ethics and Supply Chain
Define Strategic Responsibilities and Supply Chain...
2
Same old same old-Supply Chain

The practice of supply chain management is guided by some
basic underlying concepts that have not changed much over the
centuries.
Clerchus of Sparta in 401 B.C., recognized the value of supply
in his speech to the small Greek army. In other words survival
of the Greek army depended not only on its discipline, training,
and morale but also on its supply chain.
Alexander the Great based his strategies and campaigns on his
armys unique capabilities and these were made possible by
effective supply chain management.
In the spirit of the saying, amateurs talk strategy and professionals
talk logistics,
Alexander was a master of supply chain management and he could
not have succeeded otherwise. 3
Same old same old- -Supply Chain

The practice of supply chain management is guided by some
basic underlying concepts that have not changed much over
the centuries.
Several hundred years ago, Napoleon made the remark,
An army marches on its stomach.
Napoleon was a master strategist and a skilful general
and this remark shows that he clearly understood the
importance of what we would now call an efficient
supply chain. Unless the soldiers are fed, the army cannot
move.
4
Supply Chain
A supply chain represents all the stages at which value is
added in producing and delivering a product or service from
suppliers (and their suppliers) to customers (and their
customers).
supply chain is a term that describes how organizations
(suppliers, manufacturers, distributors, and customers) are linked
together.
Supply Chain Management has an important role to play in
moving goods more quickly to their destination.
Supply Chain Management is a total system approach to
managing the entire flow of information, materials, and
services from raw-material suppliers through factories and
warehouses to the end customer.
5
A Typical Supply Chain
Manufacturing Supply Chain

Mfg, storage, distributing, Retailer, and
Customer
Service Supply Chain
Storage, Service and Customer
6
Supply Chain Flow
Supply Chain Flow
Good and services flow clockwise
Cash flows counter-clockwise
7
A farm to market supply chain
A farm to market supply chain shows key suppliers at each stage

8
Value Chain
Supply chains are sometimes called value chains.
This means that value is added as goods and services progress

through chain.
Value Chain Components
Supply
o This starts at the begining of the chain and ends with the
internal operations of the organization.
Demand
o It starts at the point where the organizations output is delivered
to its immediate customer and ends with the final customer in
the chain.
o The demand chain is the sales and distribution portion of the
value chain.
9
The goal of the Supply Chain Management
Determining the appropriate level of outsourcing
Managing procurement
Managing Suppliers
Managing customer relationships
Being able to quickly identify problems and respond to them
10
The Five Major

Supply Chain Drivers
Production Inventory
Information
Trasportation Location
11
Trends in Supply Chain Management

Measuring supply chain ROI
This enables manager to incorporate economics into outsourcing and other
decisions, giving them a rational basis for managing their supply chains.
Greening the supply chain
This generating interest for variety of reasons including corporate
responsibility, regulations and public pressure i.e. Reducing pollution and
choosing green suppliers.
Reevaluating outsourcing
This is a second chance looking at outsourcing, especially global suppliers. i.e
lower labor costs, converting fixed costs to variable costs, freeing up capital
to devote to other needs etc...
12
Trends in Supply Chain Management

Integrating IT
This produces real time data that can enhance strategic planning and help
business to control costs, measure quality and productivity, respond quickly
to problems and improve supply chain operations...
Managing risks
This develops strategies to manage risks. i.e. risk avoidance, risk reduction,
risk transfer etc...
Adopting lean principles
This improves the performance of their supply chains. i.e. It can easily
eliminate traditional supply chain. In other words, eliminate non value added
processes, improving product flow by using pull system...
13
The effect of Global Supply Chain

Global Logistics
It was so easy to deal with supply chain management in the past.
Good and services were used to flow from developed countries
to under-developed countries. Flow of raw-materials was other
way around.
Difficulties in Global Logistics
Claim 50% shares in a firms partnership
An increase in labor wages
New opportunities in India, China and Russia
Some trade agreement organizations make international trade
easier; such as NAFTA or EU
14
Global Supply Chain

Make use of outsourcing
Pursue opportunities beyond their domestic market
Products should be design globally
Low labor and material cost
Some services may be outsourced to the countries such as
China and India...
Well and young educated people
Language and cultural differences
Technological improvement
15
Global Supply Chain

Outsourcing is defined as the act of moving a firms internal
activities and decision responsibility to outside providers.
Reasons to Outsorcing
Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Cost-driven
Employee-driven
16
Global Supply Chain: Outsourcing
17
Global Supply Chain:Supply Network
18
The Wal-Mart supply Chain
To succeed in the competitive
markets that make up todays
economy, companies must
learn to align their supply
chains with the demands of
the markets they serve.
Supply chain performance is
now a distinct competitive
advantage for companies
who excel in this area.
One of the largest companies in North America is a testament to the power of effective
supply chain management. Wal-Mart has grown steadily over the last 20 years and
much, if not most, of its success is directly related to its evolving capabilities to
continually improve its supply chain.
19
Measuring Supply-Chain Performance

One of the most commonly used measures in all of operations
management is Inventory Turnover
Cost of goods sold

Inventory turnover
Average aggregate inventory value
In situations where distribution inventory is dominant, Weeks

of Supply is preferred and measures how many weeks worth
of inventory is in the system at a particular time

Weeks of supply 52 weeks
Cost of goods sold
20
Example of Measuring Supply-Chain

Performance
Suppose a companys new annual report claims their costs of

goods sold for the year is $160 million and their total
average inventory (production materials + work-in-process)
is worth $35 million. This company normally has an
inventory turn ratio of 10. What is this years Inventory
Turnover ratio? What does it mean?
21
Example of Measuring Supply-Chain

Performance-Answer
Cost of goods sold
Inventory turnover
= $160/$35
= 4.57
Since the companys normal inventory turnover ration is 10,
a drop to 4.57 means that the inventory is not turning over as
quickly as it had in the past. Without knowing the industry
average of turns for this company it is not possible to
comment on how they are competitively doing in the
industry, but they now have more inventory relative to their
cost of goods sold than before.
22
Ethics and Supply Chain

Bribing government or company officials
Ignoring health, safety, and environment standards
Violating basic rights of workers
Mislabeling country of origin
Selling goods abroad that are banned at home.
23
Strategic Responsibilities and Supply Chain

Supply Chain strategy alignment
How is outsorcing employed
Network configuration
Location of supplier, production facilities, distrubution center
Information Technology
Integrating system, monitoring inventory sytem, tracking of shipments
Product and services
New product design and service selection
Capacity planning
Long term needs for the capacity are assessed
24
Strategic responsibilities and Supply Chain

Strategic partnerships
Choices are made carefully
Distribution strategy
Use centralized or decentralized distribution
Deciding to use own facilities and equipment or not
Uncertainty and risk reduction
Potential source of risk should be identified or acceptable
25
Creating an effective Supply Chain

Strategic sourcing
is a term that plays an important role for an effective SC
Analysing the procurement process to lower costs by reducing
waste and non value added activities, increasing profits, reduce
risks, and improve supplier performance.
Trust
Information velocity
Supply Chain visibility
Event management (unplanned activities such as delayed shipment)
Performance metrics (Fill rate: % demand on stock, late deliveries,
inventory turnover response time etc...)
26
Purchasing Interfaces- Functional Areas
Operations Accounting
Purchasing
Design and engineering Receiving
Supplier (vendor)
Excluded from the exam topics

27
Purchasing Cycle
Purchasing Cycle: Series of steps that begin with a request for purchase and
end with notification of shipment received in satisfactory condition.
Requisition Supplier
Purchasing Cycle
Monitor orders
Order with a vendor
Receiving orders
28
Purchasing Cycle
Purchasing Cycle: Series of steps that begin with a request for purchase
and end with notification of shipment received in satisfactory condition.
Requisition
A description of the item
The quantity and quality
Desired delivery dates
Supplier
They should have the capability of supplying the desired goods
Order with a vendor

Large and expensive one-time purchase of equipment
A vendor need to be used for small purchase
29
Purchasing Cycle
Purchasing Cycle: Series of steps that begin with a request for purchase
and end with notification of shipment received in satisfactory condition.
Monitor orders
They follow up on orders, especially larger orders with lengthy lead
time.
Receiving orders
It must notify purchasing, accounting, and the operating unit that
requested the goods.

30
Purchasing Strategies
Plans to help achieve company mission

Affect long-term competitive position
Strategic options
Many suppliers
Few suppliers
Keiretsu network
Vertical integration
Virtual company
Plan
1995 Corel Corp.
31
Supply-Chain Strategies
Negotiate with many suppliers; play one supplier against
another
Develop long-term partnering arrangements with a
few suppliers who will work with you to satisfy the end
customer
Keiretsu - have your suppliers become part of a company
coalition.
Vertically integrate; buy the actual supplier
Create a virtual company that uses suppliers on an as-
needed basis.
32
Many Suppliers Strategy
Many sources per item

Adversarial relationship
Short-term
Little openness
High prices
large lots
Delivery to receiving dock
1995 Corel Corp.

33
Few Suppliers Strategy
One or few sources per item

Partnership (JIT)
Long-term, stable
On-site audits & visits
Exclusive contracts
Low prices (large orders) 1995
Corel
Corp.
Frequent, small lots

Delivery to point of use

34
Vertical Integration Strategy

Vertical integration is a strategy
Raw Material
and a control mechanism.
(Suppliers)
Backward
In the form of Vertical
Integration
integration, the companies in the
same supply chain merge under Current
the joint management. Transformation
Forward
Horizontal integration is a Integration
strategy where one company
Finished Goods
buys its rival company.
(Customers)
35
Forms of Vertical Integration
Iron Ore Silicon Farming Raw Material

(Suppliers)
Steel Flour Milling Backward

Integration
Integrated Current
Automobiles
Circuits Transformation
Distribution Forward
Circuit Boards
System Integration
Computers
Finished Goods
Dealers Watches Baked Goods
(Customers)
Calculators
36
Logistics
Logistics is the part of a supply chain involved with the

forward and reverse flow of goods, services, cash and
information.
Logistics is the movement of goods through the supply

chain.
Logistics is the art and science of obtaining, producing, and

distributing material and product in the proper place and in
proper quantities
37
Logistics Management
Logistics Management includes management of inbound

and outbound transportation, material handling,
warehousing, inventory, distribution and reverse logistics.
First time, the word of Logistics was used for military

purposes in 1905. Military staffs and personnels were
transported from one point to another.
38
Logistics Functions
People prefer to use the Logistics Functions or the concept

of Logistics becomes popular because of;
An increase in transportation and distance costs

An increase in production
An increase in use of JIT and Lean system
An increase in type of products
An increase in use of technology
An increase in use of recycling materials
An increase in number of international companies
39
Logistics Organization
Purchasing System
Production System
Distribution System
Examples for logistics companies
Craft Inc. :
o Sales of volume is 10 billion per annum for food staffs.
Bayer AG:
o Sales of volume is 25 billion per annum for food staffs...
3000 distribution points... Logistics budget is 5 billion dollar
per annum...
40
Logistics Organization
Examples for logistics companies
Canon Inc.:
o It is the 100th biggest company about photograph machines.
FedEx:
o Sales of volume is 12 billion per annum for delivery staffs...
3 billion parcels distributed... Number of customers is 2
million..
United Parcel Service:
o Sales of volume is 22 billion per annum for delivery
staffs... 3.1 billion packets distributed to the point...
Number of transportation vehicles is 2 million..
Excluded from the exam topics 41
Related issues in Logistics
How to best transport goods

Modes of transportation
Truck, ship, rail pipelines
Warehouses
Consolidation
Cross Docking
Hub-and-Spoke systems
Facility Location

42
Facility Location
Proximity to Customers
Business Climate
Total Costs
Infrastructure
Quality of Labor
Suppliers
Other Facilities
43
Facility Location
Free Trade Zones

Political Risk
Government Barriers
Trading Blocs
Environmental Regulation
Host Community
Competitive Advantage

44
How to calculate Facility Location-The centroid method
The centroid method is used for locating single facilities

that considers existing facilities, the distances between
them, and the volumes of goods to be shipped between
them
This methodology involves formulas used to compute the
coordinates of the two-dimensional point that meets the
distance and volume criteria stated in the formula.
45
Cx =
d V ix i d V iy i
V i
Cy =
V i
Where:
Cx = X coordinate of centroid (facility location)
Cy = Y coordinate of centroid (facility location)
dix = X coordinate of the ith location (destination)
diy = Y coordinate of the ith location (destination)
Vi = volume of goods moved to or from ith location
46

Example 1a
Several automobile showrooms are located according to
the following grid which represents coordinate locations
for each showroom
Question: What is the best location for a new Z-Mobile
warehouse facility considering only distances and
quantities sold per month?
Y No of Truckload
Q Shipment
(790,900)
D
(250,580)
A
(100,200)
(0,0) X
47

Example-1a
Y
To begin, you must identify the Q
existing facilities on a two- (790,900)
dimensional plane or grid and D

(250,580)
determine their coordinates.
A
(100,200)
(0,0) X
No of Truckload
You must also have the Shipment
volume information
(number of shipment/trip)
on the business activity at
the existing facilities.
48

Solution
You then compute the new coordinates using the formulas:
100(1250) + 250(1900) + 790(2300) 2,417,000

Cx = = = 443.49
1250 + 1900 + 2300 5,450
200(1250) + 580(1900) + 900(2300) 3,422,000

Cy = = = 627.89
1250 + 1900 + 2300 5,450
49

Solution
You then take the coordinates and place them on the map:
Y
Q No of Truckload
(790,900)
New Shipment
location
D Z
(250,580) of facility
A Z about
(100,200)
(443,627)
(0,0) X
50
Calculate Facility Location-Induvidual volume/ distance
d (V) Induvidual distance(v olume) = (dx - Cx) 2 (dy - Cy) 2
Where:
Cx = X coordinate of computed facility location
Cy = Y coordinate of computed facility location
dx = X coordinate of destination
dy = Y coordinate of destination
51
Calculate Facility Location-The centroid method
d (V)Total distance (volume) = d (v) t
where
d (v) = distance/volume to town or city

t = total annual trips /volume
52
Example 1b: Based on the information below:

(1b/1) calculate the distance for each showroom.
(1b/2) calculate the total distance from the new location to
showrooms.
Y
Q No of truckload
(790,900)
Showroom shipment
D
(250,580) A 1250
A
(100,200)
D 1900
(0,0) X Q 2300
Example 1b: Based on the information below:

(1b/1) Individual distance for each showroom.
dA=SQRT((100-443.49)^2+(200-627.89)^2)=548.70
dD=SQRT((250-443.49)^2+(580-627.89)^2)=199.32
dQ==SQRT((790-443.49)^2+(900-627.89)^2)=440.58
(1b/2) calculate the total distance for new location.

d(v)=2077944 total distance travelled to showrooms.
Facility Location
Example 2
Consider, for example, The Clayton County Rescue Squad and Ambulance service
which serves five rural town as shown in the following table. The Rescue Squad
wants to construct a centralized facility and garage to minimize its total annual
mileage to the towns. The locations of towns in terms of their graphical X,Y
coordinates measured in miles relative to x=0, y=0 and the expected number of
annual trips the Squad will have to make to each town are as follows:
Coordinates
# of Annual
Town x y
Trips
Abbeville 20 20 75
Benton 10 35 105
Clayton 25 9 135
Dunnig 32 15 60
Eden 10 8 90
55
Facility Location
Example 2
The Clayton County Rescue Squad and Ambulance

service which serve five rural town try to find out the
best possible garage or facility location among the
towns.
(a) Determine facility location for the system
(b) Calculate individual distance for each town
(c) Compute the total distance that minimizes the miles
travelled from the garage to the towns.
(d) Show the figures calculated on a graph
56

Solution for example 2-a
You then compute the new coordinates using the formulas:
20(75) + 10(105) + 25(135) 32(60) 10(90)

Cx = = 18.80
75 + 105 + 135 60 90
20(75) + 35(105) + 9(135) 15(60) 8(90)

CY = = 16.69
75 + 105 + 135 60 90
57
How to calculate Facility Location

Example 2- b/c
d (V)Induvid ual distance/v olume = (X - Cx) 2 (Y - Cy) 2 d (V) totaldistance/volume = d (v) t
dA=sqroot[(20-18.80)2+(20-16.69)2]=3.52
dB=20.31
dC=9.87
dD=13.30
dE=12.36
D(v)=3.52(75)+....+12.36(90)=5642.20 total miles travelled to the
towns (total distance).
58
Facility Location for example 2- d
Rescue Squad Facility Location

59
Facility Location
Example 3
We have 4 suppliers to transport goods to the Lahma
company and the other information is given in the following
table:
Coordinates
# of truckload
City x y shipment
Izmir 200 200 65
Istanbul 100 500 120
Ankara 250 600 90
Bursa 500 300 75
60
Facility Location
Example 3
4 suppliers transport goods to the Lahma company

where they try to find out the best possible facility
location among the cities.
(a) Determine facility location for the system
(b) Calculate individual distance for each city
(c) Compute the total distance that minimizes the total
miles from the cities to the Lahma company.
(d) Show the figures calculated on a graph
61
Facility Location
Example 3-a
Location centers:
200(65) + 100(120) + 250(90) 500(75)

Cx = = 242.85
65 + 120 + 90 75
200(65) + 500(120) + 600(90) 300(75)
Cy = = 427.14
65 + 120 + 90 75
62
Facility Location
Example 3- b/c
d (V)Induvid ual distance/v olume = (X - Cx) 2 (Y - Cy) 2 d (V) totaldistance/volume = d (v) t
dL=sqroot[(200-242.85)2+(200-427.14.)2]=231.14
diz 231.14
dis 491.34
dan 173.00
dbu 286.86
D(v)=231.14(65)+...+286.86(75)=111071.97 total distance.
63
Facility Location
Example 3- d, e
Location
700
600 ANKARA
500 ISTANBUL
FL
400
300 BURSA
200 IZMIR
100
0
0 100 200 300 400 500 600
64
How to calculate Incremental holding cost

Example-3
Incremental holding cost= H(d)/365
H=Annual earning potential of shipped item, d= difference
between shipping alternatives.
Determine shipping alternative, one day or three days when

holding cost is $1000 with one day shipping cost is $40 and
three day shipping cost is
a) $35
b) $30
Excluded from the final exam topics
65
How to calculate Incremental holding cost

Solution
Incremental holding cost= H(d)/365

H=Annual earning potential of shipped item, d= difference
between shipping alternatives.
H=$1000 per year

with one day shipping, time saving will be 2 days
IHC=1000(2)/365=$ 5.48
a) $40-$35=$5 cost saving is less than incremental cost $5.48
b) $40- $30=$10 cost saving exceeds incremental cost $5.48
Excluded from the final exam topics
66
Thanks
67

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Supply Chain Management; Chapter 7

Department of Business Administration

Outline: What You Will Learn . . .

Define supply chain and logistics management

Same old same old-Supply Chain

Same old same old- -Supply Chain

A Typical Supply Chain

Manufacturing Supply Chain

Supply Chain Flow

Supply Chain Flow

Good and services flow clockwise

Cash flows counter-clockwise

A farm to market supply chain

A farm to market supply chain shows key suppliers at each stage

This means that value is added as goods and services progress

Value Chain Components

The goal of the Supply Chain Management

Determining the appropriate level of outsourcing

Managing customer relationships

Being able to quickly identify problems and respond to them

The Five Major

Trends in Supply Chain Management

Trends in Supply Chain Management

The effect of Global Supply Chain

Global Supply Chain

Global Supply Chain

Global Supply Chain: Outsourcing

Global Supply Chain:Supply Network

Measuring Supply-Chain Performance

Cost of goods sold

In situations where distribution inventory is dominant, Weeks

Average aggregate inventory value

Example of Measuring Supply-Chain

Suppose a companys new annual report claims their costs of

Example of Measuring Supply-Chain

Ethics and Supply Chain

Ignoring health, safety, and environment standards

Violating basic rights of workers

Mislabeling country of origin

Selling goods abroad that are banned at home.

Strategic Responsibilities and Supply Chain

Strategic responsibilities and Supply Chain

Creating an effective Supply Chain

Purchasing Interfaces- Functional Areas

Design and engineering Receiving

Excluded from the exam topics

Order with a vendor

Excluded from the exam topics

Plans to help achieve company mission

1995 Corel Corp.

Many Suppliers Strategy

Many sources per item

Excluded from the exam topics

Few Suppliers Strategy

One or few sources per item

Frequent, small lots

Excluded from the exam topics

Vertical Integration Strategy

Forms of Vertical Integration

Iron Ore Silicon Farming Raw Material

Steel Flour Milling Backward

Logistics is the part of a supply chain involved with the

Logistics is the movement of goods through the supply