Post on 20-Jan-2016
Operations ManagementOM 306.001
Lecture 10 – Supply Chain Management/E-Commerce
Al Baharmast, Ph.D.
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The Strategic Importance of the Supply Chain
Supply-chain management is the Supply-chain management is the integration of the activities that integration of the activities that procure materials and services, procure materials and services,
transform them into intermediate transform them into intermediate goods and the final product, and goods and the final product, and
deliver them to customersdeliver them to customers
Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains
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Supply-Chain Management
1.1. Transportation vendorsTransportation vendors
2.2. Credit and cash transfersCredit and cash transfers
3.3. SuppliersSuppliers
4.4. Distributors and banksDistributors and banks
5.5. Accounts payable and receivableAccounts payable and receivable
6.6. Warehousing and inventoryWarehousing and inventory
7.7. Order fulfillmentOrder fulfillment
8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information
Important activities include determiningImportant activities include determining
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Consumers
Consumers
Consumers
Consumers
Distributors
Distributors
e-tailer
Retailer
Retailer
Retailer
Manufacturer
Manufacturer
Manufacturer
Manufacturer
Supplier
Supplier
Supplier
More reflective of reality – much more complex!
• Multiple agents across the stages of supply• Multiple channels of distribution (ways of selling a company’s goods)• Multi-directional flows
Supply Network
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Global Supply-Chain Issues
React to sudden changes in parts React to sudden changes in parts availability, distribution, or shipping availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates
Use the latest computer and transmission Use the latest computer and transmission technologies to schedule and manage the technologies to schedule and manage the shipment of parts in and finished products shipment of parts in and finished products outout
Staff with local specialists who handle Staff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues
Supply chains in a global environment Supply chains in a global environment must be able tomust be able to
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Supply-Chain Economics
Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales
Table 11.2Table 11.2
Industry % Purchased
All industry 52
Automobile 67
Food 60
Lumber 61
Paper 55
Petroleum 79
Transportation 62
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Make-or-Buy Decisions
1.1. Maintain core competenceMaintain core competence
2.2. Lower production costLower production cost
3.3. Unsuitable suppliersUnsuitable suppliers
4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)
5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities
6.6. Obtain desired qualityObtain desired quality
7.7. Remove supplier collusionRemove supplier collusion
8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive commitment for a suppliercommitment for a supplier
9.9. Protect personnel from a layoffProtect personnel from a layoff
10.10. Protect proprietary design or qualityProtect proprietary design or quality
11.11. Increase or maintain size of companyIncrease or maintain size of company
Reasons for MakingReasons for Making
Table 11.4Table 11.4
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Make-or-Buy Decisions
1.1. Frees management to deal with its primary Frees management to deal with its primary businessbusiness
2.2. Lower acquisition costLower acquisition cost
3.3. Preserve supplier commitmentPreserve supplier commitment
4.4. Obtain technical or management abilityObtain technical or management ability
5.5. Inadequate capacityInadequate capacity
6.6. Reduce inventory costsReduce inventory costs
7.7. Ensure alternative sourcesEnsure alternative sources
8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources
9.9. ReciprocityReciprocity
10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret
Reasons for BuyingReasons for Buying
Table 11.4Table 11.4
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Outsourcing
Transfers traditional internal Transfers traditional internal activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors
Utilizes the efficiency that comes Utilizes the efficiency that comes with specializationwith specialization
Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production
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Supply-Chain Strategies
Negotiating with many suppliersNegotiating with many suppliers
Long-term partnering with few Long-term partnering with few supplierssuppliers
Vertical integrationVertical integration
KeiretsuKeiretsu
Virtual companies that use Virtual companies that use suppliers on an as needed basissuppliers on an as needed basis
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Many Suppliers
Commonly used for commodity Commonly used for commodity productsproducts
Purchasing is typically based on Purchasing is typically based on priceprice
Suppliers are pitted against one Suppliers are pitted against one anotheranother
Supplier is responsible for Supplier is responsible for technology, expertise, forecasting, technology, expertise, forecasting, cost, quality, and deliverycost, quality, and delivery
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Few Suppliers
Buyer forms longer term Buyer forms longer term relationships with fewer suppliersrelationships with fewer suppliers
Create value through economies of Create value through economies of scale and learning curve scale and learning curve improvementsimprovements
Suppliers more willing to participate Suppliers more willing to participate in JIT programs and contribute in JIT programs and contribute design and technological expertisedesign and technological expertise
Cost of changing suppliers is hugeCost of changing suppliers is huge
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Vertical Integration
Figure 11.2Figure 11.2
Raw material (suppliers)
Iron ore Silicon Farming
Backward integration Steel
Current transformation Automobiles Integrated circuits Flour milling
Forward integrationDistribution
systemsCircuit boards
Finished goods (customers) Dealers
Computers Watches Calculators
Baked goods
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
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Vertical Integration Developing the ability to produce goods or Developing the ability to produce goods or
service previously purchasedservice previously purchased
Integration may be forward, towards the Integration may be forward, towards the customer, or backward, towards supplierscustomer, or backward, towards suppliers
Can improve cost, quality, and inventory Can improve cost, quality, and inventory but requires capital, managerial skills, and but requires capital, managerial skills, and demanddemand
Risky in industries with rapid technological Risky in industries with rapid technological changechange
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Keiretsu Networks A middle ground between few suppliers A middle ground between few suppliers
and vertical integrationand vertical integration
Supplier becomes part of the company Supplier becomes part of the company coalitioncoalition
Often provide financial support for Often provide financial support for suppliers through ownership or loanssuppliers through ownership or loans
Members expect long-term relationships Members expect long-term relationships and provide technical expertise and stable and provide technical expertise and stable deliveriesdeliveries
May extend through several levels of the May extend through several levels of the supply chainsupply chain
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Virtual Companies
Rely on a variety of supplier Rely on a variety of supplier relationships to provide services on relationships to provide services on demanddemand
Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands
Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed
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Managing the Supply Chain
Mutual agreement on goalsMutual agreement on goals
TrustTrust
Compatible organizational culturesCompatible organizational cultures
There are significant management issues in There are significant management issues in controlling a supply chain involving many controlling a supply chain involving many independent organizationsindependent organizations
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Issues in an Integrated Supply Chain
Local optimization - focusing on local Local optimization - focusing on local profit or cost minimization based on profit or cost minimization based on limited knowledgelimited knowledge
Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions) - discounts, quotas, and promotions) - push merchandise prior to salepush merchandise prior to sale
Large lots - low unit cost but do not Large lots - low unit cost but do not reflect salesreflect sales
Bullwhip effect - stable demand becomes Bullwhip effect - stable demand becomes lumpy orders through the supply chainlumpy orders through the supply chain
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Why Supply Chain Management is so difficult?
• Nonlinearities –
1. Reliance on forecasts at each stage for basing decisions
2. Different demand patterns of different products over time
3. Different constraints (lot-sizing, transport capacity etc.)
4. Different supply chain structures
5. Dynamic nature of relationships and information
• Results into upstream demand amplification (Bull-whip)
Courtesy of Partha Datta Martin Christopher & Peter Allen Cranfield University
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Opportunities in an Integrated Supply Chain Accurate “pull” dataAccurate “pull” data
Lot size reduction (or right-sizing)Lot size reduction (or right-sizing)
Single stage control of Single stage control of replenishmentreplenishment
Vendor managed inventoryVendor managed inventory
PostponementPostponement
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Opportunities in an Integrated Supply Chain
Channel assemblyChannel assembly
Drop shipping and special Drop shipping and special packagingpackaging
Blanket ordersBlanket orders
StandardizationStandardization
Electronic ordering and Electronic ordering and funds transferfunds transfer
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Internet Purchasing
Internet used to communicate Internet used to communicate order releases against blanket order releases against blanket purchase orderspurchase orders Internet replaces other forms of Internet replaces other forms of
electronic order releaseselectronic order releases
Four Common VariationsFour Common Variations
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Internet Purchasing
Internet used to buy non-Internet used to buy non-standard items from catalogsstandard items from catalogs Long-term master agreements in Long-term master agreements in
placeplace
Reduces order lead-time and Reduces order lead-time and purchasing costspurchasing costs
Four Common VariationsFour Common Variations
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Internet Purchasing
Traditional purchasing system, Traditional purchasing system, but Internet-basedbut Internet-based Significantly speeds up Significantly speeds up
requisitioning, bidding, supplier requisitioning, bidding, supplier selection, and order placementselection, and order placement
Four Common VariationsFour Common Variations
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Internet Purchasing
Internet auctionsInternet auctions May be used for commodity May be used for commodity
items for which long-term items for which long-term contracts do not existcontracts do not exist
Four Common VariationsFour Common Variations
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Ships good;receives
electronicpayment
Receiveselectronic
purchase order
Selects a supplierbased on quality,
cost, deliveryperformance;
issues purchaseorder
Collects/reviewsbids submittedelectronically
Assigns suppliersto bid; givesclosing dates
and conditions
Enters data intoInternet system
Buyer reviewsrequisition
Inputs request intocomputer systemand transmits to
purchasingdepartment
Internet Purchasing
Figure 11.3Figure 11.3
Individual initiatesIndividual initiatesrequisitionrequisition
PurchasingPurchasingdepartment/buyerdepartment/buyer SupplierSupplier
Prepares requisition
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Internet Purchasing
Suppliers get closer to their customers Shorter cycle times may improve cash
flow Capital investment is low Buyers enjoy comparison shopping,
rapid ordering, reduced transaction costs, and lower inventory
May be part of an integrated Enterprise Resource Planning (ERP) system
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Vendor Selection
Vendor evaluationVendor evaluation Critical decisionCritical decision
Find potential vendorsFind potential vendors
Determine the likelihood of them Determine the likelihood of them becoming good suppliersbecoming good suppliers
Vendor DevelopmentVendor Development
TrainingTraining
Engineering and production helpEngineering and production help
Establish policies and proceduresEstablish policies and procedures
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Vendor Selection
NegotiationsNegotiations Cost-Based Price Model - supplier Cost-Based Price Model - supplier
opens books to purchaseropens books to purchaser
Market-Based Price Model - price Market-Based Price Model - price based on published, auction, or based on published, auction, or indexed priceindexed price
Competitive Bidding - used for Competitive Bidding - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult
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Vendor EvaluationCriteria Weights Scores (1-5) Weight x Score
Engineering/research/innovation skills .20 5 1.0
Production process capability (flexibility/technical assistance)
.15 4 .6
Distribution/delivery capability .05 4 .2
Quality systems and performance .10 2 .2
Facilities/location .05 2 .1
Financial and managerial strength (stability and cost structure)
.15 4 .6
Information systems capability (e-commerce, Internet)
.10 2 .2
Integrity (environmental compliance/ ethics)
.20 5 1.0
Total 1.00 3.9
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Distribution Systems
TruckingTrucking Moves the vast majority of Moves the vast majority of
manufactured goodsmanufactured goods
Chief advantage is flexibilityChief advantage is flexibility
RailroadsRailroads Capable of carrying large loadsCapable of carrying large loads
Little flexibility though Little flexibility though containers and piggybacking containers and piggybacking have helped with thishave helped with this
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Distribution Systems
AirfreightAirfreight Fast and flexible for light loadsFast and flexible for light loads
May be expensiveMay be expensive
WaterwaysWaterways Typically used for bulky, low-Typically used for bulky, low-
value cargovalue cargo
Used when shipping cost is Used when shipping cost is more important than speedmore important than speed
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Distribution Systems
PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,
and other chemical productsand other chemical products
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Cost of Shipping Alternatives
Product in transit is a form of Product in transit is a form of inventory and has a carrying costinventory and has a carrying cost
Faster shipping is generally more Faster shipping is generally more expensive than slower shippingexpensive than slower shipping
We can evaluate the two costs to We can evaluate the two costs to better understand the trade-offbetter understand the trade-off
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Electronic Commerce E-commerce (or e-business) – the use of E-commerce (or e-business) – the use of
the internet to buy and sell products and the internet to buy and sell products and services and exchange informationservices and exchange information
Low cost rapid exchangesLow cost rapid exchanges
A whole new way of doing businessA whole new way of doing business
“… all about cycle time, speed, globalization, enhanced productivity, reaching new customers and sharing knowledge across institutions for competitive advantage.”
Louis GerstnerFormer Chairman, IBM
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E-Commerce Definitions Business-to-business (B2B) – Both sides Business-to-business (B2B) – Both sides
of the transaction are businesses, non-of the transaction are businesses, non-profit organizations, or governmentsprofit organizations, or governments
Business-to-consumer (B2C) – Business-to-consumer (B2C) – Transactions in which buyers are Transactions in which buyers are individual consumersindividual consumers
Consumer-to-consumer (C2C) – Consumer-to-consumer (C2C) – Consumers sell directly to each otherConsumers sell directly to each other
Consumer-to-business (C2B) – Consumer-to-business (C2B) – Individuals sell services or goods to Individuals sell services or goods to businessesbusinesses
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Economics of E-Commerce
Costs of information exchange are Costs of information exchange are dramatically reduceddramatically reduced
Barriers to entry are lowerBarriers to entry are lower
Time constraints almost disappearTime constraints almost disappear
Information and communication is Information and communication is cheap and easycheap and easy
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Product Design
Easily shared knowledge and Easily shared knowledge and information allows quicker and lower information allows quicker and lower cost design cycles that can involve cost design cycles that can involve participants in diverse locationsparticipants in diverse locations
Product data can be managed over the Product data can be managed over the InternetInternet
Engineering changes and configuration Engineering changes and configuration management can be extended along the management can be extended along the supply chainsupply chain
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Collaborative Project Management
Project management software Project management software allows for establishing intranet allows for establishing intranet sites for sharing documents and sites for sharing documents and maintaining status reportsmaintaining status reports
Intranets can also be used for Intranets can also be used for document librariesdocument libraries
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E-Procurement
Purchasing or order release communicated over the Internet
Online catalogs allow quicker cost comparisons and bidding processes
Catalogs can be provided byVendors IntermediariesBuyers
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Online Catalogs
Vendor catalogs provide quick and Vendor catalogs provide quick and easy access to the entire product easy access to the entire product lineline
Available to anyone with Internet Available to anyone with Internet accessaccess
Quick and easy to customize and Quick and easy to customize and adjustadjust
Reduced paper trails reduce Reduced paper trails reduce purchasing costspurchasing costs
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Internet Trading Exchanges
Table S11.3Table S11.3
Retail goods — setup by Sears and France’s Retail goods — setup by Sears and France’s Carrefour; called GlobalNetXchange for Carrefour; called GlobalNetXchange for retailers (gnx.com) retailers (gnx.com)
Health care products — set up by Johnson Health care products — set up by Johnson & Johnson, GE Medical systems, Baxter & Johnson, GE Medical systems, Baxter International, Abbott Laboratories, and International, Abbott Laboratories, and Medtronic Inc; called the Global Heath Care Medtronic Inc; called the Global Heath Care Exchange (ghx.com)Exchange (ghx.com)
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Internet Trading Exchanges
Table S11.3Table S11.3
Defense and aerospace products — created Defense and aerospace products — created by Boeing, Raytheon, Lockheed-Martin, and by Boeing, Raytheon, Lockheed-Martin, and Britain’s BAE Systems; called the Britain’s BAE Systems; called the Aerospace and Defense Industry Trading Aerospace and Defense Industry Trading Exchange (exostar.com)Exchange (exostar.com)
Food, beverage, consumer products — set Food, beverage, consumer products — set up by 49 leading food and beverage firms; up by 49 leading food and beverage firms; called Transora (transora.com)called Transora (transora.com)
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Internet Trading Exchanges
Table S11.3Table S11.3
Steel and metal products — such as New Steel and metal products — such as New View Technologies (exchange.e-steel.com); View Technologies (exchange.e-steel.com); and Metal-Site (metalsite.com)and Metal-Site (metalsite.com)
Hotels — created by Marriott and Hyatt, and Hotels — created by Marriott and Hyatt, and later joined by Fairmont, Six Continents, later joined by Fairmont, Six Continents, and Club Corp: called Aventra and Club Corp: called Aventra (aventra.com) buys for 2,800 hotels(aventra.com) buys for 2,800 hotels
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E-Procurement
Online AuctionsOnline Auctions Maintained by buyers (reverse), Maintained by buyers (reverse),
sellers (forward), or intermediariessellers (forward), or intermediaries
May be used to sell excess raw May be used to sell excess raw material or discontinued or excess material or discontinued or excess inventoryinventory
Low cost and increased access to Low cost and increased access to buyersbuyers
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- Traditionally, auctions were seller-initiated events – means of getting a highest price
- A seller identifies a single product or a lot that they intend to sell
- Often requires an intermediary – an auctioneer/qualifier- Generally, the highest bidder (English auction) or the first high
bidder (Dutch auction) ‘wins’- B-2-B seller auctions are most viable for -
- Commoditized goods (wheat, cattle, steel)- Consortium-controlled goods (oil, flowers)
Seller’s (Forward) Auctions
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- Relatively new, very successful for B-2-B buy environments – means of getting the lowest price
- A buyer identifies a single product or a lot that they intend to buy
- Often requires an intermediary – an auctioneer/qualifier- Generally, the lowest bidder (English auction) or the first low
bidder (Dutch auction) ‘wins’- B-2-B buyer auctions are most viable for -
- Standardized product acquisitions- Simple services with broadly applicable performance criteria
Buyer’s (Reverse) Auctions
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• Supply Chain Council – A leading inter-industry organization consisting of about 1000 top international firms including manufacturers, services, distributors, and retailers.
• SCOR – The Supply Chain Council’s “Supply Chain Operations Reference Model”
From the Supply Chain Council’s SCOR Version 7.0 Overview
Introduction to SCOR
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A Process Reference Model Contains:
• Standard descriptions of management processes• A framework of relationships among the standard processes• Standard metrics to measure process performance• Management practices that produce best-in-class performance• Standard alignment to features and functionality
From the Supply Chain Council’s SCOR Version 7.0 Overview
Introduction to SCOR
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• SCOR spans:• All customer interactions, from order entry through paid invoice• All product (physical material and service) transactions, from your
supplier’s supplier to your customer’s customer, including equipment, supplies, spare parts, bulk product, software, etc.
• All market interactions, from the understanding of aggregate demand to the fulfillment of each order
• SCOR does not attempt to describe every business process or activity, including:• Sales and marketing (demand generation)• Research and technology development• Product development• Some elements of post-delivery customer support
From the Supply Chain Council’s SCOR Version 7.0 Overview
Introduction to SCOR
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• Demand/Supply Planning and Management• Balance resources with requirements and
establish/communicate plans for the whole supply chain, including Return, and the execution processes of Source, Make, and Deliver.
• Management of business rules, supply chain performance, data collection, inventory, capital assets, transportation, planning configuration, and regulatory requirements and compliance.
• Align the supply chain unit plan with the financial plan.
From the Supply Chain Council’s SCOR Version 7.0 Overview
PLANNote- Planning is required in aggregate and for other, detailed
processes
Introduction to SCOR
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• Sourcing Stocked, Make-to-Order, and Engineer-to-Order Product• Schedule deliveries; receive, verify, and transfer product; and
authorize supplier payments.• Identify and select supply sources when not predetermined,
as for engineer-to-order product.• Manage business rules, assess supplier performance, and
maintain data.• Manage inventory, capital assets, incoming product, supplier
network, import/export requirements, and supplier agreements.
From the Supply Chain Council’s SCOR Version 7.0 Overview
SOURCE
Introduction to SCOR
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• Make-to-Stock, Make-to-Order, and Engineer-to-Order Production Execution• Schedule production activities, issue product,
produce and test, package, stage product, and release product to deliver.
• Finalize engineering for engineer-to-order product.• Manage rules, performance, data, in-process
products (WIP), equipment and facilities, transportation, production network, and regulatory compliance for production.
From the Supply Chain Council’s SCOR Version 7.0 Overview
MAKE
Introduction to SCOR
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• Order, Warehouse, Transportation, and Installation Management for Stocked, Make-to-Order, and Engineer-to-Order Product• All order management steps from processing customer inquiries and
quotes to routing shipments and selecting carriers.• Warehouse management from receiving and picking product to load and
ship product.• Receive and verify product at customer site and install, if necessary.• Invoicing customer.• Manage Deliver business rules, performance, information, finished
product inventories, capital assets, transportation, product life cycle, and import/export requirements.
From the Supply Chain Council’s SCOR Version 7.0 Overview
DELIVER
Introduction to SCOR
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• Return of Raw Materials and Receipt of Returns of Finished Goods
• All Return Defective Product steps from source – identify product condition, disposition product, request product return authorization, schedule product shipment, and return defective product – and deliver – authorized product return, schedule return receipt, receive product, and transfer defective product.
• All Return of Maintenance, Repair, and Overhaul product steps from source – identify product condition, disposition product, request product return authorization, schedule product shipment, and return MRO product – and deliver – authorize product return, schedule return receipt, receive product, and transfer MRO product.
• All Return Excess Product steps from source – identify product condition, disposition product, request product return authorization, schedule product shipment, and return excess product – and deliver – authorize product return, schedule return receipt, receive product, and transfer excess product.
• Manage Return business rules, performance, data collection, return inventory, capital assets, transportation, network configuration, and regulatory requirements and compliance.
From the Supply Chain Council’s SCOR Version 7.0 Overview
RETURN
Introduction to SCOR
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From the Supply Chain Council’s SCOR Version 7.0 Overview
Companies implement specific supply-chain management practices at this level. Level 4 defines practices to achieve competitive advantage and to adapt to changing business conditions.
Implementation Level
(Decompose Process Elements)
Defines a company’s ability to compete successfully in its chosen markets, and consists of: Process element definitions, Process element information inputs, and outputs, Process performance metrics, Best practices, where applicable, System capabilities required to support best practices, and Systems/tools; Companies “fine tune” their Operations Strategy at Level 3.
Process Element Level
(Decompose Processes)
Configuration from 30 core “process categories.” Companies implement their operations strategy through the supply chain configuration they choose.
Configuration Level
(Process Categories)
Defines the scope and content for the Supply Chain Operations Reference-model. Basis of competition performance targets are set.
Top Level
(Process Types)
DescriptionNameLevel
Introduction to SCOR