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7. Supply Chain Management (SCM)
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Supply Chain Management Integration of the activities that procure
materials and services, transform them into intermediate goods and the final product, and deliver them to customers
Competition is no longer between companies; it is between supply chains
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A Sample Supply Chain
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Supply Chain Strategies Negotiating with many suppliers Long term partnering with few suppliers Vertical integration Keiretsu (affiliated chain)
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Many Suppliers Commonly used for commodity products
– many sources per item Adversarial short term relationship Infrequent large lots Purchasing is typically based on price -
suppliers are pitted against one another
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Few Suppliers Longer term stable relationships Partnership - JIT programs, design and
technological contribution High quality and possibly low price Frequent small lots Cost of changing suppliers is huge
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Vertical Integration Ability to produce goods or service
previously purchased – make or buy decisions
Integration may be forward, towards the customer, or backward, towards suppliers
Can improve cost, quality, and inventory but requires major financial commitment
Hard to do all things well
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Vertical Integration
Raw material (suppliers) Iron ore Silicon Farming
Backward integrationSteel
Current transformation Automobiles Integrated circuits Flour milling
Forward integrationDistribution
systemsCircuit boards
Finished goods (customers) Dealers
Computers Watches
CalculatorsBaked goods
Vertical Integration Examples of Vertical Integration
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Keiretsu Networks (affiliated chain)
A middle ground between few suppliers and vertical integration
Supplier becomes part of the company coalition
Often provide financial support for suppliers through ownership or loans
Members expect long-term relationships and provide technical expertise and stable deliveries
May extend through several levels of the supply chain
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Make or Buy Decisions
1. Lower production cost2. Obtain desired quality3. Assure adequate supply (quantity or
delivery)4. Utilize surplus labor or facilities5. Protect proprietary design or quality6. Increase or maintain size of company
Reasons for Making
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Make – or – Buy Decisions
1. Frees management to deal with its primary business
2. Inadequate capacity3. Reduce inventory costs4. Ensure alternative sources5. Inadequate managerial or technical
resources6. Item is protected by a patent or trade
secret
Reasons for Buying
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Issues in SCM Local optimization - focusing on local profit
or cost minimization based on limited knowledge
Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale
Large lots - low unit cost but do not reflect sales
Bullwhip effect - stable demand becomes lumpy orders through the supply chain
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Opportunities in SCM Accurate “pull” data Lot size reduction Single stage control of replenishment Vendor managed inventory Standardization Electronic ordering and funds transfer
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Example
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Vendor Evaluation
CriteriaWeight
sScores (1-5)
Weight x Score
Engineering/research .20 5 1.0
Production/process capability .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 (ERP) .10 2 .2
Integrity (compliance/ethics) .20 5 1.0
Total 1.00 3.9
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Supply Chain Performance Inventory Investment
=Total Inventory / Total Assets * 100 Example:
Inventory: $11.4 billion, Assets: $44.4 billion
Inventory investment = 11.4/44/4*100 = 25.7%
Manufacturing 20% (Toyota 5%)
Wholesale 34% (Coca-Cola 2.9%)
Restaurants 2.9% (McDonald’s .05%)
Retail 27% (Home Depot 25.7%)
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Supply Chain Performance Inventory Turnover
=Cost of Goods Sold / Total Inventory Example:
Inventory Turnover = 14.2 / 1.69 = 8.4
Net revenue $32.5Cost of goods sold $14.2Inventory:
Raw material inventory $.74Work-in-process inventory $.11Finished goods inventory $.84
Total inventory investment $1.69
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Supply Chain Performance
Examples of Annual Inventory Turnover
Food, Beverage, Retail Manufacturing
Anheuser Busch 15 Dell Computer 90
Coca-Cola 14 Johnson Controls 22
Home Depot 5 Toyota (overall) 13
McDonald’s 112 Nissan (assembly) 150
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Network Design in a Supply Chain Facility location Capacity allocation Market and supply allocation
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Cost vs. Number
Percent Service Level Within
Promised Time
TransportationCos
t of
Op
erat
ion
s
Number of Facilities
Inventory
Facilities
Total Costs
Labor
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Conventional Network
CustomerCustomerStoreStore
MaterialsMaterialsDCDC
ComponentComponentManufacturinManufacturin
gg
VendorVendorDCDC
Final Final AssemblyAssembly
FinishedFinishedGoods DCGoods DC
ComponentsComponentsDCDC
VendorVendorDCDC PlantPlant
WarehouseWarehouse
FinishedFinishedGoods DCGoods DC
CustomerCustomerDCDC
CustomerCustomerDCDC
CustomerCustomerDCDC
CustomerCustomerStoreStore
CustomerCustomerStoreStore
CustomerCustomerStoreStore
CustomerCustomerStoreStore
VendorVendorDCDC
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Tailored Network
RegionalRegionalFinishedFinished
Goods DCGoods DC
RegionalRegionalFinishedFinished
Goods DCGoods DC
Customer 1Customer 1DCDC
Store 1Store 1
NationalNationalFinishedFinished
Goods DCGoods DC
Local DCLocal DCCross-DockCross-Dock
Local DC Local DC Cross-DockCross-Dock
Local DCLocal DCCross-DockCross-Dock
Customer 2Customer 2DCDC
Store 1Store 1
Store 2Store 2
Store 2Store 2
Store 3Store 3
Store 3Store 3
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Network/Location Decisions Long-term decisions Decisions made infrequently Decision greatly affects both fixed and
variable costs Once committed to a location, many
resource and cost issues are difficult to change
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Critical Factors to Consider Proximity to raw materials and customers Labor, availability, costs Land/construction costs Government incentives and fiscal policies Corporate desires Environmental regulations
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Methods of Evaluating Locations Factor Rating Method Locational Break-Even Analysis Center of Gravity Method Transportation Method
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Factor Rating method Most widely used location technique
1. Develop a list of relevant factors 2. Assign a weight to each factor3. Score each location for each factor4. Multiply score by weights for each factor
for each location
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Example
CriticalCritical ScoresScoresSuccessSuccess (out of 100)(out of 100) Weighted ScoresWeighted ScoresFactorFactor WeightWeight FranceFrance DenmarkDenmark FranceFrance DenmarkDenmark
Labor availability and attitude .25 70 60 (.25)(70) = 17.5
(.25)(60) = 15.0People-to car ratio .05 50 60 (.05)(50) = 2.5
(.05)(60) = 3.0Per capita income .10 85 80 (.10)(85) = 8.5
(.10)(80) = 8.0Tax structure .39 75 70 (.39)(75) = 29.3
(.39)(70) = 27.3Education and health .21 60 70 (.21)(60) = 12.6
(.21)(70) = 14.7
Totals 1.00 70.468.0
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Locational Break Even Analysis Method of cost-volume analysis used for
industrial locations
1. Determine fixed and variable costs for each location
2. Plot the cost for each location 3. Select location with lowest total cost for
expected production volume
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Example
AkronAkron $30,000$30,000 $75$75 $180,000$180,000
Bowling GreenBowling Green $60,000$60,000 $45$45 $150,000$150,000
ChicagoChicago $110,000$110,000 $25$25 $160,000$160,000
Selling price Selling price = $120= $120
Expected volumeExpected volume = 2,000 = 2,000 unitsunits
FixedFixed VariableVariable TotalTotalCityCity CostCost CostCost CostCost
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Example
–$180,000 $180,000 –
–$160,000 $160,000 –$150,000 $150,000 –
–$130,000 $130,000 –
–$110,000 $110,000 –
––
$80,000 $80,000 ––
$60,000 $60,000 –––
$30,000 $30,000 ––
$10,000 $10,000 ––
An
nu
al c
ost
An
nu
al c
ost
| | | | | | |
00 500500 1,0001,000 1,5001,500 2,0002,000 2,5002,500 3,0003,000
VolumeVolume
Akron Akron lowest lowest costcost
Bowling Green Bowling Green lowest costlowest cost
Chicago Chicago lowest lowest costcost
Chicago cost curve
Chicago cost curve
Akron c
ost
Akron c
ost
curv
e
curv
e
Bowling Green
Bowling Green
cost curve
cost curve
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Center of Gravity Method Find location of distribution center that
minimizes distribution costs Consider location of markets, volume of goods
shipped to those markets, and shipping cost (or distance)
1. Place existing locations on a coordinate grid2. Calculate X and Y coordinates for ‘center of
gravity’
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Center of Gravity Method
x - coordinate = ∑dixQi / ∑Qi
Computation of center
y - coordinate = ∑diyQi / ∑Qi
Evaluation of potential locations
)()( 22 yyxxQ iiiMin
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ExampleNorth-SouthNorth-South
East-WestEast-West
120 120 –
90 90 –
60 60 –
30 30 –
–| | | | | |
3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin
Chicago Chicago (30, 120)(30, 120)New York New York (130, 130)(130, 130)
Pittsburgh Pittsburgh (90, 110)(90, 110)
Atlanta Atlanta (60, 40)(60, 40)
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ExampleNumber of ContainersNumber of Containers
Store LocationStore Location Shipped per MonthShipped per Month
Chicago Chicago (30, 120)(30, 120) 2,0002,000Pittsburgh Pittsburgh (90, 110)(90, 110) 1,0001,000New York New York (130, 130)(130, 130) 1,0001,000Atlanta Atlanta (60, 40)(60, 40) 2,0002,000
x-coordinate =x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= = 66.766.7
y-coordinate =y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 20002000 + 1000 + 1000 + 2000= = 93.393.3
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ExampleNorth-SouthNorth-South
East-WestEast-West
120 120 –
90 90 –
60 60 –
30 30 –
–| | | | | |
3030 6060 9090 120120 150150Arbitrary Arbitrary originorigin
Chicago Chicago (30, 120)(30, 120)New York New York (130, 130)(130, 130)
Pittsburgh Pittsburgh (90, 110)(90, 110)
Atlanta Atlanta (60, 40)(60, 40)
Center of gravity Center of gravity (66.7, 93.3)(66.7, 93.3)+
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Transportation Model Find amount to be shipped from several
points of supply to several points of demand
Solution will minimize total production and shipping costs
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Transportation Model
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Location StrategyService/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus
Volume/revenueDrawing area; purchasing powerCompetition; advertising/pricing
Physical qualityParking/access; security/lighting; appearance/image
Cost determinantsRentManagement caliberOperations policies (hours, wage rates)
Tangible costsTransportation cost of raw materialShipment cost of finished goodsEnergy and utility cost; labor; raw material; taxes, and so on
Intangible and future costsAttitude toward unionQuality of lifeEducation expenditures by stateQuality of state and local government
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Location StrategyService/Retail/Professional Location Goods-Producing Location
Techniques Techniques
Regression models to determine importance of various factors
Factor-rating methodTraffic countsDemographic analysis of drawing areaPurchasing power analysis of areaCenter-of-gravity methodGeographic information systems
Transportation methodsFactor-rating methodLocational break-even analysisCrossover charts
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Location Strategy
Service/Retail/Professional Location Goods-Producing Location
Assumptions Assumptions
Location is a major determinant of revenue
High customer-contact issues are critical
Costs are relatively constant for a given area; therefore, the revenue function is critical
Location is a major determinant of cost
Most major costs can be identified explicitly for each site
Low customer contact allows focus on the identifiable costs
Intangible costs can be evaluated
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Video Case Study
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Beer Game Was the game realistic? Did you blame your customers or vendors? Who is responsible for the performance? Why not ship them directly from the factory
to the retailer? What was the real demand? Why are there big fluctuations? Can we use some inventory policies?