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Ch 10 - Supply Chain Management

  1. Introduction (p411)
    1. Def - Supply Chain - the facilities and processes involved in producing and delivering a product (good or service) from suppliers (and their suppliers) to customers (and their customers).
    2. Def - Supply Chain Management - the managing of the flow of information thru the supply chain to be more responsive to customer needs and lower costs. (p415)
      1. The profound improvement in supply chain mgt is due to:
        1. The rapid flow of information among suppliers and customers, and
        2. The use of mgt science computer models to optimize performance, such as linear programming discussed below.
      2. Note: 20 years ago, average purchase order (PO) was manual, and cost $50. Today, average PO is electronic and costs $0.50.
    3. Supply Chain Facilities include - plants, warehouses, distribution centers, service centers, retail operations.
    4. Supply Chain Processes include (p413):
      1. Forecasting demand (Ch 11, covered in Eco/Fin)
      2. Procurement (see below)
      3. Inventory control (Chs 12 - Inventory Mgt, 14 - ERP)
      4. Scheduling production (Chs 13 - Aggregate Planning, 15 - JIT, 16 - Scheduling)
      5. Distribution - warehousing and transportation.  Transportation can be a combination of rail, truck, water, air, computer (Internet), mail, telephone, or in person. (p437)
      6. Customer service (Ch 17 - Waiting Lines)
  2. Information Technology: a Supply Chain Enabler
    1. "In modern supply chain mgt, information replaces inventory." (p417)
    2. Most Supply Chain Management Systems provide:
      1. Data acquisition at point of origin and point of sale by using bar codes
      2. Tracking item movements
      3. Realtime updating of inventory levels by using Radio Frequency Identification (RFID)   (p421)
      4. Integration of ordering, production, and distribution (intranet)
      5. Data interchange between companies by using EDI, and extranets
    3. Many firms use Enterprise Resource Planning (ERP) Systems - more in Ch 14
    4. Examples of Impact on Supply Chain
      1. Ford, General Motors, and DaimlerChrysler set up auction Internet site (www.covisint.com)  to buy $250 billion worth of parts each year. This cuts their cost by 10 percent, reducing the cost of a car by $1,000. Parts account for $10,000 of the cost of a $20,000 car. (Reference: "Believe All the Hype About B-2-B, It's the Real Thing", http://dailynews.yahoo.com, Tech Headlines, March 3, 2000)
      2. Federal Reserve Chairman Alan Greenspan told Congress Feb. 27, 2002 that . . .  the country's first recession in a decade is coming to an end.  He attributed this in part to advances in computer technology that give companies real-time information on how their businesses are doing.  (Reference: "Greenspan: Recession Likely Ending", by Martin Crutsinger, http://dailynews.yahoo.com, Feb 27, 2002.  Click here for details.)
  3. Supply Chain Integration (p424)
    1. Info sharing among supply chain members
      1. Reduced bullwhip effect.  This occurs when slight (perceived) demand variability is magnified as information moves back upstream in the supply chain (Fig 10.4, p416).
    2. Collaborative planning, forecasting, and design
      1. Outsourcing - purchasing products that were originally produced in-house from an outside supplier (p426).
      2. *Single-sourcing - company purchases component from very few (perhaps one) suppliers (p427).
      3. *Postponement (p434) - withholds customization to the product as long as possible. Example - by moving the power supply out of the printer and into the power cord, HP can ship printer anywhere in the world.
    3. Coordinated workflow, production, operations,
      1. Just-in-Time (JIT) delivery - more in Ch 15
      2. *Vendor-managed Inventory (p435)
      3. *Cross-docking - products delivered to warehouse cross from one loading dock to another within 48 hours (never sit in inventory).  Wal-Mart - Cost of sales - 2% below industry average because of cross-docking (p431).
    4. Adopt new business models
      1. *Build-to-Order - Dell sells $5 million worth of PCs daily on the Internet (p422)
  4. Procurement (Purchasing) Responsibilities
    1. *Selecting suppliers     (This and the following responsibilities not explicitly included in Russell, but hinted at in E-procurement, p428, and Fig 10.9, p430.)
    2. *Selecting carriers for shipments (sometimes called Traffic Dept.)
    3. *Evaluating supply-demand economics
    4. *Negotiating contracts (learning curves, covered in Ch8 HR)
    5. *Standardizing - when possible, replacing several similar products with one standard (a company standardizes on Microsoft Word)
  5. Global Supply Chain (p445)
    1. Global markets are changing
      1. Fall of USSR - new markets in Eastern Europe
      2. European Community
    2. Global Trading Groups
      1. EU (European Union), NAFTA (North American Free Trade Agreement), …
      2. Within group no import tax
      3. All members charge uniform tariffs to outsiders
  6. Linear Programming (Chapter 13 Supplement, page 616) (Quantitative models (such as Linear Programming) and the Internet are major contributors to the increase in US productivity. For this reason, it is important for you to understand these models. As shown below, Linear Programming can be used to determine the best product mix.)
    1. *General Linear Programming Model
      1. Define decision variables
      2. Define objective function
      3. Define constraints
    2. Methods of Solution (For your info only)
      1. Graphical - useful with two decision variables. (p618-622).
      2. Simplex - can be used with more than two decision variables.
    3. Highlands Craft Store - p617
      1. Define decision variables
            X1 = number of bowls to produce
            X2 = number of mugs to produce
      2. Define objective function
            Maximize revenue = 40 X1 + 50 X2
      3. Define constraints
               X1 + 2 X2 £    40  Labor
            4 X1 + 3 X2 £   120  Clay
      4. Solution - to see Excel solver solution, click worksheet, R513se01.xls
                X1 = 24,  X2 = 8,   revenue = $1,360
  7. Transportation Method (Chapter 10 Supplement, page 460)
    1. Objective - to determine the best pattern of shipments from several origins to several destinations so as to minimize total transportation costs.
    2. Example - potato shipment for Frodo-Lane Foods potato chips
    3. *Linear Programming Formulation
      1. Define decision variables
            X i j = Tons of potatoes transported from origin i to destination j
      2. Define objective function
            Minimize transportation cost = 6 X11 + 8 X12 + 10 X13
                + 7 X21 + 11 X22 + 11 X23
               + 4 X31 +  5 X32 + 12 X33
      3. Define constraints
            Origin 1    X11 + X12 + X13 £ 150
            Origin 2    X21 + X22 + X23 £ 175
            Origin 3    X31 + X32 + X33 £ 275

            Dest. 1    X11 + X21 + X31 = 200
            Dest. 2    X12 + X22 + X32 = 100
            Dest. 3    X13 + X23 + X33 = 300
    4. Solution - to see Excel solver solution, click worksheet, R510se01.xls
              X11 =     0     X12 =     0     X13 = 150
              X21 =   25     X22 =     0     X23 = 150
              X31 = 175    X32 = 100     X33 =     0

    Do assigned HW - Problems S10-17 and 18, page 469.
    (This page was last edited on November 06, 2006 .)