Supply-Chain

Most of the materials, including graphs tables and formulas used in the
developmentofthis coursearetaking from

Krajewski &Ritzman,“OperationsManagement", Pearson.“Operations

Management”WilliamJ. Stevenson McGrawHill

1
What is Supply Chain Design?
Supply Chain Design
Designing a firm’s supply chain to meet the
competitive priorities of the firm’s
operations strategy.

2
Supply Chain
 Supply Chain:
Interrelated series of processes with in a
firm and across different firms
 the sequence of organizations - their facilities,
functions, and activities - that are involved in
producing and delivering a product or service
 Sometimes referred to as value chains

3
The sequence of supply chain begins with basic suppliers
of raw materials and extends all the way to the final
customer.
Facilities of supply chain includes
 Warehouses
 Factories
 Processing centers
 Distribution centers
 Retail outlets
 Offices

4
Functions and Activities of supply chain includes

 Forecasting
 Purchasing
 Inventory management
 Information management
 Quality assurance
 Scheduling
 Production and delivery
 Customer service

5
 Supply Chain Efficiency Curve
Inefficient
supply chain
Area of
operations improved
operations
Total costs

Reduce costs
New supply chain
efficiency curve with
changes in design
Improve and execution
perform-
ance

Supply chain performance

6
 Supply Chain Design
 The goal is to reduce costs as well increase performance.

 Supply chains must be managed to coordinate the inputs

with the outputs in a firm to achieve the appropriate
competitive priorities of the firm’s enterprise processes.

 The Internet offers firms an alternative to traditional

methods for managing the supply chain.

 A supply chain strategy is essential for service as well as

manufacturing firms.

7
 Integrated Supply Chain
Phase 1:
Independent Suppliers Purchasing Production Distribution Customers
supply-chain
entities

Phase 2:
Suppliers Purchasing Production Distribution Customers
Internal
integration
Internal supply chain
Materials management department

Phase 3: Supply- Internal

Suppliers supply Customers
chain integration chain
Integrated supply chain

8
Supply Chains
 Every firm or organization is a member of some supply
chain
 Services supply chain
 Provide support for the essential elements of various
services the firm delivers

 Manufacturing supply chain

 Control inventory by managing the flow of materials
 Suppliers identified by position in supply chain – “tiers”
 Suppliers and customers

9
Supply Chain: Services

Home Commercial Other electric

customers customers utilities

Electric
power utility

Electric Facility Janitorial Programming Electric Office Fuel

transformers maintenance services services energy supplies supplies
services backup power

10
 Service Supply Chain

Flowers: Arrangement
Packaging
Local/International materials

Maintenance FedEx delivery Local delivery Internet

services service service service

Flowers-on-Demand florist

Home Commercial
customers customers

11
 Customer Customer Customer Customer

Distribution Distribution
Supply Chain: center center

Manufacturing
Manufacturer

Tier 1

Tier 2

Tier 3

Legend Supplier of services Supplier of materials

12
 Manufacturing Supply Chain

Tier 3 Poland USA Canada Australia Malaysia Raw

materials

Tier 2 Germany Mexico USA China Components

Major
Tier 1 Germany Mexico USA subassemblies

Manufacturer
USA Assembly

USA Ireland Distribution

centers

East Coast West Coast East Europe West Europe Retail

13
Inventory and Supply Chain-Creation of Inventory

Input flow of materials

INVENTORY is a
stock of materials Inventory level
used to satisfy
customer demand or
to support the
production of
services or goods

Scrap flow

Output flow of materials

14
 Inventory at Different Stocking Points

Raw Work in Finished

materials process goods

Supplier Manufacturing plant Distribution center Retailer

Three types of inventories:

1. Raw materials inventory (RW)
2. Work-in process inventory (WIP)
3. Finished goods inventory (FG)

15
 Inventory and Supply Chains
 Balance the advantages and disadvantages
 Pressures for small inventories
 Inventory holding cost
 Cost of capital
 Storage and handling costs
 Taxes, insurance, and shrinkage

16
Inventory and Supply Chains
 Pressures for large inventories
 Customer service
 Ordering cost
 Setup cost
 Labor and equipment utilization
 Transportation cost
 Payments to suppliers

17
Measures of Supply Chain Performance
 Financial measures
 Total revenue

 Cost of goods sold

 Operating expenses

 Cash flow

 Working capital

 Return on assets

18
 Measures of Supply Chain Performance

Total revenue Figure – How Supply Chain Decisions Can Affect ROA
Increase sales through better
customer service

Cost of goods sold

Net income
Reduce costs of
transportation and Improve profits with
purchased materials greater revenue and
lower costs

Operating expenses
Reduce fixed expenses by reducing
overhead associated with supply
chain operations
Net cash flows
Improve positive cash flows by
reducing lead times and
backlogs
Inventory
Increase inventory turnover
Return on assets
(ROA)
Working capital Increase ROA with
higher net income and
Reduce working capital by fewer total assets
reducing inventory investment,
lead times, and backlogs
Total assets
Achieve the same or
Fixed assets better performance
Reduce the number of with fewer assets
warehouses through
improved supply chain
design

19
 Measuring Supply Chain Performance
Average aggregate inventory value (AGV) is the total value of all items held in
inventory for a firm.
Average Number of Value of Number of Value of
aggregate = units of item each + units of item each +…
A typically on unit of B typically on unit of
inventory hand item A hand item B
value
Weeks of supply: The average aggregate inventory value divided by sales
per week at cost.
Average aggregate inventory value
Weeks of supply =
Weekly sales (at cost)
Inventory turnover is annual sales at cost divided by the average
aggregate inventory value maintained for the year.
Annual sales (at cost)
Inventory turnover =
Average aggregate inventory value

20
Example 1
The Eagle Machine Company averaged $2 million in
inventory last year, and the cost of goods sold was $10
million.
The breakout of raw materials, work-in-process, and
finished goods inventories is on the following slide.
The best inventory turnover in the company’s industry is
six turns per year. If the company has 52 business weeks
per year, how many weeks of supply were held in
inventory? What was the inventory turnover?

21
Example 1

22
 Example 1
The average aggregate inventory value of $2 million
translates into 10.4 weeks of supply and 5 turns per
year, calculated as follows:

$2 million
Weeks of supply = = 10.4 weeks
($10 million)/(52 weeks)

$10 million
Inventory turns = = 5 turns/year
$2 million

23
 Application 1

A recent accounting statement showed total inventories

(raw materials + WIP + finished goods) to be $6,821,000.
This year’s “cost of goods sold” is $19.2 million. The
company operates 52 weeks per year. How many weeks
of supply are being held? What is the inventory
turnover?

24
 Application 1

Average aggregate inventory value

Weeks of supply =
Weekly sales (at cost)

$6,821,000
= = 18.5 weeks
($19,200,000)/(52 weeks)

$19,200,000 = 2.8 turns

Inventory turnover =
$6,821,000

25
 Application 2
▶ From PepsiCo, Inc. Annual Report
Net revenue $32.5
Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
Work-in-process inventory $.11
Finished goods inventory $.84
Total inventory investment $1.69

Inventory 14.2
turnover = 1.69
= 8.4

Annual sales (at cost)

Inventory turnover =
Average aggregate inventory value
 Example 2 Using Break-Even Analysis
Thompson manufacturing produces industrial scales for the
electronics industry. Management is considering outsourcing
the shipping operation to a logistics provider experienced in
the electronics industry. Thompson’s annual fixed costs of the
shipping operation are $1,500,000, which includes costs of the
equipment and infrastructure for the operation. The estimated
variable cost of shipping the scales with the in-house
operation is $4.50 per ton-mile. If Thompson outsourced the
operation to Carter Trucking, the annual fixed costs of the
infrastructure and management time needed to manage the
contract would be $250,000. Carter would charge $8.50 per
ton-mile. What is the break-even quantity?
27
 Example 2
Fm – Fb 1,500,000 – 250,000
Q= c –c =
b m 8.50 – 4.50
= 312,500 ton-miles

Fm – Company fixed cost;

Cm- Company variable cost
Fb- Outsourcing fixed cost;
Cb-Outsourcing variable cost
28
Supplier Relationship Process

29
Supplier Relationship Process

30
Solved Problem 1

A distribution center experiences an average weekly demand of 50

units for one of its items. The product is valued at $650 per unit.
Average inbound shipments from the factory warehouse average
350 units. Average lead time (including ordering delays and transit
time) is 2 weeks. The distribution center operates 52 weeks per
year; it carries a 1-week supply of inventory as safety stock and no
anticipation inventory. What is the value of the average aggregate
inventory being held by the distribution center?

31
Solved Problem 1 SOLUTION

32
Total Cost Analysis
EXAMPLE
Compton Electronics manufactures laptops for major
computer manufacturers. A key element of the laptop is the
keyboard.
Compton has identified three potential suppliers for the
keyboard, each located in a different part of the world.
Important cost considerations are the price per keyboard,
freight costs, inventory costs, and contract administrative costs.
The annual requirements for the keyboard are 300,000 units.
Assume Compton has 250 business days a year. Managers
have acquired the following data for each supplier.

Which supplier provides the lowest annual total cost to

Compton?
33
Total Cost Analysis
Annual Freight Costs
Shipping Quantity (units/shipment)
Supplier 10,000 20,000 30,000
Belfast $380,000 $260,000 $237,000
Hong Kong $615,000 $547,000 $470,000
Shreveport $285,000 $240,000 $200,000

Keyboard Costs and Shipping Lead Times

Annual Inventory Shipping Administrative
Supplier Price/Unit Carrying Cost/Unit Lead Time (days) Costs
Belfast $100 $20.00 15 $180.000
Hong Kong $96 $19.20 25 $300.000
Shreveport $99 $19.80 5 $150.000

34
Total Cost Analysis

35
Total Cost Analysis

36
Total Cost Analysis
The total costs for all three shipping quantity options are similarly
calculated and are contained in the following table.

Total Annual Costs for the Keyboard Suppliers

Shipping Quantity
Supplier 10,000 20,000 30,000
Belfast
Hong Kong
Shreveport

37
 Total Cost Analysis
The total costs for all three shipping quantity options are similarly
calculated and are contained in the following table.

Decision point: Notice that the shipping quantity plays an important role.
The lowest cost for Belfast supplier comes from 20,000 quantity.
Based on total cost, Shreveport supplier will give the lowest.

38
 Application
ABC Electric Repair is a repair facility for several major electronic
appliance manufactures. ABC wants to find a low-cost supplier for
an electric relay switch used in many appliances. The annual
requirements for the relay switch (D) are 100,000 units. ABC
operates 250 days a year. The following data are available for two
suppliers. Kramer and Sunrise, for the part:

39
Application

40
Application
Kramer
Q = 2,000: ($5.00)(100,000) + $30,000
+ (2,000/2 + 400(5))($1) + $10,000 = $543,000
Q = 10,000: ($5.00)(100,000) + $20,000
+ (10,000/2 + 400(5))($1) + $10,000 = $537,000

Sunrise
Q = 2,000: ($4.90)(100,000) + $28,000
+ (2,000/2 + 400(9))($0.98) + $11,000 = $538,508

Q = 10,000: (4.90)(100,000) + $18,000

+ (10,000/2 + 400(9))($0.98) + $11,000 = $527,428

The analysis reveals that using Sunrise and a shipping quantity

of 10,000 units will yield the lowest annual total costs.
41
Key SCM Issues
The goal of SCM is to match supply to demand as
effectively and efficiently as possible
Key issues:
 Strategic issues in supply chain management include determining
the number, location and capacity of facilities, deciding whether to
make or buy a product.

 Tactical issues in supply chain management involve policies and

procedures related to procurement, processing, purchasing,
logistics, inventory and quality.

 Operational issues in supply chain management are related to

production planning and control which involves scheduling of
workforce, machinery, production, deliveries and distribution of
goods or services.

42
Flow Management
 Three types of flow management
 Product and service flow
 Involves movement of goods and services from suppliers to
customers as well as handling customer service needs and
product returns
 Information flow
 Involves sharing forecasts and sales data, transmitting orders,
tracking shipments, and updating order status
 Financial flow
 involves credit terms, payments, and consignment and title
ownership arrangements

43
Global Supply Chains: overview

 Global supply chains

 Product design often uses inputs from around the world
 Some manufacturing and service activities are outsourced to
countries where labor and/or materials costs are lower
 Products are sold globally
 Complexities
 Language and cultural differences
 Currency fluctuations
 Political instability
 Increasing transportation costs and lead times
 Increased need for trust amongst supply chain partners

44
Procurement
 The purchasing department is responsible for
obtaining the materials, parts, and supplies
and services needed to produce a product or
provide a service.
 The goal of procurement
 Develop and implement purchasing plans for
products and services that support operations
strategies

45
Duties of purchasing
 Identifying sources of supply
 Negotiating contracts
 Maintaining a database of suppliers
 Obtaining goods and services
 Managing supplies

46
Purchasing Interfaces

47
The Purchasing Cycle
 The main steps:
1. Purchasing receives the requisition
2. Purchasing selects a supplier
3. Purchasing places the order with a vendor
4. Monitoring orders
5. Receiving orders

48
Ethics in Purchasing

49
 Supply-Chain Process Measures
It is important to monitor the performance of supply chain to see where improvement
can be made. Examples of commonly used performance measures for 3 supply chain
processes

Order Placement Order Fulfillment Purchasing

 Percent orders  Percent of incomplete  Percent of

taken accurately orders shipped suppliers’ deliveries
 Time to complete the  Percent of orders on time Suppliers’
order- placement shipped on time  lead times
process  Time to fulfill the Percent defects in
 Customer satisfaction order  purchased materials
with the order-  Percent of returned and services
placement process items or botched Cost of purchased
services materials and services
 Cost to produce the item 
or service
 Customer satisfaction with
the order- fulfillment
process

50
Supply-Chain Design:

Strategic Implications
 Efficient supply chains
 Responsive supply chains
 Design of efficient and responsive
supply chains

51
 Design Features for Efficient and Responsive Supply Chains

Factor Efficient Supply Chains Responsive Supply Chains

Operations Make-to-stock or standardized Assemble-to-order, make- to-

strategy services; emphasize high order, or customized services;
volume, standardized emphasize product or service
products, or services variety
Low High
Capacity
cushion Low; enable high As needed to enable fast
Inventory inventory turns delivery time
investment Shorten, but do not Shorten aggressively
Lead time increase costs
Emphasize low prices; Emphasize fast delivery time;
Supplier consistent quality; on- time customization; volume
selection delivery flexibility; high-
performance design quality

52
Supply Chain Dynamics
 Supply chain dynamics can wreak havoc
on supply chain performance measures.
 Actions of downstream supply chain members
can affect the operations of upstream
members.

 The bullwhip effect: The phenomenon in

supply chains whereby ordering patterns
experience increasing variance as you
proceed upstream in the chain.

53
 Supply-Chain Dynamics
Customer Customer

Materials requirements
Firm C
Firm A

Firm B Firm A

Firm C
Time

54
Supply Chain Dynamics for Facial Tissue

Bullwhip Effect

Time

55
Supply Chains and the Environment
 Sustainability
 Environmental stewardship
 Environmental protection
 Productivity improvement
 Risk minimization
 Innovation
 Reverse logistics
 Planning, implementing, and controlling flows
from consumption back to origin
 Closed-loop supply chain

56
Closed Loop Supply Chain
Production process Distribution/Retailers Customers

New service/product Direct reuse Repair

development process
Remanufacture Returns
processor
Recycle parts
and materials

Product information Waste

disposal

Forward logistics flow

Figure– Flows in a Closed-Loop Supply Chain
Reverse logistics flow

57
Supply Chain Integration
 The effective coordination of supply chain
processes through the seamless flow of
information up and down the supply chain
 A river that flows from raw material
suppliers to consumers
 Upstream

 Downstream

 Mitigating the effects of supply chain

disruptions

58
Supply Chain Integration
Upstream Downstream
Tier 3 Tier 1
Tier 2

Tomato Tomato Tomato Ketchup Retail

grading paste Consumers
suppliers factory sales
stations factories

Information flows

Cash flows

Figure – Supply Chain for a Ketchup Factory

59
 Supply Chain Dynamics
 Integrated supply chains
 High degree of functional and organizational
integration minimizes disruptions
 Integration must include linkages between the firm,
its suppliers, and its customers
 SCOR (supply chain operations reference)model
 Plan
 Source
 Make
 Deliver
 Return

60
 Supply Chain Dynamics
First-Tier Supplier Service/Product Provider

Support Processes Support Processes

New service/ Business- New service/ Business-

product to-business product to-business
development (B2B) development (B2B)

Consumers
External
process customer process customer
relationship relationship
Suppliers
External

process process

Supplier Order Supplier Order

relationship fulfillment relationship fulfillment
process process process process

Figure – External Supply Chain Linkages

61