EXAM 3 CHAPTER 11 SUPPLY CHAIN MANAGEMENT

Total-Cost Approach: In the management of logistical activities, two performance variables must be considered:

(1) Total distribution costs (2) The level of logistical service provided to customers

Disadvantages of third-party logistics firms include

(i) reduced control over the logistics process (ii) diminished direct contact with customers (iii) problems of terminating internal operations

Successful Supply Chain Practices: When the participants are adversaries, supply chains are not effective, and in reality, are not supply chains. Supply chain partnerships form the foundation. Partners need to:

1 Clearly define their strategic objectives 2 Understand where their objectives converge (and perhaps diverge), and 3 Resolve any differences.

The business firm may operate its own warehouses or turn them over to a third party - a company that specializes in performing warehousing services. The advantages of third-party warehousing are

1 Flexibility 2 Reduced assets 3 Professional management

Functional products

1 For example, paper, maintenance supplies, and office furniture 2 Predictable demand patterns 3 The goal is to design a supply chain with efficient physical distribution, minimizing logistics and inventory costs and assuring low-cost manufacturing 4 Information sharing takes place within the supply chain to coordinate manufacturing, ordering, and delivery to minimize production and inventory costs

Innovative products

1 For example, smart phones, computer notepads, or other high-tech products 2 Less predictable demand 3 Reacting to short life cycles 4 Avoiding shortages or excess supplies 5 Taking advantage of high profits during peak demand periods 6 Address questions of where to position inventory (versus minimize inventory), along with production capacity, to hedge against uncertain demand

Locating warehouses in key markets

1 Increase the level of delivery service to buyers, and/or 2 Reduces transportation costs

The most commonly reported benefits for firms that adopt SCM are the following:

1 Lower costs 2 Higher profit margins 3 Enhanced cash flow 4 Revenue growth 5 A higher rate of return on assets (ROA)

Third party logistical services include

1 Packaging 2 Labeling 3 Order processing 4 Some light assembly

Logistical service

1 Relates to the availability and delivery of products to the customer 2 Comprises the series of sales-satisfying activities that begin when the customer places the order and that end when the product is delivered 3 Includes whatever aspects of performance are important to the business customer

. Inventories can be controlled and reduced to the lowest possible levels thanks to information technology involving

1 bar coding 2 scanner data 3 total quality processes 4 better transportation management 5 more effective information flow

Inventory management is the buffer in the logistical system. Inventories are needed because

1) Product and demand are not perfectly matched 2) Operating deficiencies in the logistical system often result in product unavailability (for example, delayed shipments and inconsistent carrier performance) 3) Business customers cannot predict their product needs with certainty (for example, because a machine may break down or there may be a sudden need to expand production)

A barge trip that takes

17 hours would take a train 4 hours and a truck 90 minutes for similar trips. Although very slow (averaging 15 miles per hour), the barge offers huge cost advantages compared with truck and rail. For products such as limestone, coal, farm products, and petroleum, the slow barge is an effective logistics tool.

Leading supply chain performers are provided by Gartner, Inc.'s annual ranking of the top 25 chains.

Apple, McDonald's, and Amazon have topped the list recently. Apple has achieved the #1 ranking for five years in a row based upon high inventory turns, stunning revenue growth, and a high return on assets (ROA

Dealing with Risk in the Supply Chain

As global business expands, the odds of a major or minor disruption in supply chains dramatically increase. Disasters, including earthquakes, hurricanes, and volcanic eruptions are examples of unexpected events. Therefore, the just-in-time (JIT) model pioneered in Japan becomes one of buffering risk, i.e., a just-in-case mentality.

Waste across the supply chain manifests itself in excess inventory.

Dell provides an excellent illustration of how to reduce waste through effective "waste" management strategies.

2) Diversify supply sources.

Develop a portfolio of supply resources and manufacturing sites in different regions to reduce risk.

Quality focus:

Eliminate Inventories

(i) Time compression.

Everyone in the supply chain is able to operate more efficiently when SCM can compress order-to-delivery cycle time.

(i) Waste reduction.

Firms that practice SCM seek to reduce waste by minimizing duplication, harmonizing operations and systems, and enhancing quality. If the inventories can be centralized and maintained by just a few firms at critical points in the distribution process, efficiencies can be gained for the chain as a whole.

4) Build stronger supplier relationships.

Identify the company's most valued suppliers and develop a partnership by drawing on their expertise and providing them with a greater volume of business, long-term contract, or gain-sharing arrangement where they share cost savings from ideas they provide.

1) Analyze and monitor risk exposure.

Identify those products that generate the greatest share of company revenue and map the resource inputs for those products, flagging any single-source components.

3) Reevaluate "make versus buy" decisions.

Prioritize critical inputs to key products and consider bringing some outsourced components "back in-house."

Information and Technology Drivers

Supply chain software. Much of the software is focused on each one of the different functional areas (for example, inventory planning or transportation scheduling). However, the trend is to move toward software solutions that integrate several or all of these functions.

(i) Unit cost reduction.

The business marketer should balance level of cost and degree of service provided (cost/customer service trade-off). For example, shipping products in full truckload quantities weekly is less expensive than shipping pallet quantities every day. However, when a customer, like Honda, wants daily deliveries to minimize inventories, the SCM goal is to offer daily shipments at the lowest possible cost.

Supply chain management (SCM) -

a technique for linking a manufacturer's operations with those of all of its strategic suppliers and its key intermediaries and customers to enhance efficiency and effectiveness.

SCM can

advance a firm's financial performance in two fundamental ways: revenue enhancement and cost reduction.

Just-in-time (JIT) -

an inventory principle under which suppliers carefully coordinate deliveries with the manufacturer's production schedule, often delivering products just hours before they are used.

Consistent delivery-cycle performance allows

buyers to cut their level of buffer or safety stock, thereby reducing inventory cost.

With green supply chains initiatives,

companies are committing to design, source, and manufacture and manage the end-of-life stage for all of their products in an environmentally and socially responsible manner. Other initiatives include developing green packaging and refurbishing products to avoid or minimize landfill waste.

Total cost of ownership (TCO) -

determines the total costs of acquiring and then using a given item from a particular supplier.

The objective of a JIT system is to

eliminate waste of all kinds from the production process by requiring the delivery of the specified product at the precise time and in the exact quantity needed. 1 Smaller order sizes 2 More frequent deliveries

For many manufacturers, between 40% and 60% of a company's carbon footprint resides upstream in its supply chain -

from raw materials, transport, and packaging to the energy consumed in manufacturing processes. Therefore, any significant carbon-abatement activities will require collaboration with supply chain partners.

Products can be separated into two categories:

functional items and innovative items, each with different supply chain requirements.

(i) Flexible response. Flexible response

in order handling, including how orders are handled, product variety, order configuration, order size, and several other dimensions, means that a customer's unique requirements can be met cost-effectively.

Inefficient logistics service to distributors either

increases distributor costs (larger inventories) or creates shortages of the supplier's products at the distributor level.

5) Share real-time

information with supply chain partners.

The underlying premise of SCM is that waste reduction and enhanced supply chain performance come only with both

intrafirm and interfirm functional integration, sharing, and cooperation. Integration in particular includes marketing, production, procurement, sales, and logistics. Actions, systems, and processes among all supply chain participants must be integrated and coordinated.

Transportation is usually the

largest single logistical expense. It involves selecting both a mode of transportation and the individual carrier(s) that will ensure the best performance at the lowest cost.

Total-cost approach or cost trade-off approach -

logistical management guarantees to minimize total logistical costs in the firm and within the channel.

Transportation is the link that binds the

logistical network together and ultimately results in timely delivery of products. Efficient warehousing does not enhance customer service levels if transportation is inconsistent or inadequate.

The TCO approach identifies costs -

often buried in overhead or general expenses - that relate to the costs of holding inventory, poor quality, and delivery failure.

Third-party logistics firms -

perform logistics activities to represent an important trend among business-to-business firms.

The warehouse eliminates the need for

premium transportation (air freight) and costly order processing by keeping products readily available in local markets.

Supply chain management assures that

product, information, service, and financial resources all flow smoothly through the entire value-creation process.

Mode refers to the type of carrier -

rail, truck, water, air, or some combination of the four. The decision on transportation modes and particular carriers depends on the cost trade-offs and service capabilities of each.

Speed of service -

refers to the elapsed time to move products from one facility (plant or warehouse) to another facility (warehouse or customer plant).

Product flow in the

reverse direction is also important. Many companies, such as Xerox and Canon, routinely remanufacture products that are worn out or obsolete. Effective linkages and processes must be in place to return such products to a facility in order to remanufacture or retrofit them.

Determining the Level of Service: Buyers often rank logistics service

right after quality as a criterion for selecting a vendor (supplier). Few companies trace the true costs of specialized services and the resulting effect on customer profitability (Chapter 3). Some companies are now using cost-to-serve analytics to address the problem. Service levels are developed by assessing customer service requirements. The sales and cost of various service levels are analyzed to find the service level generating the highest profits.

Action steps to increase flexibility of the supply chain:

steps 1-6

Service consistency is usually more important

than average delivery time, and all modes of transportation are not equally consistent. Although air provides the lowest average delivery time, generally it has the highest variability in delivery time relative to the average.

Logistics management -

that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements.

Similarly, the more inconsistent the delivery time,

the less available the product.

The longer the supplier's delivery time,

the less available the product.

6) Perform regular "stress tests" of

the supply chain to evaluate the likely impact of a disruption and correct vulnerabilities.

Cost of service -

the variable cost of moving products from origin to destination, including any terminal or accessory charges.

The activity-based costing (ABC) technique is

used to precisely measure the costs of performing specific activities and then trace those costs to the products, customers, and channels that consumed the activities.

SCM is undertaken to achieve four major goals:

waste reduction, time compression, flexible response, and unit cost reduction.

The notion of a "supply chain" has shifted to a "value chain,"

which is tightly connected to the overarching business strategy. SCM can offer value in the form of a competitively superior delivery and value-added services.