Chapter 14: Supply Chain Integration Flashcards
Supply chain integration
The effective coordination of supply chain processes through the seamless flow of information up and down the supply chain
Provides visibility into the capacities and inventories of other members of the supply chain to aid in planning and scheduling and facilitate collaboration
Upstream
Moving away from end customers towards raw materials
Downstream
Moving towards end customers
Tier one suppliers
Immediate suppliers to company in consideration. (Tier 2 suppliers for company in consideration = tier 1 supplier for their tier 1 suppliers)
External causes of supply chain disruption
- environmental disruptions
- supply chain complexity
- loss of major accounts
- loss of supply (failure induced downtime)
- customer induced volume changes
- customer induced service and production mix changes
- late deliveries
- underfilled shipments
Why does a complex supply chain increase potential disruptions
Increased dependencies between entities and overall increased number of entities increase points of failure
Internal causes of supply chain disruptions
- internally generated shortages
- quality failures
- poor supply chain visibility
- engineering changes
- order batching
- new service or product introductions
- service or product promotions
- information errors
How does poor supply chain visibility cause supply chain disruptions?
Inhibits ability to properly plan if don’t know supplier stock availability or customer stock need
How does order batching create supply chain disruptions?
By offering inducements to place larger orders the variability of demand and shipping is increased as firms place single large orders and then do not order again for a long time
What elements affect the demand placed on upstream parts of the supply chain by downstream parts
- inventory policy
- inventory levels
- customer demand
- information accuracy
Bullwhip effect
The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the supply chain
(Slight changes in customer demand create extreme changes upstream)
When does a firm contribute to the bullwhip effect
If the variability of its orders to its suppliers exceeds the variability of the orders from its immediate customers
What happens when supply patterns do not match demand patterns
Inventory accumulates for some firms (who stop ordering) and shortages occur for others (who place expedited orders) which creates ordering variance upstream
Emphasizes the need for a process view of an integrated supply chain
SCOR model
Supply chain operations reference model
A framework that focuses on a basic supply chain of plan, source, make, deliver, and return processes repeated again and again along the supply chain
Return process in SCOR model
Includes both return of recyclable materials and return of defective products
Supply chain risk management
The practice of managing the risk of any factor or event that can materially disrupt a supply chain, whether within a single firm or across multiple firms
Operational risks
Threats to the effective flow of materials, services and products in a supply chain
Options to reduce operation risk to a supply chain
- strategic alignment of partners
- upstream and downstream supply chain integration
- visibility (particularly of end user demand)
- flexibility and redundancy
- short replenishment lead times
- small order lot sizes
- rationing supplies when shortage exist
- everyday low pricing (EDLP)
-cooperation and trustworthiness
Mapping
Integrating the supply chain as far upstream as possible (beyond 1st and 2nd tier suppliers) to identify risks of disruptions
How to reduce order lot sizes
Reduce costs of ordering, transporting, and receiving inventory to decrease need for large orders
How does everyday low pricing mitigate operational risks
Encourages stable demand (vs promotional or discount pricing) and discourages customers from buying excess at discounted pricing
Forward buying
When customers buy in excess to take advantage of discounted pricing
Financial risks to supply chains
Threats to financial flows of a supply chain (prices, costs, profits)
Low cost hopping
Moving to new low-cost source of supply
May be a short run benefit but makes supply chain integration hard
Hedging
A supply chain risk-management strategy used in limiting or offsetting the probability of loss from fluctuations in the prices of commodities or currencies
Production shifting
Reallocating production to different facilities in different regions based on what will improve financial flows (where exchange rates or commodity prices are favorable)
Requires flexible facilities
Futures contract
A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price in the future
Often settled not for the actual commodity but for the cash difference
Who makes money on a futures contract if the price of the commodity goes up
The buyer (who can purchase the commodity at the agreed upon low price and sell it at the current higher market price)
Who makes money on a futures contract if the price of the commodity goes down
The seller (who can buy the commodity at the lower market price and sell to the buyer at the higher agreed on price)
Supplier relationship process focus
Interaction of the firm with upstream supplies
Nested processes within supplier relationship process
1) sourcing
2) design collaboration
3) negotiation
4) buying
5) information exchange
May be collected under “purchasing” or “procurement”
Purchasing
The activity that decides which suppliers to use, negotiates contracts, and determines whether to buy locally
Sourcing
The selection, certification, and evaluation of suppliers and management of supply chain contracts
Key costs to consider for each supplier
- material costs
- freight costs
- inventory costs
- administrative costs
Annual material costs equation
Price per unit (p) x annual requirements (D)
Annual inventory costs equation
= (cycle inventory + pipeline inventory)* holding cost per unit
Cycle inventory
= shipping quantity (Q)/2
Pipeline inventory
= lead time * average demand per day (or week)
Total annual cost for a supplier
= annual material costs + freight costs + annual inventory costs + administrative costs
= (Price per unit* material requirements) + freight costs per year + ((Shipping quantity / 2)+(lead time* average days demand))*holding cost + annual administrative costs
Supplier considerations besides costs
- lead time
- consistent, on-time delivery
- quality
- sustainability
Depends on competitive priorities and order winners
Green purchasing
The process of identifying, assessing. And managing the flow of environmental waste and finding ways to reduce it and minimize it’s impact on the environment
Supplier certification programs
Verify that potential suppliers have the capability to provide the services or materials the buying firm required
Design collaboration process focus
Jointly designing new services or products together with key suppliers
Bringing suppliers into the design and development stages of a new product to minimize delays and mistakes
Early supplier involvement
A program that includes suppliers in the design phase of a service or product
Suppliers may have suggestions for more efficient design and materials
Presourcing
A level of supplier involvement in which suppliers are selected early in a products concept development stage and are given significant, if not total, responsibility for the design of certain components or systems of the product
These suppliers take responsibility for the cost, quality and on time delivery of the items they produce
Value analysis
A systematic effort to reduce the cost or improve the performance of services or products either purchased or produced
Intensive evaluation of all things that go into the production of the product or service
Focus of negotiation process
Obtaining an effective contract that meets the price, quality, and delivery requirements of the supplier relationship process’s internal customers
Effected by the firms orientation to supplier relations
Competitive orientation
A supplier relation that views negotiations between buyer and seller as a zero-sum game. Whatever one side loses the other side gains and short term advantages are prioritized over long term commitments
Economic dependency
When one buyers purchasing volume represents a significant share of the suppliers sales, (or when the purchase item/service is standardized and many substitutes are available
referent power
When one entity values identification with the other (based on perceived status or network connections)
Expert power
When one entity has access to knowledge, information and skills desired by another
Reward power
When one entity has the power to give rewards to another
Legal power
When one entity has the right to prescribe the behavior of the other
Coercive power
When one entity had the power to punish the other
Cooperative orientation
A supplier relation orientation in which the buyer and seller are partners, helping each other as much as possible
Potential to lead to increased information sharing, long-term commitment, and economies of scale
Sole sourcing
Awarding a contract for service or items to only one supplier
While it can minimize supply chain complexity it can add additional risk of interrupted supply
Buying process
Procurement of service or materials from supplier. Includes: creation, management, and approval of purchase orders and determines locus of control for purchasing decisions
Approaches to e-purchasing
- electronic data interchange
- catalog hubs
- exchanges
- auctions
Electronic data interchange
EDI
A traditional form of e-purchasing. A technology that enabled the transmission of routine business documents having a standard format from computer to computer
Uses specialized communications software to replace phone, fax, mailed communication
Catalog hubs
An e-purchasing system where suppliers post their catalog of items on the internet and buyers select what they need and purchase it electronically
Single hub may include catalogs for hundreds of suppliers
Buying firm may negotiate prices with suppliers and then their employees may order pre-approved items
Exchanges
An e-purchasing system in the form of a marketplace where buying firms and selling firms come together to do business
Often allows for spot purchases at lowest offered cost
Auctions
An e-purchasing system consisting of a marketplace where firms place competitive bids to buy something
May allow for both closed and open bidding
Reverse auction
Where suppliers bid for contracts with buyers. Each bid is posted so suppliers can see how low their bid needs to be to stay in the running
Vendor managed inventories
VMI
A system in which the supplier has access to the customer’s inventory data and is responsible for maintaining inventory on the customer’s site
Inventory is on customer’s site but supplier may retain posession of the inventory until it is used by the customer
Key elements of vendor managed inventories
- require collaborative effort and information sharing
- potential for cost savings by eliminating excess inventory, reducing administrative and ordering costs
- improves customer service by bringing the supplier closer to the customer
- important to have a clear written agreement of responsibilities
Key performance measure for the supplier relationship process
- percent of supplier’s deliveries on time
- suppliers lead times
- percent defects in services and purchased materials
- cost of services and purchased materials
- inventory levels of supplies and purchased components
- evaluation of supplier’s collaboration on streamlining and waste conversion
- amount of transfer of environmental technologies to suppliers
Order fulfillment process
Produces and delivers service or product to firm’s customers
Nested processes in the order fulfillment process
- customer demand planning
- supply planning
- production
- logistics
Customer demand planning
CDP
Facilitates collaboration of a supplier and it’s customers for the purpose of forecasting customer requirements for a service or product
Creating the forecasts to enable planning
Supply planning process
Takes demand forecasts (produced by customer demand process) and combines them with customer service level requirements, inventory targets, and sales and operations resources to generate a plan to meet forecasted demand
Production process
Executing the supply plan to produce the service or product
Must be integrated with the supply facing and customer facing processes
Logistics
Delivering the product or service to the customer
Key decision for design and implement of logistics processes
1) degree of ownership
2) facility location
3) mode selection
4) capacity level
5) amount of cross docking
Private carrier
When a firm owns and operates its own logistics process
Requires major investment in equipment, labor, facilities, maintenance
Third-party logistics carrier
3PL
Logistics service providers that production firms can contract with, typically provide integrated services:
- transportation
- packaging
- warehousing
- inventory management
- supply chain design
Five basic modes of transportation
Truck
Train
Ship
Pipeline
Airplane
Choice of mode depends on firm’s competitive priorities, many firms use mixed models
Expected value decision rule
Used to evaluate capacity alternatives
Expected value of an alternative = ((probability of demand and occuring) * (payoff for using alternative if that level of demand materialized)) summed over all possible levels of demand
Sum of all probabilities must equal 1
Cross docking
The packing of products on incoming shipments so that they can be easily sorted at intermediate warehouses for outgoing shipments based on their final destinations
Enhances low-cost operations and delivery speed
Intermediate warehouses become a short term staging area rather than a long term holding area
Benefits of cross docking
Reductions in:
- inventory investment
- storage space requirements
- handling costs
- lead times
Increased inventory turnover
Accelerated cash flow
Key performance measures for the order fulfillment provess
- percent of incomplete orders shipped
- percent of orders shipped on time
- time to fulfill the order
- percent of botched services or returned items
- costs to produced the service or item
- customer satisfaction with the order fulfillment process
- inventory levels of work-in-process and finished good
- amount of greenhouse gasses emitted
- number of security breaches
