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Bachelor of Science in Accounting Information System
Operations Management (TQM)
Bulacan Polytechnic College
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MODULE : CBMEC213 - 4
COURSE TITLE : Operations Management (TQM)
MODULE TITLE : Supply Chain Management
NOMINAL DURATION : 6 HRS
SPECIFIC LEARNING OBJECTIVES:
After completing this module the student should be able to:
- Describe the structure of supply chains, bullwhip effect, supply chains for service organizations, major issues affecting supply chains, electronic commerce, global issues affecting supply chains, government regulation issues affecting supply chains, green supply chain management, the role of purchasing in supply chain management, sourcing issues, strategic purchasing partnerships, ethics in supplier management, supply chain distribution, how to implement supply chain management, supply chain management metrics, trends in supply chain management
TOPICS:
- What Is a Supply Chain?
- Components of a Supply Chain for a Manufacturer
- The Bullwhip Effect
- Supply Chains for Service Organizations
- Major Issues Affecting Supply Chain Management
- The Role of Purchasing
- Sourcing Issues
- Supply Chain Distribution
- Implementing Supply Chain Management
Bachelor of Science in Accounting Information System
Operations Management (TQM)
Bulacan Polytechnic College
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- Supply Chain Performance Metrics
- Trends in Supply Chain Management
INTRODUCTION
Buying a product used to mean browsing through mail-order catalogs or getting dressed, leaving home, and shopping at stores or malls until you found what you wanted.
Today, most of us can go on-line anytime during the day, seven days a week, and buy just about anything over the Internet. You can shop while sitting at your computer and never need to leave home. You can order food from a supermarket or a restaurant on- line or buy clothing and household goods. You can buy books, videos, CDs, or more expensive products like diamonds and cars, or even book your vacation—the Internet has revolutionized the way we do business by allowing us access to numerous suppliers around the world.
The Internet also has allowed companies to change the way they find the materials and supplies that are needed for their operations. Business-to-business (B2B) transactions are conducted between companies and their suppliers, distributors, and customers. Even though direct sales to the general public are more familiar, B2B transactions make up the majority of Internet transactions.
One of the most publicized examples is Covisint, a global business-to-business automotive supplier exchange site, begun in 2000 as an initiative by the U.S. automakers Ford Motor Company, General Motors, DaimlerChrysler, Nissan/Renault, and PSA Peugeot Citroën. Covisint became the largest industry-sponsored net marketplace. Covisint has over 300,000 users, representing 45,000 different companies, located in 96 different countries. Covisint is the electronic marketplace for the auto industry, providing on-line purchasing services and promoting supply chain collaboration between major direct suppliers and automakers.
WHAT IS A SUPPLY CHAIN? A supply chain is the network of activities that delivers a finished product or service to the customer. These include sourcing raw materials and parts, manufacturing and assembling the products, warehousing, order entry and tracking, distribution through the channels, and delivery to the customer. An organization’s supply chain is facilitated by an information system that allows relevant information such as sales data, sales forecasts, and promotions to be shared among members of the supply chain. Figure 4- 1 shows a basic supply chain structure for a manufacturer.
At the beginning of the chain are the external suppliers who supply and transport raw materials and components to the manufacturers. Manufacturers transform these materials into finished products that are shipped either to the manufacturer’s own
Bachelor of Science in Accounting Information System
Operations Management (TQM)
Bulacan Polytechnic College
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Dell Computer Corporation is a good example of a company using its supply chain to achieve a sustainable competitive advantage. Quick delivery of customized computers at prices 10 –15 percent lower than the industry standard is Dell’s competitive advantage. A customized Dell computer can be en route to the customer within 36 hours. This quick response allows Dell to reduce its inventory level to approximately 13 days of supply compared to Compaq’s 25 days of supply. Dell achieves this in part through its warehousing plan. Most of the components Dell uses are warehoused within 15 minutes travel time to an assembly plant. Dell does not order components at its Austin, Texas, facility; instead, suppliers restock warehouses as needed, and Dell is billed for items only after they are shipped. The result is better value for the customer.
COMPONENTS OF A SUPPLY CHAIN FOR A MANUFACTURER
A company’s supply chain structure has three components: external suppliers, internal functions of the company, and external distributors. Figure 4-2 shows a simplified supply chain for packaged dairy products.
External suppliers include the dairy farmer, cardboard container manufacturer, label Company, plastic container manufacturer, paper mill, chemical processing plant, lumber company, and chemical extraction plant.
Bachelor of Science in Accounting Information System
Operations Management (TQM)
Bulacan Polytechnic College
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Internal functions include the processing of the raw milk into consumer dairy products and packaging and labeling dairy products for distribution to retail grocery outlets. The external distributors transport finished products from the manufacturer to retail grocers, where the products are sold to the customer. The supply chain includes every activity from collecting the raw milk, producing the consumer dairy products, packaging the dairy products, distributing the packaged dairy products to retail grocers, to selling the finished dairy products to the customer. Let’s look at each component of the supply chain in detail.
External Suppliers Dairy products manufacturing involves several companies, as shown in Figure 4-2. The dairy products are packaged either in cardboard or plastic containers made by tier one suppliers. Note that any supplier that provides materials directly to the processing facility is designated as a tier one supplier (in this case, the dairy farm, the cardboard container manufacturer, the label company, and the plastic container manufacturer).
The paper mill and the chemical processing plant are tier two suppliers because they directly supply tier one suppliers but do not directly supply the packaging operation.
Bachelor of Science in Accounting Information System
Operations Management (TQM)
Bulacan Polytechnic College
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external carriers (trucking companies, airlines, railroads, shipping companies, and couriers) or internal fleets of carriers. Distribution management is the packaging, storing, and handling of products at receiving docks, warehouses, and retail outlets.
Next, we will look at a common challenge to supply chain managers called the bullwhip effect.
THE BULLWHIP EFFECT
Sharing product demand information between members of a supply chain is critical. However, inaccurate or distorted information can travel through the chain like a bullwhip uncoiling. The bullwhip effect , as this is called, causes erratic replenishment orders placed on different levels in the supply chain that have no apparent link to final product demand. The results are excessive inventory investment, poor customer service levels, ineffective transportation use, misused manufacturing capacity, and lost revenues. We will discuss the causes of the bullwhip effect, and how they send inaccurate or distorted information down the supply chain. First, however, let’s look at the traditional supply chain, shown in Figure 4-3, and follow the product demand information flow from the final seller back to the manufacturer of the product:
- The final seller periodically places replenishment orders with the next level of the supply chain, which could be a local distributor. The timing and order quantity— for example, monthly orders in varying amounts—are determined by the final seller. The timing and quantity can be fixed or variable.
- The local distributor has many customers (final sellers) placing replenishment orders. Each final seller uses its own product demand estimates and quantity rules. Based on these replenishment orders, the local distributor places replenishment orders with its supplier, which could be a regional distribution center (RDC).
Bachelor of Science in Accounting Information System
Operations Management (TQM)
Bulacan Polytechnic College
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- As before, the customers (the local distributors) determine the timing and quantity of orders placed with the RDC. Each RDC periodically places orders based on demand at the RDC by ordering from the manufacturer of the finished good.
- In turn, the manufacturer develops plans and schedules production orders based on orders from the RDCs. The manufacturer does not know what the demand is for the finished good by the final customer but knows only what the RDCs order.
The greater the number of levels in the supply chain, the further away the manufacturer is from final customer demand. Since suppliers in the chain do not know what customer demand is or when a replenishment order might arrive, suppliers stockpile inventory.
Causes of the Bullwhip Effect The causes of the bullwhip effect are demand forecast updating, order batching, price fluctuation, and rationing and gaming. Let’s look at each of these causes.
Each member in the supply chain, beginning with the retailers, does demand forecast updating with every inventory review. Based on actual demand, the retailers update their demand forecast. The retailers review their current inventory level and, based on their inventory policies, determine whether a replenishment order is needed. The wholesalers repeat the process. Note that the demand is from the retailers’ inventory replenishments and may not reflect actual customer demand at the retail level. The wholesalers update their demand forecast and place appropriate replenishment orders with the distribution centers. The distributors repeat the process, updating their demand forecasts based on demand from the wholesalers. The distributors review their inventory levels and place the appropriate orders with the manufacturer. These orders are determined by the inventory policies at the distributors. Orders placed with the manufacturer end up replenishing each level in the supply chain rather than being directly linked to end-customer demand.
A company does order batching when, instead of placing replenishment orders right after each unit is sold, it waits some period of time, sums up the number of units sold, and then places the order. This changes constant product demand to lumpy demand— a situation where certain levels in the supply chain experience periods of no demand. Order batching policies amplify variability in order timing and size.
Price fluctuations cause companies to buy products before they need them. Price fluctuations follow special promotions like price discounts, quantity discounts, coupons, and rebates. Each of these price fluctuations affects the replenishment orders placed in the supply system. When prices are lower, members of the supply chain tend to buy in larger quantities. When prices increase, order quantities decrease. Price fluctuations create more demand variability within the supply chain.
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Bulacan Polytechnic College
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Let’s look at an example of a supply chain for a full-service travel agency as shown in Figure 4-4. The agency arranges a wide variety of trips for its customers.
The service can be as simple as making airline, train, hotel, cruise, car rental, or personal tour arrangements for the customer. A customer can require a single type of service or have a highly complicated travel request.
Internal Operations The internal operations at the travel agency are split into two parts: Travel Enablement and Travel Billing.
Travel Enablement begins with qualifying potential suppliers of travel services. The agency does not provide the actual travel but makes the arrangements. The agency must know the scope of services provided, as well as the quality of the services, the reliability
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of the provider, the safety of the service, the financial solvency, the language capability of the provider, and the like. As people travel throughout the world, it is critical to qualify any service providers used by the agency. The better the agency develops its external suppliers, the better it can match its customers with the right service providers.
The next step deals with the different forms of credit since no business transaction is completed without assuring the financing first. Providers in many developing nations don’t accept credit cards for payment, so it may be necessary to arrange bank transfers (possibly in the local currency) to finalize the service commitment. The agency must also clarify refund and cancellation policies.
Pricing deals with negotiation of terms for delivery of the service and price discounts. Group discounts may be available. Discounts may be offered for services booked during traditionally low seasons. The agency can use integrated cost data, including available discounts and other incentives, to influence customer decisions.
The last process of Travel Enablement is assuring that any risk is minimized for the customer. This can be done by having integrated supplier performance files. The agency can evaluate past performance by the supplier and determine how to minimize any risk associated with using the supplier (a backup provider, just in case) or travel insurance.
Travel Enablement is about having a database of service providers that can be accessed instantly for use in arranging real-time travel for customers. Often the customer is sitting at the desk of a travel agent or is on the phone or Internet with the agent. The integrated database facilitates travel arrangements.
Travel Billing includes invoicing, dispute resolution, and payment to suppliers. The agency creates an integrated invoice for its customers. The agency can have both commercial and private accounts. Commercial clients can often receive a consolidated invoice monthly. Most private accounts are invoiced after the trip has been booked. It can include a payment required at time of booking, with the balance due prior to the actual travel. Providing a consolidated invoice reduces the number of transactions with the customer. Often systems for electronic payment are used.
The agency can be the focal point for all complaint resolution. This reduces the risk of miscommunications and provides a resolution process for both the customer and the service provider.
Payment of the invoice to the agency results in subsequent payment to the service providers. Ideally, payments are processed by data transfer, thus reducing the time to cash for the service providers.
The External Distributors
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side solutions. They are owned by the supplier and only offer the supplier’s product line. The primary benefits to the customers are reduced inventory replenishment costs and supplier-paid system costs.
In the late 1970s, electronic data interchange (EDI) emerged. EDI is a form of computer-to-computer communication standardized for sharing business documents such as invoices, purchase orders, shipping bills, and product stocking numbers. Most large firms have EDI systems, and most inventory groups have industry standards for defining the documents to be communicated. EDI systems are buyer-side solutions: they are designed to reduce the procurement costs for the buyer. EDI systems generally serve a specific industry.
In the mid-1990s, electronic storefronts emerged. Electronic showplaces are on-line catalogs of products made available to the general public by a single supplier. These storefronts evolved from the automated order entry systems. They are far less expensive than their predecessors because (1) they use the Internet as the communication medium, and (2) the storefronts tend to carry products that serve a number of different industries.
Net marketplaces emerged in the late 1990s. A net marketplace is designed to bring hundreds or thousands of suppliers (each with electronic catalogs) together with a significant number of purchasing firms in a single Internet-based environment to conduct trade. Covisint (www.covisint.com) is an example of a successful net marketplace. Covisint was started in 1999 by a consortium of the following auto manufacturers: General Motors, Ford Motor Company, DaimlerChrysler, Nissan, and Renault. Its purpose was to address escalating costs and gross inefficiencies within their industry. Covisint leveraged the power and potential of the Internet to solve industry- specific business problems in real time. Its goal was to deliver a secure marketplace, portal, and application-sharing platform for the global automotive industry. Currently, Covisint has more than 300,000 users that represent more than 45,000 organizations, and does business in 96 countries. Covisint streamlines and automates business processes, globally connecting business communities in the manufacturing, healthcare, aerospace, public sector, and financial services industries. A net marketplace can also facilitate on-line auctions. Two types of auctions are forward auctions (where suppliers auction excess inventory and receive the market price for their surplus goods) and reverse auctions (where buyers post electronic requests for quotes (eRFQs) for goods and services and suppliers bid for business on-line).
A virtual private network (VPN) is a computer network in which some of the links between nodes are carried by open connections or virtual circuits on the Internet instead of by physical wires. An organization can have a VPN for use by its own employees as well as suppliers and customers. Through this network, buyers and suppliers can work together on product design and development, manage inventory replenishments,
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coordinate production schedules, and work as partners. Access to the VPN is typically password controlled. More than likely, your university has a VPN for your use.
The Benefits of B2B E-Commerce The potential benefits from Internet-based B2B commerce include: Lower procurement administrative costs. Low-cost access to global suppliers. Lower inventory investment due to price transparency and quicker response times. Better product quality because of increased cooperation between buyers and sellers, especially during product design and development.
Business-to-Consumer (B2C) E-Commerce In business-to-consumer e-commerce , on-line businesses try to reach individual consumers. Let’s examine the different models that on-line businesses use to generate revenue. In the advertising revenue model , a Web site offers its users information on services and products, and provides an opportunity for providers to advertise. The company receives fees for the advertising. Yahoo.com derives its primary revenue from selling advertising such as banner ads.
In the subscription revenue model , a Web site that offers content and services charges a subscription fee for access to the site. One example is Consumer Reports Online (www.consumerreports.org), which provides access to its content only to subscribers at a rate of $3.95 per month. Companies using this model must offer content perceived to be of high value that is not readily available elsewhere on the Internet for free.
In the transaction fee model , a company receives a fee for executing a transaction. For example, Orbitz (www.orbitz.com) charges a small fee to the consumer when an airline reservation is made. Another example, E*Trade Financial Corporation, an on-line stockbroker (www.etrade.com), receives a transaction fee each time it executes a stock transaction.
In the sales revenue model , companies sell goods, information, or services directly to customers. Amazon.com, primarily a book and music seller, Travelocity.com, an airline and hotel reservations provider, and DoubleClick Inc. (www.doubleclick.net), a company that gathers information about on-line users and sells it to other companies, all use the sales revenue model.
In the affiliate revenue model , companies receive a referral fee for directing business to an “affiliate” or receive some percentage of the revenue resulting from a referred sale. For example, MyPoints.com receives money for connecting companies with potential customers by offering special deals. When members take advantage of the deal, they earn points that can later be redeemed for goods.
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service representative to be linked together. Lands’ End’s “virtual model” highlights how far technology has advanced. A few strokes on the keyboard and the shopper is able to produce an on-screen model with his or her body measurements. Even though this virtual model is not perfect, over 1 million shoppers have built their own models at the Lands’ End site.
An additional issue here is how companies handle the return of unwanted merchandise and provide for product exchanges or refunds. The Boston Consulting Group (BCG) reported that the “absence of a good return mechanism” was the second-highest reason shoppers cited for not shopping on the Web. There are methods for handling returns. An on-line company often first requires authorization to return an item, then the customer must pack up the item, pay to ship it back to the company, insure the item, and then wait for a credit to be made. Once the item is returned, the original seller must unpack the item, inspect the item, check the paperwork, and try to resell the item. Typically, neither the buyer nor seller is happy with the process.
Another approach allows the customer to drop the returned items at collection stations (sometimes the physical stores of the company, for example, Staples, Inc., Sears, OfficeMax, Inc., etc.). The returned items can then be sold from the receiving store or picked up in bulk and returned to the distribution point. Another approach is to completely outsource returns. FedEx and UPS provide such services.
In addition to buying products on-line, consumers also buy on-line services. Finance, insurance, real estate services, business services, and health services are the largest on-line service industries. Business services include consulting, advertising and marketing, and information processing.
Service organizations are categorized either as those that do transaction brokering or those that provide a “hands-on” service. An example of transaction brokering is a company providing financial services that has stockbrokers acting as intermediaries between buyers and sellers of stock. An example of a “hands-on” service is a legal service that interacts directly with the consumer to create a legal document. In general, most service organizations are knowledge- and information-intense. To provide value to consumers, these service companies must process considerable information (legal services or medical services) and employ a highly educated and skilled workforce (lawyers and doctors).
Globalization As globalization continues to increase, supply chains cover greater geographical distances, face greater uncertainty, and can end up being less efficient. Beginning in 2004, prices for steel, oil, copper, cement, and coal began rising at double-digit rates. These increases led buyers to look globally for lower-cost alternative suppliers. After purchasing items offshore, companies were challenged with moving the commodities
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over longer distances. This increase in volume resulted in a transportation capacity crunch and led to higher transportation rates. The lack of capacity slowed down supply chains, causing inventory levels to rise. The U.S. Commerce Department reported an increase in the level of inventory by November 2004 to 1.24. This means that it took approximately $1.24 of inventory to support every dollar of sales. In 2008, transportation rates went even higher due to the very high fuel costs. These higher costs have prompted companies to reexamine their offshore sourcing and to consider returning to onshore suppliers.
Ocean carriers have predicted that the volume of goods shipped from Asia to the United States will continue to have double-digit annual increases. Most of these inbound goods are shipped through U.S.West Coast ports. The higher trade volume has caused port congestion in California and Washington State. In an effort to ease port congestion, ocean carriers introduced larger ships for use on the transpacific routes. While it was hoped that these larger ships would add needed capacity and reduce operating costs, only a few U.S. ports are capable of handling the larger ships. The ships take longer to unload and reload, tying up the port for five to seven days rather than the normal two days. The longer port time has reduced terminal efficiency. Previously, importers were allowed more free time (the time cargo may occupy assigned space free of storage charges) for containers at U.S. port terminals. Container free time basically provided a cheap form of portable warehousing for importers. Because of the terminal inefficiency, container free time has been reduced and ports have increased storage capacity in an effort to turn equipment around faster.
Another issue is border security. Since September 11, 2001, the U.S. Bureau of Customs and Border Protection (CBP) has implemented new requirements. Essentially, these programs result in additional processing time. The CBP has also increased inspections at ports of suspicious cargo, creating additional port delays.
As supply chains expand globally, they share some common logistical characteristics. For example, with ocean shipping, goods tend to arrive at a warehouse in very large quantities. Because of bulk arrivals, greater break-bulk activity is required.
Break-bulk entails sorting the bulk shipments into smaller customer shipments. These global supply chains typically have higher inventory levels. Managing global supply chains will be challenging in the near future.
Government Regulation and E-Commerce The issue of government regulation of the Internet is still unresolved. Although early Internet users claimed the Internet could not be controlled given its decentralized design and its ability to cross borders, it is clear that the Internet can be controlled. In China, Malaysia, and Singapore, access to the Internet is controlled from government- owned centralized routers. This allows these countries to block access to U.S. or
Bachelor of Science in Accounting Information System
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Bulacan Polytechnic College
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the code are found, corrective action is taken with the intent of building a better supply chain capability. In short, the organization is telling the members of its supply chain: “This is what you must do to be part of our supply chain. If you don’t, we fix it. If it doesn’t get fixed, we find a new member for our supply chain.” The debate centers around how many organizations have that much leverage with members of their supply chain. Clearly, an organization such as Wal-Mart has considerable leverage. In fact, it uses a packaging scorecard to evaluate packaging compliance by members of its supply chain.
For supply chains doing business globally, it is important that they understand the packaging restrictions. For example, within the European Union cardboard boxes must be removed from consumption sites and recycled. As a result, U.S. automobile parts producers ship products in reusable containers rather than disposable contains. Reusable packaging products are used to move, store, and distribute products within a single operation or an entire supply chain. Plastic reusable packaging, a form of reusable packaging, can be used to package anything from raw materials to finished goods. It can be used within reverse logistics to return empty containers or pallets for reuse or replenishment. Products include handheld containers, pallets, bulk containers, protective interiors, and custom-designed and engineered packaging.
Companies doing business globally must also focus on the final disposition of products and packaging. The Herman Miller Company uses a design for the environment approach in new product design. To eliminate confusion as to what is a sustainable product, Herman Miller uses the McDonough Braungart Design Chemistry certification process, which is a “cradle-to-cradle” protocol for designing products in a way that they are better for the environment. For Herman Miller, the issues centered on chemicals used and ease of disassembly of recyclable parts. It is clear that for global supply chains it will be important to be green, not only in terms of the environment but also in terms of eliminating waste and allowing the supply chain to be financially solvent. Other organizations perform supply chain carbon footprint analysis. Consider the following simple supply chain example shown in Figure 4-5. When looking at the supply chain for potato chips, the chain begins with the farmer growing the potatoes, moves to the manufacturing of the chips, then their packaging, the transporting of the chips to the customer, and finally the disposal of the empty packaging. If you mapped out the carbon footprint for this supply chain, you would find that 44 percent of the carbon footprint occurred at the farm, 30 percent in the manufacturing of the chips, 15 percent in the packaging process, 9 percent in transporting the chips to market, and only 2 percent in the disposal process. In this supply chain, it turns out that the farmer was overweighting the potatoes with water, since the manufacturer bought the potatoes based on weight. Because of how the potatoes were bought, they had too much water in them; this slowed down the manufacturing process, which needed to boil out excess water before processing the chips. When the manufacturer changed how potatoes were bought—based now on volume rather than on weight— the manufacturer required only
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half as much time to process the chips. This saved considerable energy and reduced the carbon footprint. Unfortunately, attention is often fixed on the disposal process, which can be a very small contributor to the overall carbon footprint. The gain in this example lies not only in reducing the footprint, but also in becoming a more efficient and effective supply chain by eliminating a waste-causing activity.
Infrastructure Issues Global supply chains with members in developing countries can face substantial infrastructure issues (such as inadequate transportation networks, limited telecommunication capabilities, uncertain power continuity, low worker skill, poor supply availability and quality, etc.). Each of these issues increases uncertainty in supply and demand for the supply chain, which results in higher costs and poorer service.
Inadequate transportation networks increase distribution lead times. Roads may be inadequate to transport heavy loads (necessitating the creation of smaller loads), rail travel may not be available or very limited in terms of frequency (once or twice a week), air service may be limited in frequency (one or two flights per day or less), and ocean
