Module

The Management of Lean and Agile

Organisations
6ME015

Dr Jose Reyes

Week 20
Supply Chain Management
Week 20
 Contents

• Supply chain
• Supply chain management
• The activities of a supply chain
Ø Purchasing
Ø Physical distribution / Logistics
Ø Materials management
• Supply chain improvement
Supply Chain
What is a supply chain?
• A supply chain is the connection of suppliers and customers that have a
relationship with an operation (or manufacturing process)
Supply Side Demand Side

First-tier First-tier Second-tier

Second-tier customers customers
suppliers suppliers

Chemical Plastic homeware

Wholesaler
company manufacturer
Plastic Retailer
stockist

Cardboard
company
Packaging Retailer
supplier

Ink supplier

Direct supply
Information
Source: Operations Management, 5ed, Slack, Chambers & Johnston, 2007
The supply chain of a “Big Mac”

Upstream Activities Downstream Activities

Third-tier Second-tier First-tier First-tier
supplier supplier supplier customer

Farmer Miller Bakery McDonald’s Customer

I P O I P O I P O I P O

Wheat Flour Buns A meal from buns,

from from from hamburgers and
seed wheat flour other supplies

Source: Vroman Luchsinger, MANAGING ORGANIZATION QUALITY, 1994, Page 63

 Operations performance should be seen
as a whole supply chain issue

Traditionally
looked at

What are the benefits of looking at the whole supply chain?

• It helps an understanding of competitiveness
Ø Look beyond immediate suppliers and customers
• It helps to identify the significant links in the network
Ø What are the most significant and important parts of the network that contribute to the end
customer?
• It helps focus on long-terms issues
Ø Some network links may get weak. Should they be replaced or assisted?
 Importance of a Supply Chain

Source: Corbis/ Gianni Giansanti/ Sygma

Michael Dell started in 1984 by cutting out the ‘middle man’ and delivering
computers direct to the customer
Using its direct selling methods, Dell went on to become the number one
computer maker
There are many reasons for Dell’s success but most of them come
from the way Dell configures its supply networks

Source: Operations Management, 5ed, Slack, Chambers & Johnston, 2007

Supply Chain Management
What is supply chain management?
• Supply chain management is concerned with managing the materials,
services and information that flow through the supply chain/network

• Analysis of long-term plans and requirements

‘Upstream’ flow • Market research information
What management activities may be performed on
of customer • Request of
theorders
supply side (upstream)?
requirements • Payment
• Research of potential new products and services

Flow between Flow between Flow between

processes processes processes

Consumer

• Delivery of products and services ‘Downstream’ flow

What management
• R&D of newactivities
productsmay
and be performedof products and services
services
on the demand
• Delivery side (downstream)?
information for customer
• Payment request / Credit fulfilment
What is the objective of supply chain management?

1) To effectively integrate suppliers manufacturers warehouses

customers in order to minimise system wide costs while satisfying
service-level requirements

2) Satisfy end customers by:

Ø Understanding their behaviours and markets
Ø Integrating all parts in the supply chain to share the end customer focus
Ø Integrating information technology to share information along the supply chain

3) Improve efficiency of the supply chain by:

Ø Reducing inventories, reducing time delays, shortening throughput time, balancing
capacity, coordinating the smooth flow of materials, etc.

4) Improve flexibility of the supply chain by:

Ø Adapting to new market circumstances
Why is supply chain management important?

• Millions of (£) at stake!

• Excess Inventory costs
• Excess freight charges
• Lost sales / Stock outages
• Wasted time and energy
• Extra staff
• Listings / De-
De-listings
• Customer dissatisfaction
• Capital costs
• Real estate costs
The activities of a supply chain
 Supply Chain Management Concepts
Supply side Demand side
Second-tier First-tier First-tier Second-tier End
supplier supplier customer customer customer

Purchasing and Physical distribution

Information supply management
flow management Logistics
Physical
flow Materials management

Supply chain management

Purchasing
Ø Acquire materials and services
Ø Help decide whether to make or buy / outsource
Activities: Ø Identify sources of supply
Ø Select suppliers and negotiate contracts
Ø Control vendor performance

Ø Purchasing materials with the right quality

Ø Deliver materials at the right time and in full
Objective: Ø Be flexible (able to change in terms of delivery time and quantity)
Ø Be at the right price
Ø Be efficient

Ø Major cost centre

Importance:
Ø Affects quality of product
 Purchasing Process

Suppliers Purchasing function The operation

Prepare Request
Requests
quotation for for Request for Demand
specification, quotations products from
price, delivery, customers
and services
etc. Liaison
Select between
purchasing
supplier(s) and the
Quotations operation

Produce Prepare Receive Supply to

Order
products purchase products customers
and services order and services

Deliver
Making or outsourcing? – considerations
Making or outsourcing? – example
Making or outsourcing? – example (cont’d)
Making or outsourcing? – decision logic

Does Is company’s Is significant

Is activity of No company No operations No operations No Explore
strategic have performance outsourcing
performance
importance? specialized improvement this activity
superior?
knowledge? likely?

Yes Yes Yes Yes

Explore keeping this activity in-house

Source: Operations Management, 5ed, Slack, Chambers & Johnston, 2007

Single or multi-sourcing? – advantages and disadvantages
Single-sourcing Multi-sourcing
• Potentially better quality because of • Purchaser can drive price down by
Advantages
Supplier Quality Assurance (SQA) competing tendering
possibilities
• Can switch sources in case of
• Strong relationships which are more supply failure
durable
• Wide sources of knowledge and
• Greater dependency encourages expertise to tap
more commitment and effort
• Better communication
• Higher confidentiality
• Easier to cooperate on new
product/service development • Difficult to encourage commitment
by supplier
Disadvantages • More vulnerable to disruptions if a
failure to supply occurs • Less easy to develop effective SQA

• Individual supplier more affected by • More effort needed to communicate

volume fluctuations • Suppliers less likely to invest in new
• Supplier might exert upward processes
pressure on prices if no alternative • More difficult to obtain scale
supplier is available economics
Based on what criteria a supplier may be selected?

• Company
Ø Financial stability
• Service
Ø Management
Ø Delivery on time
Ø Location
ØCondition on arrival
• Product Ø Technical support
Ø Quality Ø Training
Ø Price
 Supply Chain Management Concepts
Supply side Demand side
Second-tier First-tier First-tier Second-tier End
supplier supplier customer customer customer

Purchasing and Physical distribution

Information supply management
flow management Logistics
Physical
flow Materials management

Supply chain management

Physical distribution / Logistics

Ø Transportation / distribution of goods from operations to the

customer
Activities:
Ø Goods may be moved through Trucking; Railways, Airfreight,
Waterways and Pipelines

Ø Effectively integrate information, transportation, inventory,

warehousing, material-handling, and packing
Objective:
Ø Delivering the right goods on time
Ø Delivering products in good condition

Ø Affects the performance measure of dependability

Importance:
Ø It is estimated that it represents 10-35% of gross sales
Materials management

Ø Manage material flow and integrate it with its supporting

functions (e.g. purchasing, expediting, inventory management, storage
management, production, etc.) both through the business and
Activities: immediate customers
Ø It includes all the things from raw material, to semi-finished
and finished goods

Ø Effectively and efficiently controlling the kind, amount, location,

Objective: movement and timing of raw materials, WIP and finished products
Ø Low cost operations

Ø Great significance as it has direct relation with the efficiency of

Importance: a system
Supply chain improvement
Supply chain dynamics – Forrester Effect
Manufacturer’s Wholesaler’s
Store’s orders Sales from
orders to its orders to
to wholesaler store
suppliers manufacturer

0 0 0 0
Time Time Time Time

Manu- Whole- Retail

Supplier Consumers
facturer saler Store

How could an effect like this be avoided?

• Information sharing through the whole supply chain
Ø For example, make information on current demand available to the supply chain upstream
• Channel alignment
Ø Bring into line all operations in chain (e.g. scheduling, material movements, stock levels,
pricing and other sales strategies)
• Time compression
Ø This means speeding up the flow of material down the chain and the flow of information
back up the chain
Manufacturer’s Pipeline analogy
processing time Distribution
Time= 105 days processing
15 days
time 15 days
Supplier ‘s
processing
time 10 days

Supplier’s finished Manufacturer’s

stock 30 days finished stock 45 days Customer

Manufacturer’s Distribution
Time= 43 days processing processing
time 10 days time 3 days
Supplier ‘s
processing
time 5 days

Supplier’s Manufacturer’s
finished stock finished stock
10 days 15 days Customer
 The effects of supply chain compression
Supply chain time compression

Forecasts New products

Schedule Defects are
made closer to and service
changes impact detected faster
demand time faster to market
market faster

so can so fewer lost so reduced

so improved so easier to
respond to sales from risk of
forecasts improve quality
market changes delayed launch obsolescence
better

so less need for

safety stocks

so reduced so less
so reduced so revenues
so revenues stockholding discounted
wastage costs are maximized
are maximized costs sales

Improved profitability
Questions