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SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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4 Supply Chain Management: Concepts, Techniques, and Practices
Figure 1.1. In this supply chain, Dell Computer is the captain of the
chain; the company selects suppliers, forges partnerships with other
members of the supply chain, fulfills orders from customers and follows
up the business transaction with services.
Now, consider a case of purchasing a pack of Perdue chicken breast
at Sam’s Club. When customers buy trays of chicken breast at Sam’s
Club, the demand is satisfied from inventory that is stocked in a Sam’s
Club distribution center. Production at a Perdue Farms manufacturing
facility is based on forecasted demand using historical sales data. Perdue
Farms runs a vertical supply chain starting from the eggs, to the grains
that feed chicks proceeding to manufacturing, packaging, and delivery.
Packaging materials come from suppliers. This is an efficient supply
chain and is illustrated in Figure 1.1.
These two different types of supply chain, responsive supply chain
and efficient supply chain, will be discussed in detail in Section 1.4.
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 5
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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6 Supply Chain Management: Concepts, Techniques, and Practices
own set of suppliers (second-tier suppliers) that provide inputs that are
also part of the supply chain.
The distribution network on the right-hand side of Figure 1.1 is
responsible for the actual movement of materials between locations.
Distribution management involves the management of packaging, storing,
and handling of materials at receiving docks, warehouses, and retail
outlets. A major part of distribution management is transportation
management, which includes the selection, and management of external
carriers or internal private fleets of carriers.
E-commerce uses advanced technology to assist business
transactions in a web-based environment and facilitates the transaction of
information flow and fund flow. E-commerce involves business-to-
business transaction (B2B) such as Covisint, business-to-customer
transaction such as Amazon.com (B2C), customer-to-business transaction
(C2B) such as priceline.com, and customer-to-customer transaction
(C2C) such as e-Bay auction. E-commerce is conducted via a variety
of electronic media. These electronic media include electronic data
interchange (EDI), electronic funds transfer (EFT), bar codes, fax,
automated voice mail, CD-ROM catalogs and a variety of others.
E-distribution instructs where to locate the sources of supply and
advises how to access them, as well as how to move the materials to the
retailers via the Internet or a web-based environment.
E-procurement is a part of E-commerce. E-procurement completely
revolutionizes a manufacturing or distribution firm’s supply chain,
making a seamless flow of order fulfillment information from
manufacturer to supplier.
Now we have characterized the nature of supply chain management,
we are ready to make a few relevant points:
1. The role of supply chain management is to produce products that
conform to customer requirements.
2. The objective of supply chain management is to be efficient and
cost-effective through collaborative efforts across the entire
system.
3. The scope of supply chain management encompasses the firm’s
activities from the strategic level through the tactical and
operational levels since it takes into account the efficient
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 7
1
Butler, S. (2000). “The economy downshifts; the Fed tries to do what’s never
been done before: engineer a soft landing.” U.S News and World Report, June
19, 2000.
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8 Supply Chain Management: Concepts, Techniques, and Practices
The integrated supply chain model that Dell Inc. creates is illustrated
in Figure 1.2 (b). This model focuses on mutual trust and respect of
supply chain members, just-in-time manufacturing, and eliminating
third-party retailers. With this integrated supply chain, Dell only holds
five days of inventory, and has a build cycle of two days on most
systems. The integrated supply chain includes joint improvement
projects, training seminars, workshops, and meetings between
organizations’ top management. As the degree of communication
increases between customers and suppliers, higher levels of informal
information sharing are witnessed.
A step ahead of integrated supply chain is virtual integration, which
blurs the walls of supply chain organizations as illustrated in Figure 1.2
(c). The trend of mass-customization forces many companies to focus on
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 9
2
Federal Reserve Bank of Dallas, (1999). “The new paradigm,” 1999 Annual
Report. http://www.dallasfed.org/fed/annual/1999p/ar99.pdf.
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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10 Supply Chain Management: Concepts, Techniques, and Practices
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 11
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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12 Supply Chain Management: Concepts, Techniques, and Practices
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 13
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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14 Supply Chain Management: Concepts, Techniques, and Practices
supply chain include line flows, large volume production, and low-
capacity cushions.
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 15
and services to our home, public centers, and offices evolve daily. CD
players, DVD are just a couple of examples. Organization structure is
dynamic as well. Relationship among media giants such as Time-
Warner, Disney, and Viacom are negotiated, signed, and re-negotiated
constantly to accommodate the changes in product and process design.
Aircraft industry is an example of slow clock-speed product industry.
The Boeing Company measures its product’s clock-speed in decades.
Thirty years after Boeing 747 was first introduced, the profit generated
from selling Boeing 747 is still flowing in. Boeing 747 produced and
sold in 2000 has the same manufacturing plant as it had for the first of
these aircraft.
Somewhere in the middle is automobile industry. The product does
not change as fast as information-entertainment industry, nor does it as
slow as aircraft industry. Passenger cars, for example, have a product
life of three to five years. As for its process clock-speed, each time
automaker makes a new design, it expects much of that investment to be
obsolete in four to five years.
Supply chain design should reflect the nature of the product clock-
speed; understanding what requirements would make it more likely for
one to have an effective supply chain or vice versa. Analyzing the clock-
speed of product, process and organization enables us to see with greater
clarity and accuracy of the future needs from our customers.
All processes in a supply chain fall into one of two categories: push or
pull. In the push process, production of a product is authorized based on
forecasting which is in advance of customer orders. In the pull process,
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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16 Supply Chain Management: Concepts, Techniques, and Practices
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 17
3
David Simchi-Levi (2002) presentation at Conference on Optimization in
Supply Chain Management and E-commerce, Gainesville, Florida.
4
Lee, H L., Padmanabhan, V., Whang S., (1997). The bullwhip effect in
supply chains. Sloan Management Review, 38(3), 93-103.
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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18 Supply Chain Management: Concepts, Techniques, and Practices
which the demand was significantly higher or lower than any other. The
distributor’s orders placed to the factory fluctuated much more than retail
sales. In addition, P&G’s orders to its suppliers fluctuated even more.
This phenomenon of increasing variability in demand in a supply chain is
referred to as the bullwhip effect. The bullwhip effect is essentially the
artificial distortion of consumer demand figures as they are transmitted
back to the suppliers from the retailer.
One way to address the bullwhip effect caused by order batching is to
collaboratively plan production, forecast demand, and replenish
inventory. This will lead to smaller order sizes, smoothed production
volumes, and more frequent order replenishment. The result will be a
smoother flow of smaller orders that the distributors and manufacturers
are able to handle more efficiently.
In recently years, retailers have initiated collaborative agreements
with their supply chain partners to establish on going planning,
forecasting, and replenishment process. This initiative is called
collaborative planning, forecasting, and replenishment issues (CPFR).
The Association for Operations Management defines CPFR as follows:
“Collaboration process whereby supply chain trading partners
can jointly plan key supply chain activities from production and
delivery of raw materials to production and delivery of final
products to end customers” - The Association for Operations
Management” - The Association for Operations Management5.
5
The Association for Operations Management is formerly known as American
Production and Inventory Control Society (APICS).
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 19
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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20 Supply Chain Management: Concepts, Techniques, and Practices
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 21
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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22 Supply Chain Management: Concepts, Techniques, and Practices
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Introduction to Supply Chain Management 23
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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24 Supply Chain Management: Concepts, Techniques, and Practices
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 25
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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26 Supply Chain Management: Concepts, Techniques, and Practices
1.7 Summary
Supply chain integration is difficult for two primary reasons: first, the
supply chain is an integrated system that requires cohesive decisions to
optimize the system profit and value. In practice, different facilities in
the supply chain may have different, conflicting objectives. Second, the
supply chain is a dynamic system, which has its own life cycle and
continually evolves. For example, customer demand and supplier
capabilities change over time, as do supply chain relationships.
A number of important challenges exist for supply chain managers.
For example, supply chain design and strategic collaboration are quite
difficult because of the dynamics and the conflicting objectives
employed by different facilities and partners. Inventory control is
another tough issue. What is the effect of inventory on system
performance? Why should a supply chain member hold inventory?
Distribution network configuration involves management’s making
decisions regarding warehouse locations and capacities; determining
production levels for each product at each plant; and set transportation
flows between facilities to minimize total production, inventory, and
transportation costs and satisfy service level requirements.
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Introduction to Supply Chain Management 27
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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28 Supply Chain Management: Concepts, Techniques, and Practices
create value for the supply chain members with an emphasis on the end
users. The mechanism to realize value-added activities in supply chain is
collaborative planning, forecasting, and replenishment among the supply
chain members.
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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Introduction to Supply Chain Management 29
References
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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30 Supply Chain Management: Concepts, Techniques, and Practices
SUPPLY CHAIN MANAGEMENT: CONCEPTS, TECHNIQUES AND PRACTICES - Enhancing Value Through Collaboration
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