Operations Management

Lect. 5 “Supply Chain Management”

Dr: Aly Hassan Elbatran

Head of Mechanical Engineering Department

Faculty of Engineering, Arab Academy for Science
and Technology and Maritime Transport, Egypt

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 Supply Chain
Supply chain:- A network of all the activities involved in delivering a finished
product or service to the customer.

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 Supply Chain
 The external suppliers 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 distribution
centers or to wholesalers.
 Next, the product is shipped to
retailers who sell the product to
the customer.
 Goods flow from the beginning of
the chain through the
manufacturing process to the
customer.
 Relevant information flows back
and forth among members of the
supply chain.
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 Supply Chain Flow

Material Flow

Initial supplier Ultimate customer

Information Flow

There must be a good inter-organizational information

provide the required information flow.

© 2006 Prentice Hall, Inc. 3 11 – 4

 Supply Chain Management

 Supply-chain management is the integration of the activities that

procure materials and services, transform them into intermediate

goods and the final product, and deliver them to customers.

 Coordinating the movement of goods through the supply chain

from suppliers to manufacturers to distributors to the final

customers

 Sharing relevant information such as sales forecasts, sales data,

and promotional campaigns among members of the chain

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 Supply Chain Management

 Competition is no longer between companies; it is between supply

chains

 Supply chain management provides the company with a sustainable,

competitive advantage,

 quick response time,

 low cost,

 quality design,

 operational flexibility.

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 Supply Chain Components for a Manufacturer

 A company’s supply chain

structure has three

components:

 external suppliers,

 internal functions of

the company,

 external distributors.

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 Supply Chain Components for a Manufacturer
External Suppliers

Tier one supplier

Supplies materials or services directly to

the processing facility.

Tier two supplier

Directly supplies materials or services to

a tier one supplier in the supply chain.

Tier three supplier

Directly supplies materials or services to

a tier two supplier in the supply chain.

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 Supply Chain Components for a Manufacturer
Internal Functions
Internal functions in, for example, a dairy products supply chain are as follows:

 Processing, which converts raw milk into dairy products and packages these

products for distribution to retail grocery outlets.

 Purchasing, which selects appropriate suppliers, ensures that suppliers perform

up to expectations, administers contracts, and develops and maintains good

supplier relationships.

 Production planning and control, which schedules the processing of raw milk

into dairy products.

 Quality assurance, which oversees the quality of the dairy products.

 Shipping, which selects external carriers and/or a private fleet to transport the

product from the manufacturing facility to its destination.

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 Supply Chain Components for a Manufacturer
External Distributors

 External distributors transport finished products to the appropriate locations for

eventual sale to customers.

 Logistics managers are responsible for managing the movement of

products between locations. Logistics includes traffic management and

distribution management.

 Traffic management is the selection and monitoring of 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.

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 BULLWHIP EFFECT
 Bullwhip effect:- Inaccurate or distorted demand information created in the
supply chain.
 causes erratic replenishment orders placed on different levels in the
supply chain that have no apparent link to final product demand.
 Results are excessive inventory investment, poor customer service levels,
ineffective transportation use, misused manufacturing capacity, and lost
revenues

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 BULLWHIP EFFECT
Four ways of counteracting the bullwhip effect:

1. Change the way suppliers forecast product demand by making this

information from the final-seller level available to all levels of the supply

chain. This allows all levels to use the same product demand information

when making replenishment decisions. Companies can do this by collecting

point-of-sale (POS) information, a function available on most cash registers.

2. Eliminate order batching. Companies typically use large order batches

because of the relatively high cost of placing an order. Supply chain

partners can reduce ordering costs by using electronic data interchange

(EDI) to transmit information. Lower ordering costs eliminate the need for

batch orders.
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 BULLWHIP EFFECT

3. Stabilize prices. Manufacturers can eliminate incentives for

retail forward buying by creating a uniform wholesale pricing

policy. In the grocery industry, for example, major

manufacturers use an everyday low-price policy or a value-

pricing strategy to discourage forward buying.

4. Eliminate gaming. Instead of filling an order based on a set

percentage, manufacturers can allocate products in proportion

to past sales records. Customers then have no incentive to

order a larger quantity to get the quantity they need.

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Supply Chain Management vs. Traditional Purchasing

• Traditional purchasing focuses on initial cost;

SCM focuses on total cost of ownership

• Traditional purchasing tries to negotiate the

price that is best for the purchaser; SCM
focuses on negotiating a price that is best for the
entire supply chain.

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 Supply Chain Focuses

Traditional purchasing focuses on the flow

of goods and information from the
immediate supplier and immediate
customer; SCM focuses on the flow of
goods and information from initial supplier to
ultimate customer.

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SUPPLY CHAINS FOR SERVICE ORGANIZATIONS

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Main Issues Affecting Supply Chain Management
E-Commerce
 E-commerce and e-business are defined as the use of the Internet and the
Web to transact business.
 E-business refers to transactions and processes within an organization, such as
a company’s on-line inventory control system, that support supply chain
management.
 E-commerce includes B2B (business-to-business) and B2C (business-to-
consumer) transactions.
 Business-to-business e-commerce:- Businesses selling to and buying
from other businesses.
 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.

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 E- commerce
On-line retailing, or business-to-consumer e-commerce, has shifted the power
from the suppliers to the consumers.
This shift in power has occurred because the Internet greatly reduced search
and transaction costs for the consumer.

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E- Purchasing Vs. Traditional Purchasing
E-purchasing is defined as the use of information and
communications technology through electronic means
to enhance external and internal purchasing and supply
management processes. It is not just automating the
purchasing function, but requires that an organization
have a well-defined purchasing and supply
management strategy.

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 Green Supply Chain Management
Green supply chain management has focused on the role of the supply chain
with regard to its impact on the present natural environment as well as to the
generation of any future environmental change.

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 Green Supply Chain Management (Example)
Carbon footprint of potato chip supply chain
 When the manufacturer changed how
potatoes were bought based now on
volume rather than on weight the
manufacturer required only half as
much time to process the chips.
 This saved considerable energy and
reduced the 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.

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 Sourcing Issues

 Vertical integration:- A measure of how much of the supply chain is

actually owned or operated by the manufacturing company.

 Insource:- Processes or activities that are completed in-house.

 Outsource:- Processes or activities that are completed by suppliers.

 Backward integration:- Owning or controlling sources of raw materials

and components.

 Forward integration:- Owning or controlling the channels of distribution.

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 Insourcing Vs. Outsourcing Decisions

 The total cost of buying the item is any fixed annual cost associated with buying
the product plus a variable cost for each item bought during the year, or

𝑻𝑪𝒃𝒖𝒚 = 𝑭𝑪𝒃𝒖𝒚 + (𝑽𝑪𝒃𝒖𝒚 x Q)

Where:-
TCBuy total annual costs of buying the item from a supplier
FCBuy fixed annual costs associated with buying the item from the supplier
VCBuy variable costs per unit associated with buying the item from the supplier
Q quantity of units bought

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 Insourcing Vs. Outsourcing Decisions

 Similarly, we calculate the total cost of making the item in-house as

𝑻𝑪𝒎𝒂𝒌𝒆 = 𝑭𝑪𝒎𝒂𝒌𝒆 + (𝑽𝑪𝒎𝒂𝒌𝒆 x Q)

where
TCMake total annual costs of making the item in-house
FCMake fixed annual costs associated with making the item in-house
VCMake variable costs per unit associated with making the item in-house
Q quantity of units made in-house

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 Insourcing Vs. Outsourcing Decisions:- Example

Two recent college graduates, Mary and Sue, have decided to open a bagel shop. Their
first decision is whether they should make the bagels on-site or buy the bagels from a
local bakery. They do some checking and learn the following:
• If they buy from the local bakery, they will need new airtight containers in which to store
the bagels delivered from the bakery. The fixed cost for buying and maintaining these
containers is $1000 annually.
• The bakery has agreed to sell the bagels to Mary and Sue for $0.40 each.
• If they make the bagels in-house, they will need a small kitchen with a fixed cost of
$15,000 annually and a variable cost per bagel of $0.15.
• They believe they will sell 60,000 bagels in the first year of operation.
(a) Should Mary and Sue make or buy the bagels?
(b) If Mary and Sue are uncertain as to the demand for bagels next year, what is the
indifference point between making or buying the bagels?

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 Insourcing Vs. Outsourcing Decisions:- Example

𝑇𝐶𝑏𝑢𝑦 = 𝐹𝐶𝑏𝑢𝑦 + (𝑉𝐶𝑏𝑢𝑦 x Q)= 1000$+ (60,000 X 0.4)= 25,000$

𝑇𝐶𝑚𝑎𝑘𝑒 = 𝐹𝐶𝑚𝑎𝑘𝑒 + (𝑉𝐶𝑚𝑎𝑘𝑒 x Q) =15,000$ + (60,000 X 0.15)= 24,000$

𝑭𝑪𝒃𝒖𝒚 + (𝑽𝑪𝒃𝒖𝒚 x Q)= 𝑭𝑪𝒎𝒂𝒌𝒆 + (𝑽𝑪𝒎𝒂𝒌𝒆 x Q)

𝟏𝟎𝟎𝟎$+ (𝟎. 𝟒$ x Q)= 𝟏𝟓𝟎𝟎𝟎$+ (𝟎. 𝟏𝟓$ x Q)

Solving for Q , Q= 56,000 bagels

Since the costs are equal at 56,000 bagels and Mary and Sue expect to use 60,000
bagels, they should make the bagels in house rather than buy them from the local
bakery. By making the bagels, the cost for each additional bagel above 56,000 is
$0.15 instead of the $0.40 they would pay the local bakery for each bagel.

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 Ethics in Supply Chain
ISM Principles and Standards of Ethical Supply Management Conduct

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Ethics in Supply Chain

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THANK YOU

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