Supply chain management is the streamlining of a business' supply-side activities to maximize customer value and to gain a competitive advantage in the marketplace. Supply chain management (SCM) represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Supply chains cover everything from production, to product development, to the information systems needed to direct these undertakings.

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2. 2
The Supply Chain’sThe Supply Chain’s
Strategic ImportanceStrategic Importance
Supply chain management is theSupply chain management is the
integration of the activities thatintegration of the activities that
procure materials and services,procure materials and services,
transform them into intermediatetransform them into intermediate
goods and the final product, andgoods and the final product, and
deliver them to customersdeliver them to customers
Competition is no longer betweenCompetition is no longer between
companies; it is between supply chainscompanies; it is between supply chains

3. 3
Supply Chain ManagementSupply Chain Management
1.1. Transportation vendorsTransportation vendors
2.2. Credit and cash transfersCredit and cash transfers
3.3. SuppliersSuppliers
4.4. DistributorsDistributors
5.5. Accounts payable and receivableAccounts payable and receivable
6.6. Warehousing and inventoryWarehousing and inventory
7.7. Order fulfillmentOrder fulfillment
8.8. Sharing customer, forecasting, andSharing customer, forecasting, and
production informationproduction information
Important activities include determiningImportant activities include determining

4. 4
A Supply Chain for BeerA Supply Chain for Beer
Figure 11.1Figure 11.1

5. 5
Global Supply ChainGlobal Supply Chain
IssuesIssues
 React to sudden changes in partsReact to sudden changes in parts
availability, distribution, or shippingavailability, distribution, or shipping
channels, import duties, and currency rateschannels, import duties, and currency rates
 Use the latest computer and transmissionUse the latest computer and transmission
technologies to schedule and manage thetechnologies to schedule and manage the
shipment of parts in and finished productsshipment of parts in and finished products
outout
 Staff with local specialists who handleStaff with local specialists who handle
duties, freight, customs and political issuesduties, freight, customs and political issues
Supply chains in a global environmentSupply chains in a global environment
must be able tomust be able to

6. 6
How Supply ChainHow Supply Chain
Decisions Impact StrategyDecisions Impact Strategy
Low-CostLow-Cost
StrategyStrategy
ResponseResponse
StrategyStrategy
DifferentiationDifferentiation
StrategyStrategy
Supplier’sSupplier’s
goalgoal
Supply demandSupply demand
at lowestat lowest
possible costpossible cost
(e.g., Emerson(e.g., Emerson
Electric, TacoElectric, Taco
Bell)Bell)
Respond quicklyRespond quickly
to changingto changing
requirementsrequirements
and demand toand demand to
minimizeminimize
stockouts (e.g.,stockouts (e.g.,
Dell Computers)Dell Computers)
Share marketShare market
research;research;
jointly developjointly develop
products andproducts and
options (e.g.,options (e.g.,
Benetton)Benetton)
PrimaryPrimary
selectionselection
criteriacriteria
Select primarilySelect primarily
for costfor cost
Select primarilySelect primarily
for capacity,for capacity,
speed, andspeed, and
flexibilityflexibility
Select primarilySelect primarily
for productfor product
developmentdevelopment
skillsskills
Table 11.1Table 11.1

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How Supply ChainHow Supply Chain
Decisions Impact StrategyDecisions Impact Strategy
Low-CostLow-Cost
StrategyStrategy
ResponseResponse
StrategyStrategy
DifferentiationDifferentiation
StrategyStrategy
ProcessProcess
charact-charact-
eristicseristics
Maintain highMaintain high
averageaverage
utilizationutilization
Invest in excessInvest in excess
capacity andcapacity and
flexibleflexible
processesprocesses
ModularModular
processes thatprocesses that
lendlend
themselves tothemselves to
massmass
customizationcustomization
InventoryInventory
charact-charact-
eristicseristics
MinimizeMinimize
inventoryinventory
throughout thethroughout the
chain to holdchain to hold
down costdown cost
DevelopDevelop
responsiveresponsive
system withsystem with
buffer stocksbuffer stocks
positioned topositioned to
ensure supplyensure supply
MinimizeMinimize
inventory in theinventory in the
chain to avoidchain to avoid
obsolescenceobsolescence
Tab 11.1Tab 11.1

8. 8
How Supply ChainHow Supply Chain
Decisions Impact StrategyDecisions Impact Strategy
Low-CostLow-Cost
StrategyStrategy
ResponseResponse
StrategyStrategy
DifferentiationDifferentiation
StrategyStrategy
Lead-timeLead-time
charact-charact-
eristicseristics
Shorten leadShorten lead
time as long astime as long as
it does notit does not
increase costsincrease costs
InvestInvest
aggressively toaggressively to
reducereduce
production leadproduction lead
timetime
InvestInvest
aggressively toaggressively to
reducereduce
developmentdevelopment
lead timelead time
Product-Product-
designdesign
charact-charact-
eristicseristics
MaximizeMaximize
performanceperformance
and minimizeand minimize
costscosts
Use productUse product
designs thatdesigns that
lead to lowlead to low
setup time andsetup time and
rapidrapid
productionproduction
ramp-upramp-up
Use modularUse modular
design todesign to
postponepostpone
productproduct
differentiationdifferentiation
as long asas long as
possiblepossible
Table 11.1Table 11.1

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Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Maintain core competenceMaintain core competence
2.2. Lower production costLower production cost
3.3. Unsuitable suppliersUnsuitable suppliers
4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)
5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities
6.6. Obtain desired qualityObtain desired quality
7.7. Remove supplier collusionRemove supplier collusion
8.8. Obtain unique item that would entail a prohibitiveObtain unique item that would entail a prohibitive
commitment for a suppliercommitment for a supplier
9.9. Protect personnel from a layoffProtect personnel from a layoff
10.10. Protect proprietary design or qualityProtect proprietary design or quality
11.11. Increase or maintain size of companyIncrease or maintain size of company
Reasons for MakingReasons for Making
Table 11.4Table 11.4

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Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Frees management to deal with its coreFrees management to deal with its core
competencecompetence
2.2. Lower acquisition costLower acquisition cost
3.3. Preserve supplier commitmentPreserve supplier commitment
4.4. Obtain technical or management abilityObtain technical or management ability
5.5. Inadequate capacityInadequate capacity
6.6. Reduce inventory costsReduce inventory costs
7.7. Ensure alternative sourcesEnsure alternative sources
8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources
9.9. ReciprocityReciprocity
10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret
Reasons for BuyingReasons for Buying
Table 11.4Table 11.4

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OutsourcingOutsourcing
 Transfers traditional internalTransfers traditional internal
activities and resources of a firm toactivities and resources of a firm to
outside vendorsoutside vendors
 Utilizes the efficiency that comesUtilizes the efficiency that comes
with specializationwith specialization
 Firms outsource informationFirms outsource information
technology, accounting, legal,technology, accounting, legal,
logistics, and productionlogistics, and production

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Supply Chain StrategiesSupply Chain Strategies
 Negotiating with many suppliersNegotiating with many suppliers
 Long-term partnering with fewLong-term partnering with few
supplierssuppliers
 Vertical integrationVertical integration
 KeiretsuKeiretsu
 Virtual companies that useVirtual companies that use
suppliers on an as needed basissuppliers on an as needed basis

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Many SuppliersMany Suppliers
 Commonly used for commodityCommonly used for commodity
productsproducts
 Purchasing is typically based onPurchasing is typically based on
priceprice
 Suppliers compete with oneSuppliers compete with one
anotheranother
 Supplier is responsible forSupplier is responsible for
technology, expertise, forecasting,technology, expertise, forecasting,
cost, quality, and deliverycost, quality, and delivery

14. 14
Few SuppliersFew Suppliers
 Buyer forms longer termBuyer forms longer term
relationships with fewer suppliersrelationships with fewer suppliers
 Create value through economies ofCreate value through economies of
scale and learning curvescale and learning curve
improvementsimprovements
 Suppliers more willing to participateSuppliers more willing to participate
in JIT programs and contributein JIT programs and contribute
design and technological expertisedesign and technological expertise
 Cost of changing suppliers is hugeCost of changing suppliers is huge

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Vertical IntegrationVertical Integration
Figure 11.2Figure 11.2
Raw materialRaw material
(suppliers)(suppliers) Iron oreIron ore SiliconSilicon FarmingFarming
Backward
integration SteelSteel
Current
transformation Automobiles
Integrated
circuits Flour milling
Forward integration DistributionDistribution
systemssystems Circuit boardsCircuit boards
Finished goodsFinished goods
(customers)(customers) DealersDealers
ComputersComputers
WatchesWatches
CalculatorsCalculators
Baked goodsBaked goods
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration

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Vertical IntegrationVertical Integration
 Developing the ability to produce goods orDeveloping the ability to produce goods or
service previously purchasedservice previously purchased
 Integration may be forward, towards theIntegration may be forward, towards the
customer, or backward, towards supplierscustomer, or backward, towards suppliers
 Can improve cost, quality, and inventoryCan improve cost, quality, and inventory
but requires capital, managerial skills, andbut requires capital, managerial skills, and
demanddemand
 Risky in industries with rapid technologicalRisky in industries with rapid technological
changechange

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Keiretsu NetworksKeiretsu Networks
 A middle ground between few suppliersA middle ground between few suppliers
and vertical integrationand vertical integration
 Supplier becomes part of the companySupplier becomes part of the company
coalitioncoalition
 Often provide financial support forOften provide financial support for
suppliers through ownership or loanssuppliers through ownership or loans
 Members expect long-term relationshipsMembers expect long-term relationships
and provide technical expertise and stableand provide technical expertise and stable
deliveriesdeliveries
 May extend through several levels of theMay extend through several levels of the
supply chainsupply chain

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Virtual CompaniesVirtual Companies
 Rely on a variety of supplierRely on a variety of supplier
relationships to provide services onrelationships to provide services on
demanddemand
 Fluid organizational boundaries thatFluid organizational boundaries that
allow the creation of unique enterprisesallow the creation of unique enterprises
to meet changing market demandsto meet changing market demands
 Exceptionally lean performance, lowExceptionally lean performance, low
capital investment, flexibility, and speedcapital investment, flexibility, and speed

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Vendor SelectionVendor Selection
 Vendor evaluationVendor evaluation
 Critical decisionCritical decision
 Find potential vendorsFind potential vendors
 Determine the likelihood of themDetermine the likelihood of them
becoming good suppliersbecoming good suppliers
 Vendor DevelopmentVendor Development
 TrainingTraining
 Engineering and production helpEngineering and production help
 Establish policies and proceduresEstablish policies and procedures

20. 20
Vendor SelectionVendor Selection
 NegotiationsNegotiations
 Cost-Based Price ModelCost-Based Price Model - supplier- supplier
opens books to purchaseropens books to purchaser
 Market-Based Price ModelMarket-Based Price Model - price- price
based on published, auction, orbased on published, auction, or
indexed priceindexed price
 Competitive BiddingCompetitive Bidding - used for- used for
infrequent purchases but may makeinfrequent purchases but may make
establishing long-term relationshipsestablishing long-term relationships
difficultdifficult

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Vendor EvaluationVendor Evaluation
CriteriaCriteria WeightsWeights
ScoresScores
(1-5)(1-5)
WeightWeight
x Scorex Score
Engineering/research/innovation skillsEngineering/research/innovation skills .20.20 55 1.01.0
Production process capabilityProduction process capability
(flexibility/technical assistance)(flexibility/technical assistance)
.15.15 44 .6.6
Distribution/delivery capabilityDistribution/delivery capability .05.05 44 .2.2
Quality systems and performanceQuality systems and performance .10.10 22 .2.2
Facilities/locationFacilities/location .05.05 22 .1.1
Financial and managerial strengthFinancial and managerial strength
(stability and cost structure)(stability and cost structure)
.15.15 44 .6.6
Information systems capability (e-Information systems capability (e-
procurement, ERP)procurement, ERP)
.10.10 22 .2.2
Integrity (environmental compliance/Integrity (environmental compliance/
ethics)ethics)
.20.20 55 1.01.0
TotalTotal 1.001.00 3.93.9

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PurchasingPurchasing
 Most costly activityMost costly activity
 The acquisition of good and servicesThe acquisition of good and services
 Important to reduce cost and improveImportant to reduce cost and improve
contribution margincontribution margin

23. 23
Objective of PurchasingObjective of Purchasing
ActivityActivity
 To help identify the products andTo help identify the products and
services that can be obtained externallyservices that can be obtained externally
 To develop, evaluate, and determine theTo develop, evaluate, and determine the
best supplier, price and delivery forbest supplier, price and delivery for
these products and servicesthese products and services

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 Purchasing AgentPurchasing Agent
 A person with legal authority toA person with legal authority to
execute purchasing contracts onexecute purchasing contracts on
behalf of the firm.behalf of the firm.
 Except signing of contractExcept signing of contract
 Product functionProduct function
 Product engineering drawingProduct engineering drawing
 QC documentsQC documents
 Testing activitiesTesting activities
 Service Enterprise:Service Enterprise:
 the primary product is intellectualthe primary product is intellectual
oneone

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