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Supply Chain Management

(3rd Edition)

Chapter 1
Understanding the Supply Chain

Prof N. Balasubramanian

MMM II SEM III - 2014


1-1

Sources:
plants
vendors
ports

Regional
Warehouses:
stocking
points

Field
Warehouses:
stocking
points

Customers,
demand
centers
sinks

Supply

Inventory &
warehousing
costs
Production/
purchase
costs

Transportation
costs
Inventory &
Prof N.warehousing
Balasubramanian
costs

Transportation
costs
MMM II SEM III - 2014

Inventory
Where do we hold inventory?

Suppliers and manufacturers


warehouses and distribution centers
retailers

Types of Inventory
WIP
raw materials
finished goods

Why do we hold inventory?


Economies of scale
Uncertainty in supply and demand
Lead Time, Capacity limitations

Prof N. Balasubramanian

MMM II SEM III - 2014

Goals:
Reduce Cost, Improve Service
By effectively managing inventory:
Xerox eliminated $700 million inventory from its supply chain
Wal-Mart became the largest retail company utilizing efficient inventory
management
GM has reduced parts inventory and transportation costs by 26% annually

Prof N. Balasubramanian

MMM II SEM III - 2014

Goals:
Reduce Cost, Improve Service
By not managing inventory successfully
In 1994, IBM continues to struggle with shortages in
their ThinkPad line (WSJ, Oct 7, 1994)
In 1993, Liz Claiborne said its unexpected earning decline
is the consequence of higher than anticipated excess
inventory (WSJ, July 15, 1993)
In 1993, Dell Computers predicts a loss; Stock plunges.
Dell acknowledged that the company was sharply off in its
forecast of demand, resulting in inventory write downs
(WSJ, August 1993)

Prof N. Balasubramanian

MMM II SEM III - 2014

Understanding Inventory
The inventory policy is affected by:

Demand Characteristics
Lead Time
Number of Products
Objectives
Service level
Minimize costs

Cost Structure

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MMM II SEM III - 2014

Cost Structure
Order costs
Fixed
Variable

Holding Costs

Insurance
Maintenance and Handling
Taxes
Opportunity Costs
Obsolescence

Prof N. Balasubramanian

MMM II SEM III - 2014

Types of Inventory

Prof N. Balasubramanian

MMM II SEM III - 2014

Two Forms of Demand


Dependent
Demand for items used to produce final products
Tires for autos are a dependent demand item

Independent
Demand for items used by external customers
Cars, appliances, computers, and houses are
examples of independent demand inventory

Prof N. Balasubramanian

MMM II SEM III - 2014

Objectives of Inventory Management


Provide desired customer
service level
Customer service is the
ability to satisfy customer
requirements
Percentage of orders
shipped on schedule
Percentage of line items
shipped on schedule
Percentage of dollar volume
shipped on schedule
Idle time due to material
and component shortages

Prof N. Balasubramanian

Provide for cost-efficient


operations:
Buffer stock for smooth
production flow
Maintain a level work
force
Allowing longer
production runs &
quantity discounts

Minimum inventory
investments:
Inventory turnover
Weeks, days, or hours of
supply
MMM II SEM III - 2014

Inventory Investment Measures Example: The Coach Motor Home


Company has annual cost of goods sold of $10,000,000. The average
inventory value at any point in time is $384,615. Calculate inventory turnover
and weeks/days of supply.

Inventory Turnover:
Turnover

annual cost of goods sold $10,000,000

26 inventory turns
average inventory value
$384,615

Weeks/Days of Supply:
Weeks of Supply

average inventory on hand in dollars


$384,615

2weeks
average weekly usage in dollars
$10,000,000/52

$384,615
Days of Supply
10 days
$10,000,000/260
Prof N. Balasubramanian

MMM II SEM III - 2014

Inventory Costs
Carrying cost
cost of holding an item in inventory

Ordering cost
cost of replenishing inventory

Shortage cost
temporary or permanent loss of sales when demand
cannot be met

Prof N. Balasubramanian

MMM II SEM III - 2014

Inventory Control Systems


Continuous system (fixed-order-quantity)
constant amount ordered when inventory declines to
predetermined level

Periodic system (fixed-time-period)


order placed for variable amount after fixed passage of
time

Prof N. Balasubramanian

MMM II SEM III - 2014

ABC Classification
Class A
5 15 % of units
70 80 % of value

Class B
30 % of units
15 % of value

Class C
50 60 % of units
5 10 % of value

Prof N. Balasubramanian

MMM II SEM III - 2014

ABC Classification
PART

UNIT COST

ANNUAL USAGE

1
2
3
4
5
6
7
8
9
10

$ 60
350
30
80
30
20
10
320
510
20

90
40
130
60
100
180
170
50
60
120

Prof N. Balasubramanian

MMM II SEM III - 2014

ABC Classification
PART

9
8
2
1
4
3
6
5
10
7

TOTAL
VALUE

$30,600
16,000
14,000
5,400
4,800
3,900
3,600
3,000
2,400
1,700

% OF TOTAL
VALUE

% OF TOTAL
QUANTITY

35.9
18.7
16.4
6.3
5.6
4.6
4.2
3.5
2.8
2.0

6.0
5.0
4.0
9.0
6.0
10.0
18.0
13.0
12.0
17.0

% CUMMULATIVE

A
B

6.0
11.0
15.0
24.0
30.0
40.0
58.0
71.0
83.0
100.0

$85,400

CLASS
A
B
C

ITEMS

% OF TOTAL
VALUE

9, 8, 2
1, 4, 3
6, 5, 10, 7
Prof N. Balasubramanian

71.0
16.5
12.5

% OF TOTAL
QUANTITY
15.0
25.0
60.0
MMM II SEM III - 2014

Examples of Ordering Approaches


Lot for Lot Example
4
60
0
60

5
55
0
55

6
85
0
85

7
75
0
75

8
85

Fixed Order Quantity Example with Order Quantity of 200


1
2
3
4
Requirements
70
70
65
60
Projected-on-Hand (30)
160
90
25
165
Order Placement
200
200

5
55
110

6
85
25

7
75
150
200

8
85
65

Min-Max Example with min.= 50 and max.= 250 units


1
2
3
Requirements
70
70
65
Projected-on-Hand (30)
180
110
185
Order Placement
220
140

4
60
125

5
55
70

6
85
165
180

7
75
90

8
85
165
160

4
60
140
200

5
55
85

6
85
0

7
75
85
160

8
85
0

Requirements
Projected-on-Hand (30)
Order Placement

1
70
0
40

Order n Periods with n = 3 periods


1
Requirements
70
Projected-on-Hand (30)
135
Order Placement
175

2
70
0
70

2
70
65

3
65
0
65

3
65
0

Prof N. Balasubramanian

MMM II SEM III - 2014

85

Economic Order Quantity (EOQ) Models & Assumptions

EOQ -optimal order quantity that will minimize total inventory costs
EOQ Assumptions:
Demand is known & constant - no
safety stock is required
Lead time is known & constant
No quantity discounts are available
Ordering (or setup) costs are
constant
All demand is satisfied (no
shortages)
The order quantity arrives in a
single shipment

Prof N. Balasubramanian

MMM II SEM III - 2014

Inventory Order Cycle

Inventory Level

Order quantity, Q

Demand
rate

Average
inventory

Q
2

Reorder point, R

Lead
time
Order Order
placed receipt

Prof N. Balasubramanian

Lead
time
Order Order
placed receipt

MMM II SEM III - 2014

Time

EOQ Cost Model

Co - cost of placing order


Cc - annual per-unit carrying cost

D - annual demand
Q - order quantity

Annual ordering cost =

Co D
Q

Annual carrying cost =

CcQ
2

Total cost = CoD


Q

Prof N. Balasubramanian

CcQ
2

MMM II SEM III - 2014

EOQ Cost Model


Proving equality of
costs at optimal point

Deriving Qopt
CoD
TC =
Q
CoD
TC
= Q2
Q
C0D
0 = Q2
Qopt =

CcQ
+
2
Cc
+
2

Cc
+
2

2CoD
Cc

Prof N. Balasubramanian

CoD
CcQ
=
Q
2
Q2

2CoD
=
Cc

Qopt =

MMM II SEM III - 2014

2CoD
Cc

EOQ Cost Model

Annual
cost ($)

Total Cost
Slope = 0
CcQ
Carrying Cost =
2

Minimum
total cost

CoD
Ordering Cost = Q
Optimal order
Qopt

Prof N. Balasubramanian

Order Quantity, Q

MMM II SEM III - 2014

EOQ Example
Cc = $0.75 per gallon

Qopt =

2CoD
Cc

Qopt =

2(150)(10,000)
(0.75)

Co = $150

D = 10,000 gallons

CoD
TCmin =
Q

Qopt = 2,000 gallons

TCmin

CcQ
2

(0.75)(2,000)
(150)(10,000)
=
+
2
2,000

TCmin = $750 + $750 = $1,500

Orders per year = D/Qopt


= 10,000/2,000
= 5 orders/year

Prof N. Balasubramanian

Order cycle time = 311 days/(D/Qopt)


= 311/5
= 62.2 store days

MMM II SEM III - 2014

Reorder Point
Inventory level at which a new order is placed
R = dL

where
d = demand rate per period
L = lead time
Demand = 10,000 gallons/year
Store open 311 days/year
Daily demand = 10,000 / 311 = 32.154 gallons/day
Lead time = L = 10 days
R = dL = (32.154)(10) = 321.54 gallons
Prof N. Balasubramanian

MMM II SEM III - 2014

Safety Stock

Safety stock
buffer added to on hand inventory during lead time

Stock out
an inventory shortage

Service level
probability that the inventory available during lead time
will meet demand
P(Demand during lead time <= Reorder Point)

Prof N. Balasubramanian

MMM II SEM III - 2014

Inventory level

Variable Demand With Reorder Point

Reorder
point, R

0
LT

LT
Time

Prof N. Balasubramanian

MMM II SEM III - 2014

Inventory level

Reorder Point With Safety Stock

Reorder
point, R

Safety Stock

0
LT

Prof N. Balasubramanian

Time

LT

MMM II SEM III - 2014

Reorder Point With Variable Demand

R = dL + zd L
where
d = average daily demand
L = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd L = safety stock

Prof N. Balasubramanian

MMM II SEM III - 2014

Problem using EOQ Cost Model This exercise to be done by students


For a special ingredient YZ150 used in the manufacture of a detergent at Kolkata-based
Bengal Chemicals, the following figures are existing:Yearly demand - 260,000 Kg; Production quantity 50,000 Kg
Safety Stock 20,000 Kg
The set-up cost independent of quantity is Rs 2000 for each production batch. The
price of the ingredients Rs 150/Kg. Annual holding cost is 15% of the value of the
ingredient (inventory interest rate 15%). Assuming 230 working days/year, calculate:
a. The number of production batches during a year
b. Average inventory level (including the safety stock)
c. Inventory turnover
d. Average days of supply in inventory (known as cover-time)
e. Reorder point if the lead time is 10 working days
f. Total inventory costs per year and total inventory costs per working day with
production quantity 50000 kg
g. EOQ (pure)
h. The company can produce YZ150 at a production rate 7500 kg per working day.
Determine the economic production lot size. Assuming the safety stock is
decreased to 10000 kg, calculate the new number of production batches per year,
average days of supply in inventory, and the new total costs per working day and
year.
Prof N. Balasubramanian

MMM II SEM III - 2014

Risk Pooling
Consider these two systems:

Warehouse One

Market One

Warehouse Two

Market Two

Supplier

Market One

Supplier

Warehouse
Market Two
Prof N. Balasubramanian

MMM II SEM III - 2014

Risk Pooling
For the same service level, which system will require more inventory?
Why?
For the same total inventory level, which system will have better
service? Why?
What are the factors that affect these answers?

Prof N. Balasubramanian

MMM II SEM III - 2014

Risk Pooling An Example


Compare the two systems:
two products
maintain 97% service level
$60 order cost
$0.27 weekly holding cost
$1.05 transportation cost per unit in decentralized
system, $1.10 in centralized system
1 week lead time

Prof N. Balasubramanian

MMM II SEM III - 2014

Risk Pooling An Example

Week

Prod A,
Market 1
Prod A,
Market 2
Prod B,
Market 1
Product B,
Market 2

33

45

37

38

55

30

18

58

46

35

41

40

26

48

18

55

Prof N. Balasubramanian

MMM II SEM III - 2014

Risk Pooling An Example

Warehouse Product AVG

STD

CV

Market 1

39.3

13.2

.34

Market 2

38.6

12.0

.31

Market 1

1.125

1.36

1.21

Market 2

1.25

1.58

1.26

Prof N. Balasubramanian

MMM II SEM III - 2014

Risk Pooling An Example

Warehouse Product AVG

STD CV

Market 1

39.3

13.2 .34

65

197

Avg.
%
Inven. Dec.
91

Market 2

38.6

12.0 .31

62

193

88

Market 1
Market 2

B
B

1.125 1.36 1.21 4


1.25 1.58 1.26 5

29
29

14
15

Cent.
Cent

A
B

77.9 20.7 .27


2.375 1.9 .81

Prof N. Balasubramanian

118 304
6
39

132
20

MMM II SEM III - 2014

36%
43%

Risk Pooling Observations

Centralizing inventory control reduces both safety stock and


average inventory level for the same service level.
This works best for
High coefficient of variation, which increases required
safety stock.
Negatively correlated demand. Why?
What other kinds of risk pooling will we see?

Prof N. Balasubramanian

MMM II SEM III - 2014

Risk Pooling: Types of Risk Pooling*

Risk Pooling Across Markets


Risk Pooling Across Products
Risk Pooling Across Time
Daily order up to quantity is:

LTAVG + z AVG LT

Orders
10
Prof N. Balasubramanian

11

12

13

14

Demands
MMM II SEM III - 2014

15

To Centralize or not to Centralize

What is the effect on:

Safety stock?
Service level?
Overhead?
Lead time?
Transportation Costs?

Prof N. Balasubramanian

MMM II SEM III - 2014

Centralized Systems*
Supplier

Warehouse
Centralized Decision

Retailers

Prof N. Balasubramanian

MMM II SEM III - 2014

Centralized Distribution Systems*


Question: How much inventory should management keep
at each location?
A good strategy:
The retailer raises inventory to level Sr each period
The supplier raises the sum of inventory in the retailer
and supplier warehouses and in transit to Ss
If there is not enough inventory in the warehouse to
meet all demands from retailers, it is allocated so that the
service level at each of the retailers will be equal.

Prof N. Balasubramanian

MMM II SEM III - 2014

Inventory Management: Best Practice


Periodic inventory reviews
Tight management of usage rates, lead times and safety stock
ABC approach
Reduced safety stock levels
Shift more inventory, or inventory ownership, to suppliers
Quantitative approaches

Prof N. Balasubramanian

MMM II SEM III - 2014

Changes In Inventory Turnover


Inventory turnover ratio =
annual sales/avg. inventory level
Inventory turns increased by 30% from 1995 to 1998
Inventory turns increased by 27% from 1998 to 2000
Overall the increase is from 8.0 turns per year to over 13 per year
over a five year period ending in year 2000.

Prof N. Balasubramanian

MMM II SEM III - 2014

Inventory Turnover Ratio

Industry

Median

Dairy Products

Upper
Quartile
34.4

19.3

Lower
Quartile
9.2

Electronic Component

9.8

5.7

3.7

Electronic Computers

9.4

5.3

3.5

Books: publishing

9.8

2.4

1.3

Household audio &


video equipment
Household electrical
appliances
Industrial chemical

6.2

3.4

2.3

8.0

5.0

3.8

10.3

6.6

4.4

Prof N. Balasubramanian

MMM II SEM III - 2014

Factors that Drive Reduction in Inventory


Top management emphasis on inventory reduction
(19%)
Reduce the Number of SKUs in the warehouse
(10%) (Stock keeping unit)
Improved forecasting (7%)
Use of sophisticated inventory management
software (6%)
Coordination among supply chain members (6%)
Others

Prof N. Balasubramanian

MMM II SEM III - 2014

Factors that Drive Inventory Turns Increase


Better software for inventory management (16.2%)
Reduced lead time (15%)
Improved forecasting (10.7%)
Application of SCM principals (9.6%)
More attention to inventory management (6.6%)
Reduction in SKU (5.1%)
Others

Prof N. Balasubramanian

MMM II SEM III - 2014

VALUE OF INFORMATION IN SUPPLY CHAIN


COORDINATION

Prof N. Balasubramanian

MMM II SEM III - 2014

Learning Objectives
1. Describe supply chain coordination and the
bullwhip effect, and their impact on supply chain
performance.
2. Identify obstacles to coordination in a supply
chain.
3. Discuss managerial levers that help achieve
coordination in a supply chain.
4. Understand the different forms of collaborative
planning, forecasting, and replenishment possible
in a supply chain.
Prof N. Balasubramanian

MMM II SEM III - 2014

Lack of Supply Chain Coordination


and the Bullwhip Effect
Supply chain coordination all stages of the chain
take actions that are aligned and increase total
supply chain surplus
Requires that each stage share information and take
into account the effects of its actions on the other
stages
Lack of coordination results when:
Objectives of different stages conflict
Information moving between stages is delayed or distorted

Prof N. Balasubramanian

MMM II SEM III - 2014

Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain
from retailers to wholesalers to manufacturers to suppliers
Distorts demand information within the supply chain
Results from a loss of supply chain coordination

Prof N. Balasubramanian

MMM II SEM III - 2014

Demand at Different Stages

Prof N. Balasubramanian

MMM II SEM III - 2014

The Effect on Performance


Supply chain lacks coordination if each stage optimizes only its local
objective
Reduces total profits
Performance measures include
Manufacturing cost
Inventory cost
Replenishment lead time
Transportation cost
Labor cost for shipping and receiving
Level of product availability
Relationships across the supply chain

Prof N. Balasubramanian

MMM II SEM III - 2014

The Effect on Performance

Performance Measure

Impact of the Lack of Coordination

Manufacturing cost

Increases

Inventory cost

Increases

Replenishment lead time

Increases

Transportation cost

Increases

Shipping and receiving cost

Increases

Level of product availability

Decreases

Profitability

Decreases
Table 10-1

Prof N. Balasubramanian

MMM II SEM III - 2014

Obstacles to Coordination
in a Supply Chain
Incentive Obstacles
Information Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles

Prof N. Balasubramanian

MMM II SEM III - 2014

Incentive Obstacles
Occur when incentives offered to different stages or participants in
a supply chain lead to actions that increase variability and reduce
total supply chain profits
Local optimization within functions or stages of a supply chain
Sales force incentives

Prof N. Balasubramanian

MMM II SEM III - 2014

Information Processing Obstacles


When demand information is distorted as it moves between
different stages of the supply chain, leading to increased variability
in orders within the supply chain
Forecasting based on orders, not customer demand
Lack of information sharing

Prof N. Balasubramanian

MMM II SEM III - 2014

Operational Obstacles
Occur when placing and filling orders lead to an increase in
variability
Ordering in large lots
Large replenishment lead times
Rationing and shortage gaming

Prof N. Balasubramanian

MMM II SEM III - 2014

Operational Obstacles
Figure 10-2

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MMM II SEM III - 2014

Pricing Obstacles
When pricing policies for a product lead to an increase in variability
of orders placed
Lot-size based quantity decisions
Price fluctuations

Prof N. Balasubramanian

MMM II SEM III - 2014

Pricing Obstacles
Figure 10-3

Prof N. Balasubramanian

MMM II SEM III - 2014

Behavioral Obstacles
Problems in learning within organizations that contribute to
information distortion
1.
2.
3.
4.
5.

Each stage of the supply chain views its actions locally and is unable
to see the impact of its actions on other stages
Different stages of the supply chain react to the current local
situation rather than trying to identify the root causes
Different stages of the supply chain blame one another for the
fluctuations
No stage of the supply chain learns from its actions over time
A lack of trust among supply chain partners causes them to be
opportunistic at the expense of overall supply chain performance

Prof N. Balasubramanian

MMM II SEM III - 2014

Managerial Levers to
Achieve Coordination
Aligning goals and incentives
Improving information accuracy
Improving operational performance
Designing pricing strategies to stabilize orders
Building strategic partnerships and trust

Prof N. Balasubramanian

MMM II SEM III - 2014

Aligning Goals and Incentives


Align goals and incentives so that every participant in supply chain
activities works to maximize total supply chain profits
Align goals across the supply chain
Align incentives across functions
Pricing for coordination
Alter sales force incentives from sell-in (to the retailer) to sellthrough (by the retailer)

Prof N. Balasubramanian

MMM II SEM III - 2014

Improving Information Visibility and Accuracy

Sharing point of sale data


Implementing collaborative forecasting and planning
Designing single-stage control of replenishment
Continuous replenishment programs (CRP)
Vendor managed inventory (VMI)

Prof N. Balasubramanian

MMM II SEM III - 2014

Improving Operational Performance


Reducing replenishment lead time
Reducing lot sizes
Rationing based on past sales and sharing information to limit
gaming

Prof N. Balasubramanian

MMM II SEM III - 2014

Designing Pricing Strategies


to Stabilize Orders
Encouraging retailers to order in smaller lots and reduce forward
buying
Moving from lot size-based to volume-based quantity discounts
Stabilizing pricing
Building strategic partnerships and trust

Prof N. Balasubramanian

MMM II SEM III - 2014

Continuous Replenishment and VendorManaged Inventories


A single point of replenishment
CRP wholesaler or manufacturer replenishes based on POS data
VMI manufacturer or supplier is responsible for all decisions
regarding inventory
Substitutes

Prof N. Balasubramanian

MMM II SEM III - 2014

Collaborative Planning, Forecasting, and


Replenishment (CPFR)
Sellers and buyers in a supply chain may collaborate along any or all
of the following

1.
2.
3.
4.

Strategy and planning


Demand and supply management
Execution
Analysis

Retail event collaboration


DC replenishment collaboration

Prof N. Balasubramanian

MMM II SEM III - 2014

Common CPFR Scenarios

CPFR Scenario

Where Applied in Supply


Chain

Industries Where Applied

Retail event collaboration

Highly promoted channels


or categories

All industries other than


those that practice Every
Day Low Price (EDLP)

DC replenishment
collaboration

Retail DC or distributor DC

Drugstores, hardware,
grocery

Store replenishment
collaboration

Direct store delivery or


retail DC-to-store delivery

Mass merchants, club


stores

Collaborative assortment
planning

Apparel and seasonal goods

Department stores,
specialty retail
Table 10-2

Prof N. Balasubramanian

MMM II SEM III - 2014

Collaborative Planning, Forecasting, and


Replenishment (CPFR)
Store replenishment collaboration
Collaborative assortment planning
Organizational and technology requirements for successful CPFR
Risks and hurdles for a CPFR implementation

Prof N. Balasubramanian

MMM II SEM III - 2014

Collaborative Planning, Forecasting,


and Replenishment (CPFR)

Figure 10-4
Prof N. Balasubramanian

MMM II SEM III - 2014

Achieving Coordination in Practice


Quantify the bullwhip effect
Get top management commitment for coordination
Devote resources to coordination
Focus on communication with other stages
Try to achieve coordination in the entire supply chain
network
Use technology to improve connectivity in the supply
chain
Share the benefits of coordination equitably
Prof N. Balasubramanian

MMM II SEM III - 2014

Strategic Alliances
Advanced Supply Chain Management

Prof N. Balasubramanian

MMM II SEM III - 2014

Introduction
Complexity in business environments increasing
Resources required to manage are becoming increasingly scarce
Many functions need to be outsourced
Firms need to ensure that functions are performed by the other firms

Prof N. Balasubramanian

MMM II SEM III - 2014

Framework for Strategic Alliances: When to Go for


a Strategic Alliance?
Adding value to products
Improving market access
Strengthening operations
Adding technological strength
Enhancing strategic growth
Enhancing organizational skills
Building financial strength

Prof N. Balasubramanian

MMM II SEM III - 2014

Downsides
Core competencies should not be compromised
Competitive advantages should not be compromised

Prof N. Balasubramanian

MMM II SEM III - 2014

Internal Activities

Firm A

If we have core competencies


in this business function, doing
it as an internal activity may be the
best way to do it.

Prof N. Balasubramanian

MMM II SEM III - 2014

Acquisitions

Internal Activities

Firm A can control how Firm B does


the business function.

However, it might be expensive, there


may be problems blending the cultures
of the two firms and Firm B may have
had past dealings with Firm As competitors
Firm B

Firm A

Prof N. Balasubramanian

MMM II SEM III - 2014

Arms Length transactions

Firm B

Firm A

Prof N. Balasubramanian

MMM II SEM III - 2014

Arms Length transactions

Firm B

Firm A

Prof N. Balasubramanian

MMM II SEM III - 2014

Arms Length transactions

Firm B

Firm A

Prof N. Balasubramanian

MMM II SEM III - 2014

Strategic Alliances

Order

Multifaceted, goal-oriented, long-term partnerships between


two companies.
Both risks and rewards are shared.
Typically lead to long-term strategic benefits for both partners.

Firm B

Firm A

Prof N. Balasubramanian

MMM II SEM III - 2014

Extreme Alliances the strange story of


virtual airlines
Owned no aircraft
Contracted maintenance
Leased airport gates
Leased reservation systems
Mainly provided cash flow for owners companies involved in things
like real estate

Prof N. Balasubramanian

MMM II SEM III - 2014

Three Types of Strategic Alliances


Third Party Logistics (3PL)
RetailerSupplier Partnerships (RSP)
Distributor Integration (DI)

Prof N. Balasubramanian

MMM II SEM III - 2014

Third Party Logistics (3PL)


Use of 3PL providers to take over a companys logistics functions
Almost a $85 billion industry by 2004
8% of all logistics costs attributed to 3PL

Prof N. Balasubramanian

MMM II SEM III - 2014

Key Logistics Activities


Customer service.
Demand forecasting.
Inventory management.
Logistics communication.
Materials handling.
Order processing.

Prof N. Balasubramanian

Packaging.
Parts and service
support.
Plant and warehouse site
selection.
Procurement.
Reverse logistics.
Traffic, transportation
Warehousing, storage.
MMM II SEM III - 2014

Supply Chain
Management:

internal and external


components of the supply
system

Organization

Suppliers

Customers

Demand forecasting. Plant and


warehouse site selection. Inventory
management. Materials handling.
Warehousing, storage. Packaging. Order
processing.
Prof N. Balasubramanian

MMM II SEM III - 2014

Supply Chain
Management:

internal and external


components of the supply
system

Organization

Suppliers

Customers

Procurement.
Parts and service
Support. Traffic.
Transportation.

Customer service
Parts and service support
Reverse logistics
Traffic, transportation
Prof N. Balasubramanian

. .
MMM II SEM III - 2014

Two Basic Types of Third Party Logistics


Providers
Asset-based
Trucks
Warehouses
Information systems

Prof N. Balasubramanian

MMM II SEM III - 2014

Two Basic Types of Third Party


Logistics Providers
Asset-based

Non-asset based

Trucks
Warehouses
Information systems

Prof N. Balasubramanian

Primarily are
coordinators.

MMM II SEM III - 2014

Reasons for Third Party Logistics


Allows company to focus on its core competencies.
Business including logistics is becoming so complicated it is
difficult to keep up with all developments.

Prof N. Balasubramanian

MMM II SEM III - 2014

What Is 3PL?
Strategic partnership
Long term commitment
Multi-function arrangement
Process integration
Large range of 3PL companies
Non-asset owning 3PL companies called 4PL
Provide services but not trucks, warehouses

Prevalent usage with larger companies

Prof N. Balasubramanian

MMM II SEM III - 2014

3PL Advantages
Focus on Core Strengths
Allows a company to focus on its core competencies
Logistics expertise left to the logistics experts

Prof N. Balasubramanian

MMM II SEM III - 2014

3PL Advantages
Provides Technological Flexibility
Technology advances adopted by better 3PL providers
Adoption possible by 3PLs in a quicker, more cost-effective way
3PLs may have the capability to meet the needs of a firms potential customers

Prof N. Balasubramanian

MMM II SEM III - 2014

3PL Advantages
Provides Other Flexibilities
Flexibility in geographic locations.
Flexibility in service offerings
Flexibility in resource and workforce size

Prof N. Balasubramanian

MMM II SEM III - 2014

3PL Disadvantages
Loss of control inherent in outsourcing a particular
function.

Outbound logistics 3PLs interact with a firms customers.


Many third-party logistics firms work very hard to address
these concerns.
Painting company logos on the sides of trucks, dressing 3PL
employees in the uniforms of the hiring company, and
providing extensive reporting on each customer interaction.

Logistics is one of the core competencies of a firm

Makes no sense to outsource these activities to a supplier


who may not be as capable as the firms in-house expertise
Wal-Mart, pharmaceutical companies

Prof N. Balasubramanian

MMM II SEM III - 2014

3PL Issues
Costs and Customer Orientation
Know your own costs
Compare with the cost of using an outsourcing firm.
Use activity-based costing techniques

Customer orientation of the 3PL


Ability of provider to understand the needs of the hiring firm
and to adapt its services to the special requirements of that
firm.
Reliability.
Flexibility of the provider

Prof N. Balasubramanian

MMM II SEM III - 2014

E-Supply Chains
Definitions and Concepts
supply chain
The flow of materials, information, money, and services from raw material
suppliers through factories and warehouses to the end customers
e-supply chain
A supply chain that is managed electronically, usually with Web technologies

Prof N. Balasubramanian

MMM II SEM III - 2014

7-97

E-Supply Chains

Prof N. Balasubramanian

MMM II SEM III - 2014

7-98

E-Supply Chains
Supply Chain Parts
Upstream supply chain
procurement
The process made up of a range of activities by which an organization obtains or gains
access to the resources (materials, skills, capabilities, facilities) they require to
undertake their core business activities

Internal supply chain


Downstream supply chain

Prof N. Balasubramanian

MMM II SEM III - 2014

7-99

E-Supply Chains
supply chain management (SCM)
A complex process that requires the coordination of
many activities so that the shipment of goods and
services from supplier right through to customer is
done efficiently and effectively for all parties
concerned. SCM aims to minimize inventory levels,
optimize production and increase throughput,
decrease manufacturing time, optimize logistics and
distribution, streamline order fulfillment, and
overall reduce the costs associated with these
activities
Prof N. Balasubramanian

MMM II SEM III - 2014

7-100

E-Supply Chains
e-supply chain management (e-SCM)
The collaborative use of technology to improve the
operations of supply chain activities as well as the
management of supply chains
The success of an e-supply chain depends on:
The ability of all supply chain partners to view partner
collaboration as a strategic asset
A well-defined supply chain strategy
Information visibility along the entire supply chain
Speed, cost, quality, and customer service
Integrating the supply chain more tightly
Prof N. Balasubramanian

MMM II SEM III - 2014

7-101

E-Supply Chains
Activities and infrastructure of E-SCM
Supply chain replenishment
E-procurement
Supply chain monitoring and control using RFID
Inventory management using wireless devices
Collaborative planning
Collaborative design and product development
E-logistics
Use of B2B exchanges and supply webs

Prof N. Balasubramanian

MMM II SEM III - 2014

7-102

E-Supply Chains
e-procurement
The use of Web-based technology to support the key
procurement processes, including requisitioning, sourcing,
contracting, ordering, and payment. E-procurement
supports the purchase of both direct and indirect materials
and employs several Web-based functions such as online
catalogs, contracts, purchase orders, and shipping notices
collaborative planning
A business practice that combines the business knowledge
and forecasts of multiple players along a supply chain to
improve the planning and fulfillment of customer demand

Prof N. Balasubramanian

MMM II SEM III - 2014

7-103

E-Supply Chains
Infrastructure for e-SCM

Electronic Data Interchange (EDI)


Extranets
Intranets
Corporate portals
Workflow systems and tools
Groupware and other collaborative tools

Prof N. Balasubramanian

MMM II SEM III - 2014

7-104

E-Supply Chains
Determining the Right Supply Chain Strategy
Functional products are staple products that have stable
and predictable demand and call for a simple, efficient,
low-cost supply chain
Innovative products tend to have higher profit margins,
volatile demand, and short product life cycles. These
products require a supply chain that emphasizes speed,
responsiveness, and flexibility rather than low costs

Prof N. Balasubramanian

MMM II SEM III - 2014

7-105

Supply Chain
Problems and Solutions
Typical Problems along the Supply Chain
With increasing globalization and offshoring, supply
chains can be very long and involve many internal and
external partners located in different places
A lack of logistics infrastructure might prevent the right
goods from reaching their destinations on time
Quality problems with materials and parts also can
contribute to deficiencies in the supply chain
bullwhip effect
Erratic shifts in orders up and down supply chains

Prof N. Balasubramanian

MMM II SEM III - 2014

7-106

Supply Chain
Problems and Solutions
The Need for Information Sharing along the Supply Chain
EC Solutions along the Supply Chain

Order taking
Order fulfillment
Electronic payments
Managing risk
Inventories can be minimized
Collaborative commerce

Prof N. Balasubramanian

MMM II SEM III - 2014

7-107

Key Enabling Supply Chain


Technologies: RFID and Rubee
radio frequency identification (RFID)
Tags that can be attached to or embedded in objects, animals, or
humans and use radio waves to communicate with a reader for the
purpose of uniquely identifying the object or transmitting data
and/or storing information about the object

Prof N. Balasubramanian

MMM II SEM III - 2014

7-108

Key Enabling Supply Chain


Technologies: RFID and Rubee

Prof N. Balasubramanian

MMM II SEM III - 2014

7-109

Key Enabling Supply Chain


Technologies: RFID and Rubee

Prof N. Balasubramanian

MMM II SEM III - 2014

7-110

Key Enabling Supply Chain


Technologies: RFID and Rubee

Prof N. Balasubramanian

MMM II SEM III - 2014

7-111

Key Enabling Supply Chain


Technologies: RFID and Rubee

LIMITATIONS OF RFID
For small companies, the cost of the system may be too
high
The restriction of the environments in which RFID tags are
easily read
Different levels of read accuracy at different points along
the supply chain
Concerns over customer privacy
Agreeing on universal standards
Connecting the RFIDs with existing IT systems

Prof N. Balasubramanian

MMM II SEM III - 2014

7-112

Key Enabling Supply Chain


Technologies: RFID and Rubee

RuBee
Bidirectional, on-demand, peer-to-peer radiating transceiver protocol
under development by the Institute of Electrical and Electronics
Engineers

Prof N. Balasubramanian

MMM II SEM III - 2014

7-113

Key Enabling Supply Chain


Technologies: RFID and Rubee

Prof N. Balasubramanian

MMM II SEM III - 2014

7-114

Collaborative Commerce
collaborative commerce (c-commerce)
The use of digital technologies that enable
companies to collaboratively plan, design, develop,
manage, and research products, services, and
innovative EC applications
collaboration hub
The central point of control for an e-market. A
single c-hub, representing one e-market owner, can
host multiple collaboration spaces (c-spaces) in
which trading partners use
c-enablers to exchange data with the c-hub
Prof N. Balasubramanian

MMM II SEM III - 2014

7-115

Collaborative Commerce

Prof N. Balasubramanian

MMM II SEM III - 2014

7-116

Collaborative Commerce

Prof N. Balasubramanian

MMM II SEM III - 2014

7-117

Collaborative Commerce
grid computing
A form of distributed computing that involves coordinating
and sharing computing, application, data, storage, or
network resources across dynamic and geographically
dispersed organizations
service-oriented architecture (SOA)
An architectural concept that defines the use of services to
support a variety of business needs. In SOA, existing IT assets
(called services) are reused and reconnected rather than the
more time consuming and costly reinvention of new systems

Prof N. Balasubramanian

MMM II SEM III - 2014

7-118

Collaborative Commerce
Representative Examples of
E-Collaboration

vendor-managed inventory (VMI)


The practice of retailers making suppliers responsible for
determining when to order and how much to order
Information sharing between retailers and suppliers
Retailersupplier collaboration
Lower transportation and inventory costs and reduced
stockouts
Reduction of design cycle time
Reduction of product development time

Prof N. Balasubramanian

MMM II SEM III - 2014

7-119

Collaborative Commerce

Prof N. Balasubramanian

MMM II SEM III - 2014

7-120

Collaborative Commerce
Barriers to C-Commerce
Most organizations have achieved only moderate levels of collaboration
because of:
A lack of internal integration, standards, and networks
Security and privacy concerns, and distrust over who has access to and control of
information stored in a partners database
Internal resistance to information sharing and to new approaches
A lack of internal skills to conduct c-commerce

Prof N. Balasubramanian

MMM II SEM III - 2014

7-121

Collaborative Planning, CPFR,


and Collaborative Design
collaborative planning, forecasting, and replenishment (CPFR)
Project in which suppliers and retailers collaborate in their planning
and demand forecasting to optimize flow of materials along the
supply chain

Prof N. Balasubramanian

MMM II SEM III - 2014

7-122

Collaborative Planning, CPFR,


and Collaborative Design

Prof N. Balasubramanian

MMM II SEM III - 2014

7-123

Collaborative Planning, CPFR,


and Collaborative Design

Prof N. Balasubramanian

MMM II SEM III - 2014

7-124

Collaborative Planning, CPFR,


and Collaborative Design
advanced planning and scheduling (APS) systems
Programs that use algorithms to identify optimal solutions to
complex planning problems that are bound by constraints

Prof N. Balasubramanian

MMM II SEM III - 2014

7-125

Collaborative Planning, CPFR,


and Collaborative Design

Prof N. Balasubramanian

MMM II SEM III - 2014

7-126

Collaborative Planning, CPFR,


and Collaborative Design
product lifecycle management (PLM)
Business strategy that enables manufacturers to control and share
product-related data as part of product design and development
efforts

Prof N. Balasubramanian

MMM II SEM III - 2014

7-127

Supply Chain Integration


How Information Systems Are Integrated
Internal integration includes connecting applications with
databases and with each other and connecting customerfacing applications (front end) with order fulfillment and
the functional information systems (back end)
Integration with business partners connects an
organizations systems with those of its external business
partners

Prof N. Balasubramanian

MMM II SEM III - 2014

7-128

Supply Chain Integration


Web Services
An architecture enabling assembly of distributed applications from
software services and tying them together
Integration along the Extended Supply Chain
Information integration along the extended supply chainall the way from
raw material to the customers door

Prof N. Balasubramanian

MMM II SEM III - 2014

7-129

Corporate (Enterprise) Portals


corporate (enterprise) portal
A gateway for entering a corporate Web site, enabling
communication, collaboration, and access to company information

Prof N. Balasubramanian

MMM II SEM III - 2014

7-130

Corporate (Enterprise) Portals


Types of Corporate Portals
Types of generic portals

Portals for suppliers and other partners


Customer portals
Employee portals
Executive and supervisor portal
mobile portals
Portals accessible via mobile devices, especially cell phones and PDAs

Prof N. Balasubramanian

MMM II SEM III - 2014

7-131

Corporate (Enterprise) Portals


The Functionalities of Portals
information portals
Portals that store data and enable users to navigate and query these data
collaborative portals
Portals that allow collaboration

Prof N. Balasubramanian

MMM II SEM III - 2014

7-132

Corporate (Enterprise) Portals

Prof N. Balasubramanian

MMM II SEM III - 2014

7-133

Corporate (Enterprise) Portals


Justifying Portals
Portals offer benefits that are difficult to quantify

Developing Portals
Many vendors offer tools for building corporate portals as well as hosting
services

Prof N. Balasubramanian

MMM II SEM III - 2014

7-134

Collaboration-Enabling Tools:
From Workflow to Groupware
Workflow Technologies and Applications

workflow
The movement of information as it flows through the
sequence of steps that make up an organizations work
procedures
workflow systems
Business process automation tools that place system
controls in the hands of user departments to automate
information processing tasks
workflow management
The automation of workflows, so that documents,
information, and tasks are passed from one participant to
the next in the steps of an organizations business process
Prof N. Balasubramanian

MMM II SEM III - 2014

7-135

Collaboration-Enabling Tools:
From Workflow to Groupware
Types of Workflow Applications
Collaborative workflow
Production workflow
Administrative workflow

The benefits of workflow management systems include:

Cycle time reduction


Productivity gains
Improved process control
Improved quality of services
Lower staff training costs
Lower management costs
Improved user satisfaction
More effective collaboration and knowledge sharing

Prof N. Balasubramanian

MMM II SEM III - 2014

7-136

Collaboration-Enabling Tools:
From Workflow to Groupware
groupware
Software products that use networks to support collaboration among
groups of people who share a common task or goal
Synchronous versus Asynchronous Products

Prof N. Balasubramanian

MMM II SEM III - 2014

7-137

Collaboration-Enabling Tools:
From Workflow to Groupware
Electronic Meeting Systems
virtual meetings
Online meetings whose members are in different locations, even in different
countries
group decision support system (GDSS)
An interactive computer-based system that facilitates the solution of
semistructured and unstructured problems by a group of decision makers

Prof N. Balasubramanian

MMM II SEM III - 2014

7-138

Collaboration-Enabling Tools:
From Workflow to Groupware
Electronic Teleconferencing
teleconferencing
The use of electronic communication that allows two or more people
at different locations to have a simultaneous conference

Prof N. Balasubramanian

MMM II SEM III - 2014

7-139

Collaboration-Enabling Tools:
From Workflow to Groupware
video teleconference
Virtual meeting in which participants in one
location can see participants at other locations on a
large screen or a desktop computer
data conferencing
Virtual meeting in which geographically-dispersed
groups work on documents together and exchange
computer files during videoconferences

Prof N. Balasubramanian

MMM II SEM III - 2014

7-140

Collaboration-Enabling Tools:
From Workflow to Groupware

Voice-over-IP (VoIP)
Communication systems that transmit voice calls
over Internet Protocolbased networks
Interactive whiteboards
screen-sharing software
Software that enables group members, even in
different locations, to work on the same document,
which is shown on the PC screen of each participant

Prof N. Balasubramanian

MMM II SEM III - 2014

7-141

Collaboration-Enabling Tools:
From Workflow to Groupware
Instant video
Integration and groupware suites
Lotus Notes/Domino
Microsoft NetMeeting
Novell GroupWise

Prof N. Balasubramanian

MMM II SEM III - 2014

7-142

Managerial Issues
1. How difficult is it to introduce e-collaboration?
2. How much can be shared with business
partners? Can they be trusted?
3. Who is in charge of our portal and intranet
content?
4. Who will design the corporate portal?
5. Should we conduct virtual meetings?

Prof N. Balasubramanian

MMM II SEM III - 2014

7-143

E-procurement

Prof N. Balasubramanian

MMM II SEM III - 2014

Learning objectives
Identify the benefits and risks of e-procurement
Analyse procurement methods to evaluate cost savings
Assess different options for integration of organisations information
systems with e-procurement suppliers

Prof N. Balasubramanian

MMM II SEM III - 2014

Issues for managers


What benefits and risks are associated with e-procurement?
Which method(s) of e-procurement should we adopt?
What organisational and technical issues are involved in introducing
e-procurement?

Prof N. Balasubramanian

MMM II SEM III - 2014

How important is e-procurement?


In Q1 2001, polling similar organizations showed that two thirds of
companies had started to implement e-procurement systems.
However, complete solutions were rare: only about one in six actually
has a live system in place. Of the rest, nearly half (47%) have some
form of interim solution or are part way through implementation
programmes

Prof N. Balasubramanian

MMM II SEM III - 2014

Key procurement activities within


an organization

Figure 7.1 Key procurement activities within an organization


Prof N. Balasubramanian

MMM II SEM III - 2014

Requirements for procurement systems


Baily et al., 1994 says procurement involves sourcing items:

At the right price.


Delivered at the right time.
Of the right quality.
Of the right quantity.
From the right source.

Prof N. Balasubramanian

MMM II SEM III - 2014

Electronic procurement
system

Figure 7.2 Electronic procurement system


Source: Tranmit plc

Prof N. Balasubramanian

MMM II SEM III - 2014

Turban et al. (2000) summarize the benefits of


e-procurement as follows:
Reduced purchasing cycle time and cost
Enhanced budgetary control (achieved through rules to limit spending and
improved reporting facilities)
Elimination of administrative errors (correcting errors is traditionally a
major part of a buyers workload)
Increasing buyers productivity (enabling them to concentrate on strategic
purchasing issues)
Lowering prices through product standardization and consolidation of
buys
Improving information management (better access to prices from
alternative suppliers and summaries of spending)
Improving the payment process (this does not often occur currently since
payment is not always integrated into e-procurement systems).
Prof N. Balasubramanian

MMM II SEM III - 2014

Use of different information systems


for different aspects of the fulfilment cycle

Figure 7.3 Use of different information systems for different aspects of the
fulfilment cycle
Prof N. Balasubramanian
MMM II SEM III - 2014

E-mail notification of
requisition approval

Figure 7.4 E-mail notification of requisition approval


Source: Tranmit plc

Prof N. Balasubramanian

MMM II SEM III - 2014

Document management software


for reconciling supplier invoice
with purchase order data

Figure 7.5 Document management software for reconciling supplier invoice with
purchase order data
Source: Tranmit plc

Prof N. Balasubramanian

MMM II SEM III - 2014

The three main e-procurement model


alternatives for buyers

Figure 7.6 The three main e-procurement model alternatives for buyers
Prof N. Balasubramanian

MMM II SEM III - 2014

Integration between e-procurement


systems and catalogue data

Figure 7.7 Integration between e-procurement systems and catalogue data


Prof N. Balasubramanian

MMM II SEM III - 2014

An online catalogue of items


for purchase

Figure 7.8 An online catalogue of items for purchase


Source: Tranmit plc

Prof N. Balasubramanian

MMM II SEM III - 2014

Implementation risks
Authentication fraud
Maverick purchasing
Lock-in to suppliers
Cost-savings not realized
Cost and difficulty of implementing systems

Prof N. Balasubramanian

MMM II SEM III - 2014

B2B Marketplaces
International benchmarking study:
UK, 11% of businesses provide the opportunity for
customers to purchase from e-marketplaces, 9% in
Sweden and Italy, 8% in Australia and Germany, 7% in
France and 6% in Japan.

ComputerWorld (2001a) reported that of an estimated


900 business-to-business Web sites that were
functioning worldwide mid-2000, a little more than 400
were left standing by end-2000.

Prof N. Balasubramanian

MMM II SEM III - 2014

Types of B2B marketplace

What businesses buy?

How businesses
buy?

Operating resources

Systematic sourcing

MRO Hubs
Catalogue Hubs
www.barclaysb2b.com www.sciquest.com

Spot sourcing

Yield Managers
www.elance.com

Prof N. Balasubramanian

Manufacturing
resources

Exchanges
www.e-steel.com
www.plasticsnet.com

MMM II SEM III - 2014

Covisint example - DaimlerChrysler AG - 2001


512 online bidding events processed through Covisint in
the last twelve months
Purchasing volume of approximately 10 billion. That is
a third of the total procurement volume assigned in
newly closed deals in 2001.
In May 2001, DaimlerChrysler staged the largest online
bidding event ever, with an order volume of 3.5 billion
in just four days.
In total, 43 per cent of the total value of the parts for a
future Chrysler model series was negotiated online with
over 50 online bidding events in the third quarter of
2001 alone.
Prof N. Balasubramanian

MMM II SEM III - 2014

Criteria in selecting marketplaces


Number of suppliers and customers who are actively
trading (not just members)
Costs of being a buying member (on each transaction)
Backing from trade associations
Funding source
Ease of using exchange through all stages of buying process
from order to receipt
Technical changes needed to integrate with system are
industry standards being established through XML?

Prof N. Balasubramanian

MMM II SEM III - 2014

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