CHAPTER 12:

SUPPLY CHAIN MANAGEMENT

Teaching Notes
It is important to emphasize that Supply Chain Management involves the entire range of production and
distribution processes. Students need to understand the trade offs involved in supply chain function
related to JIT, inventory management, purchasing, and delivery lead times and quality.
Supply Chain Management requires a broad view of the entire flow from purchasing to final delivery to
the customer. Supply Chain Management is becoming increasingly more important due to the following
factors:
1.

Implementation of JIT systems.

2.

Emphasis in reduction in inventories.

3.

Emphasis in reduced order cycles and reduced lead times.

4.

Continuous and rapid change in products and product designs (shorter product life cycles).

5.

Shorter product introduction and product development times.

The importance of Supply Chain Management can not be underestimated because it ensures that the right
materials are at the right place at the right time at a minimal cost and at the right quantity.
In addition, supply chain management requires very careful coordination of activities between various
business organizations on the chain. Integration of databases and sharing key pieces of information
among the different business organizations on the supply chain not only provides timely and valuable
information to companies on the supply chain, but also assists in improving the trust and the overall
relationship between suppliers and their customers.
The term supply chain management has emerged in the mid-1980s and gained popularity in the 1990s. In
the new millennium, it is continuing to gain interest at a rapid rate. Even though the term supply chain
management (SCM) is fairly new, the concepts and problems involved in SCM are not. However, many of
these problems and their solutions are integrated within and between firms in the context of managing the
flow of products and related information. Thus, supply chain management involves efficient integration
of suppliers, manufacturers, distributors and customers in the production and distribution of goods and
services.

Answers to Discussion and Review Questions

1. Supply chain is a sequence of organizations, their facilities, functions and activities that are involved
in producing and delivering a product or service. The chain begins with suppliers of raw materials
and extends all the way to the final customer.
2. The factors that make it desirable to manage a supply chain include increasing:
a. Need to improve operations
b. Levels of outsourcing
c. Transportation costs
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d. Competitive pressures
e. Globalization
f.

Complexity of supply chains

g. Importance of e-commerce
h. Need to manage inventories
The potential benefits of effective management of a supply chain include lower inventories,
higher profits, improved customer loyalty, shorter manufacturing and production lead times,
higher productivity and improved ability to respond to fluctuations in demand.
3. Elements of supply chain management consist of customers, forecasting, design, production,
inventory, purchasing, suppliers, location and logistics.
4. Strategic issues in supply chain management include determining the number, location and capacity
of facilities, and deciding whether to make or buy a product.
Tactical operational issues in supply chain management involve policies and procedures related to
procurement, processing, purchasing, logistics, inventory, quality, and production planning and
control which involves scheduling of workforce, machinery, production, deliveries and
distribution of goods or services.
5.

Bullwhip effect is the increase of inventories in a supply chain starting at the end of a supply
chain with the final customer and working backwards towards the initial supplier (supplier of raw
materials). The main reason for the occurrence of this phenomenon is the lumpiness and
variability of demand at different stages of the supply chain. The reason for this is that
replenishment is usually periodic and batched, resulting in progressive increases of batch sizes in
the supply chain from customers all the way back to initial suppliers. This is because uncertainty
and variability of demand, in the absence of info-sharing, increases the closer to the suppliers in
the supply chain we get. Setup time reduction methods and sharing customer demand
information can alleviate the bullwhip effect because these methods generate smaller batch sizes,
which result in smaller quantities of inventory.

6. If a manufacturer wants to ensure its quality and delivery needs will be met consistently, it could get
into a partnership with the supplier of the raw material. This also reduces the transaction costs.
An example is the British bread maker, Warburton, which has partnership with some Manitoba
wheat farmers.
7. Inventory velocity refers to the rate at which the inventory (material) goes through the system. The
faster the inventory moves through the system the better it is because the quick movement of
materials not only results in lower inventory costs but also faster delivery and service to
customers.
Information velocity refers to the speed at which information is transferred within a supply chain.
The higher the information velocity the better it is because quick two-way flow of information
results in faster decision making on the supply chain.
8. Quick response is fast replenishment of inventory by manufacturer who has EDI connection to the
customer and collects point-of-sale and inventory data of customer and supplies the needed
inventory.

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9.

E-commerce has had a profound and dramatic effect on supply chain management. The reasons
for this influence include buying on the Internet, both B to C (business-to-consumer) and B to B
(business-to-business), the utilization of e-mail, electronic data interchange, advance shipping
notice and electronic order tracking, and promotion of products and services through company
web sites.

10. See Table 12-2 for a comprehensive list of advantages of e-commerce.

11. See Table 12-4 for a comprehensive list of problems, solutions, and the associated trade-offs.
12. A good example of an Internet web site for a railroad company that offers freight transportation is
www.cn.ca. The Canadian National divides the products it transports into the following
categories: Automotive, Chemicals and Petroleum, Coal, Fertilizer, Forest Products. Grain,
Intermodal (containers), Metals, and Minerals.

Memo Writing Exercises

1.

For example, Transfreight can be studied: www.transfreight.com/toolkit.htm. They offer fleet

management, logistics engineering (=optimization), material control & handling, route
management (=traffic), supplier management, and transportation management (subcontractor
management).

2.

The Operations Management Centre provides a few magazines and journals with many
appropriate articles dealing with Supply Chain Management. These journals are provided under
the category OM articles and under the subcategory of Supply Chain and Logistics. The URL for
the journal is http://www.mhhe.com/business/opsci/pom/

Solutions
1.

H = $10 per item per year (2,000 item) = $20,000 per year.

d = 5 2 = 3 days
Incremental holding cost = $20,000 (3/365) = $164.38
This exceeds the savings that would result by using 5-day freight ($135). Therefore, use 2-day
freight.
2.

H = .30(80 boxes)($200 per box) = $4,800

2-day analysis:
d = 2 1 = 1 day

(overnight takes one day)

Freight Savings = $300 260 = $40

Instructors Manual, Chapter 12

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Solutions (continued)
Incremental
=H (
Holding cost

d
)
365
1
)
365

= $4,800(
= $13.15

Net savings = $40 - $13.15 = $26.85

6-day analysis
d = 6 1 = 5 days
Freight Savings = $300 180 = $120
Incremental
=H (
Holding cost

d
)
365

= $4,800(

5
)
365

= $67.75
Net savings = $120 - $67.75 = $52.25
Thus, the 6-day alternative would yield the greater savings.
3.

H = .35 (300 boxes) ($140 per box) = $14,700

As 2-day cost is less than Bs, so use As as the baseline.

A
Options
3 days
9 days

Freight
savings
$40
100

d
1
7

B
Incr. H
$40.27
281.92

Net
($.27)
(181.92)

Options
4 days
7 days

Cost
savings
$50
$90

d
2
5

Incr. H
$80.55
201.37

Net
($30.55)
(111.37)

Ship 2-day using A

4.

H = .25 (3,000)($120) = $90,000

d = 4 2 = 2 days
Freight Savings = 3000 ($0.75 - $0.65) = $300

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Solutions (continued)
Incremental
=H (
Holding cost

d
)
365

= $9,000(

2
)
365

= $493.15
Net savings = $300 - $493.15 = -$193.15
Therefore, trucking will be cheaper.

Case: Crusty Cargo

1.

Advantages of Louisville Warehouse

- No delays in the border
=> faster delivery

2.

- Could ask UPS or any other U.S. logistics companies to perform the warehousing function (i.e.,
Clearwater does not need to build a building).
- Could increase their delivery lead time, i.e., dont promise 24-hour delivery, but increase it to 48
hours.
- Fix the delay problems: paperwork mix-ups, computer system problems, customs (pre-arrange
with U.S. customs).

Instructors Manual, Chapter 12

Advantages of Couriering from Halifax

- No investment for a holding building required
- Save on trucking to Louisville (though cost is
probably the same or less that difference
between courier costs from Halifax vs.
Louisville to a US destination.

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