INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

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CHAPTER 1

INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

Chapter Overview This chapter introduces supply chain management (SCM) and describes how supply chain management is critical in today’s global business. Supply chain management is described as a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.It is important to understand the basic issues underlying SCM and the challenges facing companies to achieve effective management of their supply chains. Various issues and factors are described in this chapter. Specifically, the concept of managing risk and uncertainty, global optimization, relationship of the supply chain to the development chain are discussed. The chapter also discussed how the area evolved through the years.The primary purpose of this chapter is to establish a context for SCM in the realm of globalization and to instill this sense of importance in the students. If you’ve accomplished that by the end of the chapter, you’ve established a solid foundation for the remainder of the course.

Discussion Questions

Question 1

Pick any car model manufactured by a domestic auto maker. For example, consider the 2002 Ford Thunderbird.

• The supply chain for a car typically includes the following components::

• Suppliers for raw materials
• Suppliers for parts and subsystems
• Automobile manufacturer (Ford, in the example). Within a company, there are also different

departments, which constitute the internal supply chain:

• Purchasing and material handling

ii. Manufacturing iii. Marketing, etc.

• Transportation providers
• Automobile dealers

• Many firms are involved in the supply chain.

• Raw material suppliers. For instance, suppliers for steel, rubber, plastics, etc.
• Parts suppliers. For instance, suppliers for engines, steering wheels, seats, and electronic

components, etc.

• Automobile manufacturer. For instance, Ford.
• Transportation providers. For instance, shippers, trucking companies, railroads, etc.

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• Automobile dealers. For instance, Hayward Ford.

• All companies involved in the supply chain want to maximize their respective profits by increasing

revenue and decreasing cost. However, companies may employ different strategies in order to achieve this goal. Some of them focus on customer satisfaction and quick delivery, while others may be more concerned about minimizing inventory holding costs.

• In general, different parts of the supply chain have objectives that are not aligned with each

other.

• Purchasing: Stable order quantities, flexible delivery lead times and little variation in mix.
• Manufacturing: Long production runs, high quality, high productivity and low production

costs.

• Warehousing: Low inventory, reduced transportation costs and quick replenishment

capability.

• Customers: Short order lead times, a large variety of products and low prices.

Typically, the automobile dealer would like to offer a variety of car colors and configurations to accommodate different customer preferences, and meanwhile have a short delivery lead time from the manufacturer. However, in order to maximize the length of production runs, and utilize resources more efficiently, the manufacturer would like to aggregate orders from different dealers and offer less variety in car configurations. This is a clear example of conflicting marketing and manufacturing goals.

Question 2

• The supply chain for a consumer mortgage offered by a bank may involve various components.

• Marketing companies that handle solicitation to potential customers.
• Credit reporting agencies that evaluate potential customers.
• The bank that extends the mortgage loans.
• Mortgage brokers through which the loans are distributed.

• The marketing companies strive to increase the response rate from homebuyers in order to

maximize their returns. Banks aim at a customer portfolio with a relatively low risk, healthy flow of payments and low average loan maturity date. The brokers would like to maximize their sales commissions.

• Similar to product supply chains, the objective of a service supply chain is to provide what is

needed (in this case, a particular type of service, rather than a physical product) at the right location, at the right time, and in a form that conforms to customer requirements while minimizing systemwide costs. However, there are a number of differences between the two types of supply

chains. For instance:

• In a product supply chain, there is both a flow of information and physical products. In a

service supply chain, it is primarily information.

• Contrary to a service supply chain, transportation and inventory are major cost components in a

product supply chain.

• Services typically cannot be held in inventory, so matching capacity with demand is frequently

more important in a service supply chain. 2 / 4

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• In a service supply chain, the (explicit) cost of information is higher than in a product supply

chain. Note that in the mortgage example above, the bank has to compensate the credit reporting agency for each credit report it obtains.

Question 3

Many supply chains evolve over time. For example, consider a memory chip supply chain. Production strategies may change during different stages of the product life cycle. When a new memory chip is introduced, price is high, yield is low, and production capacity is tight, and the availability of the product is important. Consequently, production is usually done at plants close to markets, and the management focuses on increasing yield, reducing the number of production disruptions, and fully utilizing capacity. When the product matures, however, its price drops and demand is stabilized for a period of time, so minimizing production cost moves to center stage. To reduce costs, production may be outsourced to overseas foundries, where labor and materials are much cheaper.

Question 4

A vertically integrated company aims at tighter interaction among various business components, and frequently manages them centrally. Such a structure helps to achieve systemwide goals more easily by removing conflicts among different parts of the supply chain through central decision making. In a horizontally integrated company, there is frequently no benefit in coordinating the supply chains of each business within the company. Indeed, if every business specializes in its core function, and operates optimally, an overall global optimum may be approached.

Question 5

Effective supply chain management is also important for vertically integrated companies. In such an organizational structure, various business functions are handled by different departments of the company that usually have different internal objectives, and these objectives are not necessarily aligned with each other. This may be due to lack of communication among departments or the incentives provided by the upper management. For instance, if the sales department is evaluated based on revenue only, and the manufacturing department is evaluated based on revenue only, and the manufacturing department is evaluated based on cost only, the company’s profit may not be maximized globally.Effective supply chain management is still necessary to achieve globally optimal operations.

Question 6

The sources of uncertainty in this example include:

• Factors such as weather conditions, diseases, natural disasters cause uncertainty in availability of

raw materials, i.e., peach crop.

• Uncertain lead times during transportation of crop from the field to the processing facility may

affect the quality of peaches, e.g., they may get spoiled.

• Processing times in the plant, as well as the subsequent warehousing and transportation times are

subject to uncertainty.

• Demand is not known in advance. 3 / 4

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Question 7

A small number of centrally located warehouses allows a firm to take advantage of risk pooling in order to increase service levels and decrease inventory levels and costs. However, outbound transportation cost is typically higher, and delivery lead times are longer. On the other hand, by building a larger number of warehouses closer to the end customers, a firm can decrease outbound transportation costs and delivery lead times. However, this type of system will have increased total inventory levels and costs, decreased economies of scale, increases warehousing expenses, and potentially increased inbound transportation expenses.

Question 8

The choice of the particular transportation service depends largely on the types and sizes of products the company wants to transport, the inventory and delivery strategies and the need for flexibility:

• A truckload carrier is better if delivering bulky items or small items in large and stable quantities

from warehouses to demand points (stores). A good example is the delivery of groceries from warehouses to supermarkets. Note that in this case we would like the demand to be in increments of full truck loads.

• A package delivery firm is more appropriate if relatively small items are delivered from the

manufacturer/warehouse directly to the customers. Additionally, a package carrier company offers more flexibility by different modes of transportation depending on the needs of the individual customers.

Question 9

• High inventory levels

i. Advantages: High fill rate (service level) and quick order fulfillment.

ii. Disadvantages: High opportunity cost of capital tied in inventory, danger of price declines over time and obsolescence, need for more warehouse space.

• Low inventory levels

i. Advantages: Low inventory holding and warehousing costs.

ii. Disadvantages: Higher risk of shortages and lower service levels.

Question 10

Building redundancy into the supply chain means that if one portion fails, the supply chain can still satisfy demand. This is the biggest advantage of building redundancy in the supply chain.Alternate sources of supply, provision for alternate transportation and distribution modes, alternate warehouses are some of the ways by which redundancy can be built. A disadvantage of this policy is that excess capacity is built into the system in order to hedge against emergencies that may disrupt the supply – if these capacities are not used over time and if too much capacity is built as redundant capacity, the costs to the supply chain increases.

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