Understanding Supply Chain Management Concepts

Lecture 15, Supply Chain Management. So let's talk about supply chain and logistics. So the supply chain is the sequence of organizations, their facilities, functions, and activities that are involved in producing and delivering a product or service. And logistics is the part of the chain involved in the forward and reverse flow of goods, services, cash, and information. So here's some typical supply chains. At the top, this is what you might consider a goods supply chain. Typically, there's a whole bunch of suppliers. It goes into storage, and then there's some kind of manufacturing. It goes into storage, and it goes to a distributor, retailer, and then to the customer. Services tend to be a little simpler. There's a few suppliers. It goes into storage. Then you provide the service and it goes to the customer. So the third is, it talks about those flow of cash and flow of goods and services. So over here you have customers, marketing, product, service design. So here you have suppliers. Going into production, so here the goods or services are going this way and the cash is going this way. So production, it goes to logistics. Logistics goes to customers and the cash is going here. Reverse logistics, we'll talk about that. That's when a customer returns something. So if you look at reverse logistics, the customer returns the goods and they get the cash back in some form. Let's talk about the facilities in a supply chain. So that whole sequence of supply chain starts with the basic suppliers and goes all the way to the final customer. So all along the way there's warehouses, there's factories, there's processing centers, there's distribution centers, retail outlets, and then there's offices to manage all this and do all the logistics. So there's several functions and activities with the supply chain. You have to do forecasting, you're doing purchasing, inventory management, information assurance, information management, quality assurance, scheduling, production and delivery, and customer service. So those are all over the place in the supply chain. Supply chain management, or SEM. That's the strategic coordination of business functions within a business organization and throughout its supply chain for the purpose of integrating supply and demand management. So what do supply chain managers do? People at various levels in the organization who are responsible for managing supply and demand both within and across business organizations. So they're involved with planning coordinated activities, sourcing and procurement of materials and services, transformation activity, and logistics. Here's some key aspects of supply chain management. So the goal is to match supply to demand as effectively and efficiently as possible. You have some key issues. What is the approach? appropriate level of outsourcing. You have to manage procurement, manage suppliers, manage customer relationships, and being able to quickly identify problems and respond to them. Flow management. So there's several flows. There's the product and service flow. This typically the movement of goods and services from suppliers to customers as well as handling customer service needs and product returns. So product and service flow and then information flow. This is where you share forecast, sales data, you transmit orders, track shipments, update order status, all of that information. And then the financial flow. What are your credit terms? What are your payments? Do you have consignment? What about the title ownership arrangements? Who owns what when? So there's some trends in supply chain management. The first is to actually measure the return on investment of the supply chain. The second is the greening of supply chain. How do you make all the supply chain more friendly to the environment. This is what customers are demanding. Re-evaluating outsourcing. So there was a trend to do a lot of outsourcing, and now the question is, should this be outsourced? Re-evaluate things that are outsourced and explore the possibility of doing them yourselves. Integrating information technology. So can you share some kind of computer system across the supply chain? And then adopting the lean principles, things that we learned in the previous lecture. And then managing risks. How do you manage risks across the supply chain? Benefits and risks of outsourcing. So some of the benefits are you have... Lower prices may result from lower labor cost. If you were going to build it here in the United States, you may be able to outsource it to a company in China or another country that can do it cheaper. The ability of the organization to focus on its core strengths. Let's say you're good in one area and this area that you're not so good at, you outsource that to another company where that might be their core strength. It permits the conversion of some fixed cost to variable cost. Let's say that your manufacturing requires a huge upfront cost for some equipment. Now, if you outsource that to a company who already has that equipment, then you could convert those fixed costs into variable costs. They would charge you a portion of the cost for that equipment with each part. You could free up capital to address other needs. So if you didn't have to spend that fixed cost, then you'd have extra capital. And some of the risk can be shifted to the supplier. If you have a hard time building something, or even if the supplier has a hard time building something, you can shift that risk to them where they have to deliver it good. You can take advantage of the supplier's equity. And it also makes it easier to expand outside the home country. If you're trying to expand your supply chain outside your home country, outsourcing to someone or with someone who's in another country, they know the culture, they understand the local rules and laws, and it can be easier. So there's some risk, too. the inflexibility due to longer lead times. If you're outsourcing to a company in China that you probably want to ship an entire container full of things, they have to build it all, put it in a container, ship it to you. You could add months onto your lead time. Where if you were building it here, you could have a small quantity available immediately. Increased transportation costs, shipping it across the ocean. Language and cultural barriers. You may know the language, but you may not understand the culture. Something that is very accepted here in the United States may be actually offensive in another country. A great example of that is thumbs up. So we routinely use thumbs up, even like on Facebook. You give something a thumbs up. thumbs up. But in other cultures, that's a very offensive gesture, loss of jobs. So you could have to lay off people if you outsource loss of control. So you may have good control inside your organization, and then you outsource that, and they just do whatever they want. you lose that control. You could get lower productivity if you outsource. You could also lose business knowledge and And then in addition to business knowledge, you could lose intellectual property. So you could have a really great idea, outsource it to a place in China, and they turn around and sell it on the black market or other places, ignore your intellectual property rights, and there's nothing you can do about it. You could lose your intellectual property. increased effort to manage the supply chain. So if your supply chain is spread all over the place, you know, extra trips to China is just extra effort. Supply chain risks. So there's some natural risks in a supply chain. One of them is supply chain disruption. You could have natural disasters. that don't impact you but a hurricane, earthquake, flood comes in a different part of the country and that could disrupt your supply chain. Supplier problems. What if your supplier suddenly decides that they don't want to build that anymore? They decide that they don't want to build that obsolete thing and now you have to redesign it with the new item. Quality issues. So You could have problems with quality and that disrupts your supplies and leads to product recall, liability claims, negative publicity, loss of control of sensitive information. So we talked about that where your suppliers divulge sensitive information to competitors and weakens your competitive position. Risk management. So there's a couple of, it really involves identifying risks and assessing their likelihood of occurring and their potential impact and developing strategies for addressing them. So there's three strategies. One is risk avoidance, risk reduction, and risk sharing. So let's say that you're going to drive your car on a trip. And there's a risk that you could get in an accident. So risk avoidance is let's not even go on the trip. And then risk reduction is, well, we have some insurance and that reduces our risk. So if we get in an accident, our risk is reduced. Risk sharing. So risk sharing is similar to insurance, except maybe. Risk sharing might be, I have a $1,000 deductible on my car, so if I get in an accident, I pay $1,000, the insurance company pays the rest. So that's an example of risk sharing. So key elements of successful risk management, know your suppliers, provide supply chain visibility, and then develop event response capabilities. So you can go through and figure out what... could happen and what's your response to that. Global supply chains. So product design often uses inputs from around the world. Some manufacturing service activities are outsourced to countries where labor and or material costs are lower. And then the products are sold globally. So you might actually build it all in the United States and then Ship it out other places. So you have the complexities language and culture currency fluctuations the you you figure out a perfect price for an item and then the currency changes and suddenly The cost of that goes up and you've just lost your your competitive pricing just because of currency political instability you have a factory and suddenly the government changes hands and you lose everything. Transportation costs, lead times, and then you need this trust among supply chain partners. So it's harder to build trust the farther you get from each other. Ethical issues. So you Some examples of ethical issues, some countries bribing the government or company officials to secure permits or federal status, that's normal, but you can't really do that. It's, even though it's normal in that country, it's illegal for us to do it in that country. Another ethical issue is exporting smokestacks. So we want to reduce greenhouse gas emissions. And so we export that to China where there's just as much greenhouse gas being generated or even more. in the developing countries. So another ethical issue is claiming to have a green supply chain when the level of that green is really only minimal. So pretending to have a green supply chain, ignoring health, safety, environmental standards that can be both locally or an example of safety might be you You import a toy from China and there's lead in the paint. Violating basic worker rights. You hear about worker rights in China where they're working 12-hour days and really high stress. So that worker right thing, mislabeling the country of origin, where it's marked made in the U.S. when it's really made in China. And then this other ethical issue is you have a bunch of products and that product you find out it's banned in the U.S. So then you send it to China to sell where it's banned at home. So that's selling products abroad that are banned at home. So dealing with ethical issues. So develop ethical supply chain code of behavior. What do you expect from your supply chain? You can develop this jointly with them and then figure out ways to enforce it. Monitor supply chain activities. So you could actually go to the factory or go throughout your supply chain and audit what is happening. Choose suppliers that have a reputation for good ethical behavior. So. It may cost a little bit more, but they have a reputation for ethical behavior. And then you can incorporate compliance with labor standards into your supplier contract. So you could, in your contract, you say, this will, anybody who builds my products will be paid a minimum of this much. They will work a maximum of this many hours. It will be given time off, whatever standards you want incorporated into the contracts. And you can address any ethical issues as they arrive swiftly. As soon as you find out there's a problem, you deal with it swiftly. So there are several small business concerns with supply chain management. The first is inventory management. So one thing you... is as a small business you may have to carry extra inventory as a way to avoid shortages due to supply chain interruption. If you're a small business and this big business comes in to your supplier and says we want it all, they have a bigger stick and it may interrupt your supply chain. So having extra inventory in stock so that if it does get disrupted, you don't have shortages. Have backups for delivery from suppliers and two customers. So if you have, maybe you nurture a relationship with two suppliers. One is your primary supplier and the other is your secondary supplier. That way, if the primary supplier, something goes wrong, you can still get it from your backup supplier. And so what is your options to your customers? Can you have backups for your customers? Reducing risks as a small business. Use only reliable suppliers. Determine which suppliers are critical. Get to know them and any challenges they have. So if you're a small company, they're a small company, work with them and figure out where are your challenges, where are their challenges. That may be a good place for some kind of a strategic partnership or something. Measure supplier performance. So measure how often they deliver on time, how often the product is good. Recognize warning signs of supplier issues. If sometimes a supplier, as they're starting to go out of business or starting to have problems, you'll see little warning signs. Well, they're always on time, but this time they're going to be a week late. The next time they're two weeks late. Or they have things on back order. And then have plans in place to manage supply chain problems. The third concern is international trade. So you're a small business. You may not know what it's like to work with overseas suppliers. Find someone who has that expertise to help you. Set expectations for demand and timing. And then do not rely on a single supplier. It's that same thing as have multiple suppliers. Build goodwill to help in negotiation resolving any problems. And then you might want to consider using domestic suppliers if the risks for working with a foreign supplier are really too high. Management responsibility. So as a manager, you have a legal responsibility. Know the laws and regulations of the countries where your supply chains exist. Obeying the laws, operating to conform to regulation. So those are legal responsibilities. You have economic responsibilities, supplying products and services to meet the demand as efficiently as possible. And then ethical, conducting business in ways that are consistent with the moral standards of society. So you have some strategic management responsibilities. So there are certain strategic responsibilities have a major... impact on both the supply chain management and the business itself. So the first is supply chain strategy alignment. So you want your strategy to be aligned with the strategies up and down the supply chain. Your network configuration. So what does your supply chain look like? Is it a serial network, one to the next, the next? Or do you... Do you have multiple suppliers who have multiple sub-suppliers? What's your distribution look like? That whole network configuration of what your supply chain looks like. Information technology. Are you going to share an information technology across a supply chain? Or are you going to try to interface with them? How are you going to do that? Products and services. What's your strategy as far as products and services? And does the supply chain align to that strategy? Capacity planning. What happens if you grow? What happens if you shrink? And then strategic partnerships. What kind of partnership can you have in the supply chain? And then your distribution strategy. How are you going to distribute your products and services? And then how do you deal with uncertainty and risk? So there's some tactical and operational responsibilities. On the tactical side, you have forecasting, sourcing, operations planning, managing inventory, transportation planning, collaborating. Those are all tactical decisions. They're somewhere between operational and strategic. And then you have the operational decisions, scheduling, receiving, transforming, order fulfilling. Managing inventory, shipping, information sharing, controlling, all of those are normal operational decisions. Procurement. So the purchasing department is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. So the goal of procurement is to develop and implement purchasing plans for products and services that support operations strategies. So here's some purchasing interfaces. So inside the circle is the firm. So you have purchasing. It needs to work with operations. It needs to work with legal, accounting, data processing, design, and with receiving. And then it works directly with suppliers. So a big part of... Purchasing is receiving, confirming that it was received, and then with the suppliers. So the duties of purchasing are to identify the source of supply, negotiate contracts, maintain a database of suppliers. Who did we buy that from last time? Obtaining goods and services and then managing suppliers. If a supplier delivers you bad stuff, how do you deal with that? And if a supplier is going to be late, how do you deal with that? The purchasing cycle. So it starts... with receiving a requisition. Someone needs something. You select a supplier, places the order with the vendor, you monitor order, and then you receive the order. Supplier management. So you have to choose a supplier. You have supplier audits, supplier certification, you manage the relationship with suppliers, and then there's supplier partnership. So there's something called CFAR, collaborative planning, forecasting, and replenishment. So that's a very specific way of having a supplier partnership. And you can also do strategic partnering. Vendor analysis, supplier audits, and supplier certification. So vendor analysis is evaluating the source of supply in terms of price, Quality, reputation, and service. A supplier audit is a means of keeping current on the supplier's production or service. Capabilities, quality and delivery problems, and resolutions, and performance on other criteria. And then supplier certification is a detailed examination of supplier's policies and capabilities. And the process verifies the supplier meets or exceeds the requirement of a buyer. Strategic partnering. So strategic partnering is when two or more business organizations have complementary products or services, and they join so that each may realize a strategic benefit. So one example might be a supplier agrees to hold inventory for a customer. in return for a long-term commitment. So that supplier may normally have to carry a lot of inventory just because they have to be very responsive to supplier needs. Well, you just have a long-term contract that says, or a strategy that says, you hold my inventory. Anytime I need it, you send it to me immediately. So the benefit is the customer's inventory holding cost is reduced and the supplier is relieved of the cost that would be needed to continually find new customers. Supplier relationship management. The type of relationship that you have with suppliers is often governed by the duration of the trading relationship. So a short-term relationship, oftentimes it involves... competitive bidding, where you send a quote out to multiple organizations or multiple suppliers and say, how much can you, you know, I need 10 of these widgets. What's the cheapest you can give it to me by this date? And then they bid on 10 widgets. Minimal interaction, just send it to me. Then medium term involves some. ongoing relationship. And this is where I normally buy this from some company and they're used to me ordering it and you call them up and say, I need another 10 of those. A long-term is really greater cooperation and it may evolve into a partnership. And this is where I'm going to buy all of my stuff for this one thing all year long. from you or the next 10 years or something, sort of a long-term relationship. You may actually iron out costs so that the price of the item may be based on inflation or something like that, but it's fairly stable. So here's a contrast between supplier relationships. So on the far right is a partner relationship, and then in the middle is this adversary relationship. So if you look at the number of suppliers in an adversary relationship, you have lots of suppliers. You may play one off the other. I can get it from Joe for $10. Can you give it to me any cheaper? And where a partnership, you just have one or a few suppliers. Length of the relationship. In an adversary, it may be very brief. In a partnership, it tends to be long-term. Low price. In an adversary relationship, it's a major consideration. In a partnership, it's moderately important. Reliability. Adversary, it may not be that high. You get it and then you find out that it's not very good. Partner, you expect high reliability. Openness, they're not going to be very open to you in an adversarial relationship. Where a partnership, you tend to tell them, they tell you. Quality in an adversary, it may be unreliable and the buyer needs to inspect. In a partnership, you often get... quality at the source and the vendor may actually be certified. Volume of business, it may be low due to many suppliers. Partnership, it tends to be higher volume. Flexibility, an adversary you may may not have very much flexibility. I want a hundred of these and they say well we will give them to you a week from today. Where with a partner you say I want a hundred of them and I'd like 10 this week, 10 next week, 10 the next week, you know, so you can have some flexibility. Location, adversary, you're just getting it from wherever you can. Where a partner, it might be somewhat close for short lead times or quick service. Logistics. So logistics is when you move materials, services, cash, and information in a supply chain. So there's different kinds of logistics. There's movements within a facility, incoming shipments, and outgoing shipments. So here's an example within a facility. Down here at the bottom left, you have receiving. So you have raw materials coming in from your suppliers. You have some kind of storage, and it goes into your work center. You have some machines. It's transforming that. You're adding value. You come down here to the middle where you have storage. And then you go through some more work centers, and you finally come out with some finished products, go into storage, and then from storage it goes into outgoing shipment. So ideally you would have this in such a way that what you don't want is you don't want to start at this work center and then jump over to this one, and then go to this one, jump over to this one, and then go out. You want this nice flow through the facility. Incoming and outgoing shipments. A lot of times this is called traffic management. It's overseeing the shipment of incoming and outgoing goods. Handles schedules and decisions on shipping method and times, and it takes into account the cost of shipping alternatives, government regulations, needs of the organization, shipping delays, disruptions, all of those. RFID. So in tracking goods, a technology that a lot of people are going to is called radio frequency identification or RFID. And what it uses is radio waves to identify objects such as goods in supply chain. So it's similar to a barcode, but you can actually store more information there and it does not require a line of sight for reading. And you can often read more than one at a time. So there's different kinds of RFIDs. There's sort of close RFIDs. If you have a key that's not a barcode, it's a little card that you just hold up to a lock, that's an RFID, and that's a near-field RFID. Some of the others... You can go farther away. An example is something like E-ZPass, where you have a toll road and you have an E-ZPass in your car. And as you're going through the toll booth, they read your E-ZPass. Your E-ZPass has an RFID in it. And that's longer than, it's not near, it's more far field. You can actually have, you could have all your objects, or let's say you're shipping something from China. You could have RFIDs on everything in the container. You could just open up the container with like a far field RFID. You just point the gun in the container, and it will give you a list of everything in that container from all the RFIDs. So it has ability to increase supply chain visibility, improve inventory management, improve quality control, and enhance relationships with suppliers and customers. Third-party logistics, or 3PL. This is outsourcing of logistics management. It includes warehousing and distribution. So you see FedEx has expanded into this. Third-party logistics, where you can actually have them store your inventory. They will ship it from their stored location. You get favorable shipping rates. They could even answer the phone for you. You have lots of options. Managing returns. So this is called reverse logistics, the process of... transporting returned items. So products are returned to companies or third-party handlers for a variety of reasons and conditions. Maybe they didn't like it or it didn't work. So there's a couple elements of return management. One of them is gatekeeping. You screen return goods to prevent incorrect acceptance of goods. So someone buys a pair of shoes. They put an old pair of shoes back in there, return it, and say, I don't like these shoes. And it turns out to be an old pair of tennis shoes instead of what they were bringing back. So that's sort of a screening. Or sometimes they'll say, you cannot bring back this item if it's been opened. And then... And then there's avoidance, finding ways to minimize the number of items that are returned. So actually avoidance is an example of if you open it, you can't return it. Or so some places actually have a sign, no returns. Or once you buy it, it's yours or something. So avoiding returns, there's different ways. Creating an effective supply chain. It begins with strategic sourcing. You analyze the procurement process to lower costs by reducing waste, non-value-added activities, you increase profits, reduce risk, and improve supplier performance. So you must have trust, you must have effective communication, you must have information velocity. Your information has to go fast between you and the supplier. Supply chain visibility, you need to see the whole process. Event management capability, what happens when an event happens. And then performance metrics, how do you know whether it's going well or not. Challenges. So you have barriers to integration of organizations. So one organization may be doing it one way, another organization doing it a different way, and it's hard. to get those to talk the same language. Getting top management on board. Sometimes top management doesn't care about the supply chain. Dealing with trade-offs. Small businesses have their own set of challenges, vulnerability and uncertainty, and then response time. So those are all challenges. Trade-offs. So there's several trade-offs. So one of them is a... Lot size inventory trade-off. So lot sizes yield benefits in terms of quantity discounts, lower annual setup costs, but it increases the amount of safety stock and inventory carrying costs supplied, carried by suppliers. So it may be cheaper to buy an entire box of something, an entire pallet of something, an entire truckload of something, but then you have to deal with that whole truckload. And then inventory transportation trade-off. So do you want a whole truckload or a pallet? If you're getting a whole truckload, you can spread the cost across many units, but you have greater holding costs for customers. Then there's something called cross-decking. So this is a technique where arriving goods at the warehouse from a supplier are unloaded from the suppliers truck and loaded onto an outbound truck thereby avoiding warehouse storage so you have this one loading dock where things are just swapped or swapped around FedEx does a lot of cross decking where they're there they're moving things from one truck to another truck but this is you can also do this as a distributor where your inventory comes in, you move it to various trucks, and it goes out. Lead time transportation costs. So suppliers like to ship full loads, but waiting for sufficient orders or production to achieve a full load may increase the lead time. So if you need it fast, you might have to pay extra for shipping. Product variety and inventory trade-off. So the greater product variety means smaller sizes and higher setup costs, as well as higher transportation and inventory management costs. And then there's this thing called delayed differentiation. This is where you have a bunch of standard components and sub-assemblies, and they're held until late in the processing to add differentiating features. So, for example... You have a computer, you have a whole pile of hard disks, a whole pile of memory, a whole pile of motherboards. And then when the person orders the computer, you put the parts together and ship it to them. This delayed differentiation. Cost customer service trade-offs. So producing and shipping in large lots reduces cost but increases lead time. And then there's this dis- In- Intermediation. So this intermediation is reducing the number of steps in the supply chain. You might see this furniture store that says factory direct. So what they're saying is we've cut out all the steps, we have a showroom, and we get our products directly from the factory. So that takes out all the steps. in the supply chain. So that's disintermediation. Summary. So we've talked about trends in the supply chain management, global supply chains and the challenges facing a global economy, management responsibilities, procurement, supplier management, inventory management, order fulfillment, logistics, and creating an effective supply chain.

At the top, this is what you might consider a goods supply chain. Typically, there's a whole bunch of suppliers. It goes into storage, and then there's some kind of manufacturing. It goes into storage, and it goes to a distributor, retailer, and then to the customer. Services tend to be a little simpler.

There's a few suppliers. It goes into storage. Then you provide the service and it goes to the customer.

So the third is, it talks about those flow of cash and flow of goods and services. So over here you have customers, marketing, product, service design. So here you have suppliers. Going into production, so here the goods or services are going this way and the cash is going this way. So production, it goes to logistics.

Logistics goes to customers and the cash is going here. Reverse logistics, we'll talk about that. That's when a customer returns something. So if you look at reverse logistics, the customer returns the goods and they get the cash back in some form.

Let's talk about the facilities in a supply chain. So that whole sequence of supply chain starts with the basic suppliers and goes all the way to the final customer. So all along the way there's warehouses, there's factories, there's processing centers, there's distribution centers, retail outlets, and then there's offices to manage all this and do all the logistics. So there's several functions and activities with the supply chain. You have to do forecasting, you're doing purchasing, inventory management, information assurance, information management, quality assurance, scheduling, production and delivery, and customer service.

So those are all over the place in the supply chain. Supply chain management, or SEM. That's the strategic coordination of business functions within a business organization and throughout its supply chain for the purpose of integrating supply and demand management.

So what do supply chain managers do? People at various levels in the organization who are responsible for managing supply and demand both within and across business organizations. So they're involved with planning coordinated activities, sourcing and procurement of materials and services, transformation activity, and logistics.

Here's some key aspects of supply chain management. So the goal is to match supply to demand as effectively and efficiently as possible. You have some key issues. What is the approach?

appropriate level of outsourcing. You have to manage procurement, manage suppliers, manage customer relationships, and being able to quickly identify problems and respond to them. Flow management.

So there's several flows. There's the product and service flow. This typically the movement of goods and services from suppliers to customers as well as handling customer service needs and product returns.

So product and service flow and then information flow. This is where you share forecast, sales data, you transmit orders, track shipments, update order status, all of that information. And then the financial flow. What are your credit terms?

What are your payments? Do you have consignment? What about the title ownership arrangements?

Who owns what when? So there's some trends in supply chain management. The first is to actually measure the return on investment of the supply chain.

The second is the greening of supply chain. How do you make all the supply chain more friendly to the environment. This is what customers are demanding.

Re-evaluating outsourcing. So there was a trend to do a lot of outsourcing, and now the question is, should this be outsourced? Re-evaluate things that are outsourced and explore the possibility of doing them yourselves. Integrating information technology.

So can you share some kind of computer system across the supply chain? And then adopting the lean principles, things that we learned in the previous lecture. And then managing risks. How do you manage risks across the supply chain? Benefits and risks of outsourcing.

So some of the benefits are you have... Lower prices may result from lower labor cost. If you were going to build it here in the United States, you may be able to outsource it to a company in China or another country that can do it cheaper.

The ability of the organization to focus on its core strengths. Let's say you're good in one area and this area that you're not so good at, you outsource that to another company where that might be their core strength. It permits the conversion of some fixed cost to variable cost. Let's say that your manufacturing requires a huge upfront cost for some equipment.

Now, if you outsource that to a company who already has that equipment, then you could convert those fixed costs into variable costs. They would charge you a portion of the cost for that equipment with each part. You could free up capital to address other needs.

So if you didn't have to spend that fixed cost, then you'd have extra capital. And some of the risk can be shifted to the supplier. If you have a hard time building something, or even if the supplier has a hard time building something, you can shift that risk to them where they have to deliver it good.

You can take advantage of the supplier's equity. And it also makes it easier to expand outside the home country. If you're trying to expand your supply chain outside your home country, outsourcing to someone or with someone who's in another country, they know the culture, they understand the local rules and laws, and it can be easier. So there's some risk, too.

the inflexibility due to longer lead times. If you're outsourcing to a company in China that you probably want to ship an entire container full of things, they have to build it all, put it in a container, ship it to you. You could add months onto your lead time. Where if you were building it here, you could have a small quantity available immediately. Increased transportation costs, shipping it across the ocean.

Language and cultural barriers. You may know the language, but you may not understand the culture. Something that is very accepted here in the United States may be actually offensive in another country. A great example of that is thumbs up.

So we routinely use thumbs up, even like on Facebook. You give something a thumbs up. thumbs up. But in other cultures, that's a very offensive gesture, loss of jobs. So you could have to lay off people if you outsource loss of control.

So you may have good control inside your organization, and then you outsource that, and they just do whatever they want. you lose that control. You could get lower productivity if you outsource. You could also lose business knowledge and And then in addition to business knowledge, you could lose intellectual property.

So you could have a really great idea, outsource it to a place in China, and they turn around and sell it on the black market or other places, ignore your intellectual property rights, and there's nothing you can do about it. You could lose your intellectual property. increased effort to manage the supply chain. So if your supply chain is spread all over the place, you know, extra trips to China is just extra effort. Supply chain risks.

So there's some natural risks in a supply chain. One of them is supply chain disruption. You could have natural disasters. that don't impact you but a hurricane, earthquake, flood comes in a different part of the country and that could disrupt your supply chain. Supplier problems.

What if your supplier suddenly decides that they don't want to build that anymore? They decide that they don't want to build that obsolete thing and now you have to redesign it with the new item. Quality issues.

So You could have problems with quality and that disrupts your supplies and leads to product recall, liability claims, negative publicity, loss of control of sensitive information. So we talked about that where your suppliers divulge sensitive information to competitors and weakens your competitive position. Risk management. So there's a couple of, it really involves identifying risks and assessing their likelihood of occurring and their potential impact and developing strategies for addressing them. So there's three strategies.

One is risk avoidance, risk reduction, and risk sharing. So let's say that you're going to drive your car on a trip. And there's a risk that you could get in an accident.

So risk avoidance is let's not even go on the trip. And then risk reduction is, well, we have some insurance and that reduces our risk. So if we get in an accident, our risk is reduced. Risk sharing.

So risk sharing is similar to insurance, except maybe. Risk sharing might be, I have a $1,000 deductible on my car, so if I get in an accident, I pay $1,000, the insurance company pays the rest. So that's an example of risk sharing.

So key elements of successful risk management, know your suppliers, provide supply chain visibility, and then develop event response capabilities. So you can go through and figure out what... could happen and what's your response to that. Global supply chains. So product design often uses inputs from around the world.

Some manufacturing service activities are outsourced to countries where labor and or material costs are lower. And then the products are sold globally. So you might actually build it all in the United States and then Ship it out other places. So you have the complexities language and culture currency fluctuations the you you figure out a perfect price for an item and then the currency changes and suddenly The cost of that goes up and you've just lost your your competitive pricing just because of currency political instability you have a factory and suddenly the government changes hands and you lose everything.

Transportation costs, lead times, and then you need this trust among supply chain partners. So it's harder to build trust the farther you get from each other. Ethical issues.

So you Some examples of ethical issues, some countries bribing the government or company officials to secure permits or federal status, that's normal, but you can't really do that. It's, even though it's normal in that country, it's illegal for us to do it in that country. Another ethical issue is exporting smokestacks. So we want to reduce greenhouse gas emissions. And so we export that to China where there's just as much greenhouse gas being generated or even more.

in the developing countries. So another ethical issue is claiming to have a green supply chain when the level of that green is really only minimal. So pretending to have a green supply chain, ignoring health, safety, environmental standards that can be both locally or an example of safety might be you You import a toy from China and there's lead in the paint.

Violating basic worker rights. You hear about worker rights in China where they're working 12-hour days and really high stress. So that worker right thing, mislabeling the country of origin, where it's marked made in the U.S. when it's really made in China. And then this other ethical issue is you have a bunch of products and that product you find out it's banned in the U.S. So then you send it to China to sell where it's banned at home.

So that's selling products abroad that are banned at home. So dealing with ethical issues. So develop ethical supply chain code of behavior.

What do you expect from your supply chain? You can develop this jointly with them and then figure out ways to enforce it. Monitor supply chain activities.

So you could actually go to the factory or go throughout your supply chain and audit what is happening. Choose suppliers that have a reputation for good ethical behavior. So. It may cost a little bit more, but they have a reputation for ethical behavior. And then you can incorporate compliance with labor standards into your supplier contract.

So you could, in your contract, you say, this will, anybody who builds my products will be paid a minimum of this much. They will work a maximum of this many hours. It will be given time off, whatever standards you want incorporated into the contracts.

And you can address any ethical issues as they arrive swiftly. As soon as you find out there's a problem, you deal with it swiftly. So there are several small business concerns with supply chain management.

The first is inventory management. So one thing you... is as a small business you may have to carry extra inventory as a way to avoid shortages due to supply chain interruption.

If you're a small business and this big business comes in to your supplier and says we want it all, they have a bigger stick and it may interrupt your supply chain. So having extra inventory in stock so that if it does get disrupted, you don't have shortages. Have backups for delivery from suppliers and two customers. So if you have, maybe you nurture a relationship with two suppliers. One is your primary supplier and the other is your secondary supplier.

That way, if the primary supplier, something goes wrong, you can still get it from your backup supplier. And so what is your options to your customers? Can you have backups for your customers? Reducing risks as a small business.

Use only reliable suppliers. Determine which suppliers are critical. Get to know them and any challenges they have.

So if you're a small company, they're a small company, work with them and figure out where are your challenges, where are their challenges. That may be a good place for some kind of a strategic partnership or something. Measure supplier performance. So measure how often they deliver on time, how often the product is good.

Recognize warning signs of supplier issues. If sometimes a supplier, as they're starting to go out of business or starting to have problems, you'll see little warning signs. Well, they're always on time, but this time they're going to be a week late.

The next time they're two weeks late. Or they have things on back order. And then have plans in place to manage supply chain problems.

The third concern is international trade. So you're a small business. You may not know what it's like to work with overseas suppliers. Find someone who has that expertise to help you. Set expectations for demand and timing.

And then do not rely on a single supplier. It's that same thing as have multiple suppliers. Build goodwill to help in negotiation resolving any problems.

And then you might want to consider using domestic suppliers if the risks for working with a foreign supplier are really too high. Management responsibility. So as a manager, you have a legal responsibility.

Know the laws and regulations of the countries where your supply chains exist. Obeying the laws, operating to conform to regulation. So those are legal responsibilities. You have economic responsibilities, supplying products and services to meet the demand as efficiently as possible. And then ethical, conducting business in ways that are consistent with the moral standards of society.

So you have some strategic management responsibilities. So there are certain strategic responsibilities have a major... impact on both the supply chain management and the business itself. So the first is supply chain strategy alignment. So you want your strategy to be aligned with the strategies up and down the supply chain.

Your network configuration. So what does your supply chain look like? Is it a serial network, one to the next, the next? Or do you...

Do you have multiple suppliers who have multiple sub-suppliers? What's your distribution look like? That whole network configuration of what your supply chain looks like. Information technology.

Are you going to share an information technology across a supply chain? Or are you going to try to interface with them? How are you going to do that?

Products and services. What's your strategy as far as products and services? And does the supply chain align to that strategy? Capacity planning. What happens if you grow?

What happens if you shrink? And then strategic partnerships. What kind of partnership can you have in the supply chain? And then your distribution strategy.

How are you going to distribute your products and services? And then how do you deal with uncertainty and risk? So there's some tactical and operational responsibilities.

On the tactical side, you have forecasting, sourcing, operations planning, managing inventory, transportation planning, collaborating. Those are all tactical decisions. They're somewhere between operational and strategic. And then you have the operational decisions, scheduling, receiving, transforming, order fulfilling.

Managing inventory, shipping, information sharing, controlling, all of those are normal operational decisions. Procurement. So the purchasing department is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. So the goal of procurement is to develop and implement purchasing plans for products and services that support operations strategies. So here's some purchasing interfaces.

So inside the circle is the firm. So you have purchasing. It needs to work with operations. It needs to work with legal, accounting, data processing, design, and with receiving.

And then it works directly with suppliers. So a big part of... Purchasing is receiving, confirming that it was received, and then with the suppliers.

So the duties of purchasing are to identify the source of supply, negotiate contracts, maintain a database of suppliers. Who did we buy that from last time? Obtaining goods and services and then managing suppliers.

If a supplier delivers you bad stuff, how do you deal with that? And if a supplier is going to be late, how do you deal with that? The purchasing cycle. So it starts...

with receiving a requisition. Someone needs something. You select a supplier, places the order with the vendor, you monitor order, and then you receive the order.

Supplier management. So you have to choose a supplier. You have supplier audits, supplier certification, you manage the relationship with suppliers, and then there's supplier partnership.

So there's something called CFAR, collaborative planning, forecasting, and replenishment. So that's a very specific way of having a supplier partnership. And you can also do strategic partnering.

Vendor analysis, supplier audits, and supplier certification. So vendor analysis is evaluating the source of supply in terms of price, Quality, reputation, and service. A supplier audit is a means of keeping current on the supplier's production or service. Capabilities, quality and delivery problems, and resolutions, and performance on other criteria.

And then supplier certification is a detailed examination of supplier's policies and capabilities. And the process verifies the supplier meets or exceeds the requirement of a buyer. Strategic partnering. So strategic partnering is when two or more business organizations have complementary products or services, and they join so that each may realize a strategic benefit. So one example might be a supplier agrees to hold inventory for a customer.

in return for a long-term commitment. So that supplier may normally have to carry a lot of inventory just because they have to be very responsive to supplier needs. Well, you just have a long-term contract that says, or a strategy that says, you hold my inventory.

Anytime I need it, you send it to me immediately. So the benefit is the customer's inventory holding cost is reduced and the supplier is relieved of the cost that would be needed to continually find new customers. Supplier relationship management.

The type of relationship that you have with suppliers is often governed by the duration of the trading relationship. So a short-term relationship, oftentimes it involves... competitive bidding, where you send a quote out to multiple organizations or multiple suppliers and say, how much can you, you know, I need 10 of these widgets.

What's the cheapest you can give it to me by this date? And then they bid on 10 widgets. Minimal interaction, just send it to me. Then medium term involves some.

ongoing relationship. And this is where I normally buy this from some company and they're used to me ordering it and you call them up and say, I need another 10 of those. A long-term is really greater cooperation and it may evolve into a partnership.

And this is where I'm going to buy all of my stuff for this one thing all year long. from you or the next 10 years or something, sort of a long-term relationship. You may actually iron out costs so that the price of the item may be based on inflation or something like that, but it's fairly stable. So here's a contrast between supplier relationships.

So on the far right is a partner relationship, and then in the middle is this adversary relationship. So if you look at the number of suppliers in an adversary relationship, you have lots of suppliers. You may play one off the other. I can get it from Joe for $10.

Can you give it to me any cheaper? And where a partnership, you just have one or a few suppliers. Length of the relationship.

In an adversary, it may be very brief. In a partnership, it tends to be long-term. Low price. In an adversary relationship, it's a major consideration.

In a partnership, it's moderately important. Reliability. Adversary, it may not be that high.

You get it and then you find out that it's not very good. Partner, you expect high reliability. Openness, they're not going to be very open to you in an adversarial relationship. Where a partnership, you tend to tell them, they tell you. Quality in an adversary, it may be unreliable and the buyer needs to inspect.

In a partnership, you often get... quality at the source and the vendor may actually be certified. Volume of business, it may be low due to many suppliers.

Partnership, it tends to be higher volume. Flexibility, an adversary you may may not have very much flexibility. I want a hundred of these and they say well we will give them to you a week from today.

Where with a partner you say I want a hundred of them and I'd like 10 this week, 10 next week, 10 the next week, you know, so you can have some flexibility. Location, adversary, you're just getting it from wherever you can. Where a partner, it might be somewhat close for short lead times or quick service. Logistics. So logistics is when you move materials, services, cash, and information in a supply chain.

So there's different kinds of logistics. There's movements within a facility, incoming shipments, and outgoing shipments. So here's an example within a facility.

Down here at the bottom left, you have receiving. So you have raw materials coming in from your suppliers. You have some kind of storage, and it goes into your work center.

You have some machines. It's transforming that. You're adding value. You come down here to the middle where you have storage. And then you go through some more work centers, and you finally come out with some finished products, go into storage, and then from storage it goes into outgoing shipment.

So ideally you would have this in such a way that what you don't want is you don't want to start at this work center and then jump over to this one, and then go to this one, jump over to this one, and then go out. You want this nice flow through the facility. Incoming and outgoing shipments.

A lot of times this is called traffic management. It's overseeing the shipment of incoming and outgoing goods. Handles schedules and decisions on shipping method and times, and it takes into account the cost of shipping alternatives, government regulations, needs of the organization, shipping delays, disruptions, all of those. RFID.

So in tracking goods, a technology that a lot of people are going to is called radio frequency identification or RFID. And what it uses is radio waves to identify objects such as goods in supply chain. So it's similar to a barcode, but you can actually store more information there and it does not require a line of sight for reading.

And you can often read more than one at a time. So there's different kinds of RFIDs. There's sort of close RFIDs.

If you have a key that's not a barcode, it's a little card that you just hold up to a lock, that's an RFID, and that's a near-field RFID. Some of the others... You can go farther away.

An example is something like E-ZPass, where you have a toll road and you have an E-ZPass in your car. And as you're going through the toll booth, they read your E-ZPass. Your E-ZPass has an RFID in it. And that's longer than, it's not near, it's more far field. You can actually have, you could have all your objects, or let's say you're shipping something from China.

You could have RFIDs on everything in the container. You could just open up the container with like a far field RFID. You just point the gun in the container, and it will give you a list of everything in that container from all the RFIDs.

So it has ability to increase supply chain visibility, improve inventory management, improve quality control, and enhance relationships with suppliers and customers. Third-party logistics, or 3PL. This is outsourcing of logistics management. It includes warehousing and distribution. So you see FedEx has expanded into this.

Third-party logistics, where you can actually have them store your inventory. They will ship it from their stored location. You get favorable shipping rates.

They could even answer the phone for you. You have lots of options. Managing returns. So this is called reverse logistics, the process of...

transporting returned items. So products are returned to companies or third-party handlers for a variety of reasons and conditions. Maybe they didn't like it or it didn't work.

So there's a couple elements of return management. One of them is gatekeeping. You screen return goods to prevent incorrect acceptance of goods. So someone buys a pair of shoes. They put an old pair of shoes back in there, return it, and say, I don't like these shoes.

And it turns out to be an old pair of tennis shoes instead of what they were bringing back. So that's sort of a screening. Or sometimes they'll say, you cannot bring back this item if it's been opened.

And then... And then there's avoidance, finding ways to minimize the number of items that are returned. So actually avoidance is an example of if you open it, you can't return it.

Or so some places actually have a sign, no returns. Or once you buy it, it's yours or something. So avoiding returns, there's different ways. Creating an effective supply chain.

It begins with strategic sourcing. You analyze the procurement process to lower costs by reducing waste, non-value-added activities, you increase profits, reduce risk, and improve supplier performance. So you must have trust, you must have effective communication, you must have information velocity. Your information has to go fast between you and the supplier.

Supply chain visibility, you need to see the whole process. Event management capability, what happens when an event happens. And then performance metrics, how do you know whether it's going well or not.

Challenges. So you have barriers to integration of organizations. So one organization may be doing it one way, another organization doing it a different way, and it's hard. to get those to talk the same language. Getting top management on board.

Sometimes top management doesn't care about the supply chain. Dealing with trade-offs. Small businesses have their own set of challenges, vulnerability and uncertainty, and then response time.

So those are all challenges. Trade-offs. So there's several trade-offs.

So one of them is a... Lot size inventory trade-off. So lot sizes yield benefits in terms of quantity discounts, lower annual setup costs, but it increases the amount of safety stock and inventory carrying costs supplied, carried by suppliers. So it may be cheaper to buy an entire box of something, an entire pallet of something, an entire truckload of something, but then you have to deal with that whole truckload.

And then inventory transportation trade-off. So do you want a whole truckload or a pallet? If you're getting a whole truckload, you can spread the cost across many units, but you have greater holding costs for customers. Then there's something called cross-decking.

So this is a technique where arriving goods at the warehouse from a supplier are unloaded from the suppliers truck and loaded onto an outbound truck thereby avoiding warehouse storage so you have this one loading dock where things are just swapped or swapped around FedEx does a lot of cross decking where they're there they're moving things from one truck to another truck but this is you can also do this as a distributor where your inventory comes in, you move it to various trucks, and it goes out. Lead time transportation costs. So suppliers like to ship full loads, but waiting for sufficient orders or production to achieve a full load may increase the lead time.

So if you need it fast, you might have to pay extra for shipping. Product variety and inventory trade-off. So the greater product variety means smaller sizes and higher setup costs, as well as higher transportation and inventory management costs.

And then there's this thing called delayed differentiation. This is where you have a bunch of standard components and sub-assemblies, and they're held until late in the processing to add differentiating features. So, for example...

You have a computer, you have a whole pile of hard disks, a whole pile of memory, a whole pile of motherboards. And then when the person orders the computer, you put the parts together and ship it to them. This delayed differentiation.

Cost customer service trade-offs. So producing and shipping in large lots reduces cost but increases lead time. And then there's this dis- In- Intermediation. So this intermediation is reducing the number of steps in the supply chain. You might see this furniture store that says factory direct.

So what they're saying is we've cut out all the steps, we have a showroom, and we get our products directly from the factory. So that takes out all the steps. in the supply chain.

So that's disintermediation. Summary. So we've talked about trends in the supply chain management, global supply chains and the challenges facing a global economy, management responsibilities, procurement, supplier management, inventory management, order fulfillment, logistics, and creating an effective supply chain.

Transcript for:Understanding Supply Chain Management Concepts

Transcript for:
Understanding Supply Chain Management Concepts