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Supply Chain Management
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Supply Chain Management A supply chain is a set of organizations directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer. Managing a supply chain is 'supply chain management' Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. Supply chain management spans all movement and storage of raw materials, workin-process inventory, and finished goods from point of origin to point of consumption (supply chain).
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Supply Chain Management
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The Supply Chain Suppliers
Manufacturers
Transportation Costs
Material Costs Manufacturing Costs
Warehouses & Distribution Centers
Transportation Costs Inventory Costs
Customers
Transportation Costs 4
The Supply Chain – Another View
Plan
Source
Suppliers
Material Costs
Make
Manufacturers
Deliver
Warehouses & Distribution Centers
Buy
Customers
Transportation Transportation Costs Transportation Costs Manufacturing Costs Inventory Costs Costs 5
Supply Chain for Service Providers More difficult than manufacturing Does not focus on the flow of physical goods Focuses on human resources and support services More compact and less extended
Value vs. Supply Chain
Value chain ◦ every step from raw materials to the eventual end user ◦ ultimate goal is delivery of maximum value to the end user
Supply chain ◦ activities that get raw materials and subassemblies into manufacturing operation
Terms are used interchangeably
Supply Chain Management (SCM) Managing flow of information through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs Keys to effective SCM
◦ ◦ ◦ ◦
information communication cooperation trust
What Is Supply Chain Management (SCM)? Plan
Source
Make
Deliver
Buy
A set of approaches used to efficiently integrate ◦
Suppliers
◦
Manufacturers
◦
Warehouses
◦
Distribution centers
So that the product is produced and distributed ◦
In the right quantities
◦
To the right locations
◦
And at the right time
System-wide costs are minimized and Service level requirements are satisfied 9
WHAT IS SUPPLY CHAIN MANAGEMENT " Is the strategic management of activities involved in the acquisition and conversion of materials to finished products delivered to the customer"
Supplier Management
Schedule / Resources
Material Flow Information Flow
Conversion
Customer Management
Stock Deployment
Leads to Business Process Integration
Delivery
Supply chain is the system by which organizations source, make and deliver their products or services according to market demand. Supply chain management operations and decisions are ultimately triggered by demand signals at the ultimate consumer level. Supply chain as defined by experienced practitioners extends from suppliers’ suppliers to customers’ customers.
History of Supply Chain Management
1960’s - Inventory Management Focus, Cost Control 1970’s - MRP & BOM - Operations Planning 1980’s - MRPII, JIT - Materials Management, Logistics 1990’s - SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order Entry 2000’s - Optimized “Value Network” with Real-Time Decision Support; Synchronized & Collaborative Extended Network
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Why Is SCM Difficult? Plan
Source
Make
Deliver
Buy
Uncertainty is inherent to every supply chain ◦
Travel times
◦
Breakdowns of machines and vehicles
◦
Weather, natural catastrophe, war
◦
Local politics, labor conditions, border issues
The complexity of the problem to globally optimize a supply chain is significant ◦
Minimize internal costs
◦
Minimize uncertainty
◦
Deal with remaining uncertainty
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Supply Chain Uncertainty
One goal in SCM: ◦ respond to uncertainty in customer demand without creating costly excess inventory
Negative effects of uncertainty ◦ lateness ◦ incomplete orders
Inventory ◦ insurance against supply chain uncertainty
Factors that contribute to uncertainty ◦ ◦ ◦ ◦ ◦ ◦ ◦
inaccurate demand forecasting long variable lead times late deliveries incomplete shipments product changes batch ordering price fluctuations and discounts inflated orders
CASE STUDY WHY MANAGE SUPPLY CHAINS
DIFFERENT RESPONSES OF NOKIA AND ERICSSON ON A FIRE AT ONE OF THE SUPPLIER’S FACILITY ◦ Supplier was Philips Semiconductors in Albuquerque, NM
Nokia: ◦ Changed product design to source components from alternate suppliers ◦ For parts that could not be sourced from elsewhere, worked with Philips to source it from their plants in China and Netherlands ◦ All done in about five days
DIFFERENT RESPONSES OF NOKIA AND ERICSSON ON A FIRE AT ONE OF THE SUPPLIER’S FACILITY
Ericsson’s experience was quite different
◦ Took 4 weeks for the news to reach upper management ◦ Realized five weeks after the fire regarding the severity of the situation. ◦ By that time, the alternative supply of chips was already taken by Nokia. ◦ Devastating impact on Ericsson $400M in potential sales was lost Part of the loss was covered by insurance. Led to component shortages
Wrong product mix and marketing problems caused: $1.68B loss to Ericsson Cell Phone Division in 2000 Forced the company to exit the cell phone market
TOYOTA SUPPLY CHAIN In 1997, Aisin Seiki the sole supplier of 98% of brake fluid proportioning valves (P-valves) used by Toyota Inexpensive part (about $7 each) but important in the assembly of any car. Saturday, February 1, 1997:Fire stopped Aisin’s main factory in the industrial area of Kariya,
◦ Two weeks to restart the production ◦ Six months for complete recovery
Toyota producing close to 15,500 vehicles per day. ◦ JIT meant only 2-3 days of inventory supply
Recovery Effort by Toyota Blueprints of valves were distributed among all Toyota’s suppliers Engineers from Aisin and Toyota relocated to supplier’s facilities Other manufacturers like Brother were also brought in Existing machinery adapted to build the valves according to original specifications New machinery acquired in the spot market Within days, firms with little experience with P-valves were manufacturing and delivering parts to Aisin
◦ Aisin assembled and inspected valves before shipment to Toyota ◦ About 200 of Toyota’s suppliers were involved
Outcome
Accident initially cost: ◦ 7.8B Yen ($65M) to Aisin ◦ 160B Yen (or $1.3B) to Toyota
Damage reduced to 30B Yen ($250M) with extra shifts and overtime Toyota issued a $100M token of appreciation to their providers as a gift for their collaboration
The Need for Supply Chain Management The
need to improve operations. Increasing levels of outsourcing. Increasing transportation costs. Competitive pressures. Increasing importance of e-commerce. The need to manage inventories
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What the supply chain is not The
definitions described and developed earlier and recent industry collaborative activities indicate that supply chain management is not a standalone process. Many supply chain efforts have fallen short of the potential advantages because the term is often viewed as only relating to the supply side of the business or to the purchasing function. As indicated above, supply chain management is much more that just procurement. 22
Among the misunderstanding evidenced, SCM is not: Inventory
management; Logistics management; Supplier partnerships; Driven from the supply side; A shipping strategy; Distribution management; The logistics pipeline; Procurement A computer system
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Reasons for the slow growth of integrated SCM include the following: Lack
of guidelines for creating alliances with supply chain partners. Failure to develop measures for monitoring alliances. Inability to broaden the supply chain vision beyond procurement or product distribution to encompass larger business processes. Inability to integrate the company internal procedures. 24
Reasons cont……. Lack
of trust inside and outside a company.
Organizational
resistance to the concept.
Lack
of buyin-by top managers.
Lack
of integrated information systems and
electronic commerce linking firms.
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The Importance of Supply Chain Management
Dealing with uncertain environments – matching supply and demand ◦
Boeing announced a $2.6 billion write-off in 1997 due to “raw materials shortages, internal and supplier parts shortages and productivity inefficiencies”
◦
U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals”
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IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue
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Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake
U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998 26
The Importance of Supply Chain Management
Shorter product life cycles of high-technology products ◦
Less opportunity to accumulate historical data on customer demand
◦
Wide choice of competing products makes it difficult to predict demand
The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners ◦
If you don’t do it, your competitor will
◦
Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its suppliers
Availability of SCM technologies on the market ◦
Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes
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SUPPLY CHAIN INCLUDES :
◦ MATERIAL FLOWS ◦ INFORMATION FLOWS
◦ FINANCIAL FLOWS
SUPPLY CHAIN FACILITATED BY : ◦ PROCESSES ◦ STRUCTURE
◦ TECHNOLOGY
MANAGEMENT
IS
Supply chain serves two functions:
◦ Physical
◦ Market mediation
Supply chain objectives may differ from situation to situation. For functional products, cost efficiency is the critical factor. For innovative products, responsiveness is the important factor. Leanness + Agility together make up Leagility
SUPPLY CHAIN DRIVERS Not new.Value system of Michael Porter • Why sudden interest? – Demanding customers – Shrinking product life cycles – Proliferating product offerings – Growing retailer power in some cases – Doctrine of core competency – Emergence of specialized logistics providers – Globalization – Information technology
SUPPLY CHAIN ELEMENTS Strategic
• Supply Chain Design • Resource Acquisition • Long Term Planning (1 Year ++)
Tactical
• Production/ Distribution Planning • Resource Allocation • Medium Term Planning (Qtrly,Monthly)
Operational
• Shipment Scheduling • Resource Scheduling • Short Term Planning (Weekly,Daily)
Supply Chain Issues Strategic Issues
Design of the supply chain, partnering
Tactical Issues
Inventory policies Purchasing policies Production policies Transportation policies Quality policies
Operating Issues
Quality control Production planning and control
Elements of Supply Chain Management Element
Typical Issues
Customers
Determining what customers want
Forecasting
Predicting quantity and timing of demand
Design
Incorporating customer wants, mfg., and time
Processing
Controlling quality, scheduling work
Inventory
Meeting demand while managing inventory costs
Purchasing
Evaluating suppliers and supporting operations
Suppliers
Monitoring supplier quality, delivery, and relations
Location
Determining location of facilities
Logistics
Deciding how to best move and store materials
Elements of SCM Supply
chain management involves coordinating activities across the supply chain central to these corresponding activities at each level of the supply chain.
Elements Customers
Typical Issues - Determining what products and/or services customers want Forecasting - Predicting the quantity and timing of customer demand.
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Elements of SCM Cont……. Inventory
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holding Purchasing
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Meeting demand requirements while managing the costs of inventory
Evaluating potential suppliers, supporting the needs of operations on purchased goods and services
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Elements…….. Suppliers
and
Location Logistics
- Monitoring supplier quality, on-time delivery, flexibility maintaining supplier relations - Determining the location of facilities - Deciding how to best move information and materials
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Elements cont….. Capacity
Planning - Matching supply and demand
Processing
- Controlling quality, scheduling work
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Supply Chain Management – Key Issues
Overcoming functional silos with conflicting goals
Purchasing
Low purchase price Multipl e vendors SOURCE
Manufacturing
Distribution
Customer Service/ Sales
Low inventories
High inventories
Regional stocks
Long run lengths
Low transportatio n
MAKE
DELIVER
Few changeovers Stable schedules
High service levels
SELL 40
Supply Chain Management – Key Issues ISSUE
CONSIDERATIONS
Network Planning
• Warehouse locations and capacities • Plant locations and production levels • Transportation flows between facilities to minimize cost and time
Inventory Control
• How should inventory be managed? • Why does inventory fluctuate and what strategies minimize this?
Supply Contracts
• Impact of volume discount and revenue sharing • Pricing strategies to reduce order-shipment variability
Distribution Strategies
• Selection of distribution strategies (e.g., direct ship vs. cross-docking) • How many cross-dock points are needed? • Cost/Benefits of different strategies
Integration and Strategic Partnering
• • • •
Outsourcing & Procurement Strategies
• What are our core supply chain capabilities and which are not? • Does our product design mandate different outsourcing approaches? • Risk management
Product Design
• How are inventory holding and transportation costs affected by product design? • How does product design enable mass customization?
Source: Simchi-Levi
How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?
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Supply Chain Management Operations Strategies STRATEGY
WHEN TO CHOOSE
BENEFITS
Make to Stock
standardized products, relatively predictable demand
Low manufacturing costs; meet customer demands quickly
Make to Order
customized products, many variations
Customization; reduced inventory; improved service levels
Configure to Order
many variations on finished product; infrequent demand
Low inventory levels; wide range of product offerings; simplified planning
Engineer to Order
complex products, unique customer specifications
Enables response to specific customer requirements
Source: Simchi-Levi
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Supply Chain Imperatives for Success
View the supply chain as a strategic asset and a differentiator ◦ ◦
Create unique supply chain configurations that align with your company’s strategic objectives ◦ ◦ ◦ ◦ ◦
Wal-Mart’s partnership with Proctor & Gamble to automatically replenish inventory Dell’s innovative direct-to-consumer sales and build-to-order manufacturing
Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network
Supply chain configuration components
Reduce uncertainty ◦ ◦ ◦
Forecasting Collaboration Integration 43
Decision Phases in a Supply Chain
• Successful supply chain management requires many decisions relating to the flow of information, product and funds. •Each decision should be made to raise the supply chain surplus •Decisions fall into three categories depending on;
•Frequency of each decision. •Time frame during which decision has an impact.
•Each category of decision has to consider uncertainty over the decision horizon.
Decision Phases in a Supply Chain 1. Supply Chain Strategy or Design (long term Dcns)
•Company decides what the chain’s configuration will be, how resources will be allocated and what processes each stage will perform. •Decisions made by companies include;
•Whether
to outsource or perform a supply chain function in-
house. •Location of facilities. •Capabilities of production and warehousing facilities •Products to be manufactured or sold at various locations •Modes of transportation to be made available/utilized.
•Supply chain configuration should support a firms strategic objectives and increase supply chain surplus.
Decision Phases in a Supply Chain 2. Supply Chain Planning
•Time frame considered is a quarter to a year. •Goal is to maximize the supply chain surplus
that can be generated over the planning horizon given the constraints of phase 1. •Planning includes making decisions like;
•Which markets will be supplied from which locations •Subcontracting of manufacturing •Inventory policies to be followed
•As a result of the planning phase, companies define a set of operating policies that govern short-term operations
Decision Phases in a Supply Chain 3. Supply Chain Operation
•Time horizon is weekly or daily •Companies make decisions regarding individual customer orders. •Supply chain configuration is considered fixed and planning policies already defined. •Goal of supply chain operations is to handle incoming customer orders in the best possible manner.
Decision Phases in a Supply Chain 3. Supply Chain Operation … During this phase;
•Firms allocate inventory/production to individual orders. •Set a date that an order can be fulfilled. •Generate pick lists at a warehouse. •Allocate an order to a particular shipping mode and shipment. •Set delivery schedules of trucks •Place replenishment orders.
•Operational decisions are in the short term (minutes, hours or days) hence there is less uncertainty about demand information. •Goal is to exploit the reduction of uncertainty and optimize performance with constraints of phase 1 & 2
Value of Information and SCM
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Information In The Supply Chain Plan Suppliers
Manufacturers
Source
Order Lead Time
Make
Delivery Lead Time
Warehouses & Distribution Centers
Deliver
Each facility further away from actual customer demand must make forecasts of demand
Lacking actual customer buying data, each facility bases its forecasts on ‘downstream’ orders, which are more variable than actual demand
To accommodate variability, inventory levels are overstocked thus increasing inventory carrying costs
Production Lead Time
Retailer
Sell
It’s estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertainty
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Information Technology: A Supply Chain Enabler
Information links all aspects of supply chain E-business
◦ replacement of physical business processes with electronic ones
◦ data creates an instantaneous computer record of a sale
Radio frequency identification (RFID) ◦ technology can send product data from an item to a reader via radio waves
Electronic data interchange (EDI) ◦ a computer-to-computer exchange of business documents
Bar code and point-of-sale
Internet ◦ allows companies to communicate with suppliers, customers, shippers and other businesses around the world, instantaneously
E-business and Supply Chain Cost savings and price reductions Reduction or elimination of the role of intermediaries Shortening supply chain response and transaction times Gaining a wider presence and increased visibility for companies Greater choices and more information for customers
E-business and Supply Chain (cont.)
Improved service as a result of instant accessibility to services Collection and analysis of voluminous amounts of customer data and preferences Creation of virtual companies Leveling playing field for small companies Gaining global access to markets, suppliers, and distribution channels
Methods for Improving Forecasts Judgment Methods
Market Research Analysis
Panels of Experts • Internal experts • External experts • Domain experts • Delphi technique Time-Series Methods
• Moving average • Exponential smoothing • Trend analysis • Seasonality analysis
Accurate Forecasts
• Market testing • Market surveys • Focus groups Causal Analysis
• Relies on data other than that being predicted
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Supply Chain Collaboration – What Is It?
Many different definitions depending on perspective The means by which companies within the supply chain work together towards mutual goals by sharing ◦
Ideas
◦
Information
◦
Processes
◦
Knowledge
◦
Information
◦
Risks
◦
Rewards
Why collaborate? ◦
Accelerate entry into new markets
◦
Changes the relationship between cost/value/profit equation
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Supply Chain Collaboration
Cornerstone of effective SCM The focus of many of today’s SCM initiatives The only method that has the potential to eliminate or minimize Retailers the Bullwhip effect Suppliers
Synchronized Production Scheduling
Manufacturer
Collaborative Demand Planning
Collaborative Product Development
Distributors/ Wholesalers
Collaborative Logistics Planning •Transportation services •Distribution center services
Logistics Providers
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Benefits of Supply Chain Collaboration
CUSTOMERS
MATERIAL SUPPLIERS
• Reduced inventory • Increased revenue • Lower order management costs • Higher Gross Margin • Better forecast accuracy • Better allocation of promotional budgets
• • • •
Reduced inventory Lower warehousing costs Lower material acquisition costs Fewer stockout conditions
SERVICE SUPPLIERS • • • • •
Lower freight costs Faster and more reliable delivery Lower capital costs Reduced depreciation Lower fixed costs
• Improved customer service • More efficient use of human resources
Source: Cohen & Roussel
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Supply Chain Collaboration Spectrum
Extent of Collaboration
Extensive Not Viable
Synchronized Collaboration
The
green arrow describes increasing complexity and sophistication of: ◦ ◦ ◦ ◦ ◦ ◦
Coordinated Collaboration
Information systems Systems infrastructure Decision support systems Planning mechanisms Information sharing Process understanding
Higher
Cooperative Collaboration
Transactional Collaboration
Limited Many
Low Return
Number of Relationships
Source: Cohen & Roussel
Few
levels of collaboration imply the need for both trading partners to have equivalent (or close) levels of supply chain maturity Synchronized collaboration demands joint planning, R&D and sharing of information and processing models ◦
Movement to real-time customer demand information throughout the supply chain
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Successful Supply Chain Collaboration
Try to collaborate internally before you try external collaboration Help your partners to work with you Share the savings Start small (a limited number of selected partners) and stay focused on what you want to achieve in the collaboration Advance your IT capabilities only to the level that you expect your partners to manage Put a comprehensive metrics program in place that allows you to monitor your partners’ performance Make sure people are kept part of the equation ◦ ◦
Systems do not replace people Make sure your organization is populated with competent professionals who’ve done this before
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Emerging Best Practices in SCM Strategy
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Supply Chain Integration
Information sharing among supply chain members ◦ ◦ ◦ ◦
Reduced bullwhip effect Early problem detection Faster response Builds trust and confidence
Collaborative planning, forecasting, replenishment, and design ◦ ◦ ◦ ◦
Reduced bullwhip effect Lower Costs (material, logistics, operating, etc.) Higher capacity utilization Improved customer service levels
Supply Chain Integration (cont.)
Coordinated workflow, production and operations, procurement ◦ ◦ ◦ ◦
Production efficiencies Fast response Improved service Quicker to market
Adopt new business models and technologies ◦ ◦ ◦ ◦
Penetration of new markets Creation of new products Improved efficiency Mass customization
Suppliers
Procurement ◦ purchase of goods and services from suppliers
On-demand (direct response) delivery ◦ requires supplier to deliver goods when demanded by customer
Continuous replenishment ◦ supplying orders in a short period of time according to a predetermined schedule
Cross-enterprise teams coordinate processes between company and supplier
Outsourcing
Sourcing
◦ selection of suppliers
Outsourcing
◦ purchase of goods and services from an outside supplier
Core competencies
◦ what a company does best
Single sourcing
◦ a company purchases goods and services from only a few (or one) suppliers
E-Procurement Direct purchase from suppliers over the Internet Direct products go directly into production process a product, indirect products not E-marketplaces
◦ web sites where companies and suppliers conduct business-to-business activities
Reverse auction
◦ a company posts orders on the Internet for suppliers to bid on
Copyright 2006 John Wiley & Sons, Inc.
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Measuring Supply Chain Performance
Key performance indicators ◦ inventory turnover cost of annual sales per inventory unit
◦ inventory days of supply total value of all items being held in inventory
◦ fill rate fraction of orders filled by a distribution center within a specific time period
Key Performance Indicators Cost of goods sold Inventory turns = Average aggregate value of inventory
Average aggregate value of inventory = =(average inventory for item i)
Days of supply =
X (unit value item i)
Average aggregate value of inventory (Costs of goods sold)/(365 days)
Key Performance Indicators: Example 1. 2. 3. 4. 5.
Cost of goods sold: $425 million Production materials and parts: $4,629,000 Work-in-process: $17,465,000 Finished goods: $12,322,000 Total average aggregate value of inventory (2+3+4): $34,416,000
Inventory turns =
Days of supply =
$425, 000, 000 $34,416,000
= 12.3
$34,416,000 = 29.6 ($425,000,000)/(365)
Other Measures of Supply Chain Performance
Process Control ◦ used to monitor and control any process in supply chain
Supply Chain Operations Reference (SCOR) ◦ establish targets to achieve “best in class” performance
GREEN SUPPLY CHAIN MANAGEMENT PRACTICES
Definition of GSCM
GSC is a method to design and/or redesign the supply chain that incorporates recycling and remanufacturing into the production process and it involves minimization of the firm’s total environmental impact from start to finish of the supply chain and also from beginning to end of the product life cycle.
The practice
This refers to supply chain management functions which include: ◦ ◦ ◦ ◦
Green purchasing (in-bound logistics) Design for the environment (internal supply chain) Green marketing (out-bound logistics) Reverse logistics
The results of the research carried by Purba et al (2005), demonstrate that greening the inbound function, as well as greening production, lead to greening outbound, as well as to competitiveness and economic performance of the firm.
Drivers Demand – e.g organic foods, energy savers etc Regulation- e.g NEMA Own initiative - CSR Competitiveness – ISO, world class Financial enterprises- IFC terms
Benefits Cost savings Waste minimization Customer satisfaction Increased competitiveness Enhanced environmental performance Increased awareness of HSE Improved productivity Improved business-to-business relations
Global Supply Chain
To compete globally requires an effective supply chain Information technology is an “enabler” of global trade Nations form trading groups No tariffs or duties