CHAPTER 13 SUPPLY CHAIN PROCESS INTEGRATION

1. CHAPTER 13SUPPLY CHAIN PROCESS INTEGRATION Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

2. © 2009 South-Western, a division of Cengage Learning 2 Learning Objectives You should be able to: Discuss the overall importance of process integration in supply chain management Describe the advantages of, and obstacles to process integration Understand the important issues of internal and external process integration Understand the role played by information systems in creating information visibility along the supply chain.

3. © 2009 South-Western, a division of Cengage Learning 3 Learning Objectives (Cont.) Describe the various processes requiring integration along the supply chain Understand the various causes of the bullwhip effect and how they impact process integration Discuss the various issues associated with supply chain security and risk

4. © 2009 South-Western, a division of Cengage Learning 4 Chapter Thirteen Outline Introduction The Supply Chain Management Integration Model Obstacles to Process Integration along the Supply Chain Managing Supply Chain Risk and Security

5. © 2009 South-Western, a division of Cengage Learning 5 Introduction The ultimate goal of supply chain management is to create value for end customers & firms in the supply chain. Firms in the supply chain must integrate processes to achieve this goal. Process integration requires: Training Willing & competent partners Trust Organizational culture change

6. © 2009 South-Western, a division of Cengage Learning 6 The SCM Integration Model

7. © 2009 South-Western, a division of Cengage Learning 7 The SCM Integration Model (Cont.) Identify Critical SC Trading Partners Sell & deliver products to final customers Identifying primary trading partners allows the firm to concentrate on these links Review & Establish SC Strategies for: Parts purchased & suppliers Shop layout & manufacturing processes Design of the products manufactured Mode of transportation Warranty & return services Employee training methods Types of information technologies used

8. © 2009 South-Western, a division of Cengage Learning 8 The SCM Integration Model (Cont.) Align SC Strategies w/Key SC Process Objectives Lambert et al. identified 8 key SC processes: Customer relationship management Customer service management Demand management Order fulfillment Manufacturing flow management Supplier relationship management Product development & commercialization Returns management

9. © 2009 South-Western, a division of Cengage Learning 9 The SCM Integration Model (Cont.) Develop Internal Perf. Measures for Key Processes Performance should be continuously measured ERP systems support measures Firm is able to track progress in each key processes. Assess & Improve Internal Integration of Key SC Processes. Team cooperation across all functions Management support & resources ERP system an understanding of the internal supply chain

10. © 2009 South-Western, a division of Cengage Learning 10 The SCM Integration Model (Cont.) Develop SC Performance Measures for Key Processes Monitor links w/trading partners in key SCM processes. Trading partners should monitor measures across member firms for each of the SC processes. Assess & Improve External Process Integration & Performance Build, maintain & strengthen relationships Share knowledge management solutions, such as forecast information, new products, & expansion plans.

11. © 2009 South-Western, a division of Cengage Learning 11 The SCM Integration Model (Cont.) Extend Process Integration to 2nd-Tier SC Partners Integrate process to 2nd-tier partners & beyond Radio-frequency identification (RFID) tag- relays product’s location as it moves through the supply chain. Passive RFID tags don’t contain internal power. Active RFID tags use battery power & are very expensive. Reevaluate the Integration Model Annually Trading partners should revisit the integration model annually for changes within supply chains & to assess the impact of these on integration efforts.

12. © 2009 South-Western, a division of Cengage Learning 12 Obstacles to Process Integration (PI) Along the SC The Silo Mentality “I win, you lose” Using the cheapest suppliers. Ignoring customers. Assigning few resources to new product & service design. Firm must strive to align SC goals & the goals & incentives of the firm Performance reviews of managers must include their ability to integrate processes internally & externally.

13. © 2009 South-Western, a division of Cengage Learning 13 Obstacles to PI Along the SC (Cont.) Lack of Supply Chain Visibility In a recent survey, 1/3 of pharmaceutical manufacturers provided adequate information visibility. RFID technology promises to add real-time information visibility to supply chains. Technology boards & user boards are being formed now to develop standards & electronic product codes (ePCs) for the RFID industry.

14. © 2009 South-Western, a division of Cengage Learning 14 Obstacles to PI Along the SC (Cont.) Lack of Trust Successful process integration requires trust. Trust occurs over time- Partners earn trust. Collaboration & trust are based on: Start small Look inward Gather ‘round & meet face-to-face. Go for the win-win Do not give away the store: Some information should remain proprietary Just do it: Simple start - sharing information.

15. © 2009 South-Western, a division of Cengage Learning 15 Obstacles to PI Along the SC (Cont.) Lack of Knowledge In the past few years technology has caught up, enabling process integration across extended supply chains Firms successfully managing their supply chains must spend significant time influencing & increasing the capabilities of themselves & their partners. Training of supply chain partner employees is also known as collaborative education, and can result in more successful supply chains

16. © 2009 South-Western, a division of Cengage Learning 16 Obstacles to PI Along the SC (Cont.) Activities Causing the Bullwhip Effect Forecasts & their corresponding orders along the supply chain can become amplified and accumulate, causing the bullwhip effect. Variations in demand lead to problems in capacity planning, inventory control, workforce & production scheduling resulting in reduced customer service, increased safety stock, and higher SC costs.

17. © 2009 South-Western, a division of Cengage Learning 17 Obstacles to PI Along the SC (Cont.) Bullwhip Effect--Demand Forecast Updating Make actual demand data available to suppliers. Vendor-managed inventory (VMI) Reduce the length of the supply chain. Reduce the lead times from order to delivery

18. © 2009 South-Western, a division of Cengage Learning 18 Obstacles to PI Along the SC (Cont.) Bullwhip Effect--Order Batching Order batching occurs when sales reps fill end-of-period sales quotas, or when buyers spend end-of-year budgets. Solution: use frequent & smaller order sizes. Firms can order smaller quantities of a variety of items from a supplier or use a freight forwarder to consolidate small shipments.

19. © 2009 South-Western, a division of Cengage Learning 19 Obstacles to PI Along the SC (Cont.) Bullwhip Effect- Price Fluctuations Reduce price fluctuations through forward buying activities to take advantage of the low price offers between: retailers & consumers. distributors & retailers. manufacturers & distribution. Eliminate price discounting. Many retailers have adopted everyday low prices (EDLP).

20. © 2009 South-Western, a division of Cengage Learning 20 Obstacles to PI Along the SC (Cont.) Bullwhip Effect- Rationing & Shortage Gaming Rationing- When demand exceeds the availability, supplier provides partial supply to customers, who also tend to inflate orders. Shortage gaming- When production capacity equals demand, demand then drops, as the buyers try to unload excess inventories. Solution: sellers should allocate short supplies based on the demand histories of their customers. Sharing future order plans with suppliers allows suppliers to increase capacity if needed.

21. © 2009 South-Western, a division of Cengage Learning 21 Managing Supply Chain Risk & Security Managing Supply Chain Risk Increase safety stocks also known as stockpiling and forward buying Identify backup suppliers & logistics services which may emergency sourcing & multiple sourcing Diversify the supply base Utilize a supply chain IT system Develop a formal risk management program

22. © 2009 South-Western, a division of Cengage Learning 22 Managing Supply Chain Risk & Security (Cont.) Managing Supply Chain Security- Reducing the risk of intentionally created disruptions in supply chain operations A supply chain is only as secure as its weakest link Security management collaboration should include, for example, contractual requirements for secure systems.

23. © 2009 South-Western, a division of Cengage Learning 23 Managing Supply Chain Risk & Security (Cont.) Managing Supply Chain Security- Table 13.4 Supply Chain Security System Response

24. © 2009 South-Western, a division of Cengage Learning 24 Managing Supply Chain Risk & Security (Cont.) Managing Supply Chain Security- Reducing the risk of intentionally created disruptions in supply chain operations A supply chain is only as secure as its weakest link Security management collaboration should include, for example, contractual requirements for secure systems.