CHAPTER 5

1. CHAPTER 5 Enterprise Integration and Supply Chain Management: A Strategic Perspective

2. Learning Objectives After completing this chapter, you should be able to: • Define supply chain management. • Explain the consequences of not sharing information, and describe some of the information that can be shared in a supply chain. • Define Digital Loyalty Networks and CPFR. • Discuss various options in supply chain structure. • Compare in sourcing, outsourcing, and vertical integration. • Compare responsive supply chains to efficient supply chains. • Describe some supply chain strategies. • Discuss the impact of e-commerce on supply chain management. • Explain how ERP facilitates e-commerce. • Describe some supply chain performance measures and use the Strategic Profit Model. • Discuss global issues in supply chain management. • Explain the four principles of supply chain management

3. Introduction • Supply chain encompasses all activities associated with the flow and transfer of goods and services, from raw material extraction through use by the final consumer. • All of those different companies, as well as you as the consumer, are part of the supply chain. • The manufacturer purchased component parts from various tier 1 suppliers, such as companies that make plastic parts. • Those Tier 1 suppliers may have also purchased materials from tier 2 suppliers, such as companies that produce the chemicals for making plastic.

4. Introduction -- Continued • Those tier 2 suppliers could have also purchased the raw materials to make those chemicals from tier 3 suppliers • The supply chain includes the companies that move these items, such as trucking companies, railroads, and shipping companies, as well as warehouses or distribution centers. They are called logistics. • Reserve Logistics is a activity that helps to return defective products to the manufacturer for repair or replacement

5. Overview of Supply Chain Management • Several factors have emerged that now require companies to use supply chain management as part of their competitive strategy. 1-Globalization 2-Increased competition 3-Information technology 4-Shorter product life cycles

6. Overview of Supply Chain Management -- Continued • Globalization has led to new markets, but at the same time it increases the competition. • One way of winning market share is introducing new products, leading to shorter product life cycles. • One way to be more competitive is through supply chain management.

7. Information Sharing in the Supply Chain • Traditionally, information has been shared only between adjacent supply chain pairs, and that information has been very limited. • This limited approach to information sharing leads to “bullwhip effect.” • To reduce the bullwhip effect, supply chains use a hub and spoke approach to sharing information.

8. Electronic Data Interchange • EDI connects the databases of different companies. • Traditionally, EDI allowed companies utilizing material requirements planning (MRP) to inform suppliers of upcoming orders by providing them with access to the database of planned orders. • EDI is a means of sharing information among all members of a supply chain. • Shared databases can ensure that all supply chain members have access to the same information, providing visibility to everyone.

9. Forecast Accuracy • One problem with sharing information is that some of that information may not be accurate. • By sharing forecast information, risk can be spread across the entire supply chain rather than being borne by the retailer. • Information sharing can also lead to improved forecast accuracy. • Simply realizing that forecasts will always be inaccurate can lead to improving supply chain management

10. Forecast Accuracy -- Continued • Wal-Mart is one company that has used EDI to improve forecast accuracy. • Vendors can use Wal-Mart’s satellite network system to directly access real-time, point-of-sale (POS) data. • This up-to-the-minute information can improve forecasts by spotting trends the moment they occur.

11. Digital Loyalty Networks • The term “Digital Loyalty Networks” describes links between a company’s supply chain and its customer management operations. • The idea is to customize the supply chain to meet the needs of a company’s most important customers or market segments. • By sharing information, the supply chain, the customer management operations, and the customer can all benefit through improved service and reduced costs.

12. Collaborative Planning Forecasting and Replenishment (CPFR) • Members of the supply chain may make assumptions about future actions of other supply chain members. • CPFR seeks to minimize this guessing game through collaboration among supply chain partners. • CPFR requires that all supply chain parties be committed to the plans developed jointly. • Once a plan is developed, suppliers can begin production knowing that their customers in the supply chain have committed to those orders.

13. Supply Chain Structure • The upstream side of the supply chain also production planning and purchasing, which are part of the internal supply chain. • Also it includes logistics, which is responsible for moving materials between supply chain members. • The downstream side, supply chain partners are divided into echelons. • Echelon 1 includes organizations, such as distributors, importers, or exporters, that receive the product directly from the organization. • Echelon 2 might include retailers, dealers, or even final consumers.

14. Supply Chain Structure Many Suppliers versus Few Suppliers: • By using many suppliers, a company can often take advantage of competition among those suppliers to meet the company’s demands for cost, quality and delivery. • If one supplier goes out of business or is unable to provide the good or service , it is a simple matter to use another supplier. • Having one supplier ensure the long-term partnership arrangements. • It helps them to get greater integration of the supply chain.

15. Supply Chain Structure Insourcing versus Outsourcing: • If those goods and services are provided by the organization itself, they are “insourced. • Goods and services obtained from outside suppliers are “outsourced. • One basic reason companies decide to outsource is that the goods or services can be obtained less expensively from outside suppliers.

16. Supply Chain Structure Vertical Integration: • If a company owns its suppliers, it is called backward vertical integration. • If companies own the distribution systems and retail outlets that sell their products, then that is forward vertical integration. • Both integration help the companies to get a close coordination with suppliers.

17. Vertical Supply Chain Structure Advantages: Disadvantages:

18. Virtual Organizations • Outsourcing is gaining in popularity because of cost advantages and the opportunities for greater coordination. • This system has even led to “virtual corporations,” that exist only as an administrative shell, with all other functions outsourced. • One virtual corporation is Mr. Coffee Concepts, which provides in-room coffeemakers for hotel chains, such as Marriott .

19. Disintermediation • An intermediary is a business entity that exists between two other parts of the supply chain. • Disintermediation is a process to achieve efficiencies in the supply chain by eliminating some intermediaries. • Travelocity is one company that has succeeded by utilizing the Internet to provide travelers with easily accessible information from airlines, hotels, and car rental companies.

20. Types of Supply Chains • Responsive Supply Chains: respond quickly as new products are introduced and as demand changes. • Efficient Supply Chains: focus on operating efficiently to minimize costs.

21. Types of Supply Chains -- Continued Exhibit 5.5: Responsive vs. Efficient Supply Chains

22. Supply Chain Strategies • Quick Response Programs • Vendor Managed Inventory (VMI) • Efficient Consumer Response • Postponement • Revenue Sharing • Cross Docking

23. Exhibit 5.6: Revenue Sharing Example

24. E-Commerce • The Internet is now an important part of the supply chain management and communication strategy for many companies. • That particular aspect of the Internet, transactions between businesses and consumers, is referred to as B2C (business to consumer) • B2C transactions over the Internet are dwarfed by the much larger volume of B2B (business to business) transactions.

25. B2C • It is now possible to buy nearly anything over the Internet. • Customers can be given a much wider choice than would be possible in a traditional retail establishment. • The customer takes care of the order entry process by entering his or her own credit card number, address, measurements, and so forth.

26. B2B • B2B (business-to-business) transactions account for more than 80 percent of all transactions on the Internet. • Different types of B2B: 1-Exchanges 2-MRO Hubs 3-Yield Managers

27. Enterprise Resource Planning (ERP) • The idea behind ERP is to allow access to one another’s databases or, ideally, the use of one common database. • The advantage of that approach is that anyone anywhere within the organization has access to all information . • Microsoft expected to save $18 million annually by using ERP to replace 33 different financial tracking systems.

28. Performance Measurement

29. Strategic Profit Model

30. Global Issues in Supply Chain Management • Operating in today’s global economy, companies have increased opportunities and challenges for managing their supply chains. • Decisions about supply chains must focus on the type of product and a company’s competitive strategy. • Maintaining control over the supply chain can also be an important global issue.

31. Principles of Supply Chain Management • Build a competitive infrastructure • Leverage the worldwide logistics network • Synchronize supply to demand • Measure performance globally