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Chapter 10Extending the Organization Supply Chain Management1CLASSROOM OPENERGREAT BUSINESS DECISIONS Michael Dell Decides to Sell PCs Directly to Consumers and Built-to-OrderMichael Dell decided that to be successful in the PC business and to gain a significant competitive advantage he would bypass the dealer channel through which personal computers were being sold. Dell developed and deployed their own channel for manufacturing and selling PCs. This personal channel eliminated the reseller markups and large inventory expenses and allowed Dell to operate with lower costs than anyone in the industry, which led to higher profit margins.Michael Dell understood that consumers were getting smarter and that customer service abilities were becoming more sophisticated. Beginning with telephone sales, and then moving to Internet sales, Dell bypassed retailers and targeted corporate accounts. Dell understood that tailoring products to meet specific requirements of large accounts could be accomplished not only more cheaply, but also more effectively without an intermediary. Dell boasts sales of $12.3 billion and is the worlds number one direct-sales computer vendor. The companys Web site currently generates over half of its orders. Everybody in the industry is trying to imitate Dells strategy.Learning Outcomes10.1 List and describe the components of a typical supply chain

10.2 Define the relationship between decision making and supply chain management

10.3 Describe the four changes resulting from advances in IT that are driving supply chains

10.4 Summarize the best practices for implementing a successful supply chain management system210.1 List and describe the components of a typical supply chainThe components of a typical supply chain include:Suppliers supplier, Supplier, Manufacturer, Distributor, Retailer, Customer, Customers Customer10.2 Define the relationship between decision making and supply chain managementSCM enhances decision making. Collecting, analyzing, and distributing transactional information to all relevant parties, SCM systems help all the different entities in the supply chain work together more effectively. SCM systems provide dynamic holistic views of organizations. Users can drill down into detailed analyses of supply chain activities in a process analogous to DSS. Without SCM systems, organizations would be unable to make accurate and timely decisions regarding their supply chain. 10.3 Describe the four changes resulting from advances in IT that are driving supply chainsAlthough people have been talking about the integrated supply chain for a long time, it has only been recently that advances in information technology have made it possible to bring the idea to life and truly integrate the supply chain. Visibility, consumer behavior, competition, and speed are a few of the changes resulting from advances in information technology that are driving supply chains10.4 Summarize the best practices for implementing a successful supply chain management systemThe following are the SCM industry best practices:Make the sale to suppliers - A large part of any SCM system extends beyond the organization to the suppliers. Since the organization has very little control over anything external to itself, these pieces are typically the most complicated. Be sure suppliers are on board with the benefits that the SCM system will provide to ease SCM implementation difficulties.Wean employees off traditional business practices - If the organization cannot convince people that using the SCM software is worthwhile, the employees will probably find a way around using the software. Ensure the SCM system supports the organizational goals - Be sure to select SCM software that supports organizational goals and strategiesDeploy in Incremental phases and measure and communicate success - Designing the deployment of the SCM system in incremental phases is the most successful deployment method. The BIG BANG approach implementing everything at once fails 90 percent of the time.Be future oriented - An SCM system, like all systems, must scale to meet future demands. Supply Chain ManagementThe average company spends nearly half of every dollar that it earns on production

In the past, companies focused primarily on manufacturing and quality improvements to influence their supply chains

3This chapter takes a look at extending an organization through SCM and discusses:The reasons for SCMs explosive growthUsing SCM to enhance decision makingSCM success factors

Traditional SCM thinking involved I buy from my suppliers, I sell to my customers. Today, organizations are quickly realizing the tremendous value they can gain from having visibility throughout their supply chainKnowing immediately what is transacting at the customer end of the supply chain, instead of waiting days or weeks for this information to flow upstream, allows the organization to react immediatelyBest Buy checks inventory levels at each of its 750 stores across North America as often as every half-hour

Basics of Supply Chain The supply chain has three main links:Materials flow from suppliers and their upstream suppliers at all levelsTransformation of materials into semifinished and finished products through the organizations own production processDistribution of products to customers and their downstream customers at all levels4Collecting, analyzing, and distributing transactional information to all relevant parties, SCM systems help all the different entities in the supply chain work together more effectivelySCM has significantly improved companies forecasting abilities over the last few yearsBusinesses today have access to modeling and simulation tools, algorithms, and applications that can combine information from multiple sources to build forecasts for days, weeks, and months in advance

Basics of Supply Chain Organizations must embrace technologies that can effectively manage supply chains

5CLASSROOM EXERCISESupply ChainingBreak your students into groups and ask them to design a supply chain for an organization of their choice Ask your students to try to choose an organization that is currently experiencing supply chain issues, perhaps an organization where the student has had recent issues, such as not receiving an order, receiving an incorrect order, or receiving someone else's orderBe sure to have them list the names of the suppliers, manufacturers, distributors, retailers, and customers Ask the students to identify one or two areas where the organization can improve its supply chainHave each group present their supply chains to the class along with their recommendations for improvementBasics of Supply Chain

6Best Buy checks inventory levels at each of its 750 stores in North America as often as every half-hour with its SCM system, taking much of the guesswork out of inventory replenishmentSupply chain management improves ways for companies to find the raw components they need to make a product or service, manufacture that product or service, and deliver it to customersPlan This is the strategic portion of supply chain management. A company must have a plan for managing all the resources that go toward meeting customer demand for products or services. A big piece of planning is developing a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers.Source Companies must carefully choose reliable suppliers that will deliver goods and services required for making products. Companies must also develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships.Make This is the step where companies manufacture their products or services. This can include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. This is by far the most metric-intensive portion of the supply chain, measuring quality levels, production output, and worker productivity.Deliver This step is commonly referred to as logistics. Logistics is the set of processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers. During this step, companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments.Return This is typically the most problematic step in the supply chain. Companies must create a network for receiving defective and excess products and support customers who have problems with delivered products.

PLAN Aim:plan for managing all the resources that go toward meeting customer demand for products or services.

Activity: develope a set of metrics to monitor the supply chain so that it is efficient, costs less, and delivers high quality and value to customers.

SOURCE Aims:choose reliable suppliers that will deliver goods and services required for making products. develop a set of pricing, delivery, and payment processes with suppliers and create metrics for monitoring and improving the relationships.MAKE Activity: include scheduling the activities necessary for production, testing, packaging, and preparing for delivery. DELIVER commonly referred to as logistics. Logistics is the set of processes that plans for and controls the efficient and effective transportation and storage of supplies from suppliers to customers. Activity: companies must be able to receive orders from customers, fulfill the orders via a network of warehouses, pick transportation companies to deliver the products, and implement a billing and invoicing system to facilitate payments.RETURN Activity: create a network for receiving defective and excess products and support customers who have problems with delivered products.Information Technologys Role in the Supply Chain ITs primary role is to create integrations or tight process and information linkages between functions within a firm

12Considerable evidence shows that this type of supply chain integration results in superior supply chain capabilities and profits.

CLASSROOM EXERCISENear Beer Supply Chain GameThis is an excellent exercise for students who are just learning about the supply chain.http://www.forio.com/nearbeer.htmInformation Technologys Role in the Supply Chain Factors Driving SCM

13Information technology only recently have advances in IT made it possible to bring the idea of a truly integrated supply chain to lifeVisibility more visible models of different ways to do things in the supply chain have emerged. High visibility in the supply chain is changing industries, as Wal-Mart demonstratedConsumer behavior companies must respond to demanding customers through supply chain enhancementsCompetition increased competition makes any organization that is ignoring its supply chain at risk of becoming obsoleteSpeed as the pace of business increases through electronic media, an organization's supply chain must respond efficiently, accurately, and quicklyVisibility Supply chain visibility the ability to view all areas up and down the supply chain

Bullwhip effect occurs when distorted product demand information passes from one entity to the next throughout the supply chain

14Visibility more visible models of different ways to do things in the supply chain have emerged. High visibility in the supply chain is changing industries, as Wal-Mart demonstratedSupply chain visibility allows organizations to eliminate the bullwhip effectTo explain the bullwhip effect to your students discuss a product that demand does not change, such as diapers. The need for diapers is constant, it does not increase at Christmas or in the summer, diapers are in demand all year long. The number of newborn babies determines diaper demand, and that number is constant.Retailers order diapers from distributors when their inventory level falls below a certain level, they might order a few extra just to be safeDistributors order diapers from manufacturers when their inventory level falls below a certain level, they might order a few extra just to be safeManufacturers order diapers from suppliers when their inventory level falls below a certain level, they might order a few extra just to be safeEventually the one or two extra boxes ordered from a few retailers becomes several thousand boxes for the manufacturer. This is the bullwhip effect, a small ripple at one end makes a large wave at the other end of the whip.

Consumer Behavior Companies can respond faster and more effectively to consumer demands through supply chain enhances

Demand planning software generates demand forecasts using statistical tools and forecasting techniques

15Once an organization understands customer demand and its effect on the supply chain it can begin to estimate the impact that its supply chain will have on its customers and ultimately the organizations performanceCompetition Supply chain planning (SCP) software uses advanced mathematical algorithms to improve the flow and efficiency of the supply chain

Supply chain execution (SCE) software automates the different steps and stages of the supply chain

16SCP and SCE both increase a companys ability to competeSCP depends entirely on information for its accuracySCE can be as simple as electronically routing orders from a manufacturer to a supplierCompetition SCP and SCE in the supply chain

17Ask your students to determine the different types of information flows that would be represented in an SCP systemAsk your students to determine the different types of payment flows that would be represented in an SCE systemSpeed Three factors fostering speed

18Why is information speed critical in a supply chain?If the information arrives three dates late, chances are high that managers have already made decisions based on current information that might have been inaccurateInformation timeliness is criticalIT is an enabler of information timeliness

CLASSROOM EXERCISEDesigning a Digital Dashboard for an SCM SystemDigital dashboards offer an effective and efficient way to view enterprisewide information at near real-time. According to Nucleus Research, there is a direct correlation between use of digital dashboards and a companys return on investment (ROI), hence all executives should be using or pushing the development of digital dashboards to monitor and analyze organizational operations.Break your students into groups and ask them to develop a digital dashboard for the CEO of a transportation company. Be sure your students have addressed all of the following in their digital dashboard:InventoryMaterialsDemand/SupplySalesSuppliers supplierSupplierManufacturerDistributorRetailerCustomerCustomers CustomerSupply Chain Management Success Factors10-19

19The seven principles highlighted in the figure run counter to previous built-in functional thinking of how companies organize, operate, and serve customersDell computers offers one of the best examples of an extremely successful SCM systemDells highly efficient build-to-order business model enabled it to deliver customized computer systems quicklyThe U.S. government has even sent individuals to study Dells supply chain when determining ways to supply troops during wars If your students find themselves in the position of implementing an SCM, be sure they study Dell as an example of exactly what to do when building and implementing an SCM systemSupply Chain Management Success Factors SCM industry best practices include:Make the sale to suppliersWean employees off traditional business practicesEnsure the SCM system supports the organizational goalsDeploy in incremental phases and measure and communicate successBe future oriented20Studying industry best practices is an excellent way to improve SCM implementation successA large part of any SCM system extends beyond the organization to the suppliers. Since the organization has very little control over anything external to itself, these pieces are typically the most complicated to build, develop, and implement. Be sure suppliers are on board with the benefits that the SCM system will provide to ease SCM implementation difficultiesIf the organization cannot convince people that using the SCM software is worthwhile, the employees will probably find a way to continue performing their job without using the softwareBe sure to select SCM software that supports organizational goals and strategiesDesigning the deployment of the SCM system in incremental phases is the most successful deployment method. The BIG BANG approach implementing everything all at once fails 90 percent of the timeAn SCM system, like all systems, must scale to meet future demandsSCM Success Stories Top reasons why more and more executives are turning to SCM to manage their extended enterprises

21The role of SCM is evolving, and it is not uncommon for suppliers to be involved in product development and for distributors to act as consultants in brand marketing

CLASSROOM EXERCISESCM AgainBreak your students into groups and ask them to identify how each of the Top reasons executives are using SCM to manage extended enterprises in the Figure is supported by an SCM systemFor example, how does SCM help an organization control costs and save costs?Ans: Organizations gain visibility into their supply chains through an SCM system. This allows them to identify such things as inefficient and ineffective business process. Fixing these processes helps the organization control costs and save money.The answers to these questions will vary, and the goal of the activity is for students to understand the many different benefits an organization can gain through an SCM systemSCM Success Stories Numerous decision support systems (DSSs) are being built to assist decision makers in the design and operation of integrated supply chains

DSSs allow managers to examine performance and relationships over the supply chain and among: Suppliers Manufacturers Distributors Other factors that optimize supply chain performance

22Discuss the Apple computer example Apple Computer initially distributed its business operations over 16 legacy applicationsApple quickly realized that it needed a new business model centered around an integrated supply chain to drive performance efficienciesApple devised an implementation strategy that focused on specific SCM functions including finance, sales, distribution, and manufacturingThe new business model included:Build-to-order and configure-to-order manufacturing capabilities (similar to Dell)Web-enabled configure-to-order order entry and order status Real-time credit card authorizationAvailable-to-promise and rules-based allocationsIntegration to advanced planning systems

SCM Success Stories

23CLASSROOM EXERCISEDriving SCMBreak your students into groups and ask them to research each of the above companies and how they are using SCM to drive their business operationsHave your students present their findings to the class