Chapter 15 – Supply Chain Management
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Education.
CHAPTER 15
SUPPLY CHAIN MANAGEMENT
Teaching Notes
It is important to emphasize that supply chain management involves the entire range of production and
distribution processes. Students need to understand the tradeoffs involved in supply chain function related
to Lean, inventory management, purchasing, delivery lead times, and quality.
Supply chain management requires a broad view of the entire flow from purchasing to final delivery to
the customer. Supply chain management is becoming increasingly more important due to the following
factors:
1. Implementation of lean systems.
2. Emphasis on reduction of inventories.
3. Emphasis on reduced order cycles and reduced lead times.
4. Continuous and rapid change in products and product designs (shorter product life cycles).
5. Shorter product introduction and product development times.
The importance of supply chain management cannot be underestimated because it ensures that the right
materials are at the right place at the right time at minimal cost and in the right quantity.
In addition, supply chain management requires very careful coordination of activities between various
business organizations in the supply chain. Integration of databases and sharing key pieces of information
among the different business organizations in the supply chain provide timely and valuable information to
companies in the supply chain and also assist in improving the trust and the overall relationship between
suppliers and their customers.
The term supply chain management emerged in the mid-1980s and gained popularity in the 1990s. It is
continuing to gain interest at a rapid rate. Even though the term supply chain management (SCM) is fairly
new, the concepts and problems involved in SCM are not. However, many of these problems and their
solutions are integrated within and between firms in the context of managing the flow of products and
related information. Thus, supply chain management involves efficient integration of suppliers,
manufacturers, distributors, and customers in the production and distribution of goods and services.
Purchasing is the process of obtaining products, parts, supplies, and materials from an outside source of
supply. Recently, due to increased emphasis on outsourcing, the importance of purchasing has increased
substantially. The purchasing function includes identifying the supply pool, negotiating prices and terms
of the purchase, placing and receiving orders, quality assurance, material handling, and storage of
received shipments. One of the very important responsibilities of buyers is communication and
coordination with suppliers and possibly suppliers’ suppliers—especially in the areas of scheduling and
forecasting to reduce the chance of excess inventories, stockouts, and late deliveries. In addition,
purchasing works closely with production planning and control and sales to ensure that the desired
product is available at the right location at the right time in the right quantity.
To eliminate confusion, it is a good idea to let the students know that there are alternative names used in
the area of purchasing. Depending on the environment and the relative position of the firm in the supply
chain, acquisition of materials is identified by different terms. While the manufacturers of materials, parts,
components, and finished products generally refer to acquisition of materials from outside sources as
purchasing, distributors and retailers call the same function buying, while others in government and
military refer to it as procurement.
Chapter 15 – Supply Chain Management
Reading: At 3M a Long Road Became a Shorter Road
1. The tradeoffs that businesses might face in considering consolidation are as follows:
Advantages:
(a) Reduced transportation time and costs.
(b) Reduced process time.
2. Other possible reasons for long supply processes include:
(a) Labor savings or expertise at the distant plant leading the company to continue operations
there.
(b) Unusual circumstances leading to long lead times at any of the distant plants, e.g., scrap,
manufacturing bottlenecks, supplier problems, communication issues, etc.
Reading: E-Procurement at IBM
1. IBM was able to reduce its procurement costs by sending purchase orders, receiving invoices, and
2. The speed and ease of using the Internet allowed IBM to form partnerships with small suppliers
3. In addition to cost reduction, IBM’s other main reason for switching to Web-based procurement
5. IBM developed a Web-based portal to provide a single entry point to the company Web site
instead of having suppliers connect to the needed areas with separate URLs based on their
specific needs. Most large companies like IBM have multiple types of relationships and
interfaces with suppliers involving quality, purchasing, engineering, and other dimensions of the
Chapter 15 – Supply Chain Management
Reading: Rise of the 3PL
1. Larger companies are more likely to outsource than their smaller counterparts because they are in
a better position to afford the outsourcing and they have the staff and the system necessary to deal
2. Technology is very important to the 3PL decision because the companies that utilize the third
party logistics providers expect the 3PL to supply them with a certain level of IT sophistication.
Technology also enables the 3PL to scale their operations without incurring additional overhead,
assets, and other costs.
Reading: Clicks or Bricks, or Both?
1. If a retail outlet that does not have an Internet presence wants to overcome the issue of consumers
coming in to “kick the tires” and then buying online from a competitor, the retail outlet could
2. If online retailers are forced to collect taxes for online sales, this action should reduce the
disparity between online and in-store prices. We should expect to see more companies using both
clicks and bricks. The online presence could be used to sell a wider variety of slower-moving
products while the retail facility would be used to sell faster-moving products. In addition, the
retail outlet could be used for customer pick-up of products ordered online and for customer
returns.
Answers to Discussion and Review Questions
1. A supply chain is a sequence of organizations, their facilities, functions, and activities that are
2. Some recent trends in supply chain management include:
a. Measuring supply chain ROI: This enables managers to incorporate economics into
outsourcing and other decisions.
b. Greening the supply chain: This may involve redesigning products and services, reducing
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Education.
f. Managing risks: Identifying risks, assessing their likelihood of occurring and their potential
impact, and then developing strategies for addressing those risks.
3. Key aspects of supply chain management include:
a. Determining the appropriate level of outsourcing.
4. Strategic responsibilities in supply chain management include:
a. Supply chain strategy alignment: Aligning the supply and distribution strategies with the
organizational strategy and deciding on the degree to which outsourcing will be used.
b. Network configuration: Determining the number and location of suppliers, warehouses,
production/operations facilities, and distribution centers.
f. Strategic partnership: Partnership choices, level of partnership, and degree of formality.
g. Distribution strategy: Deciding whether to use centralized or decentralized distribution, and
deciding whether to use the organization’s own facilities and equipment or to use 3PL
providers.
h. Uncertainty and risk reduction: Identifying potential sources of risk and deciding the amount
d. Managing inventory: Decide where to store the various types of inventory.
e. Transportation planning: Match transportation capacity with demand.
f. Collaborating: Work with supply chain partners to coordinate plans.
Operational responsibilities in supply chain management include:
a. Scheduling: Short-term scheduling of operations and distribution.
g. Information sharing: Exchange of information with supply chain partners.
h. Controlling: Control of quality, inventory, and other key variables, and implementing
corrective action when necessary.
Chapter 15 – Supply Chain Management
5. The bullwhip effect is the progressive increase in inventories in a supply chain moving backward
in the supply chain (i.e., from the end of supply chain at the final customer to the initial suppliers
6. The procurement function is becoming more important in supply chain management because of
the following factors:
a. Purchasing selects suppliers and then establishes mutually beneficial relationships with them
so that supply chains can compete successfully.
b. Purchasing can bring suppliers into the product design and development process at an early
7. Inventory velocity refers to the speed at which inventory (material) moves through a supply
chain. The greater the velocity, the better it is because the quick movement of materials not only
8. Strategic partnering involves two or more business organizations with complementary products or
services joining together so that each partner gains a strategic benefit. For example, one way this
9. E-business has led to an explosion of Internet-related activities, many of which have had an
10. See Table 15.3 for a comprehensive list of advantages of e-business.
11. The trade-offs when designing a supply chain are:
a. Lot size—inventory trade-off: Producing or ordering large lot sizes yields benefits such as
lower annual setup costs and quantity discounts but also increases the amount of inventory
carried by suppliers and carrying cost. Large lot sizes also create the bullwhip effect.
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Education.
12. Managing returns is important because substantial value can be reclaimed from returned items.
13. Supply chain visibility involves a major trading partner being able to connect to any part of its
supply chain to access data in real time on inventory levels, shipment status, and similar key
information. This type of information sharing allows companies to prepare for future actions of
14. Purchasing managers plan, coordinate, and direct negotiation of purchase contracts, supplier
15. Purchasing interfaces with several other functions (any two of the following are sufficient):
Operations: Purchasing must inform operations of cancellations, changes in specifications, or
changes in quantity or delivery times. Operations must communicate requests for materials to
purchasing.
16. RFID tags provide an improved way to track shipments and share information. This technology
increases supply chain visibility, improves inventory management, improves quality control, and
Chapter 15 – Supply Chain Management
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2. a. Decisions on technology acquisition for supply chain management: The manager of supply
chain operations and the vice presidents of logistics, transportation, purchasing, and
production may have to be involved, depending on the level of complexity of the supply
3. Three different ways that technology has improved the ability of the firm to manage supply
chains:
a. The ability to integrate the databases of different firms to allow faster and easier access to
information among supply chain partners.
chains.
Critical Thinking Exercises
1. There are many factors critical for a successful supply chain operation. In the following section,
we will explain why certain factors are very important in the implementation of successful supply
chain operations.
a. Integrated technology: As technology becomes more integrated, it becomes easier for trading
partners in the supply chain to share information.
b. Information sharing: This is a crucial aspect of successful supply chain operation because it
allows companies to prevent problems from occurring in the supply chain. For example,
timely information sharing about a significant increase in demand will prevent shortages from
wrong in the supply chain and corrective actions will need to be taken. If there is no process
for dealing with situations that deviate from the original plan, the company will either take
too long to get organized to respond or there will be chaos in trying to resolve the problem.