Chapter
14 Supply Chain Integration
TEACHING TIP
Order Fulfillment aboard the Coral Princess shows the intricate supply decisions that must be
made during a cruise and the implications of recent disasters on the process.
• Supply chain integration is the effective coordination of supply chain processes through the
seamless flow of information up and down the supply chain.
• Figure 14.1 shows how interconnected processes and firms in a supply chain can be.
o Think of a supply chain as a river that flows from raw material suppliers to consumers.
TEACHING TIP
Discuss supply chain tiers.
• Upstream from the ketchup factory
o Tier 1 supplier: tomato paste factories
o Tier 2 supplier: tomato paste factories get major supplies from tomato grading stations
o Tier 3 supplier: tomato growers ship their products directly to tomato grading stations
• Downstream from the ketchup factory
o Retail stores
o Customers
• Mitigating the effects of supply chain disruptions is an important benefit of supply chain
integration.
1. Supply Chain Disruptions
1. Causes of Supply Chain Disruptions
a. External Causes
• Environmental Disruptions
• Supply Chain Complexity
b. Internal Causes
• Internally Generated Shortages
• Quality Failures
• Poor Supply Chain Visibility
2. Supply Chain Dynamics
a. Bullwhip effect: the phenomenon in supply chains whereby ordering patterns experience
increasing variance as you proceed upstream in the chain.
• Upstream members (toward the lowest tier in the supply chain) must react to the
demands placed on them by downstream members of the chain.
3. Integrated supply chains
a. A starting point for minimizing supply chain disruptions is to develop a supply chain with
a high degree of functional and organizational integration.
b. Integration must include linkages between the firm, its suppliers, and its customers, as
shown in figure 14.3. It requires a bi-directional flow that is critical for minimizing
supply chain disruptions.
• New service or product development
• Supplier relationship
• Order fulfillment
• Customer relationship
• Internal and external linkages integrated into normal business routine
c. The SCOR model in figure 14.4 emphasizes that the design of an integrated supply chain
is complex and requires a process view.
• Plan
2. Additive Manufacturing
Disruptive Technologies can change the existing approach to doing things. One example of such
a technology is Additive Manufacturing (AM), which uses 3D printers to fabricate objects by
adding successive layers of materials according to a computer-aided design.
1. Supply Chain Implications of AM
a. Reduced Material Inputs
b. Simplified Production
c. Production and Supply Chain Flexibility
• Decreased new product development timelines
• Increased product customization
d. Decentralized, Distributed Production Networks
2. Enablers of Adopting AM
3. New Service or Product Development Process
Competitive priorities help managers develop services and products that customers want. New
services or products are essential to the long-term survival of the firm.
TEACHING TIP
Emphasize the implications for supply chain design and integration. The new service/product
development process is an integral element in a firm’s supply chain because it defines the nature
of the materials, services, and information flows the supply chain must support.
1. Design
a. Critical because it links the creation of new services or products to the corporate strategy
of the firm and defines the requirements for the firm’s supply chain.
b. Ideas for specify how the customer connects with the service or manufacturing firm.
2. Analysis
a. Involves a critical review of the new offering and how it will be produced to make sure
that it fits with the corporate strategy.
b. The resource requirements for the new offering must be examined from the perspective
of the core capabilities of the firm.
3. Development
a. More specificity to the new offering
b. Concurrent engineering: brings product engineers, process engineers, marketers, buyers,
information specialists, quality specialists, and suppliers together to design a product and
the processes that will meet customer expectations.
4. Full launch
a. Involves the coordination of many internal processes as well as those both upstream and
downstream in the supply chain.
b. A particular strain is placed on the supply chain during a period referred to as ramp-up,
when the production process must increase volume to meet demands while coping with
quality problems and last-minute design changes.
4. Supplier Relationship Process
1. Sourcing
a. Supplier selection
• Material costs
• Freight costs
• Example 14.1 provides a Total Cost Analysis for supplier selection
• Use Application 14.1 (note this is Solved Problem 1)
ABC Electric Repair is a repair facility for several major electronic appliance
manufacturers. ABC wants to find a low-cost supplier for an electric relay switch
used in many appliances. The annual requirements for the relay switch (D) are
100,000 units. ABC operates 250 days a year. The following data are available for
two suppliers. Kramer and Sunrise, for the part:
Freight Costs
Shipping Quantity (Q)
Supplier
2,000
10,000
Price/Unit (p)
Carrying
Cost/unit (H)
Administrative
Costs
Kramer
$30,000
$20,000
$5.00
$1.00
$10,000
Sunrise
$28,000
$18,000
$4.90
$0.98
$11,000
Which supplier will provide the lowest annual cost?
Solution:
The daily requirements for the relay switch are:
400250/000,100 ==d
units
We must calculate the total annual cost for each alternative:
Total
annual
cost
=
Material
costs
+
Freight
costs
+
Inventory
costs
+
Administrative
costs
=
pD
+
Freight
costs
+
( )
HLdQ +2/
+
Administrative
costs
Kramer
Q = 2,000:
000,543$000,10$)1))($5(4002/000,2(000,30$)000,100)(00.5($ =++++
assigned to each criterion (total 100 points) and the scores assigned to each supplier
(Excellent = 5, Poor = 1).
Scores
Criterion
Weight
Kramer
Sunrise
Total annual cost
30
4
5
Consistent quality
40
3
4
Delivery speed
30
5
3
Which supplier should ABC select, given these criteria and scores?
Solution
Using the preference matrix approach, the weighted scores for each supplier are:
Based on the weighted scores, ABC should select Sunrise even though delivery speed
performance would be better with Kramer.
• See Supplement A, “Decision Making,” for a review of the multiple criteria in the
supplier selection problem.
b. Supplier certification and evaluation: verify that potential suppliers have the capability to
provide the services or materials the buying firm requires.
• ISO 9001:2008 is one such program
2. Design collaboration
a. Early supplier involvement
b. Presourcing
c. Value analysis
TEACHING TIP
Use Video Case “Sourcing Strategy at Starwood.” Starwood maintains a cooperative orientation
toward its suppliers.
3. Negotiation
a. Focuses on obtaining an effective contract that meets the price, quality, and delivery
requirements.
b. Competitive orientation
• Firms have sources of power in a relationship with suppliers.
Referent–the supplier values identification with the buyer.
Copyright © 2019 Pearson Education, Inc.
Expert–the buyer has access to knowledge, information, and skills desired by the
supplier.
Reward–the buyer has the ability to give rewards to the supplier.
Legal–the buyer has the legal right to prescribe behavior for the supplier.
Coercive–the buyer has the ability to punish the supplier.
• If the supplier holds the power, they could exercise these sources of power as well.
TEACHING TIP
Use Managerial Practice 14.1 “The Consequences of Power in an Automotive Supply Chain” to
illustrate the importance of supplier relations, particularly when General Motors was combating
issues such as economic and physical disruptions in a worldwide market with an already complex
supply chain to manage.
c. Cooperative orientation
• A partnership between buyers and sellers.
• This orientation implies long-term commitments, joint work on quality, and buyer
support of infrastructure.
• Typically, fewer suppliers are needed in this arrangement, e.g. sole sourcing.
4. Buying
Actual procurement of the service or material from the supplier. Approaches to e-purchasing
include:
a. Electronic data interchange (EDI)
b. Catalog hubs
c. Exchanges
d. Auctions
e. Locus of control
5. Information exchange
a. Radio frequency identification (RFID)
• Use of RFID data can increase a supplier’s service level.
• Pilferage reduction is another major advantage of the RFID technology.
b. Vendor-managed inventories (VMI)
• Customer service
• Written agreement
TEACHING TIP
Use Case “Wolf Motors” to explore the issues of restructuring a supplier relationship process.
5. Order Fulfillment Process
The order fulfillment process produces and delivers the service or product to the firm’s
customers. There are four nested processes: customer demand planning, supply planning,
production, and logistics.
1. Customer demand planning
a. Facilitates the collaboration of a supplier and its customers
b. Demand forecasts are inputs to service-planning processes, production and inventory
plans, and revenue planning.
2. Supply planning
a. Inventory management
b. Operations planning and scheduling
c. Resource planning
3. Production
a. The best firms tightly link their production process to suppliers as well as customers.
4. Logistics
a. Ownership
• Private carrier
• Third-party logistics provider
b. Facility location
• Facilities serve as points of service, storage, or manufacturing
• Chapter 11, “Supply Chain Location Decisions”
c. Mode selection
• Truck
• Train
• Ship
• Pipeline
• Airplane
d. Capacity: The performance of a logistics process is directly linked to its capacity
e. Use Application 14.3 (note this is Solved Problem 3)
Schneider Logistics Company has built a new warehouse in Columbus, Ohio, to facilitate
the consolidation of freight shipments to customer in the region. George Schneider must
determine how many teams of dock workers he should hire to handle the cross-docking
The purpose of the customer relationship process, which supports customer relationship
management (CRM) programs, is to identify, attract, and build relationships with customers and
to facilitate the transmission and tracking of orders.
1. Marketing
a. Electronic commerce (e-commerce)
b. Business-to-Consumer (B2C) systems
• Offers new distribution channels
• Examples: Amazon.com, E*TRADE, Auto-by-tel
c. Business-to-Business (B2B) systems
• Makes up more than 70 percent of the regular economy
• Example: Fruit of the Loom, Inc.
2. Order placement
a. Process involves the activities required to execute a sale, register the specifics of the
order request, confirm the acceptance of the order, and track the progress of the order
until completed.
b. Internet provides advantage
• Cost reduction
• Revenue flow increase
• Global access
• Pricing flexibility
3. Customer service
a. The customer service process helps customers with answers to questions regarding the
service or product, resolves problems, and, in general, provides information to assist
customers.
7. Supply Chain Risk Management
• Supply chain risk management focuses on managing the risks posed by any factor or event
that can materially disrupt a supply chain.
• Operational, financial, and security risks and reveal important performance measures for
tracking supply chain operations.
1. Operational risks are threats to the effective flow of materials, services, and products in a
supply chain. The following options reduce the risk for operational disruptions
a. Strategic alignment
b. Upstream/downstream supply chain integration
c. Visibility
d. Flexibility and redundancy
e. Short replenishment lead times
f. Small order lot sizes
g. Rationing short supplies
h. Everyday low pricing (EDLP)
i. Cooperation and trustworthiness
2. Financial Risks are threats to the financial flows in a supply chain, such as prices, costs and
profits. Buyers may purchase services or products at an agreed fixed price.
a. Hedging: a supply chain risk management strategy used in limiting or offsetting the
probability of loss from fluctuations in the prices of commodities or currencies.
b. Another way of hedging is to use a futures contract.
c. Table 14.1 provides an example of hedging the market price of cotton.
3. Security risks are threats to a supply chain that could potentially damage stakeholders,
facilities, or operations, destroy the integrity of a business, or jeopardize its continuation.
Typical security activities:
a. Access control
b. Physical security
c. Shipping and receiving
d. Transportation service provider
e. ISO 28000
4. Performance Measures
a. Table 14.2 contains examples of commonly used performance measures for three supply
chain processes.
• Customer Relationship
• Order Fulfillment
• Supplier Relationship