Transcript (Textbook) Behavior in Organizations, 8ed (A. B. Shani)

Chapter 9
Supply Chain
Management: Managing
Business to Business
Interactions
McGraw-Hill/Irwin
©The McGraw-Hill Companies, Inc. 2008
What is B2B?
• Business-to-Business (B2B) is a term commonly used to
describe business transactions between businesses, such
as the one between a manufacturer and a manufacturer
and a manufacturer and a wholesaler or a wholesaler and
a retailer i.e. these buyers and sellers are business entities.
This is unlike business-to-consumers (B2C) which
involve a business entity and end consumer, or businessto-government (B2G) which involve a business entity and
government.
9-2
Importance of B2B
• The volume of B2B transactions is much higher than the
volume of B2C transactions. The primary reason for this
is that in a typical supply chain there will be many B2B
transactions involving subcomponent or raw materials,
and only one B2C transaction, specifically sale of the
finished product to the end customer. For example, an
automobile manufacturer makes several B2B transactions
such as buying tires, glass for windshields, and rubber
hoses for its vehicles. The final transaction, a finished
vehicle sold to the consumer, is a single (B2C) transaction
9-3
Generic Supply Chain
Supply Chain –
Encompasses all
activities associated with
the flow and
transformation of goods
from the raw material
stage (extraction)
through to the end user,
as well as the associated
information flows.
Material and information
flow both up and down
the supply chain.
9-4
The Motivating Forces
• Increased competition to meet customer expectations for
value
• Recognition that customer decisions and actions often
dictate costs and limitations for suppliers.
• Recognition that supplier decisions and actions often
dictate costs and limitations for customers.
• Increased potential for timely communication and
feedback brought about by technological advances.
9-5
Motivating Forces: Increased Competition
• Increased global competition forces companies to stretch
and add value.
• Businesses, focused on core competencies and
outsourcing, need closer relationships with firms they
outsource to.
• Adding value by:
–
–
–
–
Reducing inventory throughout supply chain.
Improving timeliness and reliability of deliveries.
Working with suppliers to improve their product and service quality.
Communicating and cooperating in general.
9-6
Motivating Forces: Supply Savings
Example
• U.S. businesses spend 30-60% of revenue acquiring
goods from outside suppliers
• Purchase cost savings have strong impact on bottom
line.
In this example,
if the business
saves just 6% in
supply costs
($432,000), profit
will increase by
45%. (57.6% of
revenue)
9-7
Efficiency of Cost Reduction
•
•
•
•
•
Total Revenue
= $12,520,000
Purchases
= $ 7,200,000
Profit Before savings
=$
960,000
Percent of Revenue
= 960000/12520000 = 7.67 %
Purchases reduced by 6 percent = $ 7,200,000 x .06 =
$432,000
• Profit After Savings = 960000 + 432000 = 1,392,000
• Percent of Revenue
= 1392000/12520000 = 11.12 %
• Increase in Profit
= 432000/960000 = 45 %
9-8
Motivating Forces:
The Impact of Customers on Suppliers
• Customers and suppliers have traditionally been
adversarial - “Us-against-them” attitude.
• Bullwhip effect – The increasing variability of
demand as one moves upstream in supply chain.
– Variability of demand increases costs. Hard to plan, hard to
produce efficiently, need for larger inventories.
9-9
Motivating Forces:
The Impact of Suppliers on Customers
• Many possible events can have negative impact on
customers (missed delivery due dates, defective
products...)
• Customers increase inventory to protect against
supplier unreliability.
• Correct placement of inventory in a supply chain
improves performance, reduces cost, and reduces
impact of disruptions.
9-10
Motivating Forces:
Technological Advances
• The Internet provides a means of having immediate
access to information, enabling integrated decision
making.
• Rather than attempt to forecast demand, a supplier
can view customers’ production schedules and
eliminate forecasting.
9-11
Supply Chain Management Decisions
•
•
•
•
•
•
Strategic Alliances
Inventory Management
Cooperative product design
Information management
Standardization
Electronic commerce
9-12
Supply Chain Management Components:
Strategic Alliances
• Develop alliances rather than just hiring suppliers.
– Relationships create opportunity for communication
– Communication enhances productivity improvement
There are
significant
costs to
switching
suppliers
9-13
Supply Chain Management Decisions:
Inventory Management
• Information is used to help make decisions at all
supply chain levels.
• How many to order? When? What are the risks? How
much safety stock? Where should inventory be held?
• There are two fundamental questions: When should
we reorder? and How many?
• Increasing use of retail-supplier partnerships
– Vendor managed inventory (VMI)
9-14
Supply Chain Management Components:
Cooperative Product Design
• Make sure components from multiple suppliers can
be assembled.
• Gain insight from your suppliers
– Improve products
– Reduce costs
– Reduce time
9-15
Supply Chain Management Components:
Information Management
Three information management decisions related to
supply chain management
• What data should be collected?
• How should it be stored?
• With whom should it be shared?
9-16
Supply Chain Management Components:
Information Management
• Traditional supply chain: Forecasts based on different
data contributes to the bullwhip effect, excess
inventory, and stockouts.
9-17
A Closer Look at the Bullwhip Effect
• As you go up a supply chain, demand increases in
variability.
9-18
Bullwhip Effect
The magnification of variability in orders in the supplychain
Retailer’s Orders
Wholesaler’s Orders
Time
A lot of
retailers each
with little
variability in
their orders….
Time
…can lead to
greater variability
for a fewer number
of wholesalers,
and…
Manufacturer’s Orders
Time
…can lead to
even greater
variability for a
single
manufacturer.
9-19
Supply Chain Management Components:
Information Management
• Improved approaches enabled by technology to
collect, store and communicate data
– Collaborative planning, forecasting, and replenishment
(CPFR) – Approach to demand planning in which partners
negotiate and agree on a plan for meeting demand
9-20
A closer look at the Bullwhip Effect: causes
•
•
•
•
Overreaction to backlogs
Delaying order in an attempt to reduce inventory
No communication up and down the supply chain
Inaccurate demand forecast
9-21
A Closer Look at the Bullwhip Effect: Causes
• Demand forecast updating
– Orders from suppliers must meet demand and fill safety stocks. The longer
the lead times, the more uncertain demand is and the more safety stock is
held
• Order batching
– Because of high transaction costs, orders are batched together, causing
“lumpy” demand. Suppliers similarly allow demand to accumulate before
releasing orders
• Price fluctuation
– Businesses often buy before they need to, and in larger amounts, because
suppliers offer pricing advantages
• Rationing and shortage gaming
– Fear of supply shortages drives businesses to order in larger quantities than
they need
9-22
A Closer Look at the Bullwhip Effect: Impact
• Impact on cost, quality, and timeliness
– Spiking demand patterns puts businesses in ‘feast-or-famine’ mode. Not
good for productivity
– High inventory costs
– High inventory increases time for an innovation to get to market
– Mismatch between demand and design capacity results in increased cost per
unit, whether demand is higher or lower than capacity
– May cause low demand period layoffs, decreasing the quality of the
workforce as employees leave for more stable jobs
– Long cash-to-cash cycles and diminishing financial returns
9-23
A Closer Look at the Bullwhip Effect: Solutions
• Increase information supplied by businesses to their
suppliers—link to point of sale (POS)
• Eliminate price discounts (everyday low pricing)
• Reduce order transaction costs
• Very frequent deliveries of small quantities
(continuous replenishment) or third party delivery.
• Allocate quantities based on past sale
9-24
Cash-to-Cash Cycle
• C2C is a unique financial performance metric
(measurement) that indicates how well an entity is
managing its capital.
• It indicates length of time a company’s cash is tied up in
working capital. That is, time between when customers
receive a product or service and when they pay their bills
9-25
Cash to Cash and the Extended Value
Stream
9-26
How the Cash-to-Cash Cycle Is
Computed for a Given Reporting Period
• Cash-to-Cash Cycle =
+ Days Cash is Locked-Up as Inventory
+ Days Cash is Locked-Up in Receivables
- Days Cash Is Free Because the Business
Has Not Paid Its Bills
9-27
Supply Chain Management Components:
Standardization
• Long-term relationships drive businesses to make
their processes compatible
• Standardizing processes makes for higher levels of
productivity
9-28
Supply Chain Management Components:
Electronic Commerce
• Electronic commerce contributes to time reduction
– Electronic cash transfers speed up the cash-to-cash cycle
– Electronic order processing makes continuous replenishment
much more economical
9-29
The Supply Function
• Supply Activities
–
–
–
–
–
–
Recognition of a need
Description of the need
Identification and analysis of possible sources
Supplier selection and determination of terms
Preparation and placement of a purchase order
Follow-up or expediting of the order
9-30
Sourcing Decisions: Channel Selection
• Make versus buy, and how much to buy.
• The more strategically important the item, the more it
makes sense to ally with a supplier for it.
• Low priority items should be purchased
independently.
• Exchanges are another possible channel.
– Pooled purchases on an exchange can result in cost savings.
– Give sellers access to more buyers
9-31
Sourcing Decisions:
Outsourcing Supply Chain Activities
• Supply chain activities, especially warehousing and
transportation, are complex
– Many businesses choose to outsource these functions.
• Third party logistics provider (3PL)
– A provider of logistics services such as warehousing or transportation logistics.
• Outsourcing to a 3PL is primarily done to improve
quality, because many companies cannot afford to invest
in the expertise and technology required to do so.
– Drawback is loss of control.
9-32
Supply Chain Performance
• There are tradeoffs that may bring performance
measurements into conflict
–
–
–
–
Batch size/inventory cost tradeoff
Transportation costs/inventory cost tradeoff
Customer service/inventory cost tradeoff
Lead time/warehousing cost tradeoff
9-33
Perfect Order
• The perfect order is one that arrives on time as
promised, is of correct quantity, is not damaged,
and also includes all of the agreed-upon services.
- Entered the system correctly
- Picked accurately at the warehouse
- Delivered on time
- Delivered without damage
- Invoiced correctly
9-34
Perfect Order
• Percent of perfect order =
Total Orders - Defective Orders
Total Order
The larger the percent, the higher is the performance.
9-35