MBA - MASTER OF BUSINESS

ADMINISTRATION

STRM046:
Managing Operations and the Supply Chain

Supply Chain Management

Dr Luciano Batista BSc MSc PhD MILT

Senior Lecturer in Operations Management
Member of CELAS Centre for Excellence in Logistics and Supply Chain
Member of the Chartered Institute of Logistics and Transport UK
Editorial Member of the International Journal of Supply Chain and Operations Resilience

Key topics
General SCM aspects
Core SCM activities
Warehouse operations
Inventory management

Global sourcing

General SCM aspects

The value chain model

SCM related
activities

General SCM aspects

Creating value to customers
How can companies add value to their products?

Input resources

Process n

Process 1

Process 3

Feedback

Can SCM add value? How?

Outputs

Customers

External suppliers

Process 2

OUTBOUND
LOGISTICS

PROCUREMENT

INBOUND
LOGISTICS

General SCM aspects

Buy- and Sell- side

General SCM aspects

The supply chain
Information flow

2nd tier supplier

1st tier
supplier

Producer

Distributor

Retailer

Customer

Materials flow

Upstream supply chain

Downstream supply chain

SCM integrates supply and demand

management within and across companies.

General SCM aspects

A supply network

General SCM aspects

Conceptual views of Logistics and SCM

Logistics is part of SCM, which has a wider scope in

terms of management.
Definition of SCM:
SCM encompasses the planning and management of all activities
involved in sourcing and logistics, including coordination and
collaboration with partners, which can be suppliers, intermediaries,
third party service providers, and customers.
Source: CSCMP, http://cscmp.org/default.asp

Core SCM activities

Supply chain management activities often encompass work in the
categories of procurement, materials management, and physical
distribution and logistics.

1. Procurement
Selection and certification of suppliers.
Acquisition of inputs (transformed and
transforming), information and services.
Ensures that inputs are of the right quality, are
available when needed and have an appropriate
cost.
Inspection of incoming goods or services.
Purchasing responsibilities are generally
considered to end once the purchased inputs
have been delivered.

Core SCM activities

Key procurement processes

Core SCM activities

2. Materials management
Responsible for the activities that take place between the delivery
of materials by suppliers and their use in the transformation

process.
Manages the receipt of incoming materials, their storage and
handling, and their provision to the transformation process.
Responsible for testing, packaging and storing finished products

before they are shipped out of the production facility.

Core SCM activities

3. Physical distribution and logistics
It is concerned with transporting the physical
outputs, managing the movement of goods and
services to customers and clients.
Logistics is an extension of physical distribution

management. It includes all of the processes

involved in the physical distribution, both into
(inbound logistics) and from (outbound logistics) the
organisation, as well as associated services such as

credit and insurance.

Many organisations manage their own logistics.
However, many others outsource their logistics
activities to specialist providers (third-party logistics

- 3PL firms).

Warehouse operations
In business operations, materials need to be stored until they are needed.
Warehousing is the storage of items in a relatively large scale.

Source: Commons wikimedia

Warehouse operations

Key warehouse activities

Source: Omar Youssef

Warehouse operations
Warehouse objectives

Effective use of space

Optimize use of equipment and labour

Optimize flow and access to materials
Effective use of information
Maximize protection of goods and premises
Minimize goods handling

Minimize operating costs

Inventory management
Inventory, or stock, is the stored accumulation of material resources
that are necessary in a transformation system.

Why is it necessary?
In essence inventory exists to compensate for the differences in timing
between supply and demand

Inventory management
Inventory systems

Single-stage inventory system

Stock

Sales

Suppliers

e.g. Local retail

shop

Inventory management
Inventory systems
Two-stage inventory system

Central
depot

Distribution

Local
distribution
point

Suppliers

e.g.

Automotive parts
distributor

Sales

Inventory management
Inventory systems
Multi-stage inventory system

Input
stock

Stage 1

WIP

Stage 2

Suppliers

e.g. Television manufacturer

WIP

Stage 3

Finished
goods
stock

Inventory systems
Multi-echelon inventory system

Garment
manufacturers
Cloth
manufacturers
Yarn
producers

Regional
warehouses
Retail
stores

Inventory management
Disadvantages of holding inventory
It incurs storage costs (leasing space, maintenance, etc.)
It involves administrative and insurance costs
It may become obsolete
It can be damaged, or deteriorate

It uses space that could be used by adding-value processes

Is there any case where holding inventory adds value to the product over time?

Inventory management
Inventory analysis and control
The ABC system based on the Pareto law (80/20 rule)
80% of sales are accounted for by only 20%
of all stocked item types

Pareto curve for stocked items

Percentage of value of items

100
90
80
70

60
50
40

Class A items

Class B items

Class C items

30
20
10
10

20

30

40

50

60

70

Percentage of types of items

80

90

100

Inventory management
Inventory analysis and control
The ABC system based on the Pareto law (80/20 rule)

Class A items the

20% or so of highvalue items which
account for around
80% of the total stock
value.

Class B items the

next 30% or so of
medium-value items
which account for
around 10% of the
total stock value.

Class C items the

remaining 50% or so
of low-value items
which account for
around the last 10% of
the total stock value.

Inventory management
The long-tail in inventories
Attempt to identify the important few causes from the many causes.

Increased variety!
Amazon.com:

40% of sales from long-tail items

Higher profitability from long-tail items

Inventory management
Replenishment decisions
The replenishment challenge is to match supply and demand rates in order to
keep inventory at a minimum level. This process requires two important decisions:
1. Inventory volume decisions decisions about how much to order.
2. Inventory timing decisions decisions about when to order.
These decisions are influenced by the costs, demand, and supply lead time.

Cost issues: placing orders, discount costs, storage costs, obsolescence

costs, etc.

Demand: average sales over a period of time.

Supply lead time: period of time between order placement and

delivery

Inventory management
The re-order level and re-order point
Example: Inventory = 400 items
Demand = 100 items per week
Lead time = 2 weeks
What would be the re-order level? i.e. minimum inventory level to sustain sales?
What would be the re-order point? i.e. point in time to place a replenishment order

Inventory level

400
Re-order level
300

Re-order point

200
100

0
0

Order lead time

Time (in weeks)

Inventory management
Safety stock
Safety stock(s) helps to avoid stock-outs when demand and/or order lead times are
uncertain.

Inventory level

Re-order level (ROL)

S
Lt1
Safety stock level

Lt2

Time

Global sourcing
Factors promoting global sourcing:
Formation of free trade agreement
blocs
More sophisticated international
logistics systems
More efficient border-crossing

operations
Cost reduction

Global sourcing
Outsourcing and offshoring
What is the difference between outsourcing and offshoring?

Country A
Company A

Outsourcing

Country B

Global outsourcing

Company C

Company B

In outsourcing, the ownership of the operations transferred

to a provider company is also handed over to the provider.
Some important
issues:

Skills availability in different regions

Legislation for part-time and temporary work
Storage conditions and climatic sensitivity
Transport costs and infrastructure
Supplier conformance to employment standards
Cultural view of acceptable quality

Global sourcing
Outsourcing and offshoring
Country A

Offshoring

Company A

Country B
Company A

In offshoring, the ownership of the operations transferred

abroad remains with the company transferring them .

Some reasons to Lower location costs

offshore:

Less stringent regulatory controls

Lower communication and IT costs

Improved capabilities of offshoring regions
Ability to cluster specific capabilities in certain
regions.

Global sourcing
Risks
What are the risks associated with global sourcing?

Some potential problems associated with global sourcing:

Increased complexity of dealing with suppliers from
different countries

Risks of delays and hidden-costs related to bordercrossing operations

Complex regulatory and documentation
requirements

High transport and freight fees

Low performance of the services provided by third
parties.

MBA - MASTER OF BUSINESS

ADMINISTRATION

Thank you

Dr Luciano Batista BSc MSc PhD MILT

Senior Lecturer in Operations Management