Operations Management / Supply Chain Management

Module 09.02 Key Concept: Managing the Integrated Supply Chain

Modern day global supply chains can be quite complex and Supply Chain Managers must be able to deal effectively with complex systems, communication channels and relationships.  There are many critical issues that are faced by operational and strategic supply chain roles.  Local optimization can magnify fluctuations in both demand and supply.  Incentives push merchandise into the supply chain for sales that have not occurred.  Large lots reduce shipping costs but increase inventory holding and do not reflect actual sales.   The so called “Bullwhip effect” occurs when orders are relayed through the supply chain increasing at each step.

These issues and others can be managed by effective planning and execution strategies that are supported by systems, good communication and collaboration within and outside of organizations.  Some typical approaches are summarized below:

  • Collaborative planning, forecasting, and replenishment (CPFR) through the supply chain
  • Blanket orders against which actual orders are released
  • Standardization
  • Postponement withholds modification as long as possible
  • Electronic ordering and funds transfer speed transactions and reduce paperwork
  • Drop shipping and special packaging bypasses the seller and reduces costs

We will explore some key functional implications below:


Supplier selection, management and improvement represents a critical strategic function of the Purchasing / Procurement role.  Purchasing leadership must provide for finding potential suppliers; determining the likelihood of their becoming good suppliers and supplier certification.
Supplier development requires integration of  the supplier into the system with such things as: quality requirements, product specifications, schedules and delivery, procurement policies, training, engineering and production help and information transfer procedures.
Negotiation represents a significant element in purchasing.  This is a highly valued skill.  Often, negotiation is based on a cost-based price model where the supplier opens their books.  Alternately, a market-based price model may be used which is based on published, auction, or indexed prices. Competitive bidding is a common policy for many purchases.  However, it does not generally foster long-term relationships.
Contracting can be used to share risks, benefits, create incentives.  Since purchasing is so critical, the function is often centralized.  This provides Leverage due to increase volume.  It also results in development of  specialized staff who then develop close supplier relationships.  Centralized purchasing maintains professional control; devote resources to selection and negotiation; reduces duplication of tasks and promotes standardization
E-Procurement speeds purchasing, reduces costs, integrates supply chain.  This often employs online catalogs and exchanges for standard items or industry-specific web sites.  Online auctions are also utilized.  They provide low barriers to entry.  Reverse auctions for are popular for buyers.  Price is not always the most important factor.
•The basic objective of the Logistics Function is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities.  Thus, Logistics is a frequent candidate for outsourcing.  Outsourcing often allows competitive advantage to be gained through reduced costs and improved customer service.
Shipping represent a major cost block for the Logistics Operations.  There are many options available and the selection of approach depends on many factors such as cost, desired customer service level, access to required infrastructure, urgency of delivery, etc.  Several common modes of shipment are summarized below:
  • Trucking: Moves the vast majority of manufactured goods.  The chief advantage is flexibility
  • Railroads: Capable of carrying large loads.  Provides little flexibility but the use of containers and piggybacking have helped with this
  • Airfreight: Fast and flexible for light loads but is usually expensive
  • Waterways: Typically used for bulky, low-value cargo and when shipping cost is more important than speed
  • Pipelines: Used for transporting oil, gas, and other chemical products
  • Multi-modal: Combines shipping methods.  Is common, especially in international shipments and aided by use of standardized containers

In general, faster shipping is generally more expensive than slower shipping, and faster methods tend to involve smaller shipment sizes while slower methods involve very large shipment sizes.

Warehousing is a function that also ay be expensive, but alternatives may be even more so.  The fundamental purpose of warehousing is to store goods but often other services are also provided such as: Consolidation, Break-bulk, Cross-docking or Channel assembly
Third Party Logistics (3PL) providers are often used for outsourcing of logistics functions.  They can reduce inventory, costs, and improve delivery reliability and speed.  In general, 3PLs are used to coordinate supplier inventory with delivery services.  They may also provide warehousing, assembly, testing, shipping, and customs clearance processing / support.
Distribution management includes the movement of goods throughout the supply chain.  Distribution networks can be designed to be simple (direct from producer to customer) or quite complex (as in typical retail businesses).
So, Distribution is concerned with the outbound flow of products and is dependent on such factors as rapid response, product choice and service.
In general, increasing the number of facilities improves response time and customer satisfaction.  However, these must be balance against total cost of adding facilities (fixed and variable).
Distribution Management is concerned with facilities, packaging, and logistics as well as the selection and development of dealers or retailers.  Downstream management as just important as upstream management.