Chapter
14 Supply Chain Integration
DISCUSSION QUESTIONS
1. Supply chain dynamics can be from internal sources or external sources. Dynamics
emanating from internal causes should be corrected by addressing the firm’s
policies on pricing and promotions, ability to provide correct data and information,
and the frequency of new service or product introductions, to name a few. Some of
the external causes of supply chain disruption can be mitigated by better integration
between customers, the firm, and suppliers. However, sometimes the variability in
demands is out of the control of the firm. Figure 14.3 shows how a firm’s SKUs
could look regarding annual demands and weekly demand variability. A new supply
chain design could help to mitigate the effects of those products with lower volumes
and higher variability. The firm could have an ATO supply chain for those products
and a MTS supply chain for the higher volume, more stable products. Splintering
the supply chain into two or more individual supply chains should be undertaken
only when other approaches outlined in this chapter have been exhausted.
2. The experiences of GM and Chrysler are indicative of two differing approaches to
supplier relations. GM’s posture is indicative of a competitive orientation because
going to lunch at the request of a supplier may give certain suppliers an edge when
competing for GM’s business. Chrysler’s position is indicative of a cooperative
approach to supplier relations. If the suppliers have been chosen for a certain
product line, the goal is to develop a cooperative working relationship. Going to
lunch promotes that atmosphere.
3. Firms with power in a supply relationship can influence the behavior of suppliers in
several ways. First, if there is an economic advantage because of the amount of
business the buyer gives to the supplier, the buyer can require the supplier to
participate in programs such as CFAR or to use technology such as RFID, for
example. The threat of losing the business may coerce the supplier into compliance.
There are other sources of power that can be applied by a buyer. For example, the
buyer may have the ability to reward the supplier with the promise of future
business, or the buyer may be an expert in some field (such as technology applied to
supply chain integration) and may offer that expertise to the supplier in order to
influence behavior on other matters. Of course, the supplier may have the power in a
supply relationship, perhaps because it is the only supplier of a critical item to the
buyer or may have some expertise in an important aspect of the buyer’s business. It
is important to emphasize that power can be used to accomplish positive things in a
supply chain, not just provide one firm benefits at the expense of another.
14-1
Copyright © 2016 Pearson Education, Inc.
,14-2 l PART 3 l Managing Supply Chains
4. Many firms have applied the principles of lean systems at the firm level to their
supply chains. Small lot sizes, close supplier ties, and quality at the source are all
applicable to a supply chain.
ú Small lot sizes. We have seen in our total cost analysis that lot sizes have an
impact on cycle inventory levels and freight costs because of the options
available to transport different quantities of product. Small lot sizes lower cycle
inventory requirements (perhaps enabling smaller warehouse space) while
requiring more shipments. More shipments may require more oversight and
control of the supply relationship, and the potential for supply problems.
ú Close supplier ties. A key to achieving a reliable flow of information and
materials is to engender close supplier relationships. As opposed to a
competitive orientation, which may be appropriate for short-term relationships,
close supplier ties enabled by a cooperative orientation foster long-term
relationships, which are the backbone for cooperative programs such as CFAR
(see Chapter 14, Forecasting), vendor-managed-inventories, and RFID.
ú Quality at the source. Reliable supplies begin with reliable quality levels.
Quality at the source is a concept that discourages passing defects along to a
customer, whether that customer is internal or external. Suppliers are typically
held to a stated level of quality in their supply contracts; passing along defects
will be costly to both the buyer and the supplier.
PROBLEMS
Supplier Relationship Process
1. Horizon Cellular. We apply the equation for total annual cost analysis to each
supplier:
Total Annual Cost = pD + Freight costs + (Q/2 + d L)H + Administrative costs.
The average requirements per day are 200 circuit boards.
For Abbott and a shipping quantity of 10,000, the total annual cost is:
Total Annual Cost = ($30)(50,000) + $10,000 + (10,000/2 + 200 (4))($6) + $10,000
= $1,554,800.
The total annual costs for the other alternatives are given in the following table.
Shipping Quantity
10,000 25,000
Abbott $1,554,800 $1,596,800
Baker $1,459,840 $1,498,840
Carpenter $1,602,720 $1,646,720
Baker, with a shipping quantity of 10,000, is the lowest cost alternative.
Copyright © 2016 Pearson Education, Inc.
, Supply Chain Integration l CHAPTER 14 l 14-3
2. Eight Flags. We apply the equation for total annual cost analysis to each supplier:
Total Annual Cost = pD + Freight costs + (Q/2 + d L)H + Administrative costs.
The average requirements per week are 30,000/50 = 600 gallons.
For Sharps and a shipping quantity of 5,000, the total annual cost is:
Total Annual Cost = ($4)(30,000) + $5,000 + (5,000/2 + 600 (4))($0.80) + $4,000 =
$132,920.
The total annual costs for the other alternatives are given in the following table.
Shipping Quantity
Supplier 5,000 10,000 15,000
Sharps $132,920 $132,520 $133,920
Winkler $129,136 $128,736 $130,336
Winkler, with a shipping quantity of 10,000, is the lowest cost alternative.
3. Bennet
a. Each supplier’s performance can be calculated as:
Performance Weighted Rating
Criterion Weight Supplier A Supplier B Supplier C
0.9(0.2) = 0.18
1. Price 0.2 0.6(0.2) = 0.12 0.5(0.2) = 0.10
0.8(0.2) = 0.16
2. Quality 0.2 0.6(0.2) = 0.12 0.4(0.2) = 0.08
0.8(0.3) = 0.24
3. Delivery 0.3 0.6(0.3) = 0.18 0.3(0.3) = 0.09
4. Production facilities 0.6(0.1) = 0.06
0.1 0.5(0.1) = 0.05 0.9(0.1) = 0.09
& capacity
5. Environmental
0.1 0.7(0.1) = 0.07 0.8(0.1) = 0.08 0.6(0.1) = 0.06
protection
0.7(0.1) = 0.07
6. Financial position 0.1 0.9(0.1) = 0.09 0.9(0.1) = 0.09
Total weighted score 0.63 0.53 0.77
b. Suppliers A and C survived the hurdle. Supplier A would receive 45% of the
orders and Supplier C would receive 55% of the orders.
c. Ben’s system provides some assurance that orders are placed with qualified
suppliers. The orders are divided between two suppliers, so there is a ready
alternative if a strike, fire, or other problem prevents one supplier from
performing. The system also rewards suppliers with more orders if they improve
performance.
Copyright © 2016 Pearson Education, Inc.
14 Supply Chain Integration
DISCUSSION QUESTIONS
1. Supply chain dynamics can be from internal sources or external sources. Dynamics
emanating from internal causes should be corrected by addressing the firm’s
policies on pricing and promotions, ability to provide correct data and information,
and the frequency of new service or product introductions, to name a few. Some of
the external causes of supply chain disruption can be mitigated by better integration
between customers, the firm, and suppliers. However, sometimes the variability in
demands is out of the control of the firm. Figure 14.3 shows how a firm’s SKUs
could look regarding annual demands and weekly demand variability. A new supply
chain design could help to mitigate the effects of those products with lower volumes
and higher variability. The firm could have an ATO supply chain for those products
and a MTS supply chain for the higher volume, more stable products. Splintering
the supply chain into two or more individual supply chains should be undertaken
only when other approaches outlined in this chapter have been exhausted.
2. The experiences of GM and Chrysler are indicative of two differing approaches to
supplier relations. GM’s posture is indicative of a competitive orientation because
going to lunch at the request of a supplier may give certain suppliers an edge when
competing for GM’s business. Chrysler’s position is indicative of a cooperative
approach to supplier relations. If the suppliers have been chosen for a certain
product line, the goal is to develop a cooperative working relationship. Going to
lunch promotes that atmosphere.
3. Firms with power in a supply relationship can influence the behavior of suppliers in
several ways. First, if there is an economic advantage because of the amount of
business the buyer gives to the supplier, the buyer can require the supplier to
participate in programs such as CFAR or to use technology such as RFID, for
example. The threat of losing the business may coerce the supplier into compliance.
There are other sources of power that can be applied by a buyer. For example, the
buyer may have the ability to reward the supplier with the promise of future
business, or the buyer may be an expert in some field (such as technology applied to
supply chain integration) and may offer that expertise to the supplier in order to
influence behavior on other matters. Of course, the supplier may have the power in a
supply relationship, perhaps because it is the only supplier of a critical item to the
buyer or may have some expertise in an important aspect of the buyer’s business. It
is important to emphasize that power can be used to accomplish positive things in a
supply chain, not just provide one firm benefits at the expense of another.
14-1
Copyright © 2016 Pearson Education, Inc.
,14-2 l PART 3 l Managing Supply Chains
4. Many firms have applied the principles of lean systems at the firm level to their
supply chains. Small lot sizes, close supplier ties, and quality at the source are all
applicable to a supply chain.
ú Small lot sizes. We have seen in our total cost analysis that lot sizes have an
impact on cycle inventory levels and freight costs because of the options
available to transport different quantities of product. Small lot sizes lower cycle
inventory requirements (perhaps enabling smaller warehouse space) while
requiring more shipments. More shipments may require more oversight and
control of the supply relationship, and the potential for supply problems.
ú Close supplier ties. A key to achieving a reliable flow of information and
materials is to engender close supplier relationships. As opposed to a
competitive orientation, which may be appropriate for short-term relationships,
close supplier ties enabled by a cooperative orientation foster long-term
relationships, which are the backbone for cooperative programs such as CFAR
(see Chapter 14, Forecasting), vendor-managed-inventories, and RFID.
ú Quality at the source. Reliable supplies begin with reliable quality levels.
Quality at the source is a concept that discourages passing defects along to a
customer, whether that customer is internal or external. Suppliers are typically
held to a stated level of quality in their supply contracts; passing along defects
will be costly to both the buyer and the supplier.
PROBLEMS
Supplier Relationship Process
1. Horizon Cellular. We apply the equation for total annual cost analysis to each
supplier:
Total Annual Cost = pD + Freight costs + (Q/2 + d L)H + Administrative costs.
The average requirements per day are 200 circuit boards.
For Abbott and a shipping quantity of 10,000, the total annual cost is:
Total Annual Cost = ($30)(50,000) + $10,000 + (10,000/2 + 200 (4))($6) + $10,000
= $1,554,800.
The total annual costs for the other alternatives are given in the following table.
Shipping Quantity
10,000 25,000
Abbott $1,554,800 $1,596,800
Baker $1,459,840 $1,498,840
Carpenter $1,602,720 $1,646,720
Baker, with a shipping quantity of 10,000, is the lowest cost alternative.
Copyright © 2016 Pearson Education, Inc.
, Supply Chain Integration l CHAPTER 14 l 14-3
2. Eight Flags. We apply the equation for total annual cost analysis to each supplier:
Total Annual Cost = pD + Freight costs + (Q/2 + d L)H + Administrative costs.
The average requirements per week are 30,000/50 = 600 gallons.
For Sharps and a shipping quantity of 5,000, the total annual cost is:
Total Annual Cost = ($4)(30,000) + $5,000 + (5,000/2 + 600 (4))($0.80) + $4,000 =
$132,920.
The total annual costs for the other alternatives are given in the following table.
Shipping Quantity
Supplier 5,000 10,000 15,000
Sharps $132,920 $132,520 $133,920
Winkler $129,136 $128,736 $130,336
Winkler, with a shipping quantity of 10,000, is the lowest cost alternative.
3. Bennet
a. Each supplier’s performance can be calculated as:
Performance Weighted Rating
Criterion Weight Supplier A Supplier B Supplier C
0.9(0.2) = 0.18
1. Price 0.2 0.6(0.2) = 0.12 0.5(0.2) = 0.10
0.8(0.2) = 0.16
2. Quality 0.2 0.6(0.2) = 0.12 0.4(0.2) = 0.08
0.8(0.3) = 0.24
3. Delivery 0.3 0.6(0.3) = 0.18 0.3(0.3) = 0.09
4. Production facilities 0.6(0.1) = 0.06
0.1 0.5(0.1) = 0.05 0.9(0.1) = 0.09
& capacity
5. Environmental
0.1 0.7(0.1) = 0.07 0.8(0.1) = 0.08 0.6(0.1) = 0.06
protection
0.7(0.1) = 0.07
6. Financial position 0.1 0.9(0.1) = 0.09 0.9(0.1) = 0.09
Total weighted score 0.63 0.53 0.77
b. Suppliers A and C survived the hurdle. Supplier A would receive 45% of the
orders and Supplier C would receive 55% of the orders.
c. Ben’s system provides some assurance that orders are placed with qualified
suppliers. The orders are divided between two suppliers, so there is a ready
alternative if a strike, fire, or other problem prevents one supplier from
performing. The system also rewards suppliers with more orders if they improve
performance.
Copyright © 2016 Pearson Education, Inc.
