1. Chapter 10
Supply Chain Strategy

2. OBJECTIVES Supply-Chain Management Measuring Supply-Chain Performance
10-2
OBJECTIVES
Supply-Chain Management
Measuring Supply-Chain Performance
Supply Chain Decisions
Cycle and Push-Pull View of Supply Chains
Bullwhip Effect
Outsourcing
Value Density
Mass Customization 2

3. 10-3
What is a Supply Chain?
Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together

4. What is Supply Chain Management?
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Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer

5. What is a Supply Chain? P&G or other manufacturer Jewel or third
party DC
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Notes:
Supply chain involves everybody, from the customer all the way to the last supplier.
Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows.

6. What is a Supply Chain? P&G or other manufacturer Jewel or third
party DC
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Plastic
Producer
Tenneco
Packaging
Chemical
manufacturer
(e.g. Oil Company)
Notes:
Supply chain involves everybody, from the customer all the way to the last supplier.
Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows.

7. What is a Supply Chain? P&G or other manufacturer Jewel or third
party DC
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Plastic
Producer
Tenneco
Packaging
Chemical
manufacturer
(e.g. Oil Company)
Notes:
Supply chain involves everybody, from the customer all the way to the last supplier.
Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows.
Chemical
manufacturer
(e.g. Oil Company)
Paper
Manufacturer
Timber
Industry

8. Formulas for Measuring Supply-Chain Performance
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Formulas for Measuring Supply-Chain Performance
One of the most commonly used measures in all of operations management is “Inventory Turnover”
In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time 17

9. Example of Measuring Supply-Chain Performance
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Suppose a company’s new annual report claims their costs of goods sold for the year is $160 million and their total average inventory (production materials + work-in-process) is worth $35 million. This company normally has an inventory turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it mean?

10. Example of Measuring Supply-Chain Performance (Continued)
10-10
= $160/$35
= 4.57
Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before. 17

11. Decision Phases of a Supply Chain
Supply chain strategy or design
Supply chain planning
Supply chain operation

12. Supply Chain Strategy or Design
Decisions about the structure of the supply chain and what processes each stage will perform
What are some strategic supply chain decisions?
Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems
Chain design must support strategic objectives
Design decisions are long-term and expensive to reverse – must address market uncertainty

13. Definition of a set of policies that govern short-term operations
Supply Chain Planning
Definition of a set of policies that govern short-term operations
Fixed by the supply configuration from previous phase
Starts with a forecast of demand in the coming year

14. Supply Chain Planning
What are some planning decisions?
Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting, backup locations
Inventory policies
Timing and size of market promotions
Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

15. Supply Chain Operation
Time horizon is weekly or daily
Decisions regarding individual customer orders
Supply chain configuration is fixed and operating policies are determined
Goal is to implement the operating policies as effectively as possible – some examples?
Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders
Much less uncertainty (short time horizon)

16. Process View of a Supply Chain
Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages
Push/pull view: processes in a supply chain are divided into two categories:
Executed in response to a customer order (pull)
Executed in anticipation of a customer order (push)

17. Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage.
One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done.
This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner.
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier

18. Cycle View of a Supply Chain
Each cycle occurs at the interface between two successive stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Cycle view clearly defines processes involved and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process.

19. Customer order fulfillment Customer order receiving
Customer Order Cycle
Involves all processes directly involved in receiving and filling the customer’s order
Customer arrival
Customer order entry
Customer order fulfillment
Customer order receiving

20. Retail order fulfillment Retail order receiving
Replenishment Cycle
All processes involved in replenishing retailer inventories (retailer is now the customer)
Retail order trigger
Retail order entry
Retail order fulfillment
Retail order receiving

21. Order arrival from the distributor, retailer, or customer
Manufacturing Cycle
All processes involved in replenishing distributor (or retailer) inventory
Order arrival from the distributor, retailer, or customer
Production scheduling
Manufacturing and shipping
Receiving at the distributor, retailer, or customer

22. Procurement Cycle
All processes necessary to ensure that materials are available for manufacturing to occur according to schedule
Manufacturer orders components from suppliers to replenish component inventories
However, component orders can be determined precisely from production schedules (different from retailer/distributor orders that are based on uncertain customer demand)
Important that suppliers be linked to the manufacturer’s production schedule

23. Push/Pull View of Supply Chains
Procurement,
Customer Order
Manufacturing and
Cycle
Replenishment cycles
PUSH PROCESSES
PULL PROCESSES
In this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes.
They key difference is the uncertainty during the two phases.
Give examples at Amazon and Borders to illustrate the two views
Customer
Order Arrives

24. Push/Pull View of Supply Chain Processes
Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand
Pull: execution is initiated in response to a customer order (reactive)
Push: execution is initiated in anticipation of customer orders (speculative)
Push/pull boundary separates push processes from pull processes
Strategic supply chain decisions may lead to changing the push/pull boundary

25. Where is the push/pull boundary for L.L. Bean?
Example: L.L. Bean
Where is the push/pull boundary for L.L. Bean?
Customer order cycle is pull, remaining processes are push
What are the implications of moving the boundary to the replenishment cycle?

26. Where is the push/pull boundary for Dell?
Example: Dell
Where is the push/pull boundary for Dell?
Customer and manufacturing is a pull cycle
Procurement is a push cycle
What are the implications of moving the boundary to the customer cycle?

27. L.L. Bean vs. Dell Computer
How would you compare the two cycles?
Dell has fewer stages (customer, manufacturer, supplier) and more pull processes than L.L. Bean
Can these differences affect supply chain performance?
For Dell, no FG inventory, very low component inventory, supplier integration (demand info, part quality), faster new product introduction, outsources service/support (better coord.), close tracking of cash flows

28. Example: Snapple Acquisition
Quaker owns Gatorade and acquired Snapple in 1994 and tried to synergize the two distribution systems
Snapple produced under contract, sold through restaurants, strong in northeast and west coast
Gatorade manufactured by Quaker’s plants, sold in supermarkets and grocery stores, strong in south and southwest
Efforts to merge supply chains failed, and in 28 months Quaker sold Snapple for 20% less than purchase price

29. The Importance of Supply Chain Flows
Close connection between design and management of supply chain flows (product, information, and cash) and supply chain success
Dell: success
Quaker Oats (Snapple): failure
Supply chain decisions can play a significant role in the success or failure of a firm

30. The magnification of variability in orders in the supply-chain
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Bullwhip Effect
The magnification of variability in orders in the supply-chain
Retailer’s Orders
Wholesaler’s Orders
Manufacturer’s Orders
Quantity
Order
Quantity
Order
Quantity
Order
Time
Time
Time
A lot of retailers each with little variability in their orders….
…can lead to greater variability for a fewer number of wholesalers, and…
…can lead to even greater variability for a single manufacturer.

31. Hau Lee’s Concepts of Supply Chain Management
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Hau Lee’s Concepts of Supply Chain Management
Hau Lee’s approach to supply chain (SC) is one of aligning SC’s with the uncertainties revolving around the supply process side of the SC
A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies
Types of SC’s
Efficient SC’s
Risk-Hedging SC’s
Responsive SC’s
Agile SC’s 7

32. Hau Lee’s SC Uncertainty Framework
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Hau Lee’s SC Uncertainty Framework
Demand Uncertainty
Low (Functional products)
High (Innovative products)
Low
(Stable
Process)
High
(Evolving
Supply
Uncertainty
Efficient SC
Ex.: Grocery
Responsive SC
Ex.: Computers
Risk-Hedging SC
Ex.: Hydro-electric power
Agile SC
Ex.: Telecom 7

33. Types of Supply Chain Strategies
Efficient – highest cost efficiency
Risk-hedging – pool and share resources so that risks in supply disruption can be shared
Responsive – be responsive and flexible to customer needs
Agile – be responsive and flexible to customers, hedge risks of supply shortages

34. What is Outsourcing?
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Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers

35. Organizationally-driven Improvement-driven Financially-driven
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Reasons to Outsource
Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Cost-driven
Employee-driven 7

37. Value density is defined as the value of an item per pound of weight
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Value density is defined as the value of an item per pound of weight
It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped

38. Sourcing/Purchasing-System Design Matrix
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Sourcing/Purchasing-System Design Matrix

39. 10-39
Mass Customization
Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers
The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network

40. Mass Customization
Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers
The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network
Example: H-P customizing DeskJet printers with the power supply needed in various European countries once printers arrive at its distribution center in Germany

41. A typical supply chain would include which of the following?
10-41
Question Bowl
A typical supply chain would include which of the following?
Suppliers
Manufacturers
Distribution
All of the above
None of the above
Answer: d. All of the above 7

42. Answer: b. Costs of goods sold/Avg. aggregate inventory value
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Question Bowl
The supply chain measure of “Inventory Turnover” is which of the following ratios?
Avg. inventory value/total costs
Costs of goods sold/Avg. aggregate inventory value
Total costs of goods/Avg. costs of goods
Weeks worth of inventory/No. of weeks
None of the above
Answer: b. Costs of goods sold/Avg. aggregate inventory value 7

43. 10-43
Question Bowl
If the “cost of goods sold” for a company is $1,000,000 and the “average aggregate inventory value” is $25,000, which of the following is the “inventory turnover”? 10 25 40 50
None of the above
Answer: c. 40 (1,000,000/25,000=40) 7

44. 10-44
Question Bowl
If the “cost of goods sold” for a company is $250,000 and the “average aggregate inventory value” is $5,000, which of the following is the “inventory turnover”? 10 25 40 50
None of the above
Answer: d. 50 (250,000/5,000=50) 7

45. 10-45
Question Bowl
If the “cost of goods sold” for a company is $1,000,000 and the “average aggregate inventory value” is $50,000, which of the following is the “weeks of supply” measure for supply chain performance?
1 week
2.6 weeks
20 weeks
30 weeks
None of the above
Answer: b. 2.6 (50,000/1,000,000)x52=2.6) 7

46. Continuous replenishing Stable supply process Evolving supply process
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Question Bowl
Which of the following refers to the phenomenon of increasing variability as we move from the customer to the producer in the supply chain?
Continuous replenishing
Stable supply process
Evolving supply process
Agile supply chains
None of the above
Answer: e. None of the above (The correct term is “Bullwhip effect”.) 7

47. Answer: d. All of the above
10-47
Question Bowl
Which of the following are reasons why an organization should use “outsourcing” as a supply chain strategy?
Reduces investment in assets
Turns fixed costs into variable costs
Gives employees a stronger career
All of the above
None of the above
Answer: d. All of the above 7

48. Answer: b. Highway (trucking)
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Question Bowl
Which of the following “transportation modes” provides flexibility in delivery, timing and at reasonable rates for small quantities and over short distances?
Rail
Highway (trucking)
Water
Pipeline
Air
Answer: b. Highway (trucking) 7

49. 10-49
End of Chapter 10