1. Supply Chain Management
SYST 4050 Slides
Supply Chain Management
Lecture 5
Chapter 1

2. Outline Today Thursday Homework 1 Chapter 3 Start with Chapter 4
SYST 4050 Slides
Outline
Today
Chapter 3
Start with Chapter 4
Thursday
Finish Chapter 4
Introduction to Excel Solver
Homework 1
Due Thursday January 28 before class
Chapter 1

3. From Strategy to Decisions
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From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
To understand how a company can improve supply chain performance in terms of responsiveness and efficiency we must examine (and make decisions about) the logistical and cross-functional drivers of supply chain performance
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Logistical drivers
Cross functional drivers
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4. Facilities Facility decisions Metrics
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Facilities
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Facility decisions
Production facility
Flexible versus dedicated
Product focus (fabrication and assembly) versus functional focus (fabrication or assembly)
Storage facility
Cross-docking versus storage
Metrics
Capacity
Utilization
Flow time (theoretical and actual)
Flow time efficiency
Product variety
Average batch size
Service level
Overall tradeoff: Cost of the number, location and type versus level of responsiveness
How could a car manufacturer increase responsiveness through its facilities?
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5. Toyota Worldwide operations
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Toyota
Worldwide operations
Source:
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6. Honda East Liberty, OH Marysville, OH
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Honda
East Liberty, OH
Using Honda's flexible manufacturing, this plant produces cars and light trucks on the same assembly line
Marysville, OH
One of the most integrated and flexible auto plants in North America, it houses stamping, welding, paint, plastic injection molding and assembly under one roof.
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7. How could a grocery retailer use inventory to increase responsiveness?
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Inventory
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Inventory decisions
Cycle inventory
Safety inventory
Seasonal inventory
Level of product availability
Metrics
Average inventory
Units that have been in stock for more than a specified period of time
Fill rate (fraction of orders that were met on time from inventory)
Fraction of time out of stock
Overall tradeoff: Level of inventory versus level of product availability
How could a grocery retailer use inventory to increase responsiveness?
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8. Overall tradeoff: Cost and speed of transportation
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Transportation
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Transportation decisions
Mode of transportation
Air, package carriers, truck, rail, sea, pipeline, intermodal, …
Metrics
Inbound/outbound cost
Inbound/outbound cost per shipment
Shipment sizes
Fraction transported by mode
Overall tradeoff: Cost and speed of transportation
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9. Freight shipments in America 2002
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Transportation Facts
7.7%
0.1%
0.3%
66.0%
60.0%
32.7%
3.8%
12.4%
28.3%
8.6%
15.3%
16.5%
2.8%
10.8%
17.0%
11.0%
1.4%
5.1%
Freight shipments in America 2002
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10. SYST 4050 Slides
Transportation Facts
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11. Transportation Transportation decisions Metrics
SYST 4050 Slides
Transportation
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Transportation decisions
Design of transportation network
Route and network selection
Mode of transportation
Air, package carriers, truck, rail, sea, pipeline, intermodal, …
Metrics
Inbound/outbound cost
Inbound/outbound cost per shipment
Shipment sizes
Fraction transported by mode
Overall tradeoff: Cost and speed of transportation
How does Dell use transportation to improve responsiveness?
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12. Amazon.com Fulfillment and warehousing locations
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Amazon.com
Fulfillment and warehousing locations
Arizona, USA: Phoenix, Goodyear
Delaware, USA: New Castle
Indiana, USA: Whitestown, Munster
Kansas, USA: Coffeyville
Kentucky, USA: Campbellsville, Hebron (near CVG), Lexington, and Louisville
Nevada, USA: Fernley and Red Rock (near 4SD)
Pennsylvania, USA: Carlisle, Chambersburg, Hazleton, and Lewisberry
Texas, USA: Dallas/Fort Worth
Ontario, Canada: Mississauga (a Canada Post facility)
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13. SYST 4050 Slides
IKEA
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14. Accurate information helps both efficiency and responsiveness
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Information
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Information decisions
Push vs. Pull
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies
Metrics
Forecast horizon
Forecast errors
Ratio of demand variability and order variability
Accurate information helps both efficiency and responsiveness
How does Wal-Mart use information to improve its supply chain operations?
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15. SYST 4050 Slides
Information
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16. Sourcing Sourcing decisions Metrics
SYST 4050 Slides
Sourcing
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Sourcing decisions
In-House or outsource
Supplier selection
Metrics
Days payable outstanding
Purchase price statistics
Purchase quantities
Fraction on-time deliveries
Supply quality and lead-time
Overall tradeoff: Increased supply chain profit versus additional risk
How does Dell use sourcing to improve efficiency?
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17. Overall tradeoff: Increase company profits
SYST 4050 Slides
Pricing
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Pricing decisions
Pricing and economies of scale
Everyday low pricing versus high-low pricing
Fixed price versus menu price
Metrics
Profit margin
Average sale price
Average order size
Incremental fixed cost per order
Incremental variable cost per unit
Overall tradeoff: Increase company profits
How can Peapod use pricing of its delivery services to improve profitability?
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18. Designing a Supply Chain Network
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Designing a Supply Chain Network
In designing a supply chain, we need to consider how all supply chain drivers should be used together to support the competitive strategy of a company and maximize supply chain profits
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Chapter 1

19. From Strategy to Decisions
SYST 4050 Slides
From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
To understand how a company can improve supply chain performance in terms of responsiveness and efficiency we must examine (and make decisions about) the logistical and cross-functional drivers of supply chain performance
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Logistical drivers
Cross functional drivers
Chapter 1

20. The Role of Distribution in the Supply Chain
SYST 4050 Slides
The Role of Distribution in the Supply Chain
What is distribution?
Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain
Distribution-related cost
Make up about 10.5% of the US economy
Make up about 20% of the cost of manufacturing
Distribution can achieve supply chain objectives from low cost to high responsiveness
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21. SYST 4050 Slides
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22. SYST 4050 Slides
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23. The Role of Distribution in the Supply Chain
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The Role of Distribution in the Supply Chain
What differences in the retail environment may justify the fact that the fast-moving consumer goods supply chain in India has far more distributors than in the United States?
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24. Distribution Complexity in India
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Distribution Complexity in India
Dispersed population
30+ cities have populations of more than 1 million, but nearly 70% still live in rural areas
Retail density
More than 12 million retail outlets
Mom-and-pop stores account for more than 96% of the total market for many markets, organized retail represents only 4%
Infrastructure complexity
Very few full-service distribution companies operate in India
Some consumer multinational companies work with more than 1,000 distributors, which deliver its products to more than 1 million outlets across India
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25. Distribution Complexity
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Distribution Complexity
Baddi
Warehouse in Baddi
Cross state borders and checkpoints
Main distributor
Smaller shipments are transported to district headquarters (smaller distribution centers)
Village retailer order and transport the goods via state bus or a bullock cart
Rural village
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26. SYST 4050 Slides
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27. Distribution Complexity in India
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Distribution Complexity in India
India is becoming one of the world’s largest markets for consumer goods
Rapidly rising household incomes
One quarter of India’s population is between 20 and 35, a high spending segment in many markets
Overall retail market is more than $230 billion (2005) and expected to grow to $308 billion (2010)
Wal-Mart is teaming up with Bharti to establish wholesale and supply chain operations in India
Chapter 1

28. The Role of Distribution in the Supply Chain
SYST 4050 Slides
The Role of Distribution in the Supply Chain
What is distribution?
Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain
Distribution-related cost
Make up about 10.5% of the US economy
Make up about 20% of the cost of manufacturing
Distribution can achieve supply chain objectives from low cost to high responsiveness
Chapter 1

29. Response Time and Number of Facilities
SYST 4050 Slides
Response Time and Number of Facilities
Number of Facilities
Response Time
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30. Facility Cost and Number of Facilities
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Facility Cost and Number of Facilities
Facility
Costs
Number of Facilities
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31. Inventory Cost and Number of Facilities
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Inventory Cost and Number of Facilities
Inventory
Costs
Number of Facilities
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32. Transportation Cost and Number of Facilities
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Transportation Cost and Number of Facilities
Transportation
Costs
Includes both inbound and outbound transportation cost
If the number of facilities is increased to a point where inbound lot sizes are very small and result in a significant loss of economies of scale in inbound transportation, increasing the number of facilities increases total transportation cost
Number of Facilities
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33. Total Logistics Costs Logistics Costs Number of Facilities
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Total Logistics Costs
Logistics
Costs
Number of Facilities
Transportation Costs
Facility Costs
Logistics Costs
Inventory Costs
Each company should have at least the number of facilities that minimize total logistics costs
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34. Logistics Costs, Response Time and Number of Facilities (Fig 4.5)
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Logistics Costs, Response Time and Number of Facilities (Fig 4.5)
Response Time
Total Logistics Cost
When a company wants to reduce the response time, it may have to increase the number of facilities beyond the point that minimizes logistics costs
Number of Facilities
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35. Design Options For a Distribution Network
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Design Options For a Distribution Network
Two key decisions when designing a distribution network
Will the product be delivered to the customer location or picked up from a preordained site?
Will product flow through an intermediary?
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36. Design Options For a Distribution Network
SYST 4050 Slides
Design Options For a Distribution Network
Manufacturer Storage with Direct Shipping
Manufacturer Storage with Direct Shipping and In-Transit Merge
Distributor Storage with Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer or Distributor Storage with Consumer Pickup
Retail Storage with Consumer Pickup
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37. Manufacturer Storage with Direct Shipping (Drop Shipping)
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Manufacturer Storage with Direct Shipping (Drop Shipping)
Products are shipped directly to the consumer from the manufacturer
Retailer is an information collector:
Passes orders to the manufacturers
It does not hold product inventory
Inventory is centralized at manufacturer
Drop shipping offers the manufacturer the opportunity to postpone customization
Effective for high value, large variety, low demand products
High transportation cost
Example: eBags
Retailer
Manufacturers
Consumers
This model is also referred to as drop-shipping. Retailers carries no inventory. All inventory is at the manufacturer’s site. This is eBags model, which takes orders and arranges for the manufacturer’s to ship directly to the customers. Transportation cost is high because the average outbound distance to the end customer is large. Package carriers are used and are more expensive than TL or LTL. A good information infrastructure is needed. Response time tends to be large.
eBags
Nordstrom.com (for slow moving footwear)
W.W. Grainer (for slow moving items)
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38. Manufacturer Storage with Direct Shipping and In-Transit Merge
SYST 4050 Slides
Manufacturer Storage with Direct Shipping and In-Transit Merge
Shipments from multiple manufactures are merged before making a single delivery to the consumer
Shipments to Mergers are larger so economies of scale is achieved
Mergers increase facility costs
Response time may go up
Example:
Furniture retailers merge couches and coffee tables produced by different manufacturers
Dell merges a Dell PC with a Sony flat screen
Retailer
Mergers
Consumers
Manufacturers
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39. Distributor Storage with Carrier Delivery
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Distributor Storage with Carrier Delivery
Inventory is held at a warehouse which ships to customer by carriers
With respect to direct shipping
Inventory aggregation is less
Higher inventory costs
Facility costs are higher
Less information to track
Warehouses are physically closer to consumers which leads to
Faster response time
Lower transportation cost
Not effective for slow moving items
Example: Amazon
Distributor
Warehouse
Manufacturers
Consumers
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40. Distributor Storage with Last Mile Delivery
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Distributor Storage with Last Mile Delivery
Warehouse delivers to customers instead of carrier
Warehouses are located closer to consumers
Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale
Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher.
Products must be flowing fast to justify the infrastructure
Processing cost are high
Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress
Distributor
Warehouse
Manufacturers
Consumers
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41. Manufacturer or Distributor Storage With Customer Pickup
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Manufacturer or Distributor Storage With Customer Pickup
Customers come to pick up sites (warehouse, retailer) to get the products
If consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costs
Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located.
Significant amount of information is required
Increased handling cost
Example: 7dream.com
Distributor
Warehouse
Manufacturers
Consumers
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42. Retail Storage with Customer Pickup
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Retail Storage with Customer Pickup
Customers pick up product from retailers
Low transportation cost
High facility cost
Relative easy returnability
Increased inventory cost
No order tracking necessary
If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer
Effective for fast moving items
Example: Retail stores such as Wal-Mart and JCPenney
Retailer
Manufacturers
Consumers
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43. Comparing Distribution Networks
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Comparing Distribution Networks
1 = strongest performance
6 = weakest performance
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44. Comparing Distribution Networks
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Comparing Distribution Networks
Green = very suitable
Red = very unsuitable
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45. From brick-and-mortar to click-and-mortar
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From brick-and-mortar to click-and-mortar
What has been the impact of e-business on supply chain cost?
What has been the impact of e-business on customer service?
In the future, do you see the number of distributors decreasing, increasing, or staying about the same?
Impact of e-business on customer service
Response time to customers
Longer for products that cannot be downloaded
Product variety
Easier to provide a larger product variety
Product availability
Aggregation of inventory allows for improved availability
Customer experience
Much broader reach
Time to market
Easier to introduce new products quickly
Returnability
Cost of reverse flows increases
Impact of e-business on supply chain cost
Inventory
An e-business requires less inventory due to aggregation
Postponement can lower inventory cost
Facilities
An e-business requires less facilities because of centralizing operations
Reduced handling costs because fewer intermediaries are used
Transportation
Apart from digital products an e-business tends to have higher transportation cost (across the entire supply chain)
Information
Significant information infrastructure is needed
Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle?
Why should an e-business such as Amazon.com build more warehouses as its sales volume grows?
Chapter 1