1. © 2007 Pearson Education Supply Chain Strategy Chapter 10

2. © 2007 Pearson Education Supply Chain  Supply chain: The network of services, material, and information flows that link a firm’s customer relationship, order fulfillment, and supplier relationship processes to those of its supplier and customers.  Supply chain management: Developing a strategy to organize, control, and motivate the resources involved in the flow of services and materials within the supply chain.

3. © 2007 Pearson Education Creation of Inventory Inventory: A stock of materials used to satisfy customer demand or to support the production of services or goods. Scrap flow Inventory level Output flow of materials Input flow of materials

4. © 2007 Pearson Education Supply Chain for Manufacturing  Raw materials (RM): The inventories needed for the production of services or goods.  Work-in-process (WIP): Items, such as components or assemblies, needed to produce a final product in manufacturing.  Finished goods (FG): The items in manufacturing plants, warehouses, and retail outlets that are sold to the firm’s customers.

5. © 2007 Pearson Education Inventory at Successive Stocking Points SupplierManufacturing plantDistribution centerRetailer Rawmaterials Work in process Finishedgoods

6. © 2007 Pearson Education Supply Chain Tier 1 Tier 2 Supplier of materialsSupplier of services Tier 3 Customer Distribution center Manufacturer

7. © 2007 Pearson Education Inventory Measures of Supply Chain Performance  Average aggregate inventory value (AGV) is the total value of all items held in inventory for a firm. AGV = (# of A items)(Value of each A)+(# of B items)(Value of each B)+…  Weeks of supply: The average aggregate inventory value divided by sales per week at cost. Weeks of supply = Average aggregate inventory value Weekly sales (at cost)  Inventory turnover is annual sales at cost divided by the average aggregate inventory value maintained for the year. Inventory turnover = Annual sales at (cost) Average aggregate inventory value

8. © 2007 Pearson Education Calculating Inventory Measures Example 10.1 The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million. The best inventory turnover in the industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do? Using Inventory Estimator Solver Weeks of supply = $2 mil / ($10 mil)(52 wks.) = 10.4 weeks Inventory turns = $10 mil. / $2 mil. = 5 turns/yr

9. © 2007 Pearson Education Application 10.1

10. © 2007 Pearson Education Supply Chain Process Measures  Percent of orders taken accurately  Time to complete the order placement process  Customer satisfaction with the order placement process Customer Relationship  Percent of incomplete orders shipped  Percent of orders shipped on time  Time to fulfill the order  Percent of botched services or returned items  Cost to produce the service or item  Customer satisfaction with the order fulfillment process  Inventory levels of WIP and FG Order Fulfillment  Percent of suppliers’ deliveries on time  Suppliers’ lead times  Percent defects in services and purchased materials  Cost of services and purchased materials Supplier Relationship

11. © 2007 Pearson Education Links to Financial Measures  Return on Assets (ROA): is net income divided by total assets.  Managing the supply chain so as to reduce the aggregate inventory investment will reduce the total assets portion of the firm’s balance sheet.  Working Capital: Money used to finance ongoing operations.  Weeks of inventory and inventory turns are reflected in working capital.  Decreasing weeks of supply or increasing inventory turns reduces the working capital.

12. © 2007 Pearson Education Links to Financial Measures  Cost of Goods Sold: Buying materials at a better price, or transforming them more efficiently, improves a firm’s cost of goods sold measure and ultimately its net income.  Total Revenue: Increasing the percent of on-time deliveries to customers increases total revenue because satisfied customers will buy more services and products.  Cash Flow: Cash-to-cash is the time lag between paying for the services and materials needed to produce a service or product and receiving payment for it.  The shorter the time lag, the better the cash flow position of the firm because it needs less working capital.

13. © 2007 Pearson Education Supply Chain Dynamics  Supply chain dynamics can wreak havoc on supply chain performance measures.  Actions of downstream supply chain members can affect the operations of upstream members.  The bullwhip effect: The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the chain.

14. © 2007 Pearson Education Supply Chain Dynamics for Facial Tissue Quantity ordered Time Bullwhip Effect

15. © 2007 Pearson Education External Value-Chain Linkages First-Tier Supplier Service/Product Provider Support Processes Supplier Relation- ship Process New Service/ Product Development Process Order- Fulfill- ment Process Business-to- Business (B2B) Customer Relationship Process Supplier Relation- ship Process New Service/ Product Development Process Order- Fulfill- ment Process Business-to- Customer (B2C) Customer Relationship Process External Suppliers External Consumers

16. © 2007 Pearson Education External Causes of Supply Chain Disruption  Volume changes.  Customers may change ordered quantity or delivery date.  Service and product mix changes.  Customers may change the mix of ordered items.  Late deliveries.  Late deliveries can force a switch in production schedules.  Underfilled shipments.  Partial shipments can cause a switch in production schedule or quantity produced.

17. © 2007 Pearson Education Internal Causes of Supply Chain Disruption  Internally generated shortages of parts.  Engineering changes to the design of services or products are disruptive.  New service or product introductions disrupt the supply chain and may require a new supply chain.  Service or product promotions may create a demand spike.  Information errors such as demand forecast errors, faulty inventory counts, or miscommunication with suppliers.

18. © 2007 Pearson Education The Customer Relationship Process  Electronic Commerce (e-commerce) is the application of information and communication technology anywhere along the value chain of business processes.  Business-to-Consumer Systems (B2C) allows customers to transact business over the Internet.  Business-to-Business Systems (B2B) involves commerce between firms.  The biggest growth area, it is currently about 70% of the regular economy. E-Commerce and the Marketing Process

19. © 2007 Pearson Education E-Commerce and the Order Placement Process  Cost reduction: Using the Internet can reduce the costs of processing orders.  Revenue flow increase: Reduction in the time lag associated with billing the customer or waiting for checks.  Global Access: Available 24 hours a day.  Price flexibility: Prices can easily be changed as the need arises. The Customer Relationship Process

20. © 2007 Pearson Education The Order Fulfillment Process  Centralized placement: Keeping all the inventory at one location such as a firm’s manufacturing plant or a warehouse and shipping directly to customers.  Inventory pooling is a reduction in inventory and safety stock because of the merging of variable demands from customers.  A higher than expected demand from one customer can be offset by a lower-than-expected demand from another.  A disadvantage is the added cost of shipping smaller, uneconomical quantities directly to customers over long distances Inventory Placement

21. © 2007 Pearson Education The Order Fulfillment Process  Forward placement is locating stock closer to customers at a warehouse, wholesaler, or retailer.  Two advantages: faster delivery times and reduced transportation  Disadvantage: larger overall inventories because safety stock for the item must increase to take care of uncertain demands at each distribution center Inventory Placement

22. © 2007 Pearson Education The Order Fulfillment Process  Vendor-managed inventories (VMI): An extreme application of forward placement involving locating inventories at the customer’s facilities.  Key ingredients are:  Collaborative effort requires trust & accountability.  Cost savings is realized by eliminating excess inventory.  Customer service: The supplier is frequently on site for improved response times and reducing stockouts.  Written agreement on procedures, methods, and schedules are clearly specified. Vendor-Managed Inventories

23. © 2007 Pearson Education Order Fulfillment Programs  Continuous Replenishment Program (CRP) A VMI method in which the supplier monitors the customer’s inventory levels and replenishes stock as needed.  Radio Frequency Identification (RFID) A method for identifying items through the use of radio signals from a tag attached to an item.

24. © 2007 Pearson Education Distribution Processes  Ownership: Rather than negotiate with a contract carrier, a firm has the most control over the distribution process if it owns and operates it, thereby becoming a private carrier.  Firms may use a combination of the five basic modes of transportation: truck, train, ship, pipeline, and airplane.  Cross-Docking: The packing of products on incoming shipments so that they can be easily sorted at intermediate warehouses for outgoing shipments based on their final destinations.  Items are carried from the incoming-vehicle docking point to the outgoing-vehicle docking point without being stored in inventory at the warehouse.

25. © 2007 Pearson Education The Supplier Relationship Process  The sourcing process qualifies, selects, manages the contracts, and evaluates suppliers.  The design collaboration process focuses on jointly designing new services or products with key suppliers, seeking to eliminate costly delays and mistakes incurred when many suppliers concurrently, but independently, design service packages or manufactured components.  The information exchange process facilitates the exchange of pertinent operating information, such as forecasts, schedules, and inventory levels between the firm and its supplier.

26. © 2007 Pearson Education Supplier Selection and Certification  Green purchasing: The process of identifying, assessing, and managing the flow of environmental waste and finding ways to reduce it and minimize its impact on the environment.  Supplier certification programs verify that potential suppliers have the capability to provide the services or materials the buyer firm requires.

27. © 2007 Pearson Education Supplier Relations  Competitive orientation views negotiations between buyer and seller as a zero-sum game. Whatever one side loses, the other side gains, and short-term advantages are prized over long- term commitments.  Cooperative orientation is where the buyer and seller are partners, each helping the other as much as possible.  A cooperative orientation favor few suppliers of a particular service or item.

28. © 2007 Pearson Education Supplier Relations, Cooperative orientation…  One advantage of reducing the number of suppliers in the supply chain is a reduction in the complexity of managing them.  However, this may increase the risk of an interruption in the supply. It also means less opportunity to drive a good bargain unless the buyer has a lot of clout  Sole sourcing is the awarding of a contract for a service or item to only one supplier.

29. © 2007 Pearson Education Centralized versus Localized Buying  Centralized buying increases purchasing clout. Savings can be significant, often 10% or more.  Increased buying power can mean getting better service, ensuring long-term supply availability, or developing new supplier capability.  The biggest disadvantage is loss of local control.  Centralized buying is undesirable for items unique to a particular facility.  The best solution may be one where both local autonomy and centralized buying are possible.

30. © 2007 Pearson Education Value Analysis  Value analysis is a systematic effort to reduce the cost or improve the performance of services or products, either purchased or produced.  Early supplier involvement is a program that includes suppliers in the design phase of a service or product.  Presourcing: A level of supplier involvement in which suppliers are selected early in a product’s concept development stage and given significant, if not total, responsibility for the design of certain components or systems of the product.

31. © 2007 Pearson Education Supply Chain Strategies  Efficient supply chains focus on the efficient flows of services and materials, keeping inventories to a minimum.  Work best where demand is highly predictable.  Responsive supply chains are designed to react quickly.  Work best when firms offer a great variety of services or products and demand predictability is low.

32. © 2007 Pearson Education Environment & Design Factors Design Factors Efficient Supply Chains Responsive Supply Chains Environment Factors Efficient Supply Chains Responsive Supply Chains

33. © 2007 Pearson Education Mass Customization  Mass Customization: A strategy whereby a firm’s flexible processes generate a wide variety of personalized services or products at reasonably low costs.  Competitive advantages :  Managing customer relationships. It requires detailed inputs from customers so that the ideal service or product can be produced.  Eliminating finished goods inventory. Producing to a customer’s order eliminates finished goods inventory.  Increasing perceived value. It increases the perceived value of services or products.  Postponement is when some of the final activities in the provision of a service or product are delayed until the orders are received.  Channel assembly is when members of the distribution channel act as if they were assembly stations in the factory.

34. © 2007 Pearson Education Outsourcing  A Make-or-buy decision is a managerial choice between whether to outsource a process or do it in-house.  Outsourcing: Paying suppliers and distributors to perform processes and provide needed services and materials.  Vertical integration:  Backward integration is a firm’s movement upstream toward the sources of raw materials, parts, and services through acquisitions.  Forward integration is acquiring more channels of distribution, such as distribution centers (warehouses) and retail stores, or even business customers.

35. © 2007 Pearson Education Offshoring  Offshoring is a supply chain strategy that involves moving processes to another country. Factors that influence the offshoring decision include:  Pitfalls of offshoring include:  Not making a good-faith effort to fix the existing process  Technology transfer  Difficulties integrating processes  Tariffs and Taxes  Internet  Comparative labor costs  Logistics costs  Labor Laws and Unions

36. © 2007 Pearson Education Virtual Supply Chains  Virtual Supply Chain: Outsourcing some part of the entire order fulfillment process with the help of sophisticated, Web- based information technology support packages.  Benefits include:  Reduced investment in inventories and order fulfillment infrastructure.  Greater service or product variety without the overhead of one’s own order fulfillment process.  Lower costs due to economies of scale. The supplier typically handles more volume than does the firm doing the outsourcing.  Lower transportation costs. With drop shipping in a virtual supply chain, the only transportation cost is shipping the goods from the wholesaler to the customer.

37. © 2007 Pearson Education Which Type of Supply Chain? Traditional Supply Chain is preferred when: 1.Sales volumes are high. 2.Order consolidation is important. 3.Small-order fulfillment capability of suppliers is important. Virtual Supply Chain is preferred when: 1.Demand is highly volatile. 2.High service or product variety is important.