1. Supply Chain Management
SYST 4050 Slides
Supply Chain Management
Lecture 4
Chapter 1

2. Outline Today Next week Homework 1 Chapters 2 and ?3 Chapter 4
SYST 4050 Slides
Outline
Today
Chapters 2 and ?3
Next week
Chapter 4
Introduction to Excel Solver/Chapter 5
Homework 1
Online tomorrow afternoon Friday January 21
Due Thursday January 28
Homework by in .doc .xls or .pdf format
Chapter 1

3. SYST 4050 Slides
Examples
Successful supply chain management requires decisions on the flow of information, product, and funds
Chapter 1

4. What is a strategy in general?
SYST 4050 Slides
Strategy
What is a strategy in general?
Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its structure of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations. 
Chapter 1

5. Strategy Corporate Strategy Competitive Strategy SYST 4050 Slides
Corporate strategy: mission statement
Competitive strategy: developed by the marketing people
Chapter 1

6. What is Competitive Strategy?
SYST 4050 Slides
What is Competitive Strategy?
Competitive strategy
Defines, relative to competitors, a company’s set of customer needs that it seeks to satisfy through its products and services
Wal-Mart
Everyday low prices (low cost retailer for a wide variety of products)
Coors
The coldest tasting beer in the world, brewed with Rocky Mountain spring water
Dell
Custom-made computer systems at a reasonable cost
How do you execute your competitive strategy?
Chapter 1

7. SYST 4050 Slides
Supply Chain Cycle
Reverse logistics
Marketing
Finance Accounting IT
Customer
Product design
Logistics
Suppliers
What is a logical point to start?
Prior to anything being produced it is of the company’s best interest to predict the level of demand (Marketing).
By conducting research and forecast demand. Once markets have been identified and demand has been established
Specifications and material required are decided (Product design)
Raw materials (Suppliers)
Supplied for production (Manufacturing)
Transport (Logistics)
Distribution centers, warehouses, retailers, customers (Customers)
Returns and recycling (Reverse logistics)
Data and feedback on products
Manufacturing
To execute a company’s competitive strategy, all functions that play a role must each develop their own strategy
Chapter 1

8. Strategy Corporate Strategy Competitive Strategy Supply Chain Strategy
SYST 4050 Slides
Strategy
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Chapter 1

9. What is Supply Chain Strategy?
SYST 4050 Slides
What is Supply Chain Strategy?
Supply chain strategy
Given a competitive strategy, what should a company’s supply chain do particularly well?
Wal-Mart
Everyday low prices (low cost retailer for a wide variety of products)
Buys from low cost producers, owns its infrastructure and distribution network
Coors
The coldest tasting beer in the world, brewed with Rocky Mountain spring water
Refrigerated transport, main facility near Rocky Mountains
Dell
Custom-made computer systems at a reasonable cost
Online ordering, no middle-man
Competitive Strategy
Supply Chain Strategy
Given a competitive strategy, what should a company’s supply chain do particularly well
For any company to be successful, its supply chain strategy and competitive strategy must fit together
Competitive Strategy
Supply Chain Strategy
Competitive Strategy
Supply Chain Strategy
Chapter 1

10. What is Strategic Fit? Strategic fit How is strategic fit achieved?
SYST 4050 Slides
What is Strategic Fit?
Strategic fit
Both the competitive strategy and the supply chain strategy have aligned goals
Matching customer needs with supply chain capabilities
How is strategic fit achieved?
Understanding the customer and supply chain uncertainty
Understanding the supply chain capabilities
Achieving strategic fit
Chapter 1

11. 1. Understanding the Customer and Supply Chain Uncertainty
SYST 4050 Slides
1. Understanding the Customer and Supply Chain Uncertainty
Understanding customer (demand) uncertainty
Demand varies along certain attributes
Quantity in each lot, response time, variety of products needed, service, price, innovation, etc
Implied demand uncertainty
Demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand
Understanding customer uncertainty: Demand varies along certain attributes
Implied demand uncertainty is demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand
Demand uncertainty reflects the uncertainty of customer demand for a product
Table shows how various customer needs affect the implied demand uncertainty.
Chapter 1

12. 1. Understanding the Customer and Supply Chain Uncertainty
SYST 4050 Slides
1. Understanding the Customer and Supply Chain Uncertainty
Understanding supply uncertainty
Supply uncertainty is strongly affected by the life-cycle position of the product. New products being introduced have higher supply uncertainty than mature products
Chapter 1

13. 1. Understanding the Customer and Supply Chain Uncertainty
SYST 4050 Slides
1. Understanding the Customer and Supply Chain Uncertainty
Motorola 4th Quarter Wireless Sales Growth Lower Than Order Growth, The Dow Jones News Service, Nov. 11, 1999
Motorola announces that its inability to meet demand was due to the shortage of certain types of components
Sony Computer Says Sales of New Game Product to Be Delayed, The Dow Jones News Service, Dec. 9, 1998
Due to production problems, Sony Computer has decided to push back, by a month, the introduction of PocketStation, a video-game product.
Apple Computer Inc. Cuts 4th-period Forecast Citing Parts Shortages, Product Delays, The Wall Street Journal, Sept. 15, 1995
Apple announces that earnings would drop because of persistent shortages of key components and delays in ramping up production of new products.
Chapter 1

14. 1. Understanding the Customer and Supply Chain Uncertainty
SYST 4050 Slides
1. Understanding the Customer and Supply Chain Uncertainty
Chapter 1

15. 1. Understanding the Customer and Supply Chain Uncertainty
SYST 4050 Slides
1. Understanding the Customer and Supply Chain Uncertainty
Chapter 1

16. 1. Understanding the Customer and Supply Chain Uncertainty
SYST 4050 Slides
1. Understanding the Customer and Supply Chain Uncertainty
Demand Uncertainty
Demand Uncertainty
Low
(Functional Product)
Low
(Functional Product)
High
(Innovative Product)
Low
(Functional Product)
Low
(Functional Product)
High
(Innovative Product)
Basic Goods, Most Commodities
Fashion, Computers, Pop Music, Toys
Efficiency, Information Integration, Auto-Replenishment, VMI
(Efficient SC)
Make-to-Order, Flexible Mfg, Accurate Response, Postponement
(Flexible SC)
Low
(Stable Process)
Low
(Stable Process)
Supply Uncertainty
Some Power, Some Food Produce,
Precious Metals
Telecom, High-end Servers, Semiconductor
Buffer Inventory, Shared Resources, Multi-Sourcing, Info Sharing
(Risk-Hedging SC)
Supply Network, Postponement, Design Collaboration
(Agile SC)
High
(Evolving Process)
High
(Evolving Process)
Source: Hau Lee, “Aligning supply chain strategies with product uncertainties”, California Management Review, 44(3), 2002
Chapter 1

17. 2. Understanding the Supply Chain Capabilities
SYST 4050 Slides
2. Understanding the Supply Chain Capabilities
Supply chain capabilities
Supply chain responsiveness
Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc
Supply chain efficiency (low cost)
Celestial Seasoning
ProBuild
Mortgage
Interceptor Body Armor
Crocs
Netflix
Highly efficient
Highly responsive
Somewhat responsive
Somewhat efficient
Integrated steel mills
Hanes apparel
Most automotive production
Seven-Eleven Japan
Chapter 1

18. Achieving Strategic Fit
SYST 4050 Slides
Achieving Strategic Fit
What is the right supply chain for your product?
Responsive
supply chain
Zone of strategic fit
Cost-effective
supply chain
Implied demand
uncertainty
Low
(functional products)
High
(innovative products)
Chapter 1

19. Achieving Strategic Fit
SYST 4050 Slides
Achieving Strategic Fit
What is the right supply chain for your product over its life cycle?
Responsive
supply chain
Zone of strategic fit
Cost-effective
supply chain
Implied demand
uncertainty
Low
(functional products)
High
(innovative products)
Chapter 1

20. Complete Strategic Fit
SYST 4050 Slides
Complete Strategic Fit
Competitive Strategy
Product
Development
Strategy
Marketing
and Sales
Strategy
Supply Chain
Strategy
Information Technology Strategy
To achieve complete strategic fit, a firm must ensure that all its functions maintain consistent strategies that support the competitive strategy
Finance Strategy
Human Resources Strategy
A firm must ensure that all its functions maintain consistent strategies that support the competitive strategy
Chapter 1

21. Achieving Strategic Fit
SYST 4050 Slides
Achieving Strategic Fit
Strategic fit
Given a competitive strategy, what should a company’s supply chain do particularly well?
Wal-Mart
Everyday low prices (low cost retailer for a wide variety of products)
Buys from low cost producers, owns its infrastructure and distribution network
Coors
The coldest tasting beer in the world, brewed with Rocky Mountain spring water
Refrigerated transport, main facility near Rocky Mountains
Dell
Custom-made computer systems at a reasonable cost
Online ordering, no middle-man
Given a competitive strategy, what should a company’s supply chain do particularly well
For any company to be successful, its supply chain strategy and competitive strategy must fit together
Chapter 1

22. SYST 4050 Slides
Key Observations
There is no supply chain strategy that is always right
There is a right supply chain strategy for a given competitive strategy
A company’s competitive strategy defines (relative to its competitors) the set of customer needs that it seeks to satisfy through its products and services
Chapter 1

23. Issues Affecting Strategic Fit
SYST 4050 Slides
Issues Affecting Strategic Fit
Increasing variety of products
Firms sell different products to different customer segments
Decreasing product life cycles
Demand and supply characteristics change as a product goes through its life cycle
Increasingly demanding customers
Customers are constantly demanding improvements
Fragmentation of supply chain ownership
Harder to coordinate a supply chain broken into many owners
Globalization and competitive changes over time
More competitors may result in an increased emphasis on variety at a reasonable price
Chapter 1

24. Evolution of Supply Chain Management
SYST 4050 Slides
Evolution of Supply Chain Management
1950s
1960s
1970s
1980s
1990s
2000s
Beyond
Traditional Mass Manufacturing
Inventory Management/Cost
Optimization
JIT, TQM, BPR,
Alliances
SCM Formation/
Extensions
Further Refinement of
SCM Capabilities
Chapter 1

25. SYST 4050 Slides
Scope of Strategic Fit
Suppliers
Manufacturer
Distributor
Retailer
Customer
Intercompany Interfunctional maximize SC surplus
Intracompany Interfunctional maximize company profit
Competitive Strategy
Product Dev. Strategy
Intracompany Intrafunctional minimize functional cost
Supply Chain Strategy
Intracompany Intraoperation minimize local cost
Scope of strategic fit refers to the functions within the company and the stages across the supply chain that devise an integrated strategy with a shared objective
Intracompany Intraoperation Scope:
One operation within a functional area in a company
Each operation within each stage of the supply chain devises a strategy independently and attempts to optimize its own performance independently
Usually results in different operations having conflicting objectives – does not maximize total supply chain profits
Intracompany Intrafunctional Scope:
Strategic fit is expanded to include all operations within a function
Attempt to minimize cost for the entire function
Intracompany Interfunctional Scope:
All functional strategies within a company are developed to support each other and the company’s competitive strategy
Strategic fit is expanded to include all functions in a firm
Goal is to maximize company profit
Intercompany Interfunctional Scope:
Increasing supply chain surplus increases the amount to be shared
All stages coordinate strategy across all functions to ensure that they best meet the customer’s needs and maximize supply chain surplus
Goal is to maximize the supply chain surplus
Marketing Strategy
Integration of business functions, departments, and companies leads to successful SCM
Chapter 1

26. Harold Sirkin (Vice President of the Boston Consulting Group)
SYST 4050 Slides
Scope of Strategic Fit
“As the economy changes, as the competition becomes more global, it’s no longer company versus company but supply chain versus supply chain”
Harold Sirkin (Vice President of the Boston Consulting Group)
Chapter 1

27. SYST 4050 Slides
Examples
Successful supply chain management requires decisions on the flow of information, product, and funds
Chapter 1

28. 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 drivers of supply chain performance
Responsiveness
Efficiency
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Logistical drivers
Cross functional drivers
Chapter 1

29. Supply Chain Drivers Facilities Inventory Transportation Information
SYST 4050 Slides
Supply Chain Drivers
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Chapters 5, 6
Chapters 10, 11, 12
Chapters 4, 13
Chapters 7, 8, 9, 16, 17
Chapter 14
Chapter 15
Chapter 1

30. Facilities Facility decisions Metrics
SYST 4050 Slides
Facilities
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?
Chapter 1

31. Honda East Liberty, OH Marysville, OH
SYST 4050 Slides
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.
Chapter 1

32. How could a grocery retailer use inventory to increase responsiveness?
SYST 4050 Slides
Inventory
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?
Chapter 1

33. Transportation Transportation decisions Metrics
SYST 4050 Slides
Transportation
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?
Chapter 1

34. Amazon.com Fulfillment and warehousing locations
SYST 4050 Slides
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)
Chapter 1

35. SYST 4050 Slides
IKEA
Chapter 1

36. Accurate information helps both efficiency and responsiveness
SYST 4050 Slides
Information
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?
Chapter 1

37. SYST 4050 Slides
Information
Chapter 1

38. Overall tradeoff: Increased supply chain profit versus additional risk
SYST 4050 Slides
Sourcing
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
Chapter 1

39. SYST 4050 Slides
Sourcing
Chapter 1

40. Overall tradeoff: Increase company profits
SYST 4050 Slides
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?
Chapter 1