1 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 10 Supply-Chain Strategy

2 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Supply-Chain Management Measuring Supply-Chain Performance Bullwhip Effect Outsourcing JIT Purchasing Value Density Mass Customization OBJECTIVES

3 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together What is a Supply-Chain? Defined Suppliers Inputs Suppliers Service support operations Transformation Manufacturing Local service providers Localization Distribution Customers Output Customers Services Supply networks Manufacturing

4 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved What is Supply-Chain Management? Defined 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 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Applies a total systems approach to managing the entire flow of: —Information —Materials, and —Services Supply Chain Management Raw Material suppliers Factories & warehouses End customer

6 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved SCM Functions Forecasting demand Selecting suppliers Ordering materials Inventory control Scheduling production Shipping & delivery Information management Quality management Customer service

7 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Uncertainty In Supply Chain Wrong forecasts Late deliveries Poor quality Machine breakdowns Canceled orders Erroneous information

8 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Supply Chain Design Strategic issue — Reliable delivery of quality products — At least cost — As fast as possible Apply quality management principles Benchmark to learn what is possible Work with suppliers & customers to achieve goals Control inventory

9 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved 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

10 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Example of Measuring Supply- Chain Performance 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?

11 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Example of Measuring Supply-Chain Performance (Continued) = $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. = $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.

12 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Bullwhip Effect Order Quantity Time Retailer’s Orders Order Quantity Time Wholesaler’s Orders Order Quantity Time Manufacturer’s Orders The magnification of variability in orders in the supply-chain 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.

13 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved  Functional products: — Staples bought in wide range of retail outlets — Satisfy basic needs that do not change over time — Stable predictable demand and long life cycles — Stability invites competition—low profit margins — Incentives to buy—innovative products  Innovative products: — High profit margins and volatile demand — Have short life cycles—few months — Quite unpredictable — Requires different supply chain Matching Supply-Chains with Products

14 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved 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

15 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Hau Lee’s SC Uncertainty Framework Demand Uncertainty Low (Functional products) High (Innovative products) Efficient Supply Chains E.g.: Grocery Responsive SC E.g.: Computers Risk-Hedging SC E.g.: Hydro-electric power Agile SC E.g.: Telecom Low (Stable Process) High (Evolving Process) Supply Uncertainty

16 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved What is Outsourcing? Defined Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers

17 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Reasons to Outsource Organizationally-driven Improvement-driven Financially-driven Revenue-driven Cost-driven Employee-driven

18 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Single Sourcing Purchase from very few (or one) suppliers Make it worth supplier’s while to invest More control of quality Partnering — Supplier involved in product design process

19 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved JIT Purchasing—Suppliers Purchase materials 50% manufacturing cost Purchasing plays crucial role in SCM Quality starts with purchasing Purchasing must ensure parts & materials are: — Of correct quality — In correct quantity — Delivered on time So, select suppliers committed to quality Supplier integral part of company’s quality program

20 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved JIT Purchasing—Suppliers Fewer, nearby suppliers Repeat business Support suppliers’ competitiveness Clusters of remote suppliers Limit competitive bidding to new parts Resist vertical integration Encourage suppliers to implement JIT purchasing

21 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Supplier-Customer Relationship Customer service means: — Prompt delivery — On-demand shipments — On-time delivery — Directly to point of use — Frequent deliveries: even several a day Continuous (JIT) replenishment — Reduces need for warehouses and inventories — Suppliers may have to relocate new customer — Supplier become internal part of customer

22 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Partnership Relationship Continuing relationship involving — commitment over an extended time period, — exchange of information, and — acknowledgement of the risks & rewards of the relationship.

23 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved JIT Purchasing—Requirements Reduced lot sizes Frequent and reliable delivery schedules Reduced and highly reliable lead times Consistently high quality levels for purchased materials

24 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved JIT Purchasing--Quantities Steady output rate (a desirable prerequisite) Frequent deliveries in small lot quantities Long-term contract agreements with minimal release paperwork Deliver quantities variable from release to release but fixed for whole contract term

25 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved JIT Purchasing—Benefits Consistent quality Savings on resources Lower costs Special attention Saving on tooling Loyalty associated with long-term relationships with suppliers

26 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Value Density Defined 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

27 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Mass Customization Defined 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