Chapter 10 Supply Chain Strategy

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

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

What is Supply Chain Management? 10-4 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

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.

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.

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

Formulas for Measuring Supply-Chain Performance 10-8 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

Example of Measuring Supply-Chain Performance 10-9 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?

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

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

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

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

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

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)

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)

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

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.

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

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

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

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

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

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

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?

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?

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

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

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

The magnification of variability in orders in the supply-chain 10-30 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.

Hau Lee’s Concepts of Supply Chain Management 10-31 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

Hau Lee’s SC Uncertainty Framework 10-32 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

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

What is Outsourcing? 10-34 Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers

Organizationally-driven Improvement-driven Financially-driven 10-35 Reasons to Outsource Organizationally-driven Improvement-driven Financially-driven Revenue-driven Cost-driven Employee-driven 7

Value density is defined as the value of an item per pound of weight 10-37 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

Sourcing/Purchasing-System Design Matrix 10-38 Sourcing/Purchasing-System Design Matrix

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

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

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

Answer: b. Costs of goods sold/Avg. aggregate inventory value 10-42 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

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

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

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

Continuous replenishing Stable supply process Evolving supply process 10-46 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

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

Answer: b. Highway (trucking) 10-48 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

10-49 End of Chapter 10