Supply Chain Management Mid-Semester Review

Review Definition of supply chain Decision phases of supply chain Strategic, planning & operational Supply chain cycle times Customer order cycle, replenishment cycle, manufacturing cycle, and procurement cycle Impact on customer, retailer, distributor, manufacturing, and suppliers Cycle view varies from company to company

Weeks in Review Strategic scope Supply Chain Challenges Intracompany/intraoperational Intracompany/intrafunctional Intracompany/interfunctional Intercompany/interfunctional Supply Chain Challenges Achieving global optimization Managing uncertainty

Weeks in Review Prerequisites to effective supply chain management Top management support and commitment Quest for excellence Effective/efficient communication Relationship vs. exchange Team. Partnerships & alliances Examples

Weeks in Review Drivers of Supply Chain Performance Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Drivers How does a supply chain make the efficiency / responsiveness tradeoff and position at the appropriate point - using Inventory, Transportation, Facilities, and Information decisions.

Weeks in Review Considerations for Supply Chain Drivers

Flows in a Supply Chain Supply Chain Customer Product Information Funds Supply Chain

Supply Chain Enablers Organizational Infrastructure Information Technology Strategic Alliance Human Resource Management

Supply Chain Enablers

Organizational Infrastructure Coherent business strategy that aligns business units towards same goals – 32% Formal process-flow methodologies to enable the SCM improvements – 15% People committed to and responsible for cross-functional processes – 14% Right process metrics identified to guide operating units’ performance toward strategic organizational SCM objective - 13%

Weeks in Review Functional vs. Innovative Products: Functional (Predictable) Innovative (unpredictable) Product life cycle More than 2 years 3 months to 1 years Contribution margin 5% to 20% 20% to 60% Product variety Low (10 to 20 variants per category) High (often millions of variants per category Forecast accuracy (margin of error) 10% 40% to 100% Average stockout rate 1% to 2% 10% to 40% Average forced markdown 0% 10% to 25% Delivery Lead time 6 months to 1 year 1 day to 2 week

Weeks in Review Physically Efficient vs. Market-Responsive Physically Efficient Process Market-Responsive Process Primary purpose Supply predictable demand efficiently at the lowest possible cost Respond quickly to unpredictable demand to minimize stockouts, forced markdowns, and obsolete inventory Manufacturing focus Maintain high average utilization rate Deploy excess buffer capacity for flexibility Inventory strategy Generate high turns & lower inventory cost Deploy significant buffer stock of all stock items Lead-time focus Shorten lead time at low cost Invest in ways to reduce lead time Approach to choosing suppliers Select primarily for cost and quality Select primarily for speed, flexibility, and quality Product-design strategy Maximize performance at minimum product cost Use modular design to postpone product differentiation

Efficiency-Responsiveness Framework of Supply Chain Functional Product Innovative Products Match Mismatch Efficient Supply Chain Responsive Supply Chain

Zone of strategic fit in supply chain Responsive Supply Chain Responsiveness Spectrum Zone of Strategic Fit Efficient Supply Chain Implied Uncertainty Spectrum Uncertain Demand Certain Demand

Supply Chain Strategies Push-Based Supply Chain Pull-Based Supply Chain Push-Pull Supply Chain

Push-Pull Supply Chains The Supply Chain Time Line Push-Pull Boundary PUSH STRATEGY PULL STRATEGY Customers Suppliers Low Uncertainty High Uncertainty

Locating the Push-Pull Boundary The figure provides examples of the location of the push-pull boundary for various companies and industries What is the impact of pushing the push-pull boundary from right to left? Clearly as items move along the supply chain time line (from left to right) their value increase. Thus, locating the boundary as far to the left as possible will reduce inventory holding cost. However this is appropriate for products with short assembly and transportation lead times.

What is the Best Strategy? Demand uncertainty (C.V.) Delivery cost Unit price L H H L Economies of Scale Pull Push Pull Push I Computer II IV III

E-Fulfillment Requires a New Logistics Infrastructure

Distribution Strategies

E-business Opportunities: Reduce Facility Costs Eliminate retail/distributor sites Reduce Inventory Costs Apply the risk-pooling concept Centralized stocking Postponement of product differentiation Use Dynamic Pricing Strategies to Improve Supply Chain Performance Two Summary Slides: opportunities provided by e-business

E-business Opportunities: Supply Chain Visibility Reduction in the Bullwhip Effect Reduction in Inventory Improved service level Better utilization of Resources Improve supply chain performance Provide key performance measures Identify and alert when violations occur Allow planning based on global supply chain data

Logistics Design Decisions Determine the appropriate number of warehouses Determine the location of each warehouse Determine the size of each warehouse Allocate space for products in each warehouse Determine which products customers will receive from each warehouse

Logistics Design Decisions Determine the appropriate number of warehouses Determine the location of each warehouse Determine the size of each warehouse Allocate space for products in each warehouse Determine which products customers will receive from each warehouse

Decision Classifications Strategic Planning: Decisions that typically involve major capital investments and have a long term effect 1. Determination of the number, location and size of new plants, distribution centers and warehouses 2. Acquisition of new production equipment and the design of working centers within each plant 3. Design of transportation facilities, communications equipment, data processing means, etc.

Decision Classifications Tactical Planning: Effective allocation of manufacturing and distribution resources over a period of several months 1. Work-force size 2. Inventory policies 3. Definition of the distribution channels 4. Selection of transportation and trans-shipment alternatives

Decision Classifications Operational Control: Includes day-to-day operational decisions 1. The assignment of customer orders to individual machines 2. Dispatching, expediting and processing orders 3. Vehicle scheduling

Performance Measures What you measure is what you get Performance measures strongly affect the behavior of managers and employees Tailor your performance measures to fit company’s mission and strategy Over-reliance of a single measure might be detrimental to company’s long-term survivability

The Balanced Scorecard Framework Financial Perspective Internal Business Perspective How do we look to shareholders? GOALS MEASURES GOALS MEASURES What must we excel at? Customer Perspective Innovation & Learning Perspective How do customers see us? GOALS MEASURES GOALS MEASURES Can we continue to improve and create value?

Framework for Supply Chain Performance Metrics Business Strategy Supply Chain Strategy Supply Chain Objectives Operational Metrics Customer Service Metrics Financial metrics

Supply Chain Performance Framework Customer Service Metrics Goals Measures Operational Metrics Financial Metrics Goals Measures Goals Measures

Efficiency Frontier of a Single Product Line 10 Weeks of Supply Company B Company A 80% 100% Fill Rate

Critical Factors in SC Performance Metrics Establish performance objectives with customers in mind Consider using order windows as the basis for order fulfillment metrics Reflect reliability issues in the metrics they choose Implement metrics consistently throughout the supply chain Aggregate results as they move up the chain

Critical Factors in SC Performance Metrics (cont’d) Apply process control techniques to the business process Avoid pitting players in the systems against one another Collect only data you really intend to use Communicate the actions and rational to everyone

Bullwhip Effect Increasing propagation of variability upstream through the supply chain

Increasing Variability Upstream the Supply Chain –Bullwhip Effect

Impact of the Bullwhip Effect

What are the Causes…. Demand forecasting Long cycle times Min-max inventory level Order-up-to level orders increase more than forecasts Long cycle times Long lead times magnify this effect Impact on safety stock Product life cycle Batch ordering Volume & transportation discount

What are the Causes…. Price fluctuation Inflated orders Promotional sales Forward buying Inflated orders Orders placed increase during shortage periods IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas

Ways to Cope with the Bullwhip Effect Reducing uncertainty Centralizing demand information Bullwhip inherent in use of various forecasting techniques Reducing variability Use of EDLP strategy (Payless)

Ways to Cope with the Bullwhip Effect (cont’d) Lead time reduction Order lead time (time to produce and ship) Information lead time (time to process order) Efficient network distribution design Strategic partnership Vendor managed inventory (VMI) Sharing of customer information Collaborative forecasting

Presentations/Case Studies/Game Accenture – 3G Wireless communication Army Logistics Operations Payless ShoeSource – Supply Chain Seven Eleven Japan Li & Fung Internet Beer Game