1. Supply Chain Management
SYST 4050 Slides
Supply Chain Management
Lecture 23
Chapter 3

2. Semester Outline Thursday April 8 Chap 14
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Semester Outline
Thursday April 8 Chap 14
Tuesday April 13 Paul Dodge guest lecture
Thursday April 15 Chap 14, 15
Tuesday April 20 Chap 15
Thursday April 22 Simulation Game briefing
Tuesday April 27 Review, buffer
Thursday April 29 Simulation Game
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3. Outline Today Homework 6 online tomorrow Next week
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Outline
Today
Start with Chapter 14
Sections 1, 2, 3, 4, 6, 7, 8, 9
Section 6 buyback and revenue sharing contracts only
Homework 6 online tomorrow
Due Thursday April 15 before class
Next week
Guest speaker: Paul Dodge
SVP Supply Chain, ProBuild
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4. For more information, ask Career Services
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Announcement
Summer Internship at OptTek Systems, Boulder, CO
Date
Seven consecutive weeks during summer 
Compensation
$900/week ($6,300 Total)
Description
This summer internship will engage the student in research and development of the agent-based simulation model within OptForce. The student will gain practical real-world experience by analyzing actual customer data using OptForce. 
For more information, ask Career Services
Chapter 3

5. Summary Single period inventory model How to improve profitability?
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Summary
Single period inventory model
Cost of over- and understocking have a direct impact on both the optimal cycle service level and profitability
Optimal CSL* = (p – c)/(p – s) = Cu/(Cu + Co)
Optimal order quantity O* = F-1(CSL, , )
How to improve profitability?
Increase salvage value
Decrease margin lost from stockout
Decrease demand uncertainty
Improved forecast
Quicker reponse
Postponement
Tailored sourcing
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6. Drivers of Supply Chain Performance
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Drivers of Supply Chain Performance
Facilities
Inventory
Transportation
Sourcing
Pricing
Information
(Chapters 4, 5)
(Chapters 10, 11, 12)
(Chapters 4, 13)
(Chapter 14)
(Chapter 15)
(Chapters 7, 8, 9, 16)
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7. Comparing Different Suppliers
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Comparing Different Suppliers
Green Thumb, uses 1000 bearings per week for their production of lawn mowers and snow blowers. Green Thumb is considering one of two suppliers
Supplier A charges $1.00 per bearing
Supplier B charges $0.97 per bearing
Which supplier should Green Thumb choose?
Chapter 3

8. Comparing Different Suppliers
SYST 4050 Slides
Comparing Different Suppliers
Green Thumb, uses 1000 bearings per week for their production of lawn mowers and snow blowers. Green Thumb uses a holding cost of 25% and is considering one of two suppliers
Supplier A charges $1.00 per bearing and requires an order size of 2000
Supplier B charges $0.97 per bearing and requires an order size of 8000
Which supplier should Green Thumb choose?
Chapter 3

9. Comparing Different Suppliers
SYST 4050 Slides
Comparing Different Suppliers
Green Thumb, uses on average 1000 bearings per week, with a standard deviation of 300, for their production of lawn mowers and snow blowers. It monitors inventory continuously and aims a cycle service level of 95%. Green Thumb uses a holding cost of 25% and is considering one of two suppliers
Supplier A charges $1.00 per bearing and requires an order size of The supplier lead time is 2 weeks
Supplier B charges $0.97 per bearing and requires an order size of The supplier lead time is 6 weeks
Which supplier should Green Thumb choose?
Chapter 3

10. Comparing Different Suppliers
SYST 4050 Slides
Comparing Different Suppliers
Green Thumb, uses on average 1000 bearings per week, with a standard deviation of 300, for their production of lawn mowers and snow blowers. It monitors inventory continuously and aims a cycle service level of 95%. Green Thumb uses a holding cost of 25% and is considering one of two suppliers
Supplier A charges $1.00 per bearing and requires an order size of The supplier lead time is 2 weeks, with a standard deviation of 1 week
Supplier B charges $0.97 per bearing and requires an order size of The supplier lead time is 6 weeks, with a standard deviation of 4 weeks
Which supplier should Green Thumb choose?
Chapter 3

11. Comparing Different Suppliers
SYST 4050 Slides
Comparing Different Suppliers
Green Thumb, uses on average 1000 bearings per week, with a standard deviation of 300, for their production of lawn mowers and snow blowers. It monitors inventory continuously and aims a cycle service level of 95%. Green Thumb uses a holding cost of 25% and is considering one of two suppliers
Supplier A charges $1.00 per bearing and requires an order size of The supplier lead time is 2 weeks, with a standard deviation of 1 week. Quality is poor
Supplier B charges $0.97 per bearing and requires an order size of The supplier lead time is 2 weeks, with a standard deviation of 4 weeks. Quality is good
Which supplier should Green Thumb choose?
Chapter 3

12. Sourcing Decisions in a Supply Chain
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Sourcing Decisions in a Supply Chain
According to a KPMG survey, 77% regarded cost to be as the “most important” or “second most important” factor in all of their outsourcing decisions
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13. The Role of Sourcing in a Supply Chain
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The Role of Sourcing in a Supply Chain
Purchasing
Also called procurement, is the process by which companies acquire raw materials, components, products, services, or other resources from suppliers to execute their operations
Sourcing
Is the entire set of business processes required to purchase goods (raw materials, components, products) and services
Outsourcing
Results in the supply chain function being performed by a third party
For any supply chain, the most significant decision is whether to outsource the function or perform it in-house
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14. Outsourcing versus off-shoring
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Outsourcing versus off-shoring
What is the difference?
A firm off-shores a supply chain function if it maintains ownership but moves the production facility offshore
A firm outsources if the firm hires an outside firm to perform an operation rather than executing the operation within the firm
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15. Backsourcing and nearshoring
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Backsourcing and nearshoring
Backsourcing
Is the return of business activity to the original firm
Dell, Apple, Powergen (a British company) have backsourced from Indian call centers, claiming that their costs had become too high
Nearshoring (near source outsourcing)
Is choosing an outsource provider near the home country
US firms are interested in nearshoring to Mexico because of its somewhat low cost labor and geographic nearness to the US
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16. SYST 4050 Slides
Outsourcing to China
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17. Outsourcing to China (Walmart)
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Outsourcing to China (Walmart)
About 85% of Walmart’s merchandise is made abroad
A whopping 10%-13% of everything China sends to the US ends up on Walmart’s shelves
Over $15 billion worth of goods per year
Walmart has almost 600 people in China to make purchases
The price of portable DVD players dropped in half when Walmart found a Chinese factory to built in giant quantities
Walmart’s success has forced other retailers and manufacturers to reevaluate their supply chains
Walmart has led the way to product safety through its “responsible sourcing program”
In 2009, Walmart required “an identifiable trail” from raw material to suppliers
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18. Outsourcing in Practice
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Outsourcing in Practice
India and Philippines account for 50% of the world’s business process outsourcing (BPO) market
BPO is a form of outsourcing that involves the contracting of the operations and responsibilities of a specific business functions to a third-party service provider
Source: The A.T. Kearney Global Outsouring Index, 2009
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19. Outsourcing in Practice
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Outsourcing in Practice
Source: The A.T. Kearney Global Outsouring Index, 2009
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20. Outsourcing in Practice
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Outsourcing in Practice
Trends in outsourcing
North Africa and Middle East are rising on the global sourcing index
North America accounts for 70% of offshore outsourcing spending, but European countries are catching up as their spending has risen faster
A move toward more outsourcing providers
Experienced labor is key to success
Source: The A.T. Kearney Global Outsouring Index, 2009
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21. SYST 4050 Slides
In-House or Outsource
The decision to outsource is based on the growth in supply chain surplus provided by the third party and the increase in risk by using a third party
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22. How do third parties increase the supply chain surplus?
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How do third parties increase the supply chain surplus?
Lower cost and higher quality
Specialized third party is further along the learning curve for some supply chain activity
Capacity aggregation
Increase SC surplus by aggregating demand across multiple firms and gaining economies of scale
Capacity aggregation
* Dell and several other PCs manufacturers outsources design and production of the processors in its PCs to Intel
Intel’s family of mobile PC processors gives consumers more choice by enabling PC makers to design notebooks of every shape and size
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23. How do third parties increase the supply chain surplus?
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How do third parties increase the supply chain surplus?
Transportation aggregation
Increases supply chain surplus by aggregating transportation across a variety of shippers
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24. Transportation and Sourcing
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Transportation and Sourcing
What factors lead Wal-Mart to own its trucks although many retailers outsource their transportation?
A distribution center that supports several large retail stores can reduce supply chain costs in four ways:
Inbound shipments to the DC achieve economies of scale because each supplier sends a large shipment;
The outbound transportation costs for a DC can be low because it serves retail locations nearby; and very large inbound shipments that match retail demand can be cross-docked at the DC, which saves both
storage and
material-handling costs.
A DC also can replenish retail inventories more frequently; the DC breaks bulk from manufacturers on one side of the warehouse and sends it to retail locations on the outbound side.
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25. How do third parties increase the supply chain surplus?
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How do third parties increase the supply chain surplus?
Warehousing aggregation
Increases SC surplus by aggregating warehousing needs over several customers and lowering facility cost
Receivables aggregation
Increases SC surplus by aggregating receivables reducing collection cost (especially when retailing is fragmented)
Safexpress provides an unrivalled range of logistics and supply chain solutions including door to door distribution and single source invoicing
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26. How do third parties increase the supply chain surplus?
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How do third parties increase the supply chain surplus?
Procurement aggregation
Increases SC surplus by aggregating procurement for many small players to facilitate economies of scale
Offering members preferred pricing and volume-based rebates on truck equipment and services through a community-driven purchasing system
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27. How do third parties increase the supply chain surplus?
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How do third parties increase the supply chain surplus?
Information aggregation
Increases SC surplus by aggregating information and reducing search cost for the (online) customer
Provides the North American Trucking Industry with the most comprehensive freight matching service
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28. How do third parties increase the supply chain surplus?
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How do third parties increase the supply chain surplus?
A third party may be able to provide a sustainable growth of the surplus by aggregating capacity, inventory, inbound or outbound transportation, warehousing, procurement, information, receivables, or relationships to a level that the firm cannot on its own
A growth in surplus may also occur if the third party has lower costs or higher quality because of specialization or learning
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29. How do third parties increase the supply chain surplus?
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How do third parties increase the supply chain surplus?
Three important factors that affect the increase in surplus
Scale
Uncertainty
Specificity
Capacity aggregation
* Dell and several other PCs manufacturers outsources design and production of the processors in its PCs to Intel
A firm gains the most from outsourcing if its needs are small, highly uncertain, and shared by others
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30. How do third parties increase risk?
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How do third parties increase risk?
Less control over the function being outsourced
Reduced customer/supplier contact
Loss of internal capability and increase in third party’s power
Increases complexity in coordination, and thus increases coordination cost
It is easy to underestimate the effort to coordination
Leakage of sensitive information
In case intellectual property needs to be shared with third parties, there is the danger of leakage
Ineffective contracts
What are ways to mitigate these risks?
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31. SYST 4050 Slides
Sourcing Process
Once a decision to outsource has been made, the sourcing process includes
Supplier scoring and assessment
Supplier selection and contract negotiation
Design collaboration
Procurement
Sourcing planning and analysis
Once a decision to outsource has been made, sourcing processes include the selection of supplier s, design of supplier contracts, product design collaboration, procurement of material or services, and evaluation of supplier performance
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32. Sourcing Process Supplier scoring and assessment Supplier selection
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Sourcing Process
Supplier scoring and assessment
Process used to rate suppliers
Supplier selection
Choose the appropriate supplier(s)
Design collaboration
Work together with supplier when designing components for the final product
Procurement
Process placing orders and receiving orders from supplier(s)
Sourcing planning and analysis
Analyze spending across various suppliers, identify opportunities for decreasing cost
Supplier scoring and assessment
Supplier selection and contract negotiation
Design collaboration
Procurement
Sourcing planning and analysis
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33. Sourcing Process Supplier scoring and assessment
SYST 4050 Slides
Sourcing Process
Supplier scoring and assessment
Supplier selection and contract negotiation
Design collaboration
Procurement
Sourcing planning and analysis
Chapter 3

34. Supplier scoring and assessment
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Supplier scoring and assessment
Common fundamental mistake when choosing a supplier
Only focus on quoted price
Supplier performance should be compared on the basis of the supplier’s impact on total cost
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35. Factors besides purchase price that influence total cost
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Factors besides purchase price that influence total cost
Replenishment lead times
Does it pay to select a more expensive supplier with a shorter lead time?
If lead time grows, safety inventory grows proportionally to the square root of the replenishment lead time
On-time performance
Is a more reliable supplier worth the extra pennies?
If variability of lead time grows, the required safety inventory at the firm grows
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36. Factors besides purchase price that influence total cost
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Factors besides purchase price that influence total cost
Supply flexibility
The less flexible a supplier is, the more lead-time variability it will display as order quantities change
Delivery frequency/lot size
Delivery frequency affects the transportation cost, lot size affects the cycle inventory holding cost
Supply quality
Quality affects unit price and lead time as follow-up orders may need to be fulfilled to replace defective products
Inbound transportation cost
Sourcing a product overseas may have lower product cost, but generally incurs a higher inbound transportation cost
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37. Factors besides purchase price that influence total cost
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Factors besides purchase price that influence total cost
Pricing terms
For example, quantity discounts (and the impact it has on cycle inventory)
Information coordination capability
Good coordination results in better planning and ultimately lower production, safety inventory, and transportation cost
Design collaboration capability
Can help reduce all cost, improve quality, and decrease time-to-market
Exchange rates, taxes, and duties
Important for global supply chains as it affects the unit price
Supplier viability
The likelihood that the supplier will be around to fulfill the promises it makes (uncertainty increases safety inventory)
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38. Factors besides purchase price that influence total cost
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Factors besides purchase price that influence total cost
Chapter 3

39. Sourcing Process Supplier scoring and assessment
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Sourcing Process
Supplier scoring and assessment
Supplier selection and contract negotiation
Design collaboration
Procurement
Sourcing planning and analysis
Chapter 3

40. Sourcing Planning and Analysis
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Sourcing Planning and Analysis
A firm should periodically analyze its (1) procurement spending and (2) supplier performance and use this analysis as an input for future sourcing decisions
Supplier performance analysis should be used to build a portfolio of suppliers with complementary strengths
Cheaper but lower performing suppliers should be used to supply base demand
Higher performing but more expensive suppliers should be used to buffer against variation in demand and supply from the other source
Chapter 3

41. Sourcing Planning and Analysis
SYST 4050 Slides
Sourcing Planning and Analysis
A firm should periodically analyze its (1) procurement spending and (2) supplier performance and use this analysis as an input for future sourcing decisions
Supplier performance analysis should be used to build a portfolio of suppliers with complementary strengths
Cheaper but lower performing suppliers should be used to supply base demand
Higher performing but more expensive suppliers should be used to buffer against variation in demand and supply from the other source
Chapter 3