chapter 10 supply chain strategy. supply-chain management measuring supply-chain performance supply...

Chapter 10

Supply Chain Strategy

• 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

OBJECTIVES

10-2

• Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together

What is a Supply Chain?

10-3

What is Supply Chain Management?

• 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

10-4


Customer wantsdetergent and goes

to Jewel


to Jewel

JewelSupermarket

JewelSupermarket

Jewel or thirdparty DC


P&G or othermanufacturerP&G or othermanufacturer



to Jewel


to Jewel

JewelSupermarket

JewelSupermarket




PlasticProducer

PlasticProducer

TennecoPackagingTenneco

Packaging

Chemicalmanufacturer

(e.g. Oil Company)


(e.g. Oil Company)



to Jewel


to Jewel

JewelSupermarket

JewelSupermarket




PlasticProducer

PlasticProducer


(e.g. Oil Company)


(e.g. Oil Company)

TennecoPackagingTenneco

Packaging

Paper Manufacturer

Paper Manufacturer

TimberIndustryTimber

Industry


(e.g. Oil Company)


(e.g. Oil Company)

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

valueinventory aggregate Average

sold goods ofCost turnoverInventory valueinventory aggregate Average

sold goods ofCost turnoverInventory

weeks52 sold goods ofCost

valueinventory aggregate Averagesupply of Weeks

weeks52

sold goods ofCost

valueinventory aggregate Averagesupply of Weeks

10-8

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?

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?

10-9

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.





10-10

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

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 Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

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 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

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

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,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

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 Strategic supply chain decisions may lead to changing the push/pull boundary to changing the push/pull boundary

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?

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

Bullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

n tit

y

Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chain

The magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

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 greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

10-30

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

10-31

Hau Lee’s SC Uncertainty Framework

Demand Uncertainty

Low (Functional products)

High (Innovative products)

Efficient SC

Ex.: Grocery

Responsive SC

Ex.: Computers

Risk-Hedging SC

Ex.: Hydro-electric power

Agile SC

Ex.: Telecom

Low(Stable Process)

High(Evolving Process)

Supply

Uncertainty

10-32

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?

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

10-34

Reasons to Outsource

• Organizationally-driven

• Improvement-driven

• Financially-driven

• Revenue-driven

• Cost-driven

• Employee-driven

10-35

Value Density

• 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

10-37

Sourcing/Purchasing-SystemDesign Matrix

10-38

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

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

• Example: H-P customizing DeskJet printers with the power supply needed in various European countries once printers arrive at its distribution center in Germany

Question Bowl

A typical supply chain would include which of the following?

a. Suppliersb. Manufacturersc. Distributiond. All of the abovee. None of the above

Answer: d. All of the above

10-41

Question Bowl

The supply chain measure of “Inventory Turnover” is which of the following ratios?

a. Avg. inventory value/total costsb. Costs of goods sold/Avg. aggregate

inventory valuec. Total costs of goods/Avg. costs of

goodsd. Weeks worth of inventory/No. of

weekse. None of the above

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

10-42

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”?

a. 10b. 25c. 40d. 50e. None of the above

Answer: c. 40 (1,000,000/25,000=40)

10-43

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”?

a. 10b. 25c. 40d. 50e. None of the above

Answer: d. 50 (250,000/5,000=50)

10-44

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?

a. 1 weekb. 2.6 weeksc. 20 weeksd. 30 weekse. None of the above

Answer: b. 2.6 (50,000/1,000,000)x52=2.6)

10-45

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?

a. Continuous replenishingb. Stable supply processc. Evolving supply processd. Agile supply chainse. None of the above

Answer: e. None of the above (The correct term is “Bullwhip effect”.)

10-46

Question Bowl

Which of the following are reasons why an organization should use “outsourcing” as a supply chain strategy?

a. Reduces investment in assetsb. Turns fixed costs into variable costsc. Gives employees a stronger careerd. All of the abovee. None of the above

Answer: d. All of the above

10-47

Question Bowl

Which of the following “transportation modes” provides flexibility in delivery, timing and at reasonable rates for small quantities and over short distances?

a. Railb. Highway (trucking)c. Waterd. Pipelinee. Air

Answer: b. Highway (trucking)

10-48

End of Chapter 10

10-49

chapter 10 supply chain strategy. supply-chain management measuring supply-chain performance supply...

Documents