suresh materials
TRANSCRIPT
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SC Strategy
I. Supply Chain Strategies &Organizing for Improvements
SC Strategy
Two-Day Seminar
Strategic Supply Chain & Logistics Management
Nallan C. Suresh, Ph.D.UB Distinguished Professor & Chairman
Dept. of Operations Management & Strategy
School of Management
& Associate Director,
Institute for Sustainable Transportation & Logistics
State University of New York, Buffalo, NY, USAE-mail: [email protected]
www.buffalo.edu/~ncsuresh
Muscat, Oman, January 15 &16, 2014
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SC Strategy
How Did We Get Here?
1750s- The Industrial Revolution: Division of labor &
Concept of interchangeable parts
1800s- Larger, more complex factories;
stage set for production explosion of 20th century
Scientific management, Industrial Engineering
1900s- Assembly lines and mass production
1930s- Human Factors, Quality movement
1940s- Operations Research
1950s- Cellular manufacturing
1950s- IT Revolution
1950s- Factory Automation: NC, CNC, FMC, FMS, Robotics
1960s- MRP, MRP II, JIT, OPT..
1980s- Supply Chain Management, Inter-org. IS (EDI)
1990s- Reengineering, Internet, E-commerce
SC Strategy
RM
WIP
FP
FG
Bought-out Parts
Suppliers
Parts ProductionAssembly
Traditional View: The Single Firm
Customers
IndirectMaterials (MROs)
The Rs: right product, right place, right time, right quality, right cost
Within-firm improvement strategies: MRP, Lean, TQM, Six Sigma, ERP,..
OutboundLogistics
InboundLogistics ERP / MRP
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SC Strategy
FirmSupplier Distributor
Supplier
Supplier
Supplier
Supplier
Firm
Firm
Distributor
DistributorCustomer
Customer
Customer
Customer
Customer
Customer
The Supply Chain Era
Inter-functional => Inter-organizational collaboration & integration
to eliminate delays, disconnects, inventories & inefficiency.
Within-firm => Inter-firm improvement strategies
Material Flows, Credit
Returns, Recycling, Remanufacturing, Cash
Information Flows
SC Strategy
Logistics Management is that part of Supply
Chain Management that plans, implements, and
controls the efficient, effective forward and
reverse flow and storage of goods, services and
related information between the point of origin
and the point of consumption in order to meet
customers' requirements.- Council of Supply Chain Management Professionals (CSCMP)
www.cscmp.org
Logistics: Our Definition
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SC Strategy
Our Definition of SCM
SCM is the integration of key business
processes from end user through original
suppliers that provides products, services,
and information that add value for
customers and other stakeholders
Global Supply Chain Forum (GSCF)
SC Strategy
Numerous sources of uncertainty & inefficiency:
wrong forecasts
late deliveries
poor quality
machine breakdowns
worker absenteeism
unexpected holidays
canceled orders
miscommunication
price uncertainties
speculation
licensing, freight forwardingdelays
red tape, corruption
The basic idea in supply chains is to minimize:Costs for everyone, including the customer,
Disconnects, delays, inventories, missed shipments, poorcustomer service, etc. in the supply chain
Through better inter-organizational communication & coordination
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SC Strategy
Map CurrentSupply Chain
Identify KeySC Members
Form SteeringCommittee &
Joint Strategies
Realign CoreCompetencies
Seek SynergisticFit & Barriers to
Entry
Organize forImprovements in
Various Areas
Supply Chain Strategy &Organizing for Improvements
SC Strategy
Supply Chain Mapping
Identify primary SC members:
Considering the total network may be toocomplex, unmanageable, and unnecessary
Which members are critical, from thevantage point of the focal firm, to satisfyingend customers?
Identify primary and supporting members: Primary members: all autonomous firms / SBUs which
actually perform the operational and/or managerial activitiesin the processes designed to produce a specific output for aparticular customer or market
Supporting members: firms which simply provide resources,knowledge, utilities, assets, etc. for primary members
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SC Strategy
A given firm may be a primary member for one
process, but a supporting member for another
System boundaries:
Point of origin: the left boundary where no more
primary suppliers exist;
Point of consumption: the right boundary where
no further value is added, and the product /
service is consumed.
SC Strategy
Supply Chain Structure
Horizontal structure: number of tiersalong the supply chain
Vertical structure: number of partiesin each tier
Horizontal position of the focalcompany: at the beginning, middle orend of the chain?
SC initiatives such as single sourcing,outsourcing, etc. change the SCstructure
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SC Strategy
Types of Process LinksPrioritize the links (relationships: 80-20 rule):
1. Managed process link: focal firm typically integratesthis process with another firm
2. Monitored process link: focal firm simply monitorsor audits how the link is integrated and managed
3. Not-managed process link: not critical: focal firmdoes not even monitor this link; focal firm trusts otherfirms to do well on this link
4. Non-member process link: link between members ofthe focal firms SC with non-members of the SC (e.g.,link between a supplier who also supplies to acompeting SC (non-member); cannot be ignored.
SC Strategy
What business process governs the link?
Procurement process
Customer relationship management
Demand management
Order fulfillment
Manufacturing flow management
New product & process development (NPDP) Reverse logistics process, etc.
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SC Strategy
SCM: The Basic Strategies
A supply chain strategy can be aimed primarilyat providingLow cost goods / services, orResponsiveness, orDifferentiated products
All elements and decisions in a supply chainshould be consistent with the overall SCstrategy:new product design, physical configuration (plant,
supplier, warehouse location), supplier selection,process characteristics, etc.
SC Strategy
Porters Five Forces Model:
Threat of New
Products,
Substitutes
Suppliers
Bargaining Power
Competition Among
Existing Firms
Buyers
Bargaining Power
Threat of New
Entrants
Barriers to entry
Porters Value Chain Diagram
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SC Strategy
Strategy & Fit
Strategy is about being different: deliberatelychoosing a different set of activities to deliverunique value; Operational effectiveness (lean, six-sigma, ERP, etc.) is not strategy (Porter, 2001).
Every thing matters, not just core competencies
All activities must fit well in the value chain
Good overall fit => sustainable competitive
advantage & barriers to entry
SC Strategy
Activity Mapping (e.g.): Southwest Airlines
(Source: Porter, 1998)
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SC Strategy
FirmSupplier Distributor
Supplier
Supplier
Supplier
Firm
Firm
Distributor
DistributorCustomer
Customer
Customer
Customer
Customer
Customer
B2B B2C C2C
Using Internet & E-commerce Judiciously in SC
SC Strategy
Supply Chains:From Inter-functional
To Inter-organizationalIntegration
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SC Strategy
Phase I: Inter-functional Integration
DEPT
1
DEPT
2
DEPT
3
Process: Cross-
Functional Team
Traditional
Re-engineeredValue Chain
Silos, Disconnects & handoffs
Departmental parochialism
Slow progress of work: non-
value adding times for
move, wait, information
gathering, clarification, etc.
Customer is far away->
customer orientation
confined to marketing
SC Strategy
Phase II: Inter-organizational Integration
Common goals for the supply chain: cost and serviceimprovements sought jointly
New performance metrics to avoid sub-optimization
A culture of partnerships, collaboration, trust,transparency & information sharing with keymembers
A meta-organization (steering committee) for SC
Standardization of systems & procedures in the chain:
IT, quality, material bar codes, RFID, etc.
Conflicts possible, if one firm benefits more or less
Benefits for entire supply chain, end customer, and bigpicture must be stressed at such times
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SC Strategy
FirmSupplier Distributor
Supplier
Supplier
Supplier
FirmDistributor
Customer
Customer
Customer
Customer
Supply Chain Map
Retailer
Retailer
Retailer
Scoping: high-impact
areas; 80-20 rule
Points of vulnerability &
potential supply disruption
Implementation
Organizing
RedesigningSustainability:
Minimum carbon
footprint
SC Strategy
Organizing for Improvements
SC Steering Committee
PhysicalReconfiguration
BusinessProcesses
IS & ITIntegration
Suppliers Manufacturers Distributors Retailers
NPDP
Purchasing
Operations
Inter-OrganizationalTeams
Inter-FunctionalTeams
Marketing
NPDP
Purchasing
Operations
Marketing
NPDP
Purchasing
Operations
Marketing
NPDP
Purchasing
Operations
Marketing
(Source: Braunscheidel & Suresh, 2004)
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SC Strategy
Inter-organizational Integration
1. Scoping: Identifying good process to redesign
High-impact process to enhance SC performance
Selecting a good partner who has strong interest;one who is experienced with process redesign;fast decision maker, has collaborative culture;has good IT infrastructure, etc.
2. Organizing:
Steering committee:Executives from member firms; define each firmsinvestment, roles, share of benefits, procedures for resolvingdisputes, establish performance goals & metrics
Design teams:6 12 members committed full-time to the project;members from both firms included; experts in processredesign, and change management. Select right people.
SC Strategy
Inter-organizational Integration (contd)
3. Redesigning :
Design the new, integrated process in a way that fulfills SCperformance goals: final customer always comes first; avoidduplications; work done by the person in the best position toperform; a single process, based on one common database; Design in such a way that both firms benefit, etc.
4. Implementing:
Roll out new process in clearly defined stages, focus on
achieving benefits early, maintaining momentum Communicate tirelessly: articulate rationale, define and
manage expectations, involve everyone, make everyone animportant member, etc. Good project management.
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SC Strategy
II. Global Trends inSupply Chain Restructuring
Product-Process Design
Rethink Products, Processes &
Supply Chain Networks
Well-designed package of [ Products & Services ] isalways an important order-winner
The cost, quality, producibility, maintainability,serviceability, etc. of product are all determined atthe Design stage itself
Process and Global Logistics issues must be
considered at the Design stage itself.
Design is an on-going, full-time activity, whichshould be proactive, seeking first-moveradvantages
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Product-Process Design
First-mover Advantages
Price
1st Movers Cost
Later Entrants Cost
Period of Exclusivity
For First Mover
Product-Process Design
Expectations from NPDP
Precisely match customer needs
Meet customer needs in simple, cost-effective
manner
But which preserve barriers to entry (strive for
inimitable designs and processes)! Fast time-to-market, low development costs!
Robust designs, with minimal revisions
Designs which
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Product-Process Design
Standardization:A major Source of Productivity
Design & Process Planning: lead times & cost reduced Production & Assembly: higher volumes
increase in productivity and quality; prospects forautomation; less training costs; less changeover times,productive capacity increased, etc.
Purchasing: Lower material costs; lower purchasecosts; lower lead times
Materials Storage: fewer parts / Stock Keeping Units(SKUs) in inventory
Quality: Fewer defects
Customer Service and delivery improvedDownside of standardization = limited customer
appeal
Product-Process Design
Line Breadth & Fit in Product Line
Too narrow =>loss of competitive position
loss of distributor and sales force support
Too broad =>Variety: less volumes => less economies of scale
Increase in SKUs, inventories
Changeover costs increased, waste of capacity,
inventory cost increaseDistribut ion and material costs increase
Confusion in product offering
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Product-Process Design
DFM => DFMA => DFS => DFE => DFL
Design For Manufacture (DFM) Design for easy & economical production
Consider manufacturability early
Identify easy-to-manufacture design characteristics
Use easy to fabricate & assemble components
Design for Manufacture & Assembly (DFMA)
Design for Service (DFS)
Design for Environment (DFE)Design for Logistics or Supply Chain (DFL)
Product-Process Design
Traditional Process
CUSTOMERSENGINEERING
DESIGN
R & D
PROCESSPLANNING
(MFG. ENGG)
MARKETING
Business &Marketing Strategy
PRODUCTION /OPERATIONS
DrawingsBills of material,assembly charts
PURCHASING
Make/Buy Decisions
VENDORS
Process Plans
VendorDevelopment
Prototypes
Make/Buy Decisions
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Product-Process Design
Phase I: Concurrent Engineering:
Inter-functional integration
MARKETING DESIGNPROCESS
PLANNING
Cross-functional
team
Traditional
Concurrent
Product-Process Design
Reduction in Time-To-MarketSilo Approach
Lead Time
Concurrent Approach
Lead Time
...
...
Defects caught early, and
much less expensively
Greater Producibility
Developmental lead times
and cost reduced
Less Resistance to design
changes
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Product-Process Design
Phase II: Inter-organizationalIntegration in NPDP
Target Costing:
Design driven by global cost targets (= China costs!)
Design for Logistics:
Global Logistics issues considered at Design stageitself.
Redesign of products & processes: form and logisticspostponement: Delayed Differentiation
Pre-sourcing:
Early involvement of suppliers & distributors in design
Mass customization initiatives
Inter-organizational integration: Cross-enterprise &cross-functional teams
Product-Process Design
Marketing
Design PurchasingProcess
PlanningVendors
Traditional
Drawings,
Bill of material
Specs
Process Plans
The New Way
Early Involvement of Purchasing + Pre-sourcing
Pre-selected
Vendors,Distributors,
Retailers
Vendor
Development
ExpandedConcurrentEngineeringTeam
Make /Buy
Decisions
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Product-Process Design
External Product Development Strategies
External Development Strategies AlliancesJoint Ventures
Purchase Technology / Expertise by Acquiring Developer
Internal Development StrategiesMigrations of Existing Products
Enhancement to Existing ProductsNewInternally Developed Products
Internal ----------------------Cost of Product Development --------------------- Shared
Lengthy--------------------Speed of Product Development---------------Rapid and/or
Existing
High------------------------- Risk of Product Development ----------------------- Shared
Product-Process Design
Design For Logistics (DFL) Principle of Postponement:
Do the common & generic things first, and
differentiating / customizing things in the end
Form & Logistics postponement (time & placepostponement)
Modularity in products and processes and itsimpact on SCM reconfiguration
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Product-Process Design
Redesign for Logistics: Case of theJapanese Cubic Watermelon
Product-Process Design:
(Source: Lampel & Mintzberg 1996)
Customization Approaches
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Product-Process Design
Mass Customization:Customization Without Cost Premium
Physical Network
Industry Restructuring Based on
Postponement Principles
Form Postponement
Logistics Postponement
Time & Place Postponement
Capacity Postponement
Purchasing Postponement
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Physical Network
Form Postponement
Rearrange bills of material so thatdifferentiating (customizing) elements are
postponed to last stage of assembly.
Permits central inventories and economies
of scale for early-stage items, which are less
subject to forecast errors
Differentiating elements performed later,
when mix forecasts become more accurate.
Physical Network
Expanded View of Bill of Material
Upholsterytool
Crevicetool
Hand-vacDusting
toolPackage
PackagedHand-vac
Forwardhousing
assembly
Screw &lock washer
assembly
Rearhousing
assembly
ServiceComponents
Include
Service
Components
Reorganize BOMs into genericcomponents & differentiators (athigh level)
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Physical Network
Industry Restructuring
(Some Examples)
Pharmaceuticals: global production of bulkchemicals + local fill-and-finish plants in numerouscountries
HP printers: two approaches
Benetton model
Paint manufacture & sale (postponement + masscustomization)
Auto Industry: platform architecture + delayeddifferentiation
Physical Network
HP: Channel Assembly Approach
HP DeskJet Printer:
Before: customized the printer at the factory in Singapore forAsian and European markets; differentiated as soon asproduction began
After: a country-specific external power supply: distributioncenters purchased the materials and assembled at the site;manufacturing costs went up slightly, but total manufacturing,stocking and shipping costs reduced by 25%.
This is known as channel assembly: The finalassembly, based on option-specific customer requests,are done within distribution centers. A new role forwarehouses and 3PL providers
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Physical Network
HP: Universal Product Approach
LaserJet Printer:Before: dedicated power supply (110v or
220 volts) for US or European markets;differentiated as soon as production beganin Japan
After: a universal (standardized) powersupply developed; flexibility in shipmentsfrom US, Europe, Japan, depending on
demand; total manufacturing, stockingand shipping costs reduced by 5%.
Physical Network
Postponement atEaton: Cutler-Hammer
Before:All 3500 industrial circuit breakers were madeat Arecibo, Puerto Rico, shipped to Jacksonville,FL, and trucked to warehouse in Duncan, SC.High inventory levels at both facilitiesSame-day service rate averaged around 90%
Now:
50 generic styles made at Puerto Rico, bar coded & shipped-trucked to SCFinal assembly done at Duncan, SC after orders are receivedBuild instructions downloaded for that style based on bar code in Duncan, SCShipping costs reduced, better containerization reduced damage levels, etc. Inventories reduced significantly at both locationsSame-day service level increased to 98%
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Physical Network
Benetton & Other Models
Benetton: Fresh look at the processing steps andradical re-sequence to postpone thedifferentiating step closer to selling time
Before: to make a red sweater, start with a redfabric, cut, sew, etc to make a red sweater;
After: start with uncolored fabrics, make whitesweaters for all colors, and coloring is the laststep, when mix forecast most accurate
Auto Industry: Platform architecture, delayed
differentiation: e.g., moon roof in a car, etc.
Paint Industry Restructure
Physical Network
The Physical Network Factories:
Heavy manufacturing plants (auto plants,steel mills, chemical plants); Light industrymanufacturing plants (small componentsmanufacturing, assembly)
Warehouse & distribution centers
Changing roles
Retail & service outlets; order entry andfulfillment points
Supply sources
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Physical Network
Facilities & primary focus for each facility? Facility location: consistent with overall strategy?
Capacity allocation:
economies of scale + ?
Sufficient economies of scope?
Market & supply sources: which market do they
serve? where are the supply sources?
Exploit duties & tariffs, & exchange rates?
Exploit form & logistics postponement? Consistent with overall strategy of low cost /
responsiveness / innovation, etc.?
Redesign of Physical Network
Physical Network
Reconfiguration of Global
Manufacturing & Supply Chains
Non-Reactive
Systems
Reactive
Systems
More stable production
configurations for generic
items: items with stable,consolidated demand, plus
minimum runs of items with
high uncertainty
Flexible & agile systems for items
with high demand uncertainty;
Responsiveness, customization,economies of scope logic; Based
on analysis of SKU-product-
process matrix, & demand
uncertainty.
Global
Markets
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Physical Network
Supply Networks:
Global Sourcing, Yet Greater Proximity
Distance from Assembly Plant
SupplierInvolvementinAssembly
Modular
Consortia
System
SuppliersLocal
SuppliersDispersed
SuppliersRemote
Suppliers
Devolution of assembly tasks:
locate near OEMs
Assembly tasks performed within OEM
Pressure for JIT deliveries
Physical Network
Types of Plant Focus
Product Focus Plant: Produces a product (line) inentirety for distribution within a firms entiredomestic or global market region
Market Focus Plant: Produces most or all productlines, for distribution to specific geographic region
Process Focused Plant: Segments of productionprocess are assigned to separate plants (e.g.,feeder plants -> assembly plants)
General Purpose Plant (Wide variety, low-volumeplant;with no focus; strive for economies of scope)
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Physical Network
Global Location Factors
Government stability
Government regulations
Political & economic systems
Economic stability & growth
Exchange rates
Culture
Climate
Export import regulations
Duties & tariffs
Raw material availability
Intellectual property rights (IPR)
Number and proximity of
suppliers
Transportation & distribution
system
Labor cost & education
Available technology
Commercial travel
Technical expertise
Cross-border trade regulations
Group trade agreements
Physical Network
Global Location Factors (contd)
Labor (availability,
education, cost & unions)
Proximity of customers
Number of customers
Construction/leasing costs
Land costs
Modes and quality oftransportation
Transportation costs
Incentive packages
Governmental regulations
Environmental regulations
Raw material availability
Commercial travel
Climate
Infrastructure
Quality of life
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Physical Network
Site Location Factors
Customer base Construction/leasing
cost
Land cost
Site size
Transportation
Utilities
Zoning restrictions Traffic
Safety/security
Competition
Area business
climate
Income level
Location Incentives:
Tax credits, Relaxed government regulation, Job training,
Infrastructure improvement, etc.
Physical Network
How much capacity to install?
Econ. of scale Diseconomies of scale
Economies of scale: plants of the right size, to ensureglobally competitive costs + agility & responsiveness
Avoiding diseconomies of scale
BureaucracyNon-value addedactivitiesStrategic inertia, etc.
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Physical Network
Economies of Scope
Should be systematically applied, especially
for market-focus plants
Rooted in group technology principles
Flexible technology that can produce a
variety of parts on the same setup
Flexible, cross-trained staff, etc.
Physical Network
Six Types of Foreign Factories
Low CostProduction
Access to Skills &Knowledge
Proximity toMarket
High
Low
SiteCompetence
Off-shore Outpost Server
Source
Lead
Contributor
Primary Reason for the Factory
Source: Ferdows (1998)
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Physical Network
Cons of Decentralized Structure
Inventories increasecycle stock increases (Square Root Law of
Distribution): inventory level isproportional to (no. of warehouses). So,in a 4-warehouse system, inventories aredouble that of a centralized system.
safety stocks are also higher due tospreading the inventory, and increase instock-out probability
Higher overheads, administrative expenses Need for better coordination and control
Physical Network
Physical Network:
Compress Overall Lead Times Reduce Product Development, Procurement,
Production & shipment lead times
Maximize concurrency in and among:
product development
sourcing (procurement)
production
shipments and delivery to retailersIn summary, the total physical network
should support overall SC strategy of:< low cost / responsiveness / .. >
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Physical Network
Key Advantage for Asian & MiddleEastern Countries: Exchange Rate
Differential with US$
The yuan is kept pegged to the US $
Kept undervalued by about 40%? MakesChinese exports very cheap
Other Asian currencies, such as IndianRupee are free-floating currencies,
trading at around Rs. 60-62 to one US $
Physical Network
Global Supply Chains:
(e.g.) China - US Supply Chain
USAChina
constant exchangerate with $
Low labor costs
Tax incentivesConstant exchange ratesCooperative labor sectorContract-based managementSingle party machineryGood infrastructureFDI-friendly business climate
Low prices for consumers
High standard of living, etc.but
Loss of jobsErosion of manufacturing base
Loss of technology baseMounting deficit
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SC Strategy
V. Design of Supply ChainNetworks
Supply Chain Network Design
Maximize Customer Service Level:
Response time
Product variety o ffered
Product availability
Customer experience
Order visibility
Returnability
Minimize Costs to Provide Service:
Inventories
Transportation
Facilities and handling
Information Systems
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Network Optimization Models
Customer
Store
Materials
DC
Component
Manufacturing
Vendor
DC
Final
Assembly
Finished
Goods DC
Components
DC
Vendor
DC Plant
Warehouse
FinishedGoods DC
Customer
DC
Customer
DC
Customer
DC
Customer
Store
Customer
Store
Customer
Store
Customer
Store
Vendor
DC
Network Optimization Models
Allocating demand to production facilities
Locating facilities and allocating capacity
Which plants to establish? How to configure the network?
Key Costs:
Fixed facility cost
Transportation cost
Production cost Inventory cost
Coordination cost
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Plant Location with Multiple Sourcing:Capacitated Location Problem
yi = 1 if plant is located at
site i, 0 otherwise
xij = Quantity shipped from
plant site i to customer j
Dj = Annual demand for
market j, j = 1 to m
Ki = capacity of plant I
fi = annual fixed costs
cij
= cost of producing &
shipping one unit from i to j
Example: Sun Oil Corp.
Capacitated Location Problem
Inputs - Costs, Capacities,
Demands
Demand Region
Production and Transportation Cost per
1,000,000 Units Fixed Low Fixed High
Supply
Region
N.
America
S.
America Europe Asia Africa
Cost($)
Capacity
Cost($)
Capacity
N. America 81 92 101 130 115 6,000 10 9,000 20
S. America 117 77 108 98 100 4,500 10 6,750 20
Europe 102 105 95 119 111 6,500 10 9,750 20
Asia 115 125 90 59 74 4,100 10 6,150 20
Africa 142 100 103 105 71 4,000 10 6,000 20
Demand 12 8 14 16 7
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Solver Example Spreadsheetfor Sun Oil Corp Problem
Telecom One & High Optic example
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DemandCity
Production&TransportationCostper1000Units Fixed Capa
SupplyCity Atlanta Boston Chicago Denver Omaha Portland Cost($) city
Baltimore 1,675 400 685 1,630 1,160 2,800 7,650 18Memphis 380 1,355 543 1,045 665 2,321 4,100 22
Wichita 922 1,646 700 508 311 1,797 2,200 31Cheyenne 1,460 1,940 970 100 495 1,200 3,500 24SaltLake 1,925 2,400 1,425 500 950 800 5,000 27Demand
10 8 14 6 7 11
Telecom One & High Optic Example
Yellow regions are High Optic (west coast)
& the others are Telecom One (east coast)
Separate Optimum SolutionsDemandCity
Production&TransportationCostper1000Units
SupplyCity Atlanta Boston Chicago Denver Omaha Portland
Baltimore 0 8 2Memphis 10 0 12
Wichita 0 0 0SaltLake 0 0 11
Cheyenne 6 7 0Costs for Telecom One = 28, 836, 000
Costs for High Optic = 21, 365, 000
Total for both firms = 50, 201, 000
See separate solver solutions for each firm
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If both fi rms merged, total costswill only be $ 47,401,000
= a savings of about $3 mill ion /month, as shown in the combined
Excel solver
Plant Location with Single Sourcing
yi = 1 if plant is located
at site i, 0 otherwise
xij = 1 if market j is
supplied by factory i, 0
otherwise
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Plant Location with Multiple Sourcing:
yi = 1 if plant is located
at site i, 0 otherwise
xij = Quantity shipped
from plant site i to
customer j
Dj= Annual demand for
market j, j = 1 to m
Ki= capacity of plant i
Sportstuff.com example
BioPharma example
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Case: SportStuff.com
(Adapted from: Chopra & Meindl, 2003)
In December 2000, Sanjay Gupta and his management team were busy evaluating the
performance at SportStuff.com over the last year. Demand had grown by 80 percent over the
year. The venture capitalists supporting the company were very pleased with the growth insales and revenue. Sanjay and his team, however, could clearly see that costs would growfaster than revenues if demand continued to grow and the supply chain network was notredesigned. They decided to analyze the performance of the current network in order to
redesign for the rapid growth anticipated for next three years.
SPORTSTUFF.COM
Sanjay Gupta founded SportStuff.com in 1996 with a mission of supplying parents with moreaffordable sports equipment for their children. Parents complained about having to discardexpensive skates, skis, jackets, and shoes because children outgrew them rapidly. Sanjay's
initial plan was for the company to purchase used equipment and jackets from families and
any surplus equipment from manufacturers and retailers and sell these over the Internet. Theidea was very well received in the marketplace, demand grew rapidly, and by the end of 1996the company had sales of $0.8 million. By this time a variety of new and used products weresold and the company received significant venture capital support.
In June 1996, Sanjay leased part of a warehouse in the outskirts of St. Louis tomanage the large amount of product being sold. Suppliers sent their product to the
warehouse. Customer orders were packed and shipped by UPS from there. As demand grew,SportStuff.com leased more space within the warehouse. By 1999, SportStuff.com leased theentire warehouse and orders were shipped to customers all over the United States.
Management divided the United States into six customer zones for planning purposes.Demand from each customer zone in 1999 was as shown in Table 1. Sanjay estimated that thenext three years would see a growth rate of about 80 percent per year, after which demand
would level off.
Table 1. Regional Demand in 1999
Zone Demand in 1999 Zone Demand in 1999Northwest 320,000 Lower Midwest 220,000Southwest 200,000 Northeast 350,000
Upper Midwest 160,000 Southeast 175,000
THE NETWORK OPTIONS
Sanjay and his management team could see that they needed more warehouse space to copewith the anticipated growth. One option was to lease more warehouse space in St. Louis
itself. Other options included leasing warehouses all over the country. Leasing a warehouseinvolved fixed costs based on the size of the warehouse and variable costs that varied with the
quantity shipped through the warehouse. Four potential locations for warehouses wereidentified in Denver, Seattle, Atlanta, and Philadelphia. Warehouses leased could be eithersmall (about 100,000 sq. ft.) or large (200,000 sq. ft.). Small warehouses could handle a flow
of up to 2 million units per year whereas large warehouses could handle a flow of up to 4
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million units per year. The current warehouse in St. Louis was small. The fixed and variablecosts of small and large warehouses in different locations are shown in Table 2.
Sanjay estimated that the inventory holding costs at a warehouse (excluding
warehouse expense) was about $600 F , where F is the number of units flowing through thewarehouse per year. Thus, a warehouse handling 1,000,000 units per year incurred aninventory holding cost of $600,000 in the course of the year.
Table 2 . Fixed and Variable Costs
Zone Small Warehouse Large Warehouse
Location Fixed Cost Variable Cost Fixed Cost Variable Cost
Seattle $300,000 / year $ 0.20 /unit $500,000 / year $ 0.20 /unit
Denver $250,000 / year $ 0.20 /unit $420,000 / year $ 0.20 /unit
St. Louis $220,000 / year $ 0.20 /unit $375,000 / year $ 0.20 /unit
Atlanta $220,000 / year $ 0.20 /unit $375,000 / year $ 0.20 /unitPhiladelphia $240,000 / year $ 0.20 /unit $400,000 / year $ 0.20 /unit
Table 3. UPS Charges per shipment of four units
LocationNorth-
west
South-
west
Upper
Midwest
Lower
Midwest
North-
east
South -
east
Seattle $ 2.00 $ 2.50 $ 3.50 $ 4.00 $ 5.00 $ 5.50
Denver $ 2.50 $ 2.50 $ 2.50 $ 3.00 $ 4.00 $ 4.50St. Louis $ 3.50 $ 3.50 $ 2.50 $ 2.50 $ 3.00 $ 3.50Atlanta $ 4.00 $ 4.00 $ 3.00 $ 2.50 $ 3.00 $ 2.50Philadelphia $ 4.50 $ 5.00 $ 3.00 $ 3.50 $ 2.50 $ 4.00
SportStuff.com charged a flat fee of $3 per shipment sent to a customer. An average
customer order contained four units. SportStuff.com in turn contracted with UPS to handle allits outbound shipments. UPS charges were based on both the origin and the destination of theshipment and are shown in Table 3. Management estimated that inbound transportation costsfor shipments from suppliers were likely to remain unchanged, no matter what the warehouseconfiguration selected.
Questions
1. What cost does SportStuff.com incur if all warehouses leased are in St. Louis ?2. What SC network configuration do you recommend for SportStuff.com ?
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C S E S T U D YB IO P H A R M A I N C
, ;
In 2005, Phillip (Phil) Landgraf faced several glaringproblems in the financial performance of his company,BioPharma, Inc. The firm had experienced a steep declinein profits and very high costs at its plants in Germany andJapan. Landgraf, the company s president for worldwideoperations, knew that demand for the company s products was stable across the globe. As a result, the surpluscapacity in his global production network looked like aluxury he could no longer afford.Any improvement in financial performance wasdependent on having the most efficient network in place,because revenues were unlikely to grow. Cutting costswas thus a top priority for the coming year. To help designa more cost-effective network, Landgraf assigned a taskforce to recommend a course of action.
B C K G R O U N DBioPharma, Inc., is a global manufacturer of bulk chemicals used in the pharmaceutical industry. The companyholds patents on two chemicals that are called Highcaland Relax internally.These bulk chemicals are used internally by the company s pharmaceutical division, and arealso sold to other drug manufacturers. There are distinctions in the precise chemical specifications to be met indifferent parts of the world. All plants, however, are currently set up to be able to produce both chemicals for anypart of the world.For 2005, sales of each product by region and the production and capacity at each plant are shown in Table 6-19.The plant capacity, measured in millions of kilograms
of production, can be assigned to either chemical as longas the plant is capable of producing both. BioPharmahas forecast that its sales for the two chemicals are likelyto be stable for all parts of the world, except for Asiawithout Japan, where sales are expected to grow by 10percent annually for each of the next five years beforestabilizing.The Japanese plant is a technology leader within theBioPharma network in terms of its ability to handle regulatory and environmental issues. Some developments inthe Japanese plant had been transferred to other plants inthe network. The German plant is a leader in terms of itsproduction ability. The plant has routinely had the highestyields within the global network. The Brazilian, Indian,and Mexican plants have somewhat outdated technologyand are in need of an update.CURRENT PL NT COSTS
T BIOPH RMAfter considerable debate, the task force identified thecost structure at each plant in 2005 as shown in Table6-20. Each plant incurs an annual fixed cost that is independent of the level of production in the plant. The fixedcost includes depreciation, utilities, and the salaries andfringe benefits of employees involved in general management, scheduling, expediting, accounting, maintenance,and so forth. Each plant that is capable of producingeither Highcal or Relax also incurs a product relatedfixed cost that is independent of the quantity of eachchemical produced.The product-related fixed cost includes
Region Plant CapacityLatin America Brazil 18.0Europe Germany 45.0Asia w/o Japan India 18.0Japan Japan 10.0Mexico Mexico 30.0U.S. U.S. 22:0
Highcal elax2 5 2 5 2 5 2 5Sales Production Sales Production
7.0 11.0 7.0 7.015.0 15.0 12.0 0.05.0 10.0 3.0 8.07.0 2.0 8.0 0.03.0 12.0 3.0 18.018.0 5.0 17.0 17.0
IThis case was inspired by pplichem Aj, Harvard Business School Case 9-685-051, 1985.
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lant Highcal Relax Highcal RelaxFixed Cost Fixed Cost Fixed Cost aw Material Production aw Material ProductionPlant (million ) (million ) (million ) ( /kg) cost ( /kg) ( /kg) cost ( /kg)Brazil 20.0 5.0 5.0 3.6 5.1 4.6 6.6Germany 45.0 13.0 14.0 3.9 7.0 5.0 8.5India 18.0 4.0 4.0 3.6 4.5 4.5 6.0Japan 17.0 6.0 6.0 3.9 7.5 5.1 9.0Mexico 30.0 6.0 6.0 3.6 5.0 4.6 6.5u s 21.0 5.0 5.0 3.6 5.0 4.5 6.5
depreciation of equipment specific to a chemical andother fixed costs mentioned that are specific to a chemical. a plant maintains the capability to produce a particular chemical, it incurs the corresponding product-relatedfixed cost even if the chemical is not produced at theplant.The variable production cost of each chemical consists of two components: raw materials and productioncosts. The variable production cost is incurred in proportion to the quantity of chemical produced and includesdirect labor and scrap. The plants themselves can handlevarying levels of production. n fact, they can also beidled for the year, in which case they incur only the fixedcost, none of the variable cost.
BioPharma transports the chemicals in specializedcontainers by sea and in specialized trucks on land. Thetransportation costs between plants and markets are asshown in Table 6 21. Historical exchange rates are shownin Table 6-22 and the regional import duties in Table 6-23.Given regional trade alliances, import duties in realityvary based on the origin of the chemical. For simplicity ssake, however, the task force has assumed that the dutiesare driven only by the destination. Local productionwithin each region is assumed to result in no import duty.Thus, production from Brazil, Germany, and India can besent to Latin America, Europe, and the rest of Asia without Japan, respectively, without incurring any importduties. Duties apply only to the raw material, production,
LatinFrom/To America EuropeBrazil 0.20 0.45Germany 0.45 0.20India 0.50 0.35Japan 0.50 0.40Mexico 0.40 0.30U.S. 0.45 0.30
Asia w/oJapan Japan Mexico U.S.0.50 0.50 0.40 0.450.35 0.40 0.30 0.300.20 0.30 0.50 0.450.30 0.10 0.45 0.450.50 0.45 0.20 0.250.45 0.45 0.25 0.20
Brazilian Indian Japanese Mexican U.S.eal Euro Rupee en Peso Dollar
2005 2.70 0.74 43.47 103.11 11.21 1.002004 2.90 0.80 45.60 107.00 11.22 1.002003 3.50 0.96 48.00 119.25 10.38 1.002002 2.30 1.11 48.27 131.76 9.12 1.002001 1.95 1.06 46.75 114.73 9.72 1.002000 1.81 0.99 43.55 102.33 9.48 1.00
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Retailer1
Retailer2
Retailer3
DCFactory PO POWO
Game Setup
TransitArea
We play a traditional, un-coordinated supply chain: no one talks to each
other: interactions entirely thru document and chip transfers
Instructorgenerates
dailydemand
WO = Work Order; PO = Purchase Order
Row 6 Row 5 Row 4 Row 3 Row 2 Row 1
TransitArea Transit
Area
Retailer1
Retailer2
Retailer3
DCFactory PO
POPOPO
WO
Factory, DC & Retailers: Move chips from Upstream into Stock
Note down Inflow and Available Beg. Inventory in the Form
(Factory: collect chips from Coordinator and place into upstreamtransit, based on earlier Work Order)
Day 23!
Step 1: Instructor Announces New day:Material Inflow & Stock Update
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Factory & DC: Demand = All Pending Purchase Orders : move ch ips to
downst ream transit area; Discard fulfilled POs; keep unfulfilled POs asBackorders (partial shipments also possible)Retailers: Demand = Random number generated by Instructor; hand over chips to
instruc tor; unfu lfilled demand = lost salesEveryone: Update Shipments / Demand, Endg. Inventory & Backorder / Lost sale,
if any, on the Form
Retailer1
Retailer2
Retailer3
DCFactory PO
POPOPO
Step 2: Meet Todays Demand
Check your Ending Inventory and qty on order (pipeline)
Place new PO/WO, if needed, and place it before upstream firm;note down this quantity in the last column of the Form
Note: Upstream firm acts on it next day as Step 2 (and you mightreceive material day after: Lead time >= 2 days).
Retailer1
Retailer2
Retailer3
DCFactory PO
POPOPO
WO
Step 3: Check Endg. Inventory &Place New Purchase/Work Orders,
if Needed
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Summary of Simultaneous Daily Steps for Each Player
Step 1:
Step 2:
Step 3:
Retailers
Move chips from Upstream pipeline into Stock (the DC would have placed the chips in
the pipeline the previous day). Note down Inflow and Beg. Available stock in form.Meet demand generated by Instructor: Move chips from Stock one step downstream.If Beg. Available stock is not enough, it leads to lost sale (no backorder for Retailer)
Place PO on DC, if necessary, based on ending & pipeline stock. The DC will act on thisthe next day (do not hand this to DC; just place this before DC in a FIFO stack)
Step 1:
Step 2:
Step 3:
DC
Move chips from Upstream pipeline into Stock (Factory would have placed the chips inpipeline the previous day). Note down Inflow and Beg. Available stock.
Meet Retailer demands: move chips for all the pending POs, placed by the retailers onprior day(s). DC does not look at / talk to Retailers. I t merely acts on the POs.
Place order on Factory, if necessary, based on ending & pipeline stock. Factory will lookat it next day.
Step 1:
Step 2:
Step 3:
Factory
Move chips from Upstream pipeline into Stock. Note down Inflow into Stock and Beg.
Available stock. Also move chips from Recycle Bin into pipeline based on Work Orderplaced by itself the previous day. Throw away this WO.
Meet DC demand: Move chips from Stock downstream, for POs placed by DC on priordays
Place a self- Work Order, if necessary, based on ending stock. The Factory will act onthis the next day.
Retailer
PO to DC
15
Retailer Form
Day inflow Avail.Stock
TodaysDemand
Endg.Invent.
Stock-out
OrderPlaced
7 10 0
8
9
Retailer Daily Operation
Stock-out = lost sales; cannot be carried over
Endg. Inventory & stock-out: one of them will be zero
Demand = 12 1. Move chips from upstream pipeline intoStock. Note Inflow & update Avail. Stock
2. Check & enter todays demand. Movedemand fulfilled chips to Recycle bin.Note Endg. Inventory & sto ck-out
3. Place Purch ase Order on DC if you want,and place it on central pile before DC
5 15 12 3 0 15
Chipsupstream = 5
Chipsdownstream = 12
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DC Form
Day Inflow Avail.Stock
Total
Shipped
Endg.Invent.
BackOrdered
OrderPlaced
7 0 10
8
9
DC Operation
Back orders are not lost sales; can be carried over
Endg. Inventory & back orders: one of them will be zero
1. Move chips from upstream. Note Inflow andupdate Available Stock
2. Check Demand: all POs from Retailers!
Update Endg. Inventory & back orders
3. Place Purchase Order, if necessary, on thefactory
DC
PO to Fac
60
R-PO-1
15
R-PO-2
20
R-PO-3
10 (bo)
Allo cate & s hip , on a FIFO basis , move chip sto pipeline before each retailer
FIFO Shipments: 10 to meet
store 3 PO (backorder), 15 for
store 1 PO, and a partial 15
for store 2 PO
Chips to downstream= 10, 15, 15
40 40 40 0 5 60
Chipsupst ream = 40
Factory Form
Day Inflow Avail.Stock
Shipped Endg.Invent.
BackOrdered
OrderPlaced
7 0 10
8
9
Factory Operation
Back orders are not lost sales; can be carried over
Endg. Inventory & back orders: one of them will be zero
1. Find any factory work order? If yes, move
chips from Recycle bin into stock & noteInflow & Avail. Stock
2. Check Demand: all POs from DC . Allocate &move chi ps, on a FIFO basis. Update Endg.Inventory & backorders
3. Place Factory Work Order (FWO) on left
Factory
FWO
40
DCPO
10 (bo) DCPO
50
FIFO Shipments: 10 to
meet earlier PO, 30
towards current demand
FWO
80
Chips todownstream= 40
40 40 40
0 20
80
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Participants will be divided into 2 or 3 such supplychains (SCs)
Each SC has 5 firms (three retailers, one DC, one factory;each firm can be operated by one or two players).
One SC will play the role of a benchmark SC. See gameparameters for benchmark SC in next slide.
The instructor may change the parameters for other SCs:one SC may have half the demand volatility (instructorwill generate different random demands for this SC);Another SC may have different inventory holding /shortage cost, etc. with respect to benchmark SC
The Game is played for 35 days, and the data is enteredinto the Game spreadsheet and analyzed later
Game Parameters for Benchmark SC
Factory DC Retailers
Demand =Backorders +Pending POs
Backorders +Pending POs
Uniform random(0 to 12) or (3 to 9)
UnfulfilledDemand
Carried over asbackorders
Carried over asbackorders
= lost sales;cant carry over
Cost ofUnfulfilledDemand
$ 2 / unitbackorder cost
$ 2 / unitbackorder cost
$ 5 / unitLost sales
Order (Setup)Cost
$100 / WO $ 25 / PO $ 25 / PO
Order Quantity25 to 100
(multiples of 5)
No Min / Max.Order Qty
(multiples of 5)
No Min / MaxOrder Qty
(multiples of 5)Inventory HoldingCost
$1 /unit/ day $1.50 /unit/ day $2.00 /unit/ day
Beg. Inventory 75 50 25
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Analyze & compare the results of all SCs withrespect to benchmark SC.
Discuss: Bullwhip effects & cost characteristics in all SCs How can end-customer service be improved? How can overall supply chain costs be lowered?
Work out a new SC coordination / informationsharing strategy and play the game again, iftime permits. This time, feel free to talk,exchange info, maintain visibility upstream &downstream & collaborate (but not collude).
Was there any: Improvement in end-customer service level? Reduction in overall supply chain costs?
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SC Strategy
VII. Collaborative Forecasting &Inventory Management
Collaborative Forecasting & Operations
Importance of ForecastingAf fects all upstream decisions in the supply chain
Forecast errors are expensive:Overestimation of demand =>
markdowns, excess commitment of resources,inventories of unwanted items, discounted sales
Underestimation of demand =>
stock-outs, opportun ity costs: lost sales, goodwill,image, market share, loss of revenue now & future
Forecasting provides extra lead time to: React to new situations: Less surpr ises
Make optimal and proactive decisions
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Collaborative Forecasting & Operations
Traditional: Firm-level, IndependentForecasting & Operations Planning
APP
MRP Orders
Forecasts
ProductionPurchasing
APP
MRP Orders
Forecasts
ProductionPurchasing
Firm Firm
Collaborative Forecasting & Operations
Management judgment, expert
opinion, sales force composites,
Delphi, Astrology & other methods
Quantitative
Time Series:
X-axis = TimeSimple and Wtd. Moving Average
Exponential Smoothing
Exp. Smoothing Adjusted for Trend
Trend-Seasonality Regression
Other models
Causal RegressionIndep. variables = causal variables
Traditional Forecasting Methods
Qualitative
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Collaborative Forecasting & Operations
Forecasting in Supply Chain Era
Inter-organizational & collaborative:-Involvement of distributors in forecasting-updating forecasts with initial orders-early information sharing with suppliers,etc.
Advances in ITPoint of sale (POS) scanner technologies,Information sharing technology among firms,common demand data bases, Extranets, etc.
=> Greater visibility upstream & downstream !
Collaborative Forecasting & Operations
Garment Industry:
Quick Response Movement
Variety: garment, gender, type, style, color, size =>numerous SKUs !
Intrinsic nature of the fashion industry
Long product development lead time: accuracy offorecasts greater when closer to the selling season
More intense competition, etc.
Forecasting problems !
Have to commi t product ion a year ahead
Long, globally extended supply chains
Quick-response initiative was developed
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Collaborative Forecasting & Operations
New Use of Forecasting Committees
Each member of the buying committee makesindependent forecast
Items with less variance among members => moreaccurate forecasts (predictable items)
Items with high variance among members =>unpredictable items
Disagreement preserved; Consensus not enforced
Collaborative Forecasting & Operations
Partition production capacity into:
Non-reactive capacity: used for :
items with more accurate forecasts
initial, minimum amounts of unpredictable items
Reactive capacity: used for :
unpredictable styles
second runs of production based on unfolding demand
Update initial forecasts with early demandinformation using POS technology
More costly styles carry greater risk: reactive
capacity greatly reduces costs
Capacity Postponement
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Collaborative Forecasting & Operations
Reconfiguration of GlobalManufacturing & Supply Chains
Non-ReactiveCapacity Systems
Reactive CapacitySystems
More stable productionconfigurations forgeneric items: itemswith stable,
consolidated demand,plus minimum runs ofitems with highuncertainty
Flexible & agile systems foritems with high demanduncertainty; Responsiveness,customization, economies of
scope logic; Based onanalysis of SKU-product-process matrix, & demanduncertainty.
GlobalMarkets
Collaborative Forecasting & Operations
Exploit Demand Aggregation Principle
Product line forecasts more accurate than SKUforecasts
Annual forecasts more accurate than weeklyforecasts
Central DC forecasts more accurate than local retailoutlets forecasts. Why?
Product Lineforecast
Items / SKUs
A B C
$$ forecast
SKU-levelforecast
Top-down Bottom-up
Sales repsadjustments
FinalForecast
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Collaborative Forecasting & Operations
Why do Forecasts Always Seem to be Wrong?
q
Demand < q,
Loss from unsold inventory
Cost of over-stocking = c-s
Demand > qShortage, loss of revenue
Cost of under-stocking = p-c
Forecast Providedby Marketing
Capacity commitments &backup options to ensure>50% service level
Expected Demand
Collaborative Forecasting & Operations
Setting Production/Order Quantity:
The Newsvendor Problem
q*
Demand q; Can sell only qCost of under-stocking
= (1-CFR) (p-c)
Balancing the two costs => CFR (c-s) = (1-CFR) (p-c)1. Compute: CFR = [ (p - c) / ( p - s) ]
2. Compute: q* = NORMINV (CFR, Exp. Demand, Std. Dev.)
CFR
Exp.Demand
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Collaborative Forecasting & Operations
Collaborative Planning, Forecasting
and Replenishment (CPFR) Systems
Initiated by Voluntary Inter-industry CommerceStandards (VICS) Association: www.vics.org
Mission: to create collaborative relationshipsbetween buyers & sellers through co-managedprocesses and shared information.
Partners share plans for future events.
Working on issues before they occur, partners havetime to react: suppliers can build inventory in
advance of promotional orders and carry less safetystock at other times, etc.
Collaborative Forecasting & Operations
CPFR: The Precursors QR pioneered in textile and garment industry:
Kurt Salmon Associates
Effic ient Consumer Response (ECR) pioneeredby Wal-Mart
Category Management (CM)
Vendor Managed Inventory (VMI)
CPFR is now v iewed as second generation ECR
(Details on CPFR taken from: Seifert, 2004; and www.cpfr.org)
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Collaborative Forecasting & Operations
Wal-Mart-Warner Lambert Pilot
Both independently forecasted demand, six monthsin advance; the forecasts were by store, week, SKU
The forecasts were shared and discrepanciesresolved; shared on paper at first, and later byelectronic exchange of spreadsheets
Before: Wal-Mart placed orders 9 days in advance;
Af ter pi lo t: Wal-Mart placed orders 6 weeks inadvance, to match Lambert's 6-week lead time.
Warner-Lambert: became a make-to-order situation,
with big reduction in finished goods inventories Wal-Mart: in-stock position went up from 85% to 98%;
sales increased by $8.5 million; inventories reduced25%
Collaborative Forecasting & Operations
CPFR Process Overview
1. Develop Front-End Agreement
2. Create Joint Business Plan
3. Create Sales Forecast
4. Identi fy Exceptions to Sales Forecast
5. Resolve / Collaborate on ExceptionItems
6. Create Order Forecast
7. Identi fy Exceptions to Order Forecast8. Resolve / Collaborate on Exception
Items
9. Order Generation
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Collaborative Forecasting & Operations
Frozen Slushy Fluid
Now
Demand Time Fence Planning Time Fence
Time - >
Forecasts/
Orders
CPFR: I see it this way
Orders Firm
Planned
Orders
Planned Orders
Firm OrdersOrder
Forecasts Sales Forecasts
APICS Terminology
CPFR Terminology
Collaborative Forecasting & Operations
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Collaborative Forecasting & Operations
Collaborative Forecasting & Operations
The CPFR Roadmap
Evaluate Current State Where does your company stand today?
Does your company have a culture that values
cooperation and communication between its
departments and with its trading partners?
Has your company implemented industry best
practices?
Is using IT to solve business challenges a company
priority? Develop Your Companys CPFR Vision
Are Your Trading Partners Ready for CPFR?
Develop a Business Case to take to Partners
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Collaborative Forecasting & Operations
Check list: Your Partners Ready for CPFR?
Can your trading partner relationships becharacterized as open and trusting?
Do you and your trading partner have
complementary strengths and weaknesses?
Does your trading partner have the appropriate
commitment and resources required to make
CPFR successful?
Does your trading partner have experience with
CPFR with another partner?
Can your trading partner quantify the potential
internal and external benefits?
Collaborative Forecasting & Operations
Collaborative Inventory Management:Value Stream View
RMWIP
FP FG
Bought-out parts
RM = Raw MaterialsWIP = Work In Process (Semi-finished Parts)FP = Finished Parts (this is also WIP)FG = Finished Goods
Targets for Inventory Turnover Ratio =Cost of Goods Sold / Avg. Total Inventory
SuppliersParts Production Assembly
COGS
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Collaborative Forecasting & Operations
FirmSupplier Distributor
Supplier
Supplier
Supplier
FirmDistributor
Customer
Customer
Customer
Customer
Inventory Targets In The Supply Chain
Retailer
Retailer
Retailer
Collaborative Forecasting & Operations
Root Cause Analysis:
(e.g.) Raw Materials
Finite lead times; Erratic lead times
Far-away suppliers
More economical to order in largebatches => creates inventory
Supply-side uncertainties
Volume discounts => inventories Speculative purchases: when prices are
going up, potential supply problems, etc.
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Collaborative Forecasting & Operations
Types of Materials
DIRECT MATERIALS
Final assemblies
Sub-assemblies
Components (finished parts)
Semi-finished parts
Raw materials
INDIRECT
MATERIALS
peripheral items
DependentDemand
Independent
Demand
Collaborative Forecasting & Operations
Right Techniques To Use
Independent Demand
Fixed Order Quantity Models
Fixed Order Period Models
Dependent Demand
MRP
ABC (Pareto or 80-20) Analysis
Just-In-Time (Lean) Systems
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Collaborative Forecasting & Operations
ABC (Pareto) Analysis
In any system, a few items contributethe most: vital few & trivial majority:
80-20 Rule
20%
80%
80%
20%
ValueItems
Collaborative Forecasting & Operations
FIXED QUANTITY MODELS:
Reorder Point & Safety Stock
R
SS
Q
R = Re-order Point ; SS= Safety s tockQ = order quanti ty; LT = Lead Time
LT0
EOQ= SQRT (2DS/C)
or through other models
LT * Demand rate
Z DDLT
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Collaborative Forecasting & Operations
FIXED QUANTITY MODELS:Reorder Point & safety Stock
R
SS
Q
R = Re-order Point; SS= Safety stockQ = order quant ity; LT = Lead Time
LT
Reorder PointExpected DemandDuring LT
0
DDLT R
SS
R = DDLT +SS
Collaborative Forecasting & Operations
FIXED PERIOD MODELS
min
Q
Order quantity varies
max
Review Period
SS
Avg. Cycle Stock =Demand Rate *Re-order Period /2
Safety Stock = Z * during (Re-order period + Lead time)
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Collaborative Forecasting & Operations
Continuous Replenishment Systems (CRP)
Pioneered by Proctor & Gamble; May beimplemented with VMI
IBM: solution provider for CRP service: EDI
connections, software, training, data processing
and automated replenishment orders
P&Gs customer service reps use CRP to monitor
movement of materials at retailers DCs
Every day replenishments handled by the
software More forecasting accuracy at DC level
Collaborative Forecasting & Operations
Distribution Requirements Planning (DRP)
DRP applies MRP logic to distributioninventories.
Integrates with.
Helps maintain inventories in warehousesby improving links between market and
manufacturing activities. DRP can yield significant logistics savings
thru improved transportation & delivery
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Collaborative Forecasting & Operations
Positioning the Inventories &Exploiting the Square Root Law
higher service level
closer to customer
local presence may stimulate sales better market information
Warehouse 1
Warehouse 2
Warehouse 3
Warehouse n
Plant
Collaborative Forecasting & Operations
Cons of decentralized structure Inventories increase !
cycle stock increases by square root law i.e.,
inventory level is proportional to the square
root of the number of warehouses (n); e.g.,
in a 4-warehouse system, inventories are
double that of a centralized system
safety stocks are also higher due to spreading
the inventory, and increase in stock-out
probability
Higher overheads, administrative expenses
Need for better coordination and control
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Collaborative Forecasting & Operations
RM
WIP
FP
FG
Bought -out Parts
Suppliers
Parts ProductionAssembly
ERPs: Still Constrained by Single-firm Perspective
Customers
ERP MPS
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Collaborative Forecasting & Operations
Countering Bullwhip Effects
Information sharing, channel alignment
Avoid multiple demand forecasts: enhancevisibility and information sharing
Decrease order batch sizes in production andtransportation; more possibilities to do thisnow
Stabilize prices: every-day-low-price (EDLP)
Reduce gaming & speculation throughtransparency
Collaborative Forecasting & Operations
Inter-organizational Production Planning
Advanced Planning Systems (APS)
Demand Planning Sophisticated forecasting toanalyze customer buying patterns
Supply Planning Synchronizes operations ofmanufacturers, suppliers, and logistics serviceproviders through information exchange.
Demand fulfillment more accurate estimates oforder fulfillment dates; order promise, backlog
management, and order fulfillment Based on greater extranet visibility upstream
and downstream and newer optimization tools.
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The task force identified that plant capacities allowed any reasonable order to beproduced in one day. Thus, a plant shipped out an order one day after receiving it. Afteranother four days in transit, the order reached the DC. The DCs ordered using a periodic
review policy with a reorder interval of six days. The holding cost incurred was $0.15 per
unit per day whether the unit was in transit or in storage. All DCs carried safety inventories toensure a CSL of 95 percent.
Region 1 Region 2 Region 3 Region 4 Region 5
Part 1 Mean 35.48 22.61 17.66 11.81 3.36Part 1 SD 6.98 6.48 5.26 3.48 4.49
Part 3 Mean 2.48 4.15 6.15 6.16 7.49Part 3 SD 3.16 6.20 6.39 6.76 3.56
Part 7 Mean 0.48 0.73 0.80 1.94 2.54Part 7 SD 1.98 1.42 2.39 3.76 3.98
ALTERNATIVE DISTRIBUTION SYSTEMS
The task force recommended that ALKO build a national distribution center (NDC) outsideChicago. The task force recommended that ALKO close its five DCs and move all inventoryto the NDC. Warehouse capacity was measured in terms of the total number of units handled
per year (i.e., the warehouse capacity was given in terms of the demand supplied from thewarehouse). The cost of constructing a warehouse is shown in the Figure below. However,
ALKO expected to recover $50,000 for each warehouse that it closed. The CSL out of theNDC would continue to be 95 percent.
Given that Chicago is close to Cleveland, inbound transportation cost from the plantsto the NDC would reduce to $0.05 per unit. Given increased average distance, however,outbound transportation cost to customers from the NDC would increase to $0. 24 per unit.
Other possibilities the task force considered include building a national distributioncenter while keeping the regional DCs open. In this case, some products would be stocked at
the regional DCs while others would be stocked at the NDC.
FISHER'S DECISION
Gary Fisher pondered the task force report. They had not detailed any of the numberssupporting their decision. He decided to evaluate the numbers before making his decision.
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0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
0 200 400 600 800 1000 1200
Units (Thousands)
$
QUESTIONS
1. What is the annual inventory and distribution cost of the current distribution system?
2. What savings would result from following the task force recommendation and settingup an NDC? Evaluate the savings as the correlation coefficient of demand in any pair of
regions varies from 0 to 0.5 to 1.0. Do you recommend setting up a NDC?
3. Suggest other options that Fisher should consider. Evaluate each option andrecommend a distribution system for ALKO that would be most profitable. How
dependent is your recommendation on the correlation coefficient of demand acrossdifferent regions?
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SC Strategy
XI. Strategic Sourcing &E-Procurement
Strategic Purchasing E-procurement
Two Major Changes1. Managerial Revolution: Strategic Sourcing
a) Elevation of Purchasing to a strategicorientation
b) Sourcing strategies that are aligned with thestrategy of firm and supply chain
c) Supply base optimization; supplier relationshipmanagement and selective strategic alliances
d) Early involvement of suppliers in product design
e) Better, cross-functional integration ofPurchasing with other functions.
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Strategic Purchasing E-procurement
Two Major Changes
2. Technological Revolut ion: E-procurement
a) Use of IT such as EDI, Internet, Intranet,Extranets
b) Greater efficiency in ordering & transactionprocessing, within the firm as well
c) Effective information sharing with others in
supply chaind) Supports strategic, global sourcing.
Strategic Purchasing E-procurement
Blanket Orders andStockless Purchasing
Blanket orders: long-term purchasecommitment for items that are to be deliveredagainst short-term shipping requests
Stockless Purchasing: supplier deliversmaterial directly to purchasers user
department or assembly line, rather than acentral stock room.
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Strategic Purchasing E-procurement
Elements of Strategic Sourcing
Strategic segmentation
Analyze the sourcing process i.e., sourcingvalue chain for each category
Based on total cost of ownership (TCO)approach
Develop sourcing strategy for each groupbased on TCO and aligned with supply
chain goals
Strategic Purchasing E-procurement
Total Cost of Ownership:
Based on the Big Picture
Reduce jointsupplier/company/
customer costs
Reduce
internal
company costs
MinimizeTCO
Purchase
Price
Transportation
Inventory
carrying costs
Warehousing
Purchasing
administration
R&DDamaged fieldproduct
Factory
yield
Specifications
Expediting
Productioncapacity
Reduce
purchase cost
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Strategic Purchasing E-procurement
Sourcing Strategies
Expand geographic supply base
Develop new suppliers
Profit from global supply/demand imbalances
Capitalize on currency exchange
Take advantage of trade incentives
Compare total costs
Renegotiate prices
Unbundle pricing
Long-term contracts
Index pricing
Commodity hedging
Competitive bidding /online auction
Pool volume across business units
Consolidate number of suppliers
Redistribute volume among suppliers
Combine volume from different
sourcing groups
Rationalize/standardize specs
Substitute materials
Apply product value analysis
Examine life cycle costs
Develop long-term contracts
Reengineer joint processes
Share productivity gains
Integrate logistics
Support supplieroperations improvement
Long-term contracts
Establish/develop key suppliers
Employ strategic alliances/partnering
Examine strategic make-versus-buy
Develop integrated supply chain
Establish joint ventures
Exploit Buying Power Build Advantage
Global
Sourcing
Best Price
Evaluation
Volume
Concentration
Product
Specification
Improvement
Joint Process
Improvement
Relationship
Restructuring
Strategic
Sourcing
Strategic Purchasing E-procurement
Emergence of Zero-level Suppliers
Distance from Assembly Plant
SupplierInvolvement
in assembly
Modular
Consortia
System
SuppliersLocal
SuppliersDispersed
SuppliersRemote
Suppliers
Devolution of assembly tasks:
locate near OEMs
Assembly tasks performed within OEM
Pressure for JIT deliveries
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Strategic Purchasing E-procurement
Vendor Managed Inventory
Manufacturer
Purchasing
Vendor
Marketing
A/cPayable
A/cReceivable Reverse PO
EFT
Demand forecasts, production &assembly schedule
Strategic Purchasing E-procurement
Impact of VMI Cuts overall costs
Minimizes double buffering of inventory
Eliminates paperwork
Reduces administrative & ordering costs
Cuts time for order fulfillment
Competitive advantages for both parties in the SC
Reduces selling-buying bureaucracy
Reduces fixed ordering costs, reduces barriers tofrequent shipments, facilitates JIT shipments
Counters the bull-whip effect
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Strategic Purchasing E-procurement
The Firm
Direct Materials
Industry-specific
Indirect Materials
(MROs)
Vertical
Hubs
(Vortals)
Horizontal
Hubs
Catalog-based
Exchanges
MRO hubs
Horizontal
spot markets
E-procurement strategy should be part of strategic sourcing
Apply Kraljic matrix again for selective use of reverse auctions
Strategic Purchasing E-procurement
Reverse Auctions
Traditional: forward auction by seller;
price movements are upward
Reverse: backward auction by buyer;
price movements are downward
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Strategic Purchasing E-procurement
Sellers Reasons for Participating
Promise of increased business
Better market information about competitorsprices (traditionally, very little is known atRFQ time)
Penetration of new markets, with flexiblepricing based on needs of the new market
Less paperwork and low administrative
cycle time between bidding and award ofbusiness
Strategic Purchasing E-procurement
Buyers Reasons Reduced purchase prices
Reduced administrative costs
RFQ process: 1) write specs; 2) id of suppliers; 3)qualify suppliers; 4) mail RFQs; 5) wait forresponses; 6) evaluate responses; 7) notifyselected supplier; 8) negotiate final terms. With
RA: steps 4 to 7 are much faster. Reduced inventory levels, faster replenishment
close to time of need
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Strategic Purchasing E-procurement
Potential Disadvantages for Sellers
Purchase decision almost entirely based onprice Less loyalty, future business cannotbe expected
Investments made cannot be recovered:tooling, employee training, capital expenses
Buyer may be using RA only as negotiationploy (buyer might have already identifiedthe supplier and uses RA only for arm twist
Relentless downward price pressure
Strategic Purchasing E-procurement
Buyer may end up destroying trust andloyalty structure
Suppliers may commit less resources dueto future order uncertainty
Too few suppliers may respond to an RA(that is happening increasingly)
Potential Disadvantages for Buyers
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Strategic Purchasing E-procurement
Appropriate Conditions for RAs
1. Clearly state the commodity specs
2. Purchase lots must be large enough to justifysellers involvement (consolidate volumes byincluding whole part families; standardize partsand specs; leverage volumes across variousdivisions of the fir, etc.)
3. Supply market conditions must exist ( sufficientnumber of qualified suppliers; excess capacityincentive, economies of scale incentive; elastic
prices)4. Infrastructure: IT, employee training, etc.
Strategic Purchasing E-procurement
Contracts to ImproveOverall Supply Chain Profits
Double marginalization: buyer and seller makeindependent decisions, instead of together =>Actual SC profits
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Strategic Purchasing E-procurement
Returns Policy: Buyback Contracts
Manufacturer specifies wholesale price and abuyback price at which the retailer can returnunsold items at the end of the season
Results in an increase in salvage value forRetailer, inducing retailer to order larger qty
Manufacturer is willing to take on some of thecost of overstocking because the SC will end
up selling more on average Manufacturer profits and supply chain profits
can increase
Strategic Purchasing E-procurement
Revenue Sharing Contracts Manufacturer charges Retailer a low
wholesale price and shares a fraction of therevenue generated by the retailer
The lower wholesale price decreases thecost to the retailer in case of an overstock
The retailer therefore increases the level ofproduct availability, which results in higherprofits for both the manufacturer and theretailer
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Strategic Purchasing E-procurement
Quantity Flexible Contracts
Allows Retailer to modify order (withinlimits) as demand visibility increases closerto the point of sale
Better matching of supply and demand
Increased overall SC profits if Manufacturerhas flexible capacity
Lower levels of information distortion than
either buyback contracts or revenue sharingcontracts
Strategic Purchasing E-procurement
Contracts to Coordinate SC Costs
Differences in costs for Buyer & Supplier canlead to higher total SC costs
Example: Replenishment order size placedby Buyer: Buyers EOQ does not take intoaccount Suppliers costs.
A quantity discount contract may encourageBuyer to purchase a larger qty (which would
be lower costs for Supplier), which wouldresult in lower total SC costs
But quantity discounts lead to informationdistortion because of order batching
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Strategic Purchasing E-procurement
Contracts to Increase Agent Effort
Often when an agent acts on behalf of aprincipal, and the agents actions affect thereward for the principal
Example: A car dealer who sells cars of amanufacturer, plus those of other makers
Examples of contracts to increase agenteffort include two-part tariffs and thresholdcontracts
Threshold contracts increase informationdistortion, however
Strategic Purchasing E-procurement
Bulk and Spot PurchaseFor the simple case where spot market price is
known but demand is uncertain:
cB = bulk rate
cS = spot market price
Q* = optimal amount of the asset to be purchased inbulk
p* = probability that demand does not exceed Q*
Marginal cost of purchasing another unit in bulk iscB. The expected marginal cost of not purchasinganother unit in bulk and then purchasing it in thespot market is (1-p*)cS.
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Strategic Purchasing E-procurement
Bulk and Spot Purchase
If the optimal amount is purchased in bulk, themarginal cost of the bulk purchase shouldequal expected marginal cost of the spotmarket purchase, or cB = (1-p*)cS
Solving for p*, p* = (cS cB) / cSIf demand is normal with mean and std. dev., optimal amount Q* to be purchased in bulkis: Q* = F-1(p*,,) = NORMINV(p*,,)
Strategic Purchasing E-procurement
Example
Bulk contract cost = cB = $10,000 per millionunits
Spot market cost = cS = $12,500 per million
= 10 million units; = 4 million units
p* = (cS cB) / cS = (12,500 10,000) / 12,500 =0.2
Q* = NORMINV(0.2,10,4) = 6.63
Therefore should sign a long-term bulk contractfor 6.63 million units per month and purchaseany additional capacity on the spot market
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SC Strategy
XII. Continuous Improvement &Sustainability
S ontinuous Improvement
Continuous Improvement Define and classify processes (standard
process c lassifications are being developed:see for instance, the system of AmericanProduct ivity and Quality Center (APQC):www.apqc.org)
Identify core processes ( the vital few )
Develop Metrics
Monitor Global Benchmark
Analyze performance gaps
Pursue process improvement
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S ontinuous Improvement
Quality Measures:Defect Rates, Order Entry Accuracy, BillingErrors, Number of Customer Returns, Picking/ Shipping Accuracy
Productivity Measures:
Asset Management Measures: Inventory Turns,ROI, ROA, Profitability of Partners in theChain, etc.
NPDP: Developmental Cost, DevelopmentalLead Time, Innovativeness, Frequency of NewProduct Introduction, etc.
Supply Chain Performance Metrics
S ontinuous Improvement
Several ImprovementPhilosophies
Theory of constraints approach:
(www.goldratt.com)
TQM, Six Sigma, Demings PDCA approach
Supply-Chain Operations Reference Model
(SCOR): Supply Chain Council
Value Stream Mapping (developed by Lean
Manufacturing group)
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S ontinuous Improvement
Process Mapping Tools
IDEF (Integrated Definition System) Workflow management software Enterprise modelers Object oriented modeling, etc. Integrating material and information flows
and transformations, data bases, etc.continues to be a challenge
Keep mapping simple, transparent and easy
to use ! Ensure buy-in and participation throughout!
S ontinuous Improvement
SCOR Developed by Supply-Chain Council (SCC)
www.supply-chain.org
These Process Reference Models integrateconcepts of BPR, benchmarking and processmeasurement in a cross-functional, and cross-enterprise framework
Used to capture the as is state, and derive tobe state, quantify and benchmark performancemetrics, and characterize management practicesand software solutions that result in best in classns that result in best in class performance
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S ontinuous Improvement
SCOR (contd)
SCOR is based on Five Distinct ManagementProcesses: Plan, Source, Make, Deliver, Return
Supplier Customer CustomersCustomerSuppliersSupplier
Make DeliverSource Make MakeSourceDeliver SourceDeliver
(internal or
external)
(internal or
external)
Your Company
Source Deliver
Plan
S ontinuous Improvement
SCOR (contd) Plan: Demand / Supply Planning & Management
Source: Sourcing stocked, MTO, ETO Product
Make: MTS, MTO, ETO production execution
Deliver: Order, Warehouse, Transportation, and
Installation Management for stocked, MTO, ETO
product
Return: Return of raw materials to supplier, receipt
of returns from customers for defective products,
excess products, etc.
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S ontinuous Improvement
Value Stream Mapping
A visual tool or documenting current state
Method for envisioning future states
A means for ensur ing part ic ipation and buy-in from
people in the value stream
A cross-funct ional communication platform
Lean Enterprise Institute - www.lean.org
The Lean University - www.leanuniversity.com
S ontinuous Improvement
Current State
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S ontinuous Improvement
Future State
SC Strategy
FirmSupplier Distributor
Supplier
Supplier
Supplier
FirmDistributor
Customer
Customer
Customer
Customer
Ensuring Sustainability
Retailer
Retailer
Retailer
Scoping: high-impact
areas; 80-20 rule
Points of vulnerability &
potential suppl