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Supply Chain Strategy

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Supply-Chain Management : Define

Measuring Supply-Chain Performance

Bullwhip Effect

Outsourcing

Global Sourcing

Value Density

Mass Customization

OBJECTIVES

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Supply-chain is a term that describes how

organizations (suppliers, manufacturers,

distributors, and customers) are linked together

What is a Supply Chain?

Suppliers

Inputs

Suppliers

Service support operations

Transformation

Manufacturing

Local service providers

Localization

Distribution

Customers

Output

Customers

Services

Supply networks

Manufacturing

4What is Supply Chain Management?

Supply-chain management is a total

system approach to managing the entire

flow of information, materials, and finance

from raw-material suppliers through

factories and warehouses to the end

customer

Supply Chain Mgt.-Understanding the Concept What is a Supply Chain?

• Consists of all parties involved directly or indirectly in fulfilling a customer order.

• Is dynamic and involves the constant flow of information, materials and funds between different stages.

Objectives of a Supply Chain

• Should be to maximize the overall value generated.

• Higher the supply chain profitability, the more successful is the supply chain.

Importance of Supply Chain Decisions

• Supply chain design, planning and operation decisions play a significant role in the success or failure of a company.

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Business/ Economic factors shaping Supply Chain Management

• Consumer demand

• Globalization

• Competition

• Information & communication

• Inventories

• Transportation

• Facilities

• Government regulations

• Environment

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SCM Network

Manufacturer

S2 S1

S2 S1

S2 S1 D3

R1

R2

R3

C

C

C

Tier 2 Supplier Tier 1 Supplier Distributors Retailers Customers

Information

Flow

D2

D1

Material

Flow

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Typical Supply Chains

Receiving Operations Distribution

Storage Storage

Purchasing

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Typical supply chain for a Manufacturer

Supplier

Supplier

Supplier

Storage Manufacturer Storage

Distributor Retailer Customer

Typical supply chain for a Service

Supplier

SupplierStorage Service Customer

PRODUT / SERVICESINFORMATION

FINANCES

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Supply Chain Decision Making Framework

Competitive Strategy

Supply Chain Strategy

Inventory Transportation Facilities Information

Supply Chain Structure

Efficiency Responsiveness

SCM Drivers

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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

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Example of Measuring Supply-Chain Performance

Suppose a company’s new annual report claims their costs of goods sold for the year is Rs 16 crore and their total average inventory (production materials + work-in-process) is worth Rs 3.5 crore. 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 Rs 16 crore and their total average inventory (production materials + work-in-process) is worth Rs 3.5 crore. This company normally has an inventory turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it mean?

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Example of Measuring Supply-Chain Performance (Continued)

= 16/3.5 = 4.57

Since the company’s normal inventory turnover ratio 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.

= 16/3.5 = 4.57

Since the company’s normal inventory turnover ratio 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.

valueinventory aggregate Average

sold goods ofCost turnoverInventory

valueinventory aggregate Average

sold goods ofCost turnoverInventory

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The Old Paradigm: Push Strategies

Production decisions based on long-term forecasts

Ordering decisions based on inventory & forecasts

What are the problems with push strategies?– Inability to meet changing demand patterns– Obsolescence– The bullwhip effect:

Excessive inventory Excessive production variability Poor service levels

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A Newer Paradigm: Pull Strategies

Production is demand driven– Production and distribution coordinated with true customer

demand– Firms respond to specific orders

Pull Strategies result in:– Reduced lead times (better anticipation)– Decreased inventory levels at retailers and manufacturers– Decreased system variability– Better response to changing markets

But: – Harder to leverage economies of scale– Doesn’t work in all cases

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Push and Pull Systems

What are the advantages of push systems?

What are the advantages of pull systems?

Is there a system that has the advantages of both systems?

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A new Supply Chain Paradigm

A shift from a Push System...– Production decisions are based on forecast

…to a Push-Pull System

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Push-Pull Supply Chains

Push-Pull Boundary

PUSH STRATEGY PULL STRATEGY

Low Uncertainty High Uncertainty

The Supply Chain Time Line

CustomersSuppliers

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Bullwhip Effect

Inventories are progressively larger moving backward through the supply chain.

Tier 2Suppliers

Tier 2Suppliers

Tier 1Suppliers

Producer(Mfg)

Distributor Retailer

Upstream Downstream

Note : Last but not the least the final customer

= Amount of Inventory

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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

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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)

SupplyUncertainty

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What is Outsourcing?

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

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Reasons to Outsource

• Organizationally-driven

• Improvement-driven

• Financially-driven

• Revenue-driven

• Employee-driven

• Cost-driven

Global Sourcing

Aluminum

Tires

Steel

Tires

Castings

Pig Iron

Al Alloy

Eltxn. parts

SteelGears

Potential Supply Chain Linkages

Plant 1

Market A

Source A Source B

Plant 2

Market B

Source C

Plant 3

Market C Markets

Manufacturing Locations

Source Locations

Far EastEuropeNorth America

Figure 16.3

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Value Density

• Value density is defined as the value of an item per kilogram of weight

• It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped

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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