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© 2007 Pearson Education
Supply Chain StrategySupply Chain Strategy
Chapter 10Chapter 10
© 2007 Pearson Education
How Supply Chain Strategy fits the Operations Management
Philosophy
Operations As a Competitive Weapon
Operations StrategyProject Management Process Strategy
Process AnalysisProcess Performance and Quality
Constraint ManagementProcess LayoutLean Systems
Supply Chain StrategyLocation
Inventory ManagementForecasting
Sales and Operations PlanningResource Planning
Scheduling
© 2007 Pearson Education
Dell, Inc.
Dell is a leader because of their fast response time. Customer orders are on delivery trucks in 36 hours. Their focus is on how fast inventory moves. The bulk of its components are housed within 15
minutes of each of its plants. As customers place orders, suppliers know when to
ship components. Suppliers restock the warehouse and manage the
inventory. Careful supply chain management is the key.
© 2007 Pearson Education
Supply Chain
Supply chain: The network of services, material, and information flows that link a firm’s customer relationship, order fulfillment, and supplier relationship processes to those of its supplier and customers.
Supply chain management: Developing a strategy to organize, control, and motivate the resources involved in the flow of services and materials within the supply chain.
Supply chain strategy: Designing a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy.
© 2007 Pearson Education
Supply Chain for Services
Supply chain design for a service provider is driven by the need to provide support for the essential elements of the various service packages it delivers.
A service package consists of supporting facilities facilitating goodsexplicit services implicit services
© 2007 Pearson Education
Supply Chain for a Florist
Required for facilitating goods
Required for explicit services Required for supporting facilities
Required for implicit services
Homecustomers
Homecustomers
Commercialcustomers
Commercialcustomers
FloristFlorist
FedEx delivery service
FedEx delivery service
PackagingPackaging Local delivery service
Local delivery service
Flowers – local/
international
Flowers – local/
international
Arrangement materials
Arrangement materials
Internet servicesInternet services
Maintenance services
Maintenance services
© 2007 Pearson Education
Creation of Inventory
Inventory: A stock of materials used to satisfy customer demand or to support the production of services or goods.
Scrap flowScrap flow
Inventory levelInventory level
Output flow of materialsOutput flow of materials
Input flow of materialsInput flow of materials
© 2007 Pearson Education© 2007 Pearson Education
Supply ChainSupply Chain
Tier 1
Tier 2
Supplier of materialsSupplier of services
Tier 3
Customer Customer Customer Customer
Distribution center
Distribution center
Manufacturer
© 2007 Pearson Education
Inventory Measures of Supply Chain Performance
Average aggregate inventory value (AGV) is the total value of all items held in inventory for a firm.
AGV = (# of A items)(Value of each A)+(# of B items)(Value of each B)+…
Weeks of supply: The average aggregate inventory value divided by sales per week at cost.
Weeks of supply = Average aggregate inventory value Weekly sales (at cost)
Inventory turnover is annual sales at cost divided by the average aggregate inventory value maintained for the year.
Inventory turnover = Annual sales at (cost)
Average aggregate inventory value
© 2007 Pearson Education© 2007 Pearson Education
Supply Chain Process MeasuresSupply Chain Process Measures
Percent of orders taken accurately
Time to complete the order placement process
Customer satisfaction with the order placement process
CustomerRelationship
Percent of incomplete orders shipped
Percent of orders shipped on time
Time to fulfill the order
Percent of botched services or returned items
Cost to produce the service or item
Customer satisfaction with the order fulfillment process
Inventory levels of WIP and FG
OrderFulfillment
Percent of suppliers’ deliveries on time
Suppliers’ lead times
Percent defects in services and purchased materials
Cost of services and purchased materials
SupplierRelationship
© 2007 Pearson Education
Links to Financial Measures
Return on Assets (ROA): is net income divided by total assets.
Managing the supply chain so as to reduce the aggregate inventory investment will reduce the total assets portion of the firm’s balance sheet.
Working Capital: Money used to finance ongoing operations.
Weeks of inventory and inventory turns are reflected in working capital.
Decreasing weeks of supply or increasing inventory turns reduces the working capital.
© 2007 Pearson Education
Supply Chain Dynamics
Supply chain dynamics can wreak havoc on supply chain performance measures.
Actions of downstream supply chain members can affect the operations of upstream members.
The bullwhip effect: The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the chain.
© 2007 Pearson Education© 2007 Pearson Education
Supply Chain Dynamics for Facial TissueSupply Chain Dynamics for Facial TissueQ
uant
i ty o
r der
e d
Time
Bullwhip Effect
© 2007 Pearson Education
External Value-Chain Linkages
First-Tier SupplierFirst-Tier Supplier Service/Product ProviderService/Product Provider
Support ProcessesSupport Processes Support ProcessesSupport Processes
Supplier Relation-
ship Process
Supplier Relation-
ship Process
New Service/ Product
Development Process
New Service/ Product
Development Process
Order-Fulfill-ment
Process
Order-Fulfill-ment
Process
Business-to-Business
(B2B) Customer
Relationship Process
Business-to-Business
(B2B) Customer
Relationship Process
Supplier Relation-
ship Process
Supplier Relation-
ship Process
New Service/ Product
Development Process
New Service/ Product
Development Process
Order-Fulfill-ment
Process
Order-Fulfill-ment
Process
Business-to-Customer
(B2C) Customer
Relationship Process
Business-to-Customer
(B2C) Customer
Relationship Process
Ext
ern
al S
up
pli
ers
Ext
ern
al S
up
pli
ers
Extern
al Co
nsu
mers
Extern
al Co
nsu
mers
© 2007 Pearson Education
The Customer Relationship Process
Electronic Commerce (e-commerce) is the application of information and communication technology anywhere along the value chain of business processes.
Business-to-Consumer Systems (B2C) allows customers to transact business over the Internet.
Business-to-Business Systems (B2B) involves commerce between firms. The biggest growth area, it is currently about 70% of the
regular economy.
E-Commerce and the Marketing Process
© 2007 Pearson Education
E-Commerce and the Order Placement Process
Cost reduction: Using the Internet can reduce the costs of processing orders.
Revenue flow increase: Reduction in the time lag associated with billing the customer or waiting for checks.
Global Access: Available 24 hours a day.
Price flexibility: Prices can easily be changed as the need arises.
The Customer Relationship Process
© 2007 Pearson Education
Order Fulfillment at Dell, Inc.
1. Customers buy from Dell by web site, voice-to-voice, and face-to-face.
2. Order information is transmitted to the inventory system.3. Unique product configuration information is contained in
the Traveler, a sheet that travels with the system the customer has ordered throughout its assembly and shipping.
4. When the Traveler is pulled, all required internal parts and components for a system are picked and put in a tote or kit. (Procedure is called Kitting)
5. A team uses the kit to assemble and initially test the system.
6. Systems are thoroughly tested.7. Completed systems are boxed and placed on trucks.8. The entire assemble-to-order cycle takes only a few hours.
© 2007 Pearson Education
Dell’s Order Fulfillment Process
© 2007 Pearson Education
The Order Fulfillment Process
Centralized placement: Keeping all the inventory at one location such as a firm’s manufacturing plant or a warehouse and shipping directly to customers.
Inventory pooling is a reduction in inventory and safety stock because of the merging of variable demands from customers. A higher than expected demand from one customer can be
offset by a lower-than-expected demand from another.
Forward placement is locating stock closer to customers at a warehouse, wholesaler, or retailer.
Inventory Placement
© 2007 Pearson Education
The Order Fulfillment Process
Vendor-managed inventories (VMI): An extreme application of forward placement involving locating inventories at the customer’s facilities.
Key ingredients are: Collaborative effort requires trust & accountability.
Cost savings is realized by eliminating excess inventory.
Customer service: The supplier is frequently on site for improved response times and reducing stockouts.
Written agreement on procedures, methods, and schedules are clearly specified.
Vendor-Managed Inventories
© 2007 Pearson Education
Order Fulfillment Programs
Continuous Replenishment Program (CRP) A VMI method in which the supplier monitors the customer’s inventory levels and replenishes stock as needed. Collaborative planning, forecasting, and replenishment (CPFR)
Radio Frequency Identification (RFID) A method for identifying items through the use of radio signals from a tag attached to an item.
Wal-Mart and Gillette are among a number of large retailers, manufacturers, government agencies, and suppliers currently implementing RFID in their supply chains.
© 2007 Pearson Education
Distribution Processes
Ownership: Rather than negotiate with a contract carrier, a firm has the most control over the distribution process if it owns and operates it, thereby becoming a private carrier.
Firms may use a combination of the five basic modes of transportation: truck, train, ship, pipeline, and airplane.
Cross-Docking: The packing of products on incoming shipments so that they can be easily sorted at intermediate warehouses for outgoing shipments based on their final destinations.
Items are carried from the incoming-vehicle docking point to the outgoing-vehicle docking point without being stored in inventory at the warehouse.
© 2007 Pearson Education
Continuous Replenishment
at Each morning Campbell uses Electronic Data
Interchange to link with retailers.
Retailers inform Campbell of demands for its products and the current inventory levels in their distribution centers.
Campbell determines which products need replenishment based on upper and lower inventory limits established with each retailer.
Campbell makes daily deliveries of needed products.
© 2007 Pearson Education
Supplier Selection and Certification
Purchasing: The activity that decides which suppliers to use, negotiates contracts, and determines whether to buy locally.
Supplier selection often considers the criteria of price, quality and delivery.
Green purchasing: The process of identifying, assessing, and managing the flow of environmental waste and finding ways to reduce it and minimize its impact on the environment.
Supplier certification programs verify that potential suppliers have the capability to provide the services or materials the buyer firm requires.
© 2007 Pearson Education
Supplier Relations
Competitive orientation views negotiations between buyer and seller as a zero-sum game. Whatever one side loses, the other side gains, and short-term advantages are prized over long-term commitments.
Cooperative orientation is where the buyer and seller are partners, each helping the other as much as possible.
Sole sourcing is the awarding of a contract for a service or item to only one supplier.
© 2007 Pearson Education
Electronic Purchasing
Electronic Data Interchange (EDI) enables the transmission of routine, standardized business documents from computer to computer.
Auction: A marketplace where firms place competitive bids to buy something.
Reverse Auction
© 2007 Pearson Education
Value Analysis
Value analysis is a systematic effort to reduce the cost or improve the performance of services or products, either purchased or produced.
© 2007 Pearson Education
Supply Chain Strategies
Efficient supply chains focus on the efficient flows of services and materials, keeping inventories to a minimum.Work best where demand is highly predictable.
Responsive supply chains are designed to react quickly.Work best when firms offer a great variety of
services or products and demand predictability is low.
© 2007 Pearson Education
Environment & Design Factors
Design Factors Efficient Supply Chains Responsive Supply Chains
Environment Factors Efficient Supply Chains Responsive Supply Chains
© 2007 Pearson Education
Mass Customization
Mass Customization: A strategy whereby a firm’s flexible processes generate a wide variety of personalized services or products at reasonably low costs. Competitive advantages: Managing customer relationships. It requires detailed
inputs from customers so that the ideal service or product can be produced.
Eliminating finished goods inventory. Producing to a customer’s order eliminates finished goods inventory.
Increasing perceived value. It increases the perceived value of services or products.
Postponement is when some of the final activities in the provision of a service or product are delayed until the orders are received.
Channel assembly is when members of the distribution channel act as if they were assembly stations in the factory.
© 2007 Pearson Education
Outsourcing
A Make-or-buy decision is a managerial choice between whether to outsource a process or do it in-house.
Outsourcing: Paying suppliers and distributors to perform processes and provide needed services and materials.
Backward integration is a firm’s movement upstream toward the sources of raw materials, parts, and services through acquisitions.
Forward integration is acquiring more channels of distribution, such as distribution centers (warehouses) and retail stores, or even business customers.
© 2007 Pearson Education
Offshoring
Offshoring is a supply chain strategy that involves moving processes to another country. Factors that influence the offshoring decision include:
Pitfalls of offshoring include:Pulling the plug too quickly. Not making a good-faith
effort to fix the existing processTechnology transferDifficulties integrating processes
Tariffs and TaxesInternet
Comparative labor costsLogistics costsLabor Laws and Unions
© 2007 Pearson Education
Virtual Supply Chains
Virtual Supply Chain: Outsourcing some part of the entire order fulfillment process with the help of sophisticated, Web-based information technology support packages.
Benefits include: Reduced investment in inventories and order fulfillment
infrastructure. Greater service or product variety without the overhead of
one’s own order fulfillment process. Lower costs due to economies of scale. The supplier typically
handles more volume than does the firm doing the outsourcing. Lower transportation costs. With drop shipping in a virtual
supply chain, the only transportation cost is shipping the goods from the wholesaler to the customer.
© 2007 Pearson Education
Which Type of Supply Chain?
Traditional Supply Chain is preferred when:
1. Sales volumes are high.
2. Order consolidation is important.
3. Small-order fulfillment capability of suppliers is important.
Virtual Supply Chain is preferred when:
1. Demand is highly volatile.
2. High service or product
variety is important.