Krajweski Chapter 10 (SCM)

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© 2007 Pearson Education

Supp ly Chain Strategy

Chapter 10




How Supply Chain Strategyf i ts the Operat ions Management

Phi losophy

Operations As a CompetitiveWeapon

Operations StrategyProject Management Process StrategyProcess Analysis

Process Performance and QualityConstraint Management

Process LayoutLean Systems

Supply Chain StrategyLocation

Inventory ManagementForecasting

Sales and Operations PlanningResource Planning

Scheduling




Dell , Inc. (case summary )

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.

(Keeping parts cost and inventories low)

The bulk of its components are housed within 15minutes of each of its plants.

As customers place orders, suppliers know when

to ship components. (WHY?)

Suppliers restock the warehouse and manage theinventory.

Effective supply chain management is the key.




WHAT IS SUPPLY CHAIN IN BUSINESS?

How do you define it?




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 andcustomers.

(All facilities, functions, and activities associated with

flow and transformation of goods and services fromraw materials to customer, as well as the associatedinformation flows)




WHY FIRMS NEED TO MANAGESUPPLY CHAIN?




Supply chain management: Developing astrategy to organize, control, and motivatethe resources involved in the flow of

services and materials within the supplychain.

(Managing flow of information through

supply chain in order to attain the level of synchronization that will make it moreresponsive to customer needs whilelowering costs)




Supply chain strategy: Designing a firm’s

supply chain to meet the competitivepriorities of the firm’s operations strategy.

Example: A boutique that emphasize onquality and exclusivity. How would it design

the SC?

SC vary between firms




Supply Chain for

Services

Supply chain design for a service provider is drivenby the need to provide support for the essentialelements of the various service packages it delivers.

A service package consists of supporting facilities (The store itself, equipments)

facilitating goods (eg, Florist: basket, ribbons, card)

explicit services: Arranging the flower implicit services: Courtesy, internet services, location




Supply Chain fo r a Flor is t

Required for facilitating goods

Required for explicit services Required for supportingfacilities

Required for implicit services

Home

customers

Commercia l

customers

Flor ist

FedEx

delivery

serv ice

Packaging Loca l

del ivery

serv ice

Flowers –

local /

internat ional

Arrangement

materials

Internet

serv ices

Maintenance

services




Creat ion o f Invento ry (s im i lar to the analogy of a water tank )

Inventory: A stock of materials used to satisfycustomer demand or to support the production of services or goods.

Scrap f low

Invento ry level

Output f low of m aterials

Input f low of mater ials

How do youmanage theflow?




Supply Chain for

Manufactur ing

Raw materials (RM): The inventories needed for the production of services or goods. (For mfg, > 60%

cost is on Material- can reap large profit will small reduction inmaterial cost)

Work-in-process (WIP): Items, such ascomponents or assemblies, needed to produce afinal product in manufacturing.

Finished goods (FG): The items inmanufacturing plants, warehouses, and retailoutlets that are sold to the firm’s customers.




Invento ry at Success ive

Stock ing Points

Suppl ier Manufactur ing plant Distr ibut ion center Retai ler

Raw

materials

Work in

process Finished

goods

How do you classify inventory at Bakery store ?



© 2007 Pearson Education © 2007 Pearson Education

Supp ly Chain

Tier 1

Tier 2

Supplier of materialsSupplier of services

Tier 3

Customer Customer Customer Customer

Distribution

center

Distribution

center

Manufacturer

U SC D




Supp ly Chain Il lus trat ion

Upstream SCmembers

DownstreamSC members

Hearts and brains of SC




Supply Chain

fo r

Denim Jeans




Supply Chain

fo r

Denim Jeans

(cont.)




Inven tory Measu res o f

Supply Chain Performance

Average aggregate inventory value (AGV) is the totalvalue 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 valuedivided 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 theaverage aggregate inventory value maintained for the year.

Inventory turnover = Annual sales at (cost)

Average aggregate inventory value




Calcu lat ing Invento ry Measu res

Example 10.1 The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goodssold was $10 million. The best inventory turnover in the industry is six turns per year. If the

company has 52 business weeks per year, how many weeks of supply were held in inventory?What was the inventory turnover? What should the company do?

Using Invento ry

Est imator Solver

Weeks of supply =$2 mil /($10 mil)(52 wks.) =10.4 weeks

Inventory turns =

$10 mil. /$2 mil. =5 turns/yr




Appl icat ion 10.1

weeksweeks

5.1852000,200,19$

000,821,6$

cost)(atsalesWeekly

valueinventoryaggregateAveragesupplyof Weeks

turns8.2000,821,6$

0$19,200,00turnover Inventory




Supply Chain Process Measu res

Percent of orderstaken accurately

Time to complete

the order placement process

Customer satisfaction withthe order placement process

Customer Relationship

Percent of incompleteorders shipped

Percent of orders

shipped on time Time to fulfill theorder

Percent of botchedservices or returneditems

Cost to produce theservice or item

Customer satisfactionwith the order fulfillment process

Inventory levels of WIP and FG

Order Fulfillment

Percent of suppliers’

deliveries on time

Suppliers’ lead

times Percent defects in

services andpurchasedmaterials

Cost of servicesand purchasedmaterials

Supplier Relationship

3 Major internal process related to SC




WHY FIRMS NEED TO MANAGESUPPLY CHAIN?




Links to

Financial Measu res

Return on Assets (ROA): is net income divided bytotal 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. (thus lead to high return on asset)

Working Capital: Money used to finance ongoingoperations.

Weeks of inventory and inventory turns are reflected inworking capital.

Decreasing weeks of supply or increasing inventory turnsreduces the working capital.




Links to

Financ ial Measu res

Cost of Goods Sold: Buying materials at a better price, or transforming them more efficiently, improves a firm’s cost of

goods sold measure and ultimately its net income.

Total Revenue: Increasing the percent of on-time deliveries tocustomers increases total revenue because satisfiedcustomers will buy more services and products.

Cash Flow: Cash-to-cash is the time lag between paying for the services and materials needed to produce a service or

product and receiving payment for it.

The shorter the time lag, the better the cash flow position of thefirm because it needs less working capital.




Supply Chain Dynam ics

Supply chain dynamics can wreak havoc onsupply chain performance measures.

Actions of downstream supply chain memberscan affect the operations of upstream members.

The bullwhip effect: The phenomenon in

supply chains whereby ordering patternsexperience increasing variance as youproceed upstream in the chain.




Bu l lwhip Effect

Occurs when slight demand variability is magnified as information movesback upstream

2. Tend to overreactand increase itsown demand

1. Slight changes in

demand occur

3. How to cope????




Supply Chain Dynam ics fo r Facial Tissue

Time

Bullwhip Effect

More variability as supply not matchdemand pattern




External

Value-Chain L inkages

First-Tier Supplier Service/Product Provider

Support Processes Support Processes

Supplier Relation-

shipProcess

New Service/Product

DevelopmentProcess

Order-Fulfill-ment

Process

Business-to-Business

(B2B)Customer

RelationshipProcess

Supplier Relation-

shipProcess

New Service/Product

DevelopmentProcess

Order-Fulfill-ment

Process

Business-to-Customer

(B2C)Customer

RelationshipProcess

E x t e r n a

l S u p p l i e r s

E x t er n al C on s um er s




External Causes of

Supply Chain Disrup t ion

Volume changes.Customers may change ordered quantity or

delivery date.

Service and product mix changes.Customers may change the mix of ordered items.

Late deliveries.Late deliveries can force a switch in production

schedules.Underfilled shipments.

Partial shipments can cause a switch inproduction schedule or quantity produced.




In ternal Causes o f

Supply Chain Disrup t ion

Internally generated shortages of parts.

Engineering changes to the design of servicesor products are disruptive.

New service or product introductions disrupt the supply chain and may require a newsupply chain.

Service or product promotions may create a

demand spike. Information errors such as demand forecast

errors, faulty inventory counts, or miscommunicationwith suppliers.




1. The Customer Relat ionsh ip

Process

Electronic Commerce (e-commerce) is theapplication of information and communication

technology anywhere along the value chain of business processes.

Business-to-Consumer Systems (B2C) allowscustomers to transact business over the Internet.

Business-to-Business Systems (B2B) involvescommerce between firms. The biggest growth area, it is currently about 70% of the

regular economy.

E-Commerce and the Marketing Process




Nested Process : Marketing and the Order Placement Process

Cost reduction: Using the Internet canreduce the costs of processing orders.

Revenue flow increase: Reduction in thetime lag associated with billing thecustomer or waiting for checks.

Global Access: Available 24 hours a day.

Price flexibility: Prices can easily be

changed as the need arises.

The Cus tomer Relat ionsh ip

Process




2. Order Fu lf i l lment at

Dell, Inc .

1. Customers buy from Dell by web site, voice-to-voice, andface-to-face.

2. Order information is transmitted to the inventory system.

3. Unique product configuration information is contained inthe Traveler, a sheet that travels with the system thecustomer has ordered throughout its assembly andshipping.

4. When the Traveler is pulled, all required internal parts andcomponents for a system are picked and put in a to te or ki t .(Procedure is called Kit t ing )

5. A team uses the kit to assemble and initially test thesystem.

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.




Dell’s

Order Fulf i l lmen t Process




The Order Fulf i l lmen t

Process

Centralized placement: Keeping all the inventory atone location such as a firm’s manufacturing plant or

a warehouse and shipping directly to customers.

Inventory pooling is a reduction in inventory andsafety stock because of the merging of variabledemands from customers.

A higher than expected demand from one customer can beoffset by a lower-than-expected demand from another.

Forward placement is locating stock closer tocustomers at a warehouse, wholesaler, or retailer.

Inventory Placement




The Order Fulf i l lmen t

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 Inv ento ries




Order Ful f i llment Programs

Continuous Replenishment Program (CRP) A VMI method in which the supplier monitors thecustomer’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 currentlyimplementing RFID in their supply chains.




Distr ibu t ion Processes

Ownership: Rather than negotiate with a contract carrier , a firmhas the most control over the distribution process if it owns andoperates 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 shipmentsso 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 atthe warehouse.




Cont inuous Replenishment

at

Each morning Campbell uses Electronic DataInterchange 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 needreplenishment based on upper and lower

inventory limits established with each retailer.

Campbell makes daily deliveries of neededproducts.




3. The Supp l ier Relat ionsh ip

Process

The sourcing process qualifies, selects, managesthe contracts, and evaluates suppliers.

The design collaboration process focuses on jointly designing new services or products with keysuppliers, seeking to eliminate costly delays andmistakes incurred when many suppliers concurrently,but independently, design service packages or manufactured components.

The negotiation process focuses on obtaining aneffective contract that meets the price, quality, anddelivery requirements of the supplier relationshipprocess’s internal customers.




The buying process relates to the actualprocurement of the service or material from the

supplier. This process includes the creation,management, and approval of purchase orders.

The information exchange process facilitatesthe exchange of pertinent operating information,

such as forecasts, schedules, and inventory levelsbetween the firm and its supplier.

The Supp l ier Relat ionsh ip

Process




Supp l ier Select ion

and Cert i f icat ion

Purchasing: The activity that decides whichsuppliers to use, negotiates contracts, anddetermines 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 providethe services or materials the buyer firm requires.




Supp l ier Relat ions

Competitive orientation views negotiationsbetween buyer and seller as a zero-sumgame. Whatever one side loses, the other

side gains, and short-term advantages areprized over long-term commitments.

Cooperative orientation is where thebuyer and seller are partners, each helpingthe other as much as possible.

Sole sourcing is the awarding of a contractfor a service or item to only one supplier.




Electronic Purchasing

Electronic Data Interchange (EDI) enables thetransmission of routine, standardized businessdocuments from computer to computer.

Catalog hubs: A system whereby suppliers post their catalog of items on the Internet and buyers selectwhat they need and purchase them electronically.

Exchange: An electronic marketplace where buying

firms and selling firms come together to do business.

Auction: A marketplace where firms placecompetitive bids to buy something.




Central ized versus Local ized

Buy ing (for f i rm s w ith several faci l i t ies)

Centralized buying increases purchasing clout.Savings can be significant, often 10% or more.

Increased buying power can mean getting better

service, ensuring long-term supply availability, or developing new supplier capability.

The biggest disadvantage is loss of local control.

Centralized buying is undesirable for items unique toa particular facility.

The best solution may be one where both localautonomy and centralized buying are possible.




Value Analys is

Value analysis is a systematic effort to reducethe cost or improve the performance of services or products, either purchased or produced.

Early supplier involvement is a program thatincludes suppliers in the design phase of a serviceor product.

Presourcing: A level of supplier involvement in

which suppliers are selected early in a product’sconcept development stage and given significant,if not total, responsibility for the design of certaincomponents or systems of the product.




Supp ly Chain Strateg ies

Efficient supply chains focus on theefficient flows of services and materials,keeping inventories to a minimum.

Work best where demand is highly predictable.

Responsive supply chains are designedto react quickly.

Work best when firms offer a great variety of services or products and demand predictabilityis low.

E i t & D i F t




Env ironment & Design Facto rs

Design Factors Efficient Supply Chains Responsive Supply Chains

Environment Factors Efficient SupplyChains

Responsive Supply Chains




Mass Custom izat ion (eg: Pain t retailer)

Mass Customization: A strategy whereby a firm’s flexibleprocesses 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 perceivedvalue of services or products.

Postponement is when some of the final activities in theprovision of a service or product are delayed until the ordersare received.

Channel assembly is when members of the distributionchannel act as if they were assembly stations in the factory.




Lean Supp ly Chains

Three key activities are required to attain a leansupply chain:

1. Strateg ic Sourc ing : Identifying items or servicesthat are of high value or complexity and purchasethem from a select set of suppliers with whom thefirm establishes a close relationship.

2. Co st Managemen t : Limiting the number of suppliers and focusing on helping them reduce

their costs through trust and friendly collaboration.3. Supp lier Developmen t : Shifting from price

negotiations to cost management and workingwith suppliers to achieve lean operations.




Outsourc ing

A Make-or-buy decision is a managerial choicebetween whether to outsource a process or do itin-house.

Outsourcing: Paying suppliers and distributors toperform processes and provide needed services andmaterials.

Backward integration is a firm’s movement upstream

toward the sources of raw materials, parts, andservices through acquisitions.

Forward integration is acquiring more channels of distribution, such as distribution centers (warehouses)and retail stores, or even business customers.




Offshor ing

Offshoring is a supply chain strategy that involvesmoving processes to another country. Factors thatinfluence the offshoring decision include:

Pitfalls of offshoring include:

Pulling the plug too quickly. Not making a good-faitheffort to fix the existing process

Technology transfer

Difficulties integrating processes

Tariffs and TaxesInternet

Comparative labor costsLogistics costs

Labor Laws and Unions




Virtual Supp ly 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.



Which Type of

Supply Chain?

Traditional Supply Chainis preferred when:

1. Sales volumes are high.

2. Order consolidation isimportant.

3. Small-order fulfillmentcapability of suppliers isimportant.

Virtual Supply Chain ispreferred when:

1. Demand is highly volatile.

2. High service or product

variety is important.

In-house order fulfillmentprocess

Outsource the order fulfillmentprocess

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Krajweski Chapter 10 (SCM)