Supply Chain Management

Lecture 3

Outline

• Today– Some more supply chain examples– Start Chapter 2

• Thursday– Chapters 2 and 3

Maximizing supply chain surplus

Manufacturer Distributor Retailer Customer

$10$5$1

Distributor profit = 600*($5-$1) = $2,400

Supply chain profit = $1,800 + $2,400 = $4,200

Retailer OrderProb. Demand 1000 800 600 400 200

0.2 1000 5000 4000 3000 2000 10000.2 800 3000 4000 3000 2000 10000.2 600 1000 2000 3000 2000 10000.2 400 -1000 0 1000 2000 10000.2 200 -3000 -2000 -1000 0 1000

Expected Profits1000 1600 1800 1600 1000

Retailer OrderProb. Demand 1000 800 600 400 200

0.2 1000 9000 7200 5400 3600 18000.2 800 7000 7200 5400 3600 18000.2 600 5000 5200 5400 3600 18000.2 400 3000 3200 3400 3600 18000.2 200 1000 1200 1400 1600 1800

Expected Profits5000 4800 4200 3200 1800

Maximizing supply chain surplus

Manufacturer Distributor Retailer Customer

$10$1

Supply chain profit = $5,000

Celestial Seasonings

• The herbs were originally harvested by hand in the Rocky Mountains

• Currently, herbs and leafs come from growers around the world– “We’ve been working to establish sustainable harvests and fair

wages for more than 30 years”

What advantages does selling tea over the Internet provide?

What are advantages of having one production facility?

What are disadvantages of having one production facility?

ProBuild

• The nation’s largest supplier of building materials to national builders, local contractors and do-it-yourselfers

• 550+ facilities nationwide – Lumber yards, millwork shops, distribution centers

What are advantages of having multiple facilities?

Why is inventory management so important?

ProBuild

• Housing outlook– Unemployment at 10.2%– Foreclosures still rising

• ProBuild– Sales declined over 20% in 2009

Why did ProBuild added hundreds of salespeople in 2009?

Mortgage

• “A mortgage is the transfer of an interest in property to a lender as a security for a debt, usually a loan of money”

What went wrong in the mortgage supply chain?

Is there lead time the mortgage supply chain?

Is the mortgage supply chain easier to automate than a manufacturing supply chain?

Source: http://www.wikipedia.org

Interceptor Body Armor

• The interceptor body armor system consists of a vest made of Kevlar that has a front and back insert for a ceramic protective plate– March, 2003 Start of the invasion of Iraq– April, 2003 Congress approves to buy 300,000 interceptor body

armor vests– October, 2003 Nearly one-quarter of the 130,000 U.S. troops in

Iraq still had not been an interceptor body armor vest– 8 months after combat operations were declared over, all

personnel in Iraq had an interceptor body armor vest

"Body Armor Saves Lives in Iraq; Pentagon Criticized for Undersupply of Protective Vests,"Washington Post . 4 Dec, 2003

What went wrong?

Interceptor Body Armor

Demand8,593

Demand77,052

Demand210,783 Supply

23,900

Interceptor Body Armor

Demand9,586

Demand108,808

Demand478,541

Supply40,495

Interceptor Body Armor

• Production – October, 2002 Production capacity 3,000 plates per month – October, 2003 Production capacity 25,000 plates per month

Where should the production facilities be located?

Crocs

• Crocs shoes are made from Croslite– Extremely light – Does not skid– Odor resistant– Easy to wash

• The founders wanted to name the shoes something that captured the amphibious nature– “Alligator” had already been taken

General Map of Croc’s Basic supply, production and distribution processes

Compound Mold AssemblePackage &

Label

Chem Pellets

Dye

Accessories

Sports protectors

Color Pellets

Size & Style blanks

Complete Croc

Labeled, packaged

Croc

Small retailer

Large Retailer

Distribution

Dow Chem & others

Glue etc

Grommets

JibbitzLeather

Pre-booked orders

Production Orders (plus %)

In-season orders

Warehouse and

distribute

Various Suppliers

Mold producers Style &

size molds

Compound

Italy

Florida*

China

Mexico*

Mold

Canada*

Bosnia

China

Mexico*

Brazil*

Assemble

Denver 3rd party

distributor

Package & Label

Denver

Color Pellets

Size & Style blanks

Small retailer

Large Retailer Europe

Warehouse / distribute

Denver

Style & size

molds

Bosnia

China

Mexico*

Brazil*

Bosnia

China

Mexico*

Brazil*

Bosnia

China

Mexico*

Brazil*

Labeled, packaged

Croc

Complete Croc

Large Retailer

Asia

Large Retailer South

America

Croc’s Global Production strategy

[2][1

]

[3]

[4][5

][1] Maintain Florida plant for “Made in USA label[2] Take advantage of tariffs, e.g., Canada to Isreal[3] Maintain higher service component of warehousing and labeling for small retailers[4] Minimize geographic transport by producing in region, including warehousing[5] Move style and size molds between facilities to maximize production[6] Use China for large volume, long-term orders from pre-season orders

[6]

*Owned by Crocs vs. outsourced

Crocs

• Revolutionized the shoe industry supply chain model– First shoe sold in 2003 (Revenue 1.2 million)– Flip flop sandal introduced in 2006 (Revenue 355 million)– Diversify in other products 2008 (Revenue 860 million)

What are advantages of having multiple production facilities?

What are advantages of short lead times?

What are advantages of excess capacity?

How does Crocs plan for demand?

Netflix

• World’s largest online movie rental service

Where is Netflix’s inventory?

Netflix

What are the differences between Netflix and Blockbuster

Netflix

• Netflix versus Blockbuster store

Where should the distribution centers be located?

No. of locations

No. of employees

No. of titles No. DVDs available

Blockbuster Inc.

Netflix

8,000+ Stores

16 DCs

89,000

381

1,000-8,000per location

13,500

100s per location

3.3 million

How does Netflix plan for demand?

Who are Netflix’s competitors?

Study of Supply Chain Management• Successful supply chain management requires

decisions on the flow of information, product, and funds that fall into three decision phases– Supply chain strategy or design– Supply chain planning– Supply chain operation

Decision Phases in a Supply Chain

TYPICAL DECISIONS

Strategic

Tactical

TYPETIME FRAME

•Supply chain network design (How many plants? Location and capacities of plants and warehouses?)•Supply chain strategies (Sell direct or through retailers? Outsource or in-house? Focus on cost or customer service?)•Product mix at each plant

years

•Workforce & Production planning •Inventory policies (safety stock level)•Which locations supply which markets•Transportation strategies

3 mo.- 1year

Operational•Production scheduling •Decisions regarding individual orders•Place replenishment orders

daily

Achieving Strategic Fit

What is a strategy in general?

Strategy

Corporate Strategy

Competitive Strategy

What is Competitive Strategy?

• Competitive strategy– Defines, relative to competitors, a company’s set of

customer needs that it seeks to satisfy through its products and services

• Wal-Mart– Everyday low prices

• Coors– The coldest tasting beer in the world, brewed with Rocky

Mountain spring water

• Dell– Custom-made computer systems at a reasonable cost

Competitive strategy is defined based on how the customer prioritizes product cost, delivery time, variety, and quality

NewProduct

Development

Competitive Strategy

• To execute a company’s competitive strategy, all functions that play a role must each develop its own strategy

Marketingand

SalesOperations Distribution Service

Finance, Accounting, Information Technology

Strategy

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

What is Strategic Fit?

• Strategic fit– For any company to be successful, its supply chain strategy and

competitive strategy must fit together• Wal-Mart

– Everyday low prices

– Owns its infrastructure and distribution network

• Coors– The coldest tasting beer in the world, brewed with Rocky

Mountain spring water

– Refrigerated transport, main facility near Rocky Mountains

• Dell– Custom-made computer systems at a reasonable cost

– Online ordering, no middle-man

How is Strategic Fit Achieved?

1. Understanding the customer and supply chain uncertainty

2. Understanding the supply chain capabilities

3. Achieving strategic fit

1. Understanding the Customer and Supply Chain Uncertainty

• Understanding customer uncertainty– Demand varies along certain attributes

• Quantity in each lot, response time, variety of products needed, convenience, price, innovation, etc

– Implied demand uncertainty• Demand uncertainty due to the portion of demand that the

supply chain is targeting, not the entire demand

Customer need Causes implied demand uncertainty to…Range of quantity increasesResponse time decreasesVariety of products increasesNumber of channels through which product may be aquired increasesRate of innovation increasesRequired service level increases

Customer need Causes implied demand uncertainty to…Range of quantity increases IncreaseResponse time decreases IncreaseVariety of products increases IncreaseNumber of channels through which product may be aquired increases

Increase

Rate of innovation increases IncreaseRequired service level increases Increase

1. Understanding the Customer and Supply Chain Uncertainty

• Understanding supply uncertainty– Supply uncertainty is strongly affected by the life-cycle position of

the product. New products being introduced have higher supply uncertainty than mature products

Supply source capability Causes supply uncertainty to…Frequent breakdownsUnpredictable and low yieldsPoor qualityLimited suppy capacityInfexible supply capacityEvolving production process

Supply source capability Causes supply uncertainty to…Frequent breakdowns IncreaseUnpredictable and low yields IncreasePoor quality IncreaseLimited suppy capacity IncreaseInfexible supply capacity IncreaseEvolving production process Increase

1. Understanding the Customer and Supply Chain Uncertainty

Demand UncertaintyLow

(Functional Product)

High(Innovative Product)

Low(Stable

Process)

Low(Functional

Product)

High(Evolving Process)

Su

pp

ly U

ncertain

ty

Basic Appeals, Grocery, Food, Most Commodities

Fashion Appeals, Computers, Pop Music, Toys

Some Power, Some Food Produce, Precious Metals

M-commerce, Telecom, High-end Servers, Semiconductor

Demand UncertaintyLow

(Functional Product)

High(Innovative Product)

Low(Stable

Process)

Low(Functional

Product)

High(Evolving Process)

Efficiency, Information Integration, Auto-Replenishment, VMI (Efficient SC)

Build-to-Order, Flexible Mfg, Accurate Response, Postponement(Flexible SC)

Buffer Inventory, Shared Resources, Multi-Sourcing, Info Sharing(Risk-Hedging SC)

Supply Network, Postponement, Design Collaboration

(Agile SC)

Source: Hau Lee, “Aligning supply chain strategies with product uncertainties”, California Management Review, 44(3), 2002

2. Understanding the Supply Chain Capabilities

• Supply chain capabilities– Supply chain responsiveness

• Respond to wide ranges of quantity demanded, short lead times, large variety, innovative products, high service level, etc

– Supply chain efficiency/cost

Highly efficient

Highly responsive

Somewhat responsive

Somewhat efficient

Integrated steel mills

Hanes apparel Most automotiveproduction

Seven-Eleven Japan

2. Understanding the Supply Chain Capabilities

High Low

Low

High

Responsiveness

Cost