Supply Chain Management

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Supply Chain Management

• Lecture 4

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Outline

• Today
• Chapters 2 and ?3
• Next week
• Chapter 4
• Introduction to Excel Solver/Chapter 5
• Homework 1
• Online tomorrow afternoon Friday January 21
• Due Thursday January 28

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Examples

• Successful supply chain management requires
  decisions on the flow of information, product,
  and funds

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Strategy
What is a strategy in general?
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Strategy
Corporate Strategy
Competitive Strategy
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What is Competitive Strategy?

• Competitive strategy
• Defines, relative to competitors, a companys set
  of customer needs that it seeks to satisfy
  through its products and services
• Wal-Mart
• Everyday low prices (low cost retailer for a wide
  variety of products)
• Coors
• The coldest tasting beer in the world, brewed
  with Rocky Mountain spring water
• Dell
• Custom-made computer systems at a reasonable cost

How do you execute your competitive strategy?
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Supply Chain Cycle
Reverse logistics
Marketing
FinanceAccountingIT
Product design
Customer
Suppliers
Logistics
Manufacturing
To execute a companys competitive strategy, all
functions that play a role must each develop
their own strategy
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Strategy
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
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What is Supply Chain Strategy?

• Supply chain strategy
• Given a competitive strategy, what should a
  companys supply chain do particularly well?
• Wal-Mart
• Everyday low prices (low cost retailer for a wide
  variety of products)
• Buys from low cost producers, 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

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What is Strategic Fit?

• Strategic fit
• Both the competitive strategy and the supply
  chain strategy have aligned goals
• Matching customer needs with supply chain
  capabilities
• How is strategic fit achieved?
• Understanding the customer and supply chain
  uncertainty
• Understanding the supply chain capabilities
• Achieving strategic fit

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1. Understanding the Customer and Supply Chain
Uncertainty

• Understanding customer (demand) uncertainty
• Demand varies along certain attributes
• Quantity in each lot, response time, variety of
  products needed, service, price, innovation, etc
• Implied demand uncertainty
• Demand uncertainty due to the portion of demand
  that the supply chain is targeting, not the
  entire demand

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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

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1. Understanding the Customer and Supply Chain
Uncertainty

• Motorola 4th Quarter Wireless Sales Growth Lower
  Than Order Growth, The Dow Jones News Service,
  Nov. 11, 1999
• Motorola announces that its inability to meet
  demand was due to the shortage of certain types
  of components
• Sony Computer Says Sales of New Game Product to
  Be Delayed, The Dow Jones News Service, Dec. 9,
  1998
• Due to production problems, Sony Computer has
  decided to push back, by a month, the
  introduction of PocketStation, a video-game
  product.
• Apple Computer Inc. Cuts 4th-period Forecast
  Citing Parts Shortages, Product Delays, The Wall
  Street Journal, Sept. 15, 1995
• Apple announces that earnings would drop because
  of persistent shortages of key components and
  delays in ramping up production of new products.

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1. Understanding the Customer and Supply Chain
Uncertainty
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1. Understanding the Customer and Supply Chain
Uncertainty
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1. Understanding the Customer and Supply Chain
Uncertainty
Demand Uncertainty
Demand Uncertainty
Low (Functional Product)
High (Innovative Product)
Low (Functional Product)
Low (Functional Product)
High (Innovative Product)
Low (Functional Product)




Basic Goods, Most Commodities
Efficiency, Information Integration,
Auto-Replenishment, VMI (Efficient SC)
Fashion, Computers, Pop Music, Toys
Make-to-Order, Flexible Mfg, Accurate Response,
Postponement (Flexible SC)
Low (Stable Process)
Low (Stable Process)
Supply Uncertainty
Some Power, Some Food Produce, Precious Metals
Telecom, High-end Servers, Semiconductor
Buffer Inventory, Shared Resources,
Multi-Sourcing, Info Sharing (Risk-Hedging SC)
Supply Network, Postponement, Design
Collaboration (Agile SC)
High (Evolving Process)
High (Evolving Process)
Source Hau Lee, Aligning supply chain
strategies with product uncertainties,
California Management Review, 44(3), 2002
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2. Understanding the Supply Chain Capabilities

• Supply chain capabilities
• Supply chain responsiveness
• Respond to wide ranges of quantity demanded, meet
  short lead times, large variety, innovative
  products, high service level, etc
• Supply chain efficiency (low cost)

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Achieving Strategic Fit
What is the right supply chain for your product?
Responsive supply chain
Zone of strategic fit
Cost-effective supply chain
Implied demand uncertainty
Low (functional products)
High (innovative products)
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Achieving Strategic Fit
What is the right supply chain for your product
over its life cycle?
Responsive supply chain
Zone of strategic fit
Cost-effective supply chain
Implied demand uncertainty
Low (functional products)
High (innovative products)
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Complete Strategic Fit
Competitive Strategy
Product Development Strategy
Marketing and Sales Strategy
Supply Chain Strategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy
A firm must ensure that all its functions
maintain consistent strategies that support the
competitive strategy
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Achieving Strategic Fit

• Strategic fit
• Given a competitive strategy, what should a
  companys supply chain do particularly well?
• Wal-Mart
• Everyday low prices (low cost retailer for a wide
  variety of products)
• Buys from low cost producers, 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

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Key Observations

1. There is no supply chain strategy that is always
   right
2. There is a right supply chain strategy for a
   given competitive strategy

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Issues Affecting Strategic Fit

• Increasing variety of products
• Firms sell different products to different
  customer segments
• Decreasing product life cycles
• Demand and supply characteristics change as a
  product goes through its life cycle
• Increasingly demanding customers
• Customers are constantly demanding improvements
• Fragmentation of supply chain ownership
• Harder to coordinate a supply chain broken into
  many owners
• Globalization and competitive changes over time
• More competitors may result in an increased
  emphasis on variety at a reasonable price

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Evolution of Supply Chain Management
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Scope of Strategic Fit
Suppliers
Manufacturer
Distributor
Retailer
Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
Integration of business functions, departments,
and companies leads to successful SCM
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Scope of Strategic Fit
As the economy changes, as the competition
becomes more global, its no longer company
versus company but supply chain versus supply
chain
Harold Sirkin (Vice President of the Boston
Consulting Group)
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Examples

• Successful supply chain management requires
  decisions on the flow of information, product,
  and funds

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From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
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Supply Chain Drivers

• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing

• Chapters 5, 6
• Chapters 10, 11, 12
• Chapters 4, 13
• Chapters 7, 8, 9, 16, 17
• Chapter 14
• Chapter 15

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Facilities

• Facility decisions
• Production facility
• Flexible versus dedicated
• Product focus (fabrication and assembly) versus
  functional focus (fabrication or assembly)
• Storage facility
• Cross-docking versus storage

• Metrics
• Capacity
• Utilization
• Flow time (theoretical and actual)
• Flow time efficiency
• Product variety
• Average batch size
• Service level

Overall tradeoff Cost of the number, location
and type versus level of responsiveness
How could a car manufacturer increase
responsiveness through its facilities?
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Honda

• East Liberty, OH
• Using Honda's flexible manufacturing, this plant
  produces cars and light trucks on the same
  assembly line
• Marysville, OH
• One of the most integrated and flexible auto
  plants in North America, it houses stamping,
  welding, paint, plastic injection molding and
  assembly under one roof.

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Inventory

• Inventory decisions
• Cycle inventory
• Safety inventory
• Seasonal inventory
• Level of product availability

• Metrics
• Average inventory
• Units that have been in stock for more than a
  specified period of time
• Fill rate (fraction of orders that were met on
  time from inventory)
• Fraction of time out of stock

Overall tradeoff Level of inventory versus level
of product availability
How could a grocery retailer use inventory to
increase responsiveness?
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Transportation

• Transportation decisions
• Design of transportation network
• Route and network selection
• Mode of transportation
• Air, package carriers, truck, rail, sea,
  pipeline, intermodal,

• Metrics
• Inbound/outbound cost
• Inbound/outbound cost per shipment
• Shipment sizes
• Fraction transported by mode

Overall tradeoff Cost and speed of transportation
How does Dell use transportation to improve
responsiveness?
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Amazon.com

• Fulfillment and warehousing locations
• Arizona, USA Phoenix, Goodyear
• Delaware, USA New Castle
• Indiana, USA Whitestown, Munster
• Kansas, USA Coffeyville
• Kentucky, USA Campbellsville, Hebron (near CVG),
  Lexington, and Louisville
• Nevada, USA Fernley and Red Rock (near 4SD)
• Pennsylvania, USA Carlisle, Chambersburg,
  Hazleton, and Lewisberry
• Texas, USA Dallas/Fort Worth
• Ontario, Canada Mississauga (a Canada Post
  facility)

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IKEA
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Information

• Information decisions
• Push vs. Pull
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies

• Metrics
• Forecast horizon
• Forecast errors
• Ratio of demand variability and order variability

Accurate information helps both efficiency and
responsiveness
How does Wal-Mart use information to improve its
supply chain operations?
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Information
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Sourcing

• Sourcing decisions
• In-House or outsource
• Supplier selection

• Metrics
• Days payable outstanding
• Purchase price statistics
• Purchase quantities
• Fraction on-time deliveries
• Supply quality and lead-time

Overall tradeoff Increased supply chain profit
versus additional risk
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Sourcing
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Pricing

• Pricing decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu price

• Metrics
• Profit margin
• Average sale price
• Average order size
• Incremental fixed cost per order
• Incremental variable cost per unit

Overall tradeoff Increase company profits
How can Peapod use pricing of its delivery
services to improve profitability?