Supply Chain Management

1
Supply Chain Management

• Lecture 23

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Semester Outline

• Thursday April 8 Chap 14
• Tuesday April 13 Paul Dodge guest lecture
• Thursday April 15 Chap 14, 15
• Tuesday April 20 Chap 15
• Thursday April 22 Simulation Game briefing
• Tuesday April 27 Review, buffer
• Thursday April 29 Simulation Game

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Outline

• Today
• Start with Chapter 14
• Sections 1, 2, 3, 4, 6, 7, 8, 9
• Section 6 buyback and revenue sharing contracts
  only
• Homework 6 online tomorrow
• Due Thursday April 15 before class
• Next week
• Guest speaker Paul Dodge
• SVP Supply Chain, ProBuild

4
Announcement

• Summer Internship at OptTek Systems, Boulder, CO
• Date
• Seven consecutive weeks during summer 
• Compensation
• 900/week (6,300 Total)
• Description
• This summer internship will engage the student in
  research and development of the agent-based
  simulation model within OptForce. The student
  will gain practical real-world experience by
  analyzing actual customer data using OptForce. 

For more information, ask Career Services
5
Summary

• Single period inventory model
• Cost of over- and understocking have a direct
  impact on both the optimal cycle service level
  and profitability
• Optimal CSL (p c)/(p s) Cu/(Cu Co)
• Optimal order quantity O F-1(CSL, ?, ?)
• How to improve profitability?
• Increase salvage value
• Decrease margin lost from stockout
• Decrease demand uncertainty
• Improved forecast
• Quicker reponse
• Postponement
• Tailored sourcing

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Drivers of Supply Chain Performance

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

(Chapters 4, 5) (Chapters 10, 11, 12) (Chapters
4, 13) (Chapter 14) (Chapter 15) (Chapters 7, 8,
9, 16)
7
Comparing Different Suppliers

• Green Thumb, uses 1000 bearings per week for
  their production of lawn mowers and snow blowers.
  Green Thumb is considering one of two suppliers
• Supplier A charges 1.00 per bearing
• Supplier B charges 0.97 per bearing

Which supplier should Green Thumb choose?
8
Comparing Different Suppliers

• Green Thumb, uses 1000 bearings per week for
  their production of lawn mowers and snow blowers.
  Green Thumb uses a holding cost of 25 and is
  considering one of two suppliers
• Supplier A charges 1.00 per bearing and requires
  an order size of 2000
• Supplier B charges 0.97 per bearing and requires
  an order size of 8000

Which supplier should Green Thumb choose?
9
Comparing Different Suppliers

• Green Thumb, uses on average 1000 bearings per
  week, with a standard deviation of 300, for their
  production of lawn mowers and snow blowers. It
  monitors inventory continuously and aims a cycle
  service level of 95. Green Thumb uses a holding
  cost of 25 and is considering one of two
  suppliers
• Supplier A charges 1.00 per bearing and requires
  an order size of 2000. The supplier lead time is
  2 weeks
• Supplier B charges 0.97 per bearing and requires
  an order size of 8000. The supplier lead time is
  6 weeks

Which supplier should Green Thumb choose?
10
Comparing Different Suppliers

• Green Thumb, uses on average 1000 bearings per
  week, with a standard deviation of 300, for their
  production of lawn mowers and snow blowers. It
  monitors inventory continuously and aims a cycle
  service level of 95. Green Thumb uses a holding
  cost of 25 and is considering one of two
  suppliers
• Supplier A charges 1.00 per bearing and requires
  an order size of 2000. The supplier lead time is
  2 weeks, with a standard deviation of 1 week
• Supplier B charges 0.97 per bearing and requires
  an order size of 8000. The supplier lead time is
  6 weeks, with a standard deviation of 4 weeks

Which supplier should Green Thumb choose?
11
Comparing Different Suppliers

• Green Thumb, uses on average 1000 bearings per
  week, with a standard deviation of 300, for their
  production of lawn mowers and snow blowers. It
  monitors inventory continuously and aims a cycle
  service level of 95. Green Thumb uses a holding
  cost of 25 and is considering one of two
  suppliers
• Supplier A charges 1.00 per bearing and requires
  an order size of 2000. The supplier lead time is
  2 weeks, with a standard deviation of 1 week.
  Quality is poor
• Supplier B charges 0.97 per bearing and requires
  an order size of 8000. The supplier lead time is
  2 weeks, with a standard deviation of 4 weeks.
  Quality is good

Which supplier should Green Thumb choose?
12
Sourcing Decisions in a Supply Chain
According to a KPMG survey, 77 regarded cost to
be as the most important or second most
important factor in all of their outsourcing
decisions
13
The Role of Sourcing in a Supply Chain

• Purchasing
• Also called procurement, is the process by which
  companies acquire raw materials, components,
  products, services, or other resources from
  suppliers to execute their operations
• Sourcing
• Is the entire set of business processes required
  to purchase goods (raw materials, components,
  products) and services
• Outsourcing
• Results in the supply chain function being
  performed by a third party

For any supply chain, the most significant
decision is whether to outsource the function or
perform it in-house
14
Outsourcing versus off-shoring

• What is the difference?

A firm off-shores a supply chain function if it
maintains ownership but moves the production
facility offshore
A firm outsources if the firm hires an outside
firm to perform an operation rather than
executing the operation within the firm
15
Backsourcing and nearshoring

• Backsourcing
• Is the return of business activity to the
  original firm
• Dell, Apple, Powergen (a British company) have
  backsourced from Indian call centers, claiming
  that their costs had become too high
• Nearshoring (near source outsourcing)
• Is choosing an outsource provider near the home
  country
• US firms are interested in nearshoring to Mexico
  because of its somewhat low cost labor and
  geographic nearness to the US

16
Outsourcing to China
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Outsourcing to China (Walmart)

• About 85 of Walmarts merchandise is made abroad
• A whopping 10-13 of everything China sends to
  the US ends up on Walmarts shelves
• Over 15 billion worth of goods per year
• Walmart has almost 600 people in China to make
  purchases
• The price of portable DVD players dropped in half
  when Walmart found a Chinese factory to built in
  giant quantities
• Walmarts success has forced other retailers and
  manufacturers to reevaluate their supply chains
• Walmart has led the way to product safety through
  its responsible sourcing program
• In 2009, Walmart required an identifiable trail
  from raw material to suppliers

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Outsourcing in Practice
India and Philippines account for 50 of the
worlds business process outsourcing (BPO) market
BPO is a form of outsourcing that involves
the contracting of the operations and
responsibilities of a specific business functions
to a third-party service provider
Source The A.T. Kearney Global Outsouring Index,
2009
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Outsourcing in Practice
Source The A.T. Kearney Global Outsouring Index,
2009
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Outsourcing in Practice

• Trends in outsourcing
• North Africa and Middle East are rising on the
  global sourcing index
• North America accounts for 70 of offshore
  outsourcing spending, but European countries are
  catching up as their spending has risen faster
• A move toward more outsourcing providers
• Experienced labor is key to success

Source The A.T. Kearney Global Outsouring Index,
2009
21
In-House or Outsource

• The decision to outsource is based on the growth
  in supply chain surplus provided by the third
  party and the increase in risk by using a third
  party

22
How do third parties increase the supply chain
surplus?

• Lower cost and higher quality
• Specialized third party is further along the
  learning curve for some supply chain activity
• Capacity aggregation
• Increase SC surplus by aggregating demand across
  multiple firms and gaining economies of scale

Intels family of mobile PC processors gives
consumers more choice by enabling PC makers to
design notebooks of every shape and size
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How do third parties increase the supply chain
surplus?

• Transportation aggregation
• Increases supply chain surplus by aggregating
  transportation across a variety of shippers

24
Transportation and Sourcing
What factors lead Wal-Mart to own its trucks
although many retailers outsource their
transportation?
25
How do third parties increase the supply chain
surplus?

• Warehousing aggregation
• Increases SC surplus by aggregating warehousing
  needs over several customers and lowering
  facility cost
• Receivables aggregation
• Increases SC surplus by aggregating receivables
  reducing collection cost (especially when
  retailing is fragmented)

Safexpress provides an unrivalled range of
logistics and supply chain solutions including
door to door distribution and single source
invoicing
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How do third parties increase the supply chain
surplus?

• Procurement aggregation
• Increases SC surplus by aggregating procurement
  for many small players to facilitate economies of
  scale

Offering members preferred pricing and
volume-based rebates on truck equipment and
services through a community-driven purchasing
system
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How do third parties increase the supply chain
surplus?

• Information aggregation
• Increases SC surplus by aggregating information
  and reducing search cost for the (online) customer

Provides the North American Trucking Industry
with the most comprehensive freight matching
service
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How do third parties increase the supply chain
surplus?

• A third party may be able to provide a
  sustainable growth of the surplus by aggregating
  capacity, inventory, inbound or outbound
  transportation, warehousing, procurement,
  information, receivables, or relationships to a
  level that the firm cannot on its own
• A growth in surplus may also occur if the third
  party has lower costs or higher quality because
  of specialization or learning

29
How do third parties increase the supply chain
surplus?

• Three important factors that affect the increase
  in surplus
• Scale
• Uncertainty
• Specificity

A firm gains the most from outsourcing if its
needs are small, highly uncertain, and shared by
others
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How do third parties increase risk?

• Less control over the function being outsourced
• Reduced customer/supplier contact
• Loss of internal capability and increase in third
  partys power
• Increases complexity in coordination, and thus
  increases coordination cost
• It is easy to underestimate the effort to
  coordination
• Leakage of sensitive information
• In case intellectual property needs to be shared
  with third parties, there is the danger of
  leakage
• Ineffective contracts

What are ways to mitigate these risks?
31
Sourcing Process

• Once a decision to outsource has been made, the
  sourcing process includes

Supplier scoring and assessment
Designcollaboration
Supplier selection and contract negotiation
Procurement
Sourcing planning and analysis
32
Sourcing Process

• Supplier scoring and assessment
• Process used to rate suppliers
• Supplier selection
• Choose the appropriate supplier(s)
• Design collaboration
• Work together with supplier when designing
  components for the final product
• Procurement
• Process placing orders and receiving orders from
  supplier(s)
• Sourcing planning and analysis
• Analyze spending across various suppliers,
  identify opportunities for decreasing cost

Supplier scoring and assessment
Supplier selection and contract negotiation
Designcollaboration
Procurement
Sourcing planning and analysis
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Sourcing Process
Supplier scoring and assessment
Designcollaboration
Supplier selection and contract negotiation
Procurement
Sourcing planning and analysis
34
Supplier scoring and assessment

• Common fundamental mistake when choosing a
  supplier
• Only focus on quoted price

Supplier performance should be compared on the
basis of the suppliers impact on total cost
35
Factors besides purchase price that influence
total cost

• Replenishment lead times
• Does it pay to select a more expensive supplier
  with a shorter lead time?
• If lead time grows, safety inventory grows
  proportionally to the square root of the
  replenishment lead time
• On-time performance
• Is a more reliable supplier worth the extra
  pennies?
• If variability of lead time grows, the required
  safety inventory at the firm grows

36
Factors besides purchase price that influence
total cost

• Supply flexibility
• The less flexible a supplier is, the more
  lead-time variability it will display as order
  quantities change
• Delivery frequency/lot size
• Delivery frequency affects the transportation
  cost, lot size affects the cycle inventory
  holding cost
• Supply quality
• Quality affects unit price and lead time as
  follow-up orders may need to be fulfilled to
  replace defective products
• Inbound transportation cost
• Sourcing a product overseas may have lower
  product cost, but generally incurs a higher
  inbound transportation cost

37
Factors besides purchase price that influence
total cost

• Pricing terms
• For example, quantity discounts (and the impact
  it has on cycle inventory)
• Information coordination capability
• Good coordination results in better planning and
  ultimately lower production, safety inventory,
  and transportation cost
• Design collaboration capability
• Can help reduce all cost, improve quality, and
  decrease time-to-market
• Exchange rates, taxes, and duties
• Important for global supply chains as it affects
  the unit price
• Supplier viability
• The likelihood that the supplier will be around
  to fulfill the promises it makes (uncertainty
  increases safety inventory)

38
Factors besides purchase price that influence
total cost
39
Sourcing Process
Supplier scoring and assessment
Designcollaboration
Supplier selection and contract negotiation
Procurement
Sourcing planning and analysis
40
Sourcing Planning and Analysis

• A firm should periodically analyze its (1)
  procurement spending and (2) supplier performance
  and use this analysis as an input for future
  sourcing decisions
• Supplier performance analysis should be used to
  build a portfolio of suppliers with complementary
  strengths
• Cheaper but lower performing suppliers should be
  used to supply base demand
• Higher performing but more expensive suppliers
  should be used to buffer against variation in
  demand and supply from the other source

41
Sourcing Planning and Analysis

• A firm should periodically analyze its (1)
  procurement spending and (2) supplier performance
  and use this analysis as an input for future
  sourcing decisions
• Supplier performance analysis should be used to
  build a portfolio of suppliers with complementary
  strengths
• Cheaper but lower performing suppliers should be
  used to supply base demand
• Higher performing but more expensive suppliers
  should be used to buffer against variation in
  demand and supply from the other source