Supply Chain Strategy

1
Supply Chain Strategy
Chapter 10
2
How Supply Chain Strategy fits the Operations
Management Philosophy
Operations As a Competitive Weapon Operations
Strategy Project Management
Process Strategy Process Analysis Process
Performance and Quality Constraint
Management Process Layout Lean Systems
Supply Chain Strategy Location Inventory
Management Forecasting Sales and Operations
Planning Resource Planning Scheduling
3
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.

4
Supply Chain

• Supply chain The network of services, material,
  and information flows that link a firms 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 firms supply
  chain to meet the competitive priorities of the
  firms operations strategy.

5
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 goods
• explicit services
• implicit services

6
Supply Chain for a Florist
7
Creation of Inventory

• Inventory A stock of materials used to satisfy
  customer demand or to support the production of
  services or goods.

8
Supply Chain for Manufacturing

• Raw materials (RM) The inventories needed for
  the production of services or goods.
• Work-in-process (WIP) Items, such as components
  or assemblies, needed to produce a final product
  in manufacturing.
• Finished goods (FG) The items in manufacturing
  plants, warehouses, and retail outlets that are
  sold to the firms customers.

9
Inventory at Successive Stocking Points
10
Supply Chain
11
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.

• Inventory turnover is annual sales at cost
  divided by the average aggregate inventory value
  maintained for the year.

12
Supply Chain Process Measures
13
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 firms 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.

14
Links to Financial Measures

• Cost of Goods Sold Buying materials at a better
  price, or transforming them more efficiently,
  improves a firms cost of goods sold measure and
  ultimately its net income.
• Total Revenue Increasing the percent of on-time
  deliveries to customers increases total revenue
  because satisfied customers 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 the firm because it needs less
  working capital.

15
Supply Chain Dynamics for Facial Tissue
Bullwhip Effect
Quantity ordered
Time
16
External Value-Chain Linkages
17
External Causes of Supply Chain Disruption

• 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 in
  production schedule or quantity produced.

18
Internal Causes of Supply Chain Disruption

• Internally generated shortages of parts.
• Engineering changes to the design of services or
  products are disruptive.
• New service or product introductions disrupt the
  supply chain and may require a new supply chain.
• Service or product promotions may create a demand
  spike.
• Information errors such as demand forecast
  errors, faulty inventory counts, or
  miscommunication with suppliers.

19
The Customer Relationship Process
E-Commerce and the Marketing 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.

20
E-Commerce and the Order Placement Process
The Customer Relationship 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.

21
Order Fulfillment at Dell, Inc.

• Customers buy from Dell by web site,
  voice-to-voice, and face-to-face.
• Order information is transmitted to the inventory
  system.
• 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.
• 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)
• A team uses the kit to assemble and initially
  test the system.
• Systems are thoroughly tested.
• Completed systems are boxed and placed on trucks.
• The entire assemble-to-order cycle takes only a
  few hours.

22
Dells Order Fulfillment Process
23
The Order Fulfillment Process
Inventory Placement

• Centralized placement Keeping all the inventory
  at one location such as a firms 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.

24
The Order Fulfillment Process
Vendor-Managed Inventories

• Vendor-managed inventories (VMI) An extreme
  application of forward placement involving
  locating inventories at the customers
  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.

25
Order Fulfillment Programs

• Continuous Replenishment Program (CRP) A VMI
  method in which the supplier monitors the
  customers 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.

26
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.

27
The Supplier Relationship Process

• The sourcing process qualifies, selects, manages
  the contracts, and evaluates suppliers.
• The design collaboration process focuses on
  jointly designing new services or products with
  key suppliers, seeking to eliminate costly delays
  and mistakes incurred when many suppliers
  concurrently, but independently, design service
  packages or manufactured components.
• The negotiation process process focuses on
  obtaining an effective contract that meets the
  price, quality, and delivery requirements of the
  supplier relationship processs internal
  customers.

28
The Supplier Relationship Process

• The buying process relates to the actual
  procurement of the service or material from the
  supplier. This process includes the creation,
  management, and approval of purchase orders.
• The information exchange process facilitates the
  exchange of pertinent operating information, such
  as forecasts, schedules, and inventory levels
  between the firm and its supplier.

29
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.

30
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.

31
Electronic Purchasing

• Electronic Data Interchange (EDI) enables the
  transmission of routine, standardized business
  documents from computer to computer.
• Catalog hubs A system whereby suppliers post
  their catalog of items on the Internet and buyers
  select what 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 place
  competitive bids to buy something.

32
Centralized versus Localized Buying

• 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 to a particular facility.
• The best solution may be one where both local
  autonomy and centralized buying are possible.

33
Value Analysis

• Value analysis is a systematic effort to reduce
  the cost or improve the performance of services
  or products, either purchased or produced.
• Early supplier involvement is a program that
  includes suppliers in the design phase of a
  service or product.
• Presourcing A level of supplier involvement in
  which suppliers are selected early in a products
  concept development stage and given significant,
  if not total, responsibility for the design of
  certain components or systems of the product.

34
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.

35
Environment Design Factors
36
Mass Customization

• Mass Customization A strategy whereby a firms
  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 customers 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.

37
Lean Supply Chains

• Three key activities are required to attain a
  lean supply chain
• Strategic Sourcing Identifying items or services
  that are of high value or complexity and purchase
  them from a select set of suppliers with whom the
  firm establishes a close relationship.
• Cost Management Limiting the number of suppliers
  and focusing on helping them reduce their costs
  through trust and friendly collaboration.
• Supplier Development Shifting from price
  negotiations to cost management and working with
  suppliers to achieve lean operations.

38
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 firms 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.

39
Offshoring

• Offshoring is a supply chain strategy that
  involves moving processes to another country.
  Factors that influence the offshoring decision
  include

• Tariffs and Taxes
• Internet

• Comparative labor costs
• Logistics costs
• Labor Laws and Unions

• Pitfalls of offshoring include
• Pulling the plug too quickly. Not making a
  good-faith effort to fix the existing process
• Technology transfer
• Difficulties integrating processes

40
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 ones 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.

41
Which Type of Supply Chain?

• Traditional Supply Chain is preferred when
• Sales volumes are high.
• Order consolidation is important.
• Small-order fulfillment capability of suppliers
  is important.

• Virtual Supply Chain is preferred when
• Demand is highly volatile.
• High service or product variety is important.