Supply Chain Management

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Supply Chain Management

• Lecture 5

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Outline

• Today
• Chapter 3
• Start with Chapter 4
• Thursday
• Finish Chapter 4
• Introduction to Excel Solver
• Homework 1
• Due Thursday January 28 before class

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

• 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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Toyota

• Worldwide operations

Source http//www2.toyota.co.jp/en/facilities/man
ufacturing/worldwide.html
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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
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Responsiveness

• 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
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Responsiveness

• Transportation decisions
• 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
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Transportation Facts
7.7
0.1
0.3
66.0
60.0
32.7
3.8
12.4
28.3
8.6
15.3
16.5
2.8
10.8
17.0
11.0
1.4
5.1
Freight shipments in America 2002
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Transportation Facts
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Transportation
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Responsiveness

• 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
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Responsiveness

• 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
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Responsiveness

• 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
How does Dell use sourcing to improve efficiency?
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Pricing
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Responsiveness

• 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?
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Designing a Supply Chain Network
In designing a supply chain, we need to consider
how all supply chain drivers should be used
together to support the competitive strategy of a
company and maximize supply chain profits
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
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From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
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The Role of Distribution in the Supply Chain

• What is distribution?
• Distribution refers to the steps taken to move
  and store a product from the supplier stage to
  the customer stage in a supply chain
• Distribution-related cost
• Make up about 10.5 of the US economy
• Make up about 20 of the cost of manufacturing

Distribution can achieve supply chain objectives
from low cost to high responsiveness
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The Role of Distribution in the Supply Chain
What differences in the retail environment may
justify the fact that the fast-moving consumer
goods supply chain in India has far more
distributors than in the United States?
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Distribution Complexity in India

• Dispersed population
• 30 cities have populations of more than 1
  million, but nearly 70 still live in rural areas
• Retail density
• More than 12 million retail outlets
• Mom-and-pop stores account for more than 96 of
  the total market for many markets, organized
  retail represents only 4
• Infrastructure complexity
• Very few full-service distribution companies
  operate in India
• Some consumer multinational companies work with
  more than 1,000 distributors, which deliver its
  products to more than 1 million outlets across
  India

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Distribution Complexity
Baddi
Rural village
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Distribution Complexity in India

• India is becoming one of the worlds largest
  markets for consumer goods
• Rapidly rising household incomes
• One quarter of Indias population is between 20
  and 35, a high spending segment in many markets
• Overall retail market is more than 230 billion
  (2005) and expected to grow to 308 billion (2010)

Wal-Mart is teaming up with Bharti to establish
wholesale and supply chain operations in India
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The Role of Distribution in the Supply Chain

• What is distribution?
• Distribution refers to the steps taken to move
  and store a product from the supplier stage to
  the customer stage in a supply chain
• Distribution-related cost
• Make up about 10.5 of the US economy
• Make up about 20 of the cost of manufacturing

Distribution can achieve supply chain objectives
from low cost to high responsiveness
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Response Time and Number of Facilities
Number of Facilities
Response Time
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Facility Cost and Number of Facilities
Facility Costs
Number of Facilities
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Inventory Cost and Number of Facilities
Inventory Costs
Number of Facilities
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Transportation Cost and Number of Facilities
Transportation Costs
Number of Facilities
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Total Logistics Costs
Inventory Costs
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Logistics Costs, Response Time and Number of
Facilities (Fig 4.5)
Response Time
Total Logistics Cost
Number of Facilities
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Design Options For a Distribution Network

• Two key decisions when designing a distribution
  network
• Will the product be delivered to the customer
  location or picked up from a preordained site?
• Will product flow through an intermediary?

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Design Options For a Distribution Network

1. Manufacturer Storage with Direct Shipping
2. Manufacturer Storage with Direct Shipping and
   In-Transit Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with Consumer
   Pickup
6. Retail Storage with Consumer Pickup

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Manufacturer Storage with Direct Shipping (Drop
Shipping)

• Products are shipped directly to the consumer
  from the manufacturer
• Retailer is an information collector
• Passes orders to the manufacturers
• It does not hold product inventory
• Inventory is centralized at manufacturer
• Drop shipping offers the manufacturer the
  opportunity to postpone customization
• Effective for high value, large variety, low
  demand products
• High transportation cost
• Example eBags

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Manufacturer Storage with Direct Shipping and
In-Transit Merge

• Shipments from multiple manufactures are merged
  before making a single delivery to the consumer
• Shipments to Mergers are larger so economies of
  scale is achieved
• Mergers increase facility costs
• Response time may go up
• Example
• Furniture retailers merge couches and coffee
  tables produced by different manufacturers
• Dell merges a Dell PC with a Sony flat screen

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Distributor Storage with Carrier Delivery

• Inventory is held at a warehouse which ships to
  customer by carriers
• With respect to direct shipping
• Inventory aggregation is less
• Higher inventory costs
• Facility costs are higher
• Less information to track
• Warehouses are physically closer to consumers
  which leads to
• Faster response time
• Lower transportation cost
• Not effective for slow moving items
• Example Amazon

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Distributor Storage with Last Mile Delivery

• Warehouse delivers to customers instead of
  carrier
• Warehouses are located closer to consumers
• Transportation costs go up because warehouses are
  not as effective as package carriers in
  aggregating loads to have economies of scale
• Warehouse may need to own a trucking fleet so the
  physical infrastructure costs are higher.
• Products must be flowing fast to justify the
  infrastructure
• Processing cost are high
• Example Milk delivery, Grocery delivery (Peapod,
  Albertsons), Denver Mattress

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Manufacturer or Distributor Storage With Customer
Pickup

• Customers come to pick up sites (warehouse,
  retailer) to get the products
• If consumers are willing to pick up the products,
  let them do so. Otherwise, they would be charged
  for the delivery costs
• Order tracking is crucial. Consumers must be
  alerted when their order is ready for pick up.
  Once a consumer arrives at the pick up site, the
  products must be quickly located.
• Significant amount of information is required
• Increased handling cost
• Example 7dream.com

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Retail Storage with Customer Pickup

• Customers pick up product from retailers
• Low transportation cost
• High facility cost
• Relative easy returnability
• Increased inventory cost
• No order tracking necessary
• If the product is available at the retailer, the
  consumer buys. Otherwise goes to another retailer
• Effective for fast moving items
• Example Retail stores such as Wal-Mart and
  JCPenney

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Comparing Distribution Networks
1 strongest performance 6 weakest performance
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Comparing Distribution Networks
Green very suitable Red very unsuitable
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From brick-and-mortar to click-and-mortar
What has been the impact of e-business on supply
chain cost?
What has been the impact of e-business on
customer service?
In the future, do you see the number of
distributors decreasing, increasing, or staying
about the same?
Is e-business likely to be more beneficial in the
early part or the mature part of a products life
cycle?
Why should an e-business such as Amazon.com build
more warehouses as its sales volume grows?