Supply Chain

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Chapter 12

• Supply Chain
• Management

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Supply Chain Management (SCM)

• SCM Management of materials, information and
  financial flows in a network consisting of
  suppliers, manufacturers, distributors, and
  customers.
• Used to be viewed as a standard operational
  issue. Now viewed as one of the most important
  strategic issues.
• Supply Chain network of suppliers, warehouse,
  operations, and retail outlets

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Traditional Supply Chain Flows
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• Information flow, Financial
  flow
• Material flow

Supplier
Retailer
Distributor
Manufacturer
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Examples of Supply Chains

• Dell / Compaq
• Toyota / GM / Ford
• Amazon / Borders / Barnes and Noble
• Zara / Gap
• Red Cross / Oxfam
• MUHC / MGH
• Air Canada / Southwest

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Need for Supply Chain Management

• Improve operations
• Increasing levels of outsourcing
• Increasing transportation costs
• Competitive pressures
• Increasing globalization
• Increasing importance of e-commerce
• Complexity of supply chains
• Manage inventories

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Supply Chain Design

• Reflect a firms strategic positioning
• Three basic steps in achieving strategic fit
• - Understanding the customer
• - Understanding the supply chain
• - Achieving strategic fit
• Primary trade-off
• Cost versus Response time
• Responsive versus Efficient supply chain

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Right Supply Chain Strategy?

• The strategy needs to be tailored to meet
  specific needs of the customers
• A product with a stable demand and a reliable
  source of supply should not be managed in the
  same way as one with highly unpredictable demand
  and unreliable supply

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A Framework for Devising the Right Supply Chain
Strategy

• Two key sources of uncertainty demand and
  supply
• Demand uncertainty
• Supply Uncertainty

Functional
Innovative
Stable
Evolving
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Drivers of Supply Chain Fit
Efficiency
Responsiveness
Supply Chain Structure
Inventory
Transportation
Facilities
Information
Drivers
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Considerations for Supply Chain Drivers
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Dealing with-Multiple Owners / Local Optimization

• Information Coordination
• Contractual Coordination

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Lack of Information Coordination Bull-Whip
Effect

• The variance of orders is greater than that of
  sales, and the distortion increases as one moves
  upstream.

Distributor Orders
Customer Demand
Manufacturer
Distributor
Retailer
Wholesaler
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Lack of Information Coordination Bull-Whip
Effect
Wholesaler
Manufacturer
Distributor
Retailer
Ordering
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Possible Solutions

• Enterprise Resource Planning (ERP)
• Electronic Data Interchange (EDI)
• Advanced Planning and Scheduling (APS)
• Customer Relationship Management (CR)
• Collaborative Planning Forecasting and
  Replenishment (CPFR)

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Creating an Effective Supply Chain Contractual
Coordination

• Develop strategic objectives and tactics
• Integrate and coordinate activities in the
  internal supply chain
• Coordinate suppliers with customers
• Coordinate planning and execution
• Form strategic partnerships

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Value and Limitations of Contractual
Coordination

• Consider a SC with 1 manufacturer and 1 retailer.
• Manufacturer has a production cost of c/unit
• Manufacturer sells the product to a retailer for
  w/unit
• The selling price for the retailer is p/unit.
• This is a fashion item so there is only one
  opportunity to produce and sell
• Single Period Problem.
• Let X (random variable) denote the demand for the
  retailer.
• X is uniformly distributed

c / unit
manufacturer
w / unit
retailer
p / unit
customers
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• The retailer will solve the singe period
  inventory problem where
• Selling price p/unit
• Purchase cost w/unit
• Demand XF(X)
• Q satisfies

• Let p12/unit, w6/unit and c3/unit XU(5,55)

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c / unit

• Now consider a different version
• The manufacturer and the retailer are owned by
  the same company.
• Demand is the same
• Production cost is still 3/unit
• Selling price is 12/unit.

Single
firm
p / unit
customers
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comparisons
3 / unit
3 / unit
manufacturer
Single
6 / unit
firm
retailer
12 / unit
12 / unit
customers
customers
Order quantity
30 units
42.5 units
Total profit
195 (Ret. 100, Mfr. 95)
213.75
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Lessons

• Coordination is always beneficial for the supply
  chain (basic application of systems approach)
• Examples Contractual Coordination
• Revenue Sharing (Movie Business)
• BuyBack Contracts (Publishing)
• Coordination may put some members worse-off
  (compensation would be required for those
  members)
• Coordination requires information sharing and a
  systems approach
• Requires trust among SC members and long-term
  thinking

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Critical Trends in Global SCs

• The cost squeeze
• - around 20 have no production in home markets
• - Even design functions are moving
• The pursuit of new markets
• - 90 of Nestle assets are outside Switzerland
• - 50 of Sony assets are outside Japan
• Product innovation
• - 35 of the revenue from products less than 3
  years
• - Average product development time has reduced
  by 40 in last 10 years

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Paradoxes of Complexities

• The optimization paradox
• The customer collaboration paradox
• The innovation paradox
• The flexibility paradox
• The risk paradox

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Supply Chain Risk Drivers
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• INDUSTRIAL INTELLIGENCE - DELL
• From 1995 to 98, 32 to 7 days of inventory
• From 1992 to 98, 204 to 47 suppliers (as few
  partners as possible)
• Suppliers agree to meet 25 of Dells volume
  requirement (shared liability)
• Electronic links with supplier with hourly update
  on raw material consumption (real time info)
• VMI, returnable totes (no inventory, decrease
  handling costs)
• Its not well, every 2 weeks, deliver 5,000 to
  this warehouse and well put them on a shelf. It
  is tomorrow morning, we need 8,562 and deliver
  them to door 7 by 7 a.m. - Michael Dell (POU
  pull demand strategy)
• Share information and plans freely with
  suppliers (forecast is not contract)
• Rely on information technology (systems)
• (Sources Harvard Business School, April 1998
  March 1999)

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• Let p12/unit, w6/unit and c3/unit XU(5,55)
• The total profit for the retailer is
• The total profit for the manufacturer is
• The total profit for the supply chain 105 90
  195

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• p12/unit and c3/unit XU(5,55)
• The total profit for the supply chain is