Production and Operations Management: Manufacturing and Services

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CHASE AQUILANO JACOBS
Operations Management
For Competitive Advantage
Chapter 9
Supply Chain Strategy
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Chapter 8Supply-Chain Strategy

• Supply-Chain Management Defined?
• Measuring Supply-Chain Performance
• Bullwhip Effect
• Outsourcing Defined
• JIT Purchasing
• Value Density Defined
• Mass Customization Defined

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What is Supply-Chain Management?Defined

• Supply-chain is a term that describes how
  organizations (suppliers, manufacturers,
  distributors, and customers) are linked together.
• Supply-chain management is a total system
  approach to managing the entire flow of
  information, materials, and services from
  raw-material suppliers through factories and
  warehouses to the end customer.

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Supply Chain Management

• Applies a total systems approach to managing the
  entire flow of
• information
• materials
• and services

Raw material suppliers
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SCM Functions

• Forecasting demand
• Selecting suppliers
• Ordering materials
• Inventory control
• Scheduling production
• Shipping delivery
• Information management
• Quality management
• Customer service

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Uncertainty In Supply Chain

• Wrong forecasts
• Late deliveries
• Poor quality
• Machine breakdowns
• Canceled orders
• Erroneous information

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Supply Chain Design

• Strategic issue
• Reliable delivery of quality products
• At least cost
• As fast as possible
• Apply quality management principles
• Benchmark to learn what is possible
• Work with suppliers customers to achieve goals
• Control inventory

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Formulas for Measuring Supply-Chain Performance

• Inventory Turnover Cost of goods
  sold .
• Average aggregate inventory
  value
• Weeks of Supply Average aggregate inventory
  value
• Cost of goods sold

(52 Weeks)
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Example of Measuring Supply-Chain Performance

• Suppose a companys new annual report claims
  their costs of goods sold for the year is 160
  million and their total average inventory
  (production materials work-in-process) is worth
  35 million. This company is used to having any
  inventory turn ratio of 10.
• What is this years Inventory Turnover ratio?
  What does it mean?

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Example of Measuring Supply-Chain Performance
(Continued)

• Inventory Turnover
• Cost of goods
  sold/Average aggregate inventory value
• 160/35
• 4.57
• Since the company is used to an inventory
  turnover of 10, a drop to 4.57 means that the
  inventory is not turning over as quickly as it
  had in the past. Without knowing the industry
  average of turns for this company it is not
  possible to comment on how they are competitively
  doing in the industry.

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Bullwhip Effect
The magnification of variability in orders in the
supply-chain.
Retailers Orders
Wholesalers Orders
Manufacturers Orders
Order Quantity
Order Quantity
Order Quantity
Time
Time
Time
A lot of retailers each with little variability
in their orders.
can lead to greater variability for a fewer
number of wholesalers, and
can lead to even greater variability for a
single manufacturer.
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Matching Supply-Chains with Products

• Functional products
• Staples bought in wide range of retail outlets
• Satisfy basic needs that do not change over time
• Stable predictable demand and long life cycles
• Stability invites competitionlow profit margins
• Incentives to buyinnovative products
• Innovative products
• High profit margins and volatile demand
• Have short life cyclesfew months
• Quite unpredictable
• Requires different supply chain

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Matching Supply-Chains with Products

• Function of supply chain
• Physical function
• Convert raw materials into parts, components,
  goods
• Transport goods from point to another in the SC
• Costs incurred for production, shipping, storage
• Market mediation
• Variety of products match what consumer wants
• Costs incurred for excess supply or shortage

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Matching Supply-Chains with Products
Innovative Products
Functional Products
Efficient Supply-Chain
Match
Mismatch
Responsive Supply-Chain
Match
Mismatch
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Purchasing And Suppliers

• Purchase materials 50 manufacturing cost
• Purchasing plays crucial role in SCM
• Quality starts with purchasing
• Purchasing must ensure parts materials are
• Of correct quality
• In correct quantity
• Delivered on time
• So, select suppliers committed to quality
• Supplier integral part of companys quality
  program

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What is Outsourcing?Defined

• Outsourcing is defined as the act of moving a
  firms internal activities and decision
  responsibility to outside providers.

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Reasons to Outsource

• Organizationally-driven
• Improvement-driven
• Financially-driven
• Revenue-driven
• Cost-driven
• Employee-driven

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Single Sourcing

• Purchase from very few (or one) suppliers
• Make it worth suppliers while to invest
• More control of quality
• Partnering
• Supplier involved in product design process

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Supplier-Customer Relationship

• Customer service means
• Prompt delivery
• On-demand shipments
• On-time delivery
• Directly to point of use
• Frequent deliveries even several a day
• Continuous (JIT) replenishment
• Reduces need for warehouses and inventories
• Suppliers may have to relocate new customer
• Supplier become internal part of customer

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Partnership Relationship

• Continuing relationship involving
• a commitment over an extended time period,
• an exchange of information, and
• an acknowledgement of the risks rewards of the
  relationship.

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JIT Purchasing--Requirements

• Reduced lot sizes
• Frequent and reliable delivery schedules
• Reduced and highly reliable lead times
• Consistently high quality levels for purchased
  materials

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JIT Purchasing--Suppliers

• Fewer, nearby suppliers
• Repeat business
• Support suppliers competitiveness
• Clusters of remote suppliers
• Limit competitive bidding to new parts
• Resist vertical integration
• Encourage suppliers to implement JIT purchasing

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JIT Purchasing--Quantities

• Steady output rate (a desirable prerequisite)
• Frequent deliveries in small lot quantities
• Long-term contract agreements with minimal
  release paperwork
• Deliver quantities variable from release to
  release but fixed for whole contract term

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JIT Purchasing--Benefits

• Consistent quality
• Savings on resources
• Lower costs
• Special attention
• Saving on tooling
• Loyalty associated with long-term relationships
  with suppliers

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Value DensityDefined

• Value density is defined as the value of an item
  per pound of weight.
• It is used as an important measure when deciding
  where items should be stocked geographically and
  how they should be shipped.

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Mass CustomizationDefined

• Mass customization is a term used to describe the
  ability of a company to deliver highly customized
  products and services to different customers.
• The key to mass customization is effectively
  postponing the tasks of differentiating a product
  for a specific customer until the latest possible
  point in the supply-chain network.