Supply Chain Strategy

1
Supply Chain Strategy

• Chapter 10

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What is Supply-Chain Management?

• 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

• Apply a total systems approach to managing the
  entire flow of
• information
• materials
• and services
• Planning, organizing, directing, controlling
  flows of materials
• Begins with raw materials
• Continues through internal operations
• Ends with distribution of finished goods

4
Supplier Production Distribution System
Customer Distribution Inventories
Productions Inventories
Supplier Distribution Inventories
Raw Material Inventory
Work-in-process Inventory
Factory Finished Goods Inventory
Retailer Inventory
Raw material in-transit
Orders
Component Inventory
Warehouse Inventory
Sub-assembly parts in-transit
MRO Inventory
Orders
Maintenance, repair, and ordering supplies
in-transit
Production and Inventory Control
Shipping and Traffic
Purchasing
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The Supply-Chain
VISA

Credit Flow
Material Flow
Consumer
Manufacturing
Supplier
Retailer
Retailer
Supplier
Wholesaler
Cash
Order
Schedules
Flow
Flow
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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
(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/Ave. aggregate inv. 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.
10
Uncertainties in theSupply Chain
Under Forecast Over Customer Demand
Early On Time Late Manufacturer Performance
Early On Time Late Customer Delivery
Early On Time Late Supplier Performance
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Sources of Uncertainty
Customer Deliveries

• Manufacturing
• Process design
• Product design
• Capacity
• Quality

• Transportation
• Location
• Information

• Supplier Performance
• Responsiveness
• Transportation
• Location
• Quality
• Information

• Customer Demand
• Past performance
• Market research
• Analytical techniques
• Promotions / Incentives

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Matching the Supply Chain with Products (Demand)

• Functional product
• products with stable predictable demand
• Innovative product
• products with short life cycles, less predictable
  demand

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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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Supply-Chain Support for Overall Strategy
Response
Respond quickly to changing requirements and
demand to minimize stock-outs

• Suppliers
• goal

Primary Selection Criteria
Select primarily for capacity, speed, and
flexibility
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Supply-Chain Support for Overall Strategy
Low Cost
Response
Differentiation
Process Characteristics
Maintain high average utilization
Invest in excess capacity and flexible processes
Modular processes to lend themselves to mass
customization
Minimize inventory throughout the chain to hold
down costs
Inventory Characteristics
Develop responsive system, with buffer stocks
positioned to ensure supply
Minimize inventory in the chain to avoid
obsolescence
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Supply-Chain Support for Overall Strategy
Low Cost
Response
Differentiation
Lead-time Characteristics
Shorten lead-time as long as it does not increase
costs
Invest aggressively to reduce production lead-time
Invest aggressively to reduce development
lead-time
Use modular design to postpone product
differentiation for as long as possible
Product-design Characteristics
Maximize performance and minimize cost
Use product designs that lead to low set-up time
and rapid production ramp-up
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Global Supply-Chain Issues

• Supply chains in a global environment must be
• flexible enough to react to sudden changes in
  parts availability, distribution, or shipping
  channels, import duties, and currency rates
• able to use the latest computer and transmission
  technologies to manage the shipment of parts in
  and finished products out
• staffed with local specialists to handle duties,
  trade, freight, customs and political issues

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Purchasing

• Acquisition of goods services
• Activities
• Help decide whether to make or buy
• Identify sources of supply
• Select suppliers negotiate contracts
• Control vendor performance
• Importance
• Major cost center
• Affects quality of final product

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Material Costs in Supply-Chain
Wholesale
8
9
COGS
Manufacturing
Payroll
Material
83
31
Other
11
Dir Wages
Retail
58
Other
16
COGS
13
Payroll
71
Other
20
Purchasing Costs as a Percent of Sales
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Objectives of the Purchasing Function

• Help identify the products and services that can
  be best obtained externallyand
• Develop, evaluate, and determine the best
  supplier, price, and delivery for those products
  and services

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Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Mail
Order
Processing
Receiving
Receivables Report
Dock
Packing
List
Mail
Invoice
Accounts Payable
Accounts Receivable
Mail
Check
Reconcile
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Purchasing Techniques

• Blanket orders
• Invoice-less purchasing
• Electronic ordering and funds transfer
• Electronic data interchange (EDI)
• Stockless purchasing
• Standardization

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Make or Buy

• Current trend favors outsourcing all activities
  that do not directly represent or support core
  competencies.
• Are there any dangers associated with aggressive
  outsourcing?

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Make/Buy Considerations
Reasons for Making Reasons for Buying

• lower production cost
• unsuitable suppliers
• assure adequate supply
• utilize surplus labor and make a marginal
  contribution
• obtain desired quantity
• remove supplier collusion
• obtain a unique item that would entail a
  prohibitive commitment from the supplier
• maintain organizational talent
• protect proprietary design or quality
• increase/maintain size of company

• lower acquisition cost
• preserve supplier commitment
• obtain technical or management ability
• inadequate capacity
• reduce inventory costs
• ensure flexibility and alternate source of supply
• reciprocity
• item is protected by patent or trade secret
• frees management to deal with its primary business

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Candidates for Outsourcing
TRANSFORMATION PROCESSES
Create ormanufac-turecompon-ents
Design products and pro-cesses
Assem-bleoutputs
Serve and deliver
Procure materials
Plan capacity
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Make-or-Buy Break-Even Analysis
Total cost (buy)
Costs
Total cost (make)
Variable cost (make)
Fixed cost (make)
Variable cost (buy)
B
Quantity
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Make-or-Buy Breakeven

• Total costs are equal at the break-even point,
  therefore TCbuy TCmake

What is the total cost to buy?
Price x BE Quantity
What is the total cost to make?
Fixed Cost Variable Cost x BE Quantity
What is the break-even quantity?
BE Quantity Fixed Cost (Price-VC)
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Make-or-Buy Breakeven Example

• A large corporation is considering establishing
  its own travel department, which would earn
  commissions on airline tickets. The current cost
  averages 122 per trip. With an internal travel
  department earning commissions, it is estimated
  that the ticket cost would drop to 105.00 per
  trip. The salaries and expenses of the travel
  department would come to 40,000 per year.
• What number of tickets would the corporation
  need to process to break even?

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Make or Buy Solution

• Price 122
• FC 40,000 VC 105
• BE Quantity (40,000)/ (122-105)
• 2,353
• If the company plans 2000 trips, should it make
  or buy?

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Traditional View of Supplier
Purchase order
Deliveries
Supplier's System a black box
Inquiries
Replies
Order modificationrequests
?
Responses
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Purchasing Strategies

• Plans to help achieve company mission
• Affect long-term competitive position
• Strategic options
• Many suppliers
• Few suppliers
• Vertical integration
• Virtual company

Plan
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Purchasing

• No longer just order takers.
• Purchasing need to know
• material
• performance
• availability
• suppliers

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Supply-Chain Strategies

• Negotiate with many suppliers play one
  supplier against another
• Develop long-term partnering arrangements
  with a few suppliers who will work with you to
  satisfy the end customer
• Vertically integrate buy the actual supplier
• Keiretsu - have your suppliers become part of
  a company coalition
• Create a virtual company that uses suppliers on
  an as-needed basis.

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Many Suppliers Strategy

• Many sources per item
• Adversarial relationship
• Short-term
• Little openness
• Negotiated, sporadic POs
• High prices
• Infrequent, large lots
• Delivery to receiving dock

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Few Suppliers Strategy

• 1 or few sources per item
• Partnership (JIT)
• Long-term, stable
• On-site audits visits
• Exclusive contracts
• Low prices (large orders)
• Frequent, small lots
• Delivery to point of use

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Chryslers Supplier Cost Reduction Effort
Supplier
Suggestion
Model
Savings
Rockwell
Use passenger car door
Dodge
280,000
locks on trucks
trucks
Rockwell
Simplify design/substitute
Various
300,000
materials on manual
window system
3M
Change tooling for wood-
Caravan,
1,500,000
grain panels to allow three
Voyager
from one die instead of two
Trico
Change wiper-blade
Various
140,000
formulation
Leslie Metal
Exterior lighting suggestions
Various
1,500,000
Arts
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Vertical Integration Strategy
Raw Material (Suppliers)

• Ability to produce goods previously purchased
• Setup operations
• Buy supplier
• Make-buy issue
• Major financial commitment
• Hard to do all things well

Backward Integration
Current Transformation
Forward Integration
Finished Goods (Customers)
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Forms of Vertical Integration
Iron Ore
Silicon
Farming
Raw Material (Suppliers)
Steel
Flour Milling
Backward Integration
Integrated Circuits
Current Transformation
Automobiles
Distribution System
Forward Integration
Circuit Boards
Computers Watches Calculators
Finished Goods (Customers)
Dealers
Baked Goods
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Keiretsu Network Strategy

• Japanese word for affiliated chain
• System of mutual alliances and cross-ownership
• Company stock is held by allied firms
• Lowers need for short-term profits
• Links manufacturers, suppliers, distributors,
  lenders
• Partnerships extend across entire supply chain

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Virtual Company Strategy

• Network of independent companies
• Linked by technology
• PCs, faxes, Internet etc.
• Each contributes core competencies
• Typically provide services
• Payroll, editing, designing
• May be long or short-term
• Usually, only until opportunity is met

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Vendor Selection Steps

• Vendor evaluation
• Identifying selecting potential vendors
• Vendor development
• Integrating buyer supplier
• Example Electronic data exchange
• Negotiations
• Results in contract
• Specifies period of agreement, price, delivery
  terms etc.

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Vendor Selection Criteria

• Service
• Delivery on time
• Condition on arrival
• Technical support
• Training

• Company
• Financial stability
• Management
• Location
• Product
• Quality
• Price

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Negotiation Strategies

• Three types
• cost-based price model - supplier opens its books
  to purchaser price based upon fixed clause plus
  escalation clause for materials and labor
• market-based price model - published price or
  index
• competitive bidding - potential suppliers bid for
  contract

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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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Global Sourcing

• Original strategy was to reduce production
  costs.
• Changing focus of global purchasing includes
• product availability
• technology
• delivery
• lead times
• labor availability and quality.

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Electronic Information FlowPaperless
Communication

• Electronic Data Interchange (EDI)
• Quick Response (QR)
• Efficient Consumer Response (ECR)

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Centralized versus Decentralized Purchasing

• Centralized Purchasing
• advantages
• volume discounts
• better attention/service from supplier
• possibility for specialization
• disadvantages
• loss of control at the local level

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Centralized versus Decentralized Purchasing

• Decentralized Purchasing
• advantages
• Local control differing local needs
• offers quicker response
• may save on transportation costs
• disadvantages
• may pay higher prices
• may duplicate orders

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Mass Customization

• Ability to provide highly customized products
  when high volume demand exists.
• Process Postponement
• Postpone differentiating product to latest
  possible point in time.
• ?Mass customization principles
• Design product in modules
• processes should have independent modules
• position inventory to aid customization