1/44

Supply Chain StrategySupply Chain Strategy

2/44

How Supply Chain Strategy fits the Operations Management

Philosophy

Operations As a Competitive Weapon

Operations StrategyProject Management Process Strategy

Process AnalysisProcess Performance and Quality

Constraint ManagementProcess LayoutLean Systems

Supply Chain StrategyLocation

Inventory ManagementForecasting

Sales and Operations PlanningResource Planning

Scheduling

3/44

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.

4/44

Supply Chain

Supply chain: The network of services, material, and information flows that link a firm’s 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 firm’s supply chain to meet the competitive priorities of the firm’s operations strategy.

5/44

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 goodsexplicit services implicit services

6/44

Supply Chain for a Florist

Required for facilitating goods

Required for explicit services Required for supporting facilities

Required for implicit services

Homecustomers

Homecustomers

Commercialcustomers

Commercialcustomers

FloristFlorist

FedEx delivery service

FedEx delivery service

PackagingPackaging Local delivery service

Local delivery service

Flowers – local/

international

Flowers – local/

international

Arrangement materials

Arrangement materials

Internet servicesInternet services

Maintenance services

Maintenance services

7/44

Creation of Inventory

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

Scrap flowScrap flow

Inventory levelInventory level

Output flow of materialsOutput flow of materials

Input flow of materialsInput flow of materials

8/44

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 firm’s customers.

9/44

Inventory at Successive Inventory at Successive Stocking PointsStocking Points

SupplierSupplier Manufacturing plantManufacturing plant Distribution centerDistribution center RetailerRetailer

RawRawmaterialsmaterials

Work inWork inprocessprocess

FinishedFinishedgoodsgoods

10/44© 2007 Pearson Education

Supply ChainSupply Chain

Tier 1

Tier 2

Supplier of materialsSupplier of services

Tier 3

Customer Customer Customer Customer

Distribution center

Distribution center

Manufacturer

11/44

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.

Weeks of supply = Average aggregate inventory value Weekly sales (at cost)

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

Inventory turnover = Annual sales at (cost)

Average aggregate inventory value

12/44

Application 10.1

weeksweeks

5.1852000,200,19$

000,821,6$

cost)(at salesWeekly

valueinventory aggregate Averagesupply of Weeks

turns8.2000,821,6$

0$19,200,00turnoverInventory

13/44© 2007 Pearson Education

Supply Chain Process MeasuresSupply Chain Process Measures

Percent of orders taken accurately

Time to complete the order placement process

Customer satisfaction with the order placement process

CustomerRelationship

Percent of incomplete orders shipped

Percent of orders shipped on time

Time to fulfill the order

Percent of botched services or returned items

Cost to produce the service or item

Customer satisfaction with the order fulfillment process

Inventory levels of WIP and FG

OrderFulfillment

Percent of suppliers’ deliveries on time

Suppliers’ lead times

Percent defects in services and purchased materials

Cost of services and purchased materials

SupplierRelationship

14/44

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 firm’s 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.

15/44

Links to Financial Measures

Cost of Goods Sold: Buying materials at a better price, or transforming them more efficiently, improves a firm’s 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.

16/44

Supply Chain Dynamics

Supply chain dynamics can wreak havoc on supply chain performance measures.

Actions of downstream supply chain members can affect the operations of upstream members.

The bullwhip effect: The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the chain.

17/44© 2007 Pearson Education

Supply Chain Dynamics for Facial TissueSupply Chain Dynamics for Facial TissueQ

uant

i ty o

r der

e d

Time

Bullwhip Effect

18/44

External Value-Chain Linkages

First-Tier SupplierFirst-Tier Supplier Service/Product ProviderService/Product Provider

Support ProcessesSupport Processes Support ProcessesSupport Processes

Supplier Relation-

ship Process

Supplier Relation-

ship Process

New Service/ Product

Development Process

New Service/ Product

Development Process

Order-Fulfill-ment

Process

Order-Fulfill-ment

Process

Business-to-Business

(B2B) Customer

Relationship Process

Business-to-Business

(B2B) Customer

Relationship Process

Supplier Relation-

ship Process

Supplier Relation-

ship Process

New Service/ Product

Development Process

New Service/ Product

Development Process

Order-Fulfill-ment

Process

Order-Fulfill-ment

Process

Business-to-Customer

(B2C) Customer

Relationship Process

Business-to-Customer

(B2C) Customer

Relationship Process

Ext

ern

al S

up

pli

ers

Ext

ern

al S

up

pli

ers

Extern

al Co

nsu

mers

Extern

al Co

nsu

mers

19/44

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.

20/44

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.

21/44

The Customer Relationship 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.

E-Commerce and the Marketing Process

22/44

E-Commerce and the Order Placement 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.

The Customer Relationship Process

23/44

Order Fulfillment at Dell, Inc.

1. Customers buy from Dell by web site, voice-to-voice, and face-to-face.

2. Order information is transmitted to the inventory system.3. 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.

4. 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)

5. A team uses the kit to assemble and initially test the system.

6. Systems are thoroughly tested.7. Completed systems are boxed and placed on trucks.8. The entire assemble-to-order cycle takes only a few hours.

24/44

Dell’s Order Fulfillment Process

25/44

The Order Fulfillment Process

Centralized placement: Keeping all the inventory at one location such as a firm’s 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.

Inventory Placement

26/44

The Order Fulfillment Process

Vendor-managed inventories (VMI): An extreme application of forward placement involving locating inventories at the customer’s 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.

Vendor-Managed Inventories

27/44

Order Fulfillment Programs

Continuous Replenishment Program (CRP) A VMI method in which the supplier monitors the customer’s 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.

28/44

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.

29/44

Continuous Replenishment

at Each morning Campbell uses Electronic Data

Interchange to link with retailers.

Retailers inform Campbell of demands for its products and the current inventory levels in their distribution centers.

Campbell determines which products need replenishment based on upper and lower inventory limits established with each retailer.

Campbell makes daily deliveries of needed products.

30/44

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 process’s internal customers.

31/44

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.

The Supplier Relationship Process

32/44

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.

33/44

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.

34/44

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.

35/44

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.

36/44

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 product’s concept development stage and given significant, if not total, responsibility for the design of certain components or systems of the product.

37/44

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.

38/44

Environment & Design Factors

Design Factors Efficient Supply Chains Responsive Supply Chains

Environment Factors Efficient Supply Chains Responsive Supply Chains

39/44

Mass Customization

Mass Customization: A strategy whereby a firm’s 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 customer’s 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.

40/44

Lean Supply Chains

Three key activities are required to attain a lean supply chain:

1. 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.

2. Cost Management: Limiting the number of suppliers and focusing on helping them reduce their costs through trust and friendly collaboration.

3. Supplier Development: Shifting from price negotiations to cost management and working with suppliers to achieve lean operations.

41/44

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 firm’s 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.

42/44

Offshoring

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

Pitfalls of offshoring include:Pulling the plug too quickly. Not making a good-faith

effort to fix the existing processTechnology transferDifficulties integrating processes

Tariffs and TaxesInternet

Comparative labor costsLogistics costsLabor Laws and Unions

43/44

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

one’s 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.

44/44

Which Type of Supply Chain?

Traditional Supply Chain is preferred when:

1. Sales volumes are high.

2. Order consolidation is important.

3. Small-order fulfillment capability of suppliers is important.

Virtual Supply Chain is preferred when:

1. Demand is highly volatile.

2. High service or product

variety is important.