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Transcript of Crock management
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Supply Chain Management
Lecture 24
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Semester Outline
Thursday April 15 Chap 14
Tuesday April 20 Chap 15
Thursday April 22 Simulation Game briefing
Tuesday April 27 Review, buffer Thursday April 29 Simulation Game
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Outline
Today
Finish with Chapter 14 Sections 1, 2, 3, 4, 6, 7, 8, 9
Section 6 buyback and revenue sharing contracts only
Homework 5 due tomorrow
Next week
Chapter 15 Sections 1, 2
Simulation game briefing
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Summary
In-House or Outsource (make or buy)? The decision to outsource is based on the growth in supply
chain surplus provided by the third party and the increase inrisk by using a third party
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Summary
Buy if Supplier has cost advantage, better quality
Supplier may have better technology and may aggregate orders
Insufficient capacity Demand grows faster than anticipated
Lack of expertise Supplier may hold the patent to a process or product
Make if
Control cost and quality Easier to control cost and quality
Protect proprietary technology Protect competitive advantage
Use existing idle capacity
Short term solution
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Single Versus Multiple Suppliers
Reasons for favoring a single supplier To establish a good relationship
Less quality variability
Lower cost (quantity discount) Transportation economies
Reasons for favoring multiple suppliers Need capacity
Spread the risk of supply interruption Create competition
Policy
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Outsourcing Logistics
A third-party logistics (3PL) provider performsone or more of the logistics activities relating to theflow of product, information, and funds that could
be performed by the firm itself First party logistics provider (1PL)
Shipper, a firm that needs to have goods transported from A to B
Second party logistics provider (2PL)
Carrier, firm which actually owns the means of transportation Third party logistics provider (3PL) (sometimes LSP)
Typically specialize in integrated operation, warehousing andtransportation services that can be scaled and customized tocustomers needs
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Services Provided by 3PLs
Service Category Basic Service Some specific value addedservices
Transportation Inbound, outbound by ship,truck, rail, air
Track/trace, mode conversion
Warehousing Storage, facilitiesmanagement
Cross-dock, in-transit merge,inventory control
Informationtechnology
Provide and maintainadvanced informationsystems
Transportation managementsystems, warehousingmanagement
Reverse logistics Handle reverse flows Recycling, customer returns,repair/refurbish
Other 3PL services Customs brokering, hazardousmaterial, order taking,consulting, port services, etc.
How has globalization impacted sourcing decisions?
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Outsourcing Logistics
A fourth-party logistics (4PL) providermanages other 3PLs. Whereas a 3PL targets afunction, a 4PL targets management of an entireprocess
Fourth party logistics provider (4PL) A 4PL is an integrator that assembles the resources,
capabilities, and technology of its own organization and other
organizations to design, build and run comprehensive supplychain solutions Source: Accenture
4PL use 2PLs and/or 3PLs to supply service to customers,owning mostly computer systems/technology
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Best Practice 4PL
Li & Fung
The firm aggregates demand across hundreds ofcustomers, capacity across thousands of suppliers,
and uses detailed information to match supply anddemand in the most cost effective manner
By sourcing appropriately Li & Fung gets aroundregional trade umbrellas such as the EU and NAFTA
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How do 4PLs Add Value?
How do 4PLs add value to a firm managing itsown logistics providers?
The fundamental advantage that 4PLs mayprovide comes from greater visibility and
coordination over a firms supply chain and
improved handoffs between logisticsproviders
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Sourcing Process
Supplier scoring and assessment Process used to rate suppliers
Supplier selection
Choose the appropriate supplier(s)
Design collaboration Work together with supplier when designing components for the
final product
Procurement Process of placing orders and receiving orders from supplier(s)
Sourcing planning and analysis Analyze spending across various suppliers, identify opportunities
for decreasing cost
Supplierscoring
andassessment
Designcollaboration
Supplierselection
andcontract
negotiation
Procurement
Sourcingplanning
andanalysis
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Sourcing Process
Supplierscoring
andassessment
Designcollaboration
Supplierselection
andcontract
negotiation
Procurement
Sourcingplanning
andanalysis
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Supplier scoring and assessment
Common fundamentalmistake when choosing asupplier
Only focus on quoted price
Supplier performance should be compared on
the basis of the suppliers impact on total cost
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Factors besides purchase pricethat influence total cost
Replenishment lead times Does it pay to select a more expensive supplier with a
shorter lead time?
If lead time grows, safety inventory grows proportionally to thesquare root of the replenishment lead time
On-time performance Is a more reliable supplier worth the extra pennies?
If variability of lead time grows, the required safety inventory atthe firm grows
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Factors besides purchase pricethat influence total cost
Supply flexibility The less flexible a supplier is, the more lead-time variability it will
display as order quantities change
Delivery frequency/lot size Delivery frequency affects the transportation cost, lot size affectsthe cycle inventory holding cost
Supply quality Quality affects unit price and lead time as follow-up orders may
need to be fulfilled to replace defective products Inbound transportation cost
Sourcing a product overseas may have lower product cost, butgenerally incurs a higher inbound transportation cost
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Factors besides purchase pricethat influence total cost
Pricing terms For example, quantity discounts(and the impact it has on cycle
inventory)
Information coordination capability Good coordination results in better planning and ultimately lowerproduction, safety inventory, and transportation cost
Exchange rates, taxes, and duties Important for global supply chainsas it affects the unit price
Supplier viability The likelihood that the supplier will be around to fulfill the
promises it makes (uncertainty increases safety inventory)
Design collaboration capability Can help reduce all cost, improve quality, and decrease time-to-
market
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Sourcing Process
Supplierscoring
andassessment
Designcollaboration
Supplierselection
andcontract
negotiation
Procurement
Sourcingplanning
andanalysis
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Design Collaboration
50-70% of spending at a manufacturer isthrough procurement
Compared to only about 20% several decades ago
80% of the cost of a purchased part is fixed inthe design phase
Design collaboration with suppliers can result in
reduced cost, improved quality, and decreasedtime to market
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Component Estimated cost
Display Module - 9.7" Diagonal, 262K Color TFT, IP
Touchscreen Assembly - 9.7" Diagonal, Capacitiv
All enclosure metals, plastics, PCB substrates, co
Battery - Li-Ion Polymer, 3.75V, 6600mAh
Microprocessor A4 Microprocessor Core Integrat2Gbit Mobile SDRAM - Package on Package (stac
WLAN n + BT + FM Module (Featuring Broadcom)
Touchscreeen Microcontroller
Touchscreen Driver
Multitouch Controller - Capacitive
Audio Codec - Ultra Low Pow er, Stereo, w / Head
Pow er Management Integrated Circuit
Pow er Management Integrated Circuit
Other Electronic Components
NAND Flash
Box Contents
Total Mater ials
Manufacturing
Retail Price $499.00
How Much Does it Cost to Make aniPad?
Source: iSuppli
Component Estimated cost
Display Module - 9.7" Diagonal, 262K Color TFT, IP $65.00
Touchscreen Assembly - 9.7" Diagonal, Capacitiv $30.00
All enclosure metals, plastics, PCB substrates, co $32.50
Battery - Li-Ion Polymer, 3.75V, 6600mAh $21.00
Microprocessor A4 Microprocessor Core Integrat $19.502Gbit Mobile SDRAM - Package on Package (stac $7.30
WLAN n + BT + FM Module (Featuring Broadcom) $8.05
Touchscreeen Microcontroller $2.30
Touchscreen Driver $1.80
Multitouch Controller - Capacitive $1.40
Audio Codec - Ultra Low Pow er, Stereo, w / Head $1.20
Pow er Management Integrated Circuit $2.10
Pow er Management Integrated Circuit $1.25
Other Electronic Components $20.20
NAND Flash $29.50
Box Contents $7.50
Total Materials $250.60
Manufacturing
Retail Price $499.00
Component Estimated cost
Display Module - 9.7" Diagonal, 262K Color TFT, IP $65.00
Touchscreen Assembly - 9.7" Diagonal, Capacitiv $30.00
All enclosure metals, plastics, PCB substrates, co $32.50
Battery - Li-Ion Polymer, 3.75V, 6600mAh $21.00
Microprocessor A4 Microprocessor Core Integrat $19.502Gbit Mobile SDRAM - Package on Package (stac $7.30
WLAN n + BT + FM Module (Featuring Broadcom) $8.05
Touchscreeen Microcontroller $2.30
Touchscreen Driver $1.80
Multitouch Controller - Capacitive $1.40
Audio Codec - Ultra Low Pow er, Stereo, w / Head $1.20
Pow er Management Integrated Circuit $2.10
Pow er Management Integrated Circuit $1.25
Other Electronic Components $20.20
NAND Flash $29.50
Box Contents $7.50
Total Materials $250.60
Manufacturing $9.00
Retail Price $499.00
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Supply Chain Top 25, 2009
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Design Collaboration
Design for logistics
Attempts to reduce transportation, handling, and inventory cost
Coors redesigned glass bottle reduced transportation cost
Design for manufacturability Attempts to design products for ease of manufacture (part
commonality, designing symmetrical parts, designing parts toprovide access for catalog parts)
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Sourcing Process
Supplierscoring
andassessment
Designcollaboration
Supplierselection
andcontract
negotiation
Procurement
Sourcingplanning
andanalysis
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Contracts and Supply ChainPerformance
Many shortcomings in supply chain performance occurbecause the buyer and supplier each try to optimize theirown profits
Total supply chain profits might therefore be lower than if thesupply chain coordinated actions to have a common objectiveof maximizing total supply chain profits
Double marginalization results in suboptimal order quantity
The supplier must share in some of the buyers demand
uncertainty
A contract should be structured to increase the firms
profits and supply chain profits
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Contracts and Supply ChainPerformance
Example
Consider a music store that sells compact discs. Thesupplier buys/manufactures compact discs at $1 per
unit and sells them to the music store at $5 per unit.The retailer sells each disc to the end customer at$10. At this price demand is normally distributed, witha mean of 1,000 and a standard deviation of 300. The
retailer has a margin of $5 per disc and canpotentially lose $5 for each unsold disc
Manufacturer Distributor Retailer Customer
$10$5$1
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Contracts and Supply ChainPerformance
Retailer Supplier
p =
c =
s =
CSL =
O* =
Expected profits =
Total profit = 3,803 + 4,000 = $7,803Manufacturer Distributor Retailer Customer
$10$5$1
$10 $5
$5 $1
$0
(p-c)/(p-s) = 0.5
F-1(CSL,,) =1,000
(see 12.3) = $3,803 1,000*4 = $4,000
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Contracts and Supply ChainPerformance
Supply Chain
p =
c =
s =
CSL =
O* =
Expected profits = versus $7,803
Manufacturer Distributor Retailer Customer
$10$1
$10
$1
$0
(p-c)/(p-s) = 0.9
F-1(CSL,,) =1,384
(see 12.3) = $8,474
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Supplier Selection and Contracts
Contracts to increase product availability and supplychain profits
Buyback Contracts
Revenue-Sharing Contracts Quantity Flexibility Contracts
Contracts to increase agent effort
Contracts to induce performance improvement
Shared savings contract
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Buyback Contracts
Allows a retailer to return unsold inventory up to aspecified amount at an agreed upon price
Increases the optimal order quantity for the retailer,
resulting in higher product availability and higher profitsfor both the retailer and the supplier
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Impact of Buyback Contracts onProfitability
Expected Expected Expected
Wholesale Buyback Optimal Expected Profit Profit Profit
Price c Price b Order Size Returns Retailer Supplier SC
$5 $0 1,000 120 $3,803 $4,000 $7,803$5 $2 1,096 174 $4,090 $4,035 $8,125
$5 $3 1,170 223 $4,286 $4,009 $8,295
$6 $0 924 86 $2,841 $4,620 $7,461
$6 $2 1,000 120 $3,043 $4,761 $7,804
$6 $4 1,129 195 $3,346 $4,865 $8,211
$7 $0 843 57 $1,957 $5,056 $7,013$7 $4 1,000 120 $2,282 $5,521 $7,803
$7 $6 1,202 247 $2,619 $5,732 $8,351
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Buyback Contracts
Downsides that buyback contract results in Surplus inventory for the supplier that must be disposed of,
which increases supply chain costs
Misleading for the supply chain as it reacts to (inflated) retailorders, not actual customer demand
Most effective for products with low variable cost, suchas music, software, books, magazines, and newspapersso that the supplier can keep the surplus
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Revenue Sharing Contracts
The buyer pays a minimal amount for each unitpurchased from the supplier but shares a fraction ofthe revenue for each unit sold
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Blockbuster (1998)
Blockbuster purchases a copy from a studio for $60 andrents for $3 Blockbuster must rent the tape at least 20 times before earning
profit
In 1998, 20% of surveyed customers reported that they could notrent the movie they wanted because the Blockbuster did nothave that movie
In 1998, Blockbuster started revenue sharing with themajor movie studios Blockbuster pays the wholesale price of $9 per copy.
Blockbuster shares (1-) =30-45% portion of the revenue withthe movie studio
The impact of revenue sharing on Blockbuster wasdramatic Rentals increased by 75% in test markets due to higher video
availability
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Netflix
Blockbuster owns its DVDs
Netflix has established revenue sharing contracts withmost studios
DVDs are purchased at cost Netflix pays on average $1.40 to the studios each time their title
is rent
At end of contract Netflix acquires some percentages of the unitsfor retention or sale, the remaining DVDs are destroyed or
returned to the original studio
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Impact of Revenue Sharing Contractson Profitability
Revenue Expected Expected Expected
Wholesale Sharing Optimal Expected Profit Profit Profit
Price c Fraction f Order Size Returns Retailer Supplier SC
$1 0.30 1,320 342 $5,526 $2,934 $8,460$1 0.45 1,273 302 $4,064 $4,367 $8,431
$1 0.60 1,202 247 $2,619 $5,732 $8,351
$2 0.30 1,170 223 $4,286 $4,009 $8,295
$2 0.45 1,105 179 $2,881 $5,269 $8,150
$2 0.60 1,000 120 $1,521 $6,282 $7,803
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Contracts Advantages vs.Disadvantages
Advantages Uncertainty reduction for
retailer
Relationship leveraging
Disadvantages Supplier being blocked
from selling to otherretailers
Retailer being blocked frombuying from other suppliers
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Sourcing Process
Supplierscoring
andassessment
Designcollaboration
Supplierselection
andcontract
negotiation
Procurement
Sourcingplanning
andanalysis
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Procurement
Procurement transactions begin with the buyer placingthe order and end with the buyer receiving and paying forthe order
Goal is to enable orders to be placed and delivered on schedule atthe lowest possible overall cost
Two main categories of purchased goods: Direct materials: components used to make finished goods
Memory, hard drives, and CD drives are direct materials for a PC
Indirect materials: goods used to support the operations of a firm
PCs are indirect materials for a car manufacturer
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Product Categorization by Valueand Criticality
Low
Low
High
HighValue/Cost
Criticality
Critical items(i.e. components with
long lead times)
Ensure availability
Strategic items(i.e. subsystems, electronics
for an auto manufacturer)
Ensure long term relationship
General items(mostly indirect materials)
Ensure low cost
Bulk purchase items(small parts, packaging)
Ensure low cost
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Outsourcing at Darden
Darden Restaurants, owner of popular brands such as OliveGarden and Red Lobster, serves more than 300 million meals
annually in over 1,700 restaurants across the US and Canada. Toachieve competitive advantage via its supply chain, Darden mustachieve excellence at each step. With purchases from 35
countries, and seafood products with a shelf life as short as 4days, this is a complex and challenging task. Those 300 million
meals annually mean 40 million pounds of shrimp and hugequantities of tilapia, swordfish, and other fresh purchases.
What are outsourcing opportunities in a restaurant?