M. Shaw, UIUC 1

Lecture 8:Managing Supply Chains in e-Businesses

Learning Objectives:

1. Characteristics of Modern Supply Chains2. Importance of Information Infrastructure3. Information Partnership between P&G and

Walmart4. Case: Ford’s Supply-Chain Strategy5. Managing Supply-Chain Strategies6. Sense and Respond vs. Make and Sell and

Coordination

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The Value Chain

Supportactivities

Firminfrastructure

Human resourcemanagement

Technologydevelopment

Procurement

Inbound Operations Outbound Marketing Servicelogistics logistics and sales

Primaryactivities Margin

Supplier valuechains

Firm valuechain

Channel valuechains

Buyer valuechains

Firmvalue

Upstreamvalue

Downstreamvalue

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Note to Managers…

Do you know what your value chain is composed of?

Manufacturer

Truckers

Truckers

Distributors

Retailers

Customers

Management

Simple push model of the supply chain

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Manufacturer

Transportation

Distributors

Retailers

Customers

Management

TransportationWeb Infrastructure

TelephonyInfrastructure

Direct Marketing

Database and dataMining

Infomediary andOutsourced service

Providers

New technology linked supply chain

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MarketStructure

CustomerLinks

(One to Many)

Transaction Contract Partnership

Nature of the Relationships

Evolution of American Airlines’ SABRE System

SuppliersLinks

Electronic Market

(Many to Many

Individualtravellers

link directly toSABRE

through 3rdparty networks

Late 1980s to Present Corporatetravel units

link directly toSABRE through

their firms’proprietarynetworks

AA

Other airlines

Onlineservices

1978 to Late 1980s(after deregulation)

Travelagents

AA

Other Airlines

Large Travelagencies

AA

1968 t0 1978(Beforederegulation)

Travelagents

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M. Shaw, UIUC

Logistics

Marketingand Sales

AfterSalesService

Research andDevelopment

Supplier

Manufacturing

Core Firm

Management

Vertically Integrated Firm

Logistics

Marketingand Sales

AfterSalesServiceResearch and

Development

Supplier

Manufacturing

Core Firm

Management

Logistics

AfterSaesService

Supplier

ManufacturingMarketingand Sales

Research andDevelopment

Core Firm

Management

Virtual Corporation

Selective Sourcing

Alternatives for Structuring Activities

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Supply Chain Management

z Supply chain network (SCN)—a network of business units and facilities that procure raw materials, transform them into intermediate goods and then final products, and deliver the products to customers through a distribution system.

z Supply chain management (SCM)—Coordination of order generation, order taking and order fulfillment/distribution of products, services or information.

Supplier

Supplier

Manufacturer DistributorRetailer

Retailer

Consumer

Consumer

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M. Shaw, UIUC

Customer

Accountmanagement

Accountplans

Inventoryplanner

Productionrequirement

productionplanner

Materialsrequirement

Materialsplanner

Material plans

Bulkbuys

Deals, pricerises

PromotionsMinimumrun lengths

Truckload

Batchsize

Demand variability in the supply chain

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80

70

60

50

40

30

20

10

0Inventoryand

capacity

Demandhistory

andforecasts

Orderstatus

Projectdesign

and specs

Financialinformation

80

70

60

50

40

30

20

10

0

Percentage of 50 fortune 1,00 companies interviewed and asked:“What information are you sharing together with your supplychain partners? And what information will you share in 2001?

Projected changes to information sharing in the supply chain

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M. Shaw, UIUC

Full commodity

Critical Vendor managedinventory

•Effective demandmanagement• Synchronized supply/demand capability

Joint replenishment

• Capacity reservation

• Synchronized fornormal demand• Plan for events

• Regular dialogue• Effective forecasting alignedwith order placing

• Joint planning periodically

Forecastedordering

Requirementsplanning

• EDI• Annual account planning

Randomordering

“One of many” Major Critical

Importance (of supplier) to customers

Impo

rtan

ce (o

f cus

tom

er)

to s

up

pli

er

Major

“One ofmany”

Irrelevant

Supplier relationships

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Dell Computer: The Best in Class

z Dell has pioneered the operating model in which direct access by telephone, by fax, by Internet, has allowed customers to specify the PC they want to purchase. The PC is then assembled to order shipped directly to customers

z Dell makes itself the internal order processing department for its major customers, eliminating costly procurement procedures.

z Cash conversion cycles: - 8 days! z Seven days of inventory

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M. Shaw, UIUC

Ford’ Supply-Chain Strategy

• Ford’s Corporate staff members began to study Dell’s

supply-chain processes, which were widely regarded as the

best practice

• Some argued that the new IT made it inevitable that Ford

needed radically redesign its supply chain or risk being left

behind.

• There was a strong sentiment to model the Ford supply

chain on that of Dell.

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Ford 2000• aiming for dramatic cost reductions to be obtained by

reengineering and globalizing corporate organizations

• Major reengineering projects were initiated • Ford Production System (FPS) • Order-To-Delivery (OTD), • Goals: OTD time from more than 60 days to15 days.

• Ford’s new global approach required that teams on different continents be able to share information and worked together as if they were in the same building.

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M. Shaw, UIUC

Ford’ Existing Supply Chains• In the early 1990s, Ford had begun to decrease the

number of suppliers and develop long-term relationships with “tier one” suppliers

• One important part of Ford Production System was “Synchronous Material Flow” (SMF), which Ford defined as “a process or system that produces a continuous flow of material and products driven by a fixed, sequenced, and leveled vehicle schedule, utilizing flexibility and lean manufacturing concepts.” The vision was of trucks constantly in motion in continuous circuits between suppliers and Ford

• One of the principles of the Ford Retail Network was to buy all the Ford dealers in a local market so that the dealers were in competition against the “real” competition

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Order To Delivery• Ford’s approach to improve OTD processes :

• 1) ongoing forecasting of customer demand from dealers;

• 2) A minimum of 15 days of vehicles in each assembly plant’s order bank to increase manufacturing stability;

• 3) regional “mixed centers” that optimize schedules and deliveries of finished vehicles via rail transportation; and

• 4) a robust order amendment process to allow vehicles to be amended for minor color and trim variations without having submit new orders.

• The OTD vision was to create a lean, flexible and predictable process that provide consumers with the right products in the right place at the right time.

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M. Shaw, UIUC

Traditional Model Versus Direct Model

Suppliers ManufacturerDistribution

ChannelCustomer

Traditional Modelorder

delivery

Suppliers Dell Customer

Dell Modelorder

delivery

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Enterprise Model ComparisonDell

Operating PrinciplesFord

Breakthrough Objectives / Key Initiatives

CustomerIntimacy

DemandPull

Velocity

VirtualIntegration

Demand to Deliveryford Retail Network

Ford Production SystemOrder to Delivery

Supply Chain Mgmt Leadership

Order to DeliveryFord Product Development System

Fixed to Variable cost ShiftModular Assembly

“Extended Enterprise”

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M. Shaw, UIUC

Enterprise Model Comparison (continued)

Customers

Sales

R & DAssembly

CommoditySuppliers

ComponentSuppliers

deliveryorder

Customers

Dealers

OrderMgmt

Bill ofMaterial

OutboundLogistics

Plant / SiteOperations

InboundLogistics

Suppliers

Supply ChainLeadership

Ford RetailNetwork

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Moving from Push to PullDell Processes

Suppliers own inventory until it is used in production

Ford

Suppliers maintain nearby ship points, delivery time 15 minutes to 1 hour

Customers frequently steered to PCs with high availability to balancesupply and demand

Demand pull throughout value chain -- “information for inventory” substitution

Complexity is low: 50 components, 8 -10 key, 100 permutations

External logistics supplier used to manage inbound supply chain

Demand forecasting is critical -- changes are shared immediately withinDell and with supply base

Focused on strategic partnerships: suppliers down from 200 to 47

M. Shaw, UIUC 11

M. Shaw, UIUC

Moving from Push to PullDell Processes

Suppliers own inventory until it is used in production

Ford

Suppliers maintain nearby ship points, delivery time 15 minutes to 1 hour

Customers frequently steered to PCs with high availability to balancesupply and demand

Demand pull throughout value chain -- “information for inventory” substitution

Complexity is low: 50 components, 8 -10 key, 100 permutations

External logistics supplier used to manage inbound supply chain

Demand forecasting is critical -- changes are shared immediately withinDell and with supply base

Focused on strategic partnerships: suppliers down from 200 to 47

M. Shaw, UIUC

Make-and-sell vs. Sense-and-respond

Make and Sell Sense and Respond

Driven by product process and capacity Driven by demand and market conditions

Directed by (usually) annual budget

resource allocation

Directed by dynamics real-time resource

allocation

Production cycle: design, build, sell Production cycle: sell, build, design

Emphasis: Plan

Supply chain policy: build to inventory.

Strategy: exploiting economies of scale

Emphasis: Act

Supply chain policy: build to order

Strategy: postponement