Supply Chain Management

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Outline• Supply-Chain Management• Measuring Supply-Chain Performance• Bullwhip Effect• Outsourcing• Value Density• Mass Customization• E-commerce and E-Ops

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What is a Supply-Chain?

Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together

Services Suppliers Service Support

Operations Local Service

Providers Customers

Supply Networks

Inputs Transformation Localization Output

Manufacturing Suppliers Manufacturing Distribution Customers

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What is Supply-Chain Management?

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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Measures of Supply-Chain Performance• One of the most commonly used measures in all of

operations management is “Inventory Turnover”

• In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time

valueinventory aggregate Average

sold goods ofCost turnoverInventory valueinventory aggregate Average

sold goods ofCost turnoverInventory

weeks52 sold goods ofCost

valueinventory aggregate Averagesupply of Weeks

weeks52

sold goods ofCost

valueinventory aggregate Averagesupply of Weeks

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Example: Supply-Chain Performance

Measurement Suppose a company’s 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 normally has an inventory turn ratio of 10.

What is this year’s Inventory Turnover ratio?

What does it mean?

Suppose a company’s 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 normally has an inventory turn ratio of 10.

What is this year’s Inventory Turnover ratio?

What does it mean?

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valueinventory aggregate Average

sold goods ofCost turnoverInventory

valueinventory aggregate Average

sold goods ofCost turnoverInventory

123

A B CCOGS 160,000,000$ Avg Inventory 35,000,000$ Turnover 4.57

=B1/B2

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Since the company’s normal inventory turnover ratio is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past.

In other words, they now have more inventory relative to their cost of goods sold than before.

What else would you want to know about this situation?

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Supply Chain Strategy

Marshall Fisher:• Adverse effects of price

promotions• Functional vs. Innovative products

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Demand Characteristics Supply Characteristics Functional Innovative Stable Evolving

Low demand Uncertainty High demand Uncertainty Few breakdowns Vulnerable to breakdowns More predictable demand Difficult to forecast Stable and higher yields Variable and lower yields Stable Demand Variable Demand Few quality problems Potential quality problems Long product life Short selling season More supply sources Limited supply sources Low inventory cost High inventory cost Reliable suppliers Unreliable suppliers Low profit margin High profit margin Few process changes More process changes Low product variety High product variety Few capacity constraints Potential capacity constraints Higher volume Low volume Easy to change over Difficult to change over Low stockout cost High stockout cost Flexible Inflexible Low obsolescence High obsolescence Dependable lead times Variable lead times

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Hau Lee’s Supply Chain Concepts

• Hau Lee’s approach to supply chains centers on aligning the supply chain with process side uncertainties (focus on the supply side)

• A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies

• Types of Supply Chains– Efficient– Risk-Hedging– Responsive– Agile

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Hau Lee’s Uncertainty Framework

Low Demand Uncertainty

(Functional Products)

High Demand Uncertainty

(Innovative Products)

Low Supply Uncertainty

(Stable Process)

Efficient Supply Chain

(Grocery, Basic Apparel, Food, Oil and Gas)

Responsive Supply Chain

(Fashion Apparel, Computers, Popular Music)

High Supply Uncertainty

(Evolving Process)

Risk-hedging Supply Chain

(Hydroelectric Power, Some Food Produce)

Agile Supply Chain

(Telecom, High-end Computers, Semiconductors)

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What is Outsourcing?

Outsourcing is defined as the act of moving a firm’s 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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Value Density

• Value density is defined as the value of an item per pound of weight

• An important measure when deciding where items should be stocked geographically and how they should be shipped

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Mass Customization

• 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

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Mass Customization• Principle 1: A product should be designed so

it consists of independent modules that can be assembled into different forms of the product easily and inexpensively.

• Principle 2: Manufacturing and service processes should be designed so that they consist of independent modules that can be moved or rearranged easily to support different distribution network strategies.

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Mass Customization

• Principle 3: The supply network — the positioning of the inventory and the location, number, and structure of service, manufacturing, and distribution facilities — should be designed to provide two capabilities. First, it must be able to supply the basic product to the facilities performing the customization in a cost-effective manner. Second, it must have the flexibility and the responsiveness to take individual customers’ orders and deliver the finished, customized good quickly.

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Electronic Commerce and E-Ops

• Electronic commerce is defined as “the use of computer applications communicated over networks to allow buyers and sellers to complete a transaction or part of a transaction”

• E-Ops is a term that refers to the application of the Internet and its attendant technologies to the field of operations management

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The Context of E-Ops Business Model

“How we make our money?”

Operations

“How do we manage production of the product or service?”

Information System Architecture

“The set of tools used to support processes.”

Exhibit MB9.1Exhibit MB9.1

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Business Web Models

B-Web Model

Example

Marketplace

Ebay

Aggregator

E-Trade

Alliance

AOL

Value Chain

Dell Computers

Distributive Network

UPS

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A Make-to-Order Fulfillment Process

Customers

ProductCompany

Factory

Step II: Build Plan

Orders sent

System provides

information

Step I: Retailer

Factory updates custome

r

Step III: Logistics

Order fulfillment flows

Customer/Product info. flows

Exhibit MB9.3Exhibit MB9.3

Suppliers

Develop Products

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Other E-Ops Applications

• Order Fulfillment in Aggregator Businesses

• Project Management• Product and Process Design• Purchasing• Manufacturing Processes

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Other E-Ops Applications (Continued)

• Inventory Management• Services• Quality Management• Forecasting• Operations Scheduling• Reengineering and Consulting

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Beer Game debrief

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The Bullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

er

Qua

n tit

y

Time

Wholesaler’s Orders

Ord

er

Qua

n tit

y

Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chainThe magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

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 greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

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Summary

• Supply-Chain Management• Measuring Supply-Chain Performance• Bullwhip Effect• Outsourcing• Value Density• Mass Customization• E-commerce and E-Ops