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Transcript of SCM Ppt Ch01
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Supply Chain Management
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Profit 4%
Logistics Cost 21%
Marketing Cost 27%
Manufacturing Cost 48%
Profit
Logistics
Cost
Marketing
Cost
Manufacturing
Cost
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All stages involved, directly or indirectly, infulfilling a customer request
Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers Within each company, the supply chain includes
all functions involved in fulfilling a customerrequest (product development, marketing,
operations, distribution, finance, customer service) Examples: Fig. 1.1 Detergent supply chain (Wal-
Mart), Dell
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Customer wants
detergent and goes
to Jewel
Jewel
Supermarket
Jewel or third
party DC
P&G or other
manufacturer
Plastic
Producer
Chemical
manufacturer
(e.g. Oil Company)
Tenneco
Packaging
Paper
Manufacturer
Timber
Industry
Chemical
manufacturer
(e.g. Oil Company)
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Maximize overall value created
Supply chain value: difference between whatthe final product is worth to the customer and
the effort the supply chain expends in fillingthe customers request
Value is correlated to supply chain profitability(difference between revenue generated fromthe customer and the overall cost across thesupply chain)
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Supply chain incurs costs (information, storage,transportation, components, assembly, etc.)
The supply chain profit
Supply chain profitability is total profit to beshared across all stages of the supply chain
Supply chain success should be measured bytotal supply chain profitability, not profits at an
individual stage
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Sources of supply chain revenue: the customer
Sources of supply chain cost: flows ofinformation, products, or funds between stages
of the supply chain Supply chain management is the management
of flows between and among supply chainstages to maximize total supply chain
profitability
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SUPPLY CHAIN MANAGEMENT SYSTEMS
Network of organizations and business processesfor procuring raw materials, transforming into
products, and distributing them to customers
Materials, information, and payments flow
through the supply chain in both directions.
The Supply Chain
Supply chain:
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Coordination of business processes to speed
information, product, and fund flows up and down
a supply chain to reduce time, redundant effort,
and inventory costs
Supply chain management:
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A Supply Chain
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Plan: Balancing demand and supply to meet sourcing,
production, and delivery requirements
Source: Procurement of goods and services needed to createa product or service
SCOR (Chain Operations Reference Model)
identifies five major supply chain processes:
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Make: Processes that transform a product into a
finished state
Deliver: Processes to manage order transportation
and distribution
Return: Processes associated with product returns
and post delivery customer support
Supply Chain Processes (Continued)
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Key Supply Chain Management Processes
SUPPLY CHAIN MANAGEMENT SYSTEMS
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Figure 1.1 A Generic Supply Chain
End product manufacturer
Wholesalers,distributors
Intermediate
component mfgs.
Raw material
suppliers
Retailers
End
customers
Product & service flow
Information and planning
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PurchasingReceiving Storage Operations Storage
Production Distribution
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Supplier
Supplier
Supplier
Storage
}Mfg. Storage Dist. Retailer Customer
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Supplier
Supplier}Storage Service Customer
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Here are two definitions:
The design and management of seamless, value-added processacross organizational boundaries to meet the real needs of the endcustomer
-- Institute for Supply Management
Managing supply and demand, sourcing raw materials and parts,manufacturing and assembly, warehousing and inventorytracking, order entry and order management, distribution acrossall channels, and delivery to the customer
-- The Supply Chain Council
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Supply chain management is concernedwith the efficient integration of suppliers,
factories, warehouses and stores so thatmerchandise is produced and distributed:In the right quantities
To the right locations
At the right time In order to
Minimize total system cost
Satisfy customer service requirements
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* Firms have discovered value-enhancing andlong term benefits
* Who benefits most? Firms with:- Large inventories- Large number of suppliers- Complex products
- Customers with large purchasing budgets
* Benefits- Lower purchasing/inventory costs, higher
quality/customer service
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Firms practicing Supply ChainManagement:
1. Start with key suppliers2. Move on to other suppliers, customers, and
shippers
3. Integrate second tier suppliers and
customers (second tier refers to thecustomers customers and the supplierssuppliers)
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* Cost savings and better coordination of resourcesare reasons to employ Supply Chain Management
-- Bullwhip Effect- the magnification of safety stocksand costs based on separate forecasts and uncoordinatedplanning and sharing of information along the supply
chain (Ex. 1.1)
* Reducing the bullwhip effect occurs through:
-- Process integration- Interdependent activities can leadto improved quality, reduced cycle time, better
production methods, better forecasts, less safety stock,etc.
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Purchasing- Supplier alliances, suppliermanagement, strategic sourcing
Operations- Demand management, MRP, ERP, JIT,TQM
Distribution- Transportation management, customerrelationship management, networkdesign, service response logistics
Integration- Coordination/Integration activities,global integration problems,performance measurement
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Purchasing:
Long term relationships
Supplier management- improvedperformance through-
-- Supplier evaluation (determiningsupplier capabilities and performance)
-- Supplier certification (third party orinternal certification to assure product
quality and service compliance)Strategic partnerships- successful andtrusting, long-term relationships with top-performingsuppliers
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Operations:
-- Demand management-match demand toavailable capacity
-- Linking buyers & suppliers viaMRPandERPsystems
-- UseJITto improve thepull of materials toreduce inventory levels
-- EmployTQMto improve quality complianceamong buyers and suppliers
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Distribution:-- Transportation management-tradeoff
decisions between cost & timing ofdelivery/customer service via trucks, rail, water
& air-- Customer relationship management-strategies to ensure deliveries, resolve
complaints, improve communications, &determine service requirements
-- Network design-creatingdistributionnetworksbased on tradeoff decisions between
cost & sophistication of distribution system
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Integration:
-- Supply Chain Integration-when supply chainparticipants work for common goals. Requiresintra
firmfunctional integration. Based on efforts to changeattitudes & adversarial relationships
-- Global Supply Chains- advantages that accrue fromsourcing from larger global market e.g., lower cost &
higher quality suppliers. May involveoperatingexposure,which is risk found in foreign settings
-- Supply Chain Performance Measurement-Crucial forfirms to know if procedures are working
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All of the advanced strategies, techniques,and approaches for Supply Chain
Management focus on:
Global Optimization
Managing Uncertainty
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Decision Support Systems
Inventory Control Network Design Design for Logistics Cross Docking
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Procurement
Planning
Manufacturing
Planning
Distribution
PlanningDemand
Planning
Sequential Optimization
Supply Contracts/Collaboration/Information Systems and DSS
Procurement
Planning
Manufacturing
Planning
Distribution
PlanningDemand
Planning
Global Optimization
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The supply chain is complexDifferent facilities have conflictingobjectives
The supply chain is a dynamic system
The power structure changesThe system varies over time
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What is variation?
What is randomness? What tools and approaches help usto deal with these issues?
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Forecasting is always wrong
The longer the forecast horizon the worsethe forecast
End item forecasts are even more wrong
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* Matching supply and demand is difficult.
* Forecasting doesnt solve the problem.
* Inventory and back-order levels typically fluctuate widely acrossthe supply chain.
* Demand is not the only source of uncertainty:Lead times
Yields
Transportation times
Natural Disasters
Component Availability
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Volumes
Time
Actual
Consumer
DemandRetailer Warehouse
to ShopRetailer Orders
Production Plan
Manufacturer Forecastof Sales
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Volumes
Time
Consumer
Demand
Production Plan
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Volumes
Time
Consumer
Demand
Production Plan
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Pull Systems
Risk Pooling
Centralization
Postponement
Strategic Alliances
Collaborative Forecasting
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Global competition
Shorter product life cycle
New, low-cost distribution channels
More powerful well-informedcustomers
Internet and E-Business strategies
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Supply chain strategy or design
Supply chain planning
Supply chain operation
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Decisions about the structure of the supply chainand what processes each stage will perform
Strategic supply chain decisions Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems
Supply chain design must support strategic
objectives Supply chain design decisions are long-term and
expensive to reverse must take into accountmarket uncertainty
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Definition of a set of policies that govern short-term operations
Fixed by the supply configuration from
previous phase Starts with a forecast of demand in the coming
year
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Planning decisions:
Which markets will be supplied from whichlocations
Planned buildup of inventories Subcontracting, backup locations
Inventory policies
Timing and size of market promotions
Must consider in planning decisions demanduncertainty, exchange rates, competition overthe time horizon
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Customer
Information
Product
Funds
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Cycle view: processes in a supply chain aredivided into a series of cycles, each performedat the interfaces between two successive supply
chain stages Push/pull view: processes in a supply chain
are divided into two categories depending onwhether they are executed in response to a
customer order (pull) or in anticipation of acustomer order (push)
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Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
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Each cycle occurs at the interface between twosuccessive stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Cycle view clearly defines processes involved and
the owners of each process. Specifies the roles andresponsibilities of each member and the desiredoutcome of each process.
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Procurement,Manufacturing and
Replenishment cycles
Customer Order
Cycle
Customer
Order Arrives
PUSH PROCESSES PULL PROCESSES
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Supply chain processes fall into one of twocategories depending on the timing of theirexecution relative to customer demand
Pull: execution is initiated in response to acustomer order (reactive)
Push: execution is initiated in anticipation ofcustomer orders (speculative)
Push/pull boundary separates push processesfrom pull processes
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Supply chain processes discussed in the twoviews can be classified into
Customer Relationship Management (CRM)
Internal Supply Chain Management (ISCM) Supplier Relationship Management (SRM)
Integration among the above three macroprocesses is critical for effective and successful
supply chain management
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Gateway
Zara
McMaster Carr / W.W. Grainger
Toyota
Amazon / Borders / Barnes and Noble
Webvan / Peapod / Jewel
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Managing supply chain flows and assets, tomaximizesupply chain surplus
What is supply chain surplus?
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Competitive strategy: defines the set of customer needsa firm seeks to satisfy through its products and services
Product development strategy: specifies the portfolioof new products that the company will try to develop
Marketing and sales strategy: specifies how the marketwill be segmented and product positioned, priced, andpromoted
Supply chain strategy: determines the nature of material procurement, transportation
of materials, manufacture of product or creation of service,distribution of product
Consistency and support between supply chain strategy,competitive strategy, and other functional strategies is
important
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New
Product
Development
Marketing
and
Sales
Operations Distribution Service
Finance, Accounting, Information Technology, Human Resources
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Introduction
How is strategic fit achieved?
Other issues affecting strategic fit
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Strategic fit: Consistency between customer priorities of
competitive strategy and supply chain capabilitiesspecified by the supply chain strategy
Competitive and supply chain strategies have thesame goals
A company may fail because of a lack of
strategic fit or because its processes andresources do not provide the capabilities toexecute the desired strategy
Example of strategic fit -- Dell
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Step 1: Understanding the customer andsupply chain uncertainty
Step 2: Understanding the supply chain
Step 3: Achieving strategic fit
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Identify the needs of the customer segmentbeing served
Quantity of product needed in each lot
Response time customers will tolerate Variety of products needed
Service level required
Price of the product Desired rate of innovation in the product
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Overall attribute of customer demand
Demand uncertainty: uncertainty of customerdemand for a product
Implied demand uncertainty: resultinguncertainty for the supply chain given theportion of the demand the supply chain musthandle and attributes the customer desires
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Implied demand uncertainty also related tocustomer needs and product attributes
First step to strategic fit is to understand
customers by mapping their demand on theimplied uncertainty spectrum
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Understanding the Customer Lot size
Response time
Service level Product variety
Price
Innovation
Implied
Demand
Uncertainty
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Customer Need Causes implied demanduncertainty to increase because
Range of quantity increases Wider range of quantity implies
greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required increases Demand per product becomes more
disaggregated
Number of channels increases Total customer demand is now
disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges in demand
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Predictablesupply and
demand
Salt at a
supermarket
A newcommunication
device
Highly uncertain
supply and demand
Figure 2.2: The Implied Uncertainty (Demand and Supply)
Predictable supply and uncertain
demand or uncertain supply and
predictable demand or somewhat
uncertain supply and demand
An existing
automobile
model
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Attribute Low Implied
Uncertainty
High Implied
Uncertainty
Product margin Low High
Avg. forecast error 10% 40%-100%
Avg. stockout rate 1%-2% 10%-40%
Avg. forced season-
end markdown
0% 10%-25%
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How does the firm best meet demand?
Dimension describing the supply chain issupply chain responsiveness
Supply chain responsiveness -- ability to respond to wide ranges of quantities demanded
meet short lead times
handle a large variety of products
build highly innovative products
meet a very high service level
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There is a cost to achieving responsiveness
Supply chain efficiency: cost of making anddelivering the product to the customer
Increasing responsiveness results in highercosts that lower efficiency
Second step to achieving strategic fit is to mapthe supply chain on the responsivenessspectrum
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High Low
Low
High
Responsiveness
Cost
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Step is to ensure that what the supply chaindoes well is consistent with target customersneeds
Examples: Dell,
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Integrated
steel mill
Dell
Highly
efficient
Highly
responsive
Somewhat
efficient
Somewhat
responsive
Hanes
apparel
Most
automotive
production
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Implied
uncertainty
spectrum
Responsive
supply chain
Efficient
supply chain
Certain
demand
Uncertain
demand
Responsivenessspectrum
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All functions in the value chain must supportthe competitive strategy to achieve strategic fit Fig. 2.7
Two extremes: Efficient supply chains (Barilla)and responsive supply chains (Dell) Table 2.3
Two key points there is no right supply chain strategy independent
of competitive strategy there is a right supply chain strategy for a given
competitive strategy
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Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense
of greater cost
Aggressively reduce even if
costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost
modes
Greater reliance on
responsive (fast) modes
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Multiple products and customer segments
Product life cycle
Competitive changes over time
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Firms sell different products to differentcustomer segments (with different implieddemand uncertainty)
The supply chain has to be able to balanceefficiency and responsiveness given itsportfolio of products and customer segments
Two approaches:
Different supply chains
Tailor supply chain to best meet the needs ofeach products demand
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The demand characteristics of a product andthe needs of a customer segment change as aproduct goes through its life cycle
Supply chain strategy must evolve throughoutthe life cycle
Early: uncertain demand, high margins (time isimportant), product availability is most
important, cost is secondary Late: predictable demand, lower margins, price
is important
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Examples: pharmaceutical firms, Intel
As the product goes through the life cycle, thesupply chain changes from one emphasizing
responsiveness to one emphasizing efficiency
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Competitive pressures can change over time
More competitors may result in an increasedemphasis on variety at a reasonable price
The Internet makes it easier to offer a widevariety of products
The supply chain must change to meet thesechanging competitive conditions
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Scope of strategic fit The functions and stages within a supply chain that
devise an integrated strategy with a shared objective
One extreme: each function at each stage develops itsown strategy
Other extreme: all functions in all stages devise a strategyjointly
Five categories: Intracompany intraoperation scope
Intracompany intrafunctional scope Intracompany interfunctional scope
Intercompany interfunctional scope
Flexible interfunctional scope
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Suppliers Manufacturer Distributor Retailer Customer
Competitive
Strategy
ProductDevelopment
Strategy
Supply Chain
Strategy
Marketing
Strategy
Intracompany
Intraoperation
at Distributor
Intracompany
Intrafunctional
at Distributor
Intracompany
Interfunctional
at Distributor
IntercompanyInterfunctional
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Facilities places where inventory is stored, assembled, or fabricated
production sites and storage sites
Inventory
raw materials, WIP, finished goods within a supply chain
inventory policies
Transportation
moving inventory from point to point in a supply chain
combinations of transportation modes and routes
Information
data and analysis regarding inventory, transportation, facilities
throughout the supply chain potentially the biggest driver of supply chain performance
Sourcing
functions a firm performs and functions that are outsourced
Pricing
Price associated with goods and services provided by a firm to thesupply chain
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Competitive Strategy
Supply Chain
Strategy
Efficiency Responsiveness
Facilities Inventory Transportation
Information
Supply chain structure
Cross Functional Drivers
Sourcing Pricing
Logistical Drivers
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Role in the supply chain the where of the supply chain
manufacturing or storage (warehouses)
Role in the competitive strategy economies of scale (efficiency priority)
larger number of smaller facilities (responsivenesspriority)
Components of facilities decisions
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Location centralization (efficiency) vs. decentralization
(responsiveness)
other factors to consider (e.g., proximity to customers)
Capacity (flexibility versus efficiency)
Manufacturing methodology (product focusedversus process focused)
Warehousing methodology (SKU storage, job lotstorage, cross-docking)
Overall trade-off: Responsiveness versus
efficiency
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Role in the supply chain Role in the competitive strategy
Components of inventory decisions
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Inventory exists because of a mismatch betweensupply and demand
Source of cost and influence on responsiveness
Impact on
material flow time: time elapsed between whenmaterial enters the supply chain to when it exits thesupply chain
throughput
rate at which sales to end consumers occur
I = RT (Littles Law)
I = inventory; R = throughput; T = flow time
Example
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If responsiveness is a strategic competitivepriority, a firm can locate larger amounts ofinventory closer to customers
If cost is more important, inventory can bereduced to make the firm more efficient
Trade-off
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Cycle inventory Average amount of inventory used to satisfy demand between
shipments
Depends on lot size
Safety inventory inventory held in case demand exceeds expectations
costs of carrying too much inventory versus cost of losing sales
Seasonal inventory
inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible
production
Overall trade-off: Responsiveness versus efficiency more inventory: greater responsiveness but greater cost
less inventor : lower cost but lower res onsiveness
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Role in the supply chain Role in the competitive strategy
Components of transportation decisions
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Moves the product between stages in thesupply chain
Impact on responsiveness and efficiency
Faster transportation allows greaterresponsiveness but lower efficiency
Also affects inventory and facilities
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If responsiveness is a strategic competitivepriority, then faster transportation modes canprovide greater responsiveness to customerswho are willing to pay for it
Can also use slower transportation modes forcustomers whose priority is price (cost)
Can also consider both inventory and
transportation to find the right balance
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Mode of transportation: air, truck, rail, ship, pipeline, electronic
transportation
vary in cost, speed, size of shipment, flexibility
Route and network selection
route: path along which a product is shipped
network: collection of locations and routes
In-house or outsource Overall trade-off: Responsiveness versus
efficiency
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Role in the supply chain Role in the competitive strategy
Components of information decisions
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The connection between the various stages inthe supply chain allows coordinationbetween stages
Crucial to daily operation of each stage in asupply chain e.g., production scheduling,inventory levels
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Allows supply chain to become more efficientand more responsive at the same time (reducesthe need for a trade-off)
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Push (MRP) versus pull (demand informationtransmitted quickly throughout the supplychain)
Coordination and information sharing Forecasting and aggregate planning
Enabling technologies
EDI
Internet
ERP systems
Supply Chain Management software
Overall trade-off: Responsiveness versus
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Role in the supply chain Role in the competitive strategy
Components of sourcing decisions
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Set of business processes required to purchasegoods and services in a supply chain
Supplier selection, single vs. multiple
suppliers, contract negotiation
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Sourcing decisions are crucial because theyaffect the level of efficiency and responsivenessin a supply chain
In-house vs. outsource decisions- improvingefficiency and responsiveness
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In-house versus outsource decisions Supplier evaluation and selection
Procurement process
Overall trade-off: Increase the supply chainprofits
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Role in the supply chain Role in the competitive strategy
Components of pricing decisions
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Pricing determines the amount to chargecustomers in a supply chain
Pricing strategies can be used to match demand
and supply
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Firms can utilize optimal pricing strategies toimprove efficiency and responsiveness
Low price and low product availability; vary
prices by response times
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Pricing and economies of scale Everyday low pricing versus high-low pricing
Fixed price versus menu pricing
Overall trade-off: Increase the firm profits
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Increasing variety of products Decreasing product life cycles
Increasingly demanding customers
Fragmentation of supply chain ownership Globalization
Difficulty executing new strategies