Supply Chain Strategy and Outsourcing

Students should be able to:

Identify the important factors in designing a competitive supply

chain.

Explain the motivating reasons for outsourcing services or

products and their processes.

Discuss the factors that enabled firms to create virtual supply

chains.

Describe the key considerations businesses should make when

implementing successful outsourcing decisions.

Key Concepts in
Operations Management

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Support Processes

Support Processes

Business- to- Business (B2B)

Customer Relationship Process

Supplier RelationshipProcess

Order -Fulfillment Process

Supplier Relationship Process

Order -Fulfillment Process

Business-to-Customer

(B2C)

Customer Relationship Process

First-Tier Supplier

Service/Product Provider

New Service/

Product Development Process

New Service/

Product

Development

Process

External Value-Chain Linkages

Dells Return-on-Invested-Capital Calculation

ROIC

NOPAT*

Invested

Capital

Operating

Income

Income

Taxes

Working

Capital

Fixed

Assets

Sales

Cost of Goods Sold

Operating Expense

Inventory

Accounts

Receivable

Accounts

Payable

Accrued

Liabilities

ROIC Drivers:

Pricing, Product Mix, and

Volume

Sales Force Productivity Forecasting Material Costs Transformation Costs R&D & I/S Costs Capacity Mgt Out-of-box Audit Logistics Quality/Cust ServiceAccounts Receivable

Terms and Timing

Inventory Turns and

Delivery

Backlog/Lead Times Excess & Obsolete Risks Accounts Payable Terms

and Timing

Facilities Mgt IBU Risk/Currency Risk

*Net operating profit after taxes.

Inventory Measures

Average inventory = $2 million

Cost of goods sold = $10 million

52 business weeks per year

Example 9.1

Weeks of supply = = 10.4 weeks

$2 million

($10 million)/(52 weeks)

$10 million

$2 million

Inventory turns = = 5 turns/year

Return on Assets Working Capital Cost of Goods Sold Total Revenue Cash Flow

Financial Measures

Consider Also: A Completely New

and Faster Business Model?

Dell

Suppliers

Manufacturer

Channels

Customers

Suppliers

Manufacturer

Customers

Suppliers

Manufacturer

Customers

2007 Pearson Education

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.

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Environments & Design Features

Design Factors

Efficient Supply Chains

Responsive Supply Chains

Environment Factors

Efficient Supply Chains

Responsive Supply Chains

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Exhibit 4

Delivery Performance and

Profit Margin by Internet Retailer

Deliver asPromised (DP)Promised DeliveryTime (Days)Actual DeliveryTime (Days)Margin (%)Samgoody.com9.4410.0039.64CDUniverse.com7.548.1715.62BarnesandNoble.com9.969.7826.38Amazon.com10.138.7931.43Towerrecords.com9.008.5435.14Avg.9.219.0529.62Under Promise/Over Deliver (UO)Promised DeliveryTime (Days)Actual DeliveryTime (Days)Margin(%)FYE.com6.484.8438.61Alphacraze.com17.8813.0013.81BestBuy.com11.286.3336.75CDnow.com13.727.0833.67Walmart.com8.584.1926.12Alldirect.com17.246.80-7.72Avg.12.537.0423.54

2007 Pearson Education

Source: David A. Taylor, A Master Plan for Software Selection, Supply Chain Management Review. January/February 2004

2007 Pearson Education

Dell

Keyboard

Assembler

Die Casting

Speaker

Connector

Cable

Cooler

High Value/Complex

Low Value/Simple

Outsourcing/Offshoring

What are the drivers for outsourcing or

offshoring?

What are the potential pitfalls for outsourcing or offshoring?

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H-P Outsourcing

Here a Part, There a Part

New H-P servers path to market:

Idea hatched in SingaporeConcept approved in HoustonConcept design done in SingaporeEngineering design in Taiwan; initial manufactureFinal assembly in Singapore, Australia, China, and India

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The Shaping of Modern Value Chains

Ten Forces that Flattened the World

Berlin Wall and Windows Operating System Web Browsers Work Flow Software Open Sourcing Outsourcing

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Outsourcing in India

Began dismantling tariff and export controls in 1991Economy expected to grow at 7%Focus on business servicesTechnology sector is strongLow wages high skills100 million English speakers

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The Shaping of Modern Value Chains

Ten Forces that Flattened the World

6. Offshoring

7. Supply Chaining

8. In-Sourcing

9. In-Forming

10. The Steroids

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Comments on Chinas Role in Global Value Chains

Glorious to be wealthy, and some people can be more wealthy than others.Capitalism Chinese style.Expect 7 to 8 percent growth for next 10 years.Constraints: Much savings but no investment; no support for small innovative businesses; 50 percent of bank loans go unpaid.Singapore has the best Asian economy has joint ventures in China (Singapore Industrial Park in Suzhou)Problems for sustainable growth: pollution control; infrastructure development; inconsistent electric power.Too much manufacturing not enough entrepreneurial service firms.

Economic Issues

2007 Pearson Education

Comments on Chinas Role in Global Value Chains

Cost, Quality, and dimensions of Customer Service are key competitive priorities.System is more important than the people because if leadership changes everything could crumble.Must move from an experience-driven management style to a scientific-driven management style.American experience will not always work in China must incorporate Chinese culture and enterprisesLower levels of staff are trained in modern practices, but their bosses are not.Need to build a good foundation before introducing elaborate systems: quality improvement; technology from abroad.

Management Issues

2007 Pearson Education

Merging of the 10 flattners enabled by a global, Web-enabled playing field.Development of business practices to promote horizontal collaboration.Three billion people entering the playing field. (China, India, Russia, Eastern Europe, Latin America, and Central Asia).

Triple Convergence