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 Relationship

Process

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 LinkagesExternal Value-Chain Linkages

“Dell’s Return-on-Invested-Capital Calculation”

ROIC

NOPAT*

InvestedCapital

OperatingIncome

IncomeTaxes

WorkingCapital

FixedAssets

Sales

Cost of Goods Sold

Operating Expense

Inventory

AccountsReceivable

AccountsPayable

AccruedLiabilities

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 Service

•Accounts 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 Inventory MeasuresMeasures

Average inventory = $2 millionAverage inventory = $2 millionCost of goods sold = $10 millionCost of goods sold = $10 million52 business weeks per year52 business weeks per year

Weeks of supply = = 10.4 weeksWeeks of supply = = 10.4 weeks$2 million$2 million

($10 million)/(52 weeks)($10 million)/(52 weeks)

Inventory turns = = 5 turns/yearInventory turns = = 5 turns/year$10 million$10 million

$2 million$2 million

Example 9.1Example 9.1

• Return on Assets

• Working Capital

• Cost of Goods Sold

• Total Revenue

• Cash Flow

Financial Measures

Suppliers Manufacturer Channels Customers

Suppliers Manufacturer Customers

Suppliers Manufacturer Customers

Consider Also: A Completely Newand Faster Business Model?

DellDell

© 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.

© 2007 Pearson Education

Environments & Design Features

Design Factors Efficient Supply Chains Responsive Supply Chains

Environment Factors Efficient Supply Chains Responsive Supply Chains

© 2007 Pearson Education

Exhibit 4Delivery Performance and

Profit Margin by Internet Retailer

Deliver asPromised (DP)

Promised DeliveryTime (Days)

Actual DeliveryTime (Days)

Margin (%)

Samgoody.com 9.44 10.00 39.64CDUniverse.com 7.54 8.17 15.62BarnesandNoble.com 9.96 9.78 26.38Amazon.com 10.13 8.79 31.43Towerrecords.com 9.00 8.54 35.14Avg. 9.21 9.05 29.62

Under Promise/Over Deliver (UO)

Promised DeliveryTime (Days)

Actual DeliveryTime (Days)

Margin(%)

FYE.com 6.48 4.84 38.61Alphacraze.com 17.88 13.00 13.81BestBuy.com 11.28 6.33 36.75CDnow.com 13.72 7.08 33.67Walmart.com 8.58 4.19 26.12Alldirect.com 17.24 6.80 -7.72Avg. 12.53 7.04 23.54

© 2007 Pearson EducationSource: 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 ConnectorCable

Cooler

High Value/ComplexLow Value/Simple

Outsourcing/Offshoring

What are the drivers for outsourcing or offshoring?

What are the potential pitfalls for outsourcing or offshoring?

H-P Outsourcing

Here a Part, There a Part …

New H-P server’s path to market:

1. Idea hatched in Singapore

2. Concept approved in Houston

3. Concept design done in Singapore

4. Engineering design in Taiwan; initial manufacture

5. Final assembly in Singapore, Australia, China, and India

The Shaping of Modern Value Chains

Ten Forces that Flattened the World

1. Berlin Wall and Windows Operating System

2. Web Browsers

3. Work Flow Software

4. Open Sourcing

5. Outsourcing

Outsourcing in India

• Began dismantling tariff and export controls in 1991

• Economy expected to grow at 7%

• Focus on business services

• Technology sector is strong

• Low wages – high skills

• 100 million English speakers

© 2007 Pearson Education

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

Comments on China’s 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

Comments on China’s 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 enterprises

• Lower 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

1. Merging of the 10 flattners enabled by a global, Web-enabled playing field.

2. Development of business practices to promote horizontal collaboration.

3. Three billion people entering the playing field. (China, India, Russia, Eastern Europe, Latin America, and Central Asia).

Triple Convergence