10. ENTERPRISE NETWORKING & THE INTERNET
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Transcript 10. ENTERPRISE NETWORKING & THE INTERNET
Chapter 7: Strategic Sourcing
Strategic Sourcing
Strategic Sourcing is the development and
management of supplier relationships to
acquire goods and services in a way that aids
in achieving the immediate needs of the
business
Ford Manufacturing Supply Chain
http://www.covisint.com/
What is the bullwhip effect?
Demand variability increases as you move up the supply chain
from customers towards supply
Equipment Tier 1 Supplier
Factory
Distributor
First noticed regarding Pampers
Retailer
Customer
Bullwhip effect in the US PC supply chain
Changes in
demand
80%
60%
Semiconductor
Equipment
40%
20%
PC
0%
-20%
Semiconductor
-40%
1995
1996
1997
1998
1999
2000
2001
Annual percentage changes in demand (in $s) at three levels of the semiconductor
supply chain: personal computers, semiconductors and semiconductor manufacturing
equipment.
Consequences of the bullwhip effect
Inefficient production or excessive inventory.
Low utilization of the distribution channel.
Necessity to have capacity far exceeding average
demand.
High transportation costs.
Poor customer service due to stockouts.
Causes of the bullwhip effect
Order synchronization
Order batching
Trade promotions and forward buying
Reactive and over-reactive ordering
Shortage gaming
Order synchronization
70
Customers order on the same
order cycle, e.g., first of the
month, every Monday, etc.
50
40
Units
The graph shows simulated
daily consumer demand (solid
line) and supplier demand
(squares) when retailers order
weekly: 9 retailers order on
Monday, 5 on Tuesday, 1 on
Wednesday, 2 or Thursday
and 3 on Friday.
60
30
20
10
0
T im e (e a c h p e rio d e q u a ls o n e d a y )
Order batching
70
The graph shows simulated
daily consumer demand (solid
line) and supplier demand
(squares) when retailers order
in batches of 15 units, i.e.,
every 15th demand a retailer
orders one batch from the
supplier that contains 15
units.
60
50
Units
Retailers may be required to
order in integer multiples of
some batch size, e.g., case
quantities, pallet quantities,
full truck load, etc.
40
30
20
10
0
T im e (e a c h p e rio d e q u a ls o n e d a y )
Trade promotions and forward buying
Supplier gives retailer a temporary discount, called a trade promotion.
Retailer purchases enough to satisfy demand until the next trade promotion.
Example: Campbell’s Chicken Noodle Soup over a one year period:
Total shipments and consumption
One retailer’s buy
7000
6000
S hipm e nts
Cases
Cases
5000
4000
3000
C ons um ption
2000
1000
Nov
Oct
Sep
Aug
Jul
Jun
Apr
Mar
Feb
May
T im e (w e e ks )
Jan
Dec
0
Reactive and over-reactive ordering
Each location forecasts demand to determine shifts in the demand process.
How should a firm respond to a “high” demand observation?
ä Is this a signal of higher future demand or just random variation in current
demand?
ä Hedge by assuming this signals higher future demand, i.e. order more than
usual.
Rational reactions at one level propagate up the supply chain.
Unfortunately, it is human to over react, thereby further increasing the
bullwhip effect.
Shortage gaming
Setting:
ä Retailers submit orders for delivery in a future period.
ä Supplier produces.
ä If supplier production is less than orders, orders are rationed, i.e., retailers
are “put on allocation”.
… to secure a better allocation, the retailers inflate their orders, i.e., order
more than they need…
… So retailer orders do not convey good information about true demand …
This can be a big problem for the supplier, especially if retailers are later able
to cancel a portion of the order:
ä Orders that have been submitted that are likely be canceled are called
phantom orders.
Strategies to combat the bullwhip effect
Information sharing:
ä Collaborative Planning, Forecasting and Replenishment (CPFR)
Smooth the flow of products
ä Coordinate with retailers to spread deliveries evenly.
ä Reduce minimum batch sizes.
ä Smaller and more frequent replenishments (EDI).
Eliminate pathological incentives
ä Every day low price
ä Restrict returns and order cancellations
ä Order allocation based on past sales in case of shortages
Vendor Managed Inventory (VMI): delegation of stocking decisions
ä Used by Barilla, P&G/Wal-Mart and others.
Supply Chain Design Strategy
Based on concepts developed by
Marshall Fischer at Wharton (Penn)
Functional Products
ä Staples that people buy at retail outlets
ä Predictable demand and long life cycles
ä Physical costs
ä Strategy: Minimize physical costs
Innovative Products
ä Life cycle is just a few months (e.g. fashion
clothes & computers)
ä Demand is unpredictable
ä Market mediation costs (inventory &
stockouts)
ä Strategy: Maximize responsiveness &
flexibility
Hau Lee’s Concepts of Supply Chain Management
Hau Lee’s approach to supply chain (SC) is one of aligning SC’s
with the uncertainties revolving around the supply process side
of the SC
A stable supply process has mature technologies and an
evolving supply process has rapidly changing technologies
Types of SC’s
ä Efficient SC’s
ä Risk-Hedging SC’s
ä Responsive SC’s
ä Agile SC’s
Hau Lee’s SC Uncertainty Framework
Demand Uncertainty
Supply
Uncertainty
Low
(Stable
Process)
High
(Evolving
Process)
Low (Functional
products)
High (Innovative
products)
Efficient SC
Responsive SC
Ex.: Grocery
Ex.: Computers
Risk-Hedging SC
Agile SC
Ex.: Hydro-electric
power
Ex.: Telecom
Outsourcing
Outsourcing is defined as the
act of moving a firm’s internal
activities and decision
responsibility to outside
providers
Reasons to Outsource
ä Organizationally-driven
ä Improvement-driven
ä Financially-driven
ABC News Report on Outsourcing Part 2
Inventory Turnover
Obtaining data
ä Look up inventory value on the
balance sheet
ä Look up cost of goods sold
(COGS) from earnings statement
– not sales!!
Common benchmark is inventory turns
ä Inventory Turns = COGS/
Inventory Value
A manufacturing company producing
medical devices reported $60 million
in sales last year. At the end of the
year, they had $20 million worth of
inventory in ready-to ship devices.
Assuming that units are valued at
$1000 per unit and sold at $2000
per unit, what is the turnover rate?
Sales = $60,000,000 per year / $2000
per unit = 30,000 units sold per year
@ $1000 COGS per unit
Inventory = $20,000,000 / $1000 per
unit = 20,000 units in inventory
Turns = COGS/Inventory =
$30,000,000/$20,000,000 = 1.5
turns
Inventory Turnover Statistics
Industries with higher gross margins tend to have lower inventory turns
Wholesale
Retail
Hardware stores: 3.5
Retail Nurseries & Garden Supply: 3.3
General Merchandise Stores: 4.7
Groceries & related: 17.8
Vehicles & automotive: 6.9
Furniture & fixtures: 5.5
Sporting goods: 4.8
Grocery Stores: 12.7
Drug store items: 8.5
New & Used Car Dealers: 6.8
Apparel & related: 5.5
Gas stations & mini-marts: 39.3
Petroleum & related: 42.4
Apparel &
Alcoholic beverages: 8.5
Accessories: 3.5
Furniture & home furnishings: 4.1
Drug Stores: 5.3
Liquor Stores: 6.6
Other Retail Stores: 4.3
Source: Bizstats.com
Value Density
Value density is defined as the value of an item
per pound of weight
ä It is used as an important measure when
deciding where items should be stocked
geographically and how they should be shipped
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
ä 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 supplychain network