Transcript KRM8_ch10 Supply Chain Design

Supply Chain Strategy
Chapter 10
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How Supply Chain Strategy
fits the Operations Management
Philosophy
Operations As a Competitive
Weapon
Operations Strategy
Project Management
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Process Strategy
Process Analysis
Process Performance and Quality
Constraint Management
Process Layout
Lean Systems
Supply Chain Strategy
Location
Inventory Management
Forecasting
Sales and Operations Planning
Resource Planning
Scheduling
Dell, Inc.
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Dell is a leader because of their fast response time.
Customer orders are on delivery trucks in 36 hours.
Their focus is on how fast inventory moves.
The bulk of its components are housed within 15
minutes of each of its plants.
 As customers place orders, suppliers know when
to ship components.
 Suppliers restock the warehouse and manage the
inventory.
 Careful supply chain management is the key.
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Supply Chain
 Supply chain: The network of services, material,
and information flows that link a firm’s customer
relationship, order fulfillment, and supplier
relationship processes to those of its supplier and
customers.
 Supply chain management: Developing a strategy
to organize, control, and motivate the resources
involved in the flow of services and materials within
the supply chain.
 Supply chain strategy: Designing a firm’s supply
chain to meet the competitive priorities of the firm’s
operations strategy.
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Supply Chain for
Services
 Supply chain design for a service provider is
driven by the need to provide support for the
essential elements of the various service
packages it delivers.
 A service package consists of
 supporting facilities
 facilitating goods
 explicit services
 implicit services
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Supply Chain for a Florist
Home
customers
Commercial
customers
Required for facilitating goods
Required for explicit services
Required for implicit services
Florist
Local
delivery
service
Packaging
FedEx
delivery
service
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Required for supporting
facilities
Maintenance
services
Arrangement
materials
Flowers –
local/
international
Internet
services
Creation of Inventory
Inventory: A stock of materials used to satisfy
customer demand or to support the production of
services or goods.
Input flow of materials
Inventory level
Output flow of materials
Scrap flow
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Supply Chain for
Manufacturing
 Raw materials (RM): The inventories needed for
the production of services or goods.
 Work-in-process (WIP): Items, such as
components or assemblies, needed to produce a
final product in manufacturing.
 Finished goods (FG): The items in manufacturing
plants, warehouses, and retail outlets that are sold
to the firm’s customers.
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Inventory at Successive
Stocking Points
Raw
materials
Supplier
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Work in
process
Manufacturing plant
Finished
goods
Distribution center
Retailer
Customer
Customer
Customer
Distribution
center
Distribution
center
Supply Chain
Customer
Manufacturer
Tier 1
Tier 2
Tier 3
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Supplier of services
Supplier of materials
Inventory Measures of
Supply Chain Performance
 Average aggregate inventory value (AGV) is the total
value of all items held in inventory for a firm.
AGV = (# of A items)(Value of each A)+(# of B items)(Value of each B)+…
 Weeks of supply: The average aggregate inventory value
divided by sales per week at cost.
Weeks of supply =
Average aggregate inventory value
Weekly sales (at cost)
 Inventory turnover is annual sales at cost divided by the
average aggregate inventory value maintained for the year.
Inventory turnover =
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Annual sales at (cost)
Average aggregate inventory value
Calculating Inventory Measures
Example 10.1
The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods
sold was $10 million. The best inventory turnover in the industry is six turns per year. If the
company has 52 business weeks per year, how many weeks of supply were held in inventory?
What was the inventory turnover? What should the company do?
Using Inventory
Estimator Solver
Weeks of supply =
$2 mil/($10 mil)(52 wks.) =
10.4 weeks
Inventory turns =
$10 mil./$2 mil. =
5 turns/yr
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Application 10.1
Averageaggregateinventoryvalue
Weeklysales (at cost)
$6,821,000

 18.5 weeks
$19,200,000 52 weeks
Weeksof supply 
Inventoryturnover
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$19,200,00
0
 2.8 turns
$6,821,000
Supply Chain Process Measures
Customer
Relationship
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Percent of orders
taken accurately
Time to complete
the order
placement process
Customer
satisfaction with
the order
placement process
Order
Fulfillment
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Percent of incomplete
orders shipped
Percent of orders
shipped on time
Time to fulfill the
order
Percent of botched
services or returned
items
Cost to produce the
service or item
Customer satisfaction
with the order
fulfillment process
Inventory levels of
WIP and FG
Supplier
Relationship
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Percent of
suppliers’
deliveries on time
Suppliers’ lead
times
Percent defects in
services and
purchased
materials
Cost of services
and purchased
materials
Links to
Financial Measures
 Return on Assets (ROA): is net income divided by
total assets.
 Managing the supply chain so as to reduce the aggregate
inventory investment will reduce the total assets portion of
the firm’s balance sheet.
 Working Capital: Money used to finance ongoing
operations.
 Weeks of inventory and inventory turns are reflected in
working capital.
 Decreasing weeks of supply or increasing inventory turns
reduces the working capital.
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Links to
Financial Measures
 Cost of Goods Sold: Buying materials at a better price, or
transforming them more efficiently, improves a firm’s cost of
goods sold measure and ultimately its net income.
 Total Revenue: Increasing the percent of on-time deliveries to
customers increases total revenue because satisfied
customers will buy more services and products.
 Cash Flow: Cash-to-cash is the time lag between paying for
the services and materials needed to produce a service or
product and receiving payment for it.
 The shorter the time lag, the better the cash flow position of the
firm because it needs less working capital.
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Supply Chain Dynamics
 Supply chain dynamics can wreak havoc on
supply chain performance measures.
 Actions of downstream supply chain members
can affect the operations of upstream members.
 The bullwhip effect: The phenomenon in
supply chains whereby ordering patterns
experience increasing variance as you
proceed upstream in the chain.
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Supply Chain Dynamics for Facial Tissue
Bullwhip Effect
Time
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First-Tier Supplier
Service/Product Provider
Support Processes
Support Processes
New Service/
Product
Development
Process
Supplier
Relationship
Process
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Business-toBusiness
(B2B)
Customer
Relationship
Process
OrderFulfillment
Process
New Service/
Product
Development
Process
Supplier
Relationship
Process
Business-toCustomer
(B2C)
Customer
Relationship
Process
OrderFulfillment
Process
External Consumers
External Suppliers
External
Value-Chain Linkages
External Causes of
Supply Chain Disruption
 Volume changes.
 Customers may change ordered quantity or
delivery date.
 Service and product mix changes.
 Customers may change the mix of ordered items.
 Late deliveries.
 Late deliveries can force a switch in production
schedules.
 Underfilled shipments.
 Partial shipments can cause a switch in
production schedule or quantity produced.
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Internal Causes of
Supply Chain Disruption
 Internally generated shortages of parts.
 Engineering changes to the design of services
or products are disruptive.
 New service or product introductions
disrupt the supply chain and may require a new
supply chain.
 Service or product promotions may create a
demand spike.
 Information errors such as demand forecast
errors, faulty inventory counts, or miscommunication
with suppliers.
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The Customer Relationship
Process
E-Commerce and the Marketing Process
 Electronic Commerce (e-commerce) is the
application of information and communication
technology anywhere along the value chain of
business processes.
 Business-to-Consumer Systems (B2C) allows
customers to transact business over the Internet.
 Business-to-Business Systems (B2B) involves
commerce between firms.
 The biggest growth area, it is currently about 70% of the
regular economy.
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The Customer Relationship
Process
E-Commerce and the Order Placement Process
 Cost reduction: Using the Internet can
reduce the costs of processing orders.
 Revenue flow increase: Reduction in the
time lag associated with billing the
customer or waiting for checks.
 Global Access: Available 24 hours a day.
 Price flexibility: Prices can easily be
changed as the need arises.
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Order Fulfillment at
Dell, Inc.
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Customers buy from Dell by web site, voice-to-voice, and
face-to-face.
Order information is transmitted to the inventory system.
Unique product configuration information is contained in
the Traveler, a sheet that travels with the system the
customer has ordered throughout its assembly and
shipping.
When the Traveler is pulled, all required internal parts and
components for a system are picked and put in a tote or kit.
(Procedure is called Kitting)
A team uses the kit to assemble and initially test the
system.
Systems are thoroughly tested.
Completed systems are boxed and placed on trucks.
The entire assemble-to-order cycle takes only a few hours.
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Dell’s
Order Fulfillment Process
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The Order Fulfillment
Process
Inventory Placement
 Centralized placement: Keeping all the inventory at
one location such as a firm’s manufacturing plant or
a warehouse and shipping directly to customers.
 Inventory pooling is a reduction in inventory and
safety stock because of the merging of variable
demands from customers.
 A higher than expected demand from one customer can be
offset by a lower-than-expected demand from another.
 Forward placement is locating stock closer to
customers at a warehouse, wholesaler, or retailer.
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The Order Fulfillment
Process
Vendor-Managed Inventories
 Vendor-managed inventories (VMI): An extreme
application of forward placement involving locating
inventories at the customer’s facilities.
 Key ingredients are:
 Collaborative effort requires trust & accountability.
 Cost savings is realized by eliminating excess inventory.
 Customer service: The supplier is frequently on site for
improved response times and reducing stockouts.
 Written agreement on procedures, methods, and schedules
are clearly specified.
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Order Fulfillment Programs
 Continuous Replenishment Program (CRP)
A VMI method in which the supplier monitors the
customer’s inventory levels and replenishes stock as
needed.
 Collaborative planning, forecasting, and replenishment (CPFR)
 Radio Frequency Identification (RFID)
A
method for identifying items through the use of radio
signals from a tag attached to an item.
 Wal-Mart and Gillette are among a number of large retailers,
manufacturers, government agencies, and suppliers currently
implementing RFID in their supply chains.
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Distribution Processes
 Ownership: Rather than negotiate with a contract carrier, a firm
has the most control over the distribution process if it owns and
operates it, thereby becoming a private carrier.
 Firms may use a combination of the five basic modes of
transportation: truck, train, ship, pipeline, and airplane.
 Cross-Docking: The packing of products on incoming shipments
so that they can be easily sorted at intermediate warehouses for
outgoing shipments based on their final destinations.
 Items are carried from the incoming-vehicle docking point to the
outgoing-vehicle docking point without being stored in inventory at
the warehouse.
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Continuous Replenishment
at
 Each morning Campbell uses Electronic Data
Interchange to link with retailers.
 Retailers inform Campbell of demands for its
products and the current inventory levels in their
distribution centers.
 Campbell determines which products need
replenishment based on upper and lower
inventory limits established with each retailer.
 Campbell makes daily deliveries of needed
products.
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The Supplier Relationship
Process
 The sourcing process qualifies, selects, manages
the contracts, and evaluates suppliers.
 The design collaboration process focuses on
jointly designing new services or products with key
suppliers, seeking to eliminate costly delays and
mistakes incurred when many suppliers concurrently,
but independently, design service packages or
manufactured components.
 The negotiation process process focuses on
obtaining an effective contract that meets the price,
quality, and delivery requirements of the supplier
relationship process’s internal customers.
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The Supplier Relationship
Process
 The buying process relates to the actual
procurement of the service or material from the
supplier. This process includes the creation,
management, and approval of purchase orders.
 The information exchange process facilitates
the exchange of pertinent operating information,
such as forecasts, schedules, and inventory levels
between the firm and its supplier.
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Supplier Selection
and Certification
 Purchasing: The activity that decides which
suppliers to use, negotiates contracts, and
determines whether to buy locally.
 Supplier selection often considers the criteria of
price, quality and delivery.
 Green purchasing: The process of identifying,
assessing, and managing the flow of
environmental waste and finding ways to reduce it
and minimize its impact on the environment.
 Supplier certification programs verify that
potential suppliers have the capability to provide
the services or materials the buyer firm requires.
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Supplier Relations
 Competitive orientation views negotiations
between buyer and seller as a zero-sum
game. Whatever one side loses, the other
side gains, and short-term advantages are
prized over long-term commitments.
 Cooperative orientation is where the
buyer and seller are partners, each helping
the other as much as possible.
 Sole sourcing is the awarding of a contract
for a service or item to only one supplier.
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Electronic Purchasing
 Electronic Data Interchange (EDI) enables the
transmission of routine, standardized business
documents from computer to computer.
 Catalog hubs: A system whereby suppliers post their
catalog of items on the Internet and buyers select
what they need and purchase them electronically.
 Exchange: An electronic marketplace where buying
firms and selling firms come together to do business.
 Auction: A marketplace where firms place competitive
bids to buy something.
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Centralized versus
Localized Buying
 Centralized buying increases purchasing clout.
Savings can be significant, often 10% or more.
 Increased buying power can mean getting better
service, ensuring long-term supply availability, or
developing new supplier capability.
 The biggest disadvantage is loss of local control.
 Centralized buying is undesirable for items unique to
a particular facility.
 The best solution may be one where both local
autonomy and centralized buying are possible.
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Value Analysis
 Value analysis is a systematic effort to reduce the
cost or improve the performance of services or
products, either purchased or produced.
 Early supplier involvement is a program that
includes suppliers in the design phase of a service
or product.
 Presourcing: A level of supplier involvement in
which suppliers are selected early in a product’s
concept development stage and given significant,
if not total, responsibility for the design of certain
components or systems of the product.
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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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Environment & Design Factors
Environment Factors
Design Factors
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Efficient Supply
Chains
Efficient Supply Chains
Responsive Supply Chains
Responsive Supply Chains
Mass Customization
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Mass Customization: A strategy whereby a firm’s flexible
processes generate a wide variety of personalized services or
products at reasonably low costs. Competitive advantages:
 Managing customer relationships. It requires detailed
inputs from customers so that the ideal service or product
can be produced.
 Eliminating finished goods inventory. Producing to a
customer’s order eliminates finished goods inventory.
 Increasing perceived value. It increases the perceived
value of services or products.

Postponement is when some of the final activities in the
provision of a service or product are delayed until the orders
are received.

Channel assembly is when members of the distribution
channel act as if they were assembly stations in the factory.
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Lean Supply Chains
 Three key activities are required to attain a lean
supply chain:
1. Strategic Sourcing: Identifying items or services
that are of high value or complexity and purchase
them from a select set of suppliers with whom the
firm establishes a close relationship.
2. Cost Management: Limiting the number of
suppliers and focusing on helping them reduce
their costs through trust and friendly collaboration.
3. Supplier Development: Shifting from price
negotiations to cost management and working
with suppliers to achieve lean operations.
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Outsourcing
 A Make-or-buy decision is a managerial choice
between whether to outsource a process or do it
in-house.
 Outsourcing: Paying suppliers and distributors to
perform processes and provide needed services and
materials.
 Backward integration is a firm’s movement upstream
toward the sources of raw materials, parts, and
services through acquisitions.
 Forward integration is acquiring more channels of
distribution, such as distribution centers (warehouses)
and retail stores, or even business customers.
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Offshoring
 Offshoring is a supply chain strategy that involves
moving processes to another country. Factors that
influence the offshoring decision include:
Comparative labor costs
Logistics costs
Labor Laws and Unions
Tariffs and Taxes
Internet
Pitfalls of offshoring include:
Pulling the plug too quickly. Not making a good-faith
effort to fix the existing process
Technology transfer
Difficulties integrating processes
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Virtual Supply Chains
 Virtual Supply Chain: Outsourcing some part of the entire
order fulfillment process with the help of sophisticated, Webbased information technology support packages.
 Benefits include:
 Reduced investment in inventories and order fulfillment
infrastructure.
 Greater service or product variety without the overhead of
one’s own order fulfillment process.
 Lower costs due to economies of scale. The supplier typically
handles more volume than does the firm doing the outsourcing.
 Lower transportation costs. With drop shipping in a virtual
supply chain, the only transportation cost is shipping the goods
from the wholesaler to the customer.
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Which Type of
Supply Chain?
Traditional Supply Chain
is preferred when:
1. Sales volumes are high.
2. Order consolidation is
important.
3. Small-order fulfillment
capability of suppliers is
important.
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Virtual Supply Chain is
preferred when:
1. Demand is highly volatile.
2. High service or product
variety is important.