9 Sep 2010 CDAC Krajweski Chapter 10_SCM (2)

8/8/2019 9 Sep 2010 CDAC Krajweski Chapter 10_SCM (2)

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2007 Pearson Education

Supply Chain StrategySupply Chain Strategy

Chapter 10Chapter 10


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HowSupply Chain Strategyfits the Operations Management

Philosophy

Operations As a CompetitiveWeapon

Operations StrategyProject Management Process Strategy

Process AnalysisProcess Performance and Quality

Constraint ManagementProcess LayoutLean Systems

Supply Chain StrategyLocation

Inventory ManagementForecasting

Sales and Operations PlanningResource Planning

Scheduling


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Dell, Inc.

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 15minutes of each of its plants.

As customers place orders, suppliers know when toship components.

Suppliers restock the warehouse and manage theinventory.

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 firms customerrelationship, order fulfillment, and supplierrelationship processes to those of its supplier and

customers.

Supply chain management: Developing a strategyto organize, control, and motivate the resourcesinvolved in the flow of services and materials within

the supply chain. Supply chain strategy: Designing a firms supply

chain to meet the competitive priorities of the firmsoperations strategy.


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Supply Chain for

Services

Supply chain design for a service providerisdriven by the need to provide support for the

essential elements of the various servicepackages it delivers.

A service package consists of

supporting facilities facilitating goods

explicit services

implicit services


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Supply Chain for a Florist

Required for facilitating goods

Required for explicit services Required for supportingfacilities

Required for implicit services

Homecustomers

Homecustomers

Commercialcustomers

Commercialcustomers

Florist

Florist

FedExdeliveryservice

FedExdeliveryservice

Packaging

Packaging Localdeliveryservice

Localdelivery

service

Flowers local/

international

Flowers local/

international

Arrangementmaterials

Arrangementmaterials

Internetservices

Internetservices

Maintenanceservices

Maintenanceservices


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Creation of Inventory

Inventory: A stock of materials used to satisfycustomer demand or to support the production ofservices or goods.

Scrap flowScrap flow

Inventory levelInventory level

Output flow of materialsOutput flow of materials

Input flow of materialsInput flow of materials


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Supply Chain for

Manufacturing

Raw materials (RM): The inventories needed forthe production of services or goods.

Work-in-process (WIP): Items, such ascomponents or assemblies, needed to produce afinal product in manufacturing.

Finished goods (FG): The items inmanufacturing plants, warehouses, and retailoutlets that are sold to the firms customers.


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Inventory at SuccessiveInventory at SuccessiveStocking PointsStocking Points

SupplierSupplier Manufacturing plantManufacturing plant Distribution centerDistribution center RetailerRetailer

RawRaw

materialsmaterials

Work inWork in

processprocess FinishedFinishedgoodsgoods


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2007 Pearson Education 2007 Pearson Education

Supply ChainSupply Chain

Tier 1

Tier 2

Supplier of materialsSupplier of services

Tier 3

Customer Customer Customer Customer

Distributioncenter

Distributioncenter

Manufacturer


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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 valuedivided by sales per week at cost.

Weeks of supply =Average aggregate inventoryvalue Weekly sales (at cost)

Inventory turnoveris annual sales at cost divided by theaverage aggregate inventory value maintained for the year.

Inventory turnover =Annual sales at (cost)

Average aggregate inventory

value


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Calculating Inventory MeasuresCalculating Inventory MeasuresExample 10.1Example 10.1

The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goodssold 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 InventoryUsing Inventory

Estimator SolverEstimator Solver

Weeks of supply =$2 mil/($10 mil)(52 wks.) =10.4 weeks

Inventory turns =

$10 mil./$2 mil. = 5turns/yr


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Application 10.1

( ) ( ) weeksweeks 5.1852000,200,19$ 000,821,6$

cost)(atsalesWeekly

valueinventoryaggregateAveragesupplyofWeeks

==

=

turns8.2000,821,6$

0$19,200,00turnoverInventory ==


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Supply Chain Process MeasuresSupply Chain Process Measures

Percent of orderstaken accurately

Time to completethe order placementprocess

Customersatisfaction withthe order placement

process

CustomerRelationship

Percent of incompleteorders shipped

Percent of orders

shipped on time Time to fulfill the

order Percent of botched

services or returneditems

Cost to produce theservice or item

Customer satisfactionwith the orderfulfillment process

Inventory levels ofWIP and FG

OrderFulfillment

Percent ofsuppliersdeliveries on time

Suppliers leadtimes

Percent defects inservices andpurchased

materials Cost of servicesand purchasedmaterials

SupplierRelationship


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Links to

Financial Measures

Return on Assets (ROA):is net income divided bytotal assets.

Managing the supply chain so as to reduce the aggregate

inventory investment will reduce the total assets portion ofthe firms balance sheet.

Working Capital: Money used to finance ongoingoperations.

Weeks of inventory and inventory turns are reflected inworking capital.

Decreasing weeks of supply or increasing inventory turnsreduces the working capital.


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Links to

Financial Measures

Cost of Goods Sold: Buying materials at a better price, ortransforming them more efficiently, improves a firms cost ofgoods sold measure and ultimately its net income.

Total Revenue: Increasing the percent of on-time deliveries tocustomers increases total revenue because satisfiedcustomers will buy more services and products.

Cash Flow: Cash-to-cash is the time lag between paying forthe services and materials needed to produce a service orproduct and receiving payment for it.

The shorter the time lag, the better the cash flow position of thefirm because it needs less working capital.


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Supply Chain Dynamics

Supply chain dynamics can wreak havoc onsupply chain performance measures.

Actions of downstream supply chain memberscan affect the operations of upstream members.

The bullwhip effect: The phenomenon in

supply chains whereby ordering patternsexperience increasing variance as youproceed upstream in the chain.


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Supply Chain Dynamics for Facial TissueSupply Chain Dynamics for Facial Tissue

Q

uantity

ordered

Time

Bullwhip Effect


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External

Value-Chain Linkages

First-Tier SupplierFirst-Tier Supplier Service/Product ProviderService/Product Provider

Support ProcessesSupport Processes Support ProcessesSupport Processes

SupplierRelation-

shipProcess

SupplierRelation-

shipProcess

New Service/Product

DevelopmentProcess

New Service/Product

DevelopmentProcess

Order-Fulfill-ment

Process

Order-Fulfill-ment

Process

Business-to-Business

(B2B)Customer

RelationshipProcess

Business-to-Business

(B2B)Customer

RelationshipProcess

SupplierRelation-

shipProcess

SupplierRelation-

shipProcess

New Service/Product

DevelopmentProcess

New Service/Product

DevelopmentProcess

Order-Fulfill-ment

Process

Order-Fulfill-ment

Process

Business-to-Customer

(B2C)Customer

RelationshipProcess

Business-to-Customer

(B2C)Customer

RelationshipProcess

Externa

lSupp

liers

Externa

lSupp

liers

ExternalC

ons

umers

ExternalCons

umers


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External Causes ofSupply 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 inproduction schedule or quantity produced.


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Internal Causes ofSupply Chain Disruption

Internally generated shortages of parts.Engineering changes to the design of services

or products are disruptive.

New service or product introductionsdisrupt the supply chain and may require a newsupply chain.

Service or product promotions may create a

demand spike. Information errors such as demand forecast

errors, faulty inventory counts, or miscommunicationwith suppliers.


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The Customer Relationship

Process

Electronic Commerce (e-commerce) is theapplication of information and communication

technology anywhere along the value chain ofbusiness processes.

Business-to-Consumer Systems (B2C) allowscustomers to transact business over the Internet.

Business-to-Business Systems (B2B) involvescommerce between firms. The biggest growth area, it is currently about 70% of the

regular economy.

E-Commerce and the Marketing Process


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E-Commerce and the Order Placement Process

Cost reduction: Using the Internet canreduce the costs of processing orders.

Revenue flow increase: Reduction in thetime lag associated with billing thecustomer or waiting for checks.

Global Access: Available 24 hours a day.

Price flexibility: Prices can easily bechanged as the need arises.

The Customer RelationshipProcess


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Order Fulfillment at

Dell, Inc.

1. Customers buy from Dell by web site, voice-to-voice, andface-to-face.

2. Order information is transmitted to the inventory system.

3. Unique product configuration information is contained in

the Traveler, a sheet that travels with the system thecustomer has ordered throughout its assembly andshipping.

4. When the Traveler is pulled, all required internal parts andcomponents for a system are picked and put in a tote orkit. (Procedure is called Kitting)

5. A team uses the kit to assemble and initially test thesystem.

6. Systems are thoroughly tested.

7. Completed systems are boxed and placed on trucks.

8. The entire assemble-to-order cycle takes only a few hours.


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Dells

Order Fulfillment Process


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The Order Fulfillment

Process

Centralized placement: Keeping all the inventory atone location such as a firms manufacturing plant or

a warehouse and shipping directly to customers.

Inventory pooling is a reduction in inventory andsafety stock because of the merging of variabledemands 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 tocustomers at a warehouse, wholesaler, or retailer.

Inventory Placement


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The Order Fulfillment

Process

Vendor-managed inventories (VMI): An extreme

application of forward placement involving locating

inventories at the customers 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.

Vendor-Managed Inventories


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Order Fulfillment Programs

Continuous Replenishment Program (CRP)A VMI method in which the supplier monitors thecustomers inventory levels and replenishes stock asneeded. 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 currentlyimplementing RFID in their supply chains.


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Distribution Processes

Ownership: Rather than negotiate with a contract carrier, a firmhas the most control over the distribution process if it owns andoperates it, thereby becoming aprivate carrier.

Firms may use a combination of the five basic modes oftransportation: truck, train, ship, pipeline, and airplane.

Cross-Docking: The packing of products on incoming shipmentsso 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 thewarehouse.

C ti R l i h t


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Continuous Replenishment

at Each morning Campbell uses Electronic DataInterchange to link with retailers.

Retailers inform Campbell of demands for its

products and the current inventory levels in theirdistribution centers.

Campbell determines which products needreplenishment based on upper and lower

inventory limits established with each retailer.

Campbell makes daily deliveries of neededproducts.


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The Supplier Relationship

Process

The sourcing process qualifies, selects, managesthe contracts, and evaluates suppliers.

The design collaborationprocess focuses on

jointly designing new services or products with keysuppliers, seeking to eliminate costly delays andmistakes incurred when many suppliers concurrently,but independently, design service packages ormanufactured components.

The negotiation process process focuses onobtaining an effective contract that meets the price,quality, and delivery requirements of the supplierrelationship processs internal customers.


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The buying process relates to the actualprocurement of the service or material from the

supplier. This process includes the creation,management, and approval of purchase orders.

The information exchange process facilitatesthe exchange of pertinent operating information,

such as forecasts, schedules, and inventory levelsbetween the firm and its supplier.

The Supplier Relationship

Process


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Supplier Selection

and Certification

Purchasing: The activity that decides whichsuppliers to use, negotiates contracts, anddetermines 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 ofenvironmental 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 providethe services or materials the buyer firm requires.


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Supplier Relations

Competitive orientation views negotiationsbetween buyer and seller as a zero-sumgame. Whatever one side loses, the other

side gains, and short-term advantages areprized over long-term commitments.

Cooperative orientation is where the buyerand seller are partners, each helping theother as much as possible.

Sole sourcing is the awarding of a contractfor a service or item to only one supplier.


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Electronic Purchasing

Electronic Data Interchange (EDI) enables thetransmission of routine, standardized businessdocuments from computer to computer.

Catalog hubs: A system whereby suppliers post theircatalog of items on the Internet and buyers selectwhat 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 placecompetitive 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, ordeveloping new supplier capability.

The biggest disadvantage is loss of local control.

Centralized buying is undesirable for items unique toa particular facility.

The best solution may be one where both localautonomy and centralized buying are possible.


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Value Analysis

Value analysis is a systematic effort to reducethe cost or improve the performance of services orproducts, either purchased or produced.

Early supplier involvement is a program thatincludes suppliers in the design phase of a serviceor product.

Presourcing: A level of supplier involvement in

which suppliers are selected early in a productsconcept development stage and given significant,if not total, responsibility for the design of certaincomponents or systems of the product.


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Supply Chain Strategies

Efficient supply chains focus on theefficient flows of services and materials,keeping inventories to a minimum.Work best where demand is highly predictable.

Responsive supply chains are designedto react quickly.Work best when firms offer a great variety of

services or products and demand predictabilityis low.

E i t & D i F t


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Environment & Design Factors

Design Factors Efficient Supply Chains Responsive Supply Chains

Environment Factors Efficient SupplyChains

Responsive Supply Chains


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Mass Customization

Mass Customization: A strategy whereby a firms flexibleprocesses 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

customers 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 theprovision of a service or product are delayed until the ordersare received.

Channel assembly is when members of the distributionchannel 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 leansupply chain:

1. Strategic Sourcing: Identifying items or servicesthat are of high value or complexity and purchasethem from a select set of suppliers with whom thefirm establishes a close relationship.

2. Cost Management: Limiting the number ofsuppliers and focusing on helping them reduce

their costs through trust and friendly collaboration.3. Supplier Development: Shifting from price

negotiations to cost management and workingwith suppliers to achieve lean operations.


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Outsourcing

A Make-or-buy decision is a managerial choicebetween whether to outsource a process or do itin-house.

Outsourcing: Paying suppliers and distributors toperform processes and provide needed services andmaterials.

Backward integration is a firms movement upstream

toward the sources of raw materials, parts, andservices through acquisitions.

Forward integration is acquiring more channels ofdistribution, such as distribution centers (warehouses)and retail stores, or even business customers.


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Offshoring

Offshoring is a supply chain strategy that involvesmoving processes to another country. Factors thatinfluence the offshoring decision include:

Pitfalls of offshoring include:

Pulling the plug too quickly. Not making a good-faitheffort to fix the existing process

Technology transfer

Difficulties integrating processes

Tariffs and TaxesInternet

Comparative labor costsLogistics costs

Labor Laws and Unions


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Virtual Supply Chains

Virtual Supply Chain: Outsourcing some part of the entire

order fulfillment process with the help of sophisticated, Web-

based information technology support packages.

Benefits include: Reduced investment in inventories and order fulfillment

infrastructure. Greater service or product variety without the overhead of

ones 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 Chainis preferred when:

1. Sales volumes are high.

2. Order consolidation isimportant.

3. Small-order fulfillmentcapability of suppliers isimportant.

Virtual Supply Chain ispreferred when:

1. Demand is highly volatile.

2. High service or product

variety is important.

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9 Sep 2010 CDAC Krajweski Chapter 10_SCM (2)

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