Supply Chain Strategy

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Manufacturing StrategyMGSC 602Prof. Saibal Ray

• Supply Chain Strategy
• Handout 8
• Session 12

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Supply Chain Management The Magnitude in the
Traditional View

• Estimated that the grocery industry could save
  30 billion (10 of operating cost) by using
  effective logistics and supply chain strategies
• A typical box of cereal spends 104 days from
  factory to sale
• A typical car spends 15 days from factory to
  dealership
• Laura Ashley turns its inventory 10 times a year,
  five times faster than 3 years ago

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Supply Chain Management The True Magnitude

• Compaq estimates it lost 0.5 billion to 1
  billion sales in 1995 because laptops were not
  available when and where needed (same with Apple
  G4 in 1999)
• When the 1 gig processor was introduced by AMD,
  the price of the 800 meg processor dropped by 30
• PG estimates it saved retail customers 65
  million by collaboration resulting in a better
  match of supply and demand

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What is a supply chain?
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Flows in a Supply Chain
Information
Product
Customer
Funds

• Supply Chain

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Cycle View of Supply Chains
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Push/Pull View of Supply Chains
Procurement, Manufacturing and Replenishment
cycles
Customer Order Cycle
PUSH PROCESSES
PULL PROCESSES
Customer Order Arrives
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Examples of Supply Chains

• Dell / Compaq
• Toyota / GM/Ford
• McMaster Carr / W.W.Grainger
• Amazon / Borders / Barnes and Noble
• Webvan / Peapod / Jewel

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What is Supply Chain Management?

• Managing supply chain flows and assets, to
  maximize supply chain surplus
• What is supply chain surplus?
• Revenue from customer costs of the entire
  supply chain

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The Value Chain Linking Supply Chain and
Business Strategy
Business Strategy
New Product Strategy
Supply Chain Strategy
Marketing Strategy
Marketing and Sales
New Product Development
Operations
Distribution
Service
Finance,Accounting, Information Technology, Human
Resources
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Right Supply Chain Strategy?

• The strategy needs to be tailored to meet
  specific needs of the customers
• A product with a stable demand and a reliable
  source of supply should not be managed in the
  same way as one with highly unpredictable demand
  and unreliable supply

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A Framework for Devising the Right Supply Chain
Strategy

• Two key sources of uncertainty demand and
  supply
• Demand uncertainty
• Supply Uncertainty

Functional
Innovative
Stable
Evolving
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Levels of Implied Demand Uncertainty
The Implied Uncertainty Spectrum
Even for the same product,different supply chains
might have different demand uncertainties. Take
for example, steel. When it is a long lead time
steel, it is functional. However, emergency
steel is innovative.
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Implied Demand Uncertainty and Customer Need
Detergent Long lead time steel
High Fashion Emergency steel
Customer Need
Price
Responsiveness
Low
High
Implied Demand Uncertainty
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Drivers of Supply Chain Fit
Efficiency
Responsiveness
Supply Chain Structure
Inventory
Transportation
Facilities
Information
Drivers
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Considerations for Supply Chain Drivers
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The Responsiveness Spectrum
Highly efficient
Somewhat efficient
Somewhat responsive
Highly responsive
Most automotive production Delivering a large
variety of products in a couple of weeks
Dell Custom-made PCs and servers in a few days
Hanes apparel A traditional make-to-stock
manufacturer with production lead time of several
weeks
Integrated steel mills Production scheduled
weeks or months in advance with little variety or
flexibility
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Major Obstacles to Achieving Fit

• Multiple owners / incentives in a supply chain
• Local optimization and lack of global fit
• Increasing product variety / shrinking life
  cycles / customer fragmentation
• Increasing implied uncertainty

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Dealing with-Multiple Owners / Local Optimization

• Information Coordination
• Contractual Coordination

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Dealing with Product Variety Mass Customization
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Which E-Business is Right for Your Supply Chain?
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What is E-Business?

• Business transacted over the Internet
• Is product information displayed on the Internet?
• Is negotiation over the Internet?
• Is the order placed over the Internet?
• Is the order tracked over the Internet?
• Is the order fulfilled over the Internet?
• Is payment transacted over the Internet?

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Potential Revenue Opportunities from E-Business

• Direct sales to customers
• 24 hour access for order placement
• Information aggregation
• Personalization and Customization of Information
• Flexibility on pricing and promotion
• Faster time to market
• Efficient funds transfer

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Potential Revenue Disadvantages from E-Business

• Longer time to satisfy except for downloadable
  products
• Payment security
• Feeling
• Mindset

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Potential Cost Opportunities from E-Business

• Direct customer contact for manufacturers
• Coordination in the supply chain
• Customer participation
• Postpone product differentiation to after order
  is placed
• Downloadable product decrease delivery time and
  cost
• Reduce facility costs
• Geographical centralization and resulting
  reduction in inventories (when most?)

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Potential Cost Disadvantages from E-Business

• Increased transportation cost
• Increased handling cost
• Large initial investment in information
  infrastructure

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Impact of E-Business on Cost of Supply Chain
Drivers

• Supply Chain Driver
• Inventory
• Transportation
• Facility
• Information

• Impact of E-Business on Cost
• Decline
• Increase
• Decline
• Improve coordination and reduce costs through
  information sharing
• Large initial investment with lower processing
  costs

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Basic Evaluation Framework

• How does going on line impact revenues?
• How does going on line impact costs?
• Facility (site personnel)
• Inventory
• Transportation
• Information
• How should the e-commerce channel position, e.g.,
  for efficiency or responsiveness?
• Who in the supply chain can extract most value?
• Is the value to existing players or entrants?

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The Computer Industry Dell on-line
Customer Order and Manufacturing Cycle
Procurement Cycle
Customer Order and Manufacturing Cycle
Procurement Cycle
Push Processes
Pull Processes
Dell Supply Chain Cycle
Customer Order Arrives
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Potential Opportunities Exploited by Dell

• Revenue opportunities
• 24 hour access for order placement
• Direct sales
• Providing customization and large selection
  information
• Flexibility on pricing and promotion
• Faster time to market
• Efficient funds transfer
• Revenue negatives
• Longer response time than store and no help with
  selection

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Potential Opportunities Exploited by Dell

• Cost opportunities
• Direct sales eliminating intermediary
• Customer participation Call center catalog
  costs
• Information sharing in supply chain
• Reduce facility costs
• Geographical Centralization and reduced
  inventories
• Postpone product differentiation to after order
  is placed using product platforms and common
  components
• Cost Increases
• Outbound transportation costs increase

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Impact of E-Business on Dell Performance

• Impact
• Increase
• Decrease
• Decrease
• Increase

• Primary Causes
• Direct Sales to customer
• Flexible pricing
• Large variety and customization
• Faster new production introduction
• Fast delivery of customer order
• Aggregation using postponement and component
  commonality
• Geographical aggregation
• Information sharing
• No retail outlets
• Customer participation in order placement
• Higher outbound transportation cost

• Factor
• Revenue
• Inventory costs
• Facility costs
• Transportation costs

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Opportunities

• Significant, but must be combined with component
  commonality, and build to order. Must move
  product customization to pull phase of supply
  chain and hold inventories as common components
  during the push phase
• Opportunity most significant for new, hard to
  forecast products
• Complements strength of existing retail channels

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Retailing Amazon.com
Customer
Customer
Pull
Pull
Amazon
Retail Store
Distributor
Warehouse (?)
Publisher
Publisher
Amazon Supply Chain
Bookstore Supply Chain
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Potential Opportunities Exploited by Amazon

• Revenue opportunities
• 24 hour access for order placement
• Providing large selection and other information
• Attract customers who do not want to go to store
• Flexibility on pricing
• Efficient funds transfer
• Revenue negatives
• Intermediary (distributor) reduces margin
• Longer response time than bookstore
• Downward pressure on book prices

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Potential Opportunities Exploited by Amazon

• Cost opportunities
• Reduce facility costs
• Geographical centralization and reduced
  inventories Most effective for low volume, hard
  to forecast books, least effective for high
  volume best sellers
• Cost increases
• Outbound transportation costs increase
• Handling cost increase

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Impact of E-Business on Amazon.com Performance

• Impact
• Increase
• Decrease
• Decrease
• Decrease
• Increase
• Increase

• Primary Causes
• Convenience
• Large variety of books
• Customer specific recommendations
• Distributor margins
• Downward price pressure
• Inability to browse
• Geographical aggregation (major benefit is for
  low-volume books)
• No retail outlets, only warehouses
• No cashiers required
• Each customer order is picked and packed
• Higher outbound transportation costs

• Factor
• Revenue
• Inventory cost
• Facility costs
• Transportation cost

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Opportunities

• Going on-line, by itself, offers lower cost
  advantages (may be some disadvantages) than in
  Dell model given current form of books
• Cost and availability advantages are more
  significant for low volume books
• On-line channel has significant cost benefit if
  books are downloadable

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How should bookstore chains react?

• An on line channel allows it to match Amazons
  revenue advantages
• Use a hybrid approach in stocking and pricing
• High volume books for local storage
• Low volume books for browsing and purchase on
  line
• Pricing varies by delivery and pick up option

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Grocery on-line
Customer
Customer
Supermarket
On-line Grocery
Warehouse (?)
Manufacturer
Manufacturer
On-line Supply Chain
Supermarket Supply Chain
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Potential Opportunities for on line grocer

• Revenue opportunities
• Attract customers who do not want to go to
  supermarket
• Out of town customers for specialty items
• Menus and other value added
• Cost opportunities
• Reduced facility costs (sites as well as checkout
  clerks)
• Inventory savings from centralization (primarily
  for slow moving, specialty items)

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Added Costs for Online Grocer

• Additional outbound transportation cost Have to
  cover the last mile to the customer
• Additional picking and packing costs

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Impact of E-Business on Peapod Performance

• Impact
• Increase
• Marginal
• decrease
• Decrease
• Increase
• Large
• increase

• Primary Causes
• Convenience (benefit larger in urban areas and
  for specialty foods)
• Customization and personalization
• Sale and use of customer information
• Geographical aggregation (primarily for
  low-volume items)
• No retail outlets, only warehouses
• No checkout clerks needed
• Each customer order is picked
• Outbound transportation cost increases

• Factor
• Revenue
• Inventory cost
• Facility costs
• Transportation cost

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Opportunities

• Negligible opportunity to compete on cost, except
  maybe for specialized low volume items
• Competition has to be on convenience or some
  other form of value added
• To lower delivery cost disadvantage, must be more
  than on-line grocery
• Greatest opportunity may be for supermarket
  chains to expand value offering

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B2B W.W. Grainger

• Revenue opportunities
• 24 hour access for order placement
• Large selection information with simple search
• Display of substitutable products
• Flexibility on pricing and promotion
• Ability to alert customer of order status
• Faster time to market

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B2B W.W. Grainger

• Cost opportunities
• Reduced order taking costs
• Reduced order placement costs for customers
• Reduced error because of multiple data entry
• Reduced catalog costs

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Impact of E-Business on Grainger Performance

• Impact
• Increase
• Decrease
• Decrease
• Unchanged
• Unchanged

• Primary Causes
• Larger product selection
• Some drop in prices
• Intermediary margin in on-line marketplaces
• Save on call center costs at Grainger
• Potential branch closings
• Save on administrative costs at customer
• Degree of aggregation similar to fulfillment of
  phone orders
• Marginal decrease if branches close
• Network similar to fulfillment of phone order
• Some increase if more shipments by package
  carriers

• Factor
• Revenue
• Facility costs
• Inventory cost
• Transportation cost

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Key Messages

• Some supply chains are better suited to exploit
  the cost benefits of going on-line
• Ability to increase processes in pull phase
• Ability to delay product differentiation
• Big inventory benefit from geographical
  centralization
• Significant facility cost reduction on
  centralization
• Transport to customer is a small fraction of
  product cost
• All are achieved if product is downloadable