Production and Operations Management: Manufacturing and Services

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Chapter 10
Supply Chain Strategy
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10-2
OBJECTIVES

• Supply-Chain Management
• Measuring Supply-Chain Performance
• Supply Chain Decisions
• Cycle and Push-Pull View of Supply Chains
• Bullwhip Effect
• Outsourcing
• Value Density
• Mass Customization

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What is a Supply Chain?
10-3

• Supply-chain is a term that describes how
  organizations (suppliers, manufacturers,
  distributors, and customers) are linked together

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What is Supply Chain Management?
10-4

• Supply-chain management is a total system
  approach to managing the entire flow of
  information, materials, and services from
  raw-material suppliers through factories and
  warehouses to the end customer

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What is a Supply Chain?
Customer wants detergent and goes to Jewel
Jewel Supermarket
Jewel or third party DC
PG or other manufacturer
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What is a Supply Chain?
Customer wants detergent and goes to Jewel
Jewel Supermarket
Jewel or third party DC
PG or other manufacturer
Plastic Producer
Tenneco Packaging
Chemical manufacturer (e.g. Oil Company)
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What is a Supply Chain?
Customer wants detergent and goes to Jewel
Jewel Supermarket
Jewel or third party DC
PG or other manufacturer
Plastic Producer
Tenneco Packaging
Chemical manufacturer (e.g. Oil Company)
Chemical manufacturer (e.g. Oil Company)
Paper Manufacturer
Timber Industry
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Formulas for Measuring Supply-Chain Performance
10-8

• One of the most commonly used measures in all of
  operations management is Inventory Turnover
• In situations where distribution inventory is
  dominant, Weeks of Supply is preferred and
  measures how many weeks worth of inventory is in
  the system at a particular time

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Example of Measuring Supply-Chain Performance
10-9

• Suppose a companys new annual report claims
  their costs of goods sold for the year is 160
  million and their total average inventory
  (production materials work-in-process) is worth
  35 million. This company normally has an
  inventory turn ratio of 10. What is this years
  Inventory Turnover ratio? What does it mean?

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Example of Measuring Supply-Chain Performance
(Continued)
10-10

• 160/35
• 4.57
• Since the companys normal inventory turnover
  ration is 10, a drop to 4.57 means that the
  inventory is not turning over as quickly as it
  had in the past. Without knowing the industry
  average of turns for this company it is not
  possible to comment on how they are competitively
  doing in the industry, but they now have more
  inventory relative to their cost of goods sold
  than before.

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Decision Phases of a Supply Chain

• Supply chain strategy or design
• Supply chain planning
• Supply chain operation

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Supply Chain Strategy or Design

• Decisions about the structure of the supply chain
  and what processes each stage will perform
• What are some strategic supply chain decisions?
• Locations and capacities of facilities
• Products to be made or stored at various
  locations
• Modes of transportation
• Information systems
• Chain design must support strategic objectives
• Design decisions are long-term and expensive to
  reverse must address market uncertainty

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Supply Chain Planning

• Definition of a set of policies that govern
  short-term operations
• Fixed by the supply configuration from previous
  phase
• Starts with a forecast of demand in the coming
  year

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Supply Chain Planning

• What are some planning decisions?
• Which markets will be supplied from which
  locations
• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions
• Must consider in planning decisions demand
  uncertainty, exchange rates, competition over the
  time horizon

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Supply Chain Operation

• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating
  policies are determined
• Goal is to implement the operating policies as
  effectively as possible some examples?
• Allocate orders to inventory or production, set
  order due dates, generate pick lists at a
  warehouse, allocate an order to a particular
  shipment, set delivery schedules, place
  replenishment orders
• Much less uncertainty (short time horizon)

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Process View of a Supply Chain

• Cycle view processes in a supply chain are
  divided into a series of cycles, each performed
  at the interfaces between two successive supply
  chain stages
• Push/pull view processes in a supply chain are
  divided into two categories
• Executed in response to a customer order (pull)
• Executed in anticipation of a customer order
  (push)

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Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
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Cycle View of a Supply Chain

• Each cycle occurs at the interface between two
  successive stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• Cycle view clearly defines processes involved and
  the owners of each process. Specifies the roles
  and responsibilities of each member and the
  desired outcome of each process.

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Customer Order Cycle

• Involves all processes directly involved in
  receiving and filling the customers order
• Customer arrival
• Customer order entry
• Customer order fulfillment
• Customer order receiving

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Replenishment Cycle

• All processes involved in replenishing retailer
  inventories (retailer is now the customer)
• Retail order trigger
• Retail order entry
• Retail order fulfillment
• Retail order receiving

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Manufacturing Cycle

• All processes involved in replenishing
  distributor (or retailer) inventory
• Order arrival from the distributor, retailer, or
  customer
• Production scheduling
• Manufacturing and shipping
• Receiving at the distributor, retailer, or
  customer

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Procurement Cycle

• All processes necessary to ensure that materials
  are available for manufacturing to occur
  according to schedule
• Manufacturer orders components from suppliers to
  replenish component inventories
• However, component orders can be determined
  precisely from production schedules (different
  from retailer/distributor orders that are based
  on uncertain customer demand)
• Important that suppliers be linked to the
  manufacturers production schedule

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

• Supply chain processes fall into one of two
  categories depending on the timing of their
  execution relative to customer demand
• Pull execution is initiated in response to a
  customer order (reactive)
• Push execution is initiated in anticipation of
  customer orders (speculative)
• Push/pull boundary separates push processes from
  pull processes
• Strategic supply chain decisions may lead to
  changing the push/pull boundary

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Example L.L. Bean

• Where is the push/pull boundary for L.L. Bean?
• Customer order cycle is pull, remaining processes
  are push
• What are the implications of moving the boundary
  to the replenishment cycle?

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Example Dell

• Where is the push/pull boundary for Dell?
• Customer and manufacturing is a pull cycle
• Procurement is a push cycle
• What are the implications of moving the boundary
  to the customer cycle?

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L.L. Bean vs. Dell Computer

• How would you compare the two cycles?
• Dell has fewer stages (customer, manufacturer,
  supplier) and more pull processes than L.L. Bean
• Can these differences affect supply chain
  performance?
• For Dell, no FG inventory, very low component
  inventory, supplier integration (demand info,
  part quality), faster new product introduction,
  outsources service/support (better coord.), close
  tracking of cash flows

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Example Snapple Acquisition

• Quaker owns Gatorade and acquired Snapple in 1994
  and tried to synergize the two distribution
  systems
• Snapple produced under contract, sold through
  restaurants, strong in northeast and west coast
• Gatorade manufactured by Quakers plants, sold in
  supermarkets and grocery stores, strong in south
  and southwest
• Efforts to merge supply chains failed, and in 28
  months Quaker sold Snapple for 20 less than
  purchase price

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The Importance of Supply Chain Flows

• Close connection between design and management of
  supply chain flows (product, information, and
  cash) and supply chain success
• Dell success
• Quaker Oats (Snapple) failure
• Supply chain decisions can play a significant
  role in the success or failure of a firm

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Bullwhip Effect
10-30
The magnification of variability in orders in the
supply-chain
Retailers Orders
Wholesalers Orders
Manufacturers Orders
Order Quantity
Order Quantity
Order Quantity
Time
Time
Time
A lot of retailers each with little variability
in their orders.
can lead to greater variability for a fewer
number of wholesalers, and
can lead to even greater variability for a
single manufacturer.
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Hau Lees Concepts of Supply Chain Management
10-31

• Hau Lees approach to supply chain (SC) is one of
  aligning SCs 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 SCs
• Efficient SCs
• Risk-Hedging SCs
• Responsive SCs
• Agile SCs

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Hau Lees SC Uncertainty Framework
10-32
Efficient SC Ex. Grocery
Responsive SC Ex. Computers
Risk-Hedging SC Ex. Hydro-electric power
Agile SC Ex. Telecom
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Types of Supply Chain Strategies

• Efficient highest cost efficiency
• Risk-hedging pool and share resources so that
  risks in supply disruption can be shared
• Responsive be responsive and flexible to
  customer needs
• Agile be responsive and flexible to customers,
  hedge risks of supply shortages

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What is Outsourcing?
10-34

• Outsourcing is defined as the act of moving a
  firms internal activities and decision
  responsibility to outside providers

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Reasons to Outsource
10-35

• Organizationally-driven
• Improvement-driven
• Financially-driven
• Revenue-driven
• Cost-driven
• Employee-driven

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Value Density
10-37

• Value density is defined as the value of an item
  per pound of weight
• It is used as an important measure when deciding
  where items should be stocked geographically and
  how they should be shipped

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Sourcing/Purchasing-SystemDesign Matrix
10-38
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Mass Customization
10-39

• Mass customization is a term used to describe the
  ability of a company to deliver highly customized
  products and services to different customers
• 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 supply-chain network

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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
• 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 supply-chain network
• Example H-P customizing DeskJet printers with
  the power supply needed in various European
  countries once printers arrive at its
  distribution center in Germany

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Question Bowl
10-41

• A typical supply chain would include which of the
  following?
• Suppliers
• Manufacturers
• Distribution
• All of the above
• None of the above

Answer d. All of the above
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Question Bowl
10-42

• The supply chain measure of Inventory
  Turnover is which of the following ratios?
• Avg. inventory value/total costs
• Costs of goods sold/Avg. aggregate inventory
  value
• Total costs of goods/Avg. costs of goods
• Weeks worth of inventory/No. of weeks
• None of the above

Answer b. Costs of goods sold/Avg. aggregate
inventory value
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Question Bowl
10-43

• If the cost of goods sold for a company is
  1,000,000 and the average aggregate inventory
  value is 25,000, which of the following is the
  inventory turnover?
• 10
• 25
• 40
• 50
• None of the above

Answer c. 40 (1,000,000/25,00040)
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Question Bowl
10-44

• If the cost of goods sold for a company is
  250,000 and the average aggregate inventory
  value is 5,000, which of the following is the
  inventory turnover?
• 10
• 25
• 40
• 50
• None of the above

Answer d. 50 (250,000/5,00050)
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Question Bowl
10-45

• If the cost of goods sold for a company is
  1,000,000 and the average aggregate inventory
  value is 50,000, which of the following is the
  weeks of supply measure for supply chain
  performance?
• 1 week
• 2.6 weeks
• 20 weeks
• 30 weeks
• None of the above

Answer b. 2.6 (50,000/1,000,000)x522.6)
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Question Bowl
10-46

• Which of the following refers to the phenomenon
  of increasing variability as we move from the
  customer to the producer in the supply chain?
• Continuous replenishing
• Stable supply process
• Evolving supply process
• Agile supply chains
• None of the above

Answer e. None of the above (The correct term is
Bullwhip effect.)
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Question Bowl
10-47

• Which of the following are reasons why an
  organization should use outsourcing as a supply
  chain strategy?
• Reduces investment in assets
• Turns fixed costs into variable costs
• Gives employees a stronger career
• All of the above
• None of the above

Answer d. All of the above
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Question Bowl
10-48

• Which of the following transportation modes
  provides flexibility in delivery, timing and at
  reasonable rates for small quantities and over
  short distances?
• Rail
• Highway (trucking)
• Water
• Pipeline
• Air

Answer b. Highway (trucking)
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End of Chapter 10