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Supply Chain Strategy


Chapter 10 How Supply Chain Strategy fits the Operations Management Philosophy Dell, Inc. Dell is a leader because of their fast response time. – PowerPoint PPT presentation

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Title: Supply Chain Strategy

Supply Chain Strategy
Chapter 10
How Supply Chain Strategy fits the Operations
Management Philosophy
Operations As a Competitive Weapon Operations
Strategy Project Management
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.
  • Dell is a leader because of their fast response
  • Customer orders are on delivery trucks in 36
  • 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
  • Careful supply chain management is the key.

Supply Chain
  • Supply chain The network of services, material,
    and information flows that link a firms 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 firms supply
    chain to meet the competitive priorities of the
    firms operations strategy.

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

Supply Chain for a Florist
Creation of Inventory
  • Inventory A stock of materials used to satisfy
    customer demand or to support the production of
    services or goods.

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 firms customers.

Inventory at Successive Stocking Points
Supply Chain
Inventory Measures of Supply Chain Performance
  • Average aggregate inventory value (AGV) is the
    total value of all items held in inventory for a

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.
  • Inventory turnover is annual sales at cost
    divided by the average aggregate inventory value
    maintained for the year.

Supply Chain Process Measures
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 firms balance sheet.
  • Working Capital Money used to finance ongoing
  • Weeks of inventory and inventory turns are
    reflected in working capital.
  • Decreasing weeks of supply or increasing
    inventory turns reduces the working capital.

Links to Financial Measures
  • Cost of Goods Sold Buying materials at a better
    price, or transforming them more efficiently,
    improves a firms 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.

Supply Chain Dynamics for Facial Tissue
Bullwhip Effect
Quantity ordered
External Value-Chain Linkages
External Causes of Supply Chain Disruption
  • Volume changes.
  • Customers may change ordered quantity or delivery
  • Service and product mix changes.
  • Customers may change the mix of ordered items.
  • Late deliveries.
  • Late deliveries can force a switch in production
  • Underfilled shipments.
  • Partial shipments can cause a switch in
    production schedule or quantity produced.

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
  • Information errors such as demand forecast
    errors, faulty inventory counts, or
    miscommunication with suppliers.

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.

E-Commerce and the Order Placement Process
The Customer Relationship 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.

Order Fulfillment at Dell, Inc.
  • Customers buy from Dell by web site,
    voice-to-voice, and face-to-face.
  • Order information is transmitted to the inventory
  • 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.

Dells Order Fulfillment Process
The Order Fulfillment Process
Inventory Placement
  • Centralized placement Keeping all the inventory
    at one location such as a firms manufacturing
    plant or a warehouse and shipping directly to
  • 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.

The Order Fulfillment Process
Vendor-Managed Inventories
  • Vendor-managed inventories (VMI) An extreme
    application of forward placement involving
    locating inventories at the customers
  • Key ingredients are
  • Collaborative effort requires trust
  • Cost savings is realized by eliminating excess
  • Customer service The supplier is frequently on
    site for improved response times and reducing
  • Written agreement on procedures, methods, and
    schedules are clearly specified.

Order Fulfillment Programs
  • Continuous Replenishment Program (CRP) A VMI
    method in which the supplier monitors the
    customers 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.

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

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 processs internal

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.

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

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.

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
  • Exchange An electronic marketplace where buying
    firms and selling firms come together to do
  • Auction A marketplace where firms place
    competitive bids to buy something.

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
  • 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.

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 products
    concept development stage and given significant,
    if not total, responsibility for the design of
    certain components or systems of the product.

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
  • Work best when firms offer a great variety of
    services or products and demand predictability is

Environment Design Factors
Mass Customization
  • Mass Customization A strategy whereby a firms
    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 customers order eliminates finished goods
  • 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.

Lean Supply Chains
  • Three key activities are required to attain a
    lean supply chain
  • 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.
  • Cost Management Limiting the number of suppliers
    and focusing on helping them reduce their costs
    through trust and friendly collaboration.
  • Supplier Development Shifting from price
    negotiations to cost management and working with
    suppliers to achieve lean operations.

  • A Make-or-buy decision is a managerial choice
    between whether to outsource a process or do it
  • Outsourcing Paying suppliers and distributors to
    perform processes and provide needed services and
  • Backward integration is a firms 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

  • Offshoring is a supply chain strategy that
    involves moving processes to another country.
    Factors that influence the offshoring decision
  • Tariffs and Taxes
  • Internet
  • Comparative labor costs
  • Logistics costs
  • Labor Laws and Unions
  • 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

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.

Which Type of Supply Chain?
  • Traditional Supply Chain is preferred when
  • Sales volumes are high.
  • Order consolidation is important.
  • Small-order fulfillment capability of suppliers
    is important.
  • Virtual Supply Chain is preferred when
  • Demand is highly volatile.
  • High service or product variety is important.