Supply Chain Management

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Supply Chain Management

• Lecture 4

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Outline

• Today
• Chapters 2 and 3
• Next week
• Chapter 4
• Introduction to Excel Solver/Chapter 5
• Bring a laptop if you can on Thursday September
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• Homework 1
• Due Tuesday September 8

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Strategy
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
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How is Strategic Fit Achieved?

• Understanding the customer and supply chain
  uncertainty
• Understanding the supply chain capabilities
• Achieving strategic fit

Matching customer needs with supply chain
capabilities
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1. Understanding the Customer and Supply Chain
Uncertainty

• Understanding customer uncertainty
• Demand varies along certain attributes
• Quantity in each lot, response time, variety of
  products needed, convenience, price, innovation,
  etc
• Implied demand uncertainty
• Demand uncertainty due to the portion of demand
  that the supply chain is targeting, not the
  entire demand

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1. Understanding the Customer and Supply Chain
Uncertainty

• Understanding supply uncertainty
• Supply uncertainty is strongly affected by the
  life-cycle position of the product. New products
  being introduced have higher supply uncertainty
  than mature products

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1. Understanding the Customer and Supply Chain
Uncertainty
Demand Uncertainty
Demand Uncertainty
Low (Functional Product)
High (Innovative Product)
Low (Functional Product)
Low (Functional Product)
High (Innovative Product)
Low (Functional Product)
Basic Appeals, Grocery, Food, Most Commodities
Efficiency, Information Integration,
Auto-Replenishment, VMI (Efficient SC)
Fashion Appeals, Computers, Pop Music, Toys
Build-to-Order, Flexible Mfg, Accurate Response,
Postponement (Flexible SC)
Low (Stable Process)
Low (Stable Process)
Supply Uncertainty
Some Power, Some Food Produce, Precious Metals
M-commerce, Telecom, High-end Servers,
Semiconductor
Buffer Inventory, Shared Resources,
Multi-Sourcing, Info Sharing (Risk-Hedging SC)
Supply Network, Postponement, Design
Collaboration (Agile SC)
High (Evolving Process)
High (Evolving Process)
Source Hau Lee, Aligning supply chain
strategies with product uncertainties,
California Management Review, 44(3), 2002
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2. Understanding the Supply Chain Capabilities

• Supply chain capabilities
• Supply chain responsiveness
• Respond to wide ranges of quantity demanded,
  short lead times, large variety, innovative
  products, high service level, etc
• Supply chain efficiency/cost

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2. Understanding the Supply Chain Capabilities
Responsiveness
High
Low
Cost
High
Low
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Responsiveness or Efficiency?
What is the right supply chain for your product?
Responsive supply chain
Zone of strategic fit
Cost-effective supply chain
Implied demand uncertainty
Low (functional products)
High (innovative products)
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Key Observations

• There is no supply chain strategy that is always
  right
• There is a right supply chain strategy for a
  given competitive strategy

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Complete Strategic Fit
Corporate Competitive Strategy
Product Development Strategy
Marketing and Sales Strategy
Supply Chain Strategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy
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Issues Affecting Strategic Fit

• Increasing variety of products
• Firms sell different products to different
  customer segments
• Decreasing product life cycles
• Demand and supply characteristics change as a
  product goes through its life cycle
• Increasingly demanding customers
• Customers are constantly demanding improvements
• Fragmentation of supply chain ownership
• Harder to coordinate a supply chain broken into
  many owners
• Globalization and competitive changes over time
• More competitors may result in an increased
  emphasis on variety at a reasonable price

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Scope of Strategic Fit
Suppliers
Manufacturer
Distributor
Retailer
Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
Integration of business functions, departments,
and companies leads to successful SCM
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Evolution of Supply Chain Management
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From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
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Facilities

• Facility decisions
• Production facility
• Flexible versus dedicated
• Product focus (fabrication and assembly) versus
  functional focus (fabrication or assembly)
• Storage facility
• Cross-docking versus storage

• Metrics
• Capacity
• Utilization
• Flow time (theoretical and actual)
• Flow time efficiency
• Product variety
• Average batch size
• Service level

Overall tradeoff Cost of the number, location
and type versus level of responsiveness
How could a bicycle manufacturer increase
responsiveness through its facilities?
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Inventory

• Inventory decisions
• Cycle inventory
• Safety inventory
• Seasonal inventory
• Level of product availability

• Metrics
• Average inventory
• Units that have been in stock for more than a
  specified period of time
• Fill rate (fraction of orders that were met on
  time from inventory)
• Fraction of time out of stock

Overall tradeoff Level of inventory versus level
of product availability
How could a grocery retailer use inventory to
increase responsiveness?
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Transportation

• Transportation decisions
• Design of transportation network
• Route and network selection
• Mode of transportation
• Air, package carriers, truck, rail, sea,
  pipeline, intermodal,

• Metrics
• Inbound/outbound cost
• Inbound/outbound cost per shipment
• Shipment sizes
• Fraction transported by mode

Overall tradeoff Cost and speed of transportation
How does Dell use transportation to improve
responsiveness?
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Amazon.com

• Fulfillment and warehousing locations
• Arizona, USA Phoenix, Goodyear
• Delaware, USA New Castle
• Indiana, USA Whitestown, Munster
• Kansas, USA Coffeyville
• Kentucky, USA Campbellsville, Hebron (near CVG),
  Lexington, and Louisville
• Nevada, USA Fernley and Red Rock (near 4SD)
• Pennsylvania, USA Carlisle, Chambersburg,
  Hazleton, and Lewisberry
• Texas, USA Dallas/Fort Worth
• Ontario, Canada Mississauga (a Canada Post
  facility)

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IKEA
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Information
Information serves as the connection between
various stages of a supply chain
Information is crucial to the daily operations of
each stage in a supply chain
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Information

• Information decisions
• Push vs. Pull
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies

• Metrics
• Forecast horizon
• Forecast errors
• Ratio of demand variability and order variability

Accurate information helps both efficiency and
responsiveness
How does Wal-Mart use information to improve its
supply chain operations?
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Information
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Sourcing

• Sourcing decisions
• In-House or outsource
• Supplier selection

• Metrics
• Days payable outstanding
• Purchase price statistics
• Purchase quantities
• Fraction on-time deliveries
• Supply quality and lead-time

Overall tradeoff Increased supply chain profit
versus additional risk
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Sourcing
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Pricing

• Pricing decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu price

• Metrics
• Profit margin
• Average sale price
• Average order size
• Incremental fixed cost per order
• Incremental variable cost per unit

Accurate information helps both efficiency and
responsiveness
How can Peapod use pricing of its delivery
services to improve profitability?
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Supply Chain Drivers

• Facilities
• Inventory
• Transportation
• Information
• Sourcing
• Pricing

• Chapters 5, 6
• Chapters 10, 11, 12
• Chapters 4, 13
• Chapters 7, 8, 9, 16, 17
• Chapter 14
• Chapter 15

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Seven-Eleven Japan

• Background
• Exponential growth
• From 2,651 stores in 1985 to 10,303 in 2003
• Total sales (including franchise stores) 21
  billion, with 841 million in net profits
• Most profitable retail chain store in Japan
• Average inventory turns 55 per year
• Compared to 7.5 turns per year at Wal-Mart