Supply Chain Management

Overview
What is it? Supply chain strategies Purchasing -> Read
Outsourcing Partnering

Managing the supply chain

Postponement Channel assembly READ others

Efficient vs. responsive supply chain ========================= Vendor selection -> Read

Supply Chain Management

Coordinates and manages all activities
of the supply chain Components of the supply chain:
External distribution Internal functions External suppliers

Supply Chain

Distribution center

Distribution center

Manufacturer

Tier 1

Tier 2

Tier 3

Legend

Supplier of services

Supplier of materials

External Distributors
Distribution center Distribution center

Internal functions
Tier 1

Manufacturer

External Suppliers

Tier 2

Tier 3

Legend

Supplier of services

Supplier of materials

Milk Supply Chain

External Distributors Packaging Operation Internal functions External Suppliers Tier 1

Tier 2

Tier 3

Supply-Chain Strategies
Many suppliers
Long-term suppliers Vertically integrate Keiretsu Virtual company

Many Suppliers Strategy

Many sources per item

Adversarial relationship
Short-term Little openness Negotiated, sporadic POs Infrequent, large lots Delivery to receiving dock
1995 Corel Corp.

Few Suppliers Strategy

1 or few sources per item Partnership (JIT) Long-term, stable On-site audits & visits Exclusive contracts Frequent, small lots
1995 Corel Corp.

Delivery to point of use

Few suppliers strategy Wallace Co.

Partnering
Listening to the needs of the customer Vendor-stocking program 98% on-time delivery Quick response on problems for customer

Daimler Chryslers Supplier Cost Reduction Effort

Supplier Suggestion
Rockwell Rockwell Use passenger car door locks on trucks Simplify design/substitute materials on manual window system Change tooling for woodgrain panels to allow three from one die instead of two Change wiper-blade formulation

Model Savings
Dodge trucks Various $280,000 $300,000

3M

Caravan, Voyager Various

$1,500,000

Trico Leslie Metal Arts

$140,000 $1,500,000

Exterior lighting suggestions Various

Vertical Integration Strategy

Ability to produce goods
previously purchased
Setup operations Buy supplier

Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)

Make-buy issue Major financial

commitment
Hard to do all things well

Vertical Integration

RAC "MiG" is the first Russian "vertically" integrated aircraft manufacturing company

Keiretsu Network Strategy

Uniquely Japanese form of corporate organization System of mutual alliances and cross-ownership
Company stock is held by allied firms

Lowers need for short-term profits

Two types: horizontal and vertical

Vertical Keiretsu
Links manufacturers, suppliers, distributors, & lenders
Partnerships extend across entire supply chain

Primarily cars and electronics industries Ex. Toyota, Nissan, Honda-Matsushita, Hitachi, Toshiba, Sony

Virtual Company Strategy

Network of independent companies
Linked by technology
PCs, faxes, Internet etc.

Each contributes core competencies Typically provide services

Payroll, editing, designing

May be long or short-term

Usually, only until opportunity is met
1995 Corel Corp.

Virtual company - Biogen

Formed in 1978 with a simple, research-centered business model
Develop drugs and sell licenses to pharmaceutical companies

Received preliminary approval to market Avonex (reduces the progression of M.S.)

Virtual company - Biogen

Four major tasks to produce Avonex
Bulk manufacturing Formulation Packaging Warehousing /Distribution

Virtual company - Biogen

Four major tasks to produce Avonex
Bulk manufacturing Formulation Packaging Warehousing /Distribution

Ben Venue Labs (OH)

Virtual company - Biogen

Packaging Four major tasks to produce Avonex Coordinators

(Philadelphia
Bulk manufacturing Formulation Packaging Warehousing /Distribution

Ben Venue Labs (OH)

Virtual company - Biogen

Packaging Four major tasks to produce Avonex Coordinators

(Philadelphia
Bulk manufacturing Formulation Packaging Warehousing /Distribution

Ben Venue Labs (OH)

Amgen Louisville facility

Virtual company - Biogen

Biogen managed the network of partners Success story
FDA approval to market was 35 hours No product shortages No recalls Production increased 5-fold over the next 3 years

Virtual company - Biogen

Benefits to Biogen
Competitive cost structure Had limited and small scale production experience Fixed assets low Capital investment was low compared to the size of its business Investment risk was shared by partners

Managing the Supply-Chain Options:

Postponement Channel assembly Drop shipping Blanket orders Electronic ordering and funds transfer Vendor managed inventory Standardization Internet purchasing (e-procurement)

Postponement
A tactic used by assemble-to-order and mass-customization firms Delay the customization of a product or service until the last possible moment e.g. Drug company produces the drug as a powder. When orders are received then produce tablets in the dosage for which the order was received.

Channel assembly
A form of postponement Utilize the distribution channel as an assembly station Warehouse performs a value-added service e.g. Car battery manufacturer produces batteries for several private labels. The manufacturer ships unmarked batteries to warehouse. When orders are received, warehouse places decals for the brand name and packages for that private label.

Purchasing
Outsourcing
Make or buy decision

Partnering

Outsourcing
Choosing to purchase a service or part from an outside source; Make or buy decision Insourcing vs. outsourcing decision Advantages Allows the firm to focus on core competencies Adds capacity without additional fixed cost and overhead Can be more cost effective Supports market agility

Hourly Labor Rates

Germany Belgium Scand Japan Austria U.S. France Canada U.K. Ireland US CEM Taiwan Brazil Czech Republic Mexico Malaysia China $2.00 $1.75 $1.52 $0.82 $30.00 $5.89 $4.75 $19.37 $18.50 $18.24 $17.97 $16.55 $15.47 $13.57 $13.50 $22.82 $22.24 $28.28

Key Is Total Cost Of Ownership

$0.00 $15.00 Source: http://stats.bls.gov/news.release/ichcc.t02.htm (1997data)+company records

Li & Fung - Outsourcing

Hong Kong based exporter American and European customer base The Limited is one of their customers Receive order for 10,000 garments:
Purchase yarn from Korean company Have the yarn dyed and woven by a company in Taiwan Purchase Japanese buttons and zippers from YKKs Chinese plants Garments made in 5 different plants in Thailand

Partnering
Process of developing a long-term relationship with a supplier based on:
mutual trust shared vision shared information shared risk

Beer distribution game

Consider a simplified beer supply chain,
A retailer who sells to the customer A wholesaler which supplies the retailer A distributor which supplies the wholesaler A factory with unlimited raw materials which makes (brews) the beer and supplies the distributor

Each component in the supply chain has:

unlimited storage capacity fixed supply lead-time order delay time between each component

Beer distribution game

Beer distribution game

Each week, each component in the supply chain tries to meet the demand of the downstream component. Any orders that cannot be met are recorded as backorders, and are met as soon as possible. No orders will be ignored, and all orders must eventually be met.

Beer distribution game

At each period, each component in the supply chain is charged a $1.00 shortage cost per backordered item. At each period, each location is charged $.50 inventory holding cost per inventory item that it owns. Each component owns the inventory at that facility. In addition,
the wholesaler owns inventory in transit to the retailer; the distributor owns inventory in transit to the wholesaler; the factory owns both items being manufactured and items in transit to the distributor.

Beer distribution game

Each supply chain member orders some amount from its upstream supplier. It takes one week for this order to arrive at the supplier. Once the order arrives, the supplier attempts to fill it with available inventory. There is a two week transportation delay before the material being shipped by the supplier arrives at the customer who placed the order.

Supply-Chain Dynamics

Supply-Chain Dynamics
Customer Customer

Firm A

(a)

Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

(a)

Supply-Chain Dynamics
Customer Customer

Firm A

Firm B

Firm C
(a)

Supply-Chain Dynamics
Customer Customer Materials requirements

Firm A

Firm B

Firm C Time
(a) (b)

Supply-Chain Dynamics
Customer Customer Materials requirements

Firm A

Firm B

Firm A

Firm C Time
(a) (b)

Supply-Chain Dynamics
Customer Customer Materials requirements Firm C

Firm A

Firm B

Firm A

Firm C

Time
(a)
(b)

Supply-Chain Dynamics
Materials requirements

Bullwhip effect
Inaccurate or distorted demand information created in the supply chain

Firm C

Firm A

Time

Supply-Chain Environments
Two supply chain designs for competitive advantage
Efficient supply chain
Goal is to minimize inventories and maximize the efficiency of manufacturers and suppliers in the chain

Responsive supply chain

Goal is to react quickly to market demands by positioning inventories and capacities in order to hedge against uncertainties of demand

Supply-Chain Environments
Environments Best Suited for Efficient and Responsive Supply Chains

Supply-Chain Environments
Environments Best Suited for Efficient and Responsive Supply Chains

Factor
Demand Competitive priorities

New-product introduction Contribution margins Product variety

Supply-Chain Environments
Environments Best Suited for Efficient and Responsive Supply Chains

Factor
Demand Competitive priorities

Efficient Supply Chains

Predictable; low forecast errors Low cost; consistent quality; on-time delivery

New-product introduction Contribution margins Product variety

Infrequent Low

Low

Supply-Chain Environments
Environments Best Suited for Efficient and Responsive Supply Chains

Factor
Demand Competitive priorities

Efficient Supply Chains

Predictable; low forecast errors Low cost; consistent quality; on-time delivery

Responsive Supply Chains

Unpredictable; high forecast errors Development speed; fast delivery times; customization; volume flexibility; highperformance design quality Frequent High

New-product introduction Contribution margins Product variety

Infrequent Low

Low

High