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Supply Chain Strategy

OBJECTIVES
Supply-Chain Measuring Bullwhip

Management : Define

Supply-Chain Performance

Effect

Outsourcing Global Value Mass

Sourcing

Density Customization

What is a Supply Chain?

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

Services

Suppliers

Service support operations Transformation

Local service providers Localization

Customers

Supply networks Manufacturing

Inputs

Output

Suppliers

Manufacturing

Distribution

Customers

What is Supply Chain Management?

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

customer

Supply Chain Mgt.-Understanding the Concept

What is a Supply Chain? Consists of all parties involved directly or indirectly in fulfilling a customer order. Is dynamic and involves the constant flow of information, materials and funds between different stages. Objectives of a Supply Chain

Should be to maximize the overall value generated.

Higher the supply chain profitability, the more successful is the supply chain. Importance of Supply Chain Decisions Supply chain design, planning and operation decisions play a significant role in the success or failure of a company.

Business/ Economic factors shaping Supply Chain Management

Consumer demand

Globalization
Competition Information & communication Inventories Transportation Facilities Government regulations Environment

SCM Network
Material Flow D1 S2 S2 S1 R1 C

S1

Manufacturer

D2

R2

S2
Tier 2 Supplier

S1
Tier 1 Supplier

D3 Information Flow
Distributors

R3
Retailers

C
Customers

Typical Supply Chains

Purchasing

Receiving

Operations

Distribution

Storage

Storage

Typical supply chain for a Manufacturer

Supplier Supplier Supplier
Distributor Retailer Customer

Storage

Manufacturer

Storage

Typical supply chain for a Service

Supplier
Storage Service Customer

Supplier
PRODUT / SERVICES INFORMATION FINANCES

Supply Chain Decision Making Framework

Competitive Strategy

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Supply Chain Strategy

Efficiency

Supply Chain Structure

Responsiveness

Inventory

Transportation

Facilities

Information

SCM Drivers

Formulas for Measuring SupplyChain Performance

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One of the most commonly used measures in all of operations management is Inventory Turnover

Cost of goods sold Inventoryturnover Average aggregate inventoryvalue

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

Average aggregate inventoryvalue 52 weeks Weeks of supply Cost of goods sold

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Example of Measuring SupplyChain Performance

Suppose a companys new annual report claims their costs of goods sold for the year is Rs 16 crore and their total average inventory (production materials + work-in-process) is worth Rs 3.5 crore. This company normally has an inventory turn ratio of 10. What is this years Inventory Turnover ratio? What does it mean?

Example of Measuring SupplyChain Performance (Continued)

Cost of goods sold Inventoryturnover Average aggregate inventoryvalue
= 16/3.5 = 4.57 Since the companys normal inventory turnover ratio 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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The Old Paradigm: Push Strategies

Production decisions based on long-term forecasts Ordering decisions based on inventory & forecasts What are the problems with push strategies?

Inability to meet changing demand patterns Obsolescence The bullwhip effect:

Excessive

inventory Excessive production variability Poor service levels

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A Newer Paradigm: Pull Strategies

Production is demand driven

Production and distribution coordinated with true customer demand Firms respond to specific orders

Pull Strategies result in:

Reduced lead times (better anticipation) Decreased inventory levels at retailers and manufacturers Decreased system variability Better response to changing markets

But:
Harder to leverage economies of scale Doesnt work in all cases

Push and Pull Systems

What

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are the advantages of push systems? What are the advantages of pull systems? Is there a system that has the advantages of both systems?

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A new Supply Chain Paradigm

A

shift from a Push System...

Production decisions are based on forecast

to

a Push-Pull System

Push-Pull Supply Chains

The Supply Chain Time Line

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Suppliers

Customers

PUSH STRATEGY
Low Uncertainty

PULL STRATEGY
High Uncertainty Push-Pull Boundary

Bullwhip Effect
Inventories are progressively larger moving backward through the supply chain.

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Tier 2 Suppliers

Tier 1 Suppliers

Producer (Mfg)

Distributor

Retailer

Upstream Note : Last but not the least the final customer

Downstream

= Amount of Inventory

Hau Lees Concepts of Supply Chain Management

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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

Hau Lees SC Uncertainty Framework

Demand Uncertainty

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Low (Functional products)

Low (Stable Process) High (Evolving Process) Efficient SC Ex.: Grocery Risk-Hedging SC

High (Innovative products)

Responsive SC Ex.: Computers Agile SC

Supply Uncertainty

Ex.: Hydroelectric power

Ex.: Telecom

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What is Outsourcing?

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

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

Global Sourcing

Steel Aluminum

Tires

Gears

Steel Castings Tires Al Alloy

Eltxn. parts Pig Iron

Potential Supply Chain Linkages

North America Europe Far East

Market A

Market B

Market C Markets

Plant 1

Plant 2

Plant 3

Manufacturing Locations

Source A Figure 16.3

Source B

Source Source C Locations

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Value Density

Value density is defined as the value

of an item per kilogram 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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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

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Question Bowl
A typical supply chain would include which of the following? a. Suppliers b. Manufacturers c. Distribution d. All of the above e. None of the above

Answer: d. All of the above

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Question Bowl
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

a.
b.

c. d. e.

Answer: b. Costs of goods sold/Avg. aggregate inventory value

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Question Bowl
If the cost of goods sold for a company is Rs1,000,000 and the average aggregate inventory value is Rs25,000, which of the following is the inventory turnover? a. 10 b. 25 c. 40 d. 50 e. None of the above

Answer: c. 40 (1,000,000/25,000=40)

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Question Bowl
If the cost of goods sold for a company is Rs250,000 and the average aggregate

inventory value is Rs5,000, which of the

following is the inventory turnover?
a. b. c. d. e.

10

25
40 50 None of the above

Answer: d. 50 (250,000/5,000=50)

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Question Bowl
If the cost of goods sold for a company is Rs1,000,000 and the average aggregate inventory value is Rs50,000, which of the following is the weeks of supply measure for supply chain performance? a. 1 week b. 2.6 weeks c. 20 weeks d. 30 weeks e. None of the above

Answer: b. 2.6 (50,000/1,000,000)x52=2.6)

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Question Bowl
Which of the following refers to the phenomenon of increasing variability as we move from the

customer to the producer in the supply chain?

a. b. c. d. e.

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
Which of the following are reasons why an organization should use outsourcing as a

supply chain strategy?

a. b. c. d. e.

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
Which of the following transportation modes provides flexibility in delivery, timing and at reasonable rates for small quantities and over short distances?
a. b. c. d. e.

Rail Highway (trucking) Water Pipeline Air

Answer: b. Highway (trucking)