Supply Chain Management

1. Supply Chain Management Lecture 4

2. Outline • Today • Chapters 2 and ?3 • Next week • Chapter 4 • Introduction to Excel Solver/Chapter 5 • Homework 1 • Online tomorrow afternoon Friday January 21 • Due Thursday January 28

3. Examples • Successful supply chain management requires decisions on the flow of information, product, and funds

4. Strategy What is a strategy in general?

5. Strategy Corporate Strategy Competitive Strategy

6. What is Competitive Strategy? • Competitive strategy • Defines, relative to competitors, a company’s set of customer needs that it seeks to satisfy through its products and services • Wal-Mart • Everyday low prices (low cost retailer for a wide variety of products) • Coors • The coldest tasting beer in the world, brewed with Rocky Mountain spring water • Dell • Custom-made computer systems at a reasonable cost How do you execute your competitive strategy?

7. Supply Chain Cycle Reverse logistics Marketing FinanceAccountingIT Customer Product design Logistics Suppliers Manufacturing To execute a company’s competitive strategy, all functions that play a role must each develop their own strategy

8. Strategy Corporate Strategy Competitive Strategy Supply Chain Strategy

9. Competitive Strategy Supply Chain Strategy Competitive Strategy Supply Chain Strategy Competitive Strategy Supply Chain Strategy What is Supply Chain Strategy? • Supply chain strategy • Given a competitive strategy, what should a company’s supply chain do particularly well? • Wal-Mart • Everyday low prices (low cost retailer for a wide variety of products) • Buys from low cost producers, owns its infrastructure and distribution network • Coors • The coldest tasting beer in the world, brewed with Rocky Mountain spring water • Refrigerated transport, main facility near Rocky Mountains • Dell • Custom-made computer systems at a reasonable cost • Online ordering, no middle-man

10. What is Strategic Fit? • Strategic fit • Both the competitive strategy and the supply chain strategy have aligned goals • Matching customer needs with supply chain capabilities • How is strategic fit achieved? • Understanding the customer and supply chain uncertainty • Understanding the supply chain capabilities • Achieving strategic fit

11. 1. Understanding the Customer and Supply Chain Uncertainty • Understanding customer (demand) uncertainty • Demand varies along certain attributes • Quantity in each lot, response time, variety of products needed, service, price, innovation, etc • Implied demand uncertainty • Demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand

12. 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

13. 1. Understanding the Customer and Supply Chain Uncertainty • Motorola 4th Quarter Wireless Sales Growth Lower Than Order Growth, The Dow Jones News Service, Nov. 11, 1999 • Motorola announces that its inability to meet demand was due to the shortage of certain types of components • Sony Computer Says Sales of New Game Product to Be Delayed, The Dow Jones News Service, Dec. 9, 1998 • Due to production problems, Sony Computer has decided to push back, by a month, the introduction of PocketStation, a video-game product. • Apple Computer Inc. Cuts 4th-period Forecast Citing Parts Shortages, Product Delays, The Wall Street Journal, Sept. 15, 1995 • Apple announces that earnings would drop because of persistent shortages of key components and delays in ramping up production of new products.

14. 1. Understanding the Customer and Supply Chain Uncertainty

15. 1. Understanding the Customer and Supply Chain Uncertainty

16. 1. Understanding the Customer and Supply Chain Uncertainty Demand Uncertainty Demand Uncertainty Low (Functional Product) Low (Functional Product) High (Innovative Product) Low (Functional Product) Low (Functional Product) High (Innovative Product) Basic Goods, Most Commodities Efficiency, Information Integration, Auto-Replenishment, VMI (Efficient SC) Fashion, Computers, Pop Music, Toys Make-to-Order, Flexible Mfg, Accurate Response, Postponement (Flexible SC) Low (Stable Process) Low (Stable Process) Supply Uncertainty Some Power, Some Food Produce, Precious Metals 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

17. Highly efficient Somewhat responsive Highly responsive Somewhat efficient Seven-Eleven Japan Most automotiveproduction Hanes apparel Integrated steel mills 2. Understanding the Supply Chain Capabilities • Supply chain capabilities • Supply chainresponsiveness • Respond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etc • Supply chain efficiency (low cost)

18. Achieving Strategic Fit 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)

19. Achieving Strategic Fit What is the right supply chain for your product over its life cycle? Responsive supply chain Zone of strategic fit Cost-effective supply chain Implied demand uncertainty Low (functional products) High (innovative products)

20. Complete Strategic Fit Competitive Strategy Product Development Strategy Marketing and Sales Strategy Supply Chain Strategy Information Technology Strategy Finance Strategy Human Resources Strategy A firm must ensure that all its functions maintain consistent strategies that support the competitive strategy

21. Achieving Strategic Fit • Strategic fit • Given a competitive strategy, what should a company’s supply chain do particularly well? • Wal-Mart • Everyday low prices (low cost retailer for a wide variety of products) • Buys from low cost producers, owns its infrastructure and distribution network • Coors • The coldest tasting beer in the world, brewed with Rocky Mountain spring water • Refrigerated transport, main facility near Rocky Mountains • Dell • Custom-made computer systems at a reasonable cost • Online ordering, no middle-man

22. Key Observations • There is nosupply chain strategy that is always right • There is a right supply chain strategy for a given competitive strategy

23. 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

24. Further Refinement of SCM Capabilities SCM Formation/ Extensions JIT, TQM, BPR, Alliances Inventory Management/Cost Optimization Traditional Mass Manufacturing 1950s 1960s Beyond 2000s 1970s 1990s 1980s Evolution of Supply Chain Management

25. IntracompanyInterfunctionalmaximize company profit IntercompanyInterfunctionalmaximize SC surplus IntracompanyIntrafunctionalminimize functional cost IntracompanyIntraoperationminimize local cost 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

26. Scope of Strategic Fit “As the economy changes, as the competition becomes more global, it’s no longer company versus company but supply chain versus supply chain” Harold Sirkin (Vice President of the Boston Consulting Group)

27. Examples • Successful supply chain management requires decisions on the flow of information, product, and funds

28. Facilities Inventory Transportation Information Sourcing Pricing Logistical drivers Cross functional drivers From Strategy to Decisions Corporate Strategy Competitive Strategy Supply Chain Strategy Responsiveness Efficiency

29. 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 Supply Chain Drivers

30. 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 Facilities Overall tradeoff: Cost of the number, location and type versus level of responsiveness How could a car manufacturer increase responsiveness through its facilities?

31. Honda • East Liberty, OH • Using Honda's flexible manufacturing, this plant produces cars and light trucks on the same assembly line • Marysville, OH • One of the most integrated and flexible auto plants in North America, it houses stamping, welding, paint, plastic injection molding and assembly under one roof.

32. 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 Inventory Overall tradeoff: Level of inventory versus level of product availability How could a grocery retailer use inventory to increase responsiveness?

33. 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 Transportation Overall tradeoff: Cost and speed of transportation How does Dell use transportation to improve responsiveness?

34. 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)

35. IKEA

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

37. Information

38. 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 Sourcing Overall tradeoff: Increased supply chain profit versus additional risk

39. Sourcing

40. 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 Pricing Overall tradeoff: Increase company profits How can Peapod use pricing of its delivery services to improve profitability?