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SUPPLY CHAINS

SUPPLY CHAINS. September 19, 2002. OUTLINE FOR LECTURE. Value chain vs. supply chain Nature of the product and supply chain functional innovative The physical value chain vs. the virtual value chain Supply chains in agriculture. VALUE CHAIN.

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SUPPLY CHAINS

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  1. SUPPLY CHAINS September 19, 2002

  2. OUTLINE FOR LECTURE • Value chain vs. supply chain • Nature of the product and supply chain • functional • innovative • The physical value chain vs. the virtual value chain • Supply chains in agriculture

  3. VALUE CHAIN • Series of value adding activities connecting a company’s supply side with its demand side. • Supply side activities include raw materials, inbound logistics and production processes. • Demand side activities include outbound logistics, product development, marketing and sales.

  4. SUPPLY CHAIN • All activities necessary to provide a product or service to the customer • Supply chain goes beyond the firm to encompass all value-adding activities involved. • One can think of a supply chain as a value chain with all the activities involved--no longer confined to the activities of a firm.

  5. DEVISING THE RIGHT SUPPLY CHAIN • Critical to success • As much as $30 billion wasted annually in the U.S. food industry because of poor coordination (1998).

  6. EVIDENCE OF SUPPLY CHAIN PROBLEMS • Dysfunctional industry practices--price promotions in grocery business • High costs • Excess of some products and shortage of others--markdowns and stockouts at the same time

  7. CATEGORIZING PRODUCTS BASED ON DEMAND PATTERNS • Functional products are products that satisfy basic needs and, hence, do not change much over time. Thus they have stable, predictable demand and long life cycles, e.g., canned soup, loaf bread, raw meats. • Innovative products have unpredictable demands and short life cycles, e.g. apparel and hybrid seed corn.

  8. Functional Products Low margins long life cycle low product variety demand predictable low stockout rate zero mark downs long lead times for made to order Innovative high margins short life cycles high product variety demand unpredictable high stockout rates end of season mark downs short lead time for made to order COMPARISONS

  9. TWO FUNCTIONS OF A SUPPLY CHAIN • Physical--converting from raw material to final product delivered to consumer • Market mediation--ensuring that the variety of products reaching marketplace matches what consumers want to buy.

  10. PHYSICAL COSTS • Costs of production, transportation and inventory storage

  11. MARKET MEDIATION COSTS • Costs that arise when • supply exceeds demand and product has to be marked down and sold at a loss or • supply falls short of demand, resulting in lost sales opportunities and dissatisfied customers. • Mediation costs are low for functional products, but high for innovative products. ( Key to design of the supply chain.)

  12. Functional Innovative MATCHING SUPPLY CHAIN TO PRODUCT Product Match Mismatch Mismatch Supply Chain Match Efficient Responsive

  13. EFFICIENT SUPPLY OF FUNCTIONAL PRODUCTS--e.g. • Continuous replenishment, Campbell Soup, 1991 • using EDI retailers each morning report demand for all Campbell’s products and inventories in distribution centers. • Campbell uses the info to forecast future demand and to determine what products require replenishment. Trucks leave and deliver on same day the needed replenishment. • Did away with price promotions • Stores that gave discounted price, given lower price from Campbell.

  14. ECONOMIC IMPACT ON RETAILER • Most retailers figure that the cost of inventory for a year is 25% of what they pay for the product. • A two week inventory reduction represents a cost saving of about 1% of sales. • Translates to a 50% increase in profit when retailer’s average profit is 2% of sales.

  15. ECONOMIC IMPACT ON CAMPBELL • Campbell’s sales grew twice as fast • Because retailers liked what program did they • carried broader line of Campbell products • gave more shelf space

  16. RESPONSIVE SUPPLY FOR AN INNOVATIVE PRODUCT • Sports Obermeyer manufactures fashion ski wear • 95% new design each year • Early order from key retailers as basis to forecast demand to within 10% • Announced to employees the cost of each extra day delay. Employees suggested how to improve responsiveness at least cost. • Consensus forecasts by six member forecasting committee to identify the best.

  17. ECONOMIC IMPACT OF ACCURATE RESPONSE SYSTEM • Obermeyer’s cut costs of over and under production in half, which increased net by 60%. • Retailers happy with Obermeyer’s more responsiveness.

  18. AN AGRICULTURAL EXAMPLE--PIONEER HYBRID • Reducing lead time to breed and deliver new varieties that growers will choose. • Improved forecasting of grower demand based on test plot yields instead of advanced orders (This is the key.) • Improved sales and profitability • Pioneer sees itself as an information company.

  19. LECTURE SUMMARY • Value chain vs. supply chain • Nature of the product and supply chain • functional • innovative

  20. DISCUSSION OF SUPPLY CHAINS IN FOOD AND AGRICULTURE

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