Chapter 10
Supply Chain Strategy
10-2
OBJECTIVES
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Supply-Chain Management
Measuring Supply-Chain Performance
Supply Chain Decisions
Cycle and Push-Pull View of Supply
Chains
Bullwhip Effect
Outsourcing
Value Density
Mass Customization
10-3
What is a Supply Chain?
• Supply-chain is a term that describes
how organizations (suppliers,
manufacturers, distributors, and
customers) are linked together
10-4
What is Supply Chain Management?
• Supply-chain management
is a total system approach to
managing the entire flow of
information, materials, and
services from raw-material
suppliers through factories
and warehouses to the end
customer
What is a Supply Chain?
P&G or other
manufacturer
Jewel or third
party DC
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
What is a Supply Chain?
P&G or other
manufacturer
Jewel or third
party DC
Plastic
Producer
Tenneco
Packaging
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Chemical
manufacturer
(e.g. Oil Company)
What is a Supply Chain?
P&G or other
manufacturer
Jewel or third
party DC
Plastic
Producer
Tenneco
Packaging
Chemical
manufacturer
(e.g. Oil Company)
Paper
Manufacturer
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Chemical
manufacturer
(e.g. Oil Company)
Timber
Industry
10-8
Formulas for Measuring Supply-Chain Performance
•
One of the most commonly used
measures in all of operations
management is “Inventory Turnover”
Cost of goodssold
Inventoryturnover
Averageaggregateinventoryvalue
•
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
 Averageaggregateinventoryvalue
 52 weeks
Weeksof supply 
Cost of goodssold


10-9
Example of Measuring Supply-Chain Performance
Suppose a company’s new annual report
claims their costs of goods sold for the
year is $160 million and their total average
inventory (production materials + work-inprocess) is worth $35 million. This
company normally has an inventory turn
ratio of 10. What is this year’s Inventory
Turnover ratio? What does it mean?
10-10
Example of Measuring Supply-Chain Performance (Continued)
Cost of goodssold
Inventoryturnover
Averageaggregateinventoryvalue
= $160/$35
= 4.57
Since the company’s normal inventory turnover ration
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.
Decision Phases of a Supply Chain
• Supply chain strategy or
design
• Supply chain planning
• Supply chain operation
Supply Chain Strategy or Design
• Decisions about the structure of the supply
chain and what processes each stage will
perform
• What are some strategic supply chain
decisions?
– Locations and capacities of facilities
– Products to be made or stored at
various locations
– Modes of transportation
– Information systems
• Chain design must support strategic
objectives
• Design decisions are long-term and
expensive to reverse – must address
market uncertainty
Supply Chain Planning
• Definition of a set of policies that
govern short-term operations
• Fixed by the supply configuration
from previous phase
• Starts with a forecast of demand
in the coming year
Supply Chain Planning
• What are some planning decisions?
– Which markets will be supplied from
which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market
promotions
• Must consider in planning decisions
demand uncertainty, exchange rates,
competition over the time horizon
Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and
operating policies are determined
• Goal is to implement the operating policies as
effectively as possible – some examples?
• Allocate orders to inventory or production, set
order due dates, generate pick lists at a
warehouse, allocate an order to a particular
shipment, set delivery schedules, place
replenishment orders
• Much less uncertainty (short time horizon)
Process View of a Supply Chain
• Cycle view: processes in a supply
chain are divided into a series of
cycles, each performed at the
interfaces between two successive
supply chain stages
• Push/pull view: processes in a supply
chain are divided into two categories:
– Executed in response to a customer
order (pull)
– Executed in anticipation of a
customer order (push)
Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Cycle View of a Supply Chain
• Each cycle occurs at the interface
between two successive stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributormanufacturer)
• Procurement cycle (manufacturersupplier)
• Cycle view clearly defines processes
involved and the owners of each process.
Specifies the roles and responsibilities of
each member and the desired outcome
of each process.
Customer Order Cycle
• Involves all processes directly
involved in receiving and filling the
customer’s order
• Customer arrival
• Customer order entry
• Customer order fulfillment
• Customer order receiving
Replenishment Cycle
• All processes involved in
replenishing retailer inventories
(retailer is now the customer)
• Retail order trigger
• Retail order entry
• Retail order fulfillment
• Retail order receiving
Manufacturing Cycle
• All processes involved in
replenishing distributor (or retailer)
inventory
• Order arrival from the distributor,
retailer, or customer
• Production scheduling
• Manufacturing and shipping
• Receiving at the distributor,
retailer, or customer
Procurement Cycle
• All processes necessary to ensure that
materials are available for manufacturing
to occur according to schedule
• Manufacturer orders components from
suppliers to replenish component
inventories
• However, component orders can be
determined precisely from production
schedules (different from
retailer/distributor orders that are based
on uncertain customer demand)
• Important that suppliers be linked to the
manufacturer’s production schedule
Push/Pull View of Supply Chains
Procurement,
Manufacturing and
Replenishment cycles
PUSH PROCESSES
Customer Order
Cycle
PULL PROCESSES
Customer
Order Arrives
Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation
of customer orders (speculative)
• Push/pull boundary separates push
processes from pull processes
• Strategic supply chain decisions may lead
to changing the push/pull boundary
Example: L.L. Bean
• Where is the push/pull boundary
for L.L. Bean?
• Customer order cycle is pull,
remaining processes are push
• What are the implications of
moving the boundary to the
replenishment cycle?
Example: Dell
• Where is the push/pull boundary
for Dell?
• Customer and manufacturing is a
pull cycle
• Procurement is a push cycle
• What are the implications of
moving the boundary to the
customer cycle?
L.L. Bean vs. Dell Computer
How would you compare the two cycles?
Dell has fewer stages (customer,
manufacturer, supplier) and more pull
processes than L.L. Bean
Can these differences affect supply chain
performance?
For Dell, no FG inventory, very low
component inventory, supplier
integration (demand info, part quality),
faster new product introduction,
outsources service/support (better
coord.), close tracking of cash flows
Example: Snapple Acquisition
• Quaker owns Gatorade and acquired
Snapple in 1994 and tried to synergize
the two distribution systems
– Snapple produced under contract, sold
through restaurants, strong in
northeast and west coast
– Gatorade manufactured by Quaker’s
plants, sold in supermarkets and
grocery stores, strong in south and
southwest
• Efforts to merge supply chains failed, and
in 28 months Quaker sold Snapple for
20% less than purchase price
The Importance of Supply
Chain Flows
• Close connection between design
and management of supply chain
flows (product, information, and
cash) and supply chain success
• Dell: success
• Quaker Oats (Snapple): failure
• Supply chain decisions can play a
significant role in the success or
failure of a firm
10-30
Bullwhip Effect
The magnification of variability in orders in the supplychain
Retailer’s Orders
Wholesaler’s Orders
Time
A lot of
retailers each
with little
variability in
their orders….
Time
…can lead to
greater variability
for a fewer number
of wholesalers,
and…
Manufacturer’s Orders
Time
…can lead to
even greater
variability for a
single
manufacturer.
10-31
Hau Lee’s Concepts of Supply Chain Management
• Hau Lee’s approach to supply chain (SC) is
one of aligning SC’s 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 SC’s
– Efficient SC’s
– Risk-Hedging SC’s
– Responsive SC’s
– Agile SC’s
10-32
Hau Lee’s SC Uncertainty Framework
Demand Uncertainty
Supply
Uncertainty
Low
(Stable
Process)
High
(Evolving
Process)
Low (Functional
products)
High (Innovative
products)
Efficient SC
Responsive SC
Ex.: Grocery
Ex.: Computers
Risk-Hedging SC
Agile SC
Ex.: Hydroelectric power
Ex.: Telecom
Types of Supply Chain Strategies
• Efficient – highest cost efficiency
• Risk-hedging – pool and share
resources so that risks in supply
disruption can be shared
• Responsive – be responsive and
flexible to customer needs
• Agile – be responsive and flexible to
customers, hedge risks of supply
shortages
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What is Outsourcing?
Outsourcing is defined as the
act of moving a firm’s
internal activities and
decision responsibility to
outside providers
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Reasons to Outsource
• Organizationally-driven
• Improvement-driven
• Financially-driven
• Revenue-driven
• Cost-driven
• Employee-driven
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Value Density
• Value density is defined as
the value of an item per
pound 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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Sourcing/Purchasing-System
Design Matrix
10-39
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 supplychain network
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
• Example: H-P customizing DeskJet
printers with the power supply needed in
various European countries once printers
arrive at its distribution center in Germany
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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
10-42
Question Bowl
The supply chain measure of
“Inventory Turnover” is which
of the following ratios?
a. Avg. inventory value/total costs
b. Costs of goods sold/Avg.
aggregate inventory value
c. Total costs of goods/Avg. costs
of goods
d. Weeks worth of inventory/No.
of weeks
e. None of the above
Answer: b. Costs of goods sold/Avg.
aggregate inventory value
10-43
Question Bowl
If the “cost of goods sold” for a
company is $1,000,000 and the
“average aggregate inventory value”
is $25,000, 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 $250,000 and the
“average aggregate inventory value”
is $5,000, which of the following is
the “inventory turnover”?
a. 10
b. 25
c. 40
d. 50
e. 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 $1,000,000 and the “average
aggregate inventory value” is $50,000,
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. Continuous replenishing
b. Stable supply process
c. Evolving supply process
d. Agile supply chains
e. 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. Reduces investment in assets
b. Turns fixed costs into variable
costs
c. Gives employees a stronger
career
d. All of the above
e. 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. Rail
b. Highway (trucking)
c. Water
d. Pipeline
e. Air
Answer: b. Highway (trucking)
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End of Chapter 10