MGT 563
OPERATIONS STRATEGIES
Dr. Aneel SALMAN
Department of Management Sciences
COMSATS Institute of Information Technology,
Islamabad
Recap Lecture 14
• What kind of capacity is needed?
• How much capacity is needed to match
demand?
• When more capacity is needed?
• Where facilities should be located (location)
• How facilities should be arranged (layout)
Why the Interest in Supply
Chains? Its Import?
Why the Interest in Supply Chains? Its Import?
• Dealing with uncertain environments – matching supply and
demand
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Boeing announced a $2.6 billion write-off in 1997 due to “raw
materials shortages, internal and supplier parts shortages and
productivity inefficiencies”
U.S Surgical Corporation announced a $22 million loss in 1993
due to “larger than anticipated inventories on the shelves of
hospitals”
IBM sold out its supply of its new Aptiva PC in 1994 costing it
millions in potential revenue
Hewlett-Packard and Dell found it difficult to obtain important
components for its PC’s from Taiwanese suppliers in 1999 due to
a massive earthquake
• U.S. firms spent $898 billion (10% of GDP) on supply-chain
related activities in 1998
Why the Interest in Supply Chains? Its Import?
• Shorter product life cycles of high-technology products
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Less opportunity to accumulate historical data on customer
demand
Wide choice of competing products makes it difficult to predict
demand
• The growth of technologies such as the Internet enable greater
collaboration between supply chain trading partners
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If you don’t do it, your competitor will
Major buyers such as Wal-Mart demand a level of “supply chain
maturity” of its suppliers
• Availability of SCM technologies on the market
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Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD
Edwards) with which to integrate internal processes
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Why the Interest in Supply Chains? Its Import?
Greater sharing of information between vendors
and customers.
Horizontal business processes replacing vertical
departmental functions.
Shift from mass production to customized
products.
Increased reliance on purchased materials and
outside processing with a simultaneous reduction
in the number of suppliers.
Value that can be extracted by manufacturing is
declining as the cost of materials and distribution
climbs.
Why the Interest in Supply Chains? Its Import?
• Greater emphasis on organizational and process
flexibility.
• Necessity to coordinate processes across many sites.
• Employee empowerment and the need for rulesbased real time decision support systems.
• Competitive pressure and compressed product life
cycles to introduce new products more quickly.
Why the Interest in Supply Chains? Its Import?
• Companies are restructuring their production
facilities on a global basis.
• Low-Cost, High-Volume Data Processing and
Communication (Internet) are revolutionizing control
systems.
What the supply chain is not
• Among the misunderstanding evidenced, supply
chain management is not:
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inventory management
logistics management
supplier partnerships
driven from the supply side
a shipping strategy
distribution management
the logistics pipeline
procurement management
a computer system
Why Is SCM Difficult?
Uncertainty is inherent to every supply chain
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Travel times
Breakdowns of machines and vehicles
Weather, natural catastrophe, war
Local politics, labor conditions, border issues
The complexity of the problem to globally optimize a supply chain
is significant
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Minimize internal costs
Minimize uncertainty
Deal with remaining uncertainty
Why Is SCM Difficult?
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Lack of guidelines for creating alliances with supply chain
partners.
Failure to develop measures for monitoring alliances.
Inability to broaden the supply chain vision beyond
procurement or product distribution to encompass larger
business processes.
Inability to integrate the company's internal procedures.
Lack of trust inside and outside a company.
Organizational resistance to the concept.
Lack of buy-in by top managers.
Lack of integrated information systems and electronic
commerce linking firms.
What is Supply Chain
Management?
Some Definitions….
A process of collaboration between trading partners that
manages the flow of products, information, and funds from
point of RM to consumption.
What Is the Supply Chain?
• Also referred to as the logistics network
• Suppliers, manufacturers, warehouses, distribution
centers and retail outlets – “facilities”
Suppliers
Manufacturers
Warehouses &
Customers
Distribution Centers
and the
• Raw materials
• Work-in-process (WIP) inventory
• Finished products
that flow between the facilities
Transportation
Costs
Material Costs
Transportation
Costs
Transportation
Manufacturing Costs
Inventory Costs
Costs
The Supply Chain
Suppliers
Manufacturers
Transportation
Costs
Material Costs
Warehouses &
Distribution Centers
Transportation
Costs
Manufacturing Costs
Customers
Transportation
Costs
Inventory Costs
The Supply Chain – Another View
Plan
Source
Suppliers
Material Costs
Make
Manufacturers
Deliver
Warehouses &
Distribution Centers
Buy
Customers
Transportation
Transportation
Costs
Transportation
Costs
Manufacturing Costs
Inventory Costs Costs
Plan
Source
Make
Deliver
Buy
• A set of approaches used to efficiently integrate
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Suppliers
Manufacturers
Warehouses
Distribution centers
• So that the product is produced and distributed
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In the right quantities
To the right locations
And at the right time
• System-wide costs are minimized and
• Service level requirements are satisfied
Supply Chain Drivers
THE PAST, PRESENT AND
FUTURE OF SCM
The Past
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3000 BC: Transportation Efficiency
1950AD: Total Cost Awareness
1955: Customer Service
1960: Inventory Management Focus, Cost Control
1965: Comprehensive Outsourcing
1970s: Material Requirement Planning (MRP) & Bill
of Materials (BOM) - Operations Planning
The Past
• 1975: Operational Integration and Quality (Six Sigma)
• 1980s: Manufacturing Resource Planning (MRPII), JIT
- Materials Management, Logistics
• 1985: Financial Positioning and Operational
Excellence
• 1990s: SCM – Enterprise Resource Planning (ERP) “Integrated” Purchasing, Financials, Manufacturing,
Order Entry and GLOBALIZATION
• 1995: Customer Relationship and Enterprise
Extension
The Present
• 2000s: Optimized “Value Network” with Real-Time
Decision Support; Synchronized & Collaborative
Extended Network AND Supply Chain Integrative
Management
• 2005: Responsive Supply Chain Management 2008:
Supply Chain Sustainability
• 2010+: Multi-firm Collaboration
2010 AND BEYOND
• Multi-Firm Collaboration
• Talent and Resource Swapping – “Federating”
• Knowledge-Dependent Process Automation:
– Intelligent Probotics
• Extreme Postponement:
– •Driven by Demand “Sensing”, not Forecasting
• Nanogenome Supply Chain Technology
From Push to Pull Making
Responsiveness- An Operational
Reality
• Two Extreme Models:
– Similar in concept to pure competition and pure
monopoly
• Anticipatory Push Business Model
• Response-driven Business Model
Anticipatory Business Model
• Forecast Driven
• Push Mentality – Allocation Paced
Responsive Business Model
• Endcast Driven
• Pull Mentality – Requirements Paced
Steps To Achieving Responsiveness
1. Achieving Integrated Logistics
2. Leveraging Collaborative Management
3. Achieving EERS Value Performance
1. Achieving Integrated Logistics
The process of moving and positioning
inventory to meet customer requirements at
the lowest possible total cost to serve.
– Time and Place Positioning
– Lowest Total Cost
– Asset Minimization
– Supply Chain Connectivity
2. Leveraging Collaborative Management
Or
SC Collaboration (SCC)
SCC – What Is It?
• Many different definitions depending on perspective
• The means by which companies within the supply chain work
together towards mutual goals by sharing
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Ideas
Information
Processes
Knowledge
Information
Risks
Rewards
• Why collaborate?
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Accelerate entry into new markets
Changes the relationship between cost/value/profit equation
• Cornerstone of effective SCM
• The focus of many of today’s SCM initiatives
• The only method that has the potential to eliminate or minimize
Retailers
the Bullwhip effect
Suppliers
Synchronized
Production
Scheduling
Manufacturer
Collaborative
Demand
Planning
Collaborative
Product
Development
Collaborative Logistics Planning
•Transportation services
•Distribution center services
Logistics Providers
Distributors/
Wholesalers
Its Benefits
CUSTOMERS
MATERIAL
SUPPLIERS
Improved customer service
More efficient use of human resources
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Reduced inventory
 Lower freight costs
 Lower warehousing costs
 Faster and more reliable
delivery
 Lower material
acquisition costs
 Lower capital costs
 Fewer stockout conditions  Reduced depreciation
 Lower fixed costs
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Source: Cohen & Roussel
Reduced inventory
 Increased revenue
 Lower order management
costs
 Higher Gross Margin
 Better forecast accuracy
 Better allocation of
promotional budgets
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SERVICE
SUPPLIERS
SC Collaboration Spectrum
Extent of Collaboration
Extensive Not Viable
Limited
Synchronized
Collaboration
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Coordinated
Collaboration
Low Return
Many
Few
Number of Relationships
Source: Cohen & Roussel
Information systems
Systems infrastructure
Decision support systems
Planning mechanisms
Information sharing
Process understanding
• Higher levels of
collaboration imply the
need for both trading
partners to have
equivalent (or close) levels
of supply chain maturity
• Synchronized collaboration
demands joint planning,
R&D and sharing of
information and
processing models
Cooperative
Collaboration
Transactional
Collaboration
• The green arrow describes
increasing complexity and
sophistication of:
– Movement to real-time
customer demand
information throughout the
supply chain
Successful SC Collaboration
• Try to collaborate internally before you try external
collaboration
• Help your partners to work with you
• Share the savings
• Start small (a limited number of selected partners) and stay
focused on what you want to achieve in the collaboration
• Advance your IT capabilities only to the level that you expect
your partners to manage
• Put a comprehensive metrics program in place that allows you
to monitor your partners’ performance
• Make sure people are kept part of the equation
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Systems do not replace people
Make sure your organization is populated with competent
professionals who’ve done this before
3. The EERS Value Performance Model
• Service Excellence - Effectiveness
• Cost Minimization and Avoidance - Efficiency
• Customer Value Generation - Relevancy
Continuous Improvement - Sustainability
Examples of Supply Chain
Hershey’s Supply Chain
Inbound Traffic
Outbound Traffic
• cocoa beans and sugar
• warehousing and inventory
control
• 1B pounds of chocolate annually,
30M kisses per day
• 12 third party manufacturers
• 2 regional distribution centers
• 14 warehouses
• 12 channels of distribution
Black & Decker’s Supply Chain
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4,000 to 6,000 suppliers worldwide
70 worldwide manufacturing plants
20 distribution centers
Markets products in 58 countries
Supplies market on JIT basis
3-5 day order cycle time, 90% fill rate