Supply Chain Management
Lecture 5
Outline
• Today
– Chapter 3
– Start with Chapter 4
• Thursday
– Finish Chapter 4
– Introduction to Excel Solver
• Homework 1
– Due Thursday January 28 before class
From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Logistical drivers
Cross functional drivers
Corporate Strategy
Competitive Strategy
Facilities
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
• 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
Overall tradeoff: Cost of the number, location and type
versus level of responsiveness
How could a car manufacturer increase
responsiveness through its facilities?
Toyota
• Worldwide operations
Source: http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html
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.
Corporate Strategy
Competitive Strategy
Inventory
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
• 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
Overall tradeoff: Level of inventory versus level of
product availability
How could a grocery retailer use inventory to increase
responsiveness?
Corporate Strategy
Competitive Strategy
Transportation
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
• Transportation decisions
– 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
Overall tradeoff: Cost and speed of transportation
Transportation Facts
Freight
Freight
Freight
value
tons
ton-miles
Mode
($billions) (billions) (millions)
7.7%
Air
777 0.1%
10 0.3%
15
66.0% 6660 60.0% 9197 32.7% 1449
Truck
3.8%
Rail
388 12.4% 1895 28.3% 1254
8.6%
Water
867 15.3% 2345 16.5% 733
2.8%
Pipeline
285 10.8% 1656 17.0% 753
Mulitmodal 11.0% 1111 1.4% 213 5.1% 226
Freight shipments in America 2002
Transportation Facts
Corporate Strategy
Competitive Strategy
Transportation
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
• 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
Overall tradeoff: Cost and speed of transportation
How does Dell use transportation to improve
responsiveness?
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)
IKEA
Corporate Strategy
Competitive Strategy
Information
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
• 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
Accurate information helps both efficiency and
responsiveness
How does Wal-Mart use information to improve its
supply chain operations?
Information
Corporate Strategy
Competitive Strategy
Sourcing
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
• 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
Overall tradeoff: Increased supply chain profit
versus additional risk
How does Dell use sourcing to improve efficiency?
Corporate Strategy
Competitive Strategy
Pricing
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
• 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
Overall tradeoff: Increase company profits
How can Peapod use pricing of its delivery
services to improve profitability?
Designing a Supply Chain Network
In designing a supply chain, we need to
consider how all supply chain drivers
should be used together to support the
competitive strategy of a company and
maximize supply chain profits
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Logistical drivers
Cross functional drivers
The Role of Distribution in the Supply
Chain
• What is distribution?
– Distribution refers to the steps taken to move and store
a product from the supplier stage to the customer stage
in a supply chain
• Distribution-related cost
– Make up about 10.5% of the US economy
– Make up about 20% of the cost of manufacturing
Distribution can achieve supply chain objectives from
low cost to high responsiveness
The Role of Distribution in the Supply
Chain
What differences in the retail
environment may justify the fact that the
fast-moving consumer goods supply
chain in India has far more distributors
than in the United States?
Distribution Complexity in India
• Dispersed population
– 30+ cities have populations of more than 1 million, but nearly 70%
still live in rural areas
• Retail density
– More than 12 million retail outlets
– Mom-and-pop stores account for more than 96% of the total
market for many markets, organized retail represents only 4%
• Infrastructure complexity
– Very few full-service distribution companies operate in India
– Some consumer multinational companies work with more than
1,000 distributors, which deliver its products to more than 1 million
outlets across India
Distribution Complexity
Baddi
Rural village
Distribution Complexity in India
• India is becoming one of the world’s largest markets for
consumer goods
– Rapidly rising household incomes
– One quarter of India’s population is between 20 and 35, a high
spending segment in many markets
– Overall retail market is more than $230 billion (2005) and expected
to grow to $308 billion (2010)
Wal-Mart is teaming up with Bharti to establish
wholesale and supply chain operations in India
The Role of Distribution in the Supply
Chain
• What is distribution?
– Distribution refers to the steps taken to move and store
a product from the supplier stage to the customer stage
in a supply chain
• Distribution-related cost
– Make up about 10.5% of the US economy
– Make up about 20% of the cost of manufacturing
Distribution can achieve supply chain objectives from
low cost to high responsiveness
Response Time and Number of Facilities
Number of
Facilities
Response
Time
Facility Cost and Number of Facilities
Facility
Costs
Number of
Facilities
Inventory Cost and Number of Facilities
Inventory
Costs
Number of
Facilities
Transportation Cost and Number of
Facilities
Transportation
Costs
Number of
Facilities
Total Logistics Costs
Logistics
Costs
Logistics Costs
Facility Costs
Inventory Costs
Transportation Costs
Number of
Facilities
Logistics Costs, Response Time and
Number of Facilities (Fig 4.5)
Response Time
Total Logistics Cost
Number of
Facilities
Design Options For a Distribution
Network
• Two key decisions when designing a distribution
network
– Will the product be delivered to the customer location
or picked up from a preordained site?
– Will product flow through an intermediary?
Design Options For a Distribution
Network
1. Manufacturer Storage with Direct Shipping
2. Manufacturer Storage with Direct Shipping and
In-Transit Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with
Consumer Pickup
6. Retail Storage with Consumer Pickup
Manufacturer Storage with Direct
Shipping (Drop Shipping)
• Products are shipped directly to
the consumer from the
manufacturer
• Retailer is an information
collector:
Manufacturers
Retailer
Consumers
– Passes orders to the
manufacturers
– It does not hold product
inventory
• Inventory is centralized at
manufacturer
• Drop shipping offers the
manufacturer the opportunity to
postpone customization
• Effective for high value, large
variety, low demand products
• High transportation cost
• Example: eBags
Manufacturer Storage with Direct
Shipping and In-Transit Merge
Manufacturers
Mergers
Consumers
Retailer
• Shipments from multiple
manufactures are merged
before making a single delivery
to the consumer
• Shipments to Mergers are
larger so economies of scale is
achieved
• Mergers increase facility costs
• Response time may go up
• Example:
– Furniture retailers merge
couches and coffee tables
produced by different
manufacturers
– Dell merges a Dell PC with a
Sony flat screen
Distributor Storage with Carrier Delivery
• Inventory is held at a
warehouse which ships to
customer by carriers
• With respect to direct shipping
Manufacturers
Distributor
Warehouse
Distributor
Warehouse
–
–
–
–
Inventory aggregation is less
Higher inventory costs
Facility costs are higher
Less information to track
• Warehouses are physically
closer to consumers which
leads to
– Faster response time
– Lower transportation cost
Consumers
• Not effective for slow moving
items
• Example: Amazon
Distributor Storage with Last Mile
Delivery
• Warehouse delivers to
customers instead of carrier
Manufacturers
Distributor
Warehouse
Distributor
Warehouse
– Warehouses are located closer
to consumers
– Transportation costs go up
because warehouses are not
as effective as package carriers
in aggregating loads to have
economies of scale
• Warehouse may need to own a
trucking fleet so the physical
infrastructure costs are higher.
– Products must be flowing fast
to justify the infrastructure
– Processing cost are high
Consumers
• Example: Milk delivery, Grocery
delivery (Peapod, Albertsons),
Denver Mattress
Manufacturer or Distributor Storage With
Customer Pickup
• Customers come to pick up
sites (warehouse, retailer) to
get the products
Manufacturers
– If consumers are willing to pick
up the products, let them do so.
Otherwise, they would be
charged for the delivery costs
Distributor
Warehouse
Consumers
Distributor
Warehouse
• Order tracking is crucial.
Consumers must be alerted
when their order is ready for
pick up. Once a consumer
arrives at the pick up site, the
products must be quickly
located.
• Significant amount of
information is required
• Increased handling cost
• Example: 7dream.com
Retail Storage with Customer Pickup
• Customers pick up product from
retailers
–
–
–
–
Manufacturers
Low transportation cost
High facility cost
Relative easy returnability
Increased inventory cost
• No order tracking necessary
Retailer
Retailer
Retailer
– If the product is available at the
retailer, the consumer buys.
Otherwise goes to another
retailer
• Effective for fast moving items
• Example: Retail stores such as
Wal-Mart and JCPenney
Consumers
Comparing Distribution Networks
Retail
Manufacturer Manufacturer Distributor
Distributor Manufacturer
storage with storage with storage with storage with storage with storage with
customer
direct
in transit
package
last mile
customer
pickup
shipping
merge
delivery
delivery
pickup
Reponse time
1
4
4
3
2
4
Product variety
4
1
1
2
3
1
Product availability
4
1
1
2
3
1
Cusomter experience
1-5
4
3
2
1
5
Time to market
4
1
1
2
3
1
Order visibility
1
5
4
3
2
6
Returnability
1
5
5
4
3
2
Inventory
4
1
1
2
3
1
Transportation
1
4
3
2
5
1
Facility and handling
6
1
2
3
4
5
Information
1
4
4
3
2
5
1 = strongest performance
6 = weakest performance
Comparing Distribution Networks
Retail
Manufacturer Manufacturer Distributor
Distributor Manufacturer
storage with storage with storage with storage with storage with storage with
customer
direct
in transit
package
last mile
customer
pickup
shipping
merge
delivery
delivery
pickup
High demand
Medium demand
Low demand
Very low demand
Many sources
High product value
Quick response
High product variety
Low customer effort
Green = very suitable
Red = very unsuitable
From brick-and-mortar to click-andmortar
What has been the impact of e-business on supply chain
cost?
What has been the impact of e-business on customer
service?
In the future, do you see the number of distributors
decreasing, increasing, or staying about the same?
Is e-business likely to be more beneficial in the early part
or the mature part of a product’s life cycle?
Why should an e-business such as Amazon.com build
more warehouses as its sales volume grows?