Strategic Framework to
Analyze Supply Chains
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Andy Guo
A Strategic Framework for Supply Chain
Design, Planning, and Operation
• Part I: Understand the supply chain
• Part II: Supply chain performance
• Part III: Supply chain drivers
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Andy Guo
Part I: Outline
• What is supply chain?
• What is supply chain management?
• Process view of a supply chain
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Andy Guo
Traditional View: Logistics in the
Manufacturing Firm
• Profit
4%
Profit
Logistics
Cost
4
• Logistics Cost
21%
• Marketing Cost
27%
• Manufacturing Cost
48%
Marketing
Cost
Manufacturing
Cost
Andy Guo
Supply Chain Management: The Magnitude
in the Traditional View
• Estimated that the grocery industry could save $30
billion (10% of operating cost) by using effective
logistics and supply chain strategies
– A typical box of cereal spends 104 days from factory to sale
– A typical car spends 15 days from factory to dealership
• Laura Ashley turns its inventory 10 times a year, five
times faster than 3 years ago
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Andy Guo
Supply Chain Management:
The True Magnitude
• Compaq estimates it lost $.5 billion to $1 billion in
sales in 1995 because laptops were not available when
and where needed
• When the 1 gig processor was introduced by AMD, the
price of the 800 mb processor dropped by 30%
• P&G estimates it saved retail customers $65 million by
collaboration resulting in a better match of supply and
demand
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Andy Guo
Definition of Supply Chain Management
Supply chain management is a set of approaches utilized to
efficiently integrate suppliers, manufacturers, warehouses
and stores, so that merchandise is produced and distributed
at the right quantities,
quantities to the right locations,
locations and at the
right time,
time in order to minimize system-wide costs while
satisfying service level requirements.
Vendors
Sourcing
Inbound
storage/ Fig. Operations
1-3
Transportation
Outbound
storage/
Transportation
Consumer
distribution
Customers
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Andy Guo
Supply Chain: Logistics Network
RAW MATERIALS
SUPPLIERS
RAW
MATERIALS
STORAGE
MANUFACTURING
production logistics
Storage
Storage
Material costs
Plant
Plant
11
Manufacturing costs
Storage
Storage
Plant
Plant
22
Transportation costs
Storage
Storage
Physical supply
materials management
inbound logistics
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FINISHED
GOODS
STORAGE
MARKETS
Warehouse
Warehouse
AA
Inventory costs
Warehouse
Warehouse
BB
Transportation costs
Plant
Plant
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Warehouse
Warehouse
CC
Physical distribution
outbound logistics
Andy Guo
Integrating Supply Chain Process
Supplier
Manufacturers
Wholesalers
Retailers
Consumers
Information
Product flow
Cash flow
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Andy Guo
The Objective of a Supply Chain
• Maximize overall value created
• Supply chain value: difference between what the final
product is worth to the customer and the effort the
supply chain expends in filling the customer’s request
• Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply chain)
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Andy Guo
The Objective of a Supply Chain
• Example: Dell receives $2000 from a customer for a
computer (revenue)
• Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Difference between $2000 and the sum of all of these costs
is the supply chain profit
• Supply chain profitability is total profit to be shared across
all stages of the supply chain
• Supply chain success should be measured by total supply
chain profitability, not profits at an individual stage
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Andy Guo
The Objective of a Supply Chain
• Sources of supply chain revenue: the customer
• Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain
• Supply chain management is the management of
flows between and among supply chain stages to
maximize total supply chain profitability
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Andy Guo
Process View of a Supply Chain
• Cycle view
– Each cycle performs at the interface between two successive stages
of a supply chain
– This view is useful when considering operational decisions, because
it specifies the roles of each member and the desired outcome for
each process
• Push/Pull view
– Depend on whether they are executed in response to a customer
order(pull) or in anticipation of customer order(push)
– This view is useful when considering strategic decisions relating to
supply chain design
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Andy Guo
Cycle View of a Supply Chain
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
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Andy Guo
Push/Pull View of L.L. Bean Supply Chain
Procurement,
Manufacturing and
Replenishment cycles
PUSH PROCESSES
Customer Order
Cycle
PULL PROCESSES
Customer
Order Arrives
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Andy Guo
Push/Pull View of Dell Supply Chain
Procurement
cycles
PUSH PROCESSES
Customer Order and
Manufacturing Cycle
PULL PROCESSES
Customer
Order Arrives
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Andy Guo
Part II: Outline
• Competitive and supply chain strategies
• Strategic fit
• Expand the scope
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Andy Guo
The Value Chain:
Linking Supply Chain and Business Strategy
Business Strategy
New Product
Strategy
New
Product
Development
Marketing
Strategy
Marketing
and
Sales
Supply Chain Strategy
Operations
Distribution
Service
Finance, Accounting, Information Technology, Human Resources
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Andy Guo
Achieve Strategic Fit
Strategic fit means both the competitive and
supply chain strategies have the same goal.
• Step 1: Understand the customer
• Step 2: Understand the supply chain
• Step 3: Achieve strategic fit
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Andy Guo
Step 1: Understand the Customer
- Implied Demand UncertaintyCustomer demand
attributes
•
•
•
•
•
•
Lot size
Response time
Service level
Product variety
Price
Innovation
Implied
Demand
Uncertainty
Implied demand uncertainty is the uncertainty that exists due to
the portion of demand that the supply chain is required to meet.
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Andy Guo
Implied Demand Uncertainty Spectrum
Detergent
Long lead time steel
Price
High Fashion
Emergency steel
Customer Need
Responsiveness
Low
High
Implied Demand Uncertainty
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Andy Guo
Step 2: Understand the Supply Chain
- Supply Chain Responsiveness •
•
•
•
•
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Respond to wide range of quantities demanded
Meet short lead time
Handle a large variety of products
Build highly innovative products
Meet a very high service level
Andy Guo
Responsiveness Spectrum
Highly
efficient
Integrated
steel mills
Highly
Responsive
Hanes
apparel
Auto
production
Dell
Low
High
Responsiveness
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Andy Guo
Step 3: Achieve Strategic Fit
Responsive
supply chain
Responsiveness
spectrum
of t
n e c Fi
o
Z egi
at
S tr
Efficient supply
chain
Certain demand
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Implied
uncertainty
spectrum
Uncertain
demand
Andy Guo
Comparison of Efficient and Responsive SC
Efficient SC
Responsive SC
Goal
Lower cost to meet demand
Respond quickly
Product design
Max performance at min cost
Create modularity to allow
postponement
Pricing
Lower margin
Higher margin
Manufacturing
Lower cost through high
utilization
Maintain capacity flexibility to meet
unexpected demand
Inventory
Min inventory
Maintain buffer inventory
Lead time
Reduce but not at the expense of
cost
Aggressively reduce even if the cost is
significant
Supplier
Based on cost and quality
Based on speed, flexibility, and quality
Transportation
Low cost modes
Responsive modes
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Andy Guo
Other Issues Affecting Strategic Fit
• Multiple products and customer segments
– Set up independent SC for each different product or customer
– Tailor the SC to best meet the needs of each product’s demand
• Product life cycle
– Use responsive SC in the early stage
– Use efficient SC when market is matured
• Competitive changes over time
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Andy Guo
Changing Strategy over Product Life Cycle
Responsive
supply chain
of t
ne ic Fi
o
Z eg
t
ra
St
Responsiveness
spectrum
Efficient supply
chain
Certain demand
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Implied
uncertainty
spectrum
Uncertain
demand
Andy Guo
Part III: Outline
• Framework for structuring drivers
–
–
–
–
–
–
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Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Andy Guo
Drivers of Supply Chain Performance
• Facilities
– Places where inventory is stored, assembled, or fabricated
• Inventory
– Raw materials, WIP, finished goods within a supply chain
• Transportation
– Moving inventory from point to point in a supply chain
• Information
– Data and analysis regarding inventory, transportation, facilities throughout the
supply chain
• Sourcing
– Functions a firm performs and functions that are outsourced
• Pricing
– Price associated with goods and services provided by a firm to the supply chain
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Andy Guo
A Framework for Structuring Drivers
C o m p e titive S tra te g y
S u p p ly C h a in
S tra teg y
E ffic ie n cy
R e sp o n siv e n e ss
S u p p ly c h a in stru c tu re
L o g istic al D riv e rs
F a c ilitie s
In v e n to ry
T ra n sp o rta tio n
In fo rm a tio n
S o u rc in g
P ric in g
C ro ss F u n c tio n al D riv e rs
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Andy Guo
Facilities Driver
• Efficient v.s. responsive
– Ex: Toyota and Honda
• Components of facilities decision:
–
–
–
–
Location
Capacity (flexibility v.s. efficiency)
Manufacturing methodology (product-focus v.s. process-focus)
Warehousing methodology
• SKU storage
• job lot storage
• cross-docking
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Andy Guo
Inventory Driver
• Little’s law
– Inventory = Flow time × Throughput
– Message for SCM: lower flow time Ælower inventory
• Responsive v.s. efficient
– Ex: Nordstorm
• Components of inventory decision:
– Cycle inventory : inventory to satisfy demand between receipts of
shipments
– Safety inventory: inventory held to counter uncertainty in demand
– Seasonal inventory: inventory held to counter predictable
variability in demand
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Andy Guo
Transportation Driver
• Efficient v.s. responsive
– Ex : Laura Ashley with Fedex for next day delivery
• Components of transportation decision:
– Mode of transportation
• Air, truck, rail, ship, pipeline, electronic
– Route and network selection
– In-house or outsource
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Andy Guo
Information Driver
• Connect various stages in SC
• Crucial to daily operations in each stage
– Ex: Dell
• Components of information decision:
–
–
–
–
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Push (MRP) v.s. pull
Coordination and information sharing
Forecasting and aggregate planning
Enabling technology: EDI, Internet, ERP, SCM
Andy Guo
Sourcing Driver
• Set of business processes required to purchase goods
and services in a supply chain
• Supplier selection, single vs. multiple suppliers,
contract negotiation
• Components of sourcing decision:
– In-house versus outsource decisions
– Supplier evaluation and selection
– Procurement process
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Andy Guo
Pricing Driver
• Pricing determines the amount to charge customers
in a supply chain
• Pricing strategies can be used to match demand and
supply
• Components in pricing decision:
– Pricing and economies of scale
– Everyday low pricing versus high-low pricing
– Fixed price versus menu pricing
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Andy Guo