Supply Chain Management
Lecture 4
Outline
• Today
– Chapters 2 and ?3
• Next week
– Chapter 4
– Introduction to Excel Solver/Chapter 5
• Homework 1
– Online tomorrow afternoon Friday January 21
– Due Thursday January 28
Examples
• Successful supply chain management requires
decisions on the flow of information, product, and
funds
Strategy
What is a strategy in general?
Strategy
Corporate Strategy
Competitive Strategy
What is Competitive Strategy?
• Competitive strategy
– Defines, relative to competitors, a company’s set of
customer needs that it seeks to satisfy through its
products and services
• Wal-Mart
– Everyday low prices (low cost retailer for a wide variety of products)
• Coors
– The coldest tasting beer in the world, brewed with Rocky Mountain
spring water
• Dell
– Custom-made computer systems at a reasonable cost
How do you execute your competitive strategy?
Supply Chain Cycle
Reverse logistics
Customer
Marketing
Finance
Accounting
IT
Logistics
Product design
Suppliers
Manufacturing
To execute a company’s competitive strategy, all functions
that play a role must each develop their own strategy
Strategy
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
What is Supply Chain Strategy?
• Supply chain strategy
– Given a competitive strategy, what should a company’s supply chain
do particularly well?
• Wal-Mart
– Everyday low prices (low cost retailer for a wide variety
of products)
Competitive
Strategy
– Buys from low cost producers, owns its infrastructure and
distribution network
Supply Chain Strategy
• Coors
– The coldest tasting beer in the world, brewed with
Rocky Mountain
Competitive
Strategy
spring water
Supply
Chain Strategy
– Refrigerated transport, main facility near Rocky
Mountains
• Dell
Strategy
– Custom-made computer systems at a reasonableCompetitive
cost
– Online ordering, no middle-man
Supply Chain Strategy
What is Strategic Fit?
•
Strategic fit
– Both the competitive strategy and the supply chain
strategy have aligned goals
– Matching customer needs with supply chain
capabilities
•
How is strategic fit achieved?
1. Understanding the customer and supply chain
uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit
1. Understanding the Customer and
Supply Chain Uncertainty
• Understanding customer (demand) uncertainty
– Demand varies along certain attributes
• Quantity in each lot, response time, variety of products needed, service,
price, innovation, etc
– Implied demand uncertainty
• Demand uncertainty due to the portion of demand that the supply chain
is targeting, not the entire demand
Customer need
Range of quantity increases
Response time decreases
Variety of products increases
Number of channels through which
product may be aquired increases
Rate of innovation increases
Required service level increases
Causes implied demand uncertainty to…
Increase
Increase
Increase
Increase
Increase
Increase
1. Understanding the Customer and
Supply Chain Uncertainty
• Understanding supply uncertainty
– Supply uncertainty is strongly affected by the life-cycle position of
the product. New products being introduced have higher supply
uncertainty than mature products
Supply source capability
Frequent breakdowns
Unpredictable and low yields
Poor quality
Limited suppy capacity
Infexible supply capacity
Evolving production process
Causes supply uncertainty to…
Increase
Increase
Increase
Increase
Increase
Increase
1. Understanding the Customer and
Supply Chain Uncertainty
• Motorola 4th Quarter Wireless Sales Growth Lower
Than Order Growth, The Dow Jones News Service, Nov. 11, 1999
– Motorola announces that its inability to meet demand was due to
the shortage of certain types of components
• Sony Computer Says Sales of New Game Product to
Be Delayed, The Dow Jones News Service, Dec. 9, 1998
– Due to production problems, Sony Computer has decided to push
back, by a month, the introduction of PocketStation, a video-game
product.
• Apple Computer Inc. Cuts 4th-period Forecast Citing
Parts Shortages, Product Delays, The Wall Street Journal,
Sept. 15, 1995
– Apple announces that earnings would drop because of persistent
shortages of key components and delays in ramping up production
of new products.
1. Understanding the Customer and
Supply Chain Uncertainty
1. Understanding the Customer and
Supply Chain Uncertainty
1. Understanding the Customer and
Supply Chain Uncertainty
Demand Uncertainty
Low
High
(Functional
(Innovative
Product)
Product)
Demand Uncertainty
Low
High
(Functional
(Innovative
Product)
Product)
Supply Uncertainty
Low
(Stable
Process)
High
(Evolving
Process)
Basic Goods,
Most
Commodities
Fashion,
Computers,
Pop Music,
Toys
Some Power,
Some Food
Produce,
Precious
Metals
Telecom, Highend Servers,
Semiconductor
Low
(Stable
Process)
Efficiency,
Information
Integration, AutoReplenishment,
VMI
(Efficient SC)
Make-to-Order,
Flexible Mfg,
Accurate
Response,
Postponement
(Flexible SC)
High
(Evolving
Process)
Buffer Inventory,
Shared
Resources, MultiSourcing, Info
Sharing
(Risk-Hedging
SC)
Supply Network,
Postponement,
Design
Collaboration
(Agile SC)
Source: Hau Lee, “Aligning supply chain strategies with product uncertainties”,
California Management Review, 44(3), 2002
2. Understanding the Supply Chain
Capabilities
• Supply chain capabilities
– Supply chain responsiveness
• Respond to wide ranges of quantity demanded, meet short
lead times, large variety, innovative products, high service
level, etc
– Supply chain efficiency (low cost)
Highly
efficient
Somewhat
efficient
Somewhat
responsive
Highly
responsive
Integrated steel
mills
Hanes apparel
Most automotive
production
Seven-Eleven
Japan
Achieving Strategic Fit
What is the right supply chain for
your product?
Responsive
supply chain
Cost-effective
supply chain
Implied demand
uncertainty
Low
(functional products)
High
(innovative products)
Achieving Strategic Fit
What is the right supply chain for
your product over its life cycle?
Responsive
supply chain
Cost-effective
supply chain
Implied demand
uncertainty
Low
(functional products)
High
(innovative products)
Complete Strategic Fit
Competitive Strategy
Product
Development
Strategy
Supply Chain
Strategy
Marketing
and Sales
Strategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy
A firm must ensure that all its functions maintain consistent
strategies that support the competitive strategy
Achieving Strategic Fit
• Strategic fit
– Given a competitive strategy, what should a company’s supply chain
do particularly well?
• Wal-Mart
– Everyday low prices (low cost retailer for a wide variety of products)
– Buys from low cost producers, owns its infrastructure and
distribution network
• Coors
– The coldest tasting beer in the world, brewed with Rocky Mountain
spring water
– Refrigerated transport, main facility near Rocky Mountains
• Dell
– Custom-made computer systems at a reasonable cost
– Online ordering, no middle-man
Key Observations
1. There is no supply chain strategy that is always
right
2. There is a right supply chain strategy for a given
competitive strategy
Issues Affecting Strategic Fit
• Increasing variety of products
– Firms sell different products to different customer segments
• Decreasing product life cycles
– Demand and supply characteristics change as a product goes
through its life cycle
• Increasingly demanding customers
– Customers are constantly demanding improvements
• Fragmentation of supply chain ownership
– Harder to coordinate a supply chain broken into many owners
• Globalization and competitive changes over time
– More competitors may result in an increased emphasis on variety
at a reasonable price
Evolution of Supply Chain Management
Further
Refinement of
SCM Capabilities
SCM
Formation/
Extensions
JIT, TQM, BPR,
Alliances
Inventory Management/Cost
Optimization
Traditional Mass Manufacturing
1950s
1960s
1970s
1980s
1990s
2000s
Beyond
Scope of Strategic Fit
Suppliers Manufacturer Distributor
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
Retailer
Customer
Intracompany
Interfunctional
maximize company profit
Intercompany
Interfunctional
maximize SC surplus
Intracompany
Intrafunctional
minimize functional cost
Intracompany
Intraoperation
minimize local cost
Integration of business functions, departments, and
companies leads to successful SCM
Scope of Strategic Fit
“As the economy changes, as the competition becomes
more global, it’s no longer company versus company but
supply chain versus supply chain”
Harold Sirkin (Vice President of the Boston Consulting Group)
Examples
• Successful supply chain management requires
decisions on the flow of information, product, and
funds
From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Logistical drivers
Cross functional drivers
Supply Chain Drivers
•
•
•
•
•
•
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Chapters 5, 6
Chapters 10, 11, 12
Chapters 4, 13
Chapters 7, 8, 9, 16, 17
Chapter 14
Chapter 15
Facilities
• 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?
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.
Inventory
• 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?
Transportation
• 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
Information
• 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
Sourcing
• 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
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?