Supply Chain Management
Holmes
Miller 1999
Based on slides for Chase Acquilano and Jacobs Operations Management ©for
Competitive
advantage McGraw-Hill
Supply Chain Management
What is it?
Purchasing strategies
Measuring Performance
Bullwhip Effect
Outsourcing
Mass Customization
Supply Chain of a Typical Original
Equipment Manufacturer
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
Toyota’s Supply Chain
Digression
 Make vs. Buy
 Purchasing
strategies
 Vertical integration
 Many suppliers
 Few suppliers
 Virtual company
Vertical Integration
Formulas for Measuring SupplyChain Performance
 One of the most commonly used measures in all of
operations management is “Inventory Turnover”
Cost of goods sold
Inventory turnover 
Average aggregate inventory value
 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
 Average aggregate inventory value 
 52 weeks
Weeks of supply  
Cost of goods sold


Question
If the “cost of goods sold” for a company is
$1,000,000 and the “average aggregate
inventory value” is $25,000, what is the
“inventory turnover”? How many weeks of
supply is there?
Answer: Turnover = 40 i.e., (1,000,000/25,000=40)
Weeks of supply = 1.3
Inventory Turnover Statistics
Hardware Stores: 3.5
Retail Nurseries & Garden
Supply: 3.3
General Merchandise Stores:
4.7
Grocery Stores: 12.7
New & Used Car Dealers: 6.8
Gas stations & mini-marts: 39.3
Apparel & Accessories: 3.5
Furniture & home furnishings:
4.1
Drug Stores: 5.3
Liquor Stores: 6.6
Other Retail Stores: 4.3
Wholesale
Groceries & related: 17.8
Vehicles & automotive: 6.9
Furniture & fixtures: 5.5
Sporting goods: 4.8
Drug store items: 8.5
Apparel & related: 5.5
Petroleum & related: 42.4
Alcoholic beverages: 8.5
Source: Bizstats.com
The Impact of Variability
 The Bullwhip Effect
 Tailoring the supply
chain to the type of
product
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.
The Beer Game
Four players per team
Delay
Delay
Retailer
Factory
Delay
Delay
Orders
Delay
Delay
Wholesaler
Material
Distributor
Delay
Delay
Supply Chain Design Strategy
Based on concepts developed by
Marshall Fischer at Wharton (Penn)
 Functional Products




Staples that people buy at retail outlets
Predictable demand and long life cycles
Physical costs
Strategy: Minimize physical costs
 Innovative Products
 Life cycle is just a few months (e.g. fashion
clothes & computers)
 Demand is unpredictable
 Market mediation costs (inventory &
stockouts)
 Strategy: Maximize responsiveness &
flexibility
Supply-Chain Strategy
Efficient
Supply Chain
Responsive
Supply Chain
Functional Products
Match
Standard picture frames
Standard eyeglass
frames
Sub shop
Innovative Products
Custom made clothes
Gourmet food
Liberal arts education
Low-cal breakfast cereal
Match
Exercise
 Go to the Mc-Graw Hill “Company Tours” link on the course’s
“web links” page
 Select a functional and innovative product and take the tour
of its operations – for example:
 Functional: Canadian Springs Water
 Innovative: Corbin Motorcycle Saddles
 From what you see, identify supply chain issues
 Are there any potential mismatches?
 Discuss and present results to the class.
What is Outsourcing?
Outsourcing is defined as
the act of moving a
firm’s internal
activities and decision
responsibility to
outside providers
Reasons to outsource
 Organizationally-driven
 Improvement-driven
 Financially-driven
 Revenue-driven
 Cost-driven
New term: Offshoring
 Employee-driven
Outsourcing – Value Added Services
Contract manufacturers
capacity and quality
Channel assembly
reduces transportation cost and damage
Vendor-managed inventory
stockless purchasing
Exercise
What are some of the social and ethical
issues surrounding global sourcing?
In the United States
In the “source” countries?
What are some arguments for? Against
In your group prepare a list of pros and cons.
Where do you stand on the issue?
Mass Customization
 Ability to deliver products & services tailored to
needs of different customers around the world.
 Organization/design principles
 Modular design (Dell Computers)
 Postponement - Flexible mix and match assembly
(HP Printers)
 Efficient supply of generic components – local make to
order assembly (Paint)
The goal: To design, manufacture and deliver customized
products using the economies of scale of mass production
Customization Creates
Problems
Demand Prediction
Feitzinger and Lee, 1997
Forecasts errors are greater when forecasting
individual products vs. a group of products
Complicated operations
How much inventory to carry
Which products are made
to order
to stock
What are capacity and component forecasts