Supply Chain Management
Overview
• What is it?
• Supply chain strategies
• Purchasing -> Read
– Outsourcing
– Partnering
• Managing the supply chain
– Postponement
– Channel assembly
– READ others
• Efficient vs. responsive supply chain
=========================
• Vendor selection -> Read
Supply Chain Management
• Coordinates and manages all activities
of the supply chain
• Components of the supply chain:
– External distribution
– Internal functions
– External suppliers
Supply
Chain
Distribution
center
Distribution
center
Manufacturer
Tier 1
Tier 2
Tier 3
Legend
Supplier of services
Supplier of materials
External
Distributors
Distribution
center
Internal
functions
Distribution
center
Manufacturer
Tier 1
External
Suppliers
Tier 2
Tier 3
Legend
Supplier of services
Supplier of materials
Milk Supply
Chain
External
Distributors
Packaging
Operation
Internal
functions
External
Suppliers
Tier 1
Tier 2
Tier 3
Supply-Chain Strategies
• Many suppliers
• Long-term suppliers
• Vertically integrate
• Keiretsu
• Virtual company
Many Suppliers Strategy
• Many sources per item
• Adversarial relationship
• Short-term
• Little openness
• Negotiated, sporadic PO’s
• Infrequent, large lots
• Delivery to receiving dock
© 1995 Corel Corp.
Few Suppliers Strategy
• 1 or few sources per item
• Partnership (JIT)
• Long-term, stable
• On-site audits & visits
• Exclusive contracts
• Frequent, small lots
• Delivery to point of use
© 1995
Corel
Corp.
Few suppliers strategy – Wallace Co.
• Partnering
• Listening to the needs of the customer
• Vendor-stocking program
• 98% on-time delivery
• Quick response on problems for
customer
Daimler Chrysler’s Supplier Cost
Reduction Effort
Supplier Suggestion
Model Savings
Rockwell
Use passenger car door
locks on trucks
Simplify design/substitute
materials on manual
window system
Dodge
trucks
Various
3M
Change tooling for woodgrain panels to allow three
from one die instead of two
Caravan,
Voyager
Trico
Change wiper-blade
formulation
Various
$140,000
Leslie Metal
Arts
Exterior lighting suggestions Various
$1,500,000
Rockwell
$280,000
$300,000
$1,500,000
Vertical Integration Strategy
• Ability to produce goods
previously purchased
– Setup operations
– Buy supplier
• Make-buy issue
• Major financial
commitment
• Hard to do all things well
Raw Material
(Suppliers)
Backward
Integration
Current
Transformation
Forward
Integration
Finished Goods
(Customers)
Vertical Integration
RAC "MiG" is the first Russian "vertically" integrated aircraft
manufacturing company
Keiretsu Network Strategy
• Uniquely Japanese form of corporate
organization
• System of mutual alliances and
cross-ownership
– Company stock is held by allied firms
• Lowers need for short-term profits
• Two types: horizontal and vertical
Vertical Keiretsu
• Links manufacturers, suppliers,
distributors, & lenders
– ‘Partnerships’ extend across entire supply
chain
• Primarily cars and electronics industries
• Ex. Toyota, Nissan, Honda-Matsushita,
Hitachi, Toshiba, Sony
Virtual Company Strategy
• Network of independent companies
– Linked by technology
• PC’s, faxes, Internet etc.
– Each contributes core competencies
– Typically provide services
• Payroll, editing, designing
• May be long or short-term
– Usually, only until opportunity is met
© 1995 Corel Corp.
Virtual company - Biogen
• Formed in 1978 with a simple, researchcentered business model
– Develop drugs and sell licenses to
pharmaceutical companies
• Received preliminary approval to market
Avonex (reduces the progression of
M.S.)
Virtual company - Biogen
Four major tasks to produce Avonex
Bulk
manufacturing
Formulation
Packaging
Warehousing
/Distribution
Virtual company - Biogen
Four major tasks to produce Avonex
Bulk
manufacturing
Formulation
Ben Venue
Labs (OH)
Packaging
Warehousing
/Distribution
Virtual company - Biogen
Packaging
Four major tasks to produce
Avonex
Coordinators
(Philadelphia
Bulk
manufacturing
Formulation
Ben Venue
Labs (OH)
Packaging
Warehousing
/Distribution
Virtual company - Biogen
Packaging
Four major tasks to produce
Avonex
Coordinators
(Philadelphia
Bulk
manufacturing
Formulation
Ben Venue
Labs (OH)
Packaging
Warehousing
/Distribution
Amgen
Louisville facility
Virtual company - Biogen
• Biogen managed the network of
partners
• Success story
– FDA approval to market was 35 hours
– No product shortages
– No recalls
– Production increased 5-fold over the next 3
years
Virtual company - Biogen
• Benefits to Biogen
– Competitive cost structure
– Had limited and small scale production
experience
– Fixed assets low
– Capital investment was low compared to
the size of its business
– Investment risk was shared by partners
Managing the Supply-Chain
• Options:
– Postponement
– Channel assembly
– Drop shipping
– Blanket orders
– Electronic ordering and funds transfer
– Vendor managed inventory
– Standardization
– Internet purchasing (e-procurement)
Postponement
• A tactic used by assemble-to-order and
mass-customization firms
• Delay the customization of a product or
service until the last possible moment
• e.g. Drug company produces the drug
as a powder. When orders are received
then produce tablets in the dosage for
which the order was received.
Channel assembly
• A form of postponement
• Utilize the distribution channel as an
assembly station
• Warehouse performs a value-added service
• e.g. Car battery manufacturer produces
batteries for several private labels. The
manufacturer ships unmarked batteries to
warehouse. When orders are received,
warehouse places decals for the brand name
and packages for that private label.
Purchasing
• Outsourcing
– Make or buy decision
• Partnering
Outsourcing
• Choosing to purchase a service or part from an
outside source;
• Make or buy decision
– Insourcing vs. outsourcing decision
• Advantages
– Allows the firm to focus on core competencies
– Adds capacity without additional fixed cost and
overhead
– Can be more cost effective
– Supports market agility
Hourly Labor Rates
Germany
$28.28
Belgium
$22.82
Scand
$22.24
Japan
$19.37
Austria
$18.50
U.S.
$18.24
France
$17.97
Canada
$16.55
U.K.
$15.47
Ireland
$13.57
US CEM
$13.50
Taiwan
$5.89
Brazil
$4.75
Czech Republic
$2.00
Mexico
$1.75
Malaysia
$1.52
China
Key Is Total Cost Of Ownership
$0.82
$15.00
$0.00
Source: http://stats.bls.gov/news.release/ichcc.t02.htm (1997data)+company records
$30.00
Li & Fung - Outsourcing
•
•
•
•
Hong Kong based exporter
American and European customer base
The Limited is one of their customers
Receive order for 10,000 garments:
– Purchase yarn from Korean company
– Have the yarn dyed and woven by a company in
Taiwan
– Purchase Japanese buttons and zippers from YKK’s
Chinese plants
– Garments made in 5 different plants in Thailand
Partnering
• Process of developing a long-term
relationship with a supplier based on:
–
–
–
–
mutual trust
shared vision
shared information
shared risk
Beer distribution game
• Consider a simplified beer supply chain,
–
–
–
–
A retailer who sells to the customer
A wholesaler which supplies the retailer
A distributor which supplies the wholesaler
A factory with unlimited raw materials which
makes (brews) the beer and supplies the
distributor
• Each component in the supply chain has:
– unlimited storage capacity
– fixed supply lead-time
– order delay time between each component
Beer distribution game
Beer distribution game
• Each week, each component in the
supply chain tries to meet the demand
of the downstream component.
• Any orders that cannot be met are
recorded as backorders, and are met
as soon as possible.
• No orders will be ignored, and all
orders must eventually be met.
Beer distribution game
• At each period, each component in the supply chain
is charged a $1.00 shortage cost per
backordered item.
• At each period, each location is charged $.50
inventory holding cost per inventory item that it
owns. Each component owns the inventory at that
facility. In addition,
– the wholesaler owns inventory in transit to the retailer;
– the distributor owns inventory in transit to the
wholesaler;
– the factory owns both items being manufactured and
items in transit to the distributor.
Beer distribution game
• Each supply chain member orders some
amount from its upstream supplier.
• It takes one week for this order to arrive
at the supplier.
• Once the order arrives, the supplier
attempts to fill it with available inventory.
• There is a two week transportation delay
before the material being shipped by the
supplier arrives at the customer who
placed the order.
Supply-Chain Dynamics
Supply-Chain Dynamics
Customer
Customer
Firm A
(a)
Supply-Chain Dynamics
Customer
Customer
Firm A
Firm B
(a)
Supply-Chain Dynamics
Customer
Customer
Firm A
Firm B
Firm C
(a)
Supply-Chain Dynamics
Customer
Firm A
Firm B
Materials requirements
Customer
Firm C
Time
(a)
(b)
Supply-Chain Dynamics
Customer
Firm A
Firm B
Materials requirements
Customer
Firm A
Firm C
Time
(a)
(b)
Supply-Chain Dynamics
Customer
Firm A
Firm B
Materials requirements
Customer
Firm C
Firm A
Firm C
Time
(a)
(b)
Bullwhip effect
Inaccurate or
distorted
demand
information
created in the
supply chain
Materials requirements
Supply-Chain Dynamics
Firm C
Firm A
Time
Supply-Chain Environments
• Two supply chain designs for
competitive advantage
– Efficient supply chain
• Goal is to minimize inventories and maximize
the efficiency of manufacturers and suppliers in
the chain
– Responsive supply chain
• Goal is to react quickly to market demands by
positioning inventories and capacities in order
to hedge against uncertainties of demand
Supply-Chain Environments
Environments Best Suited for Efficient and
Responsive Supply Chains
Supply-Chain Environments
Environments Best Suited for Efficient and
Responsive Supply Chains
Factor
Demand
Competitive
priorities
New-product
introduction
Contribution
margins
Product variety
Supply-Chain Environments
Environments Best Suited for Efficient and
Responsive Supply Chains
Factor
Demand
Competitive
priorities
New-product
introduction
Contribution
margins
Product variety
Efficient Supply Chains
Predictable; low
forecast errors
Low cost; consistent
quality; on-time
delivery
Infrequent
Low
Low
Supply-Chain Environments
Environments Best Suited for Efficient and
Responsive Supply Chains
Factor
Demand
Competitive
priorities
New-product
introduction
Contribution
margins
Product variety
Efficient Supply Chains
Responsive Supply Chains
Predictable; low
forecast errors
Low cost; consistent
quality; on-time
delivery
Infrequent
Unpredictable; high
forecast errors
Development speed; fast
delivery times;
customization; volume
flexibility; highperformance design
quality
Frequent
Low
High
Low
High