Supply Chain Management
Outline
• Supply-Chain Management
• Measuring Supply-Chain Performance
• Outsourcing
• Value Density
• Mass Customization
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What is a Supply-Chain?
Supply-chain is a term that describes how organizations
(suppliers, manufacturers, distributors, and customers)
are linked together
Services
Suppliers
Service Support
Operations
Local Service
Providers
Customers
Supply
Networks
Inputs
Transformation
Localization
Output
Manufacturing
Suppliers
Manufacturing
Distribution
Customers
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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
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Measures of Supply-Chain 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


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©The McGraw-Hill Companies, Inc., 2004
Example: Supply-Chain Performance Measurement
Suppose a company’s new annual report claims their
costs of goods sold for the year is $160 million and their
total average inventory (production materials + workin-process) is worth $35 million. This company
normally has an inventory turn ratio of 10.
What is this year’s Inventory Turnover ratio?
What does it mean?
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Cost of goods sold
Inventory turnover 
Average aggregate inventory value
A
1 COGS
$
2 Avg Inventory $
3 Turnover
B01.2314 -- Operations -- Prof. Juran
B
160,000,000
35,000,000
4.57
C
=B1/B2
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Since the company’s normal inventory turnover ratio is
10, a drop to 4.57 means that the inventory is not
turning over as quickly as it had in the past.
In other words, they now have more inventory relative
to their cost of goods sold than before.
What else would you want to know about this
situation?
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Supply Chain Strategy
Marshall Fisher:
• Adverse effects of price promotions
• Functional vs. Innovative products
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Hau Lee’s Supply Chain Concepts
• Hau Lee’s approach to supply chains centers on
aligning the supply chain with process side
uncertainties (focus on the supply side)
• A stable supply process has mature technologies and an
evolving supply process has rapidly changing
technologies
• Types of Supply Chains
– Efficient
– Risk-Hedging
– Responsive
– Agile
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Demand Characteristics
Functional
Low demand Uncertainty
More predictable demand
Stable Demand
Long product life
Low inventory cost
Low profit margin
Low product variety
Higher volume
Low stockout cost
Low obsolescence
Innovative
High demand Uncertainty
Difficult to forecast
Variable Demand
Short selling season
High inventory cost
High profit margin
High product variety
Low volume
High stockout cost
High obsolescence
B01.2314 -- Operations -- Prof. Juran
Supply Characteristics
Stable
Few breakdowns
Stable and higher yields
Few quality problems
More supply sources
Reliable suppliers
Few process changes
Few capacity constraints
Easy to change over
Flexible
Dependable lead times
Evolving
Vulnerable to breakdowns
Variable and lower yields
Potential quality problems
Limited supply sources
Unreliable suppliers
More process changes
Potential capacity constraints
Difficult to change over
Inflexible
Variable lead times
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Hau Lee’s Uncertainty Framework
Low Supply
Uncertainty
(Stable Process)
High Supply
Uncertainty
(Evolving Process)
Low Demand Uncertainty
High Demand Uncertainty
(Functional Products)
(Innovative Products)
Efficient Supply Chain
Responsive Supply Chain
(Grocery, Basic Apparel, Food, Oil
and Gas)
(Fashion Apparel, Computers, Popular
Music)
Risk-hedging Supply Chain
Agile Supply Chain
(Hydroelectric Power, Some Food
Produce)
(Telecom, High-end Computers,
Semiconductors)
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What is Outsourcing?
Outsourcing is defined as the act of moving
a firm’s internal activities and decision
responsibility to outside providers
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Reasons to Outsource
• Organizationally-driven
• Improvement-driven
• Financially-driven
• Revenue-driven
• Cost-driven
• Employee-driven
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Value Density
• Value density is defined as the value of
an item per pound of weight
• An important measure when deciding
where items should be stocked
geographically and how they should
be shipped
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Mass Customization
• Mass customization is a term used to describe the
ability of a company to deliver highly customized
products and services to different customers
• The key to mass customization is effectively
postponing the tasks of differentiating a product
for a specific customer until the latest possible
point in the supply-chain network
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Mass Customization
• Principle 1: A product should be designed so
it consists of independent modules that can
be assembled into different forms of the
product easily and inexpensively.
• Principle 2: Manufacturing and service
processes should be designed so that they
consist of independent modules that can be
moved or rearranged easily to support
different distribution network strategies.
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©The McGraw-Hill Companies, Inc., 2004
Mass Customization
• Principle 3: The supply network — the positioning of
the inventory and the location, number, and
structure of service, manufacturing, and distribution
facilities — should be designed to provide two
capabilities. First, it must be able to supply the basic
product to the facilities performing the customization
in a cost-effective manner. Second, it must have the
flexibility and the responsiveness to take individual
customers’ orders and deliver the finished,
customized good quickly.
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©The McGraw-Hill Companies, Inc., 2004
Summary
• Supply-Chain Management
• Measuring Supply-Chain Performance
• Outsourcing
• Value Density
• Mass Customization
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