Supply Chain Management
Lecture 3
Outline
• Today
– Some more supply chain examples
– Start Chapter 2
• Thursday
– Chapters 2 and 3
Maximizing supply chain surplus
Manufacturer
Distributor
$1
Prob.
0.2
0.2
0.2
0.2
0.2
Demand
1000
800
600
400
200
Retailer
$5
Customer
$10
Retailer Order
1000
800
5000
4000
3000
4000
1000
2000
-1000
0
-3000
-2000
600
3000
3000
3000
1000
-1000
400
2000
2000
2000
2000
0
200
1000
1000
1000
1000
1000
Expected Profits
1000
1600
1800
1600
1000
Distributor profit = 600*($5-$1) = $2,400
Supply chain profit = $1,800 + $2,400 = $4,200
Maximizing supply chain surplus
Manufacturer
Distributor
Retailer
$1
Prob.
0.2
0.2
0.2
0.2
0.2
Demand
1000
800
600
400
200
Retailer Order
1000
9000
7000
5000
3000
1000
Customer
$10
800
7200
7200
5200
3200
1200
600
5400
5400
5400
3400
1400
400
3600
3600
3600
3600
1600
200
1800
1800
1800
1800
1800
Expected Profits
5000
4800
4200
3200
1800
Supply chain profit = $5,000
Celestial Seasonings
• The herbs were originally harvested by hand in the Rocky
Mountains
• Currently, herbs and leafs come from growers around the
world
– “We’ve been working to establish sustainable harvests and fair
wages for more than 30 years”
What are advantages of having one production facility?
What are disadvantages of having one production facility?
What advantages does selling tea over the Internet
provide?
ProBuild
• The nation’s largest supplier of building
materials to national builders, local contractors
and do-it-yourselfers
• 550+ facilities nationwide
– Lumber yards, millwork shops, distribution centers
What are advantages of having multiple facilities?
Why is inventory management so important?
ProBuild
• Housing outlook
– Unemployment at 10.2%
– Foreclosures still rising
• ProBuild
– Sales declined over 20% in 2009
Why did ProBuild added hundreds of salespeople in 2009?
Mortgage
• “A mortgage is the transfer of an interest in
property to a lender as a security for a debt,
usually a loan of money”
Source: http://www.wikipedia.org
Is there lead time the mortgage supply chain?
What went wrong in the mortgage supply chain?
Is the mortgage supply chain easier to automate than a
manufacturing supply chain?
Interceptor Body Armor
• The interceptor body armor system consists of a
vest made of Kevlar that has a front and back
insert for a ceramic protective plate
– March, 2003 Start of the invasion of Iraq
– April, 2003 Congress approves to buy 300,000 interceptor body
armor vests
– October, 2003 Nearly one-quarter of the 130,000 U.S. troops in
Iraq still had not been an interceptor body armor vest
– 8 months after combat operations were declared over, all
personnel in Iraq had an interceptor body armor vest
"Body Armor Saves Lives in Iraq; Pentagon Criticized for Undersupply of
Protective Vests,"Washington Post . 4 Dec, 2003
What went wrong?
Interceptor Body Armor
Demand
77,052
Demand
8,593
Demand
210,783
Supply
23,900
Interceptor Body Armor
Demand
108,808
Demand
9,586
Demand
478,541
Supply
40,495
Interceptor Body Armor
• Production
– October, 2002 Production capacity 3,000 plates per month
– October, 2003 Production capacity 25,000 plates per month
Where should the production facilities be located?
Crocs
• Crocs shoes are made from Croslite
–
–
–
–
Extremely light
Does not skid
Odor resistant
Easy to wash
• The founders wanted to name the shoes something that
captured the amphibious nature
– “Alligator” had already been taken
Accessories
Various
Suppliers
Jibbitz
Leather
Mold
producers
Style &
size
molds
Sports
protectors
Grommets
Glue etc
Dye
Compound
Mold
Package &
Label
Assemble
Chem
Pellets
Color
Pellets
Size & Style
blanks
Complete
Croc
Dow Chem
& others
In-season
orders
Production
Orders
(plus %)
General Map of Croc’s Basic supply, production
and distribution processes
Pre-booked
orders
Labeled,
packaged
Croc
Warehouse
and
distribute
Small
retailer
Large
Retailer
Distribution
*Owned by Crocs vs. outsourced
Croc’s Global Production strategy
[3]
Compound
Mold
Italy
Florida*
[1]
[6]
Assemble
Denver 3rd
party
distributor
Canada*
Color
Pellets
[2]
Size & Style
blanks
Package & Warehouse
Label
/ distribute
Denver
Denver
Complete
Croc
Labeled,
packaged
Croc
Bosnia
China
China
Mexico*
Mexico*
China
Brazil*
Mexico*
Bosnia
Brazil*
[5]
Style &
size
molds
Bosnia
Bosnia
China
China
Mexico*
Mexico*
Brazil*
Brazil*
[1] Maintain Florida plant for “Made in USA label
[2] Take advantage of tariffs, e.g., Canada to Isreal
[3] Maintain higher service component of warehousing and labeling for small retailers
[4] Minimize geographic transport by producing in region, including warehousing
[5] Move style and size molds between facilities to maximize production
[6] Use China for large volume, long-term orders from pre-season orders
[4]
Small
retailer
Large
Retailer
Europe
Large
Retailer
Asia
Large
Retailer
South
America
Crocs
• Revolutionized the shoe industry supply chain
model
– First shoe sold in 2003 (Revenue 1.2 million)
– Flip flop sandal introduced in 2006 (Revenue 355 million)
– Diversify in other products 2008 (Revenue 860 million)
What are advantages of having multiple production
facilities?
What are advantages of short lead times?
What are advantages of excess capacity?
How does Crocs plan for demand?
Netflix
• World’s largest online movie rental service
Where is Netflix’s inventory?
Netflix
What are the differences between Netflix and Blockbuster
Netflix
• Netflix versus Blockbuster store
No. of
locations
No. of
employees
No. of titles
No. DVDs
available
Blockbuster
Inc.
8,000+
Stores
89,000
1,000-8,000
per location
100s per
location
Netflix
16 DCs
381
13,500
3.3 million
Who are Netflix’s competitors?
Where should the distribution centers be located?
How does Netflix plan for demand?
Study of Supply Chain Management
• Successful supply chain management requires
decisions on the flow of information, product, and
funds that fall into three decision phases
– Supply chain strategy or design
– Supply chain planning
– Supply chain operation
Decision Phases in a Supply Chain
TIME FRAME
years
3 mo.- 1year
daily
TYPE
Strategic
TYPICAL DECISIONS
•Supply chain network design (How many plants?
Location and capacities of plants and warehouses?)
•Supply chain strategies (Sell direct or through
retailers? Outsource or in-house? Focus on cost or
customer service?)
•Product mix at each plant
Tactical
•Workforce & Production planning
•Inventory policies (safety stock level)
•Which locations supply which markets
•Transportation strategies
Operational
•Production scheduling
•Decisions regarding individual orders
•Place replenishment orders
Achieving Strategic Fit
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
• Coors
– The coldest tasting beer in the world, brewed with Rocky
Mountain spring water
• Dell
– Custom-made computer systems at a reasonable cost
Competitive strategy is defined based on how the customer
prioritizes product cost, delivery time, variety, and quality
Competitive Strategy
• To execute a company’s competitive strategy, all
functions that play a role must each develop its
own strategy
Finance, Accounting, Information Technology
New
Product
Development
Marketing
and
Sales
Operations
Distribution
Service
Strategy
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
What is Strategic Fit?
• Strategic fit
– For any company to be successful, its supply chain strategy and
competitive strategy must fit together
• Wal-Mart
– Everyday low prices
– 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
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 uncertainty
– Demand varies along certain attributes
• Quantity in each lot, response time, variety of products needed,
convenience, 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
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 Appeals,
Grocery, Food,
Most
Commodities
Fashion
Appeals,
Computers,
Pop Music,
Toys
Some Power,
Some Food
Produce,
Precious
Metals
M-commerce,
Telecom, Highend Servers,
Semiconductor
Low
(Stable
Process)
Efficiency,
Information
Integration, AutoReplenishment,
VMI
(Efficient SC)
Build-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, short lead
times, large variety, innovative products, high service level, etc
– Supply chain efficiency/cost
Highly
efficient
Somewhat
efficient
Somewhat
responsive
Highly
responsive
Integrated steel
mills
Hanes apparel
Most automotive
production
Seven-Eleven
Japan
2. Understanding the Supply Chain
Capabilities
Responsiveness
High
Low
Cost
High
Low