A Strategic Framework for Supply
Chain Design, Planning, and
Operation
8/25/00
S.Chopra/Logistics Strategy
1
Outline
 What
is supply chain management?
 A supply chain strategy framework
8/25/00
S.Chopra/Logistics Strategy
2
Traditional View: Logistics in the
Economy (1990, 1996)
 Freight
Transportation
 Inventory Expense
 Administrative Expense
 Logistics related activity
$352, $455 Billion
$221, $311 Billion
$27, $31 Billion
11%, 10.5% of GNP.
Source: Cass Logistics
8/25/00
S.Chopra/Logistics Strategy
3
Traditional View: Logistics in the
Manufacturing Firm
 Profit
 Logistics
4%
Cost
 Marketing
Cost
 Manufacturing
8/25/00
21%
Profit
Logistics
Cost
Marketing
Cost
27%
Cost 48%
S.Chopra/Logistics Strategy
Manufacturing
Cost
4
Supply Chain Management: The
Magnitude in the Traditional View
 Estimated
that the grocery industry could save $30
billion (10% of operating cost by using effective
logistics and supply chain strategies
– A typical box of cereal spends 104 days from factory to sale
– A typical car spends 15 days from factory to dealership
 Laura Ashley
turns its inventory 10 times a year, five
times faster than 3 years ago
8/25/00
S.Chopra/Logistics Strategy
5
Supply Chain Management: The True
Magnitude
 Compaq
estimates it lost $0.5 billion to $1 billion in
sales in 1995 because laptops were not available when
and where needed
 When
the 1 gig processor was introduced by AMD,
the price of the 800 meg processor dropped by 30%
 P&G
estimates it saved retail customers $65 million
by collaboration resulting in a better match of supply
and demand
8/25/00
S.Chopra/Logistics Strategy
6
What is a supply chain?
P&G or other
manufacturer
Jewel or third
party DC
Plastic
Producer
Tenneco
Packaging
Chemical
manufacturer
(e.g. Oil Company)
8/25/00
Paper
Manufacturer
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Chemical
manufacturer
(e.g. Oil Company)
Timber
Industry
S.Chopra/Logistics Strategy
7
Flows in a Supply Chain
Information
Product
Customer
Funds
8/25/00
S.Chopra/Logistics Strategy
8
Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
8/25/00
S.Chopra/Logistics Strategy
9
Push/Pull View of Supply Chains
Customer Order
Cycle
Procurement,
Manufacturing and
Replenishment cycles
PUSH PROCESSES
PULL PROCESSES
Customer
Order Arrives
8/25/00
S.Chopra/Logistics Strategy
10
Examples of Supply Chains
 Dell
/ Compaq
 Toyota / GM / Ford
 McMaster Carr / W.W. Grainger
 Amazon / Borders / Barnes and Noble
 Webvan / Peapod / Jewel
What are some key issues in these supply chains?
8/25/00
S.Chopra/Logistics Strategy
11
What is Supply Chain Management?
Managing supply chain flows and assets, to maximize
supply chain surplus.
 What
8/25/00
is supply chain surplus?
S.Chopra/Logistics Strategy
12
The Value Chain: Linking Supply Chain
and Business Strategy
Business Strategy
New Product Marketing
Strategy
Strategy
New
Product
Development
Supply Chain Strategy
Marketing
and
Operations Distribution
Sales
Service
Finance, Accounting, Information Technology, Human Resources
8/25/00
S.Chopra/Logistics Strategy
13
Achieving Strategic Fit
 Understanding
–
–
–
–
–
–
8/25/00
the Customer
Lot size
Response time
Service level
Product variety
Price
Innovation
Implied
Demand
Uncertainty
S.Chopra/Logistics Strategy
14
Levels of Implied Demand Uncertainty
Detergent
Long lead time steel
High Fashion
Emergency steel
Customer Need
Price
Responsiveness
Low
High
Implied Demand Uncertainty
8/25/00
S.Chopra/Logistics Strategy
15
Understanding the Supply Chain: CostResponsiveness Efficient Frontier
Responsiveness
High
Low
Cost
High
8/25/00
Low
S.Chopra/Logistics Strategy
16
Achieving Strategic Fit
Responsive
supply chain
Responsiveness
spectrum
Efficient
supply chain
Certain
demand
8/25/00
Implied
uncertainty
spectrum
S.Chopra/Logistics Strategy
Uncertain
demand
17
Strategic Scope
Suppliers Manufacturer Distributor
Retailer
Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
8/25/00
S.Chopra/Logistics Strategy
18
Drivers of Supply Chain Performance
Efficiency
Responsiveness
Supply chain structure
Inventory
Transportation
Facilities
Information
Drivers
8/25/00
S.Chopra/Logistics Strategy
19
Considerations for Supply Chain Drivers
Driver
Efficiency
Responsiveness
Inventory
Cost of holding
Availability
Transportation
Consolidation
Speed
Facilities
Consolidation /
Proximity /
Dedicated
Flexibility
What information is best suited for
each objective
Information
8/25/00
S.Chopra/Logistics Strategy
20
Supply Chain Decisions: Structuring
Drivers
Strategy
(Design)
Planning
Operation
8/25/00
S.Chopra/Logistics Strategy
21
Major Obstacles to Achieving Fit
 Multiple
owners / incentives in a supply chain
Local optimization and lack of global fit
 Increasing
product variety / shrinking life cycles /
customer fragmentation
Increasing implied uncertainty
8/25/00
S.Chopra/Logistics Strategy
22
Dealing with Multiple Owners / Local
Optimization
 Information
Coordination
 Contractual
Coordination
8/25/00
S.Chopra/Logistics Strategy
23
Lead Time
Dealing with Product Variety: Mass
Customization
Long
Short
Mass
Customization
High
Low
Low
8/25/00
High
S.Chopra/Logistics Strategy
24
Fragmentation of Markets and
Product Variety
 Are
the requirements of all market segments served
identical?
 Are
the characteristics of all products identical?
 Can
a single supply chain structure be used for all
products / customers? No! A single supply chain
will fail different customers on efficiency or
responsiveness or both.
8/25/00
S.Chopra/Logistics Strategy
25
Tailored Logistics
 Each
Logistically Distinct Business (LDB) will have
distinct requirements in terms of
– Inventory
– Transportation
– Facility
– Information
Key: How to gain efficiencies while tailoring logistics?
8/25/00
S.Chopra/Logistics Strategy
26
Applying the Framework to ecommerce: What is e-commerce?
 Commerce
–
–
–
–
–
–
8/25/00
transacted over the Internet
Is product information displayed on the Internet?
Is negotiation over the Internet?
Is the order placed over the Internet?
Is the order tracked over the Internet?
Is the order fulfilled over the Internet?
Is payment transacted over the Internet?
S.Chopra/Logistics Strategy
27
Existing Channels for Commerce

Product information
– Physical stores, EDI, catalogs, face to face, …

Negotiation
– Face to face, phone, fax, sealed bids, …

Order placement
– Physical store, EDI, phone, fax, face to face, …

Order tracking
– EDI, phone, fax, …

Order fulfillment
– Customer pick up, physical delivery
8/25/00
S.Chopra/Logistics Strategy
28
Revenue Impact of E-Commerce
Length of supply chain
 Product information
 Time to market
 Negotiating prices and contract terms
 Order placement and tracking
 Order fulfillment
 Payment

8/25/00
S.Chopra/Logistics Strategy
29
Cost Impact of E-Commerce
 Facility
costs
– Site and processing cost
 Inventory
costs
– Cycle, Safety, Seasonal inventory
 Transportation
costs
– Inbound and outbound costs
 Information
sharing
– Coordination
8/25/00
S.Chopra/Logistics Strategy
30