Introduction to Operations Management:!

Session 5
Professor Gad Allon Kellogg School of Management, Northwestern University

G. Allon

In this Session
What is a supply chain? !! What are the key challenges? !! What are the key levers to improve supply chain performance? !! Strategically aligned supply chains
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G. Allon

Supply Chain Strategy

G. Allon

Timbuk2 Bags

Supply Chain

G. Allon

What is a Supply Chain?

1. Procurement or supply system
Raw Material supply points Movement/ Transport

2. Operating System
Raw Material Storage Movement/ Transport

3. Distribution System
Manufacturing PLANT 1 Movement/ Transport

4. Sales or demand system

Finished Goods Movement/ Storage Transport A

PLANT 2

PLANT 3 WAREHOUSES (DCs)

C MARKETS

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from suppliers to customers.

What is Supply Chain Management?

Managing supply chain ows and assets, to maximize supply chain surplus in a sustainable manner.
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What are the supply chain ows?

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Products Money Information

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Whats the goal of the supply chain?

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Match supply and demand to max surplus

Stockouts at Lululemon
While a large part of Lulus strategy is getting the product right, an equally important part is keeping it scarce. The goal is to sell gear at full price and to condition customers to buy when they see an item rather than wait. Our guest knows that theres a limited supply, and it creates these fanatical shoppers, says Ms. Day.

Costs of not Matching Supply and Demand

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Cost of overstocking
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liquidation, obsolescence, holding, consumer behavior

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Cost of under-stocking
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lost sales and resulting lost margin

Key Challenges to Matching Supply and Demand

G. Allon

Supply Chain in the Electronic Industry

WSJ May 18th 2009

Proliferation of SKUs

A Key to Matching Supply and Demand

When would you rather place your bet?

A A: B: C: D:

C D

A month before start of Derby The Monday before start of Derby The morning of start of Derby The winner is an inch from the nish line

Where is the Flow Time?

Buffer

Operation

Waiting

Processing

Operational Flows

Throughput R Inventory I FLOW TIME T Flow time T = Inventory I / Throughput R

Why do Buffers Build?! Why hold Inventory?

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Economies of scale
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Fixed costs associated with batches Quantity discounts Information Uncertainty Supply/demand uncertainty

Cycle stock

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Uncertainty
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Safety stock

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Seasonal Variability Strategic

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Seasonal stock

Flooding, availability

Strategic stock

Hedging against supply chain risks

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Reduce Safety Stock

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Driven by uncertainty and lead time: Reduce demand risk: Improve forecast Reduce supply risk: multi sourcing Reduce lead time Inventory pooling Delayed differentiation (Postponement)

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G. Allon

Reduce Lead Time: On Shoring

NY Times, Interview with CEO of Taphandles (beermarketing products) Q: Why did you decide to open your new factory in the United States? A: The lead time for orders coming from China is three weeks, and all of our brewery clients want our products faster thats the rst thing they say when we meet with them. Well break even on production, but come out ahead once we factor in lead time. Right now, were losing orders because of lead time.
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Inventory Pooling: Centralized Inventory Management at Amazon

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Inventory Pooling: Nordstrom

The change works this way: Say that a shopper was looking at a blue Marc Jacobs handbag at Nordstrom.com. She could see where it was available at nearby stores, and reserve it for pickup the same day. More signicant, if the Web warehouse was out of that bag, it did not matter. Inventory from Nordstroms 115 regular stores is also included. Maybe there was just one handbag left in the entire company, sitting forlornly in the back of the Roosevelt Field store it would be displayed online and store employees would ship it to the Web customer.

Postponement: Timbuk2 Bags

Strategic Fit in Supply Chains

G. Allon

Books
Strategy
Variety Centralized Inventory

Supply Chain

Decentralized Inventory Time and Shopping Experience

Video Rental
Strategy
Variety Centralized Inventory and Streaming

Supply Chain

Time

Decentralized Inventory at convenient locations

G. Allon

Summary

G. Allon

The Three Questions

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What is improvement?
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Linking operations to strategy Focus on processes Bottleneck Critical path Lean operations Reduce variability

Where to target improvement?

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How to improve?
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G. Allon