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Chapter 10
Supply Chain Strategy

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OBJECTIVES
Supply-Chain Management Measuring Supply-Chain Performance Bullwhip Effect 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
Suppliers Service support operations Transformation Local service providers Localization Customers

Services

Supply networks Manufacturing
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Inputs

Output

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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What recent changes have caused supply chain management to gain importance?
a. Competitive pressures from foreign firms. b. Elevation of product quality to a very high level of importance. c. International marketing and international purchasing. d. Trends towards choosing sole-source suppliers and long term relationships. e. Product varieties and ranges are rapidly changing, and speed of delivery to market is essential.

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f. Product life cycles have shortened necessitating knowledge and control of inventories in the various pipelines. g. Adoption of JIT production has changed supplier relationships and has also increased the focus on reducing inventories. h. Trends in the legal system hold manufacturers liable for product failures, even though causes of failure may lie outside of the production system itself. i. Use of EDI in purchasing. j. The growth of supplier development.

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Formulas for Measuring SupplyChain Performance

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Formulas for Measuring SupplyChain Performance
One of the most commonly used measures in all of operations management is ³Inventory Turnover´ ost o goods sold Inventory turnover ! Average aggregate inventory value In situations where distribution inventory is dominant, ³Weeks of Supply´ is preferred and measures how many weeks¶ worth of inventory is in the system at a particular time

¨ Average aggregate inventory value ¸ ¹ 52 weeks Weeks o supply ! © © ¹ ost o goods sold ª º
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Example of Measuring SupplyChain Performance
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 + work-inprocess) 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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Example of Measuring SupplyChain Performance (Continued)
ost o goods sold Inventory turnover ! Average aggregate inventory value
= $160/$35 = 4.57 Since the company¶s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.
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Bullwhip Effect
The magnification of variability in orders in the supplychain
Retailer¶s Orders Wholesaler¶s Orders Manufacturer¶s Orders

Time

Time

Time

A lot of retailers each with little variability in their orders«.
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«can lead to greater variability for a fewer number of wholesalers, and«

«can lead to even greater variability for a single manufacturer.

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It indicates a lack of synchronization among supply chain member Campbell Soup introduced continuous replenishment through EDI for the retailers where they can order and report their level of inventories and offers an ³everyday low price´ that eliminate discount. Through this system CS can cut the retailers¶ inventories to half and in turn increase profits by 50 percent.
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Marshall Fisher has developed a framework to help managers understand the nature demand for their products. The importance aspects of product¶ demand are : product life cycle, demand predictability, product variety, and market standards for lead times and service. He has found that products can be categorized as either functional of innovative.
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Differences between functional and innovative products :
Functional products are staples that people buy in a wide range of retail outlets. Typically, they do not change much over time, have low profit margins, stable predictable demand and long life cycles. Innovative products, on the other hand, give customers additional reasons to buy. Fashionable clothes and personal computers are examples of innovative products. Innovative products have short life cycles, high profit margins, and volatile demand.

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Hau Lee·s Concepts of Supply Chain Management
Hau Lee¶s approach to supply chain (SC) is one of aligning SC¶s with the uncertainties revolving around the supply process side of the SC A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies Types of SC¶s ± Efficient SC¶s ± Risk-Hedging SC¶s ± Responsive SC¶s ± Agile SC¶s

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Hau Lee·s SC Uncertainty Framework
Demand Uncertainty Lo (Functional products) Lo (Stable Process) High (Evolving Process) Efficient SC Ex.: Grocery Risk-Hedging SC Ex.: Hydroelectric po er High (Innovative products) Responsive SC Ex.: Computers gile SC Ex.: Telecom

Supply

Uncertainty

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What are characteristics of efficient, responsive, risk-hedging and agile supply chains? Can a supply chain be both efficient and responsive? Risk-hedging and Agile? Why or Why not?

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Efficient supply chains are designed to minimize cost that requires high utilization, minimizing inventory, and selecting vendors based primarily on cost and quality, and designing products that are produced at minimum cost. Market-responsive supply chains are designed to minimize lead time to respond to unpredictable demand, thus minimizing stockout costs and obsolete inventory costs. Risk sharing supply chains are those that share resources so that risks in the supply chain can be shared.

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Agile are those supply chains that are flexible while still sharing risks of shortages across the supply chain. Generally, these supply chains carry excess capacity and higher buffer stocks. Vendor in responsive supply chains would be selected for speed, flexibility, and quality. It is possible to be both efficient and responsive, and both Risk-hedging and Agile.

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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 It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped
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For an example, Assume that the inventory carrying cost rate is 30 percent per year of the product value. This cost rate captures the cost of capital, insurance, warehouse cost, and so on. Our alternative transportation modes are highway service provided by United Parcel Service (UPS) by ship and Federal Express by air.
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Where : Break-Even Product Value = 365 x Shipping cost savings 0.30 x 6 Shipping cost savings = Air shipping cost ± Regular highway shipping cost

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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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How to do it?
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 design.
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Principle 3:
The supply network-the positioning of 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 costeffective 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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Question Bowl
A typical supply chain would include which of the following? a. Suppliers b. Manufacturers c. Distribution d. All of the above e. None of the above Answer: d. All of the above

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Question Bowl
The supply chain measure of ³Inventory Turnover´ is which of the following ratios? Avg. inventory value/total costs Costs of goods sold/Avg. aggregate inventory value Total costs of goods/Avg. costs of goods Weeks worth of inventory/No. of weeks None of the above

a. b. c. d. e.

Answer: b. Costs of goods sold/Avg. aggregate inventory value
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Question Bowl
If the ³cost of goods sold´ for a company is $1,000,000 and the ³average aggregate inventory value´ is $25,000, which of the following is the ³inventory turnover´? a. 10 b. 25 c. 40 d. 50 e. None of the above

Answer: c. 40 (1,000,000/25,000=40)
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Question Bowl
If the ³cost of goods sold´ for a company is $250,000 and the ³average aggregate inventory value´ is $5,000, which of the following is the ³inventory turnover´? a. 10 b. 25 c. 40 d. 50 e. None of the above

Answer: d. 50 (250,000/5,000=50)
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Question Bowl
If the ³cost of goods sold´ for a company is $1,000,000 and the ³average aggregate inventory value´ is $50,000, which of the following is the ³weeks of supply´ measure for supply chain performance? a. 1 week b. 2.6 weeks c. 20 weeks d. 30 weeks e. None of the above

Answer: b. 2.6 (50,000/1,000,000)x52=2.6)
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Question Bowl
Which of the following refers to the phenomenon of increasing variability as we move from the customer to the producer in the supply chain? a. Continuous replenishing b. Stable supply process c. Evolving supply process d. Agile supply chains e. None of the above Answer: e. None of the above (The correct term is ³Bullwhip effect´.)
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Question Bowl
Which of the following are reasons why an organization should use ³outsourcing´ as a supply chain strategy? a. Reduces investment in assets b. Turns fixed costs into variable costs c. Gives employees a stronger career d. All of the above e. None of the above

Answer: d. All of the above
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Question Bowl
Which of the following ³transportation modes´ provides flexibility in delivery, timing and at reasonable rates for small quantities and over short distances? a. Rail b. Highway (trucking) c. Water d. Pipeline e. Air

Answer: b. Highway (trucking)
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End of Chapter 10

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