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Supply Chain Strategy

Chapter 10

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How Supply Chain Strategy fits the Operations Management Philosophy

Operations As a Competitive Weapon Operations Strategy Project Management

Process Strategy Process Analysis Process Performance and Quality Constraint Management Process Layout Lean Systems

Supply Chain Strategy Location Inventory Management Forecasting Sales and Operations Planning Resource Planning Scheduling

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Dell, Inc. (case summary)

Dell is a leader because of their fast response time. Customer orders are on delivery trucks in 36 hours. Their focus is on how fast inventory moves. (Keeping parts cost and inventories low) The bulk of its components are housed within 15 minutes of each of its plants. As customers place orders, suppliers know when to ship components. (WHY?) Suppliers restock the warehouse and manage the inventory. Effective supply chain management is the key.
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Supply Chain
Supply chain: The network of services, material, and information flows that link a firms customer relationship, order fulfillment, and supplier relationship processes to those of its supplier and customers.
(All facilities, functions, and activities associated with flow and transformation of goods and services from raw materials to customer, as well as the associated information flows)

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Supply chain management: Developing a strategy to organize, control, and motivate the resources involved in the flow of services and materials within the supply chain.
(Managing flow of information through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs)
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Supply chain strategy: Designing a firms supply chain to meet the competitive priorities of the firms operations strategy.
Example: A boutique that emphasize on quality and exclusivity. How would it design the SC? SC vary between firms
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Supply Chain for Services

Supply chain design for a service provider is driven by the need to provide support for the essential elements of the various service packages it delivers. A service package consists of
supporting facilities (The store itself, equipments) facilitating goods (eg, Florist: basket, ribbons, card) explicit services: Arranging the flower implicit services: Courtesy, internet services, location

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Supply Chain for a Florist

Home customers
Required for facilitating goods Required for explicit services

Commercial customers
Required for implicit services


Required for supporting facilities


Local delivery service

Arrangement materials

Maintenance services

FedEx delivery service

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Flowers local/ international

Internet services

Creation of Inventory
(similar to the analogy of a water tank)
Inventory: A stock of materials used to satisfy customer demand or to support the production of services or goods.
Input flow of materials

How do you manage the flow?

Inventory level

Output flow of materials

Scrap flow
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Supply Chain for Manufacturing

Raw materials (RM): The inventories needed for the production of services or goods. (For mfg, > 60%
cost is on Material- can reap large profit will small reduction in material cost)

Work-in-process (WIP): Items, such as components or assemblies, needed to produce a final product in manufacturing.
Finished goods (FG): The items in manufacturing plants, warehouses, and retail outlets that are sold to the firms customers.
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Inventory at Successive Stocking Points

Raw materials

Work in process

Finished goods


Manufacturing plant

Distribution center


How do you classify inventory at Bakery store ?

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Distribution center

Distribution center

Supply Chain
Tier 1


Tier 2

Tier 3

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Supplier of services

Supplier of materials

Upstream SC members

Downstream SC members

Hearts and brains of SC

Supply Chain Illustration

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Supply Chain for Denim Jeans

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Supply Chain for Denim Jeans (cont.)

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Inventory Measures of Supply Chain Performance

Average aggregate inventory value (AGV) is the total value of all items held in inventory for a firm. AGV = (# of A items)(Value of each A)+(# of B items)(Value of each B)+ Weeks of supply: The average aggregate inventory value divided by sales per week at cost. Weeks of supply = Average aggregate inventory value Weekly sales (at cost)

Inventory turnover is annual sales at cost divided by the average aggregate inventory value maintained for the year. Inventory turnover =
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Annual sales at (cost) Average aggregate inventory value

Calculating Inventory Measures

Example 10.1
The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million. The best inventory turnover in the industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do?

Using Inventory Estimator Solver

Weeks of supply = $2 mil/($10 mil)(52 wks.) = 10.4 weeks

Inventory turns = $10 mil./$2 mil. = 5 turns/yr

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Application 10.1

Weeks of supply

Average aggregate inventory value Weekly sales (at cost) $6,821,000 18.5 weeks $19,200,000 52 weeks

Inventory turnover
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$19,200,00 0 2.8 turns $6,821,000

Supply Chain Process Measures

3 Major internal process related to SC Customer Relationship Order Fulfillment Supplier Relationship

Percent of orders taken accurately Time to complete the order placement process Customer satisfaction with the order placement process

Percent of incomplete orders shipped Percent of orders shipped on time Time to fulfill the order Percent of botched services or returned items Cost to produce the service or item Customer satisfaction with the order fulfillment process Inventory levels of WIP and FG

Percent of suppliers deliveries on time Suppliers lead times Percent defects in services and purchased materials Cost of services and purchased materials

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Links to Financial Measures

Return on Assets (ROA): is net income divided by total assets.
Managing the supply chain so as to reduce the aggregate inventory investment will reduce the total assets portion of the firms balance sheet. (thus lead to high return on asset)

Working Capital: Money used to finance ongoing operations.

Weeks of inventory and inventory turns are reflected in working capital. Decreasing weeks of supply or increasing inventory turns reduces the working capital.
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Links to Financial Measures

Cost of Goods Sold: Buying materials at a better price, or transforming them more efficiently, improves a firms cost of goods sold measure and ultimately its net income.
Total Revenue: Increasing the percent of on-time deliveries to customers increases total revenue because satisfied customers will buy more services and products. Cash Flow: Cash-to-cash is the time lag between paying for the services and materials needed to produce a service or product and receiving payment for it.
The shorter the time lag, the better the cash flow position of the firm because it needs less working capital.

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Supply Chain Dynamics

Supply chain dynamics can wreak havoc on supply chain performance measures.
Actions of downstream supply chain members can affect the operations of upstream members.

The bullwhip effect: The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the chain.
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2. Tend to overreact and increase its own demand

Bullwhip Effect

Occurs when slight demand variability is magnified as information moves back upstream
1. Slight changes in demand occur

3. How to cope????
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Supply Chain Dynamics for Facial Tissue

Bullwhip Effect

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More variability as supply not match demand pattern

External Value-Chain Linkages

First-Tier Supplier Support Processes Service/Product Provider Support Processes

External Suppliers

New Service/ Product Development Process

Business-toBusiness (B2B) Customer Relationship Process

New Service/ Product Development Process

Business-toCustomer (B2C) Customer Relationship Process

External Consumers

Supplier Relationship Process

OrderFulfillment Process

Supplier Relationship Process

OrderFulfillment Process

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External Causes of Supply Chain Disruption

Volume changes.
Customers may change ordered quantity or delivery date.

Service and product mix changes.

Customers may change the mix of ordered items.

Late deliveries.
Late deliveries can force a switch in production schedules.

Underfilled shipments.
Partial shipments can cause a switch in production schedule or quantity produced.
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Internal Causes of Supply Chain Disruption

Internally generated shortages of parts. Engineering changes to the design of services
or products are disruptive.

New service or product introductions

disrupt the supply chain and may require a new supply chain. Service or product promotions may create a demand spike.

Information errors such as demand forecast

errors, faulty inventory counts, or miscommunication with suppliers.
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1. The Customer Relationship Process

E-Commerce and the Marketing Process

Electronic Commerce (e-commerce) is the application of information and communication technology anywhere along the value chain of business processes.
Business-to-Consumer Systems (B2C) allows customers to transact business over the Internet. Business-to-Business Systems (B2B) involves commerce between firms.
The biggest growth area, it is currently about 70% of the regular economy.
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The Customer Relationship Process

Nested Process: Marketing and the Order Placement Process

Cost reduction: Using the Internet can reduce the costs of processing orders. Revenue flow increase: Reduction in the time lag associated with billing the customer or waiting for checks. Global Access: Available 24 hours a day. Price flexibility: Prices can easily be changed as the need arises. 2007 Pearson Education

2. Order Fulfillment at Dell, Inc.


2. 3.


5. 6. 7. 8.

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Customers buy from Dell by web site, voice-to-voice, and face-to-face. Order information is transmitted to the inventory system. Unique product configuration information is contained in the Traveler, a sheet that travels with the system the customer has ordered throughout its assembly and shipping. When the Traveler is pulled, all required internal parts and components for a system are picked and put in a tote or kit. (Procedure is called Kitting) A team uses the kit to assemble and initially test the system. Systems are thoroughly tested. Completed systems are boxed and placed on trucks. The entire assemble-to-order cycle takes only a few hours.

Dells Order Fulfillment Process

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The Order Fulfillment Process

Inventory Placement

Centralized placement: Keeping all the inventory at one location such as a firms manufacturing plant or a warehouse and shipping directly to customers.
Inventory pooling is a reduction in inventory and safety stock because of the merging of variable demands from customers.
A higher than expected demand from one customer can be offset by a lower-than-expected demand from another.

Forward placement is locating stock closer to customers at a warehouse, wholesaler, or retailer.

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The Order Fulfillment Process

Vendor-Managed Inventories Vendor-managed inventories (VMI): An extreme application of forward placement involving locating inventories at the customers facilities. Key ingredients are:
Collaborative effort requires trust & accountability. Cost savings is realized by eliminating excess inventory. Customer service: The supplier is frequently on site for improved response times and reducing stockouts. Written agreement on procedures, methods, and schedules are clearly specified.
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Order Fulfillment Programs

Continuous Replenishment Program (CRP)
A VMI method in which the supplier monitors the customers inventory levels and replenishes stock as needed.
Collaborative planning, forecasting, and replenishment (CPFR)

Radio Frequency Identification (RFID)

A method for identifying items through the use of radio signals from a tag attached to an item.
Wal-Mart and Gillette are among a number of large retailers, manufacturers, government agencies, and suppliers currently implementing RFID in their supply chains.
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Distribution Processes
Ownership: Rather than negotiate with a contract carrier, a firm has the most control over the distribution process if it owns and operates it, thereby becoming a private carrier. Firms may use a combination of the five basic modes of transportation: truck, train, ship, pipeline, and airplane. Cross-Docking: The packing of products on incoming shipments so that they can be easily sorted at intermediate warehouses for outgoing shipments based on their final destinations.
Items are carried from the incoming-vehicle docking point to the outgoing-vehicle docking point without being stored in inventory at the warehouse.
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Continuous Replenishment at
Each morning Campbell uses Electronic Data Interchange to link with retailers.
Retailers inform Campbell of demands for its products and the current inventory levels in their distribution centers. Campbell determines which products need replenishment based on upper and lower inventory limits established with each retailer. Campbell makes daily deliveries of needed products.
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3. The Supplier Relationship Process

The sourcing process qualifies, selects, manages the contracts, and evaluates suppliers.

The design collaboration process focuses on jointly designing new services or products with key suppliers, seeking to eliminate costly delays and mistakes incurred when many suppliers concurrently, but independently, design service packages or manufactured components.
The negotiation process focuses on obtaining an effective contract that meets the price, quality, and delivery requirements of the supplier relationship processs internal customers.
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The Supplier Relationship Process

The buying process relates to the actual procurement of the service or material from the supplier. This process includes the creation, management, and approval of purchase orders. The information exchange process facilitates the exchange of pertinent operating information, such as forecasts, schedules, and inventory levels between the firm and its supplier.

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Supplier Selection and Certification

Purchasing: The activity that decides which suppliers to use, negotiates contracts, and determines whether to buy locally. Supplier selection often considers the criteria of price, quality and delivery. Green purchasing: The process of identifying, assessing, and managing the flow of environmental waste and finding ways to reduce it and minimize its impact on the environment. Supplier certification programs verify that potential suppliers have the capability to provide the services or materials the buyer firm requires.
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Supplier Relations
Competitive orientation views negotiations between buyer and seller as a zero-sum game. Whatever one side loses, the other side gains, and short-term advantages are prized over long-term commitments.
Cooperative orientation is where the buyer and seller are partners, each helping the other as much as possible. Sole sourcing is the awarding of a contract for a service or item to only one supplier.
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Electronic Purchasing
Electronic Data Interchange (EDI) enables the transmission of routine, standardized business documents from computer to computer. Catalog hubs: A system whereby suppliers post their catalog of items on the Internet and buyers select what they need and purchase them electronically. Exchange: An electronic marketplace where buying firms and selling firms come together to do business.

Auction: A marketplace where firms place competitive bids to buy something.

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Centralized versus Localized Buying (for firms with several facilities)

Centralized buying increases purchasing clout. Savings can be significant, often 10% or more.
Increased buying power can mean getting better service, ensuring long-term supply availability, or developing new supplier capability. The biggest disadvantage is loss of local control.

Centralized buying is undesirable for items unique to a particular facility.

The best solution may be one where both local autonomy and centralized buying are possible.
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Value Analysis
Value analysis is a systematic effort to reduce the cost or improve the performance of services or products, either purchased or produced. Early supplier involvement is a program that includes suppliers in the design phase of a service or product. Presourcing: A level of supplier involvement in which suppliers are selected early in a products concept development stage and given significant, if not total, responsibility for the design of certain components or systems of the product.
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Supply Chain Strategies

Efficient supply chains focus on the efficient flows of services and materials, keeping inventories to a minimum.
Work best where demand is highly predictable.

Responsive supply chains are designed to react quickly.

Work best when firms offer a great variety of services or products and demand predictability is low.
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Environment & Design Factors

Environment Factors Efficient Supply Chains Responsive Supply Chains

Design Factors

Efficient Supply Chains

Responsive Supply Chains

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Mass Customization (eg: Paint

Mass Customization: A strategy whereby a firms flexible processes generate a wide variety of personalized services or products at reasonably low costs. Competitive advantages: Managing customer relationships. It requires detailed inputs from customers so that the ideal service or product can be produced. Eliminating finished goods inventory. Producing to a customers order eliminates finished goods inventory. Increasing perceived value. It increases the perceived value of services or products.
Postponement is when some of the final activities in the provision of a service or product are delayed until the orders are received. Channel assembly is when members of the distribution channel act as if they were assembly stations in the factory.

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Lean Supply Chains

Three key activities are required to attain a lean supply chain: 1. Strategic Sourcing: Identifying items or services that are of high value or complexity and purchase them from a select set of suppliers with whom the firm establishes a close relationship. 2. Cost Management: Limiting the number of suppliers and focusing on helping them reduce their costs through trust and friendly collaboration. 3. Supplier Development: Shifting from price negotiations to cost management and working with suppliers to achieve lean operations.
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A Make-or-buy decision is a managerial choice between whether to outsource a process or do it in-house. Outsourcing: Paying suppliers and distributors to perform processes and provide needed services and materials. Backward integration is a firms movement upstream toward the sources of raw materials, parts, and services through acquisitions. Forward integration is acquiring more channels of distribution, such as distribution centers (warehouses) and retail stores, or even business customers.

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Offshoring is a supply chain strategy that involves moving processes to another country. Factors that influence the offshoring decision include:
Comparative labor costs Logistics costs Labor Laws and Unions Tariffs and Taxes Internet

Pitfalls of offshoring include:

Pulling the plug too quickly. Not making a good-faith effort to fix the existing process Technology transfer Difficulties integrating processes
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Virtual Supply Chains

Virtual Supply Chain: Outsourcing some part of the entire order fulfillment process with the help of sophisticated, Webbased information technology support packages. Benefits include:
Reduced investment in inventories and order fulfillment infrastructure. Greater service or product variety without the overhead of ones own order fulfillment process. Lower costs due to economies of scale. The supplier typically handles more volume than does the firm doing the outsourcing. Lower transportation costs. With drop shipping in a virtual supply chain, the only transportation cost is shipping the goods from the wholesaler to the customer.
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Which Type of Supply Chain?

In-house order fulfillment process Outsource the order fulfillment process

Traditional Supply Chain is preferred when:

1. Sales volumes are high. 2. Order consolidation is important. 3. Small-order fulfillment capability of suppliers is important.

Virtual Supply Chain is preferred when:

1. Demand is highly volatile. 2. High service or product variety is important.

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