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Production Management
Supply Chain Management and
Global Logistics Practices
02/10/08 1
Mitigating Factors for Integration and

• Changing nature of the marketplace
– Volatile demand
– Decreased customer loyalty
– Shorter product life cycles
– Mass product customization
• Changing channel structures and relationships
• Globalization of the economy and markets
• Technology
• Government policy and deregulation

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What is Supply Chain?

• Supply chain consists of all the stages involved,
directly or indirectly, in fulfilling a customer request
• Supply chain includes manufacturers, suppliers,
transporters, warehouses, retailers, and customers

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A Detergent Supply Chain

Wal-Mart or Customer wants
P&G or other Wal-Mart
third detergent and goes
manufacturer Supermarket
party DC to Wal-mart

Plastic Tenneco
Producer Packaging
(e.g. Oil Company)

Paper Timber
Manufacturer Industry
(e.g. Oil Company)

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Supply Chain: Logistics Network

Warehouse A

Material costs Manufacturing costs Inventory costs

Warehouse B

Transportation costs Transportation costs

Warehouse C

Physical supply Physical distribution
materials management
inbound logistics outbound logistics
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The Objective of a Supply Chain

• Objective: maximize the overall value generated
• Value : the difference between what the final product is
worth to the customer and the effort the supply chain
expands in fills the customer’s request
• Profitability: the total profit to be shared across all
supply chain

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Integrating Supply Chain Process

Supplier Manufacturers Wholesalers Retailers Consumers


Product flow

Cash flow

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Key Characteristics of Traditional
Systems with Supply Chain
Factor Traditional Supply Chain
Inventory management Local focused Pipeline coordination

Inventory flows Interrupted Seamless/visible

Cost Local minimized Landed cost

Information Local controlled Shared

Risk Local focused Shared

Planning Local oriented coordinated

Interorganizational Local focused on low cost Partnerships focused on
relationships landed cost

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What is SCM?

Supply chain management is a set of approaches utilized to
efficiently integrate suppliers, manufacturers, warehouses
and stores, so that merchandise is produced and
distributed at the right quantities,
quantities to the right locations,
and at the right time,
time in order to minimize system-wide
costs while satisfying service level requirements.

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Traditional View: Logistics in the Economy
(1990, 1996)

• Freight Transportation $352, $455 Billion
• Inventory Expense $221, $311 Billion
• Administrative Expense $27, $31 Billion
• Logistics related activity 11%, 10.5% of GNP.

10 Source: Cass Logistics
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Traditional View: Logistics in the
Manufacturing Firm

• Profit 4% Profit

• Logistics Cost 21% Logistics
• Marketing Cost 27% Marketing
• Manufacturing Cost 48%

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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
– 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

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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

• 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.

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The Value Chain: Linking Supply Chain and
Business Strategy
Business Strategy

New Product Marketing
Strategy Strategy
Supply Chain Strategy

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

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Achieving Strategic Fit

• Step 1: Understanding the customer

• Step 2: Understanding the SC

• Step 3: Achieving Strategic fit

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Achieving Strategic Fit

• Understanding the Customer
– Lot size
– Response time
– Service level Implied
– Product variety Demand
– Price Uncertainty
– Innovation

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Levels of Implied Demand Uncertainty

Detergent High Fashion
Long lead time steel Emergency steel

Customer Need
Price Responsiveness

Low High

Implied Demand Uncertainty

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Supply Chain Responsiveness

• Respond to wide range of quantities demanded
• Meet short lead time
• Handle a large variety of products
• Build highly innovative products
• Meet a very high service level

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Comparison of Efficient and Responsive SC
Efficient SC Responsive SC
Goal Lower cost to meet demand Response quickly
Product Design Max performance at min cost Create modularity to allow
Pricing Lower margin Higher margin
Manufacturing Lower cost high utilization Maintain flexibility

Inventory Min inventory Maintain buffer inventory
Lead time Reduce but not at the expense of Aggressively reduce even if the cost is
cost significant
Supplier Based on cost and quality Based on speed, flexibility, and quality

Transportation Low cost modes Responsive modes

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Achieving Strategic Fit
supply chain

Responsiveness e of it
n F
spectrum Zo egic
t ra

Efficient supply

Certain demand Implied Uncertain
uncertainty demand
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Other Issues Affecting Strategic Fit

• Multiple products and customer segments

• Product life cycle

• Competitive change over time

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SCOR Metrics (I)
Perspectives Metrics Measure
Reliability On time delivery Percentage
Fulfillment lead time Days
Fill rate Percentage
Perfect order fulfillment Percentage
Flexibility and Response time Days
Responsiveness Production flexibility Days

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SCOR Metrics (II)

Perspectives Metrics Measure
Expenses Management cost Dollars
Warranty cost Dollars
Value added per employee Dollars
Assets/Utilization Total inventory days of supply Days
Cash-to-cash cycle time Days
Net asset turns Turns

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Increasing Variability of Orders

Consumer Sales Retailer ‘s Orders to Manufacturer
20 20
Order Quantity


Order Quantity

10 10

5 5

0 0
Time Time

Wholesaler’s Orders to Manufacturer Manufacturer’s Orders to Supplier
20 20
Order Quantity

Order Quantity
15 15

10 10

5 5

0 0
Time Time

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Bullwhip Effect - Operational Obstacles (Batching)

• Contributing factors
– High Order Cost
– Full TL economies
– Random or correlated ordering
• Counter Measures
– EDI & Computer Assisted Ordering (CAO)
– Discounted on Assorted Truckload, consolidated by 3rd party logistics
– Regular delivery appointment
– Volume and not lot size discounts
• State of Practice
– McKesson, Nabisco, ...
– 3rd party logistics in Europe, emerging in the U.S.
– P&G

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Bullwhip Effect - Pricing Obstacles

• Contributing factors
– High-Low Pricing leading to forward buy
– Delivery and Purchase not synchronized
• Counter Measures
– Limited purchase quantities
– Scan based promotions
• State of Practice
– P&G (resisted by some retailers)
– Scan based promotion

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Bullwhip Effect - Incentive Obstacles

• Contributing factors
– Incentives based on sell-in leading to forward buy

• Counter Measures
– Focus sales force on increasing sell-thru
– Incentives based on rolling horizon
– Sales force do not compete with each other but with
the competition

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The Bullwhip Effect: Information Processing Obstacles

• Contributing factors
– No visibility of end demand
– Multiple forecasts
– Long lead-time
• Counter Measures
– Access sell-thru or POS data
– Direct sales (natural on web)
– Single control of replenishment
– Leadtime reduction
• State of Practice
– Sell-thru data in contracts (e.g., HP, Apple, IBM)
– CFAR, CPFR, CRP, VMI (P&G and Walmart)
– Quick Response Mfg. Strategy

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Bullwhip Effect - Operational Obstacles (Rationing

• Contributing factors
– Proportional rationing scheme
– Ignorance of supply conditions
– Unrestricted orders & free return policy
• Counter Measures
– Allocation based on past sales.
– Shared Capacity and Supply Information
– Flexibility Limited over time, capacity reservation
• State of Practice
– Saturn, HP
– Schedule Sharing (HP with TI and Motorola)
– HP, Sun, Seagate
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Managerial Implications of the Bullwhip Effect -
Behavioral Factors

• Contributing factors
– Lack of trust
– Local reaction
• Counter Measures
– Building trust and partnership
• State of Practice
– Wal-Mart and P&G with CFAR

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Drivers of Supply Chain Performance

Efficiency Responsiveness

Supply chain structure

Inventory Transportation Facilities Information


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Inventory Driver --- What

• Inventory = Flow time × Throughput
• Responsive v.s. efficient
– Ex: Nordstorm
• Components of inventory decision:
– Cycle inventory
– Safety inventory
– Seasonal inventory

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Inventory Management

• Inventory types
– Raw material inventory
– Work-in-process (WIP) inventory
– Finished good inventory
• Objective
Minimize inventory level (or maximize inventory
turnover ratio) while maintaining good service
annual sales
Inventory turnover ratio =
average inventory level
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Risk Pooling - Centralized Control
• Centralizing inventory reduces safety stock and average
inventory level
– reallocate over-supply inventory to short-supply market

Standard deviation
Coefficient of variation =
Average demand
• Demand coefficient of variation ↑
Benefit of centralized control ↑
• Dependence of market areas demands ↑
Benefit of centralized control ↓

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Meaning of Postponement

• Delay the timing of the crucial processes in which end
products assume their specific functionality, features,
identities, or ‘personality’
• Can be viewed as information strategy
• 3 different kinds of postponement:
– pull, logistics, form

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Pull Postponement

• BTS vs BTO
• Decoupling point: the point from which the process
switches from a build-to-stock mode to the build-to-
order mode.
• Meaning of pull postponement:
– Making the decoupling point earlier in the process.

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Pull Postponement

• Basic Elements:
– The process steps must be sequenced so that the less
differentiating steps are performed at prior to the decoupling
– After the decoupling point, the process steps can be
performed flexible and fast.
– Accurate order capture for BTO.
• Example: National Bicycle, Benetton.

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• 延遲差異化 (Postponement Differentiation) 之意義

– 此種延遲主要是運用在最終產品的需求未確定時,先生

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• 作業程序的重排序 (Resequencing)
– 例子 : Benetton, postpone dyeing until after assembled.
Cost: 10% more expensive, new machine purchased and
employee retrained.
– 例子 : US disk drive manufacturing. Insert generic circuit
board into assembly, complete much of the testing, remove
the generic circuit board, and add customer-specific boards

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• 產品的共通性 (Commonality)
– 利用產品線或產品族的重新設計來達成
– 例子 : Printer manufacturing, redesign the new and old
products to share a common circuit board and printhead such
that final process can be delayed.

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• 模組化 (Modularity):
– 模組化產品設計:將功能採模組化,使各個模組能夠簡易
且以較低成本的添加到產品上,例子 : HP Laser Jet 。
– 模組化製程設計:製程應設計盡量獨立的生產模組,容易
因應不同的要求進行彈性的調整。例子 : print-and-pigment
mixture, Levis jeans 。

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• 標準化 (Standardization):
– 建立數種顧客所需的標準化產品之選擇。
• 機動敏捷的供應網路 (Agile Supply Networks)
– 某些網路節點存放基本的產品,並在收到顧客訂單時進

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• 重新排序或延遲時所需資本投入之考量。
• 重新排序或延遲時所需技術與能力之考量。
• 延遲的結果可能使存貨成本提高。
• 在國際運籌作業中,各進出口國對原物料,零組件

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What’s Quick Response?

• A widely used strategy
– By general merchandise, soft-lines retailers and manufacturers
– To reduce retail out-of-stocks, forced markdown, merchandising system
and operating costs
• A partnership strategy
– Suppliers and retailers work together to respond more rapidly to
consumer needs
– By sharing POS information to jointly forecast future demand for
replenishable items, and to continuously monitor trends to detect
opportunities for new items
• A JIT strategy
– Spread through the supply chain and seamlessly linked at each stage by
electronic data interchange

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Basic Elements of QR

Time horizons

Information Logistics

Supplier/ Manufacturing
relationships Operations

Cultural change

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Example: US Textile and Apparel Industry in 1986
Synthetics (75%) highly concentrated
Fiber •Ten firms provide more than 90% of market

More fragmented
Fabric •6,000 firms
•12 firms provide 1/4 of market

Extremely fragmented
Apparel •15,000 firms (70% employ fewer than 50 people)

Increasing concentration
Retail Major categories:
•Department stores
•Mass merchandisers
•Mail order
•Specialty stores

Increasing sophistication
Consumer Expectation of variety/change
Wide choice of retail outlets

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Expected Results through QR
Fiber, Fabric, Apparel, and Retail Inventories (Working Weeks)



Fig. 6-15


QR system
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Example: Benetton

• Benetton deliver knitted goods in the hottest new
colors seemingly overnight.
– It knitted the sweaters in neutral yarn and then dyed them to meet
market demand.
– Putting in place fast and sophisticated retailer reporting systems.
• Key technologies
– Bar code systems
– Computer networks
– Automated distribution center
– EDI or Internet-based EC

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(Efficient Consumer Response)

ECR is a Global Industry Strategy in which
Retailers and Suppliers Work Together to
Deliver Better Consumer Satisfaction and Value.

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What is Efficient Consumer Response?

A strategy in which distributors and suppliers are working closely
together to maximize grocery consumer satisfaction and minimize cost.

Timely, accurate, paperless information flow

Supplier Distributor Retail store household

Smooth, continual product flow matched to consumption

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Anatomy of Efficient Consumer Response

A consumer The scanner An automatic Because production The retailer’s in-
purchases forwards the ordering system is tied directly into store computer
“Product A” transaction record to allows the demand, retailers acknowledges
from a an in-store product A become increasingly receipt of the
computer. The supplier to shipment and
supermarket. freed from the need
Product A match automatically issues
The transaction manufacturer, whose production to for excess inventory a computer-
is recorded by computers interface demand using and warehousing of generated payment
the store’s with the retailer’s, product excess inventory, or electronic fund
scanner. notes the transaction movement thus opening the transfer payment,
and automatically information and door for increased eliminating the need
reorders a forecasting. cross-docking and for paper invoices
replacement unit on direct store delivery and streamlining the
a just-in-time basis. shipments. accounting process.

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Efficient Consumer Response Process

Change management

Replenishment Replenishment
Integrated EDI
Promotion Continuous replenishment Promotion
Manufacturing Computer-assisted ordering Retail
business Flow-through distribution business
strategy Activity-based costing strategy
Store assortments Store assortments
Category management
Flexible manufacturing
Product introductions Product introductions

Open communication

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ECR Strategies & Objectives
Strategies Objectives
• Efficient Store Optimize the productivity of inventories and
Assortment store space at the consumer interface
Optimize time and cost in the replenishment
• Efficient Replenishment system
• Efficient Maximize the total system efficiency of
trade and consumer promotion & pricing
Maximize the effectiveness of new product
• Efficient Product development and introduction activities

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ECR Components
• Logistics (Supply Side)
– Continuous Replenishment
– Cross Docking
• Category Management (Demand Side)
– Understanding Consumer Needs
– Decisions Made with Data
– Category vs. Brand Focused
– Total Systems Approach
• Enabling Technologies (Tools)
– Electronic Fund Transfer (EFT)
– Electronic Data Interchange (EDI)
– Activity Based Costing (ABC)
– Item Coding & Database Maintenance
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Example: Throughput Time Improvement of Dry Grocery


Supplier warehouse Distributory warehouse Retail store
Packing (Forward buy 9 days, Consumer
line turn inventory 31 days) Purchase
38 days 40 days 26 days

104 days


Packing Supplier warehouse Distributor Retail store Consumer
line Purchase
27 days 12 days 22 days

61 days
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Example: P&G’s CRP Process

Direct store level shipment

Delivery Orders

s and De
e r
arri led Invmand
d C u en an
ate sched ents tor d
d i c Customer y
De Pre pointm Or
de r
Ap Distribution ing
Centers in f

ipp info
ing g
P&G inf erin Customer
Or o. Ord d
Plant der d an Headquarters
s a n y
Dem ventor
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Logistics Postponement

• Meaning:
– Redesign the tasks in the SC so that some of the
customization steps can be performed downstream closer
to the customers.

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Concurrent and Parallel Processing

• Concurrent and parallel processing involves modifying
the manufacturing process so that steps that were
previously performed in a sequence can be completed at
the same time.
– reduce lead time
– reduce inventory cost

• A key is the concept of modularity or decoupling

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Requirements for logistics postponement

• can not lead to quality degradation.
• downstream sites have capability to perform the
task without excessive cost and time.
• potentially to procure the necessary components or
modules for the customization.
• the engineering team is able and willing to design
products and processes to defer the steps

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Form Postponement

• Meaning:
– postponement is achieved through the change in the form of
the product structure by standardizing some of the process
steps or components.
• Example: HP Laser Printer.

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Postponement Enablers

• Products or processes should be modular in
• Design engineer should be aware of the importance
of SCM to pursuit design for postponement
• Must involve multiple functions or organization in
• Quantify the costs and benefits to determine the
best point for postponement

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Transportation Driver --- How

• Efficient v.s. responsive
– Ex : Laura Ashley with Fedex for next day delivery

• Components of transportation decision:
– Mode of transportation
• Air, truck, rail, ship, pipeline, electronic

– Route and network selection
– In-house or outsource

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Pros and Cons of Different Transportation
Pros Cons
Direct shipping Simple to coordinate Large shipping lot size
Direct shipping with Lower cost for small lots Increased coordination
milk run Lower inventories complexity

Via central DC with Lower inbound transportation cost Increased inventory cost
inventory storage Increased handling at DC

Via central DC with Very low inventory Increased coordination
crossdock Lower cost through consolidation complexity

Via DC using milk Lower outbound cost for small lots Further increase in
run coordination complexity

Tailored network Best matchs needs of individual product Highest coordination
and store complexity
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Tailored Transportation

• Use of different transportation networks and modes
based on customer and product characteristics.
• Various forms of tailored transportation:
– By customer density and distance
– By size of customer
– By product value and demand

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Tailored Transportation---
by Customer Density and Distance
Short distance Medium distance Long distance

High density Private fleet with milk Crossdock with milk Crossdock with milk runs
runs runs

Medium density Third-party milk run LTL carrier LTL or package carrier

Low density Third-party milk run or LTL or package Package carrier
LTL carrier carrier

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Tailored Transportation---
by Size of Customer

• Large customer: TL carrier
• Smaller customer: LTL carrier or milk run
– Depends on distance and number of deliveries

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Tailored Transportation---
by Product Demand and Value
Product Type High Value Low Value

High Demand Disaggregate cycle inventory and Disaggregate all inventories and
aggregate safety inventory. use inexpensive mode for
Inexpensive mode for replenishing replenishment inventory
cycle inventory and fast mode for
safety stock

Low Demand Aggregate all inventories. If Aggregate only safety stock. Use
needed, use mode of transportation inexpensive mode of
for filling customer orders transportation for replenishment
cycle inventory

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Outbound Distribution Strategies

• Traditional strategy: warehousing
• Direct shipment
– Advantages
• save operating cost of distribution center
• lead times are reduced
– Disadvantages
• no central warehouse, no risk-pooling effect
• transportation costs increase (quantity↓ no. of locations ↑)
• Cross-docking
– Famous Wal-Mart strategy

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Cross-Docking Distribution Strategy

• Goods are distributed continuously from suppliers through
transitional warehouses to customers.
• Goods spend very little time in warehouse (< 12 hours)
• Advantages: inventory costs ↓ lead times ↓
• Requirements
– advanced information systems to link suppliers, distributors
and retailers
– Fast and responsive transportation system
– Information sharing to enhance forecast accuracy
– effective only for large distribution system
• Expensive start-up investment and complex to manage

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Economic Packaging and Transportation

• Design products so that they can be efficiently packed, stored, and
– Example: Swedish furniture retailer IKEA
• In some cases, final packaging can even be delayed until the goods
are actually sold.
– Example: many grocery stores sell flour, cereal, and many other goods in
bulk, allowing consumers to package as much as they want.
• Packaging and products that are designed to facilitate cross-docking
by making repacking easier will lower logistics costs.

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Making Transportation Decisions in Supply
• Align transportation strategy with competitive strategy
• Appropriate combination of in-house and outsourced
• Design a transportation network that can handle e-
• Use technology to improve performance
• Design flexibility into transportation network

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Facilities Driver --- Where
• Efficient v.s. responsive
– Ex: Toyota and Honda
• Components of facilities decision
– Location
– Capacity (flexibility v.s. efficiency)
– Manufacturing methodology (product-focus v.s.
– Warehousing Methodology: SKU storage, job lot
storage, cross-docking

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Key Decisions of Network Configuration

• Determining number of facilities*
• Determining locations of facilities
• Determining sizes of facilities
• Allocating facility resources for different products
• Determining connections among facilities

*facilities include: suppliers, factories, warehouses,

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Making Network Design in SC

• Do not underestimate the life span of facilities
• Do not gloss over the cultural implications
• Do not ignore quality of life issues
• Focus on tariffs and tax incentive when locating

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Information Driver

• Role in Supply Chain:
– Connect various stages in SC
– Crucial to daily operations in each stage
• Role in competitive strategy:
– For growth need
– For cost reduction
• Characteristics of information required:
– Accurate
– Accessible timely
– Right kind
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Basic components of information

• Supplier information
– Products, price, lead time, location, order status,
modification, payment
• Manufacturing information
– Products, quantity, location, lead time, trade-offs, cost,
batch size
• Distribution and retailing information
– Products, location, quantity, mode, price, stored quantity,
lead time
• Demand information
– Customers, price, location, quantity, forecasting
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Components of
Information Decision

• Push (MRP) v.s. pull
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technology: EDI, Internet, ERP, SCM

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Making Decision on IT in SC

• Give firm advantage to success
• Align the level of sophistication with need for
• Support decision making
• Think about future

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Information Technology in a Supply Chain: Legacy




Supplier Manufacturer Distributor Retailer Customer

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Information Technology in a Supply Chain: ERP



Potential Potential
Operational ERP ERP

Supplier Manufacturer Distributor Retailer Customer

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Information Technology in a Supply Chain: Analytical


Planning Dem Plan
Transport & Inventory
Apps Transport execution & CRM/SFA
Operational MES WMS

Supplier Manufacturer Distributor Retailer Customer

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Information Technology in a Supply Chain: Future
Trends and Issues

• Best of breed versus single integrator

• The role of application service providers (ASP)

• The role of the Internet and B2B exchanges

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Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /
Dedicated Flexibility
Information What information is best suited for
each objective

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Managerial Levers to Achieve Coordination
• Align goals and incentives:
– Across function, pricing, sell-in to sell-through
• Improve information accuracy:
– Share POS, collaborative forecasting and planning,
• Improve operational performance:
– Reduce lead time, reduce lot sizes, ration based on past
sales and share info to limit gaming
• Design price strategy to stabilize orders:
– Volume-based discount, EDLP
• Build strategic partnerships and trust
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• 由功能轉向作業的過程:跨功能流程的整合規畫與
• 由產品轉向顧客的服務:著重市場與顧客價值的創
• 由收益轉向績效的評估:基於成本與服務、時基競

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• 由存貨轉向資訊的分享:建立以需求為基礎的補貨與

• 由傳統交易轉向 伴關係的模式:建立供應鏈各成員

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