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Chapter 10

Supply-Chain Strategy

Supply-Chain Management Defined? Measuring Supply-Chain Performance Bullwhip Effect Outsourcing Defined Value Density Defined Mass Customization Defined

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Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together

What is a Supply-Chain?Defined

Suppliers

Inputs

Suppliers

Service support operations

Transformation

Manufacturing

Local service providers

Localization

Distribution

Customers

Output

Customers

Services

Supply networks

Manufacturing

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What is Supply-Chain Management?Defined

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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Supply Chain

Consumer

Retailer

Mfg.

Mat'l Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlowSchedules

Consumer

Retailer

Mfg.

Mat'l Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlowSchedules

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Formulas for Measuring Internal Supply-Chain Performance

Inventory Turnover =

Weeks of Supply =

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Example of Measuring Internal Supply-Chain 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-in-process) is worth $35 million. This company is used to having any inventory turn ratio of 10.

What is this year’s Inventory Turnover ratio? What does it mean?

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Example of Measuring Supply-Chain Performance (Continued)Inventory Turnover

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Supply Chain Measures

Common practice is to measure within a function:

Supplier Plant DistributionCenter

Customer

Price CostEfficiencyOutput

InventoryStock RotationSpace

CostQualitySpeedFlexibility

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Supplier Plant DistributionCenter

Customer

Cycle TimeOn-time DeliveryVendor ManagedInventory

Cycle TimeDelivery ReliabilityProduct Availability

Cycle TimeOrder CompletionPerformance

Measure Across Supply Chain Nodes

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Total Supply Chain Inventory

Sum of inventory on hand at each node of the supply chain

Supplier, Manufacturer, Distributor, Retailer

Measurement Timing: Weekly data collection

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Bullwhip Effect

Orders to a supplier have a larger variance than sales to a buyer

These distortions amplify as they move upstream, back to suppliers

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What is the Bullwhip Effect?

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Causes of the Bullwhip Effect

– Price fluctuations

– Periodic order policies

– Rational/shortage gaming

– Production schedules based on forecasts of wholesaler demand versus consumer 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

Low (Functional products)

High (Innovative products)

Efficient SC

Ex.: Grocery

Responsive SC

Ex.: Computers

Risk-Hedging SC

Ex.: Hydro-electric power

Agile SC

Ex.: Telecom

Low(Stable Process)

High(Evolving Process)

Supply

Uncertainty

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What is Outsourcing?Defined

Outsourcing.

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Reasons to Outsource

Organizationally-driven

Improvement-driven

Financially-driven

Revenue-driven

Cost-driven

Employee-driven

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Logistics

The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirement.

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Value DensityDefined 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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Mass CustomizationDefined Mass customization is a term used to

describe the ability of a company to deliver highly customized products and services to different customers.