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SUPPLY CHAIN MANAGEMENT
Chapter 12
Supply Chain
Management
SUPPLY CHAIN MANAGEMENTSupply Chain Management (SCM)
• SCM: Management of materials, information and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers. – Used to be viewed as a standard operational issue. Now
viewed as one of the most important strategic issues.
• Supply Chain: network of suppliers, warehouse, operations, and retail outlets
SUPPLY CHAIN MANAGEMENT
US Suppliers
Off Shore Suppliers
US Factory
Singapore Factory
US DC
European DC
Asia/Pacific DC
Americas Demand
European Demand
Asia/Pacific DemandKit Suppliers
SUPPLY CHAIN MANAGEMENT
Traditional Supply Chain Flows
Information flow, Financial flow
Material flow
Supplier RetailerDistributorManufacturer
3 4
SUPPLY CHAIN MANAGEMENT
Examples of Supply Chains
• Dell / Compaq
• Toyota / GM / Ford
• Amazon / Borders / Barnes and Noble
• Zara / Gap
• Red Cross / Oxfam
• MUHC / MGH
• Air Canada / Southwest
SUPPLY CHAIN MANAGEMENT
• Improve operations• Increasing levels of outsourcing• Increasing transportation costs• Competitive pressures• Increasing globalization• Increasing importance of e-commerce• Complexity of supply chains• Manage inventories
Need for Supply Chain Management
SUPPLY CHAIN MANAGEMENTSupply Chain Design
• Reflect a firm’s strategic positioning• Three basic steps in achieving strategic fit:
- Understanding the customer
- Understanding the supply chain
- Achieving strategic fit• Primary trade-off:
Cost versus Response time• Responsive versus Efficient supply chain
SUPPLY CHAIN MANAGEMENT
Right Supply Chain Strategy?
• The strategy needs to be tailored to meet specific needs of the customers
• A product with a stable demand and a reliable source of supply should not be managed in the same way as one with highly unpredictable demand and unreliable supply
SUPPLY CHAIN MANAGEMENTA Framework for Devising the Right Supply Chain
Strategy
• Two key sources of uncertainty – demand and supply
• Demand uncertainty
• Supply Uncertainty
Functional
Innovative
Stable
Evolving
SUPPLY CHAIN MANAGEMENTDemand Uncertainty and Product Characteristics
Functional Innovative
Low demand uncertainties High demand uncertainties
More predictable demand Difficult to forecast
Stable demand Variable demand
Long product life Short selling season
Low inventory cost High inventory cost
Low profit margins High profit margins
Low product variety High product variety
Higher volume per SKU Low volumes per SKU
Low stock out cost High stock out cost
Low obsolescence High obsolescence
SUPPLY CHAIN MANAGEMENTSupply Characteristics
Stable Evolving
Less breakdowns Vulnerable to breakdowns
Stable and higher yields Variable and lower yields
Less quality problems Potential quality problems
More supply sources Limited supply sources
Reliable suppliers Unreliable suppliers
Less process changes More process changes
Less capacity constraint Potential capacity constrained
Easier to changeover Difficult to changeover
Flexible Inflexible
Dependable lead time Variable lead time
SUPPLY CHAIN MANAGEMENT
The Uncertainty Framework: Examples
Demand Uncertainty
Low (Functional Products)
High (Innovative Products)
Supply Uncertainty
Low Grocery, basic apparel, Fashion apparel,
(Stable Process) food, oil and gas computers, pop music
High Hydro-electric power, Telecom, high-end
(Evolving Process) some food produce Computers, semiconductor
SUPPLY CHAIN MANAGEMENT
Achieving Strategic Fit
Demand Uncertainty
Low (Functional Products)
High (Innovative Products)
Supply Uncertainty
Low Efficient supply chain Responsive supply chains
(Stable Process) (Posco, Barilla) (Dell, Benetton)
HighRisk-hedging supply
chains Agile supply chain
(Evolving Process)
(Subway) (Xilinx, Cisco)
SUPPLY CHAIN MANAGEMENTDrivers of Supply Chain Fit
Inventory Transportation Facilities Information
Drivers
Efficiency Responsiveness
Supply Chain Structure
SUPPLY CHAIN MANAGEMENT
Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability
Transportation Consolidation Speed
Facilities Consolidation / Dedicated
Proximity / Flexibility
Information What information is best suited for each objective
SUPPLY CHAIN MANAGEMENT
Dealing with-Multiple Owners / Local Optimization
• Information Coordination
• Contractual Coordination
SUPPLY CHAIN MANAGEMENT
• The variance of orders is greater than that of sales, and the distortion increases as one moves upstream.
Cu
sto
mer
Dem
and
Retailer
Ret
aile
r O
rder
s
Wholesaler Distributor
Wh
ole
sale
Ord
ers
Dis
trib
uto
r O
rder
s
Manufacturer
Lack of Information Coordination: Bull-Whip* Effect
SUPPLY CHAIN MANAGEMENT
ManufacturerDistributorWholesalerRetailer
Ordering
Amount ofinventory=
Lack of Information Coordination: Bull-Whip* Effect
SUPPLY CHAIN MANAGEMENTPossible Solutions
• Enterprise Resource Planning (ERP)
• Electronic Data Interchange (EDI)
• Advanced Planning and Scheduling (APS)
• Customer Relationship Management (CR)
• Collaborative Planning Forecasting and Replenishment (CPFR)
SUPPLY CHAIN MANAGEMENT
• Develop strategic objectives and tactics• Integrate and coordinate activities in the
internal supply chain– Coordinate suppliers with customers– Coordinate planning and execution
• Form strategic partnerships
Creating an Effective Supply Chain Contractual Coordination
SUPPLY CHAIN MANAGEMENT
• Consider a SC with 1 manufacturer and 1 retailer.
• Manufacturer has a production cost of $c/unit
• Manufacturer sells the product to a retailer for $w/unit
• The selling price for the retailer is $p/unit.
• This is a fashion item so there is only one opportunity to produce and sell – Single Period Problem.
• Let X (random variable) denote the demand for the retailer.
• X is uniformly distributed
manufacturer
retailer
customers
$ w / unit
$ p / unit
$ c / unit
Value and Limitations of Contractual Coordination
SUPPLY CHAIN MANAGEMENT• The retailer will solve the singe period
inventory problem where• Selling price $p/unit• Purchase cost $w/unit• Demand X~F(X)• Q* satisfies )( *QF
p
wp
cc
c
OU
U
)(5.012
612 *QFp
wp
30* Q
•Let p=$12/unit, w=$6/unit and c=$3/unit X~U(5,55)
SUPPLY CHAIN MANAGEMENT
• Now consider a different version
• The manufacturer and the retailer are owned by the same company.
• Demand is the same • Production cost is still
$3/unit• Selling price is $12/unit.
Single
firm
customers
$ p / unit
$ c / unit
)(75.012
312 *SCQF
p
cp
5.42* SCQ
SUPPLY CHAIN MANAGEMENT
manufacturer
retailer
customers
$ 6 / unit
$ 12 / unit
$ 3 / unit
Single
firm
customers
$ 12 / unit
$ 3 / unit
Order quantity
Total profit
30 units
$ 195 (Ret. = 100, Mfr. = 95)
42.5 units
$ 213.75
comparisons
SUPPLY CHAIN MANAGEMENT
• Coordination is always beneficial for the supply chain (basic application of “systems approach”)
• Examples Contractual Coordination
– Revenue Sharing (Movie Business)
– BuyBack Contracts (Publishing)
• Coordination may put some members worse-off (compensation would be required for those members)
• Coordination requires information sharing and a systems approach
– Requires trust among SC members and long-term thinking
Lessons
SUPPLY CHAIN MANAGEMENTCritical Trends in Global SCs
• The cost squeeze- around 20% have no production in home markets
- Even design functions are moving
• The pursuit of new markets- 90% of Nestle assets are outside Switzerland
- 50% of Sony assets are outside Japan
• Product innovation- 35% of the revenue from products less than 3 years - Average product development time has reduced by 40%
in last 10 years
SUPPLY CHAIN MANAGEMENT
Paradoxes of Complexities
• The optimization paradox
• The customer collaboration paradox
• The innovation paradox
• The flexibility paradox
• The risk paradox
SUPPLY CHAIN MANAGEMENT
Supply Chain Risk DriversCategories of Risk Drivers of Risk
Disruptions Natural disaster and manmade Dependency on a single source of supply as well as the capacity
and responsiveness of alternative suppliers
Delays Inflexibility of supply source Poor quality or yield at supply source
Systems Information infrastructure breakdown System integration or extensive systems networking
Forecast Inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base
“Bullwhip effect”
Intellectual Property vertical integration of supply chain global outsourcing and markets
Procurement Exchange rate risk Long-term versus short-term contracts
Inventory Rate of product obsolescence Demand and supply uncertainty
Capacity Cost of capacity Capacity flexibility
SUPPLY CHAIN MANAGEMENTINDUSTRIAL INTELLIGENCE - DELL
• From 1995 to 98, 32 to 7 days of inventory
• From 1992 to 98, 204 to 47 suppliers
(as few partners as possible)
• Suppliers agree to meet 25% of Dell’s volume requirement
(shared liability)
• Electronic links with supplier with hourly update on raw material consumption
(real time info)
• VMI, returnable totes
(no inventory, decrease handling costs)
• “It’s not : well, every 2 weeks, deliver 5,000 to this warehouse and we’ll put them on a shelf. It is : tomorrow morning, we need 8,562 and deliver them to door #7 by 7 a.m.” - Michael Dell
(=POU pull demand strategy)
• Share information and plans freely with suppliers
(forecast is not contract)
• Rely on information technology
(systems)(Sources : Harvard Business School, April 1998 & March 1999)
SUPPLY CHAIN MANAGEMENT• Let p=$12/unit, w=$6/unit and c=$3/unit X~U(5,55)
• The total profit for the retailer is
• The total profit for the manufacturer is
• The total profit for the supply chain 105 + 90 =$ 195
)(5.012
612 *QFp
wp
30* Q
105$18018010530.650
130.12
50
1].12[][
30
5
55
30
dxdxxprofitE
90$9018030*330*6 profit
SUPPLY CHAIN MANAGEMENT
• p=$12/unit and c=$3/unit X~U(5,55)
• The total profit for the supply chain is
)(75.012
312 *SCQF
p
cp
5.42* Q
75.213$5.1275.12775.213
5.42*350
15.42*12
50
1]*12[][
5.42
5
55
5.42
dxdxxprofitE
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