chopra chapter 1-3

1/6/02 S.Chopra/Logistics Strategy with modifications by S. DeLurgio 1

A Strategic Framework for Supply Chain

Design (Strategy), Planning (Policies),

and Operation (Implementation)

SUPPLY CHAIN MANAGEMENT


CHAPTER 1Understanding the Supply Chain

What is supply chain management? A supply chain strategy framework Seven Eleven Japan


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.

Source: Cass Logistics


Traditional View: Logistics in the Manufacturing Firm

Profit 4%

Logistics Cost 21%

Marketing Cost 27%

Manufacturing Cost 48%

Profit

Logistics Cost

Marketing Cost

Manufacturing Cost


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 strategies– 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


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 needed

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


What is a supply chain?

Customer wantsdetergent and goes

to Jewel

Customer wantsdetergent and goes

to Jewel

JewelSupermarket

JewelSupermarket

Jewel or thirdparty DC

Jewel or thirdparty DC

P&G or othermanufacturerP&G or othermanufacturer

PlasticProducer

PlasticProducer

Chemicalmanufacturer

(e.g. Oil Company)


(e.g. Oil Company)

TennecoPackagingTenneco

Packaging

Paper Manufacturer

Paper Manufacturer

TimberIndustryTimber

Industry


(e.g. Oil Company)


(e.g. Oil Company)


Flows in a Supply Chain

Customer

Information

Product

Funds


Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier


Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES


PUSH VS. PULL PUSH MAKE OR PROVIDE

STOCK IN ANTICIPATION OF DEMAND

DRIVEN BY FORECASTS NECESSARY WHEN

LEADTIMES ARE LONG

PULL REPLENISHMENT IS

BASED ON CUSTOMER DEMAND

EACH UNIT PLACES DEMAND ON SUPPLIER

DESIRABLE WHEN LEADTIMES ARE SHORT


HISTORICAL PUSH VS. PULL

PUSH SYSTEM-WIDE INFO. FORECASTS CURRENT DEMAND ON-HAND QUANTITIES SOME FORM OF FAIR-

SHARE ALLOCATION CENTRALIZED

ALLOCATION PROFIT-ORIENTED

ALLOCATIONS

PULL EACH UNIT PLACES

DEMAND ON DC DC CAPACITY

INSUFFICIENT SOME FORM OF

ALLOCATION SUCH AS FCFS USED

RULE-BASED OR POLITICALLY-ORIENTED ALLOCATIONS


Examples of Supply Chains

Dell / Compaq Toyota / GM / Ford McMaster Carr / W.W. Grainger Amazon / Borders / Barnes and Noble Webvan / Peapod / Jewel

What are some key issues in these supply chains?


What is Supply Chain Management?

Managing supply chain flows and assets, to maximize

supply chain PROFIT.

What is supply chain PROFIT?


CHAPTER 2SCM -STRATEGIC FITSTEPS - UNDERSTANDING:

1. THE CUSTOMER-

IMPLIED DEMAND UNCERTAINTY

2. THE SUPPLY CHAIN-

RESPONSIVE VS. EFFICIENT

3. STRATEGIC FIT-

THE ZONE OF STRATEGIC FIT


The Value Chain: Linking Supply Chain and Business Strategy

NewProduct

Development

Marketingand

Sales Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Business Strategy

New ProductStrategy

MarketingStrategy Supply Chain Strategy


Achieving Strategic Fit

Understanding the Customer– Lot size

– Response time

– Service level

– Product variety

– Price

– Innovation

ImpliedDemand

Uncertainty


Levels of Implied Demand Uncertainty

Low High

Price Responsiveness

Customer Need

Implied Demand Uncertainty

DetergentLong lead time steel

High FashionEmergency steel


SUPPLY CHAIN RESPONSIVENESS

WIDE RANGE OF QUANTITIES MEET SHORT LEAD TIMES HANDLE LARGE PRODUCT VARIETY BUILD HIGHLY INNOVATIVE

PRODUCTS MEET A VERY HIGH SERVICE LEVEL


Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost

DELL

BARILLA


SUPPLY CHAINS EFFICIENT VS. RESPONSIVE

GOAL: LOWEST COST PRODUCT:MAX. PERF. AT

MIN COST PRICING: LOWER PRICE

AND MARGIN MANU: HIGH EFFICIENCY INVENT: MIN. INVENTORY LEADTIME: REDUCE

LEADTIME SUPPLIERS: COST/QUALITY TRANSPORTATION: COST

QUICK RESPONSE ASSEMBE TO ORDER

HIGHER PRICE AND MARGINS

FLEX. CAPACITY MAINTAIN BUFFER REDUCE EVEN WITH

HIGHER PRICE SPEED, FLEX., QUALITY QUICK& RESPONSIVIE


Achieving Strategic Fit

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone o

f

Strateg

ic Fit


Achieving Strategic Fit with Same Firm with Various Products




Certain demand

Uncertain demand


f

Strateg

ic Fit

PRODUCT LINE A CUSTOMER A

PRODUCT LINE A - CUSTOMER B

PRODUCT LINE B CUSTOMER B

PRODUCT LINE B CUSTOMER A


Achieving Strategic Fit Product Life Cycle Progresses/Competition




Certain demand

Uncertain demand


f

Strateg

ic Fit

INTRODUCTION

MATURING COMMODITY


Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

VERY LOCAL OPTIMAL BY OPERATION W/ILOCAL OPTIMAL BY

FUNCTION

FUNCTIONALLY OPTIMAL


Strategic ScopeGLOBALLY OPTIMAL STRATEGY

Suppliers Manufacturer Distributor Retailer Customer


Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy


CHAPTER 3 SUPPLY CHAIN DRIVERS

INVENTORY

TRANSPORTATION

FACILITIES

INFORMATION


SUPPLY CHAIN DRIVERS OBJECTIVES OF CHAP

IDENTIFY DRIVERS OF PERFORMANCE

ROLE OF EACH IN CREATING STRATEGIC FIT

IDENTIFY MAJOR OBSTACLES TO SUCCESS


Drivers of Supply Chain Performance

Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers


Supply Strategy


Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation/Bulk Shipments

Speed

Facilities Consolidation /Dedicated

Proximity /Flexibility

Information Information best suited for eachobjective


Supply Chain Decisions: Structuring Drivers

Strategy(Design)

Planning (Policies)

Operation


Major Obstacles to Achieving Fit

INCREASING VARIETY OF PRODUCTS

DECREASING PRODUCT LIFE CYCLES

INCREASINGLY DEMANDING CUSTOMER

FRAGMENTATION OF SUPPLY CHAIN OWNERSHIP

GLOBALIZATION

DIFFICULTY EXECUTING NEW STRATEGIES


Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply chain

Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty

Local optimization and lack of global fit


Dealing with Multiple Owners / Local Optimization

Information Coordination

Contractual Coordination


Dealing with Product Variety: Mass Customization

MassCustomization

MassCustomization

High

HighLow

Low

Long

Short

Lea

d T

ime

Cost

Customizatio

n


Fragmentation of Markets and Product Variety

Are the requirements of all market segments served

identical?

Are the characteristics of all products identical?

Can a single supply chain structure be used for all

products / customers? No! A single supply chain

will fail different customers on efficiency or

responsiveness or both.


Tailored Logistics

Each Logistically Distinct Business (LDB) will have distinct requirements in terms of– Inventory

– Transportation

– Facility

– Information

Key: How to gain efficiencies while tailoring logistics?


Applying the Framework to e-commerce: What is e-commerce?

Commerce transacted over the Internet– Is product information displayed on the Internet?

– Is negotiation over the Internet?

– Is the order placed over the Internet?

– Is the order tracked over the Internet?

– Is the order fulfilled over the Internet?

– Is payment transacted over the Internet?

– Customer involvement in transactions over the Internet!


Existing Channels for Commerce

Product information – Physical stores, EDI, catalogs, face to face, …

Negotiation– Face to face, phone, fax, sealed bids, …

Order placement– Physical store, EDI, phone, fax, face to face, …

Order tracking– EDI, phone, fax, …

Order fulfillment– Customer pick up, physical delivery


Revenue Impact of E-Commerce

Length of supply chain Product information Time to market Negotiating prices and contract terms Order placement and tracking Order fulfillment Payment


Cost Impact of E-Commerce

Facility costs– Site and processing cost

Inventory costs– Cycle, Safety, Seasonal inventory

Transportation costs– Inbound and outbound costs

Information sharing– Coordination


Seven Eleven Japan


Seven Eleven - Number of Stores

0

1000

2000

3000

4000

5000

6000

85 86 87 88 89 90 91 92 93 94

Number of Stores

1999: 8,027


Seven Eleven - Net Sales

0

200

400

600

800

1000

1200

1400

85 86 87 88 89 90 91 92 93 94

Net Sales


Seven Eleven - Pre tax Profit

0102030405060708090

100

85 86 87 88 89 90 91 92 93 94

Profit


Seven Eleven - Inventory (days)

0

2

4

6

8

10

12

14

85 86 87 88 89 90 91 92 93 94

Inventory


Japanese Images of Seven Eleven

Convenient Cheerful and lively stores Many ready made dinner items I buy Famous for its great boxed lunch and dinner On weekends, when I was single, I went to buy lunch

and dinner


Key Product Categories

Processed Foods: 50 % Fresh Foods: 30 % Non Foods: 20 %


Store Description

Average size = 100 sq. m. = 1,000 sq. ft. (about 1/3 of typical US store)

Average sales = 700,000 Yen (about twice average US store)

SKU’s offered in store: Over 3,000 (change by time of day, day of week, season)

Virtually no storage space


Supply chain Objective

Micro matching of supply and demand (by location, time of day, day of week, season)


Facilities Strategy

Have many outlets, at convenient locations, close to where customers can walk

When they locate in a place they blanket the area with stores; stores open in clusters with corresponding DC’s

844 stores in the Tokyo region; Seven Eleven has 5,523 stores in 21 prefectures


Information Strategy

Quick access to up to date information (as contrasts with data)– High speed data network linking stores, headquarters, DCs

and suppliers

– Store hardware» Store computer

» POS registers linked to store computer

» Graphic Order Terminals

» Scanner terminals for receiving



Information Analysis of POS Data

Sales analysis of product categories over time SKU analysis Analysis of waste or disposal Ten day (week) sales trend by SKU Sales trends for new product Sales trend by time and day List of slow moving items Contribution of product to sections in store display


Distribution Strategy

Delivery arrives from over 200 plants Delivery is cross docked at DC (over 80 DCs for

food) Food DCs store no inventory Combined delivery system: frozen foods, chilled

foods, room temperature and hot foods 11 truck visits per store per day (compared to 70 in

1974) No supplier (not even coke!) delivers direct


The Future

7-eleven growing rapidly in the US 7-eleven aims to be a web depot in both the US and

Japan. Does this make sense from a supply chain perspective?


Summary

Two views of a supply chain A strategic framework: Achieving fit

-Efficiency/Responsiveness and Supply chain drivers

Tailored logistics E-commerce framework 7-eleven

Documents

chopra chapter 1-3