Supply Chain Management[It’s drivers and Obstacles]

A Framework for Supply Chain Drivers

Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

FacilitiesRole in the supply chain

◦the “where” of the supply chain◦manufacturing or storage

(warehouses)Role in the competitive strategy

◦economies of scale (efficiency priority) - TOYOTA

◦larger number of smaller facilities (responsiveness priority) HONDA

Inventory: Role in the Supply ChainInventory exists because of a mismatch

between supply and demandSource of cost and influence on responsivenessImpact on

◦ material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain

◦ throughput rate at which sales to end consumers occur I = RT (Little’s Law) I = inventory; R = throughput; T = flow time Example Inventory and throughput are “synonymous” in a supply

chain

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Inventory: Role in Competitive StrategyIf responsiveness is a strategic

competitive priority, a firm can locate larger amounts of inventory closer to customers

If cost is more important, inventory can be reduced to make the firm more efficient

Example – Nordstrom

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Transportation: Role in the Supply Chain

Moves the product between stages in the supply chain

Impact on responsiveness and efficiency

Faster transportation allows greater responsiveness but lower efficiency

Also affects inventory and facilities

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Transportation: Role in the Competitive StrategyIf responsiveness is a strategic

competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it

Can also use slower transportation modes for customers whose priority is price (cost)

Can also consider both inventory and transportation to find the right balance

Example 3.3: Laura Ashley

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Components ofTransportation DecisionsMode of transportation:

◦air, truck, rail, ship, pipeline, electronic transportation

◦vary in cost, speed, size of shipment, flexibility

Route and network selection◦route: path along which a product is shipped◦network: collection of locations and routes

In-house or outsourceOverall trade-off: Responsiveness

versus efficiency

Information: Role in the Supply Chain

The connection between the various stages in the supply chain – allows coordination between stages

Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels

Internal and external systems connecting the parts of the firm to each other, customers and suppliers

Companies employ various systems:◦ Decision support systems◦ Warehouse management systems◦ Production planning and tracking◦ Transaction and sales processing◦ Communications systems: Email, Intranets

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Information: Role in the Competitive StrategyAllows supply chain to become

more efficient and more responsive at the same time (reduces the need for a trade-off)

Components of Information DecisionsPush (MRP) versus pull (demand information

transmitted quickly throughout the supply chain)

Coordination and information sharingForecasting and aggregate planningEnabling technologies

◦ EDI◦ Internet◦ ERP systems◦ Supply Chain Management software

Overall trade-off: Responsiveness versus efficiency

The Role of Sourcing in a Supply ChainPurchasing

◦ Also called procurement, is the process by which companies acquire raw materials, components, products, services, or other resources from suppliers to execute their operations

Sourcing ◦ Is the entire set of business processes required to purchase

goods (raw materials, components, products) and servicesOutsourcing

◦ Results in the supply chain function being performed by a third party

For any supply chain, the most significant decision is whether to outsource the function or perform it in-house

Sourcing ProcessOnce a decision to outsource has

been made, the sourcing process includes

Supplier scoring and assessment

Designcollaboration

Supplier selection and contract negotiation

Procurement

Sourcing planning and analysis

Sourcing Process

Supplier scoring and assessment◦ Process used to rate suppliers

Supplier selection◦ Choose the appropriate supplier(s)

Design collaboration◦ Work together with supplier when designing

components for the

final product Procurement

◦ Process placing orders and receiving orders from supplier(s)

Sourcing planning and analysis◦ Analyze spending across various suppliers, identify

opportunities

for decreasing cost

Supplier scoring and assessment

Designcollaboration

Supplier selection and contract negotiation

Procurement

Sourcing planning and analysis

Outsourcing versus off-shoringWhat is the difference?

A firm off-shores a supply chain function if it maintains ownership but moves the production facility offshore

A firm outsources if the firm hires an outside firm to perform an operation rather than executing the operation within the firm

Source: The A.T. Kearney Global Outsouring Index, 2009

Outsourcing in Practice

India and Philippines account for 50% of the world’s business process outsourcing (BPO) market

BPO is a form of outsourcing that involves the contracting of the operations and responsibilities of a specific business functions to a third-party service provider

Outsourcing in Practice

Outsourcing to China (Walmart)

About 85% of Walmart’s merchandise is made abroad◦ A whopping 10%-13% of everything China sends to

the US ends up on Walmart’s shelves Over $15 billion worth of goods per year Walmart has almost 600 people in China to make

purchases

◦ The price of portable DVD players dropped in half when Walmart found a Chinese factory to built in giant quantities Walmart’s success has forced other retailers and

manufacturers to reevaluate their supply chains

◦ Walmart has led the way to product safety through its “responsible sourcing program” In 2009, Walmart required “an identifiable trail” from raw

material to suppliers

How do third parties increase the supply chain surplus?

Lower cost and higher quality◦Specialized third party is further

along the learning curve for some supply chain activity

Capacity aggregation◦Increase SC surplus by aggregating

demand across multiple firms and gaining economies of scaleIntel’s family of mobile PC processors

gives consumers more choice by enabling PC makers to design notebooks of every shape and size

How do third parties increase the supply chain surplus?

Transportation aggregation◦Increases supply chain surplus by

aggregating transportation across a variety of shippers

Pricing: Role in the Supply ChainPricing determines the amount to

charge customers in a supply chain

Pricing strategies can be used to match demand and supply

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Pricing: Role in the Competitive Strategy

Firms can utilize optimal pricing strategies to improve efficiency and responsiveness

Low price and low product availability; vary prices by response times

Example: Amazon

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Components of Pricing DecisionsPricing and economies of scaleEveryday low pricing versus high-

low pricingFixed price versus menu pricingOverall trade-off: Increase the

firm profits

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