Chap12

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


US Suppliers

Off Shore Suppliers

US Factory

Singapore Factory

US DC

European DC

Asia/Pacific DC

Americas Demand

European Demand

Asia/Pacific DemandKit Suppliers


Traditional Supply Chain Flows

Information flow, Financial flow

Material flow

Supplier RetailerDistributorManufacturer

3 4


Examples of Supply Chains

• Dell / Compaq

• Toyota / GM / Ford

• Amazon / Borders / Barnes and Noble

• Zara / Gap

• Red Cross / Oxfam

• MUHC / MGH

• Air Canada / Southwest


• 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


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


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


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


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


Dealing with-Multiple Owners / Local Optimization

• Information Coordination

• Contractual Coordination


• 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


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)


• 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


• 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)


• 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


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


• 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


Paradoxes of Complexities

• The optimization paradox

• The customer collaboration paradox

• The innovation paradox

• The flexibility paradox

• The risk paradox


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


• 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

Education

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