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7/27/2019 Krajweski Chapter 10 (SCM)
http://slidepdf.com/reader/full/krajweski-chapter-10-scm 1/54
© 2007 Pearson Education
Supp ly Chain Strategy
Chapter 10
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© 2007 Pearson Education
How Supply Chain Strategyf i ts the Operat ions Management
Phi losophy
Operations As a CompetitiveWeapon
Operations StrategyProject Management Process StrategyProcess Analysis
Process Performance and QualityConstraint Management
Process LayoutLean Systems
Supply Chain StrategyLocation
Inventory ManagementForecasting
Sales and Operations PlanningResource Planning
Scheduling
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Dell , Inc. (case summary )
Dell is a leader because of their fast response time.
Customer orders are on delivery trucks in 36 hours.
Their focus is on how fast inventory moves.
(Keeping parts cost and inventories low)
The bulk of its components are housed within 15minutes of each of its plants.
As customers place orders, suppliers know when
to ship components. (WHY?)
Suppliers restock the warehouse and manage theinventory.
Effective supply chain management is the key.
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WHAT IS SUPPLY CHAIN IN BUSINESS?
How do you define it?
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Supply Chain
Supply chain: The network of services, material,and information flows that link a firm’s customer
relationship, order fulfillment, and supplier
relationship processes to those of its supplier andcustomers.
(All facilities, functions, and activities associated with
flow and transformation of goods and services fromraw materials to customer, as well as the associatedinformation flows)
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WHY FIRMS NEED TO MANAGESUPPLY CHAIN?
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Supply chain management: Developing astrategy to organize, control, and motivatethe resources involved in the flow of
services and materials within the supplychain.
(Managing flow of information through
supply chain in order to attain the level of synchronization that will make it moreresponsive to customer needs whilelowering costs)
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Supply chain strategy: Designing a firm’s
supply chain to meet the competitivepriorities of the firm’s operations strategy.
Example: A boutique that emphasize onquality and exclusivity. How would it design
the SC?
SC vary between firms
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Supply Chain for
Services
Supply chain design for a service provider is drivenby the need to provide support for the essentialelements of the various service packages it delivers.
A service package consists of supporting facilities (The store itself, equipments)
facilitating goods (eg, Florist: basket, ribbons, card)
explicit services: Arranging the flower implicit services: Courtesy, internet services, location
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Supply Chain fo r a Flor is t
Required for facilitating goods
Required for explicit services Required for supportingfacilities
Required for implicit services
Home
customers
Commercia l
customers
Flor ist
FedEx
delivery
serv ice
Packaging Loca l
del ivery
serv ice
Flowers –
local /
internat ional
Arrangement
materials
Internet
serv ices
Maintenance
services
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Creat ion o f Invento ry (s im i lar to the analogy of a water tank )
Inventory: A stock of materials used to satisfycustomer demand or to support the production of services or goods.
Scrap f low
Invento ry level
Output f low of m aterials
Input f low of mater ials
How do youmanage theflow?
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Supply Chain for
Manufactur ing
Raw materials (RM): The inventories needed for the production of services or goods. (For mfg, > 60%
cost is on Material- can reap large profit will small reduction inmaterial cost)
Work-in-process (WIP): Items, such ascomponents or assemblies, needed to produce afinal product in manufacturing.
Finished goods (FG): The items inmanufacturing plants, warehouses, and retailoutlets that are sold to the firm’s customers.
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Invento ry at Success ive
Stock ing Points
Suppl ier Manufactur ing plant Distr ibut ion center Retai ler
Raw
materials
Work in
process Finished
goods
How do you classify inventory at Bakery store ?
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Supp ly Chain
Tier 1
Tier 2
Supplier of materialsSupplier of services
Tier 3
Customer Customer Customer Customer
Distribution
center
Distribution
center
Manufacturer
U SC D
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Supp ly Chain Il lus trat ion
Upstream SCmembers
DownstreamSC members
Hearts and brains of SC
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Supply Chain
fo r
Denim Jeans
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Supply Chain
fo r
Denim Jeans
(cont.)
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Inven tory Measu res o f
Supply Chain Performance
Average aggregate inventory value (AGV) is the totalvalue of all items held in inventory for a firm.
AGV = (# of A items)(Value of each A)+(# of B items)(Value of each B)+…
Weeks of supply: The average aggregate inventory valuedivided by sales per week at cost.
Weeks of supply = Average aggregate inventory value
Weekly sales (at cost)
Inventory turnover is annual sales at cost divided by theaverage aggregate inventory value maintained for the year.
Inventory turnover = Annual sales at (cost)
Average aggregate inventory value
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Calcu lat ing Invento ry Measu res
Example 10.1 The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goodssold was $10 million. The best inventory turnover in the industry is six turns per year. If the
company has 52 business weeks per year, how many weeks of supply were held in inventory?What was the inventory turnover? What should the company do?
Using Invento ry
Est imator Solver
Weeks of supply =$2 mil /($10 mil)(52 wks.) =10.4 weeks
Inventory turns =
$10 mil. /$2 mil. =5 turns/yr
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Appl icat ion 10.1
weeksweeks
5.1852000,200,19$
000,821,6$
cost)(atsalesWeekly
valueinventoryaggregateAveragesupplyof Weeks
turns8.2000,821,6$
0$19,200,00turnover Inventory
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Supply Chain Process Measu res
Percent of orderstaken accurately
Time to complete
the order placement process
Customer satisfaction withthe order placement process
Customer Relationship
Percent of incompleteorders shipped
Percent of orders
shipped on time Time to fulfill theorder
Percent of botchedservices or returneditems
Cost to produce theservice or item
Customer satisfactionwith the order fulfillment process
Inventory levels of WIP and FG
Order Fulfillment
Percent of suppliers’
deliveries on time
Suppliers’ lead
times Percent defects in
services andpurchasedmaterials
Cost of servicesand purchasedmaterials
Supplier Relationship
3 Major internal process related to SC
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WHY FIRMS NEED TO MANAGESUPPLY CHAIN?
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Links to
Financial Measu res
Return on Assets (ROA): is net income divided bytotal assets.
Managing the supply chain so as to reduce the aggregate
inventory investment will reduce the total assets portion of the firm’s balance sheet. (thus lead to high return on asset)
Working Capital: Money used to finance ongoingoperations.
Weeks of inventory and inventory turns are reflected inworking capital.
Decreasing weeks of supply or increasing inventory turnsreduces the working capital.
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Links to
Financ ial Measu res
Cost of Goods Sold: Buying materials at a better price, or transforming them more efficiently, improves a firm’s cost of
goods sold measure and ultimately its net income.
Total Revenue: Increasing the percent of on-time deliveries tocustomers increases total revenue because satisfiedcustomers will buy more services and products.
Cash Flow: Cash-to-cash is the time lag between paying for the services and materials needed to produce a service or
product and receiving payment for it.
The shorter the time lag, the better the cash flow position of thefirm because it needs less working capital.
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Supply Chain Dynam ics
Supply chain dynamics can wreak havoc onsupply chain performance measures.
Actions of downstream supply chain memberscan affect the operations of upstream members.
The bullwhip effect: The phenomenon in
supply chains whereby ordering patternsexperience increasing variance as youproceed upstream in the chain.
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Bu l lwhip Effect
Occurs when slight demand variability is magnified as information movesback upstream
2. Tend to overreactand increase itsown demand
1. Slight changes in
demand occur
3. How to cope????
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Supply Chain Dynam ics fo r Facial Tissue
Time
Bullwhip Effect
More variability as supply not matchdemand pattern
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External
Value-Chain L inkages
First-Tier Supplier Service/Product Provider
Support Processes Support Processes
Supplier Relation-
shipProcess
New Service/Product
DevelopmentProcess
Order-Fulfill-ment
Process
Business-to-Business
(B2B)Customer
RelationshipProcess
Supplier Relation-
shipProcess
New Service/Product
DevelopmentProcess
Order-Fulfill-ment
Process
Business-to-Customer
(B2C)Customer
RelationshipProcess
E x t e r n a
l S u p p l i e r s
E x t er n al C on s um er s
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External Causes of
Supply Chain Disrup t ion
Volume changes.Customers may change ordered quantity or
delivery date.
Service and product mix changes.Customers may change the mix of ordered items.
Late deliveries.Late deliveries can force a switch in production
schedules.Underfilled shipments.
Partial shipments can cause a switch inproduction schedule or quantity produced.
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In ternal Causes o f
Supply Chain Disrup t ion
Internally generated shortages of parts.
Engineering changes to the design of servicesor products are disruptive.
New service or product introductions disrupt the supply chain and may require a newsupply chain.
Service or product promotions may create a
demand spike. Information errors such as demand forecast
errors, faulty inventory counts, or miscommunicationwith suppliers.
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1. The Customer Relat ionsh ip
Process
Electronic Commerce (e-commerce) is theapplication of information and communication
technology anywhere along the value chain of business processes.
Business-to-Consumer Systems (B2C) allowscustomers to transact business over the Internet.
Business-to-Business Systems (B2B) involvescommerce between firms. The biggest growth area, it is currently about 70% of the
regular economy.
E-Commerce and the Marketing Process
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Nested Process : Marketing and the Order Placement Process
Cost reduction: Using the Internet canreduce the costs of processing orders.
Revenue flow increase: Reduction in thetime lag associated with billing thecustomer or waiting for checks.
Global Access: Available 24 hours a day.
Price flexibility: Prices can easily be
changed as the need arises.
The Cus tomer Relat ionsh ip
Process
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2. Order Fu lf i l lment at
Dell, Inc .
1. Customers buy from Dell by web site, voice-to-voice, andface-to-face.
2. Order information is transmitted to the inventory system.
3. Unique product configuration information is contained inthe Traveler, a sheet that travels with the system thecustomer has ordered throughout its assembly andshipping.
4. When the Traveler is pulled, all required internal parts andcomponents for a system are picked and put in a to te or ki t .(Procedure is called Kit t ing )
5. A team uses the kit to assemble and initially test thesystem.
6. Systems are thoroughly tested.
7. Completed systems are boxed and placed on trucks.
8. The entire assemble-to-order cycle takes only a few hours.
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Dell’s
Order Fulf i l lmen t Process
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The Order Fulf i l lmen t
Process
Centralized placement: Keeping all the inventory atone location such as a firm’s manufacturing plant or
a warehouse and shipping directly to customers.
Inventory pooling is a reduction in inventory andsafety stock because of the merging of variabledemands from customers.
A higher than expected demand from one customer can beoffset by a lower-than-expected demand from another.
Forward placement is locating stock closer tocustomers at a warehouse, wholesaler, or retailer.
Inventory Placement
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The Order Fulf i l lmen t
Process
Vendor-managed inventories (VMI): An extreme
application of forward placement involving locating
inventories at the customer’s facilities.
Key ingredients are:
Collaborative effort requires trust & accountability.
Cost savings is realized by eliminating excess inventory.
Customer service: The supplier is frequently on site for improved response times and reducing stockouts.
Written agreement on procedures, methods, and schedules
are clearly specified.
Vendor -Managed Inv ento ries
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Order Ful f i llment Programs
Continuous Replenishment Program (CRP) A VMI method in which the supplier monitors thecustomer’s inventory levels and replenishes stock as
needed. Collaborative planning, forecasting, and replenishment (CPFR)
Radio Frequency Identification (RFID) A method for identifying items through the use of radio
signals from a tag attached to an item. Wal-Mart and Gillette are among a number of large retailers,
manufacturers, government agencies, and suppliers currentlyimplementing RFID in their supply chains.
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Distr ibu t ion Processes
Ownership: Rather than negotiate with a contract carrier , a firmhas the most control over the distribution process if it owns andoperates it, thereby becoming a private carrier .
Firms may use a combination of the five basic modes of transportation: truck, train, ship, pipeline, and airplane.
Cross-Docking: The packing of products on incoming shipmentsso that they can be easily sorted at intermediate warehouses for
outgoing shipments based on their final destinations. Items are carried from the incoming-vehicle docking point to the
outgoing-vehicle docking point without being stored in inventory atthe warehouse.
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Cont inuous Replenishment
at
Each morning Campbell uses Electronic DataInterchange to link with retailers.
Retailers inform Campbell of demands for its
products and the current inventory levels in their distribution centers.
Campbell determines which products needreplenishment based on upper and lower
inventory limits established with each retailer.
Campbell makes daily deliveries of neededproducts.
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3. The Supp l ier Relat ionsh ip
Process
The sourcing process qualifies, selects, managesthe contracts, and evaluates suppliers.
The design collaboration process focuses on jointly designing new services or products with keysuppliers, seeking to eliminate costly delays andmistakes incurred when many suppliers concurrently,but independently, design service packages or manufactured components.
The negotiation process focuses on obtaining aneffective contract that meets the price, quality, anddelivery requirements of the supplier relationshipprocess’s internal customers.
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The buying process relates to the actualprocurement of the service or material from the
supplier. This process includes the creation,management, and approval of purchase orders.
The information exchange process facilitatesthe exchange of pertinent operating information,
such as forecasts, schedules, and inventory levelsbetween the firm and its supplier.
The Supp l ier Relat ionsh ip
Process
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Supp l ier Select ion
and Cert i f icat ion
Purchasing: The activity that decides whichsuppliers to use, negotiates contracts, anddetermines whether to buy locally.
Supplier selection often considers the criteria of
price, quality and delivery.
Green purchasing: The process of identifying,assessing, and managing the flow of environmental waste and finding ways to reduce it
and minimize its impact on the environment. Supplier certification programs verify that
potential suppliers have the capability to providethe services or materials the buyer firm requires.
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Supp l ier Relat ions
Competitive orientation views negotiationsbetween buyer and seller as a zero-sumgame. Whatever one side loses, the other
side gains, and short-term advantages areprized over long-term commitments.
Cooperative orientation is where thebuyer and seller are partners, each helpingthe other as much as possible.
Sole sourcing is the awarding of a contractfor a service or item to only one supplier.
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Electronic Purchasing
Electronic Data Interchange (EDI) enables thetransmission of routine, standardized businessdocuments from computer to computer.
Catalog hubs: A system whereby suppliers post their catalog of items on the Internet and buyers selectwhat they need and purchase them electronically.
Exchange: An electronic marketplace where buying
firms and selling firms come together to do business.
Auction: A marketplace where firms placecompetitive bids to buy something.
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Central ized versus Local ized
Buy ing (for f i rm s w ith several faci l i t ies)
Centralized buying increases purchasing clout.Savings can be significant, often 10% or more.
Increased buying power can mean getting better
service, ensuring long-term supply availability, or developing new supplier capability.
The biggest disadvantage is loss of local control.
Centralized buying is undesirable for items unique toa particular facility.
The best solution may be one where both localautonomy and centralized buying are possible.
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Value Analys is
Value analysis is a systematic effort to reducethe cost or improve the performance of services or products, either purchased or produced.
Early supplier involvement is a program thatincludes suppliers in the design phase of a serviceor product.
Presourcing: A level of supplier involvement in
which suppliers are selected early in a product’sconcept development stage and given significant,if not total, responsibility for the design of certaincomponents or systems of the product.
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Supp ly Chain Strateg ies
Efficient supply chains focus on theefficient flows of services and materials,keeping inventories to a minimum.
Work best where demand is highly predictable.
Responsive supply chains are designedto react quickly.
Work best when firms offer a great variety of services or products and demand predictabilityis low.
E i t & D i F t
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Env ironment & Design Facto rs
Design Factors Efficient Supply Chains Responsive Supply Chains
Environment Factors Efficient SupplyChains
Responsive Supply Chains
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Mass Custom izat ion (eg: Pain t retailer)
Mass Customization: A strategy whereby a firm’s flexibleprocesses generate a wide variety of personalized services or
products at reasonably low costs. Competitive advantages: Managing customer relationships. It requires detailed
inputs from customers so that the ideal service or product
can be produced. Eliminating finished goods inventory. Producing to a
customer’s order eliminates finished goods inventory.
Increasing perceived value. It increases the perceivedvalue of services or products.
Postponement is when some of the final activities in theprovision of a service or product are delayed until the ordersare received.
Channel assembly is when members of the distributionchannel act as if they were assembly stations in the factory.
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Lean Supp ly Chains
Three key activities are required to attain a leansupply chain:
1. Strateg ic Sourc ing : Identifying items or servicesthat are of high value or complexity and purchasethem from a select set of suppliers with whom thefirm establishes a close relationship.
2. Co st Managemen t : Limiting the number of suppliers and focusing on helping them reduce
their costs through trust and friendly collaboration.3. Supp lier Developmen t : Shifting from price
negotiations to cost management and workingwith suppliers to achieve lean operations.
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Outsourc ing
A Make-or-buy decision is a managerial choicebetween whether to outsource a process or do itin-house.
Outsourcing: Paying suppliers and distributors toperform processes and provide needed services andmaterials.
Backward integration is a firm’s movement upstream
toward the sources of raw materials, parts, andservices through acquisitions.
Forward integration is acquiring more channels of distribution, such as distribution centers (warehouses)and retail stores, or even business customers.
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Offshor ing
Offshoring is a supply chain strategy that involvesmoving processes to another country. Factors thatinfluence the offshoring decision include:
Pitfalls of offshoring include:
Pulling the plug too quickly. Not making a good-faitheffort to fix the existing process
Technology transfer
Difficulties integrating processes
Tariffs and TaxesInternet
Comparative labor costsLogistics costs
Labor Laws and Unions
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Virtual Supp ly Chains
Virtual Supply Chain: Outsourcing some part of the entire
order fulfillment process with the help of sophisticated, Web-
based information technology support packages.
Benefits include: Reduced investment in inventories and order fulfillment
infrastructure.
Greater service or product variety without the overhead of
one’s own order fulfillment process.
Lower costs due to economies of scale. The supplier typically
handles more volume than does the firm doing the outsourcing.
Lower transportation costs. With drop shipping in a virtual
supply chain, the only transportation cost is shipping the goods
from the wholesaler to the customer.
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Which Type of
Supply Chain?
Traditional Supply Chainis preferred when:
1. Sales volumes are high.
2. Order consolidation isimportant.
3. Small-order fulfillmentcapability of suppliers isimportant.
Virtual Supply Chain ispreferred when:
1. Demand is highly volatile.
2. High service or product
variety is important.
In-house order fulfillmentprocess
Outsource the order fulfillmentprocess