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Vertical Integration
Henry Ford’s River Rouge PlantOwned forests, iron mines, rubber plantation, coal minesShips, railroad linesDock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track
1927 Model A Production begins15,000,000 cars in 15 years120,000 employees in WWII
Supply Network View of the World
• Integrated international networks of companies process, produce and distribute products.
Computer Example
Wacker Siltronic makes silicon wafers: buy sand
grow into long crystals
slice into thin wafers
CD DriveChip stuffed onto board by Flextronics, Celestica, etc.
CD drive assembled by separate contract manufacturer
Green Printed Circuit Board from different supplier
CD drive, with a brand name on it, sold to Gateway
Strategic Sourcing
Figure out what to buy from whom
What do we want to accomplish?More effective!
More efficient!
Outsourcing - What is it?
Transfer activities to outside providersOutside providers do activities
Resources: people, facilities, equipment
Decision-making responsibility
OEM = Original Equipment Manufacturername on the product, does not produce
Flextronics or Solectron makes it for you
Outsourcing – Why do it?
Organizationally-driven reasonsFocus on what you do bestMore flexible capacity Employees: career paths
Improvement-driven reasonsBetter quality & productivity, cycle time
Gain skills not otherwise available
Associate with superior providers
Financially-driven reasonsReduce assets, improve ROALower fixed costsCash from selling capital equip.
Make or Buy Decision
DIY: Lower cost
No capable suppliers
Inadequate supply
Competitive Issues
Core competencies
Specialization
Low purchase cost
Lack of capacity
Want to gain skill
Reduce inv. costs
Management focus
Patent issues
Reasons to Make Reasons to Buy
Other Factors
Degree of coordination with other activitiesRelationship-specific investmentsEasy to copy technologies, or low IP (intellectual properties) protection
What to not Outsource
Core activities
Key to the business
Do not confer competitive advantage
Strategic activities
Key source of competitive advantageX-box – Microsoft never considered making
Flextronics in Guadalajara$5 / hr vs. $1 in Doumen, China
Outsourcing Example
In 1981, IBM ‘PC’.
Consumers care about hardware
No one cares about the software that lets them talk to the processor.
Outsourced the OS to whom?
Anybody heard of “Microsoft?”
UCSD Pascal $450
CP/M $175
MS-DOS $60
IBM: ‘05 Lenovo $1.75bMS: 2007 EBITDA $25b
Outsourcing in the News
IT & telecommunications changesNobody can tell you’re calling India
White collar jobs – now it’s seriousEducated workforces
Call centers, programmers
Privacy / security concerns
Supply Chain Performance
Inventory Turnover (turns) =Cost of goods sold / Average inv. Value
Weeks of supply =( Avg. Inv Value / CoGS ) * 52 Weeks
Fill Rate =Percentage of orders shipped on time
Supply Chain Designs
Efficient – economies of scaleRisk-Hedging – pooled resources, multiple sources of supply, share inv., need good ITResponsive – Changing consumer needs, mass customization, build-to-orderAgile – responsive to changing needs, pooled resources
Efficient
Risk-Hedging
Responsive
Agile
Low High
Low
High
SupplyUncertainty
Demand Uncertainty
Modular Components Take advantage of modules: parts or products previously prepared
Restaurants: prepared ingredients, assembled to order
Suppliers can develop new, interesting products to use more quickly, cheaply
Variety is gained by different combinations of same components
Mass Customization
Highly customizedIntegrate design, processes, supply network
Supply components cheaply to production pointsFast, responsive production, quick deliveryHigher weight, lower value
Managing the Supply ChainPostponement -- withhold any modification until as long as possible. Keep product generic “vanilla”
HP BenettonHome Depot paint department
Channel Assembly -- have distributor assemble products from components
HP Inkjet Printers
Printers made in Vancouver, sent via ship through Panama Canal to EuropeEurope warehouse stocks inventory by country
physically different-- power supplymanuals different languagesSubstitution not allowed
Re-supply time very long
HP Inkjet Printers
Redesigned printers so that power supply added in Europe
Re-engineer product, power supplyAssembly done in a warehouse (Quality?)Manuals added in EuropeMany expensive changes
Store ‘vanilla’ boxesPostpone point of differentiation25% cost reduction
Benetton
• Sweaters of undyed wool, dyed once demand is known
• Dyeing LT much faster than production• How many undyed sweaters to make?• How many Red, Green, Blue, also, if this production
process is cheaper, and you know you’ll sell some minimum amount?
Behr Paints
• Small # of bases• Small # tints• Unlimited # combinations• Keep stock colors on hand?
– How many gallons?– Which ones?– Lower labor costs– Higher inventory costs
Bullwhip Effect
• Lack of information sharing can cascade through the supply chain.
• Small changes at retail level lead to huge swings at manufacturing, like a bullwhip
• Several retailers order all at once, distributor thinks sales have jumped, orders a much bigger order, etc.
• Better: sales information shared across the “Value Chain.”
Electronic Data Interchange
• My computer talks to yours, tells you exactly what I want to order, when
• You fill out a form, very compressed message sent, viewed as form
• Software, hardware expensive to implement
Sample Purchase TransactionST88850*1 Transaction Set identifierBEG*00*NE*00498765**010698 Beginning of SegmentPID*X*08*MC**Large Widget Description of ProductP01**5*DZ*4.55*TD Baseline Item DataCTT*1 Transaction TotalsSE*1*1 End of Segment
Supply Chain Technologies• ASN -- lets customer know exactly what
has been sent
• Standardization -- reduce number of variations of a part in use
• Drop Shipping -- Supplier sends directly to the store, not to store’s warehouse