Chopra3 Ppt Ch03 Revised Handout

© 2007 Pearson Education 3-1

Chapter 3 Supply Chain Drivers and Obstacles

Supply Chain Management (3rd Edition)

3-2© 2007 Pearson Education

OutlineDrivers of supply chain performanceA framework for structuring drivers

1. Facilities2. Inventory3. Transportation4. Information5. Sourcing6. Pricing

Obstacles to achieving fit


Drivers of Supply Chain Performance1. Facilities

– places where inventory is stored, assembled, or fabricated– production sites and storage sites

2. Inventory– raw materials, WIP, finished goods within a supply chain– inventory policies

3. Transportation– moving inventory from point to point in a supply chain– combinations of transportation modes and routes

4. Information– data and analysis regarding inventory, transportation, facilities throughout the supply

chain– potentially the biggest driver of supply chain performance

5. Sourcing– functions a firm performs and functions that are outsourced

6. Pricing– Price associated with goods and services provided by a firm to the supply chain


A Framework for Structuring Drivers

Efficiency Responsiveness

Facilities Transportation Inventory Information

Supply chain structure

Drivers


Supply Chain Decisions: Structuring Drivers

Strategy(Design)

Planning

Operation


Framework for Structuring Drivers

Com petitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Inform ation

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers


FacilitiesRole in the supply chain– the “where” of the supply chain, aka nodes– manufacturing (plant) or storage (warehouses)

Role in the competitive strategy– economies of scale (efficiency priority), global (BBraun,

Schlumberger, Zara, Benetton)– larger number of smaller facilities (responsiveness priority)

(Toyota, Honda, Motorola)Example 3.1: Toyota and Honda (compete on responsiveness by siting manufacturing facilities)Components of facilities decisions


Components of Facilities DecisionsLocation– centralization (efficiency) vs. decentralization (responsiveness)– other factors to consider (e.g., proximity to customers)

Capacity (flexibility versus efficiency)Manufacturing methodology (product focused versus process focused)Warehousing methodology (SKU storage, job lot storage, cross-docking)Overall trade-off: Responsiveness versus efficiency


Facility related metricsCapacity – max amount a facility can processUtilisation – actual capacity that is being used, affects unit cost and associated delays (unit cost ↓ but delay ↑)Theoretical flow/ cycle time – time needed to process unit if no delays existActual flow/ cycle time =theoretical time + delaysFlow time efficiency = theoretical time / actual timeProduct variety no. of products / families processed in a facility, processing cost and flow times <= ↑ product varietyVolumetric contribution of top 20% SKUs and clients – use separate process for top 20%Processing/ setup/ idle time – defines value added timeAverage production batch size – average amount produced in each batch (large batch size => production cost ↓ but inventory cost in SC ↑)Production service level = % of orders completed on time and in full (OCOTF)


InventoryRole in the supply chain –”the what is being passed along the supply chain”Role in the competitive strategyComponents of inventory decisions


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 = DT (Little’s Law)» I = inventory; D = throughput; T = flow time» Example: T=10, D=60, I =600, if I=300, T=30 => speed to market» Inventory and throughput are “synonymous” in a supply chain


Inventory: Role in Competitive Strategy

If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customersIf cost is more important, inventory can be reduced to central location make the firm more efficient (low cost producer)Trade-offExample 3.2 – Nordstrom (high responsiveness and more variety and better service to higher paying customers)


Components of Inventory Decisions

Cycle inventory– Average amount of inventory used to satisfy demand between shipments– Depends on lot size = EOQ/2

Safety inventory– inventory held in case demand exceeds expectations– costs of carrying too much inventory versus cost of losing sales

Seasonal inventory– inventory built up to counter predictable variability in demand– cost of carrying additional inventory versus cost of flexible production– Level vs chase strategy in services

Product availability level– Portion of demand that is served on time from product held in inventory

Overall trade-off: Responsiveness versus efficiency– more inventory: greater responsiveness but greater cost– less inventory: lower cost but lower responsiveness


Inventory related metricsAverage inventory – ave units of stock heldProducts with more than specified no. of days of inventory (DSI)=> products by which firm is carrying high levels of stock (oversupply or slow mover) –SCALAAverage replenishment size – ave amount in each replenishment order (SKUs) = (Imax – Imin)/replenishment timeAverage safety stock - ave amont of stock on hand when replenishment order arrives. Seasonal inventory – cycle and safety stock ordered due to seasonal changes in demandFill rate = % of orders or demand met on time from inventoryFraction of time out of stock - % of time a SKU had zero inventory (estimate demand during stockout period)


TransportationRole in the supply chainRole in the competitive strategyComponents of transportation decisions


Transportation: Role in the Supply Chain

Moves the product between stages in the supply chainImpact on responsiveness and efficiencyFaster transportation allows greater responsiveness but lower efficiencyAlso affects inventory and facilities


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 itCan also use slower transportation modes for customers whose priority is price (cost)Can also consider both inventory and transportation to find the right balanceExample 3.3: Laura Ashley (quick response through air freight – high speed by Fedex)


Amazon – Books, VHS videotapes, software, video games (US to Asia)

International shipping (business days)

Per Shipment Per Item

10-15 (standard) $4.99 $4.99

5-9 (expedited) $13.99 $5.99

2-4 (priority) $29.99 $5.99

Any combination of the above items

Highest applicable per- shipment charge

As above

Source: ww.amazon.com/gp/help/customer/display.html , 2008


Components of Transportation Decisions

Mode 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


Modal Profile of Freight Transportation

Mode Value Volume Service Distance

Truck Moderate to high

Loads of less than 50,000 lbs.

On-time performance above 90%. Driver can go 500 miles/ day. 2/3 of tonnage carried over less than 100 miles.

Rail Moderate to low

Multiple car loads. No weight restriction.

4 to 7 days delivery time. 60 to 85% on-time performance.

Average haul length between 600 and 800 miles.

Intermodal Moderate to high

No weight restrictions. 3 days for cross country. On-time performance between truck and rail.

Average haul between 700 and 1,500 miles.

Air High Small. Most loads less than 100 lbs.

Normally overnight or second day. More than 1,300 miles.

Inland Water Moderate to low

Bulk shipments. Varies according to segment. Competitive with rail.

Between 250 and 1,600 miles.

Coastal Water

Moderate to low

Containers, general freight & bulk shipments.

Function of distance. Between 2 to 5 days.

Between 500 and 2,000 miles.

International Water

High to low Mainly containers and bulk shipments.

7 to 10 days trans-Atlantic and trans- Pac routes.

More than 2,600 miles.

Pipeline Low Bulk shipment of liquids and gasses.

According to demand. 0 to 20 mph. 825 miles average distance for crude oil.


InformationRole in the supply chainRole in the competitive strategyComponents of information decisions


Information: Role in the Supply Chain

The connection between the various stages in the supply chain – allows coordination between stagesCrucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels


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)Information technologyWhat information is most valuable?Example 3.4: Andersen Windows (uses “window of Knowledge”, use information to drive inventory of customised windows, speed to market)Example 3.5: Dell (complete visibility of customer demand, high investment in information, DOMS, SMART)


Components of Information Decisions

Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain)Coordination and information sharingForecasting and aggregate planningEnabling technologies– EDI (some countries find this expensive)– Internet (XML, ASP)– ERP systems (Internet is the medium)– Supply Chain Management software (APO, Infor, CyberLog, etc)– RFID – active vs passive, 18185 standards

Overall trade-off: Responsiveness versus efficiency


Information related metricsForecast horizon – how far in advance of actual event forecast is made =lead time of the decision that is driven by forecastFrequency of update of forecast – R&RForecast error – MAD, MSE, MAPESeasonal factors – need to calculate seasonal indexVariance from planned – identify shortages and surplusesRatio of demand var to order variability (if ratio < 1 then bullwhip effect exists)


SourcingRole in the supply chainRole in the competitive strategyComponents of sourcing decisions


Sourcing: Role in the Supply Chain

Set of business processes required to purchase goods and services in a supply chainSupplier selection, single vs. multiple suppliers, contract negotiation


Sourcing: Role in the Competitive StrategySourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chainIn-house vs. outsource decisions- improving efficiency and responsivenessExample 3.6: Cisco (outsource lower end products (egrouters) for greater efficiency). Cisco outsource almost all of mfg (like Nike) – lower end to China and higher end to US


Components of Sourcing Decisions

In-house versus outsource decisions – Emerson Process Management and Schlumberger insource,

Dell, Cisco outsource

Supplier evaluation and selection - AVLProcurement process – supplier send products in response to customer orders, for MRO products should be procured cheaply (lower transaction costs)– Procurement for direct materials to ensure good

coordination between buyer and seller

Overall trade-off: Increase the supply chain profits


Sourcing related metricsDays payable outstanding – days when supplier performs task to when he is paidAverage purchase price – ave price when good bought during year (weight this by quantity bought at each price)Range of purchase price – measure price fluctuations (usually correlates with amount bought)Average qty purchased – amt bought per order – measures aggregation level across locations (spatial aggregation)Fraction on time deliveries - % of deliveries made on timeSupply quality – quality of supplySupply lead time – ave time between order placed and order arrival


PricingRole in the supply chainRole in the competitive strategyComponents of pricing decisions


Pricing: Role in the Supply Chain

Pricing determines the amount to charge customers in a supply chainPricing strategies can be used to match demand and supply


Sourcing: Role in the Competitive StrategyFirms can utilize optimal pricing strategies to improve efficiency and responsivenessLow price and low product availability; vary prices by response timesExample 3.7: Amazon (uses pricing of shipping to shift high demand workload in warehouse)


Some common supply chain strategiesDriver More Responsive More Efficient

Facilities Multiple Plants (proximity)Flexible Plants

Single (consol) PlantDedicated Plant

Inventory Higher Inventory (available) Lower Inventory (cost of holding)

Transportation Higher Speed Lower Speed (consol)

Information AccurateReal Time Transmission

Less AccurateBatched Transmission

Sourcing Responsive supplier Efficient supplier

Pricing Differential Pricing Everyday Low Pricing


Components of Pricing DecisionsPricing and economies of scale –quantity discountEveryday low pricing versus high-low pricing –Walmart and Metro (EDLPP)Fixed price versus menu pricing – pick, pack and deliver to home higher than personal pickup at warehouse, zonal pricing (DHL),Overall trade-off: Increase the firm profits


DHL International rate zone table

Afghanistan L Dominican

Republic J Lebanon L Saipan H2 Albania E East Timor I Lesotho M San Marino C

Algeria M Ecuador K Liberia M Sao Tome & Principe M

American Samoa I Egypt L Libya M Saudi Arabia L

Andorra D El Salvador K Liechtenstein D Senegal M

Angola M Equatorial Guinea M Lithuania E Serbia E

Anguilla J Eritrea M Luxembourg C Seychelles M Antigua J Estonia E Macau H2 Sierra Leone M Argentina K Ethiopia M Macedonia E Singapore H1

Armenia L Falkland Islands K Madagascar M Slovakia E

Aruba J Faroe Islands D Malawi M Slovenia E

Australia H2 Fiji Islands I Malaysia H2 Solomon Islands I


Pricing related metricsProfit margin = % of revenue (type of margin –gross, net), scope (SKU, product line, customer)Days sales outstanding (DSO) = time when sales is made and when money collectedIncremental fixed cost per order – incremental cost that is indepof order, changeover cost, transportation costAverage sale price - - weighted by quantity of goods soldAverage order size – ave qty per orderRange of sale price – (min, max)Range of periodic sales – (min, max) of qty sold per period –helps to show correlation between sales and price, potential opportunity to shift sales by price changes


Obstacles to Achieving Strategic Fit

Increasing variety of productsDecreasing product life cyclesIncreasingly demanding customers (not same as demands)Fragmentation of supply chain ownership – so called focus on core competency => less vertical or horizontal integrationGlobalization – adds stress to SC as facilities are now further apart, making coordination difficultDifficulty executing new strategies


Major Obstacles to Achieving FitMultiple owners / incentives in a supply chain

Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty

Local optimization and lack of global fit


SummaryWhat are the major drivers of supply chain performance?What is the role of each driver in creating strategic fit between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)?What are the major obstacles to achieving strategic fit?In the remainder of the course, we will learn how to make decisions with respect to these drivers in order to achieve strategic fit and surmount these obstacles


Reality checkList and define four major drivers of supply chain performance. (**)


Explain the supply chain decision-making framework and the role of the major drivers. (**)


Explain the basic trade-off between responsiveness and efficiency for each of the major drivers of supply chain performance.(**)


How has globalization made strategic fit even more important to a company’s success?

Chopra3 Ppt Ch03 Revised Handout

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