Lecture05

Supply Chain Management

Lecture 5

Outline

• Today– Chapter 3– Start with Chapter 4

• Thursday– Finish Chapter 4– Introduction to Excel Solver

• Homework 1– Due Thursday January 28 before class

From Strategy to Decisions

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

Logistical drivers Cross functional drivers

Facilities

• Facility decisions– Production facility

• Flexible versus dedicated

• Product focus (fabrication and assembly) versus functional focus (fabrication or assembly)

– Storage facility• Cross-docking versus

storage

• Metrics– Capacity– Utilization– Flow time (theoretical and

actual)– Flow time efficiency– Product variety– Average batch size– Service level

Overall tradeoff: Cost of the number, location and type versus level of responsiveness

How could a car manufacturer increase responsiveness through its facilities?

Corporate Strategy





Toyota

• Worldwide operations

Source: http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html

Honda

• East Liberty, OH– Using Honda's flexible manufacturing, this plant produces cars

and light trucks on the same assembly line

• Marysville, OH– One of the most integrated and flexible auto plants in North

America, it houses stamping, welding, paint, plastic injection molding and assembly under one roof.

Inventory

• Inventory decisions– Cycle inventory– Safety inventory– Seasonal inventory– Level of product availability

• Metrics– Average inventory– Units that have been in

stock for more than a specified period of time

– Fill rate (fraction of orders that were met on time from inventory)

– Fraction of time out of stock

Overall tradeoff: Level of inventory versus level of product availability

How could a grocery retailer use inventory to increase responsiveness?

Corporate Strategy



Efficiency


Responsiveness

Transportation

• Transportation decisions– Mode of transportation

• Air, package carriers, truck, rail, sea, pipeline, intermodal, …

• Metrics– Inbound/outbound cost– Inbound/outbound cost per

shipment– Shipment sizes– Fraction transported by

mode

Overall tradeoff: Cost and speed of transportation

Corporate Strategy



Efficiency


Responsiveness

Transportation Facts

Freight shipments in America 2002

Mode

Freight value ($billions)

Freight tons (billions)

Freight ton-miles (millions)

Air 777 10 15Truck 6660 9197 1449Rail 388 1895 1254Water 867 2345 733Pipeline 285 1656 753Mulitmodal 1111 213 226

7.7%

66.0%

3.8%

8.6%

2.8%

11.0%

0.1%

60.0%

12.4%

15.3%

10.8%

1.4%

0.3%

32.7%

28.3%

16.5%

17.0%

5.1%

Transportation Facts

Transportation

• Transportation decisions– Design of transportation

network• Route and network

selection

– Mode of transportation• Air, package carriers,

truck, rail, sea, pipeline, intermodal, …

• Metrics– Inbound/outbound cost– Inbound/outbound cost per

shipment– Shipment sizes– Fraction transported by

mode

Overall tradeoff: Cost and speed of transportation

How does Dell use transportation to improve responsiveness?

Corporate Strategy



Efficiency


Responsiveness

Amazon.com

• Fulfillment and warehousing locations– Arizona, USA: Phoenix, Goodyear – Delaware, USA: New Castle – Indiana, USA: Whitestown, Munster – Kansas, USA: Coffeyville – Kentucky, USA: Campbellsville, Hebron (near CVG), Lexington,

and Louisville – Nevada, USA: Fernley and Red Rock (near 4SD) – Pennsylvania, USA: Carlisle, Chambersburg, Hazleton, and

Lewisberry – Texas, USA: Dallas/Fort Worth – Ontario, Canada: Mississauga (a Canada Post facility)

Information

• Information decisions– Push vs. Pull– Coordination and

information sharing– Forecasting and aggregate

planning– Enabling technologies

• Metrics– Forecast horizon– Forecast errors– Ratio of demand variability

and order variability

Accurate information helps both efficiency and responsiveness

How does Wal-Mart use information to improve its supply chain operations?

Corporate Strategy



Efficiency


Responsiveness

Information

Sourcing

• Sourcing decisions– In-House or outsource– Supplier selection

• Metrics– Days payable outstanding– Purchase price statistics– Purchase quantities– Fraction on-time deliveries– Supply quality and lead-time

Overall tradeoff: Increased supply chain profit versus additional risk

Corporate Strategy



Efficiency


How does Dell use sourcing to improve efficiency?

Responsiveness

Pricing

• Pricing decisions– Pricing and economies of

scale– Everyday low pricing versus

high-low pricing– Fixed price versus menu

price

• Metrics– Profit margin– Average sale price– Average order size– Incremental fixed cost per

order– Incremental variable cost

per unit

Overall tradeoff: Increase company profits

How can Peapod use pricing of its delivery services to improve profitability?

Corporate Strategy



Efficiency


Responsiveness

Designing a Supply Chain Network

In designing a supply chain, we need to consider how all supply chain drivers

should be used together to support the competitive strategy of a company and

maximize supply chain profits

Corporate Strategy





From Strategy to Decisions

Corporate Strategy





Logistical drivers Cross functional drivers

The Role of Distribution in the Supply Chain

• What is distribution?– Distribution refers to the steps taken to move and store

a product from the supplier stage to the customer stage in a supply chain

• Distribution-related cost– Make up about 10.5% of the US economy– Make up about 20% of the cost of manufacturing

Distribution can achieve supply chain objectives from low cost to high responsiveness


What differences in the retail environment may justify the fact that the

fast-moving consumer goods supply chain in India has far more distributors

than in the United States?

Distribution Complexity in India

• Dispersed population– 30+ cities have populations of more than 1 million, but nearly 70%

still live in rural areas

• Retail density– More than 12 million retail outlets– Mom-and-pop stores account for more than 96% of the total

market for many markets, organized retail represents only 4%

• Infrastructure complexity– Very few full-service distribution companies operate in India– Some consumer multinational companies work with more than

1,000 distributors, which deliver its products to more than 1 million outlets across India

Distribution Complexity

Baddi

Rural village

Distribution Complexity in India

• India is becoming one of the world’s largest markets for consumer goods– Rapidly rising household incomes– One quarter of India’s population is between 20 and 35, a high

spending segment in many markets– Overall retail market is more than $230 billion (2005) and

expected to grow to $308 billion (2010)

Wal-Mart is teaming up with Bharti to establish wholesale and supply chain operations in India


• What is distribution?– Distribution refers to the steps taken to move and store

a product from the supplier stage to the customer stage in a supply chain

• Distribution-related cost– Make up about 10.5% of the US economy– Make up about 20% of the cost of manufacturing

Distribution can achieve supply chain objectives from low cost to high responsiveness

Response Time and Number of Facilities

Number of Facilities

Response Time

Facility Cost and Number of Facilities


FacilityCosts

Inventory Cost and Number of Facilities


InventoryCosts

Transportation Cost and Number of Facilities


TransportationCosts

Total Logistics Costs

Inventory Costs

LogisticsCosts


Transportation Costs

Facility Costs

Logistics Costs

Logistics Costs, Response Time and Number of Facilities (Fig 4.5)


Response Time

Total Logistics Cost

Design Options For a Distribution Network

• Two key decisions when designing a distribution network– Will the product be delivered to the customer location

or picked up from a preordained site?– Will product flow through an intermediary?

Design Options For a Distribution Network

1. Manufacturer Storage with Direct Shipping

2. Manufacturer Storage with Direct Shipping and In-Transit Merge

3. Distributor Storage with Carrier Delivery

4. Distributor Storage with Last Mile Delivery

5. Manufacturer or Distributor Storage with Consumer Pickup

6. Retail Storage with Consumer Pickup

Manufacturer Storage with Direct Shipping (Drop Shipping)

• Products are shipped directly to the consumer from the manufacturer

• Retailer is an information collector: – Passes orders to the

manufacturers– It does not hold product

inventory• Inventory is centralized at

manufacturer• Drop shipping offers the

manufacturer the opportunity to postpone customization

• Effective for high value, large variety, low demand products

• High transportation cost• Example: eBags

Retailer

Manufacturers

Consumers

Manufacturer Storage with Direct Shipping and In-Transit Merge

• Shipments from multiple manufactures are merged before making a single delivery to the consumer

• Shipments to Mergers are larger so economies of scale is achieved

• Mergers increase facility costs• Response time may go up• Example:

– Furniture retailers merge couches and coffee tables produced by different manufacturers

– Dell merges a Dell PC with a Sony flat screen

RetailerMergers

Consumers

Manufacturers

Distributor Storage with Carrier Delivery

• Inventory is held at a warehouse which ships to customer by carriers

• With respect to direct shipping– Inventory aggregation is less– Higher inventory costs– Facility costs are higher– Less information to track

• Warehouses are physically closer to consumers which leads to– Faster response time– Lower transportation cost

• Not effective for slow moving items

• Example: Amazon

DistributorWarehouse

Manufacturers

Consumers


Distributor Storage with Last Mile Delivery

• Warehouse delivers to customers instead of carrier– Warehouses are located closer

to consumers– Transportation costs go up

because warehouses are not as effective as package carriers in aggregating loads to have economies of scale

• Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher. – Products must be flowing fast

to justify the infrastructure– Processing cost are high

• Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress


Manufacturers

Consumers


Manufacturer or Distributor Storage With Customer Pickup

• Customers come to pick up sites (warehouse, retailer) to get the products– If consumers are willing to pick

up the products, let them do so. Otherwise, they would be charged for the delivery costs

• Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located.

• Significant amount of information is required

• Increased handling cost• Example: 7dream.com


Manufacturers

Consumers


Retail Storage with Customer Pickup

• Customers pick up product from retailers– Low transportation cost– High facility cost– Relative easy returnability– Increased inventory cost

• No order tracking necessary– If the product is available at the

retailer, the consumer buys. Otherwise goes to another retailer

• Effective for fast moving items• Example: Retail stores such as

Wal-Mart and JCPenney

Retailer

Manufacturers

Consumers

RetailerRetailer

Comparing Distribution Networks

Retail storage with

customer pickup

Manufacturer storage with

direct shipping


in transit merge

Distributor storage with

package delivery


last mile delivery


customer pickup

Reponse time 1 4 4 3 2 4

Product variety 4 1 1 2 3 1

Product availability 4 1 1 2 3 1

Cusomter experience 1-5 4 3 2 1 5

Time to market 4 1 1 2 3 1

Order visibility 1 5 4 3 2 6

Returnability 1 5 5 4 3 2

Inventory 4 1 1 2 3 1

Transportation 1 4 3 2 5 1

Facility and handling 6 1 2 3 4 5

Information 1 4 4 3 2 5

1 = strongest performance6 = weakest performance

Comparing Distribution Networks

Green = very suitable Red = very unsuitable

Retail storage with

customer pickup


direct shipping


in transit merge


package delivery


last mile delivery


customer pickup

High demandMedium demandLow demandVery low demandMany sourcesHigh product valueQuick responseHigh product varietyLow customer effort

Retail storage with

customer pickup


direct shipping


in transit merge


package delivery


last mile delivery


customer pickup

High demandMedium demandLow demandVery low demandMany sourcesHigh product valueQuick responseHigh product varietyLow customer effort

From brick-and-mortar to click-and-mortar

Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle?

In the future, do you see the number of distributors decreasing, increasing, or staying about the same?

Why should an e-business such as Amazon.com build more warehouses as its sales volume grows?

What has been the impact of e-business on supply chain cost?

What has been the impact of e-business on customer service?

Lecture05

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