Achieving Strategic Fit and Scope
BABASAB
Supply Chain Management
4/11/2013 Babasabpatilfreepptmba.com
Outline
• Competitive and supply chain strategies
• Achieving strategic fit
• Expanding strategic scope
2-24/11/2013 Babas...
What is Supply Chain Management?
• Managing supply chain flows and assets, to
maximize
supply chain surplus
• What is supp...
Competitive and Supply
Chain Strategies
 Competitive strategy: defines the set of customer needs a firm
seeks to satisfy ...
The Value Chain: Linking Supply Chain
and Business Strategy
2-5
New
Product
Development
Marketing
and
Sales
Operations Dis...
Achieving Strategic Fit
• Introduction
• How is strategic fit achieved?
• Other issues affecting strategic fit
2-64/11/201...
Achieving Strategic Fit
• Strategic fit:
– Consistency between customer priorities of
competitive strategy and supply chai...
How is Strategic Fit Achieved?
• Step 1: Understanding the customer and
supply chain uncertainty
• Step 2: Understanding t...
Step 1: Understanding the Customer
and Supply Chain Uncertainty
• Identify the needs of the customer segment
being served
...
Step 1: Understanding the Customer
and Supply Chain Uncertainty
• Overall attribute of customer demand
• Demand uncertaint...
Step 1: Understanding the
Customer and Supply Chain
Uncertainty
• Implied demand uncertainty also related to
customer need...
Achieving Strategic Fit
• Understanding the Customer
– Lot size
– Response time
– Service level
– Product variety
– Price
...
Impact of Customer Needs on
Implied Demand Uncertainty (Table
2.1)
2-13
Customer Need Causes implied demand
uncertainty to...
Levels of Implied Demand
Uncertainty
2-14
Predictable
supply and
demand
Salt at a
supermarket
A new
communication
device
H...
Correlation Between Implied Demand Uncertainty
and Other Attributes (Table 2.2)
2-15
Attribute Low Implied
Uncertainty
Hig...
Step 2: Understanding the
Supply Chain
• How does the firm best meet demand?
• Dimension describing the supply chain is
su...
Step 2: Understanding the
Supply Chain
• There is a cost to achieving responsiveness
• Supply chain efficiency: cost of ma...
Understanding the Supply Chain:
Cost-Responsiveness Efficient
Frontier
2-18
High Low
Low
High
Responsiveness
Cost
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Step 3: Achieving Strategic Fit
• Step is to ensure that what the supply chain
does well is consistent with target custome...
Responsiveness Spectrum
(Figure 2.4)
2-20
Integrated
steel mill
Dell
Highly
efficient
Highly
responsive
Somewhat
efficient...
Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map (Fig. 2.5)
2-21
Implied
uncertainty
spectrum
Responsiv...
Step 3: Achieving Strategic Fit
• All functions in the value chain must support
the competitive strategy to achieve strate...
Comparison of Efficient and
Responsive Supply Chains (Table
2.4)
2-23
Efficient Responsive
Primary goal Lowest cost Quick ...
Other Issues Affecting Strategic Fit
• Multiple products and customer segments
• Product life cycle
• Competitive changes ...
Multiple Products and
Customer Segments
Firms sell different products to different
customer segments (with different impl...
Product Life Cycle
• The demand characteristics of a product and
the needs of a customer segment change as a
product goes ...
Product Life Cycle
• Examples: pharmaceutical firms, Intel
• As the product goes through the life cycle, the
supply chain ...
Competitive Changes Over Time
• Competitive pressures can change over time
• More competitors may result in an increased
e...
Expanding Strategic Scope
 Scope of strategic fit
The functions and stages within a supply chain that
devise an integrat...
Different Scopes of Strategic Fit Across
a Supply Chain
2-30
Suppliers Manufacturer Distributor Retailer Customer
Competit...
Summary of Learning Objectives
• Why is achieving strategic fit critical to a
company’s overall success?
• How does a comp...
Chapter 4
Designing the Distribution Network
in a Supply Chain
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Outline
• The Role of Distribution in the Supply Chain
• Factors Influencing Distribution Network
Design
• Design Options ...
The Role of Distribution
in the Supply Chain
• Distribution: the steps taken to move and
store a product from the supplier...
Factors Influencing
Distribution Network Design
• Distribution network performance evaluated
along two dimensions at the h...
Factors Influencing
Distribution Network Design
 Elements of customer service influenced by network structure:
Response ...
Service and Number of Facilities
(Fig. 4.1)
4-37
Number of
Facilities
Response Time
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The Cost-Response Time Frontier
4-38
Local FG
Mix
Regional FG
Local WIP
Central FG
Central WIP
Central Raw Material and Cu...
Inventory Costs and Number
of Facilities (Fig. 4.2)
4-39
Inventory
Costs
Number of facilities
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Transportation Costs and
Number of Facilities (Fig. 4.3)
4-40
Transportation
Costs
Number of facilities
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Facility Costs and Number
of Facilities (Fig. 4.4)
4-41
Facility
Costs
Number of facilities
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Transportation
Total Costs Related to
Number of Facilities
TotalCosts
Number of Facilities
Inventory
Facilities
Total...
4-43
Response Time
Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Number of Facilitie...
Design Options for a
Distribution Network
• Manufacturer Storage with Direct Shipping
• Manufacturer Storage with Direct S...
Manufacturer Storage with
Direct Shipping (Fig. 4.6)
4-45
Manufacturer
Retailer
Customers
Product Flow
Information Flow
4/...
In-Transit Merge Network (Fig. 4.7)
4-46
Factories
Retailer
Product Flow
Information Flow
In-Transit Merge by
Carrier
Cust...
Distributor Storage with
Carrier Delivery (Fig. 4.8)
4-47
Factories
Customers
Product Flow
Information Flow
Warehouse Stor...
Distributor Storage with
Last Mile Delivery (Fig. 4.9)
4-48
Factories
Customers
Product Flow
Information Flow
Distributor/...
Manufacturer or Distributor Storage with
Customer Pickup (Fig. 4.10)
4-49
Factories
Retailer
Pickup Sites
Product Flow
Inf...
Comparative Performance of
Delivery Network Designs (Table
4.7)
4-50
Information
Facility & Handling
Transportation
Invent...
Linking Product Characteristics and Customer
Preferences to Network Design
Low customer effort
High product variety
Quick ...
E-Business and the Distribution
Network
• Impact of E-Business on Customer Service
• Impact of E-Business on Cost
• Using ...
Distribution Networks in Practice
• The ownership structure of the distribution
network can have as big as an impact as th...
Summary of Learning Objectives
• What are the key factors to be considered
when designing the distribution network?
• What...
Chapter 4
Designing the Distribution Network
in a Supply Chain
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Outline
• The Role of Distribution in the Supply Chain
• Factors Influencing Distribution Network
Design
• Design Options ...
The Role of Distribution
in the Supply Chain
• Distribution: the steps taken to move and
store a product from the supplier...
Factors Influencing
Distribution Network Design
• Distribution network performance evaluated
along two dimensions at the h...
Factors Influencing
Distribution Network Design
 Elements of customer service influenced by network structure:
Response ...
Service and Number of Facilities
(Fig. 4.1)
4-60
Number of
Facilities
Response Time
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The Cost-Response Time Frontier
4-61
Local FG
Mix
Regional FG
Local WIP
Central FG
Central WIP
Central Raw Material and Cu...
Inventory Costs and Number
of Facilities (Fig. 4.2)
4-62
Inventory
Costs
Number of facilities
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Transportation Costs and
Number of Facilities (Fig. 4.3)
4-63
Transportation
Costs
Number of facilities
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Facility Costs and Number
of Facilities (Fig. 4.4)
4-64
Facility
Costs
Number of facilities
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4-65
Transportation
Total Costs Related to
Number of Facilities
TotalCosts
Number of Facilities
Inventory
Facilities
Total...
4-66
Response Time
Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Number of Facilitie...
Design Options for a
Distribution Network
• Manufacturer Storage with Direct Shipping
• Manufacturer Storage with Direct S...
Manufacturer Storage with
Direct Shipping (Fig. 4.6)
4-68
Manufacturer
Retailer
Customers
Product Flow
Information Flow
4/...
In-Transit Merge Network (Fig. 4.7)
4-69
Factories
Retailer
Product Flow
Information Flow
In-Transit Merge by
Carrier
Cust...
Distributor Storage with
Carrier Delivery (Fig. 4.8)
4-70
Factories
Customers
Product Flow
Information Flow
Warehouse Stor...
Distributor Storage with
Last Mile Delivery (Fig. 4.9)
4-71
Factories
Customers
Product Flow
Information Flow
Distributor/...
Manufacturer or Distributor Storage with
Customer Pickup (Fig. 4.10)
4-72
Factories
Retailer
Pickup Sites
Product Flow
Inf...
Comparative Performance of
Delivery Network Designs (Table
4.7)
4-73
Information
Facility & Handling
Transportation
Invent...
Linking Product Characteristics and Customer
Preferences to Network Design
Low customer effort
High product variety
Quick ...
E-Business and the Distribution
Network
• Impact of E-Business on Customer Service
• Impact of E-Business on Cost
• Using ...
Distribution Networks in Practice
• The ownership structure of the distribution
network can have as big as an impact as th...
Summary of Learning Objectives
• What are the key factors to be considered
when designing the distribution network?
• What...
Chapter 17
Coordination in the Supply Chain
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Objectives
• Describe supply chain coordination, the
bullwhip effect, and their impact on
performance
• Identify causes of...
Outline
• Lack of Supply Chain Coordination and the
Bullwhip Effect
• Effect of Lack of Coordination on
Performance
• Obst...
Lack of SC Coordination
and the Bullwhip Effect
• Supply chain coordination – all stages in the
supply chain take actions ...
Bullwhip Effect
• Fluctuations in orders increase as they
move up the supply chain from retailers to
wholesalers to manufa...
The Effect of Lack of
Coordination on Performance
• Manufacturing cost (increases)
• Inventory cost (increases)
• Replenis...
Obstacles to Coordination
in a Supply Chain
• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacl...
Incentive Obstacles
• When incentives offered to different stages
or participants in a supply chain lead to
actions that i...
Information Processing Obstacles
• When demand information is distorted as it
moves between different stages of the
supply...
Operational Obstacles
• Actions taken in the course of placing and
filling orders that lead to an increase in
variability
...
Pricing Obstacles
• When pricing policies for a product lead to
an increase in variability of orders placed
• Lot-size bas...
Behavioral Obstacles
• Problems in learning, often related to communication in the
supply chain and how the supply chain i...
Managerial Levers to
Achieve Coordination
• Aligning Goals and Incentives
• Improving Information Accuracy
• Improving Ope...
Aligning Goals and Incentives
• Align incentives so that each participant
has an incentive to do the things that will
maxi...
Improving Information Accuracy
• Sharing point of sale data
• Collaborative forecasting and planning
• Single stage contro...
Improving Operational Performance
• Reducing replenishment lead time
– Reduces uncertainty in demand
– EDI is useful
• Red...
Designing Pricing Strategies
to Stabilize Orders
• Encouraging retailers to order in smaller lots and
reduce forward buyin...
Building Strategic Partnerships and
Trust in a Supply Chain
• Designing a Relationship with Cooperation
and Trust
• Managi...
Building Strategic Partnerships and
Trust in a Supply Chain
• Trust-based relationship
– Dependability
– Leap of faith
• C...
Trust in the Supply Chain
• Historically, supply chain relationships are
based on power or trust
• Disadvantages of power-...
Building Trust into a
Supply Chain Relationship
• Deterrence-based view
– Use formal contracts
– Parties behave in trustin...
Building Trust into a
Supply Chain Relationship
• Initially more reliance on deterrence-based
view, then evolves to a proc...
Designing a Relationship
with Cooperation and Trust
• Assessing the value of the relationship and
its contributions
• Iden...
Assessing the Value of the
Relationship and its Contributions
• Identify the mutual benefit provided
• Identify the criter...
Identifying Operational Roles and
Decision Rights for Each Party
• Recognize interdependence between
parties
– Sequential ...
Effects of Interdependence on Supply
Chain Relationships (Figure 17.4)
16-103
Organization’sDependence
High
Low
Partner’s ...
Creating Effective Contracts
• Create contracts that encourage
negotiation when unplanned contingencies
arise
• It is impo...
Designing Effective Conflict
Resolution Mechanisms
• Initial formal specification of rules and
guidelines for procedures a...
Managing Supply Chain Relationships
for Cooperation and Trust
• Effective management of a relationship is
important for it...
Achieving Coordination in Practice
• Quantify the bullwhip effect
• Get top management commitment for
coordination
• Devot...
Summary of Learning Objectives
• What are supply chain coordination and the
bullwhip effect, and what are their effects on...
Logistics
• In recent years, Logistics has received
increased management attention.
• Corporations are using logistics as ...
Logistics
• The science of planning and carrying out the movement and
maintenance of forces – deals with
• Design and deve...
Logistics
• In the Industrial and commercial world.
Logistics has a acquired wider meaning
• It covers activities for the ...
Logistics Management
The Council of Logistics Management defines
Logistics Management as:
The process of planning, impleme...
Flows in a Logistics System
• Flow of Materials
• Merchandise flow
• Money flow
• Information flow
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Logistics Management
• Logistics Management is an integrating
function which coordinates and optimizes all
logistics as we...
Components
• Inbound Logistics
• Internal Logistics
• Outbound Logistics
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Inbound Logistics
• Sourcing and vendor selection for supply of
raw materials and manufacturing parts
• Inbound transporta...
Internal Logistics
• Capacity Planning Operational planning
Production planning
• Materials Requirement planning
• Shop fl...
Out bound Logistics
• Outbound logistics system is concerned with the flow of finished
products from factory warehouse to ...
Logistics v/s Logistics management
• Logistics is the process of strategically
managing the procurement, Movement and
stor...
Logistics Management
• Logistics Management refers to designing,
developing, producing and operating an
integrated system ...
Logistics Management
• For Service Industry
– Defined as the process of coordinating non martial
activities necessary to t...
Major features of
Logistics Management
• Smooth flow of all types of goods such as raw materials, work-
in-process and fin...
Integrated Logistics Management
• Defined as the process of anticipating
customer needs and wants acquiring the
capital, m...
Integrated Logistics Management
• Integrated Logistics is viewed as a method to
create a sustainable competitive advantage...
Integrated Logistics Management
• The logics process is becoming more demanding and
complex, so is the business environmen...
Strategic Logistics Planning
• Strategic logistics planning is essentially
concerned with the deployment and
management of...
Main objectives of logistics planning are:
• Cost reduction: - This strategy is directed towards minimizing the variable
c...
Logistics planning includes
• Supply Chain Planning
• Shipment Planning
• Transport System Planning
• Vehicle Routing and ...
Logistics Management Decisions
The level of investment and the periods over which the benefits
from an investment in logis...
Logistics Management Decisions
Strategic
Supply chain design
Resource acquisition
Broad scope, highly aggregated data
...
Logistics in the Firm:
The Micro Dimension
• Logistics Interfaces with
Operations/Manufacturing
• Logistics Interfaces wit...
Logistics in the Firm: Logistics
Interfaces with Operations
Manufacturing
• Length of production runs
– Balance economies ...
Logistics in the Firm: Logistics
Interfaces with
Operations/Manufacturing• Supply-side interfaces
– Stocking adequate supp...
Logistics in the Firm:
The Micro Dimension
• Logistics Interfaces with Marketing:
The Marketing Mix – Four Ps
– Price
– Pr...
Logistics in the Firm:
Price
• Carrier pricing
– Generally, since the larger the shipment, the
cheaper the transportation ...
Logistics in the Firm:
Product
• Consumer packaging
– Generally, since the size, shape, weight and
other physical characte...
Logistics in the Firm:
Place
• Wholesalers
– Generally, since wholesalers are combining
purchases for multiple retailers, ...
Logistics in the Firm:
Promotion
• Push versus pull
– The most important factor is that the logistics
division is aware of...
Logistics Interfaces with
Other Areas
• Manufacturing and marketing are probably
the two most important internal, function...
Logistics Activities
• Transportation
• Storage
• Packaging
• Materials handling
• Order fulfillment
• Forecasting
• Produ...
Approaches to Analyzing Logistics
Systems: Materials Management v.
Physical Distribution
• Frequently the movement and sto...
Logistics and Systems Analysis
• Cost Perspective
– Keep in mind that the most efficient systems are
not always comprised ...
Logistics and Systems Analysis
• Level of Optimality
– There are often constraints working which result
in sub-optimal out...
Figure 2-10 Levels of Optimality in
Economic Environments
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Techniques of Logistics System
Analysis: Short-Run/Static Analysis
• Comprised a matrix-like table which
presents each of ...
Techniques of Logistics System Analysis:
Long-Run/Dynamic Analysis
• Comprised a graph of the fixed and variable
costs of ...
Chapter 18
Pricing & Revenue mgmt
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Objectives
• Outline
– The Role of Revenue Management in the Supply
Chain
– Revenue Management for Multiple Customer
Segme...
The Role of Revenue Management in the Supply
Chain
– Revenue management is the use of pricing to
increase the profit gener...
Conditions Under Which Revenue Management Has the Greatest
Effect
– The value of the product varies in different market
se...
Revenue Management for Multiple Customer
Segments
– If a supplier serves multiple customer
segments with a fixed asset, th...
Revenue Management for Multiple Customer Segments
– p L = the price charged to the lower price segment
– p H = the price c...
Example 15.2: ToFrom Trucking
– Revenue from segment A = p A = $3.50 per cubic ft
– Revenue from segment B = p B = $3.50 p...
Revenue Management for Perishable Assets
– Any asset that loses value over time is
perishable
– Examples: high-tech produc...
Revenue Management for Perishable Assets
– Overbooking or overselling of a supply chain
asset is valuable if order cancell...
Revenue Management for Perishable Assets
– p = price at which each unit of the asset is sold
– c = cost of using or produc...
Revenue Management for Perishable Assets
– c andIf the distribution of cancellations is known to be normal
with mean c th...
Example 15.5
– Cost of wasted capacity = C w = $10 per dress
– Cost of capacity shortage = C s = $5 per dress
– s* = C w /...
Revenue Management for Seasonal Demand
– Seasonal peaks of demand are common in
many supply chains
– Examples: Most retail...
Revenue Management for Bulk and Spot
Customers
– Most consumers of production, warehousing, and transportation
assets in a...
Revenue Management for Bulk and Spot Customers
– For the simple case where the spot market price is known but
demand is un...
Revenue Management for Bulk and Spot Customers
– If the optimal amount of the asset is purchased in
bulk, the marginal cos...
Example 15.6
– Bulk contract cost = c B = $10,000 per million units
– Spot market cost = c S = $12,500 per million units
–...
Using Revenue Management in
Practice
– Evaluate your market carefully
– Quantify the benefits of revenue management
– Impl...
Summary of Learning Objectives
– What is the role of revenue management in a
supply chain?
– Under what conditions are rev...
Chapter 3
Supply Chain Drivers and Obstacles
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Outline
• Drivers of supply chain performance
• A framework for structuring drivers
• Facilities
• Inventory
• Transportat...
Drivers of Supply Chain
Performance
• Facilities
– places where inventory is stored, assembled, or fabricated
– production...
A Framework for
Structuring Drivers
3-169
Competitive Strategy
Supply Chain
Strategy
Efficiency Responsiveness
Facilities ...
Facilities
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in ...
Components of Facilities Decisions
• Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other ...
Inventory
• Role in the supply chain
• Role in the competitive strategy
• Components of inventory decisions
3-1724/11/2013...
Inventory: Role in the Supply Chain
• Inventory exists because of a mismatch
between supply and demand
• Source of cost an...
Inventory: Role in Competitive
Strategy
• If responsiveness is a strategic competitive
priority, a firm can locate larger ...
Components of Inventory
Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments...
Transportation
• Role in the supply chain
• Role in the competitive strategy
• Components of transportation decisions
3-17...
Transportation: Role in
the Supply Chain
• Moves the product between stages in the
supply chain
• Impact on responsiveness...
Transportation:
Role in the Competitive Strategy
• If responsiveness is a strategic competitive
priority, then faster tran...
Components of
Transportation Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transporta...
Information
• Role in the supply chain
• Role in the competitive strategy
• Components of information decisions
3-1804/11/...
Information: Role in
the Supply Chain
• The connection between the various stages in
the supply chain – allows coordinatio...
Information:
Role in the Competitive Strategy
• Allows supply chain to become more efficient
and more responsive at the sa...
Components of Information
Decisions
• Push (MRP) versus pull (demand information
transmitted quickly throughout the supply...
Sourcing
• Role in the supply chain
• Role in the competitive strategy
• Components of sourcing decisions
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Sourcing: Role in
the Supply Chain
• Set of business processes required to
purchase goods and services in a supply chain
•...
Sourcing:
Role in the Competitive Strategy
• Sourcing decisions are crucial because they
affect the level of efficiency an...
Components of Sourcing Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement p...
Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions
3-1884/11/2013 Bab...
Pricing: Role in
the Supply Chain
• Pricing determines the amount to charge
customers in a supply chain
• Pricing strategi...
Sourcing:
Role in the Competitive Strategy
• Firms can utilize optimal pricing strategies to
improve efficiency and respon...
Components of Pricing Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed pr...
Obstacles to Achieving
Strategic Fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly dema...
Summary
• What are the major drivers of supply chain
performance?
• What is the role of each driver in creating
strategic ...
Supply Chain Management
Introduction
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What Is a Supply Chain?
Flow of products and services from:
– Raw materials manufacturers
– Intermediate products manufact...
Definitions
The design and management of seamless, value-
added process across organizational boundaries
to meet the real ...
Source
Supplier
Supplier
Distributor
Distributor
Retailer
End-User
Converter
Converter Consumers
Information Flow
Funds/De...
Channel Intermediaries
Retailer
Merchant
Wholesaler
Agents and
Brokers
A channel intermediary that
sells mainly to custome...
Channel Intermediaries
Retailers
Merchant
Wholesalers
Agents
and
Brokers
Take Title to Goods
Take Title to Goods
Do NOT Ta...
The SCM Network
FIGURE 1.1: The logistics network
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Objective of a supply chain
• Maximize the value of supply chain (difference between the worth of the
final product to the...
The Importance of Supply Chain Management
• Dealing with uncertain environments
• Shorter product life cycles of high-tech...
Supply Chain Management
Results
of
Supply Chain
Management
Focus on Innovative Solutions
Competitive with focus on
Custome...
Supply chain includes
• Material flows / Product flows
• Information flows
• Financial flows
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• Supply Chain Design
• Resource Acquisition
• Long Term Planning (1 Year ++)
Supply chain
strategy
• Production/ Distribu...
Process view of a supply chain
1. Cycle view of a supply chain process
• Broken down into 4 Process Cycles viz..
CUSTOMER ...
2. Push pull view of Supply chain management
• Divided into 2 categories
1. Push Process initiated in anticipation of cust...
Supply chain Macro processes in a firm
Supplier relationship
management
• Source
• Negotiate
• Buy
• Design collaboration
...
The Processes Customer Relationship Management - provides the structure for how relationships with customers
are develope...
Key Issues in Supply Chain Mgt.
Network Planning –
• recognize the capacity of each warehouse to
determine production requ...
Key Issues in Supply Chain Mgt.
Inventory Control –
• Where is inventory held, (supplier, warehouse,
retailer)
• how much,...
Key Issues in Supply Chain Mgt.
Distribution Strategies –
• Relationships between suppliers and
warehouse operators that s...
Key Issues in Supply Chain Mgt.
Supply Chain Integration and Strategic
Partnering –
• information sharing and operational ...
Key Issues in Supply Chain Mgt.
• Product Design –
• Effective design, in particular an unified case code number,
plays se...
Key Issues in Supply Chain Mgt.
Customer Value –
• Measure of a company’s performance to its
customer, based upon the enti...
Key Issues in Supply Chain Mgt.
Information Technology and Decision-Support
Systems –
• much of the current interest in su...
Supply-Chain Management
Important activities include determining
1. Transportation vendors
2. Credit and cash transfers
3....
The Strategic Importance
of the Supply Chain
•Supply-chain management is the integration of the
activities that procure ma...
Supply Chain Goals
Efficient supply chain management must
result in tangible business improvements. It
is characterized by...
Benefits of
Supply Chain Management
Common Benefits
of Supply Chain
Management
Reduced Costs
Improved Service
Enhanced Rev...
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Supply chain management ppt MBA

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Supply chain management ppt MBA

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Supply chain management ppt MBA

  1. 1. Achieving Strategic Fit and Scope BABASAB Supply Chain Management 4/11/2013 Babasabpatilfreepptmba.com
  2. 2. Outline • Competitive and supply chain strategies • Achieving strategic fit • Expanding strategic scope 2-24/11/2013 Babasabpatilfreepptmba.com
  3. 3. What is Supply Chain Management? • Managing supply chain flows and assets, to maximize supply chain surplus • What is supply chain surplus? 2-34/11/2013 Babasabpatilfreepptmba.com
  4. 4. Competitive and Supply Chain Strategies  Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services  Product development strategy: specifies the portfolio of new products that the company will try to develop  Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted  Supply chain strategy:  determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product  Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important 2-44/11/2013 Babasabpatilfreepptmba.com
  5. 5. The Value Chain: Linking Supply Chain and Business Strategy 2-5 New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources 4/11/2013 Babasabpatilfreepptmba.com
  6. 6. Achieving Strategic Fit • Introduction • How is strategic fit achieved? • Other issues affecting strategic fit 2-64/11/2013 Babasabpatilfreepptmba.com
  7. 7. Achieving Strategic Fit • Strategic fit: – Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy – Competitive and supply chain strategies have the same goals • A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy • Example of strategic fit -- Dell 2-74/11/2013 Babasabpatilfreepptmba.com
  8. 8. How is Strategic Fit Achieved? • Step 1: Understanding the customer and supply chain uncertainty • Step 2: Understanding the supply chain • Step 3: Achieving strategic fit 2-84/11/2013 Babasabpatilfreepptmba.com
  9. 9. Step 1: Understanding the Customer and Supply Chain Uncertainty • Identify the needs of the customer segment being served • Quantity of product needed in each lot • Response time customers will tolerate • Variety of products needed • Service level required • Price of the product • Desired rate of innovation in the product 2-94/11/2013 Babasabpatilfreepptmba.com
  10. 10. Step 1: Understanding the Customer and Supply Chain Uncertainty • Overall attribute of customer demand • Demand uncertainty: uncertainty of customer demand for a product • Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires 2-104/11/2013 Babasabpatilfreepptmba.com
  11. 11. Step 1: Understanding the Customer and Supply Chain Uncertainty • Implied demand uncertainty also related to customer needs and product attributes • Table 2.1 • Figure 2.2 • Table 2.2 • First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum 2-114/11/2013 Babasabpatilfreepptmba.com
  12. 12. Achieving Strategic Fit • Understanding the Customer – Lot size – Response time – Service level – Product variety – Price – Innovation 2-12 Implied Demand Uncertainty 4/11/2013 Babasabpatilfreepptmba.com
  13. 13. Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1) 2-13 Customer Need Causes implied demand uncertainty to increase because … Range of quantity increases Wider range of quantity implies greater variance in demand Lead time decreases Less time to react to orders Variety of products required increases Demand per product becomes more disaggregated Number of channels increases Total customer demand is now disaggregated over more channels Rate of innovation increases New products tend to have more uncertain demand Required service level increases Firm now has to handle unusual surges in demand 4/11/2013 Babasabpatilfreepptmba.com
  14. 14. Levels of Implied Demand Uncertainty 2-14 Predictable supply and demand Salt at a supermarket A new communication device Highly uncertain supply and demand Figure 2.2: The Implied Uncertainty (Demand and Supply) Spectrum Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat uncertain supply and demand An existing automobile model 4/11/2013 Babasabpatilfreepptmba.com
  15. 15. Correlation Between Implied Demand Uncertainty and Other Attributes (Table 2.2) 2-15 Attribute Low Implied Uncertainty High Implied Uncertainty Product margin Low High Avg. forecast error 10% 40%-100% Avg. stockout rate 1%-2% 10%-40% Avg. forced season- end markdown 0% 10%-25% 4/11/2013 Babasabpatilfreepptmba.com
  16. 16. Step 2: Understanding the Supply Chain • How does the firm best meet demand? • Dimension describing the supply chain is supply chain responsiveness • Supply chain responsiveness -- ability to – respond to wide ranges of quantities demanded – meet short lead times – handle a large variety of products – build highly innovative products – meet a very high service level 2-164/11/2013 Babasabpatilfreepptmba.com
  17. 17. Step 2: Understanding the Supply Chain • There is a cost to achieving responsiveness • Supply chain efficiency: cost of making and delivering the product to the customer • Increasing responsiveness results in higher costs that lower efficiency • Figure 2.3: cost-responsiveness efficient frontier • Figure 2.4: supply chain responsiveness spectrum 2-174/11/2013 Babasabpatilfreepptmba.com
  18. 18. Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier 2-18 High Low Low High Responsiveness Cost 4/11/2013 Babasabpatilfreepptmba.com
  19. 19. Step 3: Achieving Strategic Fit • Step is to ensure that what the supply chain does well is consistent with target customer’s needs • Fig. 2.5: Uncertainty/Responsiveness map • Fig. 2.6: Zone of strategic fit • Examples: Dell, Barilla 2-194/11/2013 Babasabpatilfreepptmba.com
  20. 20. Responsiveness Spectrum (Figure 2.4) 2-20 Integrated steel mill Dell Highly efficient Highly responsive Somewhat efficient Somewhat responsive Hanes apparel Most automotive production 4/11/2013 Babasabpatilfreepptmba.com
  21. 21. Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. 2.5) 2-21 Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum 4/11/2013 Babasabpatilfreepptmba.com
  22. 22. Step 3: Achieving Strategic Fit • All functions in the value chain must support the competitive strategy to achieve strategic fit – Fig. 2.7 • Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) – Table 2.3 • Two key points – there is no right supply chain strategy independent of competitive strategy – there is a right supply chain strategy for a given competitive strategy 2-224/11/2013 Babasabpatilfreepptmba.com
  23. 23. Comparison of Efficient and Responsive Supply Chains (Table 2.4) 2-23 Efficient Responsive Primary goal Lowest cost Quick response Product design strategy Min product cost Modularity to allow postponement Pricing strategy Lower margins Higher margins Mfg strategy High utilization Capacity flexibility Inventory strategy Minimize inventory Buffer inventory Lead time strategy Reduce but not at expense of greater cost Aggressively reduce even if costs are significant Supplier selection strategy Cost and low quality Speed, flexibility, quality Transportation strategy Greater reliance on low cost modes Greater reliance on responsive (fast) modes 4/11/2013 Babasabpatilfreepptmba.com
  24. 24. Other Issues Affecting Strategic Fit • Multiple products and customer segments • Product life cycle • Competitive changes over time 2-244/11/2013 Babasabpatilfreepptmba.com
  25. 25. Multiple Products and Customer Segments Firms sell different products to different customer segments (with different implied demand uncertainty) The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments Two approaches: Different supply chains Tailor supply chain to best meet the needs of each product’s demand 2-254/11/2013 Babasabpatilfreepptmba.com
  26. 26. Product Life Cycle • The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle • Supply chain strategy must evolve throughout the life cycle • Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary • Late: predictable demand, lower margins, price is important 2-264/11/2013 Babasabpatilfreepptmba.com
  27. 27. Product Life Cycle • Examples: pharmaceutical firms, Intel • As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency 2-274/11/2013 Babasabpatilfreepptmba.com
  28. 28. Competitive Changes Over Time • Competitive pressures can change over time • More competitors may result in an increased emphasis on variety at a reasonable price • The Internet makes it easier to offer a wide variety of products • The supply chain must change to meet these changing competitive conditions 2-284/11/2013 Babasabpatilfreepptmba.com
  29. 29. Expanding Strategic Scope  Scope of strategic fit The functions and stages within a supply chain that devise an integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly  Five categories: Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope 2-294/11/2013 Babasabpatilfreepptmba.com
  30. 30. Different Scopes of Strategic Fit Across a Supply Chain 2-30 Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Development Strategy Supply Chain Strategy Marketing Strategy Intracompany Intraoperation at Distributor Intracompany Intrafunctional at Distributor Intracompany Interfunctional at Distributor Intercompany Interfunctional 4/11/2013 Babasabpatilfreepptmba.com
  31. 31. Summary of Learning Objectives • Why is achieving strategic fit critical to a company’s overall success? • How does a company achieve strategic fit between its supply chain strategy and its competitive strategy? • What is the importance of expanding the scope of strategic fit across the supply chain? 2-314/11/2013 Babasabpatilfreepptmba.com
  32. 32. Chapter 4 Designing the Distribution Network in a Supply Chain 4-32 Supply Chain Management (3rd Edition) 4/11/2013 Babasabpatilfreepptmba.com
  33. 33. Outline • The Role of Distribution in the Supply Chain • Factors Influencing Distribution Network Design • Design Options for a Distribution Network • E-Business and the Distribution Network • Distribution Networks in Practice • Summary of Learning Objectives 4-334/11/2013 Babasabpatilfreepptmba.com
  34. 34. The Role of Distribution in the Supply Chain • Distribution: the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain • Distribution directly affects cost and the customer experience and therefore drives profitability • Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness • Examples: Wal-Mart, Dell, Proctor & Gamble,4-344/11/2013 Babasabpatilfreepptmba.com
  35. 35. Factors Influencing Distribution Network Design • Distribution network performance evaluated along two dimensions at the highest level: – Customer needs that are met – Cost of meeting customer needs • Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service 4-354/11/2013 Babasabpatilfreepptmba.com
  36. 36. Factors Influencing Distribution Network Design  Elements of customer service influenced by network structure: Response time Product variety Product availability Customer experience Order visibility Returnability  Supply chain costs affected by network structure: Inventories Transportation Facilities and handling 4-364/11/2013 Babasabpatilfreepptmba.com
  37. 37. Service and Number of Facilities (Fig. 4.1) 4-37 Number of Facilities Response Time 4/11/2013 Babasabpatilfreepptmba.com
  38. 38. The Cost-Response Time Frontier 4-38 Local FG Mix Regional FG Local WIP Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers Cost Response Time HiLow Low Hi 4/11/2013 Babasabpatilfreepptmba.com
  39. 39. Inventory Costs and Number of Facilities (Fig. 4.2) 4-39 Inventory Costs Number of facilities 4/11/2013 Babasabpatilfreepptmba.com
  40. 40. Transportation Costs and Number of Facilities (Fig. 4.3) 4-40 Transportation Costs Number of facilities 4/11/2013 Babasabpatilfreepptmba.com
  41. 41. Facility Costs and Number of Facilities (Fig. 4.4) 4-41 Facility Costs Number of facilities 4/11/2013 Babasabpatilfreepptmba.com
  42. 42. 4-42 Transportation Total Costs Related to Number of Facilities TotalCosts Number of Facilities Inventory Facilities Total Costs 4/11/2013 Babasabpatilfreepptmba.com
  43. 43. 4-43 Response Time Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4.5) Number of Facilities Total Logistics Costs 4/11/2013 Babasabpatilfreepptmba.com
  44. 44. Design Options for a Distribution Network • Manufacturer Storage with Direct Shipping • Manufacturer Storage with Direct Shipping and In-Transit Merge • Distributor Storage with Carrier Delivery • Distributor Storage with Last Mile Delivery • Manufacturer or Distributor Storage with Consumer Pickup • Retail Storage with Consumer Pickup • Selecting a Distribution Network Design 4-444/11/2013 Babasabpatilfreepptmba.com
  45. 45. Manufacturer Storage with Direct Shipping (Fig. 4.6) 4-45 Manufacturer Retailer Customers Product Flow Information Flow 4/11/2013 Babasabpatilfreepptmba.com
  46. 46. In-Transit Merge Network (Fig. 4.7) 4-46 Factories Retailer Product Flow Information Flow In-Transit Merge by Carrier Customers 4/11/2013 Babasabpatilfreepptmba.com
  47. 47. Distributor Storage with Carrier Delivery (Fig. 4.8) 4-47 Factories Customers Product Flow Information Flow Warehouse Storage by Distributor/Retailer 4/11/2013 Babasabpatilfreepptmba.com
  48. 48. Distributor Storage with Last Mile Delivery (Fig. 4.9) 4-48 Factories Customers Product Flow Information Flow Distributor/Retailer Warehouse 4/11/2013 Babasabpatilfreepptmba.com
  49. 49. Manufacturer or Distributor Storage with Customer Pickup (Fig. 4.10) 4-49 Factories Retailer Pickup Sites Product Flow Information Flow Cross Dock DC Customer Flow Customers 4/11/2013 Babasabpatilfreepptmba.com
  50. 50. Comparative Performance of Delivery Network Designs (Table 4.7) 4-50 Information Facility & Handling Transportation Inventory Returnability Order Visibility Customer Experience Product Availability Product Variety Response Time Manufacturer storage with pickup Distributor storage with last mile delivery Distributor Storage with Package Carrier Delivery Manufacturer Storage with In- Transit Merge Manufacturer Storage with Direct Shipping Retail Storage with Customer Pickup 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 55 5 6 6 5
  51. 51. Linking Product Characteristics and Customer Preferences to Network Design Low customer effort High product variety Quick desired response High product value Many product sources Very low demand product Low demand product Medium demand product High demand product Manufacturer storage with pickup Distributor storage with last mile delivery Distributor Storage with Package Carrier Delivery Manufacturer Storage with In- Transit Merge Manufacturer Storage with Direct Shipping Retail Storage with Customer Pickup 4-51 +2 +2 +2 +2 +2 +2 +2 +2 +2 +2 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 0 0 0 0 0 0 0 0 0 0 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2
  52. 52. E-Business and the Distribution Network • Impact of E-Business on Customer Service • Impact of E-Business on Cost • Using E-Business: Dell, Amazon, Peapod, Grainger 4-524/11/2013 Babasabpatilfreepptmba.com
  53. 53. Distribution Networks in Practice • The ownership structure of the distribution network can have as big as an impact as the type of distribution network • The choice of a distribution network has very long-term consequences • Consider whether an exclusive distribution strategy is advantageous • Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers 4-534/11/2013 Babasabpatilfreepptmba.com
  54. 54. Summary of Learning Objectives • What are the key factors to be considered when designing the distribution network? • What are the strengths and weaknesses of various distribution options? • What roles do distributors play in the supply chain? 4-544/11/2013 Babasabpatilfreepptmba.com
  55. 55. Chapter 4 Designing the Distribution Network in a Supply Chain 4-55 Supply Chain Management (3rd Edition) 4/11/2013 Babasabpatilfreepptmba.com
  56. 56. Outline • The Role of Distribution in the Supply Chain • Factors Influencing Distribution Network Design • Design Options for a Distribution Network • E-Business and the Distribution Network • Distribution Networks in Practice • Summary of Learning Objectives 4-564/11/2013 Babasabpatilfreepptmba.com
  57. 57. The Role of Distribution in the Supply Chain • Distribution: the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain • Distribution directly affects cost and the customer experience and therefore drives profitability • Choice of distribution network can achieve supply chain objectives from low cost to high responsiveness • Examples: Wal-Mart, Dell, Proctor & Gamble,4-574/11/2013 Babasabpatilfreepptmba.com
  58. 58. Factors Influencing Distribution Network Design • Distribution network performance evaluated along two dimensions at the highest level: – Customer needs that are met – Cost of meeting customer needs • Distribution network design options must therefore be compared according to their impact on customer service and the cost to provide this level of service 4-584/11/2013 Babasabpatilfreepptmba.com
  59. 59. Factors Influencing Distribution Network Design  Elements of customer service influenced by network structure: Response time Product variety Product availability Customer experience Order visibility Returnability  Supply chain costs affected by network structure: Inventories Transportation Facilities and handling 4-594/11/2013 Babasabpatilfreepptmba.com
  60. 60. Service and Number of Facilities (Fig. 4.1) 4-60 Number of Facilities Response Time 4/11/2013 Babasabpatilfreepptmba.com
  61. 61. The Cost-Response Time Frontier 4-61 Local FG Mix Regional FG Local WIP Central FG Central WIP Central Raw Material and Custom production Custom production with raw material at suppliers Cost Response Time HiLow Low Hi 4/11/2013 Babasabpatilfreepptmba.com
  62. 62. Inventory Costs and Number of Facilities (Fig. 4.2) 4-62 Inventory Costs Number of facilities 4/11/2013 Babasabpatilfreepptmba.com
  63. 63. Transportation Costs and Number of Facilities (Fig. 4.3) 4-63 Transportation Costs Number of facilities 4/11/2013 Babasabpatilfreepptmba.com
  64. 64. Facility Costs and Number of Facilities (Fig. 4.4) 4-64 Facility Costs Number of facilities 4/11/2013 Babasabpatilfreepptmba.com
  65. 65. 4-65 Transportation Total Costs Related to Number of Facilities TotalCosts Number of Facilities Inventory Facilities Total Costs 4/11/2013 Babasabpatilfreepptmba.com
  66. 66. 4-66 Response Time Variation in Logistics Costs and Response Time with Number of Facilities (Fig. 4.5) Number of Facilities Total Logistics Costs 4/11/2013 Babasabpatilfreepptmba.com
  67. 67. Design Options for a Distribution Network • Manufacturer Storage with Direct Shipping • Manufacturer Storage with Direct Shipping and In-Transit Merge • Distributor Storage with Carrier Delivery • Distributor Storage with Last Mile Delivery • Manufacturer or Distributor Storage with Consumer Pickup • Retail Storage with Consumer Pickup • Selecting a Distribution Network Design 4-674/11/2013 Babasabpatilfreepptmba.com
  68. 68. Manufacturer Storage with Direct Shipping (Fig. 4.6) 4-68 Manufacturer Retailer Customers Product Flow Information Flow 4/11/2013 Babasabpatilfreepptmba.com
  69. 69. In-Transit Merge Network (Fig. 4.7) 4-69 Factories Retailer Product Flow Information Flow In-Transit Merge by Carrier Customers 4/11/2013 Babasabpatilfreepptmba.com
  70. 70. Distributor Storage with Carrier Delivery (Fig. 4.8) 4-70 Factories Customers Product Flow Information Flow Warehouse Storage by Distributor/Retailer 4/11/2013 Babasabpatilfreepptmba.com
  71. 71. Distributor Storage with Last Mile Delivery (Fig. 4.9) 4-71 Factories Customers Product Flow Information Flow Distributor/Retailer Warehouse 4/11/2013 Babasabpatilfreepptmba.com
  72. 72. Manufacturer or Distributor Storage with Customer Pickup (Fig. 4.10) 4-72 Factories Retailer Pickup Sites Product Flow Information Flow Cross Dock DC Customer Flow Customers 4/11/2013 Babasabpatilfreepptmba.com
  73. 73. Comparative Performance of Delivery Network Designs (Table 4.7) 4-73 Information Facility & Handling Transportation Inventory Returnability Order Visibility Customer Experience Product Availability Product Variety Response Time Manufacturer storage with pickup Distributor storage with last mile delivery Distributor Storage with Package Carrier Delivery Manufacturer Storage with In- Transit Merge Manufacturer Storage with Direct Shipping Retail Storage with Customer Pickup 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 55 5 6 6 5
  74. 74. Linking Product Characteristics and Customer Preferences to Network Design Low customer effort High product variety Quick desired response High product value Many product sources Very low demand product Low demand product Medium demand product High demand product Manufacturer storage with pickup Distributor storage with last mile delivery Distributor Storage with Package Carrier Delivery Manufacturer Storage with In- Transit Merge Manufacturer Storage with Direct Shipping Retail Storage with Customer Pickup 4-74 +2 +2 +2 +2 +2 +2 +2 +2 +2 +2 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 +1 0 0 0 0 0 0 0 0 0 0 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -2 -2
  75. 75. E-Business and the Distribution Network • Impact of E-Business on Customer Service • Impact of E-Business on Cost • Using E-Business: Dell, Amazon, Peapod, Grainger 4-754/11/2013 Babasabpatilfreepptmba.com
  76. 76. Distribution Networks in Practice • The ownership structure of the distribution network can have as big as an impact as the type of distribution network • The choice of a distribution network has very long-term consequences • Consider whether an exclusive distribution strategy is advantageous • Product, price, commoditization, and criticality have an impact on the type of distribution system preferred by customers 4-764/11/2013 Babasabpatilfreepptmba.com
  77. 77. Summary of Learning Objectives • What are the key factors to be considered when designing the distribution network? • What are the strengths and weaknesses of various distribution options? • What roles do distributors play in the supply chain? 4-774/11/2013 Babasabpatilfreepptmba.com
  78. 78. Chapter 17 Coordination in the Supply Chain 16-78 Supply Chain Management (3rd Edition) 4/11/2013 Babasabpatilfreepptmba.com
  79. 79. Objectives • Describe supply chain coordination, the bullwhip effect, and their impact on performance • Identify causes of the bullwhip effect and obstacles to coordination in the supply chain • Discuss managerial levers that help achieve coordination in the supply chain • Describe actions that facilitate the building of strategic partnerships and trust within the supply chain 16-794/11/2013 Babasabpatilfreepptmba.com
  80. 80. Outline • Lack of Supply Chain Coordination and the Bullwhip Effect • Effect of Lack of Coordination on Performance • Obstacles to Coordination in the Supply Chain • Managerial Levers to Achieve Coordination • Building Strategic Partnerships and Trust Within a Supply Chain 16-804/11/2013 Babasabpatilfreepptmba.com
  81. 81. Lack of SC Coordination and the Bullwhip Effect • Supply chain coordination – all stages in the supply chain take actions together (usually results in greater total supply chain profits) • SC coordination requires that each stage take into account the effects of its actions on the other stages • Lack of coordination results when: – Objectives of different stages conflict or – Information moving between stages is distorted 16-814/11/2013 Babasabpatilfreepptmba.com
  82. 82. Bullwhip Effect • Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers • Distorts demand information within the supply chain, where different stages have very different estimates of what demand looks like • Results in a loss of supply chain coordination • Examples: Proctor & Gamble (Pampers); HP (printers); Barilla (pasta) 16-824/11/2013 Babasabpatilfreepptmba.com
  83. 83. The Effect of Lack of Coordination on Performance • Manufacturing cost (increases) • Inventory cost (increases) • Replenishment lead time (increases) • Transportation cost (increases) • Labor cost for shipping and receiving (increases) • Level of product availability (decreases) • Relationships across the supply chain (worsens) • Profitability (decreases) 16-834/11/2013 Babasabpatilfreepptmba.com
  84. 84. Obstacles to Coordination in a Supply Chain • Incentive Obstacles • Information Processing Obstacles • Operational Obstacles • Pricing Obstacles • Behavioral Obstacles 16-844/11/2013 Babasabpatilfreepptmba.com
  85. 85. Incentive Obstacles • When incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits – misalignment of total supply chain objectives and individual objectives • Local optimization within functions or stages of a supply chain • Sales force incentives 16-854/11/2013 Babasabpatilfreepptmba.com
  86. 86. Information Processing Obstacles • When demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain • Forecasting based on orders, not customer demand – Forecasting demand based on orders magnifies demand fluctuations moving up the supply chain from retailer to manufacturer • Lack of information sharing 16-864/11/2013 Babasabpatilfreepptmba.com
  87. 87. Operational Obstacles • Actions taken in the course of placing and filling orders that lead to an increase in variability • Ordering in large lots (much larger than dictated by demand) • Large replenishment lead times • Rationing and shortage gaming (common in the computer industry because of periodic cycles of component shortages and surpluses) 16-874/11/2013 Babasabpatilfreepptmba.com
  88. 88. Pricing Obstacles • When pricing policies for a product lead to an increase in variability of orders placed • Lot-size based quantity decisions • Price fluctuations (resulting in forward buying) – 16-884/11/2013 Babasabpatilfreepptmba.com
  89. 89. Behavioral Obstacles • Problems in learning, often related to communication in the supply chain and how the supply chain is structured • Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages • Different stages react to the current local situation rather than trying to identify the root causes • Based on local analysis, different stages blame each other for the fluctuations, with successive stages becoming enemies rather than partners • No stage learns from its actions over time because the most significant consequences of the actions of any one stage occur elsewhere, resulting in a vicious cycle of actions and blame • Lack of trust results in opportunism, duplication of effort, and lack of information sharing 16-894/11/2013 Babasabpatilfreepptmba.com
  90. 90. Managerial Levers to Achieve Coordination • Aligning Goals and Incentives • Improving Information Accuracy • Improving Operational Performance • Designing Pricing Strategies to Stabilize Orders • Building Strategic Partnerships and Trust 16-904/11/2013 Babasabpatilfreepptmba.com
  91. 91. Aligning Goals and Incentives • Align incentives so that each participant has an incentive to do the things that will maximize total supply chain profits • Align incentives across functions • Pricing for coordination • Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer) 16-914/11/2013 Babasabpatilfreepptmba.com
  92. 92. Improving Information Accuracy • Sharing point of sale data • Collaborative forecasting and planning • Single stage control of replenishment – Continuous replenishment programs (CRP) – Vendor managed inventory (VMI) 16-924/11/2013 Babasabpatilfreepptmba.com
  93. 93. Improving Operational Performance • Reducing replenishment lead time – Reduces uncertainty in demand – EDI is useful • Reducing lot sizes – Computer-assisted ordering, B2B exchanges – Shipping in LTL sizes by combining shipments – Technology and other methods to simplify receiving – Changing customer ordering behavior • Rationing based on past sales and sharing information to limit gaming – “Turn-and-earn” 16-934/11/2013 Babasabpatilfreepptmba.com
  94. 94. Designing Pricing Strategies to Stabilize Orders • Encouraging retailers to order in smaller lots and reduce forward buying • Moving from lot size-based to volume-based quantity discounts (consider total purchases over a specified time period) • Stabilizing pricing – Eliminate promotions (everyday low pricing, EDLP) – Limit quantity purchased during a promotion – Tie promotion payments to sell-through rather than amount purchased • Building strategic partnerships and trust – easier16-944/11/2013 Babasabpatilfreepptmba.com
  95. 95. Building Strategic Partnerships and Trust in a Supply Chain • Designing a Relationship with Cooperation and Trust • Managing Supply Chain Relationships for Cooperation and Trust 16-954/11/2013 Babasabpatilfreepptmba.com
  96. 96. Building Strategic Partnerships and Trust in a Supply Chain • Trust-based relationship – Dependability – Leap of faith • Cooperation and trust work because: – Alignment of incentives and goals – Actions to achieve coordination are easier to implement – Supply chain productivity improves by reducing duplication or allocation of effort to appropriate stage – Greater information sharing results 16-964/11/2013 Babasabpatilfreepptmba.com
  97. 97. Trust in the Supply Chain • Historically, supply chain relationships are based on power or trust • Disadvantages of power-based relationship: – Results in one stage maximizing profits, often at the expense of other stages – Can hurt a company when balance of power changes – Less powerful stages have sought ways to 16-974/11/2013 Babasabpatilfreepptmba.com
  98. 98. Building Trust into a Supply Chain Relationship • Deterrence-based view – Use formal contracts – Parties behave in trusting manner out of self- interest • Process-based view – Trust and cooperation are built up over time as a result of a series of interactions – Positive interactions strengthen the belief in cooperation of other party • Neither view holds exclusively in all 16-984/11/2013 Babasabpatilfreepptmba.com
  99. 99. Building Trust into a Supply Chain Relationship • Initially more reliance on deterrence-based view, then evolves to a process-based view • Co-identification: ideal goal • Two phases to a supply chain relationship – Design phase – Management phase 16-994/11/2013 Babasabpatilfreepptmba.com
  100. 100. Designing a Relationship with Cooperation and Trust • Assessing the value of the relationship and its contributions • Identifying operational roles and decision rights for each party • Creating effective contracts • Designing effective conflict resolution mechanisms 16-1004/11/2013 Babasabpatilfreepptmba.com
  101. 101. Assessing the Value of the Relationship and its Contributions • Identify the mutual benefit provided • Identify the criteria used to evaluate the relationship (equity is important) • Important to share benefits equitably • Clarify contribution of each party and the benefits each party will receive 16-1014/11/2013 Babasabpatilfreepptmba.com
  102. 102. Identifying Operational Roles and Decision Rights for Each Party • Recognize interdependence between parties – Sequential interdependence: activities of one partner precede the other – Reciprocal interdependence: the parties come together, exchange information and inputs in both directions • Sequential interdependence is the traditional supply chain form • Reciprocal interdependence is more difficult but can result in more benefits 16-1024/11/2013 Babasabpatilfreepptmba.com
  103. 103. Effects of Interdependence on Supply Chain Relationships (Figure 17.4) 16-103 Organization’sDependence High Low Partner’s Dependence Low High Partner Relatively Powerful Organization Relatively Powerful High Level of Interdependence Effective Relationship Low Level of Interdependence 4/11/2013 Babasabpatilfreepptmba.com
  104. 104. Creating Effective Contracts • Create contracts that encourage negotiation when unplanned contingencies arise • It is impossible to define and plan for every possible occurrence • Informal relationships and agreements can fill in the “gaps” in contracts • Informal arrangements may eventually be formalized in later contracts 16-1044/11/2013 Babasabpatilfreepptmba.com
  105. 105. Designing Effective Conflict Resolution Mechanisms • Initial formal specification of rules and guidelines for procedures and transactions • Regular, frequent meetings to promote communication • Courts or other intermediaries 16-1054/11/2013 Babasabpatilfreepptmba.com
  106. 106. Managing Supply Chain Relationships for Cooperation and Trust • Effective management of a relationship is important for its success • Top management is often involved in the design but not management of a relationship • Process of alliance evolution • Perceptions of reduced benefits or opportunistic actions can significantly impair a supply chain partnership 16-1064/11/2013 Babasabpatilfreepptmba.com
  107. 107. Achieving Coordination in Practice • Quantify the bullwhip effect • Get top management commitment for coordination • Devote resources to coordination • Focus on communication with other stages • Try to achieve coordination in the entire supply chain network • Use technology to improve connectivity in the supply chain • Share the benefits of coordination equitably16-1074/11/2013 Babasabpatilfreepptmba.com
  108. 108. Summary of Learning Objectives • What are supply chain coordination and the bullwhip effect, and what are their effects on supply chain performance? • What are the causes of the bullwhip effect, and what are obstacles to coordination in the supply chain? • What are the managerial levers that help achieve coordination in the supply chain? • What are actions that facilitate the building of strategic partnerships and trust in the supply chain? 16-1084/11/2013 Babasabpatilfreepptmba.com
  109. 109. Logistics • In recent years, Logistics has received increased management attention. • Corporations are using logistics as a competitive weapon to meet the challenges of global competition and turbulent business environment. 4/11/2013 2-109Babasabpatilfreepptmba.com
  110. 110. Logistics • The science of planning and carrying out the movement and maintenance of forces – deals with • Design and development, acquisition, storage, movement, distribution, maintenance, evacuation and disposition of materials • Movement, evacuation and hospitalization of personnel. • Acquisition or construction, maintenance, operation, disposition of facilities, • Acquisition or furnishing of services • Act as a supportive system which reflects the practical art of moving armies and materials engaged in combat to achieve the desires results 4/11/2013 2-110Babasabpatilfreepptmba.com
  111. 111. Logistics • In the Industrial and commercial world. Logistics has a acquired wider meaning • It covers activities for the material flow from the source to the processing facilities, and subsequent distribution of finished goods from there to the ultimate users. 4/11/2013 2-111Babasabpatilfreepptmba.com
  112. 112. Logistics Management The Council of Logistics Management defines Logistics Management as: The process of planning, implementing and controlling the efficient, cost – effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements 4/11/2013 2-112Babasabpatilfreepptmba.com
  113. 113. Flows in a Logistics System • Flow of Materials • Merchandise flow • Money flow • Information flow 4/11/2013 2-113Babasabpatilfreepptmba.com
  114. 114. Logistics Management • Logistics Management is an integrating function which coordinates and optimizes all logistics as well as integrates logistics activities with other functions including marketing, sales, manufacturing, finance and IT • It Includes the design and administration of system to control the flow of materials, work- in-process and finished inventory to support business unit strategy 4/11/2013 2-114Babasabpatilfreepptmba.com
  115. 115. Components • Inbound Logistics • Internal Logistics • Outbound Logistics 4/11/2013 2-115Babasabpatilfreepptmba.com
  116. 116. Inbound Logistics • Sourcing and vendor selection for supply of raw materials and manufacturing parts • Inbound transportation and procurement planning • Raw materials warehousing including consolidation warehousing • Management of Inventory • Information system for effective support strategic alliances with the supplies and transporters 4/11/2013 2-116Babasabpatilfreepptmba.com
  117. 117. Internal Logistics • Capacity Planning Operational planning Production planning • Materials Requirement planning • Shop floor control • Management of in-process inventory • Supporting material handling facilities planning and their deployment etc 4/11/2013 2-117Babasabpatilfreepptmba.com
  118. 118. Out bound Logistics • Outbound logistics system is concerned with the flow of finished products from factory warehouse to the customers through a distribution network comprising: • The wholesalers • Distributors • Retailers • Regional warehouses • Transporters • The inventory at all levels • Sales order processing • Sales return processing • Accounts receivable realization and • Counter flow of information from the customers to the factory 4/11/2013 2-118Babasabpatilfreepptmba.com
  119. 119. Logistics v/s Logistics management • Logistics is the process of strategically managing the procurement, Movement and storage of materials, parts and finished inventory (and the related information) through the organization and its marketing channels in such a way that current future profitability are maximized through the cost – effective fulfillment of order. 4/11/2013 2-119Babasabpatilfreepptmba.com
  120. 120. Logistics Management • Logistics Management refers to designing, developing, producing and operating an integrated system which is responds to customer expectations by making available the required quantity of required quality products as and when required to offer best customer service at the least costs 4/11/2013 2-120Babasabpatilfreepptmba.com
  121. 121. Logistics Management • For Service Industry – Defined as the process of coordinating non martial activities necessary to the fulfillment of the service in a cost and customer service effective manner • It is an internal integration of interrelated managerial function to ensure a smooth flow of raw materials from the point of inception to the first product point, semi-finished goods within production process and finished goods from the last point the point of consumption 4/11/2013 2-121Babasabpatilfreepptmba.com
  122. 122. Major features of Logistics Management • Smooth flow of all types of goods such as raw materials, work- in-process and finished goods • Meeting customer expectations about product and related information requirements • Real time flow of information about products’ demand and availability • Delivery of quality product in required quantity without excessive safety stock • Best possible customer service at the least possible cost • Integration of various managerial functions for optimization of resources • Movement and storage of goods in appropriate quantity • Enhancement of productivity and profitability 4/11/2013 2-122Babasabpatilfreepptmba.com
  123. 123. Integrated Logistics Management • Defined as the process of anticipating customer needs and wants acquiring the capital, material, people. Technologies and information necessary to meet those needs and wants, optimizing the goods-or services, producing network to fulfill customer requirements; and utilizing the network request in a timely way 4/11/2013 2-123Babasabpatilfreepptmba.com
  124. 124. Integrated Logistics Management • Integrated Logistics is viewed as a method to create a sustainable competitive advantage over the company's competition • Logistics strategy must be integrated with corporate strategy because corporate strategy sets the basic requirement to the Logistics system of a strategy 4/11/2013 2-124Babasabpatilfreepptmba.com
  125. 125. Integrated Logistics Management • The logics process is becoming more demanding and complex, so is the business environment in which the logistics has to operate • Highlights seven critical factors including that are contributing to the complexity of logistics system operations • Escalating customer demand • Cycle time reduction • Globalization • Restructuring • Supply Chain Partnerships • Productivity pressures and • Environmental awareness 4/11/2013 2-125Babasabpatilfreepptmba.com
  126. 126. Strategic Logistics Planning • Strategic logistics planning is essentially concerned with the deployment and management of logistics resources to meet the desired cost effective service performance of the system • This may involve, number and location of warehouses, mode and carrier selection, Inventory positioning, inventory planning, sub contracting of services, sourcing, equipment and facilities planning, order management and Infromation systems planning etc4/11/2013 2-126Babasabpatilfreepptmba.com
  127. 127. Main objectives of logistics planning are: • Cost reduction: - This strategy is directed towards minimizing the variable costs associated with the movement and storage. The best strategy is to evaluate the alternative courses of action and select the optimum one keeping profit maximization as the prime goal in mind. • Capital reduction: - This strategy is directed towards minimizing the level of investment in the logistics system. • Service improvements: - This strategy recognizes that the revenue is a function of the logistics service provided and develops an effective service strategy that is different from the one provided by competitors. – Logistics has significant impact on these important corporate performance objectives 4/11/2013 2-127Babasabpatilfreepptmba.com
  128. 128. Logistics planning includes • Supply Chain Planning • Shipment Planning • Transport System Planning • Vehicle Routing and Scheduling • Warehousing 4/11/2013 2-128Babasabpatilfreepptmba.com
  129. 129. Logistics Management Decisions The level of investment and the periods over which the benefits from an investment in logistics system is realized • Strategic logistics decisions • Tactical logistics decision • Operational logistics decisions 4/11/2013 2-129Babasabpatilfreepptmba.com
  130. 130. Logistics Management Decisions Strategic Supply chain design Resource acquisition Broad scope, highly aggregated data Long-term planning horizons(1year+1) Tactical Operational Production/distribution planning Resource allocation Medium-term planning horizons (monthly, quarterly) Shipment routing and scheduling Resource routing and scheduling Narrow scope, detailed data Short-term planning horizons (daily, real- time) 4/11/2013 2-130Babasabpatilfreepptmba.com
  131. 131. Logistics in the Firm: The Micro Dimension • Logistics Interfaces with Operations/Manufacturing • Logistics Interfaces with Marketing • Logistics Interfaces with Other Areas 4/11/2013 2-131Babasabpatilfreepptmba.com
  132. 132. Logistics in the Firm: Logistics Interfaces with Operations Manufacturing • Length of production runs – Balance economies of long production runs against increased costs of high inventories. • Seasonal demand – Acceptance of seasonal inventory to balance lead production times. 4/11/2013 2-132Babasabpatilfreepptmba.com
  133. 133. Logistics in the Firm: Logistics Interfaces with Operations/Manufacturing• Supply-side interfaces – Stocking adequate supplies to ensure uninterrupted production now a logistics function. • Protective packaging – Principal purpose is to protect the product from damage. • Foreign & third party alternatives – Some logistics functions are being outsourced. 4/11/2013 2-133Babasabpatilfreepptmba.com
  134. 134. Logistics in the Firm: The Micro Dimension • Logistics Interfaces with Marketing: The Marketing Mix – Four Ps – Price – Product – Promotion – Place 4/11/2013 2-134Babasabpatilfreepptmba.com
  135. 135. Logistics in the Firm: Price • Carrier pricing – Generally, since the larger the shipment, the cheaper the transportation rate, shipment sizes should be tailored to the carrier’s vehicle capacity where possible. • Matching schedules – Quantity discounts should be tied to carrier quantity discounts. • Volume relationships – Volumes sold will affect inventory requirements.4/11/2013 2-135Babasabpatilfreepptmba.com
  136. 136. Logistics in the Firm: Product • Consumer packaging – Generally, since the size, shape, weight and other physical characteristics of the product impact on its storage, transportation and handling, the logistics managers should be included in any decisions regarding these product traits. – A minor correction in any of the above could conceivably cost (or save) millions of dollars in logistical costs. – Logistics costs are not necessarily paramount, but they need to be considered in the decision making process. 4/11/2013 2-136Babasabpatilfreepptmba.com
  137. 137. Logistics in the Firm: Place • Wholesalers – Generally, since wholesalers are combining purchases for multiple retailers, the shipment sizes tend to be larger and the number of transactions that have to be processed are fewer, with the result that logistics costs are smaller. • Retailers – With the exception of very large retailers who act more like wholesalers, smaller sales are the norm. These generally cost more for transportation and order processing. 4/11/2013 2-137Babasabpatilfreepptmba.com
  138. 138. Logistics in the Firm: Promotion • Push versus pull – The most important factor is that the logistics division is aware of any changes in demand patterns so that it can plan for any consequences. – Pull strategies tend to be more erratic. – Push strategies tend to more predictable. • Channel competition – The more popular a product, the easier it is to persuade channel members to promote your product. 4/11/2013 2-138Babasabpatilfreepptmba.com
  139. 139. Logistics Interfaces with Other Areas • Manufacturing and marketing are probably the two most important internal, functional interfaces with logistics. • Other important interfaces now include finance and accounting. – Logistics can have a major impact on return on assets and return on investment. – Logistics costs reported by cost systems measure supply chain trade-offs and performance. 4/11/2013 2-139Babasabpatilfreepptmba.com
  140. 140. Logistics Activities • Transportation • Storage • Packaging • Materials handling • Order fulfillment • Forecasting • Production planning • Purchasing • Customer service • Site location • Other activities 4/11/2013 2-140Babasabpatilfreepptmba.com
  141. 141. Approaches to Analyzing Logistics Systems: Materials Management v. Physical Distribution • Frequently the movement and storage of raw materials is far different from the movement and storage of finished goods. • Four different classifications of logistics systems – Balanced system - e.g., consumer products – Heavy inbound - e.g., aircraft, construction – Heavy outbound - e.g., chemicals – Reverse systems - e.g., returnable products 4/11/2013 2-141Babasabpatilfreepptmba.com
  142. 142. Logistics and Systems Analysis • Cost Perspective – Keep in mind that the most efficient systems are not always comprised of each system component operating at its lowest possible cost. – The critical concern is to have the entire system operating at its lowest total cost. 4/11/2013 2-142Babasabpatilfreepptmba.com
  143. 143. Logistics and Systems Analysis • Level of Optimality – There are often constraints working which result in sub-optimal outcomes. – Additionally, logistics systems must work in harmony with marketing, finance, production, etc.--- this may also result in sub-optimal logistics performance. – See Figure 2-10 on next slide. 4/11/2013 2-143Babasabpatilfreepptmba.com
  144. 144. Figure 2-10 Levels of Optimality in Economic Environments 4/11/2013 2-144Babasabpatilfreepptmba.com
  145. 145. Techniques of Logistics System Analysis: Short-Run/Static Analysis • Comprised a matrix-like table which presents each of the logistics and other relevant costs for two or more alternative logistics systems. • The major downside to the model is that it presents a solution which is not necessarily the correct one at all possible volume levels. 4/11/2013 2-145Babasabpatilfreepptmba.com
  146. 146. Techniques of Logistics System Analysis: Long-Run/Dynamic Analysis • Comprised a graph of the fixed and variable costs of at least two alternative logistics systems. • The graph may have at least one indifference point, but may have multiple points of indifference. 4/11/2013 2-146Babasabpatilfreepptmba.com
  147. 147. Chapter 18 Pricing & Revenue mgmt 16-147 Supply Chain Management (3rd Edition) 4/11/2013 Babasabpatilfreepptmba.com
  148. 148. Objectives • Outline – The Role of Revenue Management in the Supply Chain – Revenue Management for Multiple Customer Segments – Revenue Management for Perishable Assets – Revenue Management for Seasonable Demand – Revenue Management for Bulk and Spot Customers – Using Revenue Management in Practice 16-1484/11/2013 Babasabpatilfreepptmba.com
  149. 149. The Role of Revenue Management in the Supply Chain – Revenue management is the use of pricing to increase the profit generated from a limited supply of supply chain assets – Supply assets exist in two forms: capacity and inventory – Revenue management may also be defined as the use of differential pricing based on customer segment, time of use, and product or capacity availability to increase supply chain profits • Most common example is probably in airline16-1494/11/2013 Babasabpatilfreepptmba.com
  150. 150. Conditions Under Which Revenue Management Has the Greatest Effect – The value of the product varies in different market segments (Example: airline seats) – The product is highly perishable or product waste occurs (Example: fashion and seasonal apparel) – Demand has seasonal and other peaks (Example: products ordered at Amazon.com) – The product is sold both in bulk and on the spot market (Example: owner of warehouse who can decide whether to lease the entire warehouse through long-term contracts or save a portion of the warehouse for use in the spot market) 16-1504/11/2013 Babasabpatilfreepptmba.com
  151. 151. Revenue Management for Multiple Customer Segments – If a supplier serves multiple customer segments with a fixed asset, the supplier can improve revenues by setting different prices for each segment – Prices must be set with barriers such that the segment willing to pay more is not able to pay the lower price – The amount of the asset reserved for the higher price segment is such that the expected marginal revenue from the higher priced segment equals the price of the lower price 16-1514/11/2013 Babasabpatilfreepptmba.com
  152. 152. Revenue Management for Multiple Customer Segments – p L = the price charged to the lower price segment – p H = the price charged to the higher price segment – D H = mean demand for the higher price segment – H = standard deviation of demand for the higher price segment – C H = capacity reserved for the higher price segment – R H (C H ) = expected marginal revenue from reserving more capacity – = Probability(demand from higher price segment > C H ) x p H – R H (C H ) = p L – Probability(demand from higher price segment > C H ) = p L / p H • H ) H ) = NORMINV(1- p L /p H , D H , C H = F -1 (1- p L /p H , D H , 16-1524/11/2013 Babasabpatilfreepptmba.com
  153. 153. Example 15.2: ToFrom Trucking – Revenue from segment A = p A = $3.50 per cubic ft – Revenue from segment B = p B = $3.50 per cubic ft – Mean demand for segment A = D A = 3,000 cubic ft – A = 1,000 cubic ftStd dev of segment A demand = – A )C A = NORMINV(1- p B /p A , D A , – = NORMINV(1- (2.00/3.50), 3000, 1000) – = 2,820 cubic ft – If pA increases to $5.00 per cubic foot, then – A )C A = NORMINV(1- p B /p A , D A , – = NORMINV(1- (2.00/5.00), 3000, 1000) – = 3,253 cubic ft 16-1534/11/2013 Babasabpatilfreepptmba.com
  154. 154. Revenue Management for Perishable Assets – Any asset that loses value over time is perishable – Examples: high-tech products such as computers and cell phones, high fashion apparel, underutilized capacity, fruits and vegetables – Two basic approaches: • Vary price over time to maximize expected revenue Overbook sales of the asset to account for cancellations 16-1544/11/2013 Babasabpatilfreepptmba.com
  155. 155. Revenue Management for Perishable Assets – Overbooking or overselling of a supply chain asset is valuable if order cancellations occur and the asset is perishable – The level of overbooking is based on the trade- off between the cost of wasting the asset if too many cancellations lead to unused assets and the cost of arranging a backup if too few cancellations lead to committed orders being larger than the available capacity 16-1554/11/2013 Babasabpatilfreepptmba.com
  156. 156. Revenue Management for Perishable Assets – p = price at which each unit of the asset is sold – c = cost of using or producing each unit of the asset – b = cost per unit at which a backup can be used in the case of asset shortage – C w = p – c = marginal cost of wasted capacity – C s = b – c = marginal cost of a capacity shortage – O* = optimal overbooking level – s* = Probability cancellations < O*) = C w / (C w + C s ) 16-1564/11/2013 Babasabpatilfreepptmba.com
  157. 157. Revenue Management for Perishable Assets – c andIf the distribution of cancellations is known to be normal with mean c thenstandard deviation – c ) c ,  c ) = NORMINV(s*,  c , O* = F -1 (s*, – If the distribution of cancellations is known only as a function of the (L+O) and stdbooking level (capacity L + overbooking O) to have a mean of (L+O), the optimal overbooking level is the solution to thedeviation of following equation: – (L+O)) L+O), O = F -1 (s*, – (L+O)) L+O), = NORMINV(s*, 16-1574/11/2013 Babasabpatilfreepptmba.com
  158. 158. Example 15.5 – Cost of wasted capacity = C w = $10 per dress – Cost of capacity shortage = C s = $5 per dress – s* = C w / (C w + C s ) = 10/(10+5) = 0.667 – c = 400 c = 800;  – c ) c , O* = NORMINV(s*, – = NORMINV(0.667,800,400) = 973 – If the mean is 15% of the booking level and the coefficient of variation is 0.5, then the optimal overbooking level is the solution of the following equation: – O = NORMINV(0.667,0.15(5000+O),0.075(5000+O)) – Using Excel Solver, O* = 1,115 16-1584/11/2013 Babasabpatilfreepptmba.com
  159. 159. Revenue Management for Seasonal Demand – Seasonal peaks of demand are common in many supply chains – Examples: Most retailers achieve a large portion of total annual demand in December (Amazon.com) – Off-peak discounting can shift demand from peak to non-peak periods – Charge higher price during peak periods and a lower price during off-peak periods 16-1594/11/2013 Babasabpatilfreepptmba.com
  160. 160. Revenue Management for Bulk and Spot Customers – Most consumers of production, warehousing, and transportation assets in a supply chain face the problem of constructing a portfolio of long-term bulk contracts and short-term spot market contracts – The basic decision is the size of the bulk contract – The fundamental trade-off is between wasting a portion of the low-cost bulk contract and paying more for the asset on the spot market – Given that both the spot market price and the purchaser’s need for the asset are uncertain, a decision tree approach as discussed in Chapter 6 should be used to evaluate the amount of long-term bulk contract to sign 16-1604/11/2013 Babasabpatilfreepptmba.com
  161. 161. Revenue Management for Bulk and Spot Customers – For the simple case where the spot market price is known but demand is uncertain, a formula can be used – c B = bulk rate – c S = spot market price – Q* = optimal amount of the asset to be purchased in bulk – p* = probability that the demand for the asset does not exceed Q* – Marginal cost of purchasing another unit in bulk is c B . The expected marginal cost of not purchasing another unit in bulk and then purchasing it in the spot market is (1-p*)c S . 16-1614/11/2013 Babasabpatilfreepptmba.com
  162. 162. Revenue Management for Bulk and Spot Customers – If the optimal amount of the asset is purchased in bulk, the marginal cost of the bulk purchase should equal the expected marginal cost of the spot market purchase, or c B = (1-p*)c S – Solving for p* yields p* = (c S – c B ) / c S – , the optimal amount Q* and std deviation If demand is normal with mean to be purchased in bulk is ) ,  ) = NORMINV(p*,  , Q* = F -1 (p*, 16-1624/11/2013 Babasabpatilfreepptmba.com
  163. 163. Example 15.6 – Bulk contract cost = c B = $10,000 per million units – Spot market cost = c S = $12,500 per million units – = 10 million units – = 4 million units – p* = (c S – c B ) / c S = (12,500 – 10,000) / 12,500 = 0.2 – ) = NORMINV(0.2,10,4) = 6.63 , Q* = NORMINV(p*, – The manufacturer should sign a long-term bulk contract for 6.63 million units per month and purchase any transportation capacity beyond that on16-1634/11/2013 Babasabpatilfreepptmba.com
  164. 164. Using Revenue Management in Practice – Evaluate your market carefully – Quantify the benefits of revenue management – Implement a forecasting process – Apply optimization to obtain the revenue management decision – Involve both sales and operations – Understand and inform the customer – Integrate supply planning with revenue management 16-1644/11/2013 Babasabpatilfreepptmba.com
  165. 165. Summary of Learning Objectives – What is the role of revenue management in a supply chain? – Under what conditions are revenue management tactics effective? – What are the trade-offs that must be considered when making revenue management decisions? 16-1654/11/2013 Babasabpatilfreepptmba.com
  166. 166. Chapter 3 Supply Chain Drivers and Obstacles 3-166 Supply Chain Management (3rd Edition) 4/11/2013 Babasabpatilfreepptmba.com
  167. 167. Outline • Drivers of supply chain performance • A framework for structuring drivers • Facilities • Inventory • Transportation • Information • Sourcing • Pricing • Obstacles to achieving fit 3-1674/11/2013 Babasabpatilfreepptmba.com
  168. 168. Drivers of Supply Chain Performance • Facilities – places where inventory is stored, assembled, or fabricated – production sites and storage sites • Inventory – raw materials, WIP, finished goods within a supply chain – inventory policies • Transportation – moving inventory from point to point in a supply chain – combinations of transportation modes and routes • Information – data and analysis regarding inventory, transportation, facilities throughout the supply chain – potentially the biggest driver of supply chain performance • Sourcing – functions a firm performs and functions that are outsourced • Pricing – Price associated with goods and services provided by a firm to the supply chain3-1684/11/2013 Babasabpatilfreepptmba.com
  169. 169. A Framework for Structuring Drivers 3-169 Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Facilities Inventory Transportation Information Supply chain structure Cross Functional Drivers Sourcing Pricing Logistical Drivers 4/11/2013 Babasabpatilfreepptmba.com
  170. 170. Facilities • Role in the supply chain – the “where” of the supply chain – manufacturing or storage (warehouses) • Role in the competitive strategy – economies of scale (efficiency priority) – larger number of smaller facilities (responsiveness priority) • Example 3.1: Toyota and Honda • Components of facilities decisions 3-1704/11/2013 Babasabpatilfreepptmba.com
  171. 171. Components of Facilities Decisions • Location – 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) 3-1714/11/2013 Babasabpatilfreepptmba.com
  172. 172. Inventory • Role in the supply chain • Role in the competitive strategy • Components of inventory decisions 3-1724/11/2013 Babasabpatilfreepptmba.com
  173. 173. Inventory: Role in the Supply Chain • Inventory exists because of a mismatch between supply and demand • Source of cost and influence on responsiveness • Impact 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 = RT (Little’s Law) • I = inventory; R = throughput; T = flow time 3-1734/11/2013 Babasabpatilfreepptmba.com
  174. 174. Inventory: Role in Competitive Strategy • If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers • If cost is more important, inventory can be reduced to make the firm more efficient • Trade-off • Example 3.2 – Nordstrom 3-1744/11/2013 Babasabpatilfreepptmba.com
  175. 175. Components of Inventory Decisions • Cycle inventory – Average amount of inventory used to satisfy demand between shipments – Depends on lot size • 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 • Overall trade-off: Responsiveness versus efficiency – more inventory: greater responsiveness but greater cost – less inventory: lower cost but lower responsiveness 3-1754/11/2013 Babasabpatilfreepptmba.com
  176. 176. Transportation • Role in the supply chain • Role in the competitive strategy • Components of transportation decisions 3-1764/11/2013 Babasabpatilfreepptmba.com
  177. 177. Transportation: Role in the Supply Chain • Moves the product between stages in the supply chain • Impact on responsiveness and efficiency • Faster transportation allows greater responsiveness but lower efficiency • Also affects inventory and facilities 3-1774/11/2013 Babasabpatilfreepptmba.com
  178. 178. Transportation: Role in the Competitive Strategy • If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it • Can also use slower transportation modes for customers whose priority is price (cost) • Can also consider both inventory and transportation to find the right balance • Example 3.3: Laura Ashley 3-1784/11/2013 Babasabpatilfreepptmba.com
  179. 179. 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 outsource • Overall trade-off: Responsiveness versus efficiency 3-1794/11/2013 Babasabpatilfreepptmba.com
  180. 180. Information • Role in the supply chain • Role in the competitive strategy • Components of information decisions 3-1804/11/2013 Babasabpatilfreepptmba.com
  181. 181. Information: Role in the Supply Chain • The connection between the various stages in the supply chain – allows coordination between stages • Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels 3-1814/11/2013 Babasabpatilfreepptmba.com
  182. 182. Information: Role in the Competitive Strategy • Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) • Information technology • What information is most valuable? • Example 3.4: Andersen Windows • Example 3.5: Dell 3-1824/11/2013 Babasabpatilfreepptmba.com
  183. 183. Components of Information Decisions • Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain) • Coordination and information sharing • Forecasting and aggregate planning • Enabling technologies – EDI – Internet – ERP systems – Supply Chain Management software 3-1834/11/2013 Babasabpatilfreepptmba.com
  184. 184. Sourcing • Role in the supply chain • Role in the competitive strategy • Components of sourcing decisions 3-1844/11/2013 Babasabpatilfreepptmba.com
  185. 185. Sourcing: Role in the Supply Chain • Set of business processes required to purchase goods and services in a supply chain • Supplier selection, single vs. multiple suppliers, contract negotiation 3-1854/11/2013 Babasabpatilfreepptmba.com
  186. 186. Sourcing: Role in the Competitive Strategy • Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain • In-house vs. outsource decisions- improving efficiency and responsiveness • Example 3.6: Cisco 3-1864/11/2013 Babasabpatilfreepptmba.com
  187. 187. Components of Sourcing Decisions • In-house versus outsource decisions • Supplier evaluation and selection • Procurement process • Overall trade-off: Increase the supply chain profits 3-1874/11/2013 Babasabpatilfreepptmba.com
  188. 188. Pricing • Role in the supply chain • Role in the competitive strategy • Components of pricing decisions 3-1884/11/2013 Babasabpatilfreepptmba.com
  189. 189. Pricing: Role in the Supply Chain • Pricing determines the amount to charge customers in a supply chain • Pricing strategies can be used to match demand and supply 3-1894/11/2013 Babasabpatilfreepptmba.com
  190. 190. Sourcing: Role in the Competitive Strategy • Firms can utilize optimal pricing strategies to improve efficiency and responsiveness • Low price and low product availability; vary prices by response times • Example 3.7: Amazon 3-1904/11/2013 Babasabpatilfreepptmba.com
  191. 191. Components of Pricing Decisions • Pricing and economies of scale • Everyday low pricing versus high-low pricing • Fixed price versus menu pricing • Overall trade-off: Increase the firm profits 3-1914/11/2013 Babasabpatilfreepptmba.com
  192. 192. Obstacles to Achieving Strategic Fit • Increasing variety of products • Decreasing product life cycles • Increasingly demanding customers • Fragmentation of supply chain ownership • Globalization • Difficulty executing new strategies 3-1924/11/2013 Babasabpatilfreepptmba.com
  193. 193. Summary • What 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 3-1934/11/2013 Babasabpatilfreepptmba.com
  194. 194. Supply Chain Management Introduction 4/11/2013 2-194Babasabpatilfreepptmba.com
  195. 195. What Is a Supply Chain? Flow of products and services from: – Raw materials manufacturers – Intermediate products manufacturers – End product manufacturers – Wholesalers and distributors and – Retailers • Connected by transportation and storage activities • Integrated through information, planning, and integration activities • Cost and service levels 4/11/2013 2-195Babasabpatilfreepptmba.com
  196. 196. Definitions The design and management of seamless, value- added process across organizational boundaries to meet the real needs of the end customer Institute for Supply Management Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer The Supply Chain Council 4/11/2013 2-196Babasabpatilfreepptmba.com
  197. 197. Source Supplier Supplier Distributor Distributor Retailer End-User Converter Converter Consumers Information Flow Funds/Demand Flow Value-Added Services Material Flow Reuse/Maintenance/After Sales Service Flow SCM Definition 4/11/2013 2-197Babasabpatilfreepptmba.com
  198. 198. Channel Intermediaries Retailer Merchant Wholesaler Agents and Brokers A channel intermediary that sells mainly to customers. An institution that buys goods from manufacturers, takes title to goods, stores them, and resells and ships them. Wholesaling intermediaries who facilitate the sale of a product by representing channel member. 4/11/2013 2-198Babasabpatilfreepptmba.com
  199. 199. Channel Intermediaries Retailers Merchant Wholesalers Agents and Brokers Take Title to Goods Take Title to Goods Do NOT Take Title to Goods 4/11/2013 2-199Babasabpatilfreepptmba.com
  200. 200. The SCM Network FIGURE 1.1: The logistics network 4/11/2013 2-200Babasabpatilfreepptmba.com
  201. 201. Objective of a supply chain • Maximize the value of supply chain (difference between the worth of the final product to the customer and the cost of the supply chain in filling the customer’s request) • Increase the supply chain profitability (supply chain surplus) 4/11/2013 2-201Babasabpatilfreepptmba.com
  202. 202. The Importance of Supply Chain Management • Dealing with uncertain environments • Shorter product life cycles of high-technology products – Less opportunity to accumulate historical data on customer demand – Wide choice of competing products makes it difficult to predict demand • The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners – If you don’t do it, your competitor will • Availability of SCM technologies on the market – Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes 4/11/2013 2-202Babasabpatilfreepptmba.com
  203. 203. Supply Chain Management Results of Supply Chain Management Focus on Innovative Solutions Competitive with focus on Customer Satisfaction Synchronized Flow Customer Value 4/11/2013 2-203Babasabpatilfreepptmba.com
  204. 204. Supply chain includes • Material flows / Product flows • Information flows • Financial flows 4/11/2013 2-204Babasabpatilfreepptmba.com
  205. 205. • Supply Chain Design • Resource Acquisition • Long Term Planning (1 Year ++) Supply chain strategy • Production/ Distribution Planning • Resource Allocation • Medium Term Planning (Qtrly,Monthly) Supply chain Planning • Shipment Scheduling • Resource Scheduling • Short Term Planning (Weekly,Daily) Supply chain Operation Decision Phases in Supply chain 4/11/2013 2-205Babasabpatilfreepptmba.com
  206. 206. Process view of a supply chain 1. Cycle view of a supply chain process • Broken down into 4 Process Cycles viz.. CUSTOMER ORDER CYCLE REPLENISHMENT CYCLE MANUFACTURING CYCLE PROCUREMENT CYCLE • Each cycle consists of 6 sub processes 1 Supplier stage markets product 2 Buyer stage places the order 3 Supply stage receives the order 4 Supplier stage supplies the order 5 Buyer stage receives supply 6 Buyer returns reverse to supplies to supplier or third party • Useful in considering operational decisions 4/11/2013 2-206Babasabpatilfreepptmba.com
  207. 207. 2. Push pull view of Supply chain management • Divided into 2 categories 1. Push Process initiated in anticipation of customer orders 2. Pull process initiated by customer order • Push/pull view of SCM is useful when considering strategic decisions relating to supply design 4/11/2013 2-207Babasabpatilfreepptmba.com
  208. 208. Supply chain Macro processes in a firm Supplier relationship management • Source • Negotiate • Buy • Design collaboration • Supply collaboration Internal SCM • Strategic planning • Demand planning • Supply planning • Fulfillment • Field service Customer relationship management • Market • Price • Sell • Call center • Order management 4-208
  209. 209. The Processes Customer Relationship Management - provides the structure for how relationships with customers are developed & maintained, including the PSAs between the firm & its customers.  Customer Service Management - provides the firm’s face to the customer, including management of the PSAs, and provides a single source of customer information.  Demand Management – provides the structure for balancing the customers’ requirements with supply chain capabilities.  Order Fulfillment – includes all activities necessary to define customer requirements, design the logistics network, and fill customer orders.  Manufacturing Flow Management - includes all activities necessary to move products through the plants & to obtain & manage manufacturing flexibility in the supply chain.  Supplier Relationship Management - provides the structure for how relationships with suppliers are developed & maintained, including the PSAs between the firm & its suppliers.  Product Development and Commercialization – provides the structure for developing and bringing to market new products jointly with customers and suppliers.  Returns Management – includes all activities related to returns, reverse logistics, gate keeping, & avoidance. 4/11/2013 2-209Babasabpatilfreepptmba.com
  210. 210. Key Issues in Supply Chain Mgt. Network Planning – • recognize the capacity of each warehouse to determine production requirements and inventory levels at the vendor’s facility for each product • develop transportation flows between these facilities to the warehouses • minimize total production, inventory, and transportation costs satisfy service level requirements? 4/11/2013 2-210Babasabpatilfreepptmba.com
  211. 211. Key Issues in Supply Chain Mgt. Inventory Control – • Where is inventory held, (supplier, warehouse, retailer) • how much, and why? • Is inventory held due to uncertainty in production, distribution or customer demand? • Is there anything that can be done to reduce uncertainty thereby reducing inventory? 4/11/2013 2-211Babasabpatilfreepptmba.com
  212. 212. Key Issues in Supply Chain Mgt. Distribution Strategies – • Relationships between suppliers and warehouse operators that specify delivery lead times, appointment processes, and hours for receiving. • How can this relationship optimize supply chain efficiency? 4/11/2013 2-212Babasabpatilfreepptmba.com
  213. 213. Key Issues in Supply Chain Mgt. Supply Chain Integration and Strategic Partnering – • information sharing and operational planning are keys to successfully integrated supply chain. • But what info. will be shared? • How will it be used? • What level of integration is needed? • What partnerships can be implemented? 4/11/2013 2-213Babasabpatilfreepptmba.com
  214. 214. Key Issues in Supply Chain Mgt. • Product Design – • Effective design, in particular an unified case code number, plays several critical roles in supply chain efficiency. • Not having an unified case code number creates, complicated production, increases inventory holdings at the vendors facility, delays delivery to the warehouse and if received incorrectly delays delivery to the stores. • What role does supply chain management play in implementation of product design to simplify production requirements and reduce lead-time for inventory replenishment? 4/11/2013 2-214Babasabpatilfreepptmba.com
  215. 215. Key Issues in Supply Chain Mgt. Customer Value – • Measure of a company’s performance to its customer, based upon the entire range of products, services, and intangibles that constitute the company’s offerings. • Effective supply chain mgt. is critical if OUR objective is to fulfill the ultimate consumer needs and provide value. 4/11/2013 2-215Babasabpatilfreepptmba.com
  216. 216. Key Issues in Supply Chain Mgt. Information Technology and Decision-Support Systems – • much of the current interest in supply chain mgt. is motivated by the opportunities that appeared due to the abundance of data and the savings that can be achieved by sophisticated analysis of these data. • But what data should be transferred? Which are significant ? How should data be analyzed and used? Impact of the Internet? What infrastructure is required internally and between partners?4/11/2013 2-216Babasabpatilfreepptmba.com
  217. 217. Supply-Chain Management Important activities include determining 1. Transportation vendors 2. Credit and cash transfers 3. Suppliers 4. Distributors and banks 5. Accounts payable and receivable 6. Warehousing and inventory 7. Order fulfillment 8. Sharing customer, forecasting, production information 4/11/2013 2-217Babasabpatilfreepptmba.com
  218. 218. The Strategic Importance of the Supply Chain •Supply-chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers •Competition is no longer between companies; it is between its supply chains 4/11/2013 2-218Babasabpatilfreepptmba.com
  219. 219. Supply Chain Goals Efficient supply chain management must result in tangible business improvements. It is characterized by a sharp focus on – Revenue growth – Better asset utilization – Cost reduction. 4/11/2013 2-219Babasabpatilfreepptmba.com
  220. 220. Benefits of Supply Chain Management Common Benefits of Supply Chain Management Reduced Costs Improved Service Enhanced Revenues 4/11/2013 2-220Babasabpatilfreepptmba.com
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