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Introduction to Supply Chain Management

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  • 1. Introduction to Supply Chain Management Dr. Dale S. Rogers Dr. Dale S. Rogers Center for Logistics Management Center for Logistics Management University of Nevada University of Nevada MGRS 474/674 MGRS 474/674
  • 2. Seminar Goal s Establish an understanding of the role and function of supply chain management strategies in the context of the technology marketplace. s Develop a more thorough understanding of the critical interrelationships that compose the supply chain. s Concept of supply chain system design s Introduce and ask participants to identify an opportunity to establish or improve supply chains.
  • 3. Future of Competition Supplier Inbound Manufacturing Distribution Outbound Ultimate Transport Transport Customer My Supply Chain vs. Your Supply Chain Supplier Inbound Manufacturing Distribution Outbound Ultimate Transport Transport Customer
  • 4. 1986 CLM DEFINITION OF LOGISTICS …is 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. [Council of Logistics Management, 1986]
  • 5. SUPPLY CHAIN MANAGEMENT …is the integration of key business processes from end user through original suppliers, that provides products, services, and information that add value for customers and other stakeholders. [The International Center for Competitive Excellence, 1994] [Global Supply Chain Forum, 1998]
  • 6. 1998 CLM DEFINITION OF LOGISTICS ….is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-of- origin to the point-of-consumption in order to meet customers' requirements. [Council of Logistics Management, 1998]
  • 7. SUPPLY CHAIN MANAGEMENT Integrating and Managing Processes Across the Supply Chain Information Flow Manufacturer Tier 2 Tier 1 Consumer Supplier Supplier Logistics Customer /End-user Purchasing Marketing & Sales PRODUCT FLOW Production Finance R&D Supply Chain Business Processes CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT PROCUREMENT PRODUCT DEVELOPMENT AND COMMERCIALIZATION RETURNS Source: Douglas M. Lambert, Martha C. Cooper, Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998, pp. 2.
  • 8. Required Behaviors Customer relationships are managed by customer focus teams which negotiate mutually beneficial product / service agreements with large, strategically significant customers. Customer Relationship Management Process Customer Relationship ! Customer focus teams develop and implement Management customer partnering programs. ! Product/service agreements are established. ! New customer interfaces are used to better predict customer demand and improve the way customers are serviced. ! Teams identify and eliminate sources of production variability. ! Key performance evaluation criteria (both company performance and customer account profitability) are used to measure results.
  • 9. Required Behaviors Maximizing customer service means providing a focused point of contact for all customer enquiries in order to insulate them from the complexity of a large, multi-divisional corporation. Customer Service Management Process ! Customer Service provides a single source of Customer Service Management customer information, a point of contact for administration of the product / service agreement. ! Instant promising/availability information is conveyed via the supply/demand manager interface. ! On-line/real-time product and pricing information assists customers with order placement. ! On-line/real-time access to order status information is available to support customer enquiries.
  • 10. Required Behaviors In demand management, customer demand is continuously gathered, Demand Management compiled and renewed in order to match our supply capability with requirements in the market. Process ! Demand requirements and supply capabilities are Demand continuously modeled using point of sale and “key” Management customer data. ! Market requirements and production plans are coordinated on an enterprise-wide basis. ! Multiple sourcing and routing options are considered at the time of order receipt. ! Worldwide on-line/real-time inventory availability check and promising capacity is employed. ! Demand and production rates are synchronised and inventories are managed globally.
  • 11. Required Behaviors Customer orders that are 100% on-time, accurate, and complete require an integrated supply and delivery system that is responsive, flexible and customer-driven. Fulfilment Process ! Customer need dates and requirements drive Fulfillment the process. ! Manufacturing, distribution, and transportation plans are integrated. ! Strategic alliances with channel partners and carriers are formed to meet requirements and to reduce total-delivered-cost of the product to customers.
  • 12. Required Behaviors Rapid response to changing market conditions implies maximum flexibility in production planning and manufacturing capabilities. Manufacturing Flow Management Process ! Production must shift from a supply/push method Manufacturin of operation to a demand/pull method based on g Flow customer needs. Management ! Manufacturing processes must flexibly respond to market changes with rapid changeover capabilities for mass customisation. ! Minimum lot sizes are planned to move toward a make to order environment. ! Production priorities are driven by required delivery dates. ! Specific supply strategies are developed for each customer segment.
  • 13. Required Behaviors Relationships with major suppliers are corporately managed in strategic alliances while purchase order transactions become simplified and integrated with the supply process. Procurement Process ! Strategic plans of suppliers and company are Procurement aligned to focus resources on holding down costs and developing new products. ! Supplier categorisation and management is implemented on a corporate global basis, with purchasing in a strategic contracting role. ! Purchase order transactions are integrated with the supply process to improve productivity and all areas of supplier performance.
  • 14. SUPPLY CHAIN NETWORK STRUCTURE Tier 3 to Tier 3 to Initial Tier 2 Tier 1 Tier 1 Tier 2 Consumers/ suppliers Suppliers Suppliers Customers Customers End-Customers 1 1 Tier 3 to n suppliers 2 2 Consumers/End-customers n n 1 1 1 Initial Suppliers Tier 3 to n customers n 1 2 2 n 1 2 3 n 1 3 2 n n n 1 n Focal Company Members of the Focal Company’s Supply Chain
  • 15. SUPPLY CHAIN MANAGEMENT FRAMEWORK: Elements and Key Decisions 2) What processes should be linked with each of these key supply chain members? Supply Chain Business Processes Supply Chain Supply Chain Management Network Components Structure 3) What level of integration and 1) Who are the key supply management should be applied chain members with whom for each process link? to link processes? Source: Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998.
  • 16. TYPES OF INTER-COMPANY BUSINESS PROCESS LINKS Tier 3 to Tier 3 to Initial Tier 2 Tier 1 Tier 1 Tier 2 Consumers/ suppliers Suppliers Suppliers Customers Customers End-Customers 1 1 Tier 3 to n suppliers 2 2 Consumers/End-customers n n 1 1 1 Initial Suppliers 1 Tier 3 to n customers n 2 2 n 1 2 3 1 n 1 3 n 2 n n n 1 1 n n Managed Process Links Focal Company Monitor Process Links Members of the Focal Company’s Supply Chain Not-Managed Process Links Non-Member Process Links Non-Members of the Focal Company’s Supply Chain
  • 17. THE FOCAL COMPANY’S ALTERNATIVES FOR INVOLVEMENT WITH LINK 2 Focal Company Company B Company C Alternative 1) Integrate with and actively manage Link 2. Alternative 2) Monitor the procedures of Company B and Company C for integrating and managing Link 2. Alternative 3) Not involved, leave the Link 1 Link 2 integration and management up to Company B and Company C.  The Global Supply Chain Forum, The Ohio State University -- Do not reproduce, cite or quote without written permission.
  • 18. SUPPLY CHAIN MANAGEMENT: THE DISCONNECTS Information Flow Manufacturer Tier 2 Tier 1 Consumer/ Supplier Supplier Customer End-Customer Logistics Purchasing Marketing & Sales PRODUCT FLOW Production Finance R&D CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT PROCUREMENT PRODUCT DEVELOPMENT AND COMMERCIALIZATION RETURNS
  • 19. REPRESENTATIVE BUSINESS PROCESSES IDENTIFIED IN SELECTED CASE COMPANIES Company A Company B Company C • Product Development • Strategy Development • Selling Process • Supply Chain • Business Management • Customer Order Fulfillment • Customer Management • Market Development • Manufacturing & Supply • Product Development • New Product Creation • Manufacturing Capability Development • Procurement • Order Fulfillment Company D • Business Process Company E Company F - Marketing Planning • Customer Relationship Management • Supply Chain - Prospecting • Customer Order Fulfillment • Account Planning - Exploring Needs • Business Planning - Developing Solutions • Manufacturing & Supply - Decision • Product Development - Presenting & Closing • Procurement - Delivering - Demonstration Results
  • 20. SUPPLY CHAIN MANAGEMENT Fundamental Management Components Physical & Technical Managerial & Behavioral Management Components Management Components Planning and Management Control Methods Methods Work Flow/ Power and Activity Structure Leadership Structure Organization Risk and Structure Reward Structure Communication Culture and and Information Flow Attitude Facility Structure Product Flow Facility Structure
  • 21. AN ILLUSTRATION OF A SUPPLY CHAIN SHOWING EACH INTEGRATED AND MANAGED BUSINESS PROCESS LINK Demand Management Process Order Fulfillment Process Product Development and Customer Relationship Management Process Commercialization Process Managed Demand Management Process Links Managed Order Fulfillment Process Links Focal Company. Managed Product Develop./Commercial Process Links Managed Customer Relationship Manag. Process Links Selected Members of the Not-Managed Business Process Link. Focal Company's Supply Chain.
  • 22. AN ILLUSTRATION OF A SUPPLY CHAIN COMBINING ALL THE INTEGRATED AND MANAGED BUSINESS PROCESS LINKS Managed Demand Management Process Links Focal Company. Managed Order Fulfillment Process Links Selected Other Members Managed Product Develop./Commercial. Process Links of the Focal Company's Managed Customer Relationship Manag. Process Links Supply Chain. Not-Managed Business Process Links.
  • 23. IMPLEMENTATION OF SUPPLY CHAIN MANAGEMENT Typical Functions Silos Business Processes Sales & Manufac- Finance & Technical Logistics Purchasing Marketing turing Accounting S Customer Relationship Management Account Management Requirements Requirements Definition Definition Manufacturing Strategy Sourcing Strategy Customer Profitability C U Customer Service Account Technical Performance Coordinated Priority Cost U Management Administration Service Specifications Execution Assessment To Serve P Demand Demand Process Network Capability Tradeoff S Management Sourcing P Planning Requirements Planning Planning Analysis T Special Environmental Distribution Plant Selected Distribution L Fulfillment Orders Requirements Management Direct Supplier(s) Cost O I Manufacturing Flow Packaging Management Specifications Process Stability Prioritization Criteria Production Planning Integrated Supply Manufacturing Cost M E Procurement Order Material Inbound Integrated Supplier Materials E Booking Specifications Flow Planning Management Cost R Product Business Product Movement Process Material R Development and R & D Cost S Commercialization Plan Design Requirements Specifications Specifications S Information Architecture, Data Base Strategy, Information Visibility Note: Process sponsorship and ownership must be established to drive the attainment of the supply chain vision and eliminate the functional barriers that artificially separate the process flows.
  • 24. CHARACTERISTICS OF SUPPLY CHAIN MANAGEMENT ! Strategy and policies shared across supply chain ! Fully coordinated supply chain “cash to cash” ! Integrated business processes for entire supply chain ! Measures shared across supply chain
  • 25. THE MOVE TOWARDS TRADE MARKETING From: Traditional Buyer/Supplier Relationship MIS MIS R&D R&D MKT Buyer Seller MKT LOG LOG ACCT ACCT To: Building Stronger Partnerships Through Multiple Linkages Customer Supplier MIS MIS R&D R&D MKT MKT LOG LOG ACCT ACCT
  • 26. INVENTORY POSITIONS AND MAJOR FLOWS IN A SUPPLY CHAIN Orders Orders Orders Payments Payments Payments Suppliers Information Manufacturer Information Wholesalers Information Retailers Product Product Product Variable cost Variable cost Variable cost Variable cost of product $5 of material $10 of product $60 of product $80 Full manufac- Acquisition Other acquisition Other acquisition tured cost $7 cost $1 costs $2 costs $2 Selling Other variable Selling Selling price $10 costs $14 price $80 price $150 Total variable cost of product $25 Full manufac- tured cost $40 Selling price $60
  • 27. FUTURE RESEARCH OPPORTUNITIES: PROCESSES ❐ What are the operational definitions of the key business processes and what are the relationships among the processes? ❐ What are the relationships among the processes and the functional silos? What is the tolerance for sub-optimization? ❐ How do you obtain buy-in from the functional areas in order to implement a process approach within the firm? ❐ How can the various participants in a company be encouraged to work toward a common goal? Marketing and manufacturing reward structures often tend to be counter to one another yet the firm has overall profitability goals. ❐ Does the answer lie in similar reward structures, rewards tied to overall performance, or will process teams accomplish much of this? ❐ Beyond internal integration, how does inter-organizational change management be implemented?
  • 28. FUTURE RESEARCH OPPORTUNITIES: SUPPLY CHAIN MAPPING ❏ How should the existing supply chain be mapped? ❏ Should the map include all connected firms or only the value- adding firms? ❏ Are there other means of determining who should and should not be part of the supply chain map? For example, should only the most critical members be mapped? ❏ What are the implications for good SCM practice based upon the shape of the supply chain, that is horizontal structure, vertical structure and focal company position in the supply chain?
  • 29. FUTURE RESEARCH OPPORTUNITIES: VALUE ❏ What is the value proposition at the consumer level or end point of the supply chain? ❏ What are the methods that should be used to determine value? ❏ How should the various firms in the supply chain share the costs and the benefits?
  • 30. FUTURE RESEARCH OPPORTUNITIES: METRICS ❏ What metrics should be used to evaluate the performance of the entire supply chain, individual members or subsets of members? ❏ What are the potential barriers to implementation and how should they be overcome? ❏ What characteristics of managing the supply chain are related to higher performance of the supply chain, subsets of firms in the supply chain, and the individual firms? Since the processes may vary by link, these measures may need to be both process specific and global.
  • 31. FUTURE RESEARCH OPPORTUNITIES: NETWORK REDESIGN ❏ What is the process to take the map of the existing supply chain and modify it to obtain the best supply chain given the desired outputs? ❏ How frequently should the supply chain structure be reviewed? What approaches could be used to perform the evaluation? ❏ Which approaches are appropriate for different supply chain forms and situations? ❏ How should the firm analyze the network to determine if there is a better configuration? ❏ How does building a stronger relationship with one member affect the management time allocable to other members? ❏ Should a third party manage some relationships to free resources for this closer relationship, which thus, changes the membership of the network? Is it an iterative process?
  • 32. FUTURE RESEARCH OPPORTUNITIES: INTEGRATION ❏ What determines with whom to link business processes? ❏ What are the steps to take to determine with whom to link? ❏ What are the critical factors to the firm's success and that enable the firm to link with specific companies? ❏ What are the barriers to forming these relationships? Should the decision process vary based on whether Tier 1 or Tier n companies are the focus? ❏ For Tier n companies, what critical factors imply a closer relationship of managed or monitored links to key members to assure supply, quality, and service? ❏ What are the compelling reasons to have closer ties with companies beyond the first tier?
  • 33. FUTURE RESEARCH OPPORTUNITIES: PROCESS INTEGRATION ❏ What determines the processes to link with these key members? ❏ How should the firm decide which internal process to link with which suppliers and customers? ❏ What decision criteria determine whose internal business processes prevail across all or part of the supply chain?
  • 34. FUTURE RESEARCH OPPORTUNITIES: IMPLEMENTATION OF MANAGEMENT COMPONENTS ❏ What determines the type/level of integration that should be applied to each process link? It is important to provide firms with some guidelines regarding what level of management components to apply to achieve the desired relationship and management of a link. More components and/or a higher level of effort on a component may be required to achieve a desired level of integration of a process link. ❏ What constitutes a low level versus a high level of a specific management component? ❏ What is the relationship among the management components for successful SCM? ❏ Do changes in the physical and technical components automatically require changes in the managerial and behavioral components?
  • 35. MANAGING THE SUPPLY CHAIN INVOLVES THREE CLOSELY INTER-RELATED ELEMENTS: ❏ The supply chain network structure ❏ The supply chain business processes ❏ The management components
  • 36. SUCCESSFUL SCM IS BASED ON DETERMINING: ❏ Who are the key supply chain members with whom to integrate processes? ❏ What are the supply chain processes to link with these key members? ❏ What type/level of integration should be applied to each of these process links?
  • 37. LOGISTICS MANAGEMENT DEFINED …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. Council of Logistics Management (1986)
  • 38. SUPPLY CHAIN MANAGEMENT …is the integration of key business processes from end user through original suppliers, that provides products, services, and information that add value for customers and other stakeholders. [The International Center for Competitive Excellence, 1994] [Global Supply Chain Forum, 1998]
  • 39. TYPES OF INTER-COMPANY BUSINESS PROCESS LINKS Ti er 3 to Ti er 3 to Initia l Ti er 2 Ti er 1 Ti er 1 Ti er 2 Consumer s/ supplie rs Suppl ier s Suppl ier s Custo mer s Custo mer s End -Custome rs 1 1 Tier 3 to n su ppliers 2 2 Consumers/End-customers n n 1 1 1 Initial Suppliers n 1 2 2 Tier 3 to n customers 1 n 2 3 1 n 1 3 n 2 n n n 1 1 n n Focal Company Managed Proces s Links Monitor Process Links Members of the Focal Company’s Supply Chain Not-Managed Process Links Non-Member Process Links Non-Members of the Focal Comp any’s Supply Chain Source: Douglas M. Lambert, Mart ha C. Cooper, and Janus D. Pagh, “Supply Chain Management : Implement at ion Is sues and Res earc h Opport unities,” The Internat ional Journal of Logisti cs Management, Vol. 9, No. 2, 1998, p. 7.
  • 40. COMPONENTS OF 1997 LOGISTICS COSTS Total U.S. Logistics Costs ($862 Billion) Forwarders Air Freight Oil Pipelines Water Freight Freight 2.7% 1% 3.0% 1% Inventory Carrying Costs Railroads Freight 29.7% 4% Warehousing Motor Carriers Costs Freight 8% Order 46.4% Administration Other Costs Costs 0.6% 4% SOURCE: Adapted from Robert V. Delaney, “Ninth Annual State of Logistics Report,” press conference remarks to the National Press Club, Washington, D.C. (June, 1998)
  • 41. COST TRADEOFFS REQUIRED IN MARKETING AND LOGISTICS Marketing Product Price Promotion Place Customer Service Levels Inventory Transportation Logistics Carrying Costs Costs Lot Quantity Warehousing Costs Costs Order Processing and information Costs Marketing Objective: Allocate resources to the marketing mix in such a manner as to maximize the long-term profitability of the firm. Logistics Objective: Minimize Total Costs given the customer service objective where total costs = Transportation Costs + Warehousing Costs + Order Processing and Information Costs + Lot Quantity Costs + Inventory Carrying Costs
  • 42. Structure Versus Behavior s Structure determines behavior s Behavior does not determine structure
  • 43. Sub-Optimization s Local optimizations result from organizations optimizing own results rather than the total supply chain. s Systems approach is critical. s Performance measurements and reward systems must be synchronized with supply chain objectives.
  • 44. Supply Chain Management Defined Supply chain management is the integration of business processes from end user through original suppliers that provides products, services, and information that add value to customers. Source: Harrison, Alan, “Co-Makership as an Extension of Quality Care,”International Journal of Quality & Reliability Management, Vol. 7, No. 2 (1990), pp. 15-22.
  • 45. UCS Operations & Program Support Vision Partnering with our clients around the globe, serving their needs for future success... ...Racing as a team for market differentiation in supply chain management.
  • 46. Three Critical Business Elements “The three most important things you need to measure in a business are: 1. Customer Satisfaction 2. Employee Satisfaction 3. Cash Flow Source: Jack Welch, CEO, General Electric
  • 47. Computing History s 1833 Charles Babbage developed a calculating machine with input, storage and output s 1848 George Boole's work on mathematics (Boolean algebra) is the basis for all binary operations s 1878 W. T. Odhner used pin-wheels for the next generation of mechanical calculating machines s 1886 Herman Hollerith (founder of IBM®) had the idea of using punched cards to keep and transport information s 1886 Dorr E. Felt built the first successful key-driven (as opposed to dial) calculator s 1891 William S. Burroghs invented the first robust calculating machine and started the office calculation industry
  • 48. Burroughs Calculating Machines s Over 5,000 parts, with as many as 2000 moving in together at any one time. s Most technologically advanced of it's time s Price comparable to that of a new car. s Options such as non-add, non-print, and individual Class 3 - 1911-1929 clearing keys for each column.
  • 49. Burroughs Calculating Machines
  • 50. Burroughs Calculating Machines s Small, portable - 25 lbs. s Square keys added “wings to the 1920s fingers” s Faster keying 1949
  • 51. Elements in the Framework of Supply Chain Management Business Processes Supply Chain Management Management Supply Chain Components Structure
  • 52. Supply Chain Strategy Product Strategy Manufacturing Logistics Demand Transformation Strategy Management Strategy Strategy Marketing Strategy
  • 53. Supply Chain Strategy EDI EDI JIT Replenishment Signals BTO Signals Orders Supplier Customer Plants Supplier Order Owned Compaq Fulfillment Whses Plants THE CUSTOMER PULLS PRODUCT THROUGH THE SUPPLY CHAIN
  • 54. Logistics Strategy Customer Understanding Performance Emerging Measurement Markets Formalization Intense Information Relationships Technology Flexibility/ Agility
  • 55. Selecting Supply Chains Customer Customer Customer Customer Company Supplier Supplier Supplier •A firm’s supply chain is much more like an uprooted tree than a chain. •Not all supply chains are appropriate for ECR.
  • 56. Elements of Supply Chain Management Procurement Demand Order Management Fulfillment Product Customer Development Service and Management Commercialization Customer Manufacturing Relationship Flow Management Management
  • 57. Customer Relationship Management s Identifying key customer targets s Developing and implementing programs with key customers
  • 58. Customer Service s Single point of contact - one face to the customer s Current information about the order s Production and distribution status s Product information
  • 59. Demand Management s Synchronize flow of products and materials to customer demand s Forecasting s Reduction of variability
  • 60. Order Fulfillment s Timely and accurate delivery s Objective to exceed customer expectations s May happen in many places throughout supply chain
  • 61. Manufacturing Flow Management s Making products that customer wants s Flexible manufacturing
  • 62. Procurement s Managing relationships with strategic suppliers s Not just “bid &buy” s Should not be “order placers” s Support manufacturing flow management and new product development
  • 63. Product Development and Commercialization s Integrate customers and suppliers in development process s Reduce time to market s Incorporate supply chain management considerations into product design
  • 64. Burroughs Computers “Burroughs built splendid machines attracted a loyalty that surpassed even IBM’s….” “What made the Burroughs computers so good was the then-unique idea that the software people, the programmers, needed to participate in designing the computers from the beginning.” In most firms, engineers came first, programmers second. Burroughs went much further than the other firms in bringing programmers in quickly.” Source: Joel Shurkin, (1996). Engines of the Mind, pp. 273-274.
  • 65. Supply Chain Management Components Planning Risk Management Product & & Methods Structure Reward Control Structure Organization Culture Work Structure & Structure Attitude Power Product Information & Flow Flow Leadership Facility Facility Structure Structure Structure
  • 66. Planning & Control s Key to moving organization or supply chain in right direction. s Joint planning s Planning important during all evolutionary phases s Control is best performing metrics.
  • 67. AVERAGE INVENTORY INVESTMENT UNDER CONDITIONS OF UNCERTAINTY A. With variable demand Inve ntory 200 Average cycle inventory 100 Ave ra ge inve nto ry (15 0 ) S afe ty 8 10 20 30 40 s tock (50) Days
  • 68. AVERAGE INVENTORY INVESTMENT UNDER CONDITIONS OF UNCERTAINTY B. With variable lead time Inve ntory 200 Ave rage cycle inve ntory 100 Ave rage inve ntory S afe ty (140) s tock 10 12 20 30 40 Days (40)
  • 69. AVERAGE INVENTORY INVESTMENT UNDER CONDITIONS OF UNCERTAINTY C. With variable demand and lead time Inve ntory 200 Average cycle inventory 100 Average inventory 8 10 12 20 30 40 (200) Safety Days s tock (100)
  • 70. FACTORS INFLUENCING SAFETY STOCKS ❏ Forecast error ❏ Exposure to stockout ❏ Lead time ❏ Service level requirement
  • 71. RELATIONSHIP BETWEEN INVENTORY INVESTMENT AND CUSTOMER SERVICE LEVELS Inventory investment in units 1025 850 780 728 675 75 84.1 90.3 94.5 97.7 99.9 100 S e rvice pe rce ntage
  • 72. Work Structure s How does the firm perform tasks and activities? s What is the best way to apply tactical resources to get work done?
  • 73. Organizational Structure s Is the organization designed to facilitate or hinder supply chain management ? s Cross-functional teams. s Interorganizational teams.
  • 74. Product Flow Facility s Network structure for sourcing, manufacturing, and distribution across the supply chain. s Where should inventory be held? s Rationalization the supply chain.
  • 75. Information Flow Facility Structure s What information is passed through the supply chain? s How is information passed through the supply chain? s Frequency of update. s May be first component integrated across the supply chain.
  • 76. Product Structure s How is new product introduction coordinated across the supply chain? s How does product fit with other other products? s Product complexity
  • 77. Management Methods s Corporate philosophy s Management techniques s Do they enhance or hinder supply chain management? s Level of management involvement in tactical supply chain issues.
  • 78. Power & Leadership Structure s Channel captain s Source of power
  • 79. Risk and Reward Structure s How are risks and rewards shared across supply chain? s How are risks and rewards shared through out the organization? s What are the risks and rewards? s What should suppliers and customers risk?
  • 80. Culture & Attitude s Compatibility of corporate cultures. s How are employees valued? s What are values of the firm?
  • 81. Supply Chain Management as a Strategic Weapon s Finance company s Outsourcing for nearly 100 years
  • 82. Process Focus versus Traditional Functions s Focus of every process is on meeting the customers’ needs. s Traditional functional approach does not focus on meeting the customers’ needs.
  • 83. Customer Perspective Market Share Customer Customer Customer Acquisition Retention Profitability Customer Satisfaction
  • 84. Balanced Scorecard Financial Objectives & Measures Internal Customer Vision & Business Relationships and Strategy Processes Measures Learning & Growth
  • 85. Balanced Scorecard Strategic Framework Clarifying Vision & Strategy Strategic Communicating Balanced Feedback & Scorecard and Learning Linking Planning & Target Setting
  • 86. Product Development & Commercialization s Measuring development cost for new components s Measuring development time for new components s Determining component-level specs s Determining new introduction plans for products s Sharing component-level specs s Determining new product introduction performance objectives s Sharing estimated lifecycles for products s Determining product-level specs s Sharing new product introduction performance objectives s Sharing new introduction plans s Sharing product-level specs s Measuring product quality
  • 87. Virtual Corporations Raw Material/ Manufacturer Logistics Assembly Supplier Services Supplier Supplier Financial Marketing Services Brand Owner Service Supplier Supplier Human Information Resource Distributor Service Service Supplier Supplier
  • 88. TOTAL SUPPLY CHAIN INVENTORY Component Sales TYPICAL STOCK CALENDAR DAYS Suppliers Organization ? 65 50 Customers Manufacturing 30 35 8 Factory Transit Delivery Local delivery 2 Material Finished Warehouse Wholesaler Retailer Stocks Stocks & WIP 190 DAYS SUPPLY
  • 89. Turning Metrics into Money s What measurements should a supply chain manager focus on? s Which performance measurements best translate into bottom-line achievement? s For many managers, the measurements that are used to determine their performance are not really appropriate. s Measurements are often developed for ease of use and not really good gauges of success.
  • 90. Traditional Measurements s Standard costing systems s Management by variances can be the enemy of good supply chain management.
  • 91. Shift… s Shift from treating financial (cost) figures as only foundation for performance to one of a broader set of metrics. s Long-term success is not just based on profitability. Rather it is based on adherence to principles.
  • 92. Where are Metrics Taken? Supplier Inbound Manufacturing Distribution Outbound Ultimate Transport Transport Customer s Might not be good enough to measure within the firm. s Measure entire supply chain.
  • 93. Don’t Measure Easy & Irrelevant s Don’t just measure data that is easy to measure. s What color was that atomic bomb?
  • 94. Redefine Tasks “In knowledge and service work, however, the first questions in increasing productivity - and working smarter - have to be, ‘What is the task? What are we trying to accomplish? Why do it all?’” “The easiest, but perhaps also the greatest, productivity gains in such work will come from defining the task eliminating what does not need to be done.” Source: Peter Drucker, The New Productivity Challenge, Harvard Business Review , November- December 1991, p. 4.
  • 95. It’s Easy to Be Wrong... …even when the data exists
  • 96. Partner With the Front Line s Partner with people doing the work. s Front-line employees often know intuitively when something is wrong. s Don’t just measure them, work with them. s Do workers understand measurement system? Rules-of-thumb?
  • 97. Frequency of Measurement s Frequency of reported information should follow operations cycle. s Flood of data not much better than a drought.
  • 98. Cost Allocations s Don’t allocate to a cost center if that cost center has nothing to do with process. s To value inventory, many firms first allocate cost centers, then using cost center burden rate, allocate to products.
  • 99. Tools s Activity-Based Costing s Economic Value Added s Heuristics “Rules of Thumb” s Measurement “task force”
  • 100. Make Measurements Real “Too often we enjoy the comfort of opinion without the discomfort of thought,”
  • 101. Dashboard
  • 102. Measurement Life Cycle s Measurements generally have a discernible life cycle. s In the 3PL business, price is clearly more important than it was five years ago.
  • 103. Whiz-Kid Failure s Organized, systematic, measurement of the wrong things can lead to the undoing of many years of good, hard work. s “Systems” can be dangerous.
  • 104. Bucket Brigade 1858 Rumsey fire wagon. Supplied with water by bucket brigade. s Information can move quickly inside the walls. s Data flow to “information machine” a bucket brigade. s Web allows move to shared data pipeline.
  • 105. Sir Oracle “I am Sir Oracle, And when I ope my lips let no dog bark!” Gratiano, Shakespeare’s “Merchant of Venice.”
  • 106. Oracle is not a Silver Bullet s Results from ERP implementations mixed. s True information integration is positive. s Supply chain management personnel often lose functionality after ERP implementation. s Drains resource s What will you get from Cornerstone?
  • 107. Planning Systems s For aftermarket parts, planning systems critical. s Can take you down wrong path. s System’s weakest link will drive behavior.
  • 108. Weak Link s Managing information more important than managing inventory. s TRT
  • 109. Enterprise Resource Planning Packages Pros Cons s Links planning, • Lacks functional demand scheduling, and planning & scheduling transactions to financials • Very expensive when s Singular database modifications are needed s Links with customers/ • Implementation can take vendors of similar ERP years Packages: Baan, SAP, Oracle, DAI, American Software, JD Edwards, D&B Software, PeopleSoft, MarCam, Ross Systems, Daly & Wolcott
  • 110. Enterprise Resource Planning Systems s Motivation is from top management s Many logistics managers believe that they have to give up functionality when moving to an ERP s “In-the-box” versus “Out-of-the-box”
  • 111. “In-the-box” versus “Out-of- the-box” Warehouse Mgt Network Design Planning Order Models Order Entry Processing Distribution Performance Planning Inventory Measurement Management Systems Transportation Management Manufacturing Production General Ledger Management Scheduling Systems
  • 112. Process Change s It used to be a firm changed the systems to match current business processes. Today, many ERP installations have moved firms to change business processes to match the new system.
  • 113. Systems Goal s Goal should be supply chain system - not just corporate system. s Like an alcoholic, one step at a time.
  • 114. Data Manipulation Tools s Good supply chain managers do not have to rely on IT to get data analysis completed. s Need to be able to use tools such as: – Excel – Access – Planning tools
  • 115. Accountancy Priesthood s Measurements become a “religion” s Measurements exist to support business - not vice versa
  • 116. When the Priests aren’t Satisfied
  • 117. Measurements will Improve s Better technologies s Measuring the “right” thing as opposed to the “measurable” thing s Measurements have a life cycle s Supply chain integration s Benchmarking
  • 118. Customer Perspective Market Share Customer Customer Customer Acquisition Retention Profitability Customer Satisfaction
  • 119. Balanced Scorecard Financial Objectives & Measures Internal Customer Vision & Business Relationships and Strategy Processes Measures Learning & Growth
  • 120. Balanced Scorecard Strategic Framework Clarifying Vision & Strategy Strategic Communicating Balanced Feedback & Scorecard and Learning Linking Planning & Target Setting
  • 121. Supply Chain Classifications Margin High Low Long Niche Commodity Inventory holding Life Cycle costs are stable Rolex Lumber Products Short X-Mas trees, Bread, Inventory holding Life Cycle Dresses Fashion costs change over Dresses Products product life cycle of product
  • 122. What is the Value of Integration? s Identify Supply Economic Value Added Initiatives Net s Quantify Impact on Operating Capital Profits and/or Profit - Charge Capital After s Quantify Impact on Taxes Value Economic Profit •Economic Value is created when a company deploys its capital to create value in excess of capital costs •Profit > cost of capital
  • 123. Economic Value Added s Change in Economic Profit from year to the next. s Economic profit – NOPAT – capital charge
  • 124. What is EVA? s EVA = Return - cost of capital employed s EVA is the value created by a business over and above the required rate of return on investors’ (Shareholders) capital. s EVA is a business performance measure that gives the total economic view. s EVA is a decision making tool. s EVA links business planning/performance with required shareholder return.
  • 125. EVA Best Explains Changes in Stock Market Value Earnings per share 18% Cash flow 22% Return on Equity 35% EVA 50%
  • 126. Management of the Capital (Assets) Invested in the Business is as Critical as the Management of the Cost. s Capital includes the assets employed in running the business s Working Capital includes Cash, Inventory, Receivables, Payables s Fixed Assets include Land, Buildings, Equipment, Vehicles
  • 127. Logistics EVA s Will generally be negative is considered independently from revenue generation. – No revenue/no profit – Operating expenses – Major capital investment required in fixed assets and lease commitments s Logistics must be part of the business design that creates EVA within the business unit. – Provide the logistics solution – Minimize costs to maximize profits – Minimize asset investment/Maximize asset productivity
  • 128. Logistics Can Be A Major Contributor to EVA Improvement s Cost s Services s Asset Management
  • 129. One Firm’s EVA Implementation Plans s Measure SCM EVA by business format, channel, and function s EVA classes for all salaried and hourly SCM personnel s Incorporate EVA measurement into CAPEX decision models s Begin utilization of EVA for: – Underutilized property decisions – Private fleet decisions – New DC’s s All SCM Field personnel introduced to EVA and learning about their specific EVA drivers
  • 130. Measurements Have To... s Fairly measure both cost and service. s Look past a manager’s span of control. s Incorporate business success measures - not just “strikeouts”
  • 131. Benchmarking
  • 132. Flow Substitutions Information Forecast improvements, Pricing, deals, data sales signaling Inventory Finance Consignment, credit terms, return policy Source: Professor Hau Lee, Stanford University
  • 133. Perfect Quality is Defined by Whom? s When is the order frozen? s Speed of information versus speed of manufacturing s Quality of product includes customer satisfaction
  • 134. Formalization s Group members clearly understand culture and mission s Understand positioning s Rules & procedures give freedom
  • 135. Supply Chain Measurements Area Measurement Type Service Fill rate linear Cost Logistics cost linear Productivity Asset/Utilization Inventory linear Productivity Asset/Utilization Recycling linear Productivity Asset/Utilization Throughput – number of items sold linear Time Response time linear Time Cash-to-cash linear Time Operating expense cost to convert inventory to linear throughput Productivity Asset/Utilization & ROA with 100% customer satisfaction linear Service Service & Time Order aging curve curve Service & Time Line fill rate by time curve Value Economic profit linear
  • 136. What do Customers Want? s High levels of quality. s A high degree of flexibility (to adjust to changes in volume or type of service demanded). s High levels of service. s Low Costs. s Short response times, including time to market for new services. s Little or no variability (deviation from target). from: Richard J. Schonberger & Edward M. Knod, Jr. (1994) SynchroService! Irwin.
  • 137. Service Defections s What is the cost of losing a customer? s What is the cost of a lost sale? s What are defectors telling you? s “Watch the door” s Do you have a “Zero defections culture?”
  • 138. Performance vs. Variety vs. Lower Cost Lower Cost Performance Variety
  • 139. New Model of Service s Value investments in people as much as investments in machines, and sometimes more. s Use technology to support efforts of men and women on front lines - and not just to monitor or replace them. s Make recruitment and training as crucial for salesclerks and housekeepers as for managers and senior executives. s Link compensation to performance for employees at every level, not just for those at the top.
  • 140. Design for …. s DFM - Design for Manufacturability s DFSCM - Design for Supply Chain Management s DFR - Design for Responsiveness s Design for Postponement s DFRL - Design for Reverse Logistics Even s DFS - Design for Service
  • 141. Design for Service s Put customers first. s Expanding IT s Focus on where and systems how customers s Shifted from interact with Manufacturing to company. assembly. s “Value strategy” s Concentrate on s Flattened customers. organization s Selective hiring & liberal training.
  • 142. Design for Responsiveness Stages Activity Transactional Inte ractive Inte rdepende nt Info Sharing Information on Some sharing of process Extensive sharing of component and product informat ion process info at both specs shared strategic and tactical levels Decision Making Design decisions made Some collaboration with Supply chain structures, independently partners to influence component specification, design choices and detailed design developed by consensus and negotiation between partners Performance Performance measures Some use of Extensive use of measures by product development performance measures to performance measures not related to supply track time-to-availability tied to sharing of chain performance and total lifecyc le costs rewards and risks Technology Separate design Some sharing of Extensive use of databases and systems analytical tools and technology to facilitate accounting databases fast decision-making Source: Professor Hau Lee, Stanford University
  • 143. Service Guarantees s Commit to “error-free” service. s Unconditional s Easy to understand and communicate. s Meaningful s Easy to invoke. s Easy to collect.
  • 144. Customer Service Dimensions s Care and concern - employee friendliness, courtesy, and warmth. s Initiative - employees ability and willingness to jockey the system on customer behalf. s Problem solving - figuring out solutions to customer problems whether unusal or routine. s Recovery - going the extra yard.
  • 145. Cost of Lost Customer s Costs 5 times more to replace a customer than retaining one.
  • 146. Service Recovery s Measure the costs of service recovery. s Break the silence. s Anticipate needs for recovery. s Act fast. s Train employees. s Empower the front line. s Close the loop. s Brilliant recoveries.
  • 147. Order Management Cycle Order Planning, Sales Post forecasting, Order Sales Capacity Generation Service planning Cost Returns Estimation and Claims and Pricing Order Billing Receipt and entry Order Order Selection Fulfillment Scheduling and Prioritization
  • 148. Relationships Between Competitors conflict competition coexistence cooperation s These characterizations can be thought of as a continuum that ranges from collusion conflict as the most competitive mode to collusion where there is a total absence of competition.
  • 149. Identifying a service strategy s What attributes of service are - and will continue to be - most important to our target markets? s On which important service attributes is the competition weakest? s What are the existing and potential service capabilities of our company?
  • 150. Defining a service strategy s What are the company’s integral service competencies? What are the critical knowledge and skills that define and drive the firm both philosophically and practically? s What are the company’s service incompetencies? What are the knowledge and skill weaknesses? s What are the company’s resource strengths and weaknesses? Finances, facilities, technologies, human and other resources s What is the company’s service reputation? How do customers, noncustomers, and employees view service performance? s What is the company’s belief system? What is valued in the organization? What is the company’s core culture? s What is the company’s service strategy? What is the “reason for being” today?
  • 151. Service Checklist s Is our service strategy clear & compelling to all of our employees? s Does our service strategy deliver genuine value to customers? s Does our service strategy emphasize excellent service quality? s Do we live our service strategy in this company? s Does our service strategy demand superior achievement? s Does our service strategy differentiate our company from competitors? s Do we reinforce our service strategy with explicit service standards that guide and energize employees? s Do we reinforce our service strategy with appropriate symbols?
  • 152. Push/Pull Boundary Suppliers Manufacturing Distributor Retailer Push/Pull Boundary Postponement is the delay of the point of product differentiation to a point further downstream in the supply chain.
  • 153. Profitable Customers s Up to 70% of a firm’s typical customers are not at all profitable. s At a pharmaceutical distributor, only 30% of customers were profitable. – Top 30% generated 261% of the profits – Top 10% generated 151% of the profits – Remaining 70% lost 161% of top 30 profits Source: Hope & Hope, (1995) Transforming the Bottom Line. Harvard Business School Press
  • 154. Real Costs of Inventory s At other electronics firms, inventory is a serious concern to management because real costs have been growing. s Do we know what real costs of inventory are?
  • 155. Life-Cycle Management s Selecting & implementing supply-chain management strategies appropriate to life-cycle stage.
  • 156. Electronics Product Life Cycle 4 2 4 Development Volume Shipments End of Life
  • 157. Life Cycle Support Chasm
  • 158. Inventory Carrying Costs s consist of expenses such as: – cost of money, – insurance, – taxes, – shrinkage, – warehousing, and – obsolescence.
  • 159. Inventory Driven Carrying Costs Product 100% Salvaged Bargain Basement Discounts 50% Product Product Introduction Obsolescence And Volume Sales 0% Time
  • 160. Product Responsibility Curve Product Responsibility Curve Product Life Cycle End of Responsibility End of Life Birth
  • 161. Elements of Industry Structure Rivalry Determinants Entry Barriers •Switching Costs •Switching Costs New Entrants •Industry Growth •Economies of Scale •Fixed Costs/Value Added •Proprietary product differences •Intermittent Overcapacity •Brand Identity •Product Differences •Capital Requirements •Brand Identity •Access to Distribution •Concentration and Balance •Absolute Cost Advantages •Informational Capacity •Government Policy •Corporate Stakes •Expected Retaliation s Industry •Exit Barriers Competitors Buyers Suppliers s Intensity of Rivalry Determinants of Buyer Power Determinants of Supplier Power •Bargaining Leverage •Switching Costs of Suppliers •Switching Costs •Differentiation of Inputs Determinants of •Buyer Volume •Presence of Substitute Inputs Substitution Threat •Buyer Concentration •Supplier Concentration •Switching Costs •Buyer Information •Importance of Volume to Supplier •Relative Price •Ability to Integrate Backward •Cost Relative to Total Purchases Performance of Subs •Substitute Products •Impact of Inputs on Costs •Buyer Propensity •Price Sensitivity or Differentiation to Sub •Threat of Forward Integration Substitutes
  • 162. Supply Chain Challenges Increasing Information Logistics Product Variety Distortion Complexities (Bullwhip Effect) Geographical Increasing demand Complex global market variability upstream supply chains with preferences, local in supply chain multiple sites, flows, govt regulations borders, modes Diverse customer Beer-game, Complexities in preferences whiplash effect labor management, laws, cultures Short & overlapping What you see is not product life cycles what they see Bullwhip impact worsens with long cycle times Source: Professor Hau Lee, Stanford University
  • 163. Symptoms: Curses & Paralyses Variety Proliferation Information Logistics Distortion Complexity Forecasting Inventory piling up Long lead times nightmare High mfg cost Service degradation High Logistics costs High inventories Wasteful resources Excessive overhead Poor customer Poor capacity service planning High obsolescence Inefficient scheduling & transportation High product support Misinformed market & service costs value Source: Professor Hau Lee, Stanford University
  • 164. LEAP (Leading Edge Advanced Procurement) s Total cost of ownership s Facilitate virtualization s ERS - Evaluated Receipt Settlement - pay in X days after receipt of goods s Life cycle management s Supply chain integration s Eliminate transaction processing s Web-based procurement (Ariba, etc.)
  • 165. Invoice Payment s In Europe, shared services center processes 200,000 invoices/year s Soon to be 350,000 invoices/year
  • 166. Types of Organizational Problems s Technical - routine or possibly expert methods exist. s Adaptive - routine methods do not exist and challenge is to effectively mobilize community to solve the problem. s Hybrid - problem requires a combination of technical and adaptive leadership to be “solved”.
  • 167. Problems s Technical problems are solved well through authority. s Adaptive problems require a change in behavior.
  • 168. Solving Problems Action Technical or Routine Adaptive Direction Define problem Identify adaptive challenge Protection Shield org from threat Let org balance external pressures Orientation Clarify roles to Challenge current respond roles and resist pressure Managing Conflict Restore order Expose conflicts Maintain Norms Maintain norms, Challenge social network unproductive norms; modify social network Source: Dr. Corey Billington, Hewlett-Packard
  • 169. 2,000/200,000 Problem s At Ford, FCSD buyers looking for 2,000 parts with many special requirements while Assembly plants want 200,000 with less hassle to the supplier. s Purchasing job much tougher. s Must emphasize other issues besides cost savings. s Creativity required.
  • 170. Forecasting s Forecasting never works. s Investigate nonlinear methods
  • 171. Computer Business Increasingly Complex & Competitive s Technology s Product – Rapid Innovation – Multiple channel – Differentiated to commodity structures product – Demand distortion – Short product life cycles – Collapse of the middle – 30% reduction per year in resale value s Customer s Supply Chain – Increasingly – Transition from vertically- sophisticated integrated to network structure – Demanding unique configurations – Globalization – Product proliferation – Concentration of suppliers
  • 172. Integration Opportunities s Compress supply chain structure s Collaboration planning forecasting & replenishment s Joint capacity planning s Product development is an integration opportunity
  • 173. Integration Opportunities s Compress Supply Chain s Collaboration, Planning, – Internal postponement Forecasting & Replenishment – External postponement – Collaborative demand planning – Sales agent – Synchronized order fulfillment – Direct & replenishment – Joint capacity planning s Product Development is Integration Opportunity – Supply Chain structural analysis – Design for postponement/manage product variety – Use standard & intergenerational parts & suppliers
  • 174. Demand Planning s Today, distributors build financial plans which drive category and assortment planning, driven by sales history. s Manufacturers build a financial plan based on market demand and / or account projections that drive production planning. s These processes all affect the ability to execute at shelf level, yet the business processes and systems are not integrated. s The lack of integration creates natural disconnects in the supply chain causing excessive response times, costs and inventory.
  • 175. Collaborative Planning, Forecasting, & Replenishment s Process model – How and where forecast collaboration fits into supply chain processes s Front-end agreements – Changes to trading partner agreements to support, define, and measure collaboration. s Data Sharing – Definition of the data elements to be shared to support collaboration s Common Metrics – Definition of measures to ensure achievement of objectives of collaboration: a) reduce supply chain inventories, and b) increase sales and profits. s Rule Sets – Defines how partners will determine which forecasts require collaboration (exception selection)
  • 176. CPFR Critical Metrics s Results-oriented s Process-oriented metrics metrics – Out of stock on store – Order forecast shelf accuracy – Inventory turns – Order fill rates to each consolidated across inventory holding value chain location – Total value-chain cycle – Cycle time for each time process activity – Sales forecast – Process cost accuracy – Profitability – Return on assets
  • 177. Collaborative Planning, Forecasting, & Replenishment s Method to improve alignment of supply and demand. Supply-Demand Mismatch Supply-Demand Alignment •Short product life •Shared forecasting & cycles demand •Product shortages •Synchronized order •Independent planning fulfillment & execution decisions •Joint capacity planning s Supply-Demand alignment can significantly impact bottom-line.
  • 178. Collaborative Planning, Forecasting, & Replenishment s In Stanford University study, collaborative planning is estimated to reduce each segment of the PC industry inventory investment 10 to 25 percent and increase EVA from $135 to $330M. s Turns improve 33% Source: Andersen & Stanford CDDN Study, 1997.
  • 179. Collaborative Planning s Forecasting, order fulfillment and capacity planning are opportunity areas within Collaborative Planning that partners are using to improve supply chain performance. Forecasting Synchronized Joint Order Capacity Fulfillment Planning
  • 180. Collaborative Planning Stages Activity Transactional Interactive Interdependent Info Sharing Minimal info shared for Some sharing of demand Extensive sharing of demand forecasting info (e.g., historical demand and promotional sales, forecast info assumptions) Decision Making Demand forecast Some collaboration with Demand forecast developed independent partners to influence developed by consensus of partners demand forecast and negotiation among partners Performance No performance Some use of Extensive use of measures measures used performance measures to performance measures track forecast accuracy linked to shared risks and rewards among partners Technology Limited use of Some use of EDI to Extensive use of technology share/transmit demand technology including info EDI, web, demand planning tools Source: Professor Hau Lee, Stanford University
  • 181. Collaborative Planning, Forecasting, & Replenishment s Improves alignment of supply & demand s Moves firm from transactional to interdependent activities s Positive bottom-line impact s Large value creation resulting from synchronization and fewer assets
  • 182. Integration Issues s Some passive interfaces, but very little true integration. s Where there are points of integration, these points often allow no reaction time to correct divergent paths to the extent of satisfying consumer demand.
  • 183. Integrate Business Processes s Jointly managed business processes must be defined. – Leverage the competencies, systems and resources of each trading partner – Facilitate collaboration on planning , forecasting, and replenishment s Standards for the sharing of information (data formats) must be defined to facilitate the collaboration process. s Methods of integrating results of collaboration into operational systems of both the distributors and suppliers must be developed. s Key performance measures for joint, co-managed supply chain activities must be defined and agreed upon.
  • 184. Supply Chain Operations s Traditional aggregate forecasting & replenishment s Vendor-Managed Inventory (VMI) s Jointly-Managed Inventory (JMI)
  • 185. Aggregate Forecasting & Replenishment s Data aggregated to product family or brand level, by week or month, by region s Data inaccuracy hidden by aggregation process s Conventional DRP or push-based planning
  • 186. Inventory Management Methods Bus Aggregate Vendor Managed Jointly Managed Plan Forecasting Inventory Inventory Assemble Syndicated data & POS, whse POS data by Data historical sales withdrawl data,, product, store & syndicated data week Sales SF at high level of Product,Cus DC, by Store level by week Forecst detail week by product Order Focus on mfg Focus on retailer Time-phased forecast support within firm DC by invenotry & replenishment of cost targets stores & all DC’s Order Retailer assumes Pull from store Either party based Gen 100% fulfillment replenishment or on store level sales consumer dmd that are time phased Order Available at Priority to VMI From DC or mfg Fulfillment supplier DC customer from depnding on supplier DC’s integration plan Source: CPFR Draft, 1/98
  • 187. Compressed Supply Chain s May change which firm or organization within the firm own sales and customer relationships s May change which firm or organization within the firm own order fulfillment and final configuration s Reduces inventory investment s Increases value by providing a clearer signal of customer demand s Greater flexibility through delayed product differentiation s Utilizes postponement
  • 188. Internal Postponement s Internal postponement reduces inventory investment by delaying product differentiation and final configuration from traditional manufacturing site to internal distribution centers s Delays customization of finished goods and installation of the most expensive and fastest-depreciating components s Delayed customization allows supply chain to accommodate more demand variability with less inventory s Raw increases & FGI decreases resulting in overall reduction in inventory
  • 189. Design Principles s Process Design Principles – Keep the view of entire supply chain in mind...extend to the process’ customer’s customer; supplier’s supplier... s Question everything. – Why is this process done at all? – Why is it done here? – Why is it done by that person? – Why is it done in this sequence? – Adding value or adding cost? – Is the customer willing to pay for it?
  • 190. Product Development s Opportunity to integrate supply chain s Improves procurement s Firms that design products with supply chain performance issues in mind can improve time to availability
  • 191. Order Fulfillment Stages Activity Transactional Interactive Interdependent Info Sharing Limited to basic order Some sharing of Extensive sharing of info inventory availability inventory, shipment and and shipment info sell-through info Decision Making Independent order Some negotiation of Synchronized ordering decisions – “Phantom order decisions among decisions driven by Demand” partners shared replenishment policies, channel inventory data and POS data (VMI/JMI) Performance Limited performance Some shared Extensive use of measures measures performance measures performance measures like lead times, on-time tied to shared risks and delivery, and inventory rewards availability Technology Limited use of Some use of technology Extensive use of technology to track orders and technology to allow real- material flow time tracking or orders and material and automatic replenishment Source: Professor Hau Lee, Stanford University
  • 192. Capacity Planning Stages Activity Transactional Interactive Interdependent Info Sharing Limited capacity info Some sharing of Extensive sharing of capacity info for capacity info including materials, ability to flex up or manufacturing, and down logistics resources Decision Making Independent of partners Some shared decision- Extensive use of shared and reactive short-term making about material capacity decisions commitments contracts, manufacturing characterized by flexible and logistics resources; contracts, outsourcing, may include outsourcing and contingency planning Performance Limited to internal Some measures related Extensive use of measures partners to reliability and quality performance measures tied to sharing of rewards and risks Technology Limited to internal Some use of technology Use of transaction and partners to share info like EDI decision support systems that provide support for capacity planning Source: Professor Hau Lee, Stanford University
  • 193. Ten Dimensions of Service Quality Tangibles: Appearance of physical facilities, equipment, personnel, and communication materials. Reliability: Ability to perform the promised service dependably and accurately. Responsiveness: Willingness to help customers and provide prompt service Competence: Possession of the required skills and knowledge to perform the service. Courtesy: Politeness, respect, consideration, and friendliness of contact personnel. Credibility: Trustworthiness, believability, honesty of the service provider. Security: Freedom from danger, risk, or conflict. Access: Approachability and ease of contact. Communication: Keeping customers informed in language they can understand and also listening to them. Understanding the Customer: Making the effort to know customers and their needs. From: Zeithaml, Parasuraman, and Berry. (1990). Delivering Quality Service. New York: The Free Press
  • 194. Predictions - 1994 s Information technology critical s Look for niches s Convergence s Outsourcing will increase s Focus Speed - Time-Based Competition s Prerequisite Service Quality s Global Challenge
  • 195. How has the Business changed since 1994? s More sophisticated s Systems much bigger issue s Getting into businesses that would not have 5 years ago s International demands s Customers want more better, faster, cheaper s Customers say they want to be more integrated s Value-added services growing
  • 196. New Value-Added Services s Offerings that used to be value-added services are now considered to be a normal part of everyday business. s New value-added services such as inventory financing
  • 197. Add Services that Enhance Core Businesses and Increase Capabilities q Understand Mission - Articulate Service Philosophy q Set Multiple and Measurable Objectives q Assist Customer in Understanding Possibilities q Concentrate on Winners q Benchmark
  • 198. Long-Term Competitive Edge s With rare exception, products cannot be the source of long-term competitive edge. s Superior products can usually provide only a temporary advantage s Service-based strategies are more permanent
  • 199. Market Share vs. Customer Share TOTAL 9% 13% 50% 28% " Often price-based ☺ Built on relationship with customers " Rarely establishes loyalty ☺ Allows a more tailored " Easy to defect solution ☺ Increases switching costs
  • 200. Understand Profits q Know how profitable each customer is q Know how profitable all your services are
  • 201. Differentiate Customers, Not Just Services q Make sure all levels of firm “know” your customers. q Determine which customers are more valuable than others. q Make sure you know the value of retaining each customer.
  • 202. Share of Customer q Identify potential customers – Basic services – Value added services q Link customers’ identities to their transactions with you q Learn about your customers’ businesses with competitors q Collaborate with customers
  • 203. Partnerships s Some firms believe that they are involved in real partnerships. s To customers, partnershipping does not imply equality. s Honest disclosure of costs s Co-manage productivity s Profit sharing s Incentives
  • 204. Satisfying Customers s Different customers buy different kinds of value. You can’t hope to be the best in all dimensions, so you choose your customers and narrow your value focus. s Customers are no longer “one size fits all.” s Customers define customer service s Many firms have difficulty communicating with their customers. Customers have a tendency to forget about extra services and assume that those duties are part of normal service levels.
  • 205. Satisfying Customers s Customers select third party logistics firms based on customer service, knowledge, management strength, systems, location and price. While most customers stress issues other than price, reasonable cost is always expected. s As value standards rise, so do customer expectations. You can stay ahead only by moving ahead. s Producing an unmatched level of a particular kind of value requires a superior operating model - a “machine”- dedicated to just that kind of value.
  • 206. Third Party Value Chain Logistics Solutions s Third Party's value chain solutions fall into three major categories – logistics programs, – facility-based services and – transportation management and operation s all supported by flexible information systems that provide functionality and allow integration across functions and companies.
  • 207. 1994 Selection Factors Factor Mean Std Dev Service quality 6.44 0.98 Reliability 6.41 0.97 On time performance 6.32 0.98 Good communication 6.02 1.16 Customer support 5.93 1.18 Speed of service 5.90 1.04 Flexibility 5.87 1.17 Management quality 5.83 1.14 Willingness to customize service 5.67 1.17 Order cycle time 5.66 1.31 Price 5.65 1.20 Easy to work with 5.54 1.25 Location 5.52 1.30 Cost reduction 5.43 1.34 Vendor reputation 5.40 1.28 Special expertise 5.33 1.33 Systems capabilities 5.09 1.36 Personal relationships 5.02 1.47 Technical competence 4.96 1.43 Variety of available services 4.81 1.40 Early notification of disruptions 4.58 1.77 Decreased labor problems 4.56 1.64 Decreased asset commitment 4.55 1.49 Increased competition 4.36 1.51 Global capabilities 3.00 1.75
  • 208. 1999 Selection Factors Scale of 1 to 7 Factor Mean Factor Mean Service quality 6.36 Special expertise 5.37 Reliability 6.29 Vendor reputation 5.34 On time performance 6.20 Easy to work with 5.33 Price 5.98 Systems capabilities 5.30 Flexibility 5.81 Technical competence 5.15 Cost reduction 5.80 Personal relationships 4.92 Management quality 5.78 Variety of services 4.86 Speed of service 5.73 Early notification disruptions4.64 Order cycle time 5.68 Decreased assets 4.61 Good communication 5.67 Decreased labor problems 4.58 Customer support 5.62 Increased competition 4.32 Location 5.61 Global capabilities 3.08 Customize service 5.53
  • 209. International demands s 3rd parties have to prepare to serve international markets. s Many customers want to move to fewer providers
  • 210. Flexibility s 3rd parties cannot easily define themselves much anymore. They have to be flexible, quick, and nimble.
  • 211. Special Qualities of Services $ Intangilibility $ Inseparability $ Heterogeneity $ Perishability
  • 212. Intangibility of Services Marketing Problems Marketing Strategies q Cannot be stored q Stress tangible cues. q Cannot be protected q Use personal sources more than non-personal through patents sources. q Cannot be readily q Simulate or stimulate displayed or word-of-mouth communicated communications. q Prices are difficult to q Create strong organizational image. set q Use cost accounting to help set prices. q Engage in postpurchase communications. From: Zeithaml, Parasuraman, Berry. Problems and Strategies in Services Marketing. Journal of Marketing, (Spring 1985)
  • 213. Inseparability of Services Marketing Problems Marketing Strategies q Customer involved in q Emphasize selection and production. training of public contact. q Other customers q Manage customers. involved in production. q Use multisite locations q Centralized mass production of services difficult. From: Zeithaml, Parasuraman, Berry. Problems and Strategies in Services Marketing. Journal of Marketing, (Spring 1985)
  • 214. Heterogeneity of Services Marketing Problems Marketing Strategies q Standardization and q Industrialize service quality control difficult to (standardizing certain achieve. common services). q Customize service. From: Zeithaml, Parasuraman, Berry. Problems and Strategies in Services Marketing. Journal of Marketing, (Spring 1985)
  • 215. Perishability of Services Marketing Problems Marketing Strategies q Services cannot be q Use strategies to cope inventoried. with fluctuating demand. q Make simultaneous adjustments in demand capacity to achieve closer match between the two. From: Zeithaml, Parasuraman, Berry. Problems and Strategies in Services Marketing. Journal of Marketing, (Spring 1985)
  • 216. Relationships Between Competitors conflict competition coexistence cooperation s These characterizations can be thought of as a collusion continuum that ranges from conflict as the most competitive mode to collusion where there is a total absence of competition.
  • 217. Service Mapping s Visualize the interaction of the customer and the service system from the point of view of the customer. s Insure that all aspects of the service system add value to the customer’s experience of the service which the company intends to deliver. s Identify the points at which the service system might break down, or otherwise fail to produce the intended value for customers.
  • 218. Service Map Format Activities which can be directly perceived by customers, including customer interaction Line of visibility Activities which are invisible to customers
  • 219. Service Process Fail Points s Process does not add value to customers. s Customer involvement does not support service concept. s Inadequate integration between customer involvement and the service system. s Operations infrastructure is poorly defined.
  • 220. Does Not Add Value s No clear vision of level of service s Vision not accepted totally within the organization s Not every activity designed with objective of service speed in mind
  • 221. Customer Involvement Does Not Support Service Concept s Interaction with customer is “cluttered” s Too many steps for customer s Too complex
  • 222. Inadequate Integration Between Customer Involvement and the Service System s Poor communication linkages between first line customer service providers and the rest of the organization. s Potential customer needs not anticipated and integrated into the service system
  • 223. Operations Infrastructure Is Poorly Defined s Systems and procedures overly complicated. s System designed according to criteria which have little to do with meeting customer needs.
  • 224. Service-Profit Chain Audit s How do we define loyal customers? s Do measurements of customer profitability include profits from referrals? s What proportion of business development expenditures are directed to the retention of existing customers? s Why do our customers defect? s Are customer satisfaction data gathered in an objective, consistent, and periodic fashion? s Where are the listening posts for obtaining customer feedback in your organization?
  • 225. Service-Profit Chain Audit s How is information concerning customer satisfaction used to solve customer problems? s How do you measure service value? s How is information concerning customers’ perceptions of value shared with those responsible for designing a product or service? s To what extent are measures taken of differences between customers’ perceptions of quality delivered and their expectations before delivery?
  • 226. Service-Profit Chain Audit s Do the organization’s efforts to improve external service quality emphasize effective recovery from service errors in addition to providing a service right the first time? s How do you create employee loyalty? s Have we made an effort to determine the right level of employee retention? s Is employee satisfaction linked to customer satisfaction with enough frequency to establish trends for management use?
  • 227. Service-Profit Chain Audit s To what extent are measures of customer satisfaction, customer loyalty, or the quality and quantity of service output used in recognizing and rewarding employees? s Do employees know who their customers are?
  • 228. Leadership Audit s To what extent is the firm’s leadership” – energetic, creative vs. stately conservative? – participatory, caring vs. removed, elitist? – listening, coaching, and teaching vs. supervising and managing? – motivated by mission vs. motivated by fear? – leading by means of personally demonstrated values vs. institutionalized policies? s How much time is spent by the organization’s leadership personally developing and maintaining a corporate culture centered around service to customers and fellow employees?
  • 229. Service Laws s First Law of Service Satisfaction = Perception - Expectations s Second law of Service It’s Hard to Play Catch-Up Ball
  • 230. Waiting “Waiting is frustrating, demoralizing, agonizing, time consuming, and incredibly expensive.” Federal Express Commercial
  • 231. Principles of Waiting s Unoccupied time feels longer than occupied time. s Pre-process waits feel longer than in- process waits. s Anxiety makes waits seem longer. s Uncertain waits are longer than known, finite waits. s Unexplained waits are longer than explained Fwaits. s Unfair waits are longer than equitable waits. s The more valuable the service, the longer I will wait. s Solo waiting feels longer than group waiting.
  • 232. Service Defections s What is the cost of losing a customer? s What is the cost of a lost sale? s What are defectors telling you? s “Watch the door” s Do you have a “Zero defections culture?”
  • 233. Loyalty s Loyalty integral to to firm’s basic business strategy. s Economic benefits. s Select the “right” customers. s Demand management s Who can you deliver “superior value” to? s Customers build trust with employees - not executives
  • 234. Loyalty Measures s Understand cause-and-effect relationships between loyalty and profits. s Retention rate s Share of purchases s Repeat purchases s Referrals s Customer acquisition costs s Customer service employee retention
  • 235. New Model of Service s Value investments in people as much as investments in machines, and sometimes more. s Use technology to support efforts of men and women on front lines - and not just to monitor or replace them. s Make recruitment and training as crucial for salesclerks and housekeepers as for managers and senior executives. s Link compensation to performance for employees at every level, not just for those at the top.
  • 236. Identifying a service strategy s What attributes of service are - and will continue to be - most important to our target markets? s On which important service attributes is the competition weakest? s What are the existing and potential service capabilities of our company?
  • 237. Defining a service strategy s What are the company’s integral service competencies? What are the critical knowledge and skills that define and drive the firm both philosophically and practically? s What are the company’s service incompetencies? What are the knowledge and skill weaknesses? s What are the company’s resource strengths and weaknesses? Finances, facilities, technologies, human and other resources s What is the company’s service reputation? How do customers, noncustomers, and employees view service performance? s What is the company’s belief system? What is valued in the organization? What is the company’s core culture? s What is the company’s service strategy? What is the “reason for being” today?
  • 238. Service Checklist s Is our service strategy clear & compelling to all of our employees? s Does our service strategy deliver genuine value to customers? s Does our service strategy emphasize excellent service quality? s Do we live our service strategy in this company? s Does our service strategy demand superior achievement? s Does our service strategy differentiate our company from competitors? s Do we reinforce our service strategy with explicit service standards that guide and energize employees? s Do we reinforce our service strategy with appropriate symbols?
  • 239. Principles of Great Service s Reliability s Tangibles s Responsiveness s Assurance s Empathy
  • 240. Add Services that Enhance Core Businesses and Increase Capabilities q Understand Mission - Articulate Service Philosophy q Set Multiple and Measurable Objectives q Assist Customer in Understanding Possibilities q Concentrate on Winners q Benchmark
  • 241. Vantage Points Competition View Finance Finance View View Complete Complete Customer Customer Customer Customer View View Order Order Fulfillment Fulfillment Operations Operations View View Partner Partner View View Company Confidential 5
  • 242. Dell Computer 5 s 14 days of inventory throughout the system. For monitors, they are moving from 18 days of inventory in 1996 to five days of inventory. s Dell does not pay anyone for 45 days but they demand instant payment from customers. s Dell managed to save 25% of transportation costs after moving to UPS monitor ship program. s Dell has a single focus on keeping inventories lean. Everyone is focused on the same indices which measure how lean they run their inventories. s Dell’s build cycle is two days on most systems s Selling $4,000,000 via the internet
  • 243. Value Migration The Collapse of the Middle The Age of Manufacturing : In the age of Value manufacturing, the traditional sales force was the dominant go-to-market mechanism. Low-cost Traditional High-End Distribution Sales Force Solutions The Age of Distribution : In the age of distribution, Value value has shifted to low- cost distribution and high- end solutions. Low-cost Traditional High-End Distribution Sales Force Solutions
  • 244. s Generally, don’t get it right first time. s Able to shift resources quickly. s Manage to revenue/employee.
  • 245. NIKE s 60-90 day product life cycles. s 9-13 month product development cycles. s Customer Management - Sell “one less” than market wants s Completely outsourced (almost) s Niketown s Nike outlet stores
  • 246. COMPETITION s Who do you perceive as competition? s Who is eroding your market share? s What customer needs are being addressed by these other players in your space? s Do they have any “customer facing” app’s? s How easily can they change their value add? How easily can your company?
  • 247. Branding Services s Develop service brands s Sunkist & Kodak Colorwatch System
  • 248. Pricing s Understand value of services. s Market-based pricing vs. cost-based pricing vs. activity-based pricing s What value are you adding to customer? What should they pay for? What is the competition doing?
  • 249. Standardize Services s For operational ease and effectiveness, standardize services as much as possible. s Goes against Unisys way. s May be naïve. s Make sure all personnel understand how services are manufactured and delivered.
  • 250. Preserve the Core/Stimulate Progress Stimulate Progress Preserve the core
  • 251. STRATEGIC PROFIT MODEL SALES NET SALES (The DuPont Model) GROSS MARGIN $ NET PROFIT $ – $ COST OF NET PROFIT GOODS SOLD MARGIN – / $ % TOTAL NET SALES EXPENSES net profit RETURN ON FINANCIAL RETURN ON ( net sales ) $ NET WORTH LEVERAGE ASSETS $ = X % TIMES INVENTORY NET SALES ( net profit net worth ) ( total assets net worth ) CURRENT $ $ ASSETS ASSET TURNOVER + $ ACCOUNTS / RECEIVABLE TOTAL ASSETS + net sales $ ( total assets ) FIXED $ ASSETS + OTHER CURRENT $ ASSETS $
  • 252. Selected Financial Data for Manufacturers, Wholesalers, and Retailers for 1997 ($ Millions) Net Profits as a Total Inventory Inventories as a Companies Sales Net Profits Percent of Sales Assets Investment Percent of Assets Manufacturers Abbott Laboratories 11,883 2,094 18% 12,061 1,280 11% Borden 1,488 221 15% 2,206 302 14% Clorox 2,741 298 11% 3,030 212 7% Dresser Industries 7,458 318 4% 5,099 972 19% Ford Motor 153,627 6,920 5% 279,097 5,468 2% General Electric 90,840 8,203 9% 304,012 5,895 2% General Mills 6,033 422 7% 3,861 389 10% Goodyear Tire & Rubber 13,065 559 4% 9,917 1,835 19% Harris Corp. 3,939 133 3% 3,784 604 16% Honeywell 8,028 471 6% 6,411 1,028 16% NCR 6,598 7 0.11% 5,293 489 9% Newell 3,234 290 9% 3,944 625 16% Pfizer 12,188 2,213 18% 15,336 1,773 12% Sara Lee 20,011 (523) -3% 10,989 2,882 26% Xerox 18,166 1,452 8% 27,732 2,792 10% Wholesalers and Retailers Baxter International 6,138 300 5% 8,707 1,208 14% Bergen Brunswig 11,661 82 1% 2,707 1,309 48% Dayton Hudson 27,757 751 3% 14,191 3,251 23% Fleming Companies 15,372 25 0.16% 3,924 1,019 26% Kmart 32,183 249 1% 13,558 6,367 47% Nordstrom 4,852 186 4% 2,865 826 29% Sears, Roebuck 41,296 1,188 3% 38,700 5,044 13% Super Value Stores 17,201 231 1% 4,093 1,116 27% Wal-Mart Stores 117,958 3,526 3% 45,384 16,497 36% Winn-Dixie 13,219 204 2% 2,921 1,249 43%
  • 253. NORMATIVE MODEL OF INVENTORY CARRYING COST METHODOLOGY Capital Inventory Investment Costs Inventory Insurance Service Costs Taxes INVENTORY Plant Warehouses CARRYING COSTS Storage Public Warehouses Space Costs Rented Warehouses Company Owned Warehouses Obsolescence Inventory Damage Risk Costs Pilferage Relocation Costs
  • 254. SUMMARY OF DATA COLLECTION PROCEDURE Step No Cost Category Source Explanation Amount (Current Study) 1. Cost of Money Comptroller This represents the cost of having money invested 30% pretax in inventory and the return should be comparable to other investment opportunities. 2. Average 1. Standard cost data -- comptroller's Only want variable costs since fixed costs go on $7,800,000 valued at variable cost monthly department regardless of the amount of product manufactured delivered to the D.C. (Variable inventory valued 2. Freight rates and product specs are and stored -- follow steps outlined in body of report. manufactured cost equaled 70% of at variable costs from distribution reports full manufactured cost. Variable delivered to the 3. Average monthly inventory in cases cost FOB the DC averaged 78% of distribution from printout received from sales full manufactured cost) center forecasting 3. Taxes The comptroller's department Personal property taxes paid on inventory $90,948 which equals 1.1667% 4. Insurance The comptroller's department Insurance rate/$100 of inventory (at variable costs) $4,524 which equals 0.058% 5. Recurring Distribution operations This represents the portion of warehousing costs $226,654 annually which equals storage (public that are related to the volume of inventory stored. 2.893% warehouse) 6. Variable storage Transportation services Only those costs that are variable with the amount Nil (plant of inventory stored should be included. warehouses) 7. Obsolescence Distribution department reports Cost of holding product inventory beyond its useful 0.800% of inventory life 8. Shrinkage Distribution department reports Requires managerial judgment to determine the portion attributable to inventory storage. $100,308 which equals 1.286% 9. Damage Distribution department reports Requires managerial judgment to determine the portion attributable to inventory storage. 10. Relocation costs Not available Only relocation costs incurred to avoid Not available obsolescence should be included. 11. Total carrying Calculate the numbers generated in steps 36.203% costs 3, 4, 5, 6, 8, 9 and 10 as a percentage of average inventory valued at variable cost delivered to the distribution center and add them to the cost of money (step 1).
  • 255. ABC COMPANY A) Calculate the inventory carrying cost percentage for the ABC Company given the following information: – finished goods inventory is $28 million valued at full manufactured cost; – based on the inventory plan, the weighted average variable manufactured cost per case is 65 percent of the full manufactured cost; – the variable transportation cost incurred to move the inventory from plants to warehouse locations close to customers was $1,500,000; – the variable cost of moving the inventory into these warehouse locations was calculated to be $300,000; – the company was currently experiencing capital rationing and new investments were required to earn 15 percent after taxes; – personal property taxes paid on inventory were approximately $200,000; – insurance coverage to protect against loss of inventory was $100,000; – storage charges at public warehouses totalled $500,000; – variable storage in plant warehouses was considered to be negligible; – obsolescence was $100,000; – shrinkage was $100,000; – damage related to inventory storage was $50,000; – transportation costs associated with the relocation of field inventory to avoid obsolescence was $50,000; and, – the marginal tax rate is 40%. B) Would it be a good decision to spend $720,000 per year in increased production set- up costs and premium transportation costs in order to achieve an inventory reduction of 10%?
  • 256. THE IMPACT OF INVENTORY TURNS ON INVENTORY CARRYING COSTS Inventory Average Carrying Cost Carrying Cost Turns Inventory at 40 Percent Savings 1 $750,000 $300,000 - 2 375,000 150,000 $150,000 3 250,000 100,000 50,000 4 187,500 75,000 25,000 5 150,000 60,000 15,000 6 125,000 50,000 10,000 7 107,143 42,857 7,143 8 93,750 37,500 5,357 9 83,333 33,333 4,167 10 75,000 30,000 3,333 11 68,182 27,273 2,727 12 62,500 25,000 2,273 13 57,692 23,077 1,923 14 53,571 21,428 1,649 15 50,000 20,000 1,428
  • 257. RELATIONSHIP BETWEEN INVENTORY TURNS AND INVENTORY CARRYING COSTS Inventory carrying costs $300,000 $275,000 $250,000 $225,000 $200,000 $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $37,500 $25,000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Inventory Turns
  • 258. ANNUAL INVENTORY CARRYING COSTS COMPARED TO INVENTORY TURNS Holding Costs (per unit) $30.00 Variable Manufacturing Cost $100 Carrying Cost % 30% Annual Cost to Carry in Inventory $30 Monthly Cost (1/12) $2.50 15.00 12.50 10.00 7.50 6.00 5.00 3.75 2.50 0 1 2 3 4 5 6 7 8 9 10 11 12 Inventory Turnovers
  • 259. COST TRADEOFFS REQUIRED IN MARKETING AND LOGISTICS Marketing Product Price Promotion Place Customer Service Levels Inventory Transportation Logistics Carrying Costs Costs Lot Quantity Warehousing Costs Costs Order Processing and information Costs Marketing Objective: Allocate resources to the marketing mix in such a manner as to maximize the long-term profitability of the firm. Logistics Objective: Minimize Total Costs given the customer service objective where total costs = Transportation Costs + Warehousing Costs + Order Processing and Information Costs + Lot Quantity Costs + Inventory Carrying Costs
  • 260. COST TRADEOFFS REQUIRED IN MARKETING AND LOGISTICS Marketing Product Price Promotion Place Customer Service Levels Inventory Transportation Logistics Carrying Costs Costs Lot Quantity Warehousing Costs Costs Order Processing and information Costs Marketing Objective: Allocate resources to the marketing mix in such a manner as to maximize the long-term profitability of the firm. Logistics Objective: Minimize Total Costs given the customer service objective where total costs = Transportation Costs + Warehousing Costs + Order Processing and Information Costs + Lot Quantity Costs + Inventory Carrying Costs
  • 261. TRADITIONAL SUPPLY CHAIN FLOWS Demand flow Manufacturer Distributor Retailer Supplier Product flow ECR, Masters

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