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OPER3208-001 Supply Chain Management Fall 2006 Instructor: Prof. Setzler
<ul><li>Taylor, Chapter 2 </li></ul>
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Supply chain </li></ul></ul><...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>Facilities </li...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>SCs extend from...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>SCs extend from...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>Inventories </l...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Three Kinds of Inventory (Figure 2.2) </li></ul>Finished Goods Work-in-P...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links  </li></ul><ul><ul><li>Storage facilities </li></ul...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links  </li></ul><ul><ul><li>Lanes </li></ul></ul><ul><ul...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links  </li></ul><ul><ul><li>Each mode of transportation ...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links  </li></ul><ul><ul><li>Limited geographical region ...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links  </li></ul><ul><ul><li>Transportation lanes contain...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links  </li></ul><ul><ul><li>Package carriers (e.g., UPS ...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Essential goal of SCM </l...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Great insight </li></ul><...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Demand flows up SC   </l...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Most flows are discrete, ...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>The exchange of demand, s...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Orders trigger shipments ...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Example, </li></ul></ul><...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Make-to-stock strategy </...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Cash flow is the flow tha...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Information also moves ac...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Great insight </li></ul><...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>2 basic patterns of S...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Some plants ship to o...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Distribution network ...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Distribution network ...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Procurement network <...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Procurement network <...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Procurement network <...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Important considerati...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>There are 2 root causes...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Complexity begins with ...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Shipments </li></ul></u...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Another source of compl...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Customer side of transa...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Supplier side of transa...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Complexity is also crea...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>The structure of the ch...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul><...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul><...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul><...
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul><...
Chapter 2: The Rules of the Game (Taylor)
Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Scale makes complexity ...
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Transcript of "OPER3208-001 Supply Chain Management"

  1. 1. OPER3208-001 Supply Chain Management Fall 2006 Instructor: Prof. Setzler
  2. 2. <ul><li>Taylor, Chapter 2 </li></ul>
  3. 3. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Supply chain </li></ul></ul><ul><ul><ul><li>A set of facilities connected by transportation lanes </li></ul></ul></ul><ul><ul><ul><li>Illustrated through flow charts </li></ul></ul></ul>
  4. 4. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>Facilities </li></ul></ul><ul><ul><ul><li>Symbol: Rounded rectangles </li></ul></ul></ul><ul><ul><ul><li>Fall into 2 categories </li></ul></ul></ul><ul><ul><ul><ul><li>Production facilities </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Storage facilities </li></ul></ul></ul></ul><ul><ul><li>Transportation lanes </li></ul></ul><ul><ul><ul><li>Symbol: Arrows </li></ul></ul></ul><ul><ul><ul><li>Categories by mode of transportation </li></ul></ul></ul><ul><ul><ul><ul><li>Roadways, railways, waterways, sea lanes, air lanes, and pipelines </li></ul></ul></ul></ul>
  5. 5. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>SCs extend from the extractor of raw materials (i.e., mines, farms, etc.) to the consumer of finished goods </li></ul></ul><ul><ul><li>From Tree to Book (Figure 2.1) </li></ul></ul>You Bookstore Bindery Print Shop Paper Mill Timer Company Consumer Extractor Book Pages Paper Wood
  6. 6. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>SCs extend from the extractor of raw materials (i.e., mines, farms, etc.) to the consumer of finished goods </li></ul></ul>
  7. 7. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links – Flow Charts </li></ul><ul><ul><li>Inventories </li></ul></ul><ul><ul><ul><li>3 different forms </li></ul></ul></ul><ul><ul><ul><ul><li>Raw materials inventory </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Materials ready for use in production </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Work-in-process (WIP) inventory </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>All materials being worked on </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Finished goods inventory </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Holds completed products ready for shipment </li></ul></ul></ul></ul></ul>
  8. 8. Chapter 2: The Rules of the Game (Taylor)
  9. 9. Chapter 2: The Rules of the Game (Taylor) <ul><li>Three Kinds of Inventory (Figure 2.2) </li></ul>Finished Goods Work-in-Process Raw Materials
  10. 10. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Storage facilities </li></ul></ul><ul><ul><ul><li>Warehouses </li></ul></ul></ul><ul><ul><ul><ul><li>Usually contain only a single kind of inventory </li></ul></ul></ul></ul><ul><ul><ul><li>Distribution centers </li></ul></ul></ul><ul><ul><ul><ul><li>Do final assembly </li></ul></ul></ul></ul><ul><ul><ul><ul><li>3 types of inventories </li></ul></ul></ul></ul><ul><ul><ul><li>Cross docks </li></ul></ul></ul><ul><ul><ul><ul><li>used only to transfer goods between trucks </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Do not maintain any inventory </li></ul></ul></ul></ul>
  11. 11. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Lanes </li></ul></ul><ul><ul><ul><li>Used to move inventory between facilities along a mode of transportation </li></ul></ul></ul><ul><ul><ul><li>Combination of vehicles and containers </li></ul></ul></ul><ul><ul><ul><ul><li>Truck tractors and railway engines </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Can be decoupled from containers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Delivery vans and tanker ships </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Container built in </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Decoupling is important </li></ul></ul></ul><ul><ul><ul><ul><li>Offers more flexibility in routing, dispatching, temporary storage, and other activities </li></ul></ul></ul></ul><ul><ul><ul><li>Pipeline </li></ul></ul></ul><ul><ul><ul><ul><li>Vehicle and container are merged with the lane itself </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Pipes contain the inventory in transit </li></ul></ul></ul></ul>
  12. 12. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Each mode of transportation offers a unique mix of speed, cost, availability, and capability </li></ul></ul><ul><ul><li>Example, </li></ul></ul><ul><ul><ul><li>Air is fast, expensive, available in large cities, but limited to small, lightweight packages </li></ul></ul></ul><ul><ul><ul><li>Sea is slow, cheap, available at cities with ports, and unlimited size and weight standards </li></ul></ul></ul><ul><ul><ul><li>Volume tradeoffs </li></ul></ul></ul><ul><ul><ul><ul><li>Trucking </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cheaper to send full truckload (FTL) shipments than less-than-full truckloads (LTL) shipments </li></ul></ul></ul></ul></ul>
  13. 13. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Limited geographical region </li></ul></ul><ul><ul><ul><li>Usually uses a single mode from point A to point B </li></ul></ul></ul><ul><ul><li>Large geographical regions </li></ul></ul><ul><ul><ul><li>Shipments might use 2 or more modes </li></ul></ul></ul><ul><ul><ul><li>Inter-modal transportation </li></ul></ul></ul><ul><ul><ul><li>Example </li></ul></ul></ul><ul><ul><ul><ul><li>Shipment might travel rail to seaport  by ship across ocean  finish journey by truck </li></ul></ul></ul></ul>
  14. 14. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Transportation lanes contain inventory </li></ul></ul><ul><ul><ul><li>In-transit inventory </li></ul></ul></ul><ul><ul><ul><ul><li>4 th type of inventory </li></ul></ul></ul></ul><ul><ul><ul><li>Different from other inventories </li></ul></ul></ul><ul><ul><ul><ul><li>Unavailable for use </li></ul></ul></ul></ul><ul><ul><ul><ul><li>At high risk (theft or accident) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Subject to delays </li></ul></ul></ul></ul>
  15. 15. Chapter 2: The Rules of the Game (Taylor)
  16. 16. Chapter 2: The Rules of the Game (Taylor) <ul><li>Facilities and Links </li></ul><ul><ul><li>Package carriers (e.g., UPS and FedEx) </li></ul></ul><ul><ul><ul><li>Viewed as another mode of transportation </li></ul></ul></ul><ul><ul><ul><li>They use a combination of air and highway transport </li></ul></ul></ul><ul><ul><ul><ul><li>Have their own fleet of planes and trucks </li></ul></ul></ul></ul><ul><ul><ul><li>They are fast, relatively expensive, available in most locations, but limited to small, lightweight packages </li></ul></ul></ul>
  17. 17. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Essential goal of SCM </li></ul></ul><ul><ul><ul><li>Achieve an orderly flow of goods from beginning (extractor) to end (customer) </li></ul></ul></ul><ul><ul><ul><li>Transportation management + materials management = logistics </li></ul></ul></ul><ul><ul><ul><li>Logistics </li></ul></ul></ul><ul><ul><ul><ul><li>Manages the flow of materials from suppliers through 3 internal inventories to customer </li></ul></ul></ul></ul><ul><ul><ul><li>Supply Chain Management </li></ul></ul></ul><ul><ul><ul><ul><li>Logistics + manages the flow of demand + the flow of cash up the chain </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Demand  movement </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Cash  motivation </li></ul></ul></ul></ul></ul>
  18. 18. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Great insight </li></ul></ul><ul><ul><ul><li>The key to managing the flow of goods effectively lies in synchronizing all three flows </li></ul></ul></ul><ul><ul><ul><ul><li>Flow of Demand </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Flow of materials </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Flow of Cash </li></ul></ul></ul></ul>
  19. 19. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Demand flows up SC  </li></ul></ul><ul><ul><ul><li>Orders </li></ul></ul></ul><ul><ul><li>Products flow down SC  </li></ul></ul><ul><ul><ul><li>Shipments </li></ul></ul></ul><ul><ul><li>Cash flows up SC to pay for products  </li></ul></ul><ul><ul><ul><li>Payments </li></ul></ul></ul>
  20. 20. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Most flows are discrete, not continuous </li></ul></ul><ul><ul><ul><li>Exception: products flowing through a pipeline </li></ul></ul></ul><ul><ul><ul><li>Discrete: distinct “packets” that convey particular quantities at particular times </li></ul></ul></ul><ul><ul><ul><li>SCM is concerned with finding the best tradeoffs between size and frequency of “packets” </li></ul></ul></ul><ul><ul><ul><ul><li>Economies of scale favor large, infrequent orders </li></ul></ul></ul></ul><ul><ul><ul><ul><li>To reduce inventory costs it may be better to have small, frequent shipments </li></ul></ul></ul></ul><ul><ul><ul><li>The smaller the packets, the more closely the SC operates as a continuous flow </li></ul></ul></ul>
  21. 21. Chapter 2: The Rules of the Game (Taylor)
  22. 22. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>The exchange of demand, shipments (supply) and cash takes place between customers and suppliers </li></ul></ul><ul><ul><ul><li>Customers and suppliers can be any where within the SC </li></ul></ul></ul><ul><ul><ul><li>Some textbooks: </li></ul></ul></ul><ul><ul><ul><ul><li>Only use “customer” to refer to ultimate end user </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Only use “supplier” to refer to initial supplier of raw materials or components </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Within the SC they use buyer and seller </li></ul></ul></ul></ul>
  23. 23. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Orders trigger shipments </li></ul></ul><ul><ul><ul><li>Depending on production strategy, they may or may not trigger immediate production </li></ul></ul></ul><ul><ul><ul><li>Make-to-stock strategy </li></ul></ul></ul><ul><ul><ul><ul><li>Supplier makes product prior to demand and holds them in finished goods inventory </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Demand is satisfied by this inventory </li></ul></ul></ul></ul><ul><ul><ul><li>Make-to-order strategy </li></ul></ul></ul><ul><ul><ul><ul><li>Supplier doesn’t build (make) a product until it has a firm order </li></ul></ul></ul></ul><ul><ul><ul><li>Assemble-to-order strategy </li></ul></ul></ul><ul><ul><ul><ul><li>Intermediate strategy </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Product is partially built in advance of demand, but final assembly is postponed until an order is received </li></ul></ul></ul></ul>
  24. 24. Chapter 2: The Rules of the Game (Taylor)
  25. 25. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Example, </li></ul></ul><ul><ul><ul><li>Make-to-stock strategy </li></ul></ul></ul><ul><ul><ul><ul><li>Sony </li></ul></ul></ul></ul><ul><ul><ul><li>Make-to-order strategy </li></ul></ul></ul><ul><ul><ul><ul><li>Boeing </li></ul></ul></ul></ul><ul><ul><ul><li>Assemble-to-order strategy </li></ul></ul></ul><ul><ul><ul><ul><li>Dell </li></ul></ul></ul></ul>
  26. 26. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Make-to-stock strategy </li></ul></ul><ul><ul><ul><li>Inventory is “pushed” down the SC </li></ul></ul></ul><ul><ul><ul><li>Relies on demand forecasting to determine </li></ul></ul></ul><ul><ul><ul><ul><li>How much inventory to produce </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Where to hold the inventory </li></ul></ul></ul></ul><ul><ul><li>Make-to-order strategy </li></ul></ul><ul><ul><ul><li>Inventory is “pulled” down the SC </li></ul></ul></ul><ul><ul><ul><li>Forecasting less important, however long-term forecasts are important for setting levels of manufacturing capacity </li></ul></ul></ul><ul><ul><li>SCs are often referred to as either push chains or pull chains </li></ul></ul><ul><ul><ul><li>All chains are a combination of push and pull </li></ul></ul></ul><ul><ul><ul><ul><li>Customers pull </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Extractors push </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Somewhere between is the push-pull boundary </li></ul></ul></ul></ul>
  27. 27. Chapter 2: The Rules of the Game (Taylor)
  28. 28. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Cash flow is the flow that receives the least attention </li></ul></ul><ul><ul><ul><li>Cash is the driver for the SC </li></ul></ul></ul><ul><ul><ul><li>Cash flow performance is the worst of the three flows </li></ul></ul></ul><ul><ul><ul><li>Accelerating the flow of cash is coming to be recognized as a key element of SC excellence </li></ul></ul></ul>
  29. 29. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Information also moves across the chain </li></ul></ul><ul><ul><ul><li>Information is included in the three flows </li></ul></ul></ul><ul><ul><ul><li>Other information includes: </li></ul></ul></ul><ul><ul><ul><ul><li>Demand forecasts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Production plans </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Promotion announcements </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Reports of all kinds </li></ul></ul></ul></ul><ul><ul><li>Unlike the three flows, information can move across the chain at any time </li></ul></ul><ul><ul><ul><li>Information doesn’t have to be connected with a specific transaction </li></ul></ul></ul><ul><ul><ul><li>Information can move up or down the chain </li></ul></ul></ul><ul><ul><ul><ul><li>It can be broadcast to any subset of the chain </li></ul></ul></ul></ul>
  30. 30. Chapter 2: The Rules of the Game (Taylor) <ul><li>Demand, Supply, and Cash </li></ul><ul><ul><li>Great insight </li></ul></ul><ul><ul><ul><li>Information can often be substituted for inventory </li></ul></ul></ul><ul><ul><ul><li>Uncertainty can be reduced by sharing information </li></ul></ul></ul><ul><ul><ul><ul><li>Information sharing can allow members of the chain to reduce safety stock (buffer) because uncertainty can be reduced </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sharing information helps members anticipate coming changes in flows of demand, supply, and cash </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Information usually much cheaper than inventory </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Key Technique for improving SC performance: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Substitute information for inventory </li></ul></ul></ul></ul></ul>
  31. 31. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>2 basic patterns of SC </li></ul></ul><ul><ul><ul><li>From the perspective of a single plant </li></ul></ul></ul><ul><ul><ul><ul><li>All facilities downstream is a destination for its products </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Forms part of the plant’s distribution network </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>All facilities upstream is a source of supplies </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Forms part of the plant’s procurement network </li></ul></ul></ul></ul></ul>
  32. 32. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Some plants ship to only 1 destination, but that is rare </li></ul></ul><ul><ul><li>Most plants ship to many destinations </li></ul></ul><ul><ul><li>These destinations may ship goods to still more destinations, and so on </li></ul></ul><ul><ul><li>The layers of the supply chain are commonly referred to as echelons </li></ul></ul><ul><ul><ul><li>Echelons are numbered outward from the plant </li></ul></ul></ul>
  33. 33. Chapter 2: The Rules of the Game (Taylor)
  34. 34. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Distribution network </li></ul></ul><ul><ul><ul><li>Moving finished goods from plant to consumer in cost-effective, demand satisfying, manner </li></ul></ul></ul><ul><ul><ul><li>Traditionally, if a single distribution manager </li></ul></ul></ul><ul><ul><ul><ul><li>Shipments were not allowed to skip echelons </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Each destination received shipments from only one facility in the echelon above it </li></ul></ul></ul></ul><ul><ul><ul><ul><li>This strategy simplifies management, but don’t produce most cost-effective solutions </li></ul></ul></ul></ul><ul><ul><ul><li>As more sophisticated tools become available, constraints on distribution patterns are being relaxed </li></ul></ul></ul>
  35. 35. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Distribution network </li></ul></ul><ul><ul><ul><li>As number of destination increases, so does the difficulty of managing distribution </li></ul></ul></ul><ul><ul><ul><ul><li>With more facilities, inventory has to be divided up into smaller amounts </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Increase risk of not having the right amount at any one facility </li></ul></ul></ul></ul></ul><ul><ul><ul><li>As number of echelons increases, the time and expense of handling goods increases </li></ul></ul></ul><ul><ul><ul><ul><li>Transportation costs go down with more echelons (larger, cheap shipments) </li></ul></ul></ul></ul><ul><ul><li>Key tradeoff in distribution design: </li></ul></ul><ul><ul><ul><li>Finding the right balance between the number of facilities and the number of echelons </li></ul></ul></ul>
  36. 36. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Procurement network </li></ul></ul><ul><ul><ul><li>It is possible for a plant to receive all its suppliers from 1 supplier, this is rare </li></ul></ul></ul><ul><ul><ul><li>A plant usually receives supplies from multiple sources </li></ul></ul></ul><ul><ul><ul><li>These suppliers also receive supplies from multiple sources, and so on, up to the point where raw materials are obtained from an extractor </li></ul></ul></ul><ul><ul><ul><li>The layers are called tiers </li></ul></ul></ul><ul><ul><ul><li>Like echelons, tiers are numbered outward from the plant </li></ul></ul></ul>
  37. 37. Chapter 2: The Rules of the Game (Taylor)
  38. 38. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Procurement network </li></ul></ul><ul><ul><ul><li>Procurement </li></ul></ul></ul><ul><ul><ul><ul><li>The movement of raw materials and subassemblies from suppliers to the plant in a timely, cost-effective manner </li></ul></ul></ul></ul><ul><ul><ul><li>Procurement networks tend to be less orderly than distribution networks </li></ul></ul></ul><ul><ul><ul><ul><li>Overlapping sources are the rule rather than the exception </li></ul></ul></ul></ul>
  39. 39. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Procurement network </li></ul></ul><ul><ul><ul><li>Like distribution, procurement becomes more difficult to manage as the number of sources increases </li></ul></ul></ul><ul><ul><ul><li>Successful procurement </li></ul></ul></ul><ul><ul><ul><ul><li>Having everything arrive as close to the production date as possible without paying extra </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Laws of chance </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The more suppliers involved, the more likely that at least one will miss its deliver date and force the delay of production </li></ul></ul></ul></ul></ul><ul><ul><ul><li>The cost of placing orders and making payments goes up with the number of suppliers, as well as the cost of managing additional relationships </li></ul></ul></ul><ul><ul><ul><li>Adding tiers increases time and expense </li></ul></ul></ul>
  40. 40. Chapter 2: The Rules of the Game (Taylor) <ul><li>Distribution and Procurement </li></ul><ul><ul><li>Important consideration in analyzing SCs </li></ul></ul><ul><ul><ul><li>Identifying ownership boundaries </li></ul></ul></ul><ul><ul><ul><li>Sequence of facilities owned by the same company </li></ul></ul></ul><ul><ul><ul><ul><li>Internal supply chain </li></ul></ul></ul></ul><ul><ul><ul><li>Links outside of the ownership boundary </li></ul></ul></ul><ul><ul><ul><ul><li>External supply chain </li></ul></ul></ul></ul><ul><ul><ul><li>Vertical integration </li></ul></ul></ul><ul><ul><ul><ul><li>A single company owns as much of the supply chain a it can </li></ul></ul></ul></ul>
  41. 41. Chapter 2: The Rules of the Game (Taylor)
  42. 42. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>There are 2 root causes to the difficulty of managing SCs </li></ul></ul><ul><ul><ul><li>Complexity </li></ul></ul></ul><ul><ul><ul><li>Variability </li></ul></ul></ul>
  43. 43. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Complexity begins with the way the 3 flows relate to each other </li></ul></ul><ul><ul><li>In practice, the relationship of orders to shipment and payment becomes problematic </li></ul></ul><ul><ul><ul><li>Procurement </li></ul></ul></ul><ul><ul><ul><ul><li>A single production run could generate orders to many different suppliers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>These orders could be combined with orders for other production runs </li></ul></ul></ul></ul>
  44. 44. Chapter 2: The Rules of the Game (Taylor)
  45. 45. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Shipments </li></ul></ul><ul><ul><ul><li>Fulfilling these orders may combine orders to reduce the cost of transportation </li></ul></ul></ul><ul><ul><ul><ul><li>Large orders may be split across more than 1 shipment </li></ul></ul></ul></ul><ul><ul><ul><li>Invoices often cover multiple shipments </li></ul></ul></ul><ul><ul><ul><li>Payments may cover multiple invoices </li></ul></ul></ul><ul><ul><ul><li>Etc. </li></ul></ul></ul>
  46. 46. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Another source of complexity is the way that each company manages there SC and the 3 basic flows </li></ul></ul><ul><ul><li>Many groups handle different flows </li></ul></ul><ul><ul><li>No one group is responsible for the outcome of the entire transactions </li></ul></ul>
  47. 47. Chapter 2: The Rules of the Game (Taylor)
  48. 48. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Customer side of transactions </li></ul></ul><ul><ul><ul><li>Orders might be placed by a centralized purchasing department </li></ul></ul></ul><ul><ul><ul><li>Shipments received by many assembly plants </li></ul></ul></ul><ul><ul><ul><li>Payments made by regional accounting departments </li></ul></ul></ul>
  49. 49. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Supplier side of transactions </li></ul></ul><ul><ul><ul><li>Orders might be satellite sales offices </li></ul></ul></ul><ul><ul><ul><li>Shipments received from regional distribution centers </li></ul></ul></ul><ul><ul><ul><li>Payments received by accounting office of a parent firm </li></ul></ul></ul>
  50. 50. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Complexity is also created by the proliferation of documents associated with orders </li></ul></ul><ul><ul><ul><li>Shipment documents </li></ul></ul></ul><ul><ul><ul><ul><li>Packing slips, bills of lading, advance shipping notices, etc </li></ul></ul></ul></ul><ul><ul><ul><li>Billing and payment cycles generates another trail of paper </li></ul></ul></ul><ul><ul><ul><li>These are just the documents the flow between companies, the number of documents within each company can be larger </li></ul></ul></ul>
  51. 51. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>The structure of the chain itself is another source of complexity </li></ul></ul><ul><ul><ul><li>Most chains are rarely designed </li></ul></ul></ul><ul><ul><ul><li>Chains evolve over time </li></ul></ul></ul>
  52. 52. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul></ul><ul><ul><ul><li>No matter how well managed, all business activities exhibit natural variability in </li></ul></ul></ul><ul><ul><ul><ul><li>Duration </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Quality </li></ul></ul></ul></ul><ul><ul><ul><ul><li>And other attributes </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Daily sales, delivery times, production yields, defect rates, maintenance times, etc </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>All vary around some average value </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The more variability, the more difficult and expensive it is to run the chain </li></ul></ul></ul></ul></ul>
  53. 53. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul></ul><ul><ul><ul><li>Inventories in finished goods can act as a buffer against variability in demand </li></ul></ul></ul><ul><ul><ul><li>Raw material inventories offer some protection against variability in supply </li></ul></ul></ul><ul><ul><ul><li>Redundant sources can also provide protection against variation in availability of materials and services </li></ul></ul></ul><ul><ul><ul><ul><li>Alternate suppliers and transportation options </li></ul></ul></ul></ul>
  54. 54. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul></ul><ul><ul><ul><li>There are a number of ways to try and reduce variability at a cost </li></ul></ul></ul><ul><ul><ul><ul><li>Quality assurance </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Reduce variability in product quality </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Forecasting </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Tries to predict variability in demand </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>etc </li></ul></ul></ul></ul>
  55. 55. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Variability </li></ul></ul><ul><ul><ul><li>SCs are very vulnerable to variability </li></ul></ul></ul><ul><ul><ul><ul><li>A small delay in an upstream process can cascade down the entire SC throwing off production schedules and disrupting deliveries </li></ul></ul></ul></ul><ul><ul><ul><li>Variability in demand can amplify back up the chain </li></ul></ul></ul><ul><ul><ul><ul><li>Classic example of demand amplification </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Study conducted by Proctor&Gamble in early 1990s </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Fluctuation in demand for raw materials </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Sales of diapers showed only minor, random variations </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>These small variations where being amplified up the chain </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>P&G called it the bullwhip effect </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Demand amplification continues to be a problem in many chains </li></ul></ul></ul></ul></ul>
  56. 56. Chapter 2: The Rules of the Game (Taylor)
  57. 57. Chapter 2: The Rules of the Game (Taylor) <ul><li>Complexity and Variability </li></ul><ul><ul><li>Scale makes complexity and variability worse </li></ul></ul><ul><ul><li>Negatively impacting efficiency and effectiveness </li></ul></ul><ul><ul><li>As the number of contributors to a finished product increases, the likelihood of errors and delays inevitably increase, and the resulting disruptions become increasingly severe </li></ul></ul><ul><ul><li>SCs aren’t going to get smaller, but complexity and variability can be reduced </li></ul></ul>
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