Supply Chain Management, VTU, Module 1


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Supply Chain Management, VTU, Module 1

  1. 1. Supply Chain Management Module 1 By Prof. Raghavendran Venugopal
  2. 2. What is a Supply Chain? Prof. Raghavendran Venugopal, MBA Dept,2 Mijar
  3. 3. What is a supply chain?  A supply chain consists of all the parties involved, directly or indirectly, in fulfilling a customer request.  Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requirements. Prof. Raghavendran Venugopal, MBA Dept,3 Mijar
  4. 4. Supply Chain Supplier Manufacturer Distributor Retailer Customers Prof. Raghavendran Venugopal, MBA Dept,4 Mijar
  5. 5. The definition implies……  First, supply chain management takes into consideration every facility that has impact on cost and plays a role in making the product conform to customer requirements.  From supplier and manufacturing facilities through warehouses and distribution centers to retailers and stores.  In supply chain analysis, it is necessary to account for the suppliers’ suppliers and the customers’ customers because they have an impact on supply chain performance. Prof. Raghavendran Venugopal, MBA Dept,5 Mijar
  6. 6. The definition implies……  Second, the objective of the supply chain management is to be efficient and cost-effective across the entire system.  Total system-wide costs, from transportation and distribution to inventories of raw materials, work in process, and finished goods are to be minimized. Prof. Raghavendran Venugopal, MBA Dept,6 Mijar
  7. 7. The definition implies……  Thus the emphasis is not on simply minimizing transportation cost or reducing inventories, but rather, on taking a systems approach to supply chain management.  Finally, because supply chain management revolves around efficient integration of suppliers, manufacturers, warehouses and stores, it encompasses the firm’s activities at many levels, from strategic to the tactical and finally to the operational level Prof. Raghavendran Venugopal, MBA Dept,7 Mijar
  8. 8. Then there are other terms for SCM  Logistics Management  Value Chain management  Demand Chain management Prof. Raghavendran Venugopal, MBA Dept,8 Mijar
  9. 9. Typical Supply Chain Involves  Typical SC involves variety of stages and they are:  Customers  Retailers  Wholesalers  Manufacturers  Raw material/OE manufacturers or Suppliers Prof. Raghavendran Venugopal, MBA Dept,9 Mijar
  10. 10. A Supply Chain Example… Keethi Stores Nilgiris RK Canteen Big B GOA Coke Hotel Sagar End customer Heritage . HUL KAR HP Retail Kellogs Navami DELHI P&G WB Tier 1 suppliers State Local stores distributors Super market chains Prof. Raghavendran Venugopal, MBA Dept,10 Mijar
  11. 11. Supply Chain Management Supply Chain Management is the design and management of processes across organizational boundaries with the goal of matching supply and demand in the most cost effective way. Supply Demand Prof. Raghavendran Venugopal, MBA Dept, Mission impossible: Matching Supply and Demand11 Mijar
  12. 12. What makes Supply Chain Management Difficult?  Supply Chain strategies cannot be determined in isolation. They are directly affected by another chain that most organizations have, the development chain that includes the set of activities associated with new product introduction.  At the same time, supply chain strategies also should be aligned with specific goals of the organization, such as maximizing market share or increasing profit.  It is challenging to design and operate a supply chain so that total system-wide costs are Prof. Raghavendran Venugopal, MBA Dept,12 Mijar minimized, and system-wide service levels are
  13. 13. What makes Supply Chain Management Difficult?  Indeed, it is frequently difficult to operate a single facility so that costs are minimized and service level is maintained.  The difficulty increases exponentially when an entire system is being considered. The process of finding the system-wide strategy is known as global optimization.  Uncertainty and risk are inherent in every supply chain,  Customer demand can never be forecast exactly, travel times will never be certain, and13 machines and vehicles will breakdown. Prof. Raghavendran Venugopal, MBA Dept, Mijar
  14. 14. What makes Supply Chain Management Difficult?  Recent industry trends like outsourcing, off- shoring, and lean manufacturing that focus on reducing supply chain costs, significantly increase the level of risk in the supply chain.  Thus, supply chain needs to be designed and managed to eliminate as much uncertainty and risk as possible as well as deal effectively with the uncertainty and the risk that remain. Prof. Raghavendran Venugopal, MBA Dept,14 Mijar
  15. 15. The Development Chain  The development chain is the set of activities and processes associated with new product information Prof. Raghavendran Venugopal, MBA Dept,15 Mijar
  16. 16. The Development Chain  Specifically, the development chain includes decisions such as: o product architecure o Make and buy decisions o Supplier selection o Early supplier involvement o Strategic partnerships Prof. Raghavendran Venugopal, MBA Dept,16 Mijar
  17. 17. Enterprise development and supply chains Product Architecture Plan/Design Make/Buy Early Supplier development Strategic Partnerships Source Supplier Selection Supply Contracts Supply Produce Distribute Sell Supply Prof. Raghavendran Venugopal, MBA Dept, Chain17 Mijar
  18. 18. Global Optimization – Factors that make it a challenging proposition 1. The supply chain is a complex network of facilities dispersed over a large geography and in many cases all over the globe. 2. Different facilities in the supply chain frequently have different, conflicting objectives Prof. Raghavendran Venugopal, MBA Dept,18 Mijar
  19. 19. Global Optimization – Factors that make it a challenging proposition  The supply chain is a dynamic system that evolves over time. Customer demand characteristic changes over time, supplier capabilities change over time  Even the supply chain relationships change over time.  Customer power increases with increased demands for quality, variety and customization Prof. Raghavendran Venugopal, MBA Dept,19 Mijar
  20. 20. Global Optimization – Factors that make it a challenging proposition  System variations over time – even when demand is certain (purchase agreements etc.) the planning process needs to account for demand and cost parameters varying over time due to impact of seasonal fluctuations, trends, advertising and promotions, competitor’s pricing strategies and so forth. These variations make it difficult to develop the most effective supply chain system. Prof. Raghavendran Venugopal, MBA Dept,20 Mijar
  21. 21. Managing Uncertainty and Risk  Matching supply and demand is a major challenge  Inventory and back-order levels fluctuate considerably across the supply chain  Forecasting does not solve the problem  Demand is not the only source of uncertainty – delivery lead times, manufacturing yields, transportation times and component availability also can have significant impact on supply chain Prof. Raghavendran Venugopal, MBA Dept,21 Mijar
  22. 22. Key issues in Supply Chain management  Distribution Network  Product design Configuration  Information Technology and decision support  Supply Contracts systems  Distribution strategies  Customer value  Supply chain  Smart Pricing integration and  Local Issues strategic partnering  Inventory control  Outsourcing and Off-  Production sourcing shoring strategies Prof. Raghavendran Venugopal, MBA Dept,22 Mijar
  23. 23. The Objective of the Supply Chain  The objective of the supply chain should be to maximize the overall value generated.  The value a supply chain generates is the difference between what the final product is worth to the customer and the costs the supply chain incurs in filling the customer’s request.  For most commercial supply chains, value will be strongly correlated with supply chain profitability (also known as supply chain surplus)  Supply chain profitability or surplus is the total profit that is shared across all supply chain stages or intermediaries. Prof. Raghavendran Venugopal, MBA Dept,23  The higher the supply chain profitability, the more Mijar
  24. 24. The importance of supply chain decisions  There is a close connection between the design and management of supply chain flows (product, information and funds) and the success of a supply chain.  Also failure can also be attributed to the failure is supply chain design.  Many Indian retail outlets have busted or have truncated their business because of inefficiencies that were existing in their supply chain design which led to a negative supply chain surplus.  Wal-Mart, Dell Computer are few examples of companies that have built their success on superior design, planning and operation of the supply chain. Prof. Raghavendran Venugopal, MBA Dept,24 Mijar
  25. 25. Decision Phases in a Supply Chain  Successful Supply Chain management requires many decisions relating the flow of information, product and funds.  Supply chain design or strategy  During this phase, given the marketing and pricing plans for a product a company decides how to structure the supply over the next several years. Prof. Raghavendran Venugopal, MBA Dept,25 Mijar
  26. 26. Decision Phases in a Supply Chain  Supply chain planning  For decisions made during this phase, the time frame considered is quarter to a year. This configuration establishes constraints within which the planning must be done.  The goal of planning is to maximize the supply chain surplus that can be generated given the constraints established during the during the strategic phase or the design phase.  Companies start the planning phase with a forecast for the coming year (or comparable time frame.) of demand in different markets.  Planning includes making decisions regarding which markets will be supplied by which locations, whether subcontracting will be employed or which type inventory Prof. Raghavendran Venugopal, MBA Dept,26 Mijar policy will be adopted etc
  27. 27. Decision Phases in a Supply Chain  Supply chain planning  In the planning phase the companies must include uncertainty in demand, exchange rates, and competition over this time horizon in their decisions.  Given a shorter time frame and better forecasts than the design phase, companies in the planning phase try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimize operations. Prof. Raghavendran Venugopal, MBA Dept,27 Mijar
  28. 28. Decision Phases in a Supply Chain  Supply Chain Operations  The time horizon here is weekly or daily, and during this phase companies make decisions regarding individual customer orders.  At the operational level, supply chain configuration is considered fixed and planning policies are already defined.  The goal of supply chain operations is to handle incoming customer orders in the best possible manner  During this phase, firms allocate inventory or productions to individual orders, set a date than an28 order is to be filled. Prof. Raghavendran Venugopal, MBA Dept, Mijar
  29. 29. Decision Phases in a Supply Chain  Supply Chain Operations  Generate pick up lists at a warehouse, allocates an order to a particular shipping mode and shipment, set delivery schedules of trucks, and place replenishment orders.  Because operational decisions are being made in the short term (minutes, hours or days), there is less uncertainty about demand information  Given the constraints established by the configuration and planning policies the goal during the operation phase is to exploit the reduction of uncertainty and optimize performance. Prof. Raghavendran Venugopal, MBA Dept,29 Mijar
  30. 30. Process of Views of Supply Chain  Cycle View: The processes in the supply chain are divided into a series of cycles each performed at the interface between two successive stages of the supply chain.  Push/Pull view: The processes in the supply chain are divided into two categories depending on whether they are executed in response to a customer order or in anticipation of the customer order. Prof. Raghavendran Venugopal, MBA Dept,30 Mijar
  31. 31. Process of Views of Supply Chain  Pull processes are initiated by a customer order. Whereas push processes are initiated and performed in the anticipation of customer orders. Prof. Raghavendran Venugopal, MBA Dept,31 Mijar
  32. 32. Cycle View of a Supply Chain  The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages. Prof. Raghavendran Venugopal, MBA Dept,32 Mijar
  33. 33. Cycle View of Supply Chain Processes  Customer order cycle Customer order cycle  Replenishment cycle Replenishment Cycle  Manufacturing cycle Manufacturing  Procurement Cycle Cycle Procurement Cycle Prof. Raghavendran Venugopal, MBA Dept,33 Mijar
  34. 34. Push/Pull View  The processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order or in anticipation of customer orders.  Pull processes are initiated on customer order, whereas push processes are initiated and performed in anticipation of customer orders. Prof. Raghavendran Venugopal, MBA Dept,34 Mijar
  35. 35. Push/Pull Processes Customer order Customer cycle Pull Processes Retailer Replenishment and Manufacturing Cycle Manufacturer Push Processes Procurement Cycle Prof. Raghavendran Venugopal, MBA Dept,35 Mijar
  36. 36. Process View of Supply Chain  Each cycle occurs at the interface between two successive stages of the supply chain  Which means that there are four supply chain process between five stages.  Not every supply chain will have all the four cycles clearly separated Prof. Raghavendran Venugopal, MBA Dept,36 Mijar
  37. 37. Process View of Supply Chain Customer Customer order cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle Manufacturer Procurement Cycle Prof. Raghavendran Venugopal, MBA Dept, Supplier37 Mijar
  38. 38. Sub-Process in each Supply Chain Process Cycle  Within each cycle, the goal of the buyer is to ensure product availability and to achieve economies of scale in ordering.  Even though each cycle has the same basic sub- processes, there are few differences between cycles.  In the customer order cycle, demand is external to the supply chain and thus uncertain  In all other cycles order placement is uncertain but can be projected based on policies followed by the particular chain stage.  The difference across cycles relate to the scale of an order. Prof. Raghavendran Venugopal, MBA Dept,38  Mijar For example, in the procurement cycle, a tire supplier to an automotive manufacturer is known.
  39. 39. Sub-Process in each Supply Chain Process Cycle  The cycle view clearly specifies the roles of each member of the supply chain.  The detailed process description of a supply chain in the cycle view forces a supply chain designer to consider the infrastructure required to support these processes Prof. Raghavendran Venugopal, MBA Dept,39 Mijar
  40. 40. Sub-Process in each Supply Chain Process Cycle  Each cycle consists of six sub-processes Supplier Stage markets Buyer returns reverse flows to products supplier or third party Buyer Stage Buyer Stage places order Receives Supply Supplier Stage receives order Supplier Stage supplies order Prof. Raghavendran Venugopal, MBA Dept,40 Mijar
  41. 41. Supply Chain Macro Process in a firm  Two process views can be viewed into three macro process and they are:  Customer Relationship Management (CRM)  Internal SCM (ISCM)  Supplier Relationship Management (SRM) • Source, Negotiate, Buy/Make SRM • Design, Supplier Collaboration • Strategic , Demand & Supply Planning ISCM • Fulfillment, Field Service • Market, Price, Sell CRM • Call Center & Order Management Prof. Raghavendran Venugopal, MBA Dept,41 Mijar
  42. 42. Supply Chain Performance Achieving Strategic Fit and Scope
  43. 43. Competitive & SC Strategies  A company’s competitive strategy defines relative to its competitors, the set of customer needs that it seeks to satisfy through its products and services.  Targets one or more customer segments and provides products and services to satisfy the customer’s needs. New Product Sales & Operations Distribution Service Development Marketing Finance, Accounting, Information Technology, Human Resources Value Prof. Raghavendran Venugopal, MBA Dept, Chain for a typical organization43 Mijar
  44. 44. Competitive Strategy  For Example:  Big Bazaar competitive strategy is to provide its customers goods at the lowest possible price (vis-à- vis competitors).  Acer’s competitive strategy is to provide value for money to its customers with an effective and well- accessible after sales service. Prof. Raghavendran Venugopal, MBA Dept,44 Mijar
  45. 45.  All functions play important role and each must develop its own strategy.  Product Development Strategy  Marketing and sales Strategy  Logistics/ Supply chain strategy. Prof. Raghavendran Venugopal, MBA Dept,45 Mijar
  46. 46. Competitive Advantages by SCM Company utilization of all resources Competitors Customers utilization of all Needs & Wants resources Prof. Raghavendran Venugopal, MBA Dept,46 Mijar
  47. 47. Competitive Advantages by SCM  Companies shall have productive advantages or Value advantages. Major companies shall have both.  Productivity Advantage. Cost per unit Summative volume  Value Advantages Service Leader (C) Cost & Service Leader (D) Product Market (A) Cost Leader (B) Prof. Raghavendran Venugopal, MBA Dept,47 Mijar
  48. 48. Supply chain strategies Technology Integration Strategy SC Demand stream Collaboration Strategy Frame Strategy work Customer Service Strategy Prof. Raghavendran Venugopal, MBA Dept,48 Mijar
  49. 49. Collaboration strategy:  Opportunities among business partners.  Three types of business collaborations.  Manufacturer or Supplier Collaborations  Manufacturer or Customer Collaborations  3PL’s & 4PL’s providers Customer Service Strategy:  Directly proportional to the service rendered by the organizations.  Customer Segmentation  Returns managing  Cost to serve Technology integration strategy Demand Stream Strategy Prof. Raghavendran Venugopal, MBA Dept,49 Mijar
  50. 50. Achieving Strategic Fit & Meaning of Strategic Fit  For any company to be successful its supply chain strategy and competitive strategy must fit together  It means that both the competitive and supply chain strategies have aligned goals.  It refers to consistency between customer priorities that the competitive strategy hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to build.  All processes and functions that are part of a company’s value chain contribute to its success or failure  These processes and functions do not lead to the operate in isolation  No one processes or function can ensure the chain’s success.  Failure at any one process or function, however, may lead50 to failure of Prof. Raghavendran Venugopal, MBA Dept, Mijar
  51. 51. How strategic Fit achieved? The following steps shall support to achieve the strategic fit.  Understanding the Customer and Supply Chain uncertainty.  Understanding the supply chain capabilities.  Achieving strategic fit Prof. Raghavendran Venugopal, MBA Dept,51 Mijar
  52. 52. Understanding the Customer and Supply Chain uncertainty To understand the customer, a company must identify the needs of the customer segment being served.  The quantity of the product needed in each lot.  The response time the customers are willing to tolerate.  The variety of products needed.  The service level required.  The price of the product.  The desired rate of innovation of the product. Prof. Raghavendran Venugopal, MBA Dept,52 Mijar
  53. 53. Implied Demand Uncertainty  This does not mean uncertainty in overall demand but uncertainty in demand which the company seeks to satisfy.  Range of quantity required increases  Lead Time Decreases  Increases because wider range of the quantity required implies greater variance in demand.  Increase because there is less time in which to react to orders.  Variety of products required increases  Number of channels through which product may be acquired increases Prof. Raghavendran Venugopal, MBA Dept,53 Mijar
  54. 54. Implied Demand Uncertainty  Increase because demand per product becomes more disaggregate  Increase because the total customer demand is now disaggregated over more channels.  Rate of Innovation Increases  Required service level increases  Increase because new products tend to have more uncertain demand  Increase because the firm has to handle unusual surges in demand Prof. Raghavendran Venugopal, MBA Dept,54 Mijar
  55. 55. The Implied Uncertainty (Demand and Supply) Spectrum Predictable Supply and uncertain demand or uncertain Highly uncertain Predictable Supply supply and predictable supply and and Demand demand or somewhat demand uncertain supply and demand Salt at a An existing A newSupermarket automobile communication demand device Prof. Raghavendran Venugopal, MBA Dept, 55 Mijar
  56. 56. Understanding the supply chain capabilities  Supply chain responsiveness implies the following:  Response to wide ranges of quantities demanded  Meet short lead times  Handle a large variety of products  Build highly innovative products  Meet a high service level  Handle supply uncertainty Prof. Raghavendran Venugopal, MBA Dept,56 Mijar
  57. 57. The cost-responsive efficient frontier  It is the curve showing the lowest possible cost for a given level of responsiveness Prof. Raghavendran Venugopal, MBA Dept,57 Mijar
  58. 58. Responsiveness High Low Prof. Raghavendran Venugopal, MBA Dept, High Low58 Mijar Cost
  59. 59. Responsiveness Spectrum Somewhat Somewhat HighlyHighly Efficient efficient responsive responsive Local Apparel: A Big Bazaar:Integrated traditional make- Most automotive ChangingTextile Mills: to-stock production: merchandiseProduction manufacturer delivering a mix and byscheduled with production large variety of location andweeks or months lead time of products in a time of the dayin advance with several weeks couple of weekslittle variety orflexibility Prof. Raghavendran Venugopal, MBA Dept, 59 Mijar
  60. 60. Step 3: Achieving Strategic Fit  After mapping the level of implied uncertainty and understanding the supply chain position on the responsiveness spectrum, the third and final step is to ensure that the degree of supply chain responsiveness is consistent with the implied uncertainty.  The goal is to target high responsiveness for a supply chain facing high implied uncertainty.  The relationship is represented by the “Zone of Strategic Fit”.  Increasing implied uncertainty from the customers and supply sources is best served by increasing Prof. Raghavendran Venugopal, MBA Dept,the supply chain. responsiveness from60 Mijar
  61. 61. Zone of Strategic Fit Responsive Supply Chain Responsive Spectrum Efficient Supply Chain Certain Implied Uncertain Demand Uncertainty Demand Spectrum Prof. Raghavendran Venugopal, MBA Dept, 61 Mijar
  62. 62. Zone of Strategic Fit Responsive Responsive Spectrum Efficient Product Implied Product Maturity Uncertainty Introduction Spectrum Prof. Raghavendran Venugopal, MBA Dept, 62 Mijar
  63. 63. Comparison of efficient and responsive supply chains Efficient Supply Chain Responsive Supply Chain Primary Goal Supply demand at the Respond quickly to lowest cost demand Product Design Maximizing Create modularity to Strategy performance at a allow postponement of minimum product cost product differentiation Pricing strategy Lower Margins Higher Margins because price is the because price is not prime customer driver the prime customer driver Prof. Raghavendran Venugopal, MBA Dept,63 Mijar
  64. 64. Comparison of efficient and responsive supply chains Efficient Supply Chain Responsive Supply Chain Manufacturing Lower costs through Maintain capacity Strategy higher utilization flexibility to buffer against demand and supply uncertainty Inventory Strategy Minimize inventory to Maintain buffer lower cost inventory to deal with demand/supply uncertainty Lead time strategy Reduce, but not the Reduce aggressively, expense of costs even if costs are significant Prof. Raghavendran Venugopal, MBA Dept,64 Mijar
  65. 65. Comparison of efficient and responsive supply chains Efficient Supply Chain Responsive Supply Chain Supplier Strategy Select based on cost Select based on and quality speed, flexibility, reliability and quality Transport Strategy Lowest Cost mode Fastest means of available delivery depending on needs Prof. Raghavendran Venugopal, MBA Dept,65 Mijar
  66. 66. Other Issues Affecting Strategic Fit  Multiple Products and Customer Segments  Product Life Cycle  Changing Customer Expectation  Issues on Globalization  Supply Chain uncertainty  Competitive Changes over time horizon Prof. Raghavendran Venugopal, MBA Dept,66 Mijar
  67. 67. Expanding Strategic Scope  A key issue relating to strategic fit is the scope, in terms of supply chain stages, across which the strategic fit applies.  Scope of strategic fit refers to the functions within the firm and stages across the supply chain that devise an integrated strategy with a shared objective.  At one extreme, every operation within each functional area devises its own independent strategy with the objective of optimizing its individual performance.  At the opposite extreme, all functional areas across all stages of the supply chain devise Prof. Raghavendran Venugopal, MBA Dept,67 strategy jointly with a common objective of Mijar
  68. 68. Obstacles in Achieving Strategic Fit  Increase in Product  Decreasing PLC’s Variety.  Division of SC  High Demand Ownership Customers  Difficulty in Executing  Globalization New Strategies  Silo mentality  Diminishing SC  Lack of confidence & Visibility Knowledge. Prof. Raghavendran Venugopal, MBA Dept,68 Mijar
  69. 69. Supply Chain Drivers & Metrics
  70. 70. Drivers of Supply Chain Performance  Facilities  places where inventory is stored, assembled, or fabricated  production sites and storage sites  Inventory  raw materials, WIP, finished goods within a supply chain  inventory policies  Transportation  moving inventory from point to point in a supply chain  combinations of transportation modes and routes  Information  data and analysis regarding inventory, transportation, facilities throughout the supply chain  potentially the biggest driver of supply chain performance  Sourcing  functions a firm performs and functions that are outsourced  Pricing  Prof. Raghavendran Venugopal, MBA Dept, Price associated with goods and services provided by a firm to the supply70 chain Mijar
  71. 71. A Framework for Structuring Drivers Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Supply chain structure Logistical Drivers Facilities Inventory Transportation Information Sourcing Pricing Cross Functional Drivers Prof. Raghavendran Venugopal, MBA Dept,71 Mijar
  72. 72.  Role in the supply chain  Role in the competitive strategy  Components of Drivers decisions Prof. Raghavendran Venugopal, MBA Dept,72 Mijar
  73. 73. Facilities Role in the supply chain  the “where” of the supply chain  manufacturing or storage (warehouses) Role in the competitive strategy  economies of scale (efficiency priority)  larger number of smaller facilities (responsiveness priority) Prof. Raghavendran Venugopal, MBA Dept,73 Mijar
  74. 74. FacilitiesComponents of Facilities Decisions Location  centralization (efficiency) vs. decentralization (responsiveness)  other factors to consider (e.g., proximity to customers) Capacity (flexibility versus efficiency) Manufacturing methodology (product focused versus process focused) Warehousing methodology (SKU storage, job lot storage, cross-docking) Overall trade-off: Responsiveness versus efficiency Prof. Raghavendran Venugopal, MBA Dept,74 Mijar
  75. 75. Inventory Role in the Supply Chain  Inventory exists because of a mismatch between supply and demand  Source of cost and influence on responsiveness  Impact on  material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain  throughput  rate at which sales to end consumers occur  I = RT (Little’s Law)  I = inventory; R = throughput; T = flow time  Example Prof. Raghavendran Venugopal, MBA Dept, “synonymous”  Inventory and throughput are in a supply chain75 Mijar
  76. 76. Inventory Role in Competitive Strategy  If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers  If cost is more important, inventory can be reduced to make the firm more efficient  Example: Economies of Scale Prof. Raghavendran Venugopal, MBA Dept,76 Mijar
  77. 77. Inventory Components of Inventory Decisions  Cycle inventory  Average amount of inventory used to satisfy demand between shipments  Depends on lot size  Safety inventory  inventory held in case demand exceeds expectations  costs of carrying too much inventory versus cost of losing sales  Seasonal inventory  inventory built up to counter predictable variability in demand  cost of carrying additional inventory versus cost of flexible production  Overall trade-off: Responsiveness versus efficiency  more inventory: greater responsiveness but greater cost  less inventory: lower cost but lower responsiveness Prof. Raghavendran Venugopal, MBA Dept,77 Mijar
  78. 78. Transportation Role in the supply chain  Moves the product between stages in the supply chain  Impact on responsiveness and efficiency  Faster transportation allows greater responsiveness but lower efficiency  Also affects inventory and facilities Prof. Raghavendran Venugopal, MBA Dept,78 Mijar
  79. 79. Transportation Role in the competitive strategy  If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it  Can also use slower transportation modes for customers whose priority is price (cost)  Can also consider both inventory and transportation to find the right balance Prof. Raghavendran Venugopal, MBA Dept,79 Mijar
  80. 80. Transportation Components of transportation decisions  Mode of transportation:  air, truck, rail, ship, pipeline, electronic transportation  vary in cost, speed, size of shipment, flexibility  Route and network selection  route: path along which a product is shipped  network: collection of locations and routes  In-house or outsource  Overall trade-off: Responsiveness versus efficiency Prof. Raghavendran Venugopal, MBA Dept,80 Mijar
  81. 81. Information Role in the supply chain  The connection between the various stages in the supply chain – allows coordination between stages  Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels Role in the competitive strategy  Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off)  Information technology  What information is most valuable? Prof. Raghavendran Venugopal, MBA Dept,81 Mijar
  82. 82. Information Components of information decisions  Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain)  Coordination and information sharing  Forecasting and aggregate planning  Enabling technologies  EDI  Internet  ERP systems  Supply Chain Management software  Overall trade-off: Responsiveness versus efficiency Prof. Raghavendran Venugopal, MBA Dept,82 Mijar
  83. 83. Sourcing Role in the supply chain  Set of business processes required to purchase goods and services in a supply chain  Supplier selection, single vs. multiple suppliers, contract negotiation Role in the competitive strategy  Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain  In-house vs. outsource decisions- improving83 efficiency and responsiveness Prof. Raghavendran Venugopal, MBA Dept, Mijar
  84. 84. Sourcing Components of sourcing decisions  In-house versus outsource decisions  Supplier evaluation and selection  Procurement process  Overall trade-off: Increase the supply chain profits Prof. Raghavendran Venugopal, MBA Dept,84 Mijar
  85. 85. Pricing Role in the supply chain  Pricing determines the amount to charge customers in a supply chain  Pricing strategies can be used to match demand and supply Role in the competitive strategy  Firms can utilize optimal pricing strategies to improve efficiency and responsiveness  Low price and low product availability; vary prices by response times Prof. Raghavendran Venugopal, MBA Dept,85 Mijar
  86. 86. Pricing Components of pricing decisions  Pricing and economies of scale  Everyday low pricing versus high-low pricing  Fixed price versus menu pricing  Overall trade-off: Increase the firm profits Prof. Raghavendran Venugopal, MBA Dept,86 Mijar
  87. 87. Obstacles to Achieving Strategic Fit  Increasing variety of products  Decreasing product life cycles  Increasingly demanding customers  Fragmentation of supply chain ownership  Globalization  Difficulty executing new strategies Prof. Raghavendran Venugopal, MBA Dept,87 Mijar