The document discusses supply chain management. It defines supply chain management and describes how supply chains involve networks of suppliers, manufacturers, distributors and customers. It also discusses factors that have increased the importance of supply chain management like globalization and e-commerce. Additionally, it outlines different types of supply chain strategies and how to achieve strategic fit within a supply chain.

1. Chapter 12 Supply Chain Management

2. Supply Chain Management (SCM) SCM : Management of materials, information and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers. Used to be viewed as a standard operational issue. Now viewed as one of the most important strategic issues. Supply Chain : network of suppliers, warehouse, operations, and retail outlets

3. US Suppliers Off Shore Suppliers US Factory Singapore Factory US DC European DC Asia/Pacific DC Americas Demand European Demand Asia/Pacific Demand Kit Suppliers

4. Traditional Supply Chain Flows Information flow, Financial flow Material flow Supplier Retailer Distributor Manufacturer 3 4

5. Examples of Supply Chains Dell / Compaq Toyota / GM / Ford Amazon / Borders / Barnes and Noble Zara / Gap Red Cross / Oxfam MUHC / MGH Air Canada / Southwest

6. Improve operations Increasing levels of outsourcing Increasing transportation costs Competitive pressures Increasing globalization Increasing importance of e-commerce Complexity of supply chains Manage inventories Need for Supply Chain Management

7. Supply Chain Design Reflect a firm’s strategic positioning Three basic steps in achieving strategic fit: - Understanding the customer - Understanding the supply chain - Achieving strategic fit Primary trade-off: Cost versus Response time Responsive versus Efficient supply chain

8. Right Supply Chain Strategy? The strategy needs to be tailored to meet specific needs of the customers A product with a stable demand and a reliable source of supply should not be managed in the same way as one with highly unpredictable demand and unreliable supply

9. A Framework for Devising the Right Supply Chain Strategy Two key sources of uncertainty – demand and supply Demand uncertainty Supply Uncertainty Functional Innovative Stable Evolving

10. High obsolescence Low obsolescence High stock out cost Low stock out cost Low volumes per SKU Higher volume per SKU High product variety Low product variety High profit margins Low profit margins High inventory cost Low inventory cost Short selling season Long product life Variable demand Stable demand Difficult to forecast More predictable demand High demand uncertainties Low demand uncertainties Innovative Functional Demand Uncertainty and Product Characteristics

11. Variable lead time Dependable lead time Inflexible Flexible Difficult to changeover Easier to changeover Potential capacity constrained Less capacity constraint More process changes Less process changes Unreliable suppliers Reliable suppliers Limited supply sources More supply sources Potential quality problems Less quality problems Variable and lower yields Stable and higher yields Vulnerable to breakdowns Less breakdowns Evolving Stable Supply Characteristics

12. Computers, semiconductor some food produce (Evolving Process) Telecom, high-end Hydro-electric power, High computers, pop music food, oil and gas (Stable Process) Fashion apparel, Grocery, basic apparel, Low Supply Uncertainty High (Innovative Products) Low (Functional Products) Demand Uncertainty The Uncertainty Framework: Examples

13. (Xilinx, Cisco) (Subway) (Evolving Process) Agile supply chain Risk-hedging supply chains High (Dell, Benetton) (Posco, Barilla) (Stable Process) Responsive supply chains Efficient supply chain Low Supply Uncertainty High (Innovative Products) Low (Functional Products) Demand Uncertainty Achieving Strategic Fit

14. Drivers of Supply Chain Fit Inventory Transportation Facilities Information Drivers Efficiency Responsiveness Supply Chain Structure

15. Considerations for Supply Chain Drivers Proximity / Flexibility Consolidation / Dedicated Facilities Speed Consolidation Transportation Availability Cost of holding Inventory Responsiveness Efficiency Driver Information What information is best suited for each objective

16. Dealing with-Multiple Owners / Local Optimization Information Coordination Contractual Coordination

17. The variance of orders is greater than that of sales , and the distortion increases as one moves upstream. Lack of Information Coordination: Bull-Whip* Effect Customer Demand Retailer Wholesaler Distributor Distributor Orders Manufacturer Retailer Orders Wholesale Orders

18. Lack of Information Coordination: Bull-Whip* Effect Manufacturer Distributor Wholesaler Retailer Ordering Amount of inventory =

19. Possible Solutions Enterprise Resource Planning (ERP) Electronic Data Interchange (EDI) Advanced Planning and Scheduling (APS) Customer Relationship Management (CR) Collaborative Planning Forecasting and Replenishment (CPFR)

20. Develop strategic objectives and tactics Integrate and coordinate activities in the internal supply chain Coordinate suppliers with customers Coordinate planning and execution Form strategic partnerships Creating an Effective Supply Chain Contractual Coordination

21. Consider a SC with 1 manufacturer and 1 retailer. Manufacturer has a production cost of $c/unit Manufacturer sells the product to a retailer for $w/unit The selling price for the retailer is $p/unit. This is a fashion item so there is only one opportunity to produce and sell Single Period Problem. Let X (random variable) denote the demand for the retailer. X is uniformly distributed Value and Limitations of Contractual Coordination manufacturer retailer customers $ w / unit $ p / unit $ c / unit

22. The retailer will solve the singe period inventory problem where Selling price $p/unit Purchase cost $w/unit Demand X~F(X) Q* satisfies Let p=$12/unit, w=$6/unit and c=$3/unit X~U(5,55)

23. Now consider a different version The manufacturer and the retailer are owned by the same company. Demand is the same Production cost is still $3/unit Selling price is $12/unit. Single firm customers $ p / unit $ c / unit

24. manufacturer retailer customers $ 6 / unit $ 12 / unit $ 3 / unit Single firm customers $ 12 / unit $ 3 / unit Order quantity Total profit 30 units $ 195 ( Ret. = 100, Mfr. = 95 ) 42.5 units $ 213.75 comparisons

25. Coordination is always beneficial for the supply chain (basic application of “systems approach”) Examples Contractual Coordination Revenue Sharing (Movie Business) BuyBack Contracts (Publishing) Coordination may put some members worse-off (compensation would be required for those members) Coordination requires information sharing and a systems approach Requires trust among SC members and long-term thinking Lessons

26. Critical Trends in Global SCs The cost squeeze - around 20% have no production in home markets - Even design functions are moving The pursuit of new markets - 90% of Nestle assets are outside Switzerland - 50% of Sony assets are outside Japan Product innovation - 35% of the revenue from products less than 3 years - Average product development time has reduced by 40% in last 10 years

27. Paradoxes of Complexities The optimization paradox The customer collaboration paradox The innovation paradox The flexibility paradox The risk paradox

28. Supply Chain Risk Drivers Cost of capacity Capacity flexibility Capacity Rate of product obsolescence Demand and supply uncertainty Inventory Exchange rate risk Long-term versus short-term contracts Procurement vertical integration of supply chain global outsourcing and markets Intellectual Property Inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base “ Bullwhip effect” Forecast Information infrastructure breakdown System integration or extensive systems networking Systems Inflexibility of supply source Poor quality or yield at supply source Delays Natural disaster and manmade Dependency on a single source of supply as well as the capacity and responsiveness of alternative suppliers Disruptions Drivers of Risk Categories of Risk

29. INDUSTRIAL INTELLIGENCE - DELL From 1995 to 98, 32 to 7 days of inventory From 1992 to 98, 204 to 47 suppliers (as few partners as possible) Suppliers agree to meet 25% of Dell’s volume requirement (shared liability) Electronic links with supplier with hourly update on raw material consumption (real time info) VMI, returnable totes (no inventory, decrease handling costs) “ It’s not : well, every 2 weeks, deliver 5,000 to this warehouse and we’ll put them on a shelf. It is : tomorrow morning, we need 8,562 and deliver them to door #7 by 7 a.m.” - Michael Dell (=POU pull demand strategy) Share information and plans freely with suppliers ( forecast is not contract ) Rely on information technology ( systems ) (Sources : Harvard Business School, April 1998 & March 1999)

30. Let p=$12/unit, w=$6/unit and c=$3/unit X~U(5,55) The total profit for the retailer is The total profit for the manufacturer is The total profit for the supply chain 105 + 90 =$ 195

31. p=$12/unit and c=$3/unit X~U(5,55) The total profit for the supply chain is