Ch10 supp.chain+strategy
- 2. 2 OBJECTIVES Supply-Chain Management : Define Measuring Supply-Chain Performance Bullwhip Effect Outsourcing Global Sourcing Value Density Mass Customization
- 3. 3 What is a Supply Chain? Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together Services Supply networks Manufacturing Suppliers Service support operations Local service providers Customers Inputs Transformation Localization Output Suppliers Manufacturing Distribution Customers
- 4. What is Supply Chain Management? Supply-chain management is a total system approach to managing the entire flow of information, materials, and finance from raw-material suppliers through factories and warehouses to the end customer 4
- 5. Supply Chain Mgt.-Understanding the Concept What is a Supply Chain? • Consists of all parties involved directly or indirectly in fulfilling a customer order. • Is dynamic and involves the constant flow of information, materials and funds between different stages. Objectives of a Supply Chain • • Should be to maximize the overall value generated. Importance of Supply Chain Decisions • Supply chain design, planning and operation decisions play a significant role in the success or failure of a company. Higher the supply chain profitability, the more successful is the supply chain.
- 6. 6 Business/ Economic factors shaping Supply Chain Management • • • • • • • • • Consumer demand Globalization Competition Information & communication Inventories Transportation Facilities Government regulations Environment
- 7. 7 SCM Network Material Flow D1 S2 S2 S2 Tier 2 Supplier R1 C S1 S1 Manufacturer S1 Tier 1 Supplier D2 D3 Information Flow Distributors R2 C R3 C Retailers Customers
- 9. 9 Typical supply chain for a Manufacturer Supplier Storage Manufacturer Storage Supplier Supplier Distributor Retailer Customer Typical supply chain for a Service Supplier Storage Service Supplier PRODUT / SERVICES INFORMATION FINANCES Customer
- 10. Supply Chain Decision Making Framework 10 Competitive Strategy Supply Chain Strategy Efficiency Inventory Supply Chain Structure Transportation Facilities SCM Drivers Responsiveness Information
- 11. Formulas for Measuring Supply-Chain Performance 11 One of the most commonly used measures in all of operations management is “Inventory Turnover” Cost of goods sold Inventory turnover = Average aggregate inventory value In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time Average aggregate inventory value 52 weeks Weeks of supply = Cost of goods sold
- 12. 12 Example of Measuring Supply-Chain Performance Suppose a company’s new annual report Suppose a company’s new annual report claims their costs of goods sold for the claims their costs of goods sold for the year is Rs 16 crore and their total year is Rs 16 crore and their total average inventory (production materials + average inventory (production materials + work-in-process) is worth Rs 3.5 crore. work-in-process) is worth Rs 3.5 crore. This company normally has an inventory This company normally has an inventory turn ratio of 10. What is this year’s turn ratio of 10. What is this year’s Inventory Turnover ratio? What does it Inventory Turnover ratio? What does it mean? mean?
- 13. Chain Performance (Continued) 13 Cost of goods sold Inventory turnover = Average aggregate inventory value = 16/3.5 = 16/3.5 = 4.57 = 4.57 Since the company’s normal inventory turnover ratio is Since the company’s normal inventory turnover ratio is 10, a drop to 4.57 means that the inventory is not 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without turning over as quickly as it had in the past. Without knowing the industry average of turns for this knowing the industry average of turns for this company it is not possible to comment on how they company it is not possible to comment on how they are competitively doing in the industry, but they now are competitively doing in the industry, but they now have more inventory relative to their cost of goods have more inventory relative to their cost of goods sold than before. sold than before.
- 14. 14 The Old Paradigm: Push Strategies Production decisions based on long-term forecasts Ordering decisions based on inventory & forecasts What are the problems with push strategies? – Inability to meet changing demand patterns – Obsolescence – The bullwhip effect: Excessive inventory Excessive production variability Poor service levels
- 15. 15 A Newer Paradigm: Pull Strategies Production is demand driven – Production and distribution coordinated with true customer demand – Firms respond to specific orders Pull Strategies result in: – – – – Reduced lead times (better anticipation) Decreased inventory levels at retailers and manufacturers Decreased system variability Better response to changing markets But: – Harder to leverage economies of scale – Doesn’t work in all cases
- 16. 16 Push and Pull Systems What are the advantages of push systems? What are the advantages of pull systems? Is there a system that has the advantages of both systems?
- 17. 17 A new Supply Chain Paradigm A shift from a Push System... – Production decisions are based on forecast …to a Push-Pull System
- 18. 18 Push-Pull Supply Chains The Supply Chain Time Line Customers Suppliers PUSH STRATEGY Low Uncertainty PULL STRATEGY High Uncertainty Push-Pull Boundary
- 19. 19 Bullwhip Effect Inventories are progressively larger moving backward through the supply chain. Tier 2 Suppliers Tier 1 Suppliers Producer (Mfg) Upstream Note : Last but not the least the final customer = Amount of Inventory Distributor Retailer Downstream
- 20. 20 Hau Lee’s Concepts of Supply Chain Management • Hau Lee’s approach to supply chain (SC) is one • • of aligning SC’s with the uncertainties revolving around the supply process side of the SC A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies Types of SC’s • Efficient SC’s • Risk-Hedging SC’s • Responsive SC’s • Agile SC’s
- 21. Hau Lee’s SC Uncertainty Framework 21 Demand Uncertainty Low (Functional products) Supply Uncertainty Low (Stable Process) High (Evolving Process) High (Innovative products) Efficient SC Responsive SC Ex.: Grocery Ex.: Computers Risk-Hedging SC Agile SC Ex.: Hydroelectric power Ex.: Telecom
- 22. 22 What is Outsourcing? Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers
- 23. 23 Reasons to Outsource • Organizationally-driven • Improvement-driven • Financially-driven • Revenue-driven • Employee-driven • Cost-driven
- 25. Potential Supply Chain Linkages North America Market A Plant 1 Source A Figure 16.3 Europe Market B Plant 2 Source B Far East Market C Markets Plant 3 Manufacturing Locations Source Source C Locations
- 26. 26 Value Density • Value density is defined as the value of an item per kilogram of weight • It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped
- 27. 27 Mass Customization • Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers • The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network
- 28. 28 Question Bowl A typical supply chain would include which of the following? a. Suppliers b. Manufacturers c. Distribution d. All of the above e. None of the above Answer: d. All of the above
- 29. 29 Question Bowl a. b. c. d. e. The supply chain measure of “Inventory Turnover” is which of the following ratios? Avg. inventory value/total costs Costs of goods sold/Avg. aggregate inventory value Total costs of goods/Avg. costs of goods Weeks worth of inventory/No. of weeks None of the above Answer: b. Costs of goods sold/Avg. aggregate inventory value
- 30. 30 Question Bowl If the “cost of goods sold” for a company is Rs1,000,000 and the “average aggregate inventory value” is Rs25,000, which of the following is the “inventory turnover”? a. 10 b. 25 c. 40 d. 50 e. None of the above Answer: c. 40 (1,000,000/25,000=40)
- 31. 31 Question Bowl If the “cost of goods sold” for a company is Rs250,000 and the “average aggregate inventory value” is Rs5,000, which of the following is the “inventory turnover”? a. 10 b. 25 c. 40 d. 50 e. None of the above Answer: d. 50 (250,000/5,000=50)
- 32. 32 Question Bowl If the “cost of goods sold” for a company is Rs1,000,000 and the “average aggregate inventory value” is Rs50,000, which of the following is the “weeks of supply” measure for supply chain performance? a. 1 week b. 2.6 weeks c. 20 weeks d. 30 weeks e. None of the above Answer: b. 2.6 (50,000/1,000,000)x52=2.6)
- 33. 33 Question Bowl Which of the following refers to the phenomenon of increasing variability as we move from the customer to the producer in the supply chain? a. Continuous replenishing b. Stable supply process c. Evolving supply process d. Agile supply chains e. None of the above Answer: e. None of the above (The correct term is “Bullwhip effect”.)
- 34. 34 Question Bowl Which of the following are reasons why an organization should use “outsourcing” as a supply chain strategy? a. Reduces investment in assets b. Turns fixed costs into variable costs c. Gives employees a stronger career d. All of the above e. None of the above Answer: d. All of the above
- 35. 35 Question Bowl Which of the following “transportation modes” provides flexibility in delivery, timing and at reasonable rates for small quantities and over short distances? a. Rail b. Highway (trucking) c. Water d. Pipeline e. Air Answer: b. Highway (trucking)