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SupplyChainStrategyChapter10HowSupplyChainStrategy
fitstheOperationsManagementPhilosophyOperationsAsaCompetitiveWeaponOperationsStrategyProjectManagementProcessStrategyProcessAnalysisProcessPerformanceandQualityConstraintManagementProcessLayoutLeanSystemsSupplyChainStrategyLocationInventoryManagementForecastingSalesandOperationsPlanningResourcePlanningSchedulingDell,Inc.Dellisaleaderbecauseoftheirfastresponsetime.Customerordersareondeliverytrucksin36hours.Theirfocusisonhowfastinventorymoves.Thebulkofitscomponentsarehousedwithin15minutesofeachofitsplants.Ascustomersplaceorders,suppliersknowwhentoshipcomponents.Suppliersrestockthewarehouseandmanagetheinventory.Carefulsupplychainmanagementisthekey.SupplyChainSupplychain:Thenetworkofservices,material,andinformationflowsthatlinkafirm’scustomerrelationship,orderfulfillment,andsupplierrelationshipprocessestothoseofitssupplierandcustomers.Supplychainmanagement:Developingastrategytoorganize,control,andmotivatetheresourcesinvolvedintheflowofservicesandmaterialswithinthesupplychain.Supplychainstrategy:Designingafirm’ssupplychaintomeetthecompetitiveprioritiesofthefirm’soperationsstrategy.SupplyChainforServicesSupplychaindesignforaserviceproviderisdrivenbytheneedtoprovidesupportfortheessentialelementsofthevariousservicepackagesitdelivers.
AservicepackageconsistsofsupportingfacilitiesfacilitatinggoodsexplicitservicesimplicitservicesSupplyChainforaFloristRequiredforfacilitatinggoodsRequiredforexplicitservicesRequiredforsupporting
facilitiesRequiredforimplicitservicesHomecustomersCommercialcustomersFloristFedExdeliveryservicePackagingLocaldeliveryserviceFlowers–local/internationalArrangementmaterialsInternetservicesMaintenanceservicesCreationofInventoryInventory:Astockofmaterialsusedtosatisfycustomerdemandortosupporttheproductionofservicesorgoods.ScrapflowInventorylevelOutputflowofmaterialsInputflowofmaterialsSupplyChainforManufacturingRawmaterials(RM):Theinventoriesneededfortheproductionofservicesorgoods.Work-in-process(WIP):Items,suchascomponentsorassemblies,neededtoproduceafinalproductinmanufacturing.Finishedgoods(FG):Theitemsinmanufacturingplants,warehouses,andretailoutletsthataresoldtothefirm’scustomers.InventoryatSuccessiveStockingPointsSupplier Manufacturingplant Distributioncenter RetailerRawmaterialsWorkinprocessFinishedgoods©2007PearsonEducationSupplyChainTier1Tier2SupplierofmaterialsSupplierofservicesTier3CustomerCustomerCustomerCustomerDistributioncenterDistributioncenterManufacturerInventoryMeasuresof
SupplyChainPerformanceAverageaggregateinventoryvalue(AGV)isthetotalvalueofallitemsheldininventoryforafirm.AGV=(#ofAitems)(ValueofeachA)+(#ofBitems)(ValueofeachB)+…Weeksofsupply:Theaverageaggregateinventoryvaluedividedbysalesperweekatcost.Weeksofsupply=AverageaggregateinventoryvalueWeeklysales(atcost)Inventoryturnoverisannualsalesatcostdividedbytheaverageaggregateinventoryvaluemaintainedfortheyear.Inventoryturnover=Annualsalesat(cost)Averageaggregateinventoryvalue©2007PearsonEducationCalculatingInventoryMeasuresExample10.1TheEagleMachineCompanyaveraged$2millionininventorylastyear,andthecostofgoodssoldwas$10million.Thebestinventoryturnoverintheindustryissixturnsperyear.Ifthecompanyhas52businessweeksperyear,howmanyweeksofsupplywereheldininventory?Whatwastheinventoryturnover?Whatshouldthecompanydo?UsingInventoryEstimatorSolverWeeksofsupply=$2mil/($10mil)(52wks.)=10.4weeksInventoryturns=$10mil./$2mil.=5turns/yrApplication10.1©2007PearsonEducationSupplyChainProcessMeasuresPercentoforderstakenaccuratelyTimetocompletetheorderplacementprocessCustomersatisfactionwiththeorderplacementprocessCustomerRelationshipPercentofincompleteordersshippedPercentofordersshippedontimeTimetofulfilltheorderPercentofbotchedservicesorreturneditemsCosttoproducetheserviceoritemCustomersatisfactionwiththeorderfulfillmentprocessInventorylevelsofWIPandFGOrderFulfillmentPercentofsuppliers’deliveriesontimeSuppliers’leadtimesPercentdefectsinservicesandpurchasedmaterialsCostofservicesandpurchasedmaterialsSupplierRelationshipLinksto
FinancialMeasuresReturnonAssets(ROA):
isnetincomedividedbytotalassets.
Managingthesupplychainsoastoreducetheaggregateinventoryinvestmentwillreducethetotalassetsportionofthefirm’sbalancesheet.WorkingCapital:Moneyusedtofinanceongoingoperations.Weeksofinventoryandinventoryturnsarereflectedinworkingcapital.Decreasingweeksofsupplyorincreasinginventoryturnsreducestheworkingcapital.Linksto
FinancialMeasuresCostofGoodsSold:
Buyingmaterialsatabetterprice,ortransformingthemmoreefficiently,improvesafirm’scostofgoodssoldmeasureandultimatelyitsnetincome.TotalRevenue:Increasingthepercentofon-timedeliveriestocustomersincreasestotalrevenuebecausesatisfiedcustomerswillbuymoreservicesandproducts.CashFlow:Cash-to-cashisthetimelagbetweenpayingfortheservicesandmaterialsneededtoproduceaserviceorproductandreceivingpaymentforit.Theshorterthetimelag,thebetterthecashflowpositionofthefirmbecauseitneedslessworkingcapital.SupplyChainDynamicsSupplychaindynamicscanwreakhavoconsupplychainperformancemeasures.Actionsofdownstreamsupplychainmemberscanaffecttheoperationsofupstreammembers.Thebullwhipeffect:Thephenomenoninsupplychainswherebyorderingpatternsexperienceincreasingvarianceasyouproceedupstreaminthechain.©2007PearsonEducationSupplyChainDynamicsforFacialTissueQuantityorderedTimeBullwhipEffectExternal
Value-ChainLinkagesFirst-TierSupplierService/ProductProviderSupportProcessesSupportProcessesSupplierRelation-shipProcessNewService/ProductDevelopmentProcessOrder-Fulfill-mentProcessBusiness-to-Business(B2B)CustomerRelationshipProcessSupplierRelation-shipProcessNewService/ProductDevelopmentProcessOrder-Fulfill-mentProcessBusiness-to-Customer(B2C)CustomerRelationshipProcessExternalSuppliersExternalConsumersExternalCausesof
SupplyChainDisruptionVolumechanges.Customersmaychangeorderedquantityordeliverydate.Serviceandproductmixchanges.Customersmaychangethemixofordereditems.Latedeliveries.Latedeliveriescanforceaswitchinproductionschedules.Underfilledshipments.Partialshipmentscancauseaswitchinproductionscheduleorquantityproduced.InternalCausesof
SupplyChainDisruptionInternallygeneratedshortagesofparts.Engineeringchangestothedesignofservicesorproductsaredisruptive.Newserviceorproductintroductionsdisruptthesupplychainandmayrequireanewsupplychain.Serviceorproductpromotionsmaycreateademandspike.Informationerrorssuchasdemandforecasterrors,faultyinventorycounts,ormiscommunicationwithsuppliers.TheCustomerRelationshipProcessElectronicCommerce(e-commerce)istheapplicationofinformationandcommunicationtechnologyanywherealongthevaluechainofbusinessprocesses.Business-to-ConsumerSystems(B2C)allowscustomerstotransactbusinessovertheInternet.Business-to-BusinessSystems(B2B)involvescommercebetweenfirms.Thebiggestgrowtharea,itiscurrentlyabout70%oftheregulareconomy.E-CommerceandtheMarketingProcessE-CommerceandtheOrderPlacementProcessCostreduction:UsingtheInternetcanreducethecostsofprocessingorders.Revenueflowincrease:Reductioninthetimelagassociatedwithbillingthecustomerorwaitingforchecks.GlobalAccess:Available24hoursaday.Priceflexibility:Pricescaneasilybechangedastheneedarises.TheCustomerRelationshipProcessOrderFulfillmentat
Dell,Inc.CustomersbuyfromDellbywebsite,voice-to-voice,andface-to-face.Orderinformationistransmittedtotheinventorysystem.UniqueproductconfigurationinformationiscontainedintheTraveler,asheetthattravelswiththesystemthecustomerhasorderedthroughoutitsassemblyandshipping.WhentheTravelerispulled,allrequiredinternalpartsandcomponentsforasystemarepickedandputinatoteorkit.(ProcedureiscalledKitting)Ateamusesthekittoassembleandinitiallytestthesystem.Systemsarethoroughlytested.Completedsystemsareboxedandplacedontrucks.Theentireassemble-to-ordercycletakesonlyafewhours.Dell’s
OrderFulfillmentProcessTheOrderFulfillment
ProcessCentralizedplacement:Keepingalltheinventoryatonelocationsuchasafirm’smanufacturingplantorawarehouseandshippingdirectlytocustomers.Inventorypoolingisareductionininventoryandsafetystockbecauseofthemergingofvariabledemandsfromcustomers.Ahigherthanexpecteddemandfromonecustomercanbeoffsetbyalower-than-expecteddemandfromanother.Forwardplacementislocatingstockclosertocustomersatawarehouse,wholesaler,orretailer.InventoryPlacementTheOrderFulfillment
Process
Vendor-managedinventories(VMI):Anextremeapplicationofforwardplacementinvolvinglocatinginventoriesatthecustomer’sfacilities.Keyingredientsare:Collaborativeeffortrequirestrust&accountability.Costsavingsisrealizedbyeliminatingexcessinventory.Customerservice:Thesupplierisfrequentlyonsiteforimprovedresponsetimesandreducingstockouts.Writtenagreementonprocedures,methods,andschedulesareclearlyspecified.Vendor-ManagedInventoriesOrderFulfillmentProgramsContinuousReplenishmentProgram(CRP)AVMImethodinwhichthesuppliermonitorsthecustomer’sinventorylevelsandreplenishesstockasneeded.Collaborativeplanning,forecasting,andreplenishment(CPFR)RadioFrequencyIdentification(RFID)Amethodforidentifyingitemsthroughtheuseofradiosignalsfromatagattachedtoanitem.Wal-MartandGilletteareamonganumberoflargeretailers,manufacturers,governmentagencies,andsupplierscurrentlyimplementingRFIDintheirsupplychains.DistributionProcessesOwnership:Ratherthannegotiatewithacontractcarrier,afirmhasthemostcontroloverthedistributionprocessifitownsandoperatesit,therebybecomingaprivatecarrier.Firmsmayuseacombinationofthefivebasicmodesoftransportation:truck,train,ship,pipeline,andairplane.Cross-Docking:Thepackingofproductsonincomingshipmentssothattheycanbeeasilysortedatintermediatewarehousesforoutgoingshipmentsbasedontheirfinaldestinations.Itemsarecarriedfromtheincoming-vehicledockingpointtotheoutgoing-vehicledockingpointwithoutbeingstoredininventoryatthewarehouse.ContinuousReplenishment
atEachmorningCampbellusesElectronicDataInterchange
tolinkwith
retailers.RetailersinformCampbellofdemandsforitsproductsandthecurrent
inventorylevelsintheirdistributioncenters.Campbelldetermineswhichproductsneedreplenishmentbasedon
upperandlowerinventorylimitsestablishedwitheachretailer.Campbellmakesdailydeliveriesofneededproducts.CampbellSoupTheSupplierRelationshipProcessThesourcingprocessqualifies,selects,managesthecontracts,andevaluatessuppliers.Thedesigncollaboration
processfocusesonjointlydesigningnewservicesorproductswithkeysuppliers,seekingtoeliminatecostlydelaysandmistakesincurredwhenmanysuppliersconcurrently,butindependently,designservicepackagesormanufacturedcomponents.Thenegotiationprocessprocessfocusesonobtaininganeffectivecontractthatmeetstheprice,quality,anddeliveryrequirementsofthesupplierrelationshipprocess’sinternalcustomers.Thebuyingprocessrelatestotheactualprocurementoftheserviceormaterialfromthesupplier.Thisprocessincludesthecreation,management,andapprovalofpurchaseorders.Theinformationexchangeprocessfacilitatestheexchangeofpertinentoperatinginformation,suchasforecasts,schedules,andinventorylevelsbetweenthefirmanditssupplier.TheSupplierRelationshipProcessSupplierSelection
andCertificationPurchasing:Theactivitythatdecideswhichsupplierstouse,negotiatescontracts,anddetermineswhethertobuylocally.Supplierselectionoftenconsidersthecriteriaofprice,qualityanddelivery.Greenpurchasing:Theprocessofidentifying,assessing,andmanagingtheflowofenvironmentalwasteandfindingwaystoreduceitandminimizeitsimpactontheenvironment.Suppliercertificationprogramsverifythatpotentialsuppliershavethecapabilitytoprovidetheservicesormaterialsthebuyerfirmrequires.SupplierRelationsCompetitiveorientationviewsnegotiationsbetweenbuyerandsellerasazero-sumgame.Whateveronesideloses,theothersidegains,andshort-termadvantagesareprizedoverlong-termcommitments.Cooperativeorientationiswherethebuyerandsellerarepartners,eachhelpingtheotherasmuchaspossible.Solesourcingistheawardingofacontractforaserviceoritemtoonlyonesupplier.ElectronicPurchasingElectronicDataInterchange(EDI)enablesthetransmissionofroutine,standardizedbusinessdocumentsfromcomputertocomputer.Cataloghubs:AsystemwherebysuppliersposttheircatalogofitemsontheInternetandbuyersselectwhattheyneedandpurchasethemelectronically.Exchange:Anelectronicmarketplacewherebuyingfirmsandsellingfirmscometogethertodobusiness.Auction:Amarketplacewherefirmsplacecompetitivebidstobuysomething.CentralizedversusLocalizedBuyingCentralizedbuyingincreasespurchasingclout.Savingscanbesignificant,often10%ormore.Increasedbuyingpowercanmeangettingbetterservice,ensuringlong-termsupplyavailability,ordevelopingnewsuppliercapability.Thebiggestdisadvantageislossoflocalcontrol.Centralizedbuyingisundesirableforitemsuniquetoaparticularfacility.Thebestsolutionmaybeonewherebothlocalautonomyandcentralizedbuyingarepossible.ValueAnalysisValueanalysisisasystematicefforttoreducethecostorimprovetheperformanceofservicesorproducts,eitherpurchasedorproduced.Earlysupplierinvolvementisaprogramthatincludessuppliersinthedesignphaseofaserviceorproduct.Presourcing:Alevelofsupplierinvolvementinwhichsuppliersareselectedearlyinaproduct’sconceptdevelopmentstageandgivensignificant,ifnottotal,responsibilityforthedesignofcertaincomponentsorsystemsoftheproduct.SupplyChainStrategiesEfficientsupplychainsfocusontheefficientflowsofservicesandmaterials,keepinginventoriestoaminimum.Workbestwheredemandishighlypredictable.Responsivesupplychainsaredesignedtoreactquickly.Workbestwhenfirmsofferagreatvarietyofservicesorproductsanddemandpredictabilityislow.Environment&DesignFactorsDesignFactorsEfficientSupplyChainsResponsiveSupplyChainsEnvironmentFactorsEfficientSupplyChainsResponsiveSupplyChainsMassCustomizationMassCustomization:Astrategywherebyafirm’sflexibleprocessesgenerateawidevarietyofpersonalizedservicesorproductsatreasonablylowcosts.Competitiveadvantages:Managingcustomerrelationships.Itrequiresdetailedinputsfromcustomerssothattheidealserviceorproductcanbeproduced.Eliminatingfinishedgoodsinventory.Producingtoacustomer’sordereliminatesfinishedgoodsinventory.Increasingperceivedvalue.Itincreasestheperceivedvalueofservicesorproducts.Postponementiswhensomeofthefinalactivitiesintheprovisionofaserviceorproductaredelayeduntiltheordersarereceived.Channelassemblyiswhenmembersofthedistributionchannelactasiftheywereassemblystationsinthefactory.LeanSupplyChainsThreekeyactivitiesarerequiredtoattainaleansupplychain:StrategicSourcing:Identifyingitemsorservicesthatareofhighvalueorcomplexityandpurchasethemfromaselectsetofsupplierswithwhomthefirmestablishesacloserelationship.CostManagement:Limitingthenumberofsuppliersandfocusingonhelpingthemreducetheircoststhroughtrustandfriendlycollaboration.SupplierDevelopment:Shiftingfrompricenegotiationstocostmanagementandworkingwithsupplierstoachieveleanoperations.OutsourcingAMak
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