Strategic Framework to Analyze Supply Chains

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1 Strategic Framework to Analyze Supply Chains 1 Andy Guo A Strategic Framework for Supply Chain Design, Planning, and Operation Part I: Understand the supply chain Part II: Supply chain performance Part III: Supply chain drivers 2 Andy Guo

2 Part I: Outline What is supply chain? What is supply chain management? Process view of a supply chain 3 Andy Guo Traditional View: Logistics in the Manufacturing Firm Profit 4% Logistics Cost 21% Profit Logistics Cost Marketing Cost Marketing Cost 27% Manufacturing Cost 48% Manufacturing Cost 4 Andy Guo

3 Supply Chain Management: The Magnitude in the Traditional View Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies A typical box of cereal spends 104 days from factory to sale A typical car spends 15 days from factory to dealership Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago 5 Andy Guo Supply Chain Management: The True Magnitude Compaq estimates it lost $.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed When the 1 gig processor was introduced by AMD, the price of the 800 mb processor dropped by 30% P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand 6 Andy Guo

4 Definition of Supply Chain Management 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. Vendors Sourcing Inbound storage/ Fig. Operations 1-3 Transportation Outbound storage/ Transportation Consumer distribution Customers 7 Andy Guo Supply Chain: Logistics Network RAW MATERIALS SUPPLIERS RAW MATERIALS STORAGE MANUFACTURING production logistics FINISHED GOODS STORAGE MARKETS Storage Storage Plant Plant Warehouse 1 Warehouse 1 A A Material costs Manufacturing costs Inventory costs Storage Storage Transportation costs Storage Storage Plant Plant Warehouse 2 Warehouse 2 Plant Plant Warehouse 3 Warehouse 3 Transportation costs B B C C Physical supply materials management inbound logistics Physical distribution outbound logistics 8 Andy Guo

5 Integrating Supply Chain Process Supplier Manufacturers Wholesalers Retailers Consumers Information Product flow Cash flow 9 Andy Guo The Objective of a Supply Chain Maximize overall value created Supply chain value: difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer s request Value is correlated to supply chain profitability (difference between revenue generated from the customer and the overall cost across the supply chain) 10 Andy Guo

6 The Objective of a Supply Chain Example: Dell receives $2000 from a customer for a computer (revenue) Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) Difference between $2000 and the sum of all of these costs is the supply chain profit Supply chain profitability is total profit to be shared across all stages of the supply chain Supply chain success should be measured by total supply chain profitability, not profits at an individual stage 11 Andy Guo The Objective of a Supply Chain Sources of supply chain revenue: the customer Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability 12 Andy Guo

7 Process View of a Supply Chain Cycle view Each cycle performs at the interface between two successive stages of a supply chain This view is useful when considering operational decisions, because it specifies the roles of each member and the desired outcome for each process Push/Pull view Depend on whether they are executed in response to a customer order(pull) or in anticipation of customer order(push) This view is useful when considering strategic decisions relating to supply chain design 13 Andy Guo Cycle View of a Supply Chain Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retailer Distributor Manufacturer Supplier 14 Andy Guo

8 Push/Pull View of L.L. Bean Supply Chain Procurement, Manufacturing and Replenishment cycles Customer Order Cycle PUSH PROCESSES PULL PROCESSES Customer Order Arrives 15 Andy Guo Push/Pull View of Dell Supply Chain Procurement cycles Customer Order and Manufacturing Cycle PUSH PROCESSES PULL PROCESSES Customer Order Arrives 16 Andy Guo

9 Part II: Outline Competitive and supply chain strategies Strategic fit Expand the scope 17 Andy Guo The Value Chain: Linking Supply Chain and Business Strategy Business Strategy New Product Strategy Marketing Strategy Supply Chain Strategy New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources 18 Andy Guo

10 Achieve Strategic Fit Strategic fit means both the competitive and supply chain strategies have the same goal. Step 1: Understand the customer Step 2: Understand the supply chain Step 3: Achieve strategic fit 19 Andy Guo Step 1: Understand the Customer - Implied Demand Uncertainty- Customer demand attributes Lot size Response time Implied Service level Demand Product variety Uncertainty Price Innovation Implied demand uncertainty is the uncertainty that exists due to the portion of demand that the supply chain is required to meet. 20 Andy Guo

11 Implied Demand Uncertainty Spectrum Detergent Long lead time steel High Fashion Emergency steel Price Customer Need Responsiveness Low Implied Demand Uncertainty High 21 Andy Guo Step 2: Understand the Supply Chain - Supply Chain Responsiveness - Respond to wide range of quantities demanded Meet short lead time Handle a large variety of products Build highly innovative products Meet a very high service level 22 Andy Guo

12 Responsiveness Spectrum Highly efficient Highly Responsive Integrated steel mills Hanes apparel Auto production Dell Low Responsiveness High 23 Andy Guo Responsive supply chain Step 3: Achieve Strategic Fit Responsiveness spectrum Zone of Strategic Fit Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand 24 Andy Guo

13 Comparison of Efficient and Responsive SC Goal Product design Pricing Manufacturing Inventory Lead time Supplier Transportation Efficient SC Lower cost to meet demand Max performance at min cost Lower margin Lower cost through high utilization Min inventory Reduce but not at the expense of cost Based on cost and quality Low cost modes Responsive SC Respond quickly Create modularity to allow postponement Higher margin Maintain capacity flexibility to meet unexpected demand Maintain buffer inventory Aggressively reduce even if the cost is significant Based on speed, flexibility, and quality Responsive modes 25 Andy Guo Other Issues Affecting Strategic Fit Multiple products and customer segments Set up independent SC for each different product or customer Tailor the SC to best meet the needs of each product s demand Product life cycle Use responsive SC in the early stage Use efficient SC when market is matured Competitive changes over time 26 Andy Guo

14 Changing Strategy over Product Life Cycle Responsive supply chain Responsiveness spectrum Zone of Strategic Fit Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand 27 Andy Guo Part III: Outline Framework for structuring drivers Facilities Inventory Transportation Information Sourcing Pricing 28 Andy Guo

15 Drivers of Supply Chain Performance Facilities Places where inventory is stored, assembled, or fabricated Inventory Raw materials, WIP, finished goods within a supply chain Transportation Moving inventory from point to point in a supply chain Information Data and analysis regarding inventory, transportation, facilities throughout the supply chain Sourcing Functions a firm performs and functions that are outsourced Pricing Price associated with goods and services provided by a firm to the supply chain 29 Andy Guo A Framework for Structuring Drivers Competitive Strategy Supply Chain Strategy Efficiency Supply chain structure Logistical Drivers Responsiveness Facilities Inventory Transportation Information Sourcing Pricing Cross Functional Drivers 30 Andy Guo

16 Facilities Driver Efficient v.s. responsive Ex: Toyota and Honda Components of facilities decision: Location Capacity (flexibility v.s. efficiency) Manufacturing methodology (product-focus v.s. process-focus) Warehousing methodology SKU storage job lot storage cross-docking 31 Andy Guo Inventory Driver Little s law Inventory = Flow time Throughput Message for SCM: lower flow time lower inventory Responsive v.s. efficient Ex: Nordstorm Components of inventory decision: Cycle inventory : inventory to satisfy demand between receipts of shipments Safety inventory: inventory held to counter uncertainty in demand Seasonal inventory: inventory held to counter predictable variability in demand 32 Andy Guo

17 Transportation Driver Efficient v.s. responsive Ex : Laura Ashley with Fedex for next day delivery Components of transportation decision: Mode of transportation Air, truck, rail, ship, pipeline, electronic Route and network selection In-house or outsource 33 Andy Guo Information Driver Connect various stages in SC Crucial to daily operations in each stage Ex: Dell Components of information decision: Push (MRP) v.s. pull Coordination and information sharing Forecasting and aggregate planning Enabling technology: EDI, Internet, ERP, SCM 34 Andy Guo

18 Sourcing Driver Set of business processes required to purchase goods and services in a supply chain Supplier selection, single vs. multiple suppliers, contract negotiation Components of sourcing decision: In-house versus outsource decisions Supplier evaluation and selection Procurement process 35 Andy Guo Pricing Driver Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply Components in pricing decision: Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing 36 Andy Guo

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