Escolar Documentos
Profissional Documentos
Cultura Documentos
SC Strategy
Two-Day Seminar
Strategic Supply Chain & Logistics Management
RM Parts Production FP
Assembly
WIP
FG
Bought-out Parts Outbound
Logistics
Suppliers Indirect
Materials (MROs)
The R’s: right product, right place, right time, right quality, right cost
SC Strategy
The Supply Chain Era
Supplier Customer
Distributor
Supplier Firm Customer
SC Strategy
Our Definition of SCM
SC Strategy
Form Steering
Map Current Identify Key
Committee &
Supply Chain SC Members
Joint Strategies
Organize for
Improvements in
Various Areas
SC Strategy
SC Strategy
A given firm may be a primary member for one
process, but a supporting member for another
System boundaries:
Point of origin: the left boundary where no more
primary suppliers exist;
Point of consumption: the right boundary where
no further value is added, and the product /
service is consumed.
SC Strategy
SC Strategy
• Procurement process
• Customer relationship management
• Demand management
• Order fulfillment
• Manufacturing flow management
• New product & process development (NPDP)
• Reverse logistics process, etc.
SC Strategy
SCM: The Basic Strategies
SC Strategy
Barriers to entry
Threat of New
Entrants
SC Strategy
Customer
Distributor
Supplier Firm Customer
SC Strategy
Supply Chains:
From Inter-functional
To Inter-organizational
Integration
SC Strategy
Phase I: Inter-functional Integration
Traditional
Silos, Disconnects & handoffs
Departmental parochialism
DEPT DEPT DEPT Slow progress of work: non-
2 3 value adding times for
1 move, wait, information
gathering, clarification, etc.
Customer is far away->
customer orientation
confined to marketing
Re-engineered
Value Chain
Process: Cross-
Functional Team
SC Strategy
3. Redesigning:
Design the new, integrated process in a way that fulfills SC
performance goals: final customer always comes first; avoid
duplications; work done by the person in the best position to
perform; a single process, based on one common data
base; Design in such a way that both firms benefit, etc.
4. Implementing:
Roll out new process in clearly defined stages, focus on
achieving benefits early, maintaining momentum
Communicate tirelessly: articulate rationale, define and
manage expectations, involve everyone, make everyone an
important member, etc. Good project management.
SC Strategy
II. Global Trends in
Supply Chain Restructuring
SC Strategy
Price
Period of Exclusivity
For First Mover
Product-Process Design
Product-Process Design
DFM => DFMA => DFS => DFE => DFL
Design For Manufacture (DFM)
Design for easy & economical production
Consider manufacturability early
Identify easy-to-manufacture design characteristics
Use easy to fabricate & assemble components
Business &
Traditional Process
Marketing Strategy
R&D
CUSTOMERS MARKETING
ENGINEERING
DESIGN
Prototypes Drawings
Bills of material,
assembly charts
Make/Buy Decisions
PRODUCTION / Process Plans PROCESS
OPERATIONS PLANNING
(MFG. ENGG)
Make/Buy Decisions
VENDORS PURCHASING
Vendor
Development Product-Process Design
Phase I: Concurrent Engineering:
Inter-functional integration
Traditional
MARKETING DESIGN
PROCESS
PLANNING
Concurrent
Cross-functional
team
Product-Process Design
Reduction in Time-To-Market
Silo Approach
...
Lead Time
Specs
Process
Design Purchasing Vendors
Planning
Product-Process Design
External Product Development Strategies
External Development Strategies
Alliances
Joint Ventures
Purchase Technology / Expertise by Acquiring Developer
Internal Development Strategies
Migrations of Existing Products
Enhancement to Existing Products
New Internally Developed Products
Product-Process Design
Customization Approaches
:
(Source: Lampel & Mintzberg 1996) Product-Process Design
Mass Customization:
Customization Without Cost Premium
Product-Process Design
• Form Postponement
• Logistics Postponement
Time & Place Postponement
• Capacity Postponement
• Purchasing Postponement
Physical Network
Form Postponement
Rearrange bills of material so that
differentiating (customizing) elements are
postponed to last stage of assembly.
Permits central inventories and economies
of scale for early-stage items, which are less
subject to forecast errors
Differentiating elements performed later,
when mix forecasts become more accurate.
Physical Network
Packaged
Hand-vac
Physical Network
Physical Network
HP: Universal Product Approach
LaserJet Printer:
Before: dedicated power supply (110v or
220 volts) for US or European markets;
differentiated as soon as production began
in Japan
After: a universal (standardized) power
supply developed; flexibility in shipments
from US, Europe, Japan, depending on
demand; total manufacturing, stocking
and shipping costs reduced by 5%.
Physical Network
Postponement at
Eaton: Cutler-Hammer
Before:
All 3500 industrial circuit breakers were made
at Arecibo, Puerto Rico, shipped to Jacksonville,
FL, and trucked to warehouse in Duncan, SC.
High inventory levels at both facilities
Same-day service rate averaged around 90%
Now:
• 50 generic styles made at Puerto Rico, bar coded & shipped-trucked to SC
• Final assembly done at Duncan, SC after orders are received
• Build instructions downloaded for that style based on bar code in Duncan, SC
• Shipping costs reduced, better containerization reduced damage levels, etc.
• Inventories reduced significantly at both locations
• Same-day service level increased to 98% Physical Network
Benetton & Other Models
Benetton: Fresh look at the processing steps and
radical re-sequence to postpone the
differentiating step closer to selling time
Before: to make a red sweater, start with a red
fabric, cut, sew, etc to make a red sweater;
After: start with uncolored fabrics, make white
sweaters for all colors, and coloring is the last
step, when mix forecast most accurate
Auto Industry: Platform architecture, delayed
differentiation: e.g., moon roof in a car, etc.
Paint Industry Restructure
Physical Network
Factories:
Heavy manufacturing plants (auto plants,
steel mills, chemical plants); Light industry
manufacturing plants (small components
manufacturing, assembly)
Warehouse & distribution centers
Changing roles
Retail & service outlets; order entry and
fulfillment points
Supply sources
Physical Network
Redesign of Physical Network
Facilities & primary focus for each facility?
Facility location: consistent with overall strategy?
Capacity allocation:
economies of scale + <agility & responsiveness>?
Sufficient economies of scope?
Market & supply sources: which market do they
serve? where are the supply sources?
Exploit duties & tariffs, & exchange rates?
Exploit form & logistics postponement?
Consistent with overall strategy of low cost /
responsiveness / innovation, etc.? Physical Network
Reconfiguration of Global
Manufacturing & Supply Chains
Physical Network
Supply Networks:
Global Sourcing, Yet Greater Proximity
Supplier Involvement in Assembly
Physical Network
Distance from Assembly Plant
Physical Network
Global Location Factors
Physical Network
Physical Network
Site Location Factors
Customer base Zoning restrictions
Construction/leasing Traffic
cost Safety/security
Land cost Competition
Site size Area business
Transportation climate
Utilities Income level
Location Incentives:
Tax credits, Relaxed government regulation, Job training,
Infrastructure improvement, etc.
Physical Network
Bureaucracy
Non-value added
activities
Strategic inertia, etc.
Physical Network
Source Contributor
Physical Network
Central Warehouse 2
Plant Plant
Warehouse Warehouse 3
Centralized System
Warehouse n
Decentralized System
higher service level
closer to customer
local presence may stimulate sales
better market information
Physical Network
Cons of Decentralized Structure
Inventories increase
cycle stock increases (Square Root Law of
Distribution): inventory level is
proportional to (no. of warehouses). So,
in a 4-warehouse system, inventories are
double that of a centralized system.
safety stocks are also higher due to
spreading the inventory, and increase in
stock-out probability
Higher overheads, administrative expenses
Need for better coordination and control
Physical Network
Physical Network:
Compress Overall Lead Times
Reduce Product Development, Procurement,
Production & shipment lead times
Maximize concurrency in and among:
product development
sourcing (procurement)
production
shipments and delivery to retailers
In summary, the total physical network
should support overall SC strategy of:
< low cost / responsiveness / .. >
Physical Network
Key Advantage for Asian & Middle
Eastern Countries: Exchange Rate
Differential with US$
Physical Network
China USA
SC Strategy
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC
Customer
Component Store
Vendor Manufacturing
DC Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
7
Omaha (175) Cincinnati (300)
11
11
6 10
Kansas City (150) St. Louis (100)
8
Plant Location with Multiple Sourcing:
Capacitated Location Problem
yi = 1 if plant is located at
site i, 0 otherwise
xij = Quantity shipped from
plant site i to customer j
Dj = Annual demand for
market j, j = 1 to m
Ki = capacity of plant I
fi = annual fixed costs
cij = cost of producing &
shipping one unit from i to j
Demand Region
Production and Transportation Cost per
1,000,000 Units Fixed Low Fixed High
Demand 10 8 14 6 7 11
Memphis 10 0 12
Wichita 0 0 0
Salt Lake 0 0 11
Cheyenne 6 7 0
Sportstuff.com example
BioPharma example
Case: SportStuff.com
SPORTSTUFF.COM
Sanjay Gupta founded SportStuff.com in 1996 with a mission of supplying parents with more
affordable sports equipment for their children. Parents complained about having to discard
expensive skates, skis, jackets, and shoes because children outgrew them rapidly. Sanjay's
initial plan was for the company to purchase used equipment and jackets from families and
any surplus equipment from manufacturers and retailers and sell these over the Internet. The
idea was very well received in the marketplace, demand grew rapidly, and by the end of 1996
the company had sales of $0.8 million. By this time a variety of new and used products were
sold and the company received significant venture capital support.
In June 1996, Sanjay leased part of a ware house in the outskirts of St. Louis to
manage the large amount of product being sold. Suppliers sent their product to the
warehouse. Customer orders were packed and shipped by UPS from there. As demand grew,
SportStuff.com leased more space within the warehouse. By 1999, SportStuff.com leased the
entire warehouse and orders were shipped to customers all over the United States.
Management divided the United States into six customer zones for planning purposes.
Demand from each customer zone in 1999 was as shown in Table 1. Sanjay estimated that the
next three years would see a growth rate of about 80 percent per year, after which demand
would level off.
Questions
1. What cost does SportStuff.com incur if all warehouses leased are in St. Louis ?
2. What SC network configuration do you recommend for SportStuff.com ?
,,"';.,.
CASE
~
STUDY
--
BIOPHARMA,INC. 1
In 2005, Phillip (Phil) Landgraf faced several glaring of production, can be assigned to either chemical as long
problems in the financial performance of his company, as the plant is capable of producing both. BioPharma
BioPharma, Inc. The firm had experienced a steep decline has forecast that its sales for the two chemicals are likely
in profits and very high costs at its plants in Germany and to be stable for all parts of the world, except for Asia
Japan. Landgraf, the company's president for worldwide without Japan, where sales are expected to grow by 10
operations, knew that demand for the company's prod percent annually for each of the next five years before
ucts was stable across the globe. As a result, the surplus stabilizing.
capacity in his global production network looked like a The Japanese plant is a technology leader within the
luxury he could no longer afford. BioPharma network in terms of its ability to handle regu
Any improvement in financial performance was latory and environmental issues. Some developments in
dependent on having the most efficient network in place, the Japanese plant had been transferred to other plants in
because revenues were unlikely to grow. Cutting costs the network. The German plant is a leader in terms of its
was thus a top priority for the coming year. To help design production ability. The plant has routinely had the highest
a more cost-effective network, Landgraf assigned a task yields within the global network. The Brazilian, Indian,
force to recommend a course of action. and Mexican plants have somewhat outdated technology
and are in need of an update.
BACKGROUND
BioPharma, Inc., is a global manufacturer of bulk chemi CURRENT PLANT COSTS
cals used in the pharmaceutical industry. The company AT BIOPHARMA
holds patents on two chemicals that are called Highcal After considerable debate, the task force identified the
and Relax internally. These bulk chemicals are used inter cost structure at each plant in 2005 as shown in Table
nally by the company's pharmaceutical division, and are 6-20. Each plant incurs an annual fixed cost that is inde
also sold to other drug manufacturers. There are distinc pendent of the level of production in the plant. The fixed
tions in the precise chemical specifications to be met in cost includes depreciation, utilities, and the salaries and
different parts of the world. All plants, however, are cur fringe benefits of employees involved in general manage
rently set up to be able to produce both chemicals for any ment, scheduling, expediting, accounting, maintenance,
part of the world. and so forth. Each plant that is capable of producing
For 2005, sales of each product by region and the pro either Highcal or Relax also incurs a product-related
duction and capacity at each plant are shown in Table 6-19. fixed cost that is independent of the quantity of each
The plant capacity, measured in millions of kilograms chemical produced. The product-related fixed cost includes
Highcal Relax
2005 2005 2005 2005
Region Plant Capacity Sales Production Sales Production
Latin America Brazil 18.0 7.0 11.0 7.0 7.0
Europe Germany 45.0 15.0 15.0 12.0 0.0
Asia w/o Japan India 18.0 5.0 10.0 3.0 8.0
Japan Japan 10.0 7.0 2.0 8.0 0.0
Mexico Mexico 30.0 3.0 12.0 3.0 18.0
U.S. U.S. 22:0 18.0 5.0 17.0 17.0
IThis case was inspired by Applichem (Aj, Harvard Business School Case 9-685-051, 1985.
Plant
Plant
Fixed Cost
(million $)
Highcal
Fixed Cost
(million $)
Relax
Fixed Cost
(million $)
Raw Material
($/kg)
Highcal
Production
cost ($/kg)
Raw Material
($/kg)
Relax
Production
cost ($/kg)
-
Brazil 20.0 5.0 5.0 3.6 5.1 4.6 6.6
Germany 45.0 13.0 14.0 3.9 7.0 5.0 8.5
India 18.0 4.0 4.0 3.6 4.5 4.5 6.0
Japan 17.0 6.0 6.0 3.9 7.5 5.1 9.0
Mexico 30.0 6.0 6.0 3.6 5.0 4.6 6.5
u.s. 21.0 5.0 5.0 3.6 5.0 4.5 6.5
depreciation of equipment specific to a chemical and BioPharma transports the chemicals in specialized
other fixed costs mentioned that are specific to a chemi containers by sea and in specialized trucks on land. The
cal. If a plant maintains the capability to produce a partic transportation costs between plants and markets are as
ular chemical, it incurs the corresponding product-related shown in Table 6-21. Historical exchange rates are shown
fixed cost even if the chemical is not produced at the in Table 6-22 and the regional import duties in Table 6-23.
plant. Given regional trade alliances, import duties in reality
The variable production cost of each chemical con vary based on the origin of the chemical. For simplicity's
sists of two components: raw materials and production sake, however, the task force has assumed that the duties
costs. The variable production cost is incurred in propor are driven only by the destination. Local production
tion to the quantity of chemical produced and includes within each region is assumed to result in no import duty.
direct labor and scrap. The plants themselves can handle Thus, production from Brazil, Germany, and India can be
varying levels of production. In fact, they can also be sent to Latin America, Europe, and the rest of Asia with
idled for the year, in which case they incur only the fixed out Japan, respectively, without incurring any import
cost, none of the variable cost. duties. Duties apply only to the raw material, production,
SC Strategy
1
Retailer
Game Setup 1
Factory DC Retailer
WO PO PO 2
Retailer
3
Transit Transit
Area Area Transit
Area Instructor
generates
daily
demand
Row 6 Row 5 Row 4 Row 3 Row 2 Row 1
Day 23!
PO
PO
PO
Factory DC Retailer
WO PO 2
Retailer
3
2
Step 2: Meet Today’s Demand Retailer
1
PO
PO
PO
Factory DC Retailer
PO 2
Retailer
3
Factory & DC: Demand = All Pending Purchase Orders : move chips to
downstream transit area; Discard fulfilled POs; keep unfulfilled POs as
Backorders (partial shipments also possible)
Retailers: Demand = Random number generated by Instructor; hand over chips to
instructor; unfulfilled demand = lost sales
Everyone: Update Shipments / Demand, Endg. Inventory & Backorder / Lost sale,
if any, on the Form
PO
PO
PO
Factory DC Retailer
WO PO 2
Retailer
3
3
Summary of Simultaneous Daily Steps for Each Player
Retailers
Step 1: Move chips from Upstream pipeline into Stock (the DC would have placed the chips in
the pipeline the previous day). Note down Inflow and Beg. Available stock in form.
Step 2: Meet demand generated by Instructor: Move chips from Stock one step downstream.
If Beg. Available stock is not enough, it leads to lost sale (no backorder for Retailer)
Step 3: Place PO on DC, if necessary, based on ending & pipeline stock. The DC will act on this
the next day (do not hand this to DC; just place this before DC in a FIFO stack)
DC
Step 1: Move chips from Upstream pipeline into Stock (Factory would have placed the chips in
pipeline the previous day). Note down Inflow and Beg. Available stock.
Step 2: Meet Retailer demands: move chips for all the pending POs, placed by the retailers on
prior day(s). DC does not look at / talk to Retailers. It merely acts on the POs.
Step 3: Place order on Factory, if necessary, based on ending & pipeline stock. Factory will look
at it next day.
Factory
Step 1: Move chips from Upstream pipeline into Stock. Note down Inflow into Stock and Beg.
Available stock. Also move chips from Recycle Bin into pipeline based on Work Order
placed by itself the previous day. Throw away this WO.
Step 2: Meet DC demand: Move chips from Stock downstream, for POs placed by DC on prior
days
Step 3: Place a self- Work Order, if necessary, based on ending stock. The Factory will act on
this the next day.
Retailer Form
Day inflow Avail. Today’s Endg. Stock- Order
Stock Demand Invent. out Placed
7 10 0
8 5 15 12 3 0 15
4
R-PO-3 R-PO-1 DC Operation
PO to Fac
10 (bo) 1. Move chips from upstream. Note Inflow and
60 15 update Available Stock
R-PO-2 2. Check Demand: all POs from Retailers!
DC
20 Allocate & ship, on a FIFO basis, move chips
to pipeline before each retailer
Chips Update Endg. Inventory & back orders
Chips to downstream
upstream = 40 3. Place Purchase Order, if necessary, on the
= 10, 15, 15
factory
DC Form
Day Inflow Avail. Total Endg. Back Order
Stock Shipped Invent. Ordered Placed
7 0 10
8 40 40 40 0 5 60
Back orders are not lost sales; can be carried over FIFO Shipments: 10 to meet
store 3 PO (backorder), 15 for
Endg. Inventory & back orders: one of them will be zero
store 1 PO, and a partial 15
for store 2 PO
8 40 40 40 0 20 80
Back orders are not lost sales; can be carried over FIFO Shipments: 10 to
Endg. Inventory & back orders: one of them will be zero meet earlier PO, 30
towards current demand
5
• Participants will be divided into 2 or 3 such supply
chains (SCs)
Order (Setup)
$100 / WO $ 25 / PO $ 25 / PO
Cost
Beg. Inventory 75 50 25
6
• Analyze & compare the results of all SCs with
respect to benchmark SC.
• Discuss:
– Bullwhip effects & cost characteristics in all SCs
– How can end-customer service be improved?
– How can overall supply chain costs be lowered?
• Work out a new SC coordination / information
sharing strategy and play the game again, if
time permits. This time, feel free to talk,
exchange info, maintain visibility upstream &
downstream & collaborate (but not collude).
• Was there any:
– Improvement in end-customer service level?
– Reduction in overall supply chain costs?
7
VII. Collaborative Forecasting &
Inventory Management
SC Strategy
Importance of Forecasting
Affects all upstream decisions in the supply chain
Forecast errors are expensive:
Overestimation of demand =>
markdowns, excess commitment of resources,
inventories of unwanted items, discounted sales
Underestimation of demand =>
stock-outs, opportunity costs: lost sales, goodwill,
image, market share, loss of revenue now & future
Forecasting provides extra lead time to:
React to new situations: Less surprises
Make optimal and proactive decisions
Firm Firm
Time Series:
X-axis = Time
•Simple and Wtd. Moving Average
•Exponential Smoothing
•Exp. Smoothing Adjusted for Trend
•Trend-Seasonality Regression
Quantitative •Other models
Causal Regression
Indep. variables = causal variables
Collaborative Forecasting & Operations
Forecasting in Supply Chain Era
Advances in IT
Point of sale (POS) scanner technologies,
Information sharing technology among firms,
common demand data bases, Extranets, etc.
=> Greater visibility upstream & downstream !
Garment Industry:
Quick Response Movement
Variety: garment, gender, type, style, color, size =>
numerous SKUs !
Intrinsic nature of the fashion industry
Long product development lead time: accuracy of
forecasts greater when closer to the selling season
More intense competition, etc.
Forecasting problems !
Capacity Postponement
Partition production capacity into:
Non-reactive capacity: used for:
items with more accurate forecasts
initial, minimum amounts of unpredictable items
Reactive capacity: used for:
unpredictable styles
second runs of production based on unfolding demand
Expected Demand q
Demand > q
Shortage, loss of revenue
Capacity commitments &
Cost of under-stocking = p-c
backup options to ensure
>50% service level
Collaborative Forecasting & Operations
CFR
Exp.
Demand
q*
Order
Firm Orders Sales Forecasts
Forecasts
CPFR Terminology
RM = Raw Materials
WIP = Work In Process (Semi-finished Parts)
FP = Finished Parts (this is also WIP)
FG = Finished Goods
Supplier Customer
Supplier Firm Distributor Retailer Customer
Retailer
Supplier Firm Customer
Distributor Retailer
Supplier Customer
80%
20%
Value
Items
80% 20%
Q
R
LT * Demand rate
SS
Z DDLT
LT
0
Q DDLT R
R R = DDLT +SS
SS
LT
0
R = Re-order Point; SS= Safety stock
Q = order quantity; LT = Lead Time
Collaborative Forecasting & Operations
max
Review Period
Collaborative Forecasting & Operations
Continuous Replenishment Systems (CRP)
Warehouse n
higher service level
closer to customer
local presence may stimulate sales
better market information
Collaborative Forecasting & Operations
RM Parts Production FP
Assembly
WIP
FG
Bought-out Parts
Suppliers Customers
Demand
Management
Bullwhip Effect:
Increasing demand variability as we go upstream
Supplier Customer
Customer
Supplier Firm
Distributor Customer
ALKO started in 1943 in a garage workshop set up by John Williams at his Cleveland home.
John had always enjoyed tinkering and in February 1948, he obtained a patent for one of his
designs for fighting fixtures. He decided to produce it in his workshop and tried marketing it
in the Cleveland area. The product sold well and by 1957 ALKO had grown to a $3 million
company. Its lighting fixtures were well known for their outstanding quality. By then, it sold
a total of five products.
In 1963 John took the company public. Since then ALKO has been very successful
and the company has started distributing its products nationwide. As competition intensified
in the 1980s, ALKO started introducing many new lighting fixture designs. The company's
profitability, however, started to worsen despite the fact that ALKO had taken great care to
ensure that product quality did not suffer. The problem was that margins started to shrink as
competition in the market intensified. At this point the board decided that a complete
reorganization was needed, starting at the top. Gary Fisher was then hired to reorganize and
restructure the company.
When Fisher arrived in 1999, he found a company teetering on the e dge. He spent the
first few months trying to understand the company business and the way it was structured.
Fisher realized that the key was in the operating performance. Although the company had
always been outstanding at developing and producing new products, they had historically
ignored their distribution system. The feeling within the company was that once you make a
good product, the rest takes care of itself. Fisher set up a task force to review the company's
cur-rent distribution system and come up with recommendations.
FISHER'S DECISION
Gary Fisher pondered the task force report. They had not detailed any of the numbers
supporting their decision. He decided to evaluate the numbers before making his decision.
1600000
1400000
1200000
1000000
$
800000
600000
400000
200000
0
0 200 400 600 800 1000 1200
Units (Thousands)
QUESTIONS
1. What is the annual inventory and distribution cost of the current distribution system?
2. What savings would result from following the task force recommendation and setting
up an NDC? Evaluate the savings as the correlation coefficient of demand in any pair of
regions varies from 0 to 0.5 to 1.0. Do you recommend setting up a NDC?
3. Suggest other options that Fisher should consider. Evaluate each option and
recommend a distribution system for ALKO that would be most profitable. How
dependent is your recommendation on the correlation coefficient of demand across
different regions?
XI. Strategic Sourcing &
E-Procurement
SC Strategy
Supplier Partnerships
Many types of relationships are possible.
Two ends of the spectrum:
Information sharing: helps supplier plan more
efficiently
Consignment scheme: vendor completely owns
and manages the inventory until retailer sells it
(“postponed purchasing”)
Major initiatives: VMI, CRP, QR, CPFR
Strategic Purchasing & E-procurement
Elements of Strategic Sourcing
Strategic segmentation
Analyze the sourcing process i.e., sourcing
value chain for each category
Based on total cost of ownership (TCO)
approach
Develop sourcing strategy for each group
based on TCO and aligned with supply
chain goals
Reduce
purchase cost
Transportation Warehousing
Reduce
Minimize Inventory Purchasing
internal carrying costs
TCO Factory administration
company costs
yield
Expediting
Develop communication
Understand future Identify options plan
requirements Analyze cost benefit Develop reporting &
Review spend with Review with compliance
customers management Develop transition plan
Identify buying points Select category Maintain market intelligence
Understand characteristics strategy Establish performance
Rank/weight characteristics Prepare negotiation accountability
Validate & finalise strategy
requirements
Relationship
Global
Restructuring
Sourcing
• Expand geographic supply base • Establish/develop key suppliers
• Develop new suppliers • Employ strategic alliances/partnering
• Profit from global supply/demand imbalances • Examine strategic make-versus-buy
• Capitalize on currency exchange • Develop integrated supply chain
• Take advantage of trade incentives • Establish joint ventures
Traditional Procurement
EFT
A/c A/c
Receivable Payable
PO
Vendor Manufacturer
Marketing Purchasing
Pending
POs
EFT
A/c A/c
Receivable Reverse PO Payable
Vendor Manufacturer
Marketing Purchasing
Impact of VMI
Cuts overall costs
Minimizes “double buffering” of inventory
Eliminates paperwork
Reduces administrative & ordering costs
Cuts time for order fulfillment
Competitive advantages for both parties in the SC
Reduces selling-buying bureaucracy
Reduces fixed ordering costs, reduces barriers to
frequent shipments, facilitates JIT shipments
Counters the “bull-whip effect”
The Firm
MRO hubs
Horizontal Indirect Materials
Hubs (MROs)
Horizontal
spot markets
Reverse Auctions
Traditional: forward auction by seller;
price movements are upward
Reverse: backward auction by buyer;
price movements are downward
Buyers’ Reasons
Reduced purchase prices
Reduced administrative costs
RFQ process: 1) write specs; 2) id of suppliers; 3)
qualify suppliers; 4) mail RFQs; 5) wait for
responses; 6) evaluate responses; 7) notify
selected supplier; 8) negotiate final terms. With
RA: steps 4 to 7 are much faster.
Reduced inventory levels, faster replenishment
close to time of need
Contracts to Improve
Overall Supply Chain Profits
Double marginalization: buyer and seller make
independent decisions, instead of together =>
Actual SC profits << Potential SC profits
Buyback or returns contracts
Revenue sharing contracts
Quantity flexible contracts
Contracts to Coordinate Supply Chain Costs
Contracts to Increase Agent Effort,
Performance Improvement
Strategic Purchasing & E-procurement
Returns Policy: Buyback Contracts
Manufacturer specifies wholesale price and a
buyback price at which the retailer can return
unsold items at the end of the season
Results in an increase in salvage value for
Retailer, inducing retailer to order larger qty
Manufacturer is willing to take on some of the
cost of overstocking because the SC will end
up selling more on average
Manufacturer profits and supply chain profits
can increase
Strategic Purchasing & E-procurement
Example
Bulk contract cost = cB = $10,000 per million
units
Spot market cost = cS = $12,500 per million
= 10 million units; = 4 million units
p* = (cS – cB) / cS = (12,500 – 10,000) / 12,500 =
0.2
Q* = NORMINV(0.2,10,4) = 6.63
Therefore should sign a long-term bulk contract
for 6.63 million units per month and purchase
any additional capacity on the spot market
SC Strategy
Continuous Improvement
Define and classify processes (standard
process classifications are being developed:
see for instance, the system of American
Productivity and Quality Center (APQC):
www.apqc.org)
SC Continuous Improvement
Processes: Look For
Overly complicated / unclear processes
Production of defective outputs
Unnecessary transportation / movements
Need for inspections
Queues, Inventories, Waiting times
Duplicated effort, Unnecessary data
collection / recording
Having to process / transport large lots to
pursue economies of scale, etc.
SC Continuous Improvement
SC Continuous Improvement
Supply Chain Performance Metrics
Quality Measures:
Defect Rates, Order Entry Accuracy, Billing
Errors, Number of Customer Returns, Picking
/ Shipping Accuracy
Productivity Measures:
Asset Management Measures: Inventory Turns,
ROI, ROA, Profitability of Partners in the
Chain, etc.
NPDP: Developmental Cost, Developmental
Lead Time, Innovativeness, Frequency of New
Product Introduction, etc.
SC Continuous Improvement
Several Improvement
Philosophies
SC Continuous Improvement
Process Mapping Tools
IDEF (Integrated Definition System)
Workflow management software
Enterprise modelers
Object oriented modeling, etc.
Integrating material and information flows
and transformations, data bases, etc.
continues to be a challenge
SC Continuous Improvement
SCOR
Developed by Supply-Chain Council (SCC)
www.supply-chain.org
SC Continuous Improvement
SCOR (cont’d)
SCOR is based on Five Distinct Management
Processes: Plan, Source, Make, Deliver, Return
Plan
Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source
SC Continuous Improvement
SCOR (cont’d)
• Plan: Demand / Supply Planning & Management
SC Continuous Improvement
Current State
SC Continuous Improvement
Future State
SC Continuous Improvement
Ensuring Sustainability
Supplier Customer
Supplier Firm Distributor Retailer Customer
Retailer
Supplier Firm Customer
Distributor Retailer
Supplier Customer
SC Continuous Improvement