Business, Operations and Supply Chain Strategy (BOSCS) Introduction to Supply Chain Strategy BOSCS Intro to Supply Chain Strategy

Teaching schedule, topics 7-12 Lecture 7 Introduction to supply chain strategy 8 Determining organisational boundaries: vertical integration and outsourcing 9 Drivers of supply chain performance 10 Dynamics of vertical supply networks: demand fluctuations and the bullwhip effect 11 International issues in supply chain strategy 12 Risk management in supply networks; including the design and management of sustainable supply chains BOSCS Intro to Supply Chain Strategy

Required reading for this lecture Required reading for this lecture on supply chain strategy: Chartered Institute of Purchasing and Supply (2009), Coursebook for the Unit on Strategic Supply Chain Management , 2nd edition, chapters 10, 11, 13

The boundaries of the business organisation There are two possible perspectives on the boundaries of the (business) organisation: external perspective: the supply chain internal perspective: the value chain BOSCS Intro to Supply Chain Strategy

External perspective: the supply chain The supply chain consists of all the stages of production – widely defined; that is, including manufacture, supply, transport and service – that are involved, directly or indirectly, in fulfilling customer orders for a particular product or range of products.

Simple diagram of the supply chain production of raw materials by raw material producers storage of raw materials at factory 1 storage of raw materials by raw material producers transportation of raw materials to factory 1 fabrication of raw materials into components storage of components at factory 2 storage of components at factory 1 transportation of components from factory 1 to factory 2 assembly of components into finished goods C storage of finished goods at factory 2 transportation of finished goods to Distribution Centres storage of finished goods at Distribution Centres Transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers consumption of finished goods by final customers BOSCS Intro to Supply Chain Strategy

Supply ‘chain’ versus ‘network’ At any stage of the supply chain, more than one actor (or ‘player’) may be involved. In other words, there may be multiple suppliers, manufacturers and/or distributors. Therefore, it may be more accurate to use the term ‘Supply Network’. BOSCS Intro to Supply Chain Strategy

The potential complexity of a supply network storage of materials using materials to produce finished goods storage of materials transportation of materials storage of materials storage of finished goods

Design features of a supply network The key design features of a supply network: task design workflow design organisational design coordination (planning & control) motivation The crucial problem in a supply network is that no firm is necessarily in overall control of its design. Unless there is a dominant focal firm who can pull the network together, each actor may end up making its own decisions, which will not necessary be consistent with those of the other actors. BOSCS Intro to Supply Chain Strategy

Supply Chain Management Supply Chain Management is concerned with the management of two or more (or, ideally, all) successive stages of a Supply Chain (or Network). Supply Chain Management is made much more difficult by: Uncertainty in demand: information is needed on (changes in) the demand for resources Uncertainty in supply: information is needed on (changes in) the availability of resources BOSCS Intro to Supply Chain Strategy

Maximising Added Value From a ‘systems’ perspective, the overriding goal should be to maximise the added value created by the supply network as a whole: AV = B – C = (B – P) + (P – C) But each actor or player in the network will, in practice, try to maximise its own share of this added value. This is not necessarily a ‘zero-sum’ game, but could lead to a decrease in the overall amount of added value. BOSCS Intro to Supply Chain Strategy

Key decision phases in SCM Strategic (design) phase Strategic decisions relate to the configuration of the supply chain. They have a long-term impact, lasting years. Planning phase Planning decisions cover a period of three months, say, to a year. They include decisions such as aggregate (or production) planning and product promotions over that period. Operational phase Operational decisions span days or weeks. They include the sequencing of production and the filling of specific customer orders. BOSCS Intro to Supply Chain Strategy

Different views of supply chain processes (1) Cycle view A ‘Cycle’ view of a supply chain divides processes into cycles, each performed at the interface between two successive stages of a supply chain. Each cycle starts with an order placed by one stage of the supply chain and ends when the order is received from the supplier stage. BOSCS Intro to Supply Chain Strategy

Cycle view Customer Retailer Distributor Manufacturer Supplier 14 Customer order cycle Retailer Replenishment cycle Distributor Manufacturing cycle Manufacturer Procurement cycle Supplier 14

Different views of supply chain processes (2) Push/Pull view (location of the CODP) A ‘Push/Pull’ view of a supply chain characterises processes based on their timing relative to that of a customer order. The ‘Customer Order Decoupling Point’ (CODP) indicates that storage point in the supply chain, ‘upstream’ from which the planning and control of production activities is decoupled from the actual flow of customer orders. BOSCS Intro to Supply Chain Strategy

The push/pull boundary Processes upstream from the CODP are ‘push’ processes. They are planned and controlled on the basis of prior forecasts of customer orders. Processes downstream from the CODP are ‘pull’ processes. They are performed in response to actual customer orders.  That is, the CODP constitutes the ‘push/pull boundary’ in the supply chain. The precise location of the CODP defines the basic structure of the supply chain, and thereby also the basic strategy for SCM.

Strategic policies for supply chain planning and control Engineer To Order (ETO) no CODP exists in the supply chain Make To Order (MTO) CODP is located at the point where raw materials are stored Assemble To Order (ATO) CODP is located at the point where components are stored Make To Stock (MTS) CODP is located at the point where finished goods are stored BOSCS Intro to Supply Chain Strategy

C Engineer To Order Advantages: Zero cost of holding inventory production of raw materials by raw material producers Advantages: Zero cost of holding inventory High flexibility Quality of design can be high Disadvantages: Delivery is very slow Delivery may not be dependable storage of raw materials at factory 1 storage of raw materials by raw material producers transportation of raw materials to factory 1 fabrication of raw materials into components storage of components at factory 2 storage of components at factory 1 transportation of components from factory 1 to factory 2 assembly of components into finished goods C storage of finished goods at factory 2 transportation of finished goods to Distribution Centres storage of finished goods at Distribution Centres transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers consumption of finished goods by final customers BOSCS Intro to Supply Chain Strategy

C Make To Order Advantages: Low cost of holding inventory production of raw materials by raw material producers Advantages: Low cost of holding inventory High flexibility Quality of design can be high Disadvantages: Delivery is relatively slow Delivery may not be dependable storage of raw materials at factory 1 storage of raw materials by raw material producers transportation of raw materials to factory 1 fabrication of raw materials into components storage of components at factory 2 storage of components at factory 1 transportation of components from factory 1 to factory 2 assembly of components into finished goods C storage of finished goods at factory 2 transportation of finished goods to Distribution Centres storage of finished goods at Distribution Centres transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers consumption of finished goods by final customers BOSCS Intro to Supply Chain Strategy

C Assemble To Order Advantages / disadvantages: production of raw materials by raw material producers Advantages / disadvantages: Medium cost of holding inventory Medium flexibility Quality of design can still be quite high Delivery is relatively fast Delivery is relatively dependable storage of raw materials at factory 1 storage of raw materials by raw material producers transportation of raw materials to factory 1 fabrication of raw materials into components storage of components at factory 2 storage of components at factory 1 transportation of components from factory 1 to factory 2 assembly of components into finished goods C storage of finished goods at factory 2 transportation of finished goods to Distribution Centres storage of finished goods at Distribution Centres transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers consumption of finished goods by final customers BOSCS Intro to Supply Chain Strategy

C Make To Stock Advantages: Fast delivery Dependable delivery production of raw materials by raw material producers Advantages: Fast delivery Dependable delivery Efficient production Disadvantages: High cost of holding inventory Low flexibility Standard quality of design storage of raw materials at factory 1 storage of raw materials by raw material producers transportation of raw materials to factory 1 fabrication of raw materials into components storage of components at factory 2 storage of components at factory 1 transportation of components from factory 1 to factory 2 assembly of components into finished goods C storage of finished goods at factory 2 transportation of finished goods to Distribution Centres storage of finished goods at Distribution Centres transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers consumption of finished goods by final customers BOSCS Intro to Supply Chain Strategy

Key criteria for choosing between SCM policies The key criteria upon which the choice between these different strategic policies for SCM must be based are: Feasibility Desirability

Feasibility The feasibility of a particular SCM strategic policy relates to the nature, uncertainty and unpredictability of the external environment : Customer demand may be fundamentally unforecastable; or any demand forecasts may be subject to significant errors. The supply of raw materials and/or components may be unreliable because of poor conformance quality or a low level of dependability on the part of the vendors. BOSCS Intro to Supply Chain Strategy

Desirability Even if a particular strategy is feasible, it may not be desirable , depending on its: acceptability , in terms of its financial return; vulnerability , in terms of the risks involved (of demand forecasts being wrong or vendors not delivering on time) ‘strategic fit’ with business and operations strategy; that is, how well it supports the priorities put on specific performance objectives. In relation to the last point, it should be noted that selecting one particular strategy in preference to another implies important trade-offs between the various performance objectives in SCM. BOSCS Intro to Supply Chain Strategy

Strategic performance objectives in SCM in supply chain management Strategic performance objectives in SCM Customer service (‘responsiveness’) Resource utilisation (‘efficiency’) Quality: quality of design quality of conformance Speed (of delivery) Dependability (of delivery) Flexibility: product flexibility, innovation, customisation, range; volume flexibility; delivery flexibility Selling price Cost of production BOSCS Intro to Supply Chain Strategy

Achieving strategic fit between the competitive priorities for the supply chain and the capabilities of the supply chain Industry & market environment Competitive priorities for supply chains Competitive advantage based on supply chains Business performance Business strategy Supply chain strategy Distinctive capabilities of supply chains Supply chain activities Supply chain processes Endowments of tangible & intangible resources Resources committed to supply chains BOSCS Introduction to Operations Strategy

How is strategic fit achieved? The business must understand its customer needs and competitors’ actions ; including the role of demand uncertainty. The business must understand its supply chain capabilities (in terms of its responsiveness and efficiency); including the role of supply uncertainty: a CODP that is located upstream fits better with competitive priorities based on flexibility and quality of design ; a CODP that is located downstream fits better with competitive priorities based on fast and dependable delivery and efficiency . The business must achieve an appropriate balance between flexibility and efficiency, taking account of the levels of demand and supply uncertainty. BOSCS Intro to Supply Chain Strategy

Potential obstacles to achieving strategic fit Increasing variety of products Decreasing product life cycles Increasingly demanding customers Fragmentation of Supply Chain ownership Vertical dis-integration of production activities Outsourcing of non-production / support activities Globalisation Globalised supply chains Increasing global competition

Your task Use the Internet and/or other information sources to investigate three examples of effective supply chain management. For example: Computer manufacturers (Dell) Supermarkets (Tesco) Car manufacturers (Toyota) Consumer products (Procter & Gamble) Mobile phone manufacturers (Apple) BOSCS Intro to Supply Chain Strategy