Supply Chain Management

Overview What is it? Supply chain strategies Purchasing -> Read –Outsourcing –Partnering Managing the supply chain –Postponement –Channel assembly –READ others Efficient vs. responsive supply chain ========================= Vendor selection -> Read

Supply Chain Management Coordinates and manages all activities of the supply chain Components of the supply chain: –External distribution –Internal functions –External suppliers

Supply Chain Supplier of materialsSupplier of services Tier 1 Tier 3 Tier 2 Legend Distribution center Manufacturer

Supplier of materialsSupplier of services Tier 1 Tier 3 Tier 2 Legend Distribution center Manufacturer External Suppliers Internal functions External Distributors

Milk Supply Chain

Supply-Chain Strategies Many suppliers Long-term suppliers Vertically integrate Keiretsu Virtual company

Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic PO’s Infrequent, large lots Delivery to receiving dock © 1995 Corel Corp. Many Suppliers Strategy

1 or few sources per item Partnership (JIT) Long-term, stable On-site audits & visits Exclusive contracts Frequent, small lots Delivery to point of use © 1995 Corel Corp. Few Suppliers Strategy

Few suppliers strategy – Wallace Co. Partnering Listening to the needs of the customer Vendor-stocking program 98% on-time delivery Quick response on problems for customer

Daimler Chrysler’s Supplier Cost Reduction Effort

Raw Material (Suppliers) BackwardIntegration CurrentTransformation ForwardIntegration Finished Goods (Customers) Ability to produce goods previously purchased –Setup operations –Buy supplier Make-buy issue Major financial commitment Hard to do all things well Vertical Integration Strategy

Vertical Integration RAC "MiG" is the first Russian "vertically" integrated aircraft manufacturing company

Uniquely Japanese form of corporate organization System of mutual alliances and cross-ownership –Company stock is held by allied firms Lowers need for short-term profits Two types: horizontal and vertical Keiretsu Network Strategy

Vertical Keiretsu Links manufacturers, suppliers, distributors, & lenders –‘Partnerships’ extend across entire supply chain Primarily cars and electronics industries Ex. Toyota, Nissan, Honda-Matsushita, Hitachi, Toshiba, Sony

© 1995 Corel Corp. Virtual Company Strategy Network of independent companies –Linked by technology PC’s, faxes, Internet etc. –Each contributes core competencies –Typically provide services Payroll, editing, designing May be long or short-term –Usually, only until opportunity is met

Virtual company - Biogen Formed in 1978 with a simple, research-centered business model –Develop drugs and sell licenses to pharmaceutical companies Received preliminary approval to market Avonex (reduces the progression of M.S.)

Virtual company - Biogen Four major tasks to produce Avonex

Virtual company - Biogen Four major tasks to produce Avonex Ben Venue Labs (OH)

Virtual company - Biogen Four major tasks to produce Avonex Ben Venue Labs (OH) Packaging Coordinators (Philadelphia

Virtual company - Biogen Four major tasks to produce Avonex Ben Venue Labs (OH) Packaging Coordinators (Philadelphia Amgen Louisville facility

Virtual company - Biogen Biogen managed the network of partners Success story –FDA approval to market was 35 hours –No product shortages –No recalls –Production increased 5-fold over the next 3 years

Virtual company - Biogen Benefits to Biogen –Competitive cost structure –Had limited and small scale production experience –Fixed assets low –Capital investment was low compared to the size of its business –Investment risk was shared by partners

Managing the Supply-Chain Options: –Postponement –Channel assembly –Drop shipping –Blanket orders –Electronic ordering and funds transfer –Vendor managed inventory –Standardization –Internet purchasing (e-procurement)

Postponement A tactic used by assemble-to-order and mass-customization firms Delay the customization of a product or service until the last possible moment e.g. Drug company produces the drug as a powder. When orders are received then produce tablets in the dosage for which the order was received.

Channel assembly A form of postponement Utilize the distribution channel as an assembly station Warehouse performs a value-added service e.g. Car battery manufacturer produces batteries for several private labels. The manufacturer ships unmarked batteries to warehouse. When orders are received, warehouse places decals for the brand name and packages for that private label.

Purchasing Outsourcing –Make or buy decision Partnering

Outsourcing Choosing to purchase a service or part from an outside source; Make or buy decision –Insourcing vs. outsourcing decision Advantages –Allows the firm to focus on core competencies –Adds capacity without additional fixed cost and overhead –Can be more cost effective –Supports market agility

Source: (1997data)+company records Hourly Labor Rates Key Is Total Cost Of Ownership

Li & Fung - Outsourcing Hong Kong based exporter American and European customer base The Limited is one of their customers Receive order for 10,000 garments: –Purchase yarn from Korean company –Have the yarn dyed and woven by a company in Taiwan –Purchase Japanese buttons and zippers from YKK’s Chinese plants –Garments made in 5 different plants in Thailand

Partnering Process of developing a long-term relationship with a supplier based on: – mutual trust – shared vision – shared information – shared risk

Beer distribution game Consider a simplified beer supply chain, –A retailer who sells to the customer –A wholesaler which supplies the retailer –A distributor which supplies the wholesaler –A factory with unlimited raw materials which makes (brews) the beer and supplies the distributor Each component in the supply chain has: –unlimited storage capacity –fixed supply lead-time –order delay time between each component

Beer distribution game

Each week, each component in the supply chain tries to meet the demand of the downstream component. Any orders that cannot be met are recorded as backorders, and are met as soon as possible. No orders will be ignored, and all orders must eventually be met.

Beer distribution game At each period, each component in the supply chain is charged a $1.00 shortage cost per backordered item. At each period, each location is charged $.50 inventory holding cost per inventory item that it owns. Each component owns the inventory at that facility. In addition, –the wholesaler owns inventory in transit to the retailer; –the distributor owns inventory in transit to the wholesaler; –the factory owns both items being manufactured and items in transit to the distributor.

Beer distribution game Each supply chain member orders some amount from its upstream supplier. It takes one week for this order to arrive at the supplier. Once the order arrives, the supplier attempts to fill it with available inventory. There is a two week transportation delay before the material being shipped by the supplier arrives at the customer who placed the order.

Supply-Chain Dynamics

(a) Customer Firm A

Supply-Chain Dynamics (a) Customer Firm A Firm B

Supply-Chain Dynamics (a) Customer Firm A Firm B Firm C

Supply-Chain Dynamics (a) Customer Firm A Firm B Firm C Time (b) Materials requirements

Supply-Chain Dynamics (a) Firm A Customer Firm A Firm B Firm C Time (b) Materials requirements

Supply-Chain Dynamics (a) Customer Firm A Firm B Firm C Firm A Time (b) Materials requirements

Supply-Chain Dynamics Firm C Firm A Time Materials requirements Bullwhip effect Inaccurate or distorted demand information created in the supply chain

Supply-Chain Environments Two supply chain designs for competitive advantage –Efficient supply chain Goal is to minimize inventories and maximize the efficiency of manufacturers and suppliers in the chain –Responsive supply chain Goal is to react quickly to market demands by positioning inventories and capacities in order to hedge against uncertainties of demand

Supply-Chain Environments Environments Best Suited for Efficient and Responsive Supply Chains

Supply-Chain Environments Environments Best Suited for Efficient and Responsive Supply Chains Factor Demand Competitive priorities New-product introduction Contribution margins Product variety

Supply-Chain Environments Environments Best Suited for Efficient and Responsive Supply Chains FactorEfficient Supply Chains DemandPredictable; low forecast errors CompetitiveLow cost; consistent prioritiesquality; on-time delivery New-productInfrequent introduction ContributionLow margins Product varietyLow

Supply-Chain Environments Environments Best Suited for Efficient and Responsive Supply Chains FactorEfficient Supply Chains Responsive Supply Chains DemandPredictable; low Unpredictable; high forecast errors CompetitiveLow cost; consistent Development speed; fast prioritiesquality; on-time delivery times; delivery customization; volume flexibility; high- performance design quality New-productInfrequentFrequent introduction ContributionLowHigh margins Product varietyLowHigh