Supply Chain Strategy and Outsourcing Students should be able to: Identify the important factors in designing a competitive supply chain. Explain the motivating reasons for outsourcing services or products and their processes. Discuss the factors that enabled firms to create virtual supply chains. Describe the key considerations businesses should make when implementing successful outsourcing decisions.

Key Concepts in Operations Management

External Value-Chain Linkages O M E X T R N A L S U P I External Value-Chain Linkages First-Tier Supplier Service/Product Provider Support Processes Support Processes Business- to- Business (B2B) Customer Relationship Process New Service/ Product Development Process Business-to-Customer (B2C) Customer Relationship Process New Service/ Product Development Process Supplier Relationship Process Order -Fulfillment Process Supplier RelationshipProcess Order -Fulfillment Process

“Dell’s Return-on-Invested-Capital Calculation” ROIC Drivers: Pricing, Product Mix, and Volume Sales Force Productivity Forecasting Material Costs Transformation Costs R&D & I/S Costs Capacity Mgt Out-of-box Audit Logistics Quality/Cust Service Accounts Receivable Terms and Timing Inventory Turns and Delivery Backlog/Lead Times Excess & Obsolete Risks Accounts Payable Terms and Timing Facilities Mgt IBU Risk/Currency Risk Sales Operating Income Cost of Goods Sold NOPAT* Income Taxes Operating Expense ROIC Accounts Receivable Working Capital Invested Capital Inventory Accounts Payable Fixed Assets Accrued Liabilities *Net operating profit after taxes.

Inventory Measures Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year Weeks of supply = = 10.4 weeks $2 million ($10 million)/(52 weeks) Inventory turns = = 5 turns/year $10 million $2 million Example 9.1

Financial Measures Return on Assets Working Capital Cost of Goods Sold Total Revenue Cash Flow

Visibility - Velocity - Variability Consider Also: A Completely New and Faster Business Model? Dell Suppliers Manufacturer Channels Customers Suppliers Manufacturer Customers Suppliers Manufacturer Customers Visibility - Velocity - Variability

Supply Chain Strategies Efficient supply chains focus on the efficient flows of services and materials, keeping inventories to a minimum. Work best where demand is highly predictable. Responsive supply chains are designed to react quickly. Work best when firms offer a great variety of services or products and demand predictability is low.

Environments & Design Features Environment Factors Efficient Supply Chains Responsive Supply Chains Design Factors Efficient Supply Chains Responsive Supply Chains

Delivery Performance and Profit Margin by Internet Retailer Exhibit 4 Delivery Performance and Profit Margin by Internet Retailer Deliver as Promised (DP) Promised Delivery Time (Days) Actual Delivery Margin (%) Samgoody.com 9.44 10.00 39.64 CDUniverse.com 7.54 8.17 15.62 BarnesandNoble.com 9.96 9.78 26.38 Amazon.com 10.13 8.79 31.43 Towerrecords.com 9.00 8.54 35.14 Avg. 9.21 9.05 29.62 Under Promise/ Over Deliver (UO) Margin (%) FYE.com 6.48 4.84 38.61 Alphacraze.com 17.88 13.00 13.81 BestBuy.com 11.28 6.33 36.75 CDnow.com 13.72 7.08 33.67 Walmart.com 8.58 4.19 26.12 Alldirect.com 17.24 6.80 -7.72 12.53 7.04 23.54

Source: David A. Taylor, “A Master Plan for Software Selection,” Supply Chain Management Review. January/February 2004

Dell Assembler Keyboard Die Casting Speaker Connector Cable Cooler High Value/Complex Low Value/Simple

Outsourcing/Offshoring What are the drivers for outsourcing or offshoring? What are the potential pitfalls for outsourcing or offshoring?

H-P Outsourcing Here a Part, There a Part … New H-P server’s path to market: Idea hatched in Singapore Concept approved in Houston Concept design done in Singapore Engineering design in Taiwan; initial manufacture Final assembly in Singapore, Australia, China, and India

The Shaping of Modern Value Chains Ten Forces that Flattened the World Berlin Wall and Windows Operating System Web Browsers Work Flow Software Open Sourcing Outsourcing

Outsourcing in India Began dismantling tariff and export controls in 1991 Economy expected to grow at 7% Focus on business services Technology sector is strong Low wages – high skills 100 million English speakers

The Shaping of Modern Value Chains Ten Forces that Flattened the World 6. Offshoring 7. Supply Chaining 8. In-Sourcing 9. In-Forming 10. The Steroids

Comments on China’s Role in Global Value Chains Economic Issues “Glorious to be wealthy, and some people can be more wealthy than others.” Capitalism Chinese style. Expect 7 to 8 percent growth for next 10 years. Constraints: Much savings but no investment; no support for small innovative businesses; 50 percent of bank loans go unpaid. Singapore has the best Asian economy – has joint ventures in China (Singapore Industrial Park in Suzhou) Problems for sustainable growth: pollution control; infrastructure development; inconsistent electric power. Too much manufacturing – not enough entrepreneurial service firms.

Comments on China’s Role in Global Value Chains Management Issues Cost, Quality, and dimensions of Customer Service are key competitive priorities. System is more important than the people because if leadership changes everything could crumble. Must move from an “experience-driven” management style to a “scientific-driven” management style. American experience will not always work in China – must incorporate Chinese culture and enterprises Lower levels of staff are trained in modern practices, but their bosses are not. Need to build a good foundation before introducing elaborate systems: quality improvement; technology from abroad.

Triple Convergence Merging of the 10 flattners enabled by a global, Web-enabled playing field. Development of business practices to promote horizontal collaboration. Three billion people entering the playing field. (China, India, Russia, Eastern Europe, Latin America, and Central Asia).