1. Business, Operations and Supply Chain Strategy (MS 911) Supply Chain Strategy: Drivers of Supply Chain Performance

2. Teaching schedule, topics 7-12 TopicLecture 7Introduction to supply chain strategy 8Determining organisational boundaries: vertical integration and outsourcing 9Drivers of supply chain performance 10Dynamics of vertical supply networks: demand fluctuations and the bullwhip effect 11International issues in supply chain strategy 12Risk management in supply networks; including the design and management of sustainable supply chains 2

3. Required reading for this lecture Required reading for this lecture on drivers of supply chain performance: Chartered Institute of Purchasing and Supply (2009), Coursebook for the Unit on Strategic Supply Chain Management, 2 nd edition, chapter 15 3

4. Drivers of supply chain performance Inventory Facilities Transportation Information 4

5. The purpose of inventory The key purpose of inventory is to smooth out imbalances between the rate of demand for to-be-transformed (or already transformed) resources and the rate at which they are supplied. A useful analogy to illustrate this idea is that of a water tank. 5

6. Water tank analogy Supply FLOW STOR- AGE POINT Demand 6

7. Water tank analogy Supply 7

8. Water tank analogy Demand 8

9. Inventory dynamics Generally, both inflow and outflow rates fluctuate over time. When the inflow rate exceeds the outflow rate, then the inventory in the storage point increases. In contrast, when the outflow rate exceeds the inflow rate, then the inventory in the storage point decreases. Therefore, inventory dynamics are driven by the difference between inflow (or supply) and outflow (or demand) rates. 9

10. Water tank analogy Supply Demand 10

11. Water tank analogy Supply Demand 11

12. Types of inventory Cycle inventory to smooth out planned imbalances between demand and supply during the inventory replenishment cycle Anticipation inventory to smooth out imbalances between demand and supply that are planned for the longer-term Safety (or buffer) inventory to smooth out unplanned imbalances caused by the unpredictability of demand and/or supply Pipeline inventory all resources that are in the process of being transformed from one state to another also known as Work In Progress (WIP) 12

13. Water tank analogy Supply PIPELINE CYCLE + ANTICI- PATION + SAFETY Demand 13

14. Cycle inventory The purpose of cycle inventory is to smooth out planned imbalances between demand and supply during the inventory replenishment cycle. These imbalances are planned in order to balance the ordering and holding costs of inventory. (This is the basis for the Economic Order Quantity model.) 14

15. Anticipation inventory The purpose of anticipation inventory is to smooth out imbalances between demand and supply that are planned for the longer-term. These imbalances are planned when either demand or supply is expected to be highly variable in the longer term. Many products experience substantial variations in consumer demand over the course of a year. Ice cream, for instance, will be mainly sold during the summer months, whereas woollen jumpers are popular in winter. Other products, on the other hand, experience substantial variations in supply over the course of a year – seasonal fruit and vegetables being the most obvious example. Decisions about the level of anticipation inventory involve trade-offs between responsiveness and efficiency. 15

16. Safety inventory The purpose of safety (or buffer ) inventory is to smooth out unplanned imbalances caused by the unpredictability of demand and/or supply. Safety stocks can serve as physical buffers protecting the supply chain from environmental uncertainty: Decisions about the level of safety inventory involve trade-offs between responsiveness and efficiency. 16 C

17. production of raw materials by raw material producers storage of raw materials by raw material producers consumption of finished goods by final customers transportation of finished goods to Distribution Centres transportation of raw materials to factory 1 storage of raw materials at factory 1 fabrication of raw materials into components storage of finished goods at factory 2 storage of finished goods at Distribution Centres storage of components at factory 1 assembly of components into finished goods transportation of components from factory 1 to factory 2 storage of components at factory 2 C transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers Cycle, anticipation and safety inventory 17

18. Pipeline inventory Pipeline inventory is caused by the movement of (to-be) transformed resources from point to point in the supply chain. More generally, pipeline inventory represents all resources that are in the process of being transformed from one state to another. As defined in this more general sense, pipeline inventory also includes Work In Progress (WIP). The amount of pipeline inventory is equal to the amount produced or transported during the relevant lead time; that is, the production or transportation lead time (measured in weeks, say) times the rate of production or transportation (measured in units/week). 18

19. production of raw materials by raw material producers storage of raw materials by raw material producers consumption of finished goods by final customers transportation of finished goods to Distribution Centres transportation of raw materials to factory 1 storage of raw materials at factory 1 fabrication of raw materials into components storage of finished goods at factory 2 storage of finished goods at Distribution Centres storage of components at factory 1 assembly of components into finished goods transportation of components from factory 1 to factory 2 storage of components at factory 2 C transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers Pipeline inventory 19

20. Inventory decisions: trade-off The fundamental trade-off managers face when making inventory decisions is between responsiveness and efficiency. Increasing inventory will generally: make the supply chain more responsive to the final customers; but also: reduce the efficiency of the supply chain. A ‘lean’ supply chain puts more emphasis on the need for efficiency. An ‘agile’ supply chain puts more emphasis on the need for responsiveness. 20

21. production of raw materials by raw material producers storage of raw materials by raw material producers consumption of finished goods by final customers transportation of finished goods to Distribution Centres transportation of raw materials to factory 1 storage of raw materials at factory 1 fabrication of raw materials into components storage of finished goods at factory 2 storage of finished goods at Distribution Centres storage of components at factory 1 assembly of components into finished goods transportation of components from factory 1 to factory 2 storage of components at factory 2 C transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers Facilities 21

22. Facilities decisions Number of production and/or warehousing facilities Fewer, centralised facilities (economies of scale) More, decentralised facilities (responsiveness) Location of production and/or warehousing facilities To reduce costs of supply To increase proximity to customers Production and/or warehousing capacity High utilisation of capacity Availability of excess capacity (volume flexibility) Production and/or warehousing technolog y Focus on technology and/or production process Focus on market and/or product 22

23. Facilities decisions storage of materials using materials to produce finished goods storage of finished goods 23

24. Facilities decisions: trade-off The fundamental trade-off managers face when making facilities decisions is between the number, location, capacity and type of the production and/or warehousing facilities (efficiency ) and the level of responsiveness that these facilities provide to the (final) customers. 24

25. production of raw materials by raw material producers storage of raw materials by raw material producers consumption of finished goods by final customers transportation of finished goods to Distribution Centres transportation of raw materials to factory 1 storage of raw materials at factory 1 fabrication of raw materials into components storage of finished goods at factory 2 storage of finished goods at Distribution Centres storage of components at factory 1 assembly of components into finished goods transportation of components from factory 1 to factory 2 storage of components at factory 2 C transportation of finished goods from Distribution Centres to retailers storage of finished goods at retailers transportation of finished goods from retailers to final customers Transportation 25

26. Transportation decisions Mode of transportation : Air Lorry Rail Ship Pipeline Electronically (e.g. MP3 files via the Internet) Route and network selection : Route: the path along which a product is transported Network: a collection of locations and routes along which a product can be transported 26

27. Transportation decisions storage of materials transpor- tation of materials storage of materials 27

28. Transportation decisions: trade-off The fundamental trade-off managers face when making transportation decisions is between the speed of transporting a given product (responsiveness ) and the cost of transporting it (efficiency ). 28

29. Decisions regarding information management Coordination and information sharing ‘Push’ versus ‘pull’ (location of the CODP) Forecasting Aggregate planning Use of Information and Communication Technology (ICT) 29

30. Supply chain coordination To maximise the total amount of added value created, the activities of all stages of the supply chain must be coordinated. Coordination between the different stages of the supply chain requires that each stage shares information with other stages, as appropriate. But information sharing between two or more parties may influence the share of the total added value that is captured by each of the parties! 30

31. Coordination of pull processes ‘ Pull’ processes are performed in response to actual customer orders. Effective coordination of pull processes requires information on actual customer demand to be transmitted very quickly and accurately from downstream to more upstream stages of the supply chain. Decentralised coordination (based on actual customer orders) 31

32. Coordination of push processes ‘Push’ processes are planned and controlled on the basis of prior forecasts of customer orders. Effective coordination of push processes generally requires a large-scale, centralised decision support system using a common database (MRPII, ERP). Information is transmitted from the centre to each stage of the supply chain. Centralised coordination (based on detailed planning) 32

33. Forecasting and aggregate planning Forecasting involves the use more or less sophisticated (quantitative and/or qualitative) techniques to predict future demand conditions. In line with these forecasts, a company needs to develop plans to achieve its strategic performance objectives. The aggregate plan is a managerial statement of time-phased production rates, workforce levels, and inventory investment that considers customer requirements and capacity limitations. It is stated in commonly understood, aggregated units. A key decision is how to use aggregate planning both in the company itself and throughout the entire supply chain. 33

34. Use of Information and Communication Technology (ICT) Electronic Data Interchange (EDI) Internet (incl. web portals): E-business (B2B) E-commerce (B2C) Enterprise Resource Planning (ERP) and specialist SCM software 34