1. Supply Chain Management Lecture 3

2. Outline Today –Some more supply chain examples –Start Chapter 2 Thursday –Chapters 2 and 3

3. Maximizing supply chain surplus ManufacturerDistributorRetailerCustomer $10$5$1 Distributor profit = 600*($5-$1) = $2,400 Supply chain profit = $1,800 + $2,400 = $4,200

4. Maximizing supply chain surplus ManufacturerDistributorRetailerCustomer $10$1 Supply chain profit = $5,000

5. Celestial Seasonings The herbs were originally harvested by hand in the Rocky Mountains Currently, herbs and leafs come from growers around the world –“We’ve been working to establish sustainable harvests and fair wages for more than 30 years” What advantages does selling tea over the Internet provide? What are advantages of having one production facility? What are disadvantages of having one production facility?

6. ProBuild The nation’s largest supplier of building materials to national builders, local contractors and do-it-yourselfers 550+ facilities nationwide –Lumber yards, millwork shops, distribution centers What are advantages of having multiple facilities? Why is inventory management so important?

7. ProBuild Housing outlook –Unemployment at 10.2% –Foreclosures still rising ProBuild –Sales declined over 20% in 2009 Why did ProBuild added hundreds of salespeople in 2009?

8. Mortgage “A mortgage is the transfer of an interest in property to a lender as a security for a debt, usually a loan of money” What went wrong in the mortgage supply chain? Is there lead time the mortgage supply chain? Is the mortgage supply chain easier to automate than a manufacturing supply chain? Source: http://www.wikipedia.org

9. Interceptor Body Armor The interceptor body armor system consists of a vest made of Kevlar that has a front and back insert for a ceramic protective plate –March, 2003 Start of the invasion of Iraq –April, 2003 Congress approves to buy 300,000 interceptor body armor vests –October, 2003 Nearly one-quarter of the 130,000 U.S. troops in Iraq still had not been an interceptor body armor vest –8 months after combat operations were declared over, all personnel in Iraq had an interceptor body armor vest "Body Armor Saves Lives in Iraq; Pentagon Criticized for Undersupply of Protective Vests,"Washington Post. 4 Dec, 2003 What went wrong?

10. Interceptor Body Armor Demand 8,593 Demand 77,052 Demand 210,783 Supply 23,900

11. Interceptor Body Armor Demand 9,586 Demand 108,808 Demand 478,541 Supply 40,495

12. Interceptor Body Armor Production –October, 2002 Production capacity 3,000 plates per month –October, 2003 Production capacity 25,000 plates per month Where should the production facilities be located?

13. Crocs Crocs shoes are made from Croslite –Extremely light –Does not skid –Odor resistant –Easy to wash The founders wanted to name the shoes something that captured the amphibious nature –“Alligator” had already been taken

14. General Map of Croc’s Basic supply, production and distribution processes Compound Mold Assemble Package & Label Chem Pellets Dye Accessories Sports protectors Color Pellets Size & Style blanks Complete Croc Labeled, packaged Croc Small retailer Large Retailer Distribution Dow Chem & others Glue etcGrommetsJibbitzLeather Pre-booked orders Production Orders (plus %) In-season orders Warehouse and distribute Various Suppliers Mold producers Style & size molds

15. Compound Italy Florida* China Mexico* Mold Canada* Bosnia China Mexico* Brazil* Assemble Denver 3rd party distributor Package & Label Denver Color Pellets Size & Style blanks Small retailer Large Retailer Europe Warehouse / distribute Denver Style & size molds Bosnia China Mexico* Brazil* Bosnia China Mexico* Brazil* Bosnia China Mexico* Brazil* Labeled, packaged Croc Complete Croc Large Retailer Asia Large Retailer South America Croc’s Global Production strategy [2] [1] [3] [4] [5] [1] Maintain Florida plant for “Made in USA label [2] Take advantage of tariffs, e.g., Canada to Isreal [3] Maintain higher service component of warehousing and labeling for small retailers [4] Minimize geographic transport by producing in region, including warehousing [5] Move style and size molds between facilities to maximize production [6] Use China for large volume, long-term orders from pre-season orders [6] *Owned by Crocs vs. outsourced

16. Crocs Revolutionized the shoe industry supply chain model –First shoe sold in 2003 (Revenue 1.2 million) –Flip flop sandal introduced in 2006 (Revenue 355 million) –Diversify in other products 2008 (Revenue 860 million) What are advantages of having multiple production facilities? What are advantages of short lead times? What are advantages of excess capacity? How does Crocs plan for demand?

17. Netflix World’s largest online movie rental service Where is Netflix’s inventory?

18. Netflix What are the differences between Netflix and Blockbuster

19. Netflix Netflix versus Blockbuster store Where should the distribution centers be located? No. of locations No. of employees No. of titlesNo. DVDs available Blockbuster Inc. Netflix 8,000+ Stores 16 DCs 89,000 381 1,000-8,000 per location 13,500 100s per location 3.3 million How does Netflix plan for demand? Who are Netflix’s competitors?

20. Study of Supply Chain Management Successful supply chain management requires decisions on the flow of information, product, and funds that fall into three decision phases –Supply chain strategy or design –Supply chain planning –Supply chain operation

21. Decision Phases in a Supply Chain TYPICAL DECISIONS Strategic Tactical TYPETIME FRAME Supply chain network design (How many plants? Location and capacities of plants and warehouses?) Supply chain strategies (Sell direct or through retailers? Outsource or in-house? Focus on cost or customer service?) Product mix at each plant years Workforce & Production planning Inventory policies (safety stock level) Which locations supply which markets Transportation strategies 3 mo.- 1year Operational Production scheduling Decisions regarding individual orders Place replenishment orders daily

22. Achieving Strategic Fit What is a strategy in general?

23. Strategy Corporate Strategy Competitive Strategy

24. What is Competitive Strategy? Competitive strategy –Defines, relative to competitors, a company’s set of customer needs that it seeks to satisfy through its products and services Wal-Mart –Everyday low prices Coors –The coldest tasting beer in the world, brewed with Rocky Mountain spring water Dell –Custom-made computer systems at a reasonable cost Competitive strategy is defined based on how the customer prioritizes product cost, delivery time, variety, and quality

25. New Product Development Competitive Strategy To execute a company’s competitive strategy, all functions that play a role must each develop its own strategy Marketing and Sales OperationsDistributionService Finance, Accounting, Information Technology

26. Strategy Corporate Strategy Competitive Strategy Supply Chain Strategy

27. What is Strategic Fit? Strategic fit –For any company to be successful, its supply chain strategy and competitive strategy must fit together Wal-Mart –Everyday low prices –Owns its infrastructure and distribution network Coors –The coldest tasting beer in the world, brewed with Rocky Mountain spring water –Refrigerated transport, main facility near Rocky Mountains Dell –Custom-made computer systems at a reasonable cost –Online ordering, no middle-man

28. How is Strategic Fit Achieved? 1.Understanding the customer and supply chain uncertainty 2.Understanding the supply chain capabilities 3.Achieving strategic fit

29. 1. Understanding the Customer and Supply Chain Uncertainty Understanding customer uncertainty –Demand varies along certain attributes Quantity in each lot, response time, variety of products needed, convenience, price, innovation, etc –Implied demand uncertainty Demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand

30. 1. Understanding the Customer and Supply Chain Uncertainty Understanding supply uncertainty –Supply uncertainty is strongly affected by the life-cycle position of the product. New products being introduced have higher supply uncertainty than mature products

31. 1. Understanding the Customer and Supply Chain Uncertainty Demand Uncertainty Low (Functional Product) High (Innovative Product) Low (Stable Process) Low (Functional Product) High (Evolving Process) Supply Uncertainty Basic Appeals, Grocery, Food, Most Commodities Fashion Appeals, Computers, Pop Music, Toys Some Power, Some Food Produce, Precious Metals M-commerce, Telecom, High- end Servers, Semiconductor Demand Uncertainty Low (Functional Product) High (Innovative Product) Low (Stable Process) Low (Functional Product) High (Evolving Process) Efficiency, Information Integration, Auto- Replenishment, VMI (Efficient SC) Build-to-Order, Flexible Mfg, Accurate Response, Postponement (Flexible SC) Buffer Inventory, Shared Resources, Multi- Sourcing, Info Sharing (Risk-Hedging SC) Supply Network, Postponement, Design Collaboration (Agile SC) Source: Hau Lee, “Aligning supply chain strategies with product uncertainties”, California Management Review, 44(3), 2002

32. 2. Understanding the Supply Chain Capabilities Supply chain capabilities –Supply chain responsiveness Respond to wide ranges of quantity demanded, short lead times, large variety, innovative products, high service level, etc –Supply chain efficiency/cost Highly efficient Highly responsive Somewhat responsive Somewhat efficient Integrated steel mills Hanes apparel Most automotive production Seven-Eleven Japan

33. 2. Understanding the Supply Chain Capabilities HighLow High Responsiveness Cost