MD 375 Operations Strategy & Consulting

Operations Strategy
Supply Chain Management

What is a Supply Chain?

All the organizations and processes in production External and internal view of the production process Integration of process regardless of ownership Views the process from the product, not the company, perspective

Supply Chain Management is the care and feeding of these relationships

Supply Chain Management as Competitive Edge

Materials Providers
Suppliers Core Production Process Distributors Retailers

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For example: Competitive Priorities

Cost Quality Delivery Flexibility Innovation

Designing the Multi-facility Network

Number Size Location Specialization (focus)
By product line By production volumes By process stage By geographic region

Layout
Some key issues are efficiency, communication, and ergonomics

Managing the Multifacility Network

Infrastructural issues Choosing and managing a network type
Horizontal network Vertical network

Degree of (de)centralization
Centralized networks are more appropriate when different facilities: Produce similar products Serve similar customers who value uniformity Operate in similar environments with similar constraints and/or resources Decentralized networks are more appropriate when facilities: Produce different products Serve customers with different needs Operate in very different local environments

Developing the Supply Chain: Supplier Relations

Competitive Orientation
The view that negotiations between buyer and seller is a zero-sum game. Often used when a firm represents a significant share of the suppliers sales or many substitutes are available. Example: WalMart

Cooperative Orientation
The view that the buyer and seller are partners. Includes sole sourcing. Often used with strategically important and/or high valueadded components. Example: McDonalds

Mixed strategy
Seeks to combine the advantages of the competitive orientation (e.g. low prices) with the cooperative orientation (e.g. few suppliers). Example: Toyota

Managing Supply Chain Relationships

Long-term relationships Arms Length Characteristics Necessary but nonstrategic Commodity product Purchases account for a small percentage of suppliers production Switching costs are low Low value-added Non-strategic Necessary but non-strategic Dividing purchases across multiple suppliers reduces the ability of suppliers to achieve significant economies of scale Vigorous competition can be achieved with few suppliers Switching costs are fairly high Low value-added Strategic Components help to differentiate the product Customized, non-standard products Multiple interaction effects with other inputs High degree of supplier/ buyer interdependence High value inputs

Relationship

Short-term contracts Price sensitivity Minimal interface between firms Contractual safeguards are sufficient to enforce agreements

Longer-term contracts Price sensitivity more broadly defined Minimal to moderate interface between firms Contractual safeguards are sufficient to enforce agreements

Long-term contracts Relation-specific investments Supplier performance more broadly defined Self-enforcing agreements are necessary for optimal performance

Strategic Management of the Supply Chain

Efficient Supply Chains
Competitive priorit(ies): Coordinate the flow of materials and services Minimize inventories / maximize efficiency of all players in the chain Work best when demand is predictable and products/services are stable Competitive priorit(ies): React quickly to market demands by positioning inventories & capacities Hedge against uncertainties in demand Work best when demand is unpredictable, new product introduction is frequent, and product variety is high

Responsive Supply Chains

Orchestrated Networks

Innovations in information technology & operational processes Sophisticated coordination mechanisms

Supply Chain Dynamics

Horizontal networks
Resource allocation decisions changes in product & demand If the strong get stronger

Vertical networks
Managing inventory and orders back through the supply chain Information sharing challenges

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The Bullwhip Effect

Increased fluctuations in inventory and order levels moving back the supply chain from the retailer up to the manufacturer Causes of the Bullwhip Effect
Demand forecast updating Order batching Price fluctuations Rationing and shortage gaming

Example:

Managing The Bullwhip Effect

Causes Techniques

Demand forecast updating

Order batching Price fluctuations

Improve forecasting accuracy by sharing information directly

Encourage smaller orders batches by reducing the time and cost of ordering Stabilize prices (such as everyday-lowprice)

Rationing and shortage gaming

Keep customers updated about supply available Institute ordering policies when shortages occur

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Outsourcing and Offshoring

Capabilities/resources

Coordination requirements

Strategic control and risks

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Insourcing vs. Outsourcing Considerations

Pros
Increased

Cons
Capital

control over price,

Insourcing

quality, etc. Economies of combined operations Proprietary products protected

costs Capability limits Time limits Opportunity costs Reduced flexibility to change partners Reduced volume flexibility
Unfavorable

capital costs Specialization Outsourcing Competition Increased flexibility

Low

allocation of product Lack of control over price, quality, etc. Lock-in from specialized contracts and assets Transaction (coordination) costs

Risk Assessment
Operational Risk
Can you codify work? Can you measure work precisely & objectively?

Structural Risk
Can you monitor & supervise work effectively? Tacit knowledge & intellectual capital

Operational risk high, keep nearby Structural risk high, keep in house or closely allied Risk mitigation