1

Supply Chain Strategy

OBJECTIVES

Supply-Chain Management : Define

Measuring Supply-Chain Performance

Bullwhip Effect

Outsourcing

Global Sourcing

Value Density

Mass Customization

What is a Supply Chain?

Supply-chain is a term that describes how

organizations (suppliers, manufacturers,
distributors, and customers) are linked together

Services

Supply networks
Manufacturing

Suppliers

Service support
operations

Local
service
providers

Customers

Inputs

Transformation

Localization

Output

Suppliers

Manufacturing

Distribution

Customers

What is Supply Chain

Management?

Supply-chain management is a total

system approach to managing the entire
flow of information, materials, and finance
from raw-material suppliers through
factories and warehouses to the end
customer

Supply Chain Mgt.-Understanding the Concept

What is a Supply Chain?

Consists of all parties involved directly or indirectly in fulfilling a

customer order.

Is dynamic and involves the constant flow of information, materials

and funds between different stages.

Objectives of a Supply Chain

Should be to maximize the overall value generated.

Importance of Supply Chain Decisions

Supply chain design, planning and operation decisions play a

significant role in the success or failure of a company.

Higher the supply chain profitability, the more successful is the

supply chain.

Business/ Economic factors shaping

Supply Chain Management

Consumer demand
Globalization
Competition
Information & communication
Inventories
Transportation
Facilities
Government regulations
Environment

SCM Network
Material
Flow
D1
S2
S2

S2
Tier 2 Supplier

R1

S1
S1

Manufacturer

S1
Tier 1 Supplier

D2

D3
Information
Flow

Distributors

R2

R3

Retailers

Customers

Typical Supply Chains

Purchasing

Receiving

Operations

Storage

Storage

Distribution

Typical supply chain for a Manufacturer

Supplier

Storage

Manufacturer

Storage

Supplier
Supplier

Distributor

Retailer

Customer

Typical supply chain for a Service

Supplier

Storage

Service

Supplier
PRODUT / SERVICES
INFORMATION
FINANCES

Customer

Supply Chain Decision Making

Framework

10

Competitive Strategy

Supply Chain Strategy

Efficiency

Inventory

Supply Chain
Structure

Transportation

Facilities

SCM Drivers

Responsiveness

Information

Formulas for Measuring

Supply-Chain Performance

One of the most commonly used measures in all of

operations management is Inventory Turnover

Cost
of
goods
sold
Cost
of
goods
sold
Inventory
turnover

Inventory turnover
Average
Averageaggregate
aggregateinventory
inventoryvalue
value

In situations where distribution inventory is

dominant, Weeks of Supply is preferred and
measures how many weeks worth of inventory is in
the system at a particular time

Average

aggregate
inventory
value
Average
aggregate
inventory
value
52
Weeks
weeks
Weeksof
of supply
supply
52
weeks

Cost

Costof
of goods
goodssold
sold

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Example of Measuring
Supply-Chain Performance
Suppose
Suppose aa companys
companys new
new annual
annual report
report
claims
claims their
their costs
costs of
of goods
goods sold
sold for
for the
the
year
year is
is Rs
Rs 16
16 crore
crore and
and their
their total
total average
average
inventory
inventory (production
(production materials
materials ++ work-inwork-inprocess)
process) is
is worth
worth Rs
Rs 3.5
3.5 crore.
crore. This
This
company
company normally
normally has
has an
an inventory
inventory turn
turn
ratio
ratio of
of 10.
10. What
What is
is this
this years
years Inventory
Inventory
Turnover
Turnover ratio?
ratio? What
What does
does itit mean?
mean?

Example of Measuring SupplyChain Performance (Continued)

Cost
of
goods
sold
Cost
of
goods
sold
Inventory
Inventoryturnover
turnover
Average
Averageaggregate
aggregateinventory
inventoryvalue
value
==16/3.5
16/3.5

==4.57
4.57

Since
Sincethe
thecompanys
companysnormal
normalinventory
inventoryturnover
turnoverratio
ratiois
is
10,
10,aadrop
dropto
to4.57
4.57means
meansthat
thatthe
theinventory
inventoryis
isnot
not
turning
turningover
overas
asquickly
quicklyas
asitithad
hadin
inthe
thepast.
past. Without
Without
knowing
knowingthe
theindustry
industryaverage
averageof
ofturns
turnsfor
forthis
this
company
companyititis
isnot
notpossible
possibleto
tocomment
commenton
onhow
how they
they
are
arecompetitively
competitivelydoing
doingin
inthe
theindustry,
industry,but
butthey
theynow
now
have
havemore
moreinventory
inventoryrelative
relativeto
totheir
theircost
costof
ofgoods
goods
sold
soldthan
thanbefore.
before.

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The Old Paradigm:

Push Strategies

Production decisions based on long-term

forecasts
Ordering decisions based on inventory &
forecasts
What are the problems with push strategies?
Inability to meet changing demand patterns
Obsolescence
The bullwhip effect:

Excessive inventory
Excessive production variability
Poor service levels

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A Newer Paradigm:
Pull Strategies

Production is demand driven

Production and distribution coordinated with true customer
demand
Firms respond to specific orders

Pull Strategies result in:

Reduced lead times (better anticipation)

Decreased inventory levels at retailers and manufacturers
Decreased system variability
Better response to changing markets

But:
Harder to leverage economies of scale
Doesnt work in all cases

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Push and Pull Systems

What

are the advantages of push

systems?
What are the advantages of pull
systems?
Is there a system that has the
advantages of both systems?

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A new Supply Chain

Paradigm

A shift from a Push System...

Production decisions are based on forecast

to a Push-Pull System

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Push-Pull Supply Chains

The Supply Chain Time Line

Customers

Suppliers

PUSH STRATEGY
Low Uncertainty

PULL STRATEGY
High Uncertainty
Push-Pull Boundary

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Bullwhip Effect
Inventories are progressively larger moving backward through the supply chain.

Tier 2
Suppliers

Tier 1
Suppliers

Producer
(Mfg)

Upstream
Note : Last but not the least the final customer

= Amount of Inventory

Distributor

Retailer

Downstream

Hau Lees Concepts of Supply

Chain Management

Hau Lees approach to supply chain (SC) is one

of aligning SCs with the uncertainties revolving

around the supply process side of the SC
A stable supply process has mature technologies
and an evolving supply process has rapidly
changing technologies
Types of SCs
Efficient SCs
Risk-Hedging SCs
Responsive SCs
Agile SCs

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Hau Lees SC Uncertainty

Framework
Demand Uncertainty

Supply
Uncertainty

Low
(Stable
Process)
High
(Evolving
Process)

Low (Functional
products)

High (Innovative
products)

Efficient SC

Responsive SC

Ex.: Grocery

Ex.: Computers

Risk-Hedging SC

Agile SC

Ex.: Hydroelectric power

Ex.: Telecom

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What is Outsourcing?

Outsourcing is defined as the act of

moving a firms internal activities
and decision responsibility to
outside providers

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Reasons to Outsource

Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Employee-driven
Cost-driven

Global Sourcing

Steel
Aluminum

Tires

Gears

Steel
Castings
Tires
Al Alloy
Eltxn. parts

Pig Iron

Potential Supply Chain Linkages

North America

Market A

Plant 1

Source A
Figure 16.3

Europe

Market B

Plant 2

Source B

Far East

Market C Markets

Plant 3

Manufacturing
Locations

Source
Source C Locations

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Value Density

Value density is defined as the value

of an item per kilogram of weight

It is used as an important measure

when deciding where items should be

stocked geographically and how they
should be shipped

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Mass Customization

Mass customization is a term used to describe the

ability of a company to deliver highly customized
products and services to different customers

The key to mass customization is effectively

postponing the tasks of differentiating a product for

a specific customer until the latest possible point in
the supply-chain network