Optimizing Supply Chain Strategies for Competitive Performance

1. OUTLINE • Any supply chain or facilities stories or news? • New Homework • Discuss Homework –names, team numbers, short titles, use solver to learn it also, submit excel file when using solver • Review • Chopra Chapters 1-6 and cost determination (check your edition) • Note – only what we covered in each of those chapters

2. What is a supply chain? • All the activities required to fill a customer’s order • Objective – Maximize the overall value that is generated

3. Phases • Design • Decide on structure • Planning • Define operating policies for short term operations • Annual forecast • Operation • Implement operating policies

4. Process View • Cycles • Customer • Retailer • Distributor • Manufacturer • Supplier • Push/pull • Push : initiated by anticipation of orders • Pull : initiated by a customer order

5. Strategies • Employing resources to achieve objectives • Broad in scope • Long term • Coordination among all units • Marketing • Design Engineering • Manufacturing • Distribution • Sales • Field support

6. Performance - Introduction Competitive Strategy – set of customers’ needs that a company seeks to satisfy through its products and services All functions play a role and have their own strategies Supply chain and competitive strategies must fit together to form a coordinated strategy

7. Performance – Achieving competitive fit Competitive fit is achieved in three steps: By understanding the uncertainties in customers’ needs and the supply chain By understanding the supply chain’s capabilities By matching the strategies

8. Performance - Uncertainties Quantity Response time Variety Service level Price Rate of innovation

9. Performance - Responsiveness Wide ranges of quantities Short lead times Large variety Innovation Service level Supply uncertainty Responsiveness comes at a cost

10. Performance – Product Life Cycle Demand – uncertain to relatively certain Margins from high to low Availability essential early to capture the market Price – unimportant to important

11. Definitions • Facilities – places where product is • Stored • Assembled • Fabricated • Inventory – • Raw materials • Work in process (WIP) • Finished goods (FG) • Transportation • Spares • Facilities – where services are provided

12. Definitions - continued • Transportation – moving inventory from point to point • Ground • Road • Rail • Pipe line • Barge • Air • Ship • Information • Data • Analysis

13. Definitions - continued • Transportation – moving inventory from point to point • Ground • Road • Rail • Pipe line • Barge • Air • Ship • Information • Data • Analysis

14. Framework

15. Facilities • Role in the chain – the where of the supply chain • Role in the competitive strategy – Location, location, location • Components of decisions • Location • Capacity • Operational methods • Warehousing methods • Tradeoff: Responsiveness vs. Efficiency

16. Inventory • Role in the supply chain – alleviate mismatch between supply and demand • Increase demand that can be satisfied • Exploit economies of scale • Definitions: • Material flow (Flow time) – elapsed time between material entering the supply chain and exiting • Throughput – rate at which material moves through the chain • Little’s law: Inventory = Throughput x Flow time • Flow time is also called cycle time

17. Inventory - continued • Role in competitive strategy: responsiveness • Components of inventory decisions: • Cycle inventory – satisfies demand between replenishments • Safety Stock – protects against variations in demand • Seasonal Inventory – built up to counter demand that exceeds capacity • Sources – from whom to buy (or make)

18. Transportation • Role: move material • Role in competitive strategy: match required responsiveness • Components of decisions: • Mode (rail, truck, air, ship, pipeline, electronic) • Route and network selection • Sourcing • Who provides transportation services?

19. Information • Role: connects the members of the chain and supports daily operations • Role in strategy: most important underpinning • Components of decisions: • Push/pull • What to share • Forecasting and planning • Pricing • Enabling technologies: Software (EDI, ERP, SCM)

20. Obstacles • Increasing variety • Shorter life cycles • Demanding customers • Decreasing vertical integration • Globalization

21. Types of Chains • Internal • Often as complex as complete chains • Good place to start integrating • Need to educate people in the organization to understand their internal supply chains • External • Consider potential conflicts among prospective members • Find common goals • Each must think they will benefit

22. More on Information • EDI • Bar Coding and scanning • Data warehousing – separate from operational data • Internet • Started with DARPA (Defense Advanced Research Projects Agency) • Intranets • World Wide Web • Decision support systems • SQL, LP, Scheduling software • Definition ATP: Available to promise

23. Benefits of collaboration • Establishing contacts • Gaining Insight • Joint projects

24. Definitions • Benchmarking • Identifying, understanding and adapting outstanding practices from other organizations to improve performance • Logistics • Planning, implementing and controlling the flow and storage of goods, services and information

25. International Chains – what is different? • Greater geographic and time distances • Diversity of demand and supply conditions • Wage rates • Taxes • Incentives • Political climates • Exchange rates • Special laws

26. Cycle time • Definition – the total elapsed time required to complete a process (e.g. 4 years to get an engineering degree, one month to build an airplane) • Little’s Law: Cycle time = Work in process/Throughput • Causes of long cycle times: • Waiting • Old processes that don’t add value • Serial vs. parallel, external vs. internal • Repeated activities • Batching • Excessive controls

27. Measuring Performance • What should measuring performance accomplish? • Basis for understanding the system • Influence behavior in the system • Provide information about results • Provide information that will initiate actions to improve the system • Create accountability in individual operations • The concept of Supply Chain Management requires that overall performance be measured, but intermediate points must also be measured to insure accountability

28. Measuring Performance (continued) • Typical internal measures • % orders on time • Inventory turns • Cycle time • Costs/Goods sold • Aging of orders

29. Measuring Performance (continued) • Typical supply chain measurements • Cycle time • % orders on time (service level) or fill rate • Order aging • Comparisons to competitors (Bench marking) • Responsiveness to changes in demand • End items sold/Total costs • Market Share

30. Chapter 4 – Designing the distribution network in a Supply Chain • Move and store product between stages • The structure of the network influences: • Response time • Variety of products • Availability of products • Customers’ experience • Visibility of orders • Returnability

31. Some basic relationships in a supply network • Lower response times require more facilities • Inventory costs increase with the number of facilities • Transportation costs decrease with the number of facilities • Total logistics costs vary parabolically with the number of facilities – there is an optimum number of facilities

32. Major types of distribution networks • Definition: Inventory Turns = Annual Sales/ average inventory • Manufacturing Storage with direct shipping (drop) • Manufacturing Storage with direct shipping and in transit merge • Distributor Storage with carrier delivery • Distributor Storage with Last Mile delivery (not carrier) • Manufacturer/Distributor Storage with customer pickup • Retail Storage with customer pickup

33. Models Capacitated Plant Location Gravity location model Allocation of demand

34. Capacitated Plant Location Model

35. Discounted Cash Flow • Money earned in the future is worth less today • Present Value = Future Value /( 1 + interest rate/period)^ # of periods • Example1: I lend someone $1000 for two years at 4% interest, compounded annually. How much do they have to pay me back four years from now? F = P(1+I)^n = 1000(1+.04)^2 = $1081.60 • Example2: A company will make a $5000 profit 3 years from now. How much should they invest now to break even at a 10% Minimum Attractive Rate of Return (MARR)? P = F/(1+I)^n = 5000/(1+.1)^3 = $3756.57

36. Chapter 14 – Sourcing Decisions • Assessing suppliers • Selecting suppliers - Single or multiple • Contracts • Design Collaboration • Procurement Process

37. Definitions • Cost of Goods Sold – total expenditures to obtain or manufacture the product. This does not include Sales and administrative costs. • Safety Inventory – Inventory held to protect against variations in demand and lead time • Cycle Inventory – Inventory held to account for lot sizing • Landed Cost – Purchase Price plus transportation in • Bullwhip effect – accentuation of variations in demand as we go up the chain • Replenishment lead time – time from ordering to receipt

38. Adding up the costs (example) • A plant generates 270,000 earned hours (established by standards for each of the products produced). 85% efficiency is assumed. • The cost of an hour of labor, including benefits, is $30 • Indirect labor totals $30M • Materials cost $70M • Material overhead costs are $4M • What is the cost of a product containing 0.8 hours of standard labor and $20 of material? • We first calculate the total labor rate as (30,000,000+270,000*30/0.85)/270,000=$146.40/hour

39. Adding up the costs (example continued) • Material overhead = $4M/$70M= 5.7% • Direct and indirect labor =0.8* $146.40=$117.12 • Material =$20.00 • Material Overhead= 0.057*20 =$1.14 • Total Cost =$138.26 • We can separate the direct and indirect labor into: • Direct labor = 0.8*30 =$24 • Indirect =$93.12 • And you can see why everyone attacks overhead • If you are independent, the profit would add another 10% or so. It is very dependent on the industry and level of investment

40. Cost Distribution