Supply Chain Management Based on slides for Chase Acquilano and Jacobs Operations Managementfor Competitive advantage McGraw-Hill © Holmes Miller 1999
Supply Chain Management • What is it? • Purchasing strategies • Measuring Performance • Bullwhip Effect • Outsourcing • Mass Customization
What is Supply-Chain Management? • Supply-chain management • is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer
Digression • Make vs. Buy • Purchasing strategies • Vertical integration • Many suppliers • Few suppliers • Virtual company
Formulas for Measuring Supply-Chain Performance • One of the most commonly used measures in all of operations management is “Inventory Turnover” • 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
Question If the “cost of goods sold” for a company is$1,000,000 and the “average aggregate inventory value” is $25,000, what is the “inventory turnover”? How many weeks of supply is there? Answer: Turnover = 40 i.e., (1,000,000/25,000=40) Weeks of supply = 1.3
Inventory Turnover Statistics Hardware Stores: 3.5 Retail Nurseries & Garden Supply: 3.3 General Merchandise Stores: 4.7 Grocery Stores: 12.7 New & Used Car Dealers: 6.8 Gas stations & mini-marts: 39.3 Apparel & Accessories: 3.5 Furniture & home furnishings: 4.1 Drug Stores: 5.3 Liquor Stores: 6.6 Other Retail Stores: 4.3 Wholesale Groceries & related: 17.8 Vehicles & automotive: 6.9 Furniture & fixtures: 5.5 Sporting goods: 4.8 Drug store items: 8.5 Apparel & related: 5.5 Petroleum & related: 42.4 Alcoholic beverages: 8.5 Source: Bizstats.com
The Impact of Variability The Bullwhip Effect Tailoring the supply chain to the type of product
Bullwhip Effect The magnification of variability in orders in the supply-chain Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders Order Quantity Order Quantity Order Quantity Time Time Time A lot of retailers each with little variability in their orders…. …can lead to greater variability for a fewer number of wholesalers, and… …can lead to even greater variability for a single manufacturer.
The Beer Game Orders Factory Distributor Delay Delay Delay Delay Wholesaler Retailer Delay Delay Delay Delay Material Four players per team
Supply Chain Design Strategy Based on concepts developed by Marshall Fischer at Wharton (Penn) • Functional Products • Staples that people buy at retail outlets • Predictable demand and long life cycles • Physical costs • Strategy: Minimize physical costs • Innovative Products • Life cycle is just a few months (e.g. fashion clothes & computers) • Demand is unpredictable • Market mediation costs (inventory & stockouts) • Strategy: Maximize responsiveness & flexibility
Supply-Chain Strategy Functional Products Innovative Products Custom made clothes Gourmet food Liberal arts education Low-cal breakfast cereal Supply Chain Efficient Match Standard picture frames Standard eyeglass frames Sub shop Supply Chain Responsive Match
Exercise • Go to the Mc-Graw Hill “Company Tours” link on the course’s “web links” page • Select a functional and innovative product and take the tour of its operations – for example: • Functional: Canadian Springs Water • Innovative: Corbin Motorcycle Saddles • From what you see, identify supply chain issues • Are there any potential mismatches? • Discuss and present results to the class.
What is Outsourcing? Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers Reasons to outsource Organizationally-driven Improvement-driven Financially-driven Revenue-driven Cost-driven Employee-driven New term: Offshoring
Outsourcing – Value Added Services • Contract manufacturers • capacity and quality • Channel assembly • reduces transportation cost and damage • Vendor-managed inventory • stockless purchasing
Exercise • What are some of the social and ethical issues surrounding global sourcing? • In the United States • In the “source” countries? • What are some arguments for? Against • In your group prepare a list of pros and cons. Where do you stand on the issue?
Mass Customization • Ability to deliver products & services tailored to needs of different customers around the world. • Organization/design principles • Modular design (Dell Computers) • Postponement - Flexible mix and match assembly • (HP Printers) • Efficient supply of generic components – local make to order assembly (Paint) The goal: To design, manufacture and deliver customized products using the economies of scale of mass production
Customization Creates Problems Feitzinger and Lee, 1997 • Demand Prediction • Forecasts errors are greater when forecasting individual products vs. a group of products • Complicated operations • How much inventory to carry • Which products are made • to order • to stock • What are capacity and component forecasts