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Chapter 10

Chapter 10. Supply Chain Strategy. Supply-Chain Management Measuring Supply-Chain Performance Bullwhip Effect Outsourcing Value Density Mass Customization. OBJECTIVES. Suppliers Inputs Suppliers. Service support operations Transformation Manufacturing. Local service providers

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Chapter 10

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  1. Chapter 10 Supply Chain Strategy

  2. Supply-Chain Management • Measuring Supply-Chain Performance • Bullwhip Effect • Outsourcing • Value Density • Mass Customization OBJECTIVES

  3. Suppliers Inputs Suppliers Service support operations Transformation Manufacturing Local service providers Localization Distribution Customers Output Customers Services Supply networks Manufacturing What is a Supply Chain? • Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together

  4. 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

  5. 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

  6. Example 10.1 Inventory Turnover Calculation Dell Computer reported the following in its 1999 annual report (in million dollars): Net revenue (fiscal year 1999) 18,243 Cost of revenue (fiscal year 1999) i.e., cost of goods sold 14,137 Cost of production materials (fiscal year 1999) 6,423 Production materials on hand (1/25/1999) 234 Work-in-process and finished goods on hand (1/25/1999) 39 Production materials (days of supply) 6 days

  7. Inventory turnover= 14,137/(234+39) = 51.78 turns per year Weeks of supply = [(234+39)/14,137]×52 = 1 week

  8. 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.

  9. Hau Lee’s Concepts ofSupply Chain Management • Hau Lee’s approach to supply chain (SC) is one of aligning SC’s 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 SC’s • Efficient SC’s • Risk-Hedging SC’s • Responsive SC’s • Agile SC’s

  10. Demand Uncertainty Low (Functional products) High (Innovative products) Low (Stable Process) Supply Uncertainty High (Evolving Process) Hau Lee’s SC Uncertainty Framework Efficient SC: Grocery, basic apparel, food, oil and gas Responsive SC: fashion apparel, computers, popular music Risk-Hedging SC: hydroelectric power, some food produce Agile SC: telecom, high-end computers, semiconductor

  11. 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

  12. Value Density • Value density is defined as the value of an item per pound of weight • It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped Example 10.2: package shipping, air or ground? Assumptions: • From Bloomington, Indiana to Littleton, Massachusetts • Inventory carrying cost is 30% per year of the product value • Alternatives: UPS 8-day ground and FedEx 2-day air

  13. Solution • In general, expensive items should be shipped by air, and low-value items by ground • We need to equate the shipping cost saving and the cost of carrying inventory for additional 6-days Shipping cost saving= air shipping cost - ground shipping cost At break-even, Shipping cost saving = inventory carrying cost Inventory carrying cost = (item value×30%×6 days)/365 days Solving for item value: Item value = (365×shipping cost saving)/(30%×6) (see example10-2.xls for details) Any item (with a given weight) whose value density is greater than the corresponding value in the last column should be shipped by air.

  14. 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

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