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Supply Chain Management. Lecture 5. Outline. Today Chapter 3 Start with Chapter 4 Thursday Finish Chapter 4 Introduction to Excel Solver Homework 1 Due Thursday January 28 before class. Facilities. Inventory. Transportation. Information. Sourcing. Pricing. Logistical drivers.

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outline
Outline
  • Today
    • Chapter 3
    • Start with Chapter 4
  • Thursday
    • Finish Chapter 4
    • Introduction to Excel Solver
  • Homework 1
    • Due Thursday January 28 before class
from strategy to decisions

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Logistical drivers

Cross functional drivers

From Strategy to Decisions

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness

Efficiency

facilities
Facility decisions

Production facility

Flexible versus dedicated

Product focus (fabrication and assembly) versus functional focus (fabrication or assembly)

Storage facility

Cross-docking versus storage

Metrics

Capacity

Utilization

Flow time (theoretical and actual)

Flow time efficiency

Product variety

Average batch size

Service level

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Facilities

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Overall tradeoff: Cost of the number, location and type versus level of responsiveness

How could a car manufacturer increase responsiveness through its facilities?

toyota
Toyota
  • Worldwide operations

Source: http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html

honda
Honda
  • East Liberty, OH
    • Using Honda's flexible manufacturing, this plant produces cars and light trucks on the same assembly line
  • Marysville, OH
    • One of the most integrated and flexible auto plants in North America, it houses stamping, welding, paint, plastic injection molding and assembly under one roof.
inventory
Inventory decisions

Cycle inventory

Safety inventory

Seasonal inventory

Level of product availability

Metrics

Average inventory

Units that have been in stock for more than a specified period of time

Fill rate (fraction of orders that were met on time from inventory)

Fraction of time out of stock

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Inventory

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Overall tradeoff: Level of inventory versus level of product availability

How could a grocery retailer use inventory to increase responsiveness?

transportation
Transportation decisions

Mode of transportation

Air, package carriers, truck, rail, sea, pipeline, intermodal, …

Metrics

Inbound/outbound cost

Inbound/outbound cost per shipment

Shipment sizes

Fraction transported by mode

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Transportation

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Overall tradeoff: Cost and speed of transportation

transportation facts
Transportation Facts

7.7%

0.1%

0.3%

66.0%

60.0%

32.7%

3.8%

12.4%

28.3%

8.6%

15.3%

16.5%

2.8%

10.8%

17.0%

11.0%

1.4%

5.1%

Freight shipments in America 2002

transportation11
Transportation decisions

Design of transportation network

Route and network selection

Mode of transportation

Air, package carriers, truck, rail, sea, pipeline, intermodal, …

Metrics

Inbound/outbound cost

Inbound/outbound cost per shipment

Shipment sizes

Fraction transported by mode

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Transportation

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Overall tradeoff: Cost and speed of transportation

How does Dell use transportation to improve responsiveness?

amazon com
Amazon.com
  • Fulfillment and warehousing locations
    • Arizona, USA: Phoenix, Goodyear
    • Delaware, USA: New Castle
    • Indiana, USA: Whitestown, Munster
    • Kansas, USA: Coffeyville
    • Kentucky, USA: Campbellsville, Hebron (near CVG), Lexington, and Louisville
    • Nevada, USA: Fernley and Red Rock (near 4SD)
    • Pennsylvania, USA: Carlisle, Chambersburg, Hazleton, and Lewisberry
    • Texas, USA: Dallas/Fort Worth
    • Ontario, Canada: Mississauga (a Canada Post facility)
information
Information decisions

Push vs. Pull

Coordination and information sharing

Forecasting and aggregate planning

Enabling technologies

Metrics

Forecast horizon

Forecast errors

Ratio of demand variability and order variability

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Information

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Accurate information helps both efficiency and responsiveness

How does Wal-Mart use information to improve its supply chain operations?

sourcing
Sourcing decisions

In-House or outsource

Supplier selection

Metrics

Days payable outstanding

Purchase price statistics

Purchase quantities

Fraction on-time deliveries

Supply quality and lead-time

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Sourcing

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Overall tradeoff: Increased supply chain profit versus additional risk

How does Dell use sourcing to improve efficiency?

pricing
Pricing decisions

Pricing and economies of scale

Everyday low pricing versus high-low pricing

Fixed price versus menu price

Metrics

Profit margin

Average sale price

Average order size

Incremental fixed cost per order

Incremental variable cost per unit

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Pricing

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Responsiveness

Overall tradeoff: Increase company profits

How can Peapod use pricing of its delivery services to improve profitability?

designing a supply chain network

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Designing a Supply Chain Network

In designing a supply chain, we need to consider how all supply chain drivers should be used together to support the competitive strategy of a company and maximize supply chain profits

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness

Efficiency

from strategy to decisions19

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Logistical drivers

Cross functional drivers

From Strategy to Decisions

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness

Efficiency

the role of distribution in the supply chain
The Role of Distribution in the Supply Chain
  • What is distribution?
    • Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain
  • Distribution-related cost
    • Make up about 10.5% of the US economy
    • Make up about 20% of the cost of manufacturing

Distribution can achieve supply chain objectives from low cost to high responsiveness

the role of distribution in the supply chain23
The Role of Distribution in the Supply Chain

What differences in the retail environment may justify the fact that the fast-moving consumer goods supply chain in India has far more distributors than in the United States?

distribution complexity in india
Distribution Complexity in India
  • Dispersed population
    • 30+ cities have populations of more than 1 million, but nearly 70% still live in rural areas
  • Retail density
    • More than 12 million retail outlets
    • Mom-and-pop stores account for more than 96% of the total market for many markets, organized retail represents only 4%
  • Infrastructure complexity
    • Very few full-service distribution companies operate in India
    • Some consumer multinational companies work with more than 1,000 distributors, which deliver its products to more than 1 million outlets across India
distribution complexity
Distribution Complexity

Baddi

Rural village

distribution complexity in india27
Distribution Complexity in India
  • India is becoming one of the world’s largest markets for consumer goods
    • Rapidly rising household incomes
    • One quarter of India’s population is between 20 and 35, a high spending segment in many markets
    • Overall retail market is more than $230 billion (2005) and expected to grow to $308 billion (2010)

Wal-Mart is teaming up with Bharti to establish wholesale and supply chain operations in India

the role of distribution in the supply chain28
The Role of Distribution in the Supply Chain
  • What is distribution?
    • Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain
  • Distribution-related cost
    • Make up about 10.5% of the US economy
    • Make up about 20% of the cost of manufacturing

Distribution can achieve supply chain objectives from low cost to high responsiveness

response time and number of facilities
Response Time and Number of Facilities

Number of Facilities

Response Time

facility cost and number of facilities
Facility Cost and Number of Facilities

Facility

Costs

Number of Facilities

inventory cost and number of facilities
Inventory Cost and Number of Facilities

Inventory

Costs

Number of Facilities

transportation cost and number of facilities
Transportation Cost and Number of Facilities

Transportation

Costs

Number of Facilities

total logistics costs

Logistics

Costs

Logistics Costs

Facility Costs

Transportation Costs

Number of Facilities

Total Logistics Costs

Inventory Costs

logistics costs response time and number of facilities fig 4 5
Logistics Costs, Response Time and Number of Facilities (Fig 4.5)

Response Time

Total Logistics Cost

Number of Facilities

design options for a distribution network
Design Options For a Distribution Network
  • Two key decisions when designing a distribution network
    • Will the product be delivered to the customer location or picked up from a preordained site?
    • Will product flow through an intermediary?
design options for a distribution network36
Design Options For a Distribution Network
  • Manufacturer Storage with Direct Shipping
  • Manufacturer Storage with Direct Shipping and In-Transit Merge
  • Distributor Storage with Carrier Delivery
  • Distributor Storage with Last Mile Delivery
  • Manufacturer or Distributor Storage with Consumer Pickup
  • Retail Storage with Consumer Pickup
manufacturer storage with direct shipping drop shipping
Products are shipped directly to the consumer from the manufacturer

Retailer is an information collector:

Passes orders to the manufacturers

It does not hold product inventory

Inventory is centralized at manufacturer

Drop shipping offers the manufacturer the opportunity to postpone customization

Effective for high value, large variety, low demand products

High transportation cost

Example: eBags

Manufacturers

Retailer

Consumers

Manufacturer Storage with Direct Shipping (Drop Shipping)
manufacturer storage with direct shipping and in transit merge
Shipments from multiple manufactures are merged before making a single delivery to the consumer

Shipments to Mergers are larger so economies of scale is achieved

Mergers increase facility costs

Response time may go up

Example:

Furniture retailers merge couches and coffee tables produced by different manufacturers

Dell merges a Dell PC with a Sony flat screen

Manufacturers

Retailer

Mergers

Consumers

Manufacturer Storage with Direct Shipping and In-Transit Merge
distributor storage with carrier delivery
Inventory is held at a warehouse which ships to customer by carriers

With respect to direct shipping

Inventory aggregation is less

Higher inventory costs

Facility costs are higher

Less information to track

Warehouses are physically closer to consumers which leads to

Faster response time

Lower transportation cost

Not effective for slow moving items

Example: Amazon

Manufacturers

Distributor

Warehouse

Distributor

Warehouse

Consumers

Distributor Storage with Carrier Delivery
distributor storage with last mile delivery
Warehouse delivers to customers instead of carrier

Warehouses are located closer to consumers

Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale

Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher.

Products must be flowing fast to justify the infrastructure

Processing cost are high

Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress

Manufacturers

Distributor

Warehouse

Distributor

Warehouse

Consumers

Distributor Storage with Last Mile Delivery
manufacturer or distributor storage with customer pickup
Customers come to pick up sites (warehouse, retailer) to get the products

If consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costs

Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located.

Significant amount of information is required

Increased handling cost

Example: 7dream.com

Manufacturers

Distributor

Warehouse

Distributor

Warehouse

Consumers

Manufacturer or Distributor Storage With Customer Pickup
retail storage with customer pickup
Customers pick up product from retailers

Low transportation cost

High facility cost

Relative easy returnability

Increased inventory cost

No order tracking necessary

If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer

Effective for fast moving items

Example: Retail stores such as Wal-Mart and JCPenney

Manufacturers

Retailer

Retailer

Retailer

Consumers

Retail Storage with Customer Pickup
comparing distribution networks
Comparing Distribution Networks

1 = strongest performance

6 = weakest performance

comparing distribution networks44
Comparing Distribution Networks

Green = very suitable

Red = very unsuitable

from brick and mortar to click and mortar
From brick-and-mortar to click-and-mortar

What has been the impact of e-business on supply chain cost?

What has been the impact of e-business on customer service?

In the future, do you see the number of distributors decreasing, increasing, or staying about the same?

Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle?

Why should an e-business such as Amazon.com build more warehouses as its sales volume grows?