OPER3208-001 Supply Chain Management

OPER3208-001Supply Chain Management Fall 2006 Instructor: Prof. Setzler

Taylor, Chapter 1

Chapter 1: The New Competition(Taylor) • If a company touches a physical product, then it is part of a Supply Chain (SC) • The new competition in business is between supply chains • How a SC is managed can make or break a company • A SC is only as good as its weakest link

Ch1: The Thrill of Victory (Taylor) • Siemens was experiencing rising costs and having to reduce prices • They reinvented its SC • The team • tightened links with suppliers, • eliminated all interim warehousing, • adopted just-in-time production techniques, and • switched to airfreight deliveries for customers outside of Europe

Ch1: The Thrill of Victory (Taylor) • Today, Siemens’ • lead time is down from 22 weeks to 2 weeks • On-time deliveries went from 60% to 99.3% • On-time means that the delivery occurs within a 2 hour window • The cost? Zero! • Gains were realized by • 40% reduction in inventory • 50% reduction in factory workspace • 76% reduction in assembly line • 30% reduction in total costs • At the same time they doubled production output

Ch1: The Thrill of Victory (Taylor) • In 1990s, Gillette was losing market share due to rising costs • In January 2000, they reworked their SC • Within 18 months • Total inventory within the chain was reduced 30% • Eliminated 40 days’ worth of material costing $400 million • Gillette’s savings? $90 million!

Ch1: The Thrill of Victory (Taylor) • Late 1980s, Chrysler Corp was in trouble • Ending the decade with 4th quarter loss of $664 million • Chrysler began experimenting with techniques having been used by Japanese carmakers • They reinvented their SC by • Cutting supplier base by 50% • Included remaining suppliers in design process • Developed long-term relationships (trust, not coercion) • Asked suppliers to help find ways to cut costs, and passed savings back to them (rewards)

Ch1: The Thrill of Victory (Taylor) • Chrysler (continued) • Chrysler called its sharing program SCORE (Supplier Cost Reduction Effort) • By 1995, Chrysler had implemented 5,300 supplier ideas  Net annual savings of $1.7 billion • Development cost dropped 40% • Development time dropped from 234 weeks to 160 weeks (68%) • Profits went from $250 (mid-’80s) to $2,110 (mid-’90s)  844% increase

Ch1: The Thrill of Victory (Taylor) • In 1997, Apple Computer was on the verge of bankruptcy, losing $1 billion a year • It was “radical surgery on its supply chain that actually saved the company.” • Within 2 years, the company went from holding 1 month of inventory ($437 million) to a few days’ of inventory ($25 million) • Inventory was reduced by 40%

Ch1: The Thrill of Victory (Taylor) • The companies discussed in the previous slides demonstrate how managing a supply chain can save companies money • Cost reduction is the #1 reason companies initiate SC improvements • Cost reductions are great, but supply chains can also provide companies with competitive advantage

Ch1: The Thrill of Victory (Taylor) • An example of how a company can use its SC for a competitive advantage is Dell Computer • Prior to Dell, computers were build-to-stock • Manufactured in volume, shipped to retail outlets, and then sold • Required a lot of inventory • Customers choices were limited • Dell introduced a direct sales strategy • Build-to-order, and shipped directly to customers

Ch1: The Thrill of Victory (Taylor) • Dell recognized to potential of the Internet • Sold its 1st computer online in 1996 • In 2000, it was making $50 million a day from its Web site alone

Ch1: The Thrill of Victory (Taylor) • Dell’s success was based on • Direct sales • Build-to-order production • Dell wasn’t the 1st to try these strategies • Dell pulls every bit of time and cost out of its SC • Dell is very good at forecasting and planning • It has a negative cash-to-cash time  It gets paid for its product before it buys the parts • These techniques give Dell a 5% points of profit advantage over its competitors

Ch1: The Thrill of Victory (Taylor) • “Modern manufacturing has driven so much time and cost out of the production process that there is only one place left to turn for competitive advantage” • “The supply chain is the last untapped vein of business gold.” • “Today, supply chain management is far more important than manufacturing as a core competence.”

Ch1: The Agony of Defeat (Taylor) • “For all the advantages that can come from getting the supply chain right, getting it wrong can be catastrophic.”

Ch1: The Agony of Defeat (Taylor) • The end of the 1990s found Kmart Corporation is trouble, unable to compete with Wal-Mart and Target • Kmart’s SC was very badly managed • In 2000, Kmart invested $1.4 billion in software and services to overhaul its SC • 1 1/2 years later, Kmart announced it was abandoning most of the software and taking a $130 million write-off • Kmart did not have a clear SC strategy before it made its purchase

Ch1: The Agony of Defeat (Taylor) • We discussed earlier how Chrysler experienced a huge success with its SCORE program • After becoming DaimlerChrysler SCORE was discontinued, and supplier relationships went bad

Ch1: The Agony of Defeat (Taylor) • Nike has also experienced trouble with its SC • In 2001, the company announced it had lost $100 million in sales because of a problem with its SC • The problem was caused by a new $400 million planning software system • Nike’s stock dropped 20% the day of the announcement • The maker of the software, i2, also had a drop in its stock of 22% the same day

Ch1: The Agony of Defeat (Taylor) • In 2001, Cisco Systems announced it had to write off unusable inventory worth $2.2 billion • The largest inventory write off in the history of business • The problem. A breakdown in communication with suppliers throughout the SC

Ch1: The Agony of Defeat (Taylor) • These last few companies discussed show that SC problems can be very costly • Both directly and indirectly • Consider Nike and i2 who lost 1/5 of their market value in one day

Ch1: The Agony of Defeat (Taylor) • Georgia Tech examined >1,000 news reports reporting SC problems between 1989 and 1999 • Question: Do such reports impact stock prices • Answer: Yes • Companies reporting problems had an average stock price drop of 7.5% the day of the announcement (average drop in value = $143 million) • The total drop over 12 months was 18.5% (average loss >$350 million) • These figures don’t take into account that prices were rising at 15% per year between 1989 and 1999 • The real impact may be nearly twice what’s reported

Ch1: The Agony of Defeat (Taylor) • Georgia Tech examined >1,000 news reports reporting SC problems between 1989 and 1999 (continued) • Of the 1,131 SC problems examined, the loss in shareholder value was more than $160 billion • Investors don’t care who caused the problem • When companies took blame, its stock dropped 7.1% • When it blamed suppliers, its stock dropped 8.3% • When it blamed customers, its stock dropped 10.9%

Ch1: A High Stakes Game (Taylor) • Supply chains are so important because holding and moving inventory is very expensive • U.S. companies spend a trillion dollars a year on supply chains (~10% of the U.S. GDP) • ~1/3 of the cost is for holding inventory • ~2/3 of the cost is for moving it around

Ch1: A High Stakes Game (Taylor) • Individual companies also spend ~10% of their gross income on SC • A survey of SC costs across industries showed an average of 9.8% of revenue devoted to supply chains • 25% of best performers had an average cost of just 4.2% of revenue • The gap is not closing, but widening

Ch1: A High Stakes Game (Taylor) • The actual advantage is really more than this, because a penny saved isn’t really a penny earned…it’s usually closer to a nickel or a dime.

1 2 3 Ch1: A High Stakes Game (Taylor) • Suppose you want to increase gross profit by 50% over current conditions (panel 1) • Panel 2: Increase sales by 50% • Panel 3: Decrease SC costs by 50%

Ch1: A High Stakes Game (Taylor) • Consider a company having $500 million in excess inventory • If carrying costs were 50% of the purchase price, that would mean that the company was paying $250 million just to hold the inventory • If the company’s profit margin were 10%, then it would need to earn an extra $2.5 billion to equal the benefit of eliminating the excess inventory

Ch1: A High Stakes Game (Taylor) • The retail sector only has a profit margin of ~ 2% • With thin margins, if SC costs are reduced from 10% to 8% the increase in profits could be as much as doubling sales

Ch1: A High Stakes Game (Taylor) • There are additional drivers besides financial concerns to streamline SC • Shorter product life cycles • Faster product development • Rising globalization of sourcing • Increasing demand for customization • Intensive quality initiatives

Ch1: The New Competition (Taylor) • A survey of executive in manufacturing companies found that 91% ranked SCM (supply chain management) as either “very important” or “critical” • Only 2% regarded their chains as excellent. • 59% reported that their company had no strategy to improve their chains

Ch1: The New Competition (Taylor) • What’s the root cause for all the supply chain problems? • All the key activities take place in different groups with different agendas and conflicting goals • Most groups go all the way up to the CEO before coming under common management • The CEO is not the right person to be planning and operating the SC

Ch1: The New Competition (Taylor) • The 1st step in fixing SC is to get all the key decision makers from each group and get them working together to find solutions • All the companies in the 1st section of the chapter started out by forming teams • Cross-functional teams are needed to run a good SC • Most successful companies create a single top-level executive who is responsible for the chain

Ch1: The New Competition (Taylor) • It’s now the SC that makes the difference between winning and losing • Customers don’t care about supply chains • Normally, the only member of the chain consumers ever see is the retailer • Customers only care about who can sell the best product at the best price • The fate of all the members of a SC are becoming increasingly joined • If the members of a chain can work together to put the most quality in the consumer’s hands at the lowest price, they win

Ch1: The New Competition (Taylor) • The real challenge isn’t getting your own people to work as a team; it’s getting all the companies in your SC to form a larger team

Ch1: The New Competition (Taylor) • The National Research Council says that American manufacturers are in the midst of a fundamental revolution in the nature of business, one that “has the potential to alter the manufacturing landscape as dramatically as the Industrial Revolution.”

OPER3208-001 Supply Chain Management