chapter 11

Supply Chain Management

Overview• What is it?• Supply chain strategies• Purchasing -> Read

– Outsourcing– Partnering

• Managing the supply chain– Postponement– Channel assembly– READ others

• Efficient vs. responsive supply chain=========================• Vendor selection -> Read

Supply Chain Management

• Coordinates and manages all

activities of the supply chain

• Components of the supply chain:

– External distribution

– Internal functions

– External suppliers

Supply Supply ChainChain

Supplier of materialsSupplier of services

Tier 1

Tier 3

Tier 2

Legend

Distribution center

Distribution center

Manufacturer

Supplier of materialsSupplier of services

Tier 1

Tier 3

Tier 2

Legend

Distribution center

Distribution center

Manufacturer

External Suppliers

Internal functions

External Distributors

Milk Supply Chain

PackagingOperation

ExternalDistributors

Internalfunctions

ExternalSuppliers

Tier 1

Tier 2

Tier 3

Supply-Chain Strategies

• Many suppliers

• Long-term suppliers

• Vertically integrate

• Keiretsu

• Virtual company

• Many sources per item

• Adversarial relationship

• Short-term

• Little openness

• Negotiated, sporadic PO’s

• Infrequent, large lots

• Delivery to receiving dock© 1995 Corel Corp.

Many Suppliers Strategy

• 1 or few sources per item

• Partnership (JIT)

• Long-term, stable

• On-site audits & visits

• Exclusive contracts

• Frequent, small lots

• Delivery to point of use

© 1995 Corel Corp.

Few Suppliers Strategy

Few suppliers strategy – Wallace Co.

• Partnering

• Listening to the needs of the customer

• Vendor-stocking program

• 98% on-time delivery

• Quick response on problems for customer

Daimler Chrysler’s Supplier Cost Reduction Effort

Supplier Suggestion Model Savings Rockwell Use passenger car door

locks on trucks Dodge trucks

$280,000

Rockwell Simplify design/substitute materials on manual window system

Various $300,000

3M Change tooling for wood-grain panels to allow three from one die instead of two

Caravan, Voyager

$1,500,000

Trico Change wiper-blade formulation

Various $140,000

Leslie Metal Arts

Exterior lighting suggestions Various $1,500,000

Raw Material(Suppliers)

BackwardBackwardIntegrationIntegration

CurrentCurrentTransformationTransformation

ForwardForwardIntegrationIntegration

Finished GoodsFinished Goods(Customers)(Customers)

• Ability to produce goods

previously purchased– Setup operations

– Buy supplier

• Make-buy issue

• Major financial

commitment

• Hard to do all things

well

Vertical Integration Strategy

Vertical Integration

RAC "MiG" is the first Russian "vertically" integrated aircraft manufacturing company

• Uniquely Japanese form of corporate organization

• System of mutual alliances and cross-ownership– Company stock is held by allied firms

•Lowers need for short-term profits

• Two types: horizontal and vertical

Keiretsu Network Strategy

Vertical Keiretsu

• Links manufacturers, suppliers, distributors, & lenders– ‘Partnerships’ extend across entire supply

chain

• Primarily cars and electronics industries

• Ex. Toyota, Nissan, Honda-Matsushita, Hitachi, Toshiba, Sony

© 1995 Corel Corp.

Virtual Company Strategy

• Network of independent companies– Linked by technology

• PC’s, faxes, Internet etc.

– Each contributes core competencies– Typically provide services

• Payroll, editing, designing

• May be long or short-term– Usually, only until opportunity is

met

Virtual company - Biogen• Formed in 1978 with a simple,

research-centered business model– Develop drugs and sell licenses to

pharmaceutical companies

• Received preliminary approval to market Avonex (reduces the progression of M.S.)

Virtual company - Biogen

Four major tasks to produce Avonex

Bulkmanufacturing

Formulation PackagingWarehousing/Distribution



Bulkmanufacturing


Ben Venue Labs (OH)



Bulkmanufacturing


Ben Venue Labs (OH)

Packaging Coordinators (Philadelphia



Bulkmanufacturing


Ben Venue Labs (OH)

Packaging Coordinators (Philadelphia

Amgen

Louisville facility


• Biogen managed the network of partners

• Success story– FDA approval to market was 35 hours– No product shortages– No recalls– Production increased 5-fold over the

next 3 years


• Benefits to Biogen– Competitive cost structure– Had limited and small scale production

experience– Fixed assets low– Capital investment was low compared

to the size of its business– Investment risk was shared by partners

Managing the Supply-Chain•Options:

– Postponement – Channel assembly– Drop shipping– Blanket orders – Electronic ordering and funds

transfer– Vendor managed inventory– Standardization– Internet purchasing (e-procurement)

Postponement

• A tactic used by assemble-to-order and mass-customization firms

• Delay the customization of a product or service until the last possible moment

• e.g. Drug company produces the drug as a powder. When orders are received then produce tablets in the dosage for which the order was received.

Channel assembly• A form of postponement• Utilize the distribution channel as an

assembly station• Warehouse performs a value-added

service• e.g. Car battery manufacturer produces

batteries for several private labels. The manufacturer ships unmarked batteries to warehouse. When orders are received, warehouse places decals for the brand name and packages for that private label.

Purchasing

• Outsourcing– Make or buy decision

• Partnering

Outsourcing• Choosing to purchase a service or part from

an outside source; • Make or buy decision

– Insourcing vs. outsourcing decision• Advantages

– Allows the firm to focus on core competencies

– Adds capacity without additional fixed cost and overhead

– Can be more cost effective– Supports market agility

$0.82

$1.52

$1.75

$2.00

$4.75

$5.89

$13.50

$13.57

$15.47

$16.55

$17.97

$18.24

$18.50

$19.37

$22.24

$22.82

$28.28

$0.00 $15.00 $30.00

China

Malaysia

Mexico

Czech Republic

Brazil

Taiwan

US CEM

Ireland

U.K.

Canada

France

U.S.

Austria

Japan

Scand

Belgium

Germany

$0.82

$1.52

$1.75

$2.00

$4.75

$5.89

$13.50

$13.57

$15.47

$16.55

$17.97

$18.24

$18.50

$19.37

$22.24

$22.82

$28.28

$0.00 $15.00 $30.00

China

Malaysia

Mexico

Czech Republic

Brazil

Taiwan

US CEM

Ireland

U.K.

Canada

France

U.S.

Austria

Japan

Scand

Belgium

Germany

Source: http://stats.bls.gov/news.release/ichcc.t02.htm (1997data)+company recordsSource: http://stats.bls.gov/news.release/ichcc.t02.htm (1997data)+company records

Hourly Labor Rates

Key Is Total Cost Of Ownership

Li & Fung - Outsourcing• Hong Kong based exporter• American and European customer base• The Limited is one of their customers• Receive order for 10,000 garments:

– Purchase yarn from Korean company– Have the yarn dyed and woven by a company

in Taiwan– Purchase Japanese buttons and zippers from

YKK’s Chinese plants– Garments made in 5 different plants in

Thailand

Partnering

• Process of developing a long-term relationship with a supplier based on:– mutual trust– shared vision– shared information– shared risk

Beer distribution game• Consider a simplified beer supply chain,

– A retailer who sells to the customer– A wholesaler which supplies the retailer– A distributor which supplies the wholesaler– A factory with unlimited raw materials which

makes (brews) the beer and supplies the distributor

• Each component in the supply chain has:– unlimited storage capacity – fixed supply lead-time – order delay time between each component

Beer distribution game

Beer distribution game

• Each week, each component in the supply chain tries to meet the demand of the downstream component.

• Any orders that cannot be met are recorded as backorders, and are met as soon as possible.

• No orders will be ignored, and all orders must eventually be met.

Beer distribution game• At each period, each component in the supply

chain is charged a $1.00 shortage cost per backordered item.

• At each period, each location is charged $.50 inventory holding cost per inventory item that it owns. Each component owns the inventory at that facility. In addition,– the wholesaler owns inventory in transit to the

retailer; – the distributor owns inventory in transit to the

wholesaler; – the factory owns both items being manufactured and

items in transit to the distributor.

Beer distribution game• Each supply chain member orders some

amount from its upstream supplier. • It takes one week for this order to arrive at

the supplier. • Once the order arrives, the supplier

attempts to fill it with available inventory.• There is a two week transportation delay

before the material being shipped by the supplier arrives at the customer who placed the order.

Supply-Chain DynamicsSupply-Chain Dynamics


(a)

Customer Customer

Firm A


(a)

Customer Customer

Firm A

Firm B


(a)

Customer Customer

Firm A

Firm B

Firm C


(a)

Customer Customer

Firm A

Firm B

Firm CTime

(b)

Mat

eria

ls r

equ

irem

ents


(a)

Firm A

Customer Customer

Firm A

Firm B

Firm CTime

(b)

Mat

eria

ls r

equ

irem

ents


(a)

Customer Customer

Firm A

Firm B

Firm C

Firm C

Firm A

Time(b)

Mat

eria

ls r

equ

irem

ents


Firm C

Firm A

Time

Mat

eria

ls r

equ

irem

ents

Bullwhip effectInaccurate or distorted demand information created in the supply chain

Supply-Chain EnvironmentsSupply-Chain Environments• Two supply chain designs for

competitive advantage– Efficient supply chain

• Goal is to minimize inventories and maximize the efficiency of manufacturers and suppliers in the chain

– Responsive supply chain• Goal is to react quickly to market

demands by positioning inventories and capacities in order to hedge against uncertainties of demand

Supply-Chain EnvironmentsSupply-Chain EnvironmentsEnvironments Best Suited for Efficient and Responsive Supply Chains


Factor

Demand

Competitivepriorities

New-productintroduction

Contributionmargins

Product variety


Factor Efficient Supply Chains

Demand Predictable; low forecast errors

Competitive Low cost; consistent priorities quality; on-time

delivery

New-product Infrequentintroduction

Contribution Lowmargins

Product variety Low


Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable; low Unpredictable; highforecast errors forecast errors

Competitive Low cost; consistent Development speed; fastpriorities quality; on-time delivery times;

delivery customization; volumeflexibility; high-performance designquality

New-product Infrequent Frequentintroduction

Contribution Low Highmargins

Product variety Low High

chapter 11

Documents

supplychain strategies

entire supply chain

supplychain options

supply chain components

responsive supply chain

milk supply chain

keiretsu virtual company

drug company