© 2011 Pearson Education, Inc. publishing as Prentice Hall

A Supply Chain for Beer

Figure 11.1

The Supply Chain’s Strategic Importance

Supply chain management is the integration of the activities that procure materials and services, transform them

into intermediate goods and final products, and deliver them through a distribution

system

Competition is no longer between companies; it is between supply chains

Supply Chain Management

1. Transportation vendors

2. Suppliers

3. Distributors

4. Contracts

5. Accounts payable and receivable

6. Warehousing and inventory

7. Order fulfillment

8. Sharing customer, forecasting, and production information

Important activities include determining

Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

Operational Functions Forecasting demand Selecting suppliers Ordering materials Inventory control Scheduling production Shipping & delivery Information

management Quality management Customer service

Strategic Functions Chain structure

design Strategic

partnerships Make-or-buy

decisions

Supply Chain Management Functions

Wrong forecasts Late deliveries Poor quality Machine breakdowns Canceled orders Erroneous information

Uncertainty In Supply Chain

Information Coordination: The Bullwhip Effect

Consumer Sales at Retailer

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Impact of the Bullwhip EffectPerformance Measure Impact on Performance

Manufacturing Cost

Inventories

Lead Time

Transport Cost

Shipping & Receiving Cost

Customer Service Level

Profitability

Carry Just-in-Case inventory (often referred to as safety stock)◦ Expensive!

Rework the supply chain so that sources of risk/uncertainty are reduced◦ A couple of examples of how this has been done:

Until two years ago, Dell did not include the replenishment cycle in its supply chain structure and all of its computers were BTO.

Companies use RFID tags to keep track of inventory throughout the supply chains

Companies use Every-Day-Low-Pricing strategies to reduce the bullwhip effect

Two Philosophies for Managing Supply Chain Risk

Opportunities for effectively managing the supply chain by

reducing sources of uncertainty (reading assignment 3):◦ Point of sales systems

◦ Single stage control of replenishment: Radio Frequency

Identification Tags◦ Lot size reduction◦ Postponement ◦ Drop shipping◦ Blanket orders ◦ Vendor-managed inventory ◦ Standardization

Managing the Supply-Chain

Low High

Price ResponsivenessCustomer Need

Implied Demand Uncertainty

Functional Products:Detergent, Gas

Innovative Products:High Fashion, AppleWatch

Responsiveness: the ability to◦ Respond to wide ranges of quantities demanded◦ Meet short lead times◦ Handle a large variety of products◦ Build highly innovative products◦ Meet a very high service level

Efficiency: ◦ Minimize the cost of making and delivering a

product to the customer

Supply Chain Characteristics

Efficient –vs- Responsive Chains

Efficient Chain Responsive Chain

Primary Goal Low Cost Quick Response

Pricing Strategy Lower Margins Higher Margins

Manufacturing Strategy

High Utilization Maintain Capacity Flexibility

Inventory Strategy Minimize Inventory Maintain Safety Inventory

Lead Time Strategy Reduce if possible Aggressively Reduce

Supplier Strategy Select based on Cost and Quality

Select based on Speed, Flexibility and Quality

Transportation Strategy Low Cost Modes Responsive Modes

Negotiate with many suppliers; play one supplier against another

Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer

Vertically integrate; buy the actual supplier

Supply-Chain Strategies

Company◦Financial stability◦Management◦Location

Product◦Quality◦Price

Service◦Delivery on time◦Condition on

arrival◦Technical support◦Training

Supplier Selection Criteria

Tactic 1. Reduce total number of

suppliers

Certify suppliers

Ask for JIT delivery from key suppliers

Involve key suppliers in new product design

Develop software linkages to suppliers

Results Average 20% reduction in 5

years

Almost 40% of all companies surveyed were themselves currently certified

About 60% ask for this; about 54% do this

Almost 80% claim to do this

About 50% claim this; about 15% more than have EDI links to suppliers

Purchasing Trends

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Measuring Supply-Chain Performance

Table 11.6

Typical FirmsBenchmark

Firms

Lead time (weeks) 15 8

Time spent placing an order 42 minutes 15 minutes

Percentage of late deliveries 33% 2%

Percentage of rejected material 1.5% .0001%

Number of shortages per year 400 4

Measuring Supply-Chain Performance

Assets committed to inventory

Percent invested in inventory

= x 100

Total inventory investment

Total assets

Investment in inventory = $11.4 billionTotal assets = $44.4 billion

Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Measuring Supply-Chain Performance

Table 11.7

Inventory as a % of Total Assets(with exceptional performance)

Manufacturing 15%(Toyota 5%)

Wholesale 34%(Coca-Cola 2.9%)

Restaurants 2.9%(McDonald’s .05%)

Retail 27%(Home Depot 25.7%)