8/25/00 S.Chopra/Logistics Strategy 1

A Strategic Framework for Supply Chain Design, Planning, and

Operation

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Outline

What is supply chain management? A supply chain strategy framework

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Traditional View: Logistics in the Economy (1990, 1996)

Freight Transportation $352, $455 Billion Inventory Expense $221, $311 Billion Administrative Expense$27, $31 Billion Logistics related activity 11%, 10.5% of GNP.

Source: Cass Logistics

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Traditional View: Logistics in the Manufacturing Firm

Profit 4%

Logistics Cost 21%

Marketing Cost 27%

Manufacturing Cost 48%

Profit

Logistics Cost

Marketing Cost

Manufacturing Cost

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Supply Chain Management: The Magnitude in the Traditional View

Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies– A typical box of cereal spends 104 days from factory to sale

– A typical car spends 15 days from factory to dealership

Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago

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Supply Chain Management: The True Magnitude

Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed

When the 1 gig processor was introduced by AMD, the price of the 800 meg processor dropped by 30%

P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand

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What is a supply chain?

Customer wantsdetergent and goes

to Jewel

Customer wantsdetergent and goes

to Jewel

JewelSupermarket

JewelSupermarket

Jewel or thirdparty DC

Jewel or thirdparty DC

P&G or othermanufacturerP&G or othermanufacturer

PlasticProducer

PlasticProducer

Chemicalmanufacturer

(e.g. Oil Company)

Chemicalmanufacturer

(e.g. Oil Company)

TennecoPackagingTenneco

Packaging

Paper Manufacturer

Paper Manufacturer

TimberIndustryTimber

Industry

Chemicalmanufacturer

(e.g. Oil Company)

Chemicalmanufacturer

(e.g. Oil Company)

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Flows in a Supply Chain

Customer

Information

Product

Funds

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Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

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Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

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Examples of Supply Chains

Dell / Compaq Toyota / GM / Ford McMaster Carr / W.W. Grainger Amazon / Borders / Barnes and Noble Webvan / Peapod / Jewel

What are some key issues in these supply chains?

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What is Supply Chain Management?

Managing supply chain flows and assets, to maximize

supply chain surplus.

What is supply chain surplus?

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The Value Chain: Linking Supply Chain and Business Strategy

NewProduct

Development

Marketingand

Sales Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Business Strategy

New ProductStrategy

MarketingStrategy Supply Chain Strategy

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Achieving Strategic Fit

Understanding the Customer– Lot size

– Response time

– Service level

– Product variety

– Price

– Innovation

ImpliedDemand

Uncertainty

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Levels of Implied Demand Uncertainty

Low High

Price Responsiveness

Customer Need

Implied Demand Uncertainty

DetergentLong lead time steel

High FashionEmergency steel

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Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost

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Achieving Strategic Fit

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone o

f

Strateg

ic Fit

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Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Drivers of Supply Chain Performance

Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers

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Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation /Dedicated

Proximity /Flexibility

Information What information is best suited foreach objective

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Supply Chain Decisions: Structuring Drivers

Strategy(Design)

Planning

Operation

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Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply chain

Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty

Local optimization and lack of global fit

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Dealing with Multiple Owners / Local Optimization

Information Coordination

Contractual Coordination

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Dealing with Product Variety: Mass Customization

MassCustomization

MassCustomization

High

HighLow

Low

Long

Short

Lea

d T

ime

Cost

Customizatio

n

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Fragmentation of Markets and Product Variety

Are the requirements of all market segments served

identical?

Are the characteristics of all products identical?

Can a single supply chain structure be used for all

products / customers? No! A single supply chain

will fail different customers on efficiency or

responsiveness or both.

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Tailored Logistics

Each Logistically Distinct Business (LDB) will have distinct requirements in terms of– Inventory

– Transportation

– Facility

– Information

Key: How to gain efficiencies while tailoring logistics?

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Applying the Framework to e-commerce: What is e-commerce?

Commerce transacted over the Internet– Is product information displayed on the Internet?

– Is negotiation over the Internet?

– Is the order placed over the Internet?

– Is the order tracked over the Internet?

– Is the order fulfilled over the Internet?

– Is payment transacted over the Internet?

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Existing Channels for Commerce

Product information – Physical stores, EDI, catalogs, face to face, …

Negotiation– Face to face, phone, fax, sealed bids, …

Order placement– Physical store, EDI, phone, fax, face to face, …

Order tracking– EDI, phone, fax, …

Order fulfillment– Customer pick up, physical delivery

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Revenue Impact of E-Commerce

Length of supply chain Product information Time to market Negotiating prices and contract terms Order placement and tracking Order fulfillment Payment

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Cost Impact of E-Commerce

Facility costs– Site and processing cost

Inventory costs– Cycle, Safety, Seasonal inventory

Transportation costs– Inbound and outbound costs

Information sharing– Coordination