SUPPLY CHAIN MANAGEMENTSUPPLY CHAIN MANAGEMENT

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SUPPLY CHAIN MANAGEMENTSUPPLY CHAIN MANAGEMENT

• Supply ChainSupply Chain– A network that includes:A network that includes:

• Vendors of raw materialsVendors of raw materials• Plants that transform those materials into Plants that transform those materials into

useful productsuseful products• Distribution centers that get products to Distribution centers that get products to

customerscustomers

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SUPPLY CHAIN MANAGEMENTSUPPLY CHAIN MANAGEMENT

• If there is no specific effort to coordinate If there is no specific effort to coordinate the overall supply chain:the overall supply chain:– Each organization in the network will have its Each organization in the network will have its

own agendaown agenda– Each organization will operate independently Each organization will operate independently

from the othersfrom the others– Inefficiencies will result from the lack of Inefficiencies will result from the lack of

managementmanagement

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SUPPLY CHAIN MANAGEMENTSUPPLY CHAIN MANAGEMENT

• There is much to be gained by managing There is much to be gained by managing the supply chain network to improve its the supply chain network to improve its performance and efficiencyperformance and efficiency

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DECISION VARIABLES IN DECISION VARIABLES IN SUPPLY CHAIN MANAGEMENTSUPPLY CHAIN MANAGEMENT

• Decision Variables (when managing the supply Decision Variables (when managing the supply chain)chain)– LocationLocation

• Of facilities and sourcing pointsOf facilities and sourcing points

– ProductionProduction• What to produce in which facilitiesWhat to produce in which facilities

– InventoryInventory• How much to order and when to orderHow much to order and when to order

– TransportationTransportation• Mode of transport, shipment size, routing, and schedulingMode of transport, shipment size, routing, and scheduling

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THE BULLWHIP EFFECTTHE BULLWHIP EFFECT

• A problem observed frequently in unmanaged A problem observed frequently in unmanaged supply chainssupply chains

• Demand variability increases as one moves up the Demand variability increases as one moves up the supply chain away from the retail customersupply chain away from the retail customer

• Small changes in consumer demand can result in Small changes in consumer demand can result in large variations in orders placed upstreamlarge variations in orders placed upstream

• The network can oscillate in very large swings as The network can oscillate in very large swings as each organization in the supply chain seeks to each organization in the supply chain seeks to solve the problem from its own perspectivesolve the problem from its own perspective

• Results in increased cost and poorer serviceResults in increased cost and poorer service

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INVENTORY MANAGAMENTINVENTORY MANAGAMENT

• Variation in demand increases the challenge Variation in demand increases the challenge of maintaining inventory to avoid stock-of maintaining inventory to avoid stock-outsouts

• The uncertainty of demand can cause stock-The uncertainty of demand can cause stock-outs in which inventory is depleted and outs in which inventory is depleted and orders cannot be filledorders cannot be filled

• Inventory management minimizes supply Inventory management minimizes supply and demand imbalances in the supply chain and demand imbalances in the supply chain

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VENDOR MANAGED INVENTORYVENDOR MANAGED INVENTORY

• VMI is an effective way to improve supply VMI is an effective way to improve supply chain performancechain performance

• The vendor determines the quantities that The vendor determines the quantities that should be ordered by its downstream should be ordered by its downstream customerscustomers

• It can be an effective method for reducing It can be an effective method for reducing inventory and stock-outsinventory and stock-outs

• Its implementation faces practical challengesIts implementation faces practical challenges

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ACCURATE RESPONSEACCURATE RESPONSE

• A firm’s ability to match supply and A firm’s ability to match supply and demand, and ultimately make a profitdemand, and ultimately make a profit

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SUPPLY CHAIN STRUCTURESUPPLY CHAIN STRUCTURE

• The performance of a supply chain is measured in terms of profit, The performance of a supply chain is measured in terms of profit, average product fill rate, response time, and capacity utilizationaverage product fill rate, response time, and capacity utilization

• Profit projections may improve if another parameter is relaxed, but one Profit projections may improve if another parameter is relaxed, but one must consider the impact of all aspects of the relaxed parameter on profitmust consider the impact of all aspects of the relaxed parameter on profit

• Response time often can be improved at the expense of higher overall Response time often can be improved at the expense of higher overall costscosts

• Capacity utilization should be high enough to reduce overhead Capacity utilization should be high enough to reduce overhead sufficiently, but not so high that there is no room to grow or handle sufficiently, but not so high that there is no room to grow or handle fluctuations in demandfluctuations in demand

• Lower capacity utilization, in effect, buys an option for increased output Lower capacity utilization, in effect, buys an option for increased output in the futurein the future

• Higher capacity utilization decreases downside risk since costs are Higher capacity utilization decreases downside risk since costs are reduced, but also limits the upside gain if future demand should outstrip reduced, but also limits the upside gain if future demand should outstrip supplysupply

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MAKE-TO-ORDERMAKE-TO-ORDER

• Produce a product only after it is orderedProduce a product only after it is ordered

• Compare this to make-to-stockCompare this to make-to-stock– Produce products and stock them as inventory Produce products and stock them as inventory

until solduntil sold

• Reduces inventory Reduces inventory

• Increases flexibilityIncreases flexibility

• Increases customizationIncreases customization

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MAKE-TO-ORDERMAKE-TO-ORDER

• Factors to consider when evaluating the prospect Factors to consider when evaluating the prospect of make-to-order:of make-to-order:– Value of custom product to consumersValue of custom product to consumers

– Customer patienceCustomer patience

– Cost of stock-outsCost of stock-outs

– Inventory holding costsInventory holding costs

– ModularityModularity

– Manufacturing lead timeManufacturing lead time

– Manufacturing set-up costsManufacturing set-up costs

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MARKET SHAREMARKET SHARE

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MARKET SHAREMARKET SHARE

• Sales figures do not necessarily indicate Sales figures do not necessarily indicate how a firm is performing relative to its how a firm is performing relative to its competitorscompetitors

• Changes in sales simply may reflect Changes in sales simply may reflect changes in the market size or changes in changes in the market size or changes in economic conditionseconomic conditions

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MARKET SHAREMARKET SHARE

• A firm’s performance relative to A firm’s performance relative to competitors can be measured by the competitors can be measured by the proportion of the market that the firm is proportion of the market that the firm is able to captureable to capture

• That “proportion” is the market shareThat “proportion” is the market share

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MARKET SHAREMARKET SHARE

Market Share = Firm’s Sales / Total Market SalesMarket Share = Firm’s Sales / Total Market Sales

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REASONS TO INCREASE REASONS TO INCREASE MARKET SHAREMARKET SHARE

• Market share is often associated with Market share is often associated with profitabilityprofitability

• Many firms seek to increase their sales Many firms seek to increase their sales relative to competitorsrelative to competitors

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REASONS TO INCREASE REASONS TO INCREASE MARKET SHAREMARKET SHARE

• Economies of scaleEconomies of scale

• Sales growth in a stagnant industrySales growth in a stagnant industry

• ReputationReputation

• Increased bargaining powerIncreased bargaining power

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WAYS TO INCREASE MARKET WAYS TO INCREASE MARKET SHARESHARE

Share of Market = Share of Preferences * Share of Share of Market = Share of Preferences * Share of Voice * Share of DistributionVoice * Share of Distribution

• Share of PreferencesShare of Preferences– Can be increased through product, pricing, and Can be increased through product, pricing, and

promotional changespromotional changes

• Share of Voice (promotional expenditures)Share of Voice (promotional expenditures)– Can be increased by increasing advertising Can be increased by increasing advertising

expendituresexpenditures

• Share of DistributionShare of Distribution– Can be increased through more intensive distributionCan be increased through more intensive distribution

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MARKETING MIXMARKETING MIX

• The Four (4) The Four (4) PPs of Marketing – The s of Marketing – The variables that marketing managers can variables that marketing managers can control in order to best satisfy customers in control in order to best satisfy customers in the target marketthe target market– ProductProduct– PricePrice– Place (Distribution)Place (Distribution)– PromotionPromotion

MARKETING MIXMARKETING MIX• ProductProduct

– Attributes can be changed to provide more value to the customerAttributes can be changed to provide more value to the customer

• PricePrice– Consider price elasticity and competitors’ prices before making Consider price elasticity and competitors’ prices before making

price adjustmentsprice adjustments

• Place (Distribution)Place (Distribution)– Add new distribution channels or increase the intensity of Add new distribution channels or increase the intensity of

distribution in each channeldistribution in each channel

• PromotionPromotion– Increasing advertising expenditures can increase market share, Increasing advertising expenditures can increase market share,

unless competitors respond with similar increasesunless competitors respond with similar increases

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MARKETING MIXMARKETING MIX

PRODUCT

TARGET MARKET

PROMOTIONPRICE

PLACE

REASONS NOT TO INCREASE REASONS NOT TO INCREASE MARKET SHAREMARKET SHARE

• An increase in market share is not always desirableAn increase in market share is not always desirable– When a firm is at or near its production capacityWhen a firm is at or near its production capacity– When market share is gained due to increasing promotional When market share is gained due to increasing promotional

expenditures expenditures or by decreasing prices (this is not always true)or by decreasing prices (this is not always true)

– If competitors lower prices in an attempt for a price warIf competitors lower prices in an attempt for a price war

– Small/Unique/Niche markets (this is not always true)Small/Unique/Niche markets (this is not always true)• As an example, if a company’s market share increases, a larger, more As an example, if a company’s market share increases, a larger, more

capable competitor may decide to enter the nichecapable competitor may decide to enter the niche

– Antitrust issues (laws that protect businesses from concerns such Antitrust issues (laws that protect businesses from concerns such as monopolization) may arise if a firm dominates its marketas monopolization) may arise if a firm dominates its market

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REASONS NOT TO INCREASE REASONS NOT TO INCREASE MARKET SHAREMARKET SHARE

• In some cases, it may be advantageous to In some cases, it may be advantageous to decrease market sharedecrease market share

• It is possible to increase profitability while It is possible to increase profitability while dropping certain customers/marketsdropping certain customers/markets

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REFERENCESREFERENCES

• http://www.quickmba.com/ops/scm/

• http://www.quickmba.com/marketing/market-share/