supply chain management lecture 5. outline today –chapter 3 –start with chapter 4 thursday...
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Supply Chain Management
Lecture 5
Outline
• Today– Chapter 3– Start with Chapter 4
• Thursday– Finish Chapter 4– Introduction to Excel Solver
• Homework 1– Due Thursday January 28 before class
From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Logistical drivers Cross functional drivers
Facilities
• Facility decisions– Production facility
• Flexible versus dedicated
• Product focus (fabrication and assembly) versus functional focus (fabrication or assembly)
– Storage facility• Cross-docking versus
storage
• Metrics– Capacity– Utilization– Flow time (theoretical and
actual)– Flow time efficiency– Product variety– Average batch size– Service level
Overall tradeoff: Cost of the number, location and type versus level of responsiveness
How could a car manufacturer increase responsiveness through its facilities?
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Toyota
• Worldwide operations
Source: http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html
Honda
• East Liberty, OH– Using Honda's flexible manufacturing, this plant produces cars
and light trucks on the same assembly line
• Marysville, OH– One of the most integrated and flexible auto plants in North
America, it houses stamping, welding, paint, plastic injection molding and assembly under one roof.
Inventory
• Inventory decisions– Cycle inventory– Safety inventory– Seasonal inventory– Level of product availability
• Metrics– Average inventory– Units that have been in
stock for more than a specified period of time
– Fill rate (fraction of orders that were met on time from inventory)
– Fraction of time out of stock
Overall tradeoff: Level of inventory versus level of product availability
How could a grocery retailer use inventory to increase responsiveness?
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Responsiveness
Transportation
• Transportation decisions– Mode of transportation
• Air, package carriers, truck, rail, sea, pipeline, intermodal, …
• Metrics– Inbound/outbound cost– Inbound/outbound cost per
shipment– Shipment sizes– Fraction transported by
mode
Overall tradeoff: Cost and speed of transportation
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Responsiveness
Transportation Facts
Freight shipments in America 2002
Mode
Freight value ($billions)
Freight tons (billions)
Freight ton-miles (millions)
Air 777 10 15Truck 6660 9197 1449Rail 388 1895 1254Water 867 2345 733Pipeline 285 1656 753Mulitmodal 1111 213 226
7.7%
66.0%
3.8%
8.6%
2.8%
11.0%
0.1%
60.0%
12.4%
15.3%
10.8%
1.4%
0.3%
32.7%
28.3%
16.5%
17.0%
5.1%
Transportation Facts
Transportation
• Transportation decisions– Design of transportation
network• Route and network
selection
– Mode of transportation• Air, package carriers,
truck, rail, sea, pipeline, intermodal, …
• Metrics– Inbound/outbound cost– Inbound/outbound cost per
shipment– Shipment sizes– Fraction transported by
mode
Overall tradeoff: Cost and speed of transportation
How does Dell use transportation to improve responsiveness?
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Responsiveness
Amazon.com
• Fulfillment and warehousing locations– Arizona, USA: Phoenix, Goodyear – Delaware, USA: New Castle – Indiana, USA: Whitestown, Munster – Kansas, USA: Coffeyville – Kentucky, USA: Campbellsville, Hebron (near CVG), Lexington,
and Louisville – Nevada, USA: Fernley and Red Rock (near 4SD) – Pennsylvania, USA: Carlisle, Chambersburg, Hazleton, and
Lewisberry – Texas, USA: Dallas/Fort Worth – Ontario, Canada: Mississauga (a Canada Post facility)
IKEA
Information
• Information decisions– Push vs. Pull– Coordination and
information sharing– Forecasting and aggregate
planning– Enabling technologies
• Metrics– Forecast horizon– Forecast errors– Ratio of demand variability
and order variability
Accurate information helps both efficiency and responsiveness
How does Wal-Mart use information to improve its supply chain operations?
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Responsiveness
Information
Sourcing
• Sourcing decisions– In-House or outsource– Supplier selection
• Metrics– Days payable outstanding– Purchase price statistics– Purchase quantities– Fraction on-time deliveries– Supply quality and lead-time
Overall tradeoff: Increased supply chain profit versus additional risk
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
How does Dell use sourcing to improve efficiency?
Responsiveness
Pricing
• Pricing decisions– Pricing and economies of
scale– Everyday low pricing versus
high-low pricing– Fixed price versus menu
price
• Metrics– Profit margin– Average sale price– Average order size– Incremental fixed cost per
order– Incremental variable cost
per unit
Overall tradeoff: Increase company profits
How can Peapod use pricing of its delivery services to improve profitability?
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Responsiveness
Designing a Supply Chain Network
In designing a supply chain, we need to consider how all supply chain drivers
should be used together to support the competitive strategy of a company and
maximize supply chain profits
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
From Strategy to Decisions
Corporate Strategy
Competitive Strategy
Supply Chain Strategy
Responsiveness Efficiency
Facilities Inventory Transportation Information Sourcing Pricing
Logistical drivers Cross functional drivers
The Role of Distribution in the Supply Chain
• What is distribution?– Distribution refers to the steps taken to move and store
a product from the supplier stage to the customer stage in a supply chain
• Distribution-related cost– Make up about 10.5% of the US economy– Make up about 20% of the cost of manufacturing
Distribution can achieve supply chain objectives from low cost to high responsiveness
The Role of Distribution in the Supply Chain
What differences in the retail environment may justify the fact that the
fast-moving consumer goods supply chain in India has far more distributors
than in the United States?
Distribution Complexity in India
• Dispersed population– 30+ cities have populations of more than 1 million, but nearly 70%
still live in rural areas
• Retail density– More than 12 million retail outlets– Mom-and-pop stores account for more than 96% of the total
market for many markets, organized retail represents only 4%
• Infrastructure complexity– Very few full-service distribution companies operate in India– Some consumer multinational companies work with more than
1,000 distributors, which deliver its products to more than 1 million outlets across India
Distribution Complexity
Baddi
Rural village
Distribution Complexity in India
• India is becoming one of the world’s largest markets for consumer goods– Rapidly rising household incomes– One quarter of India’s population is between 20 and 35, a high
spending segment in many markets– Overall retail market is more than $230 billion (2005) and
expected to grow to $308 billion (2010)
Wal-Mart is teaming up with Bharti to establish wholesale and supply chain operations in India
The Role of Distribution in the Supply Chain
• What is distribution?– Distribution refers to the steps taken to move and store
a product from the supplier stage to the customer stage in a supply chain
• Distribution-related cost– Make up about 10.5% of the US economy– Make up about 20% of the cost of manufacturing
Distribution can achieve supply chain objectives from low cost to high responsiveness
Response Time and Number of Facilities
Number of Facilities
Response Time
Facility Cost and Number of Facilities
Number of Facilities
FacilityCosts
Inventory Cost and Number of Facilities
Number of Facilities
InventoryCosts
Transportation Cost and Number of Facilities
Number of Facilities
TransportationCosts
Total Logistics Costs
Inventory Costs
LogisticsCosts
Number of Facilities
Transportation Costs
Facility Costs
Logistics Costs
Logistics Costs, Response Time and Number of Facilities (Fig 4.5)
Number of Facilities
Response Time
Total Logistics Cost
Design Options For a Distribution Network
• Two key decisions when designing a distribution network– Will the product be delivered to the customer location
or picked up from a preordained site?– Will product flow through an intermediary?
Design Options For a Distribution Network
1. Manufacturer Storage with Direct Shipping
2. Manufacturer Storage with Direct Shipping and In-Transit Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with Consumer Pickup
6. Retail Storage with Consumer Pickup
Manufacturer Storage with Direct Shipping (Drop Shipping)
• Products are shipped directly to the consumer from the manufacturer
• Retailer is an information collector: – Passes orders to the
manufacturers– It does not hold product
inventory• Inventory is centralized at
manufacturer• Drop shipping offers the
manufacturer the opportunity to postpone customization
• Effective for high value, large variety, low demand products
• High transportation cost• Example: eBags
Retailer
Manufacturers
Consumers
Manufacturer Storage with Direct Shipping and In-Transit Merge
• Shipments from multiple manufactures are merged before making a single delivery to the consumer
• Shipments to Mergers are larger so economies of scale is achieved
• Mergers increase facility costs• Response time may go up• Example:
– Furniture retailers merge couches and coffee tables produced by different manufacturers
– Dell merges a Dell PC with a Sony flat screen
RetailerMergers
Consumers
Manufacturers
Distributor Storage with Carrier Delivery
• Inventory is held at a warehouse which ships to customer by carriers
• With respect to direct shipping– Inventory aggregation is less– Higher inventory costs– Facility costs are higher– Less information to track
• Warehouses are physically closer to consumers which leads to– Faster response time– Lower transportation cost
• Not effective for slow moving items
• Example: Amazon
DistributorWarehouse
Manufacturers
Consumers
DistributorWarehouse
Distributor Storage with Last Mile Delivery
• Warehouse delivers to customers instead of carrier– Warehouses are located closer
to consumers– Transportation costs go up
because warehouses are not as effective as package carriers in aggregating loads to have economies of scale
• Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher. – Products must be flowing fast
to justify the infrastructure– Processing cost are high
• Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress
DistributorWarehouse
Manufacturers
Consumers
DistributorWarehouse
Manufacturer or Distributor Storage With Customer Pickup
• Customers come to pick up sites (warehouse, retailer) to get the products– If consumers are willing to pick
up the products, let them do so. Otherwise, they would be charged for the delivery costs
• Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located.
• Significant amount of information is required
• Increased handling cost• Example: 7dream.com
DistributorWarehouse
Manufacturers
Consumers
DistributorWarehouse
Retail Storage with Customer Pickup
• Customers pick up product from retailers– Low transportation cost– High facility cost– Relative easy returnability– Increased inventory cost
• No order tracking necessary– If the product is available at the
retailer, the consumer buys. Otherwise goes to another retailer
• Effective for fast moving items• Example: Retail stores such as
Wal-Mart and JCPenney
Retailer
Manufacturers
Consumers
RetailerRetailer
Comparing Distribution Networks
Retail storage with
customer pickup
Manufacturer storage with
direct shipping
Manufacturer storage with
in transit merge
Distributor storage with
package delivery
Distributor storage with
last mile delivery
Manufacturer storage with
customer pickup
Reponse time 1 4 4 3 2 4
Product variety 4 1 1 2 3 1
Product availability 4 1 1 2 3 1
Cusomter experience 1-5 4 3 2 1 5
Time to market 4 1 1 2 3 1
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility and handling 6 1 2 3 4 5
Information 1 4 4 3 2 5
1 = strongest performance6 = weakest performance
Comparing Distribution Networks
Green = very suitable Red = very unsuitable
Retail storage with
customer pickup
Manufacturer storage with
direct shipping
Manufacturer storage with
in transit merge
Distributor storage with
package delivery
Distributor storage with
last mile delivery
Manufacturer storage with
customer pickup
High demandMedium demandLow demandVery low demandMany sourcesHigh product valueQuick responseHigh product varietyLow customer effort
Retail storage with
customer pickup
Manufacturer storage with
direct shipping
Manufacturer storage with
in transit merge
Distributor storage with
package delivery
Distributor storage with
last mile delivery
Manufacturer storage with
customer pickup
High demandMedium demandLow demandVery low demandMany sourcesHigh product valueQuick responseHigh product varietyLow customer effort
From brick-and-mortar to click-and-mortar
Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle?
In the future, do you see the number of distributors decreasing, increasing, or staying about the same?
Why should an e-business such as Amazon.com build more warehouses as its sales volume grows?
What has been the impact of e-business on supply chain cost?
What has been the impact of e-business on customer service?