Chopra, 4th Edition, Chapter 1 - San Francisco State...

Supply/Demand Chain Introduction, Overview and Strategy

These slides address chapters 1 through 3 of the

textbook, with some information already found in the

earlier “Sustainable Demand Chain Management: an

Introduction” de-emphasized

While the slide decks are based on the textbook, they

have been customized for this class

– Additional materials are often included

– Professorial commentary that expresses a different

viewpoint than in the text will be noted in a different color

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Overview of Course

1. Chapters 1-3 + additional slide deck: Introduction, Overview

and Strategy

2. Chapters 4-6: Network Planning and Distribution

3. Chapters 8-9: Aggregate Planning

4. Chapters 10-11, 13+ additional slide deck: Inventory and

Transportation

5. Chapter 17: Supply Chain Coordination

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Who Needs to Know About this

Topic?

Anyone involved in a manufacturing or service

industry where capacities and raw materials cannot be

obtained or expanded without a time or cost penalty

– Executives and Entrepreneurs must understand the strategic

importance of the Supply Chain

– Managers, Consultants and Software Designers need to be

able to analyze, design, and implement Supply Chain

solutions

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Supply Chain Management is not

Learned just Through a Textbook

The “best” solution to a Supply Chain problem may not win

– An elegant, mathematically complex LP presented such that only Ph.D.s

understand may not be the best practical solution to the problem at hand.

And even if it is, it is not the one that will be awarded the contract!

Supply Chain Practitioners need soft skills

– Work effectively with clients and team members, including being

responsive to questions and requests

– You must package and sell your proposed solution

Supply Chain Practitioners need hard skills

– Lots of data, need to understand processes and interactions with IT

– Work usually involves creating or adapting large-scale computer models

The class is designed for you to practice both hard and soft skills

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Traditional View: Logistics in the

US Economy (2006, 2007)

Freight Transportation $809, $856 Billion

Inventory Expense $446, $487 Billion

Administrative Expense $50, $54 Billion

Total Logistics Costs $1.31, $1.4 Trillion

Logistics Related Activity 10%, 10.1% of GNP

– About 21% of total costs for a manufacturing firm

– Logistical costs percentages are higher in the EU

But supply chain is more than logistics….

Source: 18th and 19th Annual State of Logistics Report – Logistics Magazine

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Supply Chain Management:

Mishaps and Opportunities

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

Compaq estimates it lost $.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

its previous version, the 800 megabyte processor, dropped by

30%

– What happened to firms who had stockpiled those?

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Chapter 1 Outline

What is a Supply Chain? (We covered this earlier)

Decision Phases in a Supply Chain

Process View of a Supply Chain

The Importance of Supply Chain Flows

A Brief Review of Material to Date

Typical stages: (from a demand chain perspective)

customers<retailers<distributors<manufacturers<suppliers

– All stages may not be present- Can you think of some well

known companies that are missing a stage?

– What stage is always present?

The obvious flow is the movement of products from

suppliers to the customer, but also includes movement

of information, funds, and products in both directions

– Reverse logistics is an important facet of both sustainability

and CRM initiatives, will be discussed later.

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The Objective of a Supply Chain

Sources of supply chain revenue: the customer

Sources of supply chain cost: flows of information,

products, or funds between stages of the supply chain

Supply chain management is ….

– Book: …the management of flows between and among

supply chain stages to maximize total supply chain

profitability

– Professor commentary: …is the coordination of business

functions within an organization and its channel partners in

order to provide goods and services to fulfill customer

demand responsively, efficiently and sustainably

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Dell Computer: Illustration of

Supply Chain Success

Example: Dell receives $1000 from a customer for a computer (revenue)

Supply chain incurs costs (information, storage, transportation, components, assembly, etc.)

Difference between $1000 and the sum of all of these costs is the supply chain profit

– Time value of money often plays a role

Supply chain profitability is the total profit to be shared across all stages of the supply chain

Supply chain success should be measured by total supply chain profitability, not profits at an individual stage

– In practice this may be difficult when stages are separate firms

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Decision Phases of a Supply Chain

1. Supply chain strategy (also called chain design)

2. Supply chain planning

3. Supply chain operation

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Supply Chain Strategy (or Design)

Decisions about the structure of the supply chain and what processes each stage will perform

Strategic supply chain decisions

– Locations and capacities of facilities

– Products to be made or stored at various locations

– Modes of transportation

– Information systems

Supply chain design must support strategic objectives

Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty

Decisions often analyzed first through models and simulations

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Supply Chain Planning

Definition of a set of policies that govern short-term

operations - typically a quarter to a couple years

Fixed by the supply configuration from previous phase

– Typically starts with a forecast of demand in the coming year

Planning decisions:

– Which markets will be supplied from which locations

– Planned buildup of inventories, inventory policies

– Subcontracting, backup locations

– Timing and size of market promotions

Must consider demand uncertainty, exchange rates,

competition over the time horizon

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Supply Chain Operations

Time horizon is weekly or daily

Decisions regarding individual customer orders

Supply chain configuration is fixed and operating policies are determined

Goal is to implement the operating policies as effectively as possible

Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders

Much less uncertainty (due to short time horizon)

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Process View of a Supply Chain

Cycle view: processes in a supply chain are divided

into a series of cycles, each performed at the

interfaces between two successive supply chain stages

– We will not be emphasizing the cycle view in class, as not

all chains have all stages present

Push/pull view: processes in a supply chain are

divided into two categories depending on whether

they are executed in response to a customer order

(pull) or in anticipation of a customer order (push)

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Push/Pull View of Supply Chains

Actions initiated from Suppliers Retail/Customer

Initiated Action

The barrier between push

And pull may vary for different

companies and industries

PUSH PROCESSES PULL PROCESSES

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Push/Pull View of

Supply Chain Processes

Supply chain processes fall into one of two categories

depending on the timing of their execution relative to

customer demand

– Pull: execution is initiated in response to a customer order

(reactive)

– Push: execution is initiated in anticipation of customer

orders (speculative)

Push/pull boundary separates push processes from

pull processes

– The relative proportion of push and pull processes can have

an impact on supply chain performance

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Outline: Chapter 2 - Chain Performance:

Achieving Strategic Fit and Scope

Competitive and supply chain strategies

Achieving strategic fit

Expanding strategic scope

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Competitive and Supply

Chain Strategies

Competitive strategy: defines the set of customer needs a firm

seeks to satisfy through its products and services

Product development strategy: specifies the portfolio of new

products that the company will try to develop

Marketing and sales strategy: specifies how the market will be

segmented and product positioned, priced, and promoted

Supply chain strategy:

– determines the nature of material procurement, transportation of

materials, manufacture of product or creation of service, distribution of

product

– Consistency and support between supply chain strategy, competitive

strategy, and other functional strategies is important

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The Value Chain: Linking Supply

Chain and Business Strategy

New

Product

Development

Marketing

and

Sales

Operations Distribution Service

Overall Competitive Strategy

Product Dev.

Strategy Marketing

Strategy Supply Chain Strategy

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Achieving Strategic Fit

Strategic fit:

– Consistency between customer priorities of competitive

strategy and supply chain capabilities specified by the

supply chain strategy

– Competitive and supply chain strategies have the same

goals

A company may fail because of a lack of strategic fit

or because its processes and resources do not provide

the capabilities to execute the desired strategy

Example of strategic fit – Dell’s varied sales channels

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How is Strategic Fit Achieved?

Step 1: Understanding the customer and the supply

chain uncertainty

Step 2: Understanding the supply chain capabilities

Step 3: Achieving strategic fit

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Step 1: Understanding the Customer

and Supply Chain Uncertainty

Identify the needs of the customer segment being served

– Quantity of product needed in each lot

– Response time customers will tolerate

– Variety of products needed

– Service level required

– Price of the product

– Desired rate of innovation in the product

– Demand uncertainty: How much does customer demand for a

product vary?

– Are there particular needs related to Sustainability?

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Step 1: Understanding the Customer

and Supply Chain Uncertainty

Key Point: Implied Demand Uncertainty is more than

just Demand Uncertainty

Demand uncertainty: uncertainty of customer demand for a

product

Implied demand uncertainty: resulting uncertainty for the

supply chain given the portion of the demand the supply chain

must handle and the attributes the customer desires from the

product and the experience of purchasing it:

– For example: if customers require very fast service or if they are many

varieties of the product (and customers are picky about what they get)

implied demand uncertainty is higher.

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Impact of Customer Needs on Implied

Demand Uncertainty

Customer Need Causes implied demand

uncertainty to increase because …

Range of quantity required increases Wider range of quantity required

implies greater variance in demand

Lead time required to decrease Less time to react to orders

Variety of products required increases Demand per product becomes more

disaggregated

Number of channels through which

product may be acquired increases

Total customer demand is now

disaggregated over more channels

Rate of innovation must increase New products tend to have more

uncertain demand

Required service level must increase Firm now has to handle unusual

surges in demand

Supply Uncertainty

Now turn away from demand briefly to look at other side of the

coin: Supply

Supply Uncertainty – variability associated with getting the

right amount of the product at the right time

Will increase with….

– Unpredictable/low yields problematic issue from high tech

(semiconductor) to low tech- traditional agriculture)

– Limited/inflexible supply capacity

– Evolving production process

First step to achieving strategic fit is to understand customers

and their inherent implied demand uncertainty, and also

consider effects from Supply Uncertainty, mapping both onto

the implied uncertainty spectrum

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Implied Uncertainty Spectrum

Predictable

supply and

demand

Salt at a

supermarket

A new communication

device

Highly uncertain

supply and demand

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum

Predictable supply and uncertain demand or uncertain supply and

predictable demand or somewhat

uncertain supply and demand

An existing

automobile

model

There are exceptions- for example, with salt, think of Fleur de Sel or pink Himalayan salt!

Many firms have attempted to move their products upstream, eg. Fresh Choice: bagged salads

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Step 2: Understanding the

Supply Chain Capabilities

How does the firm best meet demand?

One dimension describing the chain is supply chain responsiveness

– 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

There is a cost to achieving responsiveness

Supply chain efficiency: cost of making and delivering the product

to the customer

– Increasing responsiveness usually results in higher costs, lowing efficiency

Second step to achieving strategic fit is to map the supply chain on

the responsiveness spectrum

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High Low

Low

High

Responsiveness

Cost

Understanding the Supply Chain: Cost-

Responsiveness Efficient Frontier

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Responsiveness Spectrum

Integrated

steel mill-

Production

scheduled

months in

advance

7-11 Japan,

Changes

merchandise

Mix by location

and time of day

Highly

efficient

Highly

responsive

Somewhat

efficient

Somewhat

responsive

Hanes

Apparel,

Traditional

Make-to-stock

Manufacturer

With lead-times

of several weeks

Most

automotive

Production, large

Variety of products

in a few weeks,

Some customization

So now we have two spectrums (lines)- what do you think is next?

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Step 3: Achieving Strategic Fit

Third Step is to ensure that what the supply chain does well is

consistent with target customer’s needs

All functions in the value chain must support the competitive

strategy to achieve strategic fit

Barilla Pasta and Apple Computer are examples of companies

that are “in the Zone”

– Do you think their supply chain strategies are similar?

Key points

– There is no one right supply chain for all companies

– there is a right supply chain strategy for a given competitive strategy

– In balancing efficiency and responsiveness, it is still critical to

remember sustainability

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Achieving Strategic Fit Shown on the

Uncertainty/Responsiveness Map

Implied

uncertainty

spectrum

Responsive

supply chain

Efficient

supply chain

More

Certain

Highly

Uncertain

Responsiveness

spectrum

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Comparison of Efficient and

Responsive Supply Chains

Efficient Responsive

Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow

postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense

of greater cost

Aggressively reduce even if

costs are significant

Supplier selection strategy Cost and, typically lower

quality

Speed, flexibility, quality

Transportation strategy Greater reliance on low cost

modes

Greater reliance on

responsive (fast) modes

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Other Issues Affecting Strategic Fit

1. Multiple products and customer segments

2. Product life cycle

3. Competitive changes over time

4. Sustainability

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Multiple Products and

Customer Segments

Firms sell different products to different customer

segments (with different implied demand uncertainty)

The supply chain has to be able to balance efficiency

and responsiveness given its portfolio of products and

customer segments

Two approaches:

1. Different supply chains for different products/customers

or

2. Tailor supply chain to best meet the needs of each product’s

demand. Example: W.W. Grainger, MRO

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Product Life Cycle

The demand characteristics of a product and the needs

of a customer segment change as a product goes

through its life cycle

– Examples: pharmaceutical firms, Intel

As the product goes through the life cycle, the supply

chain changes from one emphasizing responsiveness to

one emphasizing efficiency

Supply chain strategy must evolve throughout life cycle

– Early: uncertain demand, high margins (time is important),

product availability is most important, cost is secondary

– Late: predictable demand, lower margins, price is important

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Competitive Changes Over Time

Competitive pressures can change over time

More competitors may result in an increased emphasis

on variety at a reasonable price

The Internet makes it easier to offer a wide variety of

products

The supply chain must change to meet these changing

competitive conditions

– Example Dell used to sell PCs and laptops only via internet,

but now also sells at Wal-Mart

Sustainability

Consider both Ethical as well as Environmental issues

Sustainability policies may be driven by either

regulation or risk factors

– WEEE- EU regulation forced electronics providers to

rethink SCs

– Supplier risk

– Demand risk, consumer expectations

May be complex relationships between

responsiveness, efficiency and sustainability issues

– Sometimes, but not always, involving tradeoffs

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Expanding Strategic Scope

Scope of strategic fit : The functions and stages within a supply chain that devise an integrated strategy with a shared objective

– One extreme: each function at each stage develops its own strategy

– Other extreme: all functions in all stages devise a strategy jointly

From least to most evolved/expanded….

1. Intracompany intraoperation scope – silos!

2. Intracompany intrafunctional scope

3. Intracompany interfunctional scope

4. Intercompany interfunctional scope - CPFR…

5. Agile Intercompany, interfunctional scope - 3+ companies

Obstacles to Achieving Strategic Fit

In short: today’s business environment is more

challenging for companies

1. Increasing variety of products

2. Shorter product life cycles (technology development, trend)

3. Increasingly picky customers

4. Fragmentation of chain ownership

5. Globalization, on supply-side and also the demand side*

6. Rapidly changing business environment

7. Difficulties with executing new strategies

8. Especially for 2007-2011 timeframe- economic cycle

2-40 *see the P&G Swiffer in Italy story

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Outline: Chapter 3- Supply Chain

Drivers and Metrics

Drivers of supply chain performance

A framework for structuring drivers

Detailed view for each driver and appropriate metrics

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Drivers of Supply Chain Performance

1. Facilities

– places where inventory is stored, assembled, or fabricated

– production sites and storage sites

2. Inventory

– raw materials, WIP, finished goods within a supply chain

– inventory policies

3. Transportation

– moving inventory from point to point in a supply chain

– combinations of transportation modes and routes

4. Information

– data & analysis regarding inventory, transportation, facilities throughout the chain

– potentially the biggest driver of chain performance

5. Sourcing

– functions a firm performs and functions that are outsourced

6. Pricing

– Price associated with goods and services provided by a firm to the supply chain

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A Framework for

Structuring Drivers

Competitive Strategy

Supply Chain

Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

** also includes Sustainability

**

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Facilities

Role in the supply chain- the “where”

– manufacturing or storage (warehouses)

Role in the competitive strategy

– economies of scale (efficiency priority)

– larger number of smaller facilities (responsiveness priority)

Components of facilities decisions

– Location

» centralization (efficiency) vs. decentralization (responsiveness)

» other factors to consider (e.g., proximity to customers)

– Capacity (flexibility versus efficiency)

– Manufacturing methodology (product focused versus process focused)

– Warehousing methodology (SKU storage, job lot storage, cross-docking)

Overall trade-off: Responsiveness versus efficiency

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Inventory

Role in the supply chain

– Exists because of a mismatch between supply and demand

– Source of cost and influence on responsiveness

– Given Little’s Law, if throughput=demand, then inventory synonymous

with material flow time


– If responsiveness is a strategic competitive priority, a firm can locate

larger amounts of inventory closer to customers

– If cost is more important, inventory can be reduced (or consolidated

further away) to make the firm more efficient

– Example: High-service department store: Nordstrom’s

We will spend 2 chapters in this class on inventory policies!

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Components of Inventory

Decisions

Cycle inventory

– Average amount of inventory used to satisfy demand between shipments

– Depends on lot size

Safety inventory

– inventory held in case demand exceeds expectations

– costs of carrying too much inventory versus cost of losing sales

Seasonal inventory

– inventory built up to counter predictable variability in demand

– cost of carrying additional inventory versus cost of flexible production


– more inventory: greater responsiveness but greater cost

– less inventory: lower cost but lower responsiveness

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Transportation


– Moves the product between stages in the supply chain

– Impact on responsiveness and efficiency

– Faster transportation allows greater responsiveness but lower efficiency

– Also affects inventory and facilities


– If responsiveness is a strategic competitive priority, then faster

transportation modes can provide greater responsiveness to customers

who are willing to pay for it

– Can also use slower transportation modes for customers whose priority

is price (cost)

– Can also consider both inventory and transportation to find the right

balance

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Components of

Transportation Decisions

Mode of transportation:

– air, truck, rail, ship, pipeline, electronic transportation

– Utilization and backhaul rates should be considered

– vary in cost, speed, size of shipment, flexibility, carbon footprint

Route and network selection

– route: path along which a product is shipped

– network: collection of locations and routes

In-house or outsource (see driver #5)


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Information


– The connection between the various stages in the supply chain – allows

coordination between stages

– Crucial to daily operation of each stage in a supply chain – e.g.,

production scheduling, inventory levels


– Allows supply chain to become more efficient and more responsive at

the same time (reduces the need for a trade-off)

– Need to ask: what information is most valuable?

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Components of Information

Decisions

Components of information decisions

– Push (MRP) versus pull (need demand information across

all stages)

– Coordination and information sharing

– Forecasting and aggregate planning

– Enabling technologies include the following:

» EDI

» Internet

» ERP systems

» Supply Chain Management software

» RFID

– Still some tradeoff exists: Responsiveness versus efficiency

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Sourcing


– Set of business processes required to purchase goods and services in a chain

» Examples: contract manufacturers, Transportation/Inventory services- 3PL

– Supplier selection, single vs. multiple suppliers, contract negotiation


– Sourcing decisions are crucial because they affect the level of efficiency and

responsiveness in a supply chain

– In-house vs. outsource decisions- improving efficiency and responsiveness

» Example: Expedited delivery usually requires Parcel Delivery

Components of sourcing decisions

– Perform a task in-house versus outsource?

– Supplier evaluation and selection

– Procurement process

– Overall trade-off: balance profitability (Risk? Ethical issues?)

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Pricing


– Pricing determines the amount to charge customers

– Pricing strategies can be used to match demand and supply


– Firms can utilize optimal pricing strategies to improve efficiency and

responsiveness

– Low price and low product availability; vary prices by response times

Components of pricing decisions

– Pricing and economies of scale

– Everyday low pricing versus high-low pricing

– Fixed price versus menu pricing

– Overall trade-off: Increase the firm profits

We will explore effects from some of these pricing decisions later

Metrics

The performance for these supply chain drivers can be quantified

with metrics. Here’s some examples we will work with during

this term:

1. Facilities: Capacity, Utilization rate, per unit production cost

2. Inventory: Days-OnHand (Dollars-OnHand), Safety Stock, Stockout %

3. Transportation: Fraction transported by mode, inbound/outbound

shipment size, inbound/outbound transportation cost per unit

4. Information: Forecast error, ratio of demand variability to order variability

5. Sourcing: supplier lead time, average purchase price, supplier reliability

6. Pricing: profit margin, fixed cost per order, variable cost per unit

Certain metrics will be more important than others for different

firms with different supply chain strategies

Information Overload: SCOR has over 150+ KPIs

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Summary of Learning Objectives-

Chapter 1

What are supply chain stages?

What are the three flows within a supply chain?

What are the three key supply chain decision phases

and what is the significance of each?

What is the push/pull view of a supply chain?

What is the goal of a supply chain and what is the

impact of supply chain decisions on the success of the

firm?

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Summary of Learning Objectives

for Chapter 2

Why is achieving strategic fit critical to a company’s

overall success?

How does implied demand uncertainty differ from

demand uncertainty?

How does a company achieve strategic fit between its

supply chain strategy and its competitive strategy?

What are some complications to achieving this fit?

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Summary of Learning Objectives

for Chapter 3

What are the major drivers of supply chain

performance?

What is the role of each driver in creating strategic fit

between supply chain strategy and competitive strategy

(or between implied demand uncertainty and supply

chain responsiveness)?

What are some relevant metrics?

In the remainder of the course, we will learn how to make

decisions with respect to these drivers in order to achieve

strategic fit and surmount these obstacles

Chopra, 4th Edition, Chapter 1 - San Francisco State...

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