Crock management

7/29/2019 Crock management

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Supply Chain Management

Lecture 24


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Semester Outline

Thursday April 15 Chap 14

Tuesday April 20 Chap 15

Thursday April 22 Simulation Game briefing

Tuesday April 27 Review, buffer Thursday April 29 Simulation Game


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Outline

Today

Finish with Chapter 14 Sections 1, 2, 3, 4, 6, 7, 8, 9

Section 6 buyback and revenue sharing contracts only

Homework 5 due tomorrow

Next week

Chapter 15 Sections 1, 2

Simulation game briefing


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Summary

In-House or Outsource (make or buy)? The decision to outsource is based on the growth in supply

chain surplus provided by the third party and the increase inrisk by using a third party


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Summary

Buy if Supplier has cost advantage, better quality

Supplier may have better technology and may aggregate orders

Insufficient capacity Demand grows faster than anticipated

Lack of expertise Supplier may hold the patent to a process or product

Make if

Control cost and quality Easier to control cost and quality

Protect proprietary technology Protect competitive advantage

Use existing idle capacity

Short term solution


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Single Versus Multiple Suppliers

Reasons for favoring a single supplier To establish a good relationship

Less quality variability

Lower cost (quantity discount) Transportation economies

Reasons for favoring multiple suppliers Need capacity

Spread the risk of supply interruption Create competition

Policy


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Outsourcing Logistics

A third-party logistics (3PL) provider performsone or more of the logistics activities relating to theflow of product, information, and funds that could

be performed by the firm itself First party logistics provider (1PL)

Shipper, a firm that needs to have goods transported from A to B

Second party logistics provider (2PL)

Carrier, firm which actually owns the means of transportation Third party logistics provider (3PL) (sometimes LSP)

Typically specialize in integrated operation, warehousing andtransportation services that can be scaled and customized tocustomers needs


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Services Provided by 3PLs

Service Category Basic Service Some specific value addedservices

Transportation Inbound, outbound by ship,truck, rail, air

Track/trace, mode conversion

Warehousing Storage, facilitiesmanagement

Cross-dock, in-transit merge,inventory control

Informationtechnology

Provide and maintainadvanced informationsystems

Transportation managementsystems, warehousingmanagement

Reverse logistics Handle reverse flows Recycling, customer returns,repair/refurbish

Other 3PL services Customs brokering, hazardousmaterial, order taking,consulting, port services, etc.

How has globalization impacted sourcing decisions?


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Outsourcing Logistics

A fourth-party logistics (4PL) providermanages other 3PLs. Whereas a 3PL targets afunction, a 4PL targets management of an entireprocess

Fourth party logistics provider (4PL) A 4PL is an integrator that assembles the resources,

capabilities, and technology of its own organization and other

organizations to design, build and run comprehensive supplychain solutions Source: Accenture

4PL use 2PLs and/or 3PLs to supply service to customers,owning mostly computer systems/technology


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Best Practice 4PL

Li & Fung

The firm aggregates demand across hundreds ofcustomers, capacity across thousands of suppliers,

and uses detailed information to match supply anddemand in the most cost effective manner

By sourcing appropriately Li & Fung gets aroundregional trade umbrellas such as the EU and NAFTA


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How do 4PLs Add Value?

How do 4PLs add value to a firm managing itsown logistics providers?

The fundamental advantage that 4PLs mayprovide comes from greater visibility and

coordination over a firms supply chain and

improved handoffs between logisticsproviders


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Sourcing Process

Supplier scoring and assessment Process used to rate suppliers

Supplier selection

Choose the appropriate supplier(s)

Design collaboration Work together with supplier when designing components for the

final product

Procurement Process of placing orders and receiving orders from supplier(s)

Sourcing planning and analysis Analyze spending across various suppliers, identify opportunities

for decreasing cost

Supplierscoring

andassessment

Designcollaboration

Supplierselection

andcontract

negotiation

Procurement

Sourcingplanning

andanalysis


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Sourcing Process

Supplierscoring

andassessment

Designcollaboration

Supplierselection

andcontract

negotiation

Procurement

Sourcingplanning

andanalysis


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Supplier scoring and assessment

Common fundamentalmistake when choosing asupplier

Only focus on quoted price

Supplier performance should be compared on

the basis of the suppliers impact on total cost


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Factors besides purchase pricethat influence total cost

Replenishment lead times Does it pay to select a more expensive supplier with a

shorter lead time?

If lead time grows, safety inventory grows proportionally to thesquare root of the replenishment lead time

On-time performance Is a more reliable supplier worth the extra pennies?

If variability of lead time grows, the required safety inventory atthe firm grows


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Supply flexibility The less flexible a supplier is, the more lead-time variability it will

display as order quantities change

Delivery frequency/lot size Delivery frequency affects the transportation cost, lot size affectsthe cycle inventory holding cost

Supply quality Quality affects unit price and lead time as follow-up orders may

need to be fulfilled to replace defective products Inbound transportation cost

Sourcing a product overseas may have lower product cost, butgenerally incurs a higher inbound transportation cost


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Pricing terms For example, quantity discounts(and the impact it has on cycle

inventory)

Information coordination capability Good coordination results in better planning and ultimately lowerproduction, safety inventory, and transportation cost

Exchange rates, taxes, and duties Important for global supply chainsas it affects the unit price

Supplier viability The likelihood that the supplier will be around to fulfill the

promises it makes (uncertainty increases safety inventory)

Design collaboration capability Can help reduce all cost, improve quality, and decrease time-to-

market


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Sourcing Process

Supplierscoring

andassessment

Designcollaboration

Supplierselection

andcontract

negotiation

Procurement

Sourcingplanning

andanalysis


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Design Collaboration

50-70% of spending at a manufacturer isthrough procurement

Compared to only about 20% several decades ago

80% of the cost of a purchased part is fixed inthe design phase

Design collaboration with suppliers can result in

reduced cost, improved quality, and decreasedtime to market


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Component Estimated cost

Display Module - 9.7" Diagonal, 262K Color TFT, IP

Touchscreen Assembly - 9.7" Diagonal, Capacitiv

All enclosure metals, plastics, PCB substrates, co

Battery - Li-Ion Polymer, 3.75V, 6600mAh

Microprocessor A4 Microprocessor Core Integrat2Gbit Mobile SDRAM - Package on Package (stac

WLAN n + BT + FM Module (Featuring Broadcom)

Touchscreeen Microcontroller

Touchscreen Driver

Multitouch Controller - Capacitive

Audio Codec - Ultra Low Pow er, Stereo, w / Head

Pow er Management Integrated Circuit

Pow er Management Integrated Circuit

Other Electronic Components

NAND Flash

Box Contents

Total Mater ials

Manufacturing

Retail Price $499.00

How Much Does it Cost to Make aniPad?

Source: iSuppli


Display Module - 9.7" Diagonal, 262K Color TFT, IP $65.00

Touchscreen Assembly - 9.7" Diagonal, Capacitiv $30.00

All enclosure metals, plastics, PCB substrates, co $32.50

Battery - Li-Ion Polymer, 3.75V, 6600mAh $21.00

Microprocessor A4 Microprocessor Core Integrat $19.502Gbit Mobile SDRAM - Package on Package (stac $7.30

WLAN n + BT + FM Module (Featuring Broadcom) $8.05

Touchscreeen Microcontroller $2.30

Touchscreen Driver $1.80

Multitouch Controller - Capacitive $1.40

Audio Codec - Ultra Low Pow er, Stereo, w / Head $1.20

Pow er Management Integrated Circuit $2.10


Other Electronic Components $20.20

NAND Flash $29.50

Box Contents $7.50

Total Materials $250.60

Manufacturing



Display Module - 9.7" Diagonal, 262K Color TFT, IP $65.00

Touchscreen Assembly - 9.7" Diagonal, Capacitiv $30.00

All enclosure metals, plastics, PCB substrates, co $32.50

Battery - Li-Ion Polymer, 3.75V, 6600mAh $21.00

Microprocessor A4 Microprocessor Core Integrat $19.502Gbit Mobile SDRAM - Package on Package (stac $7.30

WLAN n + BT + FM Module (Featuring Broadcom) $8.05

Touchscreeen Microcontroller $2.30

Touchscreen Driver $1.80

Multitouch Controller - Capacitive $1.40

Audio Codec - Ultra Low Pow er, Stereo, w / Head $1.20



Other Electronic Components $20.20

NAND Flash $29.50

Box Contents $7.50

Total Materials $250.60

Manufacturing $9.00



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Supply Chain Top 25, 2009


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Design Collaboration

Design for logistics

Attempts to reduce transportation, handling, and inventory cost

Coors redesigned glass bottle reduced transportation cost

Design for manufacturability Attempts to design products for ease of manufacture (part

commonality, designing symmetrical parts, designing parts toprovide access for catalog parts)


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Sourcing Process

Supplierscoring

andassessment

Designcollaboration

Supplierselection

andcontract

negotiation

Procurement

Sourcingplanning

andanalysis


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Contracts and Supply ChainPerformance

Many shortcomings in supply chain performance occurbecause the buyer and supplier each try to optimize theirown profits

Total supply chain profits might therefore be lower than if thesupply chain coordinated actions to have a common objectiveof maximizing total supply chain profits

Double marginalization results in suboptimal order quantity

The supplier must share in some of the buyers demand

uncertainty

A contract should be structured to increase the firms

profits and supply chain profits


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Example

Consider a music store that sells compact discs. Thesupplier buys/manufactures compact discs at $1 per

unit and sells them to the music store at $5 per unit.The retailer sells each disc to the end customer at$10. At this price demand is normally distributed, witha mean of 1,000 and a standard deviation of 300. The

retailer has a margin of $5 per disc and canpotentially lose $5 for each unsold disc

Manufacturer Distributor Retailer Customer

$10$5$1


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Retailer Supplier

p =

c =

s =

CSL =

O* =

Expected profits =

Total profit = 3,803 + 4,000 = $7,803Manufacturer Distributor Retailer Customer

$10$5$1

$10 $5

$5 $1

$0

(p-c)/(p-s) = 0.5

F-1(CSL,,) =1,000

(see 12.3) = $3,803 1,000*4 = $4,000


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Supply Chain

p =

c =

s =

CSL =

O* =

Expected profits = versus $7,803

Manufacturer Distributor Retailer Customer

$10$1

$10

$1

$0

(p-c)/(p-s) = 0.9

F-1(CSL,,) =1,384

(see 12.3) = $8,474


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Supplier Selection and Contracts

Contracts to increase product availability and supplychain profits

Buyback Contracts

Revenue-Sharing Contracts Quantity Flexibility Contracts

Contracts to increase agent effort

Contracts to induce performance improvement

Shared savings contract


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Buyback Contracts

Allows a retailer to return unsold inventory up to aspecified amount at an agreed upon price

Increases the optimal order quantity for the retailer,

resulting in higher product availability and higher profitsfor both the retailer and the supplier


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Impact of Buyback Contracts onProfitability

Expected Expected Expected

Wholesale Buyback Optimal Expected Profit Profit Profit

Price c Price b Order Size Returns Retailer Supplier SC

$5 $0 1,000 120 $3,803 $4,000 $7,803$5 $2 1,096 174 $4,090 $4,035 $8,125

$5 $3 1,170 223 $4,286 $4,009 $8,295

$6 $0 924 86 $2,841 $4,620 $7,461

$6 $2 1,000 120 $3,043 $4,761 $7,804

$6 $4 1,129 195 $3,346 $4,865 $8,211

$7 $0 843 57 $1,957 $5,056 $7,013$7 $4 1,000 120 $2,282 $5,521 $7,803

$7 $6 1,202 247 $2,619 $5,732 $8,351


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Buyback Contracts

Downsides that buyback contract results in Surplus inventory for the supplier that must be disposed of,

which increases supply chain costs

Misleading for the supply chain as it reacts to (inflated) retailorders, not actual customer demand

Most effective for products with low variable cost, suchas music, software, books, magazines, and newspapersso that the supplier can keep the surplus


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Revenue Sharing Contracts

The buyer pays a minimal amount for each unitpurchased from the supplier but shares a fraction ofthe revenue for each unit sold


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Blockbuster (1998)

Blockbuster purchases a copy from a studio for $60 andrents for $3 Blockbuster must rent the tape at least 20 times before earning

profit

In 1998, 20% of surveyed customers reported that they could notrent the movie they wanted because the Blockbuster did nothave that movie

In 1998, Blockbuster started revenue sharing with themajor movie studios Blockbuster pays the wholesale price of $9 per copy.

Blockbuster shares (1-) =30-45% portion of the revenue withthe movie studio

The impact of revenue sharing on Blockbuster wasdramatic Rentals increased by 75% in test markets due to higher video

availability


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Netflix

Blockbuster owns its DVDs

Netflix has established revenue sharing contracts withmost studios

DVDs are purchased at cost Netflix pays on average $1.40 to the studios each time their title

is rent

At end of contract Netflix acquires some percentages of the unitsfor retention or sale, the remaining DVDs are destroyed or

returned to the original studio


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Impact of Revenue Sharing Contractson Profitability

Revenue Expected Expected Expected

Wholesale Sharing Optimal Expected Profit Profit Profit

Price c Fraction f Order Size Returns Retailer Supplier SC

$1 0.30 1,320 342 $5,526 $2,934 $8,460$1 0.45 1,273 302 $4,064 $4,367 $8,431

$1 0.60 1,202 247 $2,619 $5,732 $8,351

$2 0.30 1,170 223 $4,286 $4,009 $8,295

$2 0.45 1,105 179 $2,881 $5,269 $8,150

$2 0.60 1,000 120 $1,521 $6,282 $7,803


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Contracts Advantages vs.Disadvantages

Advantages Uncertainty reduction for

retailer

Relationship leveraging

Disadvantages Supplier being blocked

from selling to otherretailers

Retailer being blocked frombuying from other suppliers


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Sourcing Process

Supplierscoring

andassessment

Designcollaboration

Supplierselection

andcontract

negotiation

Procurement

Sourcingplanning

andanalysis


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Procurement

Procurement transactions begin with the buyer placingthe order and end with the buyer receiving and paying forthe order

Goal is to enable orders to be placed and delivered on schedule atthe lowest possible overall cost

Two main categories of purchased goods: Direct materials: components used to make finished goods

Memory, hard drives, and CD drives are direct materials for a PC

Indirect materials: goods used to support the operations of a firm

PCs are indirect materials for a car manufacturer


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Product Categorization by Valueand Criticality

Low

Low

High

HighValue/Cost

Criticality

Critical items(i.e. components with

long lead times)

Ensure availability

Strategic items(i.e. subsystems, electronics

for an auto manufacturer)

Ensure long term relationship

General items(mostly indirect materials)

Ensure low cost

Bulk purchase items(small parts, packaging)

Ensure low cost


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Outsourcing at Darden

Darden Restaurants, owner of popular brands such as OliveGarden and Red Lobster, serves more than 300 million meals

annually in over 1,700 restaurants across the US and Canada. Toachieve competitive advantage via its supply chain, Darden mustachieve excellence at each step. With purchases from 35

countries, and seafood products with a shelf life as short as 4days, this is a complex and challenging task. Those 300 million

meals annually mean 40 million pounds of shrimp and hugequantities of tilapia, swordfish, and other fresh purchases.

What are outsourcing opportunities in a restaurant?

Crock management

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