chopra 03 chapter

8/11/2019 Chopra 03 chapter

1/56

Supply/Demand ChainIntroduction, 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-emphasizedWhile 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

1-1


2/56

1-2

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 Planning4. Chapters 10-11, 13+ additional slide deck: Inventoryand

Transportation

5. Chapter 17: Supply Chain Coordination


3/56

1-3

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 Chainsolutions


4/56

1-4

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 needsoftskills 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 hardskills 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


5/56

1-5

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: 18thand 19thAnnual State of L ogistics ReportLogistics Magazine


6/56

1-6

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 ofits previous version, the 800 megabyte processor, dropped by

30%

What happened to firms who had stockpiled those?


7/561-7

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


8/56

A Brief Review of Material to Date

Typical stages: (from a demand chain perspective)

customers


9/561-9

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, efficientlyand sustainably


10/561-10

Dell Computer: Illustration of

Supply Chain Success

Example: Dell receives $1000 from a customer for acomputer (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 sharedacross all stages of the supply chain

Supply chain successshouldbe measured by total supplychain profitability, not profits at an individual stage

In practice this may be difficult when stages are separate firms


11/561-11

Decision Phases of a Supply Chain

1. Supply chain strategy (also called chain design)

2. Supply chain planning

3. Supply chain operation


12/561-12

Supply Chain Strategy (or Design)

Decisions about the structure of the supply chain and whatprocesses 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 reversemust take into account marketuncertainty

Decisions often analyzed first through models and simulations


13/561-13

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

Typicallystarts 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


14/561-14

Supply Chain Operations

Time horizon is weekly or daily

Decisions regarding individual customer orders

Supply chain configuration is fixed and operating

policies are determinedGoal 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, allocatean order to a particular shipment, set deliveryschedules, place replenishment orders

Much less uncertainty (due to short time horizon)


15/561-15

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 notall 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)


16/561-16

Push/Pull View of Supply Chains

Actions initiated from Suppliers Retail/CustomerInitiated Action

The barrier between push

And pull may vary for different

companies and industries

PUSH PROCESSES PULL PROCESSES


17/561-17

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 boundaryseparates push processes frompull processes

The relative proportion of push and pull processes can have

an impact on supply chain performance


18/562-18

Outline: Chapter 2- Chain Performance:Achieving Strategic Fit and Scope

Competitive and supply chain strategies

Achieving strategic fit

Expanding strategic scope


19/56

2-19

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


20/56

2-20

The ValueChain: Linking Supply

Chain and Business Strategy

New

ProductDevelopment

Marketing

andSales Operations Distribution Service

Overall Competi tive Strategy

Product Dev.

Strategy

Marketing

Strategy Supply Chain Strategy


21/56

2-21

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 providethe capabilities to execute the desired strategy

Example of strategic fitDells varied sales channels


22/56

2-22

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


23/56


24/56

2-24

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.


25/56

2-25

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 channelsRate 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


26/56

Supply Uncertainty

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

coin: Supply

Supply Uncertaintyvariability 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 spectrum1-26


27/56

2-27

Implied Uncertainty Spectrum

Predictable

supply and

demand

Salt at a

supermarket

A newcommunication

device

Highly uncertain

supply and demand

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Predictable supply and uncertaindemand or uncertain supply and

predictable demand or somewhat

uncertain supply and demand

An existing

automobile

model

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

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


28/56

2-28

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 productto 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


29/56

2-29

High Low

Low

High

Responsiveness

Cost

Understanding the Supply Chain: Cost-

Responsiveness Efficient Frontier


30/56


31/56

2-31

Step 3: Achieving Strategic Fit

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

consistent with target customers 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 isa right supply chain strategy for a given competitive strategy

In balancing efficiency and responsiveness, it is still critical to

remember sustainability


32/56

2-32

Achieving Strategic Fit Shown on the

Uncertainty/Responsiveness Map

Implied

uncertainty

spectrum

Responsivesupply chain

Efficient

supply chain

More

Certain

Highly

Uncertain

Responsivenessspectrum


33/56

2-33

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, typicallylower

quality

Speed, flexibility, quality

Transportation strategy Greater reliance on low cost

modes

Greater reliance on

responsive (fast) modes


34/56

2-34

Other Issues Affecting Strategic Fit

1. Multiple products and customer segments

2. Product life cycle

3. Competitive changes over time

4. Sustainability


35/56

2-35

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 andcustomer segments

Two approaches:

1. Different supply chains for different products/customers

or

2. Tailor supply chain to best meet the needs of each products

demand. Example: W.W. Grainger, MRO


36/56

2-36

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, IntelAs 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


37/56

2-37

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 ofproducts

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


38/56

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 torethink SCs

Supplier risk

Demand risk, consumer expectations

May be complex relationships betweenresponsiveness, efficiency and sustainability issues

Sometimes, but not always, involving tradeoffs

2-38


39/56

2-39

Expanding Strategic Scope

Scope of strategic fit : The functions and stages within a supplychain 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 intraoperationscope silos!

2. Intracompany intrafunctional scope

3. Intracompany interfunctional scope4. Intercompany interfunctional scope - CPFR

5. Agile Intercompany, interfunctional scope - 3+ companies


40/56

Obstacles to Achieving Strategic Fit

In short: todays business environment is more

challenging for companies

1. Increasing variety of products

2. Shorter product life cycles (technology development, trend)3. Increasinglypicky 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


41/56

3-41

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


42/56

3-42

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 policies3. 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

A F k f


43/56

3-43

A Framework for

Structuring Drivers

Competi tive Strategy

Supply Chain

Strategy

Efficiency Responsiveness

Faci li ti es Inventory Transpor tati on

I nformation

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

** also includes Sustainability

**


44/56

3-44

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


45/56

3-45

Inventory

Role in the supply chain

Exists because of a mismatch between supply and demand

Source of cost and influence on responsiveness

Given Littles Law, if throughput=demand, then inventory synonymous

with material flow time


If responsivenessis 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: Nordstroms

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

C t f I t


46/56

3-46

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


47/56

3-47

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

C t f


48/56

3-48

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)



49/56

3-49

Information


The connection between the various stages in the supply chainallows

coordination between stages

Crucial to daily operation of each stage in a supply chaine.g.,

production scheduling, inventory levels Role in the competitive strategy

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?

C t f I f ti


50/56

3-50

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


51/56

3-51

Sourcing

Role in the supply chain 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

Role in the competitive strategy 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?)


52/56

3-52

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


53/56

Metrics

The performance for these supply chain drivers can be quantified

with metrics. Heres 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+ KPIs3-53

Summary of Learning Objectives


54/56

1-54

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 thefirm?



55/56

2-55


for Chapter 2

Why is achieving strategic fit critical to a companys

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?


56/56

chopra 03 chapter

Documents