Supply Chain Strategy

1
Supply Chain Strategy
Chapter 10
2
How Supply Chain Strategy fits the Operations
Management Philosophy
Operations As a Competitive Weapon Operations
Strategy Project Management
Process Strategy Process Analysis Process
Performance and Quality Constraint
Management Process Layout Lean Systems
Supply Chain Strategy Location Inventory
Management Forecasting Sales and Operations
Planning Resource Planning Scheduling
3
Supply Chain

• Supply chain The network of services, material,
  and information flows that link a firms customer
  relationship, order fulfillment, and supplier
  relationship processes to those of its supplier
  and customers.
• Supply chain management Developing a strategy to
  organize, control, and motivate the resources
  involved in the flow of services and materials
  within the supply chain.
• Supply chain strategy Designing a firms supply
  chain to meet the competitive priorities of the
  firms operations strategy.

4
Supply Chain for Services

• Supply chain design for a service provider is
  driven by the need to provide support for the
  essential elements of the various service
  packages it delivers.
• A service package consists of
• supporting facilities
• facilitating goods
• explicit services
• implicit services

5
Supply Chain for a Florist
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Creation of Inventory

• Inventory A stock of materials used to satisfy
  customer demand or to support the production of
  services or goods.

7
Supply Chain for Manufacturing

• Raw materials (RM) The inventories needed for
  the production of services or goods.
• Work-in-process (WIP) Items, such as components
  or assemblies, needed to produce a final product
  in manufacturing.
• Finished goods (FG) The items in manufacturing
  plants, warehouses, and retail outlets that are
  sold to the firms customers.

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Inventory at Successive Stocking Points
9
Supply Chain
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Inventory Measures of Supply Chain Performance

• Average aggregate inventory value (AGV) is the
  total value of all items held in inventory for a
  firm.

AGV ( of A items)(Value of each A)( of B
items)(Value of each B)

• Weeks of supply The average aggregate inventory
  value divided by sales per week at cost.

• Inventory turnover is annual sales at cost
  divided by the average aggregate inventory value
  maintained for the year.

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Supply Chain Process Measures
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Links to Financial Measures

• Return on Assets (ROA) is net income divided by
  total assets.
• Managing the supply chain so as to reduce the
  aggregate inventory investment will reduce the
  total assets portion of the firms balance sheet.
• Working Capital Money used to finance ongoing
  operations.
• Weeks of inventory and inventory turns are
  reflected in working capital.
• Decreasing weeks of supply or increasing
  inventory turns reduces the working capital.

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Links to Financial Measures

• Cost of Goods Sold Buying materials at a better
  price, or transforming them more efficiently,
  improves a firms cost of goods sold measure and
  ultimately its net income.
• Total Revenue Increasing the percent of on-time
  deliveries to customers increases total revenue
  because satisfied customers will buy more
  services and products.
• Cash Flow Cash-to-cash is the time lag between
  paying for the services and materials needed to
  produce a service or product and receiving
  payment for it.
• The shorter the time lag, the better the cash
  flow position of the firm because it needs less
  working capital.

14
Supply Chain Dynamics for Facial Tissue
Bullwhip Effect
Quantity ordered
Time
15
External Value-Chain Linkages
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External Causes of Supply Chain Disruption

• Volume changes.
• Customers may change ordered quantity or delivery
  date.
• Service and product mix changes.
• Customers may change the mix of ordered items.
• Late deliveries.
• Late deliveries can force a switch in production
  schedules.
• Underfilled shipments.
• Partial shipments can cause a switch in
  production schedule or quantity produced.

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Internal Causes of Supply Chain Disruption

• Internally generated shortages of parts.
• Engineering changes to the design of services or
  products are disruptive.
• New service or product introductions disrupt the
  supply chain and may require a new supply chain.
• Service or product promotions may create a demand
  spike.
• Information errors such as demand forecast
  errors, faulty inventory counts, or
  miscommunication with suppliers.

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The Customer Relationship Process
E-Commerce and the Marketing Process

• Electronic Commerce (e-commerce) is the
  application of information and communication
  technology anywhere along the value chain of
  business processes.
• Business-to-Consumer Systems (B2C) allows
  customers to transact business over the Internet.
• Business-to-Business Systems (B2B) involves
  commerce between firms.
• The biggest growth area, it is currently about
  70 of the regular economy.

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E-Commerce and the Order Placement Process
The Customer Relationship Process

• Cost reduction Using the Internet can reduce the
  costs of processing orders.
• Revenue flow increase Reduction in the time lag
  associated with billing the customer or waiting
  for checks.
• Global Access Available 24 hours a day.
• Price flexibility Prices can easily be changed
  as the need arises.

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The Order Fulfillment Process
Inventory Placement

• Centralized placement Keeping all the inventory
  at one location such as a firms manufacturing
  plant or a warehouse and shipping directly to
  customers.
• Inventory pooling is a reduction in inventory and
  safety stock because of the merging of variable
  demands from customers.
• A higher than expected demand from one customer
  can be offset by a lower-than-expected demand
  from another.
• Forward placement is locating stock closer to
  customers at a warehouse, wholesaler, or retailer.

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The Order Fulfillment Process
Vendor-Managed Inventories

• Vendor-managed inventories (VMI) An extreme
  application of forward placement involving
  locating inventories at the customers
  facilities.
• Key ingredients are
• Collaborative effort requires trust
  accountability.
• Cost savings is realized by eliminating excess
  inventory.
• Customer service The supplier is frequently on
  site for improved response times and reducing
  stockouts.
• Written agreement on procedures, methods, and
  schedules are clearly specified.

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Order Fulfillment Programs

• Continuous Replenishment Program (CRP) A VMI
  method in which the supplier monitors the
  customers inventory levels and replenishes stock
  as needed.
• Collaborative planning, forecasting, and
  replenishment (CPFR)
• Radio Frequency Identification (RFID) A
  method for identifying items through the use of
  radio signals from a tag attached to an item.
• Wal-Mart and Gillette are among a number of large
  retailers, manufacturers, government agencies,
  and suppliers currently implementing RFID in
  their supply chains.

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Distribution Processes

• Ownership Rather than negotiate with a contract
  carrier, a firm has the most control over the
  distribution process if it owns and operates it,
  thereby becoming a private carrier.
• Firms may use a combination of the five basic
  modes of transportation truck, train, ship,
  pipeline, and airplane.
• Cross-Docking The packing of products on
  incoming shipments so that they can be easily
  sorted at intermediate warehouses for outgoing
  shipments based on their final destinations.
• Items are carried from the incoming-vehicle
  docking point to the outgoing-vehicle docking
  point without being stored in inventory at the
  warehouse.

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The Supplier Relationship Process

• The sourcing process qualifies, selects, manages
  the contracts, and evaluates suppliers.
• The design collaboration process focuses on
  jointly designing new services or products with
  key suppliers, seeking to eliminate costly delays
  and mistakes incurred when many suppliers
  concurrently, but independently, design service
  packages or manufactured components.
• The negotiation process process focuses on
  obtaining an effective contract that meets the
  price, quality, and delivery requirements of the
  supplier relationship processs internal
  customers.

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The Supplier Relationship Process

• The buying process relates to the actual
  procurement of the service or material from the
  supplier. This process includes the creation,
  management, and approval of purchase orders.
• The information exchange process facilitates the
  exchange of pertinent operating information, such
  as forecasts, schedules, and inventory levels
  between the firm and its supplier.

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Supplier Selection and Certification

• Purchasing The activity that decides which
  suppliers to use, negotiates contracts, and
  determines whether to buy locally.
• Supplier selection often considers the criteria
  of price, quality and delivery.
• Green purchasing The process of identifying,
  assessing, and managing the flow of environmental
  waste and finding ways to reduce it and minimize
  its impact on the environment.
• Supplier certification programs verify that
  potential suppliers have the capability to
  provide the services or materials the buyer firm
  requires.

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Supplier Relations

• Competitive orientation views negotiations
  between buyer and seller as a zero-sum game.
  Whatever one side loses, the other side gains,
  and short-term advantages are prized over
  long-term commitments.
• Cooperative orientation is where the buyer and
  seller are partners, each helping the other as
  much as possible.
• Sole sourcing is the awarding of a contract for a
  service or item to only one supplier.

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Centralized versus Localized Buying

• Centralized buying increases purchasing clout.
  Savings can be significant, often 10 or more.
• Increased buying power can mean getting better
  service, ensuring long-term supply availability,
  or developing new supplier capability.
• The biggest disadvantage is loss of local
  control.
• Centralized buying is undesirable for items
  unique to a particular facility.
• The best solution may be one where both local
  autonomy and centralized buying are possible.

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Value Analysis

• Value analysis is a systematic effort to reduce
  the cost or improve the performance of services
  or products, either purchased or produced.
• Early supplier involvement is a program that
  includes suppliers in the design phase of a
  service or product.
• Presourcing A level of supplier involvement in
  which suppliers are selected early in a products
  concept development stage and given significant,
  if not total, responsibility for the design of
  certain components or systems of the product.

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Supply Chain Strategies

• Efficient supply chains focus on the efficient
  flows of services and materials, keeping
  inventories to a minimum.
• Work best where demand is highly predictable.
• Responsive supply chains are designed to react
  quickly.
• Work best when firms offer a great variety of
  services or products and demand predictability is
  low.

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Environment Design Factors
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Mass Customization

• Mass Customization A strategy whereby a firms
  flexible processes generate a wide variety of
  personalized services or products at reasonably
  low costs. Competitive advantages
• Managing customer relationships. It requires
  detailed inputs from customers so that the ideal
  service or product can be produced.
• Eliminating finished goods inventory. Producing
  to a customers order eliminates finished goods
  inventory.
• Increasing perceived value. It increases the
  perceived value of services or products.
• Postponement is when some of the final activities
  in the provision of a service or product are
  delayed until the orders are received.
• Channel assembly is when members of the
  distribution channel act as if they were assembly
  stations in the factory.

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Lean Supply Chains

• Three key activities are required to attain a
  lean supply chain
• Strategic Sourcing Identifying items or services
  that are of high value or complexity and purchase
  them from a select set of suppliers with whom the
  firm establishes a close relationship.
• Cost Management Limiting the number of suppliers
  and focusing on helping them reduce their costs
  through trust and friendly collaboration.
• Supplier Development Shifting from price
  negotiations to cost management and working with
  suppliers to achieve lean operations.

34
Outsourcing

• A Make-or-buy decision is a managerial choice
  between whether to outsource a process or do it
  in-house.
• Outsourcing Paying suppliers and distributors to
  perform processes and provide needed services and
  materials.
• Backward integration is a firms movement
  upstream toward the sources of raw materials,
  parts, and services through acquisitions.
• Forward integration is acquiring more channels of
  distribution, such as distribution centers
  (warehouses) and retail stores, or even business
  customers.

35
Virtual Supply Chains

• Virtual Supply Chain Outsourcing some part of
  the entire order fulfillment process with the
  help of sophisticated, Web-based information
  technology support packages.
• Benefits include
• Reduced investment in inventories and order
  fulfillment infrastructure.
• Greater service or product variety without the
  overhead of ones own order fulfillment process.
• Lower costs due to economies of scale. The
  supplier typically handles more volume than does
  the firm doing the outsourcing.
• Lower transportation costs. With drop shipping in
  a virtual supply chain, the only transportation
  cost is shipping the goods from the wholesaler to
  the customer.

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Which Type of Supply Chain?

• Traditional Supply Chain is preferred when
• Sales volumes are high.
• Order consolidation is important.
• Small-order fulfillment capability of suppliers
  is important.

• Virtual Supply Chain is preferred when
• Demand is highly volatile.
• High service or product variety is important.

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Forecasting
Chapter 13
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Demand Patterns

• Time Series The repeated observations of demand
  for a service or product in their order of
  occurrence.
• There are five basic patterns of most time
  series.
• Horizontal. The fluctuation of data around a
  constant mean.
• Trend. The systematic increase or decrease in the
  mean of the series over time.
• Seasonal. A repeatable pattern of increases or
  decreases in demand, depending on the time of
  day, week, month, or season.
• Cyclical. The less predictable gradual increases
  or decreases over longer periods of time (years
  or decades).
• Random. The unforecastable variation in demand.

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Demand Patterns
Horizontal
Trend
Seasonal
Cyclical
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Designing the Forecast System

• Deciding what to forecast
• Level of aggregation.
• Units of measure.
• Choosing the type of forecasting method
• Qualitative methods
• Judgment
• Quantitative methods
• Causal
• Time-series

41
Deciding What To Forecast

• Few companies err by more than 5 percent when
  forecasting total demand for all their services
  or products. Errors in forecasts for individual
  items may be much higher.
• Level of Aggregation The act of clustering
  several similar services or products so that
  companies can obtain more accurate forecasts.
• Units of measurement Forecasts of sales revenue
  are not helpful because prices fluctuate.
• Forecast the number of units of demand then
  translate into sales revenue estimates
• Stock-keeping unit (SKU) An individual item or
  product that has an identifying code and is held
  in inventory somewhere along the value chain.

42
Choosing the Type ofForecasting Technique

• Judgment methods A type of qualitative method
  that translates the opinions of managers, expert
  opinions, consumer surveys, and sales force
  estimates into quantitative estimates.
• Causal methods A type of quantitative method
  that uses historical data on independent
  variables, such as promotional campaigns,
  economic conditions, and competitors actions, to
  predict demand.
• Time-series analysis A statistical approach that
  relies heavily on historical demand data to
  project the future size of demand and recognizes
  trends and seasonal patterns.
• Collaborative planning, forecasting, and
  replenishment (CPFR) A nine-step process for
  value-chain management that allows a manufacturer
  and its customers to collaborate on making the
  forecast by using the Internet.

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Demand Forecast Applications
44
Judgment Methods

• Sales force estimates The forecasts that are
  compiled from estimates of future demands made
  periodically by members of a companys sales
  force.
• Executive opinion A forecasting method in which
  the opinions, experience, and technical knowledge
  of one or more managers are summarized to arrive
  at a single forecast.
• Executive opinion can also be used for
  technological forecasting to keep abreast of the
  latest advances in technology.
• Market research A systematic approach to
  determine external consumer interest in a service
  or product by creating and testing hypotheses
  through data-gathering surveys.
• Delphi method A process of gaining consensus
  from a group of experts while maintaining their
  anonymity.

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Guidelines for Using Judgment Forecasts

• Judgment forecasting is clearly needed when no
  quantitative data are available to use
  quantitative forecasting approaches.
• Guidelines for the use of judgment to adjust
  quantitative forecasts to improve forecast
  quality are as follows
• Adjust quantitative forecasts when they tend to
  be inaccurate and the decision maker has
  important contextual knowledge.
• Make adjustments to quantitative forecasts to
  compensate for specific events, such as
  advertising campaigns, the actions of
  competitors, or international developments.

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Causal Methods Linear Regression

• Causal methods are used when historical data are
  available and the relationship between the factor
  to be forecasted and other external or internal
  factors can be identified.
• Linear regression A causal method in which one
  variable (the dependent variable) is related to
  one or more independent variables by a linear
  equation.
• Dependent variable The variable that one wants
  to forecast.
• Independent variables Variables that are assumed
  to affect the dependent variable and thereby
  cause the results observed in the past.

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Causal Methods Linear Regression
48
Time Series Methods

• Naive forecast A time-series method whereby the
  forecast for the next period equals the demand
  for the current period, or Forecast Dt
• Simple moving average method A time-series
  method used to estimate the average of a demand
  time series by averaging the demand for the n
  most recent time periods.
• It removes the effects of random fluctuation and
  is most useful when demand has no pronounced
  trend or seasonal influences.

49
Time Series Methods

• Weighted moving average method A time-series
  method in which each historical demand in the
  average can have its own weight the sum of the
  weights equals 1.0.

Ft1 W1Dt W2Dt-1 WnDt-n1

• Exponential smoothing method A sophisticated
  weighted moving average method that calculates
  the average of a time series by giving recent
  demands more weight than earlier demands.

Ft1 ?(Demand this period) (1 ?)(Forecast
calculated last period) ? Dt
(1?)Ft Or an equivalent equation Ft1
Ft ??(Dt Ft ) (Where alpha (???is a smoothing
parameter with a value between 0 and 1.0)
Trend-Adjusted Exponential Smoothing Formula
Seasonal methods
50
Using Multiple Techniques

• Research during the last two decades suggests
  that combining forecasts from multiple sources
  often produces more accurate forecasts.
• Combination forecasts Forecasts that are
  produced by averaging independent forecasts based
  on different methods or different data or both.
• Focus forecasting A method of forecasting that
  selects the best forecast from a group of
  forecasts generated by individual techniques.
• The forecasts are compared to actual demand, and
  the method that produces the forecast with the
  least error is used to make the forecast for the
  next period. The method used for each item may
  change from period to period.

51
Forecasting as a Process
The forecast process itself, typically done on a
monthly basis, consists of structured steps. They
often are facilitated by someone who might be
called a demand manager, forecast analyst, or
demand/supply planner.
52
Some Principles for the Forecasting Process

• Better processes yield better forecasts.
• Demand forecasting is being done in virtually
  every company. The challenge is to do it better
  than the competition.
• Better forecasts result in better customer
  service and lower costs, as well as better
  relationships with suppliers and customers.
• The forecast can and must make sense based on the
  big picture, economic outlook, market share, and
  so on.
• The best way to improve forecast accuracy is to
  focus on reducing forecast error.
• Bias is the worst kind of forecast error strive
  for zero bias.
• Whenever possible, forecast at higher, aggregate
  levels. Forecast in detail only where necessary.
• Far more can be gained by people collaborating
  and communicating well than by using the most
  advanced forecasting technique or model.

53
Sales and Operations Planning

• Chapter 14

54
Sales and Operations Planning

• Sales and operations planning (SOP) The process
  of planning future aggregate resource levels so
  that supply is in balance with demand.
• Staffing plan A sales and operations plan of a
  service firm, which centers on staffing and other
  human resourcerelated factors.
• Production plan A sales and operations plan of a
  manufacturing firm, which centers on production
  rates and inventory holdings.

55
Aggregation

• The sales and operations plan is useful because
  it focuses on a general course of action,
  consistent with the companys strategic goals and
  objectives, without getting bogged down in
  details.
• Product family A group of customers, services,
  or products that have similar demand requirements
  and common process, labor, and materials
  requirements.
• A company can aggregate its workforce in various
  ways as well, depending on its flexibility.
• The company looks at time in the aggregate
  months, quarters, or seasonsrather than in days
  or hours.

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The Relationship of Sales and Operations
Plansto Other Plans

• A financial assessment of an organizations near
  future (1 or 2 years ahead) is called either a
  business plan (in for-profit firms) or an annual
  plan (in nonprofit services).
• Business plan A projected statement of income,
  costs, and profits.
• Annual plan or financial plan A plan for
  financial assessment used by a nonprofit service
  organization.

57
The Relationship of Sales and Operations
Plansto Other Plans
58
Managerial Inputs from FunctionalAreas to Sales
and Operations Plans
59
Plan Objectives

• Six objectives usually are considered during
  development of a plan
• Minimize Costs/Maximize Profits
• Maximize Customer Service
• Minimize Inventory Investment
• Minimize Changes in Production Rates
• Minimize Changes in Workforce Levels
• Maximize Utilization of Plant and Equipment

60
Reactive Alternatives

• Reactive alternatives are actions that can be
  taken to cope with demand requirements.
• Anticipation inventory is inventory that can be
  used to absorb uneven rates of demand or supply.
• Workforce adjustment Hiring and laying off to
  match demand.
• Workforce utilization Use of overtime and
  undertime.
• Vacation schedules Use of plant-wide vacation
  period, vacation blackout periods.

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Reactive Alternatives

• Subcontracting Outsourcing to overcome
  short-term capacity shortages.
• Backlogs, Backorders, and Stockouts
• Backlog An accumulation of customer orders that
  have been promised for delivery at some future
  date.
• Backorder A customer order that cannot be filled
  immediately but is filled as soon as possible.
• Stockout An order that is lost and causes the
  customer to go elsewhere.

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Aggressive Alternatives

• Aggressive alternatives are actions that attempt
  to modify demand and, consequently, resource
  requirements.
• Complementary products Services or products that
  have similar resource requirements but different
  demand cycles.
• Creative Pricing Promotional campaigns designed
  to increase sales with creative pricing.

63
Planning Strategies

• Chase strategy A strategy that involves hiring
  and laying off employees to match the demand
  forecast.
• Level-utilization strategy A strategy that keeps
  the workforce constant, but varies its
  utilization to match the demand forecast.
• Level-inventory strategy A strategy that relies
  on anticipation inventories, backorders, and
  stockouts to keep both the output rate and the
  workforce constant.
• Mixed strategy A strategy that considers and
  implements a fuller range of reactive
  alternatives than any one pure strategy.

64
Constraints and Costs

• The planner usually considers several types of
  costs when preparing sales and operations plans.
• Regular-Time Costs These costs include
  regular-time wages plus contributions to
  benefits, Social Security, retirement funds, and
  pay for vacations and holidays.
• Overtime Costs Overtime wages typically are 150
  percent of regular-time wages.
• Hiring and Layoff Costs Include the costs of
  advertising jobs, interviews,training programs,
  exit interviews, severance pay, and lost
  productivity.
• Inventory Holding Costs
• Backorder and Stockout Costs

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Chase StrategyApplication 14.1
66
Level-Utilization StrategyApplication 14.2
67
Mixed StrategyApplication 14.3

• Key Ideas
• ? Hire only 7 in quarter 3, making maximum use
  of overtime to compensate.
• ? Reduce the amount of undertime in quarter 3.
• ? Reduce the layoffs required in quarter 4.

68
Sales and Operations Planning as a Process

• Sales and operations planning is a
  decision-making process, involving both planners
  and management.
• The process itself, typically done on a monthly
  basis, consists of six basic steps.

69
Decision Support Tools

• Spreadsheets can be used, including ones that you
  develop on your own.
• Input values
• Derived values
• Utilized time
• Calculated values
• The Transportation method of production planning
  to solve production planning problems assumes
  that a demand forecast is available for each
  period, along with a possible workforce
  adjustment plan.

70
Planning Using a Spreadsheet
71
SOP Spreadsheetfor a Make-to-Stock Family