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School of Business

MGT 330: Introduction to Operations and Production Management

Chapter 09: Supply Chain Strategy

Dell is a leader because of their fast response time. Customer orders are on delivery trucks in 36 hours. Their focus is on how fast inventory moves. The bulk of its components are housed within 15 minutes of each of its plants. As customers place orders, suppliers know when to ship components. Suppliers restock the warehouse and manage the inventory. Careful supply chain management is the key.

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.

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

Home customers
Required for facilitating goods Required for explicit services

Commercial customers
Required for implicit services

Florist

Required for supporting facilities

Packaging

Local delivery service FedEx delivery service Flowers local/ international

Arrangement materials

Maintenance services

Internet services

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

Inventory level

Output flow of materials Scrap flow

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.

Inventory at Successive Stocking Points

Raw materials

Work in process

Finished goods

Supplier

Manufacturing plant

Distribution center

Retailer

Customer

Customer

Customer

Customer

Distribution center

Distribution center

Supply Chain
Tier 1

Manufacturer

Tier 2

Tier 3

Supplier of services
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Supplier of materials

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. Weeks of supply = Average aggregate inventory value Weekly sales (at cost)

Inventory turnover is annual sales at cost divided by the average aggregate inventory value maintained for the year. Inventory turnover = Annual sales at (cost) Average aggregate inventory value

Calculating Inventory Measures


Example 10.1
The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million. The best inventory turnover in the industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do?

Using Inventory Estimator Solver

Weeks of supply = $2 mil/($10 mil)(52 wks.) = 10.4 weeks

Inventory turns = $10 mil./$2 mil. = 5 turns/yr


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Weeks of supply

Average aggregate inventory value Weekly sales (at cost) $6,821,000 18.5 weeks $19,200,000 52 weeks

Inventory turnover

$19,200,00 0 2.8 turns $6,821,000

Supply Chain Process Measures


Customer Relationship Order Fulfillment Supplier Relationship

Percent of orders taken accurately Time to complete the order placement process Customer satisfaction with the order placement process

Percent of incomplete orders shipped Percent of orders shipped on time Time to fulfill the order Percent of botched services or returned items Cost to produce the service or item Customer satisfaction with the order fulfillment process Inventory levels of WIP and FG

Percent of suppliers deliveries on time Suppliers lead times Percent defects in services and purchased materials Cost of services and purchased materials

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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.

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.

Supply chain dynamics can wreak havoc on supply chain performance measures.
Actions of downstream supply chain members can affect the operations of upstream members.

The bullwhip effect: The phenomenon in supply chains whereby ordering patterns experience increasing variance as you proceed upstream in the chain.

Volume changes.

Service and product mix changes. Late deliveries.

Customers may change ordered quantity or delivery date.

Customers may change the mix of ordered items.


Late deliveries can force a switch in production schedules. Partial shipments can cause a switch in production schedule or quantity produced.

Underfilled shipments.

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.

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.

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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5. 6. 7. 8.

Customers buy from Dell by web site, voice-to-voice, and face-to-face. Order information is transmitted to the inventory system. Unique product configuration information is contained in the Traveler, a sheet that travels with the system the customer has ordered throughout its assembly and shipping. When the Traveler is pulled, all required internal parts and components for a system are picked and put in a tote or kit. (Procedure is called Kitting) A team uses the kit to assemble and initially test the system. Systems are thoroughly tested. Completed systems are boxed and placed on trucks. The entire assemble-to-order cycle takes only a few hours.

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

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.

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.

Environment Factors

Efficient Supply Chains

Responsive Supply Chains

Design Factors

Efficient Supply Chains

Responsive Supply Chains

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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.

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