Supply Chain Management

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Supply Chain Management Outline What is supply chain management? A supply chain strategy framework Components of a SCM Major obstacles and common problems.

What is a Supply Chain?

A supply chain consists of the flow of products and services from:
Raw materials manufacturers Component and intermediate manufacturers Final product manufacturers Wholesalers and distributors and Retailers

Connected by transportation and storage activities, and Integrated through information, planning, and integration activities Many large firms are moving away from in-house Vertically Integrated structures to Supply Chain Management

What is a Supply Chain? (Cont.)

What is a Supply Chain?

The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer Institute for Supply Management Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer The Supply Chain Council The planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities also includes coordination with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. Council of Supply Chain Management Professionals

What is a Supply Chain?

"Supply chain strategies require a total systems view of the linkages in the chain that work together efficiently to create customer satisfaction at the end point of delivery to the consumer. As a consequence costs must be lowered throughout the chain by driving out unnecessary costs and focusing attention on adding value. Throughput efficiency must be increased, bottlenecks removed and performance measurement must focus on total systems efficiency and equitable reward distribution to those in the supply chain adding value. The supply chain system must be responsive to customer requirements. A customer focused definition is given by Hines (2004)

What is a Supply Chain?

Old paradigm - Firm gained synergy as a vertically integrated firm encompassing the ownership and coordination of several supply chain activities. Organizational cultures emphasized short-term, company focused performance. New paradigm - Firm in a supply chain focuses activities in its area of specialization and enters into voluntary and trust-based relationships with supplier and customer firms. All participants in the supply chain benefit. Boundaries are dynamic and extend from the firms suppliers suppliers to its customers customers (i.e., second tier suppliers and customers). Supply chains now deal with reverse logistics to handle returned products, warranty repairs, and recycling.

Detergent supply chain:

P&G or other manufacturer Third party DC Albertsons Supermarket Customer wants detergent

Plastic cup Producer

Tenneco Packaging

Chemical manufacturer (e.g. Oil Company)

Chemical manufacturer (e.g. Oil Company)

Paper Manufacturer

Timber Industry

santk@live.com

A picture is better than 1000 words! How many words would be better than 3 pictures?
- A supply chain consists of
Supplier Manufacturer Distributor Retailer Customer

Upstream

Downstream

- aims to Match Supply and Demand, profitably for products and services achieves
The right The right The right The right

SUPPLY SIDE

DEMAND SIDE

Product

+ + + + +
The right

The right

Price

Store

Quantity

Customer

Time

Higher

Profits 9

A Supply Chain
Suppliers Manufacturers Warehouses & Distribution Centers Customers

Transportation Costs Material Costs

Transportation Costs

Manufacturing Costs

Transportation Costs Inventory Costs

A Supply Chain
Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks

Supply

Inventory Purchase Transportation Inventory

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The Supply Chain Another View

Plan

Source

Make

Deliver

Buy

Suppliers

Manufacturers

Warehouses & Distribution Centers

Customers

Material Costs

Transportation Transportation Costs Transportation Costs Manufacturing Costs Inventory Costs Costs

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Emerging Best Practices in SCM Strategy

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History of Supply Chain Management

1960s - Inventory Management Focus, Cost Control 1970s - MRP & BOM - Operations Planning 1980s - MRPII, JIT - Materials Management, Logistics 1990s - SCM - ERP - Integrated Purchasing, Financials, Manufacturing, Order Entry 2000s - Optimized Value Network with RealTime Decision Support; Synchronized & Collaborative Extended Network

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Why Is SCM Difficult?

Plan Source Make Deliver Buy

Uncertainty is inherent to every supply chain

Travel times Breakdowns of machines and vehicles Weather, natural catastrophe, war Local politics, labor conditions, border issues

The complexity of the problem to globally optimize a supply chain is significant

Minimize internal costs Minimize uncertainty Deal with remaining uncertainty

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The Importance of Supply Chain Management

Dealing with uncertain environments matching supply and demand
Boeing announced a $2.6 billion write-off in 1997 due to raw materials shortages, internal and supplier parts shortages and productivity inefficiencies U.S Surgical Corporation announced a $22 million loss in 1993 due to larger than anticipated inventories on the shelves of hospitals IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PCs from Taiwanese suppliers in 1999 due to a massive earthquake

U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998
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The Importance of Supply Chain Management

Shorter product life cycles of high-technology products
Less opportunity to accumulate historical data on customer demand Wide choice of competing products makes it difficult to predict demand

The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners
If you dont do it, your competitor will Major buyers such as Wal-Mart demand a level of supply chain maturity of its suppliers
Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes

Availability of SCM technologies on the market

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Importance of SCM understood by some

AMR Research:
"The biggest issue enterprises face today is intelligent visibility of their supply chains-both upstream and down"

Forrester Research:
"Companies need to sense and proactively respond to unanticipated variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks

Gartner Group:
By 2004, 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers
Open ended statement. Agility can be increased continuously.
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Importance of Supply Chain Management

In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains).
Source: State of Logistics Report

Frequent Supply shortages Inefficient logistics

Low order fill rates

Tier 1 Supplier

Manufacturer

Distributor

Retailer

Customer

High stockouts

Glitch-Wrong Material, Machine is Down effect snowballs

High inventories through the chain

Ineffective promotions

High landed costs to the shelf

Eliminating inefficiencies in supply chains can save millions of $.

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SCM Generated Value

Minimizing supply chain costs while keeping a reasonable service level
customer satisfaction/quality/on time delivery, etc.

This is how SCM contributes to the bottom line

SCM is not strictly a cost reduction paradigm!

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Flows in a Supply Chain

Material

Supplier

Information Funds

Customer

The flows resemble a chain reaction.

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SCM in a Supply

Network

Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains.
Cash Products and Services

Information
THAILAND INDIA N-Tier Suppliers Suppliers MEXICO Logistics TEXAS Distributors US Retailers

Supply Side

OEM

Demand Side

Demand Supply

The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably
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Top 25 Supply Chains

AMR research http://www.amrresearch.com publishes reports on supply chains and other issues. The Top 25 supply chains report comes out in Novembers. The table on the right-hand side is from The Second Annual Supply Chain Top 25 prepared by Kevin Riley .

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Supply Chain Management and Uncertainty

Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesnt vary The variability worsens as we travel up the supply chain Forecasting doesnt help!
Multi-tier Suppliers Manufacturer Wholesale Distributors Retailers Consumers

Sales

Sales

Time

Sales

Time

Time

Sales Time

Bullwhip Effect
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Todays Marketplace Requires:

Personalized content and services for their customers Collaborative planning with design partners, distributors, and suppliers Real-time commitments for design, production, inventory, and transportation capacity Flexible logistics options to ensure timely fulfillment Order tracking & reporting across multiple vendors and carriers
Shared visibility for trading partners
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Factors Contributing to the Bullwhip

Demand forecasting practices
Min-max inventory management (reorder points to bring inventory up to predicted levels) Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs

Lead time

Batch ordering

Peaks and valleys in orders Fixed ordering costs Impact of transportation costs (e.g., fuel costs) Sales quotas
Promotion and discount policies

Price fluctuations Lack of centralized information

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Supply Chain Management Key Issues

Forecasts are never right
Very unlikely that actual demand will exactly equal forecast demand

The longer the forecast horizon, the worse the forecast

A forecast for a year from now will never be as accurate as a forecast for 3 months from now

Aggregate forecasts are more accurate

A demand forecast for all CV therapeutics will be more accurate than a forecast for a specific CV-related product

Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty
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Supply Chain Management Key Issues

Overcoming functional silos with conflicting goals
Purchasing Manufacturing Distribution Customer Service/ Sales
High inventories

Low purchase price Multiple vendors

Few changeovers Stable schedules Long run lengths

Low inventories

High service levels Regional stocks

Low transportation

SOURCE

MAKE

DELIVER

SELL

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Supply Chain Management Key Issues

ISSUE Network Planning CONSIDERATIONS
Warehouse locations and capacities Plant locations and production levels Transportation flows between facilities to minimize cost and time How should inventory be managed? Why does inventory fluctuate and what strategies minimize this? Impact of volume discount and revenue sharing Pricing strategies to reduce order-shipment variability Selection of distribution strategies (e.g., direct ship vs. cross-docking) How many cross-dock points are needed? Cost/Benefits of different strategies How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?

Inventory Control Supply Contracts Distribution Strategies

Integration and Strategic Partnering

Outsourcing & Procurement Strategies Product Design

What are our core supply chain capabilities and which are not? Does our product design mandate different outsourcing approaches? Risk management How are inventory holding and transportation costs affected by product design? How does product design enable mass customization?

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Supply Chain Management Operations Strategies

STRATEGY Make to Stock WHEN TO CHOOSE
standardized products, relatively predictable demand customized products, many variations many variations on finished product; infrequent demand

BENEFITS
Low manufacturing costs; meet customer demands quickly Customization; reduced inventory; improved service levels Low inventory levels; wide range of product offerings; simplified planning Enables response to specific customer requirements

Make to Order Configure to Order

Engineer to Order

complex products, unique customer specifications

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Supply Chain Management Benefits

A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain Delivery Performance Inventory Reduction Fulfillment Cycle Time Forecast Accuracy Overall Productivity Lower Supply-Chain Costs Fill Rates Improved Capacity Realization
Source: Cohen & Roussel 31

16%-28% Improvement 25%-60% Improvement 30%-50% Improvement 25%-80% Improvement 10%-16% Improvement 25%-50% Improvement 20%-30% Improvement 10%-20% Improvement

Supply Chain Imperatives for Success

View the supply chain as a strategic asset and a differentiator
Wal-Marts partnership with Proctor & Gamble to automatically replenish inventory Dells innovative direct-to-consumer sales and build-to-order manufacturing

Create unique supply chain configurations that align with your companys strategic objectives
Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network Forecasting Collaboration Integration
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Supply chain configuration components

Reduce uncertainty

Value of Information and SCM

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Information In The Supply Chain

Plan
Suppliers Manufacturers Warehouses & Distribution Centers Retailer

Source

Make

Deliver

Sell

Order Lead Time Delivery Lead Time

Production Lead Time

Each facility further away from actual customer demand must make forecasts of demand Lacking actual customer buying data, each facility bases its forecasts on downstream orders, which are more variable than actual demand To accommodate variability, inventory levels are overstocked thus increasing inventory carrying costs

Its estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertainty

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Taming the Bullwhip

Four critical methods for reducing the Bullwhip effect:
Reduce uncertainty in the supply chain

Centralize demand information Keep each stage of the supply chain provided with up-to-date customer demand information More frequent planning (continuous real-time planning the goal)
Every-day-low-price strategies for stable demand patterns Use cross-docking to reduce order lead times Use EDI techniques to reduce information lead times Vendor-managed inventory (VMI) Collaborative planning, forecasting and replenishment (CPFR)
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Reduce variability in the supply chain Reduce lead times

Eliminate the bullwhip through strategic partnerships

The Evolving Supply Chain

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Methods for Improving Forecasts

Judgment Methods Market Research Analysis

Panels of Experts Internal experts External experts Domain experts Delphi technique Accurate Forecasts Causal Analysis

Market testing Market surveys Focus groups

Time-Series Methods

Moving average Exponential smoothing Trend analysis Seasonality analysis

Relies on data other than that being predicted Economic data, commodity data, etc.

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Supply Chain Integration Push Strategies

Classical manufacturing supply chain strategy Manufacturing forecasts are long-range
Orders from retailers warehouses Unable to meet changing demand patterns Supply chain inventory becomes obsolete as demand for certain products disappears Large inventory safety stocks Larger and more variably sized production batches Unacceptable service levels Inventory obsolescence How is demand determined? Peak? Average? How is transportation capacity determined?

Longer response time to react to marketplace changes

Increased variability (Bullwhip effect) leading to:

Inefficient use of production facilities (factories)

Examples: Auto industry, large appliances, others?

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Supply Chain Integration Pull Strategies

Production and distribution are demand-driven
Coordinated with true customer demand

None or little inventory held

Only in response to specific orders

POS data

Fast information flow mechanisms Decreased lead times Decreased retailer inventory Decreased variability in the supply chain and especially at manufacturers Decreased manufacturer inventory More efficient use of resources More difficult to take advantage of scale opportunities Examples: Dell, Amazon

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Supply Chain Integration Push/Pull Strategies

Hybrid of push and pull strategies to overcome disadvantages of each Early stages of product assembly are done in a push manner
Partial assembly of product based on aggregate demand forecasts (which are more accurate than individual product demand forecasts) Uncertainty is reduced so safety stock inventory is lower

Final product assembly is done based on customer demand for specific product configurations Supply chain timeline determines push-pull boundary
Generic Product Push Strategy Raw Materials
PushPull Boundary

Customized Product Pull Strategy End Consumer 40

Supply Chain Timeline

Choosing Between Push/Pull Strategies

Pull High Industries where:
Customization is High Demand is uncertain Scale economies are Low

Industries where:
Demand is uncertain Scale economies are High Low economies of scale

Where do the following industries fit in this model: Automobile? Aircraft? Fashion? Petroleum refining? Pharmaceuticals? Biotechnology? Medical Devices?

Demand Uncertainty

Computer equipment Industries where:

Uncertainty is low Low economies of scale Push-pull supply chain

Furniture

Industries where:
Standard processes are the norm Demand is stable Scale economies are High

Books, CDs Push Low Low Pull

Grocery, Beverages
High Push

Economies of Scale

Source: Simchi-Levi

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Characteristics of Push, Pull and Push/Pull Strategies

PUSH

PULL
Maximize Service Level

Objective
Complexity Focus Lead Time

Minimize Cost

High

Low

Resource Allocation

Responsiveness

Long

Short

Processes

Supply Chain Planning

Order Fulfillment

Source: Simchi-Levi 42

Supply Chain Collaboration What Is It?

Many different definitions depending on perspective The means by which companies within the supply chain work together towards mutual goals by sharing
Ideas Information Processes Knowledge Information Risks Rewards Accelerate entry into new markets Changes the relationship between cost/value/profit equation

Why collaborate?

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Supply Chain Collaboration

Cornerstone of effective SCM The focus of many of todays SCM initiatives The only method that has the potential to eliminate or minimize Retailers the Bullwhip effect
Suppliers

Synchronized Production Scheduling

Collaborative Product Development

Manufacturer

Collaborative Demand Planning

Distributors/ Wholesalers

Collaborative Logistics Planning Transportation services Distribution center services

Logistics Providers

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Benefits of Supply Chain Collaboration

CUSTOMERS
Reduced inventory Increased revenue Lower order management costs Higher Gross Margin Better forecast accuracy Better allocation of promotional budgets

MATERIAL SUPPLIERS
Reduced inventory Lower warehousing costs Lower material acquisition costs Fewer stockout conditions

SERVICE SUPPLIERS
Lower freight costs Faster and more reliable delivery Lower capital costs Reduced depreciation Lower fixed costs

Improved customer service More efficient use of human resources

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Supply Chain Collaboration Spectrum

Extensive Not Viable
Synchronized Collaboration

The green arrow describes increasing complexity and sophistication of:

Information systems Systems infrastructure Decision support systems Planning mechanisms Information sharing Process understanding

Extent of Collaboration

Coordinated Collaboration

Cooperative Collaboration

Limited

Transactional Collaboration

Low Return

Higher levels of collaboration imply the need for both trading partners to have equivalent (or close) levels of supply chain maturity Synchronized collaboration demands joint planning, R&D and sharing of information and processing models
Movement to real-time customer demand information throughout the supply chain

Many Number of Relationships

Few

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Successful Supply Chain Collaboration

Try to collaborate internally before you try external collaboration Help your partners to work with you Share the savings Start small (a limited number of selected partners) and stay focused on what you want to achieve in the collaboration Advance your IT capabilities only to the level that you expect your partners to manage Put a comprehensive metrics program in place that allows you to monitor your partners performance Make sure people are kept part of the equation
Systems do not replace people Make sure your organization is populated with competent professionals whove done this before

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The SCOR Model

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Collaboration and the SCOR Model

The Supply-Chain Council (SCC) is a global, not-for-profit trade association open to all types of organizations
800 world-wide members Multi-industry

SCC sponsors and supports educational programs including conferences, retreats, benchmarking studies, and development of the Supply-Chain Operations Reference-model (SCOR), the process reference model designed to improve users' efficiency and productivity Promotes research and thought leadership in the supply chain management area Adoption of common standards for reference to process, information and material goods flows is essential to enable trading partner collaboration

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Process Reference Models

Process reference models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework
Business Process Reengineering Capture the as-is state of a process and derive the desired to-be future state Best Practices Analysis Process Reference Model Capture the as-is state of a process and derive the desired to-be future state Quantify the operational performance of similar companies and establish internal targets based on best-inclass results Quantify the operational performance of similar companies and establish internal targets based on best-in-class results Characterize the management practices and software solutions that result in best-inclass performance

Benchmarking

Characterize the management practices and software solutions that result in bestin-class performance

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SCOR Structure

Plan

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source

Return

Suppliers Supplier

Supplier
Internal or External

Your Company

Customer
Internal or External

Customers Customer

SCOR Model
Building Block Approach Processes Best Practice Metrics Technology
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SCOR 7.0 Model Structure

Plan
P2 Plan Source P1 Plan Supply Chain P3 Plan Make P4 Plan Deliver P5 Plan Returns

Suppliers

Source
S1 Source Stocked Products S2 Source MTO Products

Make
M1 Make-to-Stock

Deliver
D1 Deliver Stocked Products

M2 Make-to-Order

D2 Deliver MTO Products

S3 Source ETO Products

M3 Engineer-to-Order

D3 Deliver ETO Products

D4 Deliver Retail Products

Return Source

Return Deliver

Enable
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Customers

SCOR Implementation Roadmap

Analyze Basis of Competition Operations Strategy
Competitive Performance Requirements Performance Metrics Supply Chain Scorecard Scorecard Gap Analysis Project Plan

SCOR Level 1

Configure supply chain

Material Flow

AS IS Geographic Map AS IS Thread Diagram Design Specifications TO BE Thread Diagram TO BE Geographic Map

SCOR Level 2

Align Performance Levels, Practices, and Systems

Information and Work Flow

AS IS Level 2, 3, and 4 Maps Disconnects Design Specifications TO BE Level 2, 3, and 4 Maps

SCOR Level 3

Implement supply chain Processes and Systems

Develop, Test, and Roll Out

Organization Technology Process People

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Examples of SCOR Adoptions

Consumer Foods Project Time (Start to Finish) 3 months Investment - $50,000 1st Year Return - $4,300,000 Electronics Project Time (Start to Finish) 6 months Investment - $3-5 Million Projected Return on Investment - $ 230 Million Software and Planning SAP bases APO key performance indicators (KPIs) on SCOR Model Aerospace and Defense SCOR Benchmarking and use of SCOR metrics to specify performance criteria and provide basis for contracts / purchase orders
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The SCOR Model As Context for Pharmaceutical

Pharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model
Segment Analysis, Marketing Planning

Plan

Patients

Pharmacies, Hospitals, Doctors

Deliver Source Make Deliver Return Return Return

Source Return

Make

Deliver
Source Make Deliver Source Return Return

Return

Return

Suppliers Supplier

Supplier

Your Company

Customer

Customers Customer

Internal or External

Internal or External

Marketing Data Suppliers

Doctors, Hospitals

Marketing and Sales Functions

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Drivers of Supply Chain Performance

How to achieve Efficiency Responsiveness

Supply chain structure

Inventory

Transportation

Facilities

Logistical Drivers

Information

Sourcing

Pricing

CrossFunctional Drivers 56

1. Inventory
Convenience: Cycle inventory
No customer buys eggs one by one

Unstable demand: Seasonal inventory

Bathing suits Xmas toys and computer sales

Randomness: Safety inventory

20% more syllabi than the class size were available in the first class Compaqs loss in 95

Pipeline inventory
Work in process or transit
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Littles law
Long run averages = Expected values I=R.T I=Pipeline inventory; R=output per time=throughput; T=delay time=flow time

Spend 1 minute

10/minute

Flow time? Thruput? Pipeline (work in process) Inventory?

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2. Transportation

Air Truck Rail Ship Pipeline Electronic

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3. Facilities
Production
Flexible vs. Dedicated Flexibility costs
Production: Remember BMW: a sports car disguised as a sedan Service: Can your instructor teach music as well as SCM? Sports: A playmaker who shoots well is rare.

Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping
Job Lot Storage: Need more space. Reticle storage in fabs. Crossdocking: Wal-Mart
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4. Information
Role in the supply chain
The connection between the various stages in the supply chain Crucial to daily operation of each stage in a supply chain
E.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) Information technology
Andersen Windows
Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory.

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Characteristics of the Good Information

Information

Global Scope

Coordinated Decisions

Supply Chain Success

Strategy

Information Accurate? Accessible? Up-to-date? In the Correct form?

Analytical Models

$$$

If not, database restricted ability. How difficult is it to import data into SAP?

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Quality of Information

Information drives the decisions:

Good information means good decisions

IT helps: MRP, ERP, SAP, EDI Relevant information? How to use information?

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Information Technology in a Supply Chain: Legacy Systems

Strategic

Planning

Operational

Supplier

Manufacturer

Distributor

Retailer

Customer

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Information Technology in a Supply Chain: ERP Systems

Strategic

Planning

Operational

Potential
ERP

ERP

Potential
ERP

Supplier

Manufacturer

Distributor

Retailer

Customer

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Information Technology in a Supply Chain: Analytical Applications

Strategic
SCM

Planning
Supplier Apps

APS

Transport & Inventory Planning Transport execution & WMS

Dem Plan

Operational
Supplier

MES

CRM/SFA

Manufacturer

Distributor

Retailer

Customer

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ERP Systems
Wider focus Push (MRP) versus Pull (demand information transmitted quickly throughout the supply chain) Real-time information Coordination and Information sharing Transactional IT Expensive and difficult to implement
About 25% of ERP installations are cancelled within a year About 70% of ERP installations go over the budget

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5. Sourcing
Role in the supply chain
Set of processes required to purchase goods and services in a supply chain Supplier selection, single vs. multiple suppliers, contract negotiation

Role in the competitive strategy

Sourcing is crucial. It affects efficiency and responsiveness in a supply chain In-house vs. outsource decisions- improving efficiency and responsiveness
TI: More than half of the revenue spent for sourcing. Cisco sources: Low-end products (e.g. home routers) from China.

Components of sourcing decisions

In-house versus outsource decisions Supplier evaluation and selection Procurement process:
Every department of a firm buy from suppliers independently, or all together.
EDS to reduce the number of officers with purchasing authorization.
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6. Pricing
Role in the supply chain
Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply
Price elasticity: Do you know yours?

Role in the competitive strategy

Use pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times
Amazon: Faster delivery is more expensive

Components of pricing decisions

Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing, depending on the product and services
Packaging, delivery location, time, customer pick up Bundling products; products and services
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Considerations for Supply Chain Drivers

Driver Inventory Transportation Facilities Information Sourcing Pricing Efficiency Cost of holding Consolidation Consolidation / Dedicated Low cost/slow/no duplication Low cost sources Constant price Responsiveness Availability Speed Proximity / Flexibility High cost/ streamlined/reliable Responsive sources Low-high price

Major Obstacles to Achieving Fit

SC is big:
Variety of products/services Spoiled customer Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives Globalization

Local optimization and lack of global fit

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Major Obstacles to Achieving Fit

Dealing with Multiple Owners / Local Optimization
Information Coordination
Information sharing / Shyness / Legal and ethical issues

Contractual Coordination
Mechanisms to align local objectives with global ones

Coordination with (real) options

Rare in the practice

Without coordination, misleading reliance on metrics:

Average safety inventory, Average incoming shipment size, Average purchase price of raw materials, Revenue
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Major obstacles to achieving fit

Instability and Randomness:
Increasing product variety Shrinking product life cycles Customer fragmentation: Push for customization, segmentation Fragmentation of Supply Chain ownership: Globalization

Increasing implied uncertainty

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Common problems
Lack of relevant SCM metrics: How to measure responsiveness?
How to measure efficiency, costs, worker performance, etc? Theft: Major problem for furniture retailers. Transaction errors: Retailers with inaccurate inventory records for 65% of SKUs Information delays, dated information, incompatible info. systems Misplaced inventory: 16% of items cannot be found at a major retailer Spoilage: active ingredients in the products are losing their properties Product quality and yield Lack of visibility in SCs
Do you know the inventory your distribution centers hold? Do you know the inventory your fellow retailer holds?

Poor inventory status information

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Common problems
Poor delivery status information
Not knowing the order status

Poor IT design
Unreliable, duplicate data Security problems: too much or too little

Ignoring uncertainties
The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty.
Nitin Nohra, HBR February 2006 issue.

Internal customer discrimination

Giving lower priority to internal customers than external customers

Poor integration Elusive inventory costs

Accounting systems do not capture opportunity costs

SC-insensitive product design

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THANK YOU

santk@live.com

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