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Supply Chain Design

PowerPoint Slides by Jeff Heyl

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

For Operations Management, 9e by Krajewski/Ritzman/Malhotra 2010 Pearson Education

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Supply Chain Design

Inefficient supply chain operations

Area of improved operations

Total costs

Reduce costs New supply chain efficiency curve with changes in design and execution Improve performance Supply chain performance

Figure 9.1 Supply Chain Efficiency Curve

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Supply Chain Design

The goal is to reduce costs as well increase performance. Supply chains must be managed to coordinate the inputs with the outputs in a firm to achieve the appropriate competitive priorities of the firms enterprise processes. The Internet offers firms an alternative to traditional methods for managing the supply chain.

A supply chain strategy is essential for service as well as manufacturing firms.

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Supply Chains
Every firm or organization is a member of some supply chain

Services

Provide support for the essential elements of various services the firm delivers

Manufacturing

Control inventory by managing the flow of materials Suppliers identified by position in supply chain tiers Suppliers and customers

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Supply Chains
Packaging Flowers: Local/International Arrangement materials

Maintenance services

FedEx delivery service

Local delivery service

Internet service

Flowers-on-Demand florist

Home customers

Commercial customers

Figure 9.2 Supply Chain for a Florist

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Supply Chains
Tier 3 Poland USA Canada Australia Malaysia Raw materials

Tier 2

Germany

Mexico

USA

China

Components

Tier 1

Germany

Mexico

USA

Major subassemblies

Manufacturer Ireland

Assembly

USA

Ireland

Distribution centers

East Coast

West Coast

East Europe

West Europe

Retail

Figure 9.2 Supply Chain for a Manufacturing Firm

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Inventory and Supply Chains

Input flow of materials Inventory level

Figure 9.4 Creation of Inventory

Scrap flow

Output flow of materials

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Inventory and Supply Chains

Balance the advantages and disadvantages Pressures for small inventories
Inventory
Cost

holding cost

of capital and handling costs

Storage

Taxes,

insurance, and shrinkage

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Inventory and Supply Chains

Pressures for large inventories
Customer
Ordering Setup

service

cost

cost

Labor

and equipment utilization

cost to suppliers

Transportation Payments

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Types of Inventory
Three aggregate categories

Raw materials Work-in-process Finished goods

Classified by how it is created

Cycle inventory
Safety stock inventory Anticipation inventory

Pipeline inventory
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Types of Inventory

Figure 9.5 Inventory at Successive Stocking Points

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Cycle Inventory
Lot sizing principles
1. The lot size, Q, varies directly with the elapsed time (or cycle) between orders. 2. The longer the time between orders for a given item, the greater the cycle inventory must be. Q+0 Q Average cycle inventory = = 2 2

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Safety Stock and Anticipation Inventory

Safety Stock inventory

- Protects against uncertainties in demand, lead time, and supply changes

Anticipation inventory - Used to absorb uneven rates of demand or supply - Predictable, seasonal demand patterns lend themselves well to the use of anticipation inventory
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Pipeline Inventory
Pipeline inventory
Average demand during lead time = DL

Average demand per period = d

Number of periods in the items lead time = L

Pipeline inventory = DL = dL

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Estimating Inventory Levels

EXAMPLE 9.1

A plant makes monthly shipments of electric drills to a wholesaler in average lot sizes of 280 drills. The wholesalers average demand is 70 drills a week, and the lead time from the plant is 3 weeks. The wholesaler must pay for the inventory from the moment the plant makes a shipment. If the wholesaler is willing to increase its purchase quantity to 350 units, the plant will give priority to the wholesaler and guarantee a lead time of only 2 weeks. What is the effect on the wholesalers cycle and pipeline inventories?

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Estimating Inventory Levels

SOLUTION The wholesalers current cycle and pipeline inventories are

Q Cycle inventory = = 140 drills 2 Pipeline inventory = DL = dL = (70 drills/week)(3 weeks) = 210 drills

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Estimating Inventory Levels

1. Enter the average lot size, average demand during a period, and the number of periods of lead time: Average lot size Average demand Lead time 350 70 2

2. To compute cycle inventory, simply divide average lot size by 2. To compute pipeline inventory, multiply average demand by lead time Cycle inventory Pipeline inventory 175 140

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Inventory Reduction Tactics

Cycle inventory

Reduce the lot size Reduce ordering and setup costs and allow Q to be reduced Increase repeatability to eliminate the need for changeovers

Safety stock inventory

Place orders closer to the time when they must be received Improve demand forecasts Cut lead times Reduce supply chain uncertainty Rely more on equipment and labor buffers
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Inventory Reduction Tactics

Anticipation inventory

Match demand rate with production rates Add new products with different demand cycles Provide off-season promotional campaigns Offer seasonal pricing plans

Pipeline inventory

Reduce lead times Find more responsive suppliers and select new carriers

Change Q in those cases where the lead time depends on the lot size

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Inventory Placement
Where to locate an inventory of finished goods

Use of distribution centers (DCs)

Centralized placement Inventory pooling Forward placement

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Measures of Supply Chain Performance

Inventory measures
Average Number of aggregate units of item = inventory A typically value on hand Number of Value of units of item each unit + B typically of item A on hand Value of each unit of item B

Weeks of supply =

Average aggregate inventory value Weekly sales (at cost)

Annual sales (at cost) Inventory turnover = Average aggregate inventory value

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Calculating Inventory Measures

EXAMPLE 9.2

The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million. Figure 9.7 shows the breakout of raw materials, work-in-process, and finished goods inventories. The best inventory turnover in the companys 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?

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Calculating Inventory Measures

Figure 9.7 Calculating Inventory Measures Using Inventory Estimator Solver

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Calculating Inventory Measures

SOLUTION The average aggregate inventory value of $2 million translates into 10.4 weeks of supply and 5 turns per year, calculated as follows:
Weeks of supply = $2 million = 10.4 weeks ($10 million)/(52 weeks)

$10 million Inventory turns = = 5 turns/year $2 million

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Application 9.1
A recent accounting statement showed total inventories (raw materials + WIP + finished goods) to be $6,821,000. This years cost of goods sold is $19.2 million. The company operates 52 weeks per year. How many weeks of supply are being held? What is the inventory turnover?
Average aggregate inventory value Weekly sales (at cost) $6,821,000 = 18.5 weeks ($19,200,000)/(52 weeks)

Weeks of supply =

$19,200,000 Inventory turnover = = 2.8 turns $6,821,000

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Measures of Supply Chain Performance

Financial measures
Total Cost

revenue of goods sold

Operating
Cash

expenses

flow capital

Working

Return

on assets

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Measures of Supply Chain Performance

Total revenue
Increase sales through better customer service

Figure 9.8 How Supply Chain Decisions Can Affect ROA

Cost of goods sold

Reduce costs of transportation and purchased materials

Net income
Improve profits with greater revenue and lower costs

Operating expenses
Reduce fixed expenses by reducing overhead associated with supply chain operations

Return on assets (ROA) Working capital

Increase ROA with higher net income and fewer total assets

Net cash flows

Improve positive cash flows by reducing lead times and backlogs

Reduce working capital by reducing inventory investment, lead times, and backlogs

Total assets
Achieve the same or better performance with fewer assets

Fixed assets Inventory

Increase inventory turnover
Reduce the number of warehouses through improved supply chain design

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Mass Customization
Competitive advantages
Managing Eliminate Increased

customer relationships finished goods inventory perceived value of services or

products

Supply chain design for mass customization

Assemble-to-order
Modular

strategy

design

Postponement

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Outsourcing Processes
Make-or-buy decision Vertical integration
Backward Forward

integration

integration

Outsourcing
Offshoring Benefits Pitfalls

to outsourcing

to outsourcing
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Using Break-Even Analysis

EXAMPLE 9.3 Thompson manufacturing produces industrial scales for the electronics industry. Management is considering outsourcing the shipping operation to a logistics provider experienced in the electronics industry. Thompsons annual fixed costs of the shipping operation are $1,500,000, which includes costs of the equipment and infrastructure for the operation. The estimated variable cost of shipping the scales with the in-house operation is $4.50 per ton-mile. If Thompson outsourced the operation to Carter Trucking, the annual fixed costs of the infrastructure and management time needed to manage the contract would be $250,000. Carter would charge $8.50 per ton-mile. What is the breakeven quantity?
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Using Break-Even Analysis

SOLUTION From Supplement A, Decision Making, the formula for the break-even quantity yields Fm Fb Q= c c b m = 1,500,000 250,000 8.50 4.50

= 312,500 ton-miles

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Strategic Implications
Efficient supply chains Responsive supply chains Design of efficient and responsive supply chains

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Strategic Implications
TABLE 9.1
Factor Demand Competitive priorities

| |

ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS

Efficient Supply Chains Predictable, low forecast errors Low cost, consistent quality, on-time delivery Responsive Supply Chains Unpredictable, high forecast errors Development speed, fast delivery times, customization, volume flexibility, variety, top quality Frequent High High

New-service/product introduction Contribution margins Product variety

Infrequent Low Low

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Strategic Implications
TABLE 9.2
Factor Operation strategy

DESIGN FEATURES FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS

Efficient Supply Chains Make-to-stock or standardized services or products; emphasize high volumes Low Low; enable high inventory turns Shorten, but do not increase costs Emphasize low prices, consistent quality, on-time delivery Responsive Supply Chains Assemble-to-order, make-toorder, or customized service or products; emphasize variety High As needed to enable fast delivery time Shorten aggressively Emphasize fast delivery time, customization, variety, volume flexibility, top quality

Capacity cushion Inventory investment Lead time Supplier selection

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Solved Problem 1
A distribution center experiences an average weekly demand of 50 units for one of its items. The product is valued at $650 per unit. Average inbound shipments from the factory warehouse average 350 units. Average lead time (including ordering delays and transit time) is 2 weeks. The distribution center operates 52 weeks per year; it carries a 1-week supply of inventory as safety stock and no anticipation inventory. What is the value of the average aggregate inventory being held by the distribution center?

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Solved Problem 1
SOLUTION

Type of Inventory Cycle Safety stock Anticipation Pipeline

Calculation of Average Inventory Q 350 = 2 2 None dL = (50 units/week)(2 weeks) = 100 units Average aggregate inventory = 325 units Value of aggregate inventory = $650(325) = $211,250 = 175 units

1-week supply = 50 units

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Solved Problem 2
A firms cost of goods sold last year was $3,410,000, and the firm operates 52 weeks per year. It carries seven items in inventory: three raw materials, two work-in-process items, and two finished goods. The following table contains last years average inventory level for each item, along with its value. a. What is the average aggregate inventory value? b. How many weeks of supply does the firm maintain? c. What was the inventory turnover last year?
Category Raw materials Part Number 1 2 3 Work-in-process Finished goods 4 5 6 7 Average Level 15,000 2,500 3,000 5,000 4,000 2,000 1,000 Unit Value $ 3.00 5.00 1.00 14.00 18.00 48.00 62.00

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Solved Problem 2
SOLUTION a.
Part Number 1 2 3 4 5 6 7 Average Level 15,000 2,500 3,000 5,000 4,000 2,000 1,000 Unit Value $ 3.00 5.00 1.00 14.00 18.00 48.00 62.00 = = = = = = = = Total Value

Average aggregate inventory value

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Solved Problem 2
SOLUTION a.
Part Number 1 2 3 4 5 6 7 Average Level 15,000 2,500 3,000 5,000 4,000 2,000 1,000 Unit Value $ 3.00 5.00 1.00 14.00 18.00 48.00 62.00 = = = = = = = = Total Value $ 45,000 12,500 3,000 70,000 72,000 96,000 62,000 $360,500

Average aggregate inventory value

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Solved Problem 2
b. Average weekly sales at cost = $3,410,000/52 weeks = $65,577/week Average aggregate inventory value Weeks of supply = Weekly sales (at cost) $360,500 = = 5.5 weeks $65,577 Annual sales (at cost) c. Inventory turnover = Average aggregate inventory value $3,410,000 = = 9.5 turns $360,500

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