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Supply Chain and

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Supply Chain and

  1. 1. Supply Chain and e-Supply Chain: Structures, Strategies and Drivers 1. SUPPLY CHAIN DESCRIPTION Supply Chain: Activities involved in fulfilling a customer request Actors: Suppliers, Sub-Contractors, Manufacturers, Transporters, Warehouses, Retailers, Customers Functions: Product, Development, Marketing, Procurement, Manufac- turing, Operations, Distribution, Finance, Customer Service Objective: Maximize value generated through customer satisfaction Decision Phases 1. Strategy (Design) Locations, Capacity channel design, Warehouses, Manufacturing, Out- sourcing 2. Planning Supply scheme, Inventory policy, Subcontracting 3. Operations Allocation of individual orders to inventory or production, allocation to transportation routes, etc. Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 1
  2. 2. Prof. P. Miliotis Process view of the Supply Chain Cycle view 1. Customer Order Cycle Customer arrival Customer order entry Customer order fulfilment Customer order receiving 2. Replenishment Cycle Retail order trigger Retail order entry Retail order fulfilment Retail order receiving 3. Manufacturing Cycle Order arrival Production scheduling Manufacturing and Shipping Receiving 4. Procurement Cycle Supplier / Manufacturer interface Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 2
  3. 3. Prof. P. Miliotis Sources Cycles Converters Retailers Product and Service Flow Information Flow Pull Funds Flow Customer Suppliers Order Distributors Consumers Customer arrival Customer order entry Customer order fulfilment Replenishment Customer order receivingRetail order C trigger Retail order entry Retail order fulfilment Retail order receivingOrder arrival from r distributors Production scheduling Push Manufacturing and Shipping Receiving (distributors, retailers, customers ( Manufacturing Procurement Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 3
  4. 4. Prof. P. Miliotis Push-Pull view of S.C. Pull Process: Execution is initiated in response to a customer order (increased responsiveness) Push Process: Execution is initiated in anticipation to a customer order (increased efficiency) Push-Pull Boundary: Which processes are of each type Push Systems MRP supported Pull Systems Require fast information transmission and sharing 2. STRATEGIC FIT Matching of the company’s competitive strategy to supply chain strategy Competitive Strategy: Define ways to satisfy customer require- ments through products and services  Product Development Strategy  Marketing and Sales Strategy Supply Chain Strategy: Design strategy to achieve the right mix of efficiency and responsiveness Products with high demand uncertainty (and usually high profit margins) require responsive supply chains. This usually occurs early in the life cycle of the product. Products with low demand uncertainty (and usually low profit margins) require effective supply chains. This usually occurs late in the life cycle of a product. Supply chains serving multiple products and multiple customer segments require the right balance between effectiveness and responsiveness. Achieving strategic fit: Matching S.C. to customer segment require- ments Understanding the cus- Volumes, variety, response time, service level, tomer: price innovation rates Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 4
  5. 5. Prof. P. Miliotis Understanding the supply Responsiveness chain:  Response to wide range of quantities (excess capacity)  Meet short lead time  Handle a large variety of products  Meet a high level service Efficiency  Economies of scale  Low capacity (excess costs)  Low cost transport Supply chain Characteristics Efficient Responsive Primary goal Lowest cost Quick response to demand Product design Max per. at min cost Modularity for postpone- ment of product differen- tiation Pricing Lower margins price High margins prime customer drive Manufacturing Lower costs through high Capacity availability to strategy utilization meet unexpected demand Inventory Minimize inventory to Maintain buffer inventory strategy lower cost to meet unexpected de- mand Lead time Reduce but not at expense Reduce aggressively even of cost if costs are significant Supplier Select based on cost and Select based on speed, strategy quality flexibility and quantity Transportation Low cost models Responsive models Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 5
  6. 6. Prof. P. Miliotis Intercompany view of the Supply Chain Intercompany alliances: 1. Maximize supply’s surplus, and not maximize the profit of each segment because this is an internal account (Distribution of profits 2. Increases speed: Successful interface between stages → requires close cooperation, alliances, common investments, etc. 3. SUPPLY CHAIN DRIVERS AND OBSTACLES Competitive Strategy S.C. Strategy Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain Drivers Inventory Benefits Smoothing Supply-Demand uncertainties Economies of scale (Start up costs, Transport fixed costs) Costs Capital cost Risk Operational costs Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 6
  7. 7. Prof. P. Miliotis Inventory types By uncertainty 1. Cycle Inventory: designed to meet economies of scale type (EOS) 2. Safety Inventory: designed to meet uncertainties (marginal analysis) By supply chain Raw materials stage Process inventory cost increase Ready product inventory Inventory cost = Inventory volume × Time Substitute inventory for information: More accurate and timely in- formation reduces inventory requirements Substitute inventory for capacity: Capacity increases flexibility and reduces inventory re- quirements Substitute inventory for speed: Speed reduces lead times and result in more accurate fore- casting Inventory increases responsiveness at a cost Transportation Transportation Modes (air, truck, sea, rail) In House or Outsource Transportation speed makes a positive contribution to responsiveness and can be increased at a cost Facilities - Capacity Location of factories, warehouses, retail outlets Focuses factories vs factories near distribution centres Increased capacity adds to flexibility and responsive- ness at a cost Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 7
  8. 8. Prof. P. Miliotis Information  Accurate forecasting  Coordination between stages of S.C.  Fast cycles  Inventory reduction  Lost sales reduction  Markdowns reduction Enabling Technologies  EDI  Internet  ERP  SCM software Supply chain Obstacles  Increasing variety of products  Decreasing product life cycles  Increasingly demanding customers  Fragmentation of supply chain ownership  Globalization  Difficulty in executing new strategies Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 8
  9. 9. Prof. P. Miliotis 4. FACILITIES NETWORK Warehouses Customer Service Performance and Logistics Costs Warehousing, Inventory Costs Customer Service Transportation Costs Number of Warehouses Relationship between service/cost performance and number of warehouse locations  Increasing the number of warehousing facilities in a logistics network generally improves customer service, because additional stocking loca- tions reduce average delivery times to customers. However, more ware- houses increase warehousing and inventory costs. Warehousing costs in- crease because there are more overhead and fixed costs to absorb. In- ventory costs increase because a greater number of warehouses means more safety stock inventory must held system-wide to provide a spe- cified level of customer service.  In contrast, transportation costs decrease as the number of facilities is increased over some range. Rather than shipping smaller quantities direct from points of supply (eg. Plants) to customers, warehouses serve as product mixing centers that allow larger, consolidated shipments between supply points and warehouses. This transportation cost advantage be- comes diminished, however, if too many warehouses are present because the shipment sizes between supply points and warehouses decrease to the point that there is little shipment consolidation advantage over dir- ect shipments to customers. Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 9
  10. 10. Prof. P. Miliotis Factories Figure below outlines some of the trade-offs network modeling can address when integrating manufacturing and distribution within a comprehensive network design. Manufacturing costs frequently decrease as manufacturing is concen- trated in fewer facilities – a result of economies of scale and more revenue gen- erated per dollar spent on manufacturing infrastructure and overhead. However, more modern, flexible-manufacturing technology may diminish or even eliminate the benefits of this traditional axiom in certain industries. More Focused Factories Less Focused Factories Manufacturing Costs Transportation and Inventory Costs Fewer Number of Plants Greater Number of Plants Relationship between cost performance, factory focus and number of plant locations 5. ALLIANCES Alliances are important in effective supply chain management. The main issues concerning alliances are the following:  Extendedness  Operational Information Exchange  Operating Controls  Sharing of Benefits and Burdens  Planning  Compatible Corporate Cultures (Trust) Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 10
  11. 11. Prof. P. Miliotis Extendedness The investment necessary in time, personnel, equipment to establish an interface among channel members cannot be returned over a short period in most cases. Thus, members usually enter into contracts or have an understanding of a long-term relationship if they are in- volved in a partnership relationship. Operational Information Exchange Information systems must be connected, which means having compatible equipment and software. Operating Controls Channel members want to monitor other members’ in- formation systems to be aware of product flows and any potential supply problems. Sharing of Benefits and Burdens There is an expectation that channel members will share both benefits and burdens. If only the channel captain, or the strongest one in the channel, reaps the rewards, the other members will be constantly looking for altern- ative relationships. Certainly, the relationships should be reviewed periodically against other alternatives, but without sharing of benefits and burdens, the ties will be particularly tenuous and uncomfortable. Planning Considerable planning is needed to integrate the mem- bers of the supply chain, or two partners. Compatible Corporate Cultures (Trust) Finally, there is chemistry between partners and/or among supply chain members. Corporate cultures should be compatible among the parties involved for the part- nership to work. Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 11
  12. 12. Prof. P. Miliotis 6. SUPPLY CHAIN COORDINATION The bullwhip effect Fluctuations in orders increase as we move up the supply chain from retailers to manufacturers. This increases costs and re- duces profitability. Obstacles to coordination Incentive obstacles Information processing obstacles Operational obstacles Pricing obstacles Behavioural obstacles Actions to improve coordination Aligning goals and incentives Improving information accuracy Improving operational performance Designing pricing strategies to stabilize orders Building partnerships and trust 7. SUPPLY CHAIN PERFORMANCE Performance improvement stages 1 st stage Improve in-house performance 2 n d stage Consider relationships with supply chain partners 3 r d stage Optimize the operations of the extended enterprise (optimal facilities setting, optimal stock levels, delayed differen- tiation, mass customization, accurate response) Cost reduction is not always appropriate if it hurts responsive- ness. Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 12
  13. 13. Prof. P. Miliotis Performance measures and variables Measures and variables used depend on the desirable characteristics of the supply chain (mix between effectiveness and responsiveness). Traditional measures Inventory measures Inventory turns, inventory costs, inventory levels Time Product development time, time to market, time to break even, lead times Quality Partners’ contribution to continuous improvement, percentage of defects Traditional measures focus mainly on cost con- siderations Less traditional measures Customer focus Customer satisfaction Information practices Information about workflow practices and integ- rated production planning Partner selection criteria (non-cost) Performance measures Depending on the type of the supply chain (effectiveness vs. responsiveness) Traditional measures Lead times, inventory levels, service levels focus: cost reduction Modern measures The extent of supplier or customer involvement in product design The importance of non-price factors in partner se- lection The establishment of long term partnerships with suppliers and customers A firm’s ability to capture and use information Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 13
  14. 14. Prof. P. Miliotis 8. e-BUSINESS AND e-MARKETS Open e-markets Reduce prices and increase product variety Transaction cost of order placement and fulfilment is reduced Used to make occasional transactions when short- ages occur in the supply chain or in capacity: quick information regarding availability and spot prices. An auction facilitates a one time transaction Tight links (through Tight-links result in greater speed and certainty networks and alliances) and they are used for regular and steady transac- tions through long-term relationships 9. e-BUSINESS AND SUPPLY CHAIN Revenue Impact of e-Business  Offering direct sales to customers  Provide 24-hour service from any location  Aggregate information from various sources  Provide personalization and customization of information  Speed up time to market  Implement flexible pricing  Allow price and service discrimination  Facilitate efficient funds transfer Cost Impact of e-Business  Reducing product handling with a shorter supply chain  Postponing product differentiation until after an order is placed  Decreasing delivery cost and time with downloadable products  Reducing facility and processing cost  Decreasing inventory costs through centralization  Improving supply chain coordination through information sharing Potential Cost Disadvantage  Increased transportation cost through aggregation  Increased handling cost if customer participation is reduced  Large initial investment in information infrastructure Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 14
  15. 15. Prof. P. Miliotis 10. e-SUPPLY CHAIN AND DISTRIBUTION 1. Proper mix with “bricks”: Physical network necessary 2. Suitable pricing to reflect costs 3. Optimize distribution systems to handle “parcels” not “pallets” 4. Efficient handling of return: increased returns in e-ordering 11. e-SUPPLY CHAIN CASES 1. Dell Supply Chain Customer Pull Customer Pull Dell Retailer Manufacture r Supplier Supplier Dell S.C. Traditional PC S.C. Dell has fewer stages in the S.C. Greater part of the S.C. operates in “pull mode”. Comments on the characteristics follow: Type of products More Product introduction Faster Response time Longer (products not immediately available) Stages Fewer: increased profit margin through cost reduc- tion Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 15
  16. 16. Prof. P. Miliotis Payments e-funds transfer: faster pay-in slower pay-out negative working capital (matter of negotiation with partners) Inventory Lower: Through aggregation and delayed dif- ferentiation Facilities costs Lower: Fewer facilities (mainly retail outlets) Transport costs Increased: Distribution on a personal basis (whose cost is it?) However Transport cost small fraction of price and cost 24-hour service More customers, revenue enhancement Price More flexible: Price revisions depending on stocks 2. Amazon Supply Chain Customer Pull Customer Pull Amazon Retailer Warehouse Distributor Publisher Publisher Product range Greater Facilities cost Lower (no retail infrastructure) Transport and Di s- Higher distribution cost tribution cost Significant part of the total price/cost 24-hour service Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 16
  17. 17. Prof. P. Miliotis Delivery Longer Processing cost Higher Amazon does not charge for certain services that are significant part of total cost. Low prices result in high revenues but fail to recover costs. Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 17