Supply Chain Management

What is a Supply Chain?

What is a Supply Chain?

A supply chain is the system of organizations, people, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform raw materials and components into a finished product that is delivered to the end customer.

Supply Chain

Supplier

Manufacturer

Distributor

Retailer

Customers

A Supply Chain Example

Kroger Coke JNJ Kellog P&G TX Tier 1 suppliers GA FL AL Publix
V. Highlands Peachtree Ocean Drive Ft. Laud.

End customer

State distributors

Local stores

Super market chains

Supply Chain Management

Supply Chain Management is the design and management of processes across organizational boundaries with the goal of matching supply and demand in the most cost effective way.
Supply Demand

Mission impossible: Matching Supply and Demand

Why so Difficult to Match Supply and Demand?

Uncertainty in demand and/or supply Changing customer requirements Decreasing product life cycles Fragmentation of supply chain ownership Conflicting objectives in the supply chain Conflicting objectives even within a single firm
Marketing/Sales wants: more FGI inventory, fast delivery, many package types, special wishes/promotions Production wants: bigger batch size, depots at factory, latest ship date, decrease changeovers, stable production plan Distribution wants: full truckload, low depot costs, low distribution costs, small # of SKUs, stable distribution plan

Losing Sight of the Common Objective

I'm glad that the hole is not on our side!

Supply Chain Story I

On tracing the journey of a part

Source: The Resilient Enterprise

Supply Chain Story II

On responding to a supply chain disruption

Nokia Ericsson

Philips factory in New Mexico

Source: The Resilient Enterprise

Supply Chain Story II

On responding to a supply chain disruption

Nokia Ericsson

Philips factory in New Mexico

Source: The Resilient Enterprise

Supply Chain Story III

On Internal communication and collaboration

In the mid-1990s, the Swedish car manufacturer Volvo found itself with excessive stocks of green cars. To move them along, the sales and marketing departments began offering attractive special deals, so green cars started to sell. But nobody had told the manufacturing department about the promotions. It noted the increase in sales, read it as a sign that consumers had started to like green, and ramped up production.
Source: Chain reaction, The Economist, Jan 31, 2002

Supply Chain Story IV

On external communication and collaboration

Supply Chain Story V

On supplier management

Suppliers

US auto man.

Arms Length

The Big Three [US automakers] set annual costreduction targets [for the parts they purchase]. To realize those targets, theyll do anything. [Theyve unleashed] a reign of terror, and it gets worse every year. You cant trust anyone [in those companies] -Director, interior systems supplier to Ford, GM, and Chrysler, October 1999*

Suppliers

Toyota

Toyota helped us dramatically improve our production system. We started by making one component, and as we improved, [Toyota] rewarded us with orders for more components. Toyota is our best customer. -Senior executive, supplier to Ford, GM, Chrysler, and Toyota, July 2001**

Partnership

* And ** Source: Building Deep Supplier Relationships, HBR, December 2004

Supply Chain Story VI

On gaining competitive advantage

Traditional Supply Chain Dell Supply Chain

On April 20, 2001 Dell toppled Compaq as the worlds largest PC maker*
Dells market share was 12.8% as opposed to Compaqs market share 12.1%

Compaq and HP could not get into a price war with Dell because
Dells profit margin was 18% Compaq and HPs profit margins were in single digits
*Source: Forbes.com, April 24, 2001

Supply Chain Story VII

On gaining competitive advantage

In the late 1970s, with about 200 stores, Wal-Mart was a relatively small retailer. At that time, Sears and Kmart dominated the retail market. Since then, Wal-Mart gained significant market share from these retailers and became the largest and most profitable retailer in the world. Today, Wal-Mart is admired for its collaboration and technology driven supply chain practices and is leading the retailing industry with its innovative supply chain practices.

Supply Chain Performance Measures

Cost

Total Supply Chain Cost is the sum of all supply chain costs for all products processed through a supply chain during a given period Inventory Turnover is the ratio of the cost of goods sold to the value of average inventory. Weeks of inventory is the ratio of average inventory to the average weekly sales

Customer Service

Average Response Time is the sum of delays of ordering, processing, and transportation between the time an order is placed at a customer zone and the time the order arrives at the customer zone

What do these measures mean?

Inventory Turnover: how often the company replenishes inventory. High value of inventory turnover means that the inventory was not sitting around a long time. Weeks of Supply: how many weeks worth of inventory does the company have on hand. High value of weeks of supply means that the firm has a lot of inventory sitting around.

Inventory Turns
Excerpts from financial statements of Kmart and Wal-Mart
Kmart 1998 1999 2000 2001 2002

Inventory
Tot.Revenue COGS Net Income

$6.367B
$33.674B $26.319B $0.518B

$6.536B
$35.925B $28.161B $0.364B

$6.350B
$37.028B $29.732B ($0.268B)

$5.796B
$36.151B $29.853B ($2.446B)

$4.825B
$30.762B $26.258B ($3.219B)

Wal-Mart
Inventory Tot.Revenue COGS Net Income

1998
$16.497B $117.958B $93.438B $3.526B

1999
$17.076B $137.634B $108.725B $4.430B

2000
$19.793B $165.013B $129.664B $5.377B

2001
$21.644B $191.329B $150.255B $6.295B

2002
$22.749B $217.799B $171.562B $6.671B

Source: Matching Supply with Demand: An Introduction to Operations Management, Cachon and Terwiesch

Inventory Turns
Inventory Turns= COGS

Inventory

Inventory Turns for Kmart and Wal-Mart Kmart 1998 4.15 1999 4.34 2000 4.68 2001 5.14 2002 5.45

Wal-Mart

5.70

6.40

6.63

7.01

7.60

Inventory Turns is a common benchmark in retailing Inventory Turns10 for grocery retailers (Safeway, Kroger), 1.5 for jewelry (Tiffany), 4 department stores (JCPenny)

Inventory Productivity
How long does it takes you to transform a dollar invested in inventory into sales (hopefully profitably)

Littles Law: L=W

Inventory = Flow x Flow Rate Time

What is the flow rate? COGS

Flow Times for Kmart and Wal-Mart Kmart Wal-Mart 1998 88 days 64 days 1999 2000 84 days 78 days 57 days 55 days 2001 2002 71 days 67 days 52 days 48 days

Wal-Marts Phenomenal Success

Walmart's Growth in Shareholders' Equity vs S&P 500 Growth
19 87- 19 97
12 10

Walmart S &P 5 00

0 86 88 90 92 94 96 98

At IPO: $1000 of Wal-Mart shares

Became worth $2M + dividends paid in 1993

Wal-Mart: 256 B sales in 2004 =IBM+HP+Dell+Microsoft+Cisco+2 B

Wal-Mart: Efficient Supply Chain

Procurement Distribution Product Assortment Pricing

Efficient S. Chain: Procurement

In 90s, Wal-Mart began to bypass wholesalers Expanded private label business (used unbranded suppliers) Build partnerships with many suppliers Retail Link: suppliers could access POS and inventory What are the benefits? Example: Wal-Mart and P&G partnership (JIT II)

Wal-Mart and P&G Partnership

Consumer-Products Giant Helps Huge Retailer Make Specialty Items Mainstream, Jan 31, 2005 Early on, P&G employees, who relocated to Fayetteville to be close to Wal-Mart, called their adopted home Fayette-nam, and often griped about Wal-Mart's demands. Still, P&G and Wal-Mart came up with specific goals. In their first collaboration, Wal-Mart complained that Pampers diapers sat for too long in its warehouses, costing it money. Wal-Mart buyers were shipping diapers from the factory every two weeks. After gaining access to Wal-Mart's sales data, P&G assigned one manager to monitor the data and order just enough Pampers to meet sales but not too much so that the diapers sat in the warehouse.

Efficient S. Chain: Distribution

At the end of 2003: 84 Wal-Mart DCs DCs functioned as the hubs in a hub-and-spoke network Distribution costs accounted for 2-3% of Wal-Marts revenues compared to 4-5% for other retailers Wal-Mart mastered large scale Cross Docking Automation of distribution: RFID technology Inventory turns were a key measure of the overall performance of the supply chain

Efficient S. Chain: Product Assortment

Stocked mix of nationally branded and private label products
What are the pros and cons of nationally branded and private label products?

Product assortment managed by store more variety

What are the pros and cons of offering more variety? Pro: More variety than competitors customer satisfaction Con: More variety than competitors higher costs

Pricing Strategy: EDLP

How Wal-Mart Got Ready Early, Nov 28, 2005
Another aggressive move: Wal-Mart announced early last week that it would match competitors' prices on promoted items -- even the after-rebate price -- provided Wal-Mart had the identical item in stock. While this isn't a new policy for Wal-Mart, it was the first time the company repeatedly advertised it. "By reminding people we match prices, shoppers will know they don't have to run around." said Mr. [Sonny Littlefield], the Arlington store manager.

Wal-Mart: every day low price (EDLP) retailer

What are the advantages of EDLP?

Store managers allowed to match or beat the lowest competing price What is really allowing Wal-Mart to have lowest prices?

Wal-Mart: Market Position

First: Small town rural strategy
Only 55% compete directly with Kmart and 23% with Target Have displaced small local merchants Only competition is the Wal-Mart in the next town

Second: Clearly defined competitive position: emphasis on nationally branded products and EDLP
Reinforce EDLP by posting competitors prices weekly

Supply Chain Design

Traditional vertically disintegrated channel

WHOLESALER
INFORMATION PRODUCT

AMAZON.COM
INFORMATION PRODUCT

CUSTOMER

Meet Spun.com
Cheap tricks*
Start-up capital: $825,000
200,000 CD titles available for immediate shipment No inventory

Other Retailers: Proflowers.com, Zappos.com, Outpost.com, Other Wholesalers: Baker & Taylor, Ingram, etc.
*Forbes, February 21, 2000, 116

Supply Chain Design

Traditional vertically disintegrated channel Drop-shipping channel

WHOLESALER
INFORMATION PRODUCT

Alliance Entertainment Inc.

INFORMATION

AMAZON.COM
INFORMATION PRODUCT

SPUN.COM
INFORMATION

PRODUCT

CUSTOMER

CUSTOMER

Drop-Shipping in a Click World*

Primary way company fulfills online orders Type of retailer
Internet-only Multi-channel (online plus brick) 61.5% 10.3%

From company facility that existed From company facility that was developed

13.9% 30.6%

Drop-shipped
Outsourced From facility operated by a partner Electronic fulfillment (software) Other
*The state of eRetailing 2000. Supplement to eRetailing World March 2000.

30.6%
8.3% 8.3% 5.6% 2.7%

5.1%
17.9% 2.6% 0% 2.6%

Marketing expenditure of the Internet Retailer

Marketing budget as % of sales

40.5% 21.4%

Pure Internet Multi-channel

Where does the money go?

5%

Brick-and-mortar

Customer retention

Customer acquisition

Brand awareness

Supply Chain Alternatives

Manufacturer Manufacturer Manufacturer Manufacturer Manufacturer

Distributor

Distributor

Retailer

Retailer

Retailer

Retailer

Customer

Customer

Customer

Customer

Customer

Dover

Varsity Books

Amazon BN.com

Amazon resellers

Barnes & Noble Borders Small Bookstores

Manufacturers margin

Supply chain cost Customer acquisition cost

Outsourcing
Outsourcing: moving some of the firms internal activities and decisions to outside providers Firm

Supplier

Question: When should the firm outsource activities?

Outsourcing

A firm may outsource some of its activities

or the whole of it!

Examples of outsourcing

Toshiba has outsourced manufacturing to Solectron

GM has outsourced its interior design to Delphi Many firms outsource problem solving to McKinsey & Co. Advertising is often outsourced completely. Many companies outsource logistics and transportation.

Why do firms outsource?

Organizational reasons - Focus on service

- Focus on core capabilities - Transform the organization - Increase flexibility

Operational reasons - Improve performance (quality, productivity, etc.) - Obtain expertise, skill, and technology - Risk management

Why do firms outsource?

Financial reasons - Transfer assets to the outsourcing partner.

- Free up resources for investment in other purposes.

Cost driven reasons - Transform fixed costs into variable costs. - Reduce costs through outsourcing partner efficiencies. Revenue driven reasons - Expand and grow with the help of another organization. - Obtain access to outsourcing partners network.