Test 3

Coordination in a supply chain

• Supply chain coordination improves the effectiveness of stage of the supply chain.

Lack of coordination can occur due to:

• Conflicting objectives of different stages,

• Distorted information moving between different stages.

• Example: food produces various models with different options. The increased variety makes it difficult for Ford to coordinate information exchange with thousands of suppliers and dealers.

• The main challenge is to achieve coordination in supply chain in spite of multiple ownership and increased product variety.

Bullwhip effect

• Bullwhip effect refers to the increase in fluctuations in orders as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers.

• Bullwhip effect distorts demand information within the supply chain, with different stages having a very different estimate of what demand looks like.

• Examples:

1. Procter & Gamble (P&G)

• In the production of “pamapers” diapers, P&G found significant fluctuation in the raw material orders to its suppliers even though sales at retail stores had very little fluctuation.
  

2. Hewlett Packard (HP)

• Although product demand showed some variability, orders place with the intergrated circuit (IC) division were much more variable.
  

Impact of bullwhip effect

Performance measure	Impact of bullwhip Effect
Manufacturing cost	Increase
Inventory cost	Increase
Replenishment lead time	Increase
Transportation cost	Increase

 

Shipping and receiving cost	Increase
Level of product Availability	Decrease
Profitability	Decrease

 

Bullwhip effect reduces the profitability of a supply chain by making it more expensive to provide a given level of product availability.

Obstacles to coordination in a supply chain

1. Incentive obstacles

• Incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce overall effectiveness.

• If a transportation manager's compensation is linked to the average transportation cost per unit, decisions made can increase inventory costs or hurt customer service.

• Sales force offering discounts to increase end-of-period sales will result in jump in orders at end of evaluation period followed by very few orders at the beginning of the next evaluation period.
  

2. Information processing obstacles

• These obstacles occur when demand information is distorted as it moves between different stages of the supply chain.  When forecasts are based on orders received, any variability in customers demand is magnified as orders move up the supply chain.  Lack of information sharing between stages of the supply chain magnifies the bullwhip effect.

• For example, a planned promotion may be interpreted as a permanent increase in demand
  

3. Operational obstacles

• Action taken in the course of placing and filling orders can lead to increase in variability. When a firm places orders in lot sizes that are much larger than the lot sizes in which demand arises, variability of order is magnified up the supply chain.

• Bullwhip effect is magnified if replenishment lead times between stages are long.  Rationing schemes that allocate limiting production in proportion to order placed by retailers lead to a magnification of the bullwhip effect.
  

4. Pricing obstacles

• Pricing policies for a product lead to an increase in the variability of demand.  Lot-size based quantity discounts ultimately result in increased variability.  Trade promotions and other short-term discounts result in retailer purchasing larger lots during the discounting period to cover demand during future periods. This results in significantly higher variability in manufacturing shipments than retailer sales.
  

5. Behavioral obstacles

• Problems in learning within organization that contribute to the bullwhip effect are as follows:

• each stage in the supply chain views its actions locally

• different stages of the supply chain react to the current local situation

• based on local analysis, different stages blame each other for fluctuations

• no stage of the supply chain learns from its actions overtime

• a lack of trust between supply chain partners causes them to be opportunistic at the cost of overall supply chain performance
  

 

Achieving Coordination in Practice 

1. Quantify the bullwhip effect

• Mangers should compare the variability in the orders they receive from their customers with the variability in order they place with their suppliers.

2. Get the top management commitment for coordination

• Coordination requires managers at all stages of the supply chain to subordinate their local interests the greater interest of the firm or supply chain.

• Top management commitment was a key factor in helping Wal-mart and procter&Gamble set up collaborative forecasting and replenishment teams.

3. Devote resources to coordination

• All parties involved should devote significant managerial resources to foster coordination. One of the best ways to solve coordination problems is through teams made up members to different companies throughout the supply chain.

4. Focus on communication with other stages

• Regular communication helps different stages of the supply chain share their goals and identify common goals and mutually beneficial actions that improve coordination.

5. Achieve coordination in the entire supply chain

• The most powerful party in supply chain should make an effort to achieve coordination in the entire supply chain network.

6. Use technology to improve connectivity

• The interest, enterprise resource planning (ERP) systems, and other information systems can be used to increase the visibility of information throughout the supply chain.

7. Share the benefits equitably

• Mangers from the strongest party in the supply chain relationship must ensure that all parties perceive that benefits are shared in a fair manner.

 

E-Business and the supply chain

• E-Business is the execution of business transactions over the internet. The following supply chain transactions can be conducted over the internet:

1. Providing information across the supply chain,

2. Negotiating prices and contacts with customers and suppliers,

3. Allowing customers to place orders,

4. Allowing customers to trace orders,

5. Filling and delivering orders to customers, and

6. Receiving payments from customers. Business-to-Consumers (B2C) E-business involves transactions between a company and a consumer. Example: Amazon, Dell.com,etc

• Business-to-Business (B2B) E-Business involves transaction between two companies.

• Examples: W.W.Grainger, McMaster- Carr who sells maintenance, repair, and operations (MRO) supplies to other companies over the internet.

Revenue impact of E-Business

• The impact of E-Business can be studied in the following two ways:

1. Revenue impact of E-Business

1. Offering direct sales to customers

• E-Business allows manufacturers enhance revenues by passing intermediaries and selling directly to the customers.

2. Providing 24 hour access

• E-business attracts customers who may be able to place orders during regular business hours. E-business can be accessed by customers who are geographically distant.

3. Aggregating information from various sources

• E-business offer information regarding a very large selection of product.

4. Providing personalization and customization of information

• The internet offers E-business the ability to use personal info to guide each customers buying and increase sales.

• In B2b environment, firms can set up customer specific sites.

5. Speeding up time to market

• A firm with E-business can increase revenues by introducing new products much faster than a firm that uses physical channels.

6. Implementing flexible pricing

• An E-business can easily alter prices over time by changing one entry in the database linked to its web site.  This allows for maximizing revenues by setting prices based on current inventories and demand.

7. Allowing price and service discrimination

• An E-business can price- discriminate and alter prices based on the buying power of individual customers to enhance revenues.

8. Facilitating efficient funds transfer

• An E-business can enhance revenues by speeding up collection.

2. Cost Impact of E-Business

1. Reducing product handling with a shorter supply chain

• A manufacturer using E_business to sell directly to customers is able to reduce handling costs because fewer supply chain stages are involved.

2. Postponing product differentiation until after an order is placed

• An E-business can lower its inventories if it can postpone the introduction of variety until after the customer order is received.

3. Decreasing delivery cost and time with downloadable product

• If the firm is dealing with digitizable product such as software or nusical CD, cost and time of delivery can be drastically reduced.

4. Reducing facility and processing costs

• An E-business can reduce facility costs by centralizing all inventories and decreasing the number of facilities.

5. Decreasing inventory costs through aggregation

• An E-business can aggregate inventories because it does not have to carry inventory close to customer.

6. Improving supply chain coordination through information sharing

• An e-business can easily share demand information throughout the supply chain to dampen the bullwhip effect and improve coordination.

Impact of E-business on Dell Performance

Factor: Revenue

Impact: Increase

Primary causes

1. Direct sales to customers

2. Large variety and customization

3. Faster new product introduction

4. Fast delivery of customer order

5. Flexible pricing

Factor:  Inventory Costs

Impact: Decrease

Primary Causes:

1. Aggregation using postponement and Component commonality

2. Geographic aggregation

3. Info sharing

Factor: Facility Costs

Impact: Decrease

Primary Causes:

1. No retail outlets

2. Customer participation in order placement

Factor: Transportation Costs

Impact: Increase

Primary Cause:

1. Higher outbound transportation cost.

Setting Up of E-Business in Practice

• Integrate the internet with the existing physical network.

• Devise shipment pricing strategies that reflect costs. Optimize the e-business logistics to handle packages, not pallets.

• Design the e-business supply chain to handle returns efficiently.

• Keep customers informed throughout the fulfillment cycle.

Managing Uncertainty in Supply Chain

1. Inventory Profile with safety inventory
• Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a given period.
• Safety inventory is carried because demand is uncertain and a product shortage may result if actual demand exceeds the forecasted demand
• Trade-off to be considered is whether to raise the level of safety inventory or to control the level of safety to minimize inventory holding costs.
• The appropriate level of safety inventory is determined by the following:
1. The uncertainty of both demand and supply
2. The desired level of product availability
• As the uncertainty of supply and demand grows, the required level of safety inventory increases.
• As the desired level of product availability increases, the required level of safety inventory also increases.
2. Measuring Product Availability
• Product availability can be measured in the following ways:
1. Product Fill Rate
• Product fill rate is the fraction of product demand that is satisfied from product inventory
• Fill rate should be measured over specified amounts of demand rather than time.
• For example, if a company provides products to 90% of its customers from its inventory, then the fill rate is 90%.
  
2. Order Fill Rate
• Order fill rate is the fraction of orders that are filled from available inventory.
• This should be measured over a specified number of orders rather than time.
• In a multi-product scenario, an order is filled from inventory only if alll products in the order can be supplied from the available inventory
  
3. Cycle Service Level
• Cycle service level is the fraction of replenishment cycles that end with all the customer demands being met.  A replenishment cycle is the interval between two successive replenishment deliveries
3. Replenishment Policies
• The two types of replenishment policies are:
1. Continuous Review
• Inventory is continuously tracked and an order for a lot size Q is placed when the inventory declines to the reorder point (ROP)
  
2. Periodic Review
• Inventory status is checked at regular intervals and an order is placed to raise the inventory level to a specified threshold. 
  
• The time between orders is fixed.
• The size of the order can vary depending upon the demand.
4. Evaluating a Safety Inventory Given a Replenishment Policy
• Example:  Consider a weekly demand of 2500.  The manufacturer takes two weeks to fill an order.  Orders for 10,000 units are made when the inventory on hand drops to 6000.  Evaluate the safety inventory.
5. Product Selection
• Substitution refers to the use of one product to satisfy demand for a different product.  The two types are:
1. Manufacturer-Driven Substitution
• In manufacturer-driven substitution, manufacturer or supplier makes the decision to substitute.
• Typically, the manufacturer substitutes a higher value product for a lower value product in the inventory.
  
2. Customer-Driven Substitution
• In customer-driven substitution, the customer makes the decision to substitute.
• When a customer calls online to place an order and the product requested is not available, the customer is immediately told the availability of all equivalent products.
  

Test 2

Transportation in supply chain

Transportation refers to the movement of product from one location to another as it makes its way from the beginning of supply chain to the customers

7-eleven Japan

The objective is to carry products in its stores to match the needs of customers as they vary by geographic location or time of day.

7-eleven uses a very responsive transportation system that replenishes its stores several times a day so that the products available match customers’ needs.

Products from different suppliers are aggregated on trucks according to the required temperature to help achieve very frequent deliveries at a reasonable cost.

Factors affecting carrier decisions

1. Vehicle-related cost

• The cost a carrier incurs for the purchase or lease of the vehicle used to transport goods.

• Vehicles related cost incurred whether the vehicle is used or not.
  

2. Fixed operating cost

• Cost associated with termninal, airport gates, and labor that are incurred whether vehicles are used or not.

• Ex. Fixed cost of a trucking terminal facility that is incurred independent of the number of trucks visiting the terminal
  

3. Trip-related cost

• Cost that is incurred each time a vehicle leaves on a trip and includes the price of labor and fuel.

• Trip-related costs depends on the length and duration of trip but is independent of the quantity shipped.
  

4. Quantity related cost

• These costs include loading/unloading costs and a portion of the fuel cost that varies with the quantity being transferred
  

5. Overhead cost

• Costs of planning and scheduling a transportation network and investment information technology are included in this category
  

Factors affecting shipper’s decisions

1. Transportation cost

• Total amount paid to various carriers for transporation products to customers. Transportation costs are considered variable for all shipper decision as long as the shippers does not own the carrier.
  

2. Inventory cost

• Cost of holding inventory incurred the shipper's supply chain network. 
  

• Inventory costs are considered fixed for short term transportation decisions.

• Inventory costs are considered variable while desigining the transportation network.
  

3. Facility cost

• Costs of various facilities in the shipper's supply chain network.

• Considered as a variable cost while making strategic design decisions

• Considered as a fixed cost for all other transportation decisions.
  

4. Processing cost

• Cost of loading/unloading orders and other processing costs associated with transportation.

• Considered as a variable cost for all transportation decisions.

5. Service level cost

• Cost of not being able to meet delivery commitments.

• Sometimes can be considered in strategic, planning, and operation decisions.
  

Transportation network design

1. Direct shipment network

• All shipments are made directly from suppliers to retail stores.

• Routing of each shipment is specified

• Supply chain managers have to decide on thequantity to ship and mode of transportation.

• Advantages

1. No Intermediate warehouses

2. Simple to coordinate

• Disadvantages
  

1. High inventories

2. Significant receiving expense as each supplier makes a separate delivery
   

2. Direct shipping with milk runs

• 

  
  

• A milk run is a route in which a truck either
  

1. delivers a product from a single supplier to multiple retailer

2. goes from multiple suppliers to single retailer

• Advantages

1. Lower transportation costs by consolidating multiple shipments

2. Lower inventories

• Disadvantages

1. Increased coordination complexity
   

3. All shipments via central distribution center

• 

  
  

• Distribution centers are built for each region

• Suppliers send their shipments to DC and then DC forwards appropriate shipments to each retail store.

• Distribution center can be used to ship inventory or for cross docking. 
  

• With inventory storage, lower inbound transportation costs are achieved through consolidation, but it also results in increase inventory cost and increased handling at DC.

• With cross docking, the advantages are very low inventory requirements, and low transportation cost through consolidation.  The disadvantage is increased coordination complexity

• Distribution center design will result in economies of scales in the following ways:

• On the inbound side, total lot size to all stores from each supplier fills trucks

• On the outbound side, the sum of lot sizes from all suppliers to each retail store fills trucks.
  

4. Shipping via distribution center using milk runs

• 

• Milk runs can be used from DC if lot sizes to be delivered to each retail store are small

• Example: 7-Eleven Japan cross docks deliveries from its fresh food suppliers at its distribution centers and sends out milk runs to retail outlets because the total shipments to a store from all suppliers do not fill a truck.

• Advantage: Milk runs reduce outbound transportation

• Disadvantage: Further increase in cooridination complexity
  

Information Technology in a Supply Chain

• Importance of information in a supply chain:

1. Supplier Information

• This includes details of product purchase such as product specification, price, delivery schedule, order status, modification, and payment arrangements
  

2. Manufacturing Information

• This type of information answers such questions as what products can be made, in what quantities, and in what batch sizes
  

3. Distribution and Retailing Information

• This includes details of products to be transported such as mode of transport, quantity per shipment, storage volumes, etc
  

4. Demand Information

• This type of information answers such questions as who is buying what product, in what quantities, etc.  This also includes forecasting and demand distribution information
  

Characteristics of information

1. Accuracy

2. Timeliness

3. Relevance

Role of information in supply chain success:

• 

• Information access leads to global scope for supply chain activities.
  

• Global scope leads to good decisions.
  

• Good decisions, in turn lead to supply chain success.

Making transportation decisions in practice

1. Transportation and competitive strategies

• Manager should ensure that a firm's transportation strategy supports its competitive strategy.

• Firms should evaluate the transportation cost, inventory costs affected by transportation decisions, and level of responsiveness achieved with customers

2. In house and outsourced transportation

• Consider an appropriate combination of company owned and outsourced

• Outsourced is a better option when shipments sizes are small

• Owning a transportation fleet is better when shipment sizes is large and responsiveness is important.

3. E-commerce handling capability

• Transportation system to the new economy should be very responsive.

• Transportation system must be capable of exploiting every opportunity for aggregation to decrease the transportation cost of small shipments

4. Use of technology

• Available technology should be used to decrease costs and improve responsiveness.

• Transportation planning and model selection is helped by software from "i2 Technologies", "Caps logistics," and "Logility."

• Available technology allows carriers to identify the precise location of and shipments in each vehicle.

5. Flexible design

• Uncertainty regarding demand and availability of transportation should be taken into consideration.  Including more expensive, flexible options will reduce the overall cost of providing high level of responsiveness.

Use of information in supply chain

1. Inventory

• Information regarding demand patterns, cost of carrying inventory, costs of stocking out, and cost of ordering is needed to set optimal inventory policies

2. Transportation

• Information regarding costs, customers locations, and shipment sizes is needed to make decisions which integrate operations of manufacturers with suppliers

3. Facility

• Information on trade-offs between efficiency and flexibility, demand, exchange rates, taxes, etc. is required in making decisions regarding location, capacity, and schedules of facilities

Strategic stage	High level in oragization	Long time frame	Little low detail	Highly analytical
Planning stage	Medium level in oragazation	MEDIUM TIME FRAME	Moderated level of low detail	Combination of transactional and analytical
Operational stage	Low level in oganzation	Short time frame	Lots of low level detail	Mostly transactional

 

Enterprise resource planning (ERP) system

• ERP systems are operational information technology systems that gather information from across all functions.
  

• ERP systems have many modules, each covering different functions within a company.

• These modules are linked together so that users in each function can see what is happening in other areas.

Some important ERP modules are as follows:

1. Finance: 

• This module tracks financial information such as revenue and cost.

2. Logistics

• This module is broken into several sub-modules, each covering a different logistic function such as transportation, inventory management, and warehouse management.

3. Manufacturing

• This module tracks the flow of products through the manufacturing process, coordinating what is done to what part at what time.

4. Order fulfillment

• This module monitors the entire order fulfillment cycle, keeping track of the progress the company has made in satisfying the demand.

5. Human resources

• This module handles all sorts of human resources tasks such as the scheduling of workers

6. Supplier management

• This module monitors supplier performance and tracks the delivery of supplier's products

• All of the above modules allow the ERP system to track the status of orders, products, supplies, people, and dollars.

Advantages of ERP systems

1. ERP systems provide managers broad information availiblity,

2. ERP systems are good at giving real-time information,

3. ERP systems are good at using enabling technologies like the internet to share information.

 

Disadvantages of ERP systems

1. ERP systems have relatively weak analytical capabilities because of their focus is at the operational level

2. ERP systems are very expensive and difficult to implement.

ERP Vendors:

1. SAP

• SAP has about 30% of the market.  They are expanding their product offerings vertically by developing more analytical functions to be used in supply chain planning

2. Oracle

• Oracle is the second largest vendor after SAP.  This has most success with consumers packaged goods companies

3. PeopleSoft

• This started with human resource applications.  This company has acquired an analytical software firm in the supply chain area.

4. JD Edwards

• This company started out with building cross-functional systems.  It has purchased "NuMetrix," a supply chain software company.

Test 1

Introduction to Supply Chains

Supply Chain

• Consists of all stages involved, directly or indirectly in fulfilling customer request
• Includes manufacturer, suppliers, transporters, warehouses, retailers, and customers
• Includes functions such as new product development, marketing, operations, distributions, finance, and customer service.

Supply Chain Stages

• Each stage need not be present in a supply chain
• Example: Dell builds to order, therefore retailer and distributor stages do not exist in that supply chain

Decision Phases in a Supply Chain

1. Supply Chain Design
• During this phase, decisions regarding the following aspects are made:
• Location and capacities of production and warehousing facilities
• Products to be manufactured or stored at various locations
• Modes of transportation
• Type of information system to be used
  
2. Supply Chain Planning
• During this phase, decisions regarding the following are made:
• Which markets will be supplied from which locations?
• Planned build-up of inventories
• Subcontracting or manufacturing
• Replenishment and inventory policies to be followed
• Timing and size of market promotions
  
3. Supply Chain Operation
• Time frame: weekly/daily.
  
• During this phase:
• Firms allocate individual orders to inventory or production
• Set a date that an order is to be filled and generate pick lists at a warehouse
• Allocate an order to a particular shipping mode or shipment
• Set delivery schedules of trucks
• Place replenishment orders

Process View of Supply Chain

1. Cycle View
• 

  
  
  
  
• Supply chain processes are broken down into the following four process cycles
• Customer Order Cycle
• 

  
  
  
  
• Occurs at the customer/retailer interface and includes all processes directly involved in receiving and filling the customer's order
• Customer Arrival
  
• occurs when
• The customer walks into a supermarket to make a purchase
• The customer calls a mail order telemarketing center
• The customer uses the Web to a mail order firm
• The objective of the customer arrival process is to maximize the conversion of customer arrivals to customer orders
• Customer Order Entry
• This refers customers telling the retailer what products they want to purchase and the retailer allocating products to customers
• The objective of the customer order entry process is to ensure that the order entry is quick and accurate and is communicated to all other supply chain processes that are affected by it.
• Customer Order Fulfillment
• In this process, the customer's order is filled and sent to the customer
• The objective of the customer order fulfillment process is to get the correct and complete orders to customers by the promised dude dates and at the lowest possible cost
  
• Customer Order Receiving
• In this process, the customer receives the order and takes ownership
  
• Replenishment Cycle
• 
  
  
• Occurs at the retailer/distributor interface
• Similar to customer order cycle except that retailer is now the customer
• The objective of the replenishment cycle is to replenish inventories at the retailer at minimum cost while providing the necessary product availability to the customer
• Retail Order Trigger
• Retailer devices a replenishment or ordering policy that triggers an order from the previous stage
• The objective of setting the triggers is to maximize profitability by balancing product availability and cost
• Retail Order Entry
• The objective of the retail order entry process is that an order be entered accurately and conveyed quickly to all supply chain processes by the order
  
• Retail Order Fulfillment
• The objective of the retail order fulfillment is to get the replenishment order to the retailer on time while minimizing costs
  
• Retail Order Receiving
• This process involves product flow from the distributor to the retailer as well as information and financial flows
• The objective of the retail order receiving process is to update inventories quickly and accurately at the lowest possible cost
  
• Manufacturing Cycle
• 

  
  
• Occurs at the distributor/manufacturer interface and includes all processes involved in replenishing distributor inventory
• Order Arrival
• During the order arrival process, a distributor sets a replenishment order trigger based on the forecast of future demand and current product inventories
• The resulting order is then conveyed to the manufacturer
• Production Scheduling
• In this process, orders are allocated to a production plan or schedule
• The objective of the production scheduling process is to maximize the proportion of orders filled on time while keeping costs down
  
• Manufacturing and Shipping
• The objective of this process is to ship the product by the promised due date while meeting quality requirements and keeping costs down
  
• Receiving
• In the receiving process, the product is received at the distributor, finished goods warehouse, retailer, or customer, and inventory records are updated
  
• Procurement Cycle
• 
• Occurs at the manufacturer/supplier interface
• During the procurement cycle, the manufacturer orders components from suppliers that replenish the component inventories
• Each cycle occurs at the interface between two successive stages of the supply chain
  
2. Push/Pull View
• Pull processes are initiated in response to a customer order
• Push processes are executed in anticipation of customer orders
• Push Pull boundary in a supply chain separates push processes from pull processes
• 

  
  
• 

  
  
  
  
• Dell Supply Chain Flows
• 
  
  
• Dell carries only about 10 days worth of inventory
• Dell supply chain is facilitated by sophisticated information exchange
• If a customer calls in with a problem, production is stopped and design flaws are fixed in real time
• Defective merchandise produced is minimized as there is no finished product with the identified design flaw
• Dell has created customized web pages so that its major suppliers can view demand forecasts
• Quaker Oasts and Snapple
• Quaker Oats owns Gatorade which was strong in south and southwest United States
• Snapple was strong in northeast and west coast
• In 1994, Quaker purchased Snapple at a cost of $1.7 billion
• Gatorade was manufactured in plants owned by Quaker
• Snapple was produced under contract by outside plants
• Gatorade sold through supermarkets and grocery stores.
• Snapple sold through restaurants and independent retailers
• Supply chain disparities hurt the sales of both products
• After 28 months, Quaker sold Snapple to Triarc Companies for $300 million

Supply Chain Drivers and Metrics

• 
  
  
• Drivers of supply chain performance are:
1. Inventory
2. Transportation
3. Facilities
4. Information
• Goal of a supply chain strategy is to strike a balance between responsiveness and efficiency
• Supply chain strategy should fit with the competitive strategy
• Example: Wal-Mart
• Competitive Strategy: Reliable, low-cost retailer for mas consumption of goods.  This strategy dictates that the ideal supply chain will emphasize efficiency and responsiveness.
• Inventory Driver
• Wal-Mart maintains an efficient supply chain by keeping low levels of inventory.
• Wal-Mart uses "Corss Docking," a system in which inventory is directly shipped to stores from manufacturer Transportation Driver
• Transportation Driver
• Wal-Mart runs its own fleet to keep responsiveness high
• Increases cost and investment, but benefits in terms of responsiveness
• 
  
  
• Facilities Driver
• Uses central distribution centers
• Builds facilities only where the demand is sufficient to justify having them
• Information Driver
• Wal-Mart feeds demand information all the way back up the supply chain to suppliers who manufacture only what is being demanded
• Information system which enables to share demand information results in an improved supply chain both in terms of responsiveness and efficiency
• 
  
  

1. Inventory
• Role in the Supply Chain
• Inventory increases the amount of demand that can be satisfied by having the product ready and available when the customer wants it
• Inventory reduces cost by exploiting any economies of scale that may exist during both production and distribution
• Role in the Competitive Strategy
• If a high level of responsiveness is required, a company can locate large amounts of inventory close to the customer
• By storing inventories by centralized stocking, efficiency in the supply chain can be achieved
• Components of Inventory Decisions
1. Cycle Inventory
• 
  
  
• Average amount of inventory used to satisfy demand between receipt of supplier shipments
• Trade-off is the cost of holding larger lots of inventory versus the cost of ordering frequently
  
2. Safety Inventory
• 
  
  
• Inventory held just in case demand exceeds expectation
• Trade-off is between the costs of having too much inventory and the costs of losing sales due to not having enough inventory
  
3. Seasonal Inventory
• 
  
  
• Inventory that is built up to counter predictable variability in demand
• Built up during periods of low demand and stored for periods of high demand when manufacturers will not have the capacity to produce to meet the demand.
• Trade-off is the cost of carrying the additional seasonal inventory versus the cost of having a more flexible production rate
• Overall trade-off regarding inventory decisions is between responsiveness and efficiency
2. Transportation
• Role in the Supply Chain
• Transportation moves the product between different stages in a supply chain
• Faster transportation makes the supply chain more responsive but reduces its efficiency
• Role in the Competitive Strategy
• If the strategy targets customers who demand a high level of responsiveness, and are willing to pay for this, then company can opt for faster transportation
• If the main decision criterion is price, then more cost effective transportation is to be used.
• Components of Transportation Decisions
1. Mode of Transportation
• Air: Most expensive, but very fast
• Truck: Relatively quick and inexpensive mode with high levels of flexibility
• Rail: Inexpensive mode used for large quantities
• Ship: Slowest mode but often the only economical choice for large overseas shipments
• Pipeline: Used to transport oil and gas
• Electronic: Digitized products such as software and musical CDs can be transported over the Internet
  
2. Route and Network Selection
• Route is the path along which a product is shipped
• Network is the collection of locations and routes along which a product can be shipped
• Companies have to decide whether to ship products directly to customers or to use a series of distribution layers
  
3. In House or Outsource
• Earlier, transportation function was an in house activity
• Now, transportation is being outsourced
• The fundamental trade-off for transportation is between the cost of transporting a given product and the speed with which the product is transported
3. Facilities
• Role in the Supply Chain
• Facilities are needed during manufacturing and warehousing stages of the supply chain
• Role in the Competitive Strategy
• Fewer facilities will result in economies of scale and increases efficiency
• More facilities located close to customers will result in higher responsiveness
• Components of Facilities Decisions
1. Location
• Macroeconomic factors, strategic factors, quality of workers, cost of workers, cost of facility, availability of infrastructure, proximity to customers have to be considered for location decisions
  
2. Capacity
• Excess capacity allows the facility to be flexible and respond to variations in demand
• Excess capacity costs money and decreases efficiency
• High utilization facility with no excess capacity will be very efficient but cannot respond to variation in demand
  
3. Manufacturing Methodology
• Facilities have to be designed to have either a product focus or functional focus
• A product focused factory performs many different functions to produce a single type of product (More Efficient Approach)
• A functional focused factory performs few functions on many types of products (More Responsive Approach)
  
4. Warehousing Methodology
• Stock-Keeping Unit (SKU) Storage
• Traditional warehouse that stores all of one type of product together
  
• Job Lot Storage
• Different types of products needed to perform a particular job are stored together
  
• Cross Docking
• Goods are not actually warehoused in a facility
• Inventory supplied from suppliers is broken into smaller lots and quickly loaded onto store-bound trucks
• The overall trade-off is between the cost of the number, location, and type of facilities and the level of responsiveness that these facilities provide the customers\
4. Information
• Role in the Supply Chain
• Information servers as the connection between vairous stages of the supply chain
• Information is crucial to the daily operations of each stage in the supply chain
• Role in the Competitive Strategy
• Information systems can be used to make the supply chain mroe efficient and responsive
• Example: "Window of Knowledge" is an information system used by Anderson Windows.  It provides users a choice of Design Windows using over 50,000 components which can be combined in different ways.  Once the customer chooses a design, the system gives the price quotes and sends information to the factory
• Components of Information Decisions
1. Push vs. Pull
• Push systems create schedules to suppliers based on information from Material Requirements Planning (MRP)
• Pull systems require information on actual demand to be transmitted quickly throughout the supply chain.
  
2. Coordination and Information Sharing
• Supply chain coordination occurs when the different stages of the supply chain work towards overall profitability rather than on maximizing progitability at each stage.  Coordination requires that each stage shares appropriate information with other stages.
  
3. Forecasting and Aggregate Planning
• Forecasting is making projections about future needs and conditions
• Aggregate Planning transforms forecasts into plans of activity to satisfy the projected demand
  
4. Enabling Technologies
• Electronic Data Interchange (EDI) allows companies to place instantaneous paperless purchase orders with suppliers
• The Internet enables the different stages of the supply chain to communicate efficiently
• Enterprise Resource Planning (ERP) systems provide transactional tracking from any part of a company to its supply chain
• Supply Chain Management (SCM) software (example: i2 Technologies) provides analytical decision support in addition to visibility of information

Obstacles to Achieving Strategic Fit

1. Increasing variety of products
• Products that were formerly quite generic are now custom-made for a specific customer
• Increase in product variety makes forecasting and meeting demand more difficult.
• Increased variety tends to raise uncertainty and results in increased cost and decreased responsiveness.
  
2. Decreasing Product Life Cycles
• Today, life-cycles of some products can be measured in months compared with the old standard of years
• Decreased life cycles increases uncertainty and reduces the time frame within which the supply chain can achieve it.
  
3. Increasingly demanding customers
• Today, customers are demanding faster fulfillment, better quality, and better performing products for the same price they paid years ago
• Growth in customer expectations means that the supply chain must provide more just to maintain its business
  
4. Fragmentation of Supply Chain Ownership
• Nowadays most firms are not vertically integrated
• Companies take advantage of supplier and customer competencies
• As the supply chain gets broken into many owners, it becomes more difficult to coordinate
  
5. Globalization
• Supply chains are becoming more global
• Globalization adds stress to the supply chain as coordination among widely dispersed facilities becomes difficult.  Global competition renders supply chain performance a very critical factor
  
6. Difficulty in Executing New Strategies
• Many highly talented employees at all levels of the organization are necessary to make a supply chain strategy successful