Supply Chain Management_08

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Supply Chain Management

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What is a Supply Chain?

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:

Supply Chain Supplier Manufacturer Distributor Retailer Customers

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A Supply Chain Example… Coke JNJ Kellog P&G GA FL AL TX Kroger Tier 1 suppliers Super market chains State distributors V. Highlands Peachtree Ocean Drive Ft. Laud. Local stores End customer Publix

Supply Chain Management:

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?:

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:

Losing Sight of the Common Objective I'm glad that the hole is not on our side!

Supply Chain Story I:

Supply Chain Story I On tracing the journey of a part Source: The Resilient Enterprise

Supply Chain Story II:

Supply Chain Story II Philips factory in New Mexico Nokia Ericsson Source: The Resilient Enterprise On responding to a supply chain disruption

Supply Chain Story II:

Supply Chain Story II Philips factory in New Mexico Nokia Ericsson Source: The Resilient Enterprise On responding to a supply chain disruption

Supply Chain Story III:

Supply Chain Story III 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 On Internal communication and collaboration

Supply Chain Story IV:

Supply Chain Story IV On external communication and collaboration

Supply Chain Story V:

Supply Chain Story V US auto man. Suppliers 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** “The Big Three [US automakers] set annual cost-reduction targets [for the parts they purchase]. To realize those targets, they’ll do anything. [They’ve unleashed] a reign of terror, and it gets worse every year. You can’t trust anyone [in those companies]” -Director, interior systems supplier to Ford, GM, and Chrysler, October 1999* * And ** Source: Building Deep Supplier Relationships, HBR, December 2004 Arm’s Length Partnership On supplier management

Supply Chain Story VI:

Supply Chain Story VI Traditional Supply Chain Dell Supply Chain On April 20, 2001 Dell toppled Compaq as the world’s largest PC maker* Dell’s market share was 12.8% as opposed to Compaq’s market share 12.1% Compaq and HP could not get into a price war with Dell because Dell’s profit margin was 18% Compaq and HP’s profit margins were in single digits *Source:, April 24, 2001 ? On gaining competitive advantage

Supply Chain Story VII:

Supply Chain Story VII 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. On gaining competitive advantage

Supply Chain Performance Measures:

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

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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:

Inventory Turns Kmart 1998 1999 2000 2001 2002 Inventory $6.367B $6.536B $6.350B $5.796B $4.825B Tot.Revenue $33.674B $35.925B $37.028B $36.151B $30.762B COGS $26.319B $28.161B $29.732B $29.853B $26.258B Net Income $0.518B $0.364B ($0.268B) ($2.446B) ($3.219B) Wal-Mart 1998 1999 2000 2001 2002 Inventory $16.497B $17.076B $19.793B $21.644B $22.749B Tot.Revenue $117.958B $137.634B $165.013B $191.329B $217.799B COGS $93.438B $108.725B $129.664B $150.255B $171.562B Net Income $3.526B $4.430B $5.377B $6.295B $6.671B Source: Matching Supply with Demand: An Introduction to Operations Management, Cachon and Terwiesch Excerpts from financial statements of Kmart and Wal-Mart

Inventory Turns:

Inventory Turns Inventory Turns= 1998 1999 2000 2001 2002 Kmart 4.15 4.34 4.68 5.14 5.45 Wal-Mart 5.70 6.40 6.63 7.01 7.60 Inventory Turns for Kmart and Wal-Mart Inventory Turns is a common benchmark in retailing Inventory Turns≈10 for grocery retailers (Safeway, Kroger), ≈1.5 for jewelry (Tiffany), ≈ 4 department stores (JCPenny) COGS Inventory

Inventory Productivity:

Inventory Productivity What is the flow rate? COGS Little’s Law: L= λ W Inventory Flow Rate Flow Time = x 1998 1999 2000 2001 2002 Kmart 88 days 84 days 78 days 71 days 67 days Wal-Mart 64 days 57 days 55 days 52 days 48 days How long does it takes you to transform a dollar invested in inventory into sales (hopefully profitably) Flow Times for Kmart and Wal-Mart

Wal-Mart’s Phenomenal Success:

Wal-Mart’s Phenomenal Success 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:

Wal-Mart: Efficient Supply Chain Procurement Distribution Product Assortment Pricing

Efficient S. Chain: Procurement:

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:

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:

Efficient S. Chain: Distribution At the end of 2003: 84 Wal-Mart DCs DC’s functioned as the hubs in a hub-and-spoke network Distribution costs accounted for 2-3% of Wal-Mart’s 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:

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:

Pricing Strategy: EDLP 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? 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: Market Position:

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:

Supply Chain Design WHOLESALER AMAZON.COM CUSTOMER INFORMATION INFORMATION PRODUCT PRODUCT Traditional vertically disintegrated channel


Meet Cheap tricks * Start-up capital: $825,000 200,000 CD titles available for immediate shipment No inventory *Forbes, February 21, 2000, 116 Other Retailers:,,, … Other Wholesalers: Baker & Taylor, Ingram, etc.

Supply Chain Design:

Supply Chain Design WHOLESALER AMAZON.COM CUSTOMER INFORMATION INFORMATION PRODUCT PRODUCT Traditional vertically disintegrated channel Alliance Entertainment Inc. SPUN.COM CUSTOMER INFORMATION INFORMATION PRODUCT Drop-shipping channel

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Drop-Shipping in a Click World* Primary way company fulfills online orders Type of retailer Internet-only Multi-channel (on-line plus brick) From company facility that existed 13.9% 61.5% From company facility that was developed 30.6% 10.3% Drop-shipped 30.6% 5.1% Outsourced 8.3% 17.9% From facility operated by a partner 8.3% 2.6% Electronic fulfillment (software) 5.6% 0% Other 2.7% 2.6% *The state of eRetailing 2000. Supplement to “eRetailing World” March 2000.

Marketing expenditure of the Internet Retailer:

Marketing expenditure of the Internet Retailer Marketing budget as % of sales 40.5% 21.4% Brick-and-mortar Multi-channel Pure Internet 5% Customer acquisition Brand awareness Customer retention

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Manufacturer Customer Retailer Manufacturer Customer Retailer Distributor Amazon Varsity Books Amazon resellers Barnes & Noble Borders Small Bookstores Dover Supply Chain Alternatives Manufacturer Customer Retailer Manufacturer Customer Retailer Distributor Manufacturer Customer Supply chain cost Manufacturer’s margin Retailer’s margin Distributor’s margin Customer acquisition cost

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Outsourcing Supplier Question: When should the firm outsource activities? Outsourcing : moving some of the firms internal activities and decisions to outside providers Firm

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Outsourcing A firm may outsource some of its activities… … or the whole of it!

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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.

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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

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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 partner’s network.

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