Supply Chain Strategy and Outsourcing

1. Supply Chain Strategy and Outsourcing • Students should be able to: • Identify the important factors in designing a competitive supply • chain. • Explain the motivating reasons for outsourcing services or • products and their processes. • Discuss the factors that enabled firms to create virtual supply • chains. • Describe the key considerations businesses should make when • implementing successful outsourcing decisions.

2. Key Concepts in Operations Management

3. E X T E R N A L C U S T O M E R S E X T E R N A L S U P P L I E R S External Value-Chain Linkages First-Tier Supplier Service/Product Provider Support Processes Support Processes Business- to- Business (B2B) Customer Relationship Process New Service/ Product Development Process Business-to-Customer (B2C) Customer Relationship Process New Service/ Product Development Process Supplier Relationship Process Order -Fulfillment Process Supplier RelationshipProcess Order -Fulfillment Process

4. ROIC Drivers: • Pricing, Product Mix, and • Volume • Sales Force Productivity • Forecasting • Material Costs • Transformation Costs • R&D & I/S Costs • Capacity Mgt • Out-of-box Audit • Logistics • Quality/Cust Service • Accounts Receivable • Terms and Timing • Inventory Turns and • Delivery • Backlog/Lead Times • Excess & Obsolete Risks • Accounts Payable Terms • and Timing • Facilities Mgt • IBU Risk/Currency Risk “Dell’s Return-on-Invested-Capital Calculation” Sales Operating Income Cost of Goods Sold NOPAT* Income Taxes Operating Expense ROIC Accounts Receivable Working Capital Invested Capital Inventory Accounts Payable Fixed Assets Accrued Liabilities *Net operating profit after taxes.

5. $2 million ($10 million)/(52 weeks) Weeks of supply = = 10.4 weeks $10 million $2 million Inventory turns = = 5 turns/year Inventory Measures Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year Example 9.1

6. Financial Measures • Return on Assets • Working Capital • Cost of Goods Sold • Total Revenue • Cash Flow

7. Suppliers Manufacturer Channels Customers Suppliers Manufacturer Customers Suppliers Manufacturer Customers Consider Also: A Completely New and Faster Business Model? Dell Visibility - Velocity - Variability

8. Supply Chain Strategies • Efficient supply chains focus on the efficient flows of services and materials, keeping inventories to a minimum. • Work best where demand is highly predictable. • Responsive supply chains are designed to react quickly. • Work best when firms offer a great variety of services or products and demand predictability is low.

9. Efficient Supply Chains Environment Factors Responsive Supply Chains Design Factors Responsive Supply Chains Efficient Supply Chains Environments & Design Features

10. Exhibit 4 Delivery Performance and Profit Margin by Internet Retailer

11. Source: David A. Taylor, “A Master Plan for Software Selection,” Supply Chain Management Review. January/February 2004

12. Dell Assembler Speaker Connector Cable Cooler Keyboard Die Casting High Value/Complex Low Value/Simple

13. Outsourcing/Offshoring • What are the drivers for outsourcing or offshoring? • What are the potential pitfalls for outsourcing or offshoring?

14. H-P Outsourcing • Here a Part, There a Part … • New H-P server’s path to market: • Idea hatched in Singapore • Concept approved in Houston • Concept design done in Singapore • Engineering design in Taiwan; initial manufacture • Final assembly in Singapore, Australia, China, and India

16. The Shaping of Modern Value Chains Ten Forces that Flattened the World • Berlin Wall and Windows Operating System • Web Browsers • Work Flow Software • Open Sourcing • Outsourcing

17. Outsourcing in India • Began dismantling tariff and export controls in 1991 • Economy expected to grow at 7% • Focus on business services • Technology sector is strong • Low wages – high skills • 100 million English speakers

18. The Shaping of Modern Value Chains Ten Forces that Flattened the World 6. Offshoring 7. Supply Chaining 8. In-Sourcing 9. In-Forming 10. The Steroids

19. Comments on China’s Role in Global Value Chains Economic Issues • “Glorious to be wealthy, and some people can be more wealthy than others.” • Capitalism Chinese style. • Expect 7 to 8 percent growth for next 10 years. • Constraints: Much savings but no investment; no support for small innovative businesses; 50 percent of bank loans go unpaid. • Singapore has the best Asian economy – has joint ventures in China (Singapore Industrial Park in Suzhou) • Problems for sustainable growth: pollution control; infrastructure development; inconsistent electric power. • Too much manufacturing – not enough entrepreneurial service firms.

20. Comments on China’s Role in Global Value Chains Management Issues • Cost, Quality, and dimensions of Customer Service are key competitive priorities. • System is more important than the people because if leadership changes everything could crumble. • Must move from an “experience-driven” management style to a “scientific-driven” management style. • American experience will not always work in China – must incorporate Chinese culture and enterprises • Lower levels of staff are trained in modern practices, but their bosses are not. • Need to build a good foundation before introducing elaborate systems: quality improvement; technology from abroad.

21. Triple Convergence • Merging of the 10 flattners enabled by a global, Web-enabled playing field. • Development of business practices to promote horizontal collaboration. • Three billion people entering the playing field. (China, India, Russia, Eastern Europe, Latin America, and Central Asia).