Supply Chain Management

1. Supply Chain Management Lecture 5

2. Outline • Today • Chapter 3 • Start with Chapter 4 • Thursday • Finish Chapter 4 • Introduction to Excel Solver • Homework 1 • Due Thursday January 28 before class

3. Facilities Inventory Transportation Information Sourcing Pricing Logistical drivers Cross functional drivers From Strategy to Decisions Corporate Strategy Competitive Strategy Supply Chain Strategy Responsiveness Efficiency

4. Facility decisions Production facility Flexible versus dedicated Product focus (fabrication and assembly) versus functional focus (fabrication or assembly) Storage facility Cross-docking versus storage Metrics Capacity Utilization Flow time (theoretical and actual) Flow time efficiency Product variety Average batch size Service level Facilities Inventory Transportation Information Sourcing Pricing Facilities Corporate Strategy Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Overall tradeoff: Cost of the number, location and type versus level of responsiveness How could a car manufacturer increase responsiveness through its facilities?

5. Toyota • Worldwide operations Source: http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html

6. Honda • East Liberty, OH • Using Honda's flexible manufacturing, this plant produces cars and light trucks on the same assembly line • Marysville, OH • One of the most integrated and flexible auto plants in North America, it houses stamping, welding, paint, plastic injection molding and assembly under one roof.

7. Inventory decisions Cycle inventory Safety inventory Seasonal inventory Level of product availability Metrics Average inventory Units that have been in stock for more than a specified period of time Fill rate (fraction of orders that were met on time from inventory) Fraction of time out of stock Facilities Inventory Transportation Information Sourcing Pricing Inventory Corporate Strategy Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Overall tradeoff: Level of inventory versus level of product availability How could a grocery retailer use inventory to increase responsiveness?

8. Transportation decisions Mode of transportation Air, package carriers, truck, rail, sea, pipeline, intermodal, … Metrics Inbound/outbound cost Inbound/outbound cost per shipment Shipment sizes Fraction transported by mode Facilities Inventory Transportation Information Sourcing Pricing Transportation Corporate Strategy Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Overall tradeoff: Cost and speed of transportation

9. Transportation Facts 7.7% 0.1% 0.3% 66.0% 60.0% 32.7% 3.8% 12.4% 28.3% 8.6% 15.3% 16.5% 2.8% 10.8% 17.0% 11.0% 1.4% 5.1% Freight shipments in America 2002

10. Transportation Facts

11. Transportation decisions Design of transportation network Route and network selection Mode of transportation Air, package carriers, truck, rail, sea, pipeline, intermodal, … Metrics Inbound/outbound cost Inbound/outbound cost per shipment Shipment sizes Fraction transported by mode Facilities Inventory Transportation Information Sourcing Pricing Transportation Corporate Strategy Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Overall tradeoff: Cost and speed of transportation How does Dell use transportation to improve responsiveness?

12. Amazon.com • Fulfillment and warehousing locations • Arizona, USA: Phoenix, Goodyear • Delaware, USA: New Castle • Indiana, USA: Whitestown, Munster • Kansas, USA: Coffeyville • Kentucky, USA: Campbellsville, Hebron (near CVG), Lexington, and Louisville • Nevada, USA: Fernley and Red Rock (near 4SD) • Pennsylvania, USA: Carlisle, Chambersburg, Hazleton, and Lewisberry • Texas, USA: Dallas/Fort Worth • Ontario, Canada: Mississauga (a Canada Post facility)

13. IKEA

14. Information decisions Push vs. Pull Coordination and information sharing Forecasting and aggregate planning Enabling technologies Metrics Forecast horizon Forecast errors Ratio of demand variability and order variability Facilities Inventory Transportation Information Sourcing Pricing Information Corporate Strategy Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Accurate information helps both efficiency and responsiveness How does Wal-Mart use information to improve its supply chain operations?

15. Information

16. Sourcing decisions In-House or outsource Supplier selection Metrics Days payable outstanding Purchase price statistics Purchase quantities Fraction on-time deliveries Supply quality and lead-time Facilities Inventory Transportation Information Sourcing Pricing Sourcing Corporate Strategy Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Overall tradeoff: Increased supply chain profit versus additional risk How does Dell use sourcing to improve efficiency?

17. Pricing decisions Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu price Metrics Profit margin Average sale price Average order size Incremental fixed cost per order Incremental variable cost per unit Facilities Inventory Transportation Information Sourcing Pricing Pricing Corporate Strategy Competitive Strategy Supply Chain Strategy Efficiency Responsiveness Overall tradeoff: Increase company profits How can Peapod use pricing of its delivery services to improve profitability?

18. Facilities Inventory Transportation Information Sourcing Pricing Designing a Supply Chain Network In designing a supply chain, we need to consider how all supply chain drivers should be used together to support the competitive strategy of a company and maximize supply chain profits Corporate Strategy Competitive Strategy Supply Chain Strategy Responsiveness Efficiency

19. Facilities Inventory Transportation Information Sourcing Pricing Logistical drivers Cross functional drivers From Strategy to Decisions Corporate Strategy Competitive Strategy Supply Chain Strategy Responsiveness Efficiency

20. The Role of Distribution in the Supply Chain • What is distribution? • Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain • Distribution-related cost • Make up about 10.5% of the US economy • Make up about 20% of the cost of manufacturing Distribution can achieve supply chain objectives from low cost to high responsiveness

23. The Role of Distribution in the Supply Chain What differences in the retail environment may justify the fact that the fast-moving consumer goods supply chain in India has far more distributors than in the United States?

24. Distribution Complexity in India • Dispersed population • 30+ cities have populations of more than 1 million, but nearly 70% still live in rural areas • Retail density • More than 12 million retail outlets • Mom-and-pop stores account for more than 96% of the total market for many markets, organized retail represents only 4% • Infrastructure complexity • Very few full-service distribution companies operate in India • Some consumer multinational companies work with more than 1,000 distributors, which deliver its products to more than 1 million outlets across India

25. Distribution Complexity Baddi Rural village

27. Distribution Complexity in India • India is becoming one of the world’s largest markets for consumer goods • Rapidly rising household incomes • One quarter of India’s population is between 20 and 35, a high spending segment in many markets • Overall retail market is more than $230 billion (2005) and expected to grow to $308 billion (2010) Wal-Mart is teaming up with Bharti to establish wholesale and supply chain operations in India

28. The Role of Distribution in the Supply Chain • What is distribution? • Distribution refers to the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain • Distribution-related cost • Make up about 10.5% of the US economy • Make up about 20% of the cost of manufacturing Distribution can achieve supply chain objectives from low cost to high responsiveness

29. Response Time and Number of Facilities Number of Facilities Response Time

30. Facility Cost and Number of Facilities Facility Costs Number of Facilities

31. Inventory Cost and Number of Facilities Inventory Costs Number of Facilities

32. Transportation Cost and Number of Facilities Transportation Costs Number of Facilities

33. Logistics Costs Logistics Costs Facility Costs Transportation Costs Number of Facilities Total Logistics Costs Inventory Costs

34. Logistics Costs, Response Time and Number of Facilities (Fig 4.5) Response Time Total Logistics Cost Number of Facilities

35. Design Options For a Distribution Network • Two key decisions when designing a distribution network • Will the product be delivered to the customer location or picked up from a preordained site? • Will product flow through an intermediary?

36. Design Options For a Distribution Network • Manufacturer Storage with Direct Shipping • Manufacturer Storage with Direct Shipping and In-Transit Merge • Distributor Storage with Carrier Delivery • Distributor Storage with Last Mile Delivery • Manufacturer or Distributor Storage with Consumer Pickup • Retail Storage with Consumer Pickup

37. Products are shipped directly to the consumer from the manufacturer Retailer is an information collector: Passes orders to the manufacturers It does not hold product inventory Inventory is centralized at manufacturer Drop shipping offers the manufacturer the opportunity to postpone customization Effective for high value, large variety, low demand products High transportation cost Example: eBags Manufacturers Retailer Consumers Manufacturer Storage with Direct Shipping (Drop Shipping)

38. Shipments from multiple manufactures are merged before making a single delivery to the consumer Shipments to Mergers are larger so economies of scale is achieved Mergers increase facility costs Response time may go up Example: Furniture retailers merge couches and coffee tables produced by different manufacturers Dell merges a Dell PC with a Sony flat screen Manufacturers Retailer Mergers Consumers Manufacturer Storage with Direct Shipping and In-Transit Merge

39. Inventory is held at a warehouse which ships to customer by carriers With respect to direct shipping Inventory aggregation is less Higher inventory costs Facility costs are higher Less information to track Warehouses are physically closer to consumers which leads to Faster response time Lower transportation cost Not effective for slow moving items Example: Amazon Manufacturers Distributor Warehouse Distributor Warehouse Consumers Distributor Storage with Carrier Delivery

40. Warehouse delivers to customers instead of carrier Warehouses are located closer to consumers Transportation costs go up because warehouses are not as effective as package carriers in aggregating loads to have economies of scale Warehouse may need to own a trucking fleet so the physical infrastructure costs are higher. Products must be flowing fast to justify the infrastructure Processing cost are high Example: Milk delivery, Grocery delivery (Peapod, Albertsons), Denver Mattress Manufacturers Distributor Warehouse Distributor Warehouse Consumers Distributor Storage with Last Mile Delivery

41. Customers come to pick up sites (warehouse, retailer) to get the products If consumers are willing to pick up the products, let them do so. Otherwise, they would be charged for the delivery costs Order tracking is crucial. Consumers must be alerted when their order is ready for pick up. Once a consumer arrives at the pick up site, the products must be quickly located. Significant amount of information is required Increased handling cost Example: 7dream.com Manufacturers Distributor Warehouse Distributor Warehouse Consumers Manufacturer or Distributor Storage With Customer Pickup

42. Customers pick up product from retailers Low transportation cost High facility cost Relative easy returnability Increased inventory cost No order tracking necessary If the product is available at the retailer, the consumer buys. Otherwise goes to another retailer Effective for fast moving items Example: Retail stores such as Wal-Mart and JCPenney Manufacturers Retailer Retailer Retailer Consumers Retail Storage with Customer Pickup

43. Comparing Distribution Networks 1 = strongest performance 6 = weakest performance

44. Comparing Distribution Networks Green = very suitable Red = very unsuitable

45. From brick-and-mortar to click-and-mortar What has been the impact of e-business on supply chain cost? What has been the impact of e-business on customer service? In the future, do you see the number of distributors decreasing, increasing, or staying about the same? Is e-business likely to be more beneficial in the early part or the mature part of a product’s life cycle? Why should an e-business such as Amazon.com build more warehouses as its sales volume grows?