Supply Chain Management

1. Supply Chain Management Lecture 3

2. Outline • Today • Some more supply chain examples • Start Chapter 2 • Thursday • Chapters 2 and 3

3. Maximizing supply chain surplus Manufacturer Distributor Retailer Customer $1 $5 $10 Distributor profit = 600*($5-$1) = $2,400 Supply chain profit = $1,800 + $2,400 = $4,200

4. Maximizing supply chain surplus Manufacturer Distributor Retailer Customer $1 $10 Supply chain profit = $5,000

5. Celestial Seasonings • The herbs were originally harvested by hand in the Rocky Mountains • Currently, herbs and leafs come from growers around the world • “We’ve been working to establish sustainable harvests and fair wages for more than 30 years” What are advantages of having one production facility? What are disadvantages of having one production facility? What advantages does selling tea over the Internet provide?

6. ProBuild • The nation’s largest supplier of building materials to national builders, local contractors and do-it-yourselfers • 550+ facilities nationwide • Lumber yards, millwork shops, distribution centers What are advantages of having multiple facilities? Why is inventory management so important?

7. ProBuild • Housing outlook • Unemployment at 10.2% • Foreclosures still rising • ProBuild • Sales declined over 20% in 2009 Why did ProBuild added hundreds of salespeople in 2009?

8. Mortgage • “A mortgage is the transfer of an interest in property to a lender as a security for a debt, usually a loan of money” Source: http://www.wikipedia.org Is there lead time the mortgage supply chain? What went wrong in the mortgage supply chain? Is the mortgage supply chain easier to automate than a manufacturing supply chain?

9. Interceptor Body Armor • The interceptor body armor system consists of a vest made of Kevlar that has a front and back insert for a ceramic protective plate • March, 2003 Start of the invasion of Iraq • April, 2003 Congress approves to buy 300,000 interceptor body armor vests • October, 2003 Nearly one-quarter of the 130,000 U.S. troops in Iraq still had not been an interceptor body armor vest • 8 months after combat operations were declared over, all personnel in Iraq had an interceptor body armor vest "Body Armor Saves Lives in Iraq; Pentagon Criticized for Undersupply of Protective Vests,"Washington Post . 4 Dec, 2003 What went wrong?

10. Interceptor Body Armor Demand77,052 Demand210,783 Supply23,900 Demand8,593

11. Interceptor Body Armor Demand478,541 Demand108,808 Supply40,495 Demand9,586

12. Interceptor Body Armor • Production • October, 2002 Production capacity 3,000 plates per month • October, 2003 Production capacity 25,000 plates per month Where should the production facilities be located?

13. Crocs • Crocs shoes are made from Croslite • Extremely light • Does not skid • Odor resistant • Easy to wash • The founders wanted to name the shoes something that captured the amphibious nature • “Alligator” had already been taken

14. Leather Jibbitz Glue etc Style & size molds Grommets General Map of Croc’s Basic supply, production and distribution processes Accessories Various Suppliers Sports protectors Mold producers Dye Labeled, packaged Croc Package & Label Mold Compound Assemble Chem Pellets Color Pellets Size & Style blanks Complete Croc Warehouse and distribute Dow Chem & others Small retailer In-season orders Large Retailer Distribution Production Orders (plus %) Pre-booked orders

15. Small retailer Labeled, packaged Croc Style & size molds Color Pellets Size & Style blanks Complete Croc Bosnia China Mexico* Brazil* Bosnia China Mexico* Brazil* Large Retailer South America Large Retailer Asia Large Retailer Europe *Owned by Crocs vs. outsourced Croc’s Global Production strategy [3] Mold Canada* Bosnia China Mexico* Brazil* Compound Italy Florida* China Mexico* Package & Label Denver Warehouse / distribute Denver Assemble Denver 3rd party distributor [2] [1] [6] Bosnia China Mexico* Brazil* [4] [5] [1] Maintain Florida plant for “Made in USA label[2] Take advantage of tariffs, e.g., Canada to Isreal[3] Maintain higher service component of warehousing and labeling for small retailers[4] Minimize geographic transport by producing in region, including warehousing[5] Move style and size molds between facilities to maximize production[6] Use China for large volume, long-term orders from pre-season orders

16. Crocs • Revolutionized the shoe industry supply chain model • First shoe sold in 2003 (Revenue 1.2 million) • Flip flop sandal introduced in 2006 (Revenue 355 million) • Diversify in other products 2008 (Revenue 860 million) What are advantages of having multiple production facilities? What are advantages of short lead times? What are advantages of excess capacity? How does Crocs plan for demand?

17. Netflix • World’s largest online movie rental service Where is Netflix’s inventory?

18. Netflix What are the differences between Netflix and Blockbuster

19. Netflix • Netflix versus Blockbuster store 8,000+ Stores 100s per location 89,000 1,000-8,000per location 16 DCs 3.3 million 381 13,500 Who are Netflix’s competitors? Where should the distribution centers be located? How does Netflix plan for demand?

20. Study of Supply Chain Management • Successful supply chain management requires decisions on the flow of information, product, and funds that fall into three decision phases • Supply chain strategy or design • Supply chain planning • Supply chain operation

21. Supply chain network design (How many plants? Location and capacities of plants and warehouses?) • Supply chain strategies(Sell direct or through • retailers? Outsource or in-house? Focus on cost or • customer service?) • Product mix at each plant years • Workforce & Production planning • Inventory policies (safety stock level) • Which locations supply which markets • Transportation strategies 3 mo.- 1year • Production scheduling • Decisions regarding individual orders • Place replenishment orders Operational daily Decision Phases in a Supply Chain TIME FRAME TYPE TYPICAL DECISIONS Strategic Tactical

22. Achieving Strategic Fit What is a strategy in general?

23. Strategy Corporate Strategy Competitive Strategy

24. What is Competitive Strategy? • Competitive strategy • Defines, relative to competitors, a company’s set of customer needs that it seeks to satisfy through its products and services • Wal-Mart • Everyday low prices • Coors • The coldest tasting beer in the world, brewed with Rocky Mountain spring water • Dell • Custom-made computer systems at a reasonable cost Competitive strategy is defined based on how the customer prioritizes product cost, delivery time, variety, and quality

25. Competitive Strategy • To execute a company’s competitive strategy, all functions that play a role must each develop its own strategy Finance, Accounting, Information Technology NewProductDevelopment Marketingand Sales Operations Distribution Service

26. Strategy Corporate Strategy Competitive Strategy Supply Chain Strategy

27. What is Strategic Fit? • Strategic fit • For any company to be successful, its supply chain strategy and competitive strategy must fit together • Wal-Mart • Everyday low prices • Owns its infrastructure and distribution network • Coors • The coldest tasting beer in the world, brewed with Rocky Mountain spring water • Refrigerated transport, main facility near Rocky Mountains • Dell • Custom-made computer systems at a reasonable cost • Online ordering, no middle-man

28. How is Strategic Fit Achieved? • Understanding the customer and supply chain uncertainty • Understanding the supply chain capabilities • Achieving strategic fit

29. 1. Understanding the Customer and Supply Chain Uncertainty • Understanding customer uncertainty • Demand varies along certain attributes • Quantity in each lot, response time, variety of products needed, convenience, price, innovation, etc • Implied demand uncertainty • Demand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand

30. 1. Understanding the Customer and Supply Chain Uncertainty • Understanding supply uncertainty • Supply uncertainty is strongly affected by the life-cycle position of the product. New products being introduced have higher supply uncertainty than mature products

31. 1. Understanding the Customer and Supply Chain Uncertainty Demand Uncertainty Demand Uncertainty Low (Functional Product) Low (Functional Product) High (Innovative Product) Low (Functional Product) Low (Functional Product) High (Innovative Product) Basic Appeals, Grocery, Food, Most Commodities Efficiency, Information Integration, Auto-Replenishment, VMI (Efficient SC) Fashion Appeals, Computers, Pop Music, Toys Build-to-Order, Flexible Mfg, Accurate Response, Postponement (Flexible SC) Low (Stable Process) Low (Stable Process) Supply Uncertainty Some Power, Some Food Produce, Precious Metals M-commerce, Telecom, High-end Servers, Semiconductor Buffer Inventory, Shared Resources, Multi-Sourcing, Info Sharing (Risk-Hedging SC) Supply Network, Postponement, Design Collaboration (Agile SC) High (Evolving Process) High (Evolving Process) Source: Hau Lee, “Aligning supply chain strategies with product uncertainties”, California Management Review, 44(3), 2002

32. Highly efficient Somewhat responsive Highly responsive Somewhat efficient Seven-Eleven Japan Most automotiveproduction Hanes apparel Integrated steel mills 2. Understanding the Supply Chain Capabilities • Supply chain capabilities • Supply chain responsiveness • Respond to wide ranges of quantity demanded, short lead times, large variety, innovative products, high service level, etc • Supply chain efficiency/cost

33. 2. Understanding the Supply Chain Capabilities Responsiveness High Low Cost High Low