Download Supply Chain Drivers and Obstacles

Supply Chain Management
Lecture 23
Semester Outline
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Thursday April 8
Tuesday April 13
Thursday April 15
Tuesday April 20
Thursday April 22
Tuesday April 27
Thursday April 29
Chap 14
Paul Dodge guest lecture
Chap 14, 15
Chap 15
Simulation Game briefing
Review, buffer
Simulation Game
Outline
• Today
– Start with Chapter 14
• Sections 1, 2, 3, 4, 6, 7, 8, 9
– Section 6 buyback and revenue sharing contracts only
• Homework 6 online tomorrow
– Due Thursday April 15 before class
• Next week
– Guest speaker: Paul Dodge
• SVP Supply Chain, ProBuild
Announcement
• Summer Internship at OptTek Systems, Boulder, CO
– Date
• Seven consecutive weeks during summer
– Compensation
• $900/week ($6,300 Total)
– Description
• This summer internship will engage the student in
research and development of the agent-based simulation
model within OptForce. The student will gain practical
real-world experience by analyzing actual customer data
using OptForce.
For more information, ask Career Services
Summary
• Single period inventory model
– Cost of over- and understocking have a direct impact on both the
optimal cycle service level and profitability
– Optimal CSL* = (p – c)/(p – s) = Cu/(Cu + Co)
– Optimal order quantity O* = F-1(CSL, , )
• How to improve profitability?
– Increase salvage value
– Decrease margin lost from stockout
– Decrease demand uncertainty
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Improved forecast
Quicker reponse
Postponement
Tailored sourcing
Drivers of Supply Chain
Performance
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Facilities
Inventory
Transportation
Sourcing
Pricing
Information
(Chapters 4, 5)
(Chapters 10, 11, 12)
(Chapters 4, 13)
(Chapter 14)
(Chapter 15)
(Chapters 7, 8, 9, 16)
Comparing Different Suppliers
• Green Thumb, uses 1000 bearings per week for their
production of lawn mowers and snow blowers. Green
Thumb is considering one of two suppliers
– Supplier A charges $1.00 per bearing
– Supplier B charges $0.97 per bearing
Which supplier should Green Thumb choose?
Comparing Different Suppliers
• Green Thumb, uses 1000 bearings per week for their
production of lawn mowers and snow blowers. Green
Thumb uses a holding cost of 25% and is considering
one of two suppliers
– Supplier A charges $1.00 per bearing and requires an order
size of 2000
– Supplier B charges $0.97 per bearing and requires an order
size of 8000
Which supplier should Green Thumb choose?
Comparing Different Suppliers
• Green Thumb, uses on average 1000 bearings per
week, with a standard deviation of 300, for their
production of lawn mowers and snow blowers. It
monitors inventory continuously and aims a cycle
service level of 95%. Green Thumb uses a holding cost
of 25% and is considering one of two suppliers
– Supplier A charges $1.00 per bearing and requires an order size
of 2000. The supplier lead time is 2 weeks
– Supplier B charges $0.97 per bearing and requires an order size
of 8000. The supplier lead time is 6 weeks
Which supplier should Green Thumb choose?
Comparing Different Suppliers
• Green Thumb, uses on average 1000 bearings per
week, with a standard deviation of 300, for their
production of lawn mowers and snow blowers. It
monitors inventory continuously and aims a cycle service
level of 95%. Green Thumb uses a holding cost of 25%
and is considering one of two suppliers
– Supplier A charges $1.00 per bearing and requires an order size
of 2000. The supplier lead time is 2 weeks, with a standard
deviation of 1 week
– Supplier B charges $0.97 per bearing and requires an order size
of 8000. The supplier lead time is 6 weeks, with a standard
deviation of 4 weeks
Which supplier should Green Thumb choose?
Comparing Different Suppliers
• Green Thumb, uses on average 1000 bearings per
week, with a standard deviation of 300, for their
production of lawn mowers and snow blowers. It
monitors inventory continuously and aims a cycle service
level of 95%. Green Thumb uses a holding cost of 25%
and is considering one of two suppliers
– Supplier A charges $1.00 per bearing and requires an order size
of 2000. The supplier lead time is 2 weeks, with a standard
deviation of 1 week. Quality is poor
– Supplier B charges $0.97 per bearing and requires an order size
of 8000. The supplier lead time is 2 weeks, with a standard
deviation of 4 weeks. Quality is good
Which supplier should Green Thumb choose?
Sourcing Decisions in a Supply
Chain
According to a KPMG survey, 77% regarded
cost to be as the “most important” or “second
most important” factor in all of their
outsourcing decisions
The Role of Sourcing in a Supply
Chain
• Purchasing
– Also called procurement, is the process by which companies
acquire raw materials, components, products, services, or other
resources from suppliers to execute their operations
• Sourcing
– Is the entire set of business processes required to purchase
goods (raw materials, components, products) and services
• Outsourcing
– Results in the supply chain function being performed by a third
party
For any supply chain, the most significant decision is
whether to outsource the function or perform it in-house
Outsourcing versus off-shoring
• What is the difference?
A firm off-shores a supply chain function if it
maintains ownership but moves the
production facility offshore
A firm outsources if the firm hires an outside
firm to perform an operation rather than
executing the operation within the firm
Backsourcing and nearshoring
• Backsourcing
– Is the return of business activity to the original firm
• Dell, Apple, Powergen (a British company) have backsourced from
Indian call centers, claiming that their costs had become too high
• Nearshoring (near source outsourcing)
– Is choosing an outsource provider near the home country
• US firms are interested in nearshoring to Mexico because of its
somewhat low cost labor and geographic nearness to the US
Outsourcing to China
Outsourcing to China (Walmart)
• About 85% of Walmart’s merchandise is made abroad
– A whopping 10%-13% of everything China sends to the US ends
up on Walmart’s shelves
• Over $15 billion worth of goods per year
• Walmart has almost 600 people in China to make purchases
– The price of portable DVD players dropped in half when Walmart
found a Chinese factory to built in giant quantities
• Walmart’s success has forced other retailers and manufacturers to
reevaluate their supply chains
– Walmart has led the way to product safety through its
“responsible sourcing program”
• In 2009, Walmart required “an identifiable trail” from raw material to
suppliers
Outsourcing in Practice
India and Philippines account for 50%
of the world’s business process
outsourcing (BPO) market
BPO is a form of outsourcing that
involves the contracting of the
operations and responsibilities of a
specific business functions to a
third-party service provider
Source: The A.T. Kearney Global Outsouring Index, 2009
Outsourcing in Practice
Source: The A.T. Kearney Global Outsouring Index, 2009
Outsourcing in Practice
• Trends in outsourcing
– North Africa and Middle
East are rising on the
global sourcing index
– North America accounts for
70% of offshore
outsourcing spending, but
European countries are
catching up as their
spending has risen faster
– A move toward more
outsourcing providers
– Experienced labor is key to
success
Source: The A.T. Kearney Global Outsouring Index, 2009
In-House or Outsource
• The decision to outsource is based on the
growth in supply chain surplus provided by the
third party and the increase in risk by using a
third party
How do third parties increase the
supply chain surplus?
• Lower cost and higher quality
– Specialized third party is further along the learning
curve for some supply chain activity
• Capacity aggregation
– Increase SC surplus by aggregating demand across
multiple firms and gaining economies of scale
Intel’s family of mobile PC processors
gives consumers more choice by
enabling PC makers to design
notebooks of every shape and size
How do third parties increase the
supply chain surplus?
• Transportation aggregation
– Increases supply chain surplus by aggregating
transportation across a variety of shippers
Transportation and Sourcing
What factors lead Wal-Mart to own its trucks
although many retailers outsource their
transportation?
How do third parties increase the
supply chain surplus?
• Warehousing aggregation
– Increases SC surplus by aggregating warehousing
needs over several customers and lowering facility
cost
• Receivables aggregation
– Increases SC surplus by aggregating receivables
reducing collection cost (especially when retailing is
fragmented)
Safexpress provides an unrivalled
range of logistics and supply chain
solutions including door to door
distribution and single source invoicing
How do third parties increase the
supply chain surplus?
• Procurement aggregation
– Increases SC surplus by aggregating procurement for
many small players to facilitate economies of scale
Offering members preferred pricing and
volume-based rebates on truck
equipment and services through a
community-driven purchasing system
How do third parties increase the
supply chain surplus?
• Information aggregation
– Increases SC surplus by aggregating information and
reducing search cost for the (online) customer
Provides the North American Trucking
Industry with the most comprehensive
freight matching service
How do third parties increase the
supply chain surplus?
• A third party may be able to provide a sustainable growth
of the surplus by aggregating capacity, inventory,
inbound or outbound transportation, warehousing,
procurement, information, receivables, or
relationships to a level that the firm cannot on its own
• A growth in surplus may also occur if the third party has
lower costs or higher quality because of specialization
or learning
How do third parties increase the
supply chain surplus?
• Three important factors that affect the increase in surplus
– Scale
– Uncertainty
– Specificity
Firm scale
Demand
uncertainty
Low
High
Low
High
Specifity of assets involved
Low
High
High growth in surplus
Low/medium growth in surplus
Low growth in surplus
No growth in surplus
Low/medium growth in surplus Low growth in surplus
High growth in surplus
Low/medium growth in surplus
A firm gains the most from outsourcing if its needs
are small, highly uncertain, and shared by others
How do third parties increase risk?
• Less control over the function being outsourced
– Reduced customer/supplier contact
– Loss of internal capability and increase in third party’s power
• Increases complexity in coordination, and thus increases
coordination cost
– It is easy to underestimate the effort to coordination
• Leakage of sensitive information
– In case intellectual property needs to be shared with third
parties, there is the danger of leakage
• Ineffective contracts
What are ways to mitigate these risks?
Sourcing Process
• Once a decision to outsource has been made,
the sourcing process includes
Supplier
scoring
and
assessment
Supplier
selection
and
contract
negotiation
Design
collaboration
Procurement
Sourcing
planning
and
analysis
Sourcing Process
• Supplier scoring and assessment
Supplier
scoring
and
assessment
– Process used to rate suppliers
• Supplier selection
Supplier
selection
and
contract
negotiation
– Choose the appropriate supplier(s)
• Design collaboration
– Work together with supplier when designing components for the
final product
Design
collaboration
• Procurement
– Process placing orders and receiving orders from supplier(s)
Procurement
• Sourcing planning and analysis
– Analyze spending across various suppliers, identify opportunities
for decreasing cost
Sourcing
planning
and
analysis
Sourcing Process
Supplier
scoring
and
assessment
Supplier
selection
and
contract
negotiation
Design
collaboration
Procurement
Sourcing
planning
and
analysis
Supplier scoring and assessment
• Common fundamental mistake when choosing a
supplier
– Only focus on quoted price
Supplier performance should be compared on
the basis of the supplier’s impact on total cost
Factors besides purchase price
that influence total cost
• Replenishment lead times
– Does it pay to select a more expensive supplier with a
shorter lead time?
– If lead time grows, safety inventory grows proportionally to the
square root of the replenishment lead time
• On-time performance
– Is a more reliable supplier worth the extra pennies?
– If variability of lead time grows, the required safety inventory at
the firm grows
Factors besides purchase price
that influence total cost
• Supply flexibility
– The less flexible a supplier is, the more lead-time variability it will
display as order quantities change
• Delivery frequency/lot size
– Delivery frequency affects the transportation cost, lot size affects
the cycle inventory holding cost
• Supply quality
– Quality affects unit price and lead time as follow-up orders may
need to be fulfilled to replace defective products
• Inbound transportation cost
– Sourcing a product overseas may have lower product cost, but
generally incurs a higher inbound transportation cost
Factors besides purchase price
that influence total cost
• Pricing terms
– For example, quantity discounts (and the impact it has on
cycle inventory)
• Information coordination capability
– Good coordination results in better planning and ultimately lower
production, safety inventory, and transportation cost
• Design collaboration capability
– Can help reduce all cost, improve quality, and decrease timeto-market
• Exchange rates, taxes, and duties
– Important for global supply chains as it affects the unit price
• Supplier viability
– The likelihood that the supplier will be around to fulfill the
promises it makes (uncertainty increases safety inventory)
Factors besides purchase price
that influence total cost
Purchase
price of
component
Replenishment lead time
On-time performance
Supply flexibility
Delivery frequency
Supply quality
Inbound transportation cost
Pricing terms
Information coordination
Design collaboration
Exchange rates and taxes
Supplier viability
Cycle
inventory
X
X
Safety
inventory
X
X
X
X
X
Product
Transporta- introduction
tion cost
time
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Sourcing Process
Supplier
scoring
and
assessment
Supplier
selection
and
contract
negotiation
Design
collaboration
Procurement
Sourcing
planning
and
analysis
Sourcing Planning and Analysis
• A firm should periodically analyze its (1) procurement
spending and (2) supplier performance and use this
analysis as an input for future sourcing decisions
• Supplier performance analysis should be used to build a
portfolio of suppliers with complementary strengths
– Cheaper but lower performing suppliers should be used to
supply base demand
– Higher performing but more expensive suppliers should be used
to buffer against variation in demand and supply from the other
source
Sourcing Planning and Analysis
• A firm should periodically analyze its (1) procurement
spending and (2) supplier performance and use this
analysis as an input for future sourcing decisions
• Supplier performance analysis should be used to build a
portfolio of suppliers with complementary strengths
– Cheaper but lower performing suppliers should be used to
supply base demand
– Higher performing but more expensive suppliers should be used
to buffer against variation in demand and supply from the other
source