Supply Chain Management

Lecture 5
Outline

• Today
– Chapter 3
– Start with Chapter 4
• Thursday
– Finish Chapter 4
– Introduction to Excel Solver
• Homework 1
– Due Thursday January 28 before class
From Strategy to Decisions

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

Logistical drivers Cross functional drivers

 Corporate Strategy

Facilities
Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

• Facility decisions • Metrics

– Production facility – Capacity
• Flexible versus dedicated – Utilization
• Product focus (fabrication – Flow time (theoretical and
and assembly) versus actual)
functional focus (fabrication
or assembly) – Flow time efficiency
– Storage facility – Product variety
• Cross-docking versus storage – Average batch size
– Service level
Overall tradeoff: Cost of the number, location and type
versus level of responsiveness
How could a car manufacturer increase
responsiveness through its facilities?
Toyota

• Worldwide operations

Source: http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html
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.
 Corporate Strategy

Inventory
Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

• Inventory decisions • Metrics

– Cycle inventory – Average inventory
– Safety inventory – Units that have been in
– Seasonal inventory stock for more than a
– Level of product availability specified period of time
– Fill rate (fraction of orders
that were met on time from
inventory)
– Fraction of time out of stock

Overall tradeoff: Level of inventory versus level of

product availability
How could a grocery retailer use inventory to increase
responsiveness?
 Corporate Strategy

Transportation
Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

• Transportation decisions • Metrics

– Mode of transportation – Inbound/outbound cost
• Air, package carriers, truck, – Inbound/outbound cost per
rail, sea, pipeline, intermodal, shipment
…
– Shipment sizes
– Fraction transported by
mode

Overall tradeoff: Cost and speed of transportation

Transportation Facts

Freight Freight Freight

value tons ton-miles
Mode ($billions) (billions) (millions)
Air 7.7% 777 0.1% 10 0.3% 15
Truck 66.0% 6660 60.0% 9197 32.7% 1449
Rail 3.8% 388 12.4% 1895 28.3% 1254
Water 8.6% 867 15.3% 2345 16.5% 733
Pipeline 2.8% 285 10.8% 1656 17.0% 753
Mulitmodal 11.0% 1111 1.4% 213 5.1% 226

Freight shipments in America 2002

Transportation Facts
 Corporate Strategy

Transportation
Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

• Transportation decisions • Metrics

– Design of transportation – Inbound/outbound cost
network – Inbound/outbound cost per
• Route and network selection shipment
– Mode of transportation – Shipment sizes
• Air, package carriers, truck, – Fraction transported by
rail, sea, pipeline, intermodal, mode
…

Overall tradeoff: Cost and speed of transportation

How does Dell use transportation to improve
responsiveness?
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)
IKEA
 Corporate Strategy

Information
Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

• Information decisions • Metrics

– Push vs. Pull – Forecast horizon
– Coordination and – Forecast errors
information sharing – Ratio of demand variability
– Forecasting and aggregate and order variability
planning
– Enabling technologies

Accurate information helps both efficiency and

responsiveness
How does Wal-Mart use information to improve its
supply chain operations?
Information
 Corporate Strategy

Sourcing
Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

• Sourcing decisions • Metrics

– In-House or outsource – Days payable outstanding
– Supplier selection – Purchase price statistics
– Purchase quantities
– Fraction on-time deliveries
– Supply quality and lead-time

Overall tradeoff: Increased supply chain profit

versus additional risk
How does Dell use sourcing to improve efficiency?
 Corporate Strategy

Pricing
Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

• Pricing decisions • Metrics

– Pricing and economies of – Profit margin
scale – Average sale price
– Everyday low pricing versus – Average order size
high-low pricing – Incremental fixed cost per
– Fixed price versus menu order
price – Incremental variable cost
per unit

Overall tradeoff: Increase company profits

How can Peapod use pricing of its delivery

services to improve profitability?
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

Facilities Inventory Transportation Information Sourcing Pricing

From Strategy to Decisions

Corporate Strategy

Competitive Strategy

Supply Chain Strategy

Responsiveness Efficiency

Facilities Inventory Transportation Information Sourcing Pricing

Logistical drivers Cross functional drivers

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
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?
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
Distribution Complexity

Baddi

Rural village
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
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
Response Time and Number of Facilities

Number of
Facilities

Response
Time
Facility Cost and Number of Facilities

Facility
Costs

Number of
Facilities
Inventory Cost and Number of Facilities

Inventory
Costs

Number of
Facilities
Transportation Cost and Number of Facilities

Transportation
Costs

Number of
Facilities
Total Logistics Costs

Logistics Logistics Costs

Costs

Facility Costs
Inventory Costs

Transportation Costs

Number of
Facilities
Logistics Costs, Response Time and Number of
Facilities (Fig 4.5)

Response Time

Total Logistics Cost

Number of
Facilities
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?
Design Options For a Distribution Network

1. Manufacturer Storage with Direct Shipping

2. Manufacturer Storage with Direct Shipping and
In-Transit Merge
3. Distributor Storage with Carrier Delivery
4. Distributor Storage with Last Mile Delivery
5. Manufacturer or Distributor Storage with
Consumer Pickup
6. Retail Storage with Consumer Pickup
 Manufacturer Storage with Direct Shipping
(Drop Shipping)
• Products are shipped directly to
Manufacturers
the consumer from the
manufacturer
• Retailer is an information
collector:
– Passes orders to the
manufacturers
– It does not hold product
Retailer inventory
• Inventory is centralized at
manufacturer
• Drop shipping offers the
manufacturer the opportunity to
postpone customization
Consumers • Effective for high value, large
variety, low demand products
• High transportation cost
• Example: eBags
 Manufacturer Storage with Direct Shipping
and In-Transit Merge
• Shipments from multiple
Manufacturers manufactures are merged
before making a single delivery
to the consumer
• Shipments to Mergers are
larger so economies of scale is
achieved
Mergers Retailer • Mergers increase facility costs
• Response time may go up
• Example:
– Furniture retailers merge
couches and coffee tables
produced by different
Consumers manufacturers
– Dell merges a Dell PC with a
Sony flat screen
 Distributor Storage with Carrier Delivery

• Inventory is held at a
Manufacturers
warehouse which ships to
customer by carriers
• With respect to direct shipping
– Inventory aggregation is less
– Higher inventory costs
– Facility costs are higher
Distributor Distributor – Less information to track
Warehouse Warehouse
• Warehouses are physically
closer to consumers which
leads to
– Faster response time
– Lower transportation cost
Consumers
• Not effective for slow moving
items
• Example: Amazon
 Distributor Storage with Last Mile Delivery
• Warehouse delivers to
customers instead of carrier
Manufacturers
– 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
Distributor Distributor
Warehouse Warehouse • 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
Consumers • Example: Milk delivery, Grocery
delivery (Peapod, Albertsons),
Denver Mattress
 Manufacturer or Distributor Storage With
Customer Pickup
• Customers come to pick up
sites (warehouse, retailer) to
Manufacturers 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
Distributor Distributor when their order is ready for
Warehouse Warehouse pick up. Once a consumer
arrives at the pick up site, the
products must be quickly
located.
• Significant amount of
information is required
Consumers
• Increased handling cost
• Example: 7dream.com
 Retail Storage with Customer Pickup
• Customers pick up product from
retailers
Manufacturers – Low transportation cost
– High facility cost
– Relative easy returnability
– Increased inventory cost
• No order tracking necessary
– If the product is available at the
Retailer Retailer Retailer retailer, the consumer buys.
Otherwise goes to another
retailer
• Effective for fast moving items
• Example: Retail stores such as
Wal-Mart and JCPenney
Consumers
Comparing Distribution Networks
Retail Manufacturer Manufacturer Distributor Distributor Manufacturer
storage with storage with storage with storage with storage with storage with
customer direct in transit package last mile customer
pickup shipping merge delivery delivery pickup
Reponse time 1 4 4 3 2 4
Product variety 4 1 1 2 3 1
Product availability 4 1 1 2 3 1
Cusomter experience 1-5 4 3 2 1 5
Time to market 4 1 1 2 3 1
Order visibility 1 5 4 3 2 6
Returnability 1 5 5 4 3 2
Inventory 4 1 1 2 3 1
Transportation 1 4 3 2 5 1
Facility and handling 6 1 2 3 4 5
Information 1 4 4 3 2 5

1 = strongest performance
6 = weakest performance
Comparing Distribution Networks

Retail Manufacturer Manufacturer Distributor Distributor Manufacturer

storage with storage with storage with storage with storage with storage with
customer direct in transit package last mile customer
pickup shipping merge delivery delivery pickup
High demand
Medium demand
Low demand
Very low demand
Many sources
High product value
Quick response
High product variety
Low customer effort

Green = very suitable

Red = very unsuitable
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?