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2006 The McGraw-Hill Companies, Inc., All

Chapter 10
Supply Chain Strategy

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OBJECTIVES
Supply-Chain Management
Measuring Supply-Chain
Performance
Bullwhip Effect
Outsourcing
Value Density
Mass Customization

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What is a Supply Chain?

Supply-chain is a term that describes

how organizations (suppliers,
manufacturers, distributors, and
customers) are linked together

Services

Supply networks
Manufacturing
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Suppliers

Service support
operations

Local
service
providers

Customers

Inputs

Transformation

Localization

Output

Suppliers

Manufacturing

Distribution

Customers

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What is Supply Chain

Management?

Supply-chain management is a total

system approach to managing the
entire flow of information, materials,
and services from raw-material
suppliers through factories and
warehouses to the end customer

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Formulas for Measuring

Supply-Chain Performance
One of the most commonly used measures in
all of operations management is Inventory
Turnover
Cost
of
goods
sold
Cost
of
goods
sold
Inventory
turnover

Inventory turnover
Average
Averageaggregate
aggregateinventory
inventoryvalue
value

In situations where distribution inventory is

dominant, Weeks of Supply is preferred and
measures how many weeks worth of inventory
is in the system at a particular time

Average

aggregate
inventory
value
Average
aggregate
inventory
value
52
Weeks
weeks
Weeksof
of supply
supply
52
weeks

Cost

Costof
of goods
goodssold
sold
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Example of Measuring
Supply-Chain Performance
Suppose
Suppose aa companys
companys new
new annual
annual report
report
claims
claims their
their costs
costs of
of goods
goods sold
sold for
for the
the
year
year is
is $160
$160 million
million and
and their
their total
total average
average
inventory
inventory (production
(production materials
materials ++ work-inwork-inprocess)
process) is
is worth
worth $35
$35 million.
million. This
This
company
company normally
normally has
has an
an inventory
inventory turn
turn
ratio
ratio of
of 10.
10. What
What is
is this
this years
years Inventory
Inventory
Turnover
Turnover ratio?
ratio? What
What does
does itit mean?
mean?
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Example of Measuring SupplyChain Performance (Continued)

Cost
of
goods
sold
Cost
of
goods
sold
Inventory
Inventoryturnover
turnover
Average
Averageaggregate
aggregateinventory
inventoryvalue
value
==$160/$35
$160/$35

==4.57
4.57

Since
Sincethe
thecompanys
companysnormal
normalinventory
inventoryturnover
turnoverration
rationis
is
10,
10,aadrop
dropto
to4.57
4.57means
meansthat
thatthe
theinventory
inventoryis
isnot
not
turning
turningover
overas
asquickly
quicklyas
asitithad
hadin
inthe
thepast.
past. Without
Without
knowing
knowingthe
theindustry
industryaverage
averageof
ofturns
turnsfor
forthis
this
company
companyititis
isnot
notpossible
possibleto
tocomment
commenton
onhow
how they
they
are
arecompetitively
competitivelydoing
doingin
inthe
theindustry,
industry,but
butthey
theynow
now
have
havemore
moreinventory
inventoryrelative
relativeto
totheir
theircost
costof
ofgoods
goods
sold
soldthan
thanbefore.
before.
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Bullwhip Effect
The
Themagnification
magnificationof
ofvariability
variabilityin
inorders
ordersin
inthe
thesupplysupplychain
chain

Time

AAlot
lotof
of
retailers
retailerseach
each
with
withlittle
little
variability
variabilityin
in
their
theirorders.
orders.
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Manufacturers Orders

Order
Quantity

Order
Quantity

Wholesalers Orders

Order
Quantity

Retailers Orders

Time

can
canlead
leadto
to
greater
greatervariability
variability
for
foraafewer
fewernumber
number
of
of wholesalers,
wholesalers,
and
and

Time

can
canlead
leadto
to
even
evengreater
greater
variability
variabilityfor
foraa
single
single
manufacturer.
manufacturer.

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Hau Lees Concepts of Supply

Chain Management

Hau Lees approach to supply chain (SC) is one of

aligning SCs with the uncertainties revolving around
the supply process side of the SC
A stable supply process has mature technologies and
an evolving supply process has rapidly changing
technologies
Types of SCs
Efficient SCs
Risk-Hedging SCs
Responsive SCs
Agile SCs

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10

Hau Lees SC Uncertainty

Framework
Demand Uncertainty

Supply
Uncertainty

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Low
(Stable
Process)
High
(Evolving
Process)

Low (Functional
products)

High (Innovative
products)

Efficient SC

Responsive SC

Ex.: Grocery

Ex.: Computers

Risk-Hedging SC

Agile SC

Ex.: Hydroelectric power

Ex.: Telecom

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12

What is Outsourcing?

Outsourcing is defined as the act of

moving a firms internal activities
and decision responsibility to
outside providers

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13

Reasons to Outsource

Organizationally-driven

Improvement-driven

Financially-driven

Revenue-driven

Cost-driven

Employee-driven

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14

Value Density

Value density is defined as the

value of an item per pound of
weight

It is used as an important measure

when deciding where items
should be stocked geographically
and how they should be shipped

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15

Mass Customization

Mass customization is a term used to

describe the ability of a company to
deliver highly customized products and
services to different customers

The key to mass customization is

effectively postponing the tasks of
differentiating a product for a specific
customer until the latest possible point
in the supply-chain network

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16

End of Chapter 10

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