Lecture 22-23 Supply Chain Strategy

SUPPLY CHAIN STRATEGY
• Supply Chain Drivers

• Supply Chain Strategy
• Measuring Supply Chain Performance
• Push Strategy/Pull Strategy/Push-Pull Strategy
• Bullwhip Effect
• Outsourcing. 3PL and 4PL
• Design for Logistics
• Global Sourcing
• Mass Customization
• Supply Chain Drivers

• Bullwhip Effect
• Outsourcing
• Global Sourcing
A Framework for
Six Structuring Drivers
Role in Comp. Strategy Competitive Strategy
Role in Supply Chain Strategy

Supply Chain
Strategy
Efficiency Responsiveness
Supply chain structure
Logistical Drivers
Facilities Inventory Transportation

Components
& Metrics
Information Sourcing Pricing
Cross FunctionalDrivers
Cross Functional Drivers
Three LOGISTICAL Drivers of Supply
Chain Performance
1) Facilities
– places where inventory is stored,
assembled, or fabricated
– production sites and storage sites
2) Inventory
– raw materials, WIP, finished goods within
a supply chain
– inventory policies
3) Transportation
– moving inventory from point to point in a
supply chain
– combinations of transportation modes
Three Cross Functional Drivers
of Supply Chain Performance
1) Information
 data and analysis regarding inventory, transportation, facilities

throughout the supply chain
 potentially the biggest driver of supply chain performance
2) Sourcing
 functions a firm performs and functions that are outsourced
3) Pricing
 Price associated with goods and services provided by a firm to the

supply chain
Facilities, Inventory, Transportation, Information, Sourcing & Pricing

1) Facilities
• Components of Facilities decisions
• Role in the supply chain
• Role in the competitive strategy
• Facility relates Metrics
Competitive Strategy
Supply Chain
Strategy
Logistical Drivers

1) Facilities
Components of Facilities Decisions
• Location
– Various factors considered such as cost,
env, govt policy etc
– other factors to consider (e.g., proximity to
customers)
• Capacity (flexibility versus efficiency)
• Warehousing methodology (SKU

storage, job lot storage )
Facilities
– the “where” of the supply chain
– manufacturing or storage (warehouses)

If efficiency priority…
– economies of scale..centralisation
– If responsiveness priority…
– larger number of smaller facilities
Facility related metrics
• Capacity
• Utilization
• Storage cost per

unit
• Product variety
• Quality losses
2) Inventory
• Components of inventory decisions
• (Inventory related metrics.)
Supply Chain
Strategy
Logistical Drivers

Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy
demand between shipments
– Depends on lot size
• Safety inventory
– inventory held in case demand exceeds
expectations
– costs of carrying too much inventory versus
cost of losing sales
• Seasonal inventory
– inventory built up to counter predictable
variability in demand
– cost of carrying additional inventory versus
Inventory: Role in the Supply Chain
• Inventory exists because of a mismatch
between supply and demand
• Source of cost and influence on

responsiveness
• Impact on
– material flow time: time elapsed between when
material enters the supply chain to when it exits
the supply chain
– throughput
• rate at which sales to end consumers occur
Inventory: Role in Competitive Strategy
• If responsiveness is a strategic competitive

priority,
……a firm can locate larger amounts of inventory
closer to customers
• If cost is more important,

….inventory can be reduced to make the firm more
efficient
3) Transportation
• Components of transportation decisions
• (Transportation related metrics)
Supply Chain
Strategy
Logistical Drivers

Components of
Transportation Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic
transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource
Overall trade-off: Responsiveness versus

efficiency
Transportation - Role in the Supply
Chain
• Moves the product between
stages in the supply chain
• Impact on responsiveness and

efficiency
• Also affects inventory and

facilities
Transportation-Role in the Competitive Strategy
• If responsiveness is a strategic
competitive priority, ...
….faster transportation modes can provide
greater responsiveness to customers who
are willing to pay for it
• If cost is a strategic competitive priority, …
….use slower transportation modes for
customers whose priority is price
• Can also consider both inventory and
transportation to find the right balance
4) Information
• Components of information decisions
• Information related metrics
Supply Chain
Strategy
Logistical Drivers

Components of Information
Decisions
• Push (MRP) versus pull (demand
information transmitted quickly
throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– Internet
– ERP systems
– Supply Chain Management software
– RFID
Information - Role in the Supply
Chain
• The connection between the
various stages in the supply
chain – allows coordination
between stages
• Crucial to daily operation of each

stage in a supply chain – e.g.,
production scheduling, inventory
levels
Information - Role in the Competitive Strategy
• Allows supply chain to become

more efficient and more
responsive at the same time
(reduces the need for a trade-off)
• Information technology
• What information is most valuable?

Information related metrics
• Forecast horizon
• Frequency of update
• Forecast error
• Seasonal factors
• Variance from plan
• Ratio of demand variability to
order variability
5) Sourcing
• Components of sourcing decisions
• Sourcing related metrics
Supply Chain
Strategy
Logistical Drivers

Components of Sourcing Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
Overall trade-off: Increase the supply

chain profits
Sourcing - Role in the Supply Chain
• Set of business processes required to

purchase goods and services in a
supply chain
• Supplier selection, single vs. multiple

suppliers, contract negotiation
Sourcing - Role in the Competitive Strategy
• Sourcing decisions are crucial

because they affect the level
of efficiency and
responsiveness in a supply
chain
• In-house vs. outsource decisions-

improving efficiency and
responsiveness
Sourcing related metrics
• Days payable outstanding
• Average purchase price
• Range of purchase price
• Average purchase quantity
• Fraction of on time deliveries
• Supply quality
• Supply lead time
• Supplier reliability
6) Pricing
• Components of pricing decisions
• Pricing related metrics
Supply Chain
Strategy
Logistical Drivers

Components of Pricing
Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low

pricing
• Fixed price versus menu pricing
Overall trade-off: Increase the

firm profits
Pricing - Role in the Supply
Chain
• Pricing determines the amount to
charge customers in a supply chain
• Pricing strategies can be used to

match demand and supply
Pricing - Role in Competitive Strategy
• Firms can utilize optimal

pricing strategies to improve
efficiency and responsiveness
• Low price and high product

availability; vary prices by
response times
Pricing related metrics
• Profit margin
• Days sales outstanding
• Incremental fixed cost per unit
• Incremental variable cost per unit
• Average sales price
• Average order size
• Range of sale price
• Range of periodic sales
A Framework for

Supply Chain
Strategy
Logistical Drivers

Components
& Metrics
 Supply Chain Drivers

• Bullwhip Effect
• Outsourcing
• Global Sourcing
Business Elements
Structural Infrastructural
Difficult to change: Relatively easy to
change:
Business Elements
Structural Infrastructural
Difficult to change: Relatively easy to
– Buildings change:
– Equipment – People
– Computer systems – Policies
– Other capital assets – Decision rules
– Organizational structure
Definitions
• Business Strategy
• Functional Strategies
• Core Competencies
Definitions
• Business Strategy
Long-term master plan for the company;
establishes the general direction
• Functional Strategies
Further develop the business strategy in
segments of the business — must be aligned and
coordinated
• Core Competencies
Organizational strengths that provide focus
and foundation for the company’s strategies
A Top-Down Model of Business Strategy
Goals
Mission Business
Statement Strategy
Marketing R&D Operations Supply Chain Financial

Strategy Strategy Strategy Strategy Strategy
Operations and Supply Chain Decisions ...

Functional Strategy
• Translates the business strategy into
functional terms.
• Assures coordination with other areas.
• Provides direction and guidance for
operations and supply chain decisions.
Operations and Supply Chain Strategies
Design, operation, and improvement of the operations
and supply chain systems and processes
– What mix of structure and infrastructure?
– Is the mix aligned with the business strategy?
– Does it support the development of core
competencies?
Key Interactions
Finance MIS
Budgeting.
What IT solutions Human
to make it all work
Analysis.
together? Resources
Funds. Skills? Training?
# of Employees?
Design Supply Chain
Sustainability. and
Quality. Operations Marketing
Manufacturability.
What products?
Accounting What volumes?
Performance measurement systems. Costs? Quality?
Planning and control. Delivery?
Decisions Guided by the Structural Strategy
(Difficult to change)
Capacity Size?
Timing?
Type?
Facilities Size?
Location?
Technology Equipment?
Processes?
Information systems?
Vertical Direction?
Extent?
Integration
Decisions Guided by the Infrastructural Strategy
Relatively easy to change:
Organization Control/reward systems?

Centralization/decentralization?
Workforce – skilled/semi-skilled?
Sourcing and Supplier selection/performance metrics?
Purchasing Procurement systems?
Sourcing strategy?
Planning and Forecasting?
Control Inventory management?
Production planning/control?
Process and Quality Continuous improvement processes?
Business process management
SPC/Six Sigma
Product and Service Development process?
Design Organization/supplier roles?
How Big Retail Giants are managing SC during
heaviest on-line shopping
Encouraging shoppers to shop earlier & more often
Today’s leading retailers supplement traditional in-store shopping experiences

with a variety of convenient omnichannel fulfillment options, including buy on-line/
in-store pickup, a range of delivery speeds and add-on services (BOPIS)
Giving customers incentives to place orders in larger quantities or choose slower

shipping speeds can help retailers limit the cost and environmental
impact of split shipments.
Amazon Day delivery allows Prime members to choose a day of the week for their
orders to arrive together. This service lets Amazon ship items in fewer boxes and reduce
split shipments, gives customers greater control over the delivery timeline, and aims to
reduce the carbon footprint of the order.
While some retailers are closing stores, others recognize proximity to customers as an
asset and are saving up to 40% by fulfilling online orders in stores.
A Flurry of SC Innovations
-Experimenting with new technologies for last-mile delivery. CVS and Walgreens are bo
testing drone delivery to get orders to customers’ homes within minutes.
Automating microfulfillment and store operations. Walmart relies on self-service kiosks

which quickly retrieve customers’ online orders, to improve pickup time by 60%. South
Korea’s largest discount chain, Emart,has launched cashierless stores and an automated
concierge service via robots.
Using artificial intelligence (AI) for demand planning and inventory allocation. Retailers
such as Amazon and Stitch Fix are using predictive demand forecasting to estimate which
items customers will want and preemptively send inventory where it’s most likely to be
purchased.
Innovative supply chain solutions can create value for both

companies and customers, not only during the holidays but all
year long.

 Supply Chain Strategy
• Bullwhip Effect
• Outsourcing
• Global Sourcing
A Framework for

Supply Chain
Strategy
Logistical Drivers

Components
& Metrics
Measuring SC Performance
Logistical Drivers Cross Functional Drivers
 FACILITIES INFORMATION
• INVENTORY SOURCING
• TRANSPORTATION PRICING
Inventory related metrics
• Cash-to-cash cycle time
• Average inventory
• Inventory turns
• Products with more than a specified number of days
of inventory
• Average replenishment batch size
• Average safety inventory
• Seasonal inventory
• Fill rate (order/demands met on time)
• Fraction of time out of stock (Zero inventory)
• Obsolete inventory
Inventory turns
Inventory = Buffer = Cost
Hence the need to minimize
Effy of Supply Chain can be measured based on size of inventory investment

in the supply chain
Inventory Turnover = ??
Cost of Goods sold / Avg Aggregate Inventory Value
(Avg I/V Value = Total value of ALL items held in I/V..RM, WIP, FG, Distr I/V)
Grocery store…I/V > 100 times/yr

Mfg Firm ……….~ 6 to 7 times/yr
Weeks of supply = ??
(Avg Aggregate I/V Value / Cost of Goods sold) x 52 weeks
(how many weeks’ worth of I/V is in system at a particular point in time)
DELL COMPUTER
$
Net revenue 55,908 Mn
Cost of revenue 45,958
Prod Mtls on hand 327
WIP & FG on hand 247
Prod Mtls – days of supply 4
I/V Turnover = ??
Weeks of supply = ??
DELL COMPUTER
$
Net revenue 55,908 Mn
Cost of revenue 45,958
Prod Mtls on hand 327
WIP & FG on hand 247
Prod Mtls – days of supply 4
I/V Turnover = 45,958/(327+247) = 80 turns/yr
Weeks of supply = (1/80) x 52 = 0.65 week

• FACILITIES INFORMATION
 INVENTORY SOURCING
• TRANSPORTATION PRICING
Transportation related
metrics
• Average inbound transportation cost
• Average incoming shipment size
• Average inbound transportation cost per
shipment
• Average outbound transportation cost
• Average outbound shipment size
• Average outbound transportation cost per
shipment
• Fraction transported by mode

 Measuring Supply Chain Performance
Bullwhip Effect
• Outsourcing
• Global Sourcing
Supply Chain Strategies
• Push-Based Supply Chain
• Pull-Based Supply Chain
• Push-Pull Supply Chain

The Old Paradigm:
Push Strategies
• Production decisions based on long-term forecasts
• Ordering decisions based on inventory & forecasts
• What are the problems with push strategies?

– Inability to meet changing demand patterns
– Obsolescence
– The bullwhip effect:
• Excessive inventory
• Excessive production variability
• Poor service levels
Information Coordination: The Bullwhip
Effect
I- Consumer Sales at Retailer II-Retailer's Orders to Wholesaler
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III-Wholesaler's Orders to Manufacturer IV-Manufacturer's Orders with Supplier
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A Newer Paradigm:
Pull Strategies
• Production is demand driven
– Production and distribution coordinated with true customer demand
– Firms respond to specific orders
• Pull Strategies result in:

– Reduced lead times (better anticipation)
– Decreased inventory levels at retailers and manufacturers
– Decreased system variability
– Better response to changing markets
• But:
– Harder to leverage economies of scale
– Doesn’t work in all cases
Push and Pull Systems
• What are the advantages of push systems?
• What are the advantages of pull systems?
• Is there a system that has the advantages of

both systems?
A new Supply Chain Paradigm
• A shift from a Push System...
– Production decisions are based on forecast
• And from Pull System
• Production decisions based on demand
• …to a Push-Pull System

Push-Pull Supply Chains
The Supply Chain Time Line
Customers
Suppliers
PUSH STRATEGY PULL STRATEGY
Low Uncertainty High Uncertainty

Push-Pull Boundary
A new Supply Chain Paradigm
• A shift from a Push System...
– Production decisions are based on forecast
• …to a Push-Pull System ( Ind/Dep Demand)
– Initial portion of the supply chain is replenished
based on long-term forecasts
• For example, parts inventory may be replenished based
on forecasts
– Final supply chain stages based on actual
customer demand.
• For example, assembly may based on actual orders.
Consider Two PC Manufacturers:
• Build to Stock • Build to order

– Forecast demand – Forecast demand
– Buys components – Buys components
– Assembles computers – Observes demand
– Observes demand and – Assembles computers
meets demand if – Meets demand
possible.
• A traditional push • A push-pull system
system
Push-Pull Strategies
• The push-pull system takes advantage of the
rules of forecasting:
– Forecasts are always wrong
– The longer the forecast horizon the worst is the
forecast
– Aggregate forecasts are more accurate
What is the Best Strategy?
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Selecting the Best SC Strategy
• Higher demand uncertainty suggests pull
• Higher importance of economies of scale suggests push
• High uncertainty/ EOS not important such as

• the computer industry implies pull
• Low uncertainty/ EOS important such as

• groceries implies push
– Demand is stable
– Transportation cost reduction is critical
– Pull would not be appropriate here.
Demand
uncertainty
Pull
Delivery cost
Unit price
Push
Economies of
Pull Push Scale
Selecting the Best SC Strategy
• Low uncertainty but low value of economies of

scale , such as:
• high volume books and cd’s
– Either push strategies or push/pull strategies might be
most appropriate
• High uncertainty and high value of economies of

scale, such as:
– the furniture industry
– How can production be pull but delivery push?
– Is this a “pull-push”
Demand
system?
uncertainty
Pull
Delivery cost
Unit price
Push
Economies of
Pull Push Scale
Demand
uncertainty
(C.V.)
Pull H
Delivery cost
Unit price
Push L
L H Economies of
Scale
Pull Push
Characteristics and Skills
Raw
Material Customers
Push Pull
Low Uncertainty High Uncertainty
Long Lead Times Short Cycle Times
Cost Minimization Service Level
Resource Allocation Responsiveness

Locating the Push-Pull Boundary
Demand
• The push section: uncertainty
– Uncertainty is relatively low Pull
– Economies of scale important Delivery cost
Unit price
– Long lead times
Push
– Complex supply chain structures: Economies of
• Thus Pull Push Scale
– Management based on forecasts is appropriate
– Focus is on cost minimization
– Achieved by effective resource utilization – supply chain optimization
--------------------------------------------------------------------------------------------------
• The pull section:
– High uncertainty
– Simple supply chain structure
Demand
– Short lead times uncertainty
• Thus Pull
– Reacting to realized demand is important Delivery cost
Unit price
– Focus on service level
Push
– Flexible and responsive approaches Economies of
Pull Push Scale
• The push section requires:

– Supply chain planning
– Long term strategies
• The pull section requires:
– Order fulfillment processes
– Customer relationship management
• Buffer inventory at the boundaries:
– The output of the tactical planning process
– The input to the order fulfillment process.

 Push Strategy/Pull Strategy/Push-Pull Strategy
Bullwhip Effect
• Outsourcing . 3PL and 4PL
• Global Sourcing
Make or Buy?
INSOURCING/OUTSOURCING
“Make-or-buy” decisions
• Deciding whether to produce a product component “in-house”, or
purchase/procure it from an outside source.
• Issues to be considered while making this decision:
– Quality of the externally procured part………………………….?

– Reliability of the supplier in terms of both item quality and
delivery times………………………………………………………………..?
– Criticality of the considered component for the
performance/quality of the entire
product………………………………………….?
– Potential for development of new core competencies of
strategic significance to the company…………………………….?
– Existing patents on this item……………………………………………?
– Costs of deploying and operating the necessary infrastructure
……….?
A simple economic trade-off model for
the “Make or Buy” problem
Model parameters:
• c1 ($/unit): cost per unit when item is outsourced (item price, ordering
and receiving costs)
• C ($): required capital investment in order to support internal
production
• c2 ($/unit): variable production cost for internal production (materials,
labor,variable overhead charges)
• Assume that c2 < c1
• X: total quantity of the item to be outsourced or produced internally
Total cost as c1*X

u se
a function of X ho
In- C+c2*X
u rce
C
utso
O
X
Example: Introducing a new (stabilizing)
bracket for an existing product
• Machine capacity available
• Required “infrastructure” for in-house production

– new tooling: $12,500
– Hiring and training an additional worker: $1,000
• Internal variable production (raw material + labor) cost:

$1.12 / unit
• Vendor-quoted price: $1.55 / unit
• Forecasted demand: 10,000 units/year for next 2 years
Buy!
Analysing Strategic Outsource Decisions
• Option to make or buy is first presented at the

beginning of product life cycle during NPD
• Vertical integration to make or source material

can affect cost, flexibility and responsiveness.
• Lean manufacturing mindset is the trend

( lean firms increasingly buy more, make less)
Reasons for Buying (1/2)
• Organisation lacks managerial or technical expertise in the
production of the items or services in question
• Organisation lacks production capacity
• Certain suppliers have built such a reputation for
themselves that they have been able to build a real
preference for their component as part of the finished
product
• Challenges for maintaining long term technological &
economical viability for a noncore activity are too great
• A decision to make, once made, is often difficult to reverse
• Assures cost accuracy
• There are more options in potential sources and substitute
items
Reasons for Buying (2/2)
• Future forecasts show great demand or technological uncertainty & the
firm is unable or unwilling to undertake the risk of manufacture
• A highly capable supplier is available nearby
• Organisation desires to stay lean
• Buying outside may open up markets for the firm’s products/services
• Provides the organisation with the ability to bring a product or service to

market much faster
• A significant customer may demand it
• Encourages superior supply management expertise

Determination of the cost to
Make or Buy
A make-or buy cost analysis involves a determination of the cost to make an ite
and a comparison of this cost with cost to buy.
To Make
• Delivered purchased material costs
• Direct labour costs
• Any follow-on costs stemming from quality and related problems
• Incremental inventory carrying costs
• Incremental factory overhead costs
• Incremental managerial costs
• Incremental purchasing costs
• Incremental costs of capital
To Buy
• Purchase price of part
• Transportation costs
• Receiving & Inspection costs
• Incremental & inspection costs
• Any follow-on costs related to quality or service
OUTSOURCING (1/2)
• Outsourcing reverses a previous make decision. Thus an
activity, product, or service previously done in-house will next
be purchased.
• Almost no function is immune to outsourcing. The growth in

logistics outsourcing is attributed to transportation
deregulation, the focus on core competencies, reduction in
inventories, and enhanced logistics management computer
programs.
• The reasons for outsourcing are similar to those advanced for

the buy option in make-or-buy decisions. There is a key
difference.
“ What happens to the employees, space and equipment
previously dedicated to this product or service now
outsourced?”
OUTSOURCING (2/2)
Additional concerns
• Loss of control
• Exposure to supplier risks: financial, weakness, loss of
commitment, slow implementation, promised features or services
not available, poor quality, poor responsiveness
• Unexpected fees or “extra charges”
• Difficulty in qualifying economics
• Conversion costs
• Supply restraints
• Attention required by senior management
• Possibility of being tied to obsolete technology
• Concerns with long term flexibility and meeting changing business
requirements.
GROUP WORK # 10
• For your resp. companies, make a list of
components/items/services that may merit
buy with rationale
• Make a list of components/items/services that

you, as manufacturing manager would NOT
choose to buy and why.
Three Types of Strategic Alliances
• 1) Third Party Logistics (3PL)
• 2) Fourth Party Logistics (4PL)

1..Third Party Logistics (3PL)
• Use of 3PL providers to take over a company’s

logistics functions
• Almost a $200 billion industry by 2015
• 8% of all logistics costs attributed to 3PL
• eg of 3PL…A company with its own warehousing

facilities decides to employ external transportation
Evolution of 3PL
• 1980’s…many transportation and warehousing
firms developed into 3PL providers
• Early 1990’s…firms that specialised in express

parcel deliveries entered the markets
• Late 1990’s..companies originally specialising in

financial services, IT services & mgt consulting
entered the market by developing competence in
information systems and supply chain planning
Suppliers
Manufacturers
3PL
Distributors
Consumers
Services provided by 3PL’s
Service Some specific value
Basic Service
Category added services
Inbound, outbound by Track/trace, mode
Transportation
ship, truck, rail, airc conversion
Storage, facilities Cross-dock, in-transit merge,
Warehousing
management Inventory control
Provide & maintain Transportation management

Information
advanced information systems, Warehousing
Technology
systems management
Reverse Handle reverse flows Recycling, customer returns,
Logistics Repair/refurbish
Customs brokering, hazardous

Other 3PL
material, order taking,
Servces
consulting, port services etc.
3PL Advantages
• 1)Focus on Core Strengths
– Allows a company to focus on its core competencies
– Logistics expertise left to the logistics experts
• 2)Provides Technological Flexibility

– Technology advances adopted by better 3PL providers in a quicker, more cost-
effective way
3)Provides Other Flexibilities

– Flexibility in geographic locations/service offerings
3PL Disadvantages
• Loss of control inherent in outsourcing a particular
function.
– Outbound logistics 3PLs interact with a firm’s customers.
– Many third-party logistics firms work very hard to address these
concerns.
• 1)Painting company logos on the sides of trucks,
• 2) Dressing 3PL employees in the uniforms of the hiring company,
• 3) Providing extensive reporting on each customer interaction.
• Logistics is one of the core competencies of a firm

– Makes no sense to outsource these activities to a supplier who
may not be as capable as the firm’s in-house expertise
• Wal-Mart, pharmaceutical companies
2..Fourth Party Logistics (4PL)
• Manage & direct the activities of multiple
3PLs, serving as an integrator.
• Refinement on the idea of 3PLs
• 4PLs are not asset based like 3PLs

Functions provided by a 4PL Company
• PROCUREMENT
• STORAGE
• DISTRIBUTION
4PL
3PLs
Trucking 3PLs
Ocean Freight
3PLs
Cient 4PL Air Freight
3PLs
Warehousing
3PLs
Integrator
Integrator
Suppliers
Manufacturers
3PL 4PL
Distributors
Consumers
Integrator
4PL Types
• Synergy Plus operating model
(Partnership between 4PL – 3PL)
• Solution Integrator model

(Comprehensive supply chain solutions for a
single client)
• Industry Innovator model

(for multiple industry players )
Synergy Plus operating model
• Partnership between 4PL – 3PL to market supply

chain solutions
• Capabilities and market reach of both partners are
combined
• The 4PL provides:
 Technology
 Supply Chain strategy skills
 Capability to go to market
By program management expertise
Solution Integrator model
• Core Model: 4PL operates comprehensive

supply chain solutions for a single client
• Solution encompasses resources, capabilities

and technology of the 4PL with
complementary service providers
Industry Innovator model
• 4PL develops and runs a supply chain solution

for multiple industry players with focus on
synchronisation and collaboration
• This model provides the greatest benefits,

however it is complex and a great challenge
4PL Advantages
• Economies of scale
• Reduced Supply Chain costs
• Increased flexibility
• Combines the advantages of in- and out sourcing
• Manufacturers can focus on core competencies
• Improved customer service
• Reduced capital requirements
4PL Disadvantages
• Loosing sight of original core concept of
SCM due to loss of control
• Customer relationships should not be
dismissed on basis of efficiency
• Strict functional organisation structure
hinders integrated Supply Chains
• Resistance to change…the biggest obstacle
to implementation of new approaches
4PL Example
• Bicycle Importer
• Main function is to import and sell bicycles
• Need spare parts for these unique bikes
• A 4PL would manage the total logistic

operations for the spare parts business
Difference between 3PL & 4PL
• 4PL organisation is often a joint venture between a
primary client and one or more partners
• 4PL organisation acts as a single interface between

the client and multiple logistics service providers
• The major part of the client’s supply chain is

outsourced to the 4PL organisation

Bullwhip Effect
 Outsourcing
• Global Sourcing
Design for Logistics (DFL)
• Strategy in SCM which involves product design to
reduce logistics cost.
• In 1957 Soda Can mfrs. switched from cone top soda
can to flat top soda can
• 3 Components:
– Product design should facilitate easy to ship & shelf
– Concurrent and parallel processing…..to save lead time
and lower inv.cost
– Standardization of parts …common parts for many
different products
• Therefore design for logistics is a crucial
component in supply chain management.
• It is not just a mechanism to save costs but is

being consistently used as a strategic weapon
to gain competitive advantage.

Bullwhip Effect
 Outsourcing
 Design for Logistics
• Global Sourcing
Why Manufacture Globally?
80 Tn $
GLOBALISATION
Question : What is the truest definition of Globalization ?
Answer : Princess Diana's death.
Question : How come ?
-------------------------------------------------------------------------------------------------------
Answer : An English princess with an Egyptian boyfriend crashes in a French

tunnel,
driving a German car with a Dutch engine,
driven by a Belgian who was drunk on Scottish whisky,
followed closely by Italian Paparazzis on Japanese motorcycles,
treated by an American doctor,
using Brazilian medicines !!!!!!!!!! (11)

GLOBALISATION
And moreover this is displayed to you by an Indian using
American technology,
and you're probably reading this on your iPhone or Android or

Windows phone or Blackberry, or on your DT!!
that use Taiwanese chips
and a Korean screen,
assembled by Bangladeshi workers
in a Singapore plant,
transported by Pakistani lorry-drivers.... (7)
That is Globalisation!!
20 Most Profitable/Largest Co’s
• 20 Most Profitable Co’s
• 20 Largest Co’s
Profit/day Profit/sec Industry Revenue
Mn $ $ Bn $
1. Aramco 304 3,500 1. Walmart Retail 514
2. Apple 163 1,900 2. Sinopec Oil/Gas 414
3. ICBC 123 1,400 3. Royal Dutch Shell --”-- 396
4. Samsung 109 1,265 4. China Nat Petro --”-- 392
5. China Con Bank 105 1,220 5. China State Grid Electricity 387
6. J P Morgan 89 1,030 6. Aramco Oil/Gas 355
7. Alphabet 84 975 7. BP --”-- 303
8. Agr Bank China 84 970 8. Exxon --”-- 290
9. BOA 77 890 9. Volkswagon Automotive 278
10. Bank of China 75 863 10. Toyota --”-- 272
11. Royal Dutch Shell 64 740 11. Apple Electronics 265
12. Gazprom 63 736 12. Berkshire Hathway Conglomerate 247
13. Wells Fargo 61 710 13. Amazon Retail 232
14. FB 60 701 14. United Health Healthcare 226
15. Intel 58 668 15. Samsung Electronics 221
16. Exxon 57 661 16. Glemcore Commodities 219
17. AT&T 53 614 17. McKenon Healthcare 214
18. Citigroup 49 572 18. Daimler Automotive 197
19. Toyota 47 538 19. CVS Health Healthcare 194
20. China Dev Bank 46 531
20. Total Oil/Gas 184
Why Manufacture Globally?
• Cost
• Access to raw-material
• New Markets
• Multi-Point Communication
Overall goal improvement in cash flows of the

parent firm to maximize shareholder wealth
Examples: Automotive parts, Forgings, Software Dev,

Healthcare, R&D….India //Mobile phones, clothing…China
Global Manufacturing Strategies
• Manufacturing Configuration
– Should manufacturing be centralized in one country or
should we have manufacturing facilities in specific zones to
service those zones or should we go multidomestic with a
facility in each country
– When should we have a centralized location?
– When should we go for multidomestic location?
• Coordination and Control

– Linking or integrating activities into a unified system is
called COORDINATION
– Defining organizational structure and reporting systems to
ensure timely implementation of policies is termed as
CONTROL
Global Manufacturing Strategies
• Plant Location Strategies
– Transportation costs, duties, proximity to
customers and suppliers, foreign exchange rate
risk, economies of scale in the production process,
government incentives, climate, technological
requirements of the manufacturing process.
• Plant Layout Planning Strategies

– Physical arrangement of economic activity centers
within a manufacturing facility
– Every manufacturing facility cannot have the same
type layout—local conditions such as cost of labor,
cost of land, local culture must be considered in
deciding about the plant layout
Global Sourcing Strategy
R&D, Manufacturing, and Marketing

Interfaces
Extent and Complexity of Global Sourcing Strategy
 Global Sourcing Strategy: the logistical
management of the interfaces of R&D,
manufacturing, and marketing activities on
a global basis, which determins a
company's competitive strengths and,
consequently, its market performance.
Global Sourcing Strategy
Competitive Comparative
Advantage Advantage
What activities Where to source

and technologies and market
Common examples of globally sourced products or
services
• Majority of companies today strive to harness the potential
of global sourcing in reducing cost. Hence it is commonly
found that global sourcing initiatives and programs form an
integral part of the strategic sourcing plan and procurement
strategy of many multinational companies:
• Labor-intensive manufactured products produced using low-cost

Chinese labor
• Call centers staffed with low-cost English speaking workers in the

Philippines and India,
• IT work performed by low-cost programmers in India and Eastern

Europe.
Firms heading home as benefits wane in China
• More companies from Europe and the United States

that outsourced production to China are returning
home as price gaps narrow.
 Philips NV, the Dutch engineering and electronics conglomerate,
improved automation and smarter robots meant it made more
sense financially to build a new factory in Drachten last year than
extend its operations in China.
 General Electric Co took arguably a bigger gamble by opting to
reshore some production from China to its Appliance Park in
Louisville, Kentucky, also in 2012.
– Such cases have become more common over the
past five years as more European and US
companies find it attractive to return jobs and
production home, a strategy known as reshoring.
TRADE SHIFT
SHIFTING GEARS
As mfg leaves China, Vietnam & India are benefitting the most in Asia
Share of US imports from

14 Asian LCC countries
50% Vietnam
9%
15% India
Lost
to: 12% Taiwan
22% Rest of LCC’s
From
China
China
69%
60%
042013 012019 LCC’s: Group of 14 low

cost countries in Asia
Advantages and disadvantages of global sourcing
 Some advantages of global sourcing:
Low cost;
Learning how to do business in a potential market;
Tapping into skills or resources unavailable domestically;
Developing alternate supplier/vendor sources to stimulate competition;
Increasing total supply capacity.
 Some key disadvantages of global sourcing:
Hidden costs associated with different cultures and time zones,
Exposure to financial and political risks in countries with emerging economies,
Increased risk of the loss of intellectual property
Increased monitoring costs relative to domestic supply.
For manufactured goods, some key disadvantages include long lead times, the risk of
port shutdowns interrupting supply, and the difficulty of monitoring product quality.
Trends in Global Sourcing Strategy
Trend 1: The Decline of the Exchange Rate
Determinism of Sourcing
Reasons:
1. It takes time to develop overseas suppliers for
noncost purpose.
2. Domestic suppliers are to increase prices to match
rising import prices following exchange rate
changes.
3. Many companies are developing long-term
relationships with international suppliers.
Trend 2: New Competitive Environment Caused by Excess Worldwide
Capacity
Key factors for Sourcing from Abroad
There has occurred a Very Important

strategic shift from 1.Better quality
2.Lower price
price and quantity to
3.Unavailability of items in the western
quality and reliability country
of products as a Important
determinant of 4. More advanced technology abroad
competitive strength: 5. Willingness to solve problems
6. More on-time delivery
7. Negotiability
8. Association with foreign subsidiary
Neutral
9. Geographical location
10. Countertrade requirements
11. Government assistance
Trends in Global Sourcing
Strategy
Trend 3: Innovations in and Restructuring of International
Trade Infrastructure
☆The innovations and structure changes that have
important influence on sourcing strategy are:
 improvements made in transportation and communication
 the increased number of purchasing managers experienced in
sourcing
 new financing options, including countertrade, offering new
incentives and opportunities for exports from countries without
hard currency
④ manufacturing facilities diffused throughout the world by globally
minded companies
⑤ neighboring country souring opportunities
Trend 4: Enhanced Role of Purchasing Managers
 In the past, just-in-time productions requires close
working relationships with component suppliers and
places an enormous amount of resposibilities on
purchasing managers.
 Now, purchasing managers are increasingly making long-

term commitments to foreign suppliers, direct dealings
with suppliers is justified. A survery shows that the
dominant form of purchasing from abroad was to buy
directly from foreign sources.
Trend 5: Trend toward Global Manufacturing
 During the 1980s, while U.S. companies continued to locate their

operations in various parts of the world, companies from other
countries such as Japan, Germany, and Britain expanded the
magnitude of their foreign manufacturing operations at a much
faster pace.
 In the late 1980s, U.S. companies increased sourcing from abroad,

which represents a strategic expansion and rationalization over
time.
 Foreign affiliates have developed more independent R&D activities

to manufacture products for the U.S. markets in addition to
expanding local sales.
Pattern in Decades
DECADE What Happened
1960’s USA the hottest story in world economy
1970’s USA gave way to Emerging Nations
1980’s Rise of JAPAN in world economy
1990’s USA again the leader in world economy
2000’s Emerging Nations make another strong run
2010’s USA again strong. Emerging Markets’ share of Global

economy declines (excl China & to some extent India)
2020’s USA complacent with rising govt deficit, spreading

corporate debts.
Pattern in Decades
• Decade after decade, this cycle plays out in such a
predictable way. After a good run, national leaders
grow complacent & spend irresponsibly. Businesses
run up debts.
• USA at the dawn of 2020’s is a complacent land
with rising govt deficit & spreading corp debts.
• On the other hand, emerging countries forced to
reduce deficits & debt, and enhancing reforms.
• Expect a comeback by smaller nations &
businesses in 2020’s
Pattern in Decades
With US & China battling, trade & investment shifting to
smaller countries incl Vietnam, Taiwan, Mexico etc.
Globalisation is thus gradually giving way to
Localisation, which makes this a promising time for
countries with domestic markets large enough to
support significant expansion in local businesses.
If the 2020’s were a golden age for the world’s largest

economy and its mega corporations, the 2020’s are
likely to be remembered as the decade when smaller
was beautiful again!!
SMALLER WILL BE BEAUTIFUL AGAIN !!

India…Happy New Decade
• Current Per capita GDP ~$2000/person (doubled in last decade,
better roads, airports, internet etc)
• USA $60,000/person, China $10,000/person
• By 2030 India ~ $5,000/person (no more poor country)
• By 2040 India ~ $12,000/person (semi-developed country)
• Bright decade for India, provided, provided that
• We as Indians & almost any govt in the centre is convinced that growi
Indian incomes is a worthwhile , top priority goal.
• Religion gets us going, caste gets us going, personality cults of leaders
get us going. But a burning desire to make every Indian affluent is not
something that gets us passionate
• Let’s resolve that in the next decade, we will keep reminding ourselv
& the govt to make economy a top priority…. $5000/person

Bullwhip Effect
 Outsourcing
 Global Sourcing
Mass Customization – How It Evolved
• Middle Ages – Craft Production
– Master Craftsmen and Apprentices
– One off products, high labour content, expensive
• 18th Century – Industrial Revolution

– Movement of people off land to towns and cities
– Sub-division of work  loss of traditional skills
Mass Customization – How it evolved
• United States – Industrial Development
started later, from mid-19th Century
– Industrial workers had greater skills
– More use of these skills in U.S. factories
– Development of Mass Production in early 20th

Century  U.S. becomes global power
Mass Production to Mass Customization
• Mass Production – example: Ford
– Division of work
– Low variety of output – ‘any colour as long as it’s black’
– Constantly rising volume sales, and lower input costs =

lower prices (economies of scale)
– Okay in permanently expanding economy with

favourable demographics
Mass Production to Mass Customization
• 1970’s – Slowing Economy – Rising Oil Prices
• Need for alternative approach
• 1970’s-1980’s – Increasing competition within U.S.

market from outside countries, esp. Japan
• Late 80’s-early 90’s: Literature proposing MC
• Development of internet (esp. product configuration

systems) in mid-1990’s opens door to widespread
use of Mass Customization
Evolution of MC
• Craft Production (Middle Ages)
Industrial Revolution ( 18th Century)
Industrial Development ( Mid 19th Century)
Mass Production ( Early 20th Century)
Mass Customization (Mid 1990’s)
Types of Mass Customization
• The Four Faces of Mass Customization –
……..Collaborative, Adaptive, Cosmetic, Transparent
– 1. Collaborative Customization:
• Consumer and producer engage in a dialogue to determine
customer requirements
• Computers, clothing and footwear, furniture, some services
– 2. Adaptive Customization:
• Product is designed so that users can alter it themselves to fit
unique requirements on different occasions
• High-end office chairs, R7 golf club, certain electronic devices
Types of Mass Customization
– 3. Cosmetic Customization:
• Product is unique in appearance only
• Customer’s chosen text or image on T-shirts, mouse mats, baseball
caps, mugs etc.
• Also called ‘Personalization’
– 4. Transparent Customization:
• Producer provides customized product without consumer being
necessarily being aware that it has been customized
• Can be used when consumer’s needs are predictable or can be
easily deduced, and when customers do not want their
requirements repeated.
• Example- repeat orders for customized clothing, chemicals
True Mass Customization
• True Mass Customization requires:
– System for customer to specify requirements easily e.g.
online ordering, call center
– Advanced manufacturing systems

• Enable economies of scope (keep cost and price low)
– Build-to-order approach
• product is not made until order is received
– Minimum order quantity of one

Advantages of MC
– Customer has control over product
– Does not have to pay for features he/she does not want
(computers etc.)
– ‘Not in your size’ becomes a thing of the past
– Company does not have finished product inventory 
better use of working capital
– Easier for company to differentiate product
– Levels out economic fluctuations
• When slowdown occurs, less backlog of inventory
• Prices do not have to be cut as much
• Therefore, less likelihood of recession
Examples of Mass Customization
• Dell
– Build to order computers
– Assembly, not manufacture (modular components)
– MC sometimes associated with higher prices but Dell

cheaper than most
– Why? Massive efficiency of supply chain management

Examples of Mass Customization
• Clothing and Footwear
– Clothing and footwear very suited to MC due to each
person being unique in size and shape
• Sports Equipment
– Treadmills
• Industrial equipment, construction

– Insulated roof and wall panels, made to order for size,
colour, insulation type
Three Principles for MC
1) Product should be designed such that it consists of
independent modules that can be assembled into
diff forms of the product easily and inexpensively…
Printers
2) Mfg & Service processes should be designed so that

they consist of independent modules that can be
moved or rearranged easily to support diff distribution
network designs….Asian Paints hardware & paint
stores
Three Principles for MC
3) The supply network should be designed to
provide 2 capabilities:
Must be able to supply the basic product
to facilities performing the customization in a
cost effective manner
Must have the flexibility & responsiveness
to take indiv customer’s orders and deliver the
finished, customized goods effectively

Bullwhip Effect
 Outsourcing
 Global Sourcing
 Mass Customization
THANK YOU

Lecture 22-23 Supply Chain Strategy

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SUPPLY CHAIN STRATEGY

SUPPLY CHAIN STRATEGY

• Supply Chain Drivers

• Supply Chain Drivers

Role in Comp. Strategy Competitive Strategy

Role in Supply Chain Strategy

Facilities Inventory Transportation

 data and analysis regarding inventory, transportation, facilities

 functions a firm performs and functions that are outsourced

 Price associated with goods and services provided by a firm to the

Facilities, Inventory, Transportation, Information, Sourcing & Pricing

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

• Capacity (flexibility versus efficiency)

• Warehousing methodology (SKU

• Role in the competitive strategy

• Storage cost per

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

• Source of cost and influence on

• If responsiveness is a strategic competitive

• If cost is more important,

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

Overall trade-off: Responsiveness versus

• Impact on responsiveness and

• Also affects inventory and

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

• Crucial to daily operation of each

• Allows supply chain to become

• What information is most valuable?

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

• In-house versus outsource decisions

• Supplier evaluation and selection

Overall trade-off: Increase the supply

• Set of business processes required to

• Supplier selection, single vs. multiple

• Sourcing decisions are crucial

• In-house vs. outsource decisions-

Facilities Inventory Transportation

Information Sourcing Pricing

Cross Functional Drivers

• Everyday low pricing versus high-low

• Fixed price versus menu pricing

Overall trade-off: Increase the

• Pricing strategies can be used to

• Firms can utilize optimal

• Low price and high product

Role in Comp. Strategy Competitive Strategy

Role in Supply Chain Strategy

Facilities Inventory Transportation

 Supply Chain Drivers

Marketing R&D Operations Supply Chain Financial

Operations and Supply Chain Decisions ...

Organization Control/reward systems?

Today’s leading retailers supplement traditional in-store shopping experiences