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[MiniMBA_07] What is a Supply Chain and Why is it Important?

Supply Chain Management

A supply chain is the network of firms which comprise the entire process used to deliver a finished product to a consumer.

Supply chain management is how a firm manages the flow of material used to provide a good or a service.

• • Planning production
  • Sourcing material
  • Managing inventory
  • Locating facilities
  • Selecting transportation modes

Supply chain management is important because it has a significant impact on the product cost, quality, and availability.

Supply Chain Strategy

There are four main supply chain strategies.

1. Efficient
2. Risk-Hedging
3. Responsive
4. Agile

The choice of proper strategy depends on the level of supply risk and a product’s level of demand uncertainty.

Demand Uncertainty

Functional products

• • Consumer staples: shampoos, grocery items, office supplies, etc.
  • Low demand variation and accurate forecasts

Innovative products

• • novel products with high demand uncertainty: fashion items, high tech electronics
  • unpredictable demand makes forecasting difficult
  • prone to shortages and excess inventory at the end of a selling season

Supply Uncertainty

Stable supply base

• • supply base is mature and well-established
  • raw material is standard
  • common and available material such as plastics, metal, electrical connectors, etc.

Evolving supply base

• • supply base is evolving
  • high level of supply uncertainty
  • supply is prone to sources of risk such as breakdowns, low or variable yields.

Four Strategies

Efficient Supply Chain

• • primarily cost and efficiency focused
  • remove non-value adding steps, reduce inventory, gain scale economies, increase capacity utilization

Responsive Supply Chain

• • aimed at flexibility to changing/diverse customer needs
  • reduce lead-times, maintain excess capacity, make-to-order and mass customization

Risk-Hedging Supply Chain

• • reduce uncertainty of supply
  • carry extra inventory, pooling and share resources, increase number of suppliers and develop raw material alternatives

Agile Supply Chain

• • combination of responsive and risk-hedging strategies
  • pool resources, identify alternative suppliers, hold more inventory, delay product differentiation, shorten lead times

Strategic Sourcing

• Allows a company to create a competitive advantage while reducing cost by moving some internal functions to external suppliers.

Reasons to outsource

• • Financial - reduce costs, improve ROI (return on investment), generate cash
  • Improvement Driven - obtain higher quality, lower cost, shorter lead-times by relying on supplier expertise
  • Organizationally driven - Allow company to focus on its core competencies

The reason to outsource can be one of these reasons or a combination of multiple reasons.

Outsourcing Considerations

Coordination

• • Monitor the performance of the company
  • Reducing opportunism

Strategic control

• • Specific investment of either money or time in assets, people, processes, etc.
  • Investments would be difficult to recreate if outsourcing relationship terminates

Intellectual property

• • Is the function proprietary or a core function which makes your product better and cheaper than competitors?
  • Yield value which competitors cannot deliver

The Bullwhip Effect

• In the bullwhip effect, the variability in the size and timing of orders increase as you move up the supply chain.
• A small fluctuation in demand at a retailer becomes a large order at the supplier.

Consequences of the Bullwhip Effect

The Bullwhip Effect can result in:

• • Poor forecasts
  • Excess supply chain inventory
  • Excess capacity and poor utilization
  • Decreased transportation efficiency

Causes of the Bullwhip Effect

Demand forecast updating

• • Modify expectations for future demand
  • Update required stocking levels and order quantities needed to satisfy this projection

Order batching

• • Allow customer orders to accumulate before placing replenishment order with your supplier.
  • Due to fixed ordering and transportation costs.

Price fluctuations

• • Due to promotions and forward buying.
  • Customers buy in larger quantities than they actually need.

Rationing and shortage gaming

• • When demand exceeds supply, manufacturers ration and customers exaggerate needs.
  • “Phantom” orders surge

How to counter the Bullwhip Effect?

• Share demand information such as point-of-sale data or have your vendor or supplier manage the transaction of inventory between you and them.
• Break up order batches by automating ordering, using mixed-product truckloads, or using a third-party logistics provider.
• Reduce reliance on promotions to generate sales by using every day low prices.
• Reduce gaming by making customers aware of inventory status and removing incentives for companies to place larger orders than needed.

Supply Chain Dynamics

Process Variation

Variation acts upon any process

• • Demand variation
  • Late deliveries
  • Defects
  • Breakdowns

Variation degrades the performance of a process!

Process Management Triangle

Relationship between Capacity, Inventory, Variation

• • Inventory and capacity act as buffers to variation, limiting its negative effect on a process
  • Capacity can be a tradeoff with inventory. Increasing inventory can enable a decrease in capacity (and vice versa)
  • Reducing variation (possibly by using information) potentially allows you to reduce both capacity and inventory.