Professional Institutes

APICS, The Association for Operations Management

www.apics.org

ASO, American Society for QualityASQ

www.asq.org

Institute for Supply Management ISM

www.ism.ws

Institute for Operaitons Research and the Management Sciences INFORMS

www.informs.org

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Professional Institutes
The Production and Operations Management Society POMS
www.poms.org

The Project Management Institute PMI

www.pmi.org

Council of Supply Chain Management Professionals CSCMP

http://cscmp.org

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E-Supply Chain Management

Information Technology and the Supply Chain

Part Adopted from Sunil Chopra book SCM Chapter 16

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Outline
The Role of Information Technology in the Supply Chain The Supply Chain IT Framework Customer Relationship Management Internal Supply Chain Management Supplier Relationship Management The Transaction Management Foundation The Future of IT in the Supply Chain Supply Chain Information Technology in Practice
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Role of Information Technology in a Supply Chain

Information is the driver that serves as the glue to create a coordinated supply chain Information must have the following characteristics to be useful: Accurate Accessible in a timely manner Information must be of the right kind Information provides the basis for supply chain management decisions Inventory Transportation Facility
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Characteristics of Useful Supply Chain Information

Accurate Accessible in a timely manner The right kind Provides supply chain visibility

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Use of Information in a Supply Chain

Information used at all phases of decision making: strategic, planning, operational Examples:
Strategic: location decisions Operational: what products will be produced during todays production run

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Use of Information in a Supply Chain

Inventory: demand patterns, carrying costs, stockout costs, ordering costs Transportation: costs, customer locations, shipment sizes Facility: location, capacity, schedules of a facility; need information about trade-offs between flexibility and efficiency, demand, exchange rates, taxes, etc.

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Role of Information Technology in a Supply Chain

Information technology (IT)
Hardware and software used throughout the supply chain to gather and analyze information Captures and delivers information needed to make good decisions

Effective use of IT in the supply chain can have a significant impact on supply chain performance

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The Importance of Information in a Supply Chain

Relevant information available throughout the supply chain allows managers to make decisions that take into account all stages of the supply chain Allows performance to be optimized for the entire supply chain, not just for one stage leads to higher performance for each individual firm in the supply chain

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The Supply Chain IT Framework

The Supply Chain Macro Processes
Customer Relationship Management (CRM) Internal Supply Chain Management (ISCM) Supplier Relationship Management (SRM) Plus: Transaction Management Foundation

Why Focus on the Macro Processes?

Good SCM is not a zero-sum game in which one stage of the supply chain increases profits at the expense of another

Macro Processes Applied to the Evolution of Software

Real value from having ERP systems in place can only be obtained if these systems can be used to improve Decision making in all the processes
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Macro Processes in a Supply Chain

Supplier Relationship Management (SRM)

Internal Supply Chain Management (ISCM)

Customer Relationship Management (CRM)

Transaction Management Foundation (TFM)

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Customer Relationship Management

The processes that take place between an enterprise and its customers downstream in the supply chain Key processes:
Marketing Selling Order management Call/Service center

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Internal Supply Chain Management

Includes all processes involved in planning for and fulfilling a customer order ISCM processes:
Strategic Planning Demand Planning Supply Planning Fulfillment Field Service

There must be strong integration between the ISCM and CRM macro processes
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Supplier Relationship Management

Those processes focused on the interaction between the enterprise and suppliers that are upstream in the supply chain Key processes:
Design Collaboration Source Negotiate Buy Supply Collaboration

There is a natural fit between ISCM and SRM processes

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The Transaction Management Foundation

Enterprise software systems (ERP) Earlier systems focused on automation of simple transactions and the creation of an integrated method of storing and viewing data across the enterprise Real value of the TMF exists only if decision making is improved The extent to which the TMF enables integration across the three macro processes determines its value

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The Future of IT in the Supply Chain

At the highest level, the three SCM macro processes will continue to drive the evolution of enterprise software Software focused on the macro processes will become a larger share of the total enterprise software market and the firms producing this software will become more successful Functionality, the ability to integrate across macro processes, and the strength of their ecosystems, will be keys to success

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Supply Chain Information Technology in Practice

Select an IT system that addresses the companys key success factors Take incremental steps and measure value Align the level of sophistication with the need for sophistication Use IT systems to support decision making, not to make decisions Think about the future

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Summary of Learning Objectives

What is the importance of information and IT in the supply chain? How does each supply chain driver use information? What are the major applications of supply chain IT and what processes do they enable?

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E-SCM
The Value of Information

Part Adopted from Simchi Levi book Designing and Managing the SC Chapter 5

1 Introduction
Value of using any type of information technology Potential availability of more and more information throughout the supply chain Implications this availability on effective design and management of the integrated supply chain

Information Types
Inventory levels Orders Production Delivery status

More Information
Helps reduce variability in the supply chain. Helps suppliers make better forecasts, accounting for promotions and market changes. Enables the coordination of manufacturing and distribution systems and strategies. Enables retailers to better serve their customers by offering tools for locating desired items. Enables retailers to react and adapt to supply problems more rapidly. Enables lead time reductions.

2 Bullwhip Effect
While customer demand for specific products does not vary much Inventory and back-order levels fluctuate considerably across their supply chain P&Gs disposable diapers case
Sales quite flat Distributor orders fluctuate more than retail sales Supplier orders fluctuate even more

The 4-Stage Supply Chain

The supply chain

Effect of Order Variability

The increase in variability in the supply chain

Factors that Contribute to the Variability - Demand Forecasting

Periodic review policy
Characterized by a single parameter, the base-stock level. Base-stock level = Average demand during lead time and review period + a multiple of the standard deviation of demand during lead time and review period (safety stock) Estimation of average demand and demand variability done using standard forecast smoothing techniques. Estimates get modified as more data becomes available Safety stock and base-stock level depends on these estimates Order quantities are changed accordingly increasing variability

Factors that Contribute to the Variability Lead Time

Increase in variability magnified with increasing lead time. Safety stock and base-stock levels have a lead time component in their estimations. With longer lead times:
a small change in the estimate of demand variability implies a significant change in safety stock and base-stock level, which implies significant changes in order quantities leads to an increase in variability

Factors that Contribute to the Variability Batch Ordering

Retailer uses batch ordering, as with a (Q,R) or a min-max policy Wholesaler observes a large order, followed by several periods of no orders, followed by another large order, and so on. Wholesaler sees a distorted and highly variable pattern of orders. Such pattern is also a result of:
Transportation discounts with large orders Periodic sales quotas/incentives

Factors that Contribute to the Variability Price Fluctuations

Retailers often attempt to stock up when prices are lower.
Accentuated by promotions and discounts at certain times or for certain quantities. Such Forward Buying results in:
Large order during the discounts Relatively small orders at other time periods

Factors that Contribute to the Variability Inflated Orders

Inflated orders during shortage periods Common when retailers and distributors suspect that a product will be in short supply and therefore anticipate receiving supply proportional to the amount ordered. After period of shortage, retailer goes back to its standard orders
leads to all kinds of distortions and variations in demand estimates

Quantifying the Bullwhip

Consider a two-stage supply chain:
Retailer who observes customer demand Retailer places an order to a manufacturer.

Retailer faces a fixed lead time

order placed at the end of period t Order received at the start of period t+L.

Retailer follows a simple periodic review policy

retailer reviews inventory every period places an order to bring its inventory level up to a target level. the review period is one

Quantifying the Bullwhip

Base-Stock Level = average demand + safety stock L x AVG + z x STD x L Order up-to point = t L + z LS t If the retailer uses a moving average technique,

t = Di
i =t p

t 1

S t2 =

( Di t ) 2 i=t p p 1

t 1

AVG = Average daily demand faced by distributor STD = Standard deviation of daily demand faced by distributor L = Replenishment Lead time from supplier to distributor in days z= safety factor (1.29 for 90% service level 1.69 for 95% and 2.33 for 99% service level) Mut and St are the estimated average and standard deviation P number of periods in estimation

Quantifying the Increase in Variability

Var(D), variance of the customer demand seen by the retailer Var(Q), variance of the orders placed by that retailer to the
manufacturer

Var (Q) 2 L 2 L2 1+ + 2 Var ( D) p p

When p is large and L is small, the bullwhip effect is negligible. Effect is magnified as we increase the lead time L and decrease p.

Lower Bound on the Increase in Variability Given as a Function of p

A lower bound on the increase in variability given as a function of p

Impact of Variability Example

Assume p = 5, L=1
Var (Q) 1.4 Var ( D)

Assume p = 10, L=1

Var(Q) 1.2 Var(D)

Increasing the number of observations used in the moving average forecast reduces the variability of the retailer order to the manufacturer

Impact of Centralized Information on Bullwhip Effect

Centralize demand information within a supply chain
Provide each stage of supply chain with complete information on the actual customer demand Creates more accurate forecasts rather than orders received from the previous stage

Variability with Centralized Information

Var(D), variance of the customer demand seen by the retailer Var(Qk), variance of the orders placed by the kth stage to its Li, lead time between stage i and stage i + 1
Var (Q ) 1+ Var ( D )
k

2i =1 Li p

2(i =1 Li ) 2 p2

Variance of the orders placed by a given stage of a supply chain is an increasing function of the total lead time between that stage and the retailer

Variability with Decentralized Information

Retailer does not make its forecast information available to the remainder of the supply chain Other stages have to use the order information
k 2 Li 2 L2 Var (Q k ) (1 + + 2i ) Var ( D) p p i =1

Variance of the orders:

becomes larger up the supply chain increases multiplicatively at each stage of the supply chain.

Managerial Insights
Variance increases up the supply chain in both centralized and decentralized cases Variance increases:
Additively with centralized case Multiplicatively with decentralized case

Centralizing demand information can significantly reduce the bullwhip effect

Although not eliminate it completely!!

Increase in Variability for Centralized and Decentralized Systems

Increase in variability for centralized and decentralized systems

Methods for Coping with the Bullwhip

Reducing uncertainty. Centralizing information Reducing variability.
Reducing variability inherent in the customer demand process. Everyday low pricing (EDLP) strategy.

Methods for Coping with the Bullwhip

Lead-time reduction
Lead times magnify the increase in variability due to demand forecasting. Two components of lead times:
order lead times [can be reduced through the use of cross-docking] Information lead times [can be reduced through the use of electronic data interchange (EDI).]

Strategic partnerships
Changing the way information is shared and inventory is managed Vendor managed inventory (VMI)
Manufacturer manages the inventory of its product at the retailer outlet VMI the manufacturer does not rely on the orders placed by a retailer, thus avoiding the bullwhip effect entirely.

3 Information Sharing And Incentives

Centralizing information will reduce variability Upstream stages would benefit more Unfortunately, information sharing is a problem in many industries Inflated forecasts are a reality Forecast information is inaccurate and distorted
Forecasts inflated such that suppliers build capacity Suppliers may ignore the forecasts totally

Contractual Incentives to Get True Forecasts from Buyers

Capacity Reservation Contract
Buyer pays to reserve a certain level of capacity at the supplier A menu of prices for different capacity reservations provided by supplier Buyer signals true forecast by reserving a specific capacity level

Advance Purchase Contract

Supplier charges special price before building capacity When demand is realized, price charged is different Buyers commitment to paying the special price reveals the buyers true forecast

4 Effective Forecasts
Retailer forecasts
Typically based on an analysis of previous sales at the retailer. Future customer demand influenced by pricing, promotions, and release of new products. Including such information will make forecasts more accurate.

Distributor and manufacturer forecasts

Influenced by factors under retailer control. Promotions or pricing. Retailer may introduce new products into the stores Closer to actual sales may have more information

Cooperative forecasting systems

Sophisticated information systems iterative forecasting process all participants in the supply chain collaborate to arrive at an agreed-upon forecast All parties share and use the same forecasting tool

5 Information for the Coordination of Systems

Many interconnected systems
manufacturing, storage, transportation, and retail systems the outputs from one system within the supply chain are the inputs to the next system trying to find the best set of trade-offs for any one stage isnt sufficient. need to consider the entire system and coordinate decisions

Systems are not coordinated

each facility in the supply chain does what is best for that facility the result is local optimization.

Global Optimization
Issues:
Who will optimize? How will the savings obtained through the coordinated strategy be split between the different supply chain facilities?

Methods to address issues:

Supply contracts Strategic partnerships

6 Locating Desired Products

Meet customer demand from available retailer inventory What if the item is not in stock at the retailer?
Being able to locate and deliver goods is sometimes as effective as having them in stock If the item is available at the competitor, then this is a problem

Other Methods
Inventory pooling Distributor Integration

7 Lead-Time Reduction
Numerous benefits:
The ability to quickly fill customer orders that cant be filled from stock. Reduction in the bullwhip effect. More accurate forecasts due to a decreased forecast horizon. Reduction in finished goods inventory levels

Many firms actively look for suppliers with shorter lead times Many potential customers consider lead time a very important criterion for vendor selection. Much of the manufacturing revolution of the past 20 years led to reduced lead times Other methods:
Distribution network designs Effective information systems (e.g., EDI) Strategic partnering (Sharing point-of-sale (POS) data with supplier)

8 Information and Supply Chain Trade-Offs

Conflicting objectives in the supply chains Designing the supply chain with conflicting goals

Wish-Lists of the Different Stages

Raw material suppliers
Stable volume requirements and little variation in mix Flexible delivery times Large volume demands

Manufacturing
High productivity through production efficiencies and low production costs Known future demand pattern with little variability.

Materials, warehousing, and outbound logistics

Minimizing transportation costs through: quantity discounts, minimizing inventory levels, quickly replenishing stock.

Retailers
Short order lead times and efficient, accurate order delivery

Customers
In-stock items, enormous variety, and low prices.

Trade-Offs: Inventory-Lot Size

Manufacturers would like to have large lot sizes.
Per unit setup costs are reduced Manufacturing expertise for a particular product increases Processes are easier to control.

Modern practices [Setup time reduction, Kanban and CONWIP]

Reduce inventories and improve system responsiveness. Advanced manufacturing systems make it possible for manufacturers to meet shorter lead times and respond more rapidly to customer needs.

Manufacturer should have as much time as possible to react to the needs of downstream supply chain members. Distributors/retailers can have factory status and manufacturer inventory data:
they can quote lead times to customers more accurately. develops an understanding of, and confidence in, the manufacturers ability. allows reduction in inventory in anticipation of manufacturing problems

Trade-offs Inventory-Transportation Costs

Company operates its own fleet of trucks.
Fixed cost of operation + variable cost Carrying full truckloads minimizes transportation costs.

Outside firm is used for shipping

quantity discounts TL shipping cheaper than LTL shipping

In many cases
demand is much less than TL Items sit for a long time before consumption leading to higher inventory costs.

Trade-off cant be eliminated completely.

Use advanced information technology to reduce this effect. Distribution control systems allow combining shipments of different products from warehouses to stores Cross-docking, Decision-support systems allow appropriate balance between transportation and inventory costs

Trade-offs Lead Time-Transportation Costs

Transportation costs lowest when large quantities of items are transported between stages of the supply chain.
Hold items to accumulate enough to combine shipments

Lead times can be reduced if items are transported immediately after they are manufactured or arrive from suppliers. Cannot be completely eliminated
Information can be used to reduce its effect. Control transportation costs reducing the need to hold items until a sufficient number accumulate. Improved forecasting techniques and information systems reduce the other components of lead time may not be essential to reduce the transportation component.

Trade-Offs Product Variety-Inventory

Higher product variety makes supply chain decisions more complex
Better for meeting customer demand Typically leads to higher inventories

Strategies:
Delayed Differentiation
Ship generic products as far as possible down the supply chain

Design for logistics

Trade-Offs Cost-Customer Service

Reducing inventories, manufacturing costs, and transportation costs typically comes at the expense of customer service Customer service could mean the ability of a retailer to meet a customers demand quickly Strategies:
transshipping direct shipping from warehouses to customers Charging price premiums for customized products

9 Decreasing Marginal Value of Information

Obtaining and sharing information is not free. Many firms are struggling with exactly how to use the data they collect through loyalty programs, RFID readers, and so on. Cost of exchanging information versus the benefit of doing so.
May not be necessary to exchange all of the available information, or to exchange information continuously. Decreasing marginal value of additional information

In multi-stage decentralized manufacturing supply chains many of the performance benefits of detailed information sharing can be achieved if only a small amount of information is exchanged between supply chain participants. Exchanging more detailed information or more frequent information is costly.
Understand the costs and benefits of particular pieces of information How often this information is collected How much of this information needs to be stored How much of this information needs to be shared In what form it needs to shared

Summary
The bullwhip effect suggests that variability in demand increases as one moves up in the supply chain. Increase in variability causes significant operational inefficiencies Specific techniques to counteract bullwhip effect
Information sharing, i.e., centralized demand information. Incentives to share credible forecasts Alignments of expectations associated with the use of information.

Interaction of various supply chain stages.

A series of trade-offs both within and between the different stages. Information is the key enabler of integrating the different supply chain stages Information can be used to reduce the necessity of many of these tradeoffs

Which E-Business is Right for Your Supply Chain?

What is E-Business?
E-business is a collection of business models and processes motivated by Internet technology, and focusing on improving the extended enterprise performance E-commerce is the ability to perform major commerce transactions electronically
e-commerce is part of e-Business Internet technology is the driver of the business change The focus is on the extended enterprise:
Intra-organizational Business to Consumer (B2C) Business to Business (B2B)

The Internet can have a huge impact on supply chain performance.

What is E-Business?
Business transacted over the Internet
Is product information displayed on the Internet? Is negotiation over the Internet? Is the order placed over the Internet? Is the order tracked over the Internet? Is the order fulfilled over the Internet? Is payment transacted over the Internet?

The Retail Industry

Brick-and-mortar companies establish virtual retail stores
Wal-Mart, K-Mart, Barnes & Noble, Circuit City

An effective approach - hybrid stocking strategy

High volume/fast moving products for local storage Low volume/slow moving products for browsing and purchase on line (risk pooling)

Danger of channel conflict

Existing Channels for Business

Product information
Physical stores, EDI, catalogs, face to face, Negotiation, phone, fax, sealed bids,

Order placement
Physical store, EDI, phone, fax, face to face,

Order tracking
EDI, phone, fax,

Order fulfillment
Customer pick up, physical delivery

Potential Revenue Opportunities from E-Business

Direct sales to customers 24 hour access for order placement Information aggregation Information sharing in supply chain Flexibility on pricing and promotion Price and service discrimination Faster time to market Efficient funds transfer - reduce working capital

Potential Cost Opportunities from E-Business

Direct customer contact for manufacturers Coordination in the supply chain Customer participation Postpone product differentiation to after order is placed Downloadable product Reduce facility costs Geographical centralization and resulting reduction in inventories

Basic evaluation framework

How does going on line impact revenues? How does going on line impact costs?
Facility (site + personnel) Inventory Transportation Information

Should the e-commerce channel position itself for efficiency or responsiveness? Who in the supply chain can extract most value? Is the value to existing players or new entrants?

The Computer Industry: Dell on-line

Customer Order and Manufacturing Cycle

Procurement cycle

Customer Order and Manufacturing Cycle

Procurement Cycle
PUSH PR OCESSES PUL L PR OCESSES

Customer Order Arrives

Dell Supply Chain Cycles

Potential opportunities exploited by Dell

Revenue opportunities
24 hour access for order placement Direct sales Providing customization and large selection information Flexibility on pricing and promotion Faster time to market Efficient funds transfer - reduce working capital

Revenue negatives
Longer response time than store and no help with selection

Potential opportunities exploited by Dell

Cost opportunities
Direct sales eliminating intermediary Customer participation Information sharing in supply chain Reduce facility costs Geographical Centralization and reduced inventories Postpone product differentiation to after order is placed using product platforms and common components

Outbound transportation costs increase

Opportunities
Significant, but must be combined with component commonality, and build to order. Must move product customization to pull phase of supply chain and hold inventories as common components during the push phase Opportunity most significant for new, hard to forecast products Complements strength of existing retail channels

Retailing: Amazon.com
Custom er
Pull

Custom er R etail Store W arehouse (?) Publisher

Pull

A m azon Distributor Publisher A m azon Supply Chain

Book store Supply Chain

Potential opportunities exploited by Amazon

Revenue opportunities
24 hour access for order placement Providing large selection and other information Attract customers who do not want to go to store Flexibility on pricing Efficient funds transfer

Revenue negatives
Intermediary (distributor) reduces margin Longer response time than bookstore

Potential opportunities exploited by Amazon

Cost opportunities
Reduce facility costs Geographical centralization and reduced inventories: Most effective for low volume, hard to forecast books, least effective for high volume best sellers

Cost increases
Outbound transportation costs increase Handling cost increase

Opportunities
Going on-line, by itself, offers lower cost advantages (may be some disadvantages) than in Dell model

given current form of books

Cost and availability advantages are more significant for low volume books On-line channel has significant cost benefit if books

are downloadable

How should bookstore chains react?

An on line channel allows it to match Amazons revenue advantages Use a hybrid approach in stocking and pricing
High volume books for local storage Low volume books for browsing and purchase on line Pricing varies by delivery and pick up option

Grocery on-line
Custom er Custom er Superm ark et Online Grocer W arehouse (?) M anufacturer On-L ine Supply Chain M anufacturer Superm ark et Supply Chain

Potential opportunities for on line grocer

Revenue opportunities
Attract customers who do not want to go to supermarket Out of town customers for specialty items Menus and other value added

Cost opportunities
Reduced facility costs (sites as well as checkout clerks) Inventory savings from centralization (primarily for slow moving, specialty items)

Added costs for online grocer

Additional outbound transportation cost: Have to cover the last mile to the customer Additional picking and packing costs

Opportunities
Negligible opportunity to compete on cost, except maybe for specialized low volume items Competition has to be on convenience or some other form of value added To lower delivery cost disadvantage, must be more than on-line grocery Greatest opportunity may be for supermarket chains to expand value offering

Key Messages
Some supply chains are better suited to exploit the cost benefits of going on-line
Ability to increase processes in pull phase Ability to delay product differentiation Big inventory benefit from geographical centralization Significant facility cost reduction on centralization

Transport to customer is a small fraction of product cost

A ll are achieved if product is downloadable

B2B: W.W. Grainger

Revenue opportunities
24 hour access for order placement Large selection information with simple search Display of substitutable products Flexibility on pricing and promotion Ability to alert customer of order status Faster time to market

B2B: W.W. Grainger

Cost opportunities
Reduced order taking costs Reduced order placement costs for customers Reduced error because of multiple data entry Reduced catalog costs

Key Messages
Significant B2B opportunity to use Internet to reduce cost and improve efficiency of existing processes Significant B2B opportunity to improve collaboration within existing supply chains

E-business Opportunities:
Reduce Facility Costs
Eliminate retail/distributor sites

Reduce Inventory Costs

Apply the risk-pooling concept
Centralized stocking Postponement of product differentiation

Use Dynamic Pricing Strategies to Improve Supply Chain Performance

E-business Opportunities:
Supply Chain Visibility
Reduction in the Bullwhip Effect
Reduction in Inventory Improved service level Better utilization of Resources

Improve supply chain performance

Provide key performance measures Identify and alert when violations occur Allow planning based on global supply chain data

Distribution Strategies
Warehousing Direct Shipping
No DC needed Lead times reduced smaller trucks no risk pooling effects

Cross-Docking

Cross Docking
In 1979
Kmart had 1891 stores and average revenues per store of $7.25 million Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues under $3.5 million

10 Years later
Wal-Mart had
highest sales per square foot of any discount retailer highest inventory turnover of any discount retailer Highest operating profit of any discount retailer. Today Wal-Mart is the largest and highest profit retailer in the world

Kmart ????

What accounts for Wal-Marts remarkable success

A focus on satisfying customer needs
providing customers access to goods when and where they want them cost structures that enable competitive pricing

This was achieved by way the company replenished inventory the centerpiece of its strategy. Wal-Mart employed a logistics technique known as crossdocking
goods are continuously delivered to warehouses where they are dispatched to stores without ever sitting in inventory.

This strategy reduced Wal-Marts cost of sales significantly and made it possible to offer everyday low prices to their customers.

Characteristics of Cross-Docking:
Goods spend at most 48 hours in the warehouse Cross Docking avoids inventory and handling costs, Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for Kmart Stores trigger orders for products.

Distribution Strategies
Strategy Attribute Risk Pooling Transportation Costs Holding Costs Demand Variability No Warehouse Costs Reduced Inbound Costs No Holding Costs Delayed Allocation Delayed Allocation Direct Shipment Cross Docking Inventory at Warehouses Take Advantage Reduced Inbound Costs

Direct-to-Consumer:Cost TradeOff
Cost Trade-Off for BuyPC.com
$20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 0 5 10 15 Number of DC's

Cost ($ million)

Total Cost Inventory Transportation Fixed Cost

Industry Benchmarks: Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg. # of WH

14

25
- Low margin product - Service very important - Outbound transportation expensive relative to inbound

- High margin product - Service not important (or easy to ship express) - Inventory expensive relative to transportation

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

E-Fulfillment
How have strategies changed?
From shipping cases to single items From shipping to a relatively small number of stores to individual end users

What is the difference between on-line and catalogue selling?

Drivers of Supply Chain Performance

Efficiency Responsiveness Supply chain structure

Inventory

Transportation

Facilities

Information

Drivers

Considerations for Supply Chain Drivers

Driver Inventory Transportation Facilities Information Efficiency Cost of holding Consolidation Responsiveness Availability Speed

Consolidation / Proximity / Dedicated Flexibility What information is best suited for each objective

Functional vs. Innovative Products: Differences in Demand

Functional (Predictable) Product life cycle Contribution margin Product variety Forecast accuracy (margin of error) Average stockout rate Average forced markdown Delivery Lead time More than 2 years 5% to 20% Low (10 to 20 variants per category) 10% 1% to 2% 0% 6 months to 1 year Innovative (unpredictable) 3 months to 1 years 20% to 60% High (often millions of variants per category 40% to 100% 10% to 40% 10% to 25% 1 day to 2 week

Physically Efficient vs. MarketResponsive Supply Chain

Physically Efficient Primary purpose Supply predictable demand efficiently at the lowest possible cost Maintain high average utilization rate Market-Responsive Respond fast to unpredictable demand to minimize stockouts, forced markdowns, and obsolete inventory Deploy excess buffer capacity for flexibility

Manufacturing focus Inventory strategy Lead-time focus Approach to choosing suppliers

Generate high turns & lower Deploy significant buffer stock inventory cost of all stock items Shorten lead time at low cost Invest in ways to reduce lead time

Select primarily for cost and Select primarily for speed, quality flexibility, and quality Use modular design to postpone product differentiation

Product-design strategy Maximize performance at minimum product cost

Efficiency-Responsiveness Framework of Supply Chain

Functional Product Efficient Supply Chain Supply Chain Responsive Supply Chain Innovative Products

Match

Mismatch

Mismatch

Match

Zone of strategic fit in supply chain

Responsive Supply Chain

Responsiveness Spectrum

Zone of Strategic Fit

Efficient Supply Chain Certain Demand Implied Uncertainty Spectrum Uncertain Demand

Flows in a Supply Chain

Information Product

Customer
Funds