Supply Chain ManageMent

(Open eleCtiVe)
25Oe13Ce43
MODule 2

leCture by
Dr. Vasim A. Shaikh

DepartMent Of MeChaniCal engineering

fr. COnCeiCaO rODrigueS COllege Of engineering

© Dr. Vasim A. Shaikh
 Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

The value chain is a framework that connects the supply

chain with overall business strategy, focusing on activities
that create value for customers and the company.

It emphasizes how each step in the process, from product

development to delivery, support and services,
contributes to the customer's experience and the
company's competitive advantage.
 Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

By optimizing the value chain, businesses can enhance

efficiency, reduce costs, improve customer satisfaction,
and ultimately, achieve greater profitability
 Value Chain vs. Supply Chain:
While the supply chain focuses on the efficient flow of
goods and materials, the value chain encompasses all
activities that add value to a product or service, including
those related to marketing, sales, and customer service.

Linking to Business Strategy:

The value chain provides a framework for integrating
supply chain operations with the overall business strategy. It
helps identify areas where value can be created or
enhanced, aligning supply chain activities with strategic
goals.
 Key Activities in the Value Chain:
These include product development, procurement,
inbound logistics, operations, outbound logistics, marketing
and sales, and service. Each activity is analyzed to identify
opportunities for improvement and value creation.

Benefits of Value Chain Optimization:

By optimizing the value chain, businesses can improve
product quality, reduce costs, enhance customer
satisfaction, and gain a competitive edge.
Examples of Value Chain Integration:
Improved Product Design: A value chain analysis might
reveal that a product's design could be simplified, reducing
manufacturing costs while maintaining customer
satisfaction.
Enhanced Customer Service: Analyzing the service
component of the value chain can lead to improved support,
leading to higher customer loyalty.
Efficient Logistics: Optimizing the supply chain, including
transportation and distribution, can reduce costs and
delivery times, contributing to a more efficient value chain.
Competitive strategy: defines the set of customer needs a
firm seeks to satisfy through its products and services

Product development strategy: specifies the portfolio of

new products that the company will try to develop

Marketing and sales strategy: specifies how the market

will be segmented and product positioned, priced, and
promoted

Supply chain strategy:

– determines the nature of material procurement, transportation of materials,
manufacture of product or creation of service, distribution of product
– Consistency and support between supply chain strategy, competitive strategy,
and other functional strategies is important
Strategic fit:
– Consistency between customer priorities of competitive
strategy and supply chain capabilities specified by the
supply chain strategy
– Competitive and supply chain strategies have the same
goals

A company may fail because of a lack of strategic fit or

because its processes and resources do not provide the
capabilities to execute the desired strategy
Step 1: Understanding the customer and supply
chain uncertainty

Step 2: Understanding the supply chain

Step 3: Achieving strategic fit

Identify the needs of the customer segment being served

Quantity of product needed in each lot

Response time customers will tolerate

Variety of products needed

Service level required

Price of the product

Desired rate of innovation in the product

Overall attribute of customer demand like volume,
variety, predictability, and timing.

Demand uncertainty: uncertainty of customer demand

for a product

Implied demand uncertainty: resulting uncertainty for the

supply chain given the portion of the demand the supply
chain must handle and attributes the customer desires
Implied demand uncertainty also related to customer
needs and product attributes

Table 2.1
Figure 2.2
Table 2.2

First step to strategic fit is to understand customers by

mapping their demand on the implied uncertainty
spectrum
Understanding the Customer
– Lot size
– Response time
– Service level
Implied
Demand
– Product variety
Uncertainty
– Price
– Innovation
Customer Need Causes implied demand uncertainty to
increase because …
Range of quantity increases Wider range of quantity implies greater
variance in demand
Lead time decreases Less time to react to orders

Variety of products required increases Demand per product becomes more

disaggregated
Number of channels increases Total customer demand is now
disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual surges
in demand
Predictable Predictable supply and uncertain Highly uncertain
supply and demand or uncertain supply and supply and demand
demand predictable demand or somewhat
uncertain supply and demand

Salt at a An existing A new

supermarket automobile communication
model device

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Attribute Low Implied High Implied
Uncertainty Uncertainty
Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season- 0% 10%-25%

end markdown
How does the firm best meet demand?

Supply chain responsiveness -- ability to

– respond to wide ranges of quantities demanded
– meet short lead times
– handle a large variety of products
– build highly innovative products
– meet a very high service level
There is a cost to achieving responsiveness

Cost of making and delivering the product to the

customer

Increasing responsiveness results in higher costs that

lower efficiency

Figure 2.3: cost-responsiveness efficient frontier

Figure 2.4: supply chain responsiveness spectrum

Second step to achieving strategic fit is to map the supply

chain on the responsiveness spectrum
Responsiveness

High

Low
Cost
High Low
Highly Somewhat Somewhat Highly
efficient efficient responsive responsive

Integrated Hanes Most Dell

steel mill apparel automotive
production
Step is to ensure that what the supply chain does well is
consistent with target customer’s needs

Fig. 2.5: Uncertainty/Responsiveness map

Fig. 2.6: Zone of strategic fit

Examples: Dell, Barilla

 Responsive
supply chain

Responsiveness
spectrum

Efficient supply
chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
All functions in the value chain must support the
competitive strategy to achieve strategic fit – Fig. 2.7

Two extremes: Efficient supply chains (Barilla) and

responsive supply chains (Dell) – Table 2.3

Two key points

– there is no right supply chain strategy independent of
competitive strategy
– there is a right supply chain strategy for a given
competitive strategy
 Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense Aggressively reduce even if
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on
modes responsive (fast) modes
Multiple products and customer segments

Product life cycle

Competitive changes over time

Firms sell different products to different customer
segments (with different implied demand uncertainty)

The supply chain has to be able to balance efficiency and

responsiveness given its portfolio of products and
customer segments

Two approaches:
– Different supply chains
– Tailor supply chain to best meet the needs of each
product’s demand
The demand characteristics of a product and the needs
of a customer segment change as a product goes through
its life cycle

Supply chain strategy must evolve throughout the life

cycle

Early: uncertain demand, high margins (time is

important), product availability is most important, cost is
secondary

Late: predictable demand, lower margins, price is

important
Examples: pharmaceutical firms, Intel

As the product goes through the life cycle, the supply

chain changes from one emphasizing responsiveness to
one emphasizing efficiency
Competitive pressures can change over time

More competitors may result in an increased emphasis

on variety at a reasonable price

The Internet makes it easier to offer a wide variety of

products

The supply chain must change to meet these changing

competitive conditions
Scope of strategic fit
– The functions and stages within a supply chain that devise an
integrated strategy with a shared objective
– One extreme: each function at each stage develops its own strategy
– Other extreme: all functions in all stages devise a strategy jointly

Five categories:
– Intracompany intraoperation scope
– Intracompany intrafunctional scope
– Intracompany interfunctional scope
– Intercompany interfunctional scope
– Flexible interfunctional scope
 S u p p liers M a n ufactu rer D istrib u tor R eta iler C u sto m er

C o m p etitiv e
S tra teg y
P ro d u ct Intercom pa ny
D eve lo p m en t Interfu nctio n a l In tra co m p a ny
S tra teg y In tra fu nctio n a l
a t D istrib uto r
S u p p ly C h a in
Intra co m p a ny
S tra teg y In tracom p any
Intra o p era tio n
Interfu nctio n a l
a t D istrib u to r
M arketin g a t D istribu to r
S tra teg y
Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
Information
– data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– potentially the biggest driver of supply chain performance
Sourcing
– functions a firm performs and functions that are outsourced
Pricing
– Price associated with goods and services provided by a firm to the supply
chain
 Com petitive Strategy

Supply C hain
Strategy
Efficiency R esponsiveness
Supply chain structure

Logistical Drivers

Facilities Inventory Transportation

Inform ation Sourcing Pricing

Cross Functional D rivers

Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)

Role in the competitive strategy

– economies of scale (efficiency priority)
– larger number of smaller facilities (responsiveness
priority)

Example 3.1: Toyota and Honda

Components of facilities decisions

Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other factors to consider (e.g., proximity to customers)
Capacity (flexibility versus efficiency)
Manufacturing methodology (product focused versus
process focused)
Warehousing methodology (SKU storage, job lot storage,
cross-docking)
Overall trade-off: Responsiveness versus efficiency
Role in the supply chain

Role in the competitive strategy

Components of inventory decisions

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
• I = RT (Little’s Law)
• I = inventory; R = throughput; T = flow time
• Example
• Inventory and throughput are “synonymous” in a supply
chain
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

Trade-off

Example 3.2 – Nordstrom

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 cost of flexible production

Overall trade-off: Responsiveness versus efficiency

– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
Role in the supply chain

Role in the competitive strategy

Components of transportation decisions

Moves the product between stages in the supply
chain

Impact on responsiveness and efficiency

Faster transportation allows greater responsiveness

but lower efficiency

Also affects inventory and facilities

If responsiveness is a strategic competitive priority,
then faster transportation modes can provide
greater responsiveness to customers who are willing
to pay for it

Can also use slower transportation modes for

customers whose priority is price (cost)

Can also consider both inventory and transportation

to find the right balance

Example 3.3: Laura Ashley

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

Role in the supply chain

Role in the competitive strategy

Components of information decisions

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
Allows supply chain to become more efficient and
more responsive at the same time (reduces the need
for a trade-off)

Information technology
Push (MRP) versus pull (demand information transmitted
quickly throughout the supply chain)

Coordination and information sharing

Forecasting and aggregate planning

Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software

Overall trade-off: Responsiveness versus efficiency

Role in the supply chain

Role in the competitive strategy

Components of sourcing decisions

Set of business processes required to purchase
goods and services in a supply chain

Supplier selection, single vs. multiple suppliers,

contract negotiation
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
In-house versus outsource decisions

Supplier evaluation and selection

Procurement process

Overall trade-off: Increase the supply chain profits

Role in the supply chain

Role in the competitive strategy

Components of pricing decisions

Pricing determines the amount to charge customers
in a supply chain

Pricing strategies can be used to match demand and

supply
Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness

Low price and low product availability; vary prices by

response times
Pricing and economies of scale

Everyday low pricing versus high-low pricing

Fixed price versus menu pricing

Overall trade-off: Increase the firm profits

Increasing variety of products

Decreasing product life cycles

Increasingly demanding customers

Fragmentation of supply chain ownership

Globalization

Difficulty executing new strategies