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Operations Management
OPMA 317
Brent Snider

Chapter Eight: Supply Chain Strategy Supply chain management involves optimizing the entire supply chain operations for the product by taking a systems approach to managing the flow of information, materials, and services from raw materials suppliers through factories and warehouse to the end customer The supply chain includes suppliers, the transformation process, distributors, and customers Issues that need to be addressed in designing a companys supply chain o Sourcing o Logistics and inventory management o Vertical integration and outsourcing o Measuring supply chain performance o Product design to facilitate supply chain management Strategic sourcing is the development and management of supplier relationships to acquire goods and services in a way that aids in achieving the needs of the business Disintermediation eliminates the intermediaries which reduces costs and increases the contact between the vendor and buyer thus increasing the vendors understanding of the customer The phenomenon of variability magnification in the manufacturer, distributor, wholesaler, and retailer chain is called the bullwhip effect o Indicates a lack of synchronization among supply chain members o The lack of information sharing, rationing, and gaming can cause the bullwhip effect as well Continuous replenishment is a way to minimize or eliminate the bullwhip effect o Establish a electronic data interchange (EDI) links with retailers and offers an everyday low price that eliminates discounts o Use upper and lower limit previously established with each supplier based on each daily demand o Trucks leave the plant and arrive at the distribution centers that required replenishments that day which cuts the lead time Benefits of continuous replenishment o Retailer increases profits o Retailer has more incentive to carry a broader line of products and give them more shelf space Root cause of supply chain problems is a mismatch between the type of product and the type of supply chain Fisher has developed a framework to help managers understand the nature of the demand and then devise the supply chain that can best satisfy that demand Products can either be categorized as primarily functional or primarily innovative o Functional products include the staples that people buy in a wide range of retail outlets satisfy basic needs which do not change much over time o Innovative products typically have a life cycle of just a few months have a great variety typical which increases unpredictability Functional Demand Innovative Demand Low demand uncertainty High demand uncertainty More predictable demand Difficult to forecast Stable demand Variable demand Long product life Short selling season Low inventory cost High inventory cost Low profit margin High profit margin Higher volume High product variety Low stockout cost High stockout cost Low obsolescence High obsolescence There are uncertainties revolving around the supply chain that are equally important drivers for the right supply chain strategy classified into either stable or evolving supply processes o Stable supply process is where the manufacturing process and the underlying technology are mature and the supply base is well established Tends to be highly automated Long term contracts are prevalent o Evolving supply process is where the manufacturing process and the underlying technology are still under early development and are rapidly changing supply base is limited in both size and experience Stable Supply Process Evolving Supply Process Fewer breakdowns Vulnerable to breakdowns Stable and higher yields Variable and lower yields Less quality problems Potential quality problems More supply sources Limited supply sources Reliable suppliers Unreliable suppliers Fewer process changes More process changes Fewer capacity constrains Potential capacity constrained Easier to change over Difficult to change over Flexible Inflexible Dependable lead times Variable lead time Efficient supply chains use strategies aimed at creating the highest cost efficiency o Non-value added activities should be eliminated, scale economies should be pursued, optimization techniques should be deployed to get the best capability utilization, information linkages should be established to ensure the most efficient, accurate, and cost effective transmission of info across the supply chain Risk hedging supply chains use strategies aimed at pooling and sharing resources so that risks in supply disruption can be shared o Increased safety stock is a key component, inventory technology is important for the success since real time information on inventory and demand allows for the most cost effective management and transshipment of goods between partners Responsive supply chains use strategies aimed at being responsive and flexible to the changing and diverse needs of the customers o Use build to order and mass customization processes Agile supply chains use strategies aimed at being responsive and flexible to customer needs, while the risks of supply shortages is hedged by pooling inventory and other capacity resources o Combine hedged and responsive supply chains Low (Functional) Demand High (Innovative) Demand Uncertainty Uncertainty Low (Stable) Supply Efficient supply chain Responsive supply chain Uncertainty Ex. Grocery, basic apparel, Ex. Fashion apparel, food, oil and gas computers, popular music High (Evolving) Supply Risk hedging supply Agile supply chain Uncertainty chain Ex. Telecom, high end Ex. Hydroelectric power, computers, semiconductor food produce When selecting a supplier it is important to consider all of the costs involved (total cost of ownership) o Consider both the additional costs and the qualitative factors Logistics refers to the management functions that support the complete cycle of material flow: from the purchase and internal control of production materials; to the planning and control of work in process; to the purchasing, shipping, and distribution of the finished product Inventory positioning involves deciding where and in
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