Supply/Demand Chain

Introduction, Overview and Strategy

These slides address chapters 1 through 3 of the
textbook, with some information already found in the
earlier Sustainable Demand Chain Management: an
Introduction de-emphasized
While the slide decks are based on the textbook, they
have been customized for this class
Additional materials are often included
Professorial commentary that expresses a different
viewpoint than in the text will be noted in a different color
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Overview of Course

1. Chapters 1-3 + additional slide deck: Introduction, Overview
and Strategy
2. Chapters 4-6: Network Planning and Distribution
3. Chapters 8-9: Aggregate Planning
4. Chapters 10-11, 13+ additional slide deck: Inventory and
Transportation
5. Chapter 17: Supply Chain Coordination
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Who Needs to Know About this
Topic?
Anyone involved in a manufacturing or service
industry where capacities and raw materials cannot be
obtained or expanded without a time or cost penalty

Executives and Entrepreneurs must understand the strategic
importance of the Supply Chain

Managers, Consultants and Software Designers need to be
able to analyze, design, and implement Supply Chain
solutions

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Supply Chain Management is not
Learned just Through a Textbook
The best solution to a Supply Chain problem may not win
An elegant, mathematically complex LP presented such that only Ph.D.s
understand may not be the best practical solution to the problem at hand.
And even if it is, it is not the one that will be awarded the contract!

Supply Chain Practitioners need soft skills
Work effectively with clients and team members, including being
responsive to questions and requests
You must package and sell your proposed solution

Supply Chain Practitioners need hard skills
Lots of data, need to understand processes and interactions with IT
Work usually involves creating or adapting large-scale computer models

The class is designed for you to practice both hard and soft skills

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Traditional View: Logistics in the
US Economy (2006, 2007)
Freight Transportation $809, $856 Billion
Inventory Expense $446, $487 Billion
Administrative Expense $50, $54 Billion
Total Logistics Costs $1.31, $1.4 Trillion
Logistics Related Activity 10%, 10.1% of GNP
About 21% of total costs for a manufacturing firm
Logistical costs percentages are higher in the EU

But supply chain is more than logistics.
Source: 18
th
and 19
th
Annual State of Logistics Report Logistics Magazine
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Supply Chain Management:
Mishaps and Opportunities
Estimated that the grocery industry could save $30 billion (10%
of operating cost) by using effective logistics and supply chain
strategies
A typical box of cereal spends 104 days from factory to sale
A typical car spends 15 days from factory to dealership
Compaq estimates it lost $.5 billion to $1 billion in sales in
1995 because laptops were not available when and where
needed
When the 1 gig processor was introduced by AMD, the price of
its previous version, the 800 megabyte processor, dropped by
30%
What happened to firms who had stockpiled those?
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Chapter 1 Outline
What is a Supply Chain? (We covered this earlier)
Decision Phases in a Supply Chain
Process View of a Supply Chain
The Importance of Supply Chain Flows
A Brief Review of Material to Date
Typical stages: (from a demand chain perspective)
customers<retailers<distributors<manufacturers<suppliers
All stages may not be present- Can you think of some well
known companies that are missing a stage?
What stage is always present?

The obvious flow is the movement of products from
suppliers to the customer, but also includes movement
of information, funds, and products in both directions
Reverse logistics is an important facet of both sustainability
and CRM initiatives, will be discussed later.



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The Objective of a Supply Chain
Sources of supply chain revenue: the customer
Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain
Supply chain management is .
Book: the management of flows between and among
supply chain stages to maximize total supply chain
profitability
Professor commentary: is the coordination of business
functions within an organization and its channel partners in
order to provide goods and services to fulfill customer
demand responsively, efficiently and sustainably

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Dell Computer: Illustration of
Supply Chain Success
Example: Dell receives $1000 from a customer for a
computer (revenue)
Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
Difference between $1000 and the sum of all of these
costs is the supply chain profit
Time value of money often plays a role
Supply chain profitability is the total profit to be shared
across all stages of the supply chain
Supply chain success should be measured by total supply
chain profitability, not profits at an individual stage
In practice this may be difficult when stages are separate firms
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Decision Phases of a Supply Chain
1. Supply chain strategy (also called chain design)
2. Supply chain planning
3. Supply chain operation
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Supply Chain Strategy (or Design)
Decisions about the structure of the supply chain and what
processes each stage will perform
Strategic supply chain decisions
Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems
Supply chain design must support strategic objectives
Supply chain design decisions are long-term and
expensive to reverse must take into account market
uncertainty
Decisions often analyzed first through models and simulations
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Supply Chain Planning
Definition of a set of policies that govern short-term
operations - typically a quarter to a couple years
Fixed by the supply configuration from previous phase
Typically starts with a forecast of demand in the coming year
Planning decisions:
Which markets will be supplied from which locations
Planned buildup of inventories, inventory policies
Subcontracting, backup locations
Timing and size of market promotions
Must consider demand uncertainty, exchange rates,
competition over the time horizon

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Supply Chain Operations
Time horizon is weekly or daily
Decisions regarding individual customer orders
Supply chain configuration is fixed and operating
policies are determined
Goal is to implement the operating policies as
effectively as possible
Allocate orders to inventory or production, set order
due dates, generate pick lists at a warehouse, allocate
an order to a particular shipment, set delivery
schedules, place replenishment orders
Much less uncertainty (due to short time horizon)
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Process View of a Supply Chain
Cycle view: processes in a supply chain are divided
into a series of cycles, each performed at the
interfaces between two successive supply chain stages
We will not be emphasizing the cycle view in class, as not
all chains have all stages present
Push/pull view: processes in a supply chain are
divided into two categories depending on whether
they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)
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Push/Pull View of Supply Chains
Actions initiated from Suppliers Retail/Customer
Initiated Action
The barrier between push
And pull may vary for different
companies and industries
PUSH PROCESSES PULL PROCESSES
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Push/Pull View of
Supply Chain Processes
Supply chain processes fall into one of two categories
depending on the timing of their execution relative to
customer demand
Pull: execution is initiated in response to a customer order
(reactive)
Push: execution is initiated in anticipation of customer
orders (speculative)
Push/pull boundary separates push processes from
pull processes
The relative proportion of push and pull processes can have
an impact on supply chain performance

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Outline: Chapter 2 - Chain Performance:
Achieving Strategic Fit and Scope
Competitive and supply chain strategies
Achieving strategic fit
Expanding strategic scope
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Competitive and Supply
Chain Strategies
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
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The Value Chain: Linking Supply
Chain and Business Strategy
New
Product
Development
Marketing
and
Sales
Operations Distribution Service
Overall Competitive Strategy
Product Dev.
Strategy
Marketing
Strategy
Supply Chain Strategy
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Achieving Strategic Fit
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
Example of strategic fit Dells varied sales channels
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How is Strategic Fit Achieved?
Step 1: Understanding the customer and the supply
chain uncertainty
Step 2: Understanding the supply chain capabilities
Step 3: Achieving strategic fit
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Step 1: Understanding the Customer
and Supply Chain Uncertainty
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
Demand uncertainty: How much does customer demand for a
product vary?
Are there particular needs related to Sustainability?

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Step 1: Understanding the Customer
and Supply Chain Uncertainty
Key Point: Implied Demand Uncertainty is more than
just Demand Uncertainty
Demand uncertainty: uncertainty of customer demand for a
product
I mplied demand uncertainty: resulting uncertainty for the
supply chain given the portion of the demand the supply chain
must handle and the attributes the customer desires from the
product and the experience of purchasing it:
For example: if customers require very fast service or if they are many
varieties of the product (and customers are picky about what they get)
implied demand uncertainty is higher.
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Impact of Customer Needs on Implied
Demand Uncertainty
Customer Need Causes implied demand
uncertainty to increase because
Range of quantity required increases Wider range of quantity required
implies greater variance in demand
Lead time required to decrease Less time to react to orders
Variety of products required increases Demand per product becomes more
disaggregated
Number of channels through which
product may be acquired increases
Total customer demand is now
disaggregated over more channels
Rate of innovation must increase New products tend to have more
uncertain demand
Required service level must increase Firm now has to handle unusual
surges in demand
Supply Uncertainty
Now turn away from demand briefly to look at other side of the
coin: Supply
Supply Uncertainty variability associated with getting the
right amount of the product at the right time
Will increase with.
Unpredictable/low yields problematic issue from high tech
(semiconductor) to low tech- traditional agriculture)
Limited/inflexible supply capacity
Evolving production process
First step to achieving strategic fit is to understand customers
and their inherent implied demand uncertainty, and also
consider effects from Supply Uncertainty, mapping both onto
the implied uncertainty spectrum

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Implied Uncertainty Spectrum
Predictable
supply and
demand
Salt at a
supermarket
A new
communication
device
Highly uncertain
supply and demand
Figure 2.2: The Implied Uncertainty (Demand and Supply)
Spectrum
Predictable supply and uncertain
demand or uncertain supply and
predictable demand or somewhat
uncertain supply and demand
An existing
automobile
model
There are exceptions- for example, with salt, think of Fleur de Sel or pink Himalayan salt!
Many firms have attempted to move their products upstream, eg. Fresh Choice: bagged salads
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Step 2: Understanding the
Supply Chain Capabilities
How does the firm best meet demand?
One dimension describing the chain is supply chain responsiveness
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
Supply chain efficiency: cost of making and delivering the product
to the customer
Increasing responsiveness usually results in higher costs, lowing efficiency
Second step to achieving strategic fit is to map the supply chain on
the responsiveness spectrum

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High Low
Low
High
Responsiveness
Cost
Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
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Responsiveness Spectrum
I ntegrated
steel mill-
Production
scheduled
months in
advance
7-11 J apan,
Changes
merchandise
Mix by location
and time of day
Highly
efficient
Highly
responsive
Somewhat
efficient
Somewhat
responsive
Hanes
Apparel,
Traditional
Make-to-stock
Manufacturer
With lead-times
of several weeks
Most
automotive
Production, large
Variety of products
in a few weeks,
Some customization
So now we have two spectrums (lines)- what do you think is next?
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Step 3: Achieving Strategic Fit
Third Step is to ensure that what the supply chain does well is
consistent with target customers needs
All functions in the value chain must support the competitive
strategy to achieve strategic fit
Barilla Pasta and Apple Computer are examples of companies
that are in the Zone
Do you think their supply chain strategies are similar?
Key points
There is no one right supply chain for all companies
there is a right supply chain strategy for a given competitive strategy
In balancing efficiency and responsiveness, it is still critical to
remember sustainability
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Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Implied
uncertainty
spectrum
Responsive
supply chain
Efficient
supply chain
More
Certain
Highly
Uncertain
Responsiveness
spectrum
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Comparison of Efficient and
Responsive Supply Chains
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
of greater cost
Aggressively reduce even if
costs are significant
Supplier selection strategy Cost and, typically lower
quality
Speed, flexibility, quality
Transportation strategy Greater reliance on low cost
modes
Greater reliance on
responsive (fast) modes
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Other Issues Affecting Strategic Fit
1. Multiple products and customer segments
2. Product life cycle
3. Competitive changes over time
4. Sustainability
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Multiple Products and
Customer Segments
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:
1. Different supply chains for different products/customers
or
2. Tailor supply chain to best meet the needs of each products
demand. Example: W.W. Grainger, MRO
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Product Life Cycle
The demand characteristics of a product and the needs
of a customer segment change as a product goes
through its life cycle
Examples: pharmaceutical firms, Intel
As the product goes through the life cycle, the supply
chain changes from one emphasizing responsiveness to
one emphasizing efficiency
Supply chain strategy must evolve throughout 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
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Competitive Changes Over Time
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
Example Dell used to sell PCs and laptops only via internet,
but now also sells at Wal-Mart
Sustainability
Consider both Ethical as well as Environmental issues
Sustainability policies may be driven by either
regulation or risk factors
WEEE- EU regulation forced electronics providers to
rethink SCs
Supplier risk
Demand risk, consumer expectations
May be complex relationships between
responsiveness, efficiency and sustainability issues
Sometimes, but not always, involving tradeoffs

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2-39
Expanding Strategic Scope
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

From least to most evolved/expanded.
1. Intracompany intraoperation scope silos!
2. Intracompany intrafunctional scope
3. Intracompany interfunctional scope
4. Intercompany interfunctional scope - CPFR
5. Agile Intercompany, interfunctional scope - 3+ companies
Obstacles to Achieving Strategic Fit
In short: todays business environment is more
challenging for companies
1. Increasing variety of products
2. Shorter product life cycles (technology development, trend)
3. Increasingly picky customers
4. Fragmentation of chain ownership
5. Globalization, on supply-side and also the demand side*
6. Rapidly changing business environment
7. Difficulties with executing new strategies
8. Especially for 2007-2011 timeframe- economic cycle
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*see the P&G Swiffer in Italy story
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Outline: Chapter 3- Supply Chain
Drivers and Metrics
Drivers of supply chain performance
A framework for structuring drivers
Detailed view for each driver and appropriate metrics
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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 and routes
4. Information
data & analysis regarding inventory, transportation, facilities throughout the chain
potentially the biggest driver of chain performance
5. Sourcing
functions a firm performs and functions that are outsourced
6. Pricing
Price associated with goods and services provided by a firm to the supply chain
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A Framework for
Structuring Drivers
Competitive Strategy
Supply Chain
Strategy
Efficiency
Responsiveness
Facilities Inventory Transportation
Information
Supply chain structure
Cross Functional Drivers
Sourcing Pricing
Logistical Drivers
** also includes Sustainability
**
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Facilities
Role in the supply chain- the where
manufacturing or storage (warehouses)
Role in the competitive strategy
economies of scale (efficiency priority)
larger number of smaller facilities (responsiveness priority)
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

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Inventory
Role in the supply chain
Exists because of a mismatch between supply and demand
Source of cost and influence on responsiveness
Given Littles Law, if throughput=demand, then inventory synonymous
with material flow time
Role in the 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 (or consolidated
further away) to make the firm more efficient
Example: High-service department store: Nordstroms

We will spend 2 chapters in this class on inventory policies!
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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 cost of flexible production
Overall trade-off: Responsiveness versus efficiency
more inventory: greater responsiveness but greater cost
less inventory: lower cost but lower responsiveness
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Transportation
Role in the supply chain
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
Role in the competitive strategy
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
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Components of
Transportation Decisions
Mode of transportation:
air, truck, rail, ship, pipeline, electronic transportation
Utilization and backhaul rates should be considered
vary in cost, speed, size of shipment, flexibility, carbon footprint
Route and network selection
route: path along which a product is shipped
network: collection of locations and routes
In-house or outsource (see driver #5)
Overall trade-off: Responsiveness versus efficiency
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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
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)
Need to ask: what information is most valuable?

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Components of Information
Decisions
Components of information decisions
Push (MRP) versus pull (need demand information across
all stages)
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies include the following:
EDI
Internet
ERP systems
Supply Chain Management software
RFID
Still some tradeoff exists: Responsiveness versus efficiency
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Sourcing
Role in the supply chain
Set of business processes required to purchase goods and services in a chain
Examples: contract manufacturers, Transportation/Inventory services- 3PL
Supplier selection, single vs. multiple suppliers, contract negotiation
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
Example: Expedited delivery usually requires Parcel Delivery
Components of sourcing decisions
Perform a task in-house versus outsource?
Supplier evaluation and selection
Procurement process
Overall trade-off: balance profitability (Risk? Ethical issues?)

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Pricing
Role in the supply chain
Pricing determines the amount to charge customers
Pricing strategies can be used to match demand and supply
Role in the competitive strategy
Firms can utilize optimal pricing strategies to improve efficiency and
responsiveness
Low price and low product availability; vary prices by response times
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
We will explore effects from some of these pricing decisions later

Metrics
The performance for these supply chain drivers can be quantified
with metrics. Heres some examples we will work with during
this term:
1. Facilities: Capacity, Utilization rate, per unit production cost
2. Inventory: Days-OnHand (Dollars-OnHand), Safety Stock, Stockout %
3. Transportation: Fraction transported by mode, inbound/outbound
shipment size, inbound/outbound transportation cost per unit
4. Information: Forecast error, ratio of demand variability to order variability
5. Sourcing: supplier lead time, average purchase price, supplier reliability
6. Pricing: profit margin, fixed cost per order, variable cost per unit
Certain metrics will be more important than others for different
firms with different supply chain strategies
Information Overload: SCOR has over 150+ KPIs

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Summary of Learning Objectives-
Chapter 1
What are supply chain stages?
What are the three flows within a supply chain?
What are the three key supply chain decision phases
and what is the significance of each?
What is the push/pull view of a supply chain?
What is the goal of a supply chain and what is the
impact of supply chain decisions on the success of the
firm?
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Summary of Learning Objectives
for Chapter 2
Why is achieving strategic fit critical to a companys
overall success?
How does implied demand uncertainty differ from
demand uncertainty?
How does a company achieve strategic fit between its
supply chain strategy and its competitive strategy?
What are some complications to achieving this fit?

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Summary of Learning Objectives
for Chapter 3
What are the major drivers of supply chain
performance?
What is the role of each driver in creating strategic fit
between supply chain strategy and competitive strategy
(or between implied demand uncertainty and supply
chain responsiveness)?
What are some relevant metrics?

In the remainder of the course, we will learn how to make
decisions with respect to these drivers in order to achieve
strategic fit and surmount these obstacles