Operations Management For Competitive Advantage ninth edition 1

CHASE AQUILANO JACOBS

Operations Management
For Competitive Advantage
Chapter 8

Supply Chain Strategy

CHASE AQUILANO JACOBS ninth edition
©The McGraw-Hill Companies, Inc., 2001
Operations Management For Competitive Advantage ninth edition 2

Chapter 8
Supply-Chain Strategy
• Supply-Chain Management Defined?
• Measuring Supply-Chain Performance
• Bullwhip Effect
• Outsourcing Defined
• Value Density Defined
• Mass Customization Defined

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What is Supply-Chain Management?

Defined
• Supply-chain is a term that describes how
organizations (suppliers, manufacturers,
distributors, and customers) are linked
together.
• Supply-chain management is a total
system approach to managing the entire
flow of information, materials, and services
from raw-material suppliers through factories
and warehouses to the end customer.

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Formulas for Measuring Supply-Chain

Performance
• Inventory Turnover = Cost of goods sold .
Average aggregate inventory value

• Weeks of Supply = Average aggregate inventory value (52 Weeks)

Cost of goods sold

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Example of Measuring Supply-

Chain Performance
• Suppose a company’s new annual report
claims their costs of goods sold for the
year is $160 million and their total
average inventory (production materials +
work-in-process) is worth $35 million.
This company is used to having any
inventory turn ratio of 10.
• What is this year’s Inventory Turnover
ratio? What does it mean?

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Example of Measuring Supply-Chain

Performance (Continued)
Inventory Turnover
= Cost of goods sold/Average aggregate inventory
value
= $160/$35
= 4.57

Since the company is used to an inventory turnover of 10, a

drop to 4.57 means that the inventory is not turning over as
quickly as it had in the past. Without knowing the industry
average of turns for this company it is not possible to
comment on how they are competitively doing in the
industry.

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Bullwhip Effect
The magnification of variability in orders in the supply-chain.

Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

Quantity

Quantity

Quantity
Order

Order

Order
Time Time Time

A lot of retailers …can lead to …can lead to even

each with little greater variability for greater variability
variability in their a fewer number of for a single
orders…. wholesalers, and… manufacturer.
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Supply Chain Management

• Apply a total systems approach to managing

the entire flow of
– information
– materials
– and services

Raw
Factories & End
material
warehouses customer
suppliers

3
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CONSIDER UNCOORDINATED, LARGE BATCHES

NO INFORMATION SHARING EXCEPT ORDERS

SUPP. > MANUFACTURER > RETAILER > CUSTOMER

d=100 U/DAY, D=25000 U/YEAR,
Order Quantities Qs=2500, Qm=1250,Qr=1250, Qc=100 U/DAY
Time Between Shipments AND Information Lag:
Ts = 2500/25000=1/10 > 1 month
Tm = 1250/25,000 = 1/20 year > 2 weeks Tr = 1/20 year > 2 weeks
Total network shipment and info. leadtimes ABOUT 2 months
Retailer change will take about 2 months to be felt back at the Supplier
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CONSIDER COORDINATED, SMALL BATCHES

NO INFORMATION SHARING SHORT LEADTIMES

SUPP. > MANUFACTURER > RETAILER > CUSTOMER

d=100 U/DAY, D=25000 U/YEAR,
Order Quantities Qs=100, Qm=100,Qr=100, Qc=100 U/DAY
Time Between Shipments and Information Lag:
Ts = Tm = Tr = 1 DAY
Total network shipment and information leadtime = 3 DAYS
A change at retail will take about 3 DAYS to be felt back at the Supplier

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CONSIDER COORDINATED, SMALL BATCHES

FULL INFORMATION SHARING FROM RETAIL

ON-LINE, REAL TIME

SUPP. > MANUFACTURER > RETAILER > CUSTOMER
d=100 U/DAY, D=25000 U/YEAR,
Order Quantities Qs=100, Qm=100,Qr=100, Qc=100 U/DAY
Time Between Shipments:Ts = Tm = Tr = 1 DAY
Information Lag = 0 time.
Total shipment leadtime = 3 DAYS
A change at retail will be felt back at the Supplier immediately.
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Matching Supply-Chains with

Products
Functional Innovative

Products Products

Efficient
Supply-Chain Match Mismatch

Responsive
Mismatch Match
Supply-Chain

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What is Outsourcing?
Defined
Outsourcing is defined as the act of moving a

firm’s internal activities and decision

responsibility to outside providers.

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Outsourcing

• Purchased items account for 60 to 70% of

the cost of goods sold.
• Outsourcing allows firms to focus on their
core competencies.
– Organizations outsource when they decide to
purchase something they had been making in-
house.
• Typically handled by materials management
function. 4
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Reasons to Outsource

• Organizationally-driven (what we do best, transform.)

• Improvement-driven (cost, quality, speed, flexibility)
• Financially-driven (reduce invest. Increase profits)
• Revenue-driven (increase market share, new markets)
• Cost-driven (reduce costs)
• Employee-driven (better career paths, more focus)

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Make or Buy

• Current trend favors outsourcing all activities

that do not directly represent or support core
competencies.
• Are there any dangers associated with
aggressive outsourcing? What are the
implications for JIT production?

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Value Density
Defined
• Value density is defined as the value of an
item per pound of weight.

• It is used as an important measure when

deciding where items should be stocked
geographically and how they should be
shipped.

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Mass Customization
Defined
• Mass customization is a term used to
describe the ability of a company to deliver
highly customized products and services to
different customers.

• The key to mass customization is effectively

postponing the tasks of differentiating a
product for a specific customer until the
latest possible point in the supply-chain
network.

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