BUSOBA 3230: Purchasing and Supply Chain Design

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Strategic Sourcing

The development and management of supplier relationships to acquire goods and services in a way that aids in achieving the needs of a business.

Sourcing

A process suitable for procuring products that are strategically important to the firm.

Bullwhip Effect

• The variability in demand is magnified as we move from the customer to the producer in the supply chain.
• The effect indicates a lack of synchronization among supply chain members.
• A slight change in consumer sales ripples backward in the form of magnified oscillations upstream, resembling the result of a flick of a bullwhip handle.
• Because the supply patterns do not match the demand patterns, inventory accumulates at various stages and shortages and delays occur at others.

Continuous Replenshiment

A program for automatically supplying groups of items to a customer on a regular basis.

Functional Products

• Staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations.
• Products satisfy basic needs, which do not change much over time.
• They have stable, predictable demand and long life cycles.
• Their stability invites competition, which often leads to low profit margins.

Innovative Products

• Products such as fashionable clothes and cell phones that may have a life cycle of just a few months.
• To avoid low margins, many companies introduce innovations to give customers an additional reason to buy their products.
  The newness of the innovative products makes demand for them unpredictable.
• Imitators quickly erode the competitive advantage that innovative products enjoy, and companies are forced to introduce a steady stream of newer innovations.
• The short life cycles and the great variety typical of these products further increase unpredictability.

Efficient Supply Chains

• Supply chains that utilize strategies aimed at creating the highest levels of cost efficiency.
• For such efficiencies to be achieved, non-value added activities should be eliminated, scale economies should be pursued, optimization techniques should be deployed to get the best capacity utilization in production and distribution, and information linkages should be established to ensure the most efficient, accurate, and cost-effective transmission of information across the supply chain.

Responsive Supply Chains

• Supply chains that utilize strategies aimed at being responsive and flexible to the changing and diverse needs of customers.
• To be responsive, companies use build to order and mass customization processes as a means to meet the specific requirements of customers.

Outsourcing

• Moving some of a firm's internal activities and decision responsibility to outside providers.
• The terms of the agreement are established in a contract.
• Goes beyond the more common purchasing and consulting contracts because not only are the activities transferred, but also resources that make the activities occur, including people, facilities, equipment, technology, and other assets, are transferred.
• The responsibilities for making decisions over certain elements of the activities are transferred as well.
• Taking complete responsibility for this is a specialty of contract manufacturers.

Inventory Turnover

• A measure of supply chain efficiency.
• Cost of Goods Sold / Average Aggregate Inventory Value

Cost of Goods Sold

• The annual cost for a company to produce the goods or services provided to customers.
• Sometimes referred to as the cost of revenue.
• Doesn't include selling and administrative expenses of the company.

Average Aggregate Inventory Value

• The average total value of all items held in inventory for the firm, valued at cost.
• Includes the raw materials, work in process, finished goods, and distribution inventory considered owned by the company.

Weeks of Supply

• Preferred measure of supply chain efficiency that is mathematically the inverse of inventory turnover times 52.
• Measure of how many weeks' worth of inventory is in the system at a particular point in time.
• (Average Aggregate/Cost of Goods Sold) x 52

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What is a supply chain?

• Regional, national, global.

Important Aspects/Skills of Supply Chains

• Collaboration (functions, firms)
• Critical thinking (problem solving)
• Strategic thinking

What are the main components of a supply chain?

The main components include sourcing, making, and delivering.

What are the types of suppliers in a supply chain?

Types of suppliers (from left to right/sourcing to delivering) include Tier 2 suppliers (service providers), Tier 1 suppliers, manufacturers, distributors, and retailers (brick and mortar/are online). At the end are customers.

Manufacturers to customers is…

Direct To Consumer

Downstream

Goods and services move from sourcing to delivering. Tier 2 suppliers to customers.

Upstream

Information and money move from delivering to sourcing. Customers to Tier 2 suppliers.

Inventory Production Strategies

• Make To Stock
• Make To Order
• Assemble To Order

Make To Stock

Everything is done based on forecast. All before customer orders.

Make To Stock Competitive Priorities

• Low cost
• Consistent quality
• Fast delivery
• High volume
• Economies of scale

Make To Stock Process Choice

• Continuous flow
• Line
• Large batch
• Product/Process Matrix

Assemble To Order

Some production before customer order.

Assemble To Order Competitive Priorities

Fast delivery + High variety

Assemble To Order Process Choice

• Continuous flow
• Line
• Large batch

Make To Order

Nothing is done before customer order.

Make To Order Competitive Priorities

• High quality
• On-time delivery
• Customization

Make To Order Process Choice

• Small batch
• Small volumes
• Job Shop
• Custom

Backward placement is…

further upstream.

Forward placement is…

• Close to customers.
• Further downstream.

Finished Goods

• More expensive than parts and components.
• Added value.

Engineer To Order

No design or engineering until customer order. Ex. Hospital

Customer Order Decoupling Point (CODP)

• Upstream from _, based on forecast.
• Downstream from _,based on customer order.

Supply chain design is based on…

An article titled "Right Supply Chain For Your Product" by Marshall Fisher.

Efficient Supply Chains

• Ex. Paper Towels
• Demand: Predictable, Low error
• Competitive Dimensions/Priorities: Low cost, Consistent quality
• New Service/Product Information: Infrequent
• Contribution Margins: Low

Efficient Supply Chains PART 2

• Product Variety: Low
• Operations Strategy: Make To Stock
• Capacity Cushion: Very low
• Supplier Selection: Emphasize low prices and on time delivery

Responsive Supply Chains

• Ex. Phone, Camera
• Demand: Unpredictable, High error
• Competitive Dimensions/Priorities: Top quality, Customization, Volume flexibility
• New Service/Product Information: More frequent
• Contribution Margins: Higher

Responsive Supply Chains PART 2

• Product Variety: Higher
• Operations Strategy: Make To Order or Assemble To Order
• Capacity Cushion: Higher
• Supplier Selection: Emphasize customization, Volume flexibility, Fast delivery

Innovative

• Ex. iPad, trendy clothing/fashion
• Demand certainty is low.
• Profit margins is high.

Innovative PART 2

• Product life cycles is short.
• Product variety is high.
• Make to order lead time is shorter.

Functional

• Ex. Paper towels, flour, toilet paper.
• Demand certainty is high.
• Profit margins is low.

Functional PART 2

• Product life cycles is long.
• Product variety is low.
• Make to order lead time is longer.

Make To Order Lead Time

How long it takes to design new products, gets them to market.

Efficient Supply Chain is connected to…

Functional Products

Responsive Supply Chain is connected to…

Innovative Products

Mass Customization in Supply Chains

• Assemble To Order
• Modular Design
• Postponement

Mass Customization/Competitive Advantage

• Managing customer relationships
• Eliminating finished goods inventory
• Increasing perceived value of services or products

Outsourcing

moving some of afirm's internal activities anddecision responsibility tooutside providers

Outsourcing Decisions

• Financial, organizational, and improvement.
• Not cheaper.

Financial

• Turning fixed cost into variable cost.
• Improve return on assets (fewer assets)
• Ex. Apple

Financial Driven Reasons

• Improve return on assets.
• Generate cash.
• Gain access to new markets.
• Reduce costs.
• Turn fixed costs into variable costs.

Organizational

Obtain expertise, skills, tech.

Organizationally Driven Reasons

-improve effectiveness by focusing on what the firm does best
-increase flexibility to meet changing demand for products and services
-increase product and service value by improving response to customer needs

Improvement

• Focus on core competencies.
• Increase flexibility.
• Improve risk management.

Improvement Driven Reasons

• Improve quality and productivity.
• Shorten cycle time.
• Obtain expertise, skills, and technologies that are not otherwise available.
• Improve risk management.
• Improve credibility and image.

Offshoring

Outsourcing overseas.

What is the purpose of outsourcing in supply chain management?

Outsourcing involves moving some internal activities and decision responsibilities to outside providers to improve efficiency and focus on core competencies.

Average Aggregate Inventory Value

How much inventory are we holding?

How is average aggregate inventory value calculated?

Average aggregate inventory value is calculated by summing the value of each type of inventory typically on hand.

What does 'weeks of supply' / 'days of supply' measure?

• 'Weeks of supply' measures how long inventory can support sales volume based on weekly sales at cost.
• How long will inventory support sales volume?

How is inventory turnover calculated?

• Inventory turnover is calculated by dividing annual sales at cost by average aggregate inventory value.
• How much sales volume can we get from inventory?

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Vendor Managed Inventory

When a customer allows the supplier to manage the inventory policy of an item or group of items.

Forward Buying

A term that refers to when a customer, responding to a promotion, buys far in advance of when an item will be used.

Supply Chain Uncertainty Framework

Designed to help managers understand the nature of demand for their products and then devise the supply chain that can best satisfy that demand.