Introduction to Supply Chain Management

Introduction to Supply Chain Management

Dr. Dale S. RogersCenter for Logistics Management

University of NevadaMGRS 474/674

Dr. Dale S. RogersCenter for Logistics Management

University of NevadaMGRS 474/674

Seminar Goal

■ Establish an understanding of the role and function of supply chain management strategies in the context of the technology marketplace.

■ Develop a more thorough understanding of the critical interrelationships that compose the supply chain.

■ Concept of supply chain system design■ Introduce and ask participants to identify an

opportunity to establish or improve supply chains.

Future of Competition

My Supply Chain vs. Your Supply Chain

SupplierSupplier InboundInboundTransportTransport

OutboundOutboundTransportTransport

DistributionDistributionManufacturingManufacturing UltimateUltimateCustomerCustomer




…is the process of planning, implementing and controlling the efficient, cost effective

flow and storage of raw materials, in-process inventory, finished goods, and related

information from point-of-origin to point-of-consumption for the purpose of conforming to

customer requirements.

[Council of Logistics Management, 1986]

1986 CLM DEFINITION OF LOGISTICS

SUPPLY CHAIN MANAGEMENT

…is the integration of key business processes

from end user through original suppliers, that

provides products, services, and information

that add value for customers and

other stakeholders.

[The International Center for Competitive Excellence, 1994][Global Supply Chain Forum, 1998]

1998 CLM DEFINITION OF LOGISTICS

….is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services,

and related information from the point-of-origin to the point-of-consumption in order to

meet customers' requirements.

[Council of Logistics Management, 1998]

Supp

ly C

hain

Bus

ines

s Pr

oces

ses

Tier 1Supplier

Tier 2Supplier

SUPPLY CHAIN MANAGEMENTIntegrating and Managing Processes Across the Supply Chain

LogisticsPurchasing Marketing & Sales

R&D

Customer Consumer/End-user

CUSTOMER RELATIONSHIP MANAGEMENT

CUSTOMER SERVICE MANAGEMENT

DEMAND MANAGEMENT

ORDER FULFILLMENT

MANUFACTURING FLOW MANAGEMENT

PROCUREMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

RETURNS

PRODUCT FLOWProduction Finance

Manufacturer

Information Flow

Source: Douglas M. Lambert, Martha C. Cooper, Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998, pp. 2.

Customer Relationship Management Process

! Customer focus teams develop and implement customer partnering programs.

! Product/service agreements are established.! New customer interfaces are used to better predict

customer demand and improve the way customers are serviced.

! Teams identify and eliminate sources of production variability.

! Key performance evaluation criteria (both company performance and customer account profitability) are used to measure results.

Required BehaviorsRequired Behaviors

Customer relationships are managed by customer focus teams whichnegotiate mutually beneficial product / service agreements with large, strategically significant customers.

Customer Relationship Management

Customer Service Management Process

! Customer Service provides a single source of customer information, a point of contact for administration of the product / service agreement.

! Instant promising/availability information is conveyed via the supply/demand manager interface.

! On-line/real-time product and pricing information assists customers with order placement.

! On-line/real-time access to order status information is available to support customer enquiries.

Required BehaviorsRequired BehaviorsMaximizing customer service means providing a focused point of contact for all customer enquiries in order to insulate them from the complexity of a large, multi-divisional corporation.

Customer ServiceManagement

Demand Management Process

! Demand requirements and supply capabilities are continuously modeled using point of sale and “key” customer data.

! Market requirements and production plans are coordinated on an enterprise-wide basis.

! Multiple sourcing and routing options are considered at the time of order receipt.

! Worldwide on-line/real-time inventory availability check and promising capacity is employed.

! Demand and production rates are synchronised and inventories are managed globally.

Required BehaviorsRequired BehaviorsIn demand management, customer demand is continuously gathered, compiled and renewed in order to match our supply capability with requirements in the market.

Demand Management

Fulfilment Process! Customer need dates and requirements drive

the process.

! Manufacturing, distribution, and transportation plans are integrated.

! Strategic alliances with channel partners and carriers are formed to meet requirements and to reduce total-delivered-cost of the product to customers.


Customer orders that are 100% on-time, accurate, and complete require an integrated supply and delivery system that is responsive, flexible and customer-driven.

Fulfillment

Manufacturing Flow Management Process

! Production must shift from a supply/push method of operation to a demand/pull method based on customer needs.

! Manufacturing processes must flexibly respond to market changes with rapid changeover capabilities for mass customisation.

! Minimum lot sizes are planned to move toward a make to order environment.

! Production priorities are driven by required delivery dates.

! Specific supply strategies are developed for each customer segment.


Rapid response to changing market conditions implies maximum flexibility in production planning and manufacturing capabilities.

Manufacturing Flow

Management

Procurement

Procurement Process

Relationships with major suppliers are corporately managed in strategic alliances while purchase order transactions become simplified and integrated with the supply process.


! Strategic plans of suppliers and company are aligned to focus resources on holding down costs and developing new products.

! Supplier categorisation and management is implemented on a corporate global basis, with purchasing in a strategic contracting role.

! Purchase order transactions are integrated with the supply process to improve productivity and all areas of supplier performance.

SUPPLY CHAIN NETWORK STRUCTURE

Members of the Focal Company’s Supply Chain

n

2

3

1

2

1

1

n

2

1

3

n

1

21

n

2

n

1

2

n

1

Tie r

3 to

n c

usto

mer

s

Con

sum

ers/

End-

cust

omer

s

n

Tier

3 to

n s

uppl

iers

Initi

al S

uppl

iers

Focal Company

Tier 1Customers

Tier 2Customers

Tier 3 toConsumers/

End-CustomersTier 2

SuppliersTier 1

Suppliers

Tier 3 toInitial

suppliers

n

1

n

2) What processes should belinked with each of these

key supply chain members?

1) Who are the key supplychain members with whom

to link processes?

3) What level of integration and management should be applied

for each process link?

Supply ChainBusinessProcesses

Supply ChainNetworkStructure

Supply ChainManagementComponents

SUPPLY CHAIN MANAGEMENT FRAMEWORK:Elements and Key Decisions

Source: Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities,” The International Journal of Logistics Management, Vol. 9, No. 2, 1998.

Managed Process LinksMonitor Process LinksNot-Managed Process LinksNon-Member Process Links

n

2

3

1

2

n

1

1

n

2

1

3

n

n

1

1

2 1

n

2

n

1

2

n

1n

1 n

Tier 1Customers

Tier 2Customers

Tier 3 toConsumers/

End-CustomersTier 2

SuppliersTier 1

Suppliers

Tier 3 toInitial

suppliers

n

1

TYPES OF INTER-COMPANY BUSINESS PROCESS LINKSIn

itial

Sup

plie

rs

Tier

3 to

n s

uppl

iers

Tie r

3 to

n c

usto

mer

s

Con

sum

ers/

End-

cust

omer

s


Non-Members of the Focal Company’s Supply Chain

Focal Company

The Global Supply Chain Forum, The Ohio State University -- Do not reproduce, cite or quote without written permission.

Alternative 1) Integrate with and activelymanage Link 2.

Alternative 2) Monitor the procedures ofCompany B and Company C for integrating and managing Link 2.

Alternative 3) Not involved, leave theintegration and management up toCompany B and Company C.

FocalCompany Company B Company C

Link 1 Link 2

THE FOCAL COMPANY’S ALTERNATIVES FOR INVOLVEMENT WITH LINK 2

SUPPLY CHAIN MANAGEMENT: THE DISCONNECTS

Tier 1Supplier

Tier 2Supplier

LogisticsPurchasing Marketing & Sales

R&D

Customer Consumer/End-Customer

CUSTOMER RELATIONSHIP MANAGEMENT

CUSTOMER SERVICE MANAGEMENT

DEMAND MANAGEMENT

ORDER FULFILLMENT

MANUFACTURING FLOW MANAGEMENT

PROCUREMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

RETURNS

PRODUCT FLOWProduction Finance

Manufacturer

Information Flow

Company A• Product Development• Supply Chain• Customer Management

Company B• Strategy Development• Business Management• Market Development• Product Development• Manufacturing Capability Development• Order Fulfillment

Company E• Customer Relationship Management• Customer Order Fulfillment• Business Planning• Manufacturing & Supply• Product Development• Procurement

Company D• Business Process

- Marketing Planning- Prospecting- Exploring Needs- Developing Solutions- Decision- Presenting & Closing- Delivering- Demonstration Results

Company F• Supply Chain• Account Planning

Company C• Selling Process• Customer Order Fulfillment• Manufacturing & Supply• New Product Creation• Procurement

REPRESENTATIVE BUSINESS PROCESSES IDENTIFIED IN SELECTED CASE COMPANIES

Communicationand Information Flow

Facility Structure

Work Flow/Activity Structure

OrganizationStructure

Product FlowFacility Structure

Planning andControl Methods

Physical & Technical Management Components

ManagementMethods

Power andLeadership Structure

Risk andReward Structure

Culture andAttitude

Managerial & BehavioralManagement Components

SUPPLY CHAIN MANAGEMENTFundamental Management Components

AN ILLUSTRATION OF A SUPPLY CHAIN SHOWING EACHINTEGRATED AND MANAGED BUSINESS PROCESS LINK

Product Development andCommercialization Process

Demand Management Process

Customer Relationship Management Process

Order Fulfillment Process

Not-Managed Business Process Link.

Focal Company.

Selected Members of the Focal Company's Supply Chain.

Managed Demand Management Process LinksManaged Order Fulfillment Process LinksManaged Product Develop./Commercial Process LinksManaged Customer Relationship Manag. Process Links

AN ILLUSTRATION OF A SUPPLY CHAIN COMBINING ALL THE INTEGRATED AND MANAGED BUSINESS PROCESS LINKS

Managed Customer Relationship Manag. Process Links

Not-Managed Business Process Links.

Focal Company.

Selected Other Membersof the Focal Company'sSupply Chain.

Managed Product Develop./Commercial. Process Links

Managed Order Fulfillment Process LinksManaged Demand Management Process Links

IMPLEMENTATION OF SUPPLY CHAIN MANAGEMENT

Note: Process sponsorship and ownership must be established to drive the attainment of the supply chain vision and eliminatethe functional barriers that artificially separate the process flows.

Information Architecture, Data Base Strategy, Information Visibility

Technical Logistics Purchasing Finance &Accounting

Sales &Marketing

BusinessProcesses

TypicalFunctions

Silos

Manufac-turing

CUSTOMERS

DemandManagement

NetworkPlanning

CapabilityPlanning SourcingDemand

Planning

CustomerRelationshipManagement

RequirementsDefinition

ManufacturingStrategy

SourcingStrategy

CustomerProfitability

AccountManagement

RequirementsDefinition

Customer ServiceManagement

PerformanceSpecifications

CoordinatedExecution

AccountAdministration

TechnicalService

Manufacturing FlowManagement

ProductionPlanning

IntegratedSupply

ManufacturingProcessStability

Fulfillment DistributionManagement

PlantDirect

SelectedSupplier(s)

DistributionCost

SpecialOrders

ProductDevelopment andCommercialization

ProcessSpecifications

MaterialSpecifications R & D Cost

ProductDesign

BusinessPlan

MovementRequirements

PriorityAssessment

CostTo Serve

TradeoffAnalysis

ProcessRequirements

EnvironmentalRequirements

PackagingSpecifications

PrioritizationCriteria

SUPPLIERS

Procurement IntegratedPlanning

SupplierManagement

MaterialsCost

MaterialSpecifications

OrderBooking

InboundFlow

Cost

CHARACTERISTICS OF SUPPLYCHAIN MANAGEMENT! Strategy and policies shared across

supply chain

! Fully coordinated supply chain “cash to cash”

! Integrated business processes for entire supply chain

! Measures shared across supply chain

THE MOVE TOWARDS TRADE MARKETING

To:To:Building Stronger Partnerships Through Multiple LinkagesBuilding Stronger Partnerships Through Multiple Linkages

MISR&DMKTLOGACCT

MISR&DMKTLOG

ACCT

Customer Supplier

From:From:Traditional Buyer/Supplier RelationshipTraditional Buyer/Supplier Relationship

MISR&DMKTLOGACCT

MISR&DMKTLOG

ACCT

Buyer Seller

INVENTORY POSITIONS AND MAJOR FLOWS IN A SUPPLY CHAIN

Variable costof product

Full manufac-tured cost

Sellingprice

$5

$7

$10

Variable costof material

Acquisitioncost

Other variablecosts

Total variablecost of product

Full manufac-tured cost

Sellingprice

$10

$1

$14

$25

$40

$60


Other acquisitioncosts

Sellingprice

$60

$2

$80


Other acquisitioncosts

Sellingprice

$80

$2

$150

Suppliers Wholesalers RetailersManufacturer

Orders

Payments

Information

Product

Orders

Payments

Information

Product

Orders

Payments

Information

Product

FUTURE RESEARCH OPPORTUNITIES:PROCESSES

❐ What are the operational definitions of the key business processes and what are the relationships among the processes?

❐ What are the relationships among the processes and the functional silos? What is the tolerance for sub-optimization?

❐ How do you obtain buy-in from the functional areas in order to implement a process approach within the firm?

❐ How can the various participants in a company be encouraged to work toward a common goal? Marketing and manufacturing reward structures often tend to be counter to one another yet the firm has overall profitability goals.

❐ Does the answer lie in similar reward structures, rewards tied to overall performance, or will process teams accomplish much of this?

❐ Beyond internal integration, how does inter-organizational change management be implemented?

❏ How should the existing supply chain be mapped? ❏ Should the map include all connected firms or only the value-

adding firms? ❏ Are there other means of determining who should and should not

be part of the supply chain map? For example, should only the most critical members be mapped?

❏ What are the implications for good SCM practice based upon the shape of the supply chain, that is horizontal structure, vertical structure and focal company position in the supply chain?

FUTURE RESEARCH OPPORTUNITIES:SUPPLY CHAIN MAPPING

❏ What is the value proposition at the consumer level or end point of the supply chain?

❏ What are the methods that should be used to determine value?

❏ How should the various firms in the supply chain share the costs and the benefits?

FUTURE RESEARCH OPPORTUNITIES:VALUE

❏ What metrics should be used to evaluate the performance of the entire supply chain, individual members or subsets of members?

❏ What are the potential barriers to implementation and how shouldthey be overcome?

❏ What characteristics of managing the supply chain are related tohigher performance of the supply chain, subsets of firms in the supply chain, and the individual firms? Since the processes may vary by link, these measures may need to be both process specific and global.

FUTURE RESEARCH OPPORTUNITIES:METRICS

❏ What is the process to take the map of the existing supply chainand modify it to obtain the best supply chain given the desired outputs?

❏ How frequently should the supply chain structure be reviewed? What approaches could be used to perform the evaluation?

❏ Which approaches are appropriate for different supply chain forms and situations?

❏ How should the firm analyze the network to determine if there is a better configuration?

❏ How does building a stronger relationship with one member affectthe management time allocable to other members?

❏ Should a third party manage some relationships to free resourcesfor this closer relationship, which thus, changes the membershipof the network? Is it an iterative process?

FUTURE RESEARCH OPPORTUNITIES:NETWORK REDESIGN

❏ What determines with whom to link business processes? ❏ What are the steps to take to determine with whom to link? ❏ What are the critical factors to the firm's success and that enable

the firm to link with specific companies? ❏ What are the barriers to forming these relationships? Should the

decision process vary based on whether Tier 1 or Tier n companies are the focus?

❏ For Tier n companies, what critical factors imply a closer relationship of managed or monitored links to key members to assure supply, quality, and service?

❏ What are the compelling reasons to have closer ties with companies beyond the first tier?

FUTURE RESEARCH OPPORTUNITIES:INTEGRATION

❏ What determines the processes to link with these key members?❏ How should the firm decide which internal process to link with

which suppliers and customers? ❏ What decision criteria determine whose internal business

processes prevail across all or part of the supply chain?

FUTURE RESEARCH OPPORTUNITIES:PROCESS INTEGRATION

❏ What determines the type/level of integration that should be applied to each process link? It is important to provide firms with some guidelines regarding what level of management components to apply to achieve the desired relationship and management of a link. More components and/or a higher level of effort on a component may be required to achieve a desired levelof integration of a process link.

❏ What constitutes a low level versus a high level of a specific management component?

❏ What is the relationship among the management components for successful SCM?

❏ Do changes in the physical and technical components automatically require changes in the managerial and behavioral components?

FUTURE RESEARCH OPPORTUNITIES:IMPLEMENTATION OF MANAGEMENT COMPONENTS

MANAGING THE SUPPLY CHAIN INVOLVES THREE CLOSELY INTER-RELATED ELEMENTS:

❏ The supply chain network structure

❏ The supply chain business processes

❏ The management components

SUCCESSFUL SCM IS BASED ON DETERMINING:

❏ Who are the key supply chain members with whom to integrate processes?

❏ What are the supply chain processes to link with these key members?

❏ What type/level of integration should be applied to each of these process links?

LOGISTICS MANAGEMENT DEFINED

Council of Logistics Management (1986)

…the process of planning, implementing and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods, and related information from point-of-origin to point-of-consumption for the purpose of conforming to customer requirements.

SUPPLY CHAIN MANAGEMENT

…is the integration of key business processes

from end user through original suppliers, that provides

products, services, and information

that add value for customers

and other stakeholders.

[The International Center for Competitive Excellence, 1994][Global Supply Chain Forum, 1998]

Managed Process LinksMonitor Process LinksNot-Managed Process LinksNon-Member Process Links

n

2

3

1

2

n

1

1

n

2

1

3

n

n

1

1

2 1

n

2

n

1

2

n

1n

1 n

Ti er 1Customer s

Ti er 2Customer s

Tier 3 toConsumer s/

End-Custome rsTi er 2

Suppl ier sTier 1

Suppl ier s

Tier 3 toInitia l

supplie rs

n

1

TYPES OF INTER-COMPANY BUSINESSPROCESS LINKS

Initi

al Su

pplie

rs

Tier

3 to

n sup

plier

s

T ier

3 to

n cus

tom e

rs

Cons

umer

s/End

-cus

tome

rs


Non-Members of the Focal Company’s Supply Chain

Focal Company

Source: Douglas M. Lambert, Martha C. Cooper, and Janus D. Pagh, “Supply Chain Management : Implementat ion Issues and Research Opportunities,” TheInternat ional Journal of Logisti cs Management, Vol. 9, No. 2, 1998, p. 7.

COMPONENTS OF 1997 LOGISTICS COSTS

SOURCE: Adapted from Robert V. Delaney, “Ninth Annual State of Logistics Report,” press conference remarks to the National Press Club, Washington, D.C. (June, 1998)

Total U.S. Logistics Costs ($862 Billion)

Inventory Carrying Costs

29.7%

Order Administration

Costs4%

Other Costs0.6%

Warehousing Costs

8%

Air Freight 2.7%

Oil Pipelines1%

Forwarders Freight

1%

Motor Carriers Freight46.4%

Railroads Freight4%

Water Freight3.0%

COST TRADEOFFS REQUIRED INMARKETING AND LOGISTICS

Product

Price

Marketing Objective:

Logistics Objective:

Allocate resources to the marketing mix in such a manner as to maximize the long-term profitability of the firm.

Minimize Total Costs given the customer service objective where total costs = Transportation Costs +Warehousing Costs + Order Processing and Information Costs + Lot Quantity Costs +Inventory Carrying Costs

Promotion

PlaceCustomer Service

Levels

InventoryCarrying Costs

TransportationCosts

WarehousingCosts

Order Processingand information

Costs

Lot QuantityCosts

Logi

stic

sM

arke

ting

Structure Versus Behavior

■ Structure determines behavior

■ Behavior does not determine structure

Sub-Optimization

■ Local optimizations result from organizations optimizing own results rather than the total supply chain.

■ Systems approach is critical.■ Performance measurements and

reward systems must be synchronized with supply chain objectives.

Supply Chain Management Defined

Supply chain management is the integration of business processes from end user through original suppliers that provides products, services, and information that add value to customers.

Source: Harrison, Alan, “Co-Makership as an Extension of Quality Care,”International Journal of Quality & Reliability Management, Vol. 7, No. 2 (1990), pp. 15-22.

...Racing as a team for market differentiation in supply chain management.

UCS Operations & Program Support Vision

Partnering with our clients around the globe, serving their needs for future success...

Three Critical Business Elements

“The three most important things you need to measure in a business are:1. Customer Satisfaction 2. Employee Satisfaction3. Cash Flow

Source: Jack Welch, CEO, General Electric

Computing History

■ 1833 Charles Babbage developed a calculating machine with input, storage and output

■ 1848 George Boole's work on mathematics (Boolean algebra) is the basis for all binary operations

■ 1878 W. T. Odhner used pin-wheels for the next generation of mechanical calculating machines

■ 1886 Herman Hollerith (founder of IBM®) had the idea of using punched cards to keep and transport information

■ 1886 Dorr E. Felt built the first successful key-driven (as opposed to dial) calculator

■ 1891 William S. Burroghs invented the first robust calculating machine and started the office calculation industry

Burroughs Calculating Machines■ Over 5,000 parts, with as

many as 2000 moving in together at any one time.

■ Most technologically advanced of it's time

■ Price comparable to that of a new car.

■ Options such as non-add, non-print, and individual clearing keys for each column.

Class 3 - 1911-1929

Burroughs Calculating Machines

Burroughs Calculating Machines

■ Small, portable - 25 lbs.

■ Square keys added “wings to the fingers”

■ Faster keying

1949

1920s

Elements in the Framework ofSupply Chain Management

BusinessProcesses

Supply ChainManagement

ManagementComponents

Supply ChainStructure

Supply Chain Strategy

ManufacturingTransformation

Strategy

LogisticsStrategy

ProductStrategy

DemandManagement

Strategy

MarketingStrategy

SupplierSupplierPlantsPlants SupplierSupplier

OwnedOwnedWhsesWhses

CompaqCompaqPlantsPlants

OrderOrderFulfillmentFulfillment

CustomerCustomer

EDIEDIReplenishmentReplenishment EDI JITEDI JIT

SignalsSignals BTOBTOSignalsSignals OrdersOrders

THE CUSTOMER PULLS PRODUCT THROUGH THE SUPPLY CHAIN

Supply Chain Strategy

Logistics Strategy

PerformanceMeasurement

Intense Relationships

Customer Understanding

EmergingMarkets

InformationTechnology

Formalization

Flexibility/Agility

Selecting Supply Chains

Company

Customer Customer CustomerCustomer

Supplier Supplier Supplier

•A firm’s supply chain is much more like an uprooted tree than a chain.•Not all supply chains are appropriate for ECR.

Elements of Supply Chain Management

CustomerService

Management

DemandManagement

CustomerRelationshipManagement

OrderFulfillment

Procurement

ManufacturingFlow

Management

ProductDevelopment

andCommercialization

Customer Relationship Management

■ Identifying key customer targets■ Developing and implementing programs

with key customers

Customer Service

■ Single point of contact - one face to the customer

■ Current information about the order■ Production and distribution status■ Product information

Demand Management

■ Synchronize flow of products and materials to customer demand

■ Forecasting■ Reduction of variability

Order Fulfillment

■ Timely and accurate delivery■ Objective to exceed customer

expectations■ May happen in many places throughout

supply chain

Manufacturing Flow Management

■ Making products that customer wants■ Flexible manufacturing

Procurement

■ Managing relationships with strategic suppliers

■ Not just “bid &buy”■ Should not be “order placers”■ Support manufacturing flow

management and new product development

Product Development and Commercialization

■ Integrate customers and suppliers in development process

■ Reduce time to market■ Incorporate supply chain management

considerations into product design

Burroughs Computers“Burroughs built splendid machines attracted a

loyalty that surpassed even IBM’s….”“What made the Burroughs computers so good was

the then-unique idea that the software people, the programmers, needed to participate in designing the computers from the beginning.”

In most firms, engineers came first, programmers second. Burroughs went much further than the other firms in bringing programmers in quickly.”

Source: Joel Shurkin, (1996). Engines of the Mind, pp. 273-274.

Supply Chain Management Components

WorkStructure

Planning &

Control

OrganizationStructure

ProductStructure

ManagementMethods

ProductFlow

FacilityStructure

InformationFlow

FacilityStructure

Power&

LeadershipStructure

Risk&

RewardStructure

Culture&

Attitude

Planning & Control

■ Key to moving organization or supply chain in right direction.

■ Joint planning■ Planning important during all

evolutionary phases■ Control is best performing metrics.

Inventory

Averagecycle

inventory

A. With variable demand

Ss(

afe tytock50)

yAve ra geinve nto r(150)

200

100

8 10 20 30 40Days

AVERAGE INVENTORY INVESTMENT UNDER CONDITIONS OF UNCERTAINTY

Inve ntory

Averagecycle

inventory

B. With variable lead time

Safe tys tock(40)

Averageinve ntory(140)

200

100

10 20 30 40Days

12



Inventory

Averagecycle

inventory

C. With variable demand and lead time

Safetys tock(100)

Averageinventory(200)

200

100

20 30 40Days

12108

FACTORS INFLUENCING SAFETY STOCKS

❏ Forecast error

❏ Exposure to stockout

❏ Lead time

❏ Service level requirement

RELATIONSHIP BETWEEN INVENTORY INVESTMENT AND CUSTOMER SERVICE LEVELS

75 84.1 90.3 94.5 97.799.9 100

675

728

780

850

1025

Se rvice pe rce ntage

Inve

ntor

y in

vest

men

t in

units

Work Structure

■ How does the firm perform tasks and activities?

■ What is the best way to apply tactical resources to get work done?

Organizational Structure

■ Is the organization designed to facilitate or hinder supply chain management ?

■ Cross-functional teams.■ Interorganizational teams.

Product Flow Facility

■ Network structure for sourcing, manufacturing, and distribution across the supply chain.

■ Where should inventory be held?■ Rationalization the supply chain.

Information Flow Facility Structure

■ What information is passed through the supply chain?

■ How is information passed through the supply chain?

■ Frequency of update.■ May be first component integrated

across the supply chain.

Product Structure

■ How is new product introduction coordinated across the supply chain?

■ How does product fit with other other products?

■ Product complexity

Management Methods

■ Corporate philosophy ■ Management techniques■ Do they enhance or hinder supply chain

management?■ Level of management involvement in

tactical supply chain issues.

Power & Leadership Structure

■ Channel captain■ Source of power

Risk and Reward Structure

■ How are risks and rewards shared across supply chain?

■ How are risks and rewards shared through out the organization?

■ What are the risks and rewards?■ What should suppliers and customers

risk?

Culture & Attitude

■ Compatibility of corporate cultures.■ How are employees valued?■ What are values of the firm?

Supply Chain Management as a Strategic Weapon

■ Finance company■ Outsourcing for nearly 100 years

Process Focus versus Traditional Functions

■ Focus of every process is on meeting the customers’ needs.

■ Traditional functional approach does not focus on meeting the customers’ needs.

Customer Perspective

CustomerAcquisition Customer

Profitability

MarketShare

CustomerRetention

CustomerSatisfaction

Balanced Scorecard

CustomerRelationships and

Measures

Vision & Strategy

FinancialObjectives

& Measures

InternalBusiness

Processes

Learning&

Growth

Balanced Scorecard Strategic Framework

Communicating&

Linking

BalancedScorecard

ClarifyingVision & Strategy

StrategicFeedback

and Learning

Planning &Target Setting

Product Development & Commercialization

■ Measuring development cost for new components■ Measuring development time for new components■ Determining component-level specs■ Determining new introduction plans for products■ Sharing component-level specs■ Determining new product introduction performance objectives■ Sharing estimated lifecycles for products■ Determining product-level specs■ Sharing new product introduction performance objectives■ Sharing new introduction plans■ Sharing product-level specs■ Measuring product quality

Virtual Corporations

Brand Owner

Raw Material/AssemblySupplier

HumanResourceServiceSupplier

FinancialServicesSupplier

ManufacturerSupplier

LogisticsServicesSupplier

MarketingServiceSupplier

InformationServiceSupplier

Distributor

50

35

2

30

?

MaterialStocks& WIP

FinishedStocks

Warehouse Wholesaler Retailer

Factory Transit Delivery Local delivery

8

TYPICAL STOCKCALENDAR DAYS

190 DAYS SUPPLY

65

ComponentSuppliers

SalesOrganization

ManufacturingCustomers

TOTAL SUPPLY CHAININVENTORY

Turning Metrics into Money■ What measurements should a supply chain

manager focus on? ■ Which performance measurements best translate

into bottom-line achievement?■ For many managers, the measurements that are

used to determine their performance are not really appropriate.

■ Measurements are often developed for ease of use and not really good gauges of success.

Traditional Measurements

■ Standard costing systems■ Management by variances can be

the enemy of good supply chain management.

Shift…

■ Shift from treating financial (cost) figures as only foundation for performance to one of a broader set of metrics.

■ Long-term success is not just based on profitability. Rather it is based on adherence to principles.

Where are Metrics Taken?

■ Might not be good enough to measure within the firm.

■ Measure entire supply chain.




Don’t Measure Easy & Irrelevant■ Don’t just measure

data that is easy to measure.

■ What color was that atomic bomb?

Redefine Tasks“In knowledge and service work, however, the first

questions in increasing productivity - and working smarter - have to be, ‘What is the task? What are we trying to accomplish? Why do it all?’”

“The easiest, but perhaps also the greatest, productivity gains in such work will come from defining the task eliminating what does not need to be done.”

Source: Peter Drucker, The New Productivity Challenge, Harvard Business Review , November-December 1991, p. 4.

It’s Easy to Be Wrong...

…even when the data exists

Partner With the Front Line

■ Partner with people doing the work.■ Front-line employees often know

intuitively when something is wrong.■ Don’t just measure them, work with

them.■ Do workers understand measurement

system? Rules-of-thumb?

Frequency of Measurement■ Frequency of

reported information should follow operations cycle.

■ Flood of data not much better than a drought.

Cost Allocations

■ Don’t allocate to a cost center if that cost center has nothing to do with process.

■ To value inventory, many firms first allocate cost centers, then using cost center burden rate, allocate to products.

Tools

■ Activity-Based Costing■ Economic Value Added■ Heuristics “Rules of Thumb”■ Measurement “task force”

Make Measurements Real

“Too often we enjoy the comfort of opinion without the discomfort of thought,”

Dashboard

Measurement Life Cycle

■ Measurements generally have a discernible life cycle.

■ In the 3PL business, price is clearly more important than it was five years ago.

Whiz-Kid Failure

■ Organized, systematic, measurement of the wrong things can lead to the undoing of many years of good, hard work.

■ “Systems” can be dangerous.

Bucket Brigade

■ Information can move quickly inside the walls.■ Data flow to “information machine” a bucket brigade.■ Web allows move to shared data pipeline.

1858 Rumsey fire wagon. Supplied with water by bucket brigade.

Sir Oracle

“I am Sir Oracle, And when I ope my lips let no dog bark!”

Gratiano, Shakespeare’s “Merchant of Venice.”

Oracle is not a Silver BulletSilver BulletSilver BulletSilver BulletSilver BulletSilver BulletSilver BulletSilver Bullet■ Results from ERP implementations

mixed.■■ TrueTrueTrueTrueTrueTrueTrueTrue information integration is positive.■ Supply chain management personnel

often lose functionality after ERP implementation.

■ Drains resource■ What will you get from Cornerstone?

Planning Systems

■ For aftermarket parts, planning systems critical.

■ Can take you down wrong path.■ System’s weakest link will drive

behavior.

Weak Link

■ Managing information more important than managing inventory.

■ TRT

Enterprise Resource Planning Packages

Pros■ Links planning,

scheduling, and transactions to financials

■ Singular database■ Links with customers/

vendors of similar ERP

Cons• Lacks functional demand

planning & scheduling• Very expensive when

modifications are needed • Implementation can take

years

Packages: Baan, SAP, Oracle, DAI, American Software, JD Edwards, D&B Software, PeopleSoft,MarCam, Ross Systems, Daly & Wolcott

Enterprise Resource Planning Systems

■ Motivation is from top management■ Many logistics managers believe that

they have to give up functionality when moving to an ERP

■ “In-the-box” versus “Out-of-the-box”

“In-the-box” versus “Out-of-the-box”

Inventory Management

General Ledger

Transportation Management

Performance Measurement

Systems

WarehouseMgt Network Design

Planning Models

Production Scheduling

Manufacturing Management

Systems

Order EntryOrder

ProcessingDistribution

Planning

Process Change■ It used to be a firm changed the systems to

match current business processes. Today, many ERP installations have moved firms to change business processes to match the new system.

Systems Goal

■ Goal should be supply chain system -not just corporate system.

■ Like an alcoholic, one step at a time.

Data Manipulation Tools

■ Good supply chain managers do not have to rely on IT to get data analysis completed.

■ Need to be able to use tools such as:– Excel– Access– Planning tools

Accountancy Priesthood■ Measurements

become a “religion”

■ Measurements exist to support business - not vice versa

When the Priests aren’t Satisfied

Measurements will Improve

■ Better technologies■ Measuring the “right”

thing as opposed to the “measurable” thing

■ Measurements have a life cycle

■ Supply chain integration■ Benchmarking

Customer Perspective

CustomerAcquisition Customer

Profitability

MarketShare

CustomerRetention

CustomerSatisfaction

Balanced Scorecard

CustomerRelationships and

Measures

Vision & Strategy

FinancialObjectives

& Measures

InternalBusiness

Processes

Learning&

Growth

Balanced Scorecard Strategic Framework

Communicating&

Linking

BalancedScorecard

ClarifyingVision & Strategy

StrategicFeedback

and Learning

Planning &Target Setting

Supply Chain ClassificationsMargin

High Low

LongLife CycleProducts

ShortLife CycleProducts

Niche Commodity

Fashion

Inventory holdingcosts are stable

Inventory holdingcosts change over product life cycle of product

Rolex Lumber

X-Mas trees,Dresses Bread,

Dresses

What is the Value of Integration?

■ Identify Supply Initiatives

■ Quantify Impact on Profits and/or Capital

■ Quantify Impact on Value

Economic Value Added

Net Operating

Profit After Taxes

Capital Charge-

Economic Profit

•Economic Value is created when a company deploys its capital to create value in excess of capital costs

•Profit > cost of capital

Economic Value Added

■ Change in Economic Profit from year to the next.

■ Economic profit– NOPAT – capital charge

What is EVA?

■ EVA = Return - cost of capital employed■ EVA is the value created by a business over

and above the required rate of return on investors’ (Shareholders) capital.

■ EVA is a business performance measure that gives the total economic view.

■ EVA is a decision making tool.■ EVA links business planning/performance

with required shareholder return.

EVA Best Explains Changes in Stock Market Value

Earnings per share 18%Cash flow 22%Return on Equity 35%EVA 50%

Management of the Capital (Assets) Invested in the Business is as Critical as the Management of the Cost.

■ Capital includes the assets employed in running the business

■ Working Capital includes Cash, Inventory, Receivables, Payables

■ Fixed Assets include Land, Buildings, Equipment, Vehicles

Logistics EVA■ Will generally be negative is considered

independently from revenue generation.– No revenue/no profit– Operating expenses– Major capital investment required in fixed assets and

lease commitments■ Logistics must be part of the business design

that creates EVA within the business unit.– Provide the logistics solution– Minimize costs to maximize profits– Minimize asset investment/Maximize asset

productivity

Logistics Can Be A Major Contributor to EVA Improvement

■ Cost■ Services■ Asset Management

One Firm’s EVA Implementation Plans

■ Measure SCM EVA by business format, channel, and function

■ EVA classes for all salaried and hourly SCM personnel

■ Incorporate EVA measurement into CAPEX decision models

■ Begin utilization of EVA for:– Underutilized property decisions– Private fleet decisions– New DC’s

■ All SCM Field personnel introduced to EVA and learning about their specific EVA drivers

Measurements Have To...

■ Fairly measure both cost and service.■ Look past a manager’s span of control.■ Incorporate business success measures

- not just “strikeouts”

Benchmarking

Flow Substitutions

Inventory

Information

Finance

Source: Professor Hau Lee, Stanford University

Forecast improvements,signaling

Consignment, credit terms, return policy

Pricing, deals, data sales

Perfect Quality is Defined by Whom?

■ When is the order frozen?■ Speed of information versus speed of

manufacturing■ Quality of product includes customer

satisfaction

Formalization■ Group members

clearly understand culture and mission

■ Understand positioning

■ Rules & procedures give freedom

Supply Chain MeasurementsArea Measurement TypeService Fill rate linearCost Logistics cost linearProductivity Asset/Utilization Inventory linearProductivity Asset/Utilization Recycling linearProductivity Asset/Utilization Throughput – number of items sold linearTime Response time linearTime Cash-to-cash linearTime Operating expense cost to convert inventory to

throughputlinear

Productivity Asset/Utilization &Service

ROA with 100% customer satisfaction linear

Service & Time Order aging curve curveService & Time Line fill rate by time curveValue Economic profit linear

What do Customers Want?■ High levels of quality.■ A high degree of flexibility (to adjust to

changes in volume or type of service demanded).

■ High levels of service.■ Low Costs.■ Short response times, including time to

market for new services.■ Little or no variability (deviation from target).from: Richard J. Schonberger & Edward M. Knod, Jr. (1994) SynchroService! Irwin.

Service Defections

■ What is the cost of losing a customer?■ What is the cost of a lost sale?■ What are defectors telling you?■ “Watch the door”■ Do you have a “Zero defections

culture?”

Performance vs. Variety vs. Lower Cost

Performance

Lower Cost

Variety

New Model of Service

■ Value investments in people as much as investments in machines, and sometimes more.

■ Use technology to support efforts of men and women on front lines - and not just to monitor or replace them.

■ Make recruitment and training as crucial for salesclerks and housekeepers as for managers and senior executives.

■ Link compensation to performance for employees at every level, not just for those at the top.

Design for ….■ DFM - Design for Manufacturability ■ DFSCM - Design for Supply Chain

Management■ DFR - Design for Responsiveness■ Design for Postponement■ DFRL - Design for Reverse LogisticsEven■ DFS - Design for Service

Design for Service

■ Put customers first.■ Focus on where and

how customers interact with company.

■ “Value strategy”■ Flattened

organization

■ Expanding IT systems

■ Shifted from Manufacturing to assembly.

■ Concentrate on customers.

■ Selective hiring & liberal training.

Design for Responsiveness Stages

Activity Transactional Interactive InterdependentInfo Sharing Information on

component and productspecs shared

Some sharing of processinformat ion

Extensive sharing ofprocess info at bothstrategic and tacticallevels

Decision Making Design decisions madeindependently

Some collaboration withpartners to influencedesign choices

Supply chain structures,component specification,and detailed designdeveloped by consensusand negotiation betweenpartners

Performancemeasures

Performance measuresby product developmentnot related to supplychain performance

Some use ofperformance measures totrack time-to-availabilityand total lifecycle costs

Extensive use ofperformance measurestied to sharing ofrewards and risks

Technology Separate designdatabases and systems

Some sharing ofanalytical tools andaccounting databases

Extensive use oftechnology to facilitatefast decision-making


Service Guarantees

■ Commit to “error-free” service.■ Unconditional■ Easy to understand and communicate.■ Meaningful■ Easy to invoke.■ Easy to collect.

Customer Service Dimensions

■ Care and concern - employee friendliness, courtesy, and warmth.

■ Initiative - employees ability and willingness to jockey the system on customer behalf.

■ Problem solving - figuring out solutions to customer problems whether unusal or routine.

■ Recovery - going the extra yard.

Cost of Lost Customer

■ Costs 5 times more to replace a customer than retaining one.

Service Recovery

■ Measure the costs of service recovery.■ Break the silence.■ Anticipate needs for recovery.■ Act fast.■ Train employees.■ Empower the front line.■ Close the loop.■ Brilliant recoveries.

Order Management Cycle

OrderSelection

and Prioritization

OrderGeneration

Order Planning,Sales

forecasting,Capacityplanning

OrderReceipt

andentry

CostEstimation

and Pricing

SchedulingOrder

Fulfillment

Billing

Returnsand Claims

PostSales

Service

Relationships Between Competitors

■ These characterizations can be thought of as a continuum that ranges from conflict as the most competitive mode to collusion where there is a total absence of competition.

conflict

competition

coexistence

cooperation

collusion

Identifying a service strategy

■ What attributes of service are - and will continue to be - most important to our target markets?

■ On which important service attributes is the competition weakest?

■ What are the existing and potential service capabilities of our company?

Defining a service strategy■ What are the company’s integral service competencies? What are

the critical knowledge and skills that define and drive the firm both philosophically and practically?

■ What are the company’s service incompetencies? What are the knowledge and skill weaknesses?

■ What are the company’s resource strengths and weaknesses? Finances, facilities, technologies, human and other resources

■ What is the company’s service reputation? How do customers,noncustomers, and employees view service performance?

■ What is the company’s belief system? What is valued in the organization? What is the company’s core culture?

■ What is the company’s service strategy? What is the “reason forbeing” today?

Service Checklist■ Is our service strategy clear & compelling to all of our

employees?■ Does our service strategy deliver genuine value to customers?■ Does our service strategy emphasize excellent service quality?■ Do we live our service strategy in this company?■ Does our service strategy demand superior achievement?■ Does our service strategy differentiate our company from

competitors?■ Do we reinforce our service strategy with explicit service

standards that guide and energize employees?■ Do we reinforce our service strategy with appropriate symbols?

Push/Pull Boundary

Suppliers Manufacturing Distributor Retailer

Push/Pull Boundary

Postponement is the delay of the point of product differentiation to a point further downstream in the supply chain.

Profitable Customers

■ Up to 70% of a firm’s typical customers are not at all profitable.

■ At a pharmaceutical distributor, only 30% of customers were profitable.– Top 30% generated 261% of the profits– Top 10% generated 151% of the profits– Remaining 70% lost 161% of top 30 profits

Source: Hope & Hope, (1995) Transforming the Bottom Line. Harvard Business School Press

Real Costs of Inventory

■ At other electronics firms, inventory is a serious concern to management because real costs have been growing.

■ Do we know what real costs of inventory are?

Life-Cycle Management

■ Selecting & implementing supply-chain management strategies appropriate to life-cycle stage.

Electronics Product Life Cycle

4

4

2

Development Volume Shipments End of Life

Life Cycle SupportChasm

Inventory Carrying Costs

■ consist of expenses such as:– cost of money, – insurance, – taxes, – shrinkage, – warehousing, and – obsolescence.

Inventory Driven Carrying Costs

Time

100%

50%

0%

ProductIntroductionAnd Volume

Sales

ProductObsolescence

BargainBasementDiscounts

ProductSalvaged

Product Responsibility Curve

Product Life Cycle

Product Responsibility Curve

Birth End of Life

End ofResponsibility

Elements of Industry Structure

■ Industry Competitors

■ Intensity of Rivalry

New Entrants

Suppliers

Substitutes

Buyers

Entry Barriers•Switching Costs•Economies of Scale•Proprietary product differences•Brand Identity•Capital Requirements•Access to Distribution•Absolute Cost Advantages•Government Policy•Expected Retaliation

Rivalry Determinants•Switching Costs•Industry Growth•Fixed Costs/Value Added•Intermittent Overcapacity•Product Differences•Brand Identity•Concentration and Balance•Informational Capacity•Corporate Stakes•Exit Barriers

Determinants of Supplier Power•Switching Costs of Suppliers•Differentiation of Inputs•Presence of Substitute Inputs•Supplier Concentration•Importance of Volume to Supplier•Cost Relative to Total Purchases•Impact of Inputs on Costs

or Differentiation•Threat of Forward Integration

Determinants of Substitution Threat•Switching Costs •Relative PricePerformance of Subs

•Buyer Propensityto Sub

Determinants of Buyer Power•Bargaining Leverage•Switching Costs•Buyer Volume•Buyer Concentration•Buyer Information•Ability to Integrate Backward•Substitute Products•Price Sensitivity

Supply Chain ChallengesIncreasingProduct Variety

InformationDistortion(Bullwhip Effect)

LogisticsComplexities

Geographicalmarketpreferences, localgovt regulations

Increasing demandvariability upstreamin supply chain

Complex globalsupply chains withmultiple sites, flows,borders, modes

Diverse customerpreferences

Beer-game,whiplash effect

Complexities inlabor management,laws, cultures

Short & overlappingproduct life cycles

What you see is notwhat they see

Bullwhip impactworsens with longcycle times


Symptoms: Curses & ParalysesVariety Proliferation Information

DistortionLogisticsComplexity

Forecastingnightmare

Inventory piling up Long lead times

High mfg cost Service degradation High Logistics costs

High inventories Wasteful resources Excessive overhead

Poor customerservice

Poor capacityplanning

High obsolescence Inefficient scheduling& transportation

High product support& service costs

Misinformed marketvalue


LEAP (Leading Edge Advanced Procurement)

■ Total cost of ownership■ Facilitate virtualization■ ERS - Evaluated Receipt Settlement -

pay in X days after receipt of goods■ Life cycle management■ Supply chain integration■ Eliminate transaction processing■ Web-based procurement (Ariba, etc.)

Invoice Payment

■ In Europe, shared services center processes 200,000 invoices/year

■ Soon to be 350,000 invoices/year

Types of Organizational Problems

■ Technical - routine or possibly expert methods exist.

■ Adaptive - routine methods do not exist and challenge is to effectively mobilize community to solve the problem.

■ Hybrid - problem requires a combination of technical and adaptive leadership to be “solved”.

Problems

■ Technical problems are solved well through authority.

■ Adaptive problems require a change in behavior.

Solving ProblemsAction Technical or Routine Adaptive

Direction Define problem Identify adaptivechallenge

Protection Shield org from threat Let org balanceexternal pressures

Orientation Clarify roles torespond

Challenge currentroles and resistpressure

Managing Conflict Restore order Expose conflicts

Maintain Norms Maintain norms,social network

Challengeunproductive norms;modify social network

Source: Dr. Corey Billington, Hewlett-Packard

2,000/200,000 Problem

■ At Ford, FCSD buyers looking for 2,000 parts with many special requirements while Assembly plants want 200,000 with less hassle to the supplier.

■ Purchasing job much tougher.■ Must emphasize other issues besides

cost savings.■ Creativity required.

Forecasting

■ Forecasting never works.■ Investigate nonlinear methods

Computer Business Increasingly Complex & Competitive

■ Technology– Rapid Innovation– Differentiated to commodity

product– Short product life cycles– 30% reduction per year in

resale value

■ Product– Multiple channel

structures– Demand distortion– Collapse of the middle

■ Customer– Increasingly

sophisticated– Demanding unique

configurations– Product proliferation

■ Supply Chain– Transition from vertically-

integrated to network structure

– Globalization– Concentration of suppliers

Integration Opportunities■ Compress supply chain structure■ Collaboration planning forecasting &

replenishment■ Joint capacity planning■ Product development is an integration

opportunity

Integration Opportunities

■ Compress Supply Chain– Internal postponement– External postponement– Sales agent– Direct

■ Collaboration, Planning, Forecasting & Replenishment– Collaborative demand planning– Synchronized order fulfillment

& replenishment– Joint capacity planning

■ Product Development is Integration Opportunity– Supply Chain structural analysis– Design for postponement/manage

product variety– Use standard & intergenerational parts &

suppliers

Demand Planning■ Today, distributors build financial plans which drive

category and assortment planning, driven by sales history.

■ Manufacturers build a financial plan based on market demand and / or account projections that drive production planning.

■ These processes all affect the ability to execute at shelf level, yet the business processes and systems are not integrated.

■ The lack of integration creates natural disconnects in the supply chain causing excessive response times, costs and inventory.

Collaborative Planning, Forecasting, & Replenishment

■ Process model – How and where forecast collaboration fits into supply chain processes

■ Front-end agreements – Changes to trading partner agreements to support, define, and measure collaboration.

■ Data Sharing – Definition of the data elements to be shared to support collaboration

■ Common Metrics – Definition of measures to ensure achievement of objectives of collaboration: a) reduce supply chain inventories, and b) increase sales and profits.

■ Rule Sets – Defines how partners will determine which forecasts require collaboration (exception selection)

CPFR Critical Metrics■ Results-oriented

metrics– Out of stock on store

shelf– Inventory turns

consolidated across value chain

– Total value-chain cycle time

– Sales forecast accuracy

– Profitability– Return on assets

■ Process-oriented metrics– Order forecast

accuracy– Order fill rates to each

inventory holding location

– Cycle time for each process activity

– Process cost


■ Method to improve alignment of supply and demand.

Supply-Demand Mismatch•Short product life cycles•Product shortages•Independent planning & execution decisions

Supply-Demand Alignment•Shared forecasting & demand•Synchronized order fulfillment•Joint capacity planning

■ Supply-Demand alignment can significantly impact bottom-line.


■ In Stanford University study, collaborative planning is estimated to reduce each segment of the PC industry inventory investment 10 to 25 percent and increase EVA from $135 to $330M.

■ Turns improve 33%

Source: Andersen & Stanford CDDN Study, 1997.

Collaborative Planning■ Forecasting, order fulfillment and capacity planning

are opportunity areas within Collaborative Planning that partners are using to improve supply chain performance.

Forecasting

SynchronizedOrder

Fulfillment

JointCapacityPlanning

Collaborative Planning Stages


Activity Transactional Interactive InterdependentInfo Sharing Minimal info shared for

demand forecastingSome sharing of demandinfo (e.g., historicalsales, forecastassumptions)

Extensive sharing ofdemand and promotionalinfo

Decision Making Demand forecastdeveloped independentof partners

Some collaboration withpartners to influencedemand forecast

Demand forecastdeveloped by consensusand negotiation amongpartners

Performancemeasures

No performancemeasures used

Some use ofperformance measures totrack forecast accuracy

Extensive use ofperformance measureslinked to shared risksand rewards amongpartners

Technology Limited use oftechnology

Some use of EDI toshare/transmit demandinfo

Extensive use oftechnology includingEDI, web, demandplanning tools


■ Improves alignment of supply & demand■ Moves firm from transactional to

interdependent activities■ Positive bottom-line impact■ Large value creation resulting from

synchronization and fewer assets

Integration Issues

■ Some passive interfaces, but very little true integration.

■ Where there are points of integration, these points often allow no reaction time to correct divergent paths to the extent of satisfying consumer demand.

Integrate Business Processes■ Jointly managed business processes must be defined.

– Leverage the competencies, systems and resources of each tradingpartner

– Facilitate collaboration on planning , forecasting, and replenishment

■ Standards for the sharing of information (data formats) must be defined to facilitate the collaboration process.

■ Methods of integrating results of collaboration into operational systems of both the distributors and suppliers must be developed.

■ Key performance measures for joint, co-managed supply chain activities must be defined and agreed upon.

Supply Chain Operations

■ Traditional aggregate forecasting & replenishment

■ Vendor-Managed Inventory (VMI)■ Jointly-Managed Inventory (JMI)

Aggregate Forecasting & Replenishment

■ Data aggregated to product family or brand level, by week or month, by region

■ Data inaccuracy hidden by aggregation process

■ Conventional DRP or push-based planning

Inventory Management MethodsBusPlan

AggregateForecasting

Vendor ManagedInventory

Jointly ManagedInventory

AssembleData

Syndicated data &historical sales

POS, whsewithdrawl data,,syndicated data

POS data byproduct, store &week

SalesForecst

SF at high level ofdetail

Product,Cus DC, byweek

Store level by weekby product

Orderforecast

Focus on mfgsupport within firm

Focus on retailerDC by invenotry &cost targets

Time-phasedreplenishment ofstores & all DC’s

OrderGen

Retailer assumes100% fulfillment

Pull from storereplenishment orconsumer dmd

Either party basedon store level salesthat are timephased

OrderFulfillment

Available atsupplier DC

Priority to VMIcustomer fromsupplier DC’s

From DC or mfgdepnding onintegration plan

Source: CPFR Draft, 1/98

Compressed Supply Chain■ May change which firm or organization within the

firm own sales and customer relationships■ May change which firm or organization within the

firm own order fulfillment and final configuration■ Reduces inventory investment■ Increases value by providing a clearer signal of

customer demand■ Greater flexibility through delayed product

differentiation■ Utilizes postponement

Internal Postponement■ Internal postponement reduces inventory investment by

delaying product differentiation and final configuration from traditional manufacturing site to internal distribution centers

■ Delays customization of finished goods and installation of the most expensive and fastest-depreciating components

■ Delayed customization allows supply chain to accommodate more demand variability with less inventory

■ Raw increases & FGI decreases resulting in overall reduction in inventory

Design Principles

■ Process Design Principles – Keep the view of entire supply chain in mind...extend to the

process’ customer’s customer; supplier’s supplier...

■ Question everything.– Why is this process done at all?– Why is it done here?– Why is it done by that person?– Why is it done in this sequence?– Adding value or adding cost?– Is the customer willing to pay for it?

Product Development

■ Opportunity to integrate supply chain■ Improves procurement■ Firms that design products with supply

chain performance issues in mind can improve time to availability

Order Fulfillment StagesActivity Transactional Interactive InterdependentInfo Sharing Limited to basic order

infoSome sharing ofinventory availabilityand shipment info

Extensive sharing ofinventory, shipment andsell-through info

Decision Making Independent orderdecisions – “PhantomDemand”

Some negotiation oforder decisions amongpartners

Synchronized orderingdecisions driven byshared replenishmentpolicies, channelinventory data and POSdata (VMI/JMI)

Performancemeasures

Limited performancemeasures

Some sharedperformance measureslike lead times, on-timedelivery, and inventoryavailability

Extensive use ofperformance measurestied to shared risks andrewards

Technology Limited use oftechnology

Some use of technologyto track orders andmaterial flow

Extensive use oftechnology to allow real-time tracking or ordersand material andautomatic replenishment


Capacity Planning StagesActivity Transactional Interactive InterdependentInfo Sharing Limited capacity info Some sharing of

capacity info formaterials,manufacturing, andlogistics resources

Extensive sharing ofcapacity info includingability to flex up ordown

Decision Making Independent of partnersand reactive short-termcommitments

Some shared decision-making about materialcontracts, manufacturingand logistics resources;may include outsourcing

Extensive use of sharedcapacity decisionscharacterized by flexiblecontracts, outsourcing,and contingencyplanning

Performancemeasures

Limited to internalpartners

Some measures relatedto reliability and quality

Extensive use ofperformance measurestied to sharing ofrewards and risks

Technology Limited to internalpartners

Some use of technologyto share info like EDI

Use of transaction anddecision support systemsthat provide support forcapacity planning


Ten Dimensions of Service Quality

Tangibles: Appearance of physical facilities, equipment, personnel, and communication materials.

Reliability: Ability to perform the promised service dependably and accurately.Responsiveness: Willingness to help customers and provide prompt serviceCompetence: Possession of the required skills and knowledge to perform the

service.Courtesy: Politeness, respect, consideration, and friendliness of contact

personnel.Credibility: Trustworthiness, believability, honesty of the service provider.Security: Freedom from danger, risk, or conflict.Access: Approachability and ease of contact.Communication: Keeping customers informed in language they can understand

and also listening to them.Understanding the Customer: Making the effort to know customers and their

needs.From: Zeithaml, Parasuraman, and Berry. (1990). Delivering Quality Service. New York: The Free Press

Predictions - 1994

■ Information technology critical■ Look for niches■ Convergence■ Outsourcing will increase■ Focus Speed - Time-Based Competition■ Prerequisite Service Quality■ Global Challenge

How has the Business changed since 1994?

■ More sophisticated■ Systems much bigger issue■ Getting into businesses that would not have 5

years ago■ International demands■ Customers want more better, faster, cheaper■ Customers say they want to be more

integrated■ Value-added services growing

New Value-Added Services

■ Offerings that used to be value-added services are now considered to be a normal part of everyday business.

■ New value-added services such asinventory financing

Add Services that Enhance CoreBusinesses and Increase Capabilities

● Understand Mission - Articulate Service Philosophy

● Set Multiple and Measurable Objectives● Assist Customer in Understanding

Possibilities● Concentrate on Winners● Benchmark

Long-Term Competitive Edge■ With rare exception, products cannot be the

source of long-term competitive edge.■ Superior products can usually provide only a

temporary advantage■ Service-based strategies are more permanent

Market Share vs. Customer Share

" Often price-based" Rarely establishes loyalty" Easy to defect

TOTAL

9%

13%

28%

50%

☺ Built on relationship with customers

☺ Allows a more tailored solution

☺ Increases switching costs

Understand Profits

● Know how profitable each customer is

● Know how profitable all your services are

Differentiate Customers, Not Just Services

● Make sure all levels of firm “know” your customers.

● Determine which customers are more valuable than others.

● Make sure you know the value of retaining each customer.

Share of Customer

● Identify potential customers– Basic services– Value added services

● Link customers’ identities to their transactions with you

● Learn about your customers’ businesses with competitors

● Collaborate with customers

Partnerships

■ Some firms believe that they are involved in real partnerships.

■ To customers, partnershipping does not imply equality.

■ Honest disclosure of costs■ Co-manage productivity■ Profit sharing■ Incentives

Satisfying Customers■ Different customers buy different kinds of

value. You can’t hope to be the best in all dimensions, so you choose your customers and narrow your value focus.

■ Customers are no longer “one size fits all.” ■ Customers define customer service■ Many firms have difficulty communicating with

their customers. Customers have a tendency to forget about extra services and assume that those duties are part of normal service levels.

Satisfying Customers■ Customers select third party logistics firms based on

customer service, knowledge, management strength, systems, location and price. While most customers stress issues other than price, reasonable cost is always expected.

■ As value standards rise, so do customer expectations. You can stay ahead only by moving ahead.

■ Producing an unmatched level of a particular kind of value requires a superior operating model - a “machine”- dedicated to just that kind of value.

Third Party Value Chain Logistics Solutions

■ Third Party's value chain solutions fall into three major categories – logistics programs,– facility-based services and – transportation management and operation

■ all supported by flexible information systems that provide functionality and allow integration across functions and companies.

1994 Selection FactorsFactor Mean Std DevService quality 6.44 0.98Reliability 6.41 0.97On time performance 6.32 0.98Good communication 6.02 1.16Customer support 5.93 1.18Speed of service 5.90 1.04Flexibility 5.87 1.17Management quality 5.83 1.14Willingness to customize service 5.67 1.17Order cycle time 5.66 1.31Price 5.65 1.20Easy to work with 5.54 1.25Location 5.52 1.30Cost reduction 5.43 1.34Vendor reputation 5.40 1.28Special expertise 5.33 1.33Systems capabilities 5.09 1.36Personal relationships 5.02 1.47Technical competence 4.96 1.43Variety of available services 4.81 1.40Early notification of disruptions 4.58 1.77Decreased labor problems 4.56 1.64Decreased asset commitment 4.55 1.49Increased competition 4.36 1.51Global capabilities 3.00 1.75

1999 Selection FactorsScale of 1 to 7

Factor MeanService quality 6.36Reliability 6.29On time performance 6.20Price 5.98Flexibility 5.81Cost reduction 5.80Management quality 5.78Speed of service 5.73Order cycle time 5.68Good communication 5.67Customer support 5.62Location 5.61Customize service 5.53

Factor MeanSpecial expertise 5.37Vendor reputation 5.34Easy to work with 5.33Systems capabilities 5.30Technical competence 5.15Personal relationships 4.92Variety of services 4.86Early notification disruptions4.64Decreased assets 4.61Decreased labor problems 4.58Increased competition 4.32Global capabilities 3.08

International demands■ 3rd parties have to

prepare to serve international markets.

■ Many customers want to move to fewer providers

Flexibility

■ 3rd parties cannot easily define themselves much anymore. They have to be flexible, quick, and nimble.

Special Qualities of Services

$ Intangilibility

$ Inseparability

$ Heterogeneity

$ Perishability

Intangibility of Services

● Cannot be stored● Cannot be protected

through patents● Cannot be readily

displayed or communicated

● Prices are difficult to set

● Stress tangible cues.● Use personal sources

more than non-personal sources.

● Simulate or stimulate word-of-mouth communications.

● Create strong organizational image.

● Use cost accounting to help set prices.

● Engage in postpurchasecommunications.

Marketing Problems Marketing Strategies

From: Zeithaml, Parasuraman, Berry. Problems and Strategies in Services Marketing. Journal of Marketing, (Spring 1985)

Inseparability of Services

● Customer involved in production.

● Other customers involved in production.

● Centralized mass production of services difficult.

● Emphasize selection and training of public contact.

● Manage customers.● Use multisite locations



Heterogeneity of Services

● Standardization and quality control difficult to achieve.

● Industrialize service (standardizing certain common services).

● Customize service.



Perishability of Services

● Services cannot be inventoried.

● Use strategies to cope with fluctuating demand.

● Make simultaneous adjustments in demand capacity to achieve closer match between the two.



Relationships Between Competitors

■ These characterizations can be thought of as a continuum that ranges from conflict as the most competitive mode to collusion where there is a total absence of competition.

conflict

competition

coexistence

cooperation

collusion

Service Mapping

■ Visualize the interaction of the customer and the service system from the point of view of the customer.

■ Insure that all aspects of the service system add value to the customer’s experience of the service which the company intends to deliver.

■ Identify the points at which the service system might break down, or otherwise fail to produce the intended value for customers.

Service Map FormatActivities which can be directly

perceived by customers, including customer interaction

Activities which are invisible to customers

Line of visibility

Service Process Fail Points

■ Process does not add value to customers. ■ Customer involvement does not support

service concept.■ Inadequate integration between customer

involvement and the service system.■ Operations infrastructure is poorly defined.

Does Not Add Value

■ No clear vision of level of service■ Vision not accepted totally within the

organization■ Not every activity designed with

objective of service speed in mind

Customer Involvement Does Not Support Service Concept

■ Interaction with customer is “cluttered”■ Too many steps for customer■ Too complex

Inadequate Integration Between Customer Involvement and the Service System

■ Poor communication linkages between first line customer service providers and the rest of the organization.

■ Potential customer needs not anticipated and integrated into the service system

Operations Infrastructure Is Poorly Defined

■ Systems and procedures overly complicated.

■ System designed according to criteria which have little to do with meeting customer needs.

Service-Profit Chain Audit

■ How do we define loyal customers?■ Do measurements of customer profitability include

profits from referrals?■ What proportion of business development

expenditures are directed to the retention of existing customers?

■ Why do our customers defect?■ Are customer satisfaction data gathered in an

objective, consistent, and periodic fashion?■ Where are the listening posts for obtaining customer

feedback in your organization?


■ How is information concerning customer satisfaction used to solve customer problems?

■ How do you measure service value?■ How is information concerning customers’

perceptions of value shared with those responsible for designing a product or service?

■ To what extent are measures taken of differences between customers’ perceptions of quality delivered and their expectations before delivery?


■ Do the organization’s efforts to improve external service quality emphasize effective recovery from service errors in addition to providing a service right the first time?

■ How do you create employee loyalty?■ Have we made an effort to determine the right level

of employee retention?■ Is employee satisfaction linked to customer

satisfaction with enough frequency to establish trends for management use?


■ To what extent are measures of customer satisfaction, customer loyalty, or the quality and quantity of service output used in recognizing and rewarding employees?

■ Do employees know who their customers are?

Leadership Audit■ To what extent is the firm’s leadership”

– energetic, creative vs. stately conservative?– participatory, caring vs. removed, elitist?– listening, coaching, and teaching vs. supervising and

managing?– motivated by mission vs. motivated by fear?– leading by means of personally demonstrated values vs.

institutionalized policies?■ How much time is spent by the organization’s leadership

personally developing and maintaining a corporate culture centered around service to customers and fellow employees?

Service Laws

■ First Law of ServiceSatisfaction = Perception - Expectations

■ Second law of ServiceIt’s Hard to Play Catch-Up Ball

Waiting

“Waiting is frustrating, demoralizing, agonizing, time consuming, and incredibly expensive.” Federal Express Commercial

Principles of Waiting■ Unoccupied time feels longer than occupied

time.■ Pre-process waits feel longer than in-

process waits.■ Anxiety makes waits seem longer.■ Uncertain waits are longer than known,

finite waits.■ Unexplained waits are longer than

explained Fwaits.■ Unfair waits are longer than equitable waits.■ The more valuable the service, the longer I

will wait.■ Solo waiting feels longer than group

waiting.

Service Defections

■ What is the cost of losing a customer?■ What is the cost of a lost sale?■ What are defectors telling you?■ “Watch the door”■ Do you have a “Zero defections

culture?”

Loyalty

■ Loyalty integral to to firm’s basic business strategy.■ Economic benefits.■ Select the “right” customers.■ Demand management■ Who can you deliver “superior value” to?■ Customers build trust with employees - not

executives

Loyalty Measures

■ Understand cause-and-effect relationships between loyalty and profits.

■ Retention rate■ Share of purchases■ Repeat purchases■ Referrals■ Customer acquisition costs■ Customer service employee retention

New Model of Service

■ Value investments in people as much as investments in machines, and sometimes more.

■ Use technology to support efforts of men and women on front lines - and not just to monitor or replace them.

■ Make recruitment and training as crucial for salesclerks and housekeepers as for managers and senior executives.

■ Link compensation to performance for employees at every level, not just for those at the top.

Identifying a service strategy

■ What attributes of service are - and will continue to be - most important to our target markets?

■ On which important service attributes is the competition weakest?

■ What are the existing and potential service capabilities of our company?

Defining a service strategy■ What are the company’s integral service competencies? What are

the critical knowledge and skills that define and drive the firm both philosophically and practically?

■ What are the company’s service incompetencies? What are the knowledge and skill weaknesses?

■ What are the company’s resource strengths and weaknesses? Finances, facilities, technologies, human and other resources

■ What is the company’s service reputation? How do customers,noncustomers, and employees view service performance?

■ What is the company’s belief system? What is valued in the organization? What is the company’s core culture?

■ What is the company’s service strategy? What is the “reason forbeing” today?

Service Checklist■ Is our service strategy clear & compelling to all of our

employees?■ Does our service strategy deliver genuine value to customers?■ Does our service strategy emphasize excellent service quality?■ Do we live our service strategy in this company?■ Does our service strategy demand superior achievement?■ Does our service strategy differentiate our company from

competitors?■ Do we reinforce our service strategy with explicit service

standards that guide and energize employees?■ Do we reinforce our service strategy with appropriate symbols?

Principles of Great Service

■ Reliability■ Tangibles■ Responsiveness■ Assurance■ Empathy

Add Services that Enhance Core Businesses and Increase Capabilities

● Understand Mission - Articulate Service Philosophy

● Set Multiple and Measurable Objectives● Assist Customer in Understanding

Possibilities● Concentrate on Winners● Benchmark

5Company ConfidentialCompany Confidential

Vantage PointsVantage Points

Complete Customer

OrderFulfillment

Complete Complete CustomerCustomer

OrderOrderFulfillmentFulfillment

Finance View

Finance Finance ViewView

OperationsView

OperationsOperationsViewView

PartnerView

PartnerPartnerViewView

CustomerView

CustomerCustomerViewView

CompetitionCompetitionViewView

Dell Computer■ 14 days of inventory throughout the system. For

monitors, they are moving from 18 days of inventory in 1996 to five days of inventory.

■ Dell does not pay anyone for 45 days but they demand instant payment from customers.

■ Dell managed to save 25% of transportation costs after moving to UPS monitor ship program.

■ Dell has a single focus on keeping inventories lean. Everyone is focused on the same indices which measure how lean they run their inventories.

■ Dell’s build cycle is two days on most systems■ Selling $4,000,000 via the internet

5

The Collapse of the Middle

Value Migration

Value

Value

In the age of manufacturing, the traditional sales force was the dominant go-to-market mechanism.

In the age of distribution, value has shifted to low-cost distribution and high-end solutions.

The Age of Manufacturing :The Age of Manufacturing :

The Age of Distribution :The Age of Distribution :

Low-costDistribution

TraditionalSales Force

High-EndSolutions

Low-costDistribution

TraditionalSales Force

High-EndSolutions

■ Generally, don’t get it right first time.

■ Able to shift resources quickly.■ Manage to revenue/employee.

NIKE■ 60-90 day product life cycles.■ 9-13 month product development

cycles.■ Customer Management - Sell “one less”

than market wants■ Completely outsourced (almost)■ Niketown■ Nike outlet stores

COMPETITION■ Who do you perceive as competition?■ Who is eroding your market share?■ What customer needs are being

addressed by these other players in your space?

■ Do they have any “customer facing” app’s?

■ How easily can they change their value add? How easily can your company?

Branding Services

■ Develop service brands■ Sunkist & Kodak Colorwatch System

Pricing

■ Understand value of services.■ Market-based pricing vs. cost-based

pricing vs. activity-based pricing■ What value are you adding to

customer? What should they pay for? What is the competition doing?

Standardize Services

■ For operational ease and effectiveness, standardize services as much as possible.

■ Goes against Unisys way.■ May be naïve.■ Make sure all personnel understand

how services are manufactured and delivered.

Preserve the Core/Stimulate Progress

Preservethe core

StimulateProgress

STRATEGIC PROFIT MODEL

TIMES

RETURN ONNET WORTH

FINANCIALLEVERAGE

RETURN ONASSETS

NET PROFITMARGIN

NET PROFIT

NET SALES

NET SALES

TOTALEXPENSES

GROSSMARGIN

NET SALES

COST OFGOODS SOLD

ASSETTURNOVER

INVENTORY

TOTALASSETS

CURRENTASSETS

FIXED ASSETS

OTHER CURRENTASSETS

ACCOUNTSRECEIVABLE

(The DuPont Model)

net profitnet worth( )

net profitnet sales( )

total assetsnet worth

net salestotal assets( )

( )

= X %

%

$

$

$

$

$

$

$

$

$

$

$

$

$

/–

–

/

+

+

+

SALES

Selected Financial Data for Manufacturers, Wholesalers, and Retailers for 1997 ($ Millions)

Companies

ManufacturersAbbott Laboratories 11,883 2,094 18% 12,061 1,280 11%Borden 1,488 221 15% 2,206 302 14%Clorox 2,741 298 11% 3,030 212 7%Dresser Industries 7,458 318 4% 5,099 972 19%Ford Motor 153,627 6,920 5% 279,097 5,468 2%General Electric 90,840 8,203 9% 304,012 5,895 2%General Mills 6,033 422 7% 3,861 389 10%Goodyear Tire & Rubber 13,065 559 4% 9,917 1,835 19%Harris Corp. 3,939 133 3% 3,784 604 16%Honeywell 8,028 471 6% 6,411 1,028 16%NCR 6,598 7 0.11% 5,293 489 9%Newell 3,234 290 9% 3,944 625 16%Pfizer 12,188 2,213 18% 15,336 1,773 12%Sara Lee 20,011 (523) -3% 10,989 2,882 26%Xerox 18,166 1,452 8% 27,732 2,792 10%Wholesalers and RetailersBaxter International 6,138 300 5% 8,707 1,208 14%Bergen Brunswig 11,661 82 1% 2,707 1,309 48%Dayton Hudson 27,757 751 3% 14,191 3,251 23%Fleming Companies 15,372 25 0.16% 3,924 1,019 26%Kmart 32,183 249 1% 13,558 6,367 47%Nordstrom 4,852 186 4% 2,865 826 29%Sears, Roebuck 41,296 1,188 3% 38,700 5,044 13%Super Value Stores 17,201 231 1% 4,093 1,116 27%Wal-Mart Stores 117,958 3,526 3% 45,384 16,497 36%Winn-Dixie 13,219 204 2% 2,921 1,249 43%

Sales Net ProfitsNet Profits as a

Percent of SalesInventories as a

Percent of Assets Inventory

InvestmentTotal

Assets

INVENTORYCARRYING

COSTS

CapitalCosts Inventory Investment

Insurance

Taxes

Plant Warehouses

Public Warehouses

Rented Warehouses

Company OwnedWarehouses

Obsolescence

Damage

Pilferage

Relocation Costs

InventoryServiceCosts

StorageSpace Costs

InventoryRisk Costs

NORMATIVE MODEL OF INVENTORY CARRYING COST METHODOLOGY

SUMMARY OF DATA COLLECTION PROCEDURE

StepNo Cost Category Source Explanation Amount (Current Study)1. Cost of Money Comptroller This represents the cost of having money invested

in inventory and the return should be comparable toother investment opportunities.

30% pretax

2. Averagemonthlyinventory valuedat variable costsdelivered to thedistributioncenter

1. Standard cost data -- comptroller'sdepartment

2. Freight rates and product specs are from distribution reports

3. Average monthly inventory in casesfrom printout received from salesforecasting

Only want variable costs since fixed costs go onregardless of the amount of product manufacturedand stored -- follow steps outlined in body of report.

$7,800,000 valued at variable costdelivered to the D.C. (Variablemanufactured cost equaled 70% offull manufactured cost. Variablecost FOB the DC averaged 78% offull manufactured cost)

3. Taxes The comptroller's department Personal property taxes paid on inventory $90,948 which equals 1.1667%4. Insurance The comptroller's department Insurance rate/$100 of inventory (at variable costs) $4,524 which equals 0.058%5. Recurring

storage (publicwarehouse)

Distribution operations This represents the portion of warehousing coststhat are related to the volume of inventory stored.

$226,654 annually which equals2.893%

6. Variable storage(plantwarehouses)

Transportation services Only those costs that are variable with the amountof inventory stored should be included.

Nil

7. Obsolescence Distribution department reports Cost of holding product inventory beyond its usefullife

0.800% of inventory

8. Shrinkage Distribution department reports Requires managerial judgment to determine theportion attributable to inventory storage. $100,308 which equals 1.286%

9. Damage Distribution department reports Requires managerial judgment to determine theportion attributable to inventory storage.

10. Relocation costs Not available Only relocation costs incurred to avoidobsolescence should be included.

Not available

11. Total carryingcosts

Calculate the numbers generated in steps3, 4, 5, 6, 8, 9 and 10 as a percentage ofaverage inventory valued at variable costdelivered to the distribution center and addthem to the cost of money (step 1).

36.203%

ABC COMPANYA) Calculate the inventory carrying cost percentage for the ABC Company given the

following information:

– finished goods inventory is $28 million valued at full manufactured cost;– based on the inventory plan, the weighted average variable manufactured cost per case is 65

percent of the full manufactured cost;– the variable transportation cost incurred to move the inventory from plants to warehouse

locations close to customers was $1,500,000;– the variable cost of moving the inventory into these warehouse locations was calculated to be

$300,000;– the company was currently experiencing capital rationing and new investments were required

to earn 15 percent after taxes;– personal property taxes paid on inventory were approximately $200,000;– insurance coverage to protect against loss of inventory was $100,000;– storage charges at public warehouses totalled $500,000;– variable storage in plant warehouses was considered to be negligible;– obsolescence was $100,000;– shrinkage was $100,000;– damage related to inventory storage was $50,000;– transportation costs associated with the relocation of field inventory to avoid obsolescence

was $50,000; and,– the marginal tax rate is 40%.

B) Would it be a good decision to spend $720,000 per year in increased production set-up costs and premium transportation costs in order to achieve an inventory reduction of 10%?

123456789

101112131415

$750,000375,000250,000187,500150,000125,000107,14393,75083,33375,00068,18262,50057,69253,57150,000

$300,000150,000100,000

75,00060,00050,00042,85737,50033,33330,00027,27325,00023,07721,42820,000

-$150,000

50,00025,00015,00010,0007,1435,3574,1673,3332,7272,2731,9231,6491,428

InventoryTurns

AverageInventory

Carrying Costat 40 Percent

Carrying CostSavings

THE IMPACT OF INVENTORY TURNS ON INVENTORY CARRYING COSTS

$300,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

$250,000

$200,000

$175,000

$150,000

$125,000

$100,000

$75,000

$50,000

$37,500$25,000

0

Inventory Turns

Inventory carrying costs

$225,000

$275,000

RELATIONSHIP BETWEEN INVENTORY TURNS AND INVENTORY CARRYING COSTS

ANNUAL INVENTORY CARRYING COSTS COMPARED TO INVENTORY TURNS

Holding Costs(per unit)

Inventory Turnovers

$30.00

15.00

12.50

10.00

7.506.005.003.752.50

0

1 2 3 4 5 6 7 8 9 10 11 12

Variable Manufacturing CostCarrying Cost %Annual Cost to Carry in InventoryMonthly Cost (1/12)

$10030%$30

$2.50


Product

Price





Promotion


Levels


TransportationCosts

WarehousingCosts


Costs

Lot QuantityCosts

Logi

stic

sM

arke

ting


Product

Price





Promotion


Levels


TransportationCosts

WarehousingCosts


Costs

Lot QuantityCosts

Logi

stic

sM

arke

ting

TRADITIONAL SUPPLY CHAIN FLOWS

Demand flow

Product flow

Supplier RetailerDistributorManufacturer

ECR, Masters

Introduction to Supply Chain Management

Documents

customer demand

customer requirements

implementmanagement

customer enquiries

supply chain process

key management customer

customer focus teams

supply chain managementis