OPSM 301 Operations Management Class 21: Supply Chain Strategy (Selected sections Chapter 8) Koç University Zeynep Aksin [email protected].

OPSM 301 Operations Management

Class 21:

Supply Chain Strategy(Selected sections Chapter 8)

Koç University

Zeynep [email protected]

First: Project management example

Activity Immediate Predecessor(s)

Normal Time (weeks)

Crash Time(weeks) Cost

($)

Crash Cost($)

A -- 6 -- 1200 --

B A 12 10 2200 4000

C A 20 16 3600 6000

D B,C 10 6 1300 2500

E B 8 4 6000 10000

F E 14 10 2600 7000

G D,F 12 8 1200 3000

H F,G 10 8 1500 4500

Crashing the project

The company wants to complete the project in 56 weeks. What is the least cost plan for crashing activities in order to complete the project in 56 weeks?

The Research and Development department of the company proposes a new process to perform activity G. The proposed process would eliminate the precedence relationship between activities F and G. That is, after the proposed process change is implemented, activity G will have activity D as its sole immediate predecessor. What is maximum amount of investment you would allocate for the implementation of this proposal if the objective of the company is to complete the project in 56 weeks?

4

A Supply Chain

Figure 11.1Figure 11.1

Consumer

Retailer

Manufacturing

Material Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlowSchedules

Flows in a Supply-Chain

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

Example: Köşebaşı Restaurant [1]

1995: first restaurant opened in Levent: hosting Chelsea Clinton, Donna Karan, Warren Beatty, Annette Bening, and the international gourmet Tom Zagat .

1999: Köşebaşı is voted one of the 50 restaurants in the world by Conde Nast Traveler magazine. Second rest. In Fenerbahce.

2000: Köşebaşı received the 26th International Tourism, Lodging and Catering Association's award in Madrid.

2001: Köşebaşı Express concept 2002 Time: "Meat lovers can rejoice at Köşebaşı. Don't bother with

a mess, sit back and let your waiter make the choices”. New restaurants: Nişantaşı (2002), Ataşehir Köşebaşı Express

(2003), and Ankara (2004). Also in the summer, Köşebaşı serves in Reina and in Bodrum.

[1] www.kosebasi.com.tr

Köşebaşı Restaurant SC in the summer

Definition:

Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements.

Notice:– Who is involved– Cost and Service Level– It is all about integration

Supply Chain Management

Supply Chain Management: the challenge

Global optimization– Conflicting Objectives– Complex network of facilities– System Variations over time

Managing uncertainty– Matching Supply and Demand– Demand is not the only source of uncertainty

A Common Supply-Chain Performance Measure

Inventory Turnover =Cost of Goods Sold

Average Aggregate Inventory Value

Weeks of Supply =1

Inventory Turnover52 weeks

A Case Study- Dell Computer

From From Business WeekBusiness Week http://www.businessweek.com/1997/14/b3521131.htmhttp://www.businessweek.com/1997/14/b3521131.htm

13

A Case Study- Dell Computer

Global Leader in PC market share (until 2007-Now second after HP, but still the leader in the US)

# 1 in most admired companies list in 2005

2005 figures: Return on Assets: 12.01% (vs 4.47% for HP) Profit margin: 6.39% (vs 3.05% for HP)

2008 figures: Return on Assets: 9.40% (vs. 7.49% HP) Profit margin:4.25% (vs 9.65% for HP)

14

Dell Computer

In 1984, the dominant business model in computer industry was “vertical integration”, produce everything in house

Dell outsourced production of chips, monitors etc. and focused on creating value for the customer. Intensive use of internet and EDI technology—towards “virtual integration”

Main principle of the Dell model:– Eliminate the dealers and sell directly to the customer– Build to order and not carry finished goods inventory

Dell Computer

Summary of facts:

70% of the sales are to large corporate customers

Use electronic commerce for sales, marketing, ordering and billing

– $ 6 million a day in PCs on web site in 2004

Suppliers located within 15 minutes of plant in Round Rock, Texas

Flow time of about a day (not counting delivery time)

16

Dell Computer Focus on “velocity”: how fast the inventory is

moving Inventory is a big risk in Computer industry

– Costs go down – by 50% in a year

– Products become obsolete

Dell’s Inventory Turnover Data Year      Inventory Turnover         Day'sInventory1995      9.8                                  351996      24.2                                141997      41.7                                8.51998      52.40                               6.51999      52.40                               6.52000      51.4                                62001      63.50                               5.52005 102.3 3.62006 88.8 4.12007 77.5 4.7

HP’s turnover: 9.75

Dell Computer

Inventory equivalent to 13 days of sales in 1997 (versus 25 days for Compaq) (reduced to about 4 days in 2004)– Little’s Law!

Can beat competitor’s prices by 10-15%

Dell Computer

Supplier Relationships: Reduced number of suppliers from 204 in 1992

to 47 in 1997– – Build long term relationships with suppliers– Buy everyday as needed, communicate inventory

levels and plans to the suppliers– When a new product is introduced, supplier engineers

stay within Dell plant to fix problems– For trusted suppliers, eliminate shipment to plant and

unnecessary double quality control

A Case Study -- Dell Computer

Caliber Logistics, Inc. manages a warehouse 15 minutes from plant– Vendor managed inventory (VMI): supplier is responsible for

the inventory in the warehouse, until it is used

– Caliber handles transportation– Dell is billed only when parts are used

Bar codes are used to manage inventory within assembly plant– Real-time management of inventory

Dell Computer

Video displays are shipped directly from the manufacturer– When order is approved by finance, e-mail is sent to a

3rd party shipper like UPS– Saves $30 per display in freight costs

Dell ComputerDisplay

Manufacturer

UPS

Customer

InformationProduct

1

43

2

Dell Computer

(Sony)

Dell Computer

Customer Relationships Assemble to order in the channel: a form

of postponement Direct model means being close to the

customer:– Get better information about the demand,

better forecast– Understand customer needs to design new

products and services that create value

How to choose the right supply chain?

Functional Product

Innovative Product

Product Life Cycle More than 2 years

3 months to 1 year

Contribution Margin 5% to 20% 20% to 60%

Product Variety Low (10-20 variants) High

Average Margin of Error in the Forecasts 10% 40% to 100%

Average Markdown 0% 10% to 25%

Average Stockout Rate 1% to 2% 10% to 40%

• Before devising a supply chain consider the nature of the demand for your products:

Supply Chain Types

Physically Efficient Market-Responsive

Primary Purpose Supply predictable demand at lowest cost

Respond quickly to unpredictable demand while controlling

stockouts, forced markdowns and obsolete inventory

Manufacturing Focus High Utilization Excess Capacity

Inventory Strategy High turns and minimum inventory through chain

Buffer stock of parts or finished goods

Lead-Time Focus

Shorten lead-times if it doesn’t increase cost

Shorten lead-times as much as possible

Supplier Choice On cost and quality On speed, flexibility, and quality

Product Design Maximixe performance, minimize cost

Modular design, postponement of differentitation for as long as

possible

Drivers of Supply Chain Performance

Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers