Suppy Chain Mgt Intro

Introduction to Supply Chain Management

Dr. Dr.Dale DaleS. S.Rogers Rogers Center Centerfor forLogistics LogisticsManagement Management University UniversityofofNevada Nevada

MGRS MGRS474/674 474/674

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

Supplier

Inbound Transport

Manufacturing

Distribution

Outbound Transport

Ultimate Customer

My Supply Chain vs. Your Supply Chain

Supplier

Inbound Transport

Manufacturing

Distribution

Outbound Transport

Ultimate Customer

1986 CLM DEFINITION OF LOGISTICS

…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-ofconsumption for the purpose of conforming to customer requirements. [Council of Logistics Management, 1986]

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-oforigin to the point-of-consumption in order to meet customers' requirements.

[Council of Logistics Management, 1998]

SUPPLY CHAIN MANAGEMENT Integrating and Managing Processes Across the Supply Chain Information Flow Tier 2 Supplier

Manufacturer

Tier 1 Supplier

Marketing & Sales

Purchasing Production

Supply Chain Business Processes

Customer

Logistics

PRODUCT FLOW

Consumer /End-user

Finance

R&D

CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT PROCUREMENT PRODUCT DEVELOPMENT AND COMMERCIALIZATION RETURNS

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.

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

Customer Relationship Management Process

Customer Relationship ! Management

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 Behaviors Maximizing 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 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.

Customer Service Management

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

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.

Demand Management

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

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.

Fulfillment

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

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.

Manufacturin g Flow Management

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

Procurement Process !

Strategic plans of suppliers and company are aligned to focus resources on holding down costs

Procurement

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 Tier 1 Suppliers

Tier 1 Customers

Tier 2 Customers

1

1

2

2

n

1

1

2

2

Tier 3 to Consumers/ End-Customers

n

1 n

n

1 2

3

n

3 n

1 2

n

n

1 n

Focal Company

1

Members of the Focal Company’s Supply Chain

Consumers/End-customers

Tier 2 Suppliers

Tier 3 to n customers

Tier 3 to n suppliers

Initial Suppliers

Tier 3 to Initial suppliers

SUPPLY CHAIN MANAGEMENT FRAMEWORK: Elements and Key Decisions

Supply Chain Business Processes

Supply Chain Management Components 3) What level of integration and management should be applied for each process link?

2) What processes should be linked with each of these key supply chain members?

Supply Chain Network Structure 1) Who are the key supply chain members with whom to link processes?

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.

TYPES OF INTER-COMPANY BUSINESS PROCESS LINKS

Tier 1 Customers

Tier 1 Suppliers

Tier 2 Customers

1

1

2

2

n

1

1

2

2

Tier 3 to Consumers/ End-Customers

n

1 n

n

1 2

3

3 n

1

1 n

n

1 2 n

1

1

n

n

Managed Process Links Monitor Process Links Not-Managed Process Links Non-Member Process Links

n

Focal Company Members of the Focal Company’s Supply Chain Non-Members of the Focal Company’s Supply Chain

Consumers/End-customers

Tier 2 Suppliers

Tier 3 to n customers

Tier 3 to n suppliers

Initial Suppliers

Tier 3 to Initial suppliers

THE FOCAL COMPANY’S ALTERNATIVES FOR INVOLVEMENT WITH LINK 2 Focal Company

Company B

Company C Alternative 1) Integrate with and actively manage Link 2. Alternative 2) Monitor the procedures of Company B and Company C for integrating and managing Link 2.

Link 1

Link 2

Alternative 3) Not involved, leave the integration and management up to Company B and Company C.

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

SUPPLY CHAIN MANAGEMENT: THE DISCONNECTS Information Flow Tier 2 Supplier

Manufacturer

Tier 1 Supplier

Logistics Purchasing Production

Customer

Marketing & Sales

PRODUCT FLOW

Finance

R&D CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT MANUFACTURING FLOW MANAGEMENT PROCUREMENT PRODUCT DEVELOPMENT AND COMMERCIALIZATION RETURNS

Consumer/ End-Customer

REPRESENTATIVE BUSINESS PROCESSES IDENTIFIED IN SELECTED CASE COMPANIES Company A • Product Development • Supply Chain • Customer Management

Company D • Business Process - Marketing Planning - Prospecting - Exploring Needs - Developing Solutions - Decision - Presenting & Closing - Delivering - Demonstration Results

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

Company F • Supply Chain • Account Planning

SUPPLY CHAIN MANAGEMENT Fundamental Management Components

Physical & Technical Management Components

Managerial & Behavioral Management Components

Planning and Control Methods

Management Methods

Work Flow/ Activity Structure

Power and Leadership Structure

Organization Structure

Risk and Reward Structure

Communication and Information Flow Facility Structure

Culture and Attitude

Product Flow Facility Structure

AN ILLUSTRATION OF A SUPPLY CHAIN SHOWING EACH INTEGRATED AND MANAGED BUSINESS PROCESS LINK Demand Management Process

Order Fulfillment Process

Product Development and Commercialization Process

Customer Relationship Management Process

Managed Demand Management Process Links Managed Order Fulfillment Process Links Managed Product Develop./Commercial Process Links Managed Customer Relationship Manag. Process Links Not-Managed Business Process Link.

Focal Company. Selected Members of the Focal Company's Supply Chain.

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

Managed Demand Management Process Links Managed Order Fulfillment Process Links Managed Product Develop./Commercial. Process Links Managed Customer Relationship Manag. Process Links Not-Managed Business Process Links.

Focal Company. Selected Other Members of the Focal Company's Supply Chain.

IMPLEMENTATION OF SUPPLY CHAIN MANAGEMENT Typical Functions Silos Business Processes

S U P P L I E R S

Customer Relationship Management

Sales & Marketing Account Management

Account Customer Service Management Administration

Technical

Logistics

Requirements Requirements Definition Definition Technical Service

Demand Planning

Process Requirements

Network Planning

Fulfillment

Special Orders

Environmental Requirements

Distribution Management

Procurement

Product Development and Commercialization

Process Stability

Order Booking

Material Specifications

Business Plan

Product Design

Purchasing

Finance & Accounting

Manufacturing Strategy

Sourcing Strategy

Customer Profitability

Priority Assessment

Cost To Serve

Capability Planning

Sourcing

Tradeoff Analysis

Plant Direct

Selected Supplier(s)

Distribution Cost

Production Planning

Integrated Supply

Manufacturing Cost

Integrated Planning

Supplier Management

Performance Coordinated Specifications Execution

Demand Management

Manufacturing Flow Packaging Management Specifications

Manufacturing

Prioritization Criteria Inbound Flow

Movement Process Material Requirements Specifications Specifications

Materials Cost

R & D Cost

C U S T O M E R S

Information Architecture, Data Base Strategy, Information Visibility

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

CHARACTERISTICS OF SUPPLY CHAIN 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 From: Traditional Buyer/Supplier Relationship MIS

MIS

R&D

R&D

MKT

Buyer

Seller

LOG

MKT LOG

ACCT

ACCT

To: Building Stronger Partnerships Through Multiple Linkages Customer MIS

Supplier MIS

R&D

R&D

MKT

MKT

LOG

LOG

ACCT

ACCT

INVENTORY POSITIONS AND MAJOR FLOWS IN A SUPPLY CHAIN Suppliers

Orders

Orders

Orders

Payments

Payments

Payments

Information Manufacturer

Information Wholesalers

Information

Product

Product

Retailers

Product

Variable cost of product $5

Variable cost of material $10

Variable cost $60 of product

Variable cost of product

Full manufactured cost $7

Acquisition cost

Other acquisition $2 costs

Other acquisition costs $2

Selling price

Other variable $14 costs

Selling price

Selling price

$10

$1

Total variable cost of product $25 Full manufactured cost $40 Selling price

$60

$80

$80

$150

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?

FUTURE RESEARCH OPPORTUNITIES: SUPPLY CHAIN MAPPING ❏ How should the existing supply chain be mapped? ❏ Should the map include all connected firms or only the valueadding 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: VALUE ❏

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: METRICS ❏ 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 should they be overcome? ❏ What characteristics of managing the supply chain are related to higher 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: NETWORK REDESIGN ❏ What is the process to take the map of the existing supply chain and 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 affect the management time allocable to other members? ❏ Should a third party manage some relationships to free resources for this closer relationship, which thus, changes the membership of the network? Is it an iterative process?

FUTURE RESEARCH OPPORTUNITIES: INTEGRATION ❏ 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: PROCESS 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: IMPLEMENTATION OF MANAGEMENT COMPONENTS ❏ 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 level of 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?

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

…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-ofconsumption for the purpose of conforming to customer requirements. Council of Logistics Management (1986)

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]

TYPES OF INTER-COMPANY BUSINESS PROCESS LINKS Ti er 1 Suppl ier s

Ti er 1 Custo mer s

Ti er 2 Custo mer s

1

1

2

2

n

1

1

2

2

Ti er 3 to Consumer s/ End -Custome rs

n

1 n

n

1 2

3

3 n

1

1 n

n

1 2 n

1

1

n

n

Managed Proces s Links Monitor Process Links Not-Managed Process Links Non-Member Process Links

n

Consumers/End-customers

Ti er 2 Suppl ier s

Tier 3 to n customers

Tier 3 to n su ppliers

Initial Suppliers

Ti er 3 to Initia l supplie rs

Focal Company Members of the Focal Company’s Supply Chain Non-Members of the Focal Comp any’s Supply Chain

Source: Douglas M. Lambert, Mart ha C. Cooper, and Janus D. Pagh, “Supply Chain Management : Implement at ion Is sues and Res earc h Opport unities,” The Internat ional Journal of Logisti cs Management, Vol. 9, No. 2, 1998, p. 7.

COMPONENTS OF 1997 LOGISTICS COSTS Total U.S. Logistics Costs ($862 Billion) Water Freight 3.0%

Air Freight 2.7%

Oil Pipelines 1%

Forwarders Freight 1% Inventory Carrying Costs 29.7%

Railroads Freight 4%

Warehousing Costs 8%

Motor Carriers Freight 46.4% Other Costs 0.6%

Order Administration Costs 4%

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)

Product

Price

Promotion

Marketing

COST TRADEOFFS REQUIRED IN MARKETING AND LOGISTICS

Inventory Carrying Costs

Transportation Costs

Lot Quantity Costs

Warehousing Costs Order Processing and information Costs

Marketing Objective: Logistics Objective:

Logistics

Place Customer Service Levels

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

Structure Versus Behavior ■

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Structure determines behavior Behavior does not determine structure

Sub-Optimization ■

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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.

UCS Operations & Program Support Vision Partnering with our clients around the globe, serving their needs for future success...

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

Three Critical Business Elements “The three most important things you need to measure in a business are: 1. Customer Satisfaction 2. Employee Satisfaction 3. Cash Flow Source: Jack Welch, CEO, General Electric

Computing History ■

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

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

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

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

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

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

Burroughs Calculating Machines ■

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Class 3 - 1911-1929

Over 5,000 parts, with as many as 2000 moving in together at any one time. Most technologically advanced of it's time

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Price comparable to that of a new car.

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

Burroughs Calculating Machines

Burroughs Calculating Machines ■

■

1920s ■

1949

Small, portable - 25 lbs. Square keys added “wings to the fingers” Faster keying

Elements in the Framework of Supply Chain Management

Business Processes

Supply Chain Management Management Components

Supply Chain Structure

Supply Chain Strategy Product Strategy Manufacturing Transformation Strategy

Logistics Strategy

Marketing Strategy

Demand Management Strategy

Supply Chain Strategy EDI EDI JIT Replenishment Signals

Supplier Plants

BTO Signals

Orders

Customer Supplier Order Owned Compaq Fulfillment Whses Plants

THE CUSTOMER PULLS PRODUCT THROUGH THE SUPPLY CHAIN

Logistics Strategy Customer Understanding Performance Measurement

Emerging Markets

Formalization Intense Relationships

Information Technology

Flexibility/ Agility

Selecting Supply Chains Customer

Customer

Customer

Customer

Company

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 Procurement Demand Management

Order Fulfillment

Product Development and Commercialization

Customer Service Management

Customer Relationship Management

Manufacturing Flow Management

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 Planning & Control

Work Structure

Product Flow Facility

Structure

Management Methods

Product Structure

Risk & Reward

Structure

Organization Structure

Power & Leadership

Structure

Culture & Attitude

Information Flow Facility Structure

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.

AVERAGE INVENTORY INVESTMENT UNDER CONDITIONS OF UNCERTAINTY A. With variable demand Inve ntory 200

Average cycle inventory

100 Ave ra ge inve nto ry (15 0 )

S afe ty s tock (50)

8

10

20

30 Days

40

AVERAGE INVENTORY INVESTMENT UNDER CONDITIONS OF UNCERTAINTY B. With variable lead time Inve ntory 200

Ave rage cycle inve ntory

100 Ave rage inve ntory S afe ty (140) s tock (40)

10

12

20

Days

30

40

AVERAGE INVENTORY INVESTMENT UNDER CONDITIONS OF UNCERTAINTY C. With variable demand and lead time Inve ntory 200

Average cycle inventory

100 Average inventory (200)

Safety s tock (100)

8

10

12

20

Days

30

40

FACTORS INFLUENCING SAFETY STOCKS ❏

Forecast error

❏

Exposure to stockout

❏

Lead time

❏

Service level requirement

RELATIONSHIP BETWEEN INVENTORY INVESTMENT AND CUSTOMER SERVICE LEVELS

Inventory investment in units

1025

850

780 728 675

75

84.1

90.3

S e rvice pe rce ntage

94.5

97.7

99.9 100

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 Market Share Customer Acquisition

Customer Profitability

Customer Satisfaction

Customer Retention

Balanced Scorecard Financial Objectives & Measures Customer Relationships and Measures

Vision & Strategy

Learning & Growth

Internal Business Processes

Balanced Scorecard Strategic Framework Clarifying Vision & Strategy Communicating & Linking

Balanced Scorecard

Planning & Target Setting

Strategic Feedback and Learning

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 Raw Material/ Assembly Supplier Financial Services Supplier Human Resource Service Supplier

Manufacturer Supplier

Brand Owner

Distributor

Logistics Services Supplier Marketing Service Supplier

Information Service Supplier

TOTAL SUPPLY CHAIN INVENTORY Component Suppliers

Sales Organization

?

65

TYPICAL STOCK CALENDAR DAYS

50 Customers

Manufacturing

35

30 8 Factory

Transit

Delivery

Local delivery

2 Material Stocks & WIP

Finished Stocks

Warehouse

Wholesaler

190 DAYS SUPPLY

Retailer

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?

Supplier

■

■

Inbound Transport

Manufacturing

Distribution

Outbound Transport

Might not be good enough to measure within the firm. Measure entire supply chain.

Ultimate Customer

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

■ ■ ■

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

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 Bullet Results from ERP implementations mixed. ■ True 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-ofthe-box” Warehouse Mgt Order Entry Distribution Planning

Production Scheduling

Order Processing

Performance Inventory Measurement Management Systems General Ledger

Manufacturing Management Systems

Network Design Planning Models

Transportation Management

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 Market Share Customer Acquisition

Customer Profitability

Customer Satisfaction

Customer Retention

Balanced Scorecard Financial Objectives & Measures Customer Relationships and Measures

Vision & Strategy

Learning & Growth

Internal Business Processes

Balanced Scorecard Strategic Framework Clarifying Vision & Strategy Communicating & Linking

Balanced Scorecard

Planning & Target Setting

Strategic Feedback and Learning

Supply Chain Classifications Margin High Long Life Cycle Products Short Life Cycle Products

Niche Rolex

Low Commodity Lumber

X-Mas trees, Bread, Fashion Dresses Dresses

Inventory holding costs are stable

Inventory holding costs change over product life cycle of product

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

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

-

Capital Charge

Economic Profit

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 Cash flow Return on Equity EVA

18% 22% 35% 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 Information Forecast improvements, signaling

Inventory

Pricing, deals, data sales

Finance

Consignment, credit terms, return policy Source: Professor Hau Lee, Stanford University

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 Measurements Area Service Cost Productivity Asset/Utilization Productivity Asset/Utilization Productivity Asset/Utilization Time Time Time Productivity Asset/Utilization & Service Service & Time Service & Time Value

Measurement Fill rate Logistics cost Inventory Recycling Throughput – number of items sold Response time Cash-to-cash Operating expense cost to convert inventory to throughput ROA with 100% customer satisfaction

Type linear linear linear linear linear linear linear linear

Order aging curve Line fill rate by time Economic profit

curve curve linear

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 Lower Cost

Performance

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 Logistics Even ■ 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 Info Sharing

Transactional

Inte ractive

Inte rdepende nt

Information on component and product specs shared

Some sharing of process informat ion

Decision Making

Design decisions made independently

Some collaboration with partners to influence design choices

Performance measures

Performance measures by product development not related to supply chain performance Separate design databases and systems

Some use of performance measures to track time-to-availability and total lifecyc le costs Some sharing of analytical tools and accounting databases

Extensive sharing of process info at both strategic and tactical levels Supply chain structures, component specification, and detailed design developed by consensus and negotiation between partners Extensive use of performance measures tied to sharing of rewards and risks Extensive use of technology to facilitate fast decision-making

Technology

Source: Professor Hau Lee, Stanford University

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 Post Sales Service

Order Planning, Sales forecasting, Capacity planning

Order Generation

Cost Estimation and Pricing

Returns and Claims

Order Receipt and entry

Billing

Order Fulfillment

Scheduling

Order Selection and Prioritization

Relationships Between Competitors conflict competition coexistence

■

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

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 for being” 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 2 4 Development

Volume Shipments

End of Life

Life Cycle Support Chasm

Inventory Carrying Costs ■

consist of expenses such as: – – – – – –

cost of money, insurance, taxes, shrinkage, warehousing, and obsolescence.

Inventory Driven Carrying Costs Product Salvaged

100% Bargain Basement Discounts 50%

Product Product Introduction Obsolescence And Volume Sales

0%

Time

Product Responsibility Curve Product Responsibility Curve

Product Life Cycle Birth

End of Life

End of Responsibility

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

Suppliers 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

New Entrants

■

■

Industry Competitors Intensity of Rivalry

Determinants of Substitution Threat •Switching Costs •Relative Price Performance of Subs •Buyer Propensity to Sub

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

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

Substitutes

Supply Chain Challenges Increasing Product Variety Geographical market preferences, local govt regulations Diverse customer preferences

Information Distortion (Bullwhip Effect) Increasing demand variability upstream in supply chain Beer-game, whiplash effect

Short & overlapping What you see is not product life cycles what they see Bullwhip impact worsens with long cycle times Source: Professor Hau Lee, Stanford University

Logistics Complexities Complex global supply chains with multiple sites, flows, borders, modes Complexities in labor management, laws, cultures

Symptoms: Curses & Paralyses Variety Proliferation Information Distortion Forecasting Inventory piling up nightmare High mfg cost Service degradation

Logistics Complexity Long lead times

High inventories

Wasteful resources

Excessive overhead

Poor customer service High obsolescence

Poor capacity planning Inefficient scheduling & transportation Misinformed market value

High product support & service costs

Source: Professor Hau Lee, Stanford University

High Logistics costs

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 Problems Action

Technical or Routine Adaptive

Direction

Define problem

Protection Orientation

Managing Conflict Maintain Norms

Identify adaptive challenge Shield org from threat Let org balance external pressures Clarify roles to Challenge current respond roles and resist pressure Restore order Expose conflicts Maintain norms, social network

Source: Dr. Corey Billington, Hewlett-Packard

Challenge unproductive norms; modify social network

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 ■

Customer – Increasingly sophisticated – Demanding unique configurations – Product proliferation

Product – Multiple channel structures – Demand distortion – Collapse of the middle

■

Supply Chain – Transition from verticallyintegrated 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

Collaborative Planning, Forecasting, & Replenishment ■

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.

Collaborative Planning, Forecasting, & Replenishment ■

■

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

Synchronized Order Fulfillment

Joint Capacity Planning

Collaborative Planning Stages Activity Info Sharing

Transactional

Interactive

Interdependent

Minimal info shared for demand forecasting

Extensive sharing of demand and promotional info

Decision Making

Demand forecast developed independent of partners

Some sharing of demand info (e.g., historical sales, forecast assumptions) Some collaboration with partners to influence demand forecast

Performance measures

No performance measures used

Some use of performance measures to track forecast accuracy

Technology

Limited use of technology

Some use of EDI to share/transmit demand info

Source: Professor Hau Lee, Stanford University

Demand forecast developed by consensus and negotiation among partners Extensive use of performance measures linked to shared risks and rewards among partners Extensive use of technology including EDI, web, demand planning tools

Collaborative Planning, Forecasting, & Replenishment ■ ■

■ ■

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 trading partner – 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 Methods Bus Plan

Aggregate Forecasting

Vendor Managed Inventory

Jointly Managed Inventory

Assemble Data

Syndicated data & historical sales

POS, whse withdrawl data,, syndicated data Product,Cus DC, by week

POS data by product, store & week Store level by week by product

Focus on retailer DC by invenotry & cost targets Pull from store replenishment or consumer dmd

Time-phased replenishment of stores & all DC’s Either party based on store level sales that are time phased From DC or mfg depnding on integration plan

Sales SF at high level of Forecst detail Order Focus on mfg forecast support within firm Order Gen

Retailer assumes 100% fulfillment

Order Fulfillment

Available at supplier DC

Source: CPFR Draft, 1/98

Priority to VMI customer from supplier DC’s

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 Stages Activity Info Sharing

Transactional

Interactive

Interdependent

Limited to basic order info

Decision Making

Independent order decisions – “Phantom Demand”

Some sharing of inventory availability and shipment info Some negotiation of order decisions among partners

Performance measures

Limited performance measures

Extensive sharing of inventory, shipment and sell-through info Synchronized ordering decisions driven by shared replenishment policies, channel inventory data and POS data (VMI/JMI) Extensive use of performance measures tied to shared risks and rewards

Technology

Limited use of technology

Source: Professor Hau Lee, Stanford University

Some shared performance measures like lead times, on-time delivery, and inventory availability Some use of technology to track orders and material flow

Extensive use of technology to allow realtime tracking or orders and material and automatic replenishment

Capacity Planning Stages Activity Info Sharing

Transactional

Interactive

Interdependent

Limited capacity info

Extensive sharing of capacity info including ability to flex up or down

Decision Making

Independent of partners and reactive short-term commitments

Some sharing of capacity info for materials, manufacturing, and logistics resources Some shared decisionmaking about material contracts, manufacturing and logistics resources; may include outsourcing

Performance measures

Limited to internal partners

Some measures related to reliability and quality

Technology

Limited to internal partners

Some use of technology to share info like EDI

Source: Professor Hau Lee, Stanford University

Extensive use of shared capacity decisions characterized by flexible contracts, outsourcing, and contingency planning Extensive use of performance measures tied to sharing of rewards and risks Use of transaction and decision support systems that provide support for capacity 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 service Competence: 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 as inventory financing

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

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 TOTAL

9%

13%

50%

28%

" " "

Often price-based Rarely establishes loyalty Easy to defect

☺ 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 Factors Factor Service quality Reliability On time performance Good communication Customer support Speed of service Flexibility Management quality Willingness to customize service Order cycle time Price Easy to work with Location Cost reduction Vendor reputation Special expertise Systems capabilities Personal relationships Technical competence Variety of available services Early notification of disruptions Decreased labor problems Decreased asset commitment Increased competition Global capabilities

Mean 6.44 6.41 6.32 6.02 5.93 5.90 5.87 5.83 5.67 5.66 5.65 5.54 5.52 5.43 5.40 5.33 5.09 5.02 4.96 4.81 4.58 4.56 4.55 4.36 3.00

Std Dev 0.98 0.97 0.98 1.16 1.18 1.04 1.17 1.14 1.17 1.31 1.20 1.25 1.30 1.34 1.28 1.33 1.36 1.47 1.43 1.40 1.77 1.64 1.49 1.51 1.75

1999 Selection Factors Scale of 1 to 7

Factor Service quality Reliability On time performance Price Flexibility Cost reduction Management quality Speed of service Order cycle time Good communication Customer support Location Customize service

Mean 6.36 6.29 6.20 5.98 5.81 5.80 5.78 5.73 5.68 5.67 5.62 5.61 5.53

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

●

●

Cannot be stored Cannot be protected through patents Cannot be readily displayed or communicated Prices are difficult to set

Marketing Strategies ● 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 postpurchase communications.

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

Inseparability of Services Marketing Problems ●

●

●

Customer involved in production. Other customers involved in production. Centralized mass production of services difficult.

Marketing Strategies ● Emphasize selection and training of public contact. ● Manage customers. ● Use multisite locations

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

Heterogeneity of Services Marketing Problems

●

Standardization and quality control difficult to achieve.

Marketing Strategies ● Industrialize service (standardizing certain common services). ● Customize service.

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

Perishability of Services

Marketing Problems ●

Services cannot be inventoried.

Marketing Strategies ● Use strategies to cope with fluctuating demand. ● Make simultaneous adjustments in demand capacity to achieve closer match between the two.

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

Relationships Between Competitors conflict competition coexistence cooperation ■

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.

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 Format Activities which can be directly perceived by customers, including customer interaction Line of visibility Activities which are invisible to customers

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?

Service-Profit Chain Audit ■

■ ■

■

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?

Service-Profit Chain Audit ■

■ ■

■

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?

Service-Profit Chain Audit ■

■

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 Service Satisfaction = Perception - Expectations

■

Second law of Service It’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 inprocess 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 for being” 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 ●

Vantage Points Competition View

Finance Finance View View

Operations Operations View View

Complete Complete Customer Customer Order Order Fulfillment Fulfillment

Customer Customer View View

Partner Partner View View Company Confidential

5

Dell Computer ■

■

■

■

5 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

Value Migration The Collapse of the Middle The Age of Manufacturing : In the age of manufacturing, the traditional sales force was the dominant go-to-market mechanism.

Value

Low-cost Distribution

Traditional Sales Force

High-End Solutions

The Age of Distribution : In the age of distribution, value has shifted to lowcost distribution and highend solutions.

Value

Low-cost Distribution

Traditional Sales Force

High-End Solutions

■

■ ■

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 Stimulate Progress

Preserve the core

STRATEGIC PROFIT MODEL (The DuPont Model)

GROSS MARGIN NET PROFIT

–

$

–

/ NET SALES RETURN ON NET WORTH

FINANCIAL LEVERAGE

=

RETURN ON ASSETS

X

(

net profit net sales

)

$

$

NET PROFIT MARGIN %

SALES NET SALES

COST OF GOODS SOLD $

TOTAL EXPENSES $

$

TIMES

%

INVENTORY

(

net profit net worth

) (

total assets net worth

NET SALES

)

CURRENT ASSETS

$

ASSET TURNOVER

+ /

(

net sales total assets

$

)

$

TOTAL ASSETS $

ACCOUNTS RECEIVABLE

+

$

FIXED ASSETS $

+ OTHER CURRENT ASSETS

$

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

Sales

Net Profits

Net Profits as a Percent of Sales

Total Assets

Inventory Investment

Inventories as a Percent of Assets

Manufacturers 11,883

2,094

18%

12,061

1,280

11%

Borden

Abbott Laboratories

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%

153,627

6,920

5%

279,097

5,468

2%

90,840

8,203

9%

304,012

5,895

2%

6,033

422

7%

3,861

389

10%

13,065

559

4%

9,917

1,835

19%

Ford Motor General Electric General Mills Goodyear Tire & Rubber 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

-3%

10,989

2,882

26%

Xerox

18,166

1,452

8%

27,732

2,792

10%

6,138

300

5%

8,707

1,208

14%

(523)

Wholesalers and Retailers Baxter International 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%

4,852

186

4%

2,865

826

29%

Sears, Roebuck

Nordstrom

41,296

1,188

3%

38,700

5,044

13%

Super Value Stores

17,201

231

1%

4,093

1,116

27%

117,958

3,526

3%

45,384

16,497

36%

13,219

204

2%

2,921

1,249

43%

Wal-Mart Stores Winn-Dixie

NORMATIVE MODEL OF INVENTORY CARRYING COST METHODOLOGY Capital Costs Inventory Service Costs INVENTORY CARRYING COSTS

Inventory Investment

Insurance Taxes Plant Warehouses

Storage Space Costs

Public Warehouses Rented Warehouses Company Owned Warehouses Obsolescence

Inventory Risk Costs

Damage Pilferage Relocation Costs

SUMMARY OF DATA COLLECTION PROCEDURE Step No Cost Category 1. Cost of Money

Source Comptroller

Explanation This represents the cost of having money invested in inventory and the return should be comparable to other investment opportunities. Only want variable costs since fixed costs go on regardless of the amount of product manufactured and stored -- follow steps outlined in body of report.

Amount (Current Study) 30% pretax

Personal property taxes paid on inventory Insurance rate/$100 of inventory (at variable costs) This represents the portion of warehousing costs that are related to the volume of inventory stored.

$90,948 which equals 1.1667% $4,524 which equals 0.058% $226,654 annually which equals 2.893%

Transportation services

Only those costs that are variable with the amount of inventory stored should be included.

Nil

Distribution department reports

Cost of holding product inventory beyond its useful life Requires managerial judgment to determine the portion attributable to inventory storage. Requires managerial judgment to determine the portion attributable to inventory storage. Only relocation costs incurred to avoid obsolescence should be included.

0.800% of inventory

2. Average monthly inventory valued at variable costs delivered to the distribution center 3. Taxes 4. Insurance 5. Recurring storage (public warehouse) 6. Variable storage (plant warehouses) 7. Obsolescence

1. Standard cost data -- comptroller's department 2. Freight rates and product specs are from distribution reports 3. Average monthly inventory in cases from printout received from sales forecasting The comptroller's department The comptroller's department Distribution operations

8. Shrinkage

Distribution department reports

9. Damage

Distribution department reports

10. Relocation costs Not available 11. Total carrying costs

Calculate the numbers generated in steps 3, 4, 5, 6, 8, 9 and 10 as a percentage of average inventory valued at variable cost delivered to the distribution center and add them to the cost of money (step 1).

$7,800,000 valued at variable cost delivered to the D.C. (Variable manufactured cost equaled 70% of full manufactured cost. Variable cost FOB the DC averaged 78% of full manufactured cost)

$100,308 which equals 1.286%

Not available 36.203%

ABC COMPANY A) 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 setup costs and premium transportation costs in order to achieve an inventory reduction of 10%?

THE IMPACT OF INVENTORY TURNS ON INVENTORY CARRYING COSTS Inventory Turns 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Average Inventory $750,000 375,000 250,000 187,500 150,000 125,000 107,143 93,750 83,333 75,000 68,182 62,500 57,692 53,571 50,000

Carrying Cost at 40 Percent $300,000 150,000 100,000 75,000 60,000 50,000 42,857 37,500 33,333 30,000 27,273 25,000 23,077 21,428 20,000

Carrying Cost Savings $150,000 50,000 25,000 15,000 10,000 7,143 5,357 4,167 3,333 2,727 2,273 1,923 1,649 1,428

RELATIONSHIP BETWEEN INVENTORY TURNS AND INVENTORY CARRYING COSTS Inventory carrying costs

$300,000 $275,000 $250,000

$225,000 $200,000

$175,000 $150,000

$125,000 $100,000 $75,000

$50,000 $37,500 $25,000 0 1

2

3

4

5

6

7

Inventory Turns

8

9

10

11

12

13

14

15

ANNUAL INVENTORY CARRYING COSTS COMPARED TO INVENTORY TURNS Holding Costs (per unit) $30.00

Variable Manufacturing Cost Carrying Cost % Annual Cost to Carry in Inventory Monthly Cost (1/12)

$100 30% $30 $2.50

15.00 12.50 10.00 7.50 6.00 5.00 3.75 2.50 0 1

2

3

4

5

6

7

Inventory Turnovers

8

9

10

11

12

Product

Price

Promotion

Marketing

COST TRADEOFFS REQUIRED IN MARKETING AND LOGISTICS

Inventory Carrying Costs

Transportation Costs

Lot Quantity Costs

Warehousing Costs Order Processing and information Costs

Marketing Objective: Logistics Objective:

Logistics

Place Customer Service Levels

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

Product

Price

Promotion

Marketing

COST TRADEOFFS REQUIRED IN MARKETING AND LOGISTICS

Inventory Carrying Costs

Transportation Costs

Lot Quantity Costs

Warehousing Costs Order Processing and information Costs

Marketing Objective: Logistics Objective:

Logistics

Place Customer Service Levels

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

TRADITIONAL SUPPLY CHAIN FLOWS

Demand flow

Supplier

Manufacturer

Product flow

ECR, Masters

Distributor

Retailer