SUPPLY CHAIN STRATEGY

Review and Discussion Questions

1. What recent changes have caused supply chain management to gain importance?

Changes include:

a. Competitive pressures from foreign firms.

b. Elevation of product quality to a very high level of importance.

c. International marketing and international purchasing.

d. Trends towards choosing sole-source suppliers and long term relationships.

e. Product varieties and ranges are rapidly changing, and speed of delivery to market is essential.

f. Product life cycles have shortened necessitating knowledge and control of inventories in the various pipelines.

g. Adoption of JIT production has changed supplier relationships and has also increased the focus on reducing inventories.

h. Trends in the legal system hold manufacturers liable for product failures, even though causes of failure may lie outside of the production system itself.

i. Use of EDI in purchasing.

j. The growth of supplier development.

2. With so much productive capacity and room for expansion in the United States, why would a company based in the United States choose to purchase items from foreign firm? Discuss the pros and cons.

The use of foreign firms can provide a U.S. firm more alternatives in selecting a supplier.

The pros are more choices, potentially reduced costs in the areas of materials, transportation, production, and distribution, and potentially moving closer to a foreign market. The cons are the distance is generally increased, communications problems are increased due to distance, culture, and technology. There may be problems with customs, government regulations, political stability, etc.

3. Describe the differences between functional and innovative products.

Functional products are staples that people buy in a wide range of retail outlets. Typically, they do not change much over time, have low profit margins, stable predictable demand and long life cycles. Innovative products, on the other hand, give customers additional reasons to

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buy. Fashionable clothes and personal computers are examples of innovative products.

Innovative products have short life cycles, high profit margins, and volatile demand.

4. What are characteristics of efficient, responsive, risk-hedging and agile supply chains? Can a supply chain be both efficient and responsive? Risk-hedging and Agile? Why or Why not?

Efficient supply chains are designed to minimize cost that requires high utilization, minimizing inventory, and selecting vendors based primarily on cost and quality, and designing products that are produced at minimum cost. Market-responsive supply chains are designed to minimize lead time to respond to unpredictable demand, thus minimizing stockout costs and obsolete inventory costs. Risk sharing supply chains are those that share resources so that risks in the supply chain can be shared. Agile are those supply chains that are flexible while still sharing risks of shortages across the supply chain. Generally, these supply chains carry excess capacity and higher buffer stocks. Vendor in responsive supply chains would be selected for speed, flexibility, and quality. It is possible to be both efficient and responsive, and both Risk-hedging and Agile, but Exhibit 10.4 helps illustrate why supply chains are generally not both.

5. As a supplier, which factors would you consider about a buyer (your potential customer) to be important in setting up a long-term relationship?

The financial stability and credit worthiness of the company is of primary importance. The reputation of the company visavis their supplier is also very important. For example, is this a company that is fair with its suppliers and honors its payables in a timely fashion? Is the technological match between supplier and customer sufficient? Will delivery schedules and quantities be stable, facilitating smooth operations?

6. For the value density example in Exhibit 10.9, what would the effect be if a competing firm offers you a similar service for 10 percent less than Federal Express’s rates?

Weight United Parcel Competitor Cost Break-Even

(lbs.) Service: 8-day 2-Day Air Savings Break-Even Product Value Ground Service Service with UPS Product Value (per pound)

1 $3.30 $16.43 $13.13 $2,661.46 $2,661.46

2 $3.60 $18.45 $14.85 $3,011.25 $1,505.63

3 $3.85 $20.25 $16.40 $3,325.56 $1,108.52

4 $4.10 $22.05 $17.95 $3,639.86 $909.97

5 $4.30 $24.08 $19.78 $4,009.93 $801.99

6 $4.50 $25.88 $21.38 $4,334.38 $722.40

7 $4.65 $27.68 $23.03 $4,668.96 $666.99

8 $4.75 $29.48 $24.73 $5,013.68 $626.71

9 $4.85 $31.28 $26.43 $5,358.40 $595.38

10 $5.00 $33.08 $28.08 $5,692.99 $569.30

7. What are the advantages of using the postponement strategy?

Process postponement delays the process step that differentiate the product to as late in the supply chain as possible. The advantages of this approach are that lower levels of inventory, and fewer models are needed to match customer requirements. This results in higher levels of customer satisfaction at a lower cost.

Supply Chain Strategy

8. Describe how outsourcing works. Why would a firm want to outsource?

Outsourcing is the act of moving some of a firm's internal activities and decision responsibilities to outside providers. The terms of the agreement are established in a contract.

Outsourcing goes beyond the more common purchasing and consulting contracts because not only are the activities transferred, but also resources that make the activities occur are transferred. Reasons for outsourcing are listed in Exhibit 10.6. Some of the major categories from this Exhibit include organizational, improvement, financial, revenue, cost, and employee driven reasons.

9. What is so different about Li & Fung's approach to working with their customers? Would this approach work with functional products like toothpaste and basketballs?

There is greater opportunity with innovative products, such as clothing, in that each season the production mix and production schedule is different. However, dispersing the manufacturing to different countries depending upon the costs and skill will work for staple products.

10. What are the basic building blocks of an effective mass customization program? What kind of company wide cooperation is required for a successful mass customization program?

The three organizational design principles for mass customization are 1) A product should be designed so it consists of independent modules that can be assembled into different forms of the product easily and inexpensively, 2) Manufacturing and service processes should be designed so that they consists of independent modules that can be moved or rearranged easily to support different distribution network designs, 3) The supply network--the positioning of inventory and the location, number, and structure of service, manufacturing, and distribution facilities--should be designed to provide two capabilities. First, it must be able to supply the basic product to the facilities performing the customization in a cost-effective manner.

Second, it must have the flexibility and the responsiveness to take individual customer's orders and deliver the finished, customized good quickly.

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Problems

Problem Type of Problem Difficulty New Problem

Modified Problem

Check Figure in Appendix A Supply Chain

Performance

Value Density

1 Yes Moderate Yes

2 Yes Easy

3 Yes Easy

4 Yes Moderate

1. Shipping cost - U.S. Postal Service - Peoria, IL to Memphis, TN.

Weight (lbs.) Cost (overnight) Cost (3 day)

Cost Savings Break-even Break-even value per pound

2 $15.00 $2.87 $12.13 $8,854.90 $4,427.45

3 17.25 3.34 13.91 10,154.30 3,384.77

4 19.40 3.78 15.62 11,402.60 2,850.65

5 21.55 4.10 17.45 12,738.50 2,547.70

6 25.40 4.39 21.01 15,337.30 2,556.22

7 26.45 4.67 21.78 15,899.40 2,271.34

8 27.60 4.91 22.69 16,563.70 2,070.46

9 28.65 5.16 23.49 17,147.70 1,905.30

2. Days of raw material on-hand

= (production material on hand in dollars/cost of revenue)*365 days per year.

= (234/14,137) *365 = 6.04 days.

The amount of raw materials at the end of the year will depend on the timing of payment, physical units on had may be higher than this.

3. Inventory turnover = cost of goods sold/average aggregate inventory value

= (4,000 hamburgers * $1 per pound * 1/4 pound per hamburger * 52 week per year)/(350 pounds * $1 per pound)

= 148.5 turns/year

Day of supply = (average aggregate inventory value/cost of goods sold)*365

= ((350 pounds * $1 per pound)/( 4,000 hamburgers * $1 per pound * 1/4 pound per hamburger * 52 week per year))*365

= 2.46 days

Supply Chain Strategy

4.

a. Inventory turnover = costs of good sold/average aggregate inventory value.

Quarter 1 2 3 4 Total

Cost of goods sold 280 295 340 350 1265

Raw material 50 40 55 60

WIP 100 105 120 150

Distribution Center Inventory 40 42 43 51 Aggregate Inventory 190 187 218 261

Average aggregate inventory value = (190 + 187 + 218 + 261)/4 = 214 Inventory turnover = 1265/214 = 5.91

b. Focus on reducing WIP.

c. Average raw material inventory value = (50 + 40 + 55 + 60)/4 = 51.25

Day of supply = (average aggregate raw material inventory value/cost of goods sold)*52

= (51.25/500)*52 = 5.33

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