Supplychainstrategy 2

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2. Supply chain strategy

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OBJECTIVES
Supply-Chain Management
Measuring Supply-Chain Performance
Bullwhip Effect
Outsourcing
Value Density
Mass Customization
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What is a Supply Chain?

Supply-chain is a term that describes how
organizations (suppliers, manufacturers,
distributors, and customers) are linked
together
Suppliers Service support Local Customers

Services operations service
providers
Inputs Transformation Localization Output
Supply networks
Manufacturing Suppliers Manufacturing Distribution Customers

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What is Supply Chain

Management ?
Supply-chain management is a total system
approach to managing the entire flow of
information, materials, and services from raw-
material suppliers through factories and
warehouses to the end customer
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Formulas for Measuring Supply-Chain

Performance
 One of the most commonly used measures in all
of operations management is “Inventory
Turnover”
Cost of goods sold
Inventory turnover
 Average aggregate inventory
 In situations wherevalue
distribution inventory is
dominant, “Weeks of Supply” is preferred and
measures how many weeks’ worth of inventory is in
the system at a particular time
Weeks of supply   Average aggregate inventory value  52 weeks

 Cost of goods sold 

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Example of Measuring Supply-

Chain Performance
Suppose a company’s new annual report claims their costs of
goods sold for the year is $160 million and their total
average inventory (production materials + work-in-
process) is worth
$35 million. This company normally has an inventory turn
ratio of 10. What is this year’s
Inventory Turnover ratio? What does it mean?
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Example of Measuring Supply-Chain

Performance (Continued)
Cost of goods sold
Inventory turnover
 Average aggregate inventory
value
= $160/$35
= 4.57
Since the company’s normal inventory turnover ration is 10, a

drop to 4.57 means that the inventory is not turning over
as quickly as it had in the past. Without knowing the
industry average of turns for this company it is not
possible to comment on how they are competitively doing
in the industry, but they now have more inventory relative
to their cost of goods sold than before.
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Bullwhip Effect
The magnification of variability in orders in the supply-
chain
Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

Quantit
Quantit
Quantit
Order
Order
Order
y
y
Time Time Time
A lot of …can lead to …can lead to

retailers each greater variability even greater
with little for a fewer number variability for a
variability in of wholesalers, single
their orders…. and… manufacturer.
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Hau Lee’s Concepts of Supply Chain

Management
 Hau Lee’s approach to supply chain (SC) is one of aligning SC’s
with the uncertainties revolving around the supply process
side of the SC
 A stable supply process has mature technologies and an
evolving supply process has rapidly changing technologies
 Types of SC’s
Efficient SC’s
Risk-Hedging SC’s
Responsive SC’s
Agile SC’s
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Hau Lee’s SC Uncertainty Framework

Demand Uncertainty
Low (Functional High (Innovative

products) products)
Low Efficient SC Responsive SC

Supply (Stable
Ex.: Grocery Ex.: Computers
Process)
Risk-Hedging SC Agile SC
Uncertainty High
(Evolving Ex.: Hydro- Ex.: Telecom
Process) electric power
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What is Outsourcing?
Outsourcing is defined as the act of moving a

firm’s internal activities and decision
responsibility to outside providers
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Reasons to Outsource
Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Cost-driven
Employee-driven
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Value Density
Valuedensity is defined as the value of an

item per pound of weight
Itis used as an important measure when

deciding where items should be stocked
geographically and how they should be
shipped
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Mass Customization
Mass customization is a term used to

describe the ability of a company to deliver
highly customized products and services to
different customers
The key to mass customization is

effectively postponing the tasks of
differentiating a product for a specific
customer until the latest possible point in
the supply-chain network

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1

2. Supply chain strategy

What is a Supply Chain?

Suppliers Service support Local Customers

Manufacturing Suppliers Manufacturing Distribution Customers

What is Supply Chain

Formulas for Measuring Supply-Chain

Weeks of supply   Average aggregate inventory value  52 weeks

Example of Measuring Supply-

Example of Measuring Supply-Chain

Since the company’s normal inventory turnover ration is 10, a

Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

A lot of …can lead to …can lead to

Hau Lee’s Concepts of Supply Chain

Hau Lee’s SC Uncertainty Framework

Low (Functional High (Innovative

Low Efficient SC Responsive SC

Outsourcing is defined as the act of moving a

Valuedensity is defined as the value of an

Itis used as an important measure when

Mass customization is a term used to

The key to mass customization is

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