March 25, 2015

Supply-Chain Strategy - Review Notes

The idea of supply-chain management is to apply a total systems approach to managing the entire flow of information, materials, and services from raw-materials suppliers through factories and warehouses to the end customer. The term supply chain comes from a picture of how organizations are linked together as viewed from a particular company.

The focus is on those core activities that a business must operate each day to meet demand. The topic is popular because many companies are achieving competitive advantage by the way they configure and manage their supply chain operations. Dell Computer is a good example of effective supply chain management.

Because inventory at each stage of an operation ties up money, it is important that the operations at each stage are synchronized to minimize the size of buffer inventories. The efficiency of the supply chain can be measured based on the size of the inventory investment in the supply chain. Key measures to evaluate supply chain efficiency are inventory turnover and weeks-of-supply. Other measures include the cost of goods sold and the average aggregate inventory value.

Inventory turnover =  Cost of goods sold/Average aggregate inventory value

Variability within the supply chain magnifies as we move from the customer to the producer in the supply chain. This bullwhip effect indicates a lack of synchronization among supply chain members. Programs like continuous replenishment smooth the flow of materials through the supply chain.

Other supply chain issues occur because of the length of the product life cycle, demand predictability, product variety, and market standards for lead times and service. Products may be either functional staples or primarily innovative and require different management methods.

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 new benefits and hence provide additional reasons to buy.  Fashionable clothes is one example of innovative products. Smart phone and tablet computers are examples of innovative products of the recent period.  Innovative products have short life cycles, high profit margins, and volatile demand.

 Lee argued that on the supply side also there are stable supply processes and evolving supply processes. Based on these two classification four supply chain management strategies were identified.

Efficient supply chains
Risk-hedging supply chains
Responsive supply chains
Agile supply chains

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.


Outsourcing is moving some of a firm's internal activities and decision responsibility to outside providers. Companies have a variety of reasons for outsourcing but primarily the reasons are to reduce costs and create a competitive advantage. Full list adopted from the book Strategic Outsourcing by Maurice F. Greaver II. was provided in the book (Chase et al.)  One popular area to outsource is logistics. In determining the shipping mode for an item a key variable is the value density or value per unit of weight.

Design for Logistics

Given the emphasis on minimizing inventory and handling in efficient supply chains, design of the components and materials can be evaluated from their each of storing, picking and handling. Hence design for logistics is also to be incorporated in design process.

Global Sourcing

With the communist bloc of countries now into free trade system, a truly global supply chain system can be created.

Mass Customization

Three principles of mass customization are given in the book.

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 consist 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 customization in a cost-effective manner. Second, it must have the flexibility and the responsiveness to take individual customers' orders and deliver the finished, customized good quickly.

Chapter outline

Supply-Chain Strategy
Supply Chain Defined

Measuring Supply Chain Performance
Inventory Turnover Defined
Cost of Goods Sold Defined
Average Aggregate Inventory Value Defined
Weeks of Supply Defined

Supply Chain Design Strategy
Bullwhip Effect Defined
Functional Products Defined
Innovative Products Defined

Outsourcing Defined
Logistics Defined

Design For Logistics
Design for Logistics Defined

Value Density (Value per Unit of Weight)
Transportation Mode Defined
Value Density Defined

Global Sourcing

Mass Customization
Mass Customization Defined
Process Postponement Defined


Case: Pepe Jeans


Updated  7.12.2014, 10.12.2011

Summaries of all Chapters of Operation Management

MBA Core Management Knowledge - One Year Revision Schedule

Updated 25 March 2015, 7 Dec 2014

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