Module 9 (ch.13&14) Sourcing and Logistics

Understand the two basic supply chain functions differences . Stable Supply Process

1. Fewer breakdowns 2. Stable and higher yields 3. Fewer quality problems 4. More supply sources 5. Reliable suppliers 6. Fewer process changes 7. Fewer capacity constraints 8. Easier to change over 9. Dependable lead times

disadvantages of outsourcing

-Increased logistics and inventory costs -Loss of control (quality, delivery,etc.) -Potential creation of future competition -negative impact on employees -risk may not manifest themselves for years ex. of cons -OSCM in the news: Canadian hospital outsources janitorial services -OSCM in the news: Outsourcing-airbus -Lenovo: founded as a distributor of equipment made by IBM, and then assembles products for IBM, and eventually affix its own logo on to the PCs.

what international logistics

-International logistics: managing these functions when the movement is on a global scale.

Proximity to Competitors (Competitive Clustering)

Dealership Fast food chains: McDonald's, Burger King, Wendy's, Pizza Hut Motel - Why? Due to critical mass of information, talent, venture capital, or nature resources

Demand Forecast Update

*Demand for cast Update; - when an order arrives, companies estimate this as a signal for future demand *Counteract -Avoid multiple demand forecast updates -information sharing: Point-of-sales data -channel alignment: VMI, Customer direct - operational efficiency: Lead time reduction.

differences between vertical integration and arm's-length relationships

Vertical Integration (do not outsource) Arms-length relationship (outsource)

Supply Uncertainty

- A stable supply process is one where the manufacturing process and the underlying technology are mature and the supply base is well established. Manufacturing process tends to be highly automated. - An evolving supply process is one where the manufacturing process and the underlying technology are still under early development and are rapidly changing and the supply base may be limited in both size and experience Manufacturing process requires a lot of fine-tuning.

Be able to explain how and why postponement brings economic benefits

Examples -Vegetables are canned in brights. Brights are cans without labels. Holding inventory as brights means the product is not committed to specific customers or carton package. Once a specific customer order is received, the warehouse can complete labeling and finalize packaging. - Warehouses configure Hewlett-Packard printers by inserting the swappable power supply module at the last minute before shipping to different countries. Benefits - Risk associated with customization is reduced because customized packaging is not performed in anticipation of customer orders or to accommodate a forecast. The customized product is configured after the order is received. - Total inventory is reduced by using inventory of the base product to support multiple customers' labeling and package requirements.

Order Batching

*Order batching -Periodic ordering -Push ordering *Counteract -Break order batches:reduce costs associated with ordering and transportation -information sharing: internet ordering -Channel alignment: outsourcing transportation -Operational efficiency: Use EDI

Price Fluctuation

*Price Fluctuation -Forward buying *Counteract -Stabilize prices: reduce the frequency and magnitude of price discounting -Channel alignment: everyday low price -Operational efficiency: activity-based costing

Rationing and Shortage Gaming

*Rationing and Shortage Gaming -When demand is greater then supply *counteract -Eliminate gaming in shortage situations -Information sharing: sharing sales, capacity, inventory, et al. data. -Channel alignment: allocation based on past sales

Undestand what conslidation warehouses and break-bulk warehouses are. Be able to explain why and how these these warehouses reduce transportation costs

- Consolidation warehouses: shipments from various sources are pulled together into larger shipments with a common destination. Benefits: 1. Inbound shipping economics: full truck loads to distribution center 2. Outbound scope economics: possibly full truck assortments to retail sites -Break-bulk warehouses: receives a single large shipment and arranges for delivery to multiple destinations. Benefits: 1. Inbound shipping economics: full truck loads to distribution center

Understand the uncertainty framework: be able to explain how demand and supply uncertainty affect the choice of supply chain strategies

- Demand and supply uncertainty is a good framework for understanding supply chain strategy. -Innovative products with unpredictable demand and an evolving supply process face a major challenge. Because pf shorter and shorter product life cycles, the pressure for dynamically adjusting and adopting a company supply chain strategy is great.

What types of products are the best candidates for cross- docking ?

- Low demand variability Rationale:coordination is crucial (match demand and supply) -High volume and fast-moving Rationale:sufficient to warrant frequent shipments -Standardized packaging Rationale:can easily be broken down for multiple out bound customers -No repackaging or special handling needs (e.g.securityof refrigeration) Rationale:mixing freight is often involved to create the assortment for a specific customer.

describe the common sourcing/purchasing processes. Given a specific application, be able to recognize what sourcing process is adopted

- Spot purchase: one-time purchase -Strategic alliance: direct sourcing from a long-term close partner - Electronic catalog: a digitized version of a suppliers catalog that allows buyers to view detailed buying and specifies information about the suppliers products and/or services. - Request for proposal (RFP): bid included in the proposal (for more complex requirements) -Request for a bid and reverse auction: bid on real time. -Vendor managed inventory: when a customer actually allows the supplier to manage an item or group of items for them.

Understand the consequences of "Bullwhip Effect".

- The bullwhip effect distorts final demand information within the supply chain, with different stages having a very different estimate of what final demand looks like, and consequently creates discrepancies between supply and demand patterns -increased variations -the bullwhip effect reduces the profitability of a supply chain by making it more expensive to provide a given level of product availability . *excess inventory * lost sales * lost revenue * excess manufacturing capacity * excess transportation capacity, labor for shipping/receiving.

Stable Supply Process

- Where manufacturing process and the underlying technology are mature and the supply base is well established - Manufacturing complexity tends to be low or manageable -Stable manufacturing process tend to be highly automated, and long-term supply contracts are prevalent.

Evolving Supply Process

- Where the manufacturing process and the underlying technology are still under early development and are rapidly changing. -the manufacturing process requires a lot of fine tuning and is often subject to breakdowns and uncertain yields.

Functional Products

- include the staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations. -Have stable, predictable demand and long life cycles - Their stability invites competition, which often leads to low profit margin. -Specific criteria for identifying functional products; 1. Product life cycle of more than 2 years 2. Contribution margin of 5 to 20% 3. Only 10 to 20 product variations 4. An average forecast error time of production of only 10% 5. Lead time for make-to-order products of from 6months to 1year.

Responsive supply chains

- utilize strategies aimed at being responsive and flexible to the changing and diverse needs of the customers. -to be responsive, companies use build-to-order and mass customization processes as a means to meet the specific requirements of customers.

Periodic Order Batching

-Amplifies variability and contributes to the bullwhip affect -When order cycles overlap, most customers that order periodically do so at the same time

Be able to describe differences in warehouse operations between cross-docking and traditional warehousing.

-Basic warehouse operations in a traditional warehouse (Video: Thomann Distribution Center) Receiving Storage Order picking and processing Shipping - Warehouse operations in cross-docking warehouse (Video: Freight handling- cross docking) Receiving Sorting and consolidation Shipping

key characteristics of cross-docking.

-Consolidation: combine inventory from multiple origins -Assortment: mix a variety of freights into an assortment for specific customers. -No storage involved: receiving dock direct to shipping dock -Information and coordination are critical

Major Benefits of Cross-docking

-Less inventory holding costs: Because of elimination of storage -Less handling costs and reduced damage Because of less handling: freight movement within the warehouse is reduced. (storing and picking are eliminated) -Reduced flow time Because of simplified flow: receiving dock direct to shipping dock -Inventory turn over increases

Understand what logistics is and what are the key functions logistics plays

-Logistics is about the movement of goods through the supply chain. -Logistics: the art and science of obtaining, producing, and distributing material and product in the proper place and in the proper quantities -Basic Functions: material movement -other functions: efficient warehouses and distribution centers ,

Understand the differences between core activities and strategic activities. Understand what types of activities can be outsourced and what should not be

-Outsourcing has its benefits as well as costs and risks. What's important is to understand under which conditions an organization should vertically integrate, and when it should outsource. -Keep control of strategic activities and outsource the rest -Strategic activities: ones that generate competitive advantages (Don't outsource) -Core activities: key to the business but do not confer a competitive advantage

Innovative Products

-Products such as fashionable clothes and arsenal computers that typically have a life cycle of just a few months. - Demand is very unpredictable -imitators quickly erode the competitive advantage that innovative products enjoy, and companies are forced to introduce a steady stream of newer innovations. -The short life cycles and the great variety typical of these products further increase unpredictability.

Understand the three common location strategies

-Proximity to Markets -Proximity to Suppliers -Proximity to Competitors

identify and discuss the causes of bullwhip effects.

-Rationing and shortage gaming -price fluctuation -order batching -demand forecast updating *when an order arrives, companies estimate this as a signal for future demand.

Understand the major economic benefits provided by warehouses

-Reduce transportation cost due to shipment economies of scale by consolidation and break-bulk -Create assortment by reconfiguring freights as it flows from origin to destination Send a variety of different products in one shipment to a specific customer (e.g., a package of 2 toys, one book, and one ipad to a consumer). -Postpone commitment to final product configuration by completing final packaging, labeling, and light manufacturing -Stockpiling to accommodate seasonal production or demand Examples: lawn furniture (produced year-around but sold only during a very short marketing period); agricultural products (harvested at specific times with consumption throughout the year). -Reverse logistics

Outsourcing

-The act of moving some of a firms internal activities and decision responsibility to outside providers. - Outsourcing changes organizational boundaries and decreases the degree of vertical integration. (i.e. activities are conducted in house)

Strategic sourcing

-The development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of a business -In the past, sourcing was another name for purchasing. - As a result of globalization, sourcing implies a more complex process suitable for products that are strategically important.

what a third-party logistics provider (company) do

-Third party logistics company: an outside company used to manage all or part of another company's logistics functions. -Companies are UPS, FedEx and DHL -the logistics company can also provide additional services such as warehouse management, inventory control, and other customer service functions.

Proximity to Markets vs. Proximity to Suppliers

-Transportation cost: moving supplies to the facility vs. moving output from the facility to the market Weight-added operations: use converging material flows to produce items that are much more costly to transport than the supplies from which they are made. * Bridge or other construction projects *The manufacturing facility should be located closer to markets Weight-reduced operations: use diverging material flows to stratify objects according to their market values. *Lumber facilities: cut to standard dimensions and dried prior to transportation *The manufacturing facility should be located closer to suppliers Overall rule: choose to transport the less-weighted Expensive finished goods *Toyota builds cars in the U.S. (close to markets) Bulky, fragile Perishable raw material *Dairy plants (close to suppliers) Convenience to source of supply vs. to source of customer * A fire department: - close to market (customers) *Movie studio: -close to the source of acting and editing talent (i.e., Hollywood) *Post offices -close to market (customers) * Barbers -close to market (customers)

Risk-hedging supply chains

-utilize strategies aimed at pooling and sharing resources in a supply chain so that the risk in the supply disruption can be shared. - A single entity in a supply chain can be vulnerable to supply disruption, but if there is more than on supply source or if alternative supply resources are available, then the risk of disruption is reduced.

Agile supply chains

-utilizes strategies aimed at being responsive and flexible to customers needs, while the risks of supply shortages or disruptions are hedged by pooling inventory and other capacity resources. . -these supply chains essentially have strategies in place that combine the strengths of "hedged" and "responsive" supply chains. -They are agile because they have the ability to be responsive to the changing, diverse, and unpredictable demands of customers on the front end, while minimizing the back-end risks of supply disruptions.

explain the three factors that influence outsourcing decisions

1. Coordination:degree of difficulty to ensure that the activity will integrate well with the overall process 2. Strategic Control: degree of loss if the relationship were severed (i.e.the cost of switching partners. 3. Intellectual property: potential risk of leakage and the degree to which parties can identify and delineate boundaries around "who owns what" ahead of time.

differences between Demand Characteristics of FUNCTIONAL PRODUCTS and innovative products. Pg. 438

1. Low demand uncertainty 2. more predictable demand 3. Long product life 4. Low inventory cost 5. low profit margin 6. Low product variety 7. Higher Volume 8. Low stock-out cost 9. Low obsolescence

explain the four key factors in the selection of sourcing processes

1. Specificity: refers to how common the item is and, in a relative sense, how many substitutes might be available. -Commonly available (low specificity) items vs. custom made items 2. Value of items - complex/expensive vs. simple/inexpensive 3. Transaction costs: cost incurred in making the economic exchange. - search costs: costs required to find suppliers - Bargaining costs: costs required to com to an acceptable agreement - Policing and enforcement costs: cost of making sure the other party sticks to the contract term, and taking appropriate actions if this turns out not to be the case. 4. Contract duration

Understand the two basic supply chain functions differences . Evolving Supply Process

1. Vulnerable to breakdowns 2. Variable and lower yields 3. Potential quality problems 4. Limited supply sources 5. Unreliable suppliers 6. More process changes 7. Potential capacity constrained 8. Difficult to change over 9. Variable lead times

Reasons to outsourcing

1.Financially driven reason -Improve return on assets by reducing and selling unnecessary assets -generate cash by selling low-return entities. -gain access to new markets, particularly in developing countries - Reduce costs through lower cost structure - turn fixed costs into variable costs. 2. Improvement Driven reasons - Improve quality and productivity - shorten cycle time -obtain expertise, skills and technologies that are otherwise unavailable -improve risk management - improve credibility and image by associating with superior providers 3. Organizationally Driven Reasons -improve effectiveness by focusing on what the firm does best -increase flexibility to meet changing demand for products and services - increase product and service value by improving response to customers needs.

differences between Demand Characteristics of functional products and INNOVATIVE PRODUCTS. Pg. 438

1.High demand uncertainty 2. Difficult to forecast 3. Short selling season 4. High inventory cost 5. High profit margin 6. High product variety 7. Low Volume 8. High stock-out cost 9. High obsolescence

Understanding the concept of cross-docking

Cross docking: -An approach used in consolidation warehouses where, rather than making larger shipments, large shipments are broken down into small mixed shipments for local delivery in an area. -Hub-and-spoke systems: systems that combine the ideas of consolidation and cross-docking.

Understand the logic behind the selection of transportation mode. Given a specific application, be able to suggest proper transportation mode(s).

Tradeoff:cost,volume,vs.delivery/flexibility Guidelines:supply chain strategy Practice:Multi modal solutions are the norm

Demand Uncertainty

Two Basic Supply Chain Functions: - Physical function: converting raw materials into parts, components, and eventually finished goods, and transporting all of them from one point in the supply chain to the next. Physical costs: cost of production, transportation, and inventory storage. -Market mediation function: ensuring that the variety of products reaching the marketplace matches what consumers want to buy. Market mediation costs: A product has to be marked down and sold at a loss when supply exceeds demand, or lost sales and dissatisfied customers when supply falls short of demand. Basic supply chain functions: Physical function Market mediation function Type of Product vs. Supply Chain Functions: Functional products' primary challenge : physical function Innovative products' primary challenge : market mediation function

discuss different ways to counteract bullwhip effects and explain why they are effective.

-information sharing -channel alignment - operational efficiency

Efficient supply chains

-utilize strategies aimed at creating the highest cost efficiency - For this to be achieved non-value adding activities should be eliminated, scale of economies should be pursued, optimization techniques should be deployed to get the best capacity utilization in production and distribution, and information linkages should be established to ensure the most efficient, accurate, and cost effective transmission of information across the supply chain.

Describe the four different types of supply chain strategies

1. Efficient supply chains 2. Risk-hedging supply chains 3. Responsive supply chains 4. Agile supply chains

Describe the major transportation modes and the pros and cons of each mode.

1.Highway(truck):few products are moved without some highway transportation. -Pros: Offers great flexibility for moving goods to Virtually any location not separated by water. Size of the product, weight, and liquid or bulk can all be accommodated with this mode. 2. Water (ship) -Pros: Very high capacity and very low cost. Useful for bulk items such as oil, coal,chemical products -Cons: transit times are slow, and large areas of the world are not directly accessible to water carriers. 3. Air -Pros: Fast -Cons: expensive Small, light, expensive items are most appropriate 4. Rail(trains) -Pros: Fairly low cost alternative. For European Infrastructure is highly developed attractive alternative compared to trucks. -Cons: Transit times can be long and subject to Variability. US the infrastructure has declined making it less attractive Suitability of rail vary depending on the rail infrastructure 5. Pipelines: -Pros: no packaging is needed and the cost per mile are low -Cons: Highly specialized and limited to liquids, gases, and solids in slurry form. The initial cost to build is very high. 6. Hand delivery: last step in many supply chains Pros: Cons: getting the product in the customers hands is often a slow and costly activity due to high labor content.

What is the Bull Whip Effect

Phenomenon of variability magnification as we move from the customer to the producer in the supply chain. -a slight change in consumer sales ripples backward as magnified oscillations upstream, like the result of a flick of a bullwhip handle