CHAPTER 10 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. rends to!ards choosing sole"source suppliers and long term relationships.

e. #roduct varieties and ranges are rapidly changing$ and speed of delivery to market is essential. f. #roduct life cycles have shortened necessitating kno!ledge and control of inventories in the various pipelines.

g. %doption of &I production has changed supplier relationships and has also increased the focus on reducing inventories. h. i. ). rends in the legal system hold manufacturers liable for product failures$ even though causes of failure may lie outside of the production system itself. 'se of E(I in purchasing. he gro!th of supplier development.

*. With so much productive capacity and room for e+pansion in the 'nited ,tates$ !hy !ould a company based in the 'nited ,tates choose to purchase items from foreign firm? (iscuss the pros and cons. he use of foreign firms can provide a '.,. firm more alternatives in selecting a supplier. he pros are more choices$ potentially reduced costs in the areas of materials$ transportation$ production$ and distribution$ and potentially moving closer to a foreign market. he cons are the distance is generally increased$ communications problems are increased due to distance$ culture$ and technology. here may be problems !ith customs$ government regulations$ political stability$ etc. -. (escribe the differences bet!een functional and innovative products. .unctional products are staples that people buy in a !ide range of retail outlets. ypically$ they do not change much over time$ have lo! 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. .ashionable clothes and personal computers are e+amples of innovative products. Innovative products have short life cycles$ high profit margins$ and volatile demand. 1. What are characteristics of efficient$ responsive$ risk"hedging and agile supply chains? Can a supply chain be both efficient and responsive? 2isk"hedging and %gile? Why or Why not? Efficient supply chains are designed to minimi3e cost that requires high utili3ation$ minimi3ing inventory$ and selecting vendors based primarily on cost and quality$ and designing products that are produced at minimum cost. 4arket"responsive supply chains are designed to minimi3e lead time to respond to unpredictable demand$ thus minimi3ing stockout costs and obsolete inventory costs. 2isk sharing supply chains are those that share resources so that risks in the supply chain can be shared. %gile are those supply chains that are fle+ible !hile still sharing risks of shortages across the supply chain. 5enerally$ these supply chains carry e+cess capacity and higher buffer stocks. 6endor in responsive supply chains !ould be selected for speed$ fle+ibility$ and quality. It is possible to be both efficient and responsive$ and both 2isk"hedging and %gile$ but E+hibit 10.1 helps illustrate !hy supply chains are generally not both. 7. %s a supplier$ !hich factors !ould you consider about a buyer 8your potential customer9 to be important in setting up a long"term relationship? he financial stability and credit !orthiness of the company is of primary importance. he reputation of the company visavis their supplier is also very important. .or e+ample$ is this a company that is fair !ith its suppliers and honors its payables in a timely fashion? Is the technological match bet!een supplier and customer sufficient? Will delivery schedules and quantities be stable$ facilitating smooth operations? :. .or the value density e+ample in E+hibit 10./$ !hat !ould the effect be if a competing firm offers you a similar service for 10 percent less than .ederal E+press;s rates?
Weight (lbs.) 1 2 3 4 5 6 7 8 9 10 United Parcel Service: -da! 'ro%nd Service $3.30 $3.60 $3.85 $4.10 $4.30 $4.50 $4.65 $4.75 $4.85 $5.00 Competitor "-#a! $ir Service $16.43 $18.45 $20.25 $22.05 $24.08 $25.88 $27.68 $29.48 $31.28 $33.08 Cost Savings (ith UPS $13.13 $14.85 $16.40 $17.95 $19.78 $21.38 $23.03 $24.73 $26.43 $28.08 Break-Even Prod%ct &al%e (per po%nd) $2,661.46 $1,505.63 $1,108.52 $909.97 $801.99 $722.40 $666.99 $626.71 $595.38 $569.30

Break-Even Prod%ct &al%e $2,661.46 $3,011.25 $3,325.56 $3,639.86 $4,009.93 $4,334.38 $4,668.96 $5,013.68 $5,358.40 $5,692.99

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What are the advantages of using the postponement strategy? #rocess postponement delays the process step that differentiate the product to as late in the supply chain as possible. he advantages of this approach are that lo!er levels of inventory$ and fe!er models are needed to match customer requirements. his results in higher levels of customer satisfaction at a lo!er cost.

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,upply Chain ,trategy

=. (escribe ho! outsourcing !orks. Why !ould a firm !ant to outsource? >utsourcing is the act of moving some of a firm?s internal activities and decision responsibilities to outside providers. he terms of the agreement are established in a contract. >utsourcing 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. 2easons for outsourcing are listed in E+hibit 10.:. ,ome of the ma)or categories from this E+hibit include organi3ational$ improvement$ financial$ revenue$ cost$ and employee driven reasons. /. What is so different about @i A .ung?s approach to !orking !ith their customers? Would this approach !ork !ith functional products like toothpaste and basketballs? here is greater opportunity !ith innovative products$ such as clothing$ in that each season the production mi+ and production schedule is different. Bo!ever$ dispersing the manufacturing to different countries depending upon the costs and skill !ill !ork for staple products. 10. What are the basic building blocks of an effective mass customi3ation program? What kind of company !ide cooperation is required for a successful mass customi3ation program? he three organi3ational design principles for mass customi3ation are 19 % product should be designed so it consists of independent modules that can be assembled into different forms of the product easily and ine+pensively$ *9 4anufacturing and service processes should be designed so that they consists of independent modules that can be moved or rearranged easily to support different distribution net!ork designs$ -9 he supply net!ork""the positioning of inventory and the location$ number$ and structure of service$ manufacturing$ and distribution facilities""should be designed to provide t!o capabilities. .irst$ it must be able to supply the basic product to the facilities performing the customi3ation in a cost"effective manner. ,econd$ it must have the fle+ibility and the responsiveness to take individual customer?s orders and deliver the finished$ customi3ed good quickly.

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P o!"e#s
#roblem ype of #roblem ,upply Chain 6alue #erformance (ensity Des Des Des Des (ifficulty Ce! #roblem 4odified #roblem Check .igure in %ppendi+ % Des

1 * 1 1.

4oderate Easy Easy 4oderate

,hipping cost " '.,. #ostal ,ervice " #eoria$ I@ to 4emphis$ C. Cost 8overnight9 F17.00 1<.*7 1/.10 *1.77 *7.10 *:.17 *<.:0 *=.:7 Cost 8- day9 F*.=< -.-1 -.<= 1.10 1.-/ 1.:< 1./1 7.1: Cost ,avings F1*.11-./1 17.:* 1<.17 *1.01 *1.<= **.:/ *-.1/ Ereak"even F=$=71./0 10$171.-0 11$10*.:0 1*$<-=.70 17$--<.-0 17$=//.10 1:$7:-.<0 1<$11<.<0 Ereak"even value per pound F1$1*<.17 -$-=1.<< *$=70.:7 *$71<.<0 *$77:.** *$*<1.-1 *$0<0.1: 1$/07.-0

Weight 8lbs.9 * 1 7 : < = /

*.

(ays of ra! material on"hand G 8production material on hand in dollarsHcost of revenue9I-:7 days per year. G 8*-1H11$1-<9 I-:7 G :.01 days. he amount of ra! materials at the end of the year !ill depend on the timing of payment$ physical units on had may be higher than this. Inventory turnover G cost of goods soldHaverage aggregate inventory value G 81$000 hamburgers I F1 per pound I 1H1 pound per hamburger I 7* !eek per year9H8-70 pounds I F1 per pound9 G 11=.7 turnsHyear (ay of supply G 8average aggregate inventory valueHcost of goods sold9I-:7 G 88-70 pounds I F1 per pound9H8 1$000 hamburgers I F1 per pound I 1H1 pound per hamburger I 7* !eek per year99I-:7 G *.1: days

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,upply Chain ,trategy 1. a. Inventory turnover G costs of good soldHaverage aggregate inventory value. Quarter Cost of goods sold Raw mater al !"# $ str %ut o& Ce&ter "&'e&tor( )ggregate "&'e&tor( 1 2 3 4 Total 280 295 340 350 1265 50 40 55 60 100 105 120 150 40 42 43 51 190 187 218 261

%verage aggregate inventory value G 81/0 J 1=< J *1= J *:19H1 G *11 Inventory turnover G 1*:7H*11 G 7./1 b. .ocus on reducing WI#. c. %verage ra! material inventory value G 870 J 10 J 77 J :09H1 G 71.*7 (ay of supply G 8average aggregate ra! material inventory valueHcost of goods sold9I7* G 871.*7H7009I7* G 7.--

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