Dr Ron Lembke Operations Management Old View of the World One company does all processing from raw material through delivery Vertical Integration Henry Fords River Rouge Plant Owned forests iron mines rubber plantation coal mines ID: 560688
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Slide1
Strategic Sourcing
Dr. Ron Lembke
Operations ManagementSlide2
Old View of the World
One company does all processing, from raw material through deliverySlide3
Vertical Integration
Henry Ford’s River Rouge Plant
Owned forests, iron mines, rubber plantation, coal mines
Ships, railroad lines
Dock facilities, blast furnaces, foundries, rolling mills, stamping plants, an engine plant, glass manufacturing, a tire plant, its own power plant, and 90 miles of RR track
1927 Model A Production begins15,000,000 cars in 15 years
120,000 employees in WWIISlide4
Supply Network View of the World
Integrated international networks of companies process, produce and distribute products.Slide5
Spring Hill, TennesseeSlide6
Saturn LayoutSlide7
Computer Example
Wacker Siltronic makes silicon wafers:
buy sand
grow into long crystals
slice into thin wafersSlide8
Chip Production
Chip burned in a $2b “wafer fab”
Wafer cut into chips and “packaged”Slide9
CD Drive
Chip stuffed onto board by Flextronics, Celestica, etc.
CD drive assembled by separate contract manufacturer
Green Printed Circuit Board from different supplier
CD drive, with a brand name on it, sold to GatewaySlide10
Apple and
Foxconn
EMS elect mfg services
Foxconn
:
Shenzhen, mile square1 million workersLargest private employer in China
90 million iPhonesGlobal CE industry = $150bFoxconn
= 40% = $60bSlide11
Headline Risk
10 hour
days, crowded dorms
Terry Gou:Clean
, affordableGood food17 suicides in 10 yrs¼ rate US college students9 in March-May 2010
Below national averageHK ngo:12hr*13days iPad?Counseling, outsource dorms
10,000 horses gallopingSlide12
Supply Chain Designs
Efficient – economies of scale
Risk-Hedging – pooled resources, multiple sources of supply, share inv., need good IT
Responsive – Changing consumer needs, mass customization, build-to-order
Agile – responsive to changing needs, pooled resources
Efficient
Risk-Hedging
Responsive
Agile
Low
High
Low
High
Supply
Uncertainty
Demand UncertaintySlide13
Modular Components
Take advantage of modules: parts or products previously prepared
Restaurants: prepared ingredients, assembled to order
Suppliers can develop new, interesting products to use more quickly, cheaply
Variety is gained by different combinations of same componentsSlide14
Bullwhip Effect
Lack of information sharing can cascade through the supply chain.
Small changes at retail level lead to huge swings at manufacturing, like a bullwhip
Several retailers order all at once, distributor thinks sales have jumped, orders a much bigger order, etc.
Better: sales info shared along “Value Chain.”
Graph: Disney &
Towill
, 2006, Supply Chain Mgt: An Intl JSlide15
Electronic Data Interchange
My computer talks to yours, tells you exactly what I want to order, when
You fill out a form, very compressed message sent, viewed as form
Software, hardware expensive to implement
Sample Purchase Transaction
ST88850*1 Transaction Set identifier
BEG*00*NE*00498765**010698 Beginning of Segment
PID*X*08*MC**Large Widget Description of Product
P01**5*DZ*4.55*TD Baseline Item DataCTT*1 Transaction Totals
SE*1*1 End of SegmentSlide16
XML
e
X
tensible
Markup L
anguagePerfect for E-Business
XML provides self-describing information.Easier to implement or modify than EDI.
Expected to eventually, replace EDI, but not nearly as fast as was expected.Standardization through RosettaNet
effortsSlide17
XBRL
Standardized set of tags for financial transaction
Identifies data as being Q3 EBITDA, 2011, for
WidgetCo.No rekeying, fewer errors, easier research
2009 - SEC required for external reporting, 500 largest public cos.XBRL.orgSlide18
Strategic Sourcing
Has to be feasible to outsource
Assembly line balancing – probably not a step in the middle
Figure out what to buy from whom
What do we want to accomplish?More effective!More efficient!Continuous Process Improvement?Slide19
Outsourcing - What is it?
Transfer activities to outside providers
Outside providers do activities
Resources: people, facilities, equipment
Decision-making responsibilityOEM = Original Equipment Manufacturer
name on the product, does not produceFlextronics/Solectron, Foxconn makes it for youSlide20
Outsourcing – Why do it?
Organizationally-driven reasons
Focus on what you do best
More flexible capacity
Employees: career pathsImprovement-driven reasons
Better quality & productivity, cycle timeGain skills not otherwise availableAssociate with superior providers
Financially-driven reasonsReduce assets, improve ROA
Lower fixed costsCash from selling capital equip.Slide21
Make or Buy Decision
DIY: Lower cost
No capable suppliers
Inadequate supply
Competitive IssuesCore competencies
Specialization
Low purchase costLack of capacityWant to gain skill
Reduce inv. costsManagement focusPatent issues
Reasons to Make
Reasons to BuySlide22
Other Factors
Degree of coordination with other activities
Relationship-specific investments
Easy to copy technologies, or low IP (intellectual properties) protection
Second-tier sub-suppliersSlide23
What to
not
Outsource
Core activities
Key to the businessDo not confer competitive advantageStrategic activities
Key source of competitive advantageX-box – Microsoft never considered making
Flextronics in Guadalajara$5 / hr vs. $1 in Doumen, ChinaSlide24
A
CautionaryTale
In 1981, IBM ‘PC’.
Consumers care about hardware
No one cares about the software that lets them talk to the processor.
Outsourced the OS to whom?Slide25
Anybody heard
of “Microsoft?”
UCSD Pascal $450
CP/M $175
MS-DOS $60
IBM:
2005
Lenovo $1.75b
MS:
2010 After Tax $18bSlide26
Outsourcing in the News
The World Is Flat
Bandwidth glut of dot-com boom
IT
& telecommunications changesNobody can tell you’re calling India
White collar jobs – now it’s seriousEducated workforcesCall centers, programmers
Privacy / security concernsSlide27
Mass Customization
Highly customized
Integrate design, processes, supply network
Supply components cheaply to production points
Fast, responsive production, quick delivery
Higher weight, lower value Slide28
Supply Chain Technologies
ASN -- lets customer know exactly what has been sent
Drop Shipping -- Supplier sends directly to the store, not to store’s warehouse
Computer sent to house via UPS
3PL: Third-party Logistics Provider
Trucking companies, manage inventories, anything you don’t want to doSlide29
Managing the Supply Chain
Postponement -- withhold any modification until as long as possible. Keep product generic “vanilla”
HP
Benetton
Home Depot paint department
Channel Assembly -- have distributor assemble products from componentsSlide30
HP Inkjet Printers
Printers made in Vancouver, sent via ship through Panama Canal to Europe
Europe warehouse stocks inventory by country
physically different-- power supply
manuals different languages
Substitution not allowedRe-supply time very longSlide31
Euro Plugs
No standardized power supplies for Europe
Different power supply for every country.Slide32
HP Inkjet Printers
Redesigned printers so that power supply added in Europe
Re-engineer product, power supply
Assembly done in a warehouse (Quality?)
Manuals added in Europe
Many expensive changesStore ‘vanilla’ boxes – one pile
Piles of power supplies & manualsCheaper to store than printers
Postpone point of differentiation25% cost reduction
Hau
Lee, Corey Billington
, Brent Carter, Interfaces, 1993Slide33
Delayed Customization
Production Storage Shipping Storage
Before
AfterSlide34
Benetton
Sweaters of undyed wool, dyed once demand is known
Dyeing LT much faster than production
How many undyed sweaters to make?
How many Red, Green, Blue, also, if this production process is cheaper, and you know you’ll sell some minimum amount?Slide35
Behr Paints
Small # of bases
Small # tints
Unlimited # combinations
Keep stock colors on hand?
How many gallons?
Which ones?
Lower labor costs
Higher inventory costsSlide36
Supply Chain Performance
Inventory Turnover (turns) =
Cost of goods sold / Average inv. Value
Annual sales = $3m at cost,
avg inv $500kTurns = $3m/$500k = 6.0
Fill Rate = Percentage of orders shipped on timeShipped 1500 orders last month, 1462 left on time, in fullFill Rate = 1462/1500 = 0.9747
Slide37
Weeks of Supply
Weeks of supply (annual
avg
) =
(Avg Inv Value / Annual CoGS )*52 Weeks
Annual sales = $30m, CoGS=$25m, Avg Inv = $2.5m
Turns = $25m/$2.5m = 10.0Weeks of Supply = $2.5m/$25m*52=5.2wksSlide38
Weeks of Supply-Real Time
Predicted sales(at cost) over next month
Weeks Supply =
sales next month=$4m, at cost=$3.2m
weekly CoGS=$0.8m
Current Inv (at cost) = $2.2mWeeks Supply = $2.2m/$0.8m = 2.75 wks
Forecasted Sales per week at cost
Current Inventory $ at cost