Supply Chain

Supply Chain and e-Supply Chain:
Structures, Strategies and Drivers
1. SUPPLY CHAIN DESCRIPTION
Supply Chain: Activities involved in fulfilling a customer request
Actors: Suppliers, Sub-Contractors, Manufacturers, Transporters,

Warehouses, Retailers, Customers
Functions: Product, Development, Marketing, Procurement,

Manufacturing, Operations, Distribution, Finance, Customer
Service
Objective: Maximize value generated through customer satisfaction
Decision Phases
1. Strategy (Design)
Locations, Capacity channel design, Warehouses, Manufacturing,
Outsourcing
2. Planning
Supply scheme, Inventory policy, Subcontracting
3. Operations
Allocation of individual orders to inventory or production, allocation to
transportation routes, etc.
Supply Chain and e-Supply Chain: Structures, Strategies and Drivers page 1
Prof. P. Miliotis
Process view of the Supply Chain

Cycle view
1. Customer Order Cycle
Customer arrival
Customer order entry
Customer order fulfilment
Customer order receiving
2. Replenishment Cycle
Retail order trigger

Retail order entry
Retail order fulfilment
Retail order receiving
3. Manufacturing Cycle
Order arrival
Production scheduling
Manufacturing and Shipping
Receiving
4. Procurement Cycle
Supplier / Manufacturer interface
Prof. P. Miliotis
Sources CyclesConverters Retailers

Product and Service Flow
Information Flow
Pull
Funds Flow
Customer
Suppliers
Order Distributors Consumers
Customer arrival
Customer order entry
Customer order fulfilment
Customer order receivingRetail order
Replenishment trigger
Retail order entry
Retail order fulfilment
Retail order receivingOrder arrival
from distributors
Push Production scheduling
Manufacturing and Shipping
Receiving (distributors, retailers,
Manufacturing customers
Procurement
Prof. P. Miliotis
Push-Pull view of S.C.
Pull Process: Execution is initiated in response to a customer

order (increased responsiveness)
Push Process: Execution is initiated in anticipation to a customer

order (increased efficiency)
Push-Pull Boundary: Which processes are of each type
Push Systems MRP supported
Pull Systems Require fast information transmission and sharing
2. STRATEGIC FIT
Matching of the company’s competitive strategy to supply chain strategy
Competitive Strategy: Define ways to satisfy customer

requirements through products and services
 Product Development Strategy
 Marketing and Sales Strategy
Supply Chain Strategy: Design strategy to achieve the right mix of

efficiency and responsiveness
Products with high demand uncertainty (and usually high profit margins) require
responsive supply chains. This usually occurs early in the life cycle of the
product.
Products with low demand uncertainty (and usually low profit margins) require
effective supply chains. This usually occurs late in the life cycle of a product.
Supply chains serving multiple products and multiple customer segments require
the right balance between effectiveness and responsiveness.
Achieving strategic fit: Matching S.C. to customer segment

requirements
Understanding the Volumes, variety, response time, service level,
customer: price innovation rates
Prof. P. Miliotis
Understanding the supply Responsiveness

chain:  Response to wide range of quantities
(excess capacity)
 Meet short lead time
 Handle a large variety of products
 Meet a high level service
Efficiency
 Economies of scale
 Low capacity (excess costs)
 Low cost transport
Supply chain Characteristics

Efficient Responsive
Primary goal Lowest cost Quick response to demand
Product design Max per. at min cost Modularity for
postponement of product
differentiation
Pricing Lower margins price High margins
prime customer drive
Manufacturing Lower costs through high Capacity availability to
strategy utilization meet unexpected demand
Inventory Minimize inventory to Maintain buffer inventory
strategy lower cost to meet unexpected
demand
Lead time Reduce but not at expense Reduce aggressively even
of cost if costs are significant
Supplier Select based on cost and Select based on speed,
strategy quality flexibility and quantity
Transportation Low cost models Responsive models
Prof. P. Miliotis
Intercompany view of the Supply Chain
Intercompany alliances:
1. Maximize supply’s surplus, and not maximize the profit of each segment
because this is an internal account (Distribution of profits
2. Increases speed: Successful interface between stages → requires close

cooperation, alliances, common investments, etc.
3. SUPPLY CHAIN DRIVERS AND OBSTACLES
Competitive Strategy
S.C. Strategy
Efficiency Responsiveness
Inventory Transportation Facilities Information
Supply chain Drivers
Inventory
Benefits Smoothing Supply-Demand uncertainties

Economies of scale
(Start up costs, Transport fixed costs)
Costs Capital cost

Risk
Operational costs
Prof. P. Miliotis
Inventory types
By uncertainty 1. Cycle Inventory: designed to meet economies of scale

type
(EOS)
2. Safety Inventory: designed to meet uncertainties
(marginal analysis)
By supply chain Raw materials

stage Process inventory cost increase
Ready product inventory
Inventory cost = Inventory volume × Time
Substitute inventory for information: More accurate and timely

information reduces inventory
requirements
Substitute inventory for capacity: Capacity increases flexibility

and reduces inventory
requirements
Substitute inventory for speed: Speed reduces lead times and

result in more accurate
forecasting
Inventory increases responsiveness at a cost
Transportation
Transportation Modes (air, truck, sea, rail)

In House or Outsource
Transportation speed makes a positive contribution to

responsiveness and can be increased at a cost
Facilities - Capacity
Location of factories, warehouses, retail outlets

Focuses factories vs factories near distribution centres
Increased capacity adds to flexibility and

responsiveness at a cost
Prof. P. Miliotis
Information
 Accurate forecasting
 Coordination between stages of S.C.
 Fast cycles
 Inventory reduction
 Lost sales reduction
 Markdowns reduction
Enabling Technologies
 EDI
 Internet
 ERP
 SCM software
Supply chain Obstacles
 Increasing variety of products

 Decreasing product life cycles
 Increasingly demanding customers
 Fragmentation of supply chain ownership
 Globalization
 Difficulty in executing new strategies
Prof. P. Miliotis
4. FACILITIES NETWORK
Warehouses
Customer Service Performance
and Logistics Costs
Warehousing, Inventory Costs
Customer Service
Transportation Costs
Number of Warehouses
Relationship between service/cost performance and
number of warehouse locations
 Increasing the number of warehousing facilities in a logistics network

generally improves customer service, because additional stocking
locations reduce average delivery times to customers. However, more
warehouses increase warehousing and inventory costs. Warehousing costs
increase because there are more overhead and fixed costs to absorb.
Inventory costs increase because a greater number of warehouses means
more safety stock inventory must held system-wide to provide a
specified level of customer service.
 In contrast, transportation costs decrease as the number of facilities is

increased over some range. Rather than shipping smaller quantities direct
from points of supply (eg. Plants) to customers, warehouses serve as
product mixing centers that allow larger, consolidated shipments between
supply points and warehouses. This transportation cost advantage
becomes diminished, however, if too many warehouses are present
because the shipment sizes between supply points and warehouses
decrease to the point that there is little shipment consolidation
advantage over direct shipments to customers.
Prof. P. Miliotis
Factories
Figure below outlines some of the trade-offs network modeling can address
when integrating manufacturing and distribution within a comprehensive network
design. Manufacturing costs frequently decrease as manufacturing is
concentrated in fewer facilities – a result of economies of scale and more
revenue generated per dollar spent on manufacturing infrastructure and
overhead. However, more modern, flexible-manufacturing technology may
diminish or even eliminate the benefits of this traditional axiom in certain
More Focused Factories Less Focused Factories
Manufacturing
Costs
Transportation and
Inventory Costs
Fewer Number of Plants Greater Number of Plants

industries.
Relationship between cost performance, factory focus

and number of plant locations
5. ALLIANCES
Alliances are important in effective supply chain management.

The main issues concerning alliances are the following:
 Extendedness
 Operational Information Exchange
 Operating Controls
 Sharing of Benefits and Burdens
 Planning
 Compatible Corporate Cultures (Trust)
Prof. P. Miliotis
Extendedness
The investment necessary in time, personnel, equipment

to establish an interface among channel members cannot
be returned over a short period in most cases.
Thus, members usually enter into contracts or have an
understanding of a long-term relationship if they are
involved in a partnership relationship.
Operational Information Exchange
Information systems must be connected, which means

having compatible equipment and software.
Operating Controls
Channel members want to monitor other members’

information systems to be aware of product flows and
any potential supply problems.
Sharing of Benefits and Burdens
There is an expectation that channel members will share

both benefits and burdens. If only the channel captain,
or the strongest one in the channel, reaps the rewards,
the other members will be constantly looking for
alternative relationships. Certainly, the relationships
should be reviewed periodically against other
alternatives, but without sharing of benefits and
burdens, the ties will be particularly tenuous and
uncomfortable.
Planning
Considerable planning is needed to integrate the

members of the supply chain, or two partners.
Compatible Corporate Cultures (Trust)
Finally, there is chemistry between partners and/or

among supply chain members. Corporate cultures should
be compatible among the parties involved for the
partnership to work.
Prof. P. Miliotis
6. SUPPLY CHAIN COORDINATION
The bullwhip effect
Fluctuations in orders increase as we move up the supply chain

from retailers to manufacturers. This increases costs and
reduces profitability.
Obstacles to coordination
Incentive obstacles
Information processing obstacles
Operational obstacles
Pricing obstacles
Behavioural obstacles
Actions to improve coordination
Aligning goals and incentives

Improving information accuracy
Improving operational performance
Designing pricing strategies to stabilize orders
Building partnerships and trust
7. SUPPLY CHAIN PERFORMANCE
Performance improvement stages
1 st stage Improve in-house performance
2 n d stage Consider relationships with supply chain partners
3 r d stage Optimize the operations of the extended enterprise

(optimal facilities setting, optimal stock levels, delayed
differentiation, mass customization, accurate response)
Cost reduction is not always appropriate if it hurts
responsiveness.
Prof. P. Miliotis
Performance measures and variables
Measures and variables used depend on the desirable characteristics of the

supply chain (mix between effectiveness and responsiveness).
Traditional measures
Inventory measures Inventory turns, inventory costs, inventory levels
Time Product development time, time to market, time to

break even, lead times
Quality Partners’ contribution to continuous improvement,

percentage of defects
Traditional measures focus mainly on cost

considerations
Less traditional measures
Customer focus
Customer satisfaction
Information practices
Information about workflow practices and
integrated production planning
Partner selection criteria (non-cost)
Performance measures
Depending on the type of the supply chain (effectiveness vs. responsiveness)
Traditional measures Lead times, inventory levels, service levels

focus: cost reduction
Modern measures The extent of supplier or customer involvement in

product design
The importance of non-price factors in partner
selection
The establishment of long term partnerships with
suppliers and customers
A firm’s ability to capture and use information
Prof. P. Miliotis
8. e-BUSINESS AND e-MARKETS
Open e-markets Reduce prices and increase product variety

Transaction cost of order placement and fulfilment
is reduced
Used to make occasional transactions when
shortages occur in the supply chain or in capacity:
quick information regarding availability and spot
prices. An auction facilitates a one time transaction
Tight links (through Tight-links result in greater speed and certainty

networks and alliances) and they are used for regular and steady
transactions through long-term relationships
9. e-BUSINESS AND SUPPLY CHAIN
Revenue Impact of e-Business
 Offering direct sales to customers

 Provide 24-hour service from any location
 Aggregate information from various sources
 Provide personalization and customization of information
 Speed up time to market
 Implement flexible pricing
 Allow price and service discrimination
 Facilitate efficient funds transfer
Cost Impact of e-Business
 Reducing product handling with a shorter supply chain

 Postponing product differentiation until after an order is
placed
 Decreasing delivery cost and time with downloadable products
 Reducing facility and processing cost
 Decreasing inventory costs through centralization
 Improving supply chain coordination through information
sharing
Potential Cost Disadvantage
 Increased transportation cost through aggregation

 Increased handling cost if customer participation is reduced
 Large initial investment in information infrastructure
Prof. P. Miliotis
10. e-SUPPLY CHAIN AND DISTRIBUTION
1. Proper mix with “bricks”: Physical network necessary
2. Suitable pricing to reflect costs
3. Optimize distribution systems to handle “parcels” not “pallets”
4. Efficient handling of return: increased returns in e-ordering
11. e-SUPPLY CHAIN CASES

1. Dell Supply Chain
Customer Pull
Customer
Pull
Dell Retailer
Manufacture
r
Supplier
Supplier
Dell S.C. Traditional PC S.C.
Dell has fewer stages in the S.C. Greater part of the S.C. operates in “pull
mode”.
Comments on the characteristics follow:
Type of products More
Product introduction Faster
Response time Longer (products not immediately available)
Stages Fewer: increased profit margin through cost
reduction
Prof. P. Miliotis
Payments e-funds transfer: faster pay-in

slower pay-out
negative working
capital
(matter of negotiation with partners)
Inventory Lower: Through aggregation and delayed
differentiation
Facilities costs Lower: Fewer facilities (mainly retail outlets)
Transport costs Increased: Distribution on a personal basis (whose
cost is it?)
However Transport cost small fraction of price
and cost
24-hour service More customers, revenue enhancement
Price More flexible: Price revisions depending on stocks
2. Amazon Supply Chain
Customer Pull
Customer
Pull
Amazon Retailer
Warehouse
Distributor
Publisher
Publisher
Product range Greater

Facilities cost Lower (no retail infrastructure)
Transport and Higher distribution cost
Distribution cost Significant part of the total price/cost
24-hour service
Prof. P. Miliotis
Delivery Longer
Processing cost Higher
Amazon does not charge for certain services that are significant part of total
cost. Low prices result in high revenues but fail to recover costs.

Supply Chain

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Supply Chain

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Supply Chain and e-Supply Chain:

Structures, Strategies and Drivers

1. SUPPLY CHAIN DESCRIPTION

Supply Chain: Activities involved in fulfilling a customer request

Actors: Suppliers, Sub-Contractors, Manufacturers, Transporters,

Functions: Product, Development, Marketing, Procurement,

Objective: Maximize value generated through customer satisfaction

Process view of the Supply Chain

1. Customer Order Cycle

Retail order trigger

Supplier / Manufacturer interface

Sources CyclesConverters Retailers

Push-Pull view of S.C.

Pull Process: Execution is initiated in response to a customer

Push Process: Execution is initiated in anticipation to a customer

Push-Pull Boundary: Which processes are of each type

Push Systems MRP supported

Pull Systems Require fast information transmission and sharing

Matching of the company’s competitive strategy to supply chain strategy

Competitive Strategy: Define ways to satisfy customer

Supply Chain Strategy: Design strategy to achieve the right mix of

Achieving strategic fit: Matching S.C. to customer segment

Understanding the supply Responsiveness

Supply chain Characteristics

Intercompany view of the Supply Chain

2. Increases speed: Successful interface between stages → requires close

3. SUPPLY CHAIN DRIVERS AND OBSTACLES

Inventory Transportation Facilities Information

Supply chain Drivers

Benefits Smoothing Supply-Demand uncertainties

Costs Capital cost

By uncertainty 1. Cycle Inventory: designed to meet economies of scale

By supply chain Raw materials

Inventory cost = Inventory volume × Time

Substitute inventory for information: More accurate and timely

Substitute inventory for capacity: Capacity increases flexibility

Substitute inventory for speed: Speed reduces lead times and

Inventory increases responsiveness at a cost

Transportation Modes (air, truck, sea, rail)

Transportation speed makes a positive contribution to

Location of factories, warehouses, retail outlets

Increased capacity adds to flexibility and

Supply chain Obstacles

 Increasing variety of products

Warehousing, Inventory Costs

 Increasing the number of warehousing facilities in a logistics network

 In contrast, transportation costs decrease as the number of facilities is

More Focused Factories Less Focused Factories

Fewer Number of Plants Greater Number of Plants

Relationship between cost performance, factory focus

Alliances are important in effective supply chain management.

The investment necessary in time, personnel, equipment

Operational Information Exchange

Information systems must be connected, which means

Channel members want to monitor other members’

Sharing of Benefits and Burdens

There is an expectation that channel members will share

Considerable planning is needed to integrate the

Compatible Corporate Cultures (Trust)

Finally, there is chemistry between partners and/or

6. SUPPLY CHAIN COORDINATION

The bullwhip effect