Product vs.

Supply Chain Fit

Bilal Gokpinar
Does supply chain architecture fit product
type?
 Two Types of Products
Functional Innovative
Predictability (forecast accuracy High (90%) Low (0% to 60%)
at production)
Product life cycle More than 2 years 3 months to 1 year
Gross margin (price less variable Up to 20% More than 20%
cost, as a percent of price)
Product variety (SKUs per Up to 20 More, often millions
category)
Stock-out rate 1% to 2% 10% to 40%
Forced markdowns at season 0% 10% to 25%
end (percent of full price)
Lead time for made-to-order 6 months to 1 year 1 day to 2 weeks
products
 Two Types of Supply Chains
Physically efficient Market-responsive
For functional products For innovative products
Primary purpose Supply predictable demand at Respond quickly to unpredictable
low cost demand, to minimise over- and
under-stocking
Inventory strategy Generate high turns and Deploy significant buffer stocks of
minimise inventory throughout parts or finished goods
the supply chain
Lead-time focus Shorten lead time as long as it Invest aggressively in ways to
does not increase cost reduce lead time
Product design Maximise performance and Use modular design into postpone
strategy minimise cost product differentiation
Approach to Select primarily for cost and Select primarily for speed,
choosing suppliers quality flexibility, and quality
The Bullwhip Effect

Bilal Gokpinar
 Supply Chain Demand and Variability

• Over the long run the average inflow to a firm must equal the
average outflow

Outflow
Inflow Firm (sales)

• However, the volatility of the inflow can differ substantially from the
volatility of the outflow

Outflow
Inflow Firm (sales)
The Green Volvo
Eggs in Singapore
 The Bullwhip Effect
1000

800
Manufacturer’s Production Large swings
600
at the tip
400

200

33
35
37
39
41
21

29
11
13
15
17
19

23
25
27

31
1
3
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7
9

Delivery
1000

800 Wholesaler’s Orders to Manufacturer

600
Order
400

200

0
31
33
35
37
39
41
11
13
15
17
19
21

25
27
29
23
7
1
3
5

Delivery
1000

800
Retailer’s Orders to Wholesaler Small
Order 600

400
perturbation
200
at the handle
0

39
11
13
15
17
19
21
23
25
27
29
31
33
35
37

41
3
1

5
7
9

Delivery
1000

800
Consumer Demand at Retailer
600
Order
400

200

21

27

35
11
13
15
17
19

23
25

29

37
39
41
31
33
1
3
5
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9
 Why Should Companies
Care About the Bullwhip Effect?
• Excess finished goods inventory (holding costs, required
warehouse capacity)
• Inefficient production (manufacturing costs, plant capacity
requirements)
• Shortages (poor customer service; lead time)
• Transportation costs (excess capacity or contract on short notice
for peak demand; partial truckload shipping during low demand)
• Forecasting difficulty (production planning difficult, poor utilisation
of warehouses)
• Relationships across supply chain (blame game)
The bullwhip effect reduces supply chain profitability by making it
more expensive to provide a given level of product availability.
 Underlying Driving Forces
1. Long response times (delay of material and
information flows in the chain)
2. Variability of demand (seasonality,
unpredictability, new products, promotions,…)
3. Local optimisation (plus individual forecasting)
4. Irrational behaviour of operators (panic, hence
order even more…; shortage gaming)
5. Order batching (transportation discounts,
volume discounts)
Operational Causes and Remedies

• What can managers do to limit

inefficiencies?
• Two main areas of intervention:
1. Structural: modify the design of supply
chain structure and underlying business
processes
2. Behavioural: adopt appropriate policies to
optimise the functioning of the system
 What Is JIT-Distribution or VMI?
Traditional business model:
• Distributor places order with manufacturer, deciding
timing and size of order.
Vendor Managed Inventory (VMI):
• Manufacturer receives point of sales (POS) data from
distributor, typically via electronic data interchange (EDI).
Manufacturer also has inventory information and is
informed of any plans for promotions. Based on this, the
manufacturer decides the quantity and delivery
schedule. (Ownership remains typically with
distributor/same as before.)
 Origins of VMI?

Sales increases of 20–25%

and improvement of inventory
turnover up to 30%
 Why Does It Work?
• Information sharing lowers forecast error. Supplier can
take manufacturing realities into account; customer not.
• Better production planning
• Shorter production lead times
• Smaller deliveries (and hence inventory levels) due to
increased delivery frequency and an associated smaller
lead time.
• Supplier can pool deliveries across multiple customers (or here
Synopec subsidiaries) to maintain economies of scale
• Supplier can allocate inventory based on actual needs
(rather than orders), lowering the risk of stock-outs.
• Lower inventory levels for same service level
Outsourcing

Bilal Gokpinar
 Outsourcing:
Why Buy From Outside?
Desire to focus on core Trying to improve
competency flexibility
• “No one can do • Example: easier to adjust
everything themselves” external capacity
Trying to increase • More flexible HR models
efficiency Trying to share risk
• “Buy where you get it the • Example: when
cheapest” expanding capacity
• Production globalisation Forced by target market
forces characteristics
• Tax efficiencies • Example: commercial
• Access to knowledge policies
 Should You Make or Buy?
Many factors to consider in the Focus and costs support
decision buying
• Current skills and development • Don’t want to/can’t make the
plans product yourself
• Forecast item demand and • Avoiding commitment, not
own capacity wanting to invest in technology
development…
• Costs, quality, delivery
certainty, and flexibility • Product easily purchased from
the market
• Who could and would want to
offer the product? • Buying is the cheaper option
• External, internal, and
personal factors
• Significance of independence,
employment, company size
reduction…
Low-Cost-Country Sourcing (LCCS)
Going for cost reductions
• A moving target!
Risks are present
• Disruptions
• Quality issues
• Security
• Long lead times
• Hidden costs
Preparation and risk mitigation needed
 Intermediaries
Help You Get Started
• When starting out global sourcing, many
resort to intermediaries due to skills and
scale
• Local knowledge, efficient resources, risk
minimisation
• In the beginning, benefits are larger than costs
• Speed up purchasing globalisation
Manufacturing labour costs per hour
for China, Mexico, and Vietnam 2016−2020 ($)
Supply Chain Disruptions

Bilal Gokpinar
 Supply Chain Disruption:
Ericsson vs Nokia
• Philips semiconductor plant in Albuquerque,
New Mexico.
• A bolt of lightning hit a power line in March 2000.
• A fire started, but was put out by staff within minutes.
• The damage seemed to be minor: eight trays of wafers
containing the miniature circuitry to make several
thousand chips for mobile phones had been destroyed.
• After a good clean-up, the company expected to resume
production within a week.
• Two customers:
To the firefighters’ experienced eyes, the damage seemed minor.
Compared to the devastation created by a full-scale fire, this small blaze
was hardly worth the firefighters’ trip to the plant. What the firefighters did
not realize, however, was that the blaze’s location had once been one of
the cleanest places on earth.
 Booming mobile handset market
Nokia's supply-chain managers realised within
two days that there was a problem when their
No major worry
computer systems showed some shipments
were being held up.
Was not overly concerned after the fire.
One-week delays happen in all global Immediately put the Philips plant on a watchlist
supply chains. to be closely monitored

Smoke and soot had contaminated a much larger area of the plant than had first been
thought. Production could be halted for months…
Already started locking up all the alternative
Waited for parts, moved slowly.
sources for the chips.
They demanded to know details about other
Serious parts shortage, single-sourcing. Philips plants. The Nokia team dug into the
No plan B. capacity of all Philips factories and insisted on
rerouting that capacity.
Redesigned chips on the fly, sped up a project to
Lost at least $400million in potential
boost production, work with other suppliers.
revenue.
 Natural Disasters
and Supply Chain Disruption
2020: Covid-19 Pandemic
2017: Hurricane Irma (plus others)
2016: Hurricane Matthew (plus others)
2015: Nepal earthquake (7.8 magnitude)
2014: California wildfires (150 homes destroyed, massive
power outages)
2013: Massive tornado packing 200 mph winds in the
Oklahoma City area
2012: Hurricane Sandy
2011: Japan earthquake/tsunami and Fukushima disaster
2010: Haiti earthquake
Profile of a Disruption
Identifying
and Assessing the Risks

Bilal Gokpinar
 What Is Risk?
Risk = Probability of occurrence x
consequences/impact
Vulnerability= Likelihood of disruption x its severity
• Economic definition, objective
• 80% of managers consider risk in terms of dangers or
hazards with negative outcomes
• Little attention given to probabilities or uncertainty of
positive outcomes
Enterprise Vulnerability Map
 Visibility and Quantification of Risk
Supply chain risk identification
• Creating a list of potential events that could disrupt or
harm any aspect of the supply chain’s performance
Supply chain risk monitoring
• Monitoring your supply chain’s internal and external
environment to predict when risk events are becoming
more likely
Supply chain risk assessment
• Quantifying risk to understand where the greatest risks
may exist in order to prioritise resources for risk
mitigation and management
• Measures include likelihood and impact
 Risk Identification Techniques
Geomapping/Supply chain mapping
• Visual maps of supply chains to reveal supply chain structures,
dependencies, and handoffs that may contain risk
Looking at historical problems
• Historical problems may have a high chance of recurring: problems
may have happened to the organisation itself or to others
Researching industry trends
• Other organisations and industry groups may have already
researched applicable risks
Group of experts brainstorming
• People with experience in different areas of your organisation and
supply chain have lots of knowledge of risks; getting them together
increases the knowledge-sharing
Risk Identification Techniques (cont.)

Assessment surveys
• Well-designed surveys can be an effective way to
quickly gather information on risks in your supply chain
Site visits
• Site visits to supply chain partners allow you to collect
detailed and less “filtered” information on risks
Information audits
• Data system audits can show areas of the supply chain
that have had poor performance in the past and are thus
more likely to perform poorly in the future
Supply chain for the CdTe solar cell platform

Nuss, Philip, et al. "Mapping supply chain risk by network analysis of product
platforms." Sustainable Materials and Technologies 10 (2016): 14-22.
Network
mapping
and
analysis of
a supply
chain
Resilience and Managing Risks

Bilal Gokpinar
Ford: Performance impact and total spent at
Supplier Site
Your most strategic supplier may not be your most
“risky” supplier!
 Supplier Segmentation: What would you do to
mitigate risks for the suppliers in each quadrant?

1 2

3 4
Supplier Segmentation
Supplier Segmentation
Supplier Segmentation
 What can be done to manage risks?
Mitigate—reduce the magnitude of risk by:
• Reducing the likelihood it will occur; e.g. help a risky supplier to improve
their operations
• Reducing the impact if it does occur; e.g. have more than one supplier for a
certain type of commodity
Transfer—cause someone else to be responsible for that risk
• For example, buy insurance or restructure your contracts
Avoid—completely eliminate the risk by making it impossible to occur
• For example, stop sourcing from a supplier that is too risky
Accept—do nothing; may decide the risk is too small or too difficult to
mitigate
Share—share the risk with another supply chain member
• For example, create a purchase contract with low initial prices and shared
profits for you and them if your end product sells well
Develop Resilience Strategies
Develop Resilience Strategies
1. Redundancy
1. Inject safety stock
• Buffer uncertain and variable
demand and supply
• Not lean

2. Add excess capacity

• Operational equivalent of
safety stock
• Internal or through supply
network
 Develop Resilience Strategies
2. Flexibility
1. Interchangeability e.g. Intel: CopyExactly!
• Modular plants
• Modular processes Airlines: pilot swapping
• Modular products
Automakers: platform arhitecture
2. Standardization: creates
interchangeability, which
creates flexibility to respond to
disruptions.
e.g. Benetton
3. Postponement

4. Make and buy

 The power of postponement:
Benetton
Dyed Yarns Finished Sweaters

Dyeing Knitting

White Garments Finished Sweaters

Knitting Dyeing