McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 10

Supply Chain Strategy

 10-3

What is a Supply Chain?

• Supply-chain is a term that describes

how organizations (suppliers,
manufacturers, distributors, and
customers) are linked together
 10-4

What is Supply Chain Management?

• Supply-chain management
is a total system approach
to managing the entire flow
of information, materials,
and services from raw-
material suppliers through
factories and warehouses to
the end customer
 10-5

Formulas for Measuring Supply-Chain Performance

• One of the most commonly used

measures in all of operations
management is “Inventory Turnover”

Cost of goods sold

Inventory turnover =
Average aggregate inventory value
Formulas for Measuring Supply-Chain Performance

• In situations where distribution inventory is

dominant, “Weeks of Supply” is preferred and
measures how many weeks’ worth of
inventory is in the system at a particular time

 Average aggregate inventory value 

Weeks of supply =   52 weeks
 Cost of goods sold 
 10-7

Example of Measuring Supply-Chain Performance

Suppose:
Cost of goods sold for the year is $160
million. Total average inventory
(production materials + work-in-process)
is worth $35 million. This company
normally has an inventory turn ratio of 10.
What is this year’s Inventory Turnover
ratio? What does it mean?
 10-8

Example of Measuring Supply-Chain Performance (Continued)

Cost of goods sold

Inventory turnover =
Average aggregate inventory value
= $160/$35
= 4.57
What does this mean?
 10-9

Bullwhip Effect

The magnification of variability in orders in the supply-

chain

Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

Quantity

Quantity

Quantity
Order

Order

Order
Time Time Time

A lot of …can lead to …can lead to

retailers each greater variability even greater
with little for a fewer number variability for a
variability in of wholesalers, single
their orders…. and… manufacturer.
 10-10

Hau Lee’s Concepts of Supply Chain Management

• Hau Lee’s approach to supply chain (SC) is

one of aligning SC’s with the uncertainties
revolving around the supply process side of
the SC
• A stable supply process has mature
technologies and an evolving supply process
has rapidly changing technologies
• Types of SC’s
– Efficient SC’s
– Risk-Hedging SC’s
– Responsive SC’s
– Agile SC’s
 10-11

Hau Lee’s SC Uncertainty Framework

Demand Uncertainty
Low (Functional High (Innovative
products) products)

Low Efficient SC Responsive SC

Supply (Stable
Ex.: Grocery Ex.: Computers
Process)
Risk-Hedging SC Agile SC
Uncertainty High
(Evolving Ex.: Hydro- Ex.: Telecom
Process) electric power
 10-12

End of Chapter 10