Cost and the Supply Chain

Fisher describes some of the differences in design criteria for the two types of supply chain. Table 6.2 lists those criteria. In a later section on costs and the supply chain, we describe techniques that recognize these differences in product demand. 

Of course, the main reason companies use DSS is to reduce cost and increase service level. Indeed, reducing cost in the supply chain is a key challenge because, as observed by Rick L. Adams, VP Logistics, Grainger Industrial Supply, A 5% cost decrease has the same impact on profit as a 30% increase in sales. ... 

The final measure being used is price. This needs to be agreed upon but it should not be expected to be reduced every year without help to improve the suppler s producing process. Supplier development is an important issue in removing costs from the supply chain. It mnst be accomplished in a manner that will make both the customer and the supplier better. Sometimes I see this being done by customers telling the snppliers they want a 10... 

What is the trade-ofiF between the number of facilities and the supply chain costs ... 

These are also the easiest supply chains to outsource to a third party. However, not all industries have viewed this opportunity the same. For high-tech leaders that defined the best use of their manufacturing capacity to be focused on the launch of new products (with less of a focus on internal asset utilization), they quickly outsourced products in this quadrant to third-party manufacturers. For consumer products leaders with a myopic focus on internal asset utilization, they keep the production of products in quadrant II for internal production, and outsource products in quadrants I and IV. As a result, consumer products companies reduce manufacturing costs but increase total costs of the supply chain. 

We know that cost reduction is upfront and center. It is the right of entry. We will always have a pull for cost reduction and the supply chain will always be a bank. There needs to be a defined path to getting both savings and value. It needs to be an and. We need support by leadership to get there. 

Removing cost from the supply chain Effective change to improve service and reduce cost requires understanding and managing root causes of cost in supply chain processes. 

Whether or not one achieves savings forecasts is another point. The harsh reality is that if and when the results of supply chain projects are compared to their forecasts, many fall far short. In fact, some projects may even add cost. In this section — Chapters 26 through 31, we seek a better understanding of why this happens and what can be done to prevent it. These chapters address our final SCM task removing cost from the supply chain. 

This chapter addresses lack of clarity as a root cause for too-high cost in the supply chain. In keeping with the scope of the topic, this chapter is quite long and uses detailed examples. However, most decisions about the supply chain must evaluate cost somewhere in the process. So this chapter describes helpful tools and concepts to achieve clarity in the supply chain cost picture. 

Applying the concepts described above paves the way for mapping costs in the supply chain. This provides a high-level view of where costs are incurred to pursue cost reduction and avoid chasing visible, but unimportant, cost components. If the supply chain supports multiple products,... 

In Aviv (2002a) we conducted a numerical study to analyze the three settings (LMI, SMI, and CFAR see 5), over a large set of system parameters combinations. For each specific vector of parameters, we used the cost assessment and optimization method to find the best average cost for the supply chain, under LMI, SMI, and CFAR. We found that when information about future demand is not collected periodically in the system (i.e., forecasts only rely on demand estimates that are known well in advance), the supply chain gains no benefits by providing the supplier with direct access to demand and inventory information at the retailer s level. We thus argue that the classic AR(1)... 

We find simple contracts that achieve coordination in both the traditional supply chain and the supply chain with drop-shipping. According to these contracts, in the traditional channel the wholesaler subsidizes a portion of customer acquisition expenses as well as compensates the retailer for inventory carried over. In the case of drop-shipping inventory compensation goes from the retailer to the wholesaler. If the wholesaler can choose the wholesale price, the proportion of the customer acquisition expenses to subsidize, and the inventory compensation, an arbitrary split of profits can be achieved. In any case, the proportion of profits that the wholesaler captures coincides with the proportion of customer acquisition costs she subsidizes. Therefore, the higher the subsidy, the higher the wholesale price and the higher the wholesaler s profits. 

In order to test the effect of changed parameters of the model on the total cost of the supply chain at each stage in plan period T, we analyze the sensitivity of the various parameters for suppliers, manufacturers and customers respectively. Taking the values of the parameters in experiment 1 (Fig. 4.5) as a benchmark, increase the parameters value of suppliers, manufacturers and customers respectively from the benchmark by 5, 10 and 15 % in turn (Minus sign implies decrease). As one parameter changes, all the other parameters value keep the same. The simulation results are shown in Tables 4.29, 4.30 and 4.31. 

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