DE LA CADENA DE SUMINISTRO

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INSTITUTO TECNOLÓGICO Y DE ESTUDIOS SUPERIORES DE MONTERREY

CAMPUS MONTERREY

DIVISIÓN DE INGENIERÍA Y ARQUITECTURA PROGRAMA DE GRADUADOS EN INGENIERÍA

MARCO DE REFERENCIA PARA LA TOMA DE DECISIONES ESTRATEGICAS EN LA ADMINISTRACION

DE LA CADENA DE SUMINISTRO

T E S I S

PRESENT ADA COMO REQU1SITO PARCIAL PARA OBTENER EL GRADO ACADÉMICO DE:

MAESTRO EN CIENCIAS

ESPECIALIDAD EN SISTEMAS DE MANUFACTURA

POR:

PEDRO DANIEL LOPEZ RAYGOZA

MONTERREY, N. L. DICIEMBRE DE 2002

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INSTITUTO TECNOLÓGICO Y DE ESTUDIOS SUPERIORES DE MONTERREY

CAMPUS MONTERREY

DIVISIÓN DE INGENIERÍA Y ARQUITECTURA PROGRAMA DE GRADUADOS EN INGENIERÍA

MARCO DE REFERENCIA PARA LA TOMA DE DECISIONES ESTRATÉGICAS EN LA ADMINISTRACIÓN DE LA CADENA DE SUMINISTRO

TESIS

PRESENTADA COMO REQUISITO PARCIAL PARA OBTENER EL GRADO ACADÉMICO DE:

MAESTRO EN CIENCIAS

ESPECIALIDAD EN SISTEMAS DE MANUFACTURA

POR:

PEDRO DANIEL LÓPEZ RAYGOZA

MONTERREY, N. L. DICIEMBRE DE 2002

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DEDICATORIAS

A Dios, por la vida, su amor, ser guía en mi camino y darme la oportunidad de realizar mis sueños.

A mi Madre y Padre, Dora y Pedro por su ejemplo de vida y su amor, por sus consejos e incondicional apoyo, porque lo que he sido, soy y llegaré a ser se lo debo a ustedes.

A mis hermanas, Roció y Doris por su amor, apoyo y consejos en todos los momentos de mi vida, por estar siempre al tanto de mis estudios en Monterrey, por sus ánimos de seguir adelante.

A mi Abuela, Mi Viejona por el amor y la dedicación que me ha dado durante mi vida.

A mi novia, Kathy por su amor y apoyo incondicional que a diario demuestra, por ser inspiración y estar siempre a mi lado.

A mis familiares y amigos, por su apoyo y ánimos para terminar la maestría.

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AGRADECIMIENTOS

Al Dr. Arturo Molina por haberme dado la oportunidad de estudiar la maestría y formar parte de su equipo de trabajo, por su ejemplo de profesionalismo, dedicación y responsabilidad, por ser maestro, asesor y amigo.

Al Ing. Alberto Novau por brindarme su apoyo y consejos en la realización y culminación de la maestría.

Al Ing. Luis V. Cabeza por su aportación y recomendaciones para la realización de éste trabajo.

A mis compañeros y amigos de trabajo por la compañía y amistad durante la maestría.

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RESUMEN

Discutir sobre la Administración de la Cadena de Suministro (SCM) sin mencionar la palabra "ESTRATEGIA" es casi imposible. ¿Pero qué hace ese término realmente? ¿Qué constituyen las estrategias de la Administración de la Cadena de Suministro, y cómo dan soporte a los esfuerzos de una compañía? En esta tesis, se introducen algunos conceptos cruciales en la estrategia de SCM.

Las estrategias son los mecanismos por los cuales los negocios coordinan sus decisiones, estimando recursos, su estructura organizativa, sistemas de información, políticas y procedimientos. Las operaciones y las estrategias de SCM son un intento para coordinar decisiones acerca de recursos, estructura organizativa, sistemas de información, políticas y procedimientos dentro de las operaciones de la cadena.

El rol estratégico es de gran importancia en SCM, la interrelación entre las diferentes decisiones estratégicas (la estrategia competitiva, la estrategia de administración de la cadena de suministro, la estrategia de producción, y el proceso de la cadena del suministro) y cómo ayudan a mejorar la operación de la cadena del suministro.

El diseño e implantación de SCM requieren la definición de estrategias, los procesos, los indicadores y las decisiones mantengan una relación con los inventarios, el transporte, instalaciones e información.

Esta tesis desarrolla un marco de referencia para guiar el proceso de toma de decisiones estratégico en la administración de la cadena del suministro. El proceso definirá cada uno de las actividades que ayudan a la administración de la cadena de suministro en el logro de sus cometidos.

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Framework for Strategic Decisión Making in SCM Contents

LIST OF FIGURES

Figure 2.1 Supply Chain Structure [Harrison, 2001] 6

Figure 2.2 Framework for Decision-Making [Adapted from Molina, 2001] 10

Figure 2.3 SCM Strategies [Molina, 2001] 14

Figure 2.4 Engineering to Order (ETO) [Molina et al., 1999b] 24

Figure 2.5 Make to Order (MTO) [Molina et al., 1999b] 25

Figure 2.6 Assemble to Order (ATO) [Molina et al., 1999b] 26

Figure 2.7 Make to Stock (MTS) [Molina et al., 1999b] 26

Figure 2.8 Extended Enterprise's Model. [Molina, 2001] 28

Figure 2.9 Product Characteristics Analysis Matrix [Harrison, 2001] 43

Figure 2.10 New Products Analysis Matrix [Cooper, 1988] 44

Figure 2.11 SWOT Analysis Matrix 46

Figure 2.12 Hamel and Prahalad's Core Competences Agenda Matrix [Thompson et al., 1999] 47

Figure 2.13 Porter's Five Forces Analysis [Porter, 1998] 49

Figure 2.14 Strategic Dimensions [Ayers, 2001] 51

Figure 2.15 Mass Customization Analysis 53

Figure 2.16 Product Life Cycle Grid [Ayers, 2001] 55

Figure 3.1 Strategic Decision-Making Process 58

Figure 3.2 Analysis Structure of Strategic Decision-Making Process 58

Figure 3.3 Gap Analysis 67

Figure 3.4 Frameworks that Support Strategic Selection 69

Figure 4.1 Supply Chain of Personal Computer Industry 72

Figure 4.2 Dell's Direct Business Model 73

Figure 4.3 Dell's Five Forces Analysis 77

Figure 4.4 Dell's Customer Segments 79

Figure 4.5 Strategic Decision-Making Process (Industry Analysis) 88 Figure 4.6 Strategic Decision-Making Process (Company Analysis) 93

Figure 4.7 Dell's New Product Analysis 96

Figure 4.8 Dell's Product Life Cycle 98

Figure 4.9 Dell's Products Characteristics Analysis 99

Figure 4.10 Strategic Decision-Making Process (Product Analysis) 101 Figure 4.11 Strategic Decision-Making Process (Strategic Gaps) 102

Figure 4.12 Organized Around the Flow of Information 107

Figure 4.13 Dell's Strategic Selections for Supply Chain Management 109

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LIST OF TABLES

Table 2.1 Manufacturing Outputs [Miltenburg, 1995] 17

Table 2.2 Measures for the Manufacturing Outputs [Miltenburg, 1995] 22

Table 2.3 Driving Forces [Ayers, 2001] 52

Table 2.4 Driving Forces and Supply Chain Management [Ayers, 2001] 52

Table 3.1 SWOT Analysis (Opportunities and Threats) 63

Table 3.2 SWOT Analysis (Strengths and Weakness) 65

LIST OF ABBREVIATIONS

ATO Assemble to Order

C Collaboration

CRM Customer Relationship Management

CS Customer Service

EE Extended Enterprise

ETO Engineering to Order

FC Full Collaboration

HC Horizontal Collaboration

Hl Horizontal Integration

MC Mass Customization

MTO Make to Order

MTS Make to Stock

OCC Obtaining Customer Commitment

OE Operation Excellence

OF Order Fulfillment

OEM Original Equipment Manufacturer

PC Personal Computer

Pl Product Innovation

PR Product Realization

R&D Research and Development

SBU Strategic Business Unit

SC Supply Chain

SCM Supply Chain Management

SRM Supplier Relationship Management

SWOT Strengths, Weaknesses, Opportunities and Threats

TPL Third Party Logistics

VC Vertical Collaboration

VI Vertical Integration

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LIST OF TABLES

Table 2.1 Manufacturing Outputs [Miltenburg, 1995] 17

Table 2.2 Measures for the Manufacturing Outputs [Miltenburg, 1995] 22

Table 2.3 Driving Forces [Ayers, 2001] 52

Table 2.4 Driving Forces and Supply Chain Management [Ayers, 2001] 52

Table 3.1 SWOT Analysis (Opportunities and Threats) 63

Table 3.2 SWOT Analysis (Strengths and Weakness) 65

LIST OF ABBREVIATIONS

ATO Assemble to Order

C Collaboration

CRM Customer Relationship Management

CS Customer Service

EE Extended Enterprise

ETO Engineering to Order

FC Full Collaboration

HC Horizontal Collaboration

Hl Horizontal Integration

MC Mass Customization

MTO Make to Order

MTS Make to Stock

OCC Obtaining Customer Commitment

OE Operation Excellence

OF Order Fulfillment

OEM Original Equipment Manufacturer

PC Personal Computer

Pl Product Innovation

PR Product Realization

R&D Research and Development

SBU Strategic Business Unit

SC Supply Chain

SCM Supply Chain Management

SRM Supplier Relationship Management

SWOT Strengths, Weaknesses, Opportunities and Threats

TPL Third Party Logistics

VC Vertical Collaboration

VI Vertical Integration

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Framework for Strategic Decisión Making in SCM Chapter 1

CHAPTER 1. INTRODUCTION 1.1 BACKGROUND

A new atmosphere of competitiveness for the development and manufacture of producís and/or services has arisen, forcing changes ¡n the structures of the companies. The competitive advantage in the new global economy will belong to the manufacture companies that are able to respond quickly to the demand by customizing producís of greater quality and complexity.

Manufacturing environments today have lean and optimized manufacturing processes. While a great deal of research is underway to improve efficiencies with these strategies, manufacturing companies are also looking for better ways of getting their producís to customers in a timely and cost-efficient fashion - e.g., for managing their complex, intricate supply chains. An improved manufacturing process might fail to achieve benefit for the company if the product manufactured is not selling in the market, or is not made available in the right place at the right time. A situation wherein a customer goes to a retail store to buy a particular product, finds that product to be out of stock, and ends up buying a competitor's product. At the same time, excessive stock raises ¡nventory costs and likelihood of the product getting outdated. Shortening of production cycles makes it more and more important that the product gets to the market rapidly. If the production cycle is shorter than the time a product spends in the supply chain, the product will go out of production before the customer receives it. This makes it impossible to detect and react to quality problems.

The networks were formed in response to the competitive challenges of the 90's and the dawn of the 21 st century. With increasing focus on core activities and competences by major manufacturing and service organizations there is a now well established trend towards greater devolvement of risk and responsibility to suppliers.

At the same time, many suppliers enjoy less adversaria! relationships with their customers, based on an increasing use of framework agreements and partnerships to govern long term supply deals. This is a trend which is being cascaded down the supply chain to involve second and third tier suppliers.

Industry networks play an indisputable role in the achievement of aggregated goals in a competitive environment. Such strategies (goals) related to cost reduction and sales growth can be achieved

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easily through team work ¡n processes innovation, utilization of work standard methods, technology use, training and access to suitable information for strategic decision-making process.

The globalization has torced the companies to optimize ¡ts ¡nternal processes and look for to

¡ntegration with ¡ts clients and suppliers. This new model of businesses ¡s known as Extended Enterprise and has as main strategy the Supply Chain Management (SCM). The Supply Chain Management has by objectives [Browne et al. 1999]:

• minimization of supply cycle (times, costs, inventories),

• increase the use of the supply chain, and

• increase flexibility and capacity of respond towards the customers

Since its inception about 10 years ago, the field of supply chain management has become tremendously important to companies in an increasingly competitive global marketplace. The term supply chain refers to the entire network of companies that work together to design, produce, deliver, and service producís. In the past, companies focused primarily on manufacturing and quality improvements within their four walls; now their efforts extend beyond those walls to encompass the entire supply chain.

Discussing supply chain management without someone mentioning the word "strategy" is almost impossible. But what does that term really mean? What constitutes an operations or supply chain strategy, and how does it support a company's overall efforts? In this thesis, will introducing some key concepts in business strategy. Also, will describe how businesses actually créate strategies and then position operations and supply chain strategy within that larger process.

Strategies are the mechanisms by which businesses coordínate their decisions regarding resources, organizational structure, information systems, policies and procedures. Operations and supply chain strategies are an attempt to coordínate decisions about resources, organizational structure,

¡nformation systems, policies and procedures within the operations, purchasing, and logistics functions.

The synchronized supply chain coordinates the flow of valué, information, materials, money and knowledge across a its network of stakeholders and stretches upstream from the supplier's supplier to the customer's customer downstream. With the advent of more ¡nstantaneous information

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exchange between stakeholders ¡n the supply chain, the distortions ¡n perception of market requirements caused by interchange delays vanishes and an almost real-time responsiveness becomes possible. Companies are focusing upon what they do well while still extending their markets, and henee have added trading partners downstream.

The design and implantation of SCM require the coordination and alignment of four vital flows for the company - valué, information, materials, money and knowledge - to intégrate the internal activities and processes, as well as their extended supply chain of suppliers towards its clients, supported by information technologies.

1.2 PROBLEM DEFINITION

The demands of the global markets press the companies to respond in a faster way, acting in many cases without adapted analysis and evaluation.

Strategic decision-making is the process that specifies a problem/opportunity, identifies alternatives, and selects from among the alternatives. This should impose the achievement of the SCM goals, to finally exploit business opportunities in markets.

Generally in supply chain design, the strategies had been selected in an intuitive way and there was little advance in the achievement of the main benefits that a SCM should provide to the companies.

Thus it is necessary to formalize a method that guides this process.

The design and implantation of SCM require the definition of strategies, processes, indicators and decisions related to the inventories, transport, facilities and information.

This thesis will develop the framework for guide the Strategic decision-making process in supply chain management. The process will define each one of the necessaries activities that help the SCM in the achievement of its goals, based on the information of the industrial case.

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1.3OBJECTIVES

The main objectives of this thesis are:

• Build a strategic decision-making framework that helps to manage Supply Chain Management strategies complexity.

• Develop a strategic decision-making process for strategies formulation in Supply Chain Management.

• Build an industrial case to demónstrate the framework for strategic decision-making process in Supply Chain Management.

1.4 RESEARCH SCOPE AND LIMITATION

The scope of the research ¡s to define and develop a strategic decisión making process in supply chain management.

This research began with the adaptation of Chopra framework to design the supply chain to a new methodology, proposed by Molina, which involves additional decisions during the supply chain design, trying to better explain its operation and understand the company's decisions to improve the supply chain management performance.

Finally, this research documents the implementation of this framework in a case study: Dell Computer Corporation, in such a business environment, ít is believed that the analysis on how Dell manages its supply chain will be beneficial to better understand the critical role of supply chain management, describing how it is developed, with its methodologies and tools, and also propones improvement áreas for the project development. It is necessary to make an analysis of how they are bound to the company's competitive strategy to focus for contributing to its improvement.

Each company has its own supply chain different from the rest, still within the same company; the different facilities have different characteristics among them.

It is intended that this thesis emphasizes the importance of the strategic roll of the supply chain management, the interrelation between the different strategic decisions (competitive strategy, supply chain management strategy, manufacturing strategy, and supply chain process) and how they help to improve the operation of the supply chain.

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1.5 THESIS ORGANIZATION

Supply chain management is an important component ¡n today's extended enterprise applications. It is becoming critical when firms confront competition based on supply chain efficiency.

This thesis is integrated by five chapters, which are distributed of the following way:

Chapter 1 is the introduction that integrates background, problem definition, thesis objectives, research scope and limitation, and thesis organization.

Chapter 2 describes the definition of general concepts used in this thesis and the framework used for the decisión making for the design of the supply chain management, then it becomes a general analysis of the characteristics of the supply chain and its functions, description of the strategic decisions along the company to achieve a supply chain integration, measurements systems for improve supply chain performance, and describe several tools and analysis methods that support decision-making process.

The Framework to support the strategic decision-making for the design of the supply chain management is developed in Chapter 3. It's described in terms of three main analyses: industry, company, and product analyses; identifying core competences and strategic gaps for strategies selection to support supply chain management.

Dell Computer Corporation case study is described in Chapter 4, where the framework developed is applied to support the strategic decision-making process along the company, aligning the strategies for a better supply chain management integration. The thesis conducís a case study on the success of Dell Computer's supply chain management. The intention is to demónstrate how companies can use supply chain management to serve customers effectively and at lower costs than ever before.

Finally, Chapter 5 establishes final results and conclusions, the investigation concludes, and set out recommendations for further research work.

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CHAPTER 2. LITERATURE REVIEW

2.1 BASICS CONCEPTS

2.1.1 Valué Chain Definition

The APICS dictionary defines valué chain as those "functions within a company that add valué to the producís or sen/ices that the organization sells to customers and for which it rece/Ves payment"

The differences between the definitions of supply chain and the valué chain are illustrated in the next figure. The supply chain is shown as a series of arrows moving from the raw materials stage to the final customer. Each of these arrows represents an individual firm, which has its own valué chain.

This valué chain is enlarged for one firm in the supply chain so that some of the ¡nternal functions of the firm that add valué can be shown.

Figure 2.1 Supply Chain Structure [Harrison, 2001]

2.1.2 Supply Chain Definition

The term supply chain can be defined as the "processes from initial raw material to the ultímate consumption of the finished product linking across supplier-user companies", or as the functions within and outside a company enable the valué chain to make producís and provide sen/ices to the customer". [Ayers, 2001]

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2.1.3 Supply Chain Management Definition

It's ¡mportant to have a clear definition supply chain when a company is trying to set its strategic objectives. For this purpose SCM can be defines as:

"The process of planning, implementing and controlling the efficient, cosí effective flow and storage of raw materials, in-process inventory, finished goods, and relatad Information from point-of-origin to point-of-consumption for the purpose of conforming to customer requirements". [Harrison, 2001]

"SCM is a set of approaches utilized to efficiently intégrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the ríght locations, and at the ríght time, in order to minimize system wide costs while satisfying sen/ice level requirements". [Goldman et al., 1995]

2.2 DECISIÓN PHASES IN A SUPPLY CHAIN

Successful supply chain management requires several decisions relating to the flow of information, product, and funds. These decisions fall into three categories or phases depending on the frequency of each decisión and the time frame over which a decisión phase has an important. [Chopra et al., 2001]

1. Supply Chain Strategy or Design. During this phase, a company decides how to structure the supply chain. It decides what the chain's configuration will be and what processes each stage will perform. Decisions made during this phase are also referred to as strategic supply chain decisions. Strategic decisions made by companies include the location and capacities of production and warehousing facilities, products to be manufactured or stored at various locations, modes of transportation to be made available along different shipping legs, and type of information system to be utilized. A firm must ensure that the supply chain configuration supports its strategic objectives during this phase.

2. Supply Chain Planning. As a result of the planning phase, companies define a set of operating policies that govern short term operations. For decisions made during this phase, the supply chain's configuration determined in the strategic phase is fixed. This configuration establishes constraints within which planning must be done. Companies start the planning phase with a forecast for the coming year (or a comparable time frame) of demand in

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different markets. Planning includes decisión regarding which markets will be supplied from which locations, the planned buildup of inventories, the subcontracting of manufacturing, the replenishment and inventory policies to be followed, the policies that will be enacted regarding backup locations in case of a stock-out, and the timing and size of marketing promotions. Planning establishes parameters within which a supply chain will function over a specified period of time. In the planning phase, companies must include uncertainty in demand, exchange rates, and competition over the time horizon in their decisions. Given a shorter time horizon and better forecasts that the design phase, companies in the planning phase try to incorpórate whatever flexibility may have been built into the supply chain in the design phase and exploit it to optimize performance in the short term.

3. Supply Chain Operation. The time horizon here is weekly or daily, and during this phase companies make decisions regarding individual customer orders. At the operation level, supply chain configuration in considered fixed and planning policies already defined. The goal of supply chain operations is to implement the operating policies in the best possible manner. During this phase. Firms allocate individual orders to inventory or production, set a date that an order is to be filled, genérate pick lists at a schedule of trucks, and place replenishment order. The goal during the operation phase is to exploit the reduction of uncertainty and optimize performance within constraints established by configuration and planning policies.

Supply chain decisión phases may be categorized as design, planning, or operation, depending on the time frame over which the decisions made apply.

2.3 STRATEGIC FIT

Strategic fit means that both the competitive and supply chain strategies have the same goal. It refers to consistency between customer priorities that the competitive strategy is designed to satisfy and the supply chain capabilities that the supply chain strategy aims to build. [Thompson et al., 1999]

All functions that are part of a company's valué chain contribute to its success or failure. These functions do not opérate in isolation; no one function can ensure the chain's success. However, failure at any one function may lead to failure of the overall chain. This failure can occur in according

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strategies and achievi'ng strategic fit, or it can occur when the strategies are being executed. A company's success orfailure is thus closely linked to the following keys:

• The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal.

• The different functions in a company must appropriately structure their processes and resources to be able to execute these strategies successfully.

A company may fail either because of a lack of strategic fit or because its processes and resources do not provide the capabilities to support the desired strategic fit; there are few greater than the job of aligning all of the core functional strategies with the overall competitive strategy to achieve strategic fit. If this alignment is not achieved at the strategic level, conflicts between different functional goals arise. Such conflicts results in different functions targeting different customer priorities. Because processes and resources are structured to support functional goals, a conflict in functional goals leads to conflicts during execution.

What does a company need to do to achieve that all-important strategic fit between the supply chain and competitive strategies? A competitive strategy will specify, either explicitly or implicitly, one or more customer segments that a company hopes to satisfy. To achieve strategic fit, a company must ensure that its supply chain capabilities support its ability to satisfy targeted customer segments.

There are three basic steps to achieving this strategic fit: [Chopra et al., 2001]

1. Understanding the customer. First, a company must understand the customer needs for each targeted segment. These needs help the company define the desired cost and service requirements.

2. Understanding the supply chain. There are many types of supply chains, each of which is designed to perform different tasks well. A company must understand what its supply chain is designed to do well.

3. Achieving strategic fit. If any mismatch exists between what the supply chain does particularly well and the desired customer needs, the company will either need to restructure the supply chain to support the competitive strategy or alter its strategy.

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Framework for Strategic Decision Making in SCM Chapter 2

2.4 FRAMEWORK FOR SCM STRATEGIES

This frame framework provides a methodology that takes the strategies of the company until its implementation and measurement of the results; the main steps are the following ones and are related as we represented it in the figure 2.2

• Competitive Strategy definition

• SCM Strategy definition

• Identification of the productive approach (Manufacturing Strategy)

• SCM Processes

• Metrics determination

Framework for SCM Decision-Making

Competitive Strategy

Supply Chain Strategy

Supply Chain Processes

Strategic Decisions Operation Excellence

Product Innovation Mass Customization

1 Vertical Integration Horizontal Integration

Strategic Business Unit (SBU) Collaboration

Engineering to Order (ETO) Make to Order (MTO) Assembly to Order (ATO) Make to Stock (MTS)

Product Realization Process

Obtaining Customer Commitment Process Order Fulfillment Process

Customer Service Process

Figure 2.2 Framework for Decision-Making [Adapted from Molina, 2001]

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2.4.1 Competitive Strategy

A company's Competitive Strategy defines the set of customer needs that it seeks to satisfy through its producís and services. Competitive Strategy is the Strategy to for how to marshal and determínate the actions to support the mission, goals, and objectives. Generally includes and organization's explicit mission, goals and objectives, and the specific actions needed to achieve those goals and objectives.

2.4.1.1 Operation Excellence

Operation Excellence is perhaps the clearest of the three generic strategies. In it, a firm sets its goal to become the low-cost producer in its industry. The firm has a broad scope and serves many industry segments, and many even opérate in related industries The firm's breadth is important to its cost advantage. An OE producer must find and exploit all sources of cost advantage. OE producers typically sell a standard, or no-frills, product and place considerable emphasis on reaping scale or absolute cost advantages from all sources.

A cost leader must achieve parity or proximity in the bases of differentiation relative to its competitors to be an above-average performer, even though it relies on cost leadership for its Competitive advantage. Parity in the bases of differentiation allows a cost leader to transíate its cost advantage directly into higher profits than competitors. [Porter, 1985]

They can manufacture products with higher quality and functionally, at lower cost, quicker, and low levéis of defects can be tolerated; react faster, to enjoy economies of scale at lower production volumes, and to be inherently more efficient than their mass producer counterparts. By developing a sustainable cost advantage, the cost leader can offer products that are low in price and functionally.

[Cooperetal., 1999]

2.4.1.2 Product Innovation

Product Innovation processes have moved from functional sequential approaches to multifunctional approaches that include formal reviews for moving from one stage to the next. The responsibility for product innovation process is becoming diverse, with the number of business units ¡n a firm responsible for increasing and the number of innovations reporting options increasing. Best-practice

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firms measure more and expect more from product innovation programs and have a higher proportion of moderately innovative projects. On the other hand, these firms do not have higher proportions of new-to-the-world/new-to-the-firm projects or less innovative projects than other firms.

[Griffin, 1997]

Models have been developed, in which suppliers are included to realize product innovation.

Suppliers are more likely to become involved in product innovation early when the product is complex, systems or subsystems are supplied, critical Ítems or technologies are supplied, and a strategic alliance exists with the customer. Suppliers are more likely to be integrated later when the product is simpler, a single component is involved and less critical Ítems or technologies are involved. Summarízed positive impacts of supplier involvement ¡n product innovation as greater expertise, sharing of technological risk, ability to influence the supplier's research and development (R&D) efforts, and a better sharing of technological information. Negative impacts included a tendency to "lock into" the supplier and its technologies and a lack of incentive for the supplier to provide its best efforts. [Handfield, 1999]

When suppliers are involved in product innovation key issues are identified to new product success as: [McGinnis et al., 1999]

• The active management of supplier involvement

• Purchasing involvement from the concept stage of product innovation

• Top management commitment or a corporate culture that emphasizes time-competitiveness

When suppliers are not involved in product innovation, the key issue contributing to new product success was an organizational commitment to time-competitiveness. The key issues contributing to successful supplier integration in product innovation were different for manufacturing and non- manufacturing organizations.

Product innovation strategy develop a sustainable advantage ¡n product develop. Their producís have higher functionally but sell at higher prices. They develop unique producís or services thaí closely satisfy cusíomer's requirements. In essence, they isolaíe a secíion of main market and staíe,

"This is my íerriíory. l'm so good at what I do that atíempting to compele wilh me is poiníless".

[Cooperelal., 1999]

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2.4.1.3 Mass Customization (Customer Focus)

All companies that wish to maintain and increase their profitability must recognize the ¡mportance of outstanding customer service. To achieve such a goal companies are compelled to meet the unique and diverse needs of all individual customers within their industry's marketplace. However, as customers and their diverse needs grow, an absolute increase in costs and operational complexities will be incurred. To satisfy this almost insurmountable task, firms are summoning a paradigm shift in their production process to mass customization. [Gilmore et al., 1997]

This technique attempts to avoid such costs and complexities while providing a unique valué to their customers in a timely manner. Thus, mass customization is rampantly becoming an approach that is embraced throughout production operations all around the world. Unfortunately, companies with such eagerness are now beginning to discover that mass customization, too, can cause needless costs and complications. In their hastiness towards mass customization they failed to thoroughly examine and recognize what kind of customization their customer would valué before they divulged themselves in this new strategy.

In the mass-customized system the customer is placed at the beginning and the end of the valué chain. The ideal of mass customization shares the goals of developing, producing, marketing and delivering goods and services with the mass production system but, in addition tries to offer enough variety and customization so that nearly everyone finds exactly what they want.

Satisfying the customer's individual needs and wants unavoidably means proliferation of the product variety offered. For the valué chain, proliferating variety in order to satisfy most if not all customer desires fragments the marketplace. Greater variety must be achieved with greater flexibility.

To compete in the dynamic mass-customized environment, the process of development, production, marketing and delivery take on as great, or greater, importance than the product itself. This is because so much product variety potential the individual product may decrease in importance. The effect is a decoupling of the product and the process ufe cycle. The process ufe cycle outlasts the product life cycle. It is the process life cycle that is important because the process can be used again to produce new producís.

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2.4.2 Supply Chain Strategy

A supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the company, manufacture of the product or operation to provide the service, and distribution of the product to the customer, along with any follow-up service. From a valué chain perspective, supply chain strategy specifies what operations, distribution, and service will try to do particularly well. Additionally, in each company, strategies will be devised for finance, accounting, information technology, and human resources. [Chopra et al., 2001]

Figure 2.3 SCM Strategies [Molina, 2001]

2.4.2.1 Vertical Integration

These refer to the traditional linkages between firms in the supply chain such a retailers, distributors, manufacturers, and parts and material suppliers. These firms relate to one another in the ways that buyers and sellers do m all industries, and significant attention is directed toward making sure that these relationships help to achieve individual firm and supply chain objectives. Logistics service providers are involved on a day-to-day basis as they serve their customers in this traditional, vertical form relationship. [Coyle et al., 2002]

Most large chain store organizations link together a central unit with warehouse units (e.g., wholesale-distribution centers) and selling units (e.g., retail stores). The central unit contains the administrative offices, while the warehouses handle inbound shipments of goods and send outbound shipments to the individual retail stores. Buyíng may be a function of both the central unit and the warehouses, but selling and related operations are performed only in the sepárate retail units. Some chain store organizations even have their own manufacturing facilities, thus carrying vertical integration a step further.

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Also concerns physical and logical integration of business processes from product demand to product shipment, regardless of the organizational boundaries. This type of integration is usually dependent on the technology used (it is constrained by the volume of data exchange, selected data exchange formats, use of LAN, and WAN) and ¡s realized at a given organizational level (plant level, cell level, station level). Vertical integration mainly concerns the technological flow. [CLM, 2002]

2.4.2.2 Horizontal Integration

Concerns integration between the various management levéis of the enterprise, decision-making- integration, where a management level defines the set of constrains for its lower management levéis, which in turn send, feedback information to its upper management level and so on. Horizontal integration mainly concerns the decisión flow, orders sent or objectives sent from one management level to the lower level one, and feedback information or status reports from one management level to the upper one. [SCC, 2002]

With SBU's surging its necessary optimization of the resources used, in which is looking to sharing services between several SBU's of a same group. Usually joint services are shopping, information technology and distribution.

2.4.2.3 Collaboration

Collaboration is the integration of business processes of a given enterprise with business processes of other enterprise, or even sharing some parís of business processes by different cooperative enterprises. Is the basis of the extended enterprise concept. [Goldman et al., 1995]

Collaboration occurs when companies work together for mutual benefit. The need for effective relationships is obvious, since it is difficult to imagine very many supply chain improvements that

¡nvolve only one firm. Collaboration goes well beyond vague expressions of partnership and aligned interests. In means that companies leverage each other on an operational basis so that together they perform better than they would do separately. It creates a synergistic business environment in which the sum of the parts is greater than the whole. It is a business practice that requires:

• Parties involved to dynamically share and exchange information

• Benefits experience by parties to exceed benefits

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• All parties to modify their business practices

• All parties to conduct business in a new and visibly different way

• All parties to provide a mechanism and process for collaboration to occur.

There are three important types of collaboration: vertical, horizontal, and full. Descriptions of these are included here: [Coyle et al, 2002]

Vertical collaboration (VC): refers to collaboration typically among buyers and sellers in the SC. This refers to the traditional linkages between firms in the SC such as retailers, distributors, manufacturers, and parts and materials suppliers. Transaction between buyers and sellers can be automated, and efficiencies can be significantly improved. Companies can share plans and provide mutual visibility that causes that to change behavior. A contemporary example of vertical collaboration is collaborative planning, forecasting, and replenishment, an approach that helps buyers and sellers to better align supply and demand by directly sharing critical Information such as sales forecasts.

Horizontal Collaboration (HC): refers to a relationship that is buyer to buyer and/or seller to seller, and in some cases even between competitors. Essentially, this type of collaboration refers to business arrangements between firms that have parallel or cooperating positions in the SC process.

Horizontal collaboration can help find and elimínate hidden costs in the SC that everyone pays for by allowing joint product design, sourcing, manufacturing, and logistics.

Full Collaboration (FC): is the dynamic combination of both vertical and horizontal collaboration. Only with full collaboration does dramatic efficiency gains begin occur. With full collaboration, it is intended that benefits accrue to al members of the collaboration. The development of agreed-upon methods for sharing gains and losses is essential to the success of the collaboration. [Coyle et al., 2002]

2.4.2.4 Strategic Business Unit (SBU)

A Strategic business unit may be defined as "a business unit or división that is concerned with one or more very specific producís having a clearly defined basic market in common, and is run by a manager responsible for overseeing all functions, using a strategy, in opposition to one or more identifiable competitors". [Herrera, 2001]

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Corporations are often divided into group companies that serve a specific set of customers. These group companies frequently have different competitors, sepárate management teams, and their own profit and loss statements. In effect, they are distinct operating companies inside a larger organization. Business-unit strategy involves explicit choices about how to compete successfully within a given industry.

From this definition, the following characteristics emerge:

• A unique, clearly defined mission;

• Clearly identified competitors;

• A clearly defined market;

• Control of the unit's business functions.

2.4.3 Manufacturing Strategy

Manufacturing Strategy is a collective pattern of decisions that act upon the formulation and deployment of manufacturing resources. To be most effective, the production strategy should act in support of the overall strategic direction of the business and provide for competitive advantages [Harrison, 2001].

Manufacturing provides six outputs -cost, quality, performance, delivery, flexibility, and innovativeness [Miltenburg, 1995]. These six manufacturing outputs are defined in table 2.1.

Cost Quality Performance Delivery Flexibility Innovativeness

The cost of material, labor, overhead, and other resources used to produce a product.

The extent to which materials and operations conform to specifications customer expectations, and how tight of difficult the specifications and expectations are.

The product's features and the extent to which the features or design permit the product to do things that other product cannot do.

The time between order taking and delivery to the customer. How often are orders late, and how late are they when they are late?

The extent to which volumes of existing products can be increased or decreased to respond quickly to the needs of customers.

The ability to quickly introduce new products or make design changes to existing products.

Table 2.1 Manufacturing Outputs [Miltenburg, 1995]

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Cost. Each product that manufacturing produces has a cost; all things bei'ng equal, a low cost gives a low price and provides a better opportunity for profit than does a high cost. Product cost ¡s a straightforward concept, but it can be tricky to measure, especially when manufacturing has large overhead cost that need to be allocated. The more important cost is, relative to the other manufacturing outputs, the greater will be the investment in a manufacturing cost accounting system to track and measure it.

Quality and Performance. In manufacturing strategy, quality is associated with conformance to specifications and critical customer's expectations. Performance is associated with features of the product as they affect the product's ability to do what other producís cannot. While separating quality and performance into two manufacturing outputs may seem picky, the distinction is very important for manufacturers. Tools and technologies that provide high levéis of quality (such as statistical quality control and standardization) are often different from those that provide high levéis of performance (such as concurrent engineering and highly skilled workers).

Delivery. The delivery manufacturing outputs comprises delivery time and delivery time reliability.

Delivery time is the amount of time and manufacturer requires to supply a product to a customer.

Usually delivery times are well known and are used to make delivery promises to customers when they place their orders. Often, especially in busy times, manufacturing cannot meet delivery dates and customers are told that they will receive their orders late than promised. When this happens, delivery time reliability drops. Customer expectations for delivery time and delivery time reliability have increased dramatically in recent years as a consequence of the development of just-in-time.

Customers now expect to be supplied on time and in small lots.

Flexibility and Innovativeness. Flexibility and Innovativeness are often treated as a single manufacturing output by those outside manufacturing. Manufacturers must differentiate between the two; flexibility ¡s the ability to increase or decrease production of existing producís; innovativeness is the ability to produce new products. Differentiating between flexibility and innovativeness helps manufacturers design and manage production systems that will provide high levéis of whichever output ¡s more important to their customers.

For a basic understanding of manufacturing flexibility and for the needs of exploring the relationship between flexibility and its related environmental factors, a brief description of each type of flexibility ¡s expressed as follows: [Suri et al., 1986]

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Machine flexibility. refers to the various types of operations that the machine can perform without requiring a prohibitive effort ¡n switching from one operation and other (the ease of changing tools, adjusting machine settings, making repairs, changing numeric control programs, and so on).

Measurements:

• Number of different operations that a machine can perform without requiring more than a specified amount of effort.

• Effort in terms of time and/or cost required in switching from one operation to another.

• Valué added to raw materials by the machine

• Ratio of the total output and the idle cost of the machine for a given period.

• Number of tools or number of programs that the machine can use

• The extent of variations in key dimensional and metallurgical properties of the raw input stock the machine can handle

• Rate at which the machine becomes obsolete when a new product is introduced

Material handling flexibility: is its ability to move different part types efficiently for proper positioning and processing through the manufacturing facility it serves (the definition covers loading and unloading of parts, transporting them from machine to machine, and eventually storing them under varying conditions of the manufacturing facility.)

Measurements:

• Ratio of the number of paths that the system can support to the number of paths supported by the universal system (system that can link every machine to every other machine)

• number, diversity, and transportaron time of work pieces

Process flexibility: relates to the set of part types that the system can produce without major setups (the ability to change the order in which operations are done for each product).

Measurements:

• Number of part-types that can be simultaneously processed by the system.

• Volume of the set of part types that the systems can produce without major setups

Product flexibility: is the ease with which the part mix can be changed in order to manufacture or assemble new producís (the ability to change over to produce a different product).

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Measurements:

• Time or the cost needed to switch from one part mix to another

• Total incremental valué of new products that can be fabricated within the system for a defined cost of new fixtures, tools, and parts programs

• Number of new parts introduced per year

Routing flexibility. is the ability of a production system to manufacture a part using several alternative routes in the system (the ability to produce products on different machines in the event of a breakdown).

Measurement:

• Number of such potential routes and back-up machinery in case of breakdowns

• Number of possible ways in which a part type can be processed in the given system

• Ratio of existing number to possible number of links between machines in given system

Volume flexibility. is the ability of a system to opérate profitably at different throughput levéis (the ability to opérate machines profitably at different volumes).

Measurements:

• Range of volumes at which the system runs profitably

Expansión flexibility: refers to a system's capability to be modular and expandable (the ability to expand system of machines to créate more capacity).

Measurements:

• Time or cost required for the system's expansión to a given capacity

• How large the system can become

Program flexibility: is the ability of the system to run virtually untended for a long enough periods.

Measurements:

• Expected percentage uptime during the second and third shifts

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Framework for Strategic Decisión Making in SCM Chapter2

Operation flexibility. operation flexibility of a part refers to its ability to be produced in different ways (the ability to produce producís in different ways).

Measurements:

• Number of different operation sequences in which the part may be produced

Production flexibility: the universe of all products that the machines can produce without adding major capital equipment.

Measurements:

• Size of the universe of parts the system is capable of producing

Market flexibility: is the easiness with which the manufacturing system can adapt to a changing market environment (emphasizes the importance of market orientation in manufacturing).

Measurements:

• Efforts in terms of time and cost required to introduce a new product, to increase and decrease production volume by a specified amount, and to add a unit of capacity

• Shortage cost or the cost of delay in meeting the customer orders

Many ways of measuring the six manufacturing outputs have been developed; the Table 2.2 compiled a list of measures. These measures will be useful in the analysis of manufacturing strategy.

[Miltenburg, 1995]

Cost Unit product cost

Unit labor cost Unit material cost

Total manufacturing overhead cost

Inventory turnover (raw materials, WIP, finished goods)

Capital productivity

Capacity/machine utilization Materials yield

Direct labor productivity Indirect labor productivity

Quality Internal failure cost (scrap and rework, percentage defective o reworked)

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External failure cost (frequency of failure in the field) Quality of incoming material from suppliers

Warranty cost as a percentage of sales Rework cost as percentage of sales

Performance Number of standard features

Number of advanced features Product resale price

Number of engineering changes Mean time between failures

Delivery Quoted delivery time

Percentage of on-time deliveries Average lateness

Inventory accuracy

Master production schedule performance/stability Flexibility Number of producís ¡n the product line

Number of available options Mínimum order size

Average production lot size Length of frozen schedule

Number of Job classification in the factory

Average volume fluctuations that occur over a time period divided by the capacity limit

Number of parts processed by a group of machines to the total number processed by the factory

Number of setups

Variations in key dimensional and metallurgical properties that can be handled by the equipment Is it possible to produce parts on different machines Innovativeness Number of engineering change orders per year

Number of new producís introduced each year Lead íime ío design new producís

Level of R&D ¡nvesíment

Consístency on investment over íime

Table 2.2 Measures for the Manufacturing Oulputs [Miltenburg, 1995]

Some managers use the concepís of order winners and order qualifiers lo determine the relative

¡mportance of different performance dimensions. Order winners are performance dimensions that differentiaíe a company's producís and services from iís compelilors. Firms win íhe cusíomer's business by providing superior levéis of performance on order winners. Order qualifiers are performance dimensions on which cusíomers expect a mínimum level of performance. Superior performance on an order qualífier will not, by itself, give a company a competiíive advaníage. [Hill, 1994]

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Understanding what the relevant order qualifiers and order winners are helps operations and supply chain managers to formúlate strategy in two ways. First, it clarifies the issues surrounding decisions on trade-offs. Second, it helps managers to prioritize their efforts: "We must first meet the minimum requirements set by the marketplace (order qualifiers). After that, we must decide what performance dimensions we can emphasize to differentiate ourselves from the competition (order winners). In developing a manufacturing strategy, the identification of relevant order winning for different producís is a key step. Order winners and qualifiers can be classified as follow:

Cost

• Initial cost

• Life cycle cost

Quality

• Design quality

• Conformance quality

Service

• Delivery speed

• Delivery reliability

Flexibility

• New product flexibility

• Customization

• Product mix flexibility

• Production ramp-up flexibility

Manufacturing strategy defines the productive focus to support the strategies of the company. The manufacturing strategies are classified into four categories: [Rehg, 1994]

• ETO (Engineering to Order)

• MTO (Make to Order)

• ATO (Assemble to Order)

• MTS (Make to Stock)

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Framework for Strategic Decision Making in SCM Chapter 2

2.4.3.1 ETO (Engineering to Order)

Changes to standard products are offered to customers and only made to order. Lead times include the relevant elements of engineering design and all manufacturing. The ETO sector encompasses many types of company, designing and manufacturing a diverse range of products. Individual products are generally highly customized to meet individual customer requirements and are produced in low volume on an engineer, or make to order basis.

FOCUS CHARACTERISTICS METRICS

• High participation of the customer in the design of the product and the productive process.

• High approach to the necessities and requirements of the customer.

• Reduced number of products with high degree of variations

• High quality

• High degree of flexibility.

• Effective use of technology.

• High efficiency in the design, high degree of automatization and systems integration.

• Close contact with suppliers.

• Constant quality (certification).

• Trustworthiness of delivery.

• Minimization of sources of supply for greater control.

• Service and support to the customer.

• Level of automatization of critics processes.

• Quality control.

• Times of design and production.

• Certification degree of the process and products.

Figure 2.4 Engineering to Order (ETO) [Molina et al., 1999b]

2.4.3.2 MTO (Make to Order)

Concerns manufacturing a standard product (any customization is nominal and does not increase total lead times) only on receipt of a customer order or against an agreed schedule or call-off. In general the make to order company carries no finished goods inventory. It is likely that a larger number of possible production configurations could fulfill a customer order, and therefore accurately predicting or anticipating a particular customer order requirement is unlikely. In this environment customers expect to have to wait for order fulfillment which comprise a manufacturing lead time and, possibly, a design lead time.

DE LA CADENA DE SUMINISTRO

INSTITUTO TECNOLÓGICO Y DE ESTUDIOS SUPERIORES DE MONTERREY

CAMPUS MONTERREY

MARCO DE REFERENCIA PARA LA TOMA DE DECISIONES ESTRATEGICAS EN LA ADMINISTRACION

DE LA CADENA DE SUMINISTRO

T E S I S

PRESENT ADA COMO REQU1SITO PARCIAL PARA OBTENER EL GRADO ACADÉMICO DE:

MAESTRO EN CIENCIAS

ESPECIALIDAD EN SISTEMAS DE MANUFACTURA

PEDRO DANIEL LOPEZ RAYGOZA

MONTERREY, N. L. DICIEMBRE DE 2002

INSTITUTO TECNOLÓGICO Y DE ESTUDIOS SUPERIORES DE MONTERREY

DEDICATORIAS

AGRADECIMIENTOS

RESUMEN

CONTENTS

LIST OF FIGURES

LIST OF TABLES

LIST OF ABBREVIATIONS

LIST OF TABLES

LIST OF ABBREVIATIONS

CHAPTER 2. LITERATURE REVIEW