Wednesday, June 17, 2009

Supply Chain Management

Supply Chain Diagram

Suppliers--->Costco Depot--->Warehouses--->Customers


It is beneficial for Costco that high demand items such as toilet paper or diapers be in stock and on the shelves. For the supplier of Huggies brand diapers, Kimberly-Clark, Costco keeps a two week inventory and is able to replenish its stock efficiently. The lead time (time taken from when an order is placed to when the Costco truck pulls up at a warehouse) is about one week. Suppliers affect on-time delivery and fill rates. If they do not provide the components then needed on time, then the inventory cannot be maintained or the order delivered on time.

Quality- can be measured in a number of ways. Whether it is by the performance of the product or service,conformance to specifications or customer satisfaction. Costco offers high quality products at affordable prices. It backs up its products with an unbeatable return policy. Costco has in place a quality assurance program and works with its suppliers to produce products that meet the needs of the customers as well as achieve customer satisfaction.

Time- can be measured not only for an individual company but also for the entire supply chain.
It is important to consider the time it takes to get paid for a product once it is sold. We can do this by using the cash to cash cycle time.
Cash to cash cycle time = Days in inventory+ Days in accounts receivable - Days in accounts payable.
IE- For Toilet paper:
Cash to cash cycle time= 2 weeks+days in accounts receivable - days in accounts receivable
Research shows that by decreasing the cash- to - cash time improves a firms (Costco) profitability.

There are costs all along the supply chain. From an operations point of view , it generally refers to the unit cost of the product or service. Unit cost is defined as the total manufacturing cost, including materials, labor and overhead divided by the number of units produced. There is cost involved in:sourcing products from suppliers ,shipping products from suppliers to Costco depots, distributing products to warehouses and storing products in inventory.
These are just some of the costs in the supply chain.
Reducing costs in the supply chain improves the profitability of Costco and influences the kinds of products and prices which they can offer their customers.

Ways to reduces cost along a company's supply chain:
1. Allowing suppliers to manage inventory of their own products at Costco. This is what is known as a vendor managed inventory. The supplier is responsible for maintaining inventory levels and hiring staff to do this. This reduces Costco's labor cost.

2. Costco also practices a new technique called "cross docking" which means most of Costco's inventory is kept in distribution centers, while the remaining goods (such as items to be consumed) are delivered directly to Costco stores.

Supply Chain Management at Costco

Costco uses vender managed inventory as previously mentioned. They use ConnectionHub's Drop-Ship Master application suite, which allows them to rapidly integrate new suppliers into their existing system. This enables rapid orders based on Costco requirements. This allows Costco to maintain efficient supply chain management without taking on any new inventory or risk through orders. ConnectionHub provides Costco with a single point of integration in which it can contact and interact with its suppliers directly and with ease.

As discussed in class earlier in the summer course, Costco can create an wireless tags on each pallet of supplies that will be able to be read by its distribution centers and automatically add those goods to inventory. This would not only decrease time spent delivering goods, but it would streamline inventoring all of the items delivered.

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