Introduction to Supply Chain Management

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Introduction to Supply Chain Management
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Customers, demand centers sinks
Field Warehouses stocking points
Sources plants vendors ports
Regional Warehouses stocking points
Supply
Inventory warehousing costs
Production/ purchase costs
Transportation costs
Transportation costs
Inventory warehousing costs
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What is a Supply Chain?
Customer wants detergent and goes to Jewel
Jewel Supermarket
Jewel or third party DC
PG or other manufacturer
Plastic Producer
Tenneco Packaging
Chemical manufacturer (e.g. Oil Company)
Chemical manufacturer (e.g. Oil Company)
Paper Manufacturer
Timber Industry
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What Is A Supply Chain?

• The system of suppliers, manufacturers,
  transportation, distributors, and vendors that
  exists to transform raw materials to final
  products and supply those products to customers.
• That portion of the supply chain which comes
  after the manufacturing process is sometimes
  known as the distribution network.

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What Is the Goal of Supply Chain Management?

• Supply chain management is concerned with the
  efficient integration of suppliers, factories,
  warehouses and stores so that merchandise is
  produced and distributed
• In the right quantities
• To the right locations
• At the right time
• In order to
• Minimize total system cost
• Satisfy customer service requirements

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Strategies for SCM

• All of the advanced strategies, techniques,
• and approaches for Supply Chain
• Management focus on
• Global Optimization
• Managing Uncertainty

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Tools and Strategies for Optimization

• Decision Support Systems
• Inventory Control
• Network Design
• Design for Logistics
• Cross Docking

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Global Optimization

• What is it?
• Why is it different/better than local
  optimization?
• What are conflicting supply chain objectives?
• What tools and approaches help with global
  optimization?

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Sequential Optimization vs. Global Optimization
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Why is Global Optimization Hard?

• The supply chain is complex
• Different facilities have conflicting objectives
• The supply chain is a dynamic system
• The power structure changes
• The system varies over time

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Conflicting Objectives in the Supply Chain

• 1. Purchasing
• Stable volume requirements
• Flexible delivery time
• Little variation in mix
• Large quantities
• 2. Manufacturing
• Long run production
• High quality
• High productivity
• Low production cost

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Conflicting Objectives in the Supply Chain

• 3. Warehousing
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
• 4. Customers
• Short order lead time
• High in stock
• Enormous variety of products
• Low prices

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Uncertainty

• What is variation?
• What is randomness?
• What tools and approaches help us to deal with
  these issues?

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Cant Forecasting Help?

• Forecasting is always wrong
• The longer the forecast horizon the worse the
  forecast
• End item forecasts are even more wrong

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Why Is Uncertainty Hard to Deal With?

• Matching supply and demand is difficult.
• Forecasting doesnt solve the problem.
• Inventory and back-order levels typically
  fluctuate widely across the supply chain.
• Demand is not the only source of uncertainty
• Lead times
• Yields
• Transportation times
• Natural Disasters
• Component Availability

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Supply Chain Variability
Volumes
Time
Source Tom Mc Guffry, Electronic Commerce and
Value Chain Management, 1998
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What Management Gets...
Volumes
Time
Source Tom Mc Guffry, Electronic Commerce and
Value Chain Management, 1998
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What Management Wants
Volumes
Time
Source Tom Mc Guffry, Electronic Commerce and
Value Chain Management, 1998
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Dealing with Uncertainty

• Pull Systems
• Risk Pooling
• Centralization
• Postponement
• Strategic Alliances
• Collaborative Forecasting

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Logistics in the Manufacturing Firm

• Profit 4
• Logistics Cost 21
• Marketing Cost 27
• Manufacturing Cost 48

Profit
Logistics Cost
Marketing Cost
Manufacturing Cost
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Supply Chain The Magnitude

• Compaq computer estimates it lost 500 million to
  1 billion in sales in 1995 because its laptops
  and desktops were not available when and where
  customers were ready to buy them.
• Boeing aircraft, one of America's leading capital
  goods producers, was forced to announce write
  downs of 2.6 billion in October 1997, due to
  Raw material shortages, internal and supplier
  parts shortages.

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Supply Chain The Potential

• Procter Gamble estimates that it saved retail
  customers 65 million through logistics gains
  over the past 18 months.According to PG, the
  essence of its approach lies in manufacturers and
  suppliers working closely together . jointly
  creating business plans to eliminate the source
  of wasteful practices across the entire supply
  chain. (Journal of business strategy, Oct./Nov.
  1997)

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Supply Chainthe Potential

• In 10 years, Wal-Mart transformed itself by
  changing its logistics system. It has the highest
  sales per square foot, inventory turnover and
  operating profit of any discount retailer.
• Dell Computer has outperformed the competition in
  terms of shareholder value growth over the eight
  years period, 1988-1996, by over 3,000 (see
  Anderson and Lee, 1999) using
• Direct business model
• Build-to-order strategy.

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Supply Chain The Complexity

• National Semiconductors
• Production
• Produces chips in six different locations four
  in the US, one in Britain and one in Israel
• Chips are shipped to seven assembly locations in
  Southeast Asia.
• Distribution
• The final product is shipped to hundreds of
  facilities all over the world
• 20,000 different routes
• 12 different airlines are involved
• 95 of the products are delivered within 45 days
• 5 are delivered within 90 days.

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Whats New?

• Global competition
• Shorter product life cycle
• New, low-cost distribution channels
• More powerful well-informed customers
• Internet and E-Business strategies

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New Concepts

• Push-Pull strategies
• Direct-to-Consumer
• Strategic alliances
• Manufacturing postponement
• Dynamic Pricing
• E-Procurement

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Process View of a Supply Chain

• Cycle view processes in a supply chain are
  divided into a series of cycles, each performed
  at the interfaces between two successive supply
  chain stages
• Push/pull view processes in a supply chain are
  divided into two categories depending on whether
  they are executed in response to a customer order
  (pull) or in anticipation of a customer order
  (push)

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Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
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Cycle View of a Supply Chain

• Each cycle occurs at the interface between two
  successive stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• Cycle view clearly defines processes involved and
  the owners of each process. Specifies the roles
  and responsibilities of each member and the
  desired outcome of each process.

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Push/Pull View of Supply Chains
Procurement,
Customer Order
Manufacturing and
Cycle
Replenishment cycles
PUSH PROCESSES
PULL PROCESSES
Customer
Order Arrives
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Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two
  categories depending on the timing of their
  execution relative to customer demand
• Pull execution is initiated in response to a
  customer order (reactive)
• Push execution is initiated in anticipation of
  customer orders (speculative)
• Push/pull boundary separates push processes from
  pull processes

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Supply Chain Performance Achieving
Strategic Fit and Scope
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The Value Chain Linking Supply Chain and
Business Strategy
Business Strategy
New Product Strategy
Marketing Strategy
Supply Chain Strategy
New Product Development
Marketing and Sales
Operations
Distribution
Service
Finance, Accounting, Information Technology,
Human Resources
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Understanding the Supply Chain
Cost-Responsiveness Efficient Frontier
Responsiveness
High
Low
Cost
High
Low
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Demand Characteristics

• Functional Innovative
• Low demand variability High
• Easy forecasting Difficult
• Long life cycle Short
• Low inventory cost High
• Low margins High
• Low product variety High
• Low stockout cost High
• Low obsolescence High

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Responsiveness Spectrum
Highly efficient
Highly responsive
Somewhat efficient
Somewhat responsive
Integrated steel mill
Dell
Hanes apparel
Most automotive production
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Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
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Comparison of Efficient and Responsive Supply
Chains
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense of greater cost Aggressively reduce even if costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost modes Greater reliance on responsive (fast) modes
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Supply Chain Drivers and Obstacles
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Drivers of Supply Chain Performance

• Facilities
• places where inventory is stored, assembled, or
  fabricated
• production sites and storage sites
• Inventory
• raw materials, WIP, finished goods within a
  supply chain
• inventory policies
• Transportation
• moving inventory from point to point in a supply
  chain
• combinations of transportation modes and routes
• Information
• data and analysis regarding inventory,
  transportation, facilities throughout the supply
  chain
• potentially the biggest driver of supply chain
  performance

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A Framework for Structuring Drivers
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Information Role inthe Supply Chain

• The connection between the various stages in the
  supply chain allows coordination between stages
• Crucial to daily operation of each stage in a
  supply chain e.g., production scheduling,
  inventory levels

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Components of Information Decisions

• Push (MRP) versus pull (demand information
  transmitted quickly throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
• EDI
• Internet
• ERP systems
• Supply Chain Management software
• Overall trade-off Responsiveness versus
  efficiency

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Considerations forSupply Chain Drivers
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Obstacles to Achieving Strategic Fit

• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies

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Major Obstacles to Achieving Fit

• Multiple owners / incentives in a supply chain
• Increasing product variety / shrinking life
  cycles / customer fragmentation

Local optimization and lack of global fit
Increasing implied uncertainty
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Summary

• What are the major drivers of supply chain
  performance?
• What is the role of each driver in creating
  strategic fit between supply chain strategy and
  competitive strategy (or between implied demand
  uncertainty and supply chain responsiveness)?
• What are the major obstacles to achieving
  strategic fit?
• In the remainder of the course, we will learn how
  to make decisions with respect to these drivers
  in order to achieve strategic fit and surmount
  these obstacles

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Step 1 Understanding the Customer and Supply
Chain Uncertainty

• Identify the needs of the customer segment being
  served
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product

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Step 1 Understanding the Customer and Supply
Chain Uncertainty

• Overall attribute of customer demand
• Demand uncertainty uncertainty of customer
  demand for a product
• Implied demand uncertainty resulting uncertainty
  for the supply chain given the portion of the
  demand the supply chain must handle and
  attributes the customer desires

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Step 1 Understanding the Customer and Supply
Chain Uncertainty

• Implied demand uncertainty also related to
  customer needs and product attributes
• First step to strategic fit is to understand
  customers by mapping their demand on the implied
  uncertainty spectrum

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Impact of Customer Needs on Implied Demand
Uncertainty
Customer Need Causes implied demand uncertainty to increase because
Range of quantity increases Wider range of quantity implies greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required increases Demand per product becomes more disaggregated
Number of channels increases Total customer demand is now disaggregated over more channels
Rate of innovation increases New products tend to have more uncertain demand
Required service level increases Firm now has to handle unusual surges in demand
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Correlation Between Implied Demand Uncertainty
and Other Attributes
Attribute Low Implied Uncertainty High Implied Uncertainty
Product margin Low High
Avg. forecast error 10 40-100
Avg. stockout rate 1-2 10-40
Avg. forced season-end markdown 0 10-25
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Step 2 Understanding the Supply Chain

• How does the firm best meet demand?
• Dimension describing the supply chain is supply
  chain responsiveness
• Supply chain responsiveness -- ability to
• respond to wide ranges of quantities demanded
• meet short lead times
• handle a large variety of products
• build highly innovative products
• meet a very high service level

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Step 2 Understanding the Supply Chain

• There is a cost to achieving responsiveness
• Supply chain efficiency cost of making and
  delivering the product to the customer
• Increasing responsiveness results in higher costs
  that lower efficiency
• strategic fit is to map the supply chain on the
  responsiveness spectrum

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Step 3 Achieving Strategic Fit

• Step is to ensure that what the supply chain does
  well is consistent with target customers needs
• Examples Dell, Barilla