An Introduction to Supply Chain Management

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An Introduction to Supply Chain Management
S. Viswanathan W. Watthayu
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What is Supply Chain Management?

• Supply Chain Management (SCM) is concerned with
  three core aspects of a companys operations
• Material Supply
• Goods Production
• Product Delivery to Customers

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A more formal definition is

• Integrated Supply Chain Management is a
  processing-oriented, integrated approach to
  procuring, producing and delivery products and
  services to customers. It has a broad score that
  includes sub-suppliers, suppliers, internal
  operations, trade customers, retail customers,
  and end users. It covers the management of
  material, information and funds flows
• By Peter Metz Demystifying Supply Chain
  Management

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Another description of SCM is

• Effective SCM enables you to make informed
  decisions along the entire supply chain from
  acquiring raw materials to manufacturing products
  to distributing finished goods to the customers

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A familiar household example

• Of course, supply chain management ideas also
  occur in all walks of life and thus the basic
  concepts will be very familiar to the reader.
• As a trivial example, consider the problem of
  supplying bread and milk to a household

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There are many options available, for the above
task e.g.

• Have the items home delivered
• Buy the items at the corner store each day
• Pick them up at a service station when purchasing
  gasoline for the family car
• Purchase them in bulk every 2 or 3 days from a
  large supermarket
• Purchase via e-commerce over the Internet

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There are various competing issues that might be
considered

• Reliability of supply
• Freshness of the product
• Cost
• Convenience
• Capacity to combine this task with other
  functions
• Availability of diversity and variety in the
  products, etc.

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SCM is the topic of importance

• One can readily imagines that if one application
  applies the same kind of thinking to the
  manufacture of a sophisticate item, then the
  issues become considerably more complex but also
  potentially more important.
• Indeed, one can readily understand that making
  the decision could be of considerable commercial
  importance and, indeed, could sometimes make the
  difference between staying in business or loosing
  out to competitors
• Thus SCM is the topic of importance

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Costs?

• SCM is not a trivial matter. The costs of taking
  this issues seriously can be substantial. Hence,
  it is important to be able to make the right kind
  of decisions about the extent to which one
  embraces this technology.
• In this context, theses notes are intended as a
  preliminary guide to aid decision making.

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Route to SCM

• From the many literatures, we can identify three
  routes that one might follow to introduce SCM
  into a company. These are
• Via the optimization of the utilization of
  existing facilities
• Via the use of new technologies e.g. the Internet
  and e-commerce
• Via a major restructuring
• These are further explained on the next three
  slides.

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Optimization of Existing Resources
Optimization of the existing facilities
Little restructuring required
SCM
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Use of new computer and communication
technologies
New computer Technologies, Internet
Electronic and other Intermediaries e-commerce
May lead to the need for restructuring
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Inadequate or Old infrastructure
Major restructuring
New manufacturing Technologies such as agile
manufacturing Postponement, etc
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The Supply Chain Council

• A possible source of information on SCM is the
  supply chain council
• Supply Chain council Inc.
• 303 Freepport Road
• Pittsburgh, PA 15215
• http//www.supply-chain.org

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Characteristic of Poorly Performing Supply Chain

• Excess inventories
• Long cycle times
• Stockouts and product substitutions
• Inefficient plant scheduling
• Excess capacity
• LTL deliveries
• High transaction costs
• etc.

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The issue in Supply Chain Optimization

• Four core management processes

Plan
Source
Deliver
Make
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Stages in development of SCM

• Inter-relating Warehousing and Transportation
• Shorter order response times via faster warehouse
  handing and faster transportation lessens the
  length of forecast period and increase accuracy
  of forecast. Aided by improved data
  communications between different levels of
  warehouse (plant, regional distribution centers,
  locate distribution center).

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Stages in development of SCM (cont.)

• Logistics Stage
• Addition of manufacturing, procurement and order
  management functions. Aided by electronic data
  interchange, worldwide communications, and use of
  computers to store, retrieve and analyze data.

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Stages in development of SCM (cont.)

• Integrate SCM
• Add supplier and end customers. Utilizes
  electronic data, electronic funds transfer,
  computerized decision support systems
• Key driver Explosive development of computer and
  communications technology

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Success Stories

• Some claims made for the success of SCM
  principles are given below
• Inventory reduced by 50 percent
• Supply chain total cost share of revenue reduced
  20 percent
• 40 percent increase in on-time deliveries
• Cumulative cycle time reduced by 27 percent
• Revenues increased 17 percent
• Inventory turns up 2x while out-of-stock
  incidents down 9x
• 50 percent reduction in finished-good inventory
  by postponing package

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Key factors associated with Claimed successes

• Five key factors enabling these accomplishments
• An overriding, pervasive customer focus. At every
  stage in the supply chain, the ultimate
  customers needs are understood and forced into
  the decision making
• Advanced use of IT. Data and information flow
  readily to all parts of the supply chain.
  Computer-aided decision support systems use this
  complex information to enable better, faster
  decision that are quickly communicated throughout
  the supply chain

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Key factors (cont.)

• 3. Quantitatively based performance management.
  Measurements of multiple performance factors
  occur frequently at each stage in the supply
  chain. Time and cost are key measures, but others
  are used as appropriate to the specific supply
  chain. All measures relate to the ultimate supply
  chain goals.
• 4. Use of cross-functional teams. Teams of people
  from the interrelated functional operations
  working closely together can cut through the
  normal organizational barriers to find local and
  distributed improvements that benefit the overall
  supply chain performance

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Key factors (cont.)

• 5. Attention to human factors and organization
  dynamics. Use of the best human and organization,
  coordination, cooperation, measurement, reward
  techniques facilities, supply chain innovation
  and implementation. This level of attention is
  needed to offset the tendency of individual
  accountability and work-unit accountability to
  create barriers to supply chain cooperation.

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Static or Dynamic SCM

• SCM can be static or dynamic
• Static- i.e. based on steady state understanding
  of demand, cost, location etc., or
• Dynamic supply chain reconfiguration to adapt
  to changing conditions, e.g., fluctuations in
  cost of raw materials, customer demands,
  international exchange rates, etc.

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Innovative Supply Chain Strategies

• Effective use of Information Flows
• EDI
• Bar Coding
• Shipment Container Making
• Strategic Supply Chain partnerships to share
  information.
• Advanced manufacturing technology and order
  processing systems to reduce order cycle time-
  improve forecasting

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Innovative Supply chain Strategies (cont.)

• Vendor management inventory
• Continuous Replenishment
• Quick Response (QR) System
• Efficient Consumer Response (ECR)
• Category Management
• Consolidation
• Cross-Docking
• Postponement

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Principle of Postponement

• The time of shipment and location of final
  product processing in the distribution of a
  product should be delayed until a customer order
  is received.
• Time Postponement Avoid shipping goods in
  anticipation that demand will occur. Time based
  logistics.
• Form Postponement Avoid creating the final form
  of the product until demand occurs. Delay
  differentiate or manufacturing postponement

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Postponement

• Postponement as a concept has existed since the
  1950s
• It is only the recent past that it has gained lot
  of attention due to its application in practice
• Postponement enables reducing of inventories

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Consolidation

• Enables saving in unit transportation costs by
  transportation bulk quantities
• Consolidate small orders into large shipments,
  e.g. Federal Express
• Hub and Spoke Networks
• Many logistics Hub in the world acts as
  consolidation points

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Cross docking

• Cross-docking is an advanced concept in
  warehouse that combines the benefit of
  consolidation, without incurring the cost of
  excess inventories
• Product move right from the inbound to the
  outbound dock without every staying in the
  warehouse
• Walmart practices cross-docking very effectively

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Key enables in Supply Chain innovations

• Standard Product ID Bar codes
• e.g item, case, etc.
• Electronic Data Interchange (EDI)
• Electronic Commerce The Web, private networks
• Information systems Enterprise Resource
  Planning(ERP), advanced planning and scheduling
  software, data mining

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SCM Software

• A report written in 1998 (Eric Allen, University
  of Texan at Austin) predicts that the demand for
  SCM software will have reached 3 billion by 2000
• SCM software is aimed at
• reducing distribution cost
• maximizing order deliveries
• maintaining inventory balance
• maintaining customer and supplier satisfaction

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Suppliers of SCM software include (based on 1998
data)

• I2 - (founded in 1988, now with 6000 employees,
  sales of 184M in 1997)
• Manugistics (founded in 1969 originally called
  Scientific Time Sharing Corporation, sales level
  of 94M in 1997)
• Baan ( founded 1978, 684M in 1988)
• SAP (founded Germany 1972 by 4 former IBM
  employees)
• People Soft (founded in 1987)

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• Note that the price to implement a full SCM
  solution can be large (up to a million dollars)
  However, lower cost solutions are , of course,
  also available.
• Next we focus on a case study in SCM solution and
  examine possible SCM issues.

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Case study-Wal-mart

• Leading discount retailer
• Supply chain Structure Hub-and-Spoke arrangement
  of one distribution center surrounded by several
  stores.
• Cross Docking strategy
• Very efficient Logistics Management
• Every Day Low price
• Vendor management inventory

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Case Study Dell Computer

• Use electronic commerce/Telemarketing for sales,
  marketing, ordering and billing
• Suppliers located within 15 minutes of plant in
  Round Rock, Texas
• Cycle time of about a day (not counting delivery
  time)
• Inventory equivalent to 13 days of sales (versus
  25 days for Compaq)

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Dell-computer (cont.)

• Can beat competitor s prices by 10-15
• Reduced number of suppliers from 204 in 1992 to
  47 in 1997
• Orders parts Just-In-Time ( when order is
  received)
• Parts are 60 days newer that competitors
• Rapid price decreases save 6 on parts

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Dell Computer (cont.)

• Converts sales into cash in less than 24 hours
  through use of credit cards and electronic
  payment
• Compaq (using dealers) 35 days
• Gateway 16.4 days
• In 1996, revenue jumped 47 to 7.8B, and
  profiles jumped 91 to 518M. A big favorite in
  the stock market