Class 1 Module1

7/28/2019 Class 1 Module1

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Supply Chain Management

Understanding the Supply Chain


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Supply Chain

Customer

Information

Product

Funds

All stages involved, directly or indirectly, in fulfilling a

customer request


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The Objective of a Supply Chain

Maximize overall value created

Supply chain value: difference between what the final

product is worth to the customerand the effort thesupply chain expends in filling the customers request

Value is correlated to supply chain profitability(difference between revenue generated from the

customer and the overall cost across the supply chain)


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The Objective of a Supply Chain

Supply chain management is the management of

f lows between and among supply chain stages to

maximize total supply chain profi tabil i ty


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Supply Chain Strategy or Design

Decisions about the structure of the supply chain and

what processes each stage will perform (long-term

and expensive to reverse)

Strategic supply chain decisions

Locations and capacities of facilities

Products to be made or stored at various locations Modes of transportation

Information systems


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Supply Chain Planning

Definition of a set of policies that govern short-term

operations

Fixed by the supply configuration from previousphase

Starts with a forecast of demand in the coming year


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Supply Chain Planning

Planning decisions:

Which markets will be supplied from which locations

Planned buildup of inventories Subcontracting, backup locations

Inventory policies

Timing and size of market promotions


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Supply Chain Operation

Time horizon is weekly or daily

Decisions regarding individual customer orders

Goal is to implement the operating policies as

effectively as possible

Much less uncertainty (short time horizon)


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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 Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier


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Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer Order

Cycle

Customer

Order Arrives

PUSH PROCESSES PULL PROCESSES


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The Value Chain: Linking Supply

Chain and Business Strategy

New

ProductDevelopment

Marketing

andSales

Operations Distribution Service

F inance, Accounting, Information Technology, Human Resources

Business Strategy

New Product

StrategyMarketing

Strategy Supply Chain Strategy


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Achieving Strategic Fit

Understanding the Customer

Lot size

Response time

Service level Product variety

Price

Innovation

ImpliedDemand

Uncertainty


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Levels of Implied Demand

Uncertainty

Low High

Price Responsiveness

Customer Need

Implied Demand Uncertainty

DetergentLong lead time steel

Purely functional products

High Fashion

Entirely new products


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Understanding the Supply Chain: Cost-

Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost


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Responsiveness Spectrum

I ntegrated

steel mill

Dell

Highly

efficient

Highly

responsive

Somewhat

efficient

Somewhat

responsive

Hanes

apparel

Most

automotive

production


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Achieving Strategic Fit Shown on the

Uncertainty/Responsiveness Map

Implied

uncertainty

spectrum

Responsivesupply chain

Efficient

supply chain

Certain

demand

Uncertain

demand

Responsivenessspectrum


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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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Some Definitions

Supply Chain Management encompasses every effort involved inproducing and delivering a final product or service, from thesuppliers supplier to the customers customer. Supply ChainManagement includes managing supply and demand, sourcing

raw materials and parts, manufacturing and assembly,warehousing and inventory tracking, order entry and ordermanagement, distribution across all channels, and delivery tothe customer.

The Supply Chain Council, U.S.A.


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Some More Definitions

Supply Chain Management deals with the management of materials,

information, and financial flows in a network consisting of suppliers,

manufacturers, distributors and customers.

Stanford Supply Chain Forum

Logistics involves managing the flow of items, information, cash and ideasthrough the coordination of supply chain processes and through the strategic

addition of place, period and pattern values.

MIT Center for Transportation and Logistics


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Some More Definitions

Supply Chain Management is primarily 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 and at the right time, and so

as to minimize total system cost subject to satisfying service requirements.

Simchi-Levi

Call it distribution or logistics or supply chain management. By whatever name, it is the

sinuous, gritty, and cumbersome process by which companies move, materials,

parts, and products to customers.

Fortune (1994)


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Key Observations

Integrated activity:

*Among functions such as logistics, manufacturing, distribution,design/engineering, marketing, finance,etc.

* Multiple organizations,i.e., suppliers, customers& 3 PL providers

* Coordination of conflicting goals, metrics, etc.

Responsible for multiple flows:

* Information (orders, status, contracts)

* Physical (finished goods, raw material, w.i.p.)

* Financial (payment, credits, etc.)


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Key Observations (continued)

Most analysis involves trade-offs* Across different entities

* Across metrics: Cost, Service, Time, Risk, etc.

Each interface in the supply chain represents

* Movement of goods* Information flows

* Transfer of title

* Purchase and sale


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In the end, all business comes down to

Supply Chain vs. Supply Chain

Robert Rodin, CEO, Marshall Industries

Japanese Manufacturing Industry owes its Competitive Advantage and Strength to

itsSub-Contracting Structure.Ministry of International Trade and Industry, Japan (1992)

Manufacturing now competes less on product and qualitywhich are oftencomparableand more on inventory turns and speed to market.

John Kasarda, Forbes, 1999


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Philosophy of SCM

The entire supply chain is a single, integrated entity.

The cost, quality and delivery requirements of the customer areobjectives shared by every company in the chain.

Inventory is the last resort for resolving supply and demandimbalances.


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Efficiency: Basis of

Production Management

Efficiency leads to lower costs

Lower cost implies

Lower Price => Greater demand => Better market growth =>Higher profits => Product/ Process development => Better

market share 1980s and 1990s: Era of achieving excellence at the firm level

(JIT, TQM, TPM, BPR, ERP, etc)

2000s: Era of achieving excellence at the value chain level

(SCM, CRM, E-Commerce, etc.)


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Evolution of SCM

Stage 1: Vendor Purchase Production -

Distribution Retailer

Stage 2: Materials Management -

Logistics Management

Stage 3: Supply Chain Management


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Why is SCM Important?

Strategic Advantage It Can Drive Strategy

* Manufacturing is becoming more efficient

* SCM offers opportunity for differentiation (Dell) or cost reduction (Wal-

Mart or Big Bazaar)

GlobalizationIt Covers The World

* Requires greater coordination of production and distribution

* Increased risk of supply chain interruption

* Increases need for robust and flexible supply chains


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Why is SCM Important?(continued)

At the company level, supply chain management impacts

* COSTFor many products, 20% to 40% of total

product costs are controllable logistics costs.

* SERVICEFor many products, performance factors

such as inventory availability and speed of delivery arecritical to customer satisfaction.


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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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Decision Phases in

a Supply Chain

Supply chain strategy or design

Supply chain planning

Supply chain operation


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Three Components

1. Insourcing/OutSourcing

(The Make/Buy o r Vertical Integration Decisio n)

2. Partner Selection

(Choice of su ppl iers and partners for the chain)

3. The Contractual Relationship

(Arm 's length, joint v enture, long -term contract,

str ategic all iance, equity partic ipation , etc.)


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LESSONS IN

SUPPLY CHAIN DESIGN

1. KNOW YOUR LOCATION IN THE

VALUE CHAIN.

2. UNDERSTAND THE DYNAMICS OF

VALUE CHAIN FLUCTUATIONS.3. THINK CAREFULLY ABOUT THE ROLE OF

VERTICAL COLLABORA- -TIVE RELATIONSHIPS.


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Dell Computers supply chain

Customer

Web page

Assembly plant

All of Dells suppliers and their suppliers Dell builds to order: customer order initiates

manufacturing at Dell

Dell does not have a retailer, wholesaler, ordistributor in its supply chain

ypes o n egra on


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ypes o n egra onof the Supply Chain

Geographical Integration

*From local to world-wide logistics

Functional Integration

* From Function-dominated logistics to

Flow-dominated logistics

Inter-Firm Integration

* From a Sector-based Logistics to Inter-sector Logistics


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Supply Chain Integration is Difficult for two main

reasons

Different facilities in the supply chain may have different,conflicting objectives

* For instance, the suppliers are in direct conflict with the manufacturers

desire for flexibility.

The supply chain is a dynamic system that evolvesover time

* Not only do demand and supplier capabilities change over time, butsupply chain relationships also evolve over time.


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Supply Chain: The Magnitude

In 1998, American companies spent $898 billion in

supply-related activities (or 10.6% of Gross Domestic

Product).

Transportation 58%

Inventory 38%

Management 4%

Third party logistics services grew in 1998 by 15% tonearly $40 billion


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Supply Chain: The Magnitude (continued)

SOME ESTIMATES FOR INDIA

* Logistics Spend IN Rs. 2,40,000 crores(approx. US $ 50 Billion)

* Share of GDP . 12-13 %

* Major Elements are ( Percentage of Total)* Transportation 35

* Inventories 25

* Packaging 11

* Handling & Warehousing .. 9

* Others & Losses 14


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Supply Chain:The Magnitude (continued)

It is estimated that the grocery industry in USA could save

$30 billion (10% of operating cost) by using effective

logistics strategies.

A typical box of cereal spends 104 days getting from factory to

supermarket.

A typical new car spends 15 days traveling from the factory to the

dealership.


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Supply Chain: The Magnitude (continued)

Compaq computer estimates it lost $500 million to $1 billion in sales in1995 because its laptops and desktops were not available when and wherecustomers were ready to buy them.

Boeing Aircraft, one of Americas leading capital goods producers, wasforced to announce write-downs of $2.6 billion in October 1997.The reason? Raw material shortages, internal and supplier partsshortages. (Wall Street Journal, Oct. 23, 1997)


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Supply Chain: The Potential

In 25 years, NDDB has enabled India to become the largest producer ofmilk by implementing a logistics and supply chain system that haseliminated several intermediaries, thereby leading to a much higherremunerative price (yield) for producers and lower price for consumers.

As described in the FORBES magazine, the Dabbawalas of Mumbai has

achieved an extremely high level of reliability and precision (SIX SIGMAlevel in QA parlance) in delivering to their customers the productsearmarked for them.


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Procter & Gamble estimates that it saved retail customers $65 millionthrough logistics gains over the past 18 months.

According to P&G, the essence of its approach lies in manufacturersand suppliers working closely together. jointly creating business

plans to eliminate the source of wasteful practices across the entiresupply chain.(Journal of Business Strategy, Oct./Nov. 1997)


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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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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.


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Complexities Involved in

Supply Chain Management

The supply chain is a complex network of facilities andorganizations with different, conflicting objectives

Matching supply and demand is a major challenge

System variations over time are also an important consideration

Many supply chain problems are new and there is no clearunderstanding of all the issues involved

S l Ch i


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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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Supply Chain Challenges

Achieving Global Optimization

Conflicting Objectives

Complex network of facilities

System Variations over time

S ti l O ti i ti


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Procurement

Planning

Manufacturing

Planning

Distribution

PlanningDemand

Planning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement

Planning

Manufacturing

Planning

Distribution

PlanningDemand

Planning

Global Optimization

Sequential Optimization vs.

Global Optimization

Source: Duncan McFarlane


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Supply Chain Challenges

Achieving Global Optimization

Conflicting Objectives

Complex network of facilities

System Variations over time Managing Uncertainty

Matching Supply and Demand

Demand is not the only source of uncertainty


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Managing Uncertainty

1. Point forecasts are invariably wrong

Plan for forecast rangeuse flexible contracts to go

up/down.2. Aggregate forecasts are more accurate

Aggregate the forecastpostponement/risk pooling


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Managing Uncertainty (contd)

3. Longer term forecasts are less accurate

Shorten forecasting horizonsmultiple orders; early

detection4. In many cases, somebody else knows what is going

to happen

Collaborate


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Whats New in SCM?

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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Levels of implied demand uncertainty

Low High

Price ResponsivenessCustomer Need

Implied Demand Uncertainty

Detergent

Long lead time steel

High Fashion

Emergency steel


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Understanding the Supply Chain: Cost-Responsiveness

Efficient Frontier

High Low

Low

High

Responsiveness

Cost


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Achieving Strategic Fit

Implied

uncertainty

spectrum

Responsive

supply chain

Efficient

supply chain

Certain

demand

Uncertain

demand

Responsivenessspectrum


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Key Concepts

Design, operate, and control the physical and information flowsas though the channel were one seamless corporate entity.

Let the activities (and costs) migrate across corporateboundaries to where they make the most sense.

Rely on the benefits of channel integration to replace thebenefits of open market forces.

Share the risks and the rewards between players.


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New Concepts

Push-Pull strategies

Direct-to-Consumer

Strategic alliances

Manufacturing postponement

Dynamic Pricing

E-Procurement

Dealing with Product Variety:


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Dealing with Product Variety:

Mass Customization

Mass

Customization

High

HighLow

Low

Long

Short

LeadTime

Fragmentation of Markets and


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Fragmentation of Markets and

Product Variety

Are the requirementsof all market segments served

identical?

Are the characteristicsof all products identical? Can a single supply chain structure be used for all

products / customers? No! A single supply chain

will fail different customers on efficiency orresponsiveness or both.


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Tailored Logistics

Each Logistically Distinct Business (LDB) will have

distinct requirements in terms of

Inventory

Transportation

Facility

Information

pp y ng e ramewort


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to e-commerce:

What is e-commerce?

Commerce transacted over the Internet

Is product information displayed on the Internet?

Is negotiation over the Internet?

Is the order placed over the Internet? Is the order tracked over the Internet?

Is the order fulfilled over the Internet?

Is payment transacted over the Internet?

Existing Channels


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Existing Channels

for Commerce

Product information

Physical stores, EDI, catalogs, face to face,

Negotiation

Face to face, phone, fax, sealed bids, Order placement

Physical store, EDI, phone, fax, face to face,

Order tracking

EDI, phone, fax,

Order fulfillment

Customer pick up, physical delivery

Revenue Impact of


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Revenue Impact of

E-Commerce

Length of supply chain

Product information

Time to market

Negotiating prices and contract terms

Order placement and tracking

Order fulfillment

Payment


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Cost Impact of E-Commerce

Facility costs

Site and processing cost

Inventory costs

Cycle, Safety, Seasonal inventory Transportation costs

Inbound and outbound costs

Information sharing

Coordination


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A Plethora of Approaches

Just in Time Inventory Vendor Managed Inventory

Quick Response

Collaborative Planning, Forecasting and Replenishment

Cross-docking / Flow through Centres

Outsourcing / 3 PLs

Activity Based Costing

Internet / EDI

Bar-Coding / RFID

Build to Order

A Pl th f A h


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A Plethora of Approaches(continued)

Partnerships / Alliances

Auctions / Exchanges

Postponement Strategies

SC Software

SC Event Management Merge-In-Transit

Collaborative Transportation Management

CashtoCash Metrics


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Framework for analysis

Model Based Approach* Use fundamental models to gain insights

* Analytical, though not necessarily Operations

Research, approach

* Extensive use of case studies and real-life examples Total System Cost

* Avoid the silo effect of traditional logistics

* Capture and integrate across different players in SC

* Service can be included


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Framework for Analysis (continued)

Portfolio of Solutions

* Rarely is a single solution sufficient or practical

* A set of solutions is usually more applicable

* The context matters

Management of Uncertainty

* Risk can be measured, monitored, and managed

* Impacts sourcing, contracting, pricing, incentives, etc.


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Modeling for SCM

Forecasting Models

- These models allow prediction of demand based on past data or otherparameters that are independently available. They enable better planning,given the lead-time necessary for response.

Location Models- These models identify the optimal location of facilities such as plants andwarehouses, considering the inbound and outbound transportation costs as wellas the fixed and variable costs of operation at the locations under consideration.These are usually formulated as Mixed IntegerProgramming Models.


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Modeling for SCM (contd)

Distribution Network Design Models- These models are usually comprehensive in nature, deciding between two,three and even four stages of distribution network, location of warehousesand break-bulk points, and sometimes even the transportation.

Allocation Models

- These models help in optimally allocating commodities from sources todestinations in a multi-source, multi-destination environment. The costsconsidered for optimisation are production costs and warehousing costs. Theconstraints considered can be due to demand, capacity, route

restrictions, etc.


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Inventory Models

- Inventory plays a major role in SCM.

- Inventory can be of various types such as:

- Batching and shipment inventories

- Buffer stocks to take care of uncertainties- Pipeline inventory ( primary and secondary

transportation )

These models minimize the total relevant cost, based on trade-offs among, inter

alia, inventory carrying cost, ordering cost, stock-out cost, transportation cost,

taxes & duties, etc.


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Routing Models

- These models allow optimal routing on a transportation networkfrom a given source to a destination. The models used are theShortest Path Problem, the Traveling Salesman Problem andthe Vehicle Routing Problem. Decision Support Systems that

interactively use the expertise of the decision maker by providinggraphical support through a map (i.e., using a Geographical

Information System ) are also very useful in such decisions.


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Scheduling Models- These models enable allocation of resources to particularactivities. Depending on the criteria of interest and the number ofresources, the models are of aid in evaluating appropriate rules forallocation.

Alternative Analysis- This model simply proposes the identification of alternatives,

criteria for decision making and analysis of the alternatives

across the criteria to arrive at the best choice. Formal

approaches such as simulation and analytic hierarchy process

could be used in assessing the implications of the criteria.

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Class 1 Module1