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Introduction to Supply Chain Management
Designing & Managing the Supply Chain
Chapter 1
Byung-Hyun Ha
Outline
Introduction
Global Optimization
Uncertainty
Case: Meditech Surgical
Introduction
Investment and interest in supply chain Economy issues
• Fierce competition in today’s global market
• Introduction of products with shorter and shorter life cycles
• Heightened expectations of customers
Technology issues• Advances in communications and transportation technologies
Introduction
Supply chain (logistics network) 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
Introduction
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
Supply
Sources:plantsvendorsports
RegionalWarehouses:stocking points
Field Warehouses:stockingpoints
Customers,demandcenterssinks
Production/purchase costs
Inventory &warehousing costs
Transportation costs
Inventory &warehousing costs
Transportation costs
Logistic Network
Strategies for SCM
All of the advanced strategies, techniques, and approaches for supply chain management focus on:
Global optimization
Managing uncertainty
Global Optimization
Issues Why is it different/better than local optimization? What are conflicting supply chain objectives?
Why is global optimization hard? The supply chain is complex network Different facilities in supply chain network have different and
conflicting objectives The supply chain is a dynamic system
• The power structure changes
The system varies over time• e.g. Demand and cost variation due to seasonal factors, trend,
advertising and promotion, competitors’ pricing strategies, …
Global Optimization
Tools and strategies Decision support systems Inventory control Network design Design for logistics Cross docking Strategic alliances / supplier partnerships Supply contracts / incentive schemes
Sequential vs. Global Optimization
Procurement Planning
ManufacturingPlanning
DistributionPlanning
DemandPlanning
Supply Contracts/Collaboration/Information Systems and DSS
Procurement Planning
ManufacturingPlanning
DistributionPlanning
DemandPlanning
Sequential optimization
Global optimization
Conflicting Objectives in the Supply Chain
Purchasing Stable volume requirements / flexible delivery time Little variation in mix / large quantities
Manufacturing Long run production / high quality High productivity / low production cost
Warehousing Low inventory / reduced transportation costs Quick replenishment capability
Customers Short order lead time / high in stock Enormous variety of products / low prices
Uncertainty
Why is uncertainty hard to deal with? Matching supply and demand is difficult Forecasting doesn’t 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
Forecasting Forecasting is always wrong The longer the forecast horizon the worse the forecast End item forecasts are even more wrong
Uncertainty
Time
ActualConsumerDemand
ActualConsumerDemandRetailer Warehouse
to Shop
Retailer Warehouseto ShopRetailer OrdersRetailer Orders
Production PlanProduction Plan
Manufacturer Forecastof Sales
Manufacturer Forecastof Sales
Supply Chain Variability
Uncertainty
Time
ConsumerDemand
ConsumerDemand
Production PlanProduction Plan
What Management Gets...
Uncertainty
Vo
lum
es
Time
ConsumerDemand
ConsumerDemand
Production PlanProduction Plan
What Management Wants…
Uncertainty
Dealing with uncertainty Pull systems Risk pooling Centralization Postponement Strategic alliances Collaborative forecasting
Key Issues
Issues span Strategic, tactical, operational
What are the tradeoffs and issues? Distribution network configuration Inventory control Supply contracts Distribution strategies Integration and partnerships Procurement strategies and outsourcing Product design Information technology
Case: Meditech Surgical
Case overview Intent – diagnosis of supply chain Business overview Supply chain Production planning What’s wrong? How to fix it?
Meditech Surgical
Background Endoscopic surgical instrument maker
• Minimally invasive surgery
Parent company: Largo Healthcare Company• Spun off 3 years ago
Primary competitor: National Medical Corporation• Market created in early 80’s, rapidly growing
• National sells to physicians
• Meditech sells to material managers as well as physicians
• Customer preferences change slowly
Old products continually updated• Replaced with new product introductions
Compete based on product innovations, customer service, cost
Meditech Surgical
Problems New production introduction needs to be flawless Consistently fail to keep up with demand during initial order Customers wait over six weeks to have orders delivered
Dan Franklin, manager of Customer Service & Dist. Recognizing growing customer dissatisfaction
Distribution
Central warehouse
Two primary channels to hospitals Domestic dealers
• Order and receive products from multiple manufacturers
• Independent and autonomous entities
International affiliates• Subsidiaries of Largo Healthcare
• Similar to domestic dealers from Meditech’s point of view
Internal Operations
Assembly Manually intensive Using component parts in inventory Assembly line with a team of cross-trained production workers Cycle time for assembly of a batch of instruments
• 2 weeks
Lead time for component parts• 2-16 weeks
Packaging Using machine
Sterilization Cobalt radiation sterilizer, about 1 hour
Operation Organization
Production Planning & Scheduling
Broken down two parts Assembly & component parts order based on monthly forecast Packaging & sterilization based on finished goods inventory level
Forecast Annual: during the fourth quarter of each fiscal year Monthly: using annual forecast broken down proportionately
• At the beginning of each month: adjustments of forecast
Planning of assembly Using monthly demand forecasts transfer req. =
month forecast – finished goods inventory + safety stock
Approved throughout the organization after 1 to 2 weeks
Production Planning & Scheduling
MRP systems Planning assembly schedules and parts order Calculation may be run several times each week
• Notification of change at least 1 weeks before
Packaging & sterilization process Order point/order quantity (OP/OQ)
Parts Inventory Assembly Bulk Inventory FG InventoryPackaging &Sterilization
2 – 16 weeks 2 weeks 1 weekpush pull
High Inventory Level of Finished Goods
In case of representative stable product
Var. in Production vs. Var. in Demand
Variation in production schedules often exceeded variation in demand
New Product Introduction
Poor service level Poor forecasting? Panic ordering? And high FG inventory
Poor Service Level
What is going on? Demand is quite predictable Usage in hospitals is quite stable Market share moves slowly over time With each new product, dealer must build inventory to fill pipelin
e
Why did Meditech think demand was unpredictable? Poor information systems No one looked at demand No one had responsibility for forecast errors Tendency to shift the blame Built-in delays and monthly buckets in planning system Amplifier in planning system
Poor Service Level
What to do? Recognize that demand is stable and predictable Establish accountability for forecast Eliminate planning delays and/or reduce time bucket Alternatively, put assembly within pull system and eliminate bulk
inventory
HW#1
All homework should be prepared by handwriting and be submitted at the next class
Discussion questions 5, 7, 8, 9 (p. 13)
Case discussion question 3 (p. 21)