Introduction to Supply Chain Management

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

What is a Supply Chain?Customer wants

detergent and goes to Jewel

Customer wantsdetergent and goes

to Jewel

JewelSupermarket

JewelSupermarket

Jewel or thirdparty DC

Jewel or thirdparty DC

P&G or othermanufacturerP&G or othermanufacturer

PlasticProducer

PlasticProducer

Chemicalmanufacturer

(e.g. Oil Company)

Chemicalmanufacturer

(e.g. Oil Company)

TennecoPackagingTenneco

Packaging

Paper Manufacturer

Paper Manufacturer

TimberIndustryTimber

Industry

Chemicalmanufacturer

(e.g. Oil Company)

Chemicalmanufacturer

(e.g. Oil Company)

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.

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

Strategies for SCM

All of the advanced strategies, techniques,

and approaches for Supply Chain

Management focus on:

–Global Optimization

–Managing Uncertainty

Tools and Strategies for Optimization

• Decision Support Systems

• Inventory Control

• Network Design

• Design for Logistics

• Cross Docking

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?

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Global Optimization

Sequential Optimization vs. Global Optimization

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

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

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

Uncertainty

• What is variation?

• What is randomness?

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

Can’t Forecasting Help?

• Forecasting is always wrong• The longer the forecast horizon the

worse the forecast • End item forecasts are even more

wrong

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

Supply Chain VariabilityV

olu

mes

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

ActualConsumerDemand

ActualConsumerDemandRetailer Warehouse

to Shop

Retailer Warehouseto ShopRetailer OrdersRetailer Orders

Production PlanProduction Plan

Manufacturer Forecastof Sales

Manufacturer Forecastof Sales

What Management Gets...V

olu

mes

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

ConsumerDemand

ConsumerDemand

Production PlanProduction Plan

What Management Wants…V

olu

mes

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

ConsumerDemand

ConsumerDemand

Production PlanProduction Plan

Dealing with Uncertainty

• Pull Systems

• Risk Pooling

• Centralization

• Postponement

• Strategic Alliances

• Collaborative Forecasting

Logistics in the Manufacturing Firm

• Profit 4%

• Logistics Cost 21%

• Marketing Cost 27%

• Manufacturing Cost 48%

Profit

Logistics Cost

Marketing Cost

Manufacturing Cost

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…”.

Supply Chain: The Potential

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

“According to P&G, 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)

Supply Chain:the 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.

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.

What’s New?

• Global competition

• Shorter product life cycle

• New, low-cost distribution channels

• More powerful well-informed customers

• Internet and E-Business strategies

New Concepts

• Push-Pull strategies

• Direct-to-Consumer

• Strategic alliances

• Manufacturing postponement

• Dynamic Pricing

• E-Procurement

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)

Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

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.

Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

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

Supply Chain Performance: Achieving Strategic Fit and

Scope

The Value Chain: Linking Supply Chain and Business Strategy

NewProduct

Development

Marketingand

Sales Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Business Strategy

New ProductStrategy

MarketingStrategy Supply Chain Strategy

Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost

Demand Characteristics

Functional InnovativeLow demand variability HighEasy forecasting DifficultLong life cycle ShortLow inventory cost HighLow margins HighLow product variety HighLow stockout cost HighLow obsolescence High

Responsiveness Spectrum

Integratedsteel mill

Dell

Highlyefficient

Highlyresponsive

Somewhatefficient

Somewhatresponsive

Hanesapparel

Mostautomotiveproduction

Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone o

f

Strateg

ic Fit

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

Supply Chain Drivers and Obstacles

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

A Framework for Structuring Drivers

Efficiency Responsiveness

Facilities Transportation Inventory Information

Supply chain structure

Drivers

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

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

Considerations forSupply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation /Dedicated

Proximity /Flexibility

Information What information is best suited foreach objective

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

Major Obstacles to Achieving Fit

• Multiple owners / incentives in a supply chain

• Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty

Local optimization and lack of global fit

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

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

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

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

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

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%

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

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

Step 3: Achieving Strategic Fit

• Step is to ensure that what the supply chain does well is consistent with target customer’s needs

• Examples: Dell, Barilla