*

What Is the Supply Chain? Also referred to as the logistics networkSuppliers, manufacturers, warehouses, distribution centers and retail outlets facilities

and the

Raw materialsWork-in-process (WIP) inventoryFinished products

that flow between the facilities*

The Supply Chain*

The Supply Chain Another View*

What Is Supply Chain Management (SCM)? A set of approaches used to efficiently integrateSuppliersManufacturersWarehousesDistribution centersSo that the product is produced and distributedIn the right quantitiesTo the right locationsAnd at the right timeSystem-wide costs are minimized andService level requirements are satisfied *

History of Supply Chain Management1960s - Inventory Management Focus, Cost Control1970s - MRP & BOM - Operations Planning1980s - MRPII, JIT - Materials Management, Logistics1990s - SCM - ERP - Integrated Purchasing, Financials, Manufacturing, Order Entry2000s - Optimized Value Network with Real-Time Decision Support; Synchronized & Collaborative Extended Network*

Why Is SCM Difficult? Uncertainty is inherent to every supply chainTravel timesBreakdowns of machines and vehiclesWeather, natural catastrophe, warLocal politics, labor conditions, border issues

The complexity of the problem to globally optimize a supply chain is significantMinimize internal costsMinimize uncertaintyDeal with remaining uncertainty*

The Importance of Supply Chain Management Dealing with uncertain environments matching supply and demandBoeing announced a $2.6 billion write-off in 1997 due to raw materials shortages, internal and supplier parts shortages and productivity inefficienciesU.S Surgical Corporation announced a $22 million loss in 1993 due to larger than anticipated inventories on the shelves of hospitalsIBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenueHewlett-Packard and Dell found it difficult to obtain important components for its PCs from Taiwanese suppliers in 1999 due to a massive earthquakeU.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998*

The Importance of Supply Chain Management Shorter product life cycles of high-technology productsLess opportunity to accumulate historical data on customer demandWide choice of competing products makes it difficult to predict demandThe growth of technologies such as the Internet enable greater collaboration between supply chain trading partnersIf you dont do it, your competitor willMajor buyers such as Wal-Mart demand a level of supply chain maturity of its suppliersAvailability of SCM technologies on the marketFirms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes*

Supply Chain Management and UncertaintyInventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesnt varyThe variability worsens as we travel up the supply chainForecasting doesnt help!

*

Factors Contributing to the Bullwhip Demand forecasting practicesMin-max inventory management (reorder points to bring inventory up to predicted levels)Lead timeLonger lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costsBatch orderingPeaks and valleys in ordersFixed ordering costsImpact of transportation costs (e.g., fuel costs)Sales quotasPrice fluctuationsPromotion and discount policiesLack of centralized information*

Todays Marketplace Requires: Personalized content and services for their customersCollaborative planning with design partners, distributors, and suppliersReal-time commitments for design, production, inventory, and transportation capacityFlexible logistics options to ensure timely fulfillment Order tracking & reporting across multiple vendors and carriers*Shared visibility for trading partners

Supply Chain Management Key IssuesForecasts are never rightVery unlikely that actual demand will exactly equal forecast demand

The longer the forecast horizon, the worse the forecastA forecast for a year from now will never be as accurate as a forecast for 3 months from now

Aggregate forecasts are more accurateA demand forecast for all CV therapeutics will be more accurate than a forecast for a specific CV-related product

*Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty

Supply Chain Management Key IssuesOvercoming functional silos with conflicting goals*

Supply Chain Management Key Issues*

ISSUECONSIDERATIONSNetwork Planning Warehouse locations and capacities Plant locations and production levels Transportation flows between facilities to minimize cost and timeInventory Control How should inventory be managed? Why does inventory fluctuate and what strategies minimize this?Supply Contracts Impact of volume discount and revenue sharing Pricing strategies to reduce order-shipment variabilityDistribution Strategies Selection of distribution strategies (e.g., direct ship vs. cross-docking) How many cross-dock points are needed? Cost/Benefits of different strategiesIntegration and Strategic Partnering How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?Outsourcing & Procurement Strategies What are our core supply chain capabilities and which are not? Does our product design mandate different outsourcing approaches? Risk managementProduct Design How are inventory holding and transportation costs affected by product design? How does product design enable mass customization?

Supply Chain Management Operations Strategies*Source: Simchi-Levi

STRATEGYWHEN TO CHOOSEBENEFITSMake to Stockstandardized products, relatively predictable demandLow manufacturing costs; meet customer demands quickly

Make to Ordercustomized products, many variationsCustomization; reduced inventory; improved service levelsConfigure to Ordermany variations on finished product; infrequent demandLow inventory levels; wide range of product offerings; simplified planning

Engineer to Ordercomplex products, unique customer specificationsEnables response to specific customer requirements

Supply Chain Management BenefitsA 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain*Source: Cohen & Roussel

Delivery Performance16%-28% ImprovementInventory Reduction25%-60% ImprovementFulfillment Cycle Time30%-50% ImprovementForecast Accuracy25%-80% ImprovementOverall Productivity10%-16% ImprovementLower Supply-Chain Costs25%-50% ImprovementFill Rates20%-30% ImprovementImproved Capacity Realization10%-20% Improvement

Supply Chain Imperatives for SuccessView the supply chain as a strategic asset and a differentiatorWal-Marts partnership with Proctor & Gamble to automatically replenish inventoryDells innovative direct-to-consumer sales and build-to-order manufacturingCreate unique supply chain configurations that align with your companys strategic objectivesOperations strategyOutsourcing strategyChannel strategyCustomer service strategyAsset networkReduce uncertaintyForecastingCollaborationIntegration*Supply chain configuration components

Value of Informationand SCM*

Information In The Supply ChainEach facility further away from actual customer demand must make forecasts of demandLacking actual customer buying data, each facility bases its forecasts on downstream orders, which are more variable than actual demandTo accommodate variability, inventory levels are overstocked thus increasing inventory carrying costs

* Source Make Deliver SellSuppliersManufacturersWarehouses &Distribution CentersRetailerIts estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertaintyPlan

Taming the BullwhipReduce uncertainty in the supply chainCentralize demand informationKeep each stage of the supply chain provided with up-to-date customer demand informationMore frequent planning (continuous real-time planning the goal) Reduce variability in the supply chainEvery-day-low-price strategies for stable demand patternsReduce lead timesUse cross-docking to reduce order lead timesUse EDI techniques to reduce information lead timesEliminate the bullwhip through strategic partnershipsVendor-managed inventory (VMI)Collaborative planning, forecasting and replenishment (CPFR)*Four critical methods for reducing the Bullwhip effect:

Methods for Improving Forecasts*AccurateForecastsPanels of Experts Internal experts External experts Domain experts Delphi technique Moving average Exponential smoothing Trend analysis Seasonality analysisJudgment MethodsTime-Series MethodsCausal AnalysisMarket Research Analysis Relies on data other than that being predicted Economic data, commodity data, etc. Market testing Market surveys Focus groups

The Evolving Supply Chain*

Supply Chain Integration Push StrategiesClassical manufacturing supply chain strategyManufacturing forecasts are long-range Orders from retailers warehousesLonger response time to react to marketplace changes Unable to meet changing demand patternsSupply chain inventory becomes obsolete as demand for certain products disappearsIncreased variability (Bullwhip effect) leading to:Large inventory safety stocksLarger and more variably sized production batchesUnacceptable service levelsInventory obsolescenceInefficient use of production facilities (factories)How is demand determined? Peak? Average? How is transportation capacity determined?Examples: Auto industry, large appliances, others?

*

Supply Chain Integration Pull StrategiesProduction and distribution are demand-drivenCoordinated with true customer demandNone or little inventory heldOnly in response to specific ordersFast information flow mechanismsPOS dataDecreased lead timesDecreased retailer inventoryDecreased variability in the supply chain and especially at manufacturersDecreased manufacturer inventoryMore efficient use of resourcesMore difficult to take advantage of scale opportunitiesExamples: Dell, Amazon*

Supply Chain Integration Push/Pull StrategiesHybrid of push and pull strategies to overcome disadvantages of eachEarly stages of product assembly are done in a push mannerPartial assembly of product based on aggregate demand forecasts (which are more accurate than individual product demand forecasts)Uncertainty is reduced so safety stock inventory is lowerFinal product assembly is done based on customer demand for specific product configurationsSupply chain timeline determines push-pull boundary

*Supply Chain TimelineRawMaterialsEndConsumerPush StrategyPull StrategyPush-PullBoundaryGeneric ProductCustomized Product

Choosing Between Push/Pull StrategiesWhere do the following industries fit in this model:

Automobile? Aircraft? Fashion? Petroleum refining? Pharmaceuticals? Biotechnology? Medical Devices?

*PullPushPullPushEconomies of ScaleLowHighLowHighDemand UncertaintyIndustries where:

Customization is High Demand is uncertain Scale economies are LowComputer equipmentIndustries where:

Standard processes are the norm Demand is stable Scale economies are HighGrocery,BeveragesIndustries where:

Uncertainty is low Low economies of scale Push-pull supply chainBooks, CDsIndustries where:

Demand is uncertain Scale economies are High Low economies of scaleFurnitureSource: Simchi-Levi

Characteristics of Push, Pull and Push/Pull Strategies*Source: Simchi-Levi

PUSHPULLObjectiveMinimize CostMaximize Service LevelComplexityHighLowFocusResource AllocationResponsivenessLead TimeLongShortProcessesSupply Chain PlanningOrder Fulfillment

Supply Chain Collaboration What Is It?Many different definitions depending on perspectiveThe means by which companies within the supply chain work together towards mutual goals by sharingIdeasInformationProcessesKnowledgeInformationRisksRewardsWhy collaborate?Accelerate entry into new marketsChanges the relationship between cost/value/profit equation*

Supply Chain CollaborationCornerstone of effective SCMThe focus of many of todays SCM initiativesThe only method that has the potential to eliminate or minimize the Bullwhip effect*

Benefits of Supply Chain Collaboration*Source: Cohen & Roussel

CUSTOMERSMATERIAL SUPPLIERSSERVICE SUPPLIERS Reduced inventory Increased revenue Lower order management costs Higher Gross Margin Better forecast accuracy Better allocation of promotional budgets Reduced inventory Lower warehousing costs Lower material acquisition costs Fewer stockout conditions Lower freight costs Faster and more reliable delivery Lower capital costs Reduced depreciation Lower fixed costs Improved customer service More efficient use of human resources

Supply Chain Collaboration SpectrumThe green arrow describes increasing complexity and sophistication of: Information systemsSystems infrastructureDecision support systemsPlanning mechanismsInformation sharingProcess understandingHigher levels of collaboration imply the need for both trading partners to have equivalent (or close) levels of supply chain maturitySynchronized collaboration demands joint planning, R&D and sharing of information and processing modelsMovement to real-time customer demand information throughout the supply chain *Source: Cohen & RousselNumber of RelationshipsExtent of CollaborationManyFewLimitedExtensiveTransactionalCollaborationSynchronizedCollaborationCooperativeCollaborationCoordinatedCollaborationNot ViableLow Return

Successful Supply Chain CollaborationTry to collaborate internally before you try external collaborationHelp your partners to work with youShare the savingsStart small (a limited number of selected partners) and stay focused on what you want to achieve in the collaborationAdvance your IT capabilities only to the level that you expect your partners to managePut a comprehensive metrics program in place that allows you to monitor your partners performanceMake sure people are kept part of the equationSystems do not replace peopleMake sure your organization is populated with competent professionals whove done this before*

Emerging Best Practices in SCM Strategy*

The SCOR Model*

Collaboration and the SCOR ModelThe Supply-Chain Council (SCC) is a global, not-for-profit trade association open to all types of organizations800 world-wide membersMulti-industrySCC sponsors and supports educational programs including conferences, retreats, benchmarking studies, and development of the Supply-Chain Operations Reference-model (SCOR), the process reference model designed to improve users' efficiency and productivityPromotes research and thought leadership in the supply chain management areaAdoption of common standards for reference to process, information and material goods flows is essential to enable trading partner collaboration

*

Process Reference ModelsProcess reference models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework*

Quantify the operational performance of similar companies and establish internal targets based on best-in-class resultsBenchmarking

Characterize the management practices and software solutions that result in best-in-class performanceBest Practices Analysis

Process Reference Model

Capture the as-is state of a process and derive the desired to-be future stateBusiness Process ReengineeringCapture the as-is state of a process and derive the desired to-be future state

Quantify the operational performance of similar companies and establish internal targets based on best-in-class results

Characterize the management practices and software solutions that result in best-in-class performance

SCOR Structure*

*CustomersSuppliersP1 Plan Supply ChainPlanP2 Plan SourceP3 Plan MakeP4 Plan DeliverSourceMakeDeliverS1 Source Stocked ProductsM1 Make-to-StockM2 Make-to-OrderM3 Engineer-to-Order

D1 Deliver Stocked Products

D2 Deliver MTO ProductsD3 Deliver ETO ProductsS2 Source MTO ProductsS3 Source ETO ProductsReturn SourceP5 Plan ReturnsReturn DeliverEnable

D4 Deliver Retail Products

SCOR 7.0 Model Structure

*

Examples of SCOR AdoptionsConsumer FoodsProject Time (Start to Finish) 3 monthsInvestment - $50,000 1st Year Return - $4,300,000 ElectronicsProject Time (Start to Finish) 6 monthsInvestment - $3-5 Million Projected Return on Investment - $ 230 Million Software and PlanningSAP bases APO key performance indicators (KPIs) on SCOR Model Aerospace and DefenseSCOR Benchmarking and use of SCOR metrics to specify performance criteria and provide basis for contracts / purchase orders

*

The SCOR Model As Context for This CoursePharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model

*

The SCOR Model As Context for This CourseTwo interrelated supply chains work together to deliver drugs to market:The Marketing and Sales supply chain which is principally information-basedThe Logistics supply chain which is principally product-based

*SalesManufacturing&Distribution

*Dependent on each instructors requirements******************Dependent on each instructors requirements****Dependent on each instructors requirements************Dependent on each instructors requirements**34*214Building block approachSource connects to supplierDeliver connects to customerNot all companies have makeWe can model as far up or down the supply chain as we view important (not limited to two tiers)Customers and / or suppliers can be internal or external****