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Introduction to Supply Chain Management
Syed Tabish HussainIqra University
Tel: 03212971409E-mail: [email protected]
©Copyright 2002 D. Simchi-Levi
Introduction
• Materials - any commodities used directly or indirectly in producing a product or service.– Raw materials, component parts,
assemblies, finished goods, and supplies
• Supply chain - the way materials flow through different organizations from the raw material supplier to the finished goods consumer.
What is a Supply Chain?• All stages involved, directly or indirectly,
in fulfilling a customer request• Includes manufacturers, suppliers,
transporters, warehouses, retailers, and customers
• Within each company, the supply chain includes all functions involved in fulfilling a customer request (product development, marketing, operations, distribution, finance, customer service)
1-5
What is a Supply Chain?• Customer is an essential part of the
supply chain• Includes movement of products from
suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions
• Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers
• All stages may not be present in all supply chains.
©Copyright 200
Supply Chain Management ---A River
Supply
Sources:plantsvendorsports
RegionalWarehouses:stocking points
Field Warehouses:stockingpoints
Customers,demandcenterssinks
Production/purchase costs
Inventory &warehousing costs
Transportation costs Inventory &
warehousing costs
Transportation costs
SC, if not managed effectively…
PoorService
PoorAvailability
Long Lead Times for Innovations
High InventoryHigh Inventory
Poor Quality
Lower RevenueHigher CostsReduced Profitability
And, many more……
Inventory Mgmt. Inventory Flows Cost Information Flow Risk Planning RelationshipsPipeline Intergation Seamless/Visible Landed Cost Shared Shared SC Team Approach Focus on landed Cost
Vendor Manufacturing PrimaryTransportation
Warehousing CustomerSecondaryTransportation
InboundTransportation
Vendor Intermediaries Customer
New-age Supply Chain
ProductInformation
Supply Chain Management in a Manufacturing Plant
Receivingand
Inspection
RawMaterials,Parts, andIn-process
Ware-Housing
Production
FinishedGoodsWare-
housing
Inspection,Packaging,
AndShippingS
uppl
iers
Cus
tom
ers
Materials Management
PurchasingProduction
ControlWarehousing andInventory Control
Shippingand Traffic
Physical materials flowInformation flow
INTRODUCTION
• Supply chain management is the configuration, coordination and improvement of a sequentially related set of operations
• With supply chain management, the idea of satisfying an entire chain of customers becomes reality
1-12
Flows in a Supply Chain
Customer
Information
Product
Funds
• Definition: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.
• Notice:– Who is involved– Cost and Service Level– It is all about integration
Supply Chain Management
Supply Chain Management• Refers to all the management functions related
to the flow of materials from the company’s direct suppliers to its direct customers.
• Includes purchasing, traffic, production control, inventory control, warehousing, and shipping.
• Two alternative names:– Materials management– Logistics management
Cross-Functional Linkages
Operations and Supply Chain
FinanceBudgeting.
Analysis.Funds.
MarketingWhat products?What volumes?Costs? Quality?
Delivery?
HumanResourcesSkills? Training?# of Employees?
AccountingPerformance measurement systems.
Planning and control.
MISWhat IT solutionsto make it all work
together?
DesignSustainability.
Quality.Manufacturabi
lity.
1-16
Decision Phases of a Supply Chain
• Supply chain strategy or design• Supply chain planning• Supply chain operation
Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and what processes each stage will perform.
• Strategic supply chain decisions– Locations and capacities of facilities– What SC’s configuration will be , how resources
will be allocated and what process each stage will perform
– Products to be made or stored at various locations
– Modes of transportation– Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainties
1-18
Supply Chain Planning
• Definition of a set of policies that govern short-term operations
• Fixed by the supply configuration from previous phase
• Starts with a forecast of demand in the coming year
1-19
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
• Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon
1-20
Supply Chain Operation• Time horizon is weekly or daily• Decisions regarding individual customer
orders• Supply chain configuration is fixed and
operating policies are determined• Goal is to implement the operating policies
as effectively as possible• Allocate orders to inventory or production,
set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders
• Much less uncertainty (short time horizon)
©Copyright 2002 D. Simchi-Levi
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
Global Optimization 1.Supply chain is complex network
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.
©Copyright 2002 D. Simchi-Levi
Global Optimization
2. Different facilities in the supply chain frequently have different conflicting objectives
3. Dynamic system of supply chain
buying power increase or decrease
4. System variation over time due to seasonal fluctuation , advertisement , promotion and change in pricing strategies of the competitor
©Copyright 2002 D. Simchi-Levi
Supplier
Plan
Customer Customer’sCustomer
Suppliers’Supplier
Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver
Internal or External Internal or External
Your Company
Source
SCOR is structured around five distinct management processes
SCOR Model
Return Return ReturnReturn Return Return Return Return
Building Block Approach
Processes Metrics
Best Practice Technology
©Copyright 2002 D. Simchi-Levi
Cu
sto
mer
s
Su
pp
lier
s
P1 Plan Supply ChainPlan
P2 Plan Source P3 Plan Make P4 Plan Deliver
Source Make Deliver
S1 Source Stocked Products M1 Make-to-Stock
M2 Make-to-Order
M3 Engineer-to-Order
D1 Deliver Stocked Products
D2 Deliver MTO Products
D3 Deliver ETO Products
S2 Source MTO Products
S3 Source ETO Products
Supply-Chain Operations Reference-model (SCOR) 5.0 - Processes
Return Source
P5 Plan Returns
Return Deliver
Enable
©Copyright 2002 D. Simchi-Levi
Supply Chain Management Requires Many Different Functions
1-28
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)
1-29
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 ChainsProcurement,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
1-33
Push/Pull View of Supply Chain Processes
• Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders
• Can combine the push/pull and cycle views– L.L. Bean – Dell
• The relative proportion of push and pull processes can have an impact on supply chain performance
Supply Chain Macro Processes in a Firm
• Supply chain processes discussed in the two views can be classified into:– Customer Relationship Management
(CRM)– Internal Supply Chain Management
(ISCM)– Supplier Relationship Management
(SRM)• Integration among the above three
macro processes is critical for effective and successful supply chain management
1-35
Gateway: A Direct Sales Manufacturer
• Why did Gateway have multiple production facilities in the US? What advantages or disadvantages does this strategy offer relative to Dell, which has one facility?
• What factors did Gateway consider when deciding which plants to close?
• Why does Gateway not carry any finished goods inventory at its retail stores?
• Should a firm with an investment in retail stores carry any finished goods inventory?
• Is the Dell model of selling directly without any retail stores always less expensive than a supply chain with retail stores?
1-36
7-Eleven• What factors influence decisions of opening and
closing stores? Location of stores?• Why has 7-Eleven chosen off-site preparation of fresh
food?• Why does 7-Eleven discourage direct store delivery
from vendors?• Where are distribution centers located and how many
stores does each center serve? How are stores assigned to distribution centers?
• Why does 7-Eleven combine fresh food shipments by temperature?
• What point of sale data does 7-Eleven gather and what information is made available to store managers? How should information systems be structured?
1-37
Toyota• Where should plants be located, what degree
of flexibility should each have, and what capacity should each have?
• Should plants be able to produce for all markets?
• How should markets be allocated to plants?• What kind of flexibility should be built into the
distribution system?• How should this flexible investment be valued?• What actions may be taken during product
design to facilitate this flexibility?
©Copyright 2002 D. Simchi-Levi
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
©Copyright 2002 D. Simchi-Levi
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
©Copyright 2002 D. Simchi-Levi
The Dynamics of the Supply Chain
Ord
er
Siz
e
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
CustomerDemand
Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders
Production PlanProduction Plan
©Copyright 2002 D. Simchi-Levi
The Dynamics of the Supply Chain
Ord
er
Siz
e
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
CustomerDemand
Production PlanProduction Plan
©Copyright 2002 D. Simchi-Levi
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% to nearly $40 billion
©Copyright 2002 D. Simchi-Levi
Supply Chain: The Magnitude (continued)
• It is estimated that the grocery industry 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.
©Copyright 2002 D. Simchi-Levi
Supply Chain: The Magnitude (continued)
• 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 writedowns of $2.6 billion in October 1997.The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)
©Copyright 2002 D. Simchi-Levi
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)
©Copyright 2002 D. Simchi-Levi
Supply Chain: The Potential
• 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.
©Copyright 2002 D. Simchi-Levi
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.
©Copyright 2002 D. Simchi-Levi
Supply Chain Challenges
• Achieving Global Optimization– Conflicting Objectives– Complex network of facilities– System Variations over time
©Copyright 2002 D. Simchi-Levi
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
1-50 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Supply Management’s Impact on Net Income and the Bottom Line
Increased Sales:• Faster to Market• Improved Quality• Pricing Flexibility• InnovationLower Total Cost:• Acquisition Cost• Processing Cost• Quality Cost• Downtime Cost• Risk Cost• Cycle Time Cost• Conversion Cost• Non-value Added Cost• Supply Chain Cost• Post Ownership Cost
©Copyright 2002 D. Simchi-Levi
What’s New in Logistics?
• Global competition
• Shorter product life cycle
• New, low-cost distribution channels
• More powerful well-informed customers
• Internet and E-Business strategies
©Copyright 2002 D. Simchi-Levi
New Concepts
• Push-Pull strategies• Direct-to-Consumer• Strategic alliances• Manufacturing postponement• Dynamic Pricing• E-Procurement
Operations and Supply Chain Management and You
• Analyst• Commodity Manager• Customer Service
Manager• International Logistics
Manager• Logistics Services
Salesperson• Production Manager
• Sourcing Analyst• Logistics and Material
Planner• Systems Support
Manager (MIS)• Transportation
Manager• Process Analyst• Scheduler• Purchasing Agent
Some of the many career positions
Operations and Supply Chain Activities
• Process selection, design, and improvement
• Forecasting for decision making• Capacity planning for capital investment
and resource levels• Inventory management for amount and
location• Planning and control for work
scheduling and meeting demand• Purchasing, managing supplier
relationships• Logistics or acquisition and distribution