Designing & Managing the Supply Chain

Introduction to Supply Chain Management

Dr. A. K. Dey

Why Supply Chain Management

Businesses are forced to invest & focus attention on SCM due to
Fierce competition Global market Shorter PLC Heightened expectations of customers

Continuing advances in communication & transportation technologies have motivated continuous evolution of supply chain
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Supply Chain Management

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, 1999) Supply chain management is a set of approaches utilized efficiently to integrate suppliers, manufacturers, warehouses, and stores so that merchandise is distributed at the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requirements (Simchi-Levi et al) A supply chain consists of all stages involved, directly and indirectly, in fulfilling a customer request. Supply chain management involves the management of flows between and among stages in a supply chain to maximize total profitability (Chopra and Meindl)
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Interpreting SCM definition

Leads to several observations
Takes into consideration every facility that impacts cost and makes the product conform to customer requirements Objective of SCM is to be efficient & cost effective across entire system total system wide costs transportation, distribution, inventories of RM, WIP & FG - to be minimized Encompasses firms activities from strategic to tactical and operational levels integrates suppliers, manufacturers, warehouses and stores
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Typical supply chain

upstream

downstream
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Toshiba PC supply chain

upstream

Intel, AMD

Seagate, IBM

Microsoft, Red Hat

Toshiba America Irvine, California

North America DC

Europe DC

Best Buy
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Toshiba Turkey

downstream

How is SCM different?

Builds on traditional fields such as production management, operations management or logistics management. The key differentiator is the systems approach of the supply chain management SCM considers every stage and facility in the supply chain and the interactions between them, whether they belong to different companies or different organizations within a company SCM considers the total costs in the supply chain Since SCM deals with all stages of the supply chain and their integration, it encompasses the firms activities at many levels: strategic, tactical and operational
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Other operational processes

Product Life-cycle Management (PLM)

Supply Chain Management (SCM)

Supplier Relationship Management (SRM)

Customer Relationship Management (CRM)

Dr. A. K. Dey

Why supply chain management?

In 1997, American companies spent $862 billion, or about 10% of GNP on supply chain related activities which include the cost of movement, storage and control of products across the supply chain. Most of these costs include unnecessary cost components due to redundant stock, inefficient transportation strategies, and other wasteful strategies in the supply chain

Dr. A. K. Dey

Example: Wal-Mart
In 1979, Kmart was one of the leading companies in the retail industry, with 1,891 stores and average revenues per store of $7.25 million. At that time Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those of Kmart stores. In 10 years Wal-Mart transformed itself; in 1992 it had the highest sales per square foot and the highest inventory turnover and operating profit of any discount retailer. Today Wal-Mart is the largest and highest profit retailer in the world. How did Wal-Mart do it? The starting point was a relentless focus on satisfying customer needs; Wal-Marts goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. This was done by using a logistics technique known as cross-docking. In this strategy, goods are continuously delivered to Wal-Marts warehouses from where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Marts cost of sales significantly and made it possible to offer everyday low prices to their customers.

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Dr. A. K. Dey

Example: Home Depot

The Home Depot Inc. moves over 85 percent of its merchandise directly from suppliers to stores, avoiding warehouses altogether (http://www.informationweek.com/708/08iukil6.htm)
The strategy saves money by eliminating an expensive network of Distribution Centres. But it also carries substantial risks in terms of customer service. A poorly managed supply chain can result in heavy stock-outs.
(http://www.supplychainbrain.com/archives/7.02.homedepot.htm?adcode=5)

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Dr. A. K. Dey

Example: Dells direct business model

Selling PCs direct to customer Outsourcing component manufacturing Virtual integration with the suppliers resulting in less inventory. The third party logistics company matches the Sony monitors with Dell computers and deliver it to the customer Direct relationship with customer enables Dell to understand the customer needs and segment the market to offer value added services Compaq, IBM and HP all move to emulate Dell business model Dell carries 8 days of inventory, while Compaq, IBM and Dell have targets to carry 4 weeks of inventory
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Supply Chains in India

Sony India reduced inventories by 70% just six months after it began its SCM initiative Maruti wired all its suppliers and 60% of business transactions are now online Samsung manages a 5,000-dealers' online network with just 15 employees Mahindra & Mahindra's tractor division aims for a reduction of 48% in inventories, 30% in logistics costs and a cutback in production cycle from a month to a week All these companies have one thing in common.
They are among the early adopters of Supply Chain Management systems in the country They went out all by themselves, setting a path for others to learn from.

Source: Pulling Power, DATAQUEST; 31 October 2001.

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Further readings
Read collected articles
Killer Supply Chains: Boeing, Thompson Consumer Electronics, Dayton Hudson, Dell Computers, Eastman Chemical, and The Home Depot Direct Delivery System of The Home Depot Logistics gets a little respect On line extra Q&A with Nistevo CEO Kevin Lynch
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What makes SCM difficult?

Challenging task to design & operate supply chain so that system wide costs are minimized and system wide service level is maintained process of finding best system wide strategy is Global Optimization Uncertainty is inherent in every supply chain
Demand side: customer demand can never be forecast exactly Supply side: Travel times will never be certain, machines and suppliers may fail
Dr. A. K. Dey

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Why is SCM difficult?

Global Optimization
Global and complex supply chains Different, conflicting objectives Supply chain is dynamic System variations over time Matching supply and demand Bullwhip effect Forecasts are inaccurate Uncertainties in suppliers, logistics

Managing Uncertainty

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Dr. A. K. Dey

Global Optimization
Global and complex supply chains
Facilities dispersed over large geography, all over Globe

Different, conflicting objectives

Suppliers want order for large quantities, manufacturer desires flexibility shorter production lots Manufacturers objective of large batches is in conflict with warehouse and DCs objective of reducing inventory

Supply chain is dynamic

Demand, Supplier capability, Relationships may change

System variations over time

Demand & cost vary due to seasonality, promotion, trends, competition activities
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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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Managing Uncertainty
Matching supply and demand is a major challenge
Months before actual demand manufacturers commit to specific production level

Bullwhip effect
Magnification of variability of demand from retail to supplier

Forecasts are inaccurate

Even most advanced techniques can not predict demand accurately

Uncertainties in suppliers, logistics

Delivery lead time, manufacturing yield, transportation time, component availability all have significant impact on supply chain
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Uncertainty

What is variation? What is randomness? What tools and approaches help us to deal with these issues?

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Dr. A. K. Dey

Cant Forecasting Help?

Forecasting is always wrong The longer the forecast horizon the worse the forecast End item forecasts are even more wrong

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Dr. A. K. Dey

Why Is Uncertainty Hard to Deal With?

Matching supply and demand is difficult. Forecasting doesnt 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

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Dr. A. K. Dey

Supply Chain Variability

Manufacturer Forecast of Sales

Volumes

Retailer Orders

Retailer Warehouse to Shop Production Plan

Actual Consumer Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
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What Management Gets...

Volumes

Consumer Demand

Production Plan

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

Volumes

Production Plan Consumer Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
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Dealing with Uncertainty

Pull Systems Risk Pooling Centralization Postponement Strategic Alliances Collaborative Forecasting

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Dr. A. K. Dey

Why manage supply chain?

To create sustainable competitive advantage by Reducing cost Increasing revenue Increasing flexibility Increasing customer service level Creating more value for the customers Consider Typical box of cereal, with a shelf life of few weeks, takes more than three months to get from factory to super market A Car takes 15 days or more from factory to dealership where actual travel time is not more than five days
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Procter & Gamble

Strategic Relationship between suppliers & manufacturers may have significant impact on Supply Chain to reduce cost P&G estimates that it has saved retail customers USD 18 million in 18 months y its supply chain initiatives Essence of this approach lies in suppliers and manufacturers working together to create business plan to eliminate the sources of wasteful practices across the entire supply chain
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Procter & Gamble

Key issues are
What are various business plans and partnerships that can best reduce cost for all partners and improve service level? Which one is appropriate? What incentives and performance measures should be used? How should the benefits resulting from strategic partnership be shared? Should a portion of saving be transferred to customers?
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National Semiconductor
In two years National Semiconductor reduced distribution cost y 2.5 percent, decreased delivery time by 47 percent and increased sales by 34 percent By closing six warehouses around the globe Air freighting microchips to customers from a new centralized distribution centre in Singapore

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Dr. A. K. Dey

National Semiconductor
Key issues in this case are
What is the trade off between increased cost of faster transportation versus savings due to reduction in inventory level by shifting to a centralized distribution system What is the best distribution system Centralized or Decentralized

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Dr. A. K. Dey

Nabisco Inc.
Delivers 500 types of cookies & more than 10,000 types of candies to over 80,000 buyers and spends more than USD 200 million a year in transportation cost alone Problem is too many trucks arrive at or depart from their destinations half empty adding to cost As a trial Nabisco shared warehouses and trucks with 25 other manufacturers resulting into substantial savings
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Dayton Hudson Corporation

Target stores of Dayton Hudson relies on very close relationships with its suppliers They may agree to buy certain number of Italian bowls from a supplier without specifying style and colour Near the delivery date Target forecasts the styles and colours that are likely to sell Manufacturer can produce trial lots for sale to determine whether particular style will actually sell
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The Home Depot Inc.

Moves over 85 percent of its merchandise directly from suppliers to stores, avoiding warehouse altogether In addition, due to very high volume of goods the shipments are mostly in full truck loads, resulting into more savings

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Dr. A. K. Dey

Korean Industrial Relay Manufacturer

Problems faced:
70% service level only 70% orders are delivered on time Inventory keeps piling up mostly of items for which there is no demand Inventory turnover ratio is four much below the industry average of nine times

Strategies that can increase service level will also help in inventory liquidation resulting into higher profit
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Harnessing conflicting objectives

Few years back achieving conflicting objectives such as Improved customer service level and Lower inventory was not possible Now it is possible due to
Recent developments in information and communication technologies Better understanding of SCM strategies

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Dr. A. K. Dey

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
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New Concepts
Push-Pull strategies
Direct-to-Consumer Strategic alliances Manufacturing postponement Dynamic Pricing

E-Procurement

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Dr. A. K. Dey

Key (popular) issues in SCM

Supply chain design
Where to locate manufacturing facilities, distribution centers, stores so as to minimize overall costs and improve service

Supply contracts
How to establish relationships between manufacturers and retailers so that the whole supply chain can increase profits?

Distribution strategies
Cross-docking Direct shipments to customers Pull based, push based, pull-push based systems Vendor managed inventory

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Dr. A. K. Dey

Key (popular) issues in SCM

Supply chain integration and strategic partnership
Coordinating different stages of the supply chain Value of information and information sharing

Outsourcing and procurement strategies Managing product variety

Product postponement Component commonality and modularity

Information technology and decision support systems Managing customers

Customer segmentation, revenue management

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Dr. A. K. Dey

Product postponement a storage devices manufacturer example

Production Process Occurring over Time Assembly Phase Testing Phase

PCB Board that Differentiates The Final Product is Inserted

End Product Is Completed

Production Process Occurring over Time Assembly Phase Testing Phase

Generic PCB Board is Inserted to Enable Testing

End Product Is Completed

PCB Board that Differentiates The Final Product is Inserted to Replace the Generic Board Used to Testing

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Dr. A. K. Dey

Design for Supply Chain

Also called: design for logistics -- DFL Take supply chain costs into account when designing product and manufacturing processes Approaches 1. Modularity & Component Commonality 2. Postponement

Benefits: Reduced inventory cost in the supply chain

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Approach 1: Modularity/Component Commonality Some modules are common across different products (example?)

1 2
Without component commonality

1 2
With component commonality

Benefits:
-- Modularity allows parallel processing reduced lead times -- Risk pooling reduced inventory cost -- Fewer components reduced inventory handling and procurement costs
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Modular vs. Integral Design

Modular design
One-to-one mapping between functional elements and components Interfaces between components not coupled

Integral design
Complex mapping from functional elements to components Interfaces between components are coupled

integral
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modular

Why is Modular Design Preferred, from a Supply Chain Standpoint?

Example:
Consider Chrysler. It needs to renew its Durango and Cherokee lines. Currently, each car has very little component commonality with the other, since both use integral designs. Chrysler is considering a modular platform design, in which 60% of the components, in terms of dollar value (chassis, transmission, underbody, etc.) are common to the new Cherokee and Durango. Suppose the monthly demand for the Cherokee, in 000s, N(50,202), whereas the demand for the Durango is N(40,202). Compute the monthly holding cost savings regarding inventory safety stock, if the modular design is used. Assume that each car costs Chrysler US$15,000 to manufacture, and that lead-time across components is constant at one month (for simplicity). Consider annual holding cost of a component to be 12% of the component value. Assume a 95% service level.
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Illustration of Chrysler Product Strategies

Current: Integral Designs

Proposed: Modular Design

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Dr. A. K. Dey

Solution to the Chrysler Example

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Dr. A. K. Dey

Approach 2: Postponement
Design product and manufacturing processes so that decisions about specific products can be delayed as late as possible
-- For example, first manufacture a generic product, then differentiate it to make specific products -- Aka. Delayed product differentiation -- DPD Without postponement With postponement

Raw materials components Different products

Raw materials components

Generic product Different products

Benefits:
Reduced demand uncertainty (why?) Higher service level or/and reduced inventory cost
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Example: Benetton
A world leader in knitwear Knitting Dyeing

Wool Plant in Castrette, near Treviso. Knitting division. Computerized knitting loom capable of automatically producing the most complex product designs
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Dyeing vats for the finished knitted product.

Benetton Manufacturing Process Postponement Old Sequence Purchase Yarn New Sequence Purchase Yarn Knit Garment Parts

Dye Yarn Finish Yarn

Knit Garment Parts Join Parts
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Join Parts
Dye Garment Finish Garment
This process is postponed

Process Redesign for Supply Chain: Postponement at Benetton Dye yarn only after the seasons fashion preferences become more established (knit lead-time much longer than dyeing lead-time).

Example: single product; four colors

knit dye Dyeing operations postponed

dye
knit

Outcome: Reduces demand uncertainty & inventory

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Benetton Example: Evaluating the Value of Dyeing Postponement Consider the previous example (say, a sweater). Suppose demand for each of the 4 different sweater colors has a mean of 10000. Dyeing time is 1 month; knitting time is 6 months. Due to the short season and long production lead times, there is only one production run before the season. The standard deviation of demand (forecast error), however, depends on how long the forecast is done before the season starts. If seven months before the season, the standard deviation is 6000. If done one month before the season (color preferences are well known by then), the standard deviation is 1000. Compute approximate inventory holding cost savings in WIP as a result of dyeing postponement. Assume that each sweater costs $30, annual holding cost is 12% of the product value, and 95% service level.
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Benetton Example Solution

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Dr. A. K. Dey

HP Printers Cases

1) What were the problems (crises) facing HP? What were the causes? 2) Resolving the crises What alternatives did HP consider for solving the problems?

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Dr. A. K. Dey

HP DeskJet Printer Supply Chain

US DC
Vancouver Plant Europe DC

Customer

Suppliers

Customer

Far East DC

Customer

HP

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Dr. A. K. Dey

Inventory-Service Crisis

What is the crisis? Excess inventory in some products Shortages in other products What caused it?

Poor demand forecasting Large product variety due to many markets Long shipping lead time from plant to DC Inventory levels set incorrectly

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Setting the Right Level of Inventory

How are current inventory levels set at each DC? Rule of thumb How should they be set?
Safety stock

-- Use (s, S) policy -- Reorder point: s = AVG L + z STD L

-- Use EOQ model to determine optimal order quantity Q* =

Order-up-to level: S = Q* + s

2 KAVG h

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Dr. A. K. Dey

Drivers of Safety Stock

SS = zSTD
Drivers of safety stock:

1.
2. 3.

Service level Z
Demand uncertainty STD Order lead time L

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Dr. A. K. Dey

Resolving the Crisis: Options Discussed in the Case Options

Plant in Europe Air shipments Better forecasts Hold more inventory (higher z)
Shorten lead time; May not have enough volume; Lose economy of scale in manufacturing Shorten lead time; May be too expensive Would be great! But unclear how to do that Better service; but already a problem

Pros/Cons

Postponement?
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Postponement: DC Localization Strategy

Factory-Localization Strategy: (customization performed at the factory)
HP DC

customers

(manufacturer)

DC-Localization Strategy: (customization performed at the DCs)

HP (manufacturer) DC customers

Postponement: Delaying the point of differentiation

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Dr. A. K. Dey