Supply Chain Management

A presentation
by
A.V. Vedpuriswar
 SUPPLY CHAIN
MANAGEMENT

• Value Chain
• Supply side- raw materials, inbound
logistics and production processes
• Demand side- outbound logistics,
marketing and sales.
 WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in

the acquisition and conversion of materials to finished
products delivered to the customer"

Supplier Material Flow Customer

Management Management
Information Flow

Schedule / Stock
Conversion Delivery
Resources Deployment

Leads to Business Process Integration

• Supply chain is the system by which
organizations source, make and deliver
their products or services according to
market demand.
• Supply chain management operations and
decisions are ultimately triggered by
demand signals at the ultimate consumer
level.
• Supply chain as defined by experienced
practitioners extends from suppliers’
suppliers to customers’ customers.
• SUPPLY CHAIN INCLUDES :

– MATERIAL FLOWS

– INFORMATION FLOWS

– FINANCIAL FLOWS
• SUPPLY CHAIN MANAGEMENT IS
FACILITATED BY :
– PROCESSES

– STRUCTURE

– TECHNOLOGY
• Supply chain serves two functions:

– Physical

– Market mediation
• Supply chain objectives may differ from
situation to situation.
• For functional products, cost efficiency is
the critical factor.
• For innovative products, responsiveness
is the important factor.
• Leanness + Agility together make up
Leagility
 Supply Chain Structure

SUPPLIER FACTORY DC RDC RETAILER

Raw Materials
Finished Goods

Information Flow
 Supply Chain and Demand Chain

• Demand chain is defined as the system by

which organizations manage sales and
distribution of products and services to end
users.
• Conceptually incorrect to look at demand
chain separately

• Look at the pipe as a whole.

• But is there a pipe at all?
– More a network
– Not necessarily linear

• Value chain orchestration rather than

controlling the flow through the pipe

• A network of independent and interdependent

organizations mutually and cooperatively
working together to control, manage and
improve the flow of materials and information
from suppliers to end users
 SUPPLY CHAIN DRIVERS

Not new. Value system of Michael Porter

• Why sudden interest?
– Demanding customers
– Shrinking product life cycles
– Proliferating product offerings
– Growing retailer power in some cases
– Doctrine of core competency
– Emergence of specialized logistics providers
– Globalization
– Information technology
 SUPPLY CHAIN ELEMENTS
• Supply Chain Design
Strategic • Resource Acquisition
• Long Term Planning (1 Year ++)

• Production/ Distribution Planning

Tactical • Resource Allocation
• Medium Term Planning (Qtrly,Monthly)

• Shipment Scheduling
Operational • Resource Scheduling
• Short Term Planning (Weekly,Daily)
 • Supply Chain Goals

Efficient supply chain management

must result in tangible business
improvements. It is characterized by a
sharp focus on
– Revenue growth
– Better asset utilization
– Cost reduction.
 Supply Chain
Management
Underlying Principles

Compression (Planning/Manufacturing/Supply)
Conformance (Forecasts/Plans/Distribution)
Co-operation (Cross -Functional)
Communication (Real Time Data)

Reduce Overall Cycle Time : Improve Response

 Changing Paradigm

• Functional vs Process
• Products vs Customers
• Revenues vs Performance
• Inventory vs Information
• Transactions vs Relationships
 Critical Success Factors today

• Cross functional management and

planning skills
• Ability to define, measure and manage
service requirements by market
segment
• Information systems
• Relationship management and win win
orientation
PUTTING IN PLACE A WELL OILED SUPPLY
CHAIN

• Supply chain as an efficient customer

satisfying process
• Effectiveness of the whole supply chain is
more important than the efficiency of each
individual department.
 .
The steps involved

• Step1- Designing the supply chain

– Determine the supply chain network
– Identify the levels of service required
Step 2 - Optimizing the supply chain
• Determine pathways from suppliers to
the end customer
– Customer markets to Distribution centers
– Distribution centers to production plants
– Raw material sources to production plants
– Identify constraints at vendors, plants and
distribution centers
– Get the big picture
– Plan the procurement, production and
distribution of product groups rather than
individual products in large time periods-
quarters or years
Step 3- Material flow planning

• Determine the exact flow and timing of

materials
• Arrive at decisions by working back from the
projected demand through the supply chain to
the raw material resources
• Techniques
• ERP
Step 4 - Transaction processing and
short term scheduling

• Customer orders arrive at random

• This is a day to day accounting system which
tracks and schedules every order to meet
customer demand
• Order entry, order fulfillment and physical
replenishment
Information flows in Supply Chain Management

• Information is overriding element

• Need for databases
• Master files: Information about customers, products,
materials, suppliers, transportation, production and
distribution data- do not require frequent processing
• Status files- heart of transaction processing- track
orders and infrastructure status- updated daily.
• Essentially using the same information to make all
plans right from structuring the network to
processing every day supply chain tasks.
 THE VIRTUAL VALUE CHAIN

• The value chain connects a company’s

supply side with its demand side.
• Traditionally information has been a
supporting function.
• Information however can be managed far
more creatively.
• There are various stages of using value
added information processes.
• Visibility : See physical operations more
effectively through information. Information
can be used for effective coordination of
value chain activities.
• Mirroring capability : In this stage, virtual
activities are substituted for physical ones. A
parallel value chain is created.
• New customer relationships : The company
can draw on the flow of information in the
virtual value chain to deliver value to
customers in new ways.
 Dealer Management

Conventional functions

• Inventory ownership and management

• Sales and technical support
• Order handling
• Credit
 Contemporary Trends

• Channels being divided into two- Fulfillment

and Franchised agent

• Fulfillment channel- responsible for getting

the manufacturer’s product from the plant to
the end user through a highly efficient
logistics and inventory management system
 Contemporary Trends

• Fulfillment channel may not take ownership

of the product but may perform these
functions on a per box fee structure
• Franchised agents responsible for sales and
sales support but will not write the order or
supply the product
 Issues in customer management

• Penetration vs Spread
• Concentration is necessary to commit the
necessary resources for true customer
integration
• Depth of customer contact
– R&D - sharing information vs developing new
products together
– Logistics - Pros and cons of methods of
transportation vs reengineering the logistics
process
Implementation: Points to keep in mind

• Recognize the difficulty of change.

• Prepare a blueprint for change that maps linkages
among initiatives.
• Assess the entire supply chain from supplier
relationships to internal operations to the market
place, including customers, competitors and
industry as a whole.
IS THE SUPPLY CHAIN WORKING?
• Does our manufacturing strategy increase product
line flexibility while continuing to drive down overall
production costs?
• When was the last time we measured lost sales to
end customers?
• Do we have an efficient system to get POS data
from retailers?
• Are we testing our products with end customers?
Do we use the resulting data to adjust our
forecasting and supply positions?
• Is the ratio of returned orders to sales increasing?
 The New Model of Relationships

• Hard bargaining vs shared destiny

• Exit vs Voice
• Arms length relations vs Involving dealers and
suppliers in product development
• Piling up vs Replenishing dealer inventory more
frequently
• In short working together as partners to cut
costs, boost efficiencies, innovate and share
value
• Adversarial vs partnerships
• Short term vs long term contracts
• Large vs small order quantity
• Full truck load vs small parcels
• Inspection vs no inspection
• Written order vs understanding
• Many vs few suppliers
• Design and then invite quote from
vendor vs involving vendor in
development
• Bargaining, holding cards close to chest
vs Shared destiny, transparency
Summary
• Segmentation of customers based on service
needs
• Customization of logistics network
• Listen to signals of market demand and plan
accordingly.
• Differentiate product close to the customer
• Source strategically
• Develop a supply chain wide technology
strategy
• Accept channel spanning performance
measures
• The Bullwhip Phenomenon

• Volatility amplification along the network

• Increase in demand variability as we move
upstream away from the market
• Mainly because of lack of communication and
coordination
• Delays in information and material flows
• Bullwhip effect occurs because of various
reasons:
• Order Batching- Accumulate orders
• Shortage gaming- Ask for more than what is
needed
• Demand forecast updating
 Important points to keep in mind

• Segment customers based on service needs.

• Modify the supply chain to meet these service
requirements profitably.
• Customize the logistics network.
• Develop forecasts collaboratively involving every
link of the supply chain.
• Locate the leverage point where the product is
unalterably configured to meet a single
requirement
• Delay product differentiation till the last possible
moment.
• Assess options such as modularized design
or modification of manufacturing processes
that can increase flexibility.
• Cultivate warm relationships with suppliers.
• Efficient supply chain management has to be
accompanied by a technology strategy.
ITALIAN CLOTHING MANUFACTURE
• Warehousing and transportation 6
• Inventory 5
• Late delivery returns 2
• Obsolescence 20
• Lost sales 60

• Need to minimize obsolescence costs

• Minimize product range flexibility
• Reduce product development cycle
 Dell’s Direct Business Model of
Virtual Integration
• Advantages of a tightly coordinated supply chain
traditionally facilitated by vertical integration.
• Combined with focus and specialization.
• Leveraging on investments others have made and
focusing on delivering solutions and systems to
customers
• Fewer things to manage - fewer things go wrong
• Suppliers’ engineers part of Dell’s Design team
• Have only a few partners
 Dell’s Direct Business Model of
Virtual Integration
• Share information with partners in Real time
fashion.
• Stitch together a business with partners that are
treated as if they are inside the company.
• Change focus from how much inventory there is to
how fast it is moving
• Assets collect risks around them one way or the
other.
• Limited or no testing - Eg. Sony Monitors
 Dell’s Direct Business Model of
Virtual Integration
• Only three Manufacturing centers - Austin, Ireland
and Malaysia.
• Inventory levels and replenishment needs
sometimes conveyed to vendors on hourly basis.
• Substitute information for inventory and ship only
when we have real demand from real end
customers
• Clever segmentation - Focus on institutional
markets - 70% to very large customers with
annual purchases exceeding $1 million.
 Dell’s Direct Business Model of
Virtual Integration
• Exit from retail business after wrong entry in 1989.
• Segmentation - closeness to customers and access
to valuable information.
• Demand forecasting as a critical sales skill
• Help global customers, manage their total purchase
of PCs by selling them a standard product
• Dell server loads software on customers’ computers
• Meet customers’ needs faster and more efficiently
than any other model.
 Li and Fung, Hong Kong

• Founded in 1906
• Today 35 offices in 20 countries
• 1997 revenues of $ 1.7 billion
• Largest export trading company in Hong
Kong
• Customers- American and European retailers
• Sources clothing and other consumer goods
ranging from toys to fashion accessories to
luggage
• Order from Europe
• Buy yarn from Korea
• Weave and dye in Taiwan
• Buy Japanese zippers made in China
• Make the garments in Thailand in five different
factories
• Pulling apart the value chain and optimizing at
each step
• Victor Fung
“ Today, assembly is the easy part. The hard part is
managing your suppliers and the flow of parts.“ Good
supply chain management strips away time and cost from
product delivery cycles. Our customers have become
more fashion driven, working with six or seven seasons a
year instead of just two or three. Once you move to
shorter life cycles, the problem of obsolete inventory
increases dramatically. With customer tastes changing
rapidly and markets segmenting into narrow niches, it’s
not just fashion products that are becoming increasingly
time sensitive.”
• Endorsement by Stan Shih, CEO, Acer
• Buying right things
• Reaching into suppliers to ensure that certain
things happen on time and at the right quality
level.
• Buyer informs five weeks before delivery.
• Reserve undyed yarn from yarn supplier.
• Lock up capacity in weaving and dyeing mills.
• Outsourcing not same as leaving suppliers to do the
worrying.
• Single factories are too small to have much buying
power and to demand faster deliveries from
suppliers.
• To shorten delivery cycle, need to go upstream to
organize production.
• Li & Fung able to delay commitment to a particular
fashion trend.
• Integrated logistics management
• Elimination of consolidators in container
shipments
• Smokeless factory
– Design
– Procurement
– Inspection of raw materials
– Production planning
– Line balancing
– Inspection of finished goods
– No worker ownership
– No labour management
“ If we don’t own factories, can we say we are in
manufacturing? Absolutely, because of the 15
steps in the manufacturing value chain, we
probably do 10.”
• Basic operating unit is the division.
• Divisions focused on serving single customers or
groups of small customers.
• Less emphasis on geographic grouping
• Merchandising decisions decentralized
• Financial controls and operating procedures tightly
centralized.
• Strong focus on inventory and working capital
management.
• “As far as I am concerned, inventory is the root of
all evil. At a minimum, it increases the complexity
of managing any business. So it’s a word we don’t
tolerate around here.”
• Need for sophisticated information systems. Li &
Fung working to create a database to
systematically track all supplier relationships.
• “ Someone might steal our database but when
they call up a supplier, they don’t have the long
relationship with the supplier that Li & Fung has. It
makes a difference to suppliers when they know
that you are dedicated to the business, that you
have been honoring your commitments for 90
years.”
• Broadening the middle
• Better prices and better margins for customers
• Tackling the soft $3 in the cost structure. $3
represents the inefficiency in the supply chain for
a consumer product priced at $4. Look at costs
throughout distribution channels than just in
factory
Thank You