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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
2 Dr. A. K. Dey
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)
3 Dr. A. K. Dey
WIP & FG . warehouses and stores 4 Dr. K. manufacturers.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.to be minimized Encompasses firm‘s activities from strategic to tactical and operational levels – integrates suppliers. Dey . inventories of RM. A.
A. K.Typical supply chain upstream downstream 5 Dr. Dey .
Red Hat Toshiba America Irvine. AMD Seagate. A. K. IBM Microsoft. Dey Toshiba Turkey downstream . California North America DC Europe DC Best Buy 6 Dr.Toshiba PC supply chain upstream Intel.
A.How is SCM different? Builds on traditional fields such as production management. operations management or logistics management. tactical and operational 7 Dr. 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. Dey . K. it encompasses the firm‘s activities at many levels: strategic.
Dey . A. K.Other operational processes Product Life-cycle Management (PLM) Supply Chain Management (SCM) Supplier Relationship Management (SRM) Customer Relationship Management (CRM) 8 Dr.
Dey . or about 10% of GNP on supply chain related activities which include the cost of movement. and other wasteful strategies in the supply chain 9 Dr. K. storage and control of products across the supply chain. A.Why supply chain management? In 1997. Most of these costs include unnecessary cost components due to redundant stock. American companies spent $862 billion. inefficient transportation strategies.
Wal-Mart‘s 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. A. with 1. Kmart was one of the leading companies in the retail industry. This was done by using a logistics technique known as cross-docking. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. Dey .891 stores and average revenues per store of $7. Today Wal-Mart is the largest and highest profit retailer in the world. This strategy reduced Wal-Mart‘s cost of sales significantly and made it possible to offer everyday low prices to their customers.Example: Wal-Mart In 1979. goods are continuously delivered to Wal-Mart‘s warehouses from where they are dispatched to stores without ever sitting in inventory. 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. 10 Dr.25 million. K. In this strategy. How did Wal-Mart do it? The starting point was a relentless focus on satisfying customer needs. 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.
com/archives/7. moves over 85 percent of its merchandise directly from suppliers to stores. A poorly managed supply chain can result in heavy stock-outs.supplychainbrain. A.htm?adcode=5) 11 Dr. (http://www.homedepot.informationweek. K.02. But it also carries substantial risks in terms of customer service.htm) The strategy saves money by eliminating an expensive network of Distribution Centres.com/708/08iukil6. Dey .Example: Home Depot The Home Depot Inc. avoiding warehouses altogether (http://www.
while Compaq. IBM and Dell have targets to carry 4 weeks of inventory 12 Dr. A. Dey . K. IBM and HP all move to emulate Dell business model Dell carries 8 days of 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.Example: Dell’s direct business model Selling PCs direct to customer Outsourcing component manufacturing Virtual integration with the suppliers resulting in less inventory.
Dey . 30% in logistics costs and a cutback in production cycle from a month to a week All these companies have one thing in common. 13 Dr. Source: ―Pulling Power‖. DATAQUEST.000-dealers' online network with just 15 employees Mahindra & Mahindra's tractor division aims for a reduction of 48% in inventories. setting a path for others to learn from. They are among the early adopters of Supply Chain Management systems in the country— They went out all by themselves. K. A.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. 31 October 2001.
Thompson Consumer Electronics. Eastman Chemical. A. Dayton Hudson.Further readings Read collected articles Killer Supply Chains: Boeing. Dell Computers. 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 14 Dr. K. Dey .
K. machines and suppliers may fail Dr. A.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. Dey 15 .
Why is SCM difficult? Global Optimization Global and complex supply chains Different. K. A. 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 16 Dr. Dey .
Global Optimization Global and complex supply chains Facilities dispersed over large geography. Dey . competition activities 17 Dr. all over Globe Different. promotion. Supplier capability. manufacturer desires flexibility – shorter production lots Manufacturer‘s objective of large batches is in conflict with warehouse and DC‘s objective of reducing inventory Supply chain is dynamic Demand. Relationships may change System variations over time Demand & cost vary due to seasonality. conflicting objectives Suppliers want order for large quantities. A. K. trends.
Dey .Conflicting Objectives in the Supply Chain 1. Manufacturing • Long run production • High quality • High productivity • Low production cost 18 Dr. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. K. A.
Customers • Short order lead time • High in stock • Enormous variety of products • Low prices 19 Dr. A. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4.Conflicting Objectives in the Supply Chain 3. Dey . K.
component availability all have significant impact on supply chain 20 Dr. K. Dey .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. transportation time. logistics Delivery lead time. manufacturing yield. A.
K.Uncertainty What is variation? What is randomness? What tools and approaches help us to deal with these issues? 21 Dr. A. Dey .
Dey . K. A.Can’t Forecasting Help? Forecasting is always wrong The longer the forecast horizon the worse the forecast End item forecasts are even more wrong 22 Dr.
Inventory and back-order levels typically fluctuate widely across the supply chain. K. Forecasting doesn‘t solve the problem. Demand is not the only source of uncertainty: Lead times Yields Transportation times Natural Disasters Component Availability 23 Dr.Why Is Uncertainty Hard to Deal With? Matching supply and demand is difficult. A. Dey .
K.Supply Chain Variability Manufacturer Forecast of Sales Volumes Retailer Orders Retailer Warehouse to Shop Production Plan Actual Consumer Demand Time Source: Tom Mc Guffry. 1998 24 Dr. Dey . A. Electronic Commerce and Value Chain Management.
A.. Electronic Commerce and Value Chain Management. 1998 25 Dr.What Management Gets. K. Volumes Consumer Demand Production Plan Time Source: Tom Mc Guffry.. Dey .
1998 26 Dr. Electronic Commerce and Value Chain Management. A. Dey .What Management Wants… Volumes Production Plan Consumer Demand Time Source: Tom Mc Guffry. K.
K. A. Dey .Dealing with Uncertainty Pull Systems Risk Pooling Centralization Postponement Strategic Alliances Collaborative Forecasting 27 Dr.
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 28 Dr. K.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. A. Dey .
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 29 Dr. K. A. Dey .
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? 30 Dr. Dey . K. A.
National Semiconductor In two years National Semiconductor reduced distribution cost y 2.5 percent. K. A. 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 31 Dr. Dey .
Dey . A. K.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 32 Dr.
A. Dey .Nabisco Inc. K.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 33 Dr. Delivers 500 types of cookies & more than 10.
K. Dey . A.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 34 Dr.
Dey . resulting into more savings 35 Dr. Moves over 85 percent of its merchandise directly from suppliers to stores.The Home Depot Inc. avoiding warehouse altogether In addition. A. K. due to very high volume of goods the shipments are mostly in full truck loads.
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 36 Dr. K. A.
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 37 Dr. A. K. Dey .
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 38 Dr. A. K.
Direct-to-Consumer Strategic alliances Manufacturing postponement Dynamic Pricing
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
How to establish relationships between manufacturers and retailers so that the whole supply chain can increase profits?
Cross-docking Direct shipments to customers Pull based, push based, pull-push based systems Vendor managed inventory
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
Dr. A. K. Dey
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 42 Dr. K. A.
Dey . A.DFL Take supply chain costs into account when designing product and manufacturing processes Approaches 1.Design for Supply Chain Also called: design for logistics -. Postponement Benefits: Reduced inventory cost in the supply chain 43 Dr. K. Modularity & Component Commonality 2.
Modularity allows parallel processing reduced lead times -.Risk pooling reduced inventory cost -.Approach 1: Modularity/Component Commonality Some modules are common across different products (example?) 1 2 Without component commonality 1 2 With component commonality • Benefits: -.Fewer components reduced inventory handling and procurement costs 44 Dr. A. Dey . K.
A.Modular vs. K. Dey modular . 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 45 Dr.
in terms of dollar value (chassis. if the modular design is used. underbody.202).202). from a Supply Chain Standpoint? Example: Consider Chrysler. since both use integral designs.000 to manufacture. Consider annual holding cost of a component to be 12% of the component value. Assume a 95% service level. 46 Dr. A. K. each car has very little component commonality with the other. and that lead-time across components is constant at one month (for simplicity). Suppose the monthly demand for the Cherokee. Compute the monthly holding cost savings regarding inventory safety stock.) are common to the new Cherokee and Durango. Currently. N(50. Dey . etc.Why is Modular Design Preferred. in which 60% of the components. Chrysler is considering a modular platform design. transmission. It needs to renew its Durango and Cherokee lines. in 000s. Assume that each car costs Chrysler US$15. whereas the demand for the Durango is N(40.
K. Dey . A.Illustration of Chrysler Product Strategies Current: Integral Designs Proposed: Modular Design 47 Dr.
Solution to the Chrysler Example 48 Dr. K. A. Dey .
first manufacture a generic product. then differentiate it to make specific products -. 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 49 Dr.Aka.For example.Approach 2: Postponement Design product and manufacturing processes so that decisions about specific products can be delayed as late as possible -. A. Dey . K.
Knitting division.Example: Benetton A world leader in knitwear Knitting Dyeing Wool Plant in Castrette. K. . near Treviso. Dey Dyeing vats for the finished knitted product. Computerized knitting loom capable of automatically producing the most complex product designs 50 Dr. A.
K. A.Benetton Manufacturing Process Postponement Old Sequence Purchase Yarn New Sequence Purchase Yarn Knit Garment Parts Dye Yarn Finish Yarn Knit Garment Parts Join Parts 51 Dr. Dey Join Parts Dye Garment Finish Garment This process is postponed .
K. Example: single product.Process Redesign for Supply Chain: Postponement at Benetton Dye yarn only after the season’s fashion preferences become more established (knit lead-time much longer than dyeing lead-time). Dey . A. four colors knit dye Dyeing operations postponed dye knit Outcome: Reduces demand uncertainty & inventory 52 Dr.
Due to the short season and long production lead times. Assume that each sweater costs $30. A. annual holding cost is 12% of the product value. there is only one production run before the season. however. The standard deviation of demand (forecast error). Suppose demand for each of the 4 different sweater colors has a mean of 10000. a sweater). If seven months before the season. and 95% service level.Benetton Example: Evaluating the Value of Dyeing Postponement Consider the previous example (say. knitting time is 6 months. If done one month before the season (color preferences are well known by then). Dyeing time is 1 month. 53 Dr. Dey . Compute approximate inventory holding cost savings in WIP as a result of dyeing postponement. the standard deviation is 1000. depends on how long the forecast is done before the season starts. K. the standard deviation is 6000.
A. Dey .Benetton Example Solution 54 Dr. K.
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? 55 Dr. K. Dey . A.
K.HP DeskJet Printer Supply Chain US DC Vancouver Plant Europe DC Customer Suppliers Customer Far East DC Customer HP 56 Dr. A. 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 57 Dr. A. Dey . K.
Use EOQ model to determine optimal order quantity Q* = Order-up-to level: S = Q* + s 2 · K·AVG h 58 Dr. K.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. A.Reorder point: s = AVG · L + z · STD · L -. S) policy -. Dey .
3. K. 2. Service level Z Demand uncertainty STD Order lead time L 59 Dr.Drivers of Safety Stock SS = z•STD• Drivers of safety stock: L 1. A. Dey .
but already a problem Pros/Cons Postponement? 60 Dr. Lose economy of scale in manufacturing Shorten lead time. May not have enough volume. 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. A. May be too expensive Would be great! But unclear how to do that … Better service. K.
Dey . A. K.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 61 Dr.
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