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10/05/2011

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Basics of Supply Chain Management

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Definitions

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What Is the Supply Chain?
• Also referred to as the logistics network • Suppliers, manufacturers, warehouses, distribution centers and retail outlets – “facilities”
Suppliers Manufacturers Warehouses & Customers Distribution Centers

and the • Raw materials • Work-in-process (WIP) inventory • Finished products that flow between the facilities
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Material Costs

Transportation Costs

Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs

The Supply Chain
Suppliers Manufacturers Warehouses & Distribution Centers Customers

Transportation Costs Material Costs

Transportation Costs

Manufacturing Costs

Transportation Costs Inventory Costs

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The Supply Chain – Another View Plan Plan Source Source Make Make Deliver Deliver Buy Buy Suppliers Manufacturers Warehouses & Customers Distribution Centers Transportation Transportation Costs Costs Transportation Material Costs Manufacturing Costs Inventory Costs Costs 5 .

What Is Supply Chain Management (SCM)? Plan Source Make Deliver Buy • A set of approaches used to efficiently integrate – – – – Suppliers Manufacturers Warehouses Distribution centers In the right quantities To the right locations And at the right time • So that the product is produced and distributed – – – • • System-wide costs are minimized and Service level requirements are satisfied 6 .

History of Supply Chain Management • 1960’s .“Integrated” Purchasing.Materials Management.MRP & BOM . Financials. Order Entry • 2000’s .Optimized “Value Network” with Real-Time Decision Support. Cost Control • 1970’s . Synchronized & Collaborative Extended Network 7 . Manufacturing.Inventory Management Focus.SCM . Logistics • 1990’s .MRPII.ERP .Operations Planning • 1980’s . JIT .

war Local politics. labor conditions.Why Is SCM Difficult? Plan Source Make Deliver Buy • Uncertainty is inherent to every supply chain – – – – Travel times Breakdowns of machines and vehicles Weather. border issues • The complexity of the problem to globally optimize a supply chain is significant – – – Minimize internal costs Minimize uncertainty Deal with remaining uncertainty 8 . natural catastrophe.

firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998 9 .6 billion write-off in 1997 due to “raw materials shortages.S. internal and supplier parts shortages and productivity inefficiencies” U.The Importance of Supply Chain Management • Dealing with uncertain environments – matching supply and demand – Boeing announced a $2.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals” IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake – – – • U.

g. JD Edwards) with which to integrate internal processes • Availability of SCM technologies on the market – 10 . Oracle.. SAP. your competitor will Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its suppliers Firms have access to multiple products (e.The Importance of Supply Chain Management • Shorter product life cycles of high-technology products – – Less opportunity to accumulate historical data on customer demand Wide choice of competing products makes it difficult to predict demand • The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners – – If you don’t do it. Baan.

Supply Chain Management and Uncertainty • • • Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesn’t vary The variability worsens as we travel “up” the supply chain Forecasting doesn’t help! Manufacture r Wholesale Distributor s Retailer s Consume rs Multitier Supplie rs Sales Sales Time Sales Time Time Sales Time Bullwhip Effect 11 .

.Factors Contributing to the Bullwhip • Demand forecasting practices – Min-max inventory management (reorder points to bring inventory up to predicted levels) Longer lead times lead to greater variability in estimates of average demand. thus increasing variability and safety stock costs Peaks and valleys in orders Fixed ordering costs Impact of transportation costs (e.g. fuel costs) Sales quotas Promotion and discount policies • Lead time – • Batch ordering – – – – – • Price fluctuations • Lack of centralized information 12 .

and transportation capacity • Flexible logistics options to ensure timely fulfillment • Order tracking & reporting across multiple vendors and carriers Shared visibility for trading partners 13 . and suppliers • Real-time commitments for design. inventory.Today’s Marketplace Requires: • Personalized content and services for their customers • Collaborative planning with design partners. distributors. production.

the worse the forecast – A forecast for a year from now will never be as accurate as a forecast for 3 months from now • Aggregate forecasts are more accurate – A 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 14 .Supply Chain Management – Key Issues • Forecasts are never right – Very unlikely that actual demand will exactly equal forecast demand • The longer the forecast horizon.

Supply Chain Management – Key Issues • Overcoming functional silos with conflicting goals Manufacturing Distribution Customer Service/ Sales Purchasing Low purchase price Multiple vendors Few changeovers Stable schedules Long run lengths Low inventories Low transportation High inventorie s High service levels Regional stocks SOURCE MAKE DELIVER SELL 15 .

direct ship vs.g..Supply Chain Management – Key Issues ISSUE Network Planning CONSIDERATIONS • Warehouse locations and capacities • Plant locations and production levels • Transportation flows between facilities to minimize cost and time • How should inventory be managed? • Why does inventory fluctuate and what strategies minimize this? • Impact of volume discount and revenue sharing • Pricing strategies to reduce order-shipment variability • Selection of distribution strategies (e. cross-docking) • How many cross-dock points are needed? • Cost/Benefits of different strategies • • • • 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? Inventory Control Supply Contracts Distribution Strategies Integration and Strategic Partnering Outsourcing & Procurement Strategies • What are our core supply chain capabilities and which are not? • Does our product design mandate different outsourcing approaches? • Risk management • How are inventory holding and transportation costs affected by product design? • How does product design enable mass customization? Product Design Source: Simchi-Levi 16 .

improved service levels Low inventory levels. many variations BENEFITS Low manufacturing costs. infrequent demand Engineer to Order complex products. uniqueEnables response to customer specifications specific customer requirements Source: Simchi-Levi 17 . wide range of product offerings. meet customer demands quickly Customization.Supply Chain Management Operations Strategies STRATEGY Make to Stock WHEN TO CHOOSE standardized products. relatively predictable demand customized products. simplified planning Make to Order Configure to Order many variations on finished product. reduced inventory.

Supply Chain Management – Benefits • A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain 16%-28% Improvement 25%-60% Improvement 30%-50% Improvement 25%-80% Improvement 10%-16% Improvement 25%-50% Improvement 20%-30% Improvement 10%-20% Improvement Delivery Performance Inventory Reduction Fulfillment Cycle Time Forecast Accuracy Overall Productivity Lower Supply-Chain Costs Fill Rates Improved Capacity Realization Source: Cohen & Roussel 18 .

Supply Chain Imperatives for Success • View the supply chain as a strategic asset and a differentiator – – Wal-Mart’s partnership with Proctor & Gamble to automatically replenish inventory Dell’s innovative direct-to-consumer sales and build-to-order manufacturing • Create unique supply chain configurations that align with your company’s strategic objectives – – – – – Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network Forecasting Collaboration Integration 19 Supply chain configuration components • Reduce uncertainty – – – .

Value of Information and SCM 20 .

each facility bases its forecasts on ‘downstream’ orders. which are more variable than actual demand To accommodate variability.Information In The Supply Chain Plan Suppliers Manufacturers Warehouses & Distribution Centers Retailer Source Source Make Make Deliver Deliver Sell Sell Order Lead Time Delivery Lead Time • • Production Lead Time • Each facility further away from actual customer demand must make forecasts of demand Lacking actual customer buying data. inventory levels are overstocked thus increasing inventory carrying costs It’s estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertainty 21 .

forecasting and replenishment (CPFR) 22 • • Reduce variability in the supply chain – – – Reduce lead times • Eliminate the bullwhip through strategic partnerships – – .Taming the Bullwhip Four critical methods for reducing the Bullwhip effect: • Reduce uncertainty in the supply chain – – – Centralize demand information Keep each stage of the supply chain provided with up-to-date customer demand information More frequent planning (continuous real-time planning the goal) Every-day-low-price strategies for stable demand patterns Use cross-docking to reduce order lead times Use EDI techniques to reduce information lead times Vendor-managed inventory (VMI) Collaborative planning.

23 .Methods for Improving Forecasts Judgment Methods Market Research Analysis Panels of Experts • • • • Internal experts External experts Domain experts Delphi technique Accurate Forecasts Causal Analysis • Market testing • Market surveys • Focus groups Time-Series Methods • • • • Moving average Exponential smoothing Trend analysis Seasonality analysis • Relies on data other than that being predicted • Economic data.

The Evolving Supply Chain 24 .

Supply Chain Integration – Push Strategies • Classical manufacturing supply chain strategy • Manufacturing forecasts are long-range – – – Orders from retailers’ warehouses Unable to meet changing demand patterns Supply chain inventory becomes obsolete as demand for certain products disappears Large inventory safety stocks Larger and more variably sized production batches Unacceptable service levels Inventory obsolescence How is demand determined? Peak? Average? How is transportation capacity determined? • Longer response time to react to marketplace changes • Increased variability (Bullwhip effect) leading to: – – – – – – • Inefficient use of production facilities (factories) • Examples: Auto industry. others? 25 . large appliances.

Amazon 26 .Supply Chain Integration – Pull Strategies • • • • • • • • • • Production and distribution are demand-driven – – – Coordinated with true customer demand Only in response to specific orders POS data None or little inventory held Fast information flow mechanisms Decreased lead times Decreased retailer inventory Decreased variability in the supply chain and especially at manufacturers Decreased manufacturer inventory More efficient use of resources More difficult to take advantage of scale opportunities Examples: Dell.

Supply Chain Integration – Push/Pull Strategies • • Hybrid of “push” and “pull” strategies to overcome disadvantages of each Early stages of product assembly are done in a “push” manner – Partial 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 lower – • • Final product assembly is done based on customer demand for specific product configurations Supply chain timeline determines “push-pull boundary” “Generic” Product Push Strategy PushPull Boundary “Customized” Product Pull Strategy End Consumer Raw Materials Supply Chain Timeline 27 .

Choosing Between Push/Pull Strategies Pull High Industries where: • Customization is High • Demand is uncertain • Scale economies are Low Industries where: • Demand is uncertain • Scale economies are High • Low economies of scale Where do the following industries fit in this model: • • • • • • • Automobile? Aircraft? Fashion? Petroleum refining? Pharmaceuticals? Biotechnology? Medical Devices? Demand Uncertainty Computer equipment Industries where: • Uncertainty is low • Low economies of scale • Push-pull supply chain Furniture Industries where: • Standard processes are the norm • Demand is stable • Scale economies are High Books. CD’s Push Low Low Pull Grocery. Beverages High Push Source: Simchi-Levi 28 Economies of Scale .

Pull and Push/Pull Strategies PUSH Objective Complexity Focus Lead Time Processes Minimize Cost PULL Maximize Service Level Low High Resource Allocation Responsiveness Long Short Supply Chain Planning Order Fulfillment Source: Simchi-Levi 29 .Characteristics of Push.

Supply Chain Collaboration – What Is It? • • Many different definitions depending on perspective The means by which companies within the supply chain work together towards mutual goals by sharing – – – – – – – Ideas Information Processes Knowledge Information Risks Rewards Accelerate entry into new markets Changes the relationship between cost/value/profit equation • Why collaborate? – – 30 .

Supply Chain Collaboration • • • Cornerstone of effective SCM The focus of many of today’s SCM initiatives The only method that has the potential to eliminate or minimize Retailers the Bullwhip effect Supplier s Synchroniz ed Production Scheduling Collaborati ve Product Developme nt Manufacturer Collaborativ e Demand Planning Distributors/ Wholesalers Collaborative Logistics Planning •Transportation services •Distribution center services Logistics Providers 31 .

Benefits of Supply Chain Collaboration CUSTOMERS MATERIAL SUPPLIERS SERVICE SUPPLIERS • Reduced inventory • • Increased revenue • • Lower order management costs • • Higher Gross Margin • • Better forecast accuracy • Better allocation of promotional budgets • Lower freight costs Reduced inventory • Faster and more reliable Lower warehousing costs Lower material acquisition costsdelivery • Lower capital costs Fewer stockout conditions • Reduced depreciation • Lower fixed costs • Improved customer service • More efficient use of human resources Source: Cohen & Roussel 32 .

Supply Chain Collaboration Spectrum Extensive Not Viable Synchronized Collaboration • The green arrow describes increasing complexity and sophistication of: – – – – – – Information systems Systems infrastructure Decision support systems Planning mechanisms Information sharing Process understanding Extent of Collaboration Coordinated Collaboration Cooperative Collaboration • Higher levels of collaboration imply the need for both trading partners to have equivalent (or close) levels of supply chain maturity • Synchronized collaboration demands joint planning. R&D and sharing of information and processing models – Movement to real-time customer demand information throughout the supply chain Transactional Limited Collaboration Low Return Many Number of Relationships Source: Cohen & Roussel Few 33 .

Successful Supply Chain Collaboration • • • • • • • Try to collaborate internally before you try external collaboration Help your partners to work with you Share the savings Start small (a limited number of selected partners) and stay focused on what you want to achieve in the collaboration Advance your IT capabilities only to the level that you expect your partners to manage Put a comprehensive metrics program in place that allows you to monitor your partners’ performance Make sure people are kept part of the equation – – Systems do not replace people Make sure your organization is populated with competent professionals who’ve done this before 34 .

Emerging Best Practices in SCM Strategy 35 .

The SCOR Model 36 .

benchmarking studies. and development of the Supply-Chain Operations Reference-model (SCOR). information and material goods flows is essential to enable trading partner collaboration 37 .Collaboration and the SCOR Model • The Supply-Chain Council (SCC) is a global. the process reference model designed to improve users' efficiency and productivity Promotes research and thought leadership in the supply chain management area Adoption of common standards for reference to process. not-for-profit trade association open to all types of organizations – – 800 world-wide members Multi-industry • • • SCC sponsors and supports educational programs including conferences. retreats.

benchmarking. and process measurement into a cross-functional framework Best Practices Analysis Process Reference Model Capture the “as-is” state of a process and derive the desired “to-be” future state Quantify the Quantify the operational operational performance of performance of similar companies similar companies and establish and establish internal targets internal “best-inbased ontargets based on “best-inclass” results class” results 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-inclass” performance Business Process Reengineering Capture the “as-is” Capture the “as-is” state of aaprocess state of the and derive process and derive the desired “to-be” desired “to-be” future state future state Benchmarking Characterize the Characterize management the management practices and practices and software solutions software in that resultsolutions that result in “best-in-class” “best-in-class” performance performance 38 .Process Reference Models • Process reference models integrate the well-known concepts of business process reengineering.

SCOR Structure Plan Deliver Return Source Return Make Deliver Return Source Return Make Deliver Return Source Return Make Deliver Return Source Return Suppliers’ Supplier Supplier Internal or External Your Company Customer Internal or External Customer’s Customer SCOR Model Building Block Approach Processes Best Practice Metrics Technology 39 .

SCOR 7.0 Model Structure Plan P2 Plan Source P1 Plan Supply Chain P3 Plan Make P4 Plan Deliver P5 Plan Returns Suppliers Source S1 Source Stocked Products S2 Source MTO Products Make M1 Make-to-Stock M2 Make-to-Order Deliver D1 Deliver Stocked Products D2 Deliver MTO Products S3 Source ETO Products M3 Engineer-to-Order D3 Deliver ETO Products D4 Deliver Retail Products Return Source Return Deliver Enable 40 Customers .

and 4 Maps •Disconnects •Design Specifications •TO BE Level 2. 3. 3. Test. Practices. and Systems Information and Work Flow •AS IS Level 2.SCOR Implementation Roadmap Analyze Basis of Competition Operations Strategy •Competitive Performance Requirements •Performance Metrics •Supply Chain Scorecard •Scorecard Gap Analysis •Project Plan SCOR Level 1 Configure supply chain Material Flow •AS IS Geographic Map •AS IS Thread Diagram •Design Specifications •TO BE Thread Diagram •TO BE Geographic Map SCOR Level 2 Align Performance Levels. and Roll Out •Organization •Technology •Process •People 41 . and 4 Maps SCOR Level 3 Implement Implement supply chain supply chain Processes and Processes and Systems Systems Develop.

Examples of SCOR Adoptions • Consumer Foods – Project Time (Start to Finish) – 3 months – Investment .000 Electronics – Project Time (Start to Finish) – 6 months – Investment .300.$3-5 Million – Projected Return on Investment .000 – 1st Year Return .$ 230 Million Software and Planning – SAP bases APO key performance indicators (KPIs) on SCOR Model Aerospace and Defense – SCOR Benchmarking and use of SCOR metrics to specify performance criteria and provide basis for contracts / purchase orders • • • 42 .$4.$50.

Marketing Planning Patients Pharmacies . Hospitals.The SCOR Model As Context for This Course • Pharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model Segment Analysis. Hospitals Marketing and Sales Functions 43 . Doctors Deliver Source Make Deliver Return Return Return Plan Source Return Make Deliver Source Make Deliver Source Return Return Return Return Suppliers’ Supplier Supplier Your Company Customer Customer’s Customer Internal or External Internal or External Marketing Data Suppliers Doctors.

The SCOR Model As Context for This Course • Two interrelated “supply chains” work together to deliver drugs to market: – – The Marketing and Sales “supply chain” which is principally information-based The Logistics supply chain which is principally product-based Plan Sales Deliver Return Source Return Make Deliver Return Source Make Deliver Source Make Deliver Return Source Return Return Return Return Suppliers’ Supplier Supplier Your Company Customer Plan Customer’s Customer Internal or External Internal or External Manufacturing & Distribution Deliver Return Source Return Make Deliver Return Source Make Deliver Source Make Deliver Return Source Return Return Return Return Suppliers’ Supplier Supplier Your Company Customer Customer’s Customer 44 Internal or External Internal or External .

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