Introduction to

Supply Chain Management

David Simchi-Levi
Professor of Engineering Systems
Massachusetts Institute of Technology

Customers demand centers sinks Sources: Plants vendors ports Regional warehouses: Stocking points Field warehouses: Stocking points

Supply

Inventory & warehousing costs Production/purchase costs Transportation costs Transportation costs

Inventory & warehousing costs
Image by MIT OpenCourseWare.

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Manufacturing • Long run production • High quality • High productivity • Low production cost ©Copyright 2003 D. warehouses and stores so that merchandise is produced and distributed in the right quantities.Supply Chain Management • Definition: Supply Chain Management is primarily concerned with the efficient integration of suppliers. factories. to the right locations and at the right time. 1 Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. requirements • Notice: – Who is involved – Cost and Service Level – It is all about integration ©Copyright 2003 D. Simchi-Levi 2 . Simchi-Levi Conflicting Objectives in the Supply Chain 1. and so as to minimize total system cost subject to satisfying service requirements.

3 Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4. Electronic Commerce and Value Chain Management. Simchi-Levi 3 . Customers • Short order lead time • High in stock • Enormous variety of products • Low prices ©Copyright 2003 D. Simchi-Levi The Dynamics of the Supply Chain Order Size Customer Demand Retailer Orders Distributor Orders Production Plan Time Source: Tom Mc Guffry.Conflicting Objectives in the Supply Chain 3. 1998 ©Copyright 2003 D.

The Dynamics of the Supply Chain Order Size Customer Demand Production Plan Time Source: Tom Mc Guffry. Simchi-Levi Today’s Supply Chain Challenges • • • • Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countries Increase in logistics costs 8 4 . 1998 ©Copyright 2003 D. Electronic Commerce and Value Chain Management.

Increase in Logistics Costs US Logistics Costs as Percent of GDP 14 13 12 15% increase 11 10 9 8 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 • • • • Rising energy prices Rail capacity pressure Truck driver shortage Security requirements 9 Total US Logistics Costs 1984 to 2007 ($ Billions) Total US Logistics Costs in $MMs 1600 Total Cost 52% 1400 1200 1000 47% 800 Transportation 600 400 62% Inventory 200 Admin 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Inv Carrying Transportation Admin Total 0 Source: 19th Annual Logistics Report 10 5 .

Source: NYT 12 6 .Today’s Supply Chain Challenges • • • • • • Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countries Increase in logistics costs Importance of sustainability Unprecedented Volatility 11 Unprecedented Volatility Number of days the price of oil changed 5% or more 1990: 38 days 2008: 39 days Year In 2008 the price of oil changed 5% or more from its previous close on 39 days making it the most volatile year since 1990.

©Copyright 2003 D. – A typical t i l new car spends 15 days traveling from d d t li f the factory to the dealership. 23. internal and supplier parts shortages…”. Simchi-Levi 7 . billi i O t b 1997 The reason? “Raw material shortages. • Boeing Aircraft. Oct. – A typical box of cereal spends 104 days getting from factory to supermarket.Supply Chain: The Magnitude • It i estimated that the grocery industry could is ti t d th t th d t ld save $30 billion (10% of operating cost) by using effective logistics strategies. 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. (Wall Street Journal.6 billion in October 1997. was forced to announce writedowns of $2. 1997) ©Copyright 2003 D. one of America’s leading capital goods producers.

(Journal of Business Strategy. Simchi-Levi Supply Chain: The Potential • Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period. Oct. 1988-1996./Nov. by over 3. the essence of its approach lies in manufacturers and suppliers working closely together …. 1999) using .000% (see Anderson and Lee. ©Copyright 2003 D.Direct business model .Supply Chain: The Potential • Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”.Build-to-order strategy. 1997) ©Copyright 2003 D. Simchi-Levi 8 . “According to P&G.

©Copyright 2003 D. Simchi-Levi 9 . ©Copyright 2003 D.000 different routes – 12 different airlines are involved – 95% of the products are delivered within 45 days – 5% are delivered within 90 days.Supply Chain: The Potential • In 10 years. It has the highest sales per square foot. inventory turnover and operating profit of any discount retailer. Simchi-Levi Supply Chain: The Complexity 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. by changing its logistics system. • Distribution – The final product is shipped to hundreds of facilities all over the world – 20. Wal-Mart transformed itself .

Supply Chain Challenges • Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time ©Copyright 2003 D. 10 . Simchi-Levi Sequential Optimization Procurement Planning Manufacturing Planning Distribution Planning Demand Planning Global Optimization Supply Contracts / Collaboration / Information Systems and DSS Procurement Planning Manufacturing Planning Distribution Planning Demand Planning Image by MIT OpenCourseWare.

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 ©Copyright 2003 D. Simchi-Levi The Enterprise Fulfillment and Development Supply Chains •Product Architecture •Make/Buy Make/Buy •Early Supplier Involvement •Strategic Partnerships •Suppliers Selection •Supply Contracts Develop pment Supply Chain p Plan/Design Source Supply Produce Distribute Sell Fulfillment Supply Chain 11 .

Fulfillment and Development Supply Chain Development Supply Chain S • Industry clock speed Œ Innovative vs. functional products Make vs. onshoring Production and transportation Lead time Œ Economies of scale Œ What’s New in Logistics? • Global competition • Shorter product life cycle • New. buy Modular vs. low-cost distribution channels • More powerful well-informed customers • Internet and E-Business strategies ©Copyright 2003 D. integral Plan/Design • Core competencies Œ • Product architecture • Make/buy • Early supplier involvement • Strategic partnerships • Supplier selection • Supply contracts • Product design Œ Source Supply Produce Distribute Sell Fulfillment Supply Chain • • • Uncertainty and variability Œ Demand and supply Offshoring vs. Simchi-Levi 12 .

Significant Increase in Outsourcing Purchasing as % of Sales 70% % 60% 57% 50% 40% 34% 30% 24% 20% 16% 10% 0% 1993 60% 54% 28% 22% Machinary Computer and telecom Food manufacturing Telecom services 1996 ©Copyright 2003 D. Simchi-Levi New Concepts • Push Pull strategies Push-Pull • Direct-to-Consumer • Strategic alliances • Manufacturing postponement gp p • Dynamic Pricing • E-Procurement ©Copyright 2003 D. Simchi-Levi 13 .

©Copyright 2003 D. Simchi-Levi 14 .

.273J / 1.mit.MIT OpenCourseWare http://ocw. visit: http://ocw.edu/terms.mit.270J Logistics and Supply Chain Management Fall 2009 For information about citing these materials or our Terms of Use.edu ESD.