CTL.

SC1x -Supply Chain & Logistics Fundamentals

Introduction to Logistics & Supply

Chain Management

MIT Center for

Transportation & Logistics
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 Five Questions

1.  What is a supply chain?

2.  What are logistics and supply chain management?
3.  How should you view SCM?
4.  What are the challenges
5.  Why should you care?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 3
 What is a Supply Chain?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 4
 What is a Supply Chain?
Two or more parties linked by a flow of resources –
typically material, information, and money – that ultimately
fulfill a customer request.

Information (order)

Information (status)

Material (delivery)

Money (payment)

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 5
 What is a supply chain?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 6
 What is a Supply Chain?
Customer

Tire Retailer
Rubber
Mfg Supplier Hardware
Supplier
Gear
Supplier
Supplier
Wholesaler
Customer
Pedal
Supplier
Supplier
Bicycle Retailer

Casting
Smelter
Plant
Wholesaler Customer
Frame
Supplier
Retailer

Pigment
Supplier
Paint
Supplier Retailer Customer
Chemical
Mfg

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 7
 What is a Supply Chain?

•  The primary purpose of a SC is to satisfy customer needs.

n  Only one source of revenue – the customer
n  Payments between parties are just fund exchanges
n  Division of intra-SC payments are a function of power, market
conditions, etc.

•  Supply Chains try to maximize the total value generated

n  = [What customer pays] – [Total effort expended to fulfill]

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 8
 Logistics versus Supply Chain Mgmt

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 9
 What is Supply Chain Management?
Logistics involves . . . “managing the flow of items, information, cash
and ideas through the coordination of supply chain processes and
through the strategic addition of place, period and pattern values.”
MIT Center for Transportation & Logistics

“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

“Call it distribution or logistics or supply chain management. By

whatever name it is the sinuous, gritty, and cumbersome process by
which companies move material, parts, and products to customers.”
Fortune (1994)

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 10
 Logistics vs. SCM
According to the Council of Supply Chain Management Professionals . . .

n  Logistics management is that part of supply chain management that

plans, implements, and controls the efficient, effective forward and reverse
flow and storage of goods, services and related information between the
point of origin and the point of consumption in order to meet customers'
requirements.

n  Supply chain management encompasses the planning and

management of all activities involved in sourcing and procurement,
conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can
be suppliers, intermediaries, third party service providers, and customers.
In essence, supply chain management integrates supply and demand
management within and across companies.

Source: Used by permission, Council of Supply Chain Management Professionals, http://cscmp.org/.

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 11
 Supply Chain Management
Perspectives

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 12
 Supply Chain Perspectives

Image Source: Arntzen, B. MIT Center for Transportation & Logistics, Hi-Viz Research Project (2013)

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 13
 Supply Chain Perspectives
Customers
Manufacturers

Suppliers Distributors

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 14
 Process View of Supply Chains
Customer
•  Four Primary Cycles
n  Customer Order Cycle Customer Order Cycle
n  Replenishment cycle
Retailer
n  Manufacturing Cycle
n  Procurement Cycle Replenishment Cycle
•  Cycles Occur Between Stages
n  Interactions differ at each stage Distributor
•  Not every SC will have all 4 Cycles
Manufacturing Cycle

Manufacturer

Procurement Cycle
Adapted from Chopra & Meindl “Supply Chain Management”
Supplier
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 15
 Macro Process (Software) Perspective
Firm

Customer
Supplier

SRM ISCM CRM

“source” “make, move, store” “sell”

Supplier Relationship Internal Supply Chain Customer Relationship

Management Management Management
n  Sourcing n  Strategic Planning n  Marketing
n  Negotiation n  Demand Planning n  Selling
n  Buying n  Supply Planning n  Call Centers
n  Design and Supply n  Fulfillment n  Order Management
Collaboration

Different macro processes should be aligned

n  Fall under different groups (Marketing-CRM, Manufacturing-
ISCM, Purchasing-SRM)
n  Forecasts, schedules, design, etc. should be coordinated
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 16
 Supply-Chain Operations Reference (SCOR) Model

Plan P1 Plan Supply Chain

P2 Plan Source P3 Plan Make P4 Plan Deliver P5 Plan Returns

Source Make Deliver

Suppliers

Customers
S1 Source Stocked Products M1 Make-to-Stock D1 Deliver Stocked Products

S2 Source MTO Products D2 Deliver MTO Products

M2 Make-to-Order

S3 Source ETO Products M3 Engineer-to-Order D3 Deliver ETO Products

Return Return
Source Deliver

Enable
Source: Supply Chain Council
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 17
 Traditional Functional Perspective
•  Purchasing / Procurement •  Order Processing
n  What to buy from who n  Receiving, Entry & Status
n  Corporate vs Group n  Order Management
•  Inventory Control •  Transportation
n  How much to stock where n  Inbound versus Outbound
n  Trigger points n  Domestic versus International
n  Replenishment plan n  Modal control (Rail, TL, LTL,
•  Warehousing Parcel, Air, etc.)
n  Storage, Mixing, Break bulk •  Customer Service
n  Pick Pack and Ship n  Geographic
n  What to stock where in WH n  Product Line Specific
•  Materials Handling •  Planning Group
n  How to move product n  Facility Location
n  Packaging, containerization n  Network Design
n  Storage layout n  Demand Planning

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 18
 Systems Perspective
of Supply Chains

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 19
 Supply Chain as a System
•  Take an Engineering Systems Perspective
n  What is a variable and what is a constraint?
n  Continuous expansion of decision variables
n  Increases potential for improvement but increases both
complexity and coordination requirements

Material Handling
Order Processing
Inventory Mgmt

Transportation
Customer Svc
Warehousing
Purchasing

Objective: Deliver at lowest transport cost

Variable:
w Select carrier to tender each load to
Constraints:
w Ship everything each day
w Must deliver within specified windows
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 20
 Supply Chain as a System
•  Take an Engineering Systems Perspective
n  What is a variable and what is a constraint?
n  Continuous expansion of decision variables
n  Increases potential for improvement but increases both
complexity and coordination requirements

Material Handling
Order Processing
Inventory Mgmt

Transportation
Customer Svc
Warehousing
Purchasing

Objective: Deliver at lowest transport cost

Variables:
Objective: Deliver at lowest total cost
Variables: w Select carrier to tender each load to
w Select carrier to tender each load to w Select time windows to deliver
w Select time windows to deliver Constraints:
w Select when to ship what from where w Ship everything each day
Constraints:
w Deliver within negotiated time frame
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 21
 Supply Chain as a System
•  Take an Engineering Systems Perspective
n  What is a variable and what is a constraint?
n  Continuous expansion of decision variables
n  Increases potential for improvement but increases both
complexity and coordination requirements

Material Handling
Order Processing
Inventory Mgmt
Product Design

Manufacturing

Transportation
Customer Svc
Warehousing
Purchasing

Objective:
w Design, build, and deliver at lowest total cost
Variables:
w Select carrier to tender each load to
w Select time windows to deliver
w Select when to ship what from where
w Select where to stock which form of product
Constraints:
w Deliver within negotiated time frame

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 22
 Supply Chain as a System
•  Take an Engineering Systems Perspective
n  What is a variable and what is a constraint?
n  Continuous expansion of decision variables
n  Increases potential for improvement but increases both
complexity and coordination requirements
Objective:
Material Handling w Maximize on-shelf availability

Order Processing
Inventory Mgmt
Product Design

Manufacturing

Transportation
Customer Svc
Variables:
Warehousing
Purchasing
Supplier

Retailer
w Select carrier to tender each load to
w Select time windows to deliver
w Select when to ship what from where
w Select where to stock which form of
product
w Select contract relationships
w Select who should control replenishment
w Which channel member should perform
which function
Why is this so hard to do? Constraints:
w Total delivered cost to shelf

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 23
 What are the major challenges?
(Why is it so hard?)

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 24
 Why is it so difficult? 1/2
•  Metrics – How do you measure a system?
n  Trade-off of Breadth vs. Validity of metrics
n  Outcome Based Logistics - Perfect order, Perfect Shelf

•  Politics and Power of Players - Who wins?

n  Mom & Pop Shop versus Mega-Stores
n  Mega Retailers vs. Mega CPG Manufacturers

•  Visibility – Who can see what and how quickly?

n  Data are stored separately
n  All parties do not have equal access to data
n  Massive data ≠ Shared & accessible information

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 25
 Why is it so difficult? 2/2
•  Uncertainty - Who knows what is going to happen?
n  Variable demand of product (shorter lifecycles)
n  Variable manufacturing yield
n  Unreliable sourcing of raw materials
n  Inconsistent transit lead times

•  Increased complexity – Why is it getting harder?

n  Exploding number of Stock Keeping Units (SKUs)
n  Higher and diverging customer demands
n  New & merging channels (Omni-Channel)

•  Global operations – Why don’t we ever close?

n  Most firms source & sell across globe
n  Multiple regions, time zones, languages, & cultures

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 26
 Why do we care?

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 27
 Why do we care?
•  Supply Chains . . .
n  Span the globe and cannot be managed as an isolated function,
n  Have become critical to any organization’s operations, and
n  Connect functions, divisions, and business units within a firm
as well as across firms.

Evolved into being both a Bridge and a Shock Absorber

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File:Mini_Shocks.JPG#mediaviewer/File:Mini_Shocks.JPG Lesson: Introduction to Supply Chains 28
 Example: Variability of #2 Diesel Pricing
4.8

4.6

4.4

4.2
On Highway Price of #2 Diesel ($/gallon)

3.8

3.6

3.4

3.2

2.8

2.6

2.4

2.2

2
Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 May-14 Nov-14

Data Source: U.S. Energy Information Administration, http://www.eia.gov/petroleum/gasdiesel/diesel_proc-methods.cfm

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 29
 Logistics Costs per GDP
GDP   Inv  Cost   Trans  Cost  
Year    ($T)   ($B)   ($B)  
1981   3.21   259   228  
1985   4.35   227   274  
1990   5.98   283   351  
1995   7.66   302   441  
2000   10.29   385   594  
16.0%
2005   13.1   410   739  
2010   14.96   429   769  
14.0% 2013   16.8   469   862  

12.0%
Percentage of US GDP

10.0%

8.0%

6.0%

4.0%

2.0%
1980 1985 1990 1995 2000 2005 2010 2015
Year

US Inventory Holding Cost US Transportation Cost Total US Logistics Cost

Data Sources: Council of Supply Chain Management (2014) 25th Annual State of Logistics Report
CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 30
 Still, why do we care?
Functional Logistics Supply Chain

Key Skills Technically Narrow Coordination

Influence Local & Controllable Across entire Supply Chain

Leadership Hierarchical, Direct, Influential, Indirect, ‘Soft’

‘Hard’
Risk Management Robust or Reactionary Planned Response & Flexibility

Measurement Single Focus Multi-faceted

Technology Isolated Optimization Visibility & Coordination

Approach
Technology Self-Hosted, On-site Cloud or SaaS
Platform
Scope / Reach Regional / National Global / Multi-National

Supply Chain Management is a growing and evolving discipline.

CTL.SC1x - Supply Chain and Logistics Fundamentals Lesson: Introduction to Supply Chains 31
 CTL.SC1x -Supply Chain & Logistics Fundamentals

Questions, Comments, Suggestions?

Use the Discussion!

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