Introduction to

Supply Chain Management

David Simchi-Levi

Professor of Engineering Systems

Massachusetts Institute of Technology

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

Supply

Inventory & warehousing

costs

Production/purchase
costs Transportation costs Transportation costs

Inventory & warehousing

costs

Image by MIT OpenCourseWare. 1

 Supply Chain Management
• Definition:
Supply Chain Management is primarily concerned
with the efficient integration of suppliers, factories,
warehouses and stores so that merchandise is
produced and distributed in the right quantities, to
the right locations and at the right time, and so as to
minimize total system cost subject to satisfying

service requirements.
requirements

• Notice:
– Who is involved
– Cost and Service Level
– It is all about integration
©Copyright 2003 D. Simchi-Levi

Conflicting Objectives in the Supply

Chain

1 Purchasing
1.
• Stable volume requirements
• Flexible delivery time
• Little variation in mix
• Large quantities
2. Manufacturing
• Long run production
• High quality
• High productivity
• Low production cost
©Copyright 2003 D. Simchi-Levi

2
 Conflicting Objectives in the Supply
Chain

3 Warehousing
3.
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
4. 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, Electronic Commerce and Value Chain Management, 1998
©Copyright 2003 D. Simchi-Levi

3
 The Dynamics of the Supply Chain
Order Size

Customer
Demand

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 2003 D. 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

4
Increase in Logistics Costs
US Logistics Costs as Percent of GDP
14

13

12

15% increase
11

10

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

1400
52%

1200

1000
47%
800

Transportation Inventory
600 62%

400

200
Admin
0
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

Source: 19th Annual Logistics Report

10

5
 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

1990: 38 days
of oil changed 5% or more
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.
Source: NYT 12

6
 Supply Chain: The Magnitude

• It iis esti
timated
t d tth
hatt the
th grocery ind
dustry
t could
ld
save $30 billion (10% of operating cost) by
using effective logistics strategies.
– A typical box of cereal spends 104 days getting
from factory to supermarket.
– A typical
t i l new car spendsd 15 days
d traveling
t li from
f
the factory to the dealership.

©Copyright 2003 D. 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.
• Boeing Aircraft, one of America’s leading capital goods
producers, was forced to announce writedowns of $2.6
billi iin O
billion October
t b 1997
1997.

The reason? “Raw material shortages, internal and

supplier parts shortages…”. (Wall Street Journal, Oct.

23, 1997)

©Copyright 2003 D. Simchi-Levi

7
 Supply Chain: The Potential

• Procter & Gamble estimates that it saved retail

customers $65 million through logistics gains over the
past 18 months.

“According to P&G, the essence of its approach lies in

manufacturers and suppliers working closely together
…. jointly creating business plans to eliminate the
source of wasteful practices across the entire supply
chain”.
(Journal of Business Strategy, Oct./Nov. 1997)
©Copyright 2003 D. Simchi-Levi

Supply Chain: The Potential

• Dell Computer has outperformed the competition

in terms of shareholder value growth over the
eight years period, 1988-1996, by over 3,000%
(see Anderson and Lee, 1999) using
- Direct business model
- Build-to-order strategy.

©Copyright 2003 D. Simchi-Levi

8
 Supply Chain: The Potential
• In 10 years,, Wal-Mart transformed itself
by changing its logistics system. It has
the highest sales per square foot,
inventory turnover and operating profit
of any discount retailer.

©Copyright 2003 D. 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.
• Distribution
– The final product is shipped to hundreds of facilities all
over the world
– 20,000 different routes
– 12 different airlines are involved
– 95% of the products are delivered within 45 days
– 5% are delivered within 90 days.
©Copyright 2003 D. Simchi-Levi

9
 Supply Chain Challenges
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time

©Copyright 2003 D. 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.

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 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
Develop

•Product Architecture
Plan/Design •Make/Buy
Make/Buy
pment Supp

•Early Supplier Involvement

•Strategic Partnerships
Source •Suppliers Selection
•Supply Contracts
ply Chain

Supply Produce Distribute Sell

Fulfillment Supply Chain

11
 Fulfillment and Development Supply Chain

Development Supply Chain

• Industry clock speed • Product architecture
Œ Innovative vs. functional Plan/Design • Make/buy
products • Early supplier involvement
• Core competencies
Œ Make vs. buy • Strategic partnerships
• Product design Source • Supplier selection
Œ Modular vs. integral • Supply contracts

Supply Produce Distribute Sell

Fulfillment Supply Chain

• Uncertainty and variability
ΠDemand and supply
• Lead time
ΠOffshoring vs. onshoring
• Economies of scale
ΠProduction and transportation

What’s New in Logistics?

• Global competition

• Shorter product life cycle

• New, low-cost distribution channels

• More powerful well-informed customers

• Internet and E-Business strategies

©Copyright 2003 D. Simchi-Levi

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Significant Increase in Outsourcing
Purchasing as % of Sales
70%
% 60%
60%
57%
54%
50%

40%
34%
30%
28%
24% 22%
20%
16% Machinary
10% Computer and telecom
Food manufacturing
Telecom services
0%
1993 1996

©Copyright 2003 D. Simchi-Levi

New Concepts
• Push-Pull
Push Pull strategies
• Direct-to-Consumer
• Strategic alliances
• Manufacturing
g postp
p ponement
• Dynamic Pricing
• E-Procurement

©Copyright 2003 D. Simchi-Levi

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©Copyright 2003 D. Simchi-Levi

14
MIT OpenCourseWare
http://ocw.mit.edu

ESD.273J / 1.270J Logistics and Supply Chain Management

Fall 2009

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