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Supply chain:
What is a Supply
A supply chain is the system of organizations, people,
activities, information and resources involved in moving a
product or service from supplier to customer. Supply chain
activities transform raw materials and components into a
finished product that is delivered to the end customer.
Supplier
Chain? Network of organizations and business process for procuring materials,
transforming raw materials into the finished products and distributing the finished
products to the customers.
Supply chain management :
Integration of suppliers , distributors and customer logistics
into one cohesive process.
Supply chain management process:
information system that automate the flow information between a firm and its
suppliers in order to optimize the planning , sourcing , manufacturing and delivering
of products and services.

Supplier }
Storage Mfg. Storage Dist. Retailer Customer

Supplier

A Example Of A Supply Chain

Say we get an order from a European retailer to produce 10,000
garments. For this customer we might decide to buy yarn from a
Korean producer but have it woven and dyed in Taiwan. So we pick the
yarn and ship it to Taiwan. The Japanese have the best zippers … so we
go to YKK, a big Japanese zipper manufacturer, and we order the right
zippers from their Chinese plants. …the best place to make the
garments is Thailand. So we ship everything there. …the customer
needs quick delivery, we may divide the order across five factories in
Thailand. Effectively, we are customizing the value chain to best meet
the customer’s needs. (Interview of Victor Fung of Li & Fung in HBR,
Sept-Oct 1998.)

In the interview example, it can be seen that Li & Fung has created a
supply chain for the purpose of meeting a customer’s needs. In
general, this case is more the exception than the rule, but serves to
illustrate some of the pieces of a supply chain.

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Why so Difficult to Match Supply and Demand?

Supply Chain Management Uncertainty in demand and/or supply
Supply chain management deals with linking the Changing customer requirements
organizations within the supply chain in order to meet Decreasing product life cycles
demand across the chain as efficiently as possible. Fragmentation of supply chain ownership
Conflicting objectives in the supply chain
Conflicting objectives even within a single firm
Suppl Deman Marketing/Sales wants: more FGI inventory, fast delivery, many
y d package types, special wishes/promotions
Production wants: bigger batch size, depots at factory, latest ship
date, decrease changeovers, stable production plan
Distribution wants: full truckload, low depot costs, low
distribution costs, small # of SKUs, stable distribution plan
Mission impossible: Matching Supply and Demand

Why is supply chain management so important?

The Eight Components of Supply Chain Management To gain efficiencies from procurement, distribution and logistics
• Planning. This is one of the most important stages. ... To make outsourcing more efficient
• Information. The world today is dominated by a continuous flow of information. ... To reduce transportation costs of inventories
• Source. Suppliers play a very crucial role in supply chain management systems. ...
To meet competitive pressures from shorter development times,
• Inventory. ... more new products, and demand for more customization
• Production. ... To meet the challenge of globalization and longer supply chains
• Location. ... To meet the new challenges from e-commerce
• Transportation. ...
To manage the complexities of supply chains
• Return of goods.
To manage the inventories needed across the supply chain

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Why is supply chain management difficult?
Different organizations in the supply chain may have different,
conflicting objectives:
Manufacturers: long run production, high quality, high
productivity, low production cost
Distributors: low inventory, reduced transportation costs, quick
replenishment capability
Customers: shorter order lead time, high in-stock
inventory, large variety of products, low prices
Supply chains are dynamic - they evolve and change over time
Product design
Should products be redesigned to reduce logistics costs?
Should products be redesigned to reduce lead times?
Would delayed differentiation be helpful?
Information technology and decision-support systems
What data should be shared (transferred)
How should the data be analyzed and used?
What infrastructure is needed between supply chain members?
Should e-commerce play a role?
Customer value
How is customer value created by the supply chain?
What determines customer value? How do we measure it?
How is information technology used to enhance customer value in the
supply chain?
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Issues In Supply Chain Management
Distribution network configuration
How many warehouses do we need?
Where should these warehouses be located?
What should the production levels be at each of our plants?
What should the transportation flows be between plants and warehouses?
Inventory control
Why are we holding inventory? Uncertainty in customer demand? Uncertainty in the
supply process? Some other reason?
If the problem is uncertainty, how can we reduce it?
How good is our forecasting method? Distribution strategies
Direct shipping to customers?
Classical distribution in which inventory is held in warehouses and then shipped as
needed?
Cross-docking in which transshipment points are used to take stock from suppliers’
deliveries and immediately distribute to point of usage?
Supply chain integration and strategic partnering
Should information be shared with supply chain partners?
What information should be shared?
With what partners should information be shared?
What are the benefits to be gained?
SCM - Inventory Management Issues
Manufacturers would like to produce in large lot sizes because it is more cost
effective to do so. The problem, however, is that producing in large lots does
not allow for flexibility in terms of product mix.
Retailers find benefits in ordering large lots such as quantity discounts and
more than enough safety stock.
The downside is that ordering/producing large lots can result in large
inventories of products that are currently not in demand while being out of
stock for items that are in demand.
Ordering/producing in large lots can also increase the safety stock of suppliers
and its corresponding carrying cost. It can also create what’s called the
bullwhip effect.
The bullwhip effect is the phenomenon of orders and inventories getting
progressively larger (more variable) moving backwards through the supply
chain. This is illustrated graphically on the next slide.
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Inventory Management Disaster-Apple Misses Power Mac Demand
Many forget than even through the mid-1990s, Apple was often the leader in market share
in the then still deeply fragmented PC market. That position took a permanent hit in the
last half of 1995 due to supply chain foibles.
Apple was introducing its new line of Power Mac PCs, to be launched just before the
Christmas season in 1995. Just two years before, however, the company had been burned by
excess inventories and production capacity during a similar launch for its Power Book
laptops. At one point, Apple
So this time, it played things very conservatively. That turned had an order
out to be the expensive option. backlog of $1 billion.
When demand for Power Macs exploded, Apple was caught short for the critical
Christmas season. Forecasts were too low, there wasn’t enough flex in the
supply chain, and some parts suppliers developed additional delivery issues. At
one point, Apple has $1 billion dollars in unfilled orders in its system. Unable to
capitalize on the market opportunity it had been handed, the stock price was
soon cut in half, the CEO was shown the door, shareholder lawsuits came
pouring in, and Apple’s market position in PCs took a permanent hit such that it
took the IPOD years later to lead a recovery in the company.
Supply Chain Success Story- Wal-Mart
On gaining competitive advantage
In the late 1970s, with about 200 stores, Wal-Mart was a relatively small retailer.
At that time, Sears and Kmart dominated the retail market. Since then, Wal-
Mart gained significant market share from these retailers and became the
largest and most profitable retailer in the world. Today, Wal-Mart is admired for
its collaboration and technology driven supply chain practices and is leading the
retailing industry with its innovative supply chain practices.
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Other helpful techniques for improving inventory management include:
Cross-docking. This involves unloading goods arriving from a supplier and
immediately loading these goods onto outbound trucks bound for various
retailer locations. This eliminates storage at the retailer’s inbound
warehouse, cuts the lead time, and has been used very successfully by Wal-
Mart and Xerox among others.
Delayed differentiation. This involves adding differentiating features to
standard products late in the process. For example, Benetton decided to
make all of their wool sweaters in un-dyed yarn and then dye the sweaters
when they had more accurate demand data. Another term for delayed
differentiation is postponement.
Direct shipping. This allows a firm to ship directly to customers rather
than through retailers. This approach eliminates steps in the supply chain
and reduces lead time. Reducing one or more steps in the supply chain is
known as disintermediation. Companies such as Dell use this approach.
"People think we got big by putting
big stores in small towns. Really, we
got big by replacing inventory with
information.”
Sam Walton, Founder of Wal-Mart
•Wal-Mart established in 1962, known for innovative business practices.
•One of the first retailing companies to centralize distribution system.
•Wal-Mart placed orders for huge quantities of goods with its suppliers.
•Information of product, manufacturer, price was recorded on computer system &
information was passed to centralized data warehouse.
•Provided suppliers historical sales data of 24 months, allowed them to track invoice, can
make demand forecast.
•Wal-Mart operates their own satellite network.
•Effective use of logistics management
•Reduced inventory cost
•Higher productivity
• Shorter lead times
•Higher profits
•Greater customer loyalty
•Bargaining power over suppliers
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Wal-Mart Supply Chain Supply Chain

Success Story-
Traditional Dell
Supply Chain On gaining competitive advantage

?
Dell Supply
Chain

On April 20, 2001 Dell toppled Compaq as the world’s largest PC maker*
Dell’s market share was 12.8% as opposed to Compaq’s market share 12.1%
Compaq and HP could not get into a price war with Dell because
Dell’s profit margin was 18%
SUPPLIERS For DELL
Compaq and HP’s profit margins were in single digits
MICROSOFT - for Windows
INTEL- for micro processors
NVIDIA - for Graphic chips
*Source: Forbes.com, April 24, 2001 SONY- for monitors

DELL DIRECT SELLING What Is the Supply Chain?

New Value Chain: Dell had no in-house stock of finished goods inventories unlike
competitors using the traditional value chain model
• Also referred to as the logistics network
• Suppliers, manufacturers, warehouses, distribution
Pull Mechanism: It did not have to wait for resellers to clear out their own inventories before centers and retail outlets – “facilities”
it could push new models into the marketplace (typically operated with 60-70 days stock)
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

Personalization: Customers got the satisfaction of having their computers customized to their and the
particular liking
Dell’s success is a combination of:
• Direct Sales. • Raw materials
• Inventory Management • Work-in-process (WIP) inventory
• Supplier Integration Transportation Transportation

• Finished products
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory
CosCtossts

Limitation of direct sell model in emerging market

Buying habit
Not access to internet
that flow between the facilities
Lack of online payment (i.e. credit card)

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Supply Chain Management – Supply Chain Imperatives for

Benefits Success
• A 1997 PRTM Integrated Supply Chain Benchmarking Survey • View the supply chain as a strategic asset and a differentiator
of 331 firms found significant benefits to integrating the supply − Wal-Mart’s partnership with Proctor & Gamble to automatically
chain replenish inventory
− Dell’s innovative direct-to-consumer sales and build-to-order
manufacturing
Delivery Performance 16%-28% Improvement
• Create unique supply chain configurations that align with your
Inventory Reduction 25%-60% Improvement company’s strategic objectives
Fulfillment Cycle Time 30%-50% Improvement − Operations strategy
− Outsourcing strategy
Forecast Accuracy 25%-80% Improvement
− Channel strategy
Supply chain configuration components
Overall Productivity 10%-16% Improvement − Customer service strategy
Lower Supply-Chain Costs 25%-50% Improvement − Asset network
• Reduce uncertainty
Fill Rates 20%-30% Improvement
− Forecasting
Improved Capacity Realization 10%-20% Improvement − Collaboration
− Integration
Source: Cohen & Roussel
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