Supply Chain Management Lets Take Four Products

Introduction
 Apples
Let’s Discuss about their
 Zinc/ Copper Supply Chain

 Laptop Assembly

 Footballs

What is a Supply Chain? Supply Chain Management

 Introduction
 The objective of a supply chain

Supply Chains Supply Chain Processes

 All facilities, functions, and activities associated with

flow and transformation of goods and services from raw
materials to customer, as well as the associated
information flows
 An integrated group of processes to “source,” “make,”
and “deliver” products
 All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)

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 A Generic Supply Chain
Sources: Regional Field Customers,
plants Warehouses: Warehouses: demand
vendors stocking stocking centers
ports points points sinks

Supply

Inventory

Purchase Inventory
Supply Chain Illustration Transportation

Traditional View: Logistics in the

Manufacturing Firm
Logistics is the flow's management of products, services and information
Profit 4% Profit from the origin point (suppliers) to the end (final customer). It involves
Logistics the management of four basic sub-systems: supply, production support,
Cost
Logistics Cost 21% distribution and returns.
Marketing
Cost
Nowadays, the logistics needs to be totally integrated, with intense
information sharing among its sub-systems to achieve its mission, which
Marketing Cost 27%
is: delivery the right product, with appropriate quality, at minimal cost, in
the right place, satisfying the customers.
Manufacturing
Manufacturing Cost 48% Cost

The problem here is that this a purely cost based view of the supply chain and
drives a firm to simply reducing logistics costs. This is an incomplete picture.

Logistics V/s Supply Chain Management

SCM is a broader concept, it involves the logistics management of the
processes carried out within all members in supply chain and also, the
relationships management with suppliers, logistics providers, clients and
final customers, aiming partnerships or strategic alliances, in order to
enable the intense information sharing and also resources (physical,
monetary, knowledge) sharing.
Nowadays the companies do not compete with other companies, but one
supply chain competes with other supply chains. So, the companies
involved in a specific supply chain are managed as a single entity, not as
separated ones.

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 Supply Chain Management: The
Magnitude in the Traditional View
Estimated that the grocery industry could save $30 billion (10% of
operating cost) by using effective logistics and supply chain strategies
– A typical box of cereal spends 104 days from factory to sale
– A typical car spends 15 days from factory to dealership
Supply Chain Management:
The True Magnitude
Compaq estimates it lost $.5 billion to $1 billion in sales in a particular
year because laptops were not available when and where needed
When the 1 gig processor was introduced by AMD, the price of the 800
mb processor dropped by 30%
P&G estimates it saved retail customers $65 million by collaboration
resulting in a better match of supply and demand

Supply Chain
Supply Chain Management (SCM) Uncertainty and Inventory
Managing flow of information through supply chain in order to attain the  One goal in SCM:  Factors that contribute to uncertainty
level of synchronization that will make it more responsive to customer – respond to uncertainty in customer demand – inaccurate demand forecasting
without creating costly excess inventory – long variable lead times
needs while lowering costs
 Negative effects of uncertainty – late deliveries
Keys to effective SCM – lateness – incomplete shipments
– information – incomplete orders – product changes
– communication  Inventory – batch ordering
– cooperation – insurance against supply chain uncertainty – price fluctuations and discounts
– inflated orders
– trust

A picture is better than 1000 words!

Bullwhip Effect
Occurs when slight demand variability is magnified as information moves back upstream - A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

- achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits

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 Supply
Chain
for
Denim
Jeans

Supply Chain Management

Detergent supply chain:

P&G or other Third Albertson’s Customer wants

Supply manufacturer party DC Supermarket detergent

Chain
for Plastic cup XYZ Co.
Chemical
manufacturer
Denim Producer Packaging
(e.g. Oil Company)
Jeans
(cont.) Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)

Flows in a Supply Chain The Objective of a Supply Chain

Maximize overall value created
Information
Supply chain value: difference between what the final product is worth to
the customer and the effort the supply chain expends in filling the
Product customer’s request
Customer Value is correlated to supply chain profitability (difference between
Funds revenue generated from the customer and the overall cost across the
supply chain)

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 The Objective of a Supply Chain
• Sources of supply chain cost: flows of information, products, or funds
between stages of the supply chain
• Supply chain management is the management of flows between and
among supply chain stages to maximize total supply chain profitability
The Objective of a Supply Chain
Example: Dell receives $2000 from a customer for a computer (revenue)
Supply chain incurs costs (information, storage, transportation,
components, assembly, etc.)
Difference between $2000 and the sum of all of these costs is the supply
chain profit
Supply chain profitability is total profit to be shared across all stages of
the supply chain
Supply chain success should be measured by total supply chain
profitability, not profits at an individual stage

Decision Phases of a Supply Chain Supply Chain Strategy or Design

Supply chain strategy or design Decisions about the structure of the supply chain and what processes each
Supply chain planning stage will perform
Strategic supply chain decisions
Supply chain operation
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
Supply chain design must support strategic objectives
Supply chain design decisions are long-term and expensive to reverse –
must take into account market uncertainty

Supply Chain Planning Supply Chain Planning

Definition of a set of policies that govern short-term operations Planning decisions:
Fixed by the supply configuration from previous phase – Which markets will be supplied from which locations
Starts with a forecast of demand in the coming year – Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
Must consider in planning decisions demand uncertainty, exchange rates,
competition over the time horizon

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 Supply Chain Operation
Time horizon is weekly or daily
Decisions regarding individual customer orders
Supply chain configuration is fixed and operating policies are determined
Goal is to implement the operating policies as effectively as possible
Allocate orders to inventory or production, set order due dates, generate
pick lists at a warehouse, allocate an order to a particular shipment, set
delivery schedules, place replenishment orders
Much less uncertainty (short time horizon)
Process View of a Supply Chain
Cycle view: processes in a supply chain are divided into a series of
cycles, each performed at the interfaces between two successive supply
chain stages
Push/pull view: processes in a supply chain are divided into two
categories depending on whether they are executed in response to a
customer order (pull) or in anticipation of a customer order (push)

Cycle View of a Supply Chain

Cycle Each cycle occurs at the interface between two successive stages
Any cycle
Customer order cycle (customer-retailer)
View of 0. Customer arrival
1. Customer triggers an order Replenishment cycle (retailer-distributor)
Supply Manufacturing cycle (distributor-manufacturer)
2. Supplier fulfils the order
Chains 3. Customer receives the Procurement cycle (manufacturer-supplier)
order and pays Cycle view clearly defines processes involved and the owners of each process.
Specifies the roles and responsibilities of each member and the desired
outcome of each process.

Cyclic View of a Supply Chain

 A cycle view of supply chain defines the process and owners of each
process. It specifies the role/ responsibilities and desired outcome of each
process

Supplier markets  Buyer Places order  Supplier receives order

 Supplier supplies the order Buyer receives the order Buyer
returns reverse order
(reverse supply chain/ closed loop supply chain)

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 Assignment
Reading And Research Assignment: Read About SCOR Model. Visit
Supply Chain Council website for the same.

 Divide into four groups and submit the SOURCE MAKE

DELIVER Model for: 1st group: Made to Stock Company; 2nd group
Made to Order, 3rd group Assemble to order and 4th group Engineer to
order scenario. Pick any product of your choice and develop SCOR
model for all four scenario’s.

Push vs Pull System Push/Pull View of Supply Chains

 What instigates the movement of the work in the system? Procurement, Customer Order
Manufacturing and Cycle
 In Push systems, work release is based on downstream demand forecasts Replenishment cycles
– Keeps inventory to meet actual demand
– Acts proactively
» e.g. Making generic job application resumes today

 In Pull systems, work release is based on actual demand or the actual status of the PUSH PROCESSES PULL PROCESSES
downstream customers
– May cause long delivery lead times
– Acts reactively
» e.g. Making a specific resume for a company after talking to the recruiter Customer
Order Arrives
Push-Pull boundary

Push/Pull View of Push/Pull View of

Supply Chain Processes Supply Chain Processes
Supply chain processes fall into one of two categories depending on the Useful in considering strategic decisions relating to supply chain design –
timing of their execution relative to customer demand more global view of how supply chain processes relate to customer orders
Pull: execution is initiated in response to a customer order (reactive)  Can combine the push/pull and cycle views
– L.L. Bean
Push: execution is initiated in anticipation of customer orders – Dell
(speculative) The relative proportion of push and pull processes can have an impact on
Push/pull boundary separates push processes from pull processes supply chain performance

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 What is Supply Chain Management? What is Supply Chain Management?

Managing supply chain flows and assets, to maximize supply chain Managing supply chain flows and assets, to maximize supply chain
surplus surplus

What is supply chain surplus? What is supply chain surplus?

Supply chain surplus = Customer Value - Supply Chain Cost

SYSTEMS PERSPECTIVE OF SCM

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 Difficulties/ Challenges
Metrics- How to measure a system?
– Trade-off of Breath/ Length v/s Validity of metrics-importance of metrics to each
player in supply chain as you do not own the complete supply chain!!
– Outcome Based Logistics- Perfect order, Perfect Shelf-depends on what is your
product/ service you deliver
Politics and Power of Players- Who’ll wins?
– Local grocery shops V/s Mega-Stores- who is imp for suppliers?
– Mega Retailers vs. Mega CPG Manufactures- who will have more clout?
Visibility- What and how quickly to be seen?
– Data are stored separately
– All parties do not have equal access to data
– Massive data ≠ Shared & accessible information

Difficulties/ Challenges
Uncertainty Supply Chain…….
– Variable Demand of product (shorter PLC)
– Variable Manufacturing yield SPAN THE GLOBE AND CANNOT BE MANAGED AS
– Unreliable sourcing of raw material AN ISOLATED FUCNTION: IT’S A BRIDGE AS WELL
– Inconsistent transit lead times AS A SHOCK ABSORBER
Increased complexity- gets harder!!
– Exploding number of SKU’s
– Higher and divergent customer demands  Critical to any organization’s operations, and
– New & merging channels (Omni-Channel-variety of ordering/ payment modes!!) Connect functions, divisions, and business units within a firm as
Global operations- Doesn’t get easy!! well as across firms.
– Most firms source & sell across globe
– Multiple regions, time zones, languages, & cultures

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 Fitting the SC to the customer or vice versa?

Understand the customer Wishes

Understand the Capabilities of your SC

Match the Wishes with the Capabilities

Challenge: How to meet extensive Wishes with limited Capabilities?

Achieving Strategic Fit How is Strategic Fit Achieved?

Strategic fit: Step 1: Understanding the customer and supply chain uncertainty
– Consistency between customer priorities of competitive strategy and supply chain Step 2: Understanding the supply chain
capabilities specified by the supply chain strategy Step 3: Achieving strategic fit
– Competitive and supply chain strategies have the same goals
A company may fail because of a lack of strategic fit or because its
processes and resources do not provide the capabilities to execute the
desired strategy
Example of strategic fit -- Dell

Understanding the Customer and Understanding the Customer and

Supply Chain Uncertainty Supply Chain Uncertainty
Identify the needs of the customer segment being served Overall attribute of customer demand
Quantity of product needed in each lot Demand uncertainty: uncertainty of customer demand for a product
Response time customers will tolerate Implied demand uncertainty: resulting uncertainty for the supply chain
Variety of products needed given the portion of the demand the supply chain must handle and
Service level required attributes the customer desires
Price of the product
Desired rate of innovation in the product

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 Achieving Strategic Fit:
Understanding the Customer and
Consistent SCM and Competitive
Supply Chain Uncertainty
strategies
Implied demand uncertainty also related to customer needs and product Fit SC to the customer
attributes
Understanding the Customer
– Range of demand/ quantity, pizza hut stable
First step to strategic fit is to understand customers by mapping their – Production lot size, seasonal products
Implied (Demand)
demand on the implied uncertainty spectrum – Response time, organ transplantation
Uncertainty for SC
– Service level/ channels , product availability
Implied trouble
– Product variety
for SC
– Innovation
– Accommodating poor quality

Contributors to Implied Demand Obstacles to Achieving

Uncertainty Strategic Fit
Increasing variety of products
Commodities Customized products
Detergent High Fashion Clothing Decreasing product life cycles
Long lead time steel Emergency steel, Increasingly demanding customers
for maintenance/replacement
Fragmentation of supply chain ownership
Customer Need Responsiveness
Efficiency
Globalization
Low Implied Demand Uncertainty High
Difficulty executing new strategies
Short lead times, product variety,
distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty

Reading Assignment: Efficient v/s Responsive SC

Drivers of Supply Chain Performance Drivers of Supply Chain Performance

Facilities  Information
– places where inventory is stored, assembled, or fabricated – data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– Role; location; capacity, flexibility
– potentially the biggest driver of supply chain performance
– production sites and storage sites
 Sourcing
Inventory
– Responsibility of production; storage; transportation or MIS
– raw materials, WIP, finished goods within a supply chain – functions a firm performs and functions that are outsourced
– inventory policies  Pricing
Transportation – Price associated with goods and services provided by a firm to the supply chain
– moving inventory from point to point in a supply chain – Responsive Prices v/s Efficient Prices
– combinations of transportation modes and routes

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 A Framework for
Structuring Drivers WAL-MART
Competitive Strategy Efficiency v/s Responsiveness
Efficient
Supply Chain
Strategy – Inventory: cross docking; well planned DC;
Efficiency Responsiveness – Transportation
Supply chain structure
– Location: centrally Located DC’s
Logistical Drivers
– Sourcing: Large orders; economies of scale
Facilities Inventory Transportation Responsiveness:
– Information
Information Sourcing Pricing – Cross Docking
No drastic price fluctuations hence demand is stable.
Cross Functional Drivers
Wal-Mart Case Study

Facilities Components of Facilities Decisions

Role in the supply chain Location
– the “where” of the supply chain – centralization (efficiency) vs. decentralization (responsiveness)
– manufacturing or storage (warehouses) – other factors to consider (e.g., proximity to customers)
Role in the competitive strategy Capacity (flexibility (variety) versus efficiency (dedicated))
– economies of scale (efficiency priority) Manufacturing methodology (product focused versus process focused)
– larger number of smaller facilities (responsiveness priority) Warehousing methodology (SKU storage, job lot storage, cross-docking)
Components of facilities decisions Overall trade-off: Responsiveness versus efficiency

Inventory: Role in the Supply Chain Inventory: Role in Competitive Strategy

Inventory exists because of a mismatch between supply and demand If responsiveness is a strategic competitive priority, a firm can locate
Source of cost and influence on responsiveness larger amounts of inventory closer to customers
Impact on If cost is more important, inventory can be reduced to make the firm more
– material flow time: time elapsed between when material enters the supply chain to efficient
when it exits the supply chain Trade-off
– throughput
» rate at which sales to end consumers occur
» I = DT (Little’s Law)
» I = inventory; D = throughput; T = flow time
» Inventory and throughput are “synonymous” in a supply chain as throughput is determined as
per customers demand.

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 Transportation: Role in
Components of Inventory Decisions the Supply Chain
 Cycle inventory Moves the product between stages in the supply chain
– Average amount of inventory used to satisfy demand between shipments
Impact on responsiveness and efficiency
– Depends on lot size/ economies of scale!! Holding v/s ordering cost!!
 Safety inventory Faster transportation allows greater responsiveness but lower efficiency
– inventory held in case demand exceeds expectations Also affects inventory and facilities
– costs of carrying too much inventory versus cost of losing sales
 Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible production
 Overall trade-off: Responsiveness versus efficiency

Transportation: Components of
Role in the Competitive Strategy Transportation Decisions
If responsiveness is a strategic competitive priority, then faster Mode of transportation:
transportation modes can provide greater responsiveness to customers – air, truck, rail, ship, pipeline, electronic transportation
who are willing to pay for it – vary in cost, speed, size of shipment, flexibility
Can also use slower transportation modes for customers whose priority is Route and network selection
price (cost) – route: path along which a product is shipped
Can also consider both inventory and transportation to find the right – network: collection of locations and routes
balance In-house or outsource
Overall trade-off: Responsiveness versus efficiency

Information: Role in Information:

the Supply Chain Role in the Competitive Strategy
The connection between the various stages in the supply chain – allows Allows supply chain to become more efficient and more responsive at the
coordination between stages same time (reduces the need for a trade-off) HOW?? EVPI!!
Crucial to daily operation of each stage in a supply chain – e.g., Information technology
production scheduling, inventory levels What information is most valuable?

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 Sourcing: Role in
Components of Information Decisions the Supply Chain
Push (MRP) versus pull (demand information transmitted quickly Set of business processes required to purchase goods and services in a
throughout the supply chain) supply chain
Coordination and information sharing Supplier selection, single vs. multiple suppliers, contract negotiation
Forecasting and aggregate planning 3PL; Distribution; Sourcing (Manufacturing; complete/ partial) from
Enabling technologies other countries/ sources!
– EDI: Electronic Data Interchange SEARCH FOR YOUR CORE COMPETENCY!!
– Internet
– ERP systems
– Supply Chain Management software
– RFID: Radio Frequency Identification
Overall trade-off: Responsiveness versus efficiency

Sourcing:
Role in the Competitive Strategy Components of Sourcing Decisions
Sourcing decisions are crucial because they affect the level of efficiency In-house versus outsource decisions
and responsiveness in a supply chain Supplier evaluation and selection
In-house vs. outsource decisions- improving efficiency and Procurement process
responsiveness Overall trade-off: Increase the supply chain profits

Make or Buy Decisions

WHY????
– Capacity not free
– Demand is variable
Make – Cheaper to buy
– R & D costs
Or – No experience or expertise

Buy????

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 Pricing: Role in
Make or Buy Decisions the Supply Chain
Costs Pricing determines the amount to charge customers in a supply chain
Capacity Pricing strategies can be used to match demand and supply
Quality
Speed
Reliability: Delivery and Quality
Expertise

Pricing:
Role in the Competitive Strategy Components of Pricing Decisions
Firms can utilize optimal pricing strategies to improve efficiency and Pricing and economies of scale
responsiveness – Changeover
Low price and low product availability; vary prices by response times – Load size
– Quantity discounts
Everyday low pricing versus high-low pricing
Big Bazar/ Wal-Mart v/s Movie tickets
Fixed price versus menu pricing
Overall trade-off: Increase the firm profits

For Reading Assignment

Metrics related to each SC Driver.

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Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost/slow/no High cost/
duplication streamlined/reliable
Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

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