Supply Chain Management

M Akmal Ataullah
 What is a Supply Chain?
Flow of products and services from:
– Raw materials manufacturers
– Intermediate products manufacturers
– End product manufacturers
– Wholesalers and distributors and
– Retailers
• Connected by transportation and storage
activities
• Integrated through information, planning, and
integration activities
 What is a Supply Chain?
• All stages involved, directly or indirectly, in fulfilling a
customer request
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)
 What is a Supply Chain?
Customer wants
P&G or other Third
Supermarket detergent and goes
manufacturer party DC to Supermarket

Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
 The Objective of a Supply Chain
• Maximize overall value created
• Supply chain value: difference between what
the final product is worth to the customer and
the effort the supply chain expends in filling
the customer’s request
• Value is correlated to supply chain profitability
(difference between revenue generated from
the customer and the overall cost across the
supply chain)
 Supply Chain Components

• Suppliers
• Manufacturing centers
• Warehouses
• Distribution centers
• Retail outlets
• Raw material
• Work-in-Process inventory
• Finished products
 Simplified Supply-Chain
®

VISA

Material Flow Credit Flow

Supplier Manufacturing Retailer Consumer

Supplier Wholesaler Retailer

Order Cash
Schedules
Flow Flow
 The Supply Chain
Market research data
Scheduling information
Engineering and design data
Supplier Order flow and cash flow Customer
Ideas and design to
Inventory satisfy end customer
Material flow
Supplier Credit flow

Manufacturer Customer
Inventory Inventory
Supplier

Distributor Customer
Inventory
 SCM Chronology

Ancient Times The Barter System evolved as an answer to the trading requirements. This was the first supply chain.
300 BC Caesar made trading posts in East Asia to grow his trade. This was the first retailer supplier
relationship.Establishment of the silk route to India.
1151 First known fire and plague insurance offered in Iceland.
1305 House of Taxis operated courier messenger service for the rich European clients. (A kind of primitive
Outsourcing)
1621 Dutch West India Co. formed to trade with America and West Africa.
(A pseudo third party logistics (3PL) by the Dutch Companies.)
1904 Charles S. Rolls became selling agent for cars made by F. Henry Royce. (The first traces of outsourcing).
1956 Warren Buffet started investment partnership in Omaha with money from family and friends and he
went on to become a billionaire. (An overseas 3PL)
1960-1975 The essence of SCM understood. This first phase is characterized as an inventory 'push' era that
focused primarily on physical distribution of finished goods.
1975-1990 The earlier approach changed. Companies began migrating from an inventory push to a customer pull
channel as power began to move the downstream to the customer.
1980 In the last phase, companies realized that the productivity could be increased significantly by
managing relationships, information and material flow across enterprise borders. This resulted in the
present concept of supply chain management.
1981 IBM outsourced almost all of its activities and built a full computer.
1985 Wal-Mart introduced the concept of Cross Docking and replaced K-Mart as the leader in retail stores.
1985- Cisco removed itself from the supply chain by providing to the customer directly from the vendor.
1990 Computer changed the way business is done.
1996- Internet revolutionized the information pathway and the distribution system of the business.
1998- The concept of e-commerce changed the definition of business itself.
2000- Currently concepts like t-commerce and digital TV are beginning to take shape.
 2002-2012

• SCOR
• VSM
• BSC
• DNA Model
• Blue Ocean
• RFID
 Logistics Management
• Integrates all materials functions
– Purchasing
– Inventory management
– Production control
– Inbound traffic
– Warehousing and stores
– Incoming quality control
• Objective: Efficient, low cost operations
Goods Movement Options
• Trucking
• Railways
• Airfreight
• Waterways
• Pipelines
 What Management Wants…
Volumes

Production Plan
Customer
Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 What Management Gets...
Order Size

Customer
Demand

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Supply Chain:
The Complexity
1. Supply Chain Integration (network)
• Conflicting Objectives
• The Dynamics of the Supply Chain
2. Matching Supply and Demand
3. System Variations over Time (parameters)
4. Status of Logistics Knowledge
• Many problems are new
• Incomplete understanding of issues
• Methodology is rather narrow
• No historical data available
 ISSUES:
Purchasing

• What to Purchase
- In-house production Vs. external suppliers
• Where to purchase
- Domestic Vs. international
• From whom to purchase
- Cost
- Reliability: quality and on time delivery
- Availability and flexibility
 ISSUES:
Purchasing

• Centralized Vs. Decentralized

• Number of suppliers:
Single sourcing Vs. Multiple sourcing

• Supply contracts
 ISSUES:
Production

• Location of manufacturing plants

– Production cost
– Taxes
– Incentives (by government)
– Proximity to markets and/or raw materials
– Transportation infrastructure
– Political stability and culture
 ISSUES:
Production

• Flexibility
– The ability to produce different products
simultaneously and efficiently
– The ability to produce new products efficiently
 ISSUES:
Production
• Efficiency
– Low cost
– Short lead time
• Reliability
– On-time delivery
– Quality
 ISSUES:
Product Design

• Product designs can affect:

– inventory holding cost
– transportation costs
– lead time
• What role does product design play in supply
chain management?
• When is redesigning products worth the cost?
• Can product design compensate for uncertainty in
customer demand?
 ISSUES:
Information Systems
• The advantages of advanced information
systems
• The challenge of unlimited data and data
analysis
• The roll of e-commerce
• Impact of the internet
• Decision support system (DSS)
 ISSUES:
What’s New in Logistics?

• Global competition

• Shorter product life cycle

• Increasing product variety

• New, low-cost distribution channels

• More powerful well-informed customers

 Traditional View: Cost breakdown of a
manufactured good

Profit
• Profit Supply Chain
Cost

• Supply Chain Cost Marketing

Cost

• Marketing Cost
Manufacturing
Cost
• Manufacturing Cost

Effort spent for supply chain activities are invisible to the customers.
 - 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
 Flows in a Supply Chain

Material

Information
Supplier Customer
Funds

The flows resemble a chain reaction.

 SCM in a Supply Network
 Supply Chain Management (SCM) is concerned with the management and control of the
flows of material, information, and finances in supply chains.
Cash

Products and Services

Information
THAILAND INDIA MEXICO TEXAS US
N-Tier Suppliers Suppliers Logistics Distributors Retailers

Supply Side OEM Demand Side

Demand

Supply

 The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the
desired levels of service to supply chain customers profitably
 Importance of Supply Chain Management
 In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related
activities (movement, storage, and control of products across supply chains). Source:
State of Logistics Report

Frequent Supply shortages Low order fill rates

Inefficient logistics

High stockouts
Tier 1 Manufacturer Distributor Retailer Customer
Supplier

Glitch-Wrong Material, Machine is

High inventories through the chain Ineffective High landed costs to the shelf
Down – effect snowballs
promotions

 Eliminating inefficiencies in supply chains can save millions of $.

The Development Chain

The enterprise development and supply chain

 Global Optimization
• Geographically dispersed complex network
• Conflicting objectives of different facilities
• Dynamic system
– Variations over time
– Matching demand-supply difficult
– Different levels of inventory and backorders
• Recent developments have increased risks
– Lean production/Off-shoring/Outsourcing
 Global Apparel Value Chain
Tracing back the dress you are wearing
 Uncertainty and Risk Factors
Matching Supply and Demand a Major Challenge

REASONS
•Raw material shortages
•Internal and supplier parts shortages
•Productivity inefficiencies
•Sales and earnings shortfall
•Larger than anticipated inventories
•Stiff competition
•General slowdown in the market
EXAMPLES
Boeing Aircraft’s inventory write-
down of $2.6 billion
Sales at U.S. Surgical Corporation
declined 25 percent, resulting in a
loss of $22 million
Intel reported a 38 percent decline
in quarterly profit

•Higher than expected orders for EMC Corp. missed its revenue
•new products over existing products guidance of $2.66 billion for the
second quarter of 2006 by around
$100 million
 Uncertainty and Risk Factors
• Forecasting is not a solution
• Demand is not the only source of uncertainty
• Recent trends make things more uncertain
– Lean manufacturing
– Outsourcing
– Off-shoring
 Magnitude of Supply Chain Costs
Example: The Apparel Industry

Cost per Percent

Shirt Saving

Manufacturer Distributor Retailer Customer $52.72 0%

Manufacturer Distributor Retailer Customer $41.34 28%

Manufacturer Distributor Retailer Customer $20.45 62%

 E-Commerce

The use of computer networks, primarily the

internet, to buy and sell products, services,
and information.
 E-Commerce Definitions
Business-to business (B2B) Both sides of the
transaction are businesses, non-profit
organizations, or governments.
Business-to-consumer (B2C) E-commerce
transactions where customers are individual
consumers
Consumer-to-consumer (C2C) Consumers sell
directly to each other.
Consumer-to-business (C2B) Individuals sell services
or goods to businesses
 Issues in Supply Chain
• Globalization resulting in long lead times
• Rising & Changing Customer expectations
• Increase in labor costs in developing countries
• Increase in logistics costs
• Sustainability
• Unprecedented volatility
Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
1-41
 Cycle View of a Supply Chain
• Each cycle occurs at the interface between two successive
stages
• Customer order cycle (customer-retailer)
• Replenishment cycle (retailer-distributor)
• Manufacturing cycle (distributor-manufacturer)
• Procurement cycle (manufacturer-supplier)
• 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.

1-42
Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
1-43
 Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes
from pull processes
1-44
 Push vs Pull System
• What instigates the movement of the work in the system?

• In Push systems, work release is based on downstream demand forecasts

– Keeps inventory to meet actual demand
– Acts proactively
• e.g. Making generic job application resumes today (e.g.: exempli gratia)

• In Pull systems, work release is based on actual demand or the actual

status of the downstream customers
– May cause long delivery lead times
– Acts reactively
• e.g. Making a specific resume for a company after talking to the recruiter
Supply Chain Macro Processes in a
Firm
• Supply chain processes discussed in the two
views can be classified into:
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
• Integration among the above three macro
processes is critical for effective and successful
supply chain management

1-46
 SCM - STRATEGIC FIT
ACHIEVING FIT - UNDERSTANDING:

1. THE CUSTOMER/PRODUCT REQUIREMENTS – CQSF2

2. THE SUPPLY CHAIN - RESPONSIVE VS. EFFICIENT

3. STRATEGIC FIT - THE ZONE OF STRATEGIC FIT

 SCM - STRATEGIC FIT
CUSTOMERS DEMAND PRODUCTS WITH DIFFERENT
CHARACTERISTICS –
Cost Customization
Quantity Quality
Speed Service
Flexibility Features

These requirements can vary dramatically for customers

and products
(CQSF) 2
 Achieving Strategic Fit
u Strategic fit:
– Consistency between customer priorities of
competitive strategy and supply chain capabilities
specified by the supply chain strategy
– Competitive and supply chain strategies have the
same goals
u 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
 Levels of Implied Demand
Uncertainty

Customer Need
Price Responsiveness

Low High

Implied Demand Uncertainty

 Responsiveness Spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Apparel Most Dell

steel mill automotive
production
 Achieving Strategic Fit
Responsive
supply chain

Responsiven
ess spectrum

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
 Achieving Strategic Fit with Same
Firm with Various Products
Responsive
supply chain PRODUCT LINE B
CUSTOMER B

PRODUCT LINE A
CUSTOMER A

Responsiven
ess spectrum

PRODUCT LINE A -
CUSTOMER B

PRODUCT LINE B
CUSTOMER A
Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
 Achieving Strategic Fit
Product Life Cycle Progresses/Competition
Responsive
supply chain
INTRODUCTION

Responsiven
ess spectrum

MATURING
COMMODITY

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
 A Framework for
Structuring Drivers
C om petitive Strategy

Supply C hain
Strategy
E fficiency R esponsiveness
Supply chain structure

Logistical Drivers

F acilities Inventory Transportation

Inform ation Sourcing Pricing

C ross Functional Drivers

 Drivers of Supply Chain
Performance
• Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
• Information
– data and analysis regarding inventory, transportation, facilities throughout the
supply chain
– potentially the biggest driver of supply chain performance
• Sourcing
– functions a firm performs and functions that are outsourced
• Pricing
– Price associated with goods and services provided by a firm to the supply chain
 Facilities
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities (responsiveness
priority)
• Components of facilities decisions
 Components of Facilities Decisions
• Location
– centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider (e.g., proximity to customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused versus
process focused)
• Warehousing methodology (job lot storage, cross-
docking)
• Overall trade-off: Responsiveness versus efficiency
 Inventory
• Role in the supply chain
• Role in the competitive strategy
• Components of inventory decisions
Inventory: Role in the Supply Chain
• Inventory exists because of a mismatch between
supply and demand
• Source of cost and influence on responsiveness
• Impact on
– material flow time: time elapsed between when material
enters the supply chain to when it exits the supply chain
– throughput
• rate at which sales to end consumers occur
• I = RT (Little’s Law)
I = inventory; R = throughput; T = flow time
 Inventory: Role in Competitive
Strategy
• If responsiveness is a strategic competitive
priority, a firm can locate larger amounts of
inventory closer to customers
• If cost is more important, inventory can be
reduced to make the firm more efficient
• Trade-off
 Components of Inventory
Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between shipments
– Depends on lot size
• Safety inventory
– inventory held in case demand exceeds expectations
– 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
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness
 Transportation
• Role in the supply chain
• Role in the competitive strategy
• Components of transportation decisions
 Transportation: Role in
the Supply Chain
• Moves the product between stages in the
supply chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities
 Transportation:
Role in the Competitive Strategy
• If responsiveness is a strategic competitive
priority, then faster transportation modes can
provide greater responsiveness to customers
who are willing to pay for it
• Can also use slower transportation modes for
customers whose priority is price (cost)
• Can also consider both inventory and
transportation to find the right balance
 Components of
Transportation Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource
• Overall trade-off: Responsiveness versus efficiency
 Information
• Role in the supply chain
• Role in the competitive strategy
• Components of information decisions
 Information: Role in
the Supply Chain
• The connection between the various stages in
the supply chain – allows coordination
between stages
• Crucial to daily operation of each stage in a
supply chain – e.g., production scheduling,
inventory levels
 Information:
Role in the Competitive Strategy
• Allows supply chain to become more efficient
and more responsive at the same time
(reduces the need for a trade-off)
• Information technology
• What information is most valuable?
 Components of Information
Decisions
• Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
• Overall trade-off: It is always beneficial however cost
effectiveness need to be considered
 Sourcing
• Role in the supply chain
• Role in the competitive strategy
• Components of sourcing decisions
 Sourcing: Role in
the Supply Chain
• Set of business processes required to
purchase goods and services in a supply chain
• Supplier selection, single vs. multiple
suppliers, contract negotiation
 Sourcing:
Role in the Competitive Strategy
• Sourcing decisions are crucial because they
affect the level of efficiency and
responsiveness in a supply chain
• In-house vs. outsource decisions- improving
efficiency and responsiveness
Components of Sourcing Decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Overall trade-off: Increase the supply chain
profits
 Pricing
• Role in the supply chain
• Role in the competitive strategy
• Components of pricing decisions
 Pricing: Role in
the Supply Chain
• Pricing determines the amount to charge
customers in a supply chain
• Pricing strategies can be used to match
demand and supply
 Sourcing:
Role in the Competitive Strategy
• Firms can utilize optimal pricing strategies to
improve efficiency and responsiveness
• Low price and low product availability; vary
prices by response times
 Components of Pricing Decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing
• Overall trade-off: Increase the firm profits
 Obstacles to Achieving
Strategic Fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies
Thank You