02_Unit 1

Video 1_Introduction to Logistics and Supply Chain

Management
Welcome to CTL SC1x Fundamentals of Supply Chain

Management and Logistics.

In this lecture, all I want to do

is introduce concepts of Supply Chain Management and Logistics,

and set the stage for the remainder of the course.

But first, let's talk about some supply

chains for a few different products.

And so what I'm showing here are four very different products

that you would think have very different supply chains.

And you'd be right.

In the top left, we have bananas being

sold in a U.S. grocery store.

On the right, we have an integrated ignition assembly.

On the bottom right, we have women's pumps.

On the bottom left, we have a bunch

of bags of cement-- of concrete.

So if you look at these, you'd think, wow!

There's nothing that could be similar in these supply chains.

And the interesting thing about supply chain management

is that every product has a story,

and every product is part of multiple supply chains.

So everything you touch-- and most things you don't-- flow

through some kind of supply chain somewhere in the world.

It's very, very rare where you can

think of an item that gets created, manufactured,

or grown, and consumed in the exact same place,

at the exact same time.

You need to have supply chains to overcome

the tyranny of time and space.

And that's what supply chains do.

But again, you look at these four very different products,

and what's interesting is there's a lot of similarities

you might not think about.

So if I look at the bananas up here in the top left,

and compare that to the shoes, you

can think about perishability.

Because, yes, bananas will spoil over time,

but so will women's shoes.

Style is very fickle.

So what's in for this season will not be in for too long.

So the idea of perishability, how long something

will stay fresh and able to be sold

at its normal standard price, is something

that is not just about fruit, it's

about many other fashion items.

Then you can think about sourcing.

You don't have a lot of choice of where you can source cement,

or for where you can source bananas.

I can't grow bananas up here in Boston.

I could try in a greenhouse but it'd be very, very expensive.

You can't mine for cement where it doesn't already exist.

So sometimes your product is tied to a sourcing location

that you cannot change.

Then you could think of products that

are single-- individual items like bananas,

there's really only one part to the banana, or the cement--

while there are many chemicals you

might put in there as additives.

But you look at products like this ignition and the shoe.

They're made up of components.

And it could be that those components are not made by you,

but by someone else.

And therefore, you're part of a larger supply chain.

And finally, you can look at who you sell to.

For shoes, you're selling to a consumer.

A woman is probably buying these and, who knows, maybe a guy.

You never know.

So someone is buying this as a consumer.

Same thing with bananas.

It's a B to C, a business to consumer, business.

For these ignition assemblies, it's

probably being sold to an auto manufacturer,

or an original equipment manufacturer, or OEM.

Same thing with these bags of cement.

Chances are it's being sold to a construction company.

So if I look at these four different products, what's

really interesting is that the same decisions

are being made by the people managing those supply

chains in each one of these products.

Now the values and the outcomes might differ,

but they're all making the decisions

of where can I source from?

How much inventory do I hold?

How do I forecast my demand?

Where do I stock my inventory?

How do I move my product from source to final consumption?

And all those kind of things.

And what we'll do in this course,

is discuss the concepts and methodologies

that will allow you to plan supply chains for products

as diverse as bananas, women shoes, automotive parts,

cement, and everything in between.

So what are we going to do in this lecture?

Well, we're going to answer five big questions.

First is, what's a supply chain?

Then we're going to talk about the differences

between logistics and supply chain management.

Then we're going to talk about different perspectives of how

you can view supply chain management.

Because it's a very new and evolving field,

people have different perspectives,

and it helps you to understand those.

Finally, we'll talk about the challenges

that are faced in the supply chain.

And then, finally, the last thing we'll do,

is why should you care?

All right, so let's get started.

02_Unit 1
Video 2 What is a Supply Chain
So what is a Supply Chain?

Let's look at some examples.

You can think of a supply chain as being any two parties

or more that are linked by a flow of resources.

And so the key word here is "flow."

The idea of supply chains is managing flows.

And flows of what?

Flows of product or material, flows of information, and flows

of money.

And all of these things, all of these three flows,

manage between the multiple parties

and ultimately fulfill a customer request.

So let's look here at a simple example.

I have a retailer over here on the right,

and I've got some kind of manufactured something

on the left.

And I've got a consumer.

Customer comes in-- you can see his shopping cart.

So what's going to happen?

Well, what's the idea of what the store will do?

Well, at some point the store's going to have to place an order

or send some information over to its supplier.

At some point the supplier's going

to send material in the form of a delivery back to the store.

So the physical flow moves.

Then eventually-- hopefully sooner than later

for the supplier-- the retailer will send money or payment

or financial terms to the supplier.

But also during this transaction--

throughout the physical delivery and the time

between the order being placed and fulfilled--

there will be other information that's

going back and forth for status.

And so you can see these three major flows-- information,

material, and money-- will always go back and forth

between the different parties in the supply chain.

And what supply chain management is all about

is managing those three flows.

How do you manage those three flows

to minimize cost, maximize profit, improve

level of service to customers, and all those other metrics

that we'll talk about in a little while.

But it's not just this simple little link.

This is the link in the whole supply chain, the simplest

piece of a supply chain.

Because you can think about supply

chain as a series of these going all the way from this retailer,

where the customer comes in, to the farm.

You might have a distribution center here, one manufacturing

plant here, a raw processing plant here--

but it all goes back to this farm or some raw material.

And it's even more complicated than that-- this

is a serial supply chain where everything is one to the next

to the next-- because in real life,

it looks something like this.

Where I have multiple retailers, so I

have these distribution centers that

are servicing multiple locations.

I might have these raw material providers, this farm,

might ship directly to the store.

So they might have a direct link beyond these echelons,

and skip a bunch of these intermediate players

and go straight to the final customer.

You might have a farm here that's providing two different

manufacturers' raw products.

And so there's all these different flows

between different companies, between different levels

in the supply chain.

So it's not just a simple link, link, one to the other.

It's more of a web.

But the common phrase is supply chain.

Another way to look at this is, let's think

about a bicycle manufacturer.

So if I'm manufacturing bicycles,

I probably don't make everything myself.

I probably have some supplier that, say,

gives me hardware-- the gears, the wheels, all

the different pieces that go on top of stuff-- and then

the frame itself, the metal frame that everything

sits upon.

And so each one of those vendors probably also have vendors.

Because whoever makes the hardware probably

doesn't make the tires themselves.

They might get that from a third party.

They might have a manufacturer specializing

in gears, some specialized in pedals, and so forth.

The same thing for the frame supplier.

They probably don't cast their own aluminum frames.

They probably take that and then maybe mold them.

Same thing with the paint.

They must get the paint from a third party.

And we can go even further down to the inputs to each of those.

So if I'm thinking of the bicycle manufacturer,

if I'm sitting here, then these people

would be my first tier of suppliers.

This would be the second tier.

And here is the third tier.

So when people talk about my first tier suppliers,

those are the companies that I do business with directly.

But when I talk about my third tier customers,

if I'm here at this bicycle manufacturer,

that's someone I don't even talk to directly.

And so this is an interesting point

that we'll come back upon later, because there's a lot of risk

here.

Because what goes into the products down here

eventually end up in my product, but I

don't talk to them directly.

I talk to the people who talk to the people who talk to them.

So this end tier or third tier manufacturer supplier problem

is something we'll talk about a little later.

But this is only half the supply chain.

Because now I've made my bicycle,

I've got to sell it somewhere.

And you have the same type of tiered structure.

I might sell to wholesalers, who then in turn

sell to retailers, who in turn sell to customers.

And there might be other intermediary ones in there.

In fact, lately, there might be something where I sell directly

to a retailer, like an online retailer,

and they sell directly to the customer.

There's no wholesaler involved.

And even more, it might be that I have my own website,

for example, and people can buy directly from me.

So there's a lot of flux in how things are changing.

But the idea of a supply chain-- the concept

hasn't changed too much.

When people talk about a downstream supply chain, what

they're talking about is the direction

that the product flows.

So customers are downstream.

So when anyone talks about moving closer downstream,

they're moving closer to the customers.

Think of it as a river.

And when people say upstream-- I'm

worried about my upstream logistics--

they're talking about closer to your supplier, supplier,

supplier.

So the idea of downstream and upstream and tiers of suppliers

is common in all supply chains.

So one last comment.

The whole idea of a supply chain.

Think about all these links that we have going on,

but the primary purpose of a supply chain

is only to satisfy some customer's need somewhere.

There's only one source of revenue in the supply chain,

and that's at the very end.

Some customer buys it.

And that all the payments between the different parties

are just fund exchanges.

And so the division of this intra-supply chain payments

are really a function of power, market conditions,

and a bunch of other factors.

But it's very helpful to think about the supply chain

as one entity that's providing value to that customer.

Because we try to think about the supply chains

as maximizing the total value generated.

So it's what the customer pays minus the total effort

it takes to fulfill that order.

Now this is a gross simplification,

but thinking about in this way makes things a lot easier

when we look longer term and look

at the total landed cost and the effect of working together

as a supply chain that crosses multiple firms.

02_Unit 1 - Supply Chain Management Overview
Video 3_Logistics versus Supply Chain
Management
So many times, you'll hear people

refer to Logistics and Supply Chains,

and a lot of times people have a hard time distinguishing

what's the difference.

That's because people use the terms very differently

and they don't always mean the same thing.

So let's go through some definitions that I like.

First, the top one is the one that we have here

at MIT CTL, the Center for Transportation and Logistics,

and that's the whole idea that logistics involves managing

the flow-- again, that "flow" word-- of items,

information, cash, and ideas through the coordination

of supply chain processes and through the strategic addition

of place, period, and pattern values.

So again, that key word "flow," and then we

add the concept of ideas or different concepts

to the things that we manage the flow of,

and then overcoming what I talked

about before, the tyranny of time and place.

Stanford has a good definition as well,

and they're more focused on those flows

again, that supply chain management deals

with the management of material, information,

and financial flows in a network, which

is a keyword, consisting of suppliers, manufacturers,

distributors, and customers.

So again, it gets the idea that there's

a network of different players.

And then finally, Fortune has a pretty good definition here.

And they call it distribution, logistics, or supply chain

management.

Whatever name it is, it's the sinuous, gritty,

and cumbersome process by which companies move materials,

parts, and products to customers.

So it's always good to be in a sinuous, gritty,

and cumbersome field.

Anyway, the whole idea is you're managing

these three flows-- the information,

the product, and financial-- you have multiple players,

and it's going end to end.

So what's the difference between when

someone says logistics versus supply chains?

Well, let's look at some definitions that

come from the Council of Supply Chain Management

Professionals, which is the leading

organization in this space.

And what's interesting: their name of the organization

has changed over the last 30 years

from the National Council of Physical Distribution

to the Council of Logistics Management,

and now it's the Council of Supply Chain Management

Professionals.

So it's kind of moved and kind of evolved over time.

But they define logistics, and you

can read this definition yourself if you want to,

but the critical thing is that it's more of the physical flow,

and that's how they define the logistics.

I think of logistics as managing the movement of the materials

primarily.

Then you talk about supply chain management, and that's

more about encompassing all the activities, from raw sourcing

to procurement, and managing channel partners.

Channel partners are those different companies

that help you manufacture product, distribute product,

and sell product to a certain customer.

Logistics is a very old word.

It has its roots in the military.

The Greek adjective "logistikos" means skilled and calculating.

And so the first administrative use of the word

was in Roman and Byzantine times when

there was a military administrative official

with the title Logista.

Now, the term "Supply Chain Management," on the other hand,

is very new.

It was coined in 1982 by Keith Oliver, a consultant at Booz

Allen Hamilton, and he's credited

with coming up with this term in an interview for the Financial

Times.

But to me, you can talk about logistics as physical flow.

Supply chain management is more expansive.

What we're going to cover in this class

is kind of in between.
We're going to start with a lot of logistics basic

fundamentals, and we'll see how those apply to those larger

supply chain concepts.

So that's the basic difference between logistics

and supply chain management.

But as Fortune said, it's really all

about moving product materials from your manufacturer

to your end customers.

02_Unit 1 - Supply Chain Management Overview
Video 4 Supply Chain Management Perspectives
So let's talk about different perspectives of Supply Chain

Management.

How can I visualize supply chains?

And there's a bunch of different ways.

The most common way is to look at the geographic flows.

And when anyone describes their supply chain,

typically the first thing they do is to draw map.

And what I'm showing here is a screen

shot from a research initiative up here at MIT

called the High Vis Project.

And what we did in this project we

tried to understand the physical flow of different products.

They were mapped directly onto this geographic map.

And the idea was we could identify sources of risk.

So this would show products from the original source all the way

to their manufacturing process, and

through to their final consumption.

And the idea is, if I know there's

a certain risk in a different part of the world,

I can assess what the value at risk is for my whole company.

So this perspective of a physical flow over map

is very common.

And in fact, it's a really good way

when you want to talk to someone about their supply chain is

just ask them to map it out.

Another common way is to look at this simple diagram.

And here, this is kind of a product flow diagram.

Where again, the product almost always goes from left to right.

From raw materials to your finished goods.

And remember, this going from left to right is downstream.

And so I talk about my downstream supply chain,

I mean my customers.

Think of the products flowing like a river.

And so this is another good way, if you're

talking about their supply chain,

just ask them, start talking to them oh, where-- who

are your suppliers?

Where are they located?

How many do you have?

Then you ask them about their plants, their manufacturing

plants.

How many do you have?

You ask about the distribution centers and how those operate.

And you ask about the customers that they serve.

So this is a very nice framework to think

about how to describe a supply chain,

because you're covering it from end to end.

And it's a good framework to help

you understand how the product flows.

Another nice way to look at this is through cycles.

And there's different cycles in a supply chain.

And so we can think of the one we're

most familiar with is customers.

And that's what's known as a Customer Order Cycle.

So think about it this way: if I'm a customer

and I'm going to, say, a coffee shop,

I'm going to arrive, I'm going to place my order,

I'm going to hopefully receive my order, or have it fulfilled.

And even better, I'm going to actually pay for that.

And so if I look at this cycle, every kind of order cycle

follows this.

I have to arrive, I have to place the order,

it gets fulfilled and I pay.

Think about how it's different for an internet versus a bricks

and mortar kind of retail experience.

You physically arrive for a bricks and mortar

retailer versus going to a website.

You place your order, you go and pick what's there.

And in a bricks and mortar retailer,

you fulfill it yourself.

You pick it off the shelf and you pay there.

For an online experience, it's a little bit different.

A lot of this happens, it's delayed.

You might pay immediately, but you

don't get fulfilled until later.

So you can think about this order cycle

and how they differ between different supply chains.

Now there's more than just this one order cycle.

The idea is there's multiple of these.

And you can think about the Replenishment Cycle

for how the retailer gets replenished

from its distributor.

But again, they have the same thing.

They place the order, somehow it gets fulfilled,

and sometimes there's a payment.

Then I could look at the manufacturing.

It's the same thing.

The distributor here would place an order with the manufacturer.

It might have to be scheduled into production,

because now I don't have it necessarily.

There is inventory.

I might need to make it.

So I have to tie into a production plan,

and then it gets delivered to that distributor.

And you can carry this on, and finally

think about an end supplier.

I could have two chains.

I could have 20 chains, depending

on the type of product and the complexity of that product.

But the interesting thing is all the cycles

occur between these different stages.

And not every supply team will have four,

but they'll have some level.

And again, when I talk about this,

I'm talking, it's kind of strange here, going like this,

is going upstream.

And so as I move upstream from my customer to my retail,

to distributor to manufacturer, to supplier,

you can think of the Lead Time of fulfilling gets longer.

Right?

Because if I come in to a coffee shop, I expect to get my order

fulfilled immediately.

Well, it might take a longer time

for that retailer to get fulfilled from the distributor.

Longer even from the manufacturer

for that distributor and so on.

Also, you can think about as I go again,

upstream from customer to supplier,

my order size increases.

And this is important because sometimes you'll

see different members or parties in the supply chain

one work directly with the customer.

So as I move upstream again from customer to supplier,

my order gets bigger, my order size,

because here in the customer size,

I'm generally ordering eaches.

I go in and buy one tube of toothpaste.

Maybe one gallon of milk.

As I move to this Replenishment Cycle,

the retailer might order cases or pallets of product

from its distributor.

The distributor might order full truckloads,

or might have to order full truckloads of product

from the manufacturer.

And then that manufacturer might order train load or railroads,

or full truckloads, certainly, of raw material

to for its manufacturing process.

So my order size gets bigger, which

means I get a lot lumpier.

And we'll talk more about this and the idea of the bullwhip
effect.

And as I move again, upstream in my supply chain,

the interactions get a little bit different.

A little choppier.

So we'll talk more about that in the future lectures.

But let me give you another perspective here.

And this is one that most software vendors take.

And if you're a software vendor, you

think of three types of people that you're dealing with.

You've got a supplier, you've got the firm,

and you've got their customers.

So you can think of three main classes of software

that are in there.

And let me talk about each of them.

The first is this SRM, Supplier Relationship Management.

And the idea is to manage this relationship

between the firm and its suppliers.

This is all about procurement, sourcing, negotiations,

how you collaborate on supply things,

how you manage your suppliers.

The next category, Internal Supply Chain Management,

is all the things that the firm needs to make, move, and store

its own products-- the logistics within the firm.

So you can think about strategic planning, fulfillment,

Transportation Management, Inventory Management,

all those kind of things that the firm needs to,

again, manage its own Internal Supply Chain.

And then the last bucket is dealing

with this interface between the customer and the firm.

This is Customer Relationship management,

and it deals with marketing, selling, call centers,

order management, anything dealing with the customer.

Now when you look at this, you think

you can't really keep them this separated.

You can't keep this siloed, because they

all inter-depend with each other.

Demand Planning is critical of course, to the customer.

You need to have a good handle on the customer

to understand your demand planning.

Same thing with Supply Planning.

In fact, these two processes together,

Demand and Supply Planning, come together

in a process we'll talk about in a couple

lectures, called Sales and Operations Planning,

or S & OP Process.

Because one of the challenges that a firm has

is balancing what we're telling our customers up here,

and what we're able to deliver from our suppliers

and internally down here.

And so one of the things that supply chains need to manage

is to balance that supply and the demand,

and how that manages.

So one of the main roles of supply chains

is to coordinate that interaction between those.

Another very popular perspective is the Supply Chain Operations

Reference or SCOR Model.

You'll see this a lot.

This is developed by the Supply Chain Council.

And the Supply Chain Council really

pioneered this concept of having metrics

that span an entire supply chain.

Because think about it, up until like the early '90s, mid 1990s,

each company had its own metrics for its own operations.

But if you have a supply chain, sometimes the metrics

for individual companies would interfere with the supply chain

wide, or end to end performance.

And so what the Supply Chain Council came up

with this very clever, a set of metrics

and supporting documentation and processes that help you

manage a supply chain as a whole.

And it's called the SCOR Model.

And the hallmarks of it is to think of it

in three big processes, source of material,

making materials, delivering materials,

and then you've also got this planning process,

which kind of supersedes it.

And then they've added in the last several years

this whole idea of returning and recycling,

and things like that.

But the idea of source, make, deliver

is a really great framework to think about,

especially when you talk to someone about their supply

chain.

You ask them about their sourcing, their making,

and their delivering.

And it helps you understand what they do differently

within their supply chain.

One last point about this is that they separate out

the types of supply chain into three big categories.

One is the idea of making to stock, or delivering to stock.

And this is the idea where I'm delivering and making

things to go into inventory.

So I don't know what the demand is going to be.

I don't know for sure, I'm guessing

what that's going to be.

I have a forecast.

So I'm making it to put it into stock.

The next category is making it to order.

This is where I only make something

when I have a physical order for it.

I don't do it unless someone says they want it.

And you can think about all the different ramifications,

and we'll talk more about this in later lectures.

And then the idea of engineering to order, we're not only

do I not start making it until someone places an order for it,

the form of it might be different.

It might be unique to them.

I start figuring out exactly what they

need when that order is placed.

So the SCOR Model is very powerful,

and I encourage you to go check out their material

on their website, with the Supply Chain Council.

But unfortunately, in most companies,

you have a very different perspective

for supply chain, in that it's mainly functional.

Most companies, while they have supply chains,

they are not always in an organizational function

called supply chain.

They might be interspersed.

But generally, a supply chain consists

of these individual functions.

So it goes from Purchasing and Procurement.

These are the guys who determine what to buy from who.

And the real challenge is to determine

whether this is a corporate function,

or falls within each group, or business unit.

There's a group that looks an Inventory Control that

determines how much inventory to stock, where,

when to replenish, what the trigger points are.

There's a group that looks at all the warehousing

and distribution centers, and mixing centers and storage

areas.

How do I actually physically store things?

How do I mix things?

What do I stock where in the warehouse?

There's also Materials Handling.

And these people deal with things within the warehouse,

but also things like packaging.

How do I set up my packaging?

How do I make sure that I minimize damage,

but also minimize the volume?

They also look at the layout of the storage, and kind of how

to move the product within the facilities.

There's also going to be a group that does Order Processing.

These are the people who receive the orders, enter the orders,
and maintain the status those orders.

And the whole idea of order management,

from time it was placed, until it's finally fulfilled.

Then there's a Transportation Group.

And you can think of it in many different ways.

One classic way is to think Inbound versus Outbound.

Inbound means any product that's coming to me,

Outbound means anything that's leaving me.

So you can think of Inbound as things

coming from your upstream supply chain partners.

Outbound are the things go to your downstream supply chain

partners.

You can also think of it, and many companies break it up

into Domestic versus International: things

within my country, and things across borders.

Because once you cross a border, things get very tricky

and there's a lot of other things

that need to be considered.

You can also think of it broken up

by different modes of transportation,

whether it's railroads, full truckload trucking, less

than truckload trucking, partial deliveries of small items,

air, whatever, ocean.

All these different modes.

Sometimes are organized differently.

I can think of Customer Service.

And the challenge here, what many people have questions on,

is it a geographically focused one--

I have customer service in each geographic region,

or do I have customer service aligned by different products?

Each of my different product lines

has its own customer service group.

You can see there's trade offs either way.

And then almost every company will

have some kind of planning group--

the kind of covers all of these activities.

And they deal with facility location,

network design, demand planning.

A lot of the analysis that helps companies

decide how to structure their whole supply chain.

So these are the functional areas,

but I showed you a whole bunch of different perspectives

that you can think about when you talk about someone

and talk about your own supply chain.

It's valuable because it gives you a framework

to think about when you talk about your supply chain.

02_Unit 1 - Supply Chain Management Overview
Video 5 Systems Perspective of Supply Chains
The final perspective I want to give you of supply chain

is the Systems Perspective.

And the whole idea here is to think of the entire supply

chain as a system that interacts with itself

and with external factors.

And what I think is helpful in when you think about systems

is to understand what is a variable, what do I make

a decision on, and what is a constraint?

What do I have to live within?

And so when you think about this system in this perspective,

it allows you to think of what you can control,

and why things get complex.

So let's give a simple example.

Here's a simple supply chain with some functional silos

that we just talked about.

We've got Purchasing, Warehousing,

Inventory Management, Material Handling, Order Processing,

Transportation and Customer Service.

And let's say you're in transportation.

Now your role there, within the silo of transportation

can be broken down into kind of a math program form, where

you've got an objective that I either

want to minimize or maximize.

And in this case, it's the objective

is to deliver at the lowest transportation cost.

So I'm hoping to minimize my transportation cost.

And then I've got a set of decision variables

that I can make decisions on.

And in this simple example, my one decision variable

is to select which carrier, which transportation carrier,

will I tender a load to each day.

And then I've got some constraints

that I have to live within.

So I have to-- I have some boundaries.

And in this simple example, everything that comes to me,

I have to ship every day, and then I

have to deliver within specified time

windows that are given to me.

So if you look at this, this is not a trivial job.

You have a lot of complications here.

But what makes it easier is that it's in my one silo.

So let's expand it a little bit.

Let's say now you own customer service and transportation.

And so you're managing both of these jointly.

Well, your model, your decisions change a little bit.

Your objective function is still to minimize your transportation

cost.

And you've still got that decision

of which carrier to select to.

But now, since I'm in customer service,

I can influence or select the time windows to deliver.

And I still have to ship everything every day.

So let's think about that for a second.

As I expand the scope, right, so now

I own transportation and customer service,

there's some interaction.

So you can think about that maybe my transportation cost

might get lower because I can now adjust my time windows,

instead of taking that as a given.

So what we're doing there, is we're

expanding our decision variables.

What was once a constraint, is now something

I can make a choice on.

And that's great, because that will lead generally

to a better solution.

But it also adds complexity, so now I have more to decide.

And let's keep this going.

So now let's look at if I expand out, and say I

own everything from warehousing to customer service.

So all of those functions.

So my objective function is still

delivering at the lowest total cost.

And I still have to decide which carrier, set my windows,

but now I can decide when to ship what from where.

So since I own the warehousing and inventory,

I might decide to replenish or fill

an order from warehouse A instead of warehouse B.

So now it's even potentially a lower cost,

because I can select where replenish from.

And I still have to deliver within a negotiated time frame,

because I select my time windows,

but the customer has to agree to them.

So you see what's happening here,

I'm expanding what I can do, my options are getting bigger,

my decision variables I'm getting more and more of them.

But it's making it more complex.

But it could lead to a better solution.

So let's keep going.

Let's keep expanding this out.

And now let's say I'm going to throw in manufacturing

and product design.

So I have some influence over that,

and I have all the other functions.

Well now you can think about the objective function

as being a lot bigger.

And now it's something like designing, building

and delivering products at the lowest total cost.

So now I can think about what are

some things I want to do in my product design that

make it easier to manage my supply chain.

They call this design for supply chain.

If I make my products a little bit smaller maybe,

I can fit more of them in a container.

If I make them more modular, so pieces can be exchanged,

maybe it's easy to stock that inventory.

So all of these kind of things.

My variables, I've got the ones that I had before,

but now I've added some other ones.

Where do I stock with which form of product?

Because maybe I'm using I'm deciding

to keep the separate parts independent until I

get an order in and finally assemble them and deliver them.

There's all these different options.

As I own more of the supply chain,

I have more variables and decisions to make.

And it might lead to a better solution,

but it makes it much more complex.

So now let's take it another step further, because before we

had all this from product design to customer service,

but the thing is that was within one firm.

And we can assume that everyone was kind of on the same team.

But now let's look at the whole supply chain.

I'm dealing with suppliers and retailers or customers that

are not on the same team.

We might not have the same targets or goals.

We might not be aligned.

Yes, as a supply chain, we want to do better.

But individually, this retailer's

being serviced by other supply chains as well.

This supplier is servicing other supply chains as well.

So they're parts of many teams of these supply chains.

But for this one, what are some of my decisions?

Well the big difference here, if I look at the supply chain,

is my objective function changes.

Before, everyone looked at all of our objective function

from a minimizing cost, minimizing transportation cost,

minimizing total cost.

Now I'm kind of maximize the availability on the shelf.

I'm trying to make sure there's always product there.

And what are some of my constraints?

Let me just jump down to the bottom.

I might have a total constraint on the total delivered cost.

So I want to maximize the number of items

that I have available to sell, subject to keeping my cost

below a certain target.

This is totally flips the way that you

can think about supply chain, because now we're

trying to drive revenue, rather than just trying

to reduce costs.

And you can see the whole laundry list

of decision variables in this simple, simple example.

They get much longer.

So how do I set up my contract relationships?

How do I determine who replenishes from whom?

Which channel member gets it?

All these other decisions.

So as I move from a individual siloed function,

from this transportation, for example, to something

that goes from end to end supply chain,

the decisions get much more complicated,

I have more variables to decide.

But the big takeaway, it changes my objective function.

And then I can start trying to increase revenue.

Use this as a revenue generating tool,

rather than just cost reduction.

So again, this is just another perspective

of a supply chain as a system.

02_Unit 1 - Supply Chain Management Overview
Video 6 What are the major challenges
So now let's talk about some of the major challenges

for Supply Chain Management and Logistics.

In other words, why is it so hard.

And there are many, many reasons.

Let me just give you a hand full.

Let me give you six.

The first one is the idea of metrics.

How do I measure a system?

Remember we talked about supply chains as being end to end,

and covering multiple firms, multiple pieces

of each organization.

So to have a metric the ties that altogether sounds

easy, but there's a trade off between the breadth,

or the length of the supply chain that I cover,

and how valid it is to each individual member

of that supply chain.

And so no matter what system of metrics you have,

it's very difficult to get something

that really looks at the end to end performance as well

as each individual segment.

And so this is one big challenge.

How do you measure this?

And one way that people have been overcoming this,

is they look at something called Outcome Based Logistics.

And the idea is your primary metric

for the effectiveness of the whole supply chain

is at the very end.

So the idea of having a perfect order, or a perfect shelf.

How everything contributes to that.

And so the idea is I'm providing this outcome instead

of delivering number of items, I just want it to be perfect.

I want to make sure that it's filled at all times.

In the aerospace industry, I'm selling uptime of hours.

So how many hours will my aircraft be running?

And so the idea is I'm selling an outcome, not just an input.

But anyway it's a part of a larger problem,

how do you measure this system that covers multiple functions,

multiple companies.

Another challenge is looking at the politics in the power.

Who wins?

So if I look in supply chains, you know,

I can compare little nano stores, or mom and pop shops,

versus mega stores.

They're going to be treated very differently by their vendors.

And so the mega stores, the really large, global retailers

for example, will have very different deals

that they can cut because of economies of scale.

But then you can also look at the power between

say a mega retailer, a very large store,

and a very large manufacturer of Consumer Package Goods, or CPG.

So you have these two dinosaurs, or these two behemoths,

and the question is who wins, and who

controls the supply chain.

There's a lot of politics and power between players,

based on how much power they exude in that supply chain.

Then we talk about visibility.

Why is it hard?

Because all the data is stored separately.

Things are in very different parts.

It's not like there's one supply chain database.

Typically, every company will have its own.

And so what can I see, who can see it,

and how quickly can you see it.

All parties don't have equal access.

And just because, you know, we talk about data in the cloud,

and massive databases.

It doesn't mean that it's all shared,

and so easily accessible.

So visibility into what's happening in the supply chain,

since it's going end to end, is always a big challenge.

Again, because I'm crossing time zones,

cultures, geographies, boundaries

of stores, or of companies, boundaries

of different countries, themselves.

So some other reasons why this is so difficult.

The whole idea of uncertainty.

There's uncertainty in everything

that we deal with the supply chains.

The demand itself.

We'll spend three whole weeks looking at demand forecasting.

The idea that the product demand is getting harder and harder

to predict, because we're having shorter life cycles.

So think of cell phones.

When I was growing up, we had one phone in the house,

and we had it for 25 years.

Now if you look at cellphones, it's almost a fashion item.

And so they come out on 12 to 18 months cycles.

So there's always a shorter life cycle.

And so there's more chance and more challenge

to predicting and forecasting with the demand will be.

There's also variability in manufacturing yield.

You look at items ranging from chips,

to complicated machinery.

And so there is always a different yield,

and it's never certain.

I could also look at unreliable sourcing of raw materials

from the input side of things.

I could also look at lead times.

There's variability and uncertainty

in almost every aspect of a supply chain.

Then you see increased complexity

where it's getting harder and harder

to manage this supply chain for many different reasons.

One is that the number of SKUs or Stock Keeping Units, a SKU,

is increasing.

There's more and more products being offered,

and we'll talk about why in a couple lectures,

but it gets harder and harder as I

have more items to it to manage.

I have my customers are becoming more demanding,

and they're starting to diverge in what they really want.

So I have these very demanding customers

that are asking for very different things.

And then I've had many different ways to serve them.

This whole idea of an Omni-Channel approach,

where I can, for example in the retail side,

I can place an order by-- on my cell phone,

I might pick it up in store, and I might pay for it online.

Or I might view it and order it online,

have it delivered to me, and pay it some other way.

So you have all these different ways of replenishing and taking

care of customer demands and different channels that are new

and emerging.

And then finally, another reason why it's so hard

is that supply chains are global.

And you know, the supply chains never sleep.

They never close, because they're always

open at some time zone in the world.

So almost every firm sources, sells,

and manufactures across the globe.

This means they're crossing multiple regions, time zones,

languages and cultures.

So all these complications, and there's many, many more.

These are just six big ones.

These are the reasons why supply chain management is so hard,

and why we're all listening and trying to get better at it,

so we can improve for our own companies.

02_Unit 1 - Supply Chain Management Overview
Video 7 Why do we care
Now let's talk about why we even care about supply chain.

Because we've talked about why it's hard,

what the challenges are, what it actually is.

But why are we spending the time?

Why are you spending the time trying

to learn more about supply chain management?

So why do we care?

Well, supply chains have grown.

They span the globe, and they can no longer

remain as an isolated function.

Companies are finding that they can't manage their warehousing

separate from their inventory, separate

from their transportation, separate from demand planning,

and from procurement.

You need to look at them all collectively.

It's not an isolated function anymore.

It spans the globe.

It's the piece that ties everything together.

It's become critical for almost any company's operations.

And it's the one function that connects

the different functions, divisions,

and business units within a firm,

as well as across the firm.

So pretty much what's happened is supply chain management

has evolved.
It's evolved into being both a bridge and a shock absorber.

By a bridge-- and this is a picture

of the Zakim Bridge in Boston-- is that supply chain is

the only function that really covers from suppliers

all the way to customers.

It crosses all the boundaries.

It is the organization's main way to deal with suppliers

and to handle customers, and to manage the product

and coordination of flow between those.

It's also a shock absorber, so when

something outside the company changes, the supply chain

management role is to adapt, and be flexible, and to adjust,

so that the company can continue to operate.

So there's a lot of things that can happen

with these external factors that can impact.

And it's the supply chain's job to be the shock

absorber for the company and to be

able to keep that company operating.

So what do I mean by that?

Well, here's a classic example.

This is the variability of #2 Diesel fuel in the United

States.

And on the horizontal axis is just times,

and I go back to 2006 up until earlier this summer.

And on the vertical axis is the price

in dollars per gallon of #2 Diesel.

That's the most common fuel used for

truckload and less-than-truckload trucking.

And so what I show here in this dark line,

this dark solid line, is the actual price of fuel.

And you can see what happened in the summer of 2008.

The price of fuel went up to about $4.76 a gallon,

up from less than $3, about $2.60 peaked to that within

about a year, and then dropped again.

So think of all that variability and the supply chain's

function, along with transportation, logistics,

inventory, management.

How do you change your operations

to keep the company functioning, to make sure

that your cost is remaining low, and your service is remaining

high?

So you've got to be able to handle

these kind of disruptions.

You could look at disruptions like this

in terms of other commodity prices

and many other different factors,

but fuel is a predominant one.

And just as an aside, what I also show

are these little dotted lines.

So here's one, here's one, and each of these

is the prediction, or the forecast rather,

made by the Energy Information Administration

at January of that year of what the price of fuel

will be over the next 24 months.

And I've put this in here-- not to make that organization look

bad, because predicting or forecasting fuel

is very difficult-- to show that in a lot of cases,

predicting the uncertainty of this underlying input,

the fuel, is next to impossible.

Forecasting is almost impossible.

So you look at some of these and see how far off the forecasts

are, even immediately.

And now you might say, well maybe we're getting better.

Because look at here, in the more recent, and that's

just because we're hitting a stable period.

And so the reason why I bring this up,

is because that whole idea of uncertainty and variability.

It's happening.

It's happening in your inputs.

It's happening in your demand, by your products.

It's happening for your manufacturing processes.

And your job as a supply chain management professional

is to be able to handle these peaks and these valleys,

to come up with a solution that will

be able to make your company be successful.

Because, as you will learn through this course,

if I told you what the price of fuel

is going to be up here for the rest of the next 10 years,

you could design a supply chain that

would work perfectly for that.

If I told you the price of fuel will be down here,

you could do the same thing.

It'd be a different supply chain,

or you could optimize to that price of fuel.

The problem is that the price of fuel fluctuates.

And so how do you come up with a supply chain that's

able to handle all of those?

And that's why your supply chain needs to be a shock absorber.

And those are some of the skills you'll learn in this class.

Why else do we care?

Well, supply chain is massive.

So I'm showing here, is years from 1980 up until 2013,

and on the vertical axis is the percentage of GDP of the United

States Gross Domestic Product.

And what I'm showing here is the inventory cost

as a percentage of GDP.

So it's a large amount.

Right?

So it's $470 billion in 2013, but it

used to be 8% of GDP in the early 1980s.

And now it's just about 3%.

Same thing for transportation costs.

It's gone way down, at around 7% and it's

decreased down to around 5%.

So collectively, logistics costs have gone down

from right around 16% to about 8%.

So our GDP has gone up by about 5x.

We've seen that supply chain has only

gone up by a much smaller amount,

by only 2x for inventory holding costs, and less than 4x

for transportation costs.

So two points here.

One is logistics and supply chain

is a big part of the economy.

Collectively, it's about $1.2 trillion.

But because it's been efficient, we manage over the last 30

years, it's really come down as a percentage of GDP.

So we're shipping more, we're moving more product,

but we're doing it much, much more efficiently.

But this brings to the last reason

why supply chain's so interesting to focus on.

Because the idea is what got us here over the last 30 years

might not be the thing that gets us going forward.

Just because we got here by being efficient and managing

lower cost, doesn't mean that's going

to be successful going forward.

Because supply chain management is an emerging and evolving

function.

What do I mean by that?

Well, remember how I talked about the Council of Supply

Chain Management, and how it was originally called the National

Council of Physical Distribution,

back when it was considered a functional role?

And then it became the Council of Logistics Management.

And now it's the Council of Supply Chain Management

Professionals.

Well along with the organizations,

the whole approach to supply chain management has evolved.

And it's moved from individual, isolated, functional activities

to these coordinated supply chain activities.

So maybe the type of skills that got us here,

might not be the ones that take us to be successful

the next 10, 15, 20 years.

So here's a chart that kind of fleshes this out a little more.

If I look at the key skills, what was critical

was to be a technical expert in a narrow field.

Whether it's transportation, warehouse design, forecasting,

that was the critical thing, to be an expert in your function.

Now the key skill is really being

able to coordinate between those functions.

The type of influence that you would give,

you'd be within your siloed function,

and you needed to have it local and you'd control.

The leadership style you would use would be hierarchical,

direct-- kind of the hard leadership skills,

telling people what to do, performance level,

make sure they did what they were supposed to do.

Now you've got a challenge because your influence

is across the entire supply chain.

You can't necessarily tell your customer what to do.

You can influence them.

So your leadership skill will be different.

You have to have indirect or softer skills.

Because how your retail, or customer, works with

you can influence your costs.

And how your supplier-- what their operations-- will also

influence your costs.

So you need to look end to end and be

coordinating those things.

But it takes a different type of skills, both influence

and leadership.

Your risk management profile will change.

What was once reactionary, now you have to plan that response
and be more flexible, be able to be that shock

absorber I was talking about.

As we talked before, you can't have a single metric anymore

for just your silo.

It has to be multifaceted and end

to end, that SCOR model that we talked about.

And if you look at technology approaches and platforms,

if you talk to anyone who sold software in the '70s, '80s,

and early '90s, it was all about optimizing that isolated

function.

Whether it was inventory, transportation, network design,

it was really focused on that one function.

Now the technology is really all about visibility,

getting information, sharing information,

and coordinating across entities.

The platform, instead of being hosted on-site, now you

have more cloud technology or software as a service,

things jointly used.

And then, finally, the scope has changed

from being regional or national-- kind of a smaller

level-- to global and multinational.

The big takeaway from this is that supply chain management

is growing, and it's evolving.

It's going from a functional role

to something that's much more comprehensive, end to end,

involves many different facets, different types

of skills, technically, as well as leadership and management.

And that's why you should be excited to be

studying supply chain management.

So this is the end of the first lecture.

If you have any questions, comments, or suggestions

please use the discussion.

Don't be shy.

And we'll see you next time.