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Introduction to Supply Chain Management
Dr. A. K. Dey
Why Supply Chain Management
Businesses are forced to invest & focus attention on SCM due to
Fierce competition Global market Shorter PLC Heightened expectations of customers
Continuing advances in communication & transportation technologies have motivated continuous evolution of supply chain
2 Dr. A. K. Dey
Supply Chain Management
Supply chain management deals with the management of materials, information and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers (Stanford Supply Chain Forum, 1999) Supply chain management is a set of approaches utilized efficiently to integrate suppliers, manufacturers, warehouses, and stores so that merchandise is distributed at the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requirements (Simchi-Levi et al) A supply chain consists of all stages involved, directly and indirectly, in fulfilling a customer request. Supply chain management involves the management of flows between and among stages in a supply chain to maximize total profitability (Chopra and Meindl)
3 Dr. A. K. Dey
K. Dey . distribution.to be minimized Encompasses firm‘s activities from strategic to tactical and operational levels – integrates suppliers. warehouses and stores 4 Dr. WIP & FG .Interpreting SCM definition Leads to several observations Takes into consideration every facility that impacts cost and makes the product conform to customer requirements Objective of SCM is to be efficient & cost effective across entire system – total system wide costs – transportation. A. manufacturers. inventories of RM.
Dey .Typical supply chain upstream downstream 5 Dr. A. K.
K. California North America DC Europe DC Best Buy 6 Dr. A. Dey Toshiba Turkey downstream . AMD Seagate.Toshiba PC supply chain upstream Intel. IBM Microsoft. Red Hat Toshiba America Irvine.
it encompasses the firm‘s activities at many levels: strategic.How is SCM different? Builds on traditional fields such as production management. A. tactical and operational 7 Dr. operations management or logistics management. whether they belong to different companies or different organizations within a company SCM considers the total costs in the supply chain Since SCM deals with all stages of the supply chain and their integration. The key differentiator is the systems approach of the supply chain management SCM considers every stage and facility in the supply chain and the interactions between them. K. Dey .
A.Other operational processes Product Life-cycle Management (PLM) Supply Chain Management (SCM) Supplier Relationship Management (SRM) Customer Relationship Management (CRM) 8 Dr. Dey . K.
Most of these costs include unnecessary cost components due to redundant stock. or about 10% of GNP on supply chain related activities which include the cost of movement. A. storage and control of products across the supply chain. Dey .Why supply chain management? In 1997. and other wasteful strategies in the supply chain 9 Dr. American companies spent $862 billion. inefficient transportation strategies. K.
In this strategy. This was done by using a logistics technique known as cross-docking. with 1.891 stores and average revenues per store of $7. in 1992 it had the highest sales per square foot and the highest inventory turnover and operating profit of any discount retailer. K. Kmart was one of the leading companies in the retail industry. goods are continuously delivered to Wal-Mart‘s warehouses from where they are dispatched to stores without ever sitting in inventory. Dey .Example: Wal-Mart In 1979. This strategy reduced Wal-Mart‘s cost of sales significantly and made it possible to offer everyday low prices to their customers. Wal-Mart‘s goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. At that time Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those of Kmart stores.25 million. 10 Dr. A. In 10 years Wal-Mart transformed itself. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. Today Wal-Mart is the largest and highest profit retailer in the world. How did Wal-Mart do it? The starting point was a relentless focus on satisfying customer needs.
K.Example: Home Depot The Home Depot Inc.02. (http://www.com/archives/7.informationweek. But it also carries substantial risks in terms of customer service. A. Dey . A poorly managed supply chain can result in heavy stock-outs. moves over 85 percent of its merchandise directly from suppliers to stores. avoiding warehouses altogether (http://www.supplychainbrain.htm) The strategy saves money by eliminating an expensive network of Distribution Centres.com/708/08iukil6.homedepot.htm?adcode=5) 11 Dr.
IBM and HP all move to emulate Dell business model Dell carries 8 days of inventory. Dey . while Compaq.Example: Dell’s direct business model Selling PCs direct to customer Outsourcing component manufacturing Virtual integration with the suppliers resulting in less inventory. A. The third party logistics company matches the Sony monitors with Dell computers and deliver it to the customer Direct relationship with customer enables Dell to understand the customer needs and segment the market to offer value added services Compaq. IBM and Dell have targets to carry 4 weeks of inventory 12 Dr. K.
13 Dr. They are among the early adopters of Supply Chain Management systems in the country— They went out all by themselves. A.000-dealers' online network with just 15 employees Mahindra & Mahindra's tractor division aims for a reduction of 48% in inventories. 31 October 2001. DATAQUEST. 30% in logistics costs and a cutback in production cycle from a month to a week All these companies have one thing in common. setting a path for others to learn from. Source: ―Pulling Power‖.Supply Chains in India Sony India reduced inventories by 70% just six months after it began its SCM initiative Maruti wired all its suppliers and 60% of business transactions are now online Samsung manages a 5. Dey . K.
Thompson Consumer Electronics. Eastman Chemical. Dey . A. Dayton Hudson. and The Home Depot Direct Delivery System of The Home Depot Logistics gets a little respect On line extra – Q&A with Nistevo CEO Kevin Lynch 14 Dr. K.Further readings Read collected articles Killer Supply Chains: Boeing. Dell Computers.
K. machines and suppliers may fail Dr. Dey 15 .What makes SCM difficult? Challenging task to design & operate supply chain so that system wide costs are minimized and system wide service level is maintained – process of finding best system wide strategy is ‗Global Optimization‘ Uncertainty is inherent in every supply chain Demand side: customer demand can never be forecast exactly Supply side: Travel times will never be certain. A.
K. conflicting objectives Supply chain is dynamic System variations over time Matching supply and demand Bullwhip effect Forecasts are inaccurate Uncertainties in suppliers. logistics Managing Uncertainty 16 Dr. Dey . A.Why is SCM difficult? Global Optimization Global and complex supply chains Different.
all over Globe Different. A. competition activities 17 Dr. manufacturer desires flexibility – shorter production lots Manufacturer‘s objective of large batches is in conflict with warehouse and DC‘s objective of reducing inventory Supply chain is dynamic Demand. conflicting objectives Suppliers want order for large quantities. Relationships may change System variations over time Demand & cost vary due to seasonality. Dey . trends. K.Global Optimization Global and complex supply chains Facilities dispersed over large geography. Supplier capability. promotion.
Dey . Manufacturing • Long run production • High quality • High productivity • Low production cost 18 Dr.Conflicting Objectives in the Supply Chain 1. A. K. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2.
Conflicting Objectives in the Supply Chain 3. K. Dey . Customers • Short order lead time • High in stock • Enormous variety of products • Low prices 19 Dr. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4. A.
component availability all have significant impact on supply chain 20 Dr.Managing Uncertainty Matching supply and demand is a major challenge Months before actual demand manufacturers commit to specific production level Bullwhip effect Magnification of variability of demand from retail to supplier Forecasts are inaccurate Even most advanced techniques can not predict demand accurately Uncertainties in suppliers. Dey . A. transportation time. K. logistics Delivery lead time. manufacturing yield.
Dey . K. A.Uncertainty What is variation? What is randomness? What tools and approaches help us to deal with these issues? 21 Dr.
A. K.Can’t Forecasting Help? Forecasting is always wrong The longer the forecast horizon the worse the forecast End item forecasts are even more wrong 22 Dr. Dey .
Demand is not the only source of uncertainty: Lead times Yields Transportation times Natural Disasters Component Availability 23 Dr. A. Dey . K. Inventory and back-order levels typically fluctuate widely across the supply chain.Why Is Uncertainty Hard to Deal With? Matching supply and demand is difficult. Forecasting doesn‘t solve the problem.
A. 1998 24 Dr. Electronic Commerce and Value Chain Management.Supply Chain Variability Manufacturer Forecast of Sales Volumes Retailer Orders Retailer Warehouse to Shop Production Plan Actual Consumer Demand Time Source: Tom Mc Guffry. K. Dey .
Volumes Consumer Demand Production Plan Time Source: Tom Mc Guffry. Dey . 1998 25 Dr.What Management Gets. A. Electronic Commerce and Value Chain Management.. K..
1998 26 Dr. Dey . Electronic Commerce and Value Chain Management. K. A.What Management Wants… Volumes Production Plan Consumer Demand Time Source: Tom Mc Guffry.
K.Dealing with Uncertainty Pull Systems Risk Pooling Centralization Postponement Strategic Alliances Collaborative Forecasting 27 Dr. A. Dey .
Dey . with a shelf life of few weeks. K.Why manage supply chain? To create sustainable competitive advantage by Reducing cost Increasing revenue Increasing flexibility Increasing customer service level Creating more value for the customers Consider Typical box of cereal. takes more than three months to get from factory to super market A Car takes 15 days or more from factory to dealership – where actual travel time is not more than five days 28 Dr. A.
K. Dey . A.Procter & Gamble Strategic Relationship between suppliers & manufacturers may have significant impact on Supply Chain to reduce cost P&G estimates that it has saved retail customers USD 18 million in 18 months y its supply chain initiatives Essence of this approach lies in suppliers and manufacturers working together to create business plan to eliminate the sources of wasteful practices across the entire supply chain 29 Dr.
K. A.Procter & Gamble Key issues are What are various business plans and partnerships that can best reduce cost for all partners and improve service level? Which one is appropriate? What incentives and performance measures should be used? How should the benefits resulting from strategic partnership be shared? Should a portion of saving be transferred to customers? 30 Dr. Dey .
5 percent.National Semiconductor In two years National Semiconductor reduced distribution cost y 2. Dey . K. A. decreased delivery time by 47 percent and increased sales by 34 percent By closing six warehouses around the globe Air freighting microchips to customers from a new centralized distribution centre in Singapore 31 Dr.
Dey . K. A.National Semiconductor Key issues in this case are What is the trade off between increased cost of faster transportation versus savings due to reduction in inventory level by shifting to a centralized distribution system What is the best distribution system – Centralized or Decentralized 32 Dr.
A. Delivers 500 types of cookies & more than 10.000 buyers and spends more than USD 200 million a year in transportation cost alone Problem is ‗too many trucks arrive at or depart from their destinations half empty‘ – adding to cost As a trial Nabisco shared warehouses and trucks with 25 other manufacturers resulting into substantial savings 33 Dr. Dey . K.Nabisco Inc.000 types of candies to over 80.
K. A. Dey .Dayton Hudson Corporation Target stores of Dayton Hudson relies on very close relationships with its suppliers They may agree to buy certain number of Italian bowls from a supplier without specifying style and colour Near the delivery date Target forecasts the styles and colours that are likely to sell Manufacturer can produce trial lots for sale to determine whether particular style will actually sell 34 Dr.
Dey . K. due to very high volume of goods the shipments are mostly in full truck loads. resulting into more savings 35 Dr. A. avoiding warehouse altogether In addition. Moves over 85 percent of its merchandise directly from suppliers to stores.The Home Depot Inc.
Korean Industrial Relay Manufacturer Problems faced: 70% service level – only 70% orders are delivered on time Inventory keeps piling up – mostly of items for which there is no demand Inventory turnover ratio is four – much below the industry average of nine times Strategies that can increase service level will also help in inventory liquidation resulting into higher profit 36 Dr. Dey . K. A.
A. K. Dey .Harnessing conflicting objectives Few years back achieving conflicting objectives such as ‗Improved customer service level‘ and ‗Lower inventory‘ was not possible Now it is possible due to Recent developments in information and communication technologies Better understanding of SCM strategies 37 Dr.
A. K.Key Issues Issues span Strategic Tactical Operational What are the tradeoffs and issues? Distribution Network Configuration Inventory control Supply Contracts Distribution Strategies Integration and Partnerships Procurement Strategies and Outsourcing Product Design Information Technology 38 Dr. Dey .
Direct-to-Consumer Strategic alliances Manufacturing postponement Dynamic Pricing
Dr. A. K. Dey
Key (popular) issues in SCM
Supply chain design
Where to locate manufacturing facilities, distribution centers, stores so as to minimize overall costs and improve service
How to establish relationships between manufacturers and retailers so that the whole supply chain can increase profits?
Cross-docking Direct shipments to customers Pull based, push based, pull-push based systems Vendor managed inventory
Dr. A. K. Dey
Key (popular) issues in SCM
Supply chain integration and strategic partnership
Coordinating different stages of the supply chain Value of information and information sharing
Outsourcing and procurement strategies Managing product variety
Product postponement Component commonality and modularity
Information technology and decision support systems Managing customers
Customer segmentation, revenue management
Dr. A. K. Dey
K.Product postponement – a storage devices manufacturer example Production Process Occurring over Time Assembly Phase Testing Phase PCB Board that Differentiates The Final Product is Inserted End Product Is Completed Production Process Occurring over Time Assembly Phase Testing Phase Generic PCB Board is Inserted to Enable Testing End Product Is Completed PCB Board that Differentiates The Final Product is Inserted to Replace the Generic Board Used to Testing 42 Dr. Dey . A.
Postponement Benefits: Reduced inventory cost in the supply chain 43 Dr. Dey . K.Design for Supply Chain Also called: design for logistics -. A.DFL Take supply chain costs into account when designing product and manufacturing processes Approaches 1. Modularity & Component Commonality 2.
Approach 1: Modularity/Component Commonality Some modules are common across different products (example?) 1 2 Without component commonality 1 2 With component commonality • Benefits: -.Fewer components reduced inventory handling and procurement costs 44 Dr.Risk pooling reduced inventory cost -. Dey . A.Modularity allows parallel processing reduced lead times -. K.
A. Integral Design Modular design One-to-one mapping between functional elements and components Interfaces between components not coupled Integral design Complex mapping from functional elements to components Interfaces between components are coupled integral 45 Dr. K.Modular vs. Dey modular .
Assume that each car costs Chrysler US$15. in 000s. in terms of dollar value (chassis. whereas the demand for the Durango is N(40. Consider annual holding cost of a component to be 12% of the component value. and that lead-time across components is constant at one month (for simplicity). K.202). N(50. It needs to renew its Durango and Cherokee lines. transmission. each car has very little component commonality with the other.) are common to the new Cherokee and Durango. Suppose the monthly demand for the Cherokee.202). from a Supply Chain Standpoint? Example: Consider Chrysler. since both use integral designs.000 to manufacture. Chrysler is considering a modular platform design. if the modular design is used. A. Currently. underbody. Assume a 95% service level. in which 60% of the components. Dey . Compute the monthly holding cost savings regarding inventory safety stock. 46 Dr.Why is Modular Design Preferred. etc.
K. Dey . A.Illustration of Chrysler Product Strategies Current: Integral Designs Proposed: Modular Design 47 Dr.
Solution to the Chrysler Example 48 Dr. K. Dey . A.
For example. Delayed product differentiation -. K. Dey . first manufacture a generic product.Aka. A. then differentiate it to make specific products -.DPD Without postponement With postponement Raw materials components Different products Raw materials components Generic product Different products Benefits: Reduced demand uncertainty (why?) Higher service level or/and reduced inventory cost 49 Dr.Approach 2: Postponement Design product and manufacturing processes so that decisions about specific products can be delayed as late as possible -.
Computerized knitting loom capable of automatically producing the most complex product designs 50 Dr. K. A. Dey Dyeing vats for the finished knitted product. Knitting division. . near Treviso.Example: Benetton A world leader in knitwear Knitting Dyeing Wool Plant in Castrette.
K. A.Benetton Manufacturing Process Postponement Old Sequence Purchase Yarn New Sequence Purchase Yarn Knit Garment Parts Dye Yarn Finish Yarn Knit Garment Parts Join Parts 51 Dr. Dey Join Parts Dye Garment Finish Garment This process is postponed .
Process Redesign for Supply Chain: Postponement at Benetton Dye yarn only after the season’s fashion preferences become more established (knit lead-time much longer than dyeing lead-time). Dey . Example: single product. A. four colors knit dye Dyeing operations postponed dye knit Outcome: Reduces demand uncertainty & inventory 52 Dr. K.
annual holding cost is 12% of the product value. 53 Dr. Due to the short season and long production lead times. knitting time is 6 months. Dey . the standard deviation is 1000. however. and 95% service level.Benetton Example: Evaluating the Value of Dyeing Postponement Consider the previous example (say. Suppose demand for each of the 4 different sweater colors has a mean of 10000. K. Compute approximate inventory holding cost savings in WIP as a result of dyeing postponement. If done one month before the season (color preferences are well known by then). The standard deviation of demand (forecast error). A. there is only one production run before the season. the standard deviation is 6000. depends on how long the forecast is done before the season starts. Assume that each sweater costs $30. Dyeing time is 1 month. If seven months before the season. a sweater).
Benetton Example Solution 54 Dr. Dey . K. A.
HP Printers Cases 1) What were the problems (crises) facing HP? What were the causes? 2) Resolving the crises – What alternatives did HP consider for solving the problems? 55 Dr. Dey . A. K.
Dey .HP DeskJet Printer Supply Chain US DC Vancouver Plant Europe DC Customer Suppliers Customer Far East DC Customer HP 56 Dr. K. A.
Inventory-Service Crisis What is the crisis? Excess inventory in some products Shortages in other products What caused it? Poor demand forecasting Large product variety due to many markets Long shipping lead time from plant to DC Inventory levels set incorrectly 57 Dr. Dey . A. K.
A. S) policy -.Use EOQ model to determine optimal order quantity Q* = Order-up-to level: S = Q* + s 2 · K·AVG h 58 Dr.Setting the Right Level of Inventory How are current inventory levels set at each DC? Rule of thumb How should they be set? Safety stock -. Dey . K.Reorder point: s = AVG · L + z · STD · L -.Use (s.
Service level Z Demand uncertainty STD Order lead time L 59 Dr. 2.Drivers of Safety Stock SS = z•STD• Drivers of safety stock: L 1. Dey . 3. K. A.
Dey . A. but already a problem Pros/Cons Postponement? 60 Dr. May be too expensive Would be great! But unclear how to do that … Better service. Lose economy of scale in manufacturing Shorten lead time. May not have enough volume.Resolving the Crisis: Options Discussed in the Case Options Plant in Europe Air shipments Better forecasts Hold more inventory (higher z) Shorten lead time. K.
K. Dey .Postponement: DC Localization Strategy • Factory-Localization Strategy: (customization performed at the factory) HP DC customers (manufacturer) • DC-Localization Strategy: (customization performed at the DCs) HP (manufacturer) DC customers Postponement: Delaying the point of differentiation 61 Dr. A.
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