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Supply Chain Management

Definition: Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying customer service requirements. Notice: Who is involved Cost and Service Level It is all about integration

What is Supply Chain Management?

Managing supply chain flows and
assets, to maximize supply chain

What is supply chain surplus?

Sources: plants vendors ports

Regional Warehouses: stocking points

Field Warehouses: stocking points

Customers, demand centers sinks


Inventory & warehousing costs

Production/ purchase costs Transportation costs Inventory & warehousing costs Transportation costs

What is a supply chain?

P&G or other manufacturer Jewel or third party DC Jewel Supermarket Customer wants detergent and goes to Jewel

Plastic Producer

Tenneco Packaging

Chemical manufacturer (e.g. Oil Company)

Chemical manufacturer (e.g. Oil Company)

Paper Manufacturer

Timber Industry

Decision Phases in Supply Chain

Supply Chain Strategy & Design Supply Chain Planning Supply Chain Operations
Strategy & Design



Supply Chain Strategy & Design

Location & capacity of production and warehouses Products to manufactured and in which locations Mode of transportation Types of information systems to be used Strategic sourcing decisions

Supply Chain Planning

Markets to be supplied & from which location Planned build-up of inventory Subcontracting of manufacturing Timing and size of market promotion Handling uncertainty in demand, foreign exchange fluctuations Establishing production plan under fixed strategic parameters

Supply Chain Operations

Decisions over individual customer orders (daily, weekly) Less uncertainty about demand information Exploit reduction of uncertainty to optimize performance Establish deliver dates Establish order fill rate

Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle


Strategic Scope
Suppliers Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Manufacturer Distributor Retailer Customer

Strategic Scope
Intracompany Intraoperation Scope
Minimize local cost view

Intracompany Intrafunctional Scope

Minimize functional cost view

Intracompany Interfunctional Scope

Minimize company profit view

Intercompany Interfunctional Scope

Maximize supply chain surplus view

Supply Chain Challenges

Achieving Global Optimization
Conflicting Objectives Complex network of facilities System Variations over time

Supply Chain Challenges

Achieving Global Optimization
Conflicting Objectives Complex network of facilities System Variations over time

Managing Uncertainty
Matching Supply and Demand Demand is not the only source of uncertainty

Key Issues in Supply Chain Management

Distribution Network Configuration Inventory Control Supply contract Distribution Strategies Supply Chain Integration & Strategic Partnering Outsourcing & Procurement Strategies

Key Issues of SCM (cont)

Product Design Information Technology & Decision Support System Customer Value

Relationships between key SCM Issues and the business environment

Global Optimization Dist. Conf. Inv. Control X X Managing Uncertainty

Sup. Contract
Dist. Strategies St. partnership Outsourcing Pr. Design IT & DSS Cust. Value


Prerequisites for Supply Chain Management

Top management understanding & commitment Quest for excellence Effective and efficient communication Relationship instead of exchange Cross-functional teams Reality of team, partnerships & alliances (based on harmony & trust)

Supply Chain: The Magnitude

In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product).
Transportation 58% Inventory 38% Management 4%

Third party logistics services grew in 1998 by 15% to nearly $40 billion

Supply Chain: The Magnitude


It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies.
A typical box of cereal spends 104 days getting from factory to supermarket. A typical new car spends 15 days traveling from the factory to the dealership.

Supply Chain: The Magnitude

(continued) Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them. Boeing Aircraft, one of Americas leading capital goods producers, was forced to announce writedowns of $2.6 billion in October 1997. The reason? Raw material shortages, internal and supplier parts shortages. (Wall Street Journal, Oct. 23, 1997)

Supply Chain: The Potential

Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together . jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain. (Journal of Business Strategy, Oct./Nov. 1997)

Supply Chain: The Potential

Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using

- Direct business model

- Build-to-order strategy.

Supply Chain: The Potential

In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer.

Supply Chain: The Complexity

National Semiconductors:
Production: Produces chips in six different locations: four in the US, one in Britain and one in Israel Chips are shipped to seven assembly locations in Southeast Asia. Distribution The final product is shipped to hundreds of facilities all over the world 20,000 different routes 12 different airlines are involved 95% of the products are delivered within 45 days 5% are delivered within 90 days.

Supply Chain Management: The Magnitude in the Traditional View

Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies
A typical box of cereal spends 104 days from factory to sale A typical car spends 15 days from factory to dealership Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago

Supply Chain Management: The True Magnitude

Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed When the 1 gig processor was introduced by AMD, the price of the 800 meg processor dropped by 30% P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand

Drivers of Supply Chain Performance

Efficiency Responsiveness

Supply chain structure






Considerations for Supply Chain Drivers

Driver Inventory Transportation Facilities Information Efficiency Cost of holding Consolidation Responsiveness Availability Speed

Consolidation / Proximity / Dedicated Flexibility What information is best suited for each objective

Achieving Strategic Fit

Understanding the Customer
Lot size Response time Service level Product variety Price Innovation

Implied Demand Uncertainty

The Value Chain: Linking Supply Chain and Business Strategy

Business Strategy
New Product Marketing Strategy Strategy

Supply Chain Strategy

New Product Development

Marketing and Operations Distribution Sales


Finance, Accounting, Information Technology, Human Resources

Flows in a Supply Chain

Information Product


Sequential Optimization vs. Global Optimization

Sequential Optimization
Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Source: Duncan McFarlane

The Dynamics of the Supply Chain

Order Size

Customer Demand Retailer Orders

Distributor Orders

Production Plan

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

The Dynamics of the Supply Chain

Order Size

Customer Demand

Production Plan

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998