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Introduction to

Supply Chain Management

Sources:
plants
vendors
ports

Regional
Warehouses:
stocking
points

Field
Warehouses:
stocking
points

Customers,
demand
centers
sinks

Supply

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

Plastic
Producer

Tenneco
Packaging

Chemical
manufacturer
(e.g. Oil Company)

Paper
Manufacturer

Jewel
Supermarket

Customer wants
detergent and goes
to Jewel

Chemical
manufacturer
(e.g. Oil Company)

Timber
Industry

What Is A Supply Chain?


The system of suppliers, manufacturers,
transportation, distributors, and vendors
that exists to transform raw materials to
final products and supply those products
to customers.
That portion of the supply chain which
comes after the manufacturing process is
sometimes known as the distribution
network.

What Is the Goal of Supply Chain


Management?
Supply chain management is 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
At the right time
In order to
Minimize total system cost
Satisfy customer service requirements

Strategies for SCM


All of the advanced strategies, techniques,
and approaches for Supply Chain
Management focus on:

Global Optimization
Managing Uncertainty

Tools and Strategies for


Optimization

Decision Support Systems


Inventory Control
Network Design
Design for Logistics
Cross Docking

Global Optimization
What is it?
Why is it different/better than local
optimization?
What are conflicting supply chain
objectives?
What tools and approaches help with
global optimization?

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

Why is Global Optimization


Hard?
The supply chain is complex
Different facilities have conflicting
objectives
The supply chain is a dynamic system
The power structure changes

The system varies over time

Conflicting Objectives
in the Supply Chain
1. Purchasing
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
2. Manufacturing
Long run production
High quality
High productivity
Low production cost

Conflicting Objectives
in the Supply Chain
3. Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices

Uncertainty
What is variation?
What is randomness?
What tools and approaches
help us to deal with these
issues?

Cant Forecasting Help?


Forecasting is always wrong
The longer the forecast horizon the
worse the forecast
End item forecasts are even more
wrong

Why Is Uncertainty Hard to Deal


With?
Matching supply and demand is difficult.
Forecasting doesnt solve the problem.
Inventory and back-order levels typically
fluctuate widely across the supply chain.
Demand is not the only source of uncertainty:

Lead times
Yields
Transportation times
Natural Disasters
Component Availability

Supply Chain Variability

Volumes

Manufacturer Forecast
of Sales

Retailer Orders

Retailer Warehouse
to Shop

Actual
Consumer
Demand

Production Plan

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

Volumes

What Management Gets...

Consumer
Demand

Production Plan

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

Volumes

What Management Wants

Production Plan
Consumer
Demand

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

Dealing with Uncertainty

Pull Systems
Risk Pooling
Centralization
Postponement
Strategic Alliances
Collaborative Forecasting

Logistics in the Manufacturing


Firm
Profit
Logistics Cost

4%
21%

Marketing Cost

27%

Manufacturing Cost

48%

Profit

Logistics
Cost
Marketing
Cost

Manufacturing
Cost

Supply Chain: The Magnitude


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 America's leading capital
goods producers, was forced to announce write
downs of $2.6 billion in October 1997, due to
Raw material shortages, internal and supplier
parts shortages.

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


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.
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 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.

Whats New?

Global competition
Shorter product life cycle
New, low-cost distribution channels
More powerful well-informed
customers
Internet and E-Business strategies

New Concepts
Push-Pull strategies
Direct-to-Consumer
Strategic alliances
Manufacturing postponement
Dynamic Pricing

E-Procurement

Process View of a Supply Chain


Cycle view: processes in a supply chain
are divided into a series of cycles, each
performed at the interfaces between two
successive supply chain stages
Push/pull view: processes in a supply
chain are divided into two categories
depending on whether they are executed
in response to a customer order (pull) or in
anticipation of a customer order (push)

Cycle View of Supply Chains


Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier

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.

Push/Pull View of Supply


Chains
Procurement,
Manufacturing and
Replenishment cycles

PUSH PROCESSES

Customer Order
Cycle

PULL PROCESSES

Customer
Order Arrives

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

Supply Chain Performance:


Achieving Strategic Fit and
Scope

The Value Chain: Linking Supply Chain


and Business Strategy
Business Strategy
New Product Marketing
Strategy
Strategy

New
Product
Development

Supply Chain Strategy

Marketing
and
Operations Distribution
Sales

Service

Finance, Accounting, Information Technology, Human Resources

Understanding the Supply Chain: CostResponsiveness Efficient Frontier


Responsiveness
High

Low

Cost
High

Low

Demand Characteristics
Functional
Low demand variability
Easy forecasting
Long life cycle
Low inventory cost
Low margins
Low product variety
Low stockout cost
Low obsolescence

Innovative
High
Difficult
Short
High
High
High
High
High

Responsiveness Spectrum

Highly
efficient

Integrated
steel mill

Somewhat
efficient

Hanes
apparel

Somewhat
responsive

Most
automotive
production

Highly
responsive

Dell

Achieving Strategic Fit Shown on the


Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiveness
spectrum

Efficient
supply chain
Certain
demand

Implied
uncertainty
spectrum

Uncertain
demand

Comparison of Efficient and Responsive


Supply Chains
Efficient

Responsive

Primary goal

Lowest cost

Quick response

Product design strategy

Min product cost

Modularity to allow
postponement

Pricing strategy

Lower margins

Higher margins

Mfg strategy

High utilization

Capacity flexibility

Inventory strategy

Minimize inventory

Buffer inventory

Lead time strategy

Reduce but not at expense


of greater cost

Aggressively reduce even if


costs are significant

Supplier selection strategy

Cost and low quality

Speed, flexibility, quality

Transportation strategy

Greater reliance on low cost


modes

Greater reliance on
responsive (fast) modes

Supply Chain Drivers and


Obstacles

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

A Framework for
Structuring Drivers
Efficiency

Responsiveness
Supply chain structure

Facilities

Transportation

Inventory

Drivers

Information

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

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: Responsiveness versus efficiency

Considerations for
Supply Chain Drivers
Driver

Efficiency

Responsiveness

Inventory

Cost of holding

Availability

Transportation

Consolidation

Speed

Facilities

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

Information

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

Major Obstacles to Achieving Fit


Multiple owners / incentives in a supply
chain
Local optimization and lack of global fit

Increasing product variety / shrinking life


cycles / customer fragmentation
Increasing implied uncertainty

Summary
What are the major drivers of supply chain performance?
What is the role of each driver in creating strategic fit
between supply chain strategy and competitive strategy (or
between implied demand uncertainty and supply chain
responsiveness)?
What are the major obstacles to achieving strategic fit?
In the remainder of the course, we will learn how to make
decisions with respect to these drivers in order to achieve
strategic fit and surmount these obstacles

Step 1: Understanding the Customer and


Supply Chain Uncertainty

Identify the needs of the customer segment being served


Quantity of product needed in each lot
Response time customers will tolerate
Variety of products needed
Service level required
Price of the product
Desired rate of innovation in the product

Step 1: Understanding the Customer


and Supply Chain Uncertainty
Overall attribute of customer demand
Demand uncertainty: uncertainty of
customer demand for a product
Implied demand uncertainty: resulting
uncertainty for the supply chain given the
portion of the demand the supply chain
must handle and attributes the customer
desires

Step 1: Understanding the Customer


and Supply Chain Uncertainty
Implied demand uncertainty also related to
customer needs and product attributes
First step to strategic fit is to understand
customers by mapping their demand on
the implied uncertainty spectrum

Impact of Customer Needs on


Implied Demand Uncertainty
Customer Need

Causes implied demand


uncertainty to increase
because

Range of quantity increases

Wider range of quantity implies


greater variance in demand

Lead time decreases

Less time to react to orders

Variety of products required increases Demand per product becomes more


disaggregated
Number of channels increases

Total customer demand is now


disaggregated over more channels

Rate of innovation increases

New products tend to have more


uncertain demand

Required service level increases

Firm now has to handle unusual


surges in demand

Correlation Between Implied Demand


Uncertainty and Other Attributes
Attribute
Product
margin
Avg. forecast
error
Avg. stockout
rate
Avg. forced
season-end
markdown

Low Implied
Uncertainty
Low

High Implied
Uncertainty
High

10%

40%-100%

1%-2%

10%-40%

0%

10%-25%

Step 2: Understanding the


Supply Chain
How does the firm best meet demand?
Dimension describing the supply chain is
supply chain responsiveness
Supply chain responsiveness -- ability to
respond to wide ranges of quantities
demanded
meet short lead times
handle a large variety of products
build highly innovative products
meet a very high service level

Step 2: Understanding the


Supply Chain
There is a cost to achieving
responsiveness
Supply chain efficiency: cost of making
and delivering the product to the customer
Increasing responsiveness results in
higher costs that lower efficiency
strategic fit is to map the supply chain on
the responsiveness spectrum

Step 3: Achieving Strategic Fit


Step is to ensure that what the supply
chain does well is consistent with target
customers needs
Examples: Dell, Barilla