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Value Chain

Supply side- raw materials, inbound


logistics and production processes
Demand
sideoutbound
logistics,
marketing and sales.

Council of Logistics Management


Logistics is the process of planning, implementing and
controlling the efficient, cost-effective flow and storage of
raw materials, in-process inventory, finished goods and
related information from the point of origin to point of
consumption for the purpose of conforming to customer
requirements.

WHAT IS SUPPLY CHAIN MANAGEMENT


" Is the strategic management of activities involved in
the acquisition and conversion of materials to finished
products delivered to the customer"

Supplier
Management

Schedule /
Resources

Material Flow
Information Flow

Conversion

Stock
Deployment

Customer
Management

Delivery

Leads to Business Process Integration

Supply Change Management


Supply chain is the system by which organizations
source, make and deliver their products or services
according to market demand.
Supply chain management operations and decisions
are ultimately triggered by demand signals at the
ultimate consumer level.
Supply chain as defined by experienced practitioners
extends from suppliers suppliers to customers
customers.

SUPPLY CHAIN INCLUDES :

MATERIAL FLOWS
INFORMATION FLOWS
FINANCIAL FLOWS

SUPPLY CHAIN
FACILITATED BY :
PROCESSES
STRUCTURE
TECHNOLOGY

MANAGEMENT

IS

Supply Chain and Demand Chain


Demand chain is defined as the system by
which organizations manage sales and
distribution of products and services to end
users.
Conceptually incorrect to look at demand
chain separately
Look at the pipe as a whole.

But is there a pipe at all?


More a network
Not necessarily linear
A network of independent and interdependent
organizations mutually and cooperatively
working together to control, manage and
improve the flow of materials and information
from suppliers to end users

SUPPLY CHAIN DRIVERS


Not new. Value system of Michael Porter
Why sudden interest?
Demanding customers
Shrinking product life cycles
Growing retailer power in some cases
Emergence of specialized logistics providers
Globalization
Information technology

SUPPLY CHAIN ELEMENTS


Strategic

Supply Chain Design


Resource Acquisition
Long Term Planning (1 Year ++)

Tactical

Production/ Distribution Planning


Resource Allocation
Medium Term Planning (Qtrly,Mont

Operational

Shipment Scheduling
Resource Scheduling
Short Term Planning (Weekly,Daily)

Supply Chain Goals


Efficient supply chain management
must result in tangible business
improvements. It is characterized by a
sharp focus on
Revenue growth
Better asset utilization
Cost reduction.

Supply Chain
Management
Underlying Principles
Compression (Planning/Manufacturing/Supply)
Conformance (Forecasts/Plans/Distribution)
Co-operation (Cross -Functional)
Communication (Real Time Data)

Reduce Overall Cycle Time : Improve Respo

Changing Paradigm

Functional vs Process
Products vs Customers
Revenues vs Performance
Inventory vs Information
Transactions vs Relationships

Critical Success Factors today


Cross functional management and
planning skills
Ability to define, measure and manage
service
requirements
by
market
segment
Information systems
Relationship management and win win
orientation

PUTTING IN PLACE A WELL OILED SUPPLY


CHAIN
Supply chain as an efficient customer
satisfying process
Effectiveness of the whole supply chain is
more important than the efficiency of each
individual department.

Step1- Designing the supply chain


Determine the supply chain network
Identify the levels of service required

Step 2 - Optimizing the supply chain


Determine pathways from suppliers to
the end customer

Customer markets to Distribution centers


Distribution centers to production plants
Raw material sources to production plants
Identify constraints at vendors, plants and
distribution centers
Get the big picture
Plan the procurement, production and
distribution of product groups rather than
individual products in large time periodsquarters or years

Step 3- Material flow planning


Determine the exact flow and timing of
materials
Arrive at decisions by working back from the
projected demand through the supply chain to
the raw material resources
Techniques
ERP

Step 4 - Transaction processing and


short term scheduling
Customer orders arrive at random
This is a day to day accounting system which
tracks and schedules every order to meet
customer demand
Order entry, order fulfillment and physical
replenishment

Information flows in Supply Chain Management


Information is overriding element
Need for databases
Master files: Information about customers, products,
materials, suppliers, transportation, production and
distribution data- do not require frequent processing
Status files- heart of transaction processing- track
orders and infrastructure status- updated daily.
Essentially using the same information to make all
plans right from structuring the network to
processing every day supply chain tasks.

The value chain connects a companys


supply side with its demand side.
Traditionally information has been a
supporting function.
Information however can be managed far
more creatively.
There are various stages of using value
added information processes.

Visibility : See physical operations more


effectively through information. Information
can be used for effective coordination of
value chain activities.
Mirroring capability : In this stage, virtual
activities are substituted for physical ones. A
parallel value chain is created.
New customer relationships : The company
can draw on the flow of information in the
virtual value chain to deliver value to
customers in new ways.

Conventional functions

Inventory ownership and management


Sales and technical support
Order handling
Credit

Contemporary Trends
Channels being divided into two- Fulfillment
and Franchised agent
Fulfillment channel- responsible for getting
the manufacturers product from the plant to
the end user through a highly efficient
logistics and inventory management system

Contemporary Trends
Fulfillment channel may not take ownership
of the product but may perform these
functions on a per box fee structure
Franchised agents responsible for sales and
sales support but will not write the order or
supply the product

Issues in customer management


Penetration vs Spread
Concentration is necessary to commit the
necessary resources for true customer
integration
Depth of customer contact
R&D - sharing information vs developing new
products together
Logistics - Pros and cons of methods of
transportation vs reengineering the logistics
process

Implementation: Points to keep in mind


Recognize the difficulty of change.
Prepare a blueprint for change that maps linkages
among initiatives.
Assess the entire supply chain from supplier
relationships to internal operations to the market
place, including customers, competitors and
industry as a whole.

Does our manufacturing strategy increase product


line flexibility while continuing to drive down
overall production costs?
When was the last time we measured lost sales to
end customers?
Do we have an efficient system to get POS data
from retailers?
Are we testing our products with end customers?
Do we use the resulting data to adjust our
forecasting and supply positions?
Is the ratio of returned orders to sales
increasing?

The New Model of Relationships


Hard bargaining vs shared destiny
Exit vs Voice
Arms length relations vs Involving dealers and
suppliers in product development
Piling up vs Replenishing dealer inventory more
frequently
In short working together as partners to cut
costs, boost efficiencies, innovate and share
value

Adversarial vs partnerships
Short term vs long term contracts
Large vs small order quantity
Full truck load vs small parcels
Inspection vs no inspection

Written order vs understanding


Many vs few suppliers
Design and then invite quote from
vendor vs involving vendor in
development
Bargaining, holding cards close to chest
vs Shared destiny, transparency

Summary
Segmentation of customers based on service
needs
Customization of logistics network
Listen to signals of market demand and plan
accordingly.
Differentiate product close to the customer
Source strategically
Develop a supply chain wide technology
strategy
Accept channel spanning performance
measures

The Bullwhip Phenomenon

Volatility amplification along the network


Increase in demand variability as we move
upstream away from the market
Mainly because of lack of communication and
coordination
Delays in information and material flows

Bullwhip effect occurs because of various


reasons:
Order Batching- Accumulate orders
Shortage gaming- Ask for more than what is
needed
Demand forecast updating

Important points to keep in mind


Segment customers based on service needs.
Modify the supply chain to meet these service
requirements profitably.
Customize the logistics network.
Develop forecasts collaboratively involving every
link of the supply chain.
Locate the leverage point where the product is
unalterably configured to meet a single
requirement
Delay product differentiation till the last possible
moment.

Assess options such as modularized design


or modification of manufacturing processes
that can increase flexibility.
Cultivate warm relationships with suppliers.
Efficient supply chain management has to be
accompanied by a technology strategy.

Warehousing and transportation


Inventory
Late delivery returns
Obsolescence
Lost sales

Need to minimize obsolescence costs


Minimize product range flexibility
Reduce product development cycle

6
5
2
20
60

Advantages of a tightly coordinated supply chain


traditionally facilitated by vertical integration.
Combined with focus and specialization.
Leveraging on investments others have made and
focusing on delivering solutions and systems to
customers
Fewer things to manage - fewer things go wrong
Suppliers engineers part of Dells Design team
Have only a few partners

Share information with partners in Real time


fashion.
Stitch together a business with partners that are
treated as if they are inside the company.
Change focus from how much inventory there is to
how fast it is moving
Assets collect risks around them one way or the
other.
Limited or no testing - Eg. Sony Monitors

Only three Manufacturing centers - Austin, Ireland


and Malaysia.
Inventory levels and replenishment needs
sometimes conveyed to vendors on hourly basis.
Substitute information for inventory and ship only
when we have real demand from real end
customers
Clever segmentation - Focus on institutional
markets - 70% to very large customers with
annual purchases exceeding $1 million.

Exit from retail business after wrong entry in 1989.


Segmentation - closeness to customers and access
to valuable information.
Demand forecasting as a critical sales skill
Help global customers, manage their total
purchase of PCs by selling them a standard
product
Dell server loads software on customers computers
Meet customers needs faster and more efficiently
than any other model.

Founded in 1906
Today 35 offices in 20 countries
1997 revenues of $ 1.7 billion
Largest export trading company in Hong
Kong
Customers- American and European retailers
Sources clothing and other consumer goods
ranging from toys to fashion accessories to
luggage

Order from Europe


Buy yarn from Korea
Weave and dye in Taiwan
Buy Japanese zippers made in China
Make the garments in Thailand in five different
factories
Pulling apart the value chain and optimizing at
each step

Victor Fung
Today, assembly is the easy part. The hard part is
managing your suppliers and the flow of parts. Good
supply chain management strips away time and cost
from product delivery cycles. Our customers have
become more fashion driven, working with six or seven
seasons a year instead of just two or three. Once you
move to shorter life cycles, the problem of obsolete
inventory increases dramatically. With customer tastes
changing rapidly and markets segmenting into narrow
niches, its not just fashion products that are becoming
increasingly time sensitive.

Endorsement by Stan Shih, CEO, Acer


Buying right things
Reaching into suppliers to ensure that certain
things happen on time and at the right quality
level.

Buyer informs five weeks before delivery.


Reserve undyed yarn from yarn supplier.
Lock up capacity in weaving and dyeing mills.
Outsourcing not same as leaving suppliers to do the
worrying.
Single factories are too small to have much buying
power and to demand faster deliveries from
suppliers.
To shorten delivery cycle, need to go upstream to
organize production.
Li & Fung able to delay commitment to a particular
fashion trend.

Integrated logistics management


Elimination of consolidators in container
shipments
Smokeless factory

Design
Procurement
Inspection of raw materials
Production planning
Line balancing
Inspection of finished goods
No worker ownership
No labour management

If we dont own factories, can we say we are in


manufacturing? Absolutely, because of the 15
steps in the manufacturing value chain, we
probably do 10.
Basic operating unit is the division.
Divisions focused on serving single customers or
groups of small customers.
Less emphasis on geographic grouping
Merchandising decisions decentralized
Financial controls and operating procedures tightly
centralized.
Strong focus on inventory and working capital
management.

As far as I am concerned, inventory is the root of


all evil. At a minimum, it increases the complexity
of managing any business. So its a word we dont
tolerate around here.
Need for sophisticated information systems. Li &
Fung working
to create a database to
systematically track all supplier relationships.
Someone might steal our database but when
they call up a supplier, they dont have the long
relationship with the supplier that Li & Fung has. It
makes a difference to suppliers when they know
that you are dedicated to the business, that you
have been honoring your commitments for 90
years.

Broadening the middle


Better prices and better margins for customers
Tackling the soft $3 in the cost structure. $3
represents the inefficiency in the supply chain for
a consumer product priced at $4. Look at costs
throughout distribution channels than just in
factory

Thank You