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Supply Chain Management

Mr. Surendra Verru

Introduction:
Supply chain management(SCM)isthemanagementoftheflow
ofgoodsandservices.
Itincludesthemovementandstorageofrawmaterial,work-inprocessinventory,andfinishedgoodsfrompointoforiginto
pointofconsumption.
ItInterconnectedorinterlinkednetworks,channelsand
nodebusinessesareinvolvedintheprovisionof
productsandservicesrequiredbyendcustomersinaSupply
Chain.
Itdefinedasthe"design,planning,execution,control,and
monitoringofsupplychainactivitieswiththeobjectiveof
creatingnetvalue,buildingacompetitiveinfrastructure,
leveragingworldwidelogistics,synchronizingsupplywith
demandandmeasuringperformanceglobally.

Supply Chain:
Asupply chainisasystemoforganizations,people,activities,
information,andresourcesinvolvedinmovingaproductor
servicefromsuppliertocustomer.
Supplychainactivitiesinvolvethetransformationofnatural
resources,rawmaterials,andcomponentsintoafinishedproduct
thatisdeliveredtotheendcustomer.Insophisticatedsupply
chainsystems,usedproductsmayre-enterthesupplychainat
anypointwhereresidualvalueisrecyclable.Supplychains
linkvaluechains.

Value Chain:
Avalue chainisasetofactivitiesthatafirm
operatinginaspecificindustryperformsinorder
todeliveravaluableproductorservicefor
theMarket.
Michael Porterinhis1985best-seller,Competitive Advantage:
Creating and Sustaining Superior Performance.

Value Chain:

Definitions
SupplyChainManagementencompasseseveryeffort
involvedinproducinganddeliveringafinalproductor
service,fromthesupplierssuppliertothecustomers
customer.
SupplyChainManagementincludesmanagingsupplyand
demand,sourcingrawmaterialsandparts,manufacturing
andassembly,warehousingandinventorytracking,order
entryandordermanagement,distributionacrossall
channels,anddeliverytothecustomer.
TheSupplyChainCouncil,U.S.A.

Sources:
plants
vendors
ports

Regional
Warehouses
:
stocking
points

Field
Warehouses
:
stocking
points

Customers,
demand
centers
sinks

Supply

Inventory &
warehousin
g
costs

Production/
Transportati
Transportati
purchase
on
on
costs
costs
Inventory & costs
warehousin
g
costs

Flows in a supply chain


Information
Product
Funds

Customer

Some More Definitions


SupplyChainManagementdealswiththemanagementof
materials,information,andfinancialflowsinanetwork
consistingofsuppliers,manufacturers,distributorsand
customers.
StanfordSupplyChainForum
Logisticsinvolvesmanagingtheflowofitems,
information,cashandideasthroughthecoordinationof
supplychainprocessesandthroughthestrategic
additionofplace,periodandpatternvalues.
MITCenterforTransportationandLogistics

Some More Definitions


SupplyChainManagementisprimarilyconcernedwiththeefficient
integrationofsuppliers,factories,warehousesandstoressothat
merchandiseisproducedanddistributedintherightquantities,to
therightlocationsandattherighttime,andsoastominimizetotal
systemcostsubjecttosatisfyingservicerequirements.
Simchi-Levi
Callitdistributionorlogisticsorsupplychainmanagement.By
whatevername,itisthesinuous,gritty,andcumbersomeprocessby
whichcompaniesmove,materials,parts,andproductsto
customers.

Fortune
(1994)

Key Observations
Integrated activity:
*Amongfunctionssuchaslogistics,manufacturing,distribution,
design/engineering,marketing,finance,etc.
*Multipleorganizations,i.e.,suppliers,customers&3PLproviders
*Coordinationofconflictinggoals,metrics,etc.

Responsible for multiple flows:


*Information(orders,status,contracts)
*Physical(finishedgoods,rawmaterial,w.i.p.)
*Financial(payment,credits,etc.)

Key Observations (continued)


Mostanalysisinvolvestrade-offs
*Acrossdifferententities

*Acrossmetrics:Cost,Service,Time,Risk,etc.

Eachinterfaceinthesupplychainrepresents
*Movementofgoods

*Informationflows
*Transferoftitle
*Purchaseandsale

Notable Quotes
Intheend,allbusinesscomesdownto
SupplyChainvs.SupplyChain
RobertRodin,CEO,MarshallIndustries

JapaneseManufacturingIndustryowesitsCompetitiveAdvantage
andStrengthtoitsSub-ContractingStructure.
MinistryofInternationalTradeandIndustry,Japan(1992)

Manufacturingnowcompeteslessonproductandqualitywhich
areoftencomparableandmoreoninventoryturnsandspeedto
market.
JohnKasarda,Forbes,1999

Philosophy of SCM
Theentiresupplychainisasingle,integrated
entity.
Thecost,qualityanddeliveryrequirementsof
thecustomerareobjectivessharedbyevery
companyinthechain.
Inventoryisthelastresortforresolvingsupply
anddemandimbalances.

Efficiency: Basis of
Production Management
Efficiencyleadstolowercosts
Lowercostimplies
LowerPrice=>Greaterdemand=>Better
marketgrowth=>Higherprofits=>Product/
Processdevelopment=>Bettermarketshare
1980sand1990s:Eraofachievingexcellenceat
thefirmlevel(JIT,TQM,TPM,BPR,ERP,etc)
2000s:Eraofachievingexcellenceatthevalue
chainlevel(SCM,CRM,E-Commerce,etc.)

Evolution of SCM
Stage 1: Vendor Purchase
Production - Distribution Retailer
Stage 2: Materials Management Logistics Management
Stage 3: Supply Chain Management

Why is SCM Important?


Strategic Advantage It Can Drive Strategy
*Manufacturingisbecomingmoreefficient
*SCMoffersopportunityfordifferentiation(Dell)or
costreduction(Wal-MartorBigBazaar)

GlobalizationIt Covers The World


*Requiresgreatercoordinationofproductionand
distribution
*Increasedriskofsupplychaininterruption
*Increasesneedforrobustandflexiblesupplychains

Why is SCM Important?


(continued)
Atthecompanylevel,supplychainmanagement
impacts
*COSTFormanyproducts,20%to40%of
totalproductcostsarecontrollable
logisticscosts.
*SERVICEFormanyproducts,performance
factorssuchasinventoryavailability
andspeedofdeliveryarecriticalto
customersatisfaction.

Conflicting Objectives in the


Supply Chain
1.Purchasing
Stablevolumerequirements
Flexibledeliverytime
Littlevariationinmix
Largequantities
2.Manufacturing
Longrunproduction
Highquality
Highproductivity
Lowproductioncost

Conflicting Objectives in the


Supply Chain
3.Warehousing
Lowinventory
Reducedtransportationcosts
Quickreplenishmentcapability
4.Customers
Shortorderleadtime
Highinstock
Enormousvarietyofproducts
Lowprices

Decision Phases in
a Supply Chain
Supplychainstrategyordesign
Supplychainplanning
Supplychainoperation

Process view of a supply chain


Cycleview
Push/pullview

Cycle View of Supply Chains


Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier

Customer order cycle

Customerarrival
Customerorderentry
Customerorderfulfillment
Customerorderreceiving

Replenishment cycle

Retailordertrigger
Retailorderentry
Retailorderfulfillment
Retailorderreceiving

Manufacturing cycle
Orderarrivalfromthe
distributor,retailer,orcustomer
Productionscheduling
Manufacturingandshipping
Receivingatthedistributor,
retailer,orcustomer

Push/Pull View of
Supply Chains
Pull processes:executionis
initiatedinresponse toa
customerorder
Push processes:executionis
initiatedinanticipation of
customerorders

Push/Pull View of Supply


Chains
CustomerOrder
Procurement,
Manufacturingand
Replenishmentcycles

PUSH PROCESSES

Cycle

PULL PROCESSES

Customer
OrderArrives

SUPPLY CHAIN DESIGN:


Three Components
1.
Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)
2.
Partner Selection
(Choice of suppliers and partners for the chain)
3.
The Contractual Relationship
(Arm's length, joint venture, long-term contract,
strategic alliance, equity participation, etc.)

LESSONS IN
SUPPLY CHAIN DESIGN
1. KNOW YOUR LOCATION IN THE
VALUE CHAIN.
2. UNDERSTAND THE DYNAMICS OF
VALUE CHAIN FLUCTUATIONS.
3. THINK CAREFULLY ABOUT THE
ROLE OF VERTICAL COLLABORA-TIVE RELATIONSHIPS.

DellComputerssupplychain

Customer
Webpage
Assemblyplant
AllofDellssuppliersandtheirsuppliers
Dellbuilds to order:customerorder
initiatesmanufacturingatDell
Delldoesnothavearetailer,wholesaler,
ordistributorinitssupplychain

DellComputerssupplychain
Dellcarriesonlyabout10daysofinventory(vs.
80to100daysofinventoryforthecompetition)
Lessinventorytobecomeobsolete,e.g.,
computerchips
Lessinventorytobedefective(implicationsof
smallinventoryandproductquality)
Nofinishedproductinventory;somepartsno
inventory,e.g.,Sonymonitors
Delloutsourcesserviceandsupportto3rdparty
providers

Supplychainobjective
Maximizeoverallvaluegenerated
Valuestronglycorrelatedtosupply chain
profitabilitythedifferencebetweentherevenue
generatedfromthecustomerandtheoverallcost
acrossthesupplychain
Example:Acustomerpurchasingacomputerfrom
Dellpays$700(therevenue)
Dellandotherstagesofthesupplychainincurcost
toconveyinformation,producethecomponents,
storethem,transportthem,transferfunds,etc.

ExamplesofSupplyChains

Dell/Compaq
Toyota/GM/Ford
MilkDistributionSystemofNDDB
Merry-Go-RoundSystemofNTPC
DabbawalasofMumbai
Amazon/Borders/BarnesandNoble

Order Size

The Dynamics of the Supply


Chain

Customer
Customer
Demand
Demand
Distributor
Distributor Orders
Orders

Retailer
RetailerOrders
Orders

Production
ProductionPlan
Plan

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

Order Size

The Dynamics of the Supply


Chain

Customer
Customer
Demand
Demand

Production
ProductionPlan
Plan

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

Three Types of Integration


of the Supply Chain
Geographical Integration
*Fromlocaltoworld-widelogistics

Functional Integration
*FromFunction-dominatedlogisticsto
Flow-dominatedlogistics

Inter-Firm Integration
*FromaSector-basedLogisticstoInter-sectorLogistics

Supply Chain Integration is Difficult


for two main reasons
Different facilities in the supply chain may
have different, conflicting objectives
*Forinstance,thesuppliersareindirectconflictwith
themanufacturersdesireforflexibility.

The supply chain is a dynamic system


that evolves over time
*Notonlydodemandandsuppliercapabilitieschange
overtime,butsupplychainrelationshipsalsoevolve
overtime.

Supply Chain: The


Magnitude
In1998,Americancompaniesspent$898billion
insupply-relatedactivities(or10.6%ofGross
DomesticProduct).
Transportation58%
Inventory38%
Management4%

Thirdpartylogisticsservicesgrewin1998by
15%tonearly$40billion

Supply Chain: The Magnitude


(continued)

SOME ESTIMATES FOR INDIA


*LogisticsSpendINRs.2,40,000crores
(approx.US$50Billion)
*ShareofGDP
.
12-13%
*MajorElementsare(PercentageofTotal)
*Transportation
*Inventories

*Packaging

*Handling&Warehousing..
*Others&Losses

35
25
11
9
14

Supply Chain:The Magnitude


(continued)

ItisestimatedthatthegroceryindustryinUSA
couldsave$30billion(10%ofoperatingcost)
byusingeffectivelogisticsstrategies.
Atypicalboxofcerealspends104daysgettingfrom
factorytosupermarket.
Atypicalnewcarspends15daystravelingfromthe
factorytothedealership.

Supply Chain: The


Magnitude (continued)
Compaqcomputerestimatesitlost$500millionto$1billion
insalesin1995becauseitslaptopsanddesktopswerenot
availablewhenandwherecustomerswerereadytobuythem.
BoeingAircraft,oneofAmericasleadingcapitalgoods
producers,wasforcedtoannouncewrite-downsof$2.6
billioninOctober1997.
Thereason?Rawmaterialshortages,internalandsupplier
partsshortages.(WallStreetJournal,Oct.23,1997)

SupplyChain:ThePotential
In25years,NDDBhasenabledIndiatobecomethe
largestproducerofmilkbyimplementingalogisticsand
supplychainsystemthathaseliminatedseveral
intermediaries,therebyleadingtoamuchhigher
remunerativeprice(yield)forproducersandlowerprice
forconsumers.
AsdescribedintheFORBESmagazine,theDabbawalas
ofMumbaihasachievedanextremelyhighlevelof
reliabilityandprecision(SIXSIGMAlevelinQA
parlance)indeliveringtotheircustomerstheproducts
earmarkedforthem.

Supply Chain: The


Potential
Procter&Gambleestimatesthatitsavedretail
customers$65millionthroughlogisticsgainsoverthe
past18months.
AccordingtoP&G,theessenceofitsapproachliesin
manufacturersandsuppliersworkingcloselytogether
.jointlycreatingbusinessplanstoeliminatethesource
ofwastefulpracticesacrosstheentiresupplychain.
(JournalofBusinessStrategy,Oct./Nov.1997)

Supply Chain: The Potential


DellComputerhasoutperformedthecompetitionin
termsofshareholdervaluegrowthovertheeight
yearsperiod,1988-1996,byover3,000%(see
AndersonandLee,1999)using
-Directbusinessmodel
-Build-to-orderstrategy.

Supply Chain: The Potential


In10years,Wal-Marttransformeditself
bychangingitslogisticssystem.Ithasthe
highestsalespersquarefoot,inventory
turnoverandoperatingprofitofany
discountretailer.

Complexities Involved in
Supply Chain Management
Thesupplychainisacomplexnetworkof
facilitiesandorganizationswithdifferent,
conflictingobjectives
Matchingsupplyanddemandisamajor
challenge
Systemvariationsovertimearealsoanimportant
consideration
Manysupplychainproblemsarenewandthere
isnoclearunderstandingofalltheissues
involved

Supply Chain:
The Complexity
National Semiconductors:
Production:
Produceschipsinsixdifferentlocations:fourintheUS,
oneinBritainandoneinIsrael
Chipsareshippedtosevenassemblylocationsin
SoutheastAsia.
Distribution
Thefinalproductisshippedtohundredsoffacilitiesall
overtheworld
20,000differentroutes
12differentairlinesareinvolved
95%oftheproductsaredeliveredwithin45days
5%aredeliveredwithin90days.

Supply Chain Challenges


AchievingGlobalOptimization
ConflictingObjectives
Complexnetworkoffacilities
SystemVariationsovertime

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

Source: Duncan McFarlane

Distribution
Planning

Demand
Planning

Supply Chain Challenges


Achieving Global Optimization
ConflictingObjectives
Complexnetworkoffacilities
SystemVariationsovertime

Managing Uncertainty
MatchingSupplyandDemand
Demandisnottheonlysourceofuncertainty

Managing Uncertainty
1. Pointforecastsareinvariablywrong

Planforforecastrangeuseflexible
contractstogoup/down.
2. Aggregateforecastsaremoreaccurate

Aggregatetheforecast
postponement/riskpooling

Managing Uncertainty (contd)


3. Longertermforecastsarelessaccurate

Shortenforecastinghorizonsmultiple
orders;earlydetection
4. Inmanycases,somebodyelseknows
whatisgoingtohappen

Collaborate

Whats New in SCM?


Globalcompetition
Shorterproductlifecycle
New,low-costdistributionchannels
Morepowerfulwell-informedcustomers
InternetandE-Businessstrategies

Levels of implied demand


uncertainty
Detergent
Longleadtimesteel

Price

HighFashion
Emergencysteel

CustomerNeed
Responsiveness

Low

High

ImpliedDemandUncertainty

UnderstandingtheSupplyChain:CostResponsivenessEfficientFrontier
Responsiveness
High

Low
High

Low

Cost

Responsive
supply chain

AchievingStrategicFit

of it
e
F
n
Zo egic
t
a
r
St

Responsivenes
s spectrum

Efficient
supply chain
Certain
demand

Implied
uncertainty
spectrum

Uncertain
demand

Key Concepts
Design,operate,andcontrolthephysicaland
informationflowsasthoughthechannelwere
oneseamlesscorporateentity.
Lettheactivities(andcosts)migrateacross
corporateboundariestowheretheymakethe
mostsense.
Relyonthebenefitsofchannelintegrationto
replacethebenefitsofopenmarketforces.
Sharetherisksandtherewardsbetweenplayers.

New Concepts
Push-Pullstrategies
Direct-to-Consumer
Strategicalliances
Manufacturingpostponement
DynamicPricing
E-Procurement

Lead Time

DealingwithProductVariety:
MassCustomization
Long
Short

Mass
Customization
n
o
i
t
High
Low
a
z
i
m
o
t
s
u
C
Low

Co
st

High

Fragmentation of Markets
and Product Variety
Are the requirements of all market segments
served identical?
Are the characteristics of all products identical?
Can a single supply chain structure be used for
all products / customers? No! A single supply
chain will fail different customers on efficiency
or responsiveness or both.

Tailored Logistics
Each Logistically Distinct Business (LDB)
will have distinct requirements in terms of
Inventory
Transportation
Facility
Information

Key: How to gain efficiencies while tailoring


logistics?

Applying the Framework


to e-commerce:
What is e-commerce?

Commerce transacted over the Internet


Isproductinformationdisplayedonthe
Internet?
IsnegotiationovertheInternet?
IstheorderplacedovertheInternet?
IstheordertrackedovertheInternet?
IstheorderfulfilledovertheInternet?
IspaymenttransactedovertheInternet?

Existing Channels
for
Commerce
Productinformation
Physicalstores,EDI,catalogs,facetoface,

Negotiation
Facetoface,phone,fax,sealedbids,

Orderplacement
Physicalstore,EDI,phone,fax,facetoface,

Ordertracking
EDI,phone,fax,

Orderfulfillment
Customerpickup,physicaldelivery

Revenue Impact of
E-Commerce

Lengthofsupplychain
Productinformation
Timetomarket
Negotiatingpricesandcontractterms
Orderplacementandtracking
Orderfulfillment
Payment

Cost Impact of E-Commerce


Facilitycosts
Siteandprocessingcost

Inventorycosts
Cycle,Safety,Seasonalinventory

Transportationcosts
Inboundandoutboundcosts

Informationsharing
Coordination

A Plethora of Approaches

JustinTimeInventory
VendorManagedInventory
QuickResponse
CollaborativePlanning,ForecastingandReplenishment
Cross-docking/FlowthroughCentres
Outsourcing/3PLs
ActivityBasedCosting
Internet/EDI
Bar-Coding/RFID
BuildtoOrder

A Plethora of Approaches
(continued)

Partnerships/Alliances
Auctions/Exchanges
PostponementStrategies
SCSoftware
SCEventManagement
Merge-In-Transit
CollaborativeTransportationManagement
CashtoCashMetrics

Framework for analysis


ModelBasedApproach
*Usefundamentalmodelstogaininsights
*Analytical,thoughnotnecessarilyOperations
Research,approach
*Extensiveuseofcasestudiesandreal-lifeexamples

TotalSystemCost
*Avoidthesiloeffectoftraditionallogistics
*CaptureandintegrateacrossdifferentplayersinSC
*Servicecanbeincluded

Framework for Analysis


(continued)
PortfolioofSolutions
*Rarelyisasinglesolutionsufficientorpractical
*Asetofsolutionsisusuallymoreapplicable
*Thecontextmatters

ManagementofUncertainty
*Riskcanbemeasured,monitored,andmanaged
*Impactssourcing,contracting,pricing,incentives,etc.

Modeling for SCM


Forecasting Models

-Thesemodelsallowpredictionofdemandbasedonpastdataor

otherparametersthatareindependentlyavailable.They
enable
betterplanning,giventhe lead-timenecessaryfor
response.

Location Models
-Thesemodelsidentifytheoptimallocationoffacilitiessuchas
plantsandwarehouses,consideringtheinboundandoutbound
transportationcostsaswellasthefixedandvariablecostsof
operationatthelocationsunderconsideration.Theseare
usuallyformulatedasMixedIntegerProgrammingModels.

Modeling for SCM (contd)


Distribution Network Design Models
- These models are usually comprehensive in nature, deciding
between two, three and even four stages of distribution
network, location of warehouses and break-bulk points,
and sometimes even the transportation.

Allocation Models
- These models help in optimally allocating commodities from
sources to destinations in a multi-source, multi-destination
environment. The costs considered for optimisation are
production costs and warehousing costs. The constraints
considered can be due to demand, capacity, route
restrictions, etc.

Modeling for SCM (contd)


Inventory Models
- Inventory plays a major role in SCM.
- Inventory can be of various types such as:
- Batching and shipment inventories
- Buffer stocks to take care of uncertainties
- Pipeline inventory ( primary and secondary
transportation )
These models minimize the total relevant cost, based on tradeoffs among, inter alia, inventory carrying cost, ordering cost,
stock-out cost, transportation cost, taxes & duties, etc.

Modeling for SCM (contd)


Routing Models
- These models allow optimal routing on a

transportation network from a given source to a


destination. The models used are the Shortest
Path Problem, the Traveling Salesman Problem
and the Vehicle Routing Problem. Decision
Support Systems that interactively use the
expertise of the decision maker by providing
graphical support through a map (i.e., using a
Geographical Information System ) are also very
useful in such decisions.

Modeling for SCM (contd)


Scheduling Models
- These models enable allocation of resources to
particular activities. Depending on the criteria of
interest and the number of resources, the models
are of aid in evaluating appropriate rules for allocation.

Alternative Analysis
- This model simply proposes the identification of alternatives,
criteria for decision making and analysis of the alternatives
across the criteria to arrive at the best choice. Formal
approaches such as simulation and analytic hierarchy process
could be used in assessing the implications of the criteria.