Introduction to

Supply Chain Management

 Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points

Supply

Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
 What is a Supply Chain?
Customer wants
P&G or other Jewel or third Jewel
detergent and goes
manufacturer party DC Supermarket
to Jewel

Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
 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 Manufacturing Distribution

Demand
Planning Planning Planning
Planning
Global Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Manufacturing Distribution

Demand
Planning Planning Planning
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?
 Can’t 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 doesn’t 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
Manufacturer
Manufacturer Forecast
Forecast
of
of Sales
Sales
Volumes

Actual
Actual
Consumer
Consumer
Retailer
RetailerWarehouse
Warehouse Demand
Demand
Retailer
Retailer Orders
Orders to
toShop
Shop

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 What Management Gets...
Volumes

Consumer
Consumer
Demand
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 What Management Wants…
Volumes

Production
ProductionPlan
Plan
Consumer
Consumer
Demand
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
• Profit 4%
Logistics
• Logistics Cost 21% Cost

Marketing
Cost
• Marketing Cost 27%

• Manufacturing Cost 48% 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.
 What’s 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, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES 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
Supply Chain Strategy

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
 Demand Characteristics
Functional Innovative
Low demand variability High
Easy forecasting Difficult
Long life cycle Short
Low inventory cost High
Low margins High
Low product variety High
Low stockout cost High
Low obsolescence High
 Responsiveness Spectrum

Highly Somewhat Somewhat Highly

efficient efficient responsive responsive

Integrated Hanes Most Dell

steel mill apparel automotive
production
 Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
supply chain

Responsiveness e of it
n F
spectrum Zo egic
t
t ra
S

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
 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 Aggressively reduce even if
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost Greater reliance on

modes 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 Information

Drivers
 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
Information What information is best suited for
each objective
 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
Range of quantity increases
Lead time decreases
Variety of products required increases Demand per product becomes more
Number of channels increases
Rate of innovation increases
Required service level increases
Causes implied demand
uncertainty to increase
because …
Wider range of quantity implies
greater variance in demand
Less time to react to orders
disaggregated
Total customer demand is now
disaggregated over more channels
New products tend to have more
uncertain demand
Firm now has to handle unusual
surges in demand
 Correlation Between Implied Demand
Uncertainty and Other Attributes
Attribute Low Implied High Implied
Uncertainty Uncertainty
Product Low High
margin
Avg. forecast 10% 40%-100%
error
Avg. stockout 1%-2% 10%-40%
rate
Avg. forced 0% 10%-25%
season-end
markdown
 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
customer’s needs
• Examples: Dell, Barilla