Supply Chain Management Introduction

SCM Generated Value

Minimizing supply chain costs while keeping a
reasonable service level, customer satisfaction, quality,
and on time delivery, etc.
A picture is better than 1000 words!
How many words would be better than 3 pictures?
- A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

- achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits
 Flows in a Supply Chain
Material

Information
Supplier Customer
Funds

The flows resemble a chain reaction.

 SCM in a Supply Network
 Supply Chain Management (SCM) is concerned with the
management and control of the flows of material,
information, and finances in supply chains.

 The task of SCM is to design, plan, and execute the

activities at the different stages so as to provide the desired
levels of service to supply chain customers profitably
 A Generic Supply Chain
Sources: Regional Field Customers,
plants Warehouses: Warehouses: demand
vendors stocking stocking centers
ports points points sinks

Supply

Inventory

Purchase Inventor
y
Transportation
Evolution of supply chain management

First revolution- Vertically integrated firms offering low variety of

products

Second revolution- Tightly integrated supply chains offering

wide variety of products

Third revolution- Virtually integrated global supply networks

offering customized products and services
Importance of Supply Chain Management
Five major trends have emerged to make SCM a critical
success factor in most industries-

1. Proliferation in product lines

2. Shorter PLC
3. Higher level of outsourcing
4. Shift in power structure in the chain
5. Globalization of manufacturing
Enablers of supply chain performance

Improvement in ICT

Emergence of third party logistics providers

Enhanced inter-firm coordination capabilities

Decisions in a supply chain
Design decisions

Tactical and operations decision

Cycle View Customer
of Supply Chains
Customer Order
Cycle
Retailer
Any cycle
Replenishment Cycle 0. Customer arrival
1. Customer triggers an order
Distributor 2. Supplier fulfils the order
3. Customer receives the order
Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 Push vs Pull System
What instigates the movement of the work in the system?

In Push systems, work release is based on downstream demand

forecasts
 Keeps inventory to meet actual demand
 Acts proactively
 e.g. Making generic job application resumes today (e.g.: exempli gratia)

In Pull systems, work release is based on actual demand or the

actual status of the downstream customers
 May cause long delivery lead times
 Acts reactively
 e.g. Making a specific resume for a company after talking to the recruiter
Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
Push-Pull boundary
Supply Chain Macro Processes
Initiatives for improving cost and customer
service

Customer service and cost trade-offs

1. Order delivery lead time
2. Supply chain responsiveness
3. Delivery reliability
4. Product variety
SUPPLY CHAIN PERFORMANCE
Supply Chain Performance Measures
Cost
Assets
Reliability
Responsiveness
Agility
 Linking SC and Business Strategy
Competitive (Business) Strategy

Product Development Strategy Marketing Strategy

- Portfolio of products
-Frequent discounts Supply Chain Strategy
- Timing of product introductions
-Coupons

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

Strategies: Product Development
It relates to Technologies for future operations (via patents)
and Set of products/services.

Be the technology leader

IBM workstations
Offer many products
Dell computers
Offer products for locals
Tata’s Nano
Strategies: Product Development, Marketing, Sales and SCM
1. Product Development strategy- It relates to Technologies for future operations (via patents) and Set of
products/services

Be the technology leader

IBM workstations
Offer many products
Dell computers
Offer products for locals
Tata’s Nano
2. Marketing and sales strategy relates to positioning, pricing and promotion of products/services
 Never offer too much discounts
 EDLP = every day low price
 At Wal-Mart
 Demand smoothing via coupons
 BestBuy

3. Supply chain management strategy relates to procurement, transportation, storage and delivery
 Never use more than one supplier for every input.
 Never rush orders just because they are late.
 Always use domestic suppliers within the sales season not in advance.
 Fitting the SC to the customer or vice versa?
 Understand the customer Wishes .

 Understand the Capabilities of your SC.

 Match the Wishes with the Capabilities.

 Challenge: How to meet extensive Wishes with limited Capabilities?

 Strategic Fit
Step 1- Understand the uncertainty of customer and
supply chain.

Step 2- Understand the supply chain capabilities.

Step 3- Achieving strategic fit.

 Understanding the Uncertainty of
customer and supply chain
Range of demand
Production lot size
Response time
Service level
Product availability
Product variety
Innovation
Implied demand uncertainty
Demand Uncertainty & Implied Demand
Uncertainty
 Demand uncertainty reflects the uncertainty of customer demand for a
product, whereas implied demand uncertainty is the resulting
uncertainty for only the portion of the demand that the supply chain
plans to satisfy (customer needs). When the product’s demand exceeds
its supply.
Example- Let's suppose you are stocking iPhone 11 for sale. You project your sales and then you look
at how much of that your supply chain can cover. For example, you are in a large metro area and can sell
50,000 iPhone 5s but the lousy supplier will give you only 30,000 iPhone 11. That means the maximum
number of customers you can handle is 30,000. Let's say that you do a little looking at trends and such and
you determine that 25% of your customers have to upgrade to the iPhone 11 due to work requirements
(perhaps phone security). Then 75% of your sales will be due to the customer's desire to have the latest Apple
phone. So implied demand uncertainty is 75% of 30,000. That is, if the reviews are bad or the customers
decide the iPhone 10 is fine, then you could have (75% of 30,000) iPhone 11 in stock that you can't sell.
Contributors to Implied Demand Uncertainty
Commodities Customized products
Detergent High Fashion Clothing
Long lead time Emergency steel,
steel for maintenance/replacement

Price Customer Need Responsiveness

Low Implied Demand Uncertainty High

Short lead times, product variety,

distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
 Cost-Responsiveness Tradeoff
Responsiveness (in time, high service level and product variety)

High

Efficiency frontier

Fix responsiveness Inefficient Impossible

Inefficiency Region
Low

Cost
High Low
Achieving Strategic Fit: Wishes vs. Capabilities

Responsive
(high cost)
Gourmet dinner
supply chain
<High margin>

Responsivenes e of it
n F
spectrum Zo egic
at
r
St

Lunch buffet
<Low margin>
Efficient
(low cost)
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
Major Obstacles to Achieving Fit
Variety of products/services
Spoiled customer
Shrinking product life cycles
Multiple owners (Procurement, Production, Inventory,
Marketing) / multiple objectives
Globalization
Supply Chain Drivers and Obstacles
 Drivers of Supply Chain Performance
How to achieve
Efficiency Supply chain structure Responsiveness

Logistical
Inventory Transportation Facilities Drivers

Cross-
Information Sourcing Pricing Functional
Drivers
1. Inventory
 Cycle inventory

 Seasonal inventory

 Safety inventory

 Pipeline inventory (Work in process )

2. Transportation
Design of transportation network

Choice of transportation mode

 Air
 Truck
 Rail
 Ship
 Pipeline
 Electronic
3. Facilities
Location

Capacity

Production
4. Information
Role in the supply chain
The connection between the various stages in the supply chain
Crucial to daily operation of each stage in a supply chain
 E.g., production scheduling, inventory levels
Role in the competitive strategy
Allows supply chain to become more efficient and more
responsive at the same time (reduces the need for a trade-off)
Information technology
 Andersen Windows
 Wood window manufacturer, whose customers can choose from a

library of 50,000 designs or create their own. Customer orders

automatically sent to the factory.
Characteristics of the Good Information
Information Global Coordinated Supply Chain
Scope Decisions Success

Strategy Analytical $$$

Models
Information
 Accurate?
 Accessible?
 Up-to-date?
 In the Correct form?
» If not, database restricted ability. How difficult is it to import data into SAP?
Quality of Information
Information drives the decisions:
Good information means good decisions
IT helps: MRP, ERP, SAP, EDI
Relevant information?
How to use information?
 5. Sourcing
 Role in the supply chain
 Set of processes required to purchase goods and services in a supply chain
 Supplier selection, single vs. multiple suppliers, contract negotiation
 Role in the competitive strategy
 Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
 In-house vs. outsource decisions- improving efficiency and responsiveness
 TI: More than half of the revenue spent for sourcing.
 Cisco sources: Low-end products (e.g. home routers) from China.

 Components of sourcing decisions

 In-house versus outsource decisions
 Supplier evaluation and selection
 Procurement process:
 Every department of a firm buy from suppliers independently, or all together.
 EDS to reduce the number of officers with purchasing authorization.
6. Pricing
 Role in the supply chain
 Pricing determines the amount to charge customers in a supply chain
 Pricing strategies can be used to match demand and supply
 Price elasticity: Do you know yours?
 Role in the competitive strategy
 Use pricing strategies to improve efficiency and responsiveness
 Low price and low product availability; vary prices by response times
 Amazon: Faster delivery is more expensive

 Components of pricing decisions

 Pricing and economies of scale
 Everyday low pricing versus high-low pricing
 Fixed price versus menu pricing, depending on the product and services
 Packaging, delivery location, time, customer pick up
 Bundling products; products and services
Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost/slow/no High cost/
duplication streamlined/reliable
Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

DISTRIBUTION NETWORK DESIGN
Designing Distribution Networks
The Role of Distribution in the Supply Chain
Factors Influencing Distribution Network Design
Design Options for a Distribution Network
The Value of Distributors in the Supply Chain
E-business and the distribution network
Distribution Networks in Practice
Factors Influencing Distribution Network
Design (DND)
Distribution network performance evaluated along
two dimensions at the highest level:
1. Customer needs that are met
2. Cost of meeting customer need
Factors Influencing (DND) ……
 Elements of customer service influenced
by network structure:
 Response time
 Product variety
 Product availability
 Customer experience
 Order visibility
 Returnability
Factors Influencing (DND) ……
Supply chain costs affected by network
structure:
1. Inventories
2. Transportation
3. Facilities and handling
4. Information
Effect of DND on supply chain costs
Inventories
Transportation
 Facilities and handling
 Information
Key decisions of Designing a Distribution
Network

Will product be delivered to the customer location

or picked up from a preordained site?

Will product flow through an intermediary (or

intermediate location)?
Distribution Network Designs Options
Based on the choices of location decisions, there are six
distinct distribution network designs that are classified as
follows:
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with package carrier delivery
4. Distributor storage with last mile delivery
5. Manufacturer / distributor storage with costumer pickup
6. Retail storage with customer pickup
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-
transit merge
Distributor Storage with Package Carrier Delivery
Distributor Storage with Last Mile Delivery
Manufacturer / Distributor Storage with
Costumer Pickup
Retail storage with Customer Pickup