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An Overview Presentation
Documented by:Sayan Mondal
Some Definitions
Supply Chain Management encompasses every effort involved in producing and delivering a final product or service, from the suppliers supplier to the customers customer. Supply Chain Management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer. The Supply Chain Council, U.S.A.
Supply
Inventory & warehousing costs Production/ Transportati Transportati purchase on on costs costs Inventory & costs warehousing costs
Customer
Key Observations
Integrated activity:
* Among functions such as logistics, manufacturing, distribution, design/engineering, marketing, finance,etc. * Multiple organizations,i.e., suppliers, customers& 3 PL providers * Coordination of conflicting goals, metrics, etc.
Philosophy of SCM
The entire supply chain is a single, integrated entity. The cost, quality and delivery requirements of the customer are objectives shared by every company in the chain. Inventory is the last resort for resolving supply and demand imbalances.
Efficiency leads to lower costs Lower cost implies Lower Price => Greater demand => Better market growth => Higher profits => Product/ Process development => Better market share 1980s and 1990s: Era of achieving excellence at the firm level (JIT, TQM, TPM, BPR, ERP, etc) 2000s: Era of achieving excellence at the value chain level (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
distribution * Increased risk of supply chain interruption * Increases need for robust and flexible supply chains
Supply chain strategy or design Supply chain planning Supply chain operation
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Replenishment cycle
Manufacturing cycle
Order arrival from the distributor, retailer, or customer Production scheduling Manufacturing and shipping Receiving at the distributor, retailer, or customer
Pull processes: execution is initiated in response to a customer order Push processes: execution is initiated in anticipation of customer orders
PUSH PROCESSES
PULL PROCESSES
Customer Web page Assembly plant All of Dells suppliers and their suppliers Dell builds to order: customer order initiates manufacturing at Dell Dell does not have a retailer, wholesaler, or distributor in its supply chain
Dell carries only about 10 days of inventory (vs. 80 to 100 days of inventory for the competition) Less inventory to become obsolete, e.g., computer chips Less inventory to be defective (implications of small inventory and product quality) No finished product inventory; some parts no inventory, e.g., Sony monitors Dell outsources service and support to 3rd party providers
Maximize overall value generated Value strongly correlated to supply chain profitability the difference between the revenue generated from the customer and the overall cost across the supply chain Example: A customer purchasing a computer from Dell pays $ 700 (the revenue) Dell and other stages of the supply chain incur cost to convey information, produce the components, store them, transport them, transfer funds, etc.
Dell / Compaq Toyota / GM / Ford Milk Distribution System of NDDB Merry-Go-Round System of NTPC Dabbawalas of Mumbai Amazon / Borders / Barnes and Noble
Order Size
Customer Demand Distributor Orders Distributor Orders Retailer Orders Retailer Orders
Time
Order Size
Customer Demand
Time
Geographical Integration
*From local to world-wide logistics
Functional Integration
* From Function-dominated logistics to Flow-dominated logistics
Inter-Firm Integration
* From a Sector-based Logistics to Inter-sector Logistics
Different facilities in the supply chain may have different, conflicting objectives
* For instance, the suppliers are in direct conflict with the manufacturers desire for flexibility.
In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product).
Transportation 58% Inventory 38% Management 4%
Third party logistics services grew in 1998 by 15% to nearly $40 billion
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It is estimated that the grocery industry in USA could save $30 billion (10% of operating cost) by using effective logistics strategies.
A typical box of cereal spends 104 days getting from factory to supermarket. A typical new car spends 15 days traveling from the factory to the dealership.
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 Americas leading capital goods producers, was forced to announce write-downs of $2.6 billion in October 1997. The reason? Raw material shortages, internal and supplier parts shortages. (Wall Street Journal, Oct. 23, 1997)
In 25 years, NDDB has enabled India to become the largest producer of milk by implementing a logistics and supply chain system that has eliminated several intermediaries, thereby leading to a much higher remunerative price (yield) for producers and lower price for consumers. As described in the FORBES magazine, the Dabbawalas of Mumbai has achieved an extremely high level of reliability and precision (SIX SIGMA level in QA parlance) in delivering to their customers the products earmarked for them.
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)
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.
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.
The supply chain is a complex network of facilities and organizations with different, conflicting objectives Matching supply and demand is a major challenge System variations over time are also an important consideration Many supply chain problems are new and there is no clear understanding of all the issues involved
Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS
Procurement Planning
Manufacturing Planning
Distribution Planning
Demand Planning
Managing Uncertainty
Matching Supply and Demand Demand is not the only source of uncertainty
Managing Uncertainty
Point forecasts are invariably wrong Plan for forecast range use flexible contracts to go up/down. 2. Aggregate forecasts are more accurate Aggregate the forecast postponement/risk pooling
1.
4.
Longer term forecasts are less accurate Shorten forecasting horizons multiple orders; early detection In many cases, somebody else knows what is going to happen Collaborate
Global competition Shorter product life cycle New, low-cost distribution channels More powerful well-informed customers Internet and E-Business strategies
Price Low
Customer Need
Responsiveness High
Cost
Responsivenes s spectrum
f e o Fit n Zo egic t ra St
Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand
Key Concepts
Design, operate, and control the physical and information flows as though the channel were one seamless corporate entity. Let the activities (and costs) migrate across corporate boundaries to where they make the most sense. Rely on the benefits of channel integration to replace the benefits of open market forces. Share the risks and the rewards between players.
New Concepts
Push-Pull strategies Direct-to-Consumer Strategic alliances Manufacturing postponement Dynamic Pricing E-Procurement
Short
Co st
High
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
Length of supply chain Product information Time to market Negotiating prices and contract terms Order placement and tracking Order fulfillment Payment
Facility costs
Site and processing cost
Inventory costs
Cycle, Safety, Seasonal inventory
Transportation costs
Inbound and outbound costs
Information sharing
Coordination
A Plethora of Approaches
Just in Time Inventory Vendor Managed Inventory Quick Response Collaborative Planning, Forecasting and Replenishment Cross-docking / Flow through Centres Outsourcing / 3 PLs Activity Based Costing Internet / EDI Bar-Coding / RFID Build to Order
A Plethora of Approaches
(continued)
Partnerships / Alliances Auctions / Exchanges Postponement Strategies SC Software SC Event Management Merge-In-Transit Collaborative Transportation Management Cash to Cash Metrics
Portfolio of Solutions
* Rarely is a single solution sufficient or practical * A set of solutions is usually more applicable * The context matters
Management of Uncertainty
* Risk can be measured, monitored, and managed * Impacts sourcing, contracting, pricing, incentives, etc.
Forecasting Models
These models allow prediction of demand based on past data or other parameters that are independently available. They enable better planning, given the lead-time necessary for response.
Location Models
- These models identify the optimal location of facilities such as plants and warehouses, considering the inbound and outbound transportation costs as well as the fixed and variable costs of operation at the locations under consideration. These are usually formulated as Mixed Integer Programming Models.
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.
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 trade-offs among, inter alia, inventory carrying cost, ordering cost, stock-out cost, transportation cost, taxes & duties, etc.
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.
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.