Supply Chain Management

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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 supplier’s supplier to the customer’s 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.

Sources: plants vendors ports

Field Regional Warehouses Warehouses : : stocking stocking points points

Customers, demand centers sinks

Supply

Inventory & warehousing costs Production/ Transportati Transportati purchase on on costs costs Inventory & costs warehousing costs

Flows in a supply chain Information Product Funds Customer .

information. cash and ideas through the coordination of supply chain processes and through the strategic addition of place. distributors and customers. manufacturers. information. Stanford Supply Chain Forum Logistics involves “managing the flow of items. period and pattern values. and financial flows in a network consisting of suppliers.Some More Definitions Supply Chain Management deals with the management of materials. MIT Center for Transportation and Logistics .

to the right locations and at the right time.Some More Definitions Supply Chain Management is primarily concerned with the efficient integration of suppliers. warehouses and stores so that merchandise is produced and distributed in the right quantities. materials. By whatever name. gritty. factories. it is the sinuous. and products to customers. parts. and cumbersome process by which companies move. Simchi-Levi Call it distribution or logistics or supply chain management. Fortune (1994) . and so as to minimize total system cost subject to satisfying service requirements.

contracts) * Physical (finished goods. etc. raw material. w.) . status.etc. credits.Key Observations  Integrated activity: * Among functions such as logistics. finance. distribution.i. * Multiple organizations. suppliers. marketing. customers& 3 PL providers * Coordination of conflicting goals.p. manufacturing.) * Financial (payment.  Responsible for multiple flows: * Information (orders. design/engineering.e. etc.i.. metrics.

etc.Key Observations (continued)  Most analysis involves trade-offs Across different entities * Across metrics: Cost. Risk. Time. *  Each interface in the supply chain represents Movement of goods * Information flows * Transfer of title * Purchase and sale * . Service.

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.Philosophy of SCM  The entire supply chain is a single. integrated entity.

) . TQM.Efficiency: Basis of Production Management     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. TPM. E-Commerce. etc. CRM. BPR. etc) 2000s: Era of achieving excellence at the value chain level (SCM. ERP.

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

Why is SCM Important?  Strategic Advantage – It Can Drive Strategy * Manufacturing is becoming more efficient * SCM offers opportunity for differentiation (Dell) or cost reduction (Wal-Mart or Big Bazaar)  Globalization – It Covers The World * Requires greater coordination of production and distribution * Increased risk of supply chain interruption * Increases need for robust and flexible supply chains .

performance factors such as inventory availability and speed of delivery are critical to customer satisfaction. supply chain management impacts * COST – For many products.Why is SCM Important? (continued)  At the company level. . 20% to 40% of total product costs are controllable logistics costs. * SERVICE – For many products.

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 1.

Customers • Short order lead time • High in stock • Enormous variety of products • Low prices .Conflicting Objectives in the Supply Chain 3. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4.

Decision Phases in a Supply Chain    Supply chain strategy or design Supply chain planning Supply chain operation .

Process view of a supply chain  Cycle view Push/pull view  .

Cycle View of Supply Chains Customer Customer Order Cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle Manufacturer Procurement Cycle Supplier .

Customer order cycle     Customer Customer Customer Customer arrival order entry order fulfillment order receiving .

Replenishment cycle     Retail Retail Retail Retail order order order order trigger entry fulfillment receiving .

retailer.Manufacturing cycle     Order arrival from the distributor. or customer Production scheduling Manufacturing and shipping Receiving at the distributor. or customer . retailer.

Push/Pull View of Supply Chains   Pull processes: execution is initiated in response to a customer order Push processes: execution is initiated in anticipation of customer orders .

Manufacturing and Replenishment cycles Customer Order Cycle PUSH PROCESSES PULL PROCESSES Customer Order Arrives .Push/Pull View of Supply Chains Procurement.

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

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

or distributor in its supply chain .Dell Computer’s supply chain       Customer Web page Assembly plant All of Dell’s suppliers and their suppliers Dell builds to order: customer order initiates manufacturing at Dell Dell does not have a retailer. wholesaler.

e. Sony monitors Dell outsources service and support to 3rd party providers . e. some parts no inventory. computer chips Less inventory to be defective (implications of small inventory and product quality) No finished product inventory...g. 80 to 100 days of inventory for the competition) Less inventory to become obsolete.g.Dell Computer’s supply chain      Dell carries only about 10 days of inventory (vs.

Supply chain objective     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. store them. transport them. . produce the components. transfer funds. etc.

Examples of Supply Chains       Dell / Compaq Toyota / GM / Ford Milk Distribution System of NDDB Merry-Go-Round System of NTPC Dabbawalas of Mumbai Amazon / Borders / Barnes and Noble .

The Dynamics of the Supply Chain Order Size Customer Demand Distributor Orders Distributor Orders Retailer Orders Retailer Orders Production Plan Production Plan Time .

The Dynamics of the Supply Chain Order Size Customer Demand Production Plan Production Plan Time .

Three Types of Integration of the Supply Chain  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 .

Supply Chain Integration is Difficult for two main reasons  Different facilities in the supply chain may have different. conflicting objectives * For instance. but supply chain relationships also evolve over time.  The supply chain is a dynamic system that evolves over time * Not only do demand and supplier capabilities change over time. . the suppliers are in direct conflict with the manufacturers’ desire for flexibility.

Supply Chain: The Magnitude  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 .

40.…… 12-13 % * Major Elements are ( Percentage of Total) * Transportation ……… * Inventories ……… 25 * Packaging ……… 11 * Handling & Warehousing ….Supply Chain: The Magnitude (continued)  SOME ESTIMATES FOR INDIA * Logistics Spend … IN Rs. 9 * Others & Losses ……… 35 14 .. 2.000 crores (approx. US $ 50 Billion) * Share of GDP …….

• A typical box of cereal spends 104 days getting from factory to supermarket.Supply Chain:The Magnitude (continued)  It is estimated that the grocery industry in USA could save $30 billion (10% of operating cost) by using effective logistics strategies. . • A typical new car spends 15 days traveling from the factory to the dealership.

Oct. was forced to announce write-downs of $2. 1997)  . one of America’s leading capital goods producers. Boeing Aircraft. (Wall Street Journal.Supply Chain: The Magnitude (continued)  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. internal and supplier parts shortages…”. The reason? “Raw material shortages.6 billion in October 1997. 23.

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. thereby leading to a much higher remunerative price (yield) for producers and lower price for consumers. . As described in the FORBES magazine. NDDB has enabled India to become the largest producer of milk by implementing a logistics and supply chain system that has eliminated several intermediaries.Supply Chain: The Potential   In 25 years.

1997) .Supply Chain: The Potential  Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months./Nov. the essence of its approach lies in manufacturers and suppliers working closely together …. “According to P&G. (Journal of Business Strategy. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. Oct.

Direct business model . 1999) using . 1988-1996. by over 3.Supply Chain: The Potential  Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period.000% (see Anderson and Lee. .Build-to-order strategy.

It has the highest sales per square foot. inventory turnover and operating profit of any discount retailer.Supply Chain: The Potential  In 10 years. . Wal-Mart transformed itself by changing its logistics system.

Complexities Involved in Supply Chain Management     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 .

Supply Chain: The Complexity National Semiconductors: • Production: – Produces chips in six different locations: four in the US. .000 different routes – 12 different airlines are involved – 95% of the products are delivered within 45 days – 5% are delivered within 90 days. • Distribution – The final product is shipped to hundreds of facilities all over the world – 20. one in Britain and one in Israel – Chips are shipped to seven assembly locations in Southeast Asia.

Supply Chain Challenges  Achieving Global Optimization • Conflicting Objectives • Complex network of facilities • System Variations over time .

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 Distribution Planning Demand Planning .Sequential Optimization vs.

Supply Chain Challenges  Achieving Global Optimization • Conflicting Objectives • Complex network of facilities • System Variations over time  Managing Uncertainty • Matching Supply and Demand • Demand is not the only source of uncertainty .

2. Aggregate forecasts are more accurate ↓ Aggregate the forecast – postponement/risk pooling 1.Managing Uncertainty Point forecasts are invariably wrong ↓ Plan for forecast range – use flexible contracts to go up/down. .

4. early detection In many cases.Managing Uncertainty (cont’d) 3. Longer term forecasts are less accurate ↓ Shorten forecasting horizons – multiple orders. somebody else knows what is going to happen ↓ Collaborate .

What’s New in SCM?
    

Global competition Shorter product life cycle New, low-cost distribution channels More powerful well-informed customers Internet and E-Business strategies

Levels of implied demand uncertainty
Detergent Long lead time steel High Fashion Emergency steel

Price Low

Customer Need
Responsiveness High

Implied Demand Uncertainty

Understanding the Supply Chain: CostResponsiveness Efficient Frontier
Responsiveness
High

Low High Low

Cost

Achieving Strategic Fit Responsive supply chain Responsivenes s spectrum f e o Fit n Zo egic t ra St Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand .

. Share the risks and the rewards between players. 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.Key Concepts     Design. operate. and control the physical and information flows as though the channel were one seamless corporate entity.

New Concepts       Push-Pull strategies Direct-to-Consumer Strategic alliances Manufacturing postponement Dynamic Pricing E-Procurement .

Dealing with Product Variety: Mass Customization Lead Time Long Short Mass Customization ion High t Low za i tom us 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? .

 Commerce transacted over the Internet • Is product information displayed on the Internet? • Is negotiation over the Internet? • Is the order placed over the Internet? • Is the order tracked over the Internet? • Is the order fulfilled over the Internet? • Is payment transacted over the Internet? Applying the Framework to e-commerce: What is e-commerce? .

… • Physical stores. face to face. …     . sealed bids. fax. phone. catalogs. … • Physical store. EDI. physical delivery • EDI. phone.Existing Channels for Commerce  Product information Negotiation Order placement Order tracking Order fulfillment • Customer pick up. face to face. EDI. fax. phone. fax. … • Face to face.

Revenue Impact of E-Commerce        Length of supply chain Product information Time to market Negotiating prices and contract terms Order placement and tracking Order fulfillment Payment .

Cost Impact of E-Commerce  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 .

approach * Extensive use of case studies and real-life examples  Total System Cost * Avoid the silo effect of traditional logistics * Capture and integrate across different players in SC * Service can be included . though not necessarily Operations Research.Framework for analysis  Model Based Approach * * Use fundamental models to gain insights Analytical.

monitored. pricing. and managed * Impacts sourcing. etc. incentives. . contracting.Framework for Analysis (continued)  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.

These are usually formulated as Mixed Integer Programming Models.Modeling for SCM  Forecasting Models  These models allow prediction of demand based on past data or other parameters that are independently available. Location Models . They enable better planning.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. . given the lead-time necessary for response.

Modeling for SCM (cont’d)  Distribution Network Design Models . The costs considered for optimisation are production costs and warehousing costs. three and even four stages of distribution network. multi-destination environment.These models help in optimally allocating commodities from sources to destinations in a multi-source. location of warehouses and break-bulk points. capacity. . The constraints considered can be due to demand. etc.  Allocation Models . deciding between two. route restrictions.These models are usually comprehensive in nature. and sometimes even the transportation.

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

using a Geographical Information System ) are also very useful in such decisions. . The models used are the Shortest Path Problem. Decision Support Systems that interactively use the expertise of the decision maker by providing graphical support through a map (i.These models allow optimal routing on a transportation network from a given source to a destination..e. the Traveling Salesman Problem and the Vehicle Routing Problem.Modeling for SCM (cont’d)  Routing Models .

This model simply proposes the identification of alternatives.  Alternative Analysis .These models enable allocation of resources to particular activities. Formal approaches such as simulation and analytic hierarchy process could be used in assessing the implications of the criteria.Modeling for SCM (cont’d)  Scheduling Models . the models are of aid in evaluating appropriate rules for allocation. criteria for decision making and analysis of the alternatives across the criteria to arrive at the best choice. Depending on the criteria of interest and the number of resources. .

A Complete Documentation presented by Sayan Mondal .