INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

Flows in a Supply Chain

Information Product

Customer
Funds

What is Knowledge?
A collection of data is not information. A collection of information is not knowledge. A collection of knowledge is not wisdom. A collection of wisdom is not truth.

In the first half of the twentieth century industry replaced agriculture, in the second half of the twentieth century service has replaced manufacturing and right now, the knowledge industry is beginning to replace the others.

George Kotzmetzk

Chapter Outline
* Introduction * What is Supply Chain Management? * Why is Supply Chain Management important? * The origins of Supply Chain Management * Important Elements of Supply Chain Management: - Purchasing - Operations - Distribution - Integration * Strategies for Supply Chain Management * Future Trends in Supply Chain Management * The Beer Game

What is a Supply Chain?

A supply chain consists of the flow of products and services from/to:
--Raw materials manufacturers --Intermediate products manufacturers --End product manufacturers --Wholesalers and distributors --Retailers and, --End customers SEE FIGURE 1.1

Connected by agents, transportation and storage activities, and

Integrated through sharing of information, planning, and processing activities\

Examples???

Sources: plants vendors ports

Regional Warehouses: stocking points

Field Warehouses: stocking points

Customers, demand centers sinks

Supply

Inventory & warehousing costs Production/ purchase costs Transportation costs Inventory & warehousing costs

Transportation costs

Figure 1.1 A Generic Supply Chain

Product & service flow

End customers

End product manufacturer

Raw material suppliers

Intermediate component mfgs.

Wholesalers, distributors

Retailers

Information and planning

Typical Supply Chains

Production Distribution

Purchasing Receiving Storage Operations Storage

Typical Supply Chain for a Manufacturer

Supplier
Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

Supplier

Typical Supply Chain for a Service

Supplier

Storage

Service

Customer

Supplier

What is Supply Chain Management?

Here are two definitions:
The design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer -- Institute for Supply Management

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

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

Importance of Supply Chain Management

* Firms have discovered value-enhancing and long
term benefits

* Who benefits most? Firms with:

- Large inventories

- Large number of suppliers

- Complex products - Customers with large purchasing budgets

* Benefits
- Lower purchasing/inventory costs, higher quality/customer service

Importance of Supply Chain Mgt. Cont.

Firms practicing Supply Chain Management:
1. Start with key suppliers 2. Move on to other suppliers, customers, and shippers 3. Integrate second tier suppliers and customers (second tier refers to the customers customers and the suppliers suppliers)

Importance of Supply Chain Mgt. Cont.

* Cost savings and better coordination of resources
are reasons to employ Supply Chain Management
-- Bullwhip Effect- the magnification of safety stocks and costs based on separate forecasts and uncoordinated planning and sharing of information along the supply chain (Ex. 1.1)

* Reducing the bullwhip effect occurs through:

-- Process integration- Interdependent activities can lead to improved quality, reduced cycle time, better production methods, better forecasts, less safety stock, etc.

Important Elements of SCM

PurchasingSupplier alliances, supplier management, strategic sourcing Demand management, MRP, ERP, JIT, TQM Transportation management, customer relationship management, network design, service response logistics Coordination/Integration activities, global integration problems, performance measurement

Operations-

Distribution-

Integration-

Important Elements of SCM-Cont.

Purchasing:
Long term relationships Supplier management- improved performance
through-

-- Supplier evaluation (determining supplier

capabilities and performance)

-- Supplier certification (third party or

internal certification to assure product quality and service compliance)

Strategic partnerships- successful and

trusting, long-term relationships with top-performing suppliers

Important Elements of Supply Chain Management-Cont.

Operations:
-- Demand management- match demand to available capacity -- Linking buyers & suppliers via MRP and ERP systems -- Use JIT to improve the pull of materials to reduce inventory levels -- Employ TQM to improve quality compliance among buyers and suppliers

Important Elements of Supply Chain Management-Cont.

Distribution:
-- Transportation management- tradeoff decisions between cost & timing of delivery/customer service via trucks, rail, water & air -- Customer relationship managementstrategies to ensure deliveries, resolve complaints, improve communications, & determine service requirements -- Network design- creating distribution networks based on tradeoff decisions between cost & sophistication of distribution system

Important Elements of Supply Chain Management-Cont.

Integration:
-- Supply Chain Integration- when supply chain participants work for common goals. Requires intrafirm functional integration. Based on efforts to change attitudes & adversarial relationships -- Global Supply Chains- advantages that accrue from sourcing from larger global market e.g., lower cost & higher quality suppliers. May involve operating exposure, which is risk found in foreign settings -- Supply Chain Performance Measurement- Crucial for firms to know if procedures are working

Strategies for SCM

All of the advanced strategies, techniques, and approaches for Supply Chain Management focus on: Global Optimization Managing Uncertainty

Optimization

* What is it? * Why is it important? * What tools and approaches help?

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 Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Source: Duncan McFarlane

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

Uncertainty

What is variation? What is randomness? What tools and approaches help us to deal with these issues?

Cant 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 doesnt 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 Forecast of Sales

Volumes

Retailer Orders

Retailer Warehouse to Shop Production Plan

Actual Consumer Demand

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

What Management Gets...

Volumes

Consumer Demand

Production Plan

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

What Management Wants

Volumes

Production Plan Consumer 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

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

Supply Chain:the Magnitude

It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies.
A typical box of cereal spends more than three months getting from factory to supermarket.

A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days.

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.

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

H&B Wood Bats Process

ERP5 OverviewSupply System at Hillerich & Bradsby

Technology/Logistics

LO2 American President Line