Introduction to Supply Chain & Logistics Management

BY DR. SWATANTRA KUMAR

What we are talking about
 Supply Chain & Logistics Management

 It is a major function of Operations Management
 Grown in significance because of globalization,

better customer service requirements & shorter product life cycles.  Now it happens to be a strategic function  Efficient management of Logistics and supply chains reduces system wise costs and improves customer service

The genesis
 Earliest cases – War time supply chains

 Ramayana – Lord Rama build a bridge to make his

army reach Lanka to rescue Sita (Mythology).  Modern supply chains can be divided into two parts  Pre Internet era (Before 1990s)  Post Internet era (After 1990s)

Copyright © 2004 Pearson Education. Page 20 Internet has changed the way business was done by creating transparency across the supply chains. . Inc. Measured by Number of Internet Hosts with Domain Names Slide 1-4 Figure 1.The Growth of the Internet.3.

if anything goes wrong (only God knows) .The pre internet era  Average time required to process & deliver the merchandise to a customer from a warehouse inventory – 15 to 30 days (Sometimes even longer)  Order creation and transfer through – Telephone. Fax. or Public mail  If everything as per plans time taken was 15 to 30 days.

The pre internet era  Long lead times led to accumulation of inventory (by retailers. wholesalers & Manufacturers).  Product variations led to situation of „out of stock‟ for most of them!  Lack of alternatives  It became a common practice to accumulate inventory .

 Consumer seeking greater degree of customization – They are active participants in the process rather than passive recipients.Post Internet Era  The industrial world no longer characterized by scarcity.  Transportation capacity & operational performance have increasingly become more economical and reliable .

Post Internet Era
 Information Technology brought in the massive change 

  

in the way logistics and SCM operations were practiced. The world of business was irrevocably impacted by computerization, internet and a range of inexpensive information transmission capabilities during the decade of 1990s Information characterized by speed, accessibility, accuracy, and relevancy became the norm. Internet has become a common and economical way to complete B2B transactions. Internet also contributing to rapid globalization

Example: National semiconductor
 National semiconductor whose supplier list includes


 

Motorola, Compaq, Ford, IBM, Siemens & Intel is one of the largest chip makers in the world Its product is used in fax machines, cellular phones, computers and cars Four wafer fabrication facilities : 3 in US, One in Britain, & assembly sites in Malaysia and Singapore. Post manufacturing products are sent to over 100 manufacturing facilities all over the world. Highly competitive industry: short lead time specification and due date delivery are critical

Contd..
 In 1994, 95% of NS customers received orders within  

45 days from the time order was placed Remaining 5% received orders within 90 days. Tight lead times required the company to involve 12 different airline carriers using about 20,000 different routes. The difficulty: No customer knew that he will under 95% (Delivery within time) or 5% delivery beyond due date. Such is the complexity of SCM

and correctly invoiced.Information Age  High business connectivity  Transformation of all business processes – Marketing. . manufacturing. damage free. purchasing and logistics  High degree of customization is possible  Zero Defect (Six Sigma) with in reach  Perfect orders – delivering the desired assortment and quantity of products to the right location on time.

The Supply Chain Revolution  Supply Chain Revolution  Logistical renaissance (Revival)  Integrated logistics management  Vertical ownership gave way to core competent business orientation (Increased role of expertise) .

Traditional versus Integrated SCM Approaches • Independent inventory management policies • Minimization of firm costs • Short-term focus • Information sharing limited to current transaction • Corporate philosophies not relevant • Each to their own success or failure • Independent actions and information systems • Joint reduction of channel inventories • Channel-wide cost savings • Long-term perspective • As required for planning and monitoring • Compatible corporate philosophies • Sharing of risks and rewards • Channel leadership and compatible information systems .

2. Maintain core competencies and protect personnel from layoff Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity © 2004 Superfactory™. 2. 5. 3. All Rights Reserved. Reasons for Buying 1. 4. 14 . 4. 5. 3.Make/Buy Considerations Reasons for Making 1.

services.Mission of the Supply Chain: Enhancing the customer’s experience through excellence in delivering the right products. it’s supply chains that compete with supply chains!” Price Waterhouse Coopers . resources and information seamlessly to the right place at the right time! “Nowadays.

 For each firm involved the supply chain relationship reflects a strategic choice.Supply Chain Management  Consists of firms collaborating to leverage strategic positioning and to improve operating efficiency. and customers across organizational boundaries. . trading partners.  A supply Chain strategy is a channel and business organizational arrangement based on acknowledged dependency and collaboration.  Supply Chain Operations require managerial processes that span functional areas within individual firms and links suppliers.

financial. and knowledge flows M A T E R I A L S Supply Network Integrated enterprise Procurement Market Distribution Network Customer Accommodation Logistics C O N S U M E R S Manufacturing Capacity. service. product. Information. capital and Human Resource Constraints .Generalized supply chain model Relationship Management Information. core competencies.

Warehouses. in order to minimize system wise costs while satisfying service level requirements.Levi & Levi Supply Chain Management is a set of approaches utilized to efficiently integrate suppliers. and stores. so that merchandise is produced and distributed at the right quantities. and at the right time. to the right locations. . manufacturers.

typically those processes dedicated to getting goods and services to customers and consumers . typically processes dedicated to getting raw materials from suppliers – Downstream – the processes which occur after manufacturing or production.More definitions – Upstream – the processes which occur before manufacturing or production into a deliverable product or service.

Integrative Management  Traditionally Functional focus  Now – Focus on process achievement  Lowest total cost through trade-offs that exists between functions  Focus of Integrative Management – Lowest total process cost .

Three important facets  Resulting from increased attention to integrated management –    Collaboration Enterprise extension. and Integrated service providers .

technology and risk. Manufacturers and customers  Cross organizational sharing of information.  New innovative operational arrangements came into being – Like Enterprise extension .Collaboration  Among Suppliers.

Enterprise extension  Information sharing paradigm  Process specialization paradigm .

Integrated service providers  Outsourcing  To specialists (Transportation. and  4PL (non asset based) Information service providers . Warehousing)  Described as value added services  3PL (asset based) Having their own physical resources.

Responsiveness  Traditional – Anticipatory Business Model  Contemporary – Responsive Business Model  Postponement strategies .

Anticipatory Business Model  Forecast based Forecast Buy components & Materials Manufacture Warehouse Sell Deliver .

Responsive Business Model  Joint planning and rapid exchange of information between supply chain partners (Dell Computers)  Time based competition  Fewer steps (less cost & lass elapsed time)  Dell (2004). Sell Buy components & materials Manufacture Deliver . Build to order in China. sold computers in US. Five day order to delivery cycle. Delivered in US.

. e.  Two Types – (1) Manufacturing or form postponement and (2) Geographical. paint mixing on customer demand. reduce the incidence of wrong manufacturing or incorrect deployment .Postponement  Working arrangements.  Economies of scope (different form conversions).g. which allow postponement of final manufacturing or distribution of a product unit receipt of a customer order. or logistics postponement.

.Contd.  Geographical postponement – when material or goods are forwarded only when the order arrives. .

 Collaboration challenge (not easy to implement collaborative practices)  The answer – Combine anticipatory and responsive practices to supply chain arrangements  Uncertainty by non demand sources .Barriers to implementing responsive systems  Sales pressures “load the channel”  De-loading is difficult to achieve in established firms  It is easier to implement responsive systems in new organizations because of no pressures of inventory De-loading.

who source variety of components from Taiwanese manufacturers. 80% of the Island‟s power was lost.Example  In September. were impacted by supply interruptions  Similarly fabric shipments from India were delayed in the wake of Jan 26 earthquake in the Indian state of Gujarat. impacting many US apparel manufacturers. .  Companies such as HP & Dell. 1999. a massive earthquake devastated Taiwan. Initially.

which means – The science of computing and calculating  First used in Military Science  Webster: ‘The procurement. facilities and personnel‟ – Webster‟s Dictionary. 1963 . maintenance and transportation of military materials.Logistics  Stems from Greek word „Logisticos‟.

S.. Air Force technical report (1981) defines as „the science of planning and carrying out the movement and maintenance of forces‟  In 1991. the Council of Logistics Management (CLM).  U. a prestigious professional organization. modified its 1976 definition of ‘Physical Distribution Management’ by first changing the term to logistics and then changing the definition as follows - .Contd.

Logistics by CLM  „Logistics is the process of planning. effective flow and storage of goods. service and related information from the point-of-origin to the point of consumption for the purpose of conforming to customer requirements‟ . implementing and controlling of efficient.

Boversox & Closs (1996)  „Logistics Management includes the design and administration of system to control the flow of materials. and finished inventory to support business unit strategy‟ . work-in-process.

WIP and finished goods It has the ability to meet customer expectations and requirements of goods It ensures the delivery of quality product It offers the best possible customer service at the least possible cost .The crux  The major features of Logistics Management may be drawn as     It ensures a smooth flow of all types of goods such as RM.

 It deals with movement and storage of goods in appropriate quantity  It enhances productivity and profitability .The crux Contd.  It is an integration of various managerial functions for optimization of resources..

Evolution of Logistics concept  Independent business function era (Till 1950s)  Limited Internally Integrated business function era (1960-70)  Fully internally integrated business function era (1980s)  Externally Integrated Business Function Era (1990s) .

Independent Business Function (till 1950s) Outcome Aggressive preaching skills Inventory Control Sales Objective Maximization of profit by Sales volume Procurement Distribution Manufacturing .

.Limited Integrated Business Function (1960s – 70s) Output Price based competition Manufacturing Management Materials Management Objective Cost Control Physical Distribution & Sales Mgt.

. Profitability and market share Manufacturing Management Materials Management Objective Maximization of profitable sales volume and cost reduction Marketing & Distribution Mgt.Internally Integrated Business function (1980s) – Logistics Management Output Increased productivity.

Externally Integrated business function (1990s onwards) .SCM Objective Core Competency Vendors Output Customer Value and Harmonious relationships Logistics Customers .

The stages of Transformation • Independent Business Function (till 1950s) Transformation • Limited Integrated business function (1960s-70s) Transformation Transformation • Internally Integrated Business function (1980s) • Logistics Management Transformation • Externally Integrated Business Function (1990s onwards) • Supply Chain Management .

 Logistics is a process that creates value by timing and positioning inventory.Logistics  Within a firm‟s supply chain management.  As such logistics is a subset of and occurs within the broader framework of a supply chain. . logistics is the work required to move and geographically position inventory.

 Logistics is a combination of firm‟s order management. and packaging as integrated throughout a facility network.Contd. warehousing.  Integrated logistics serves to link and synchronize the overall supply chain as a continuous process and is essential for effective supply chain connectivity. transportation. . materials handling. inventory..

Growing Importance of Logistics and SCM  At the macro level.7% as a result of better SCM. India spends nearly 13% of its GDP on logistics. the logistics costs have decreased from 12.2% in 1992 to 11. .  Transportation and inventory costs constitute over 50% of the value added in India.  Worldwide. as compared to an average 10% in developing economies.

 Inventory cost (1995-96) – 243 crore  Inventory Cost (1996-97) – 204 crore . the inventory cycle time was 20 days.An Indian Case  MUL: Normally.  After implementing the detailed logistics system specifying uninterrupted flow of parts and materials at each stage of assembly line for different models. it has now been reduced to 14 days.

.The linkage  Supply Chain Management & Logistics Management  Supply Chain strategy establishes the operating framework within which logistics is performed.

The confusion around SCM  A lot has been written  Lack of structure  Lack of common vocabulary  What constitutes SCM?  Extent of integration?  Best practices? .

The traditional distribution channel practice  Business challenges led to collaborative practices  Harness benefits of  specialization  Core competency  Economy of scale  Vertical ownership integration to collaboration .

Value through Integration  Three perspectives of value  Economic Value  Market Value  Relevancy Economic Value Lowest total cost Economy of Scale efficiency Product/service creation Market Value Attractive assortment Economy of scope effectiveness Product service presentation Relevancy Value Customization Segmental diversity Product service positioning Supply Chain strategy Procurement/Manufac Market Distribution turing strategy strategy .

Financial sophistication  Time based strategies (Responsive business systems)     are great But. how fast is fast enough? How much speed is desirable? The answer lies with financial impact Three aspects of financial sophistication are cashto-cash conversion. dwell time maximization. and cash spin .

Cash to Cash conversion  Time required to convert raw material or inventory purchases into sales revenue is referred to as cashto-cash conversion  Related to inventory turn  Higher the inventory turn – quicker the cash conversion  Goal of SCM is to reduce and control receipt–to– delivery time in an effort to accelerate inventory turns .

 Used in case of inventory  Interdependence of supply chain partners in a supply chain allows for dwell time minimization.Dwell Time Minimization  Dwell time is the ratio of time that an asset sits idle to the time required to satisfy its designated supply chain mission.  Firms must look forward to eliminate duplicate and non value added work. .

 Sometimes referred to as FREE CASH SPIN.Cash Spin  A popular term for describing the potential benefits of reducing assets across a supply chain is CASH SPIN. .

 Favorable tax laws can make the performance of value adding operations in specific countries highly attractive.  Significant labor advantages can be gained by locating manufacturing and distribution facilities in developing nations (“offshoring”).Globalization  Global marketplace offers significant opportunity to strategically source RM and components. .

Documentation more complex 3. Diverse local environments 4.Internationalization of Logistics  Four significant differences in comparison to     national or even regional operations 1. The distance is fairly longer 2. Cultural variations in demand .

.Few Success stories  P&G  Proctor & Gamble estimates that it saved retail customers & 65 million is a recent 18 month supply chain initiative  “According to P&G.jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain. the essence of its approach lies in manufacturers and suppliers working closely together ….

National Semiconductor  In two years National Semiconductor reduced distribution costs by 2. increased delivery time by 47%. and increased sales by 34% by closing six warehouses around the globe and air-freighting microchips to customers from a new centralized distribution centre in Singapore.5%. .

in 1992 it had the highest sales per square foot and the highest inventory turnover and operating profit of any discount retailer.  At that time Wal-Mart was a small niche retailer in the south with only 229 stores and average revenues about half those of Kmart stores.  In 10 years had transformed itself.891 stores and average revenues per store of $7.Wal-Mart  In 1979 Kmart was one of the leading companies in the retail industry. . with 1.25 million.

In fact.. Wal-Mart‟s goal was to provide the customers with access of goods when and where they wanted and to develop cost structures that enable competitive pricing. Wal-Mart accounted for nearly 5% of the US retail spending. How did Wal-Mart do it? The starting point was relentless focus on satisfying customer focus.  Today Wal-Mart is the largest and the highest-profit     retailer in the world. . as of 1999.Wal-Mart Contd.

. goods are continuously delivered to WalMart‟s warehouses.  In this strategy.  This was done by using a logistics technique known as cross-docking.The cross-docking  The key to achieving the goal was to make the way the company replenishes inventory the centerpiece of its strategy.  This strategy reduced Wal-Mart‟s cost of sales significantly and made it possible to offer everyday low prices to their customers. from where they are dispatched to stores without ever sitting in inventory.

why not everybody in the industry is using it? .Question  If cross docking is such a wonderful strategy.

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