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Supply Chain Management Introduction

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

Supply Chain Management

Supply chain Management: Integration of various activities encompassed by the supply chain through improved supply chain relationships to achieve a sustainable competitive advantage. Supply chain: A sequence of suppliers, warehouses, operations and retail outlets, i.e., Organistions that are involved in producing and delivering a product or service.

A basic purpose of supply chain management is to control inventory by managing the flow of materials throughout the supply chain.

Objectives of a Supply Chain

The objectives are : 1. To maximize the overall value generated. The value a supply chain generates is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customers request. 2. To achieve maximum supply chain profitability. Supply chain profitability is the total profit to be shared across all supply chain stages. 3. To reduce the supply chain costs to the minimum possible level.

Supply Chain Dynamics

Three key points about supply chain dynamics are:

1.The supply chain is a highly interactive system.

2.There is an accelerator effect of demand changes. 3.The best way to improve the supply chain is to reduce the total replenishment time and to feed back actual demand information to all levels.

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

Traditional View: Cost breakdown of a manufactured good

Profit Supply Chain Cost Marketing Cost 10% 20% 25%
Profit Supply Chain Cost Marketing Cost

Manufacturing Cost


Manufacturing Cost

Effort spent for supply chain activities are invisible to the customers.

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



- aims to Match Supply and Demand, profitably for products and services - achieves



The right


+ + +
The right The right

The right




The right


The right




Detergent supply chain:

P&G or other manufacturer Jewel or third party DC Jewel Supermarket Customer wants detergent and goes to Jewel

Plastic Producer

Tenneco Packaging

Chemical manufacturer (e.g. Oil Company)

Chemical manufacturer (e.g. Oil Company)

Paper Manufacturer

Timber Industry

Flows in a Supply Chain



Information 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.
Cash Products and Services

THAILAND INDIA N-Tier Suppliers Suppliers MEXICO Logistics TEXAS Distributors US Retailers

Supply Side


Demand Side

Demand Supply

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

Examples of Supply Chains

Dell / Compaq
Dell buys some components for a product from its suppliers after that product is purchased by a customer. Extreme case of a pull process

Zara, Spains answer to Italys Benetton

Sells apparel with a short design-to-sale cycle, avoids markdowns.

Toyota / GM / Volkswagen, McMaster Carr / W.W. Grainger, sell auto parts Amazon / Barnes and Noble Frozen food industry/Fast food industry/5 star restaurants Internet shopping: Webvan / Peapod

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

Connected by agents, transportation and storage activities, and Integrated through sharing of information, planning, and processing activities


Sources: plants vendors ports

Regional Warehouses: stocking points

Field Warehouses: stocking points

Customers, demand centers sinks


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

Transportation costs

Typical Supply Chains

Purchasing Production Distribution


Storage Operations



Typical Supply Chain for a Manufacturer











Supply Chain for Steel in an Automobile Door

Mines iron ore

Iron ore
Sheet metal

Forms steel ingot

Steel ingots

Forms sheet metal


Car door


Car Prepared car

CAR DEALERSHIP Does preparation

Makes automobile


Drives automobile

Supply Chain Management in a Manufacturing Plant

Raw Materials, Parts, and In-process WareHousing

Receiving and Inspection


Finished Goods Warehousing

Inspection, Packaging, And Shipping

Materials Management Purchasing Production Control Warehousing and Shipping Inventory Control and Traffic

Physical materials flow Information flow




Typical Supply Chain for a Service







Importance of Supply Chain Management

Firms have discovered value-enhancing and long term
benefits Who benefits most?

Firms with:
- Large


- Large number of suppliers

- Complex products - Customers with large purchasing budgets

- Lower purchasing/inventory costs, higher quality/customer


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. .

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.


The Bullwhip Phenomenon Volatility amplification along the network Increase in demand variability as we move upstream away from the market Mainly because of lack of communication and coordination Delays in information and material flows
Bullwhip effect occurs because of various reasons: Order Batching - Accumulate orders Shortage gaming- Ask for more than what is needed Demand forecast updating

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.

Magnitude of Supply Chain Management

Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not available when and where needed P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand When the 1 gig processor was introduced by AMD (Advanced Micro Devices), the price of the 800 meg processor dropped by 30%

What can Supply Chain Management do?

Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory. To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE. National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time.

Importance of SCM understood by some

AMR Research: "The biggest issue enterprises face today is intelligent visibility of their supply chains-both upstream and down" Forrester Research: "Companies need to sense and proactively respond to unanticipated variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks Gartner Group: By 2004, 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers Open ended statement. Agility can be increased continuously.


SCM Generated Value

Minimizing supply chain costs while keeping a reasonable service level
customer satisfaction/quality/on time delivery, etc.

This is how SCM contributes to the bottom line

SCM is not strictly a cost reduction paradigm!


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.

What is a Supply Chain?

Customer is an integral part of the supply chain

Includes movement of products from suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions Probably more accurate to use the term supply network or supply web
Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers . All stages may not be present in all supply chains (e.g., no retailer or distributor for Dell)

Decision Phases of a Supply Chain Supply chain strategy or design Supply chain planning Supply chain operation


Supply Chain Strategy or Design

Decisions about the structure of the supply chain and what processes each stage will perform

Strategic supply chain decisions

Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems

Supply chain design must support strategic objectives

Supply chain design decisions are long-term and

expensive to reverse must take into account market uncertainty

Supply Chain Planning

Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year


Supply Chain Planning

Planning decisions:
Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions

Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

Supply Chain Operation

Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon)

Process View of a Supply Chain

Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages

Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push)


Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle


Cycle View of a Supply Chain

Each cycle occurs at the interface between two successive stages

Customer order cycle (customer-retailer)

Replenishment cycle (retailer-distributor)

Manufacturing cycle (distributor-manufacturer)

Procurement cycle (manufacturer-supplier) Cycle view clearly defines processes involved and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process.

Push/Pull View of Supply Chains

Procurement, Manufacturing and Replenishment cycles
Customer Order Cycle



Customer Order Arrives


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

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 43


Supply side- raw materials, inbound logistics and production processes Demand side- outbound logistics, marketing and sales.



Why sudden interest? Demanding customers Shrinking product life cycles Proliferating product offerings Growing retailer power in some cases Doctrine of core competency Emergence of specialized logistics providers Globalization Information technology


Supply Chain Design Strategic

Resource Acquisition Long Term Planning (1 Year ++)

Production/ Distribution Planning Tactical

Resource Allocation Medium Term Planning ( Qtrly, Monthly)

Shipment Scheduling Operational

Resource Scheduling
Short Term Planning ( Weekly, Daily)

Supply Chain Goals

Efficient supply chain management must result in tangible business improvements. It is characterized by a sharp focus on
Revenue growth Better asset utilization Cost reduction.


Supply Chain Management Underlying Principles



Conformance (Forecasts/Plans/Distribution) Co-operation (Cross -Functional) Communication (Real Time Data)

Reduce Overall Cycle Time : Improve Response


Changing Paradigm
Functional vs Process Products vs Customers Revenues vs Performance Inventory vs Information Transactions vs Relationships


Critical Success Factors today

Cross functional management and planning skills Ability to define, measure and manage service requirements by market segment Information systems Relationship orientation management and win win


Supply chain as an efficient customer satisfying process

Effectiveness of the whole supply chain is more important than the efficiency of each individual department.


The steps involved

Step1 - Designing the supply chain
Determine the supply chain network Identify the levels of service required


Step 2 - Optimizing the supply chain Determine pathways from suppliers to the end customer
Customer markets to Distribution centers Distribution centers to production plants Raw material sources to production plants Identify constraints at vendors, plants and distribution centers Get the big picture Plan the procurement, production and distribution of product groups rather than individual products in large time periods- quarters or years


Step 3Material flow planning

Determine the exact flow and timing of materials
Arrive at decisions by working back from the projected demand through the supply chain to the raw material resources


Step 4 Transaction processing and short term scheduling Customer orders arrive at random
This is a day to day accounting system which tracks and schedules every order to meet customer demand

Order entry, order fulfillment and physical replenishment


Information flows in Supply Chain Management

Information is overriding element

Need for databases

Master files: Information about customers, products, materials, suppliers, transportation, production and distribution data- do not require frequent processing Status files- heart of transaction processing- track orders and infrastructure status- updated daily. Essentially using the same information to make all plans right from structuring the network to processing every day supply chain tasks.

Visibility : See physical operations more effectively through information. Information can be used for effective coordination of value chain activities. Mirroring capability : In this stage, virtual activities are substituted for physical ones. A parallel value chain is created. New customer relationships : The company can draw on the flow of information in the virtual value chain to deliver value to customers in new ways.

Dealer Management
Conventional functions : Inventory ownership and management Sales and technical support Order handling Credit

Contemporary Trends
Channels being divided into two- Fulfillment and Franchised agent

Fulfillment channel- responsible for getting the manufacturers product from the plant to the end user through a highly efficient logistics and inventory management system


Contemporary Trends
Fulfillment channel may not take ownership of the product but may perform these functions on a per box fee structure Franchised agents responsible for sales and sales support but will not write the order or supply the product


Issues in customer management

Concentration is necessary to commit the necessary resources for true customer integration Depth of customer contact
R&D - sharing information vs developing new products together Logistics - Pros and cons of methods of transportation vs reengineering the logistics process

Implementation: Points to keep in mind

Recognize the difficulty of change. Prepare a blueprint for change that maps linkages among initiatives. Assess the entire supply chain from supplier relationships to internal operations to the market place, including customers, competitors and industry as a whole.


Does our manufacturing strategy increase product line flexibility while continuing to drive down overall production costs? When was the last time we measured lost sales to end customers? Do we have an efficient system to get POS data from retailers? Are we testing our products with end customers? Do we use the resulting data to adjust our forecasting and supply positions? Is the ratio of returned orders to sales increasing?

The New Model of Relationships

Hard bargaining vs shared destiny Arms length relations vs Involving dealers and suppliers in product development Piling up vs Replenishing dealer inventory more frequently In short working together as partners to cut costs, boost efficiencies, innovate and share value


Adversarial vs partnerships

Short term vs long term contracts

Large vs small order quantity Full truck load vs small parcels

Inspection vs no inspection


Written order vs understanding

Many vs few suppliers

Design and then invite quote from vendor vs involving vendor in development Bargaining, holding cards close to chest vs Shared destiny, transparency


Important points to keep in mind Segment customers based on service needs. Modify the supply chain to meet these service requirements profitably. Customize the logistics network. Develop forecasts collaboratively involving every link of the supply chain. Locate the leverage point where the product is unalterably configured to meet a single requirement Delay product differentiation till the last possible moment. Assess options such as modularized design or modification of manufacturing processes that can increase flexibility.

Important points to keep in mind (contd.)

Cultivate warm relationships with suppliers. Efficient supply chain management has to be accompanied by a technology strategy. Customization of logistics network Listen to signals of market demand and plan accordingly. Differentiate product close to the customer Source strategically Develop a supply chain wide technology strategy


The End Thanks for your attention!