Introduction to
Supply Chain Management
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
What is a Supply Chain?
P&G or other
manufacturer
Jewel or third
party DC
Plastic
Producer
Tenneco
Packaging
Chemical
manufacturer
(e.g. Oil Company)
Paper
Manufacturer
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Chemical
manufacturer
(e.g. Oil Company)
Timber
Industry
What Is A Supply Chain?
The system of suppliers, manufacturers,
transportation, distributors, and vendors
that exists to transform raw materials to
final products and supply those products
to customers.
That portion of the supply chain which
comes after the manufacturing process is
sometimes known as the distribution
network.
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
Strategies for SCM
All of the advanced strategies, techniques,
and approaches for Supply Chain
Management focus on:
Global Optimization
Managing Uncertainty
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
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
Conflicting Objectives
in the Supply Chain
1. 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
3. Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices
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
Volumes
Manufacturer Forecast
of Sales
Retailer Orders
Retailer Warehouse
to Shop
Actual
Consumer
Demand
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Volumes
What Management Gets...
Consumer
Demand
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Volumes
What Management Wants
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
Logistics in the Manufacturing
Firm
Profit
Logistics Cost
4%
21%
Marketing Cost
27%
Manufacturing Cost
48%
Profit
Logistics
Cost
Marketing
Cost
Manufacturing
Cost
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.
Supply Chain: The Complexity
National Semiconductors:
Production:
Produces chips in six different locations: four in the US, one in
Britain and one in Israel
Chips are shipped to seven assembly locations in Southeast Asia.
Distribution
The final product is shipped to hundreds of facilities all over the
world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within 45 days
5% are delivered within 90 days.
Whats New?
Global competition
Shorter product life cycle
New, low-cost distribution channels
More powerful well-informed
customers
Internet and E-Business strategies
New Concepts
Push-Pull strategies
Direct-to-Consumer
Strategic alliances
Manufacturing postponement
Dynamic Pricing
E-Procurement
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
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
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
PUSH PROCESSES
Customer Order
Cycle
PULL PROCESSES
Customer
Order Arrives
Push/Pull View of
Supply Chain Processes
Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
Pull: execution is initiated in response to a
customer order (reactive)
Push: execution is initiated in anticipation
of customer orders (speculative)
Push/pull boundary separates push
processes from pull processes
Supply Chain Performance:
Achieving Strategic Fit and
Scope
The Value Chain: Linking Supply Chain
and Business Strategy
Business Strategy
New Product Marketing
Strategy
Strategy
New
Product
Development
Supply Chain Strategy
Marketing
and
Operations Distribution
Sales
Service
Finance, Accounting, Information Technology, Human Resources
Understanding the Supply Chain: CostResponsiveness Efficient Frontier
Responsiveness
High
Low
Cost
High
Low
Demand Characteristics
Functional
Low demand variability
Easy forecasting
Long life cycle
Low inventory cost
Low margins
Low product variety
Low stockout cost
Low obsolescence
Innovative
High
Difficult
Short
High
High
High
High
High
Responsiveness Spectrum
Highly
efficient
Integrated
steel mill
Somewhat
efficient
Hanes
apparel
Somewhat
responsive
Most
automotive
production
Highly
responsive
Dell
Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
supply chain
Responsiveness
spectrum
Efficient
supply chain
Certain
demand
Implied
uncertainty
spectrum
Uncertain
demand
Comparison of Efficient and Responsive
Supply Chains
Efficient
Responsive
Primary goal
Lowest cost
Quick response
Product design strategy
Min product cost
Modularity to allow
postponement
Pricing strategy
Lower margins
Higher margins
Mfg strategy
High utilization
Capacity flexibility
Inventory strategy
Minimize inventory
Buffer inventory
Lead time strategy
Reduce but not at expense
of greater cost
Aggressively reduce even if
costs are significant
Supplier selection strategy
Cost and low quality
Speed, flexibility, quality
Transportation strategy
Greater reliance on low cost
modes
Greater reliance on
responsive (fast) modes
Supply Chain Drivers and
Obstacles
Drivers of Supply Chain
Performance
Facilities
places where inventory is stored, assembled, or fabricated
production sites and storage sites
Inventory
raw materials, WIP, finished goods within a supply chain
inventory policies
Transportation
moving inventory from point to point in a supply chain
combinations of transportation modes and routes
Information
data and analysis regarding inventory, transportation, facilities
throughout the supply chain
potentially the biggest driver of supply chain performance
A Framework for
Structuring Drivers
Efficiency
Responsiveness
Supply chain structure
Facilities
Transportation
Inventory
Drivers
Information
Information: Role in
the Supply Chain
The connection between the various
stages in the supply chain allows
coordination between stages
Crucial to daily operation of each stage in
a supply chain e.g., production
scheduling, inventory levels
Components of Information
Decisions
Push (MRP) versus pull (demand information transmitted quickly
throughout the supply chain)
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies
EDI
Internet
ERP systems
Supply Chain Management software
Overall trade-off: Responsiveness versus efficiency
Considerations for
Supply Chain Drivers
Driver
Efficiency
Responsiveness
Inventory
Cost of holding
Availability
Transportation
Consolidation
Speed
Facilities
Consolidation /
Proximity /
Dedicated
Flexibility
What information is best suited for
each objective
Information
Obstacles to Achieving
Strategic Fit
Increasing variety of products
Decreasing product life cycles
Increasingly demanding customers
Fragmentation of supply chain ownership
Globalization
Difficulty executing new strategies
Major Obstacles to Achieving Fit
Multiple owners / incentives in a supply
chain
Local optimization and lack of global fit
Increasing product variety / shrinking life
cycles / customer fragmentation
Increasing implied uncertainty
Summary
What are the major drivers of supply chain performance?
What is the role of each driver in creating strategic fit
between supply chain strategy and competitive strategy (or
between implied demand uncertainty and supply chain
responsiveness)?
What are the major obstacles to achieving strategic fit?
In the remainder of the course, we will learn how to make
decisions with respect to these drivers in order to achieve
strategic fit and surmount these obstacles
Step 1: Understanding the Customer and
Supply Chain Uncertainty
Identify the needs of the customer segment being served
Quantity of product needed in each lot
Response time customers will tolerate
Variety of products needed
Service level required
Price of the product
Desired rate of innovation in the product
Step 1: Understanding the Customer
and Supply Chain Uncertainty
Overall attribute of customer demand
Demand uncertainty: uncertainty of
customer demand for a product
Implied demand uncertainty: resulting
uncertainty for the supply chain given the
portion of the demand the supply chain
must handle and attributes the customer
desires
Step 1: Understanding the Customer
and Supply Chain Uncertainty
Implied demand uncertainty also related to
customer needs and product attributes
First step to strategic fit is to understand
customers by mapping their demand on
the implied uncertainty spectrum
Impact of Customer Needs on
Implied Demand Uncertainty
Customer Need
Causes implied demand
uncertainty to increase
because
Range of quantity increases
Wider range of quantity implies
greater variance in demand
Lead time decreases
Less time to react to orders
Variety of products required increases Demand per product becomes more
disaggregated
Number of channels increases
Total customer demand is now
disaggregated over more channels
Rate of innovation increases
New products tend to have more
uncertain demand
Required service level increases
Firm now has to handle unusual
surges in demand
Correlation Between Implied Demand
Uncertainty and Other Attributes
Attribute
Product
margin
Avg. forecast
error
Avg. stockout
rate
Avg. forced
season-end
markdown
Low Implied
Uncertainty
Low
High Implied
Uncertainty
High
10%
40%-100%
1%-2%
10%-40%
0%
10%-25%
Step 2: Understanding the
Supply Chain
How does the firm best meet demand?
Dimension describing the supply chain is
supply chain responsiveness
Supply chain responsiveness -- ability to
respond to wide ranges of quantities
demanded
meet short lead times
handle a large variety of products
build highly innovative products
meet a very high service level
Step 2: Understanding the
Supply Chain
There is a cost to achieving
responsiveness
Supply chain efficiency: cost of making
and delivering the product to the customer
Increasing responsiveness results in
higher costs that lower efficiency
strategic fit is to map the supply chain on
the responsiveness spectrum
Step 3: Achieving Strategic Fit
Step is to ensure that what the supply
chain does well is consistent with target
customers needs
Examples: Dell, Barilla
