Quality in Supply Chain Design

Lecture 1: Introduction to SCM

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Outline
Supply Chain Management
SCM Challenges in Todays Global Economy
Magnitude of Supply Chain Costs
Topics Covered
What Is a Supply Chain?
Flow of products and services from raw
materials manufacturers; intermediate
products manufacturers; end product
manufacturers; wholesalers and distributors
and; retailers
Connected by transportation and storage
activities
Integrated through information, planning,
and coordination activities
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Source
Supplier
Supplier
Distributor
Distributor
Retailer
End-User
Converter
Converter
Consumers
Information Flow
Funds/Demand Flow
Value-Added Services
Material Flow
Reuse/Maintenance/After Sales Service Flow
What Is a Supply Chain?
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Supply Chain for a Car
Components
Raw material suppliers. For instance, suppliers for steel, rubber,
plastics, etc.
Parts suppliers. For instance, suppliers for engines, steering
wheels, seats, and electronic components, etc.
Automobile manufacturer. For instance, Ford.
Automobile dealers. For instance, Hayward Ford.
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Supply Chain for a Car
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Supply Chain for a Consumer Mortgage
The supply chain for a consumer mortgage offered by a
bank may involve various components.
Marketing companies that handle solicitation to potential
customers.
Credit reporting agencies that evaluate potential customers.
The bank that extends the mortgage loans.
Mortgage brokers through which the loans are distributed.
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Product vs. Service Supply Chain
There are a number of differences between the two types of
supply chains. For instance:
In a product supply chain, there is both a flow of information
and physical products. In a service supply chain, it is
primarily information.
Contrary to a service supply chain, transportation and
inventory are major cost components in a product supply
chain.
Services typically cannot be held in inventory, so matching
capacity with demand is frequently more important in a
service supply chain.
In a service supply chain, the (explicit) cost of information is
higher than in a product supply chain.
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Supply Chain Goals & Strategies
All companies involved in the supply chain want to
maximize their respective profits by increasing
revenue and decreasing cost.
However, companies may employ different
strategies in order to achieve this goal.
Some of them focus on customer satisfaction and
quick delivery, while others may be more concerned
about minimizing inventory holding costs.
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Supply Chain for a Car
Typically, the automobile dealer would like to offer a
variety of car colors and configurations to
accommodate different customer preferences, and
meanwhile have a short delivery lead time from the
manufacturer.
However, in order to maximize the length of
production runs, and utilize resources more
efficiently, the manufacturer would like to
aggregate orders from different dealers and offer
less variety in car configurations.
Multi-objective Optimization
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Supply Chain for a Consumer Mortgage
The marketing companies strive to increase
the response rate from homebuyers in order
to maximize their returns.
Banks aim at a customer portfolio with a
relatively low risk, healthy flow of payments
and low average loan maturity date.
The brokers would like to maximize their
sales commissions
Multi-objective Optimization
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Source
Supplier
Supplier
Distributor
Distributor
Retailer
End-User
Converter
Converter
Consumers
Information Flow
Funds/Demand Flow
Value-Added Services
Material Flow
Reuse/Maintenance/After Sales Service Flow
What Is a Supply Chain?
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Supply Chain: A Simplified View
Two pictures:
(1) components and
(2) flow
One goal: Optimization
(1) minimize cost
(2) maintain service levels
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SCM: A Systems Approach
The Supply Chain network 14
SCM: A Systems Approach
Every facility that impacts costs need to be
considered
Multiple levels of activities
Strategic Tactical Operational
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Supply Chain Management
Simchi-Levis Definition:
Supply chain management is a set of
approaches utilized to efficiently
integrate suppliers, manufacturers, warehouses,
and stores, so that
merchandise is produced and distributed at the
right quantities, to the right locations, and at the
right time, in order to
minimize system wide costs while satisfying
service level requirements.
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SCM: Other Definition
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
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SCM: Other Definition
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
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Outline
Supply Chain Management
SCM Challenges in Todays Global Economy
Magnitude of Supply Chain Costs
Topics Covered
SCM Challenges:
Optimization, integration and synchronization with
development chain
complex, large scale network
facilities with difference, conflicting objectives
dynamic systems
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Set of activities and processes associated with
new product introduction. Includes:
product design phase
associated capabilities and knowledge
sourcing decisions
production plans
The Development Chain
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The Development Chain
The Supply Chain network 22
The Development Chain
The enterprise development and supply chain
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SCM Challenges:
Optimization, integration and synchronization with
development chain
complex, large scale network
facilities with difference, conflicting objectives
dynamic systems
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Large Scale Complex Networks
Geographically dispersed complex network
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Global Apparel Supply Chain
Tracing back the dress you are wearing
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QC & Shipping
[Hong Kong]
Product Design
[Hong Kong]
Zippers+
[Japan+]
Stitching
[Indonesia]
Weaving
[Taiwan]
Yarn Spinning
[Korea]
An Illustration: How Li & Fung Limited Might Make a Dress
Globally Dispersed Manufacturing
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Transactional 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.
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SCM Challenges:
Optimization, integration and synchronization with
development chain
complex, large scale network
facilities with difference, conflicting objectives
dynamic systems
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Decentralized environments
A
B
C
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Decentralized environments
Airport Facility
Scheduling
SCM Challenges:
Optimization, integration and synchronization with
development chain
complex, large scale network
facilities with difference, conflicting objectives
dynamic systems
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SCM Challenges
Dynamic system: uncertainty and risk
Variations over time
Matching demand-supply is difficult
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Uncertainty and Risk Factors
Matching Supply and Demand a Major Challenge
REASONS EXAMPLES
Raw material shortages
Internal and supplier parts
shortages
Productivity inefficiencies
Boeing Aircrafts inventory write-
down of $2.6 billion
Sales and earnings shortfall
Larger than anticipated inventories
Sales at U.S. Surgical Corporation
declined 25 percent, resulting in a
loss of $22 million
Stiff competition
General slowdown in the PC
market
Intel reported a 38 percent decline
in quarterly profit
Higher than expected orders for
new products over existing
products
EMC Corp. missed its revenue
guidance of $2.66 billion for the
second quarter of 2006 by around
$100 million
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Uncertainty and Risk Factors
Fluctuations of Inventory and Backorders
Order variations in the supply chain
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Forecasting is not a solution
Demand is not the only source of uncertainty
Recent trends make things more uncertain
Lean manufacturing
Outsourcing
Off-shoring
Uncertainty and Risk Factors
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Uncertainty and Risk Factors
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2002 West Coast port strike
Losses of $1B/day
Store stock-outs, factory shutdowns
1999 Taiwan earthquake
Supply interruptions of HP, Dell
2001 India (Gujarat state) earthquake
Supply interruptions for apparel manufacturers
Uncertainty and Risk Factors
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Uncertainty and Risk Factors
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Outline
Supply Chain Management
SCM Challenges in Todays Economy
Magnitude of Supply Chain Costs
Topics Covered
Magnitude of Supply Chain Costs
Cost Elements of a Typical Trade Book
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Magnitude of Supply Chain Costs
Example: The Apparel Industry
Manufacturer
Distributor
Retailer Customer
Cost per Percent
Shirt Saving
$52.72 0%
$41.34 28%
$20.45 62%
Manufacturer
Distributor
Retailer Customer
Manufacturer Distributor
Retailer Customer
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The Magnitude
U.S. companies spend more than $1 trillion in supply-
related activities (10-15% of Gross Domestic Product)
Transportation 58%
Inventory 38%
Management 4%
The grocery industry could save $30 billion (10% of
operating cost) by using effective logistics strategies
A typical box of cereal spends 104 days getting from
factory to supermarket.
A typical new car spends 15 days traveling from the
factory to the dealership.
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The Magnitude
Compaq computers loss of $500 million to $1 billion in
sales in one year
Laptops and desktops were not available when and where
customers were ready to buy them
Boeings forced announcement of write-downs of $2.6b
Raw material shortages, internal and supplier parts shortages.
Ciscos multi-billion ($2.2b) dollar write-off of
inventories in 2001-2002
Customers balked on orders due to market meltdown
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Composition of Logistics Costs
Total U.S. logistics costs between 1984 and 2005 46
Progression of Logistics Costs
Logistics costs share of the U.S. economy
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Supply Chain: The Potential
P&Gs estimated savings to retail customers of $65 million
through logistics gains
Dell Computers outperforming of the competition in terms of
shareholder value growth over more than two decades by over
3,000% using:
Direct business model
Build-to-order strategy
Wal-Mart transformation into the worlds largest retailer by
changing its logistics system:
highest sales per square foot, inventory turnover and operating
profit of any discount retailer
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Cross-Docking
Product vs. Service Supply Chain
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A Narrowcasting
Environment
Retail Store
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Expressive Commerce: Strategic
Sourcing at Procter & Gamble
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Outline
Supply Chain Management
SCM Challenges in Todays Economy
Magnitude of Supply Chain Costs
Topics Covered
SCM Challenges & Solutions
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Development
Chain
Distributed
Large scale
Conflicting
Objectives
Dynamic
Environment
Inventory
Risk Pooling
Value of Information
Tech Standard
Strategic Alliance
Smart Pricing
Procurement
Supply Contracts
eMarkets
Distribution
SCM Challenges & Solutions
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Development
Chain
Distributed
Large scale
Conflicting
Objectives
Dynamic
Environment
Inventory
Risk Pooling
Value of Information
Tech Standard
Strategic Alliance
Smart Pricing
Procurement
Supply Contracts
eMarkets
Distribution
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Summary
Supply Chain Management
SCM Challenges in Todays Economy
Magnitude of Supply Chain Costs
Topics Covered
Materials of some slides are taken from David Simchi-Levi; Philip Kaminsky;
Edith Simchi-Levi. "Designing and Managing the Supply Chain". McGraw-Hill
Higher Education, 2008. ISBN-13: 9780073341521 (ISBN-10: 0073341525)
Used by Permission.