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Chapter 1
Understanding the Supply Chain

Dr.Eng Bonivasius Prasetya Ichtiarto

Graduate School of Industrial Engineering
Mercu Buana University

Curriculum Vitae
Bonivasius Prasetya Ichtiarto
Doctor Engineering, System Engineering, Nagoya Institute of Technology
Japan, 2004
Master of Engineering, System Engineering, Nagoya Institute of
Technology Japan, 2001
Bachelor Degree in Statistics, Bogor Agricultural University, Bogor,
Indonesia, 1995

Research Interest:
Supply Chain Management, Scheduling, Production System, Optimization,
Queuing Application, Linier Programming, Heuristics and Meta Heuristics
Algorithm, Transportation System, Project Management, Quality
Management and Six Sigma, Management Science.

Rapem SCM and Course Judgment

A. UTS: 30%
B. UAS: 30%
C. Quiz,Tugas: 30%
D. Kehadiran: 10%

Nilai Akhir: 0.30A+0.30B+0.30C+0.10D


What is a Supply Chain?
Decision Phases in a Supply Chain
Process View of a Supply Chain

The Importance of Supply Chain Flows

Examples of Supply Chains


What is a Supply Chain

Two or more parties linked by a flow of material, information, & money, often

global in scope
A party could be a company, or department within a company
Magister Manajemen Industri Universitas
Mercu Buana


What is a Supply Chain?

All stages involved, directly or indirectly, in fulfilling a

customer request
Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
Within each company, the supply chain includes all
functions involved in fulfilling a customer request (product
development, marketing, operations, distribution, finance,
customer service)


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)

Definition of Supply Chain

Ganeshan and Harrison
A network of facilities and distribution options that performs the
function of procurement of materials, transformation of these
materials into intermediate and finished products, and the distribution
of these finished products to customers
Lee and Billington
A supply chain is a network of facilities that procure raw materials,
transform them into intermediate goods and then final products, and
deliver the products to customers through a distribution system.

Supply Chain Network

Supply Chain Illustration


Copyright 2009 John Wiley

Ultimate Supply Chain

3rd Party Logistic Supplier







Financial Provider

Market Research

Source Prof. Dr. Ted Lees Class Presentation - 2010


What is supply chain management?

Supply chain management is the management of flows between and among

supply chain stages to maximize total supply chain profitability

Closely related to logistics management
Expanded definitions (Council of SCM Professionals):
Logistic Management (LM) is that part of the supply chain management that

plans, implements, and controls the efficient, effective forward and reverse
flow and storage of goods, services, and related information between the
point of origin and the point of consumption in order to meet customers'
SCM encompasses the planning and management of all activities involved in

sourcing and procurement, conversion, and all LM activities. Importantly, it

also includes coordination and collaboration with channel partners, which can
be suppliers, intermediaries, third-party service providers, and customers. In
essence, Supply Chain Management integrates supply and demand
management within and across companies.
Magister Manajemen Industri Universitas
Mercu Buana

Supply Chain Management

Magister Manajemen Industri Universitas

Mercu Buana


The Objective of a Supply Chain

Maximize overall value created
Supply chain value: difference between what the final

product is worth to the customer and the effort the supply

chain expends in filling the customers request
Value is correlated to supply chain profitability (difference
between revenue generated from the customer and the
overall cost across the supply chain)
Sources of supply chain revenue: the customer
Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain


The Objective of a Supply Chain 2

Example: Dell receives $2000 from a customer for a

computer (revenue)
Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
Difference between $2000 and the sum of all of these
costs is the supply chain profit
Supply chain profitability is total profit to be shared across
all stages of the supply chain
Supply chain success should be measured by total supply
chain profitability, not profits at an individual stage



1. Planning
Balances aggregate demand and supply to develop an action which best
meets the requirements for: Sourcing, Production, and Delivery
2. Sourcing
Choose the suppliers.
Develop a set of pricing, delivery and payment processes with suppliers
and create metrics for monitoring and improving the relationships.
Put together processes for managing the inventory of goods and
services you receive from suppliers.
3. Making
Schedule the activities necessary for production, testing, packaging and
preparation for delivery.
Is the most metric-intensive portion of the supply chain, it measures
Quality levels, Production output, and Worker productivity


4. Delivering
Coordinating the receipt of orders from customers
Developing network of warehouses
Picking carriers to get products to customers, and
Set up an invoicing system to receive payments
5. Return
Create a network for receiving defective and excess products back from
Supporting customers who have problems with delivered products.

Why is SCM Important 1 ?

Big dollars $$
U.S. inventory investment: 15% - 20% of GDP

U.S. grocery pipeline $75 - $100 billion

U.S. transportation & warehousing expense: 9% of 2004 GDP (about 16%

in 1981)
U.S. companies: 25% of corporate budgets on SCM

Inventory carrying, transportation, warehousing, order management,

supply chain financing, related IT expense

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Mercu Buana

Why is SCM important 2 ?

High leverage
Impact on profit

increase sales by $12 = $1 savings in the supply chain

Impact on sales

competition often focused on the service surrounding the product

(high quality, low cost assumed)

high availability
delivery speed & consistency
order status (e.g., Internet order tracking)
Impact on stock price

profit + assets ROA

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Mercu Buana

Why is SCM important 3 ?

Increasing challenges
Shrinking product life-cycles
Increasing product variety

Food product introductions:

1980: 2,000
1991: 18,000
1997: 25,000
2000: 31,000

1947: 85,000 published titles
2001: 1.5 million published titles
Magister Manajemen Industri Universitas
Mercu Buana


Why is SCM Important 4 ?

Best-in-class SCM expense about 12% of corporate budget (versus

overall average of 25%)

World Research Advisory Fax Newsletter

Idle time in supply chain rough & quick analysis...

inventory at 15% of GDP, & say 30% to 70% of GDP due to product
value of inventory between 20% (15/70) & 50% (15/30) of sales
flowtime between 10 (52/5) & 26 (52/2) weeks, & say average
production/transport time is 2 weeks
material idle 80% to 90% of the flowtime time

Magister Manajemen Industri Universitas

Mercu Buana


Decision Phase

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



Decision Phase

Supply Chain Planning

Starts with a forecast of demand in the coming year
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


Decision Phase

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
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)

Supply Chain Processes


Copyright 2009 John Wiley


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



Push/Pull View of Supply Chains

Manufacturing and
Replenishment cycles


Customer order cycle (customer-retailer)

Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)

Customer Order


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
Push: execution is initiated in anticipation of customer
orders (speculative)
Push/pull boundary separates push processes from pull


Examples of Supply Chains

Wall Mart

Amazon / Borders / Barnes and Noble

7 Eleven

What are some key issues in these supply chains?