Supply Chain Management Introduction

Outline
What

is supply chain management? A supply chain strategy framework Components of a SCM Major obstacles and common problems Seven Eleven Japan

Traditional View: Supply Chains in the Economy (1990, 1996)

Freight Transportation

$352, $455 B

Transportation manager in charge Transportation software

Inventory Expense
Inventory manager in charge Inventory software

$221, $311 B
Transportation and inventory managers

Administrative Expense Logistics related activity

$27, $31 B

11%, 10.5% of GNP

$898 B spent domestically for SC activities in 1998. $1,160 B of inventory in the US economy in the early 2000s.

Traditional View: Cost breakdown of a manufactured good

Profit

10% Chain Cost 20%

Profit Supply Chain Cost Marketing Cost

Supply

Marketing

Cost
Cost

25%
45%
Manufacturing Cost

Manufacturing

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

What can Supply Chain Management do?

Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies
A typical box of cereal spends 104 days from factory to sale A typical car spends 15 days from factory to dealership Faster turnaround of the goods is better?

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.

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 (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand

P&G

When

the 1 gig processor was introduced by AMD (Advanced Micro Devices), the price of the 800 meg processor dropped by 30%

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.

Top 25 Supply Chains

AMR research http://www.amrresearch.com publishes reports on supply chains and other issues. The Top 25 supply chains report comes out in Novembers. The table on the right-hand side is from The Second Annual Supply Chain Top 25 prepared by Kevin Riley and Released in November 2005.

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!

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

Upstream

Downstream

- aims to Match Supply and Demand, profitably for products and services
SUPPLY SIDE DEMAND SIDE

- achieves

The right

Product

+ + + + +
The right The right The right The right

The right

Price

Store

Quantity

Customer

Time

Higher

Profits

Detergent supply chain:

P&G or other manufacturer Third party DC Albertsons Supermarket Customer wants detergent

Plastic cup Producer

Tenneco Packaging

Chemical manufacturer (e.g. Oil Company)

Chemical manufacturer (e.g. Oil Company)

Paper Manufacturer

Timber Industry

Flows in a Supply Chain

Material Information

Supplier
Funds

Customer

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

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

Supply Side

OEM

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

Importance of Supply Chain Management

In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains).
Source: State of Logistics Report

Frequent Supply shortages Inefficient logistics

Low order fill rates

Tier 1 Supplier

Manufacturer

Distributor

Retailer

Customer

High stockouts

Glitch-Wrong Material, Machine is Down effect snowballs

High inventories through the chain

Ineffective promotions

High landed costs to the shelf

Eliminating inefficiencies in supply chains can save millions of $.

A Generic Supply Chain

Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks

Supply

Inventory Purchase Transportation Inventory

Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Any cycle 0. Customer arrival 1. Customer triggers an order 2. Supplier fulfils the order 3. Customer receives the order

Manufacturer
Procurement Cycle

Supplier

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 (e.g.: exempli gratia)

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

Push/Pull View of Supply Chains

Procurement, Manufacturing and Replenishment cycles
Customer Order Cycle

PUSH PROCESSES

PULL PROCESSES

Customer Order Arrives Push-Pull boundary

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, in the course notes 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

SCM Strategy

Mission-Strategy-Tactics-Decisions
Mission,

Mission statement

The reason for existence of an organization

Strategy

A plan for achieving organizational goals The actions taken to accomplish strategies

Tactics

Operational

decisions

Day to day decisions to support tactics

Life Strategy for Ted

Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably

Mission: Goal: Strategy: Tactics: Operations:

Live a good life

Successful career, good income Obtain a masters degree Select a college and a concentration

Register, buy books, take courses, study, graduate, get a job

Linking SC and Business Strategy

Competitive (Business) Strategy
Product Development Strategy Marketing Strategy -Portfolio of products -Frequent discounts -Timing of product introductions
-Coupons

Supply Chain Strategy

New Product Development

Marketing and Sales

Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Strategies: Product Development

It relates to Technologies for future operations (via patents) and Set of products/services Be the technology leader
IBM workstations

Offer many products

Dell computers

Offer products for locals

Tatas Nano at $2500=100000 rupees
Production at Singur, West Bengal, India; l x w x h=3.1 x 1.5 x 1.6 meters; Top speed: 105km/hr; Engine volume 623 cc; Mileage 50 miles/gallon; Annual sales target 200,000.

Strategies

Marketing and sales strategy relates to positioning, pricing and promotion of products/services
e.g. Never offer more than 40% discount e.g. EDLP = every day low price
At Wal-Mart

e.g. Demand smoothing via coupons

BestBuy

Supply chain management strategy relates to procurement, transportation, storage and delivery
e.g. Never use more than 1 supplier for every input e.g. Never expedite orders just because they are late e.g. Always use domestic suppliers within the sales season not in advance.

Fitting the SC to the customer or vice versa?

Understand

the customer Wishes the Capabilities of your SC

Understand

Match

the Wishes with the Capabilities How to meet extensive Wishes with limited Capabilities?

Challenge:

Achieving Strategic Fit: Consistent SCM and Competitive strategies

Fit

SC to the customer the Customer Implied (Demand) Uncertainty for SC Implied trouble for SC

Understanding

Range of demand, pizza hut stable Production lot size, seasonal products Response time, organ transplantation Service level, product availability Product variety Innovation Accommodating poor quality

Contributors to Implied Demand Uncertainty

Commodities Detergent Long lead time steel
Price Low

Customized products High Fashion Clothing Emergency steel,

for maintenance/replacement Responsiveness High

Customer Need Implied Demand Uncertainty

Short lead times, product variety, distribution channel variety, high rate of innovation and high customer service levels all increase the Implied Demand Uncertainty

Understanding the Supply Chain: Cost-Responsiveness Tradeoff

Responsiveness (in time, high service level and product variety)
High

Efficiency frontier

Fix responsiveness

Inefficient

Impossible

Inefficiency Region
Low

High

Low

Cost in $

Why decreasing slope (concave) for the efficiency frontier?

Achieving Strategic Fit: Wishes vs. Capabilities

Responsive (high cost) supply chain

Gourmet dinner <High margin>

Responsivenes spectrum

Efficient (low cost) supply chain

Lunch buffet <Low margin>

Certain demand

Implied uncertainty spectrum

Uncertain demand

Loosing the strategic fit: Webvan

Webvan started a merger with HomeGrocer in Sept 2000 and completed in May 2001. Declared bankruptcy in July 2001. Why?
Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day. Short to midterm cash mismanagement. Venture capital of $1.2 B run out. Merger costs: duplicated work force, integration of technology, realignment of facilities.

Peapod has the same business model but more focused in terms of service and locations. It actually survives with its parent company Royal Aholds (Dutch Retailer) cash.
Delivers now at a fee of $6.95 within a day.

Top 10 Retailers Reported in 2008 First 4

Source www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf

Top 10 Retailers Reported in 2008 First 5-10

Big retailers Strategy

Wal-Mart:

Efficiency Target: More quality and service Carrefour: International, ambiance

K-Mart:

Confused.

Squeezed between Target and Wal-Mart Reliance on coupon sales Do coupons stabilize or destabilize a Supply chain?
K-Mart

and Sears merged in November 2004. Now called Sears Holdings.

K-Mart gets cash Sears gets presence outside malls

Other Factors

Multiple products in a SC. Multiple customers for a given product

Separate supply chains or Tailored supply chains
e.g. Barnes and Noble: Retailing and/or e-tailing

Product and/or customer classes

e.g. UTD library loans books for 6 months (2 weeks) to faculty (students) Customer segmentation by pricing

Competitors: more, faster and global

UTD online programs compete globally

Product life cycle (shortening)

SCM strategy moves toward efficiency and low implied uncertainty as products age
e.g. Air travel is becoming more efficient

e.g. Southwest airlines lead the drive for efficiency e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005.

e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC more efficient in June 2004.

Replacement sales
Selling to replace broken units.

e.g. AC replacement is about 50% of the market.

Macroeconomic factors for visibility

Forecasting Home Depot sales from S&P 500 price index.

Positive correlation is detected.

Achieving Strategic Fit over a Lifecycle

Responsive (high cost) supply chain

Efficient (low cost) supply chain

Certain demand

Uncertain demand

Integration
Integration Building

is the central theme in SCM

synergies by integrating business functions,

departments and companies

Strategic Scope
Suppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer

Supply Chain Drivers and Obstacles

Drivers of Supply Chain Performance

How to achieve Efficiency Responsiveness

Supply chain structure

Inventory

Transportation

Facilities

Logistical Drivers

Information

Sourcing

Pricing

CrossFunctional Drivers

1. Inventory

Convenience: Cycle inventory

No customer buys eggs one by one

Unstable demand: Seasonal inventory

Bathing suits Xmas toys and computer sales

Randomness: Safety inventory

20% more syllabi than the class size were available in the first class Compaqs loss in 95

Pipeline inventory
Work in process or transit

Littles law
Long run averages = Expected values I=R.T I=Pipeline inventory; R=output per time=throughput; T=delay time=flow time

10/minute Spend 1 minute

Flow time? Thruput? Pipeline (work in process) Inventory?

2. Transportation
Air Truck Rail Ship Pipeline Electronic

3. Facilities
Production

Flexible vs. Dedicated Flexibility costs

Production: Remember BMW: a sports car disguised as a sedan Service: Can your instructor teach music as well as SCM? Sports: A playmaker who shoots well is rare.

Inventory-like

operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping

Job Lot Storage: Need more space. Reticle storage in fabs. Crossdocking: Wal-Mart

4. Information
Role

in the supply chain

The connection between the various stages in the supply chain Crucial to daily operation of each stage in a supply chain
E.g., production scheduling, inventory levels

Role

in the competitive strategy

Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Information technology
Andersen Windows

Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory.

Characteristics of the Good Information

Information Global Scope Coordinated Decisions Supply Chain Success

Strategy

Analytical Models

$$$

Information Accurate? Accessible? Up-to-date? In the Correct form?

If not, database restricted ability. How difficult is it to import data into SAP?

Quality of Information
Information IT

drives the decisions:

Good information means good decisions

helps: MRP, ERP, SAP, EDI Relevant information? How to use information?

Information Technology in a Supply Chain: Legacy Systems

Strategic

Planning

Operational

Supplier

Manufacturer

Distributor

Retailer

Customer

Information Technology in a Supply Chain: ERP Systems

Strategic

Planning

Potential

ERP

Potential
ERP

Operational

ERP

Supplier

Manufacturer

Distributor

Retailer

Customer

Information Technology in a Supply Chain: Analytical Applications

Strategic
SCM

Planning
Supplier Apps

APS

Transport & Inventory Planning Transport execution & WMS

Dem Plan

MES

CRM/SFA

Operational

Supplier

Manufacturer

Distributor

Retailer

Customer

ERP Systems
Wider

focus Push (MRP) versus Pull (demand information transmitted quickly throughout the supply chain) Real-time information Coordination and Information sharing
Transactional

IT Expensive and difficult to implement

About 25% of ERP installations are cancelled within a year About 70% of ERP installations go over the budget

IT Push
500 400 300 200 100 0 1965 1973 1981 1989 1997 IT investment($B)

Supply Chain Software Push See Top 100 under /articles.html

Source Kanakamedala, Ramsdell, Srivatsan (2003). McKinsey Quarterly, No 1.

5. Sourcing

Role in the supply chain

Set of processes required to purchase goods and services in a supply chain Supplier selection, single vs. multiple suppliers, contract negotiation

Role in the competitive strategy

Sourcing is crucial. It affects efficiency and responsiveness in a supply chain In-house vs. outsource decisions- improving efficiency and responsiveness
TI: More than half of the revenue spent for sourcing. Cisco sources: Low-end products (e.g. home routers) from China.

Components of sourcing decisions

In-house versus outsource decisions Supplier evaluation and selection Procurement process:
Every department of a firm buy from suppliers independently, or all together.

EDS to reduce the number of officers with purchasing authorization.

6. Pricing

Role in the supply chain

Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply
Price elasticity: Do you know yours?

Role in the competitive strategy

Use pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times
Amazon: Faster delivery is more expensive

Components of pricing decisions

Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing, depending on the product and services
Packaging, delivery location, time, customer pick up Bundling products; products and services

Considerations for Supply Chain Drivers

Driver Inventory Transportation Facilities Information Sourcing Pricing Efficiency Cost of holding Consolidation Consolidation / Dedicated Low cost/slow/no duplication Low cost sources Constant price Responsiveness Availability Speed Proximity / Flexibility High cost/ streamlined/reliable Responsive sources Low-high price

Major Obstacles to Achieving Fit

SC

is big:

Variety of products/services Spoiled customer Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives Globalization

Local optimization and lack of global fit

Major Obstacles to Achieving Fit

Dealing

with Multiple Owners / Local Optimization

Information Coordination
Information sharing / Shyness / Legal and ethical issues

Contractual Coordination
Mechanisms to align local objectives with global ones

Coordination with (real) options

Rare in the practice

Without coordination, misleading reliance on metrics:

Average safety inventory, Average incoming shipment size, Average purchase price of raw materials, Revenue

Major obstacles to achieving fit

Instability

and Randomness:

Increasing product variety Shrinking product life cycles Customer fragmentation: Push for customization, segmentation Fragmentation of Supply Chain ownership: Globalization

Increasing implied uncertainty

Common problems
Lack

of relevant SCM metrics: How to measure responsiveness?

How to measure efficiency, costs, worker performance, etc?

Poor inventory status information Theft: Major problem for furniture retailers. Transaction errors: Retailers with inaccurate inventory records for 65% of SKUs Information delays, dated information, incompatible info. systems Misplaced inventory: 16% of items cannot be found at a major retailer Spoilage: active ingredients in the products are losing their properties Product quality and yield Lack of visibility in SCs

Do you know the inventory your distribution centers hold? Do you know the inventory your fellow retailer holds?

Common problems

Poor delivery status information

Not knowing the order status

Poor IT design
Unreliable, duplicate data Security problems: too much or too little

Ignoring uncertainties
The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty.
Nitin Nohra, HBR February 2006 issue, p.40.

Internal customer discrimination

Giving lower priority to internal customers than external customers

Poor integration Elusive inventory costs

Accounting systems do not capture opportunity costs

SC-insensitive product design

Summary
Supply

Chain Introduction Competitiveness / Business strategy / SCM strategy Components

Inventory, Transportation, Facilities, Information, Sourcing, Pricing

Challenges

Seven Eleven Japan (SEJ)

A Case Study

Factual Information on Seven Eleven Japan (SEJ)

Largest convenience store in Japan with market value of $95 B. The third largest retail company in the world after Wal-Mart and Home Depot. Established in 1974. In 2000, total sales $18,000 M, profit $620 M. Average inventory turnover time 7-8.5 days. Stock value increased by 3000 times from 1974 to 2000. In 1985, there were 2000 stores in Japan, increasing by 400-500 per year. Return on equity 14% over 2000-2004. A SEJ store is about the half the size of a US 7-eleven store, that is about 110 m2. Sales:
Products
32.9% Processed food: drinks, noodles, bread and snacks 31.6% Fast food: rice ball, box lunch and hamburgers 12.0% Fresh food: diary products 25.3% Non-food: magazines, ladies stockings and batteries. Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying

More on SEJ
More factual info: Average sales about twice of an average US store SKUs offered in store: Over 3,000 (change by time of day, day of week, season) Virtually no storage space No food cooking at the stores Japanese Images of Seven Eleven:

Convenient Cheerful and lively stores Many ready made dinner items I buy Famous for its great boxed lunch and dinner - On weekends, when I was single, I went to buy lunch and dinner

SC strategy:
Micro matching of supply and demand (by location, time of day, day of week, season)

Seven Eleven - Number of Stores

6000 5000 4000 3000 2000 1000 0 85 86 87 88 89 90 91 92 93 94 Number of Stores

1999: 8,027 2004: 10,356

Seven Eleven - Net Sales (B Yen) Sales 1,963 B Yen in 2000

1400 1200 1000 800 600 400 200 0 85 86 87 88 89 90 91 92 93 94 Net Sales

Seven Eleven - Pre tax Profit (B Yen)

100 90 80 70 60 50 40 30 20 10 0 85 86 87 88 89 90 91 92 93 94

Profit

Seven Eleven - Inventory turnover (days)

14 12 10 8 6 4 2 0 85 86 87 88 89 90 91 92 93 94 Inventory

Information Strategy
Quick access to up to date information (as opposed to data): In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter, DCs and suppliers

Customer checkout process

Clerk records the customers gender, (estimated) age and purchased items. These Point of Sales (POS) data are transmitted to database at the headquarters. Store hardware: Store computer, POS registers linked to store computer, Graphic Order Terminals, Scanner terminals for receiving

Daily use of the data

Headquarters aggregate the data by region, products and time and pass to suppliers and stores by next morning. Store managers deduce trend information.

Weekly use of the data

Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100 corporate managers. Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo on Monday night. Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy. Tuesday nights, field counselors return back to their regions.

Information Analysis of POS Data

Analysis of
Sales for product categories over time SKU (stock keeping unit) Waste or disposal 10 day (or week) sales trend by SKU

Sales trends for new product In the early 1990s, half-prepared fresh noodle sales were going up, new fresh noodle products were quickly developed Sales trend by time and day
Different sales patterns for different sizes of milk at different times of the day results in rearrangement of the milks in the fridge. Extreme store micromanagement.
Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?).

List of slow moving items About half of 3000 SKUs are replaced by new ones every year

Facilities Strategy

Limited storage space at stores which have only 125-150 m2 space Frequent and small deliveries to stores Deliveries arrive from over 200 plants. Products are grouped by the cooling needs
Combined delivery system: frozen foods, chilled foods, room temperature and hot foods. Such product groups are cross-docked at distribution centers (DC). Food DCs store no

inventory.
A single truck brings a group of products and visits several stores within a geographical region Aggregation: No supplier (not even coke!) delivers direct

The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000. Still, at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners. Have many outlets, at convenient locations, close to where customers can walk Focus on some territories, not all: When they locate in a place they blanket (a.k.a. clustering) the area with stores; stores open in clusters with corresponding DCs.
844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. No stores in Kobe. Success rate of franchise application <= 1/100

The Present and the Future

Is food preparation a good idea at 7-eleven locations?

e.g. Compare microwave heating vs. salad preparation.

Why SEJ does not allow direct delivery from suppliers to retailers? Point out which of the following strategies can also be used in US (or Taiwan)
Information strategy Facilities strategy

Discuss the differences between the Japanese and US (or Taiwanese) consumers with regard to
Frequency and amount of grocery purchase Use of credit cards vs. cash for purchase 7-eleven inventory turnover rate is 50 in Japan and 19 in the USA.

7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan. Does this make sense from a supply chain perspective? Cost vs. Responsiveness Business strategy What is the risk of micro-matching strategy? No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA?

Deloitte 2008 Global Retailers Survey

Excerpts from
www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf Downloaded on Jan 30, 2008.