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Supply Chain ManagementBasics.

Rajendran Ananda Krishnan

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Topics to be covered
Introduction to Supply Chain Management : Supply Chain objectives, Importance Decision Phases, Process view, Competitive and supply chain strategies, achieving strategic fit Supply chain drivers, obstacles, framework Facilities, inventory, transportation, information, sourcing, pricing

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Supply Chain- Meaning


The supply chain encompasses all activities involved in the transformation of goods from the raw material stage to the final stage, when the goods and services reach the end customer. Supply chain management involves planning, design and control of flow of material, information and finance along the supply chain to deliver superior value to the end customer in an effective and efficient manner.

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Definition
Mohanty and Deshmukh define supply chain management as a loop: It starts with the customer and ends with the customer. Through the loop flow all materials, finished goods, information and all transactions. It requires looking at the business as one continuous, seamless process. This process absorbs distinct functions such as forecasting, purchasing, manufacturing and distribution, sales and marketing into a continuous business interaction.
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Definition

Management of material, funds and information flows both in and between facilities such as vendors, manufacturing and assembly plants and distribution centers. Thomas and Griffin

The objective of managing the supply is to synchronize the requirements of the customer with the flow of materials from suppliers in order to affect a balance between what are often seen as conflicting goals of high customer service, low inventory management and low unit cost. - Stevens
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For a simple product like soap, the HUL supply chain involves ingredient suppliers, transporters, the companys manufacturing plants, carrying and forwarding agents, wholesalers, distributors and retailers. A supply chain is dynamic and involves the constant flow of information, product and funds between different stages. Of late, firms have realized that it is not the firms themselves but their supply chains that vie with each other in the marketplace.

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Order Delivery Lead Time


Order penetration point Customer order Order delivery lead time

Source

Make component s

Assembly

Delivery

Supply chain lead time


A typical firm sources material, manufactures components, assembles the product and delivers the finished product to the end customer. Total time required for the supply chain to carry out all activities from the beginning to the end is the supply chain lead time. Time required for the supply chain to deliver the order to the customer after they place it is the order delivery lead time.

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Order penetration point based supply chain typology


Customer order Source Customer order Source Make components Assembly Customer order Source Make components Assembly Deliver Deliver Make components Assembly Deliver Made to Stock (FMCG Products) Made to Order (Equipment Manufacturer) Configure to Order (Pizza Manufacturer, Laptop Manufacturer)

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Objectives of Supply chain

The objective of every supply chain should be 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 costs the supply chain incurs in filling the customers request.

Supply chain profitability is the difference between the revenue generated from the customer and the overall cost across the supply chain. The higher the supply chain profitability, the more successful is the supply chain.

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Supply chain success should be measured in terms of supply chain profitability and not in terms of the profits at an individual stage. For any supply chain, there is only one source of revenue: the customer. All flows of information, product or funds generate costs within the supply chain. Thus the appropriate management of these flows is a key to supply chain success. Effective supply chain management involves the management of supply chain assets and product, information and fund flows to maximize total supply
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The small size of Indian retail outlets limits the amount of inventory they can hold, thus requiring frequent replenishment. The only way for a manufacturer to keep transportation costs low is to bring full truckloads of product close to the market and then distribute locally using milk runs with smaller vehicles. The presence of an intermediary who can receive a full truckload shipment, break bulk, and then make smaller deliveries to the retailers is crucial if transportation costs are to be kept low. Distributors in India are also able to reduce transportation costs for outbound delivery to the retailer by aggregating products across multiple manufacturers during the delivery

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Supply Chain Stages


Supplier Manufacturer Distributor

Customer

Retailer

A typical supply chain may involve a variety of stages. These supply chain stages include: Customers, Retailers, Wholesalers/distributors, Manufacturers, Raw material suppliers. Each stage in a supply chain is connected through the flow of products, information, and funds. These flows often occur in both directions and may be managed by one of the stages or an intermediary. https://www.facebook.com/ialwaysthink
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Importance of Supply Chain Decisions

Helps in achieving success Companies being a leader at using supply chain design, planning and operation help in achieving success. Effective flow of goods and information Companies like Walmart who have invested heavily in transportation and information infrastructure help in achieving effective flow of goods and information. Reduces the level of Inventory with the manufacturer Dell centralizes manufacturing and inventories in a few locations and postpones final assembly until orders arrive. Thus, Dell is able to provide a large variety of PC configurations while keeping very low
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Improved match between supply and demand To improve the match between supply and demand, Dell makes an active effort to steer customers in real time, on the phone or via the internet, toward PC configurations that can be built given the components available. Reason for companys success For the Companies like Dell, Toyota etc., the supply chain design, and its management of product, information and cash flows play a key role in the companys success.

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Reasons for Growing Importance of Supply Chain


Firms that do not manage their supply chain will incur huge inventory costs and eventually end up losing a lot of customers because the right products are not available at the right place and time. Five major trends that have emerged to make supply chain management a critical success factor in most industries. Proliferation in product lines Companies have realized that more and more product variety is needed to satisfy the growing range of customer tastes and requirements. Companies like HUL, in their personal care products, manage, on an average, 1200 SKUs. Chains like Foodworld manage about 6000 SKUs. With increasing product variety, it becomes rather difficult to forecast accurately. Hence, retailers and other organizations involved in the business are forced to either maintain greater amount of inventories or lose customers.

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Shorter product life cycles With increased competition, product life cycles across all industries are becoming shorter. So a firm like Dell, which has, on an average, just 7 days of inventory, as compared to the industry average of 35 days, does not have to worry about product and component obsolescence. Its competitors with higher inventories end up writing off huge amounts of stocks every year as obsolete.

Higher level of outsourcing Firms increasingly focus on their core activities and outsource non-core activities to other competent players. This trend towards outsourcing is irreversible but a higher level of outsourcing makes supply chains more vulnerable, thereby forcing firms to develop different types of supply chain capabilities within the organization.
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Shift in power structure in the chain In every industry, the entities closer to customers are becoming more powerful. With increasing competition, a steadily rising number of products are chasing the same retail shelf space. Retail shelf space has not increased at the pace at which product variety has increased. So there have been case of retailers asking for slotting allowance when manufacturers introduce new products in the market place. Retailers have realized that they are powerful entities in the chain and hence expect the manufacturers to be more responsive to their demands and needs. Globalization of manufacturing Over the past decade, tariff levels have come down significantly. Many companies are restructuring their production facilities to be at par with global standards. Unlike in the past, when firms used to source components, produce goods and sell them locally, now firms are integrating their supply chain for the entire world market. This has made managing supply chains extremely complicated.
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Decision Phases in a Supply Chain

Successful supply chain management requires many decisions relating to the flow of information, products and funds. Each decision should be made to raise the supply chain surplus. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame during which the decision phase has an impact.
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Supply Chain Strategy or Design It decides what the chains configuration will be, how resources will be allocated and what processes each stage will perform. Strategic decisions made by companies include whether to outsource or perform a supply chain function in-house, the location and capacities of production and warehousing facilities, the products to be manufactured or stored at various locations, the modes of transportation to be made available along different shipping legs and the type of information system to be utilized. Ciscos decisions regarding its choice of supply sources for components, contract manufacturers for manufacturing and the location and capacity of its warehouses are all supply chain design or strategic decisions.

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2. Supply Chain Planning The goal of planning is to maximize the supply chain surplus that can be generated over the planning horizon given the constraints established during the strategic or design phase. Planning includes making decisions regarding which markets will be supplied from which locations, the subcontracting of manufacturing, the inventory policies to be followed and the timing and size of marketing and price promotions. Dells decisions regarding markets supplied by a production facility and target production quantities at each location are classified as planning decisions.

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Supply Chain Operation The goal of supply chain operations is to handle incoming customer orders in the best possible manner. During this phase, firms allocate inventory or production to individual orders, set a date that an order is to be filled, generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules of trucks and place replenishment orders.

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Process View
A supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. There are two different ways to view the processes performed in a supply chain. Cycle View The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. Push/Pull View Pull processes are initiated in response to a customer order, whereas push processes are initiated and performed in anticipation of customer orders.
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All supply chain processes can be broken down into four process cycles: Customer order cycle Replenishment cycle Manufacturing cycle Procurement cycle Each cycle occurs at the interface between two successive stages of the supply chain.

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Supply Chain Process Cycles

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Sub processes in Each Supply Chain Process Cycle


Supplier stage markets product Buyer returns reverse flows to supplier or third party

Buyer stage places order

Buyer stage receives supply

Supplier stage receives order

Supplier stage supplies order

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Each cycle starts with the supplier marketing the product to customers. A buyer then places an order that is received by the supplier. The supplier supplies the order, which is received by the buyer. The buyer may return some of the product or other recycled material to the supplier or a third party.

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Within each cycle, the goal of the buyer is to ensure product availability and to achieve economies of scale in ordering. The supplier attempts to forecast customer orders and reduce the cost of receiving the order. The supplier then works to fill the order on time and improve efficiency and accuracy of the order fulfillment process. The buyer then works to reduce the cost of the receiving process.

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Few differences between cycles: In the customer order cycle, demand is external to the supply chain and thus uncertain. In all other cycles, order placement is uncertain but can be projected based on policies followed by the particular supply chain stage. As we move from the customer to the supplier, the number of individual orders declines and the size of each order increases.
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Push/Pull View of Supply Chain Processes


With pull processes, execution is initiated in response to a customer order. With pull processes, execution is initiated in anticipation of customer orders. At the time of execution of a pull process, customer demand is known with certainty, whereas at the time of execution of a push process, demand is not known and must be forecast.

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Pull processes may also be referred to as reactive processes because they react to customer demand. Push processes may also be referred to as speculative processes because they respond to speculated rather than Push/Pull actual demand. Boundary
Push Processes Pull Processes

Customer Order Arrives

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Examples of Push and Pull Processes


Make to stock Companies like HP Executes all processes in the customer order cycle after the customer arrives. All processes that are part of the customer order cycle are thus pull processes. All processes in the replenishment cycle, manufacturing and procurement cycle are performed in anticipation of demand and are thus push processes.

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Build to order computer manufacturer like Dell All processes in the customer order, replenishment and manufacturing cycle at Dell are classified as pull processes because they are initiated by customer arrival. Dell, however, does not place component orders in response to a customer order. Inventory is replenished in anticipation of customer demand. All processes in the procurement cycle for Dell are thus classified as push processes, because they are in response to a forecast.

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Competitive and Supply Chain Strategies

A companys competitive strategy defines, relative to its competitors, the set of customer needs that it seeks to satisfy through its products and services. For eg. Wal Mart aims to provide high availability of a variety of products of reasonable quality at low prices. Most products sold at Wal Mart are commonplace and can be purchased elsewhere. What Wal Mart provides is a low price and product availability.
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Contd.
Dell has stressed customization and variety at a reasonable cost, with customers having to wait approximately one week to get their product. In contrast, a customer can walk into a computer retailer, be helped by a salesperson, and leave the same day with HP computer. The amount of variety and customization available at the retailer, however, is limited. In each case, the competitive strategy is defined based on how the customer prioritizes product cost, delivery time, variety and quality. A Dell customer, purchasing online, places great emphasis on product variety and customization. A customer purchasing HP laptop is most concerned with price, fast response time and help in product selection.
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A firms competitive strategy will be defined based on its customers priorities. Competitive strategy targets one or more customer segments and aims to provide products and services that satisfy these customers needs.
To see the relationship between competitive and supply chain strategies, we start with the value chain for a typical organization.
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The Value Chain in a Company


Finance, Accounting, Information Technology, Human Resources

New Product Marketing Development and Sales Operation s

Distribution

Service

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Value Chain
It begins with new product development, which creates specifications for the product. Marketing and sales generate demand by publicizing the customer priorities that the products and services will satisfy. Marketing also brings customer input back to new product development. Using new product specifications, operations transforms inputs to outputs to create the product. Distribution either takes the product to the customer or brings the customer to the product. Service responds to customer requests during or after the sale.

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A product development strategy specifies the portfolio of new products that a company will try to develop. It also dictates whether the development effort will be made internally or outsourced. A marketing and sales strategy specifies how the market will be segmented and how the product will be positioned, priced and promoted. A supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the company, manufacture of the product or operation to provide the service, and distribution of the product to the customer, along with any follow-up service and a specification of whether these processes will be performed in-house or outsourced.

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Achieving Strategic Fit


Strategic fit means that both the competitive and supply chain strategies have aligned goals. It refers to consistency between the customer priorities that the competitive strategy hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to build. A company may fail either because of a lack of strategic fit or because its overall supply chain design, processes and resources do not provide the capabilities to support the desired strategic fit. https://www.facebook.com/ialwaysthink
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All processes and functions that are part of a companys value chain contribute to its success or failure. A companys success or failure is thus closely linked to the following keys: The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal. The different functions in a company must appropriately structure their processes and resources to be able to execute these strategies successfully. The design of the overall supply chain and the role of each stage must be aligned to support the supply chain strategy.
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How is Strategic Fit Achieved?

A competitive strategy will specify, either explicitly or implicitly, one or more customer segments that a company hopes to satisfy. To achieve strategic fit, a company must ensure that its supply chain capabilities support its ability to satisfy the targeted customer segments.

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Three basic steps to achieve strategic fit: 1. Understanding the customer and supply chain Uncertainty First, a company must understand the customer needs for each targeted segment and the uncertainty the supply chain faces in satisfying these needs. These needs help the company define the desired cost and service requirements. The supply chain uncertainty helps the company identify the extent of the unpredictability of demand, disruption and delay that the supply
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Demand uncertainty reflects the uncertainty of customer demand for a product. An example of product with low demand uncertainty is common salt. Salt has a very low margin, accurate demand forecasts, low stockout rates, and virtually no markdowns. It is a product with highly certain demand. On the other end of the spectrum, a new palmtop computer has high demand uncertainty. It will likely have a high margin, very inaccurate demand forecasts, high stockout rates and large markdowns.
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Implied Demand uncertainty is often correlated with other characteristics of demand, as follows: Products with uncertain demand are often less mature and have less direct competition. As a result margins, tend to be high. Forecasting is more accurate when demand has less uncertainty. Increased implied demand uncertainty leads to increased difficulty in matching supply with demand. Markdowns are high for products with high implied demand uncertainty because oversupply often results.
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There is uncertainty resulting from the capability of the supply chain. For eg, when a new component is introduced in the PC industry, the quality yields of the production process tend to be low and breakdowns are frequent. As a result, companies have difficulty delivering according to a well-defined schedule, resulting in high supply uncertainty for PC manufacturers. As the production technology matures and yields improve, companies are able to follow a fixed delivery schedule, resulting in low supply uncertainty.
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The Uncertainty(Demand and Supply) Spectrum


Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat uncertain supply and demand

Predictable supply and demand

Highly uncertain supply and demand

Salt at a supermarke t

An existing automobile model

A new communication device

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2. Understanding the Supply Chain Capabilities Creating strategic fit is all about creating a supply chain strategy that best meets the demand a company has targeted given the uncertainty it faces. Supply chain responsiveness includes a supply chains ability to do the following: Respond to wide ranges of quantities demanded. Meet short lead times Handle a large variety of products Build highly innovative products Meet a high service level Handle supply uncertainty Responsiveness, however comes at a cost. For instance, to respond to a wider range of quantities demanded, capacity must be increased, which increases cost. Supply chain efficiency is the inverse of the cost of making and delivering a product to the customer. For every strategic choice to increase responsiveness, there are additional costs that lower efficiency.
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Cost-Responsiveness Efficient Frontier Responsivenes


s High

Low Hig h Cost Low

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The Responsiveness Spectrum


Highly responsiv e

Highly efficient

Somewha t efficien t Apparel: A traditional make-to-stock manufacturer with production lead time of several weeks

Somewhat responsive

Integrated steel mills : Production scheduled weeks in advance with little variety

Most automotive Reliance production: Delivering aFresh: large variety of products Changing in a couple of weeks merchandi se mix by location and time of https://www.facebook.com/ialwaysthink day
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Achieving Strategic Fit The final step is To ensure that the degree of supply chain responsiveness is consistent with the implied uncertainty. The goal is to target high responsiveness for a supply chain facing high implied uncertainty and efficiency for a supply chain facing low implied uncertainty. For eg. The competitive strategy of Dell targets customers who value having customized PCs delivered within days. Given the vast variety of PCs, the high level of innovation and rapid delivery, demand from Dell customers is having high demand uncertainty. Some supply uncertainty also exists, especially for newly introduced components. Building a responsive supply chain, will allow Dell to meet its customers needs.

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On the other hand, salt is a product with relatively stable customer demand, giving it a low implied demand uncertainty. Supply is also quite predictable. It will be in a much better position if it designs a more efficient supply chain with a focus on cost reduction.

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Drivers of Supply chain Performance


To understand how a company can improve supply chain performance in terms of responsiveness and efficiency, the logistical and cross functional drivers of supply chain performance must be examined. Facilities Actual physical locations in the supply chain network where product is stored, assembled or fabricated. The two major types of facilities are production sites and storage sites. Decisions regarding the role, location, capacity and flexibility of facilities have a significant impact on supply chains performance. For instance, an auto parts distributor striving for responsiveness could have many warehousing facilities located close to customers even though this practice reduces efficiency. Inventory It encompasses all raw materials, work in process and finished goods within a supply chain. Changing inventory policies can dramatically alter the supply chains efficiency and responsiveness. A clothing retailer can make itself more responsive by stocking large amounts of inventory, however, it increases the retailers cost, thereby making it less efficient.
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Transportation It entails moving inventory from point to point in the supply chain. Transportation can take the form of many combinations of modes and routes, each with its own performance and characteristics. Companies can use faster modes of transportation which increases responsiveness but also less efficient. Information It consists of data and analysis concerning facilities, inventory, costs, prices and customers throughout the supply chain. Information is potentially the biggest driver of performance in the supply chain because it directly affects each of the other drivers. Information presents management with the opportunity to make supply chains more
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Sourcing It is the choice of who will perform a particular supply chain activity such as production, storage, transportation or the management of information. At the strategic level, these decisions determine what functions a firm performs and what functions the firm outsources. Outsourcing the activities to an economic third party will make the supply chain efficient but at the same time its responsiveness suffer because of the long distance. Pricing It determines how much a firm will charge for goods and services that it makes available in the supply chain. Pricing affects the behavior of the buyer of the good or service, thus affecting supply chain performance. Customers who value efficiency will order early and who value responsiveness wait and order just before they need a product https://www.facebook.com/ialwaysthink transported. prettythings

Framework for Structuring Drivers


Competitive Strategy Supply Chain Strategy

Efficiency

Supply SupplyChain Chain Structure Structure


Logistical Drivers

Responsiveness

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Cross-Functional Drivers prettythings

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Most companies begin with a competitive strategy and then decide what their supply chain strategy ought to be. The supply chain strategy determines how the supply chain should perform with respect to efficiency and responsiveness. The supply chain must then use the three logistical and three cross-functional drivers to reach the performance level the supply chain strategy dictates and maximize the supply chain profits.
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Framework Walmart as an example

Wal Marts competitive strategy is to be a reliable, lowcost retailer for a wide variety of mass-consumption goods. This strategy dictates that the ideal supply chain will emphasize efficiency but also maintains an adequate level of responsiveness. Pioneered cross-docking, a system in which inventory is not stocked in a warehouse but rather is shipped to stores from the manufacturer. Runs its own fleet of trucks, to keep responsiveness high. Benefits in terms of reduced inventory and improved product availability justify this cost. Makes use of Hub and spoke model, uses centrally located DCs within its network of stores to decrease the number of facilities and increase efficiency at each DC. Practices EDLP for its products. Invested significantly more than its competitors in information technology. Identifies efficient sources for each product it sells and feeds them large orders.
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Obstacles to achieving Strategic Fit

Increasing variety of products Increase in product variety and more customised products complicate the supply chain by making forecasting much more difficult. Increased variety tends to raise uncertainty and increased uncertainty hurts both efficiency and responsiveness within the supply chain. Decreasing Product Life Cycles Makes the job of achieving strategic fit more difficult, as the supply chain must constantly adapt to manufacture and deliver new products, in addition to coping with these products demand uncertainty. Increasingly Demanding Customers Customers are constantly demanding improvements in delivery lead times, cost, product quality and product performance. If they do not receive these improvements, they move on to new suppliers. Supply chain must provide more to maintain its business.
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Fragmentation of Supply Chain Ownership The new ownership structure, due to outsourcing many of the noncore functions, has made managing the supply chain more difficult. With the chain broken into many owners, each with its own policies and interests, the chain is more difficult to coordinate. Globalization Adds stress to the chain, because facilities within the chain are farther apart, making coordination much more difficult. Difficulty Executing new Strategies Toyotas Production System, which is a supply chain strategy, has been widely known and understood and many other competitors have figured it out. The difficulty other firms have had in executing that strategy.

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