Supply Chain
Information Product
Customer
Funds
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)
Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability
Decisions about the structure of the supply chain and what processes each stage will perform (long-term and expensive to reverse) Strategic supply chain decisions
Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems
Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase 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
Time horizon is weekly or daily Decisions regarding individual customer orders Goal is to implement the operating policies as effectively as possible Much less uncertainty (short time horizon)
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)
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
PUSH PROCESSES
PULL PROCESSES
Service
Customer Need
Price Responsiveness
Low
High
Low
Cost
High Low
Responsiveness Spectrum
Highly efficient
Somewhat efficient
Somewhat responsive
Highly responsive
Hanes apparel
Dell
Responsiveness spectrum
Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand
Responsive
Quick response Modularity to allow postponement Higher margins Capacity flexibility Buffer inventory Aggressively reduce even if costs are significant Speed, flexibility, quality Greater reliance on responsive (fast) modes
Some Definitions
Supply Chain Management encompasses every effort involved in producing and delivering a final product or service, from the suppliers supplier to the customers customer. Supply Chain Management includes 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, U.S.A.
Key Observations
Integrated activity:
* Among functions such as logistics, manufacturing, distribution, design/engineering, marketing, finance,etc. * Multiple organizations,i.e., suppliers, customers& 3 PL providers * Coordination of conflicting goals, metrics, etc.
In the end, all business comes down to Supply Chain vs. Supply Chain
Robert Rodin, CEO, Marshall Industries
Japanese Manufacturing Industry owes its Competitive Advantage and Strength to its Sub-Contracting Structure. Ministry of International Trade and Industry, Japan (1992)
Manufacturing now competes less on product and quality which are often comparable and more on inventory turns and speed to market. John Kasarda, Forbes, 1999
Philosophy of SCM
The cost, quality and delivery requirements of the customer are objectives shared by every company in the chain.
Inventory is the last resort for resolving supply and demand imbalances.
Efficiency leads to lower costs Lower cost implies Lower Price => Greater demand => Better market growth => Higher profits => Product/ Process development => Better market share 1980s and 1990s: Era of achieving excellence at the firm level (JIT, TQM, TPM, BPR, ERP, etc) 2000s: Era of achieving excellence at the value chain level (SCM, CRM, E-Commerce, etc.)
Evolution of SCM
Stage 1: Vendor Purchase Production Distribution Retailer Stage 2: Materials Management Logistics Management Stage 3: Supply Chain Management
Globalization It Covers The World * Requires greater coordination of production and distribution
* Increased risk of supply chain interruption * Increases need for robust and flexible supply chains
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
Supply chain strategy or design Supply chain planning Supply chain operation
Three Components
1. Insourcing/OutSourcing (The Make/Buy or Vertical Integration Decision) 2. Partner Selection (Choice of suppliers and partners for the chain) 3. The Contractual Relationship (Arm's length, joint venture, long-term contract, strategic alliance, equity participation, etc.)
Customer Web page Assembly plant All of Dells suppliers and their suppliers Dell builds to order: customer order initiates manufacturing at Dell Dell does not have a retailer, wholesaler, or distributor in its supply chain
Geographical Integration
*From local to world-wide logistics
Functional Integration
* From Function-dominated logistics to Flow-dominated logistics
Inter-Firm Integration
* From a Sector-based Logistics to Inter-sector Logistics
Different facilities in the supply chain may have different, conflicting objectives
* For instance, the suppliers are in direct conflict with the manufacturers desire for flexibility.
In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product).
Transportation 58%
Inventory 38%
Management 4%
Third party logistics services grew in 1998 by 15% to nearly $40 billion
It is estimated that the grocery industry in USA 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.
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 Americas leading capital goods producers, was forced to announce write-downs of $2.6 billion in October 1997. The reason? Raw material shortages, internal and supplier parts shortages. (Wall Street Journal, Oct. 23, 1997)
In 25 years, NDDB has enabled India to become the largest producer of milk by implementing a logistics and supply chain system that has eliminated several intermediaries, thereby leading to a much higher remunerative price (yield) for producers and lower price for consumers. As described in the FORBES magazine, the Dabbawalas of Mumbai has achieved an extremely high level of reliability and precision (SIX SIGMA level in QA parlance) in delivering to their customers the products earmarked for them.
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)
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
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.
The supply chain is a complex network of facilities and organizations with different, conflicting objectives Matching supply and demand is a major challenge System variations over time are also an important consideration Many supply chain problems are new and there is no clear understanding of all the issues involved
Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS
Procurement Planning
Manufacturing Planning
Distribution Planning
Demand Planning
Managing Uncertainty
Matching Supply and Demand Demand is not the only source of uncertainty
Managing Uncertainty
Point forecasts are invariably wrong Plan for forecast range use flexible contracts to go up/down. 2. Aggregate forecasts are more accurate Aggregate the forecast postponement/risk pooling
1.
4.
Longer term forecasts are less accurate Shorten forecasting horizons multiple orders; early detection In many cases, somebody else knows what is going to happen Collaborate
Global competition
Shorter product life cycle
Customer Need
Price Low
Responsiveness High
Responsiveness
High
Low
Cost
High Low
Responsiveness spectrum
Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand
Key Concepts
Design, operate, and control the physical and information flows as though the channel were one seamless corporate entity. Let the activities (and costs) migrate across corporate boundaries to where they make the most sense. Rely on the benefits of channel integration to replace the benefits of open market forces. Share the risks and the rewards between players.
New Concepts
Push-Pull strategies
Direct-to-Consumer
Strategic alliances Manufacturing postponement Dynamic Pricing E-Procurement
Long
Low
High
identical?
Are the characteristics of all products identical? Can a single supply chain structure be used for all products / customers? No! A single supply chain will fail different customers on efficiency or
responsiveness or both.
Tailored Logistics
Each Logistically Distinct Business (LDB) will have distinct requirements in terms of
Inventory Transportation
Facility
Information
Product information
Physical stores, EDI, catalogs, face to face,
Negotiation
Face to face, phone, fax, sealed bids,
Order placement
Physical store, EDI, phone, fax, face to face,
Order tracking
EDI, phone, fax,
Order fulfillment
Customer pick up, physical delivery
Length of supply chain Product information Time to market Negotiating prices and contract terms Order placement and tracking Order fulfillment Payment
Facility costs
Site and processing cost
Inventory costs
Cycle, Safety, Seasonal inventory
Transportation costs
Inbound and outbound costs
Information sharing
Coordination
A Plethora of Approaches
Just in Time Inventory Vendor Managed Inventory Quick Response Collaborative Planning, Forecasting and Replenishment Cross-docking / Flow through Centres Outsourcing / 3 PLs Activity Based Costing Internet / EDI Bar-Coding / RFID Build to Order
A Plethora of Approaches
(continued)
Partnerships / Alliances Auctions / Exchanges Postponement Strategies SC Software SC Event Management Merge-In-Transit Collaborative Transportation Management Cash to Cash Metrics
Portfolio of Solutions
* Rarely is a single solution sufficient or practical * A set of solutions is usually more applicable * The context matters
Management of Uncertainty
* Risk can be measured, monitored, and managed
* Impacts sourcing, contracting, pricing, incentives, etc.
Forecasting Models
Location Models
- These models identify the optimal location of facilities such as plants and warehouses, considering the inbound and outbound transportation costs as well as the fixed and variable costs of operation at the locations under consideration. These are usually formulated as Mixed Integer Programming Models.
Allocation Models
- These models help in optimally allocating commodities from sources to destinations in a multi-source, multi-destination environment. The costs considered for optimisation are production costs and warehousing costs. The constraints considered can be due to demand, capacity, route restrictions, etc.
Inventory Models
- Inventory plays a major role in SCM. - Inventory can be of various types such as: - Batching and shipment inventories - Buffer stocks to take care of uncertainties - Pipeline inventory ( primary and secondary transportation ) These models minimize the total relevant cost, based on trade-offs among, inter alia, inventory carrying cost, ordering cost, stock-out cost, transportation cost, taxes & duties, etc.
transportation network from a given source to a destination. The models used are the Shortest Path Problem, the Traveling Salesman Problem and the Vehicle Routing Problem. Decision Support Systems that interactively use the expertise of the decision maker by providing graphical support through a map (i.e., using a Geographical Information System ) are also very useful in such decisions.
Scheduling Models
- These models enable allocation of resources to particular activities. Depending on the criteria of interest and the number of resources, the models are of aid in evaluating appropriate rules for
allocation.
Alternative Analysis
- This model simply proposes the identification of alternatives, criteria for decision making and analysis of the alternatives across the criteria to arrive at the best choice. Formal approaches such as simulation and analytic hierarchy process could be used in assessing the implications of the criteria.