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 integration activities
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What Is Supply Chain

Management?
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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Two Other Formal Definitions

The design and management of seamless, valueadded process across organizational boundaries
to meet the real needs of the end customer
Institute for Supply Management
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
1-3

SCM Definition
Material Flow

Supplier

Converter
Distributor

Retailer

Source
Converter
Supplier

Distributor

Consumers
End-User

Value-Added Chain
Funds/Demand Flow
Information Flow
Reuse/Maintenance/After Sales Service Flow
1-4

Manufacturing Industry

Added value process by the use of:

Raw Material
Machine
Equipment
Labor

To create a product to be sold at a profit

The product is either used by end-user or by other
manufacturer
Mass production
Related to Engineering and Industrial Design
1-5

Manufacturing Industry
Scope

Raw
Material

Process

Product

User

Product owner
Design Technology
Process Technology
Brand Owner
(Non Brand
Owner)
1-6

Manufacturing Industry Value Chain

Process
Design &
Engineering

Product
Design &
Engineering

Research and
Development

Research
and
Development

Technical
Service

1-7

Automotive Component Manufacturing Industry

Basic Value Chain

DCM

SI

CM

Tier 1 Product Base

Product Owner ( In-house Process )

Tier 1 Process Base

Tier 2 Process Base

1-8

Manufacturing Mode of Developed

Countries
Initial Stage

Product Creation
Innovation - Invention
Product Development
Domestic Manufacturing
In-house manufacturing
Sub-contracting

Process base
sub-contractor

Domestic Sales
Overseas Sales

Final Stage

Overseas Manufacturing
Wholly owned
Joint Venture
Technical
Collaboration- Licensing
Sub-Contracting

1-9

Manufacturing Pattern of Developing

Countries
Products from foreign
Countries

Initial Stage

Domestic Distribution Sales

Local Manufacturing
Regulation

Local Manufacturing mode:

Joint Venture
Technical Collaboration
Sub-contracting

Competitiveness

Final Stage

Process Base Manufacturing

Main R&D stays at country of
origin
Local R&D for local adaptation
1-10

Principal
OEM Brand Holder
Total Product
Development

Comp
Comp
Prod
Prod

Collaboration

Dwg

Affiliated Co

Comp
Comp

Product base
vendors

Dwg

Sub-contracting

Component design
development

Comp
Comp

Dwg

Comp
Comp

Subsidiary

Comp
Comp

Dwg

Sub-contracting

1-11

Key Observations
Every

facility that impacts costs need to be

considered
Suppliers

suppliers
Customers customers
Efficiency

and cost-effectiveness throughout the

system is required
System

Multiple

level approach

levels of activities

Strategic

Tactical Operational

1-12

Other Related Observations

Supply

chain strategy linked to the

Development Chain
Challenging to minimize system costs and
maximize system service levels
Inherent presence of uncertainty and risk

1-13

The Development Chain

Set

of activities and processes associated

with new product introduction. Includes:
product

design phase
associated capabilities and knowledge
sourcing decisions
production plans

1-14

The Development Chain

FIGURE 1-2: The enterprise development and supply chain

1-15

Global Optimization
Geographically

dispersed complex network

Conflicting objectives of different facilities
Dynamic system
Variations

over time
Matching demand-supply difficult
Different levels of inventory and backorders
Recent
Lean

developments have increased risks

production/Off-shoring/Outsourcing

1-16

Global Apparel Value Chain

Tracing back the dress you are wearing

1-17

1-18

Globally Dispersed Manufacturing

An Illustration: How Li & Fung Limited Might Make a Dress
Product
ProductDesign
Design
[Hong
[HongKong]
Kong]

Yarn
YarnSpinning
Spinning
[Korea]
[Korea]

QC
QC&
&Shipping
Shipping
[Hong
[HongKong]
Kong]

Weaving
Weaving
[Taiwan]
[Taiwan]

Stitching
Stitching
[Indonesia]
[Indonesia]

Zippers+
Zippers+
[Japan+]
[Japan+]

1-19

Uncertainty and Risk Factors

Forecasting

is not a solution
Demand is not the only source of
uncertainty
Recent trends make things more uncertain
Lean

manufacturing
Outsourcing
Off-shoring

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Uncertainty and Risk Factors

August

2005 Hurricane Katrina

P&G

coffee supplies from sites around New Orleans

Six month impact
2002

West Coast port strike

Losses

of $1B/day
Store stock-outs, factory shutdowns
1999

Taiwan earthquake

Supply

2001

interruptions of HP, Dell

India (Gujarat state) earthquake

Supply

interruptions for apparel manufacturers

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Composition of Logistics Costs

FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
1-22

Complexity: The Magnitude

U.S. companies spend more than $1 trillion in supplyrelated 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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Complexity: The Magnitude

Compaq computers loss of $500 million to $1 billion in

sales in one year

Boeings forced announcement of write-downs of $2.6b

Laptops and desktops were not available when and where

customers were ready to buy them
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

1-24

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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Magnitude of Supply Chain Costs

Example: The Apparel Industry
Cost per

Percent

Shirt

Saving

Manufacturer

Distributor

Retailer

Customer

$52.72

0%

Manufacturer

Distributor

Retailer

Customer

$41.34

28%

Manufacturer

Distributor

Retailer

Customer

$20.45

62%

1-26

Supply Chain: The Potential Saving

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

1-27

Evolution of Supply Chain

Management
Further
Refinement of
SCM Capabilities
SCM
Formation/
Extensions
JIT, TQM, BPR,
Alliances
Inventory Management/Cost
Optimization
Traditional Mass Manufacturing

1950s

1960s

1970s

1980s

1990s

2000s

Beyond

1-28