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The Role of Supply Chain Management in


Economy

Supply Chain Management_Janat Shah


Learning Objectives

Why is the supply chain important?


What are the key supply chain decisions made by a firm?
How has the supply chain evolved over the last century?
What are the unique challenges of managing a supply chain in
India?

Supply Chain Management_Janat Shah


What Is a Supply Chain?
Flow of products and services from:
Raw materials manufacturers
Intermediate products manufacturers
End product manufacturers
Wholesalers and distributors
Retailers
Customers
Connected by transportation and storage activities
Flow of information, products and funds in both directions
Cost and service levels

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The Supply Chain Network

Plan Source Make Deliver Buy

Suppliers Manufacturers Warehouses & Customers


Distribution Centers

Transportation Transportation
Material Costs Costs Costs Transportation
Manufacturing Costs Inventory Costs Costs

Supply Chain Management_Janat Shah


Supply Chain
All facilities, functions, activities, associated
with flow and transformation of goods and
services from raw materials to customer, as
well as the associated information flows
An integrated group of processes to source,
make, and deliver products

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Supply Chain Processes

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Supply Chain Management: Success Stories
Dell: Inventory turn-over ratio of 58.7 compared to industry
average of 12 (Net Profitability of 5.3.%) ( Drop from 7.8% in
2006)
Wal-Mart: Inventory turn-over ratio of 9.9 compared to
industry average of 5.5 ( Net profitability of 3.5%)
Zara Corporation: Lead-time from new product to stores is 15
to 20 days compared to industry average of six months ( Net
profitability of 11.3%)

Supply Chain Management_Janat Shah


Supply Chain Management: Horror Stories
Cisco: Cisco wrote off 2.2 $ billion worth of inventory in May
2001. Biggest write-off in history.
Sony: PlayStation IIa lost opportunity
SONY could supply only 25% of the potential demand for
Christmas market
Nintendo Wii Game Console : Shortage expected in year 2007
Kmart Launched supply chain initiative in May 2000 worth $1.4
billion in software and services. In 2001-02, announced that it was
abandoning most of the software purchased and taking $130 million
write-off
Nike- i2 Technology Controversy: Lost $100 in sales in last
quarter of 2000 i2 Technologies was blamed. This is what we get
for our $400 millionNike Chairman
Wal-Mart: RFID Initiative
-

Supply Chain Management_Janat Shah


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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Supply Chain Management: A Definition

Encompasses all activities associated with the transformation of


goods from the raw material stage to the final stage when the
goods and services reach the end customer.
Involves planning, design and control of flow of material,
information and finance along the chain in order to deliver value
to the end customer in effective and efficient way.

Supply Chain Management_Janat Shah


Two Other Formal Definitions
The design and management of seamless, value-added 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

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Supply Chain Management: A Pictorial Representation

C1

C2

C3

C4

C5

C6

VENDOR INBOUND INTERFACILITY DISTRIBUTION OUTBOUND


PLANTS CUSTOMERS
TRANSPORTATION TRANSPORTATION CENTERS TRANSPORTATION

Supply Chain Management_Janat Shah


SCM Definition
Material Flow

Converter
Supplier Retailer
Distributor

Source
Converter Consumers
Distributor End-User
Supplier

Value-Added Services

Funds/Demand Flow

Information Flow

Reuse/Maintenance/After Sales Service Flow


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Supply chain for Service
Industry
More difficult than manufacturing
Does not focus on the flow of physical goods
Focuses on human resources and support services
More compact and less extended

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Supply Chain: The Potential
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

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Complexity: The Magnitude
U.S. companies spend more than $1 trillion in supply-related 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
Laptops and desktops were not available when and where
customers were ready to buy them
Boeings forced announcement of write-downs of $2.6b
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

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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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Ratio of Logistics Cost to GDP for
Selected Countries*

Does logistics cost capture every thing?


How do we capture logistics cost of India versus
China?

* Source: Raghuram and Shah 2003

Supply Chain Management_Janat Shah


Progression of Logistics Costs

FIGURE 1-4: Logistics costs share of the U.S. economy

Supply Chain Management_Janat Shah


Composition of Logistics Costs

FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
Supply Chain Management_Janat Shah
Logistics Costs for the Indian Economy*

Rs billion 93-94 prices


Total GDP Logistics
Logistics Cost/GDP
Cost (%)
95-96 1201.27 8995.63 13.4
97-98 1261.01 10163.99 12.4
99-00 1388.93 11485.00 12.1
01-02
1508 12679 11.89
03-04
1658 14305 11.59

*Source: Raghuram and Shah 2004

Supply Chain Management_Janat Shah


Logistics Costs for the US Economy
Nominal Values
Organized Sector US: 1990 US: 2001 US: 2002

Transportation 50% 60% 63%


Inventory 20%
Warehousing
24% 40% 37%
Packaging
Losses 6%
Total Cost 11.4% 9.5% 8.7%
Logistics Cost 659 957 910
($ billion)

GDP ($ billion) 5,800 10,080 10,470

Source: CASS Information Systems, 2002

Supply Chain Management_Janat Shah


Performance of the Indian
Manufacturing Industry*

Data Source: PROWESS, CMIE


Supply Chain Management_Janat Shah
Sector-wise Industry Performance of
Indian Firms*

Data Source: PROWESS, CMIE


Supply Chain Management_Janat Shah
Supply Chain Challenges for the
Indian FMCG Sector
Managing Availability in the Complex Distribution Set up
Working with Smaller Pack Sizes
Entry of National Players in the Traditional Fresh Products
Sector
Dealing with a Complex Taxation Structure
Dealing with Counterfeit Goods
Opportunistic Games Played by the Distribution Channel
Infrastructure
Emergence of Third-party Logistics Provider
Emergence of Modern Retail Chains
Reservation for Small-scale Sector

Supply Chain Management_Janat Shah


The Marico Supply Chain

Supply Chain Management_Janat Shah


Status of Logistics Management in India

Neglected area in organizations


Taxation structure drives the logistics related decision, not cost
or service considerations
Poor state of infrastructure
Complex regulations affecting logistics decisions

Supply Chain Management_Janat Shah


Importance of The Supply Chain

Proliferation of Product Lines


Shorter Product Life Cycles
Cell phone, Laptop, Automobile
Higher Level of Outsourcing
Dell computers, Bharti Tele ventures
Shift in Balance of Power in Chain
Impact of organized retail chain
Globalization of Manufacturing
Impact of tariff structure

Supply Chain Management_Janat Shah


Why is SCM Important?
Strategic Advantage It Can Drive Strategy
* Manufacturing is becoming more efficient
* SCM offers opportunity for differentiation (Dell) or cost
reduction (Wal-Mart or Big Bazaar)
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

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Benefits
A 1997 PRTM Integrated Supply Chain Benchmarking Survey
of 331 firms found significant benefits to integrating the supply
chain

Delivery Performance 16%-28% Improvement


Inventory Reduction 25%-60% Improvement
Fulfillment Cycle Time 30%-50% Improvement
Forecast Accuracy 25%-80% Improvement
Overall Productivity 10%-16% Improvement
Lower Supply-Chain Costs 25%-50% Improvement
Fill Rates 20%-30% Improvement
Improved Capacity Realization 10%-20% Improvement

Source: Cohen & Roussel


Supply Chain Management_Janat Shah
Value vs. Supply Chain
Value chain
every step from raw materials to the eventual end user
ultimate goal is delivery of maximum value to the end user
Supply chain
activities that get raw materials and subassemblies into
manufacturing operation and finished goods to the customer
Terms are used interchangeably

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Dell Computers: Focus on Cost
Reduction

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Dells SCM
Dell sells its computer systems directly to end customers, bypassing
distributors and retailers (resellers). Dell's supply chain consists of
only three stages the suppliers, the manufacturer (Dell), and end
users.

Dells direct contact with customers allows it to:


properly identify market segments,

analyze the requirements and profitability of each segment, and

develop more accurate demand forecasts.

Another Dells advantage is that it is able to get the customers


requirements regarding software to be loaded

Supply Chain Management_Janat Shah


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

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Historical Evolution of the Supply Chain

First Revolution: (Ford Motor Co. 19101920)


Single product, that is, no product variety
Vertical integration
Second Revolution: (Toyota Motor Co. 19601970)
Wide Variety
Long-term relationship with suppliers
Third Revolution: (Dell Computers 1995Current)
Customized products
Medium-term relationship with suppliers
Suppliers have to maintain technology and cost leadership

Supply Chain Management_Janat Shah


From An Automobile Manufacturer
Our aim is always to arrange the material and machinery and to
simplify the operation so that practically no orders are
necessary. Our finished inventory is in transit. So is most of our
raw material inventory. Our production cycle is about eight-one
hours from the mine to the finished machine (automobile) in the
freight car

Supply Chain Management_Janat Shah


Supply Chain
Management
Managing flow of information through supply chain in order
to attain the level of synchronization that will make it more
responsive to customer needs while lowering costs

Keys to effective SCM


information
communication
cooperation
trust

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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 level approach
Multiple levels of activities
Strategic Tactical Operational

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Key Observations
Integrated activity:
* Among functions such as logistics, manufacturing, distribution,
design/engineering, marketing, finance,etc.
* Multiple organizations,i.e., suppliers, customers & 3 PL, 4PL
providers
* Coordination of conflicting goals, metrics, etc.

Responsible for multiple flows:


* Information (orders, status, contracts)
* Physical (finished goods, raw material, w.i.p.)
* Financial (payment, credits, etc.)

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Key Observations (contd)
One goal in SCM: Factors that contribute to
uncertainty
respond to uncertainty in
customer demand without inaccurate demand
creating costly excess forecasting
inventory
long variable lead times
late deliveries
Negative effects of uncertainty
incomplete shipments
lateness
product changes batch
incomplete orders ordering
price fluctuations and
Inventory discounts
insurance against supply inflated orders
chain uncertainty

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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

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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

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The Development Chain

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Todays Marketplace Requires:
Personalized content and services for their customers
Collaborative planning with design partners,
distributors, and suppliers
Real-time commitments for design, production,
inventory, and transportation capacity
Flexible logistics options to ensure timely fulfillment
Order tracking & reporting across multiple vendors
and carriers

Shared visibility for


trading partners
Supply Chain Management_Janat Shah
SCM Key Issues
ISSUE CONSIDERATIONS

Network Planning Warehouse locations and capacities


Plant locations and production levels
Transportation flows between facilities to minimize cost and time
Inventory Control How should inventory be managed?
Why does inventory fluctuate and what strategies minimize this?
Supply Contracts Impact of volume discount and revenue sharing
Pricing strategies to reduce order-shipment variability

Distribution Strategies Selection of distribution strategies (e.g., direct ship vs. cross-docking)
How many cross-dock points are needed?
Cost/Benefits of different strategies
Integration and Strategic Partnering How can integration with partners be achieved?
What level of integration is best?
What information and processes can be shared?
What partnerships should be implemented and in which situations?
Outsourcing & Procurement Strategies What are our core supply chain capabilities and which are not?
Does our product design mandate different outsourcing approaches?
Risk management
Product Design How are inventory holding and transportation costs affected by product
design?
How does product design enable mass customization?

Source: Simchi-Levi Supply Chain Management_Janat Shah


Key Issues in SCM
Distribution network Configuration
How should management select warehouse locations and capacities,
determine production levels for each product at each plant and set
transportation flows between facilities from plant to warehouse,
warehouse to retailer to minimize total production, inventory and
transportation costs and satisfy service level requirements
Inventory control
Minimize inventory and holding costs
Uncertainty in customer demand and supply process leads to
maintaining inventory.
Impact of forecasting tool to predict customer demand
Should retailer order more than, less than or equal to the demand
forecast?
What inventory turnover ratio should be used?
Does this ratio vary from industry to industry?
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Key Issues in SCM
Production sourcing
need to balance production and transportation costs
Large production batches reduce production costs resulting
in some facilities producing limited products but results in
higher transportation costs
Alternatively, to reduce transportation costs requires each
facility to produce small batches of all products increasing
production costs
Supply contracts
Impact of supply contracts that incorporate revenue sharing
and volume discount
Pricing strategies that provide incentives to buyers to order
more products at the same time increasing supplier profit
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Key Issues in SCM
Distribution strategies
How much centralization or decentralization of the
distribution system?
Impact of the above on inventory levels and transportation
costs as well as service levels
When should products be transported by air from
centralized locations to various demand points
When should competing retailers selling the same brand
share inventory and what would be their competing
advantage?

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Key Issues in SCM
Supply chain integration and strategic partnering
Integration achieved successfully by information sharing
and operational planning
What information should be shared and how should it be
used?
What is its impact on the design and operation of the
supply chain?
What is the degree of integration needed within the
organization and with external partners
What is the type of partnership that should be implemented
for a given situation?

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Key Issues in SCM
Outsourcing and offshoring strategies
Deciding what to make internally and what to buy from
outside sources
Determining internal core competencies
Risks associated with outsourcing and how can they be
minimized
How do you ensure timely supply of products?
When should you keep dual sources for the same product?
When should you offshore?
What is the impact of offshoring on inventory levels and
cost of capital
What are the risks of offshoring?

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Key Issues in SCM
Product design
Effective design plays critical role in the supply chain
Certain designs may increase inventory holding and
transportation costs while other designs reduce
manufacturing lead time
How to leverage product design to compensate for
uncertainty in customer demand?
How to quantify the resultant savings?
How to implement mass customization?
What role does supply chain management play in the
successful implementation of these concepts?

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Key Issues in SCM
Smart pricing
Organizations integrate pricing and inventory to influence
market demand and improve bottom line
Can smart pricing strategies be used to improve supply
chain performance?
Local issues
SCM impacted by local dynamics, customer preferences,
government policies such as tax free zones, infrastructural
constraints and strength of supply chain partners

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Key Issues in SCM
Information Technology and DS Systems
Critical enabler of effective SCM
What data should be transferred?
How frequently should it be transferred?
What infrastructure is required internally and between
partners?
Customer Value
Measure of company contribution to its customer
How does SCM contribute to enhancing customer value?

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Chain Global Optimisation Managing Risk &
Uncertainty
Distribution Network Supply Y
Contribution

Inventory Control Supply Y

Production Sourcing Supply Y

Supply Contracts Both Y Y

Distribution Strategies Supply Y Y

Outsourcing & Off Development Y


shoring
Product Design Development Y
Information Development Y Y
Technology
Customer Value Both Y Y
Smart Pricing Supply Y
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Managing Supply Chain Operations

Demand forecasting
Procurement planning
Production planning
Inventory management
Transportation
Order processing
Relationship management

Supply Chain Management_Janat Shah


Todays Supply Chain Reality
Increased outsourcing
Large global supply networks
Increased competition
Consumer driven

Lack of visibility reduces suppliers ability to handle variability


Suppliers use inventory buffers to compensate increasing costs
Errors in manual filling processes can cause stock-outs
revenue
All of these issues can increase costs, lower customer service and reduce

Supply Chain Management_Janat Shah


REASONS EXAMPLES
Raw material shortages Boeing Aircrafts inventory write-down of $2.6
Internal and supplier parts shortages billion
Productivity inefficiencies

Sales and earnings shortfall Sales at U.S. Surgical Corporation declined 25


Larger than anticipated inventories percent, resulting in a loss of $22 million

Stiff competition Intel reported a 38 percent decline in quarterly


General slowdown in the PC market profit

Higher than expected orders for new products EMC Corp. missed its revenue guidance of $2.66
over existing products billion for the second quarter of 2006 by around
$100 million

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Uncertainty and Risk Factors
Fluctuations of Inventory and Backorders
throughout the Supply Chain

Supply
FIGURE 1-3: Order variations in the Chainchain
supply Management_Janat Shah
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

Supply Chain Management_Janat Shah


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 interruptions of HP, Dell

2001 India (Gujarat state) earthquake


Supply interruptions for apparel manufacturers
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Summary
What is supply chain management?
The supply chain encompasses all activities associated with
the transformation of goods from the raw material stage to
the final stage,.
Supply chain management involves planning, design and
control of flow of material, information and finance along
the supply chain
Why is the supply chain important?
On account of globalization and increased competition,
firms have to manage a larger number of product lines with
shorter product life cycles under the situation of changed
power in supply chain performance would help Indian firms
equations within a chain.
improvement in becoming globally competitive.
Supply Chain Management_Janat Shah