Supply Chain Management

Prof. S. K. GARG,
PROFESSOR DELHI COLLEGE OF ENGINEERING

SUPPLY CHAIN MANAGEMENT

SUPPLIER

MANUFACTURER

CUSTOMER

FLOW OF MATERIAL/ VALUE FLOW OF INFORMATION FLOW OF MONEY FLOW OF OWNERSHIP

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What is a Supply Chain?

A supply chain consists of the flow of products and services from:
Raw materials manufacturers Component and intermediate manufacturers Final product manufacturers Wholesalers and distributors and Retailers

Connected by transportation and storage activities, and Integrated through information, planning, and integration activities Many large firms are moving away from inhouse Vertically Integrated structures to Supply Chain Management
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What is a Supply Chain? (Cont.)

What is Supply Chain Management?

The design and management of seamless, value-added processes 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 The planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities also includes coordination with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. Council of Supply Chain Management Professionals
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What is Supply Chain Management? (Cont.)

Old paradigm - Firm gained synergy as a vertically integrated firm encompassing the ownership and coordination of several supply chain activities. Organizational cultures emphasized short-term, company focused performance. New paradigm - Firm in a supply chain focuses activities in its area of specialization and enters into voluntary and trust-based relationships with supplier and customer firms. All participants in the supply chain benefit. Boundaries are dynamic and extend from the firms suppliers suppliers to its customers customers (i.e., second tier suppliers and customers). Supply chains now deal with reverse logistics to handle returned products, warranty repairs, and recycling.
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Global Apparel Value Chain

Tracing back the dress you are wearing

Magnitude of Supply Chain Costs

Example: The Apparel Industry
Cost per Shirt Percent Saving

Manufacturer

Distributor

Retailer

Customer

$52.72

0%

Manufacturer

Distributor

Retailer

Customer

$41.34

28%

Manufacturer

Distributor

Retailer

Customer

$20.45

62%

Complexity Dimensions of Typical Textile Company

Deals in
Yarn (70-80 sku) Sewing Thread (3000-4000 sku) Fabric (150-200 sku)

Manufacturing Units (27)

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 Yarn
Export Domestic

Fabric
2 Offices 200-250 Customers 40 Agents

Sewing Thread
250-300 Sales Force 4000-5000 Dealers/ Retailers
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 Short Lead Time High Obsolescence

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Ciscos Value Network

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Importance of Supply Chain Management

Firms have discovered value-enhancing and long term benefits Who benefits most? Firms with:
Large inventories Large number of suppliers Complex products Customers with large purchasing budgets

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Importance of Supply Chain Management (Cont.)

Firms using Supply Chain Management: 1. Start with key suppliers 2. Move on to other suppliers, customers, and shippers 3. Integrate second tier suppliers and customers (second tier refers to the customers customers and the suppliers suppliers)
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Importance of Supply Chain Management (Cont.)

Cost savings and better coordination of resources are reasons to employ Supply Chain Management Reduced Bullwhip Effect- the magnified reduction of safety stock costs based on coordinated planning and sharing of information Collaborative planning, forecasting, and replenishment activities reduce the Bullwhip Effect and lead to better customer service, lower inventory costs, improved quality, reduced cycle time, better production methods, and other benefits.

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Origins of Supply Chain Management

1950s & 1960s
U.S. manufacturers focused on mass production techniques as their principal cost reduction and productivity improvement strategies

1960s-1970s
Introduction of new computer technology lead to development of Materials Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII) to coordinate inventory management and improve internal communication

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Origins of Supply Chain Management (Cont.)

1980s & 1990s Intense global competition led U.S. manufacturers to adopt Supply Chain Management along with Just-In-Time (JIT), Total Quality Management (TQM), and Business Process Reengineering (BPR) practices
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Origins of Supply Chain Management Cont.

2000s and Beyond Industrial buyers will rely more on third-party service providers (3PLs) to improve purchasing and supply management Wholesalers/retailers will focus on transportation and logistics more & refer to these as quick response, service response logistics, and integrated logistics
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Origins of Supply Chain Management Cont.

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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

The enterprise development and supply chain

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The Foundations of Supply Chain Management

Supply Supplier management, supplier Management evaluation, supplier certification, strategic partnerships Operations Demand management, MRP, ERP, inventory visibility, JIT (AKA lean production & Toyota Production System), TQM (AKA Six Sigma) Transportation management, customer relationship management, distribution network, perfect order fulfillment, global supply chains, service response logistics Process integration, performance measurement
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Distribution

Integration

The Foundations of Supply Chain Management (Cont.)

Purchasing Trends: Long term relationships Supplier management- improve performance through
Supplier evaluation (determining supplier capabilities) Supplier certification (third party or internal certification to assure product quality and service requirements)

Strategic partnerships- successful and trusting relationships with top-performing suppliers

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Important Elements of Supply Chain Management (Cont.)

Operations Trends: Demand management- match demand to available capacity Linking buyers & suppliers via MRP and ERP systems Use JIT to improve the pull of materials to reduce inventory levels Employ TQM to improve quality compliance among suppliers
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Important Elements of Supply Chain Management (Cont.)

Distribution Trends: Transportation management- tradeoff decisions between cost & timing of delivery/customer service via trucks, rail, water & air Customer relationship managementstrategies to ensure deliveries, resolve complaints, improve communications, & determine service requirements Network design- creating distribution networks based on tradeoff decisions between cost & sophistication of distribution system
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Important Elements of Supply Chain Management (Cont.)

Integration Trends:
Supply Chain Process Integrationwhen supply chain participants work for common goals. Requires intrafirm functional integration. Based on efforts to change attitudes & adversarial relationships Supply Chain Performance Measurement- Crucial for firms to know if procedures are working

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Current Trends in Supply Chain Management

Expanding the Supply Chain U.S. firms are expanding partnerships and building facilities in foreign markets The expansion involves:
breadth- foreign manufacturing, office & retail sites, foreign suppliers & customers depth- second and third tier suppliers & customers
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Current Trends in Supply Chain Management (Cont.)

Increasing Supply Chain Responsiveness
Firms will increasingly need to be more flexible and responsive to customer needs Supply chains will need to benchmark industry performance and meet and improve on a continuous basis Responsiveness improvement will come from more effective and faster product & service delivery systems
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Current Trends in Supply Chain Management (Cont.)

The Greening of Supply Chains
- Producing, packaging, moving, storing, delivering and other supply chain activities can be harmful to the environment Supply chains will work harder to reduce environmental degradation Large majority (75%) of U.S. consumers influenced by a firms environmental friendliness reputation Recycling and conservation are a growing alternative in response to high cost of natural resources
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Current Trends in Supply Chain Management- Cont.

Reducing Supply Chain Costs Cost reduction achieved through:
Reduced purchasing costs Reducing waste Reducing excess inventory, and Reducing non-value added activities

Continuous Improvement through

Benchmarking- improve over competitors performance Trial & error Increased knowledge of supply chain processes

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SUCCESS FACTORS
Integration Reduction of Uncertainty Outsourcing/ Core Competency/ Strategic Alliance Flexibility/ Agility/ Lean

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FLOW OF MATERIAL
Inventory Control Kanban Setup Time Reduction Lead Time Reduction Flexible Machines

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Market demands

Standard products

Customized products

Available in Stock

No

Yes Can be assembled from stock

No

High technology product/service s No

Yes

Can be produced using available design Yes Existing designs can be modified Yes

No

Make -to stock 1 Delivery

Assemble- to - order 2 Assembly

Make-toorder 3 Production

Engineer- to order 4

Innovateto-order

Can be designed using available competence

Yes

Design modification and variants

5New product/
service design using available competence

Development of new competences

Increasing richness in flexibility requirements Increasing need for management of flexibility

Increasing Need For Flexibility

FLOW OF MATERIAL
Purchase Management JIT Purchasing Inbound Logistics Stock to Dock Delivery 3PL Supply Base Rationalization Outbound Logistics/ Distribution Management
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FLOW OF INFORMATION
Demand Forecasting POS Information Bar Coding/ RFID/Automatic Identification EDI/ Intranet/ Extranet/ Internet GPS CRM ERP e-Manufacturing/ Virtual manufacturing
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FLOW OF MONEY
e- Commerce e- Business

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FLOW OF OWNERSHIP
VMI

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Uncertainty and Risk Factors

Matching Supply and Demand a Major Challenge
REASONS EXAMPLES
Boeing Aircrafts inventory write-down of $2.6 billion

Raw material shortages Internal and supplier parts shortages Productivity inefficiencies Sales and earnings shortfall Larger than anticipated inventories Stiff competition General slowdown in the PC market Higher than expected orders for new
products over existing products

Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million Intel reported a 38 percent decline in quarterly profit

EMC Corp. missed its revenue guidance of $2.66 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

Order variations in the supply chain

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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 interruptions of HP, Dell

2001 India (Gujarat state) earthquake

Supply interruptions for apparel manufacturers

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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 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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COMPETITIVE STRATEGY IN SCM

CUSTOMER MATRIX
PERCEIVED USAGE VALUE AND PERCEIVED PRICE

PRODUCER MATRIX
COST EFFECTIVENESS

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Customer Matrix
PERCEIVED USAGE VALUE

*
PERCEIVED PRICE
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Customer Matrix
PERCEIVED USAGE VALUE

*
PERCEIVED PRICE
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COMPETING STRATEGY OPTIONS

High

PERCEIVED USAGE VALUE

4 6 5 High

Low

PERCEIVED PRICE

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ENHANCING PUV
Value Assurance Value Engineering Innovations

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REDUCING COST
Continual cost reduction Economies of scale and scope Control and coordination Factor costs

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Combinations of Customer and Producer Matrices

Customer Matrix

Producer Matrix

PUV

*
Perceived Price

Effectiveness

*
Unit Cost
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A
Reasons : -Price premium allows inefficiencies. -Strong brand belief, cost reduction not a priority. -Very small market share, not able to reduce cost by scale or experience. Sustainability of price premium. Leading edge technology, which is reproducible Strong brand image Sustainable Value assurance

Key Issue: Competency:

Change the perception of price to overall cost of ownership Prescription: Define the basis of differentiation Pay greater attention to cost reduction

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Combinations of Customer and Producer Matrices

Customer Matrix

Producer Matrix

PUV

Effectiveness

Perceived Price

Unit Cost

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B
Can cut prices, as low cost on product matrix. Decline in Market share Improve effectiveness, reduce price Explore other markets, where customer will not perceived it as low PUV However, new market will have its own new product and customer matrices. Alliance

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Combinations of Customer and Producer Matrices

Customer Matrix

Producer Matrix

PUV

*
Perceived Price

Effectiveness

Unit Cost

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C
Low Effectiveness, high cost Customer matrix is due to previous good products. Firm resting on past laurels. Situation also arise when the firm is good on innovations but not able to transfer them into saleable products. Management may not be aware of its position on product matrix, not collecting data of other producers. If management is aware, then first try to reduce cost and then try to improve efficiency. Since competitors effectiveness is better, it is matter of time when competitor will move north on the customer matrix. The future of the firm is not good

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Combinations of Customer and Producer Matrices

Customer Matrix

Producer Matrix

PUV

Effectiveness

Perceived Price

Unit Cost

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D
If firm donot improve effectiveness, it may have to offer large price discounts. Situation is generally of new low cost entrants to established markets They should focus on improving effectiveness.

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Combinations of Customer and Producer Matrices

Customer Matrix

Producer Matrix

PUV

*
Perceived Price

Effectiveness

*
Unit Cost
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E
Combination to aim at. Possible problems might be management complacency. Can raise price if rivals are not able to match the high PUV. Surpluses can be used to outpace competitors with strong investments in both effectiveness and efficiency. May also explore other products, where its core competence might confer similar advantages'.

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Combinations of Customer and Producer Matrices

Customer Matrix

Producer Matrix

PUV

Effectiveness

Perceived Price

Unit Cost

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F
Opposite of E Faces fight for survival Need to increase both effectiveness and efficiency. Simultaneously, Both may be difficult. Task is too large, may go for alliance or even merger, acquisition or taken over.

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Deriving a Competitive Strategy

n
Rethink target market

Which Market? Which segment? What is Value to Customer? Key Competencies required to Deliver PUV at low cost? Your core competencies?
OK No Not OK YES

Can Gaps Be closed?

Internal Developments Alliance Acquistion 64

Work Smarter to Perform Better

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Work Smarter to Perform Better

Once upon a time, a tortoise and a hare had an argument about who was faster. They decided to settle the argument with a race. They agreed on a route and set off. The hare shot ahead and ran briskly for some time. Then seeing that he was far ahead of the tortoise, he fell asleep under a tree. The tortoise overtook the hare and soon finished the race, emerging the winner. The hare woke up and realized that he had lost the race.
66 MORAL---SLOW AND STEADY WINS THE

Work Smarter to Perform Better

The hare was disappointed at losing the race and he did some thinking. He realized that he had lost the race only because he had been over confident, careless and lazy. If he had not taken things for granted, the tortoise could not have beaten him. So he challenged the tortoise for another race. The tortoise agreed. This time, the hare went all out and ran without stopping from the start to finish. He won by several miles. MORAL-- FAST AND CONSISTENT WILL 67 ALWAYS BEAT THE SLOW AND STEADY.

Work Smarter to Perform Better

The tortoise did some thinking this time and realized that there is no way he could beat the hare in a race the way it was currently formatted. He thought for a while and then challenged the hare for another race but on a different route. The hare agreed. They started off, in keeping with his self-made commitment to be consistently fast, the hare took off and ran at top speed until he came to a river. The finishing line was a couple of kilometers on the other side of the river. The hare sat there wondering what to do. In the meantime the tortoise got into the river, swam to the opposite bank continued walking 68 and finished the race.

Work Smarter to Perform Better

MORAL FIRST, IDENTIFY YOUR CORE COMPETENCY AND THEN CHANGE THE PLAYING FIELD TO SUIT YOUR CORE COMPETENCY.

Working on the basis of your strengths will not only get you noticed, but will also create opportunities for growth and 69 advancement

Work Smarter to Perform Better

The story continues. The hare and the tortoise, by this time become good friends and they did some thinking together. They decided to run the race again but this time, as a team. They started off and this time, the hare carried the tortoise till the river-bank. Then the tortoise took over and swam across with the hare on his back. On the opposite bank the hare again carried the tortoise on his back till they reached the finishing line together. They both felt a greater sense of happiness satisfaction 70 and

Work Smarter to Perform Better

MORAL ITS GOOD TO BE INDIVIDUALLY MOTIVATED AND TO HAVE A STRONG CORE COMPETENCY; BUT UNLESS YOU ARE ABLE TO WORK IN A TEAM AND HARNESS EACH OTHERS STRONG COMPETENCIES, YOU WILL ALWAYS PERFORM BELOW PAR, BECAUSE THERE WILL ALWAYS BE A SITUATION IN WHICH YOU WILL DO POORLY AND SOME ONE ELSE WILL DO WELL. Teamwork is all about situational leadership, letting the person with the relevant core competency in a situation 71 take the leadership.

Work Smarter to Perform Better

Note that neither the hare nor the tortoise gave up after failure. MORAL FAILURE IS AN EVENT, IT IS NEVER PERMANENT The tortoise changed his strategy because he was already working as hard as he could. In life, when faced with a failure, sometimes its appropriate to work harder and put in more effort by working smarter.
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Work Smarter to Perform Better

Sometimes, you just have to change strategy and try something different. And sometimes it is appropriate to do both. . MORAL WHEN WE STOP COMPETING AGAINST A RIVAL AND, INSTEAD, START COMPETING AGAINST A SITUATION, WE PERFORM BETTER.

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Supplier Selection
The process of selecting suppliers, is complex and should be based on multiple criteria:
Product and process technologies Willingness to share technologies & information [Early supplier involvement (ESI) and concurrent engineering (CE)] Quality

Cost (Total cost of ownership or acquisition) Reliability Order System & cycle time Capacity Communication capability Location Service
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Supplier Relationship Management

Improves profits & reduces costs. Refers to extended procurement processes such as sourcing analytics, sourcing execution, procurement execution, payment & settlement, supplier score carding and performance monitoring.

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Supplier Relationship Management

Five key points of an SRM system:
Automation Integration spans multiple departments, processes, & software applications. Visibility of information & process flows Collaboration through information sharing Optimization of processes & decision making
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Outsourcing Programs
Outsourcing allows a firm to:
Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce management problems Improve manufacturing flexibility.

Risks associated with outsourcing, include:

Loss of control Increased reliance on suppliers Increased need for supplier management

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Vendor Managed Inventories and JIT II

Vendor managed inventory (VMI)suppliers manage buyer inventories to reduce inventory carrying costs & avoid stockouts for buyer.

From the buyer-firms perspective:

Supplier tracks inventories Determines delivery schedules and order quantities Buyer can take ownership at stocking location.

From the suppliers perspective:

Avoids ill-advised customer orders Supplier decides inventory set up & shipments Opportunity for supplier to educate customers about other products.
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Development of ERP Systems

Operations

Logistics and Warehouse Sales and Marketing Customer Relationship Management Data Support System

Engineering Supplier Relationship Management Human Resources Finance and Accounting

Central Database and Servers

Headquarters and Branches

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Advantages & Disadvantages Of ERP Systems

Advantages
Added visibility reduce supply chain inventories Helps to standardize manufacturing processes Measure performance & communicate via a standardized method

Disadvantages
Substantial time & capital investment Complexity Firms adapt processes to meet ERP system

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CUSTOMER RELATIONSHIP MANAGEMENT

Finding a new customer costs five times as much as keeping an old customer CRM means focusing on customer requirements, then delivering products and services in a manner resulting in high levels of customer satisfaction Also refers to automated transaction and communication applications, however this can cause problems for some firms CRM must still include talking to customers, understanding their behavior and their requirements, and then building a system to satisfy those requirements.
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Global Location Strategies

Critical Location Factors
Regional Trade Agreements & the WTO Competitiveness of Nations Government Taxes & Incentives Currency Stability Access & Proximity to Markets/Customers Environmental Issues Labor Issues Right-to-work Laws Access to Suppliers & Cost Utility Availability & Cost Quality-of-Life Issues Land Availability & Cost
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The Primary Concerns of Service Response Logistics

The management and coordination of the organizations service activities. The four primary activities of SRL:
Service capacity Waiting times Distribution channels, and Service quality

Demand management tactics are also important, as services cannot be inventoried & customer demand must be met.
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SC Performance Measurement Systems

Performance measurement systems must: Link SC trading partners to achieve breakthrough performance in satisfying the end users. Overlay the entire supply chain to assure that all contribute to supply chain strategy. In a successful chain, members jointly agree on a SC performance measurement system. Demand driven supply networks are supply chains with enough flexibility to quickly respond to changes in the marketplace
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SC Performance Measurement Systems

Supply Chain Performance Measures 1. Total SCM costs: cost to process orders; purchase & manage inventories; & information systems. 2. SC cash-to-cash cycle time: Avg. # of days between paying for materials & getting paid by SC partners. 3. SC production flexibility: avg. time required to provide an unplanned 20% increase in production. 4. SC delivery performance: avg. % of orders filled by requested delivery date. 5. SC perfect order fulfillment performance: average % of orders that arrive on time, complete, & undamaged. 6. Supply chain e-business performance: avg. % of electronic orders received for all SC members. 7. Supply Chain Environmental Performance: % of SC w/ISO 14000 partners; avg. % env. goals met.
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The Balanced Scorecard (Cont.)

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Sweet Fruits Bulk of FruitS

Low Hanging Fruits

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