MEV 425 Supply Chain Management Introduction. Launched across 93 countries simultaneously.

transcript

MEV 425 Supply Chain Management

Introduction

Launched across 93 countries simultaneously

Delivering 1,75,000 lunchboxes (dabbas) across Mumbai both on forward and reverse direction daily

8,50,000 SKUs

Tata MotorsWinners of 2006 SCM award

• Established in 1945, Tata Motors' presence indeed cuts across the length and breadth of India.

• Over 5.9 million Tata vehicles ply on Indian roads, since the first rolled out in 1954.

• The company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka).

• Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains.

• The company has established a new plant at Sanand (Gujarat). • The company's dealership, sales, services and spare parts

network comprises over 3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India.

Dell Computers

• Selling computer systems directly to customers, • Dell ships more than 110,000 systems every day

to customers in 180 countries — that’s more than one every second.

• Partnerships with a wide variety of key industry software, hardware and component suppliers give us a uniquely broad perspective on the computing landscape

Management Functions

• Planning - defining goals, establishing strategies for achieving those goals, and developing plans to integrate and coordinate activities

• Organizing - determining what tasks are to be done, who is to do them, how the tasks are to be grouped, who reports to whom, and where decisions are made

• Leading - directing and motivating all involved parties and dealing with employee behavior issues

• Controlling - monitoring activities to ensure that they are going as planned

Level of Management

Four functions of Management

Planning

Choose goals

Organizing

Working together

Leading

Controlling

Monitor and Measure

History of Supply Chain Management

• 1960’s - Inventory Management Focus, Cost Control

• 1970’s - MRP & BOM - Operations Planning• 1980’s - MRPII, JIT - Materials Management,

Logistics• 1990’s - SCM - ERP - “Integrated” Purchasing,

Financials, Manufacturing, Order Entry• 2000’s - Optimized “Value Network” with Real-

Time Decision Support; Synchronized & Collaborative Extended Network

Types of Inventory

• Raw material

• Work-in-process

• Finished goods

Costs of Inventory

• Item cost

• Carrying costs

• Ordering costs

• Stock out costs

• Systematic costs

Inventory Models

• Economic Order Quantity – A trade off between carrying cost and ordering cost

• Economic Batch Quantity – A trade off between carrying cost and setup cost

Value Chain

INPUT •Material•Machines•Labor•Management•Capital

TRANSFORMATIONPROCESS

OUTPUT •Goods•Services

FeedbackFeedback

Operations as a Transformation Process

Supply chain management

Reference Books• Christopher, M., Logistics and Supply Chain Management, Pitman

Publishing Company, London, 1993. – EVOLUTION OF SUPPLY CHAIN MANAGEMENT

• Chopra, S., and Meindl, P., Supply chain Management: Strategy, Planning and Operations. Second Edition, Pearson Education (Singapore) Pte. Ltd, 2004. – INTRODUCTORY ASPECTS, MANAGING UNCERTAINITY (SUPPLY

AND DEMAND), FACILITY NETWORK DESIGN, TRANSPORTATION,

• Doebler, D.W. and Burt, D.N., Purchsing and Supply Chain Management: Text and Cases, McGraw-Hill Publishing Company Limited, New Delhi, 1996. – PURCHASE AND PROCUREMENT

• Tersine, R.J., Principles of Inventory and Materials Management, 4th edition, Prentice-Hall Inc., New Jersey, 1994. – INVENTORY CONTROL AND MANAGEMENT

What Is the Supply Chain?

• Also referred to as the logistics network• Suppliers, manufacturers, warehouses,

distribution centers and retail outlets – “facilities”

and the

• Raw materials• Work-in-process (WIP) inventory• Finished products

that flow between the facilities

Suppliers Manufacturers Warehouses &Distribution Centers

Customers

Material Costs

TransportationCosts

TransportationCosts Transportation

CostsInventory CostsManufacturing Costs

The Supply ChainSuppliers Manufacturers Warehouses &

Distribution CentersCustomers

Material Costs

TransportationCosts

TransportationCostsInventory CostsManufacturing Costs

The Supply Chain – Another View

Suppliers Manufacturers Warehouses &Distribution Centers

Customers

Material Costs

TransportationCosts

TransportationCosts Transportation

CostsInventory CostsManufacturing Costs

PlanPlan Source Source Make Make Deliver Deliver Buy Buy

What Is Supply Chain Management (SCM)?

• A set of approaches used to efficiently integrate– Suppliers

– Manufacturers

– Warehouses

– Distribution centers

• So that the product is produced and distributed– In the right quantities

– To the right locations

– And at the right time

• System-wide costs are minimized and• Service level requirements are satisfied

Plan Source Make Deliver Buy

Why Is SCM Difficult?

• Uncertainty is inherent to every supply chain– Travel times

– Breakdowns of machines and vehicles

– Weather, natural catastrophe, war

– Local politics, labor conditions, border issues

• The complexity of the problem to globally optimize a supply chain is significant– Minimize internal costs

– Minimize uncertainty

– Deal with remaining uncertainty

Plan Source Make Deliver Buy

The Objective of a Supply Chain

• 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 customer’s 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 incurs costs (information, storage, transportation, components, assembly, etc.)

• Supply chain profitability is total profit to be shared across all stages of the supply chain

• Supply chain success should be measured by total supply chain profitability, not profits at an individual stage

• Sources of supply chain revenue: the customer

• Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain

• Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability

Decision Phases of a Supply Chain

• Supply chain strategy or design

• Supply chain planning

• Supply chain operation

Supply Chain Strategy or Design

• Decisions about the structure of the supply chain and what processes each stage will perform

• Strategic supply chain decisions– Locations and capacities of facilities– Products to be made or stored at various locations– Modes of transportation– Information systems

• Supply chain design must support strategic objectives• Supply chain design decisions are long-term and

expensive to reverse – must take into account market uncertainty

Supply Chain Planning

• 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

Supply Chain Planning

• 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

• Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

Supply Chain Operation

• Time horizon is weekly or daily• Decisions regarding individual customer orders• Supply chain configuration is fixed and operating

policies are determined• Goal is to implement the operating policies as

effectively as possible• Allocate orders to inventory or production, set order

due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders

• Much less uncertainty (short time horizon)

Process View of a Supply Chain

• 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)

Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Cycle View of a Supply Chain• Each cycle occurs at the interface between two

successive stages• Customer order cycle (customer-retailer)• Replenishment cycle (retailer-distributor)• Manufacturing cycle (distributor-manufacturer)• Procurement cycle (manufacturer-supplier)• Cycle view clearly defines processes involved

and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process.

Customer Order Cycle

• Involves all processes directly involved in receiving and filling the customer’s order

• Customer arrival

• Customer order entry

• Customer order fulfillment

• Customer order receiving

Replenishment Cycle

• All processes involved in replenishing retailer inventories (retailer is now the customer)

• Retail order trigger

• Retail order entry

• Retail order fulfillment

• Retail order receiving

Manufacturing Cycle

• All processes involved in replenishing distributor (or retailer) inventory

• Order arrival from the distributor, retailer, or customer

• Production scheduling

• Manufacturing and shipping

• Receiving at the distributor, retailer, or customer

Procurement Cycle

• All processes necessary to ensure that materials are available for manufacturing to occur according to schedule

• Manufacturer orders components from suppliers to replenish component inventories

• However, component orders can be determined precisely from production schedules (different from retailer/distributor orders that are based on uncertain customer demand)

• Important that suppliers be linked to the manufacturer’s production schedule

Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand

• Pull: execution is initiated in response to a customer order (reactive)

• Push: execution is initiated in anticipation of customer orders (speculative)

• Push/pull boundary separates push processes from pull processes

Push/Pull View of Supply Chain Processes

• Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders

• Can combine the push/pull and cycle views– L.L. Bean (Figure 1.6)– Dell (Figure 1.7)

• The relative proportion of push and pull processes can have an impact on supply chain performance

Summary of Learning Objectives

• What are the cycle and push/pull views of a supply chain?

• How can supply chain macro processes be classified?

• What are the three key supply chain decision phases and what is the significance of each?

• What is the goal of a supply chain and what is the impact of supply chain decisions on the success of the firm?

Element Traditional management Supply chain management (1)Inventory management Independent efforts Joint reduction of channel

approach inventories (2)Total cost approach Minimize firm costs Channel-wide cost efficiencies (3)Time horizon Short term Long term (4)Amount of information Limited to needs of current As required for planning and sharing and monitoring transaction monitoring processes (5)Amount of coordination Single contact for the transaction Multiple contacts between

levels in of multiple levels in the between channel pairs firms and levels of channel channel (6)Joint planning Transaction-based Ongoing (7)Compatibility of Not relevant Compatibility at least for key corporate philosophies relationships (8)Breadth of supplier base Large to increase competition Small to increase coordination

and spread risks (9)Channel leadership Not needed Needed for coordination focus (10)Amount of sharing risks Each on its own Risks and rewards shared over

rewards the long term (11)Speed of operations, “Warehouse” orientation “Distribution center” orientation information and (storage, safety stock) (inventory velocity)

interconnecting inventory levels interrupted by barriers to flows; flows; JIT, quick response across

localized to channel pairs the channel

Decision areas of SCM

• There are four major decision areas in

1) location,

2) production,

3) inventory, and

4) transportation (distribution), and

There are both strategic and operational elements in each of these decision areas

• Time measurement to detect and analyze time buffers in a part of a supply chain process of concrete wall elements including the excavation and delivery of sand, the fabrication and delivery of elements, and the site installation of elements.

Supply chain in construction

• After having assessed the supply chain, the SCM methodology suggests – redesign (reconfiguring the supply chain’s structure), – control (coordinating the supply chain according to the new

configuration) and – continuous improvement.

• For instance, towards suppliers, the methodology could include – reengineering the procurement process, – installing joint coordination of logistics and recurring product

development programs.

• Typically, such activities include joint activities between separate actors in the supply chain.

Supply chain in construction

The Importance of Supply Chain Management

• Dealing with uncertain environments – matching supply and demand– Boeing announced a $2.6 billion write-off in 1997 due to

“raw materials shortages, internal and supplier parts shortages and productivity inefficiencies”

– U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals”

– IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue

– Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake

• U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998

Supply Chain Management and Uncertainty

• Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesn’t vary

• The variability worsens as we travel “up” the supply chain• Forecasting doesn’t help!

Manufacturer

Wholesale Distributor

sConsume

Multi-tier

SuppliersRetailer

Bullwhip Effect

Today’s 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 Shared visibility for trading partnerstrading partners

Supply Chain Management – Key Issues

• Forecasts are never right– Very unlikely that actual demand will exactly equal forecast

demand

• The longer the forecast horizon, the worse the forecast– A forecast for a year from now will never be as accurate as

a forecast for 3 months from now

• Aggregate forecasts are more accurate– A demand forecast for all CV therapeutics will be more

accurate than a forecast for a specific CV-related product

Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty

Achieving Strategic Fit

Outline

• Competitive and supply chain strategies

• Achieving strategic fit

• Expanding strategic scope

What is Supply Chain Management?

• Managing supply chain flows and assets, to maximizesupply chain surplus

• What is supply chain surplus?

NewProduct

Development

Marketingand

SalesOperations Distribution Service

Finance, Accounting, Information Technology, Human Resources

The Value Chain: Linking Supply Chain and Business

Strategy

Competitive and Supply Chain Strategies

• Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services

• Product development strategy: specifies the portfolio of new products that the company will try to develop

• Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted

• Supply chain strategy:

– determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product

– Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important

• Introduction

• How is strategic fit achieved?

• Other issues affecting strategic fit

• Strategic fit: – Consistency between customer priorities of

competitive strategy and supply chain capabilities specified by the supply chain strategy

– Competitive and supply chain strategies have the same goals

• A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy

• Example of strategic fit -- Dell

How is Strategic Fit Achieved?

• Step 1: Understanding the customer and supply chain uncertainty

• Step 2: Understanding the supply chain

• Step 3: Achieving strategic fit

Step 1: Understanding the Customer and Supply Chain Uncertainty

• Identify the needs of the customer segment being served

• Quantity of product needed in each lot

• Response time customers will tolerate

• Variety of products needed

• Service level required

• Price of the product

• Desired rate of innovation in the product

• Overall attribute of customer demand

• Demand uncertainty: uncertainty of customer demand for a product

• Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires

• Implied demand uncertainty also related to customer needs and product attributes

• Table 2.1

• Figure 2.2

• Table 2.2

• First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

• Understanding the Customer– Lot size– Response time– Service level– Product variety– Price– Innovation

ImpliedDemand

Uncertainty

Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1)

Customer Need Causes implied demand uncertainty to increase because …

Range of quantity increases Wider range of quantity implies greater variance in demand

Lead time decreases Less time to react to orders

Variety of products required increases

Demand per product becomes more disaggregated

Number of channels increases Total customer demand is now disaggregated over more channels

Rate of innovation increases New products tend to have more uncertain demand

Required service level increases Firm now has to handle unusual surges in demand

Levels of Implied Demand Uncertainty

Predictable supply and

demand

Salt at a supermarket

A new communication

device

Highly uncertain supply and demand

Figure 2.2: The Implied Uncertainty (Demand and Supply) Spectrum

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

uncertain supply and demand

An existing automobile

Correlation Between Implied Demand Uncertainty and Other

Attributes (Table 2.2)Attribute Low Implied

UncertaintyHigh Implied Uncertainty

Product margin

Low High

Avg. forecast error

10% 40%-100%

Avg. stockout rate

1%-2% 10%-40%

Avg. forced season-end markdown

0% 10%-25%

Step 2: Understanding the Supply Chain

• How does the firm best meet demand?

• Dimension describing the supply chain is supply chain responsiveness

• Supply chain responsiveness -- ability to– respond to wide ranges of quantities demanded– meet short lead times– handle a large variety of products– build highly innovative products– meet a very high service level

Step 2: Understanding the Supply Chain

• There is a cost to achieving responsiveness• Supply chain efficiency: cost of making and

delivering the product to the customer• Increasing responsiveness results in higher costs

that lower efficiency• Figure 2.3: cost-responsiveness efficient frontier• Figure 2.4: supply chain responsiveness

spectrum• Second step to achieving strategic fit is to map

the supply chain on the responsiveness spectrum

Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier: Fig 2.3

High Low

Responsiveness

Step 3: Achieving Strategic Fit

• Step is to ensure that what the supply chain does well is consistent with target customer’s needs

• Fig. 2.5: Uncertainty/Responsiveness map

• Fig. 2.6: Zone of strategic fit

• Examples: Dell, Barilla

Responsiveness Spectrum (Figure 2.4)

Integratedsteel mill

Highlyefficient

Highlyresponsive

Somewhatefficient

Somewhatresponsive

Hanesapparel

Mostautomotiveproduction

Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map

(Fig. 2.5)

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand

Uncertain demand

Responsiveness spectrum Zone o

Strateg

ic Fit

Step 3: Achieving Strategic Fit

• All functions in the value chain must support the competitive strategy to achieve strategic fit – Fig. 2.7

• Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) – Table 2.4

• Two key points

– there is no right supply chain strategy independent of competitive strategy

– there is a right supply chain strategy for a given competitive strategy

Comparison of Efficient and Responsive Supply Chains (Table 2.4)

Efficient Responsive

Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense of greater cost

Aggressively reduce even if costs are significant

Supplier selection strategy

Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost modes

Greater reliance on responsive (fast) modes

Other Issues Affecting Strategic Fit

• Multiple products and customer segments

• Product life cycle

• Competitive changes over time

Multiple Products and Customer Segments

• Firms sell different products to different customer segments (with different implied demand uncertainty)

• The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments

• Two approaches:– Different supply chains– Tailor supply chain to best meet the needs of

each product’s demand

Product Life Cycle

• The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle

• Supply chain strategy must evolve throughout the life cycle

• Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary

• Late: predictable demand, lower margins, price is important

Product Life Cycle

• Examples: pharmaceutical firms, Intel

• As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

Product Life Cycle

Best period to Best period to increase market increase market shareshare

R&D engineering is R&D engineering is criticalcritical

Practical to change Practical to change price or quality price or quality imageimage

Strengthen nicheStrengthen niche

Poor time to Poor time to change image, change image, price, or qualityprice, or quality

Competitive costs Competitive costs become criticalbecome criticalDefend market Defend market positionposition

Cost control Cost control criticalcritical

Introduction Growth Maturity Decline

Internet search enginesInternet search engines

SalesSales

Xbox 360Xbox 360

Drive-through Drive-through restaurantsrestaurants

CD-ROMsCD-ROMs

3 1/2” 3 1/2” Floppy Floppy disksdisks

LCD & plasma TVsLCD & plasma TVsAnalog TVsAnalog TVs

iPodsiPods

Product Life Cycle

Product design Product design and and development development criticalcritical

Frequent Frequent product and product and process design process design changeschanges

Short production Short production runsruns

High production High production costscosts

Limited modelsLimited models

Attention to Attention to qualityquality

Introduction Growth Maturity Decline

Forecasting Forecasting criticalcritical

Product and Product and process process reliabilityreliability

Competitive Competitive product product improvements improvements and optionsand options

Increase capacityIncrease capacity

Shift toward Shift toward product focusproduct focus

Enhance Enhance distributiondistribution

StandardizationStandardization

Less rapid Less rapid product changes product changes – more minor – more minor changeschanges

Optimum Optimum capacitycapacity

Increasing Increasing stability of stability of processprocess

Long production Long production runsruns

Product Product improvement and improvement and cost cuttingcost cutting

Little product Little product differentiationdifferentiation

Cost Cost minimizationminimization

Overcapacity Overcapacity in the in the industryindustry

Prune line to Prune line to eliminate eliminate items not items not returning returning good margingood margin

Reduce Reduce capacitycapacity

Competitive Changes Over Time

• Competitive pressures can change over time

• More competitors may result in an increased emphasis on variety at a reasonable price

• The Internet makes it easier to offer a wide variety of products

• The supply chain must change to meet these changing competitive conditions

Expanding Strategic Scope

• Scope of strategic fit – The functions and stages within a supply chain that devise

an integrated strategy with a shared objective– One extreme: each function at each stage develops its own

strategy– Other extreme: all functions in all stages devise a strategy

jointly• Five categories:

– Intracompany intraoperation scope– Intracompany intrafunctional scope– Intracompany interfunctional scope– Intercompany interfunctional scope– Flexible interfunctional scope

Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Development

Strategy

Supply Chain Strategy

Marketing Strategy

IntracompanyIntraoperationat Distributor

IntracompanyIntrafunctionalat Distributor

IntracompanyInterfunctional

at Distributor

IntercompanyInterfunctional

Summary of Learning Objectives

• Why is achieving strategic fit critical to a company’s overall success?

• How does a company achieve strategic fit between its supply chain strategy and its competitive strategy?

• What is the importance of expanding the scope of strategic fit across the supply chain?

Supply Chain Drivers and Obstacles

Outline• Drivers of supply chain performance• A framework for structuring drivers• Facilities• Inventory• Transportation• Information• Sourcing• Pricing• Obstacles to achieving fit

Drivers of Supply Chain Performance• Facilities

– places where inventory is stored, assembled, or fabricated– production sites and storage sites

• Inventory– raw materials, WIP, finished goods within a supply chain– inventory policies

• Transportation– moving inventory from point to point in a supply chain– combinations of transportation modes and routes

• Information– data and analysis regarding inventory, transportation, facilities throughout the

supply chain– potentially the biggest driver of supply chain performance

• Sourcing– functions a firm performs and functions that are outsourced

• Pricing– Price associated with goods and services provided by a firm to the supply chain

A Framework for Structuring Drivers

Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

Facilities• Role in the supply chain

– the “where” of the supply chain– manufacturing or storage (warehouses)

• Role in the competitive strategy– economies of scale (efficiency priority)– larger number of smaller facilities

(responsiveness priority)

• Example 3.1: Toyota and Honda• Components of facilities decisions

Components of Facilities Decisions

• Location– centralization (efficiency) vs. decentralization

(responsiveness)– other factors to consider (e.g., proximity to customers)

• Capacity (flexibility versus efficiency)

• Manufacturing methodology (product focused versus process focused)

• Warehousing methodology (SKU storage, job lot storage, cross-docking)

• Overall trade-off: Responsiveness versus efficiency

Facility Related Metrics

• Capacity – maximum amount a facility can process• Utilization – the fraction of capacity utilized• Theoretical flow/cycle time of production – time required to

process a unit• Actual / average flow / cycle time – the average actual time

taken• Flow time efficiency: ratio of the above two• Product Variety• Processing/Setup/Down/Idle time• Average production batch• Production service level: measures the fraction of production

orders completed on time and in full.

Inventory

• Role in the supply chain

• Role in the competitive strategy

• Components of inventory decisions

Inventory: Role in the Supply Chain

• Inventory exists because of a mismatch between supply and demand

• Source of cost and influence on responsiveness• Impact on

– material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain

– throughput

• rate at which sales to end consumers occur

• I = RT (Little’s Law)

• I = inventory; R = throughput; T = flow time

• Example

• Inventory and throughput are “synonymous” in a supply chain

Inventory: Role in Competitive Strategy

• If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers

• If cost is more important, inventory can be reduced to make the firm more efficient

• Trade-off

• Example 3.2 – Nordstrom

Components of Inventory Decisions

• Cycle inventory– Average amount of inventory used to satisfy demand between shipments

– Depends on lot size

• Safety inventory– inventory held in case demand exceeds expectations

– costs of carrying too much inventory versus cost of losing sales

• Seasonal inventory– inventory built up to counter predictable variability in demand

– cost of carrying additional inventory versus cost of flexible production

– more inventory: greater responsiveness but greater cost

– less inventory: lower cost but lower responsiveness

Inventory Related Metrics

• Average Inventory – Measured in units, days of demand, and financial value

• Average replenishment batch size – the average amount in each replenishment order. Measured by SKUin both units and days of demand

• Average safety Inventory – measures the average amount of inventory when a replenishment order arrives. Measured by SKU in both units and days of demand

• Fill rate – measures the fraction of orders/demand met on time from Inventory. Measured in terms of specified number of units.

• Fraction of time out of stock• Seasonal Inventory• Products with more than a specified number of days of

inventory

Transportation

• Components of transportation decisions

Transportation: Role inthe Supply Chain

• Moves the product between stages in the supply chain

• Impact on responsiveness and efficiency

• Faster transportation allows greater responsiveness but lower efficiency

• Also affects inventory and facilities

Transportation: Role in the Competitive Strategy• If responsiveness is a strategic competitive

priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it

• Can also use slower transportation modes for customers whose priority is price (cost)

• Can also consider both inventory and transportation to find the right balance

• Example 3.3: Laura Ashley

Components ofTransportation Decisions

• Mode of transportation: – air, truck, rail, ship, pipeline, electronic transportation– vary in cost, speed, size of shipment, flexibility

• Route and network selection– route: path along which a product is shipped– network: collection of locations and routes

• In-house or outsource• Overall trade-off: Responsiveness versus

efficiency

Transportation Related Metrics

• Average Inbound transportation cost – the cost of bringing product into the facility as a percentage of sales or cost of goods sold

• Average incoming shipment size – measured in terms of units or monetary value

• Average inbound transportation cost per shipment – measures the average transportation cost of each incoming delivery

Information

• Components of information decisions

Information: Role inthe Supply Chain

• The connection between the various stages in the supply chain – allows coordination between stages

• Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels

Information: Role in the Competitive Strategy• Allows supply chain to become more

efficient and more responsive at the same time (reduces the need for a trade-off)

• Information technology

• What information is most valuable?

• Example 3.4: Andersen Windows

• Example 3.5: Dell

Components of Information Decisions

• Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain)

• Coordination and information sharing• Forecasting and aggregate planning• Enabling technologies

– EDI– Internet– ERP systems– Supply Chain Management software

Information related Metrics

• Forecast Horizon• Frequency of Update• Forecast error• Seasonal factors• Variance from plan: Identifies the difference between the

planned production/inventories and the actual values

• Ratio of demand variability to order variability – Measures the standard deviation of incoming demand and supply orders placed. A ratio less than one indicates the existence of bullwhip effect

Reasons for IT in Supply Chain

• Spatial Spread

• Time Element

• Efficient, reliable and timely data capture and data availability for decision making

E-Business

• Impact of E-Business on cost

– Inventory costs - Decrease– Transportation costs - Increase– Facility costs - Decrease– Information costs - Large initial

investment withlowerprocessing costs

Sourcing

• Components of sourcing decisions

Sourcing: Role inthe Supply Chain

• Set of business processes required to purchase goods and services in a supply chain

• Supplier selection, single vs. multiple suppliers, contract negotiation

Sourcing: Role in the Competitive Strategy• Sourcing decisions are crucial because

they affect the level of efficiency and responsiveness in a supply chain

• In-house vs. outsource decisions- improving efficiency and responsiveness

• Example 3.6: Cisco

Components of Sourcing Decisions

• In-house versus outsource decisions

• Supplier evaluation and selection

• Procurement process

• Overall trade-off: Increase the supply chain profits

Sourcing Related Metrics

• Days payable outstanding

• Average Purchase price

• Range of purchase price

• Average purchase quantity

• Fraction on-time deliveries

• Supply quality

• Supply lead time

Pricing

• Components of pricing decisions

Pricing: Role inthe Supply Chain

• Pricing determines the amount to charge customers in a supply chain

• Pricing strategies can be used to match demand and supply

Pricing: Role in the Competitive Strategy• Firms can utilize optimal pricing strategies

to improve efficiency and responsiveness

• Low price and low product availability; vary prices by response times

• Example 3.7: Amazon

Components of Pricing Decisions

• Pricing and economies of scale

• Everyday low pricing versus high-low pricing

• Fixed price versus menu pricing

• Overall trade-off: Increase the firm profits

Pricing Related Metrics

• Profit margin

• Days sales outstanding

• Incremental fixed cost per order

• Incremental variable cost per order/unit

• Average order size

• Range of sale price

Obstacles to Achieving Strategic Fit

• Increasing variety of products

• Decreasing product life cycles

• Increasingly demanding customers

• Fragmentation of supply chain ownership

• Globalization

• Difficulty executing new strategies

SCM Drivers Summary

• Facilities– Location: Centralization Vs Decentralization– Capacity: Flexible Vs Efficient– Manufacturing : Product focus Vs Process focus– Warehousing methodology

• Inventory– Cycle stock: When to order?– Safety stock : How much to order?– How often to monitor the inventory status– Trade off is between cost and responsivness

SCM Drivers Summary

• Transportation– Modes– Route and Network selection– In-house or outsource– Trade-off is between cost and speed

• Information– Push Vs Pull approach– Coordination and information sharing– Forecasting and aggregate planning

Summary• What are the major drivers of supply chain

performance?• What is the role of each driver in creating strategic fit

between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)?

• What are the major obstacles to achieving strategic fit?

• In the remainder of the course, we will learn how to make decisions with respect to these drivers in order to achieve strategic fit and surmount these obstacles

Logistic Management

• Overcoming functional silos with conflicting goals

Purchasing Manufacturing Distribution Customer Service/Sales

Few change- overs

Stable schedules

Long run lengths

High inventories

High service levels

Regional stocks

SOURCE MAKE DELIVER SELL

Low pur-chase price

Multiple vendors

Low invent-ories

Low trans-portation

Definition

• Logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flow through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost effective fulfillment of orders.

Logistic Management

• Logistics By the Council of Logistics Management:Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services and related information from point of origin to point of consumption (including inbound, outbound, internal, and external movements) for the purpose of conforming to customer requirements.

• The Rule of Seven Rs:• Logistics is ensuring the availability of the right product ,

in the right quantity and right condition, at the right place, at the right time , for the right customer , at the right cost.

Sample Logistics System

Logistics Supply Chain

Logistic Management

• Design and Operation of the physical, managerial and informational systems needed to allow goods to overcome time and space, from the producer to the customer.

• It requires an integrated view of a number of different activities and functions.

• From a firm’s point of view, these activities are represented as part of the value chain called the generic value chain by Michael Porter.

DECISIONS IN LOGISTICS MANAGEMENT

• Product design

• Plant location

• Choice of market/sources

• Production structure

• Distribution/Dealer Network Design

• Location of Warehouses

• Plant layout and logistics

• Allocation decisions

• Production Planning

• Inventory Management

• Transportation mode choice, shipment size, routing decision and transport contracting

• Packaging

• Materials Handling

• Warehouse Operations

DECISIONS IN LOGISTICS MANAGEMENT

KEY ACTORS IN LOGISTICS MANAGEMENT

• Shippers (Users of logistics)

• Suppliers (of logistics services)– carriers (rail, road, air, water, pipeline, rope way)– Warehouse providers– Freight forwarders– Terminal Operators (Ports)

• Government (Regulator of logistics)

CLASSIFICATION OF LOGISTICS APPLICATIONS

• Decision-wise

• Actor-wise

• Inbound logistics and outbound logistics

• Single vs Multiple plants

• Nature of Product - Bulk vs Packaged products - Perishable vs Non-perishable products - Durable vs Non-durable products - Single vs multiple products - Industrial vs consumer products

• Made to stock vs Made to order

ELEMENTS OF LOGISTICS COST:

Product Inventory cost at source

Pipeline Inventory cost

Product Inventory cost at warehouses and dealers

Transit losses/Insurance cost

Storage losses/Insurance cost

Handling and warehouse operations cost

Packaging cost

Transportation cost

Customer’s shopping cost

LOGISTICS MANAGEMENT TO SUPPLY CHAIN MANAGEMENT:

Evolution from logistics management to SCM involves the following:

1.The Financial system is explicitly added to the scope of analysis - Mechanisms of credit and advance payments - Pricing of products and services i.e. sensitive to demand (cooperation between players) - Joint investments across different entities that could yield benefits, which are shared

2. Services are considered as part of value delivered

- Pure service elements such as installation, providing information about product features and availability, after sales service etc. are increasing in their importance.

3. The scope of SCM is enlarged to consider the entire gamut of activities from vendor to customer.

4. Effectiveness of delivery to the customer is the primary focus of SCM, Logistics is concerned with efficiency to achieve certain

goals of service at minimum cost.

LOGISTICS MANAGEMENT TO SUPPLY CHAIN MANAGEMENT

SUPPLY CHAIN MANAGEMENT

A Supply Chain consists of all stages involved directly or indirectly in fulfilling a customer request.

It includes the manufacturer, supplier, transporters, distributors, retailers and customers.

Focus of SCM: - Co-operation and trust - Recognition that properly managed, the whole can be greater than the sum of its parts in terms of benefits. - Management of relationships in order to achieve a more profitable outcome for all parties in the chain.

Definition of SCM: - The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole.

- A network of connected and interdependent organizations mutually and co-operatively working together to control, manage and improve the flow of materials and information from suppliers to end users.

OBJECTIVE OF SCM: - Maximize the overall value generated. Maximize the profitability. Profitability = Revenue generated – Overall cost

What SCM is not ?

SCM is Not Vertical Integration

Logistics Vs SCM

• Logistics is primarily concerned with optimizing flows within the organization

• SCM recognizes that internal integration by itself is not sufficient.

Supply chain’s Responsiveness and Efficiency

Responsiveness - Respond to wide ranges of qualities demanded - Meet short lead times - Handle a large variety of products - Build highly innovative products - Meet a very high service level

Efficiency - Cost of making and delivering a product to the customer

Supply Chain of IBM Europe

FUNDAMENTAL FEATURES OF SCM

SINGLE ENTITY - A single group for planning and control

INVENTORY PERSPECTIVE - Inventory is a buffer to be used as a last resort

STRATEGIC DECISION MAKING - Decisions in the supply chain are viewed as having strategic implications, rather than just operational. e.g. Long term contracts with transporters.

SYSTEMS APPROACH - A single integrated system

DOING WHAT ONE CAN DO BEST - Building effective partnerships - Implications on outsourcing and insourcing

Thrust areas of SCM

Minimizing Uncertainty• Supply uncertainty: due to unreliability of suppliers.

It can be reduced through vendor development, sharing of production planning information and joint attention to transport arrangement

• Process Uncertainty: due to machine breakdowns, uncertain yields and absenteeism. It can be reduced through better maintenance practices, better technology etc.

• Demand uncertainty: It can be reduced by using better forecasting techniques and by better communication with customers.

Reducing Lead Times• Can be achieved by faster modes of

transport, better planning practices and process technologies

Minimizing the Number of Stages• Makes the coordination of decisions easier.• Can be achieved by using Business Process

Reengineering

Thrust areas of SCM

• Improving Flexibility– Involves reducing setup or change over times in

various processes and the use of flexible manufacturing and assembly techniques

– In transport, smaller vehicles enable dispatching at short notice without being constrained by batching economies

• Improving Process Quality– Involves doing the things right at the first time– Use of statistical process control, robust design

techniques etc.

Thrust areas of SCM

• Minimizing Variety– Modularize product designs so that variety is

offered in a controlled way and some economies of scale can be exploited.

– Standardise product and service offerings

• Managing Demand– Uncertainty and anticipated variations in

demand should be dealt with by appropriate promotion and branding

Thrust areas of SCM

• Delaying Differentiation– Postponing value addition through product

differentiation as far possible, so that precise customer needs can be met without holding committed stocks in the entire chain.

– Examples: Shipping of component level goods to major points and assembling according to customer needs.

– Postponing finishing operations like grinding and mixing of additives to cement till near the point of consumption

Thrust areas of SCM

• Kitting of Supplies– In assembly systems, a major source of delay is the

staging delay where some components for assembly have to wait since matching components are not available

– Vendors or internal facilities that supply components can be arranged so all components required for an assembly are manufactured or supplied at one stage, where they are kitted into sets of matching components, ready for assembly and further operations

– This could involved some restructuring of vendors or internal activities and some vertical integration

Thrust areas of SCM

• Planning for Multiple Supply Chains– Different supply chains for different customer

segments based on response requirements

• Modifying Performance Measures– Move from single actor focused to multi-actor focused– Examples:

• In a warehouse, instead of warehouse space utilization as the measure, retrieval time can be a useful measure, since it focuses on both the warehouse and downstream actor

• A transporter like railways would focus more on time taken for delivering a wagon/rake to a customer from the time the indent is placed, rather than wagon utilization / turnaround

Thrust areas of SCM

• Competing on Service– Considering service aspects of value added delivery

• Moving from Functions to Process– Integrated process orientation rather than functional orientation– Job rotation, flatter and lean organization

• Taking Initiatives at an Industry Level– Required for dealing with poor infrastructure– Industry-level, rather than firm-level initiatives in specific product

categories can focus on say, transport and/or warehousing inadequacies and develop appropriate service providers

– Opportunity for third party logistics services

Thrust areas of SCM

Performance measures for SCM

• Total Supply Chain Cost• Supply Chain Profitability: total profitability shared across all

supply chain stages• Process Capability: Measured in terms of variability of the outcome

with respect to the desired target. It captures the technology and engineering aspects of activities

• Customer Retention: Measured in terms of the value aspect of the supply chain process. Example: Fill rate (proportion of ordered items met from available inventory)

• Process Lead Time: It captures the organization aspect of activities– Lead time to deliver a certain promised range of products indicate

how quickly and reliably the supply chain can respond to needs as and when they arise

– While inventories can be a contingency plan, process lead times measure the primary effectiveness of the demand fulfillment process.

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 Operations Strategies

STRATEGY WHEN TO CHOOSE BENEFITS

Make to Stock

standardized products, relatively predictable demand

Low manufacturing costs; meet customer demands quickly

Make to Order

customized products, many variations

Customization; reduced inventory; improved service levels

Configure to Order

many variations on finished product; infrequent demand

Low inventory levels; wide range of product offerings; simplified planning

Engineer to Order

complex products, unique customer specifications

Enables response to specific customer requirementsSource: Simchi-Levi

Supply Chain Management – 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 Imperatives for Success

• View the supply chain as a strategic asset and a differentiator– Wal-Mart’s partnership with Proctor & Gamble to automatically

replenish inventory– Dell’s innovative direct-to-consumer sales and build-to-order

manufacturing• Create unique supply chain configurations that align with your

company’s strategic objectives– Operations strategy– Outsourcing strategy– Channel strategy– Customer service strategy– Asset network

• Reduce uncertainty– Forecasting– Collaboration– Integration

Supply chain configuration components

Summary

• Evolution of Supply chain management– Perspective of supply chain management– Perspective of materials management

• Decision Phases in Supply chain• Performance measures of Supply chain• Competitive and supply chain strategies• Achieving a strategic fit• Supply chain drivers and obstacles• Information technology and SCM

MEV 425 Supply Chain Management Introduction. Launched across 93 countries simultaneously.

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