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McGraw-Hill/Irwin 2003 Simchi-Levi, Kaminsky, Simchi-Levi

Outline of Presentation

Supply Chain Capabilities

Logistics NetworkD

esign Supply Chain Master Planning

Demand Planning

Inventory Planning Information Technology

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Capabilities required for

supply chain excellence Strategic network

design

Supply chain masterplanning

Operational planning

Operational execution

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Capabilities required to

achieve

supply chain excellence

*Forrester Balancing supply and demand March 2002

Network Design

Demand

Planning

Supply Chain

Master Planning Inventory Planning Fulfillment

Decision focus Infrastructure

Forecast &

Forecast Error

Resource

utilization / cycle

stock Safety stock Customer Service

Planning Horizon 2 to 5 years 1-12 months 12 months 1 month Hours

Aggregation Level Family Item Classes Item Order

Frequency Yearly Monthly/Weekly Monthly/Weekly Monthly/Weekly Real-time

ROI * 60% to 70% ?? 15% to 20% 5% to 10% 1% to 5%

Implementation Very Short Medium Short Short Long

Users Very few Few Few Few Many

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Network Design: Key

Issues Pick the optimal number, location, and size of

warehouses and/or plants

Determine optimal sourcing strategy Which plant/vendor should produce which product

Determine best distribution channels

Which warehouses should service which customers

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Network Design Tools:

MajorComponents Mapping

Mapping allows you to visualize your supply chain and solutions

Mapping the solutions allows you to better understand different scenarios

Color coding, sizing, and utilization indicators allow for further analysis

Data

Data specifies the costs of your supply chain

The baseline cost data should match your accounting data

The output data allows you to quantify changes to the supply chain

Engine

Optimization Techniques

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Mapping Allows You to

Visualize Your SupplyC

hain

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Displaying the Solutions Allows

you ToC

ompare Scenarios

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Key Drivers forNetwork

DesignProfitability

Competitiveness

Profits Assets

Revenue Expenses

Service levels

- proximity tokey markets

Distribution

channels

Fixed cost ofDCs

Fixed cost of X-docks

Fixed cost of plants

Cost of private fleetInbound transportation

Outbound transportation

- location of facilities

drives this cost

Inventory costs

Variable production and

warehousing costs

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Typical Strategic Network

Design Applications

Evaluate the optimal distribution network to reduce

costs and improve service

Determine how to optimally consolidate two

networks after a merger

Develop an e-commerce distribution strategy

Quickly respond to RFPs

Perform due diligence studies

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Who is Involved?

Operations Can include transportation, warehousing, manufacturing, and vendors

Provides information on how the business runs and what is possible

Sales/Marketing Provides information on service level constraints and evaluates how

different scenarios will impact sales

Provides forecast data

Finance Determines cost inputs and validates cost of scenarios

Information Technology Assists with data collection

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$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

0 2 4 6 8 10

Number rehouses

C

ost

(millions$)

T t l st

Tr s rt ti st

i st

I t r st

The key is to balancethe total costs with service requirements

Network Design

Optimization

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Industry Benchmarks:

Number of Distribution

Centers

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

Avg.

# of

WH 3 14 25

Pharmaceuticals Food Companies Chemicals

- High margin product

- Service not important (or

easy to ship express)

- Inventory expensive

relative to transportation

- Low margin product

- Service very important

- Outbound transportation

expensive relative to inbound

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Limitations of Strategic Tools and

the Need for Tactical Tools Strategic tools do not consider time

periods

Demand varies over time Production capacity can vary over time

Strategic models cannot identify the

month in which warehouses will be out

of capacity or demand will not be

satisfied

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Need for Tactical

Planning Tools

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Demand

Safety Stock

ProductionCapacity

DC

Capacity

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Supply Chain Master

Planning A supply chain master plan identifies

production quantities, distribution strategies

and storage requirements by efficientlyallocating supply chain resources to

minimize system-wide cost ormaximize

profit over multiple time periods

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Supply Chain Master

Planning Allows the supply chain to replace

se uential optimi ation with global

optimi ation

In se uential optimi ation each part of the

supply chain is optimized ith no, orvery

little, regards to other supply chain components Traditional supply chain strategies

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Procurement

Planning

Manu acturing

Planning

istribution

Planning

emand

Planning

Sequential Optimization

Supply hain MasterPlanning

Procurement

PlanningManu acturing

Planning

istribution

Planningemand

Planning

Global Optimization

Sequential Optimization vs.

Global Optimization

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Supply Chain Master

Planning: A Case Study CPG xample

Sho ing the bene its o global optimi ation

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Supply Chain Master Planning:

CPG Manufacturer

Demand varies

by week

and changes

week to week

Starting inv

positions for

every product in

every DC

Production/purchases

fixed on short term

basis

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Challenges

overflow

How to best

replenish DCs

How much to

commit to for

each supplier

How to minimize

the use of overflow

warehouses

How to Coordinate

Production and Demand

Planning

High demand

variability

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The Extended Supply

Chain

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Data Integration

Files updated from the ERP Systems

Demand Forecast

Starting Inventory positions

Locked in production schedule (4 weeks out)

Remaining shelf life

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CPG Conclusions

Master supply chain planning output New production plan and order from suppliers

Inter-facility moves, out of territory moves, where to store excess

product New inventory plan

Replenishment lanes

Profitability/total cost of the given plan

Benefits

Reduced costs by optimizing over total supply chain costs

Better use of existing assets (both plants and inventory)

Created a coordinated plan

Better plan for extra resources

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Logistics Network Design

Supply Chain Master Planning

Demand Planning


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Demand Planning

Functionality: Statistical forecasting

OLAP (Online Analytical Processing)

The ability to analyze data along multiple dimensions

Event and promotion management support

The ability to track the impact of events and promotions

using historical data

Forecast demand taking into account promotions

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Demand Planning

Functionality: Lifecycle and new product support

Forecast new product demand based on models from

similar products, demand history or other marketmodels

Manage product lifecycle based on factors such as

substitution, cannibalization, or phase-out

Support collaborative forecasting Within the organization

With suppliers and customers

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Demand Planning


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There are four levels of

Inventory Planning

Level 1

Manual management within one facility

Goal Avoid Stock-outs

Process Periodic review with manual inventory checking

Tight management of usage rates, lead times & safety stock

ABC analysis

Software: Databases, no inventory management products

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Inventory Planning

Level 2

Scientific methodology within one facility

Goal Optimize local inventory

Process Determine safety stock based on replenishment lead times,

forecast errors and service level

Software: Demand planning, inventory management or replenishment tools

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Inventory Planning

Level 3

Strategic positioning of inventory across the Supply Chain

Goal: Collaborative global optimization of Inventory Levels

Process: Optimize committed lead times based on the entire supply chain

Position inventory strategically to minimize system wide cost

Satisfy service level requirements

Software: Advanced Inventory Planning

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Inventory Planning

Level 4

Tactical Supply Chain Adjustment to Optimize Inventory

Goal: Design the supply chain based on service requirements Process:

Optimize the suppliers based on service commitment, price and

inventory requirements

Software: Advanced Inventory Planning

X X

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Capabilities required to achieve

supply chain excellence

*Forrester Balancing supply and demand March 2002

Network Design

Demand

Planning

Supply Chain

Master Planning Inventory Planning Fulfillment

Decision focus Infrastructure

Forecast &

Forecast Error

Resource

utilization / cycle

stock Safety stock Customer Service

Planning Horizon 2 to 5 years 1-12 months 12 months 1 month Hours

Aggregation Level Family Item Classes Item Order

Frequency Yearly Monthly/Weekly Monthly/Weekly Monthly/Weekly Real-time

ROI * 60% to 70% ?? 15% to 20% 5% to 10% 1% to 5%

Implementation Very Short Medium Short Short Long

Users Very few Few Few Few Many

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Trends in Supply Chain

Planning Utilization of SCP will increase at all levels

of decision making

SCP will handle real time data and must

have a short processing time

SCP will become better integrated with

users information systems

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Demand Planning

Inventory Planning

Information Technology

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IT in SCM spans both internal and externalsystems connecting the firm to its customers

and suppliers Companies employ different systems that

support different locations Warehouse management systems,

Production planning, Transaction and sales processing

Decision support systems

Communications systems: Email, Intranets

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In many businesses, competitive edge in the

market is achieved through the use of IT

Banking

Retail (Wal Mart)

Airlines (American Airlines)

Trucking and Shipping (FedEx)

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Goals of IT in SCM

Access any data in the system from asingle point o contact. This is complicated

by the fact that one may need informationwhich resides

in various locations within one company

in different companies

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Goals of IT in SCM

Analyze and plan activities based on totalsupply chain information.

Decision Support Systems

Advanced Planning Systems

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Goals of IT in SCM

Collaborate with Supply Chain partners.

Alignment of IT systems

Integration of business processes

Supply chain relationship management

CPFR

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How are these Goals

Achieved?1. Standardization

2. Infrastructure

3. Electronic Commerce

4. Supply Chain System Components

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How are these Goals

Achieved?1. Standardization:

The forces behind them:

Market forces: cheaper to purchase and maintain Interconnectivity

Reduced software costs

Economies of scale

General standards

Wintel

Internet: HTML, XML

Web services

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Emerging Standards

Supply Chain Operations Reference Model

(SCOR)

Collaborative Planning Forecasting AndReplenishment (CPFR)

Rosettanet

ERPII

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How are these Goals Achieved?

(Cont.)

2. n rastructure:

Many companies have implemented Enterpriseesource Planning (ERP) systems which create

an enterprise-wide transaction bac bone as wellas tie in all the facilities into worldwide financialsystems.

IT infrastructure typically consists of the following

components: Interface/presentation devices Communications

Databases

System architecture

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How are these Goals Achieved?

(cont.)

3. Electronic Commerce:

EC refers to the ability to perform

transactions electronically

Examples of direct-sell to customers through

the Internet:

Dell Computer

Amazon.com

Peapod

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Table 1

Summary of Electronic Commerce levels

Level number Description Example

1 One-waycommunication

Email, FTP, Browsing

2 Database access Inquiries, Forms, Purchases,Tracking

3 Data Exchange EDI, Clearinghouse

4 Sharing processes CPFR, Business communities

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Table 2

Comparison of ERP and DSS Implementation

Implementation Issue ERP DSSLength 18-48 months 6-12 months

Value OperationalStrategic, tactical,

operational

ROI 2-5 year payback One-year payback

Users All and users Small groupTraining Simple Complex

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Table 3

Priorities when Implementing DSS

Industry

oft-drink distributor Network and Transportation

omputer manufacturer emand and roduction

onsumer products emand and istribution

pparel emand, apacity and istribution

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Table 4

Best of breed versus ERP package

Implementation Issue Best of Breed ingle-vendor

ength 2-4 years 12-24 months

ost Higher ower

Flexibility Higher ower

omplexity Higher ower

Quality of solution Higher ower Fit to enterprise Higher ower

taff training onger shorter

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