Chapter 1 Introduction to Supply Chain Management Qi Xu Professor of Donghua University Tel:...

Chapter 1 Introduction to Supply Chain Management

Qi Xu

Professor of Donghua University

Tel: 021-62378860E-mail: [email protected]

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Meditech Surgical

• Case describes a scenario with typical symptoms – inventories are too high and customer service is poor.

• Initial explanation is that the problems are due to poor forecasting of customer demand. There’s a perception that demand is highly variable and unpredictable, possibly due to irrational customer behavior, e. g., panic ordering. … if only Meditech could forecast what the customers will order, then they could improve customer service and reduce inventories….

Case 1

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Outline

• Intent – diagnosis of supply chain• Business overview• Supply chain• Production planning• What’s wrong?• How to fix it?

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Endoscopic Surgical Instruments

• Permits minimally invasive surgery

• Market created in early 80’s, rapidly growing

• Old products continually updated and replaced with new product introductions

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Business Overview

• National and Meditech split the market

• Compete based on product innovations, customer service, cost

• National sells to physicians; Meditech sells to material managers

• Customer preferences change slowly

Copyright Stephen C. Graves, 2002. All rights reserved

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External Supply Chain

Part suppliers

Meditech Assembly plants

MeditechWarehouse:autonomous regional warehouses

Domestic Dealers

Int’l MeditechAffiliates

Hospitals

Hospitals


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Internal Supply Chain

Parts Inventory Assembly Bulk InventoryFG Inventory

Packaging &Sterilization

2 - 16weeks

2weeks

1 week


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Assembly organized into multiple flexible lines, manual .

Packaging and sterilization have adequate capacity

Production PlanningAnnual Forecast

Monthly Revision

TransferRequirements

MonthlyPlan

MRP

PartsProcurement

Plan

WeeklyAssemblySchedule


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Annual forecast determined by marketing and finance

Revision done at beginning of month by marketing and central planning

Transfer requirements = forecast – FG inventory +safety stock (3 weeks of demand), done by central planning

Monthly plan sent to business units, who input it into MRP to get material plans and assembly schedules

Production Planning

Parts Inventory Assembly Bulk Inventory Packaging &Sterilization

FG inventory

MonthlyPlan

MRP

Order point;Order quantity

MaterialPlan


focusing on information flows

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What’s wrong?

• Poor service for new product introductions

• Poor forecasting?• Panic ordering?• And high FG inventory


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What is going on?What is going on?

• Demand is quite predictable• Usage in hospitals is quite

stable• Market share moves slowly over

time• With each new product, dealer

must build inventory to fill pipeline


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Why did Meditech think demand was unpredictable?

• Poor information systems• No one looked at demand• No one had responsibility for

forecast errors• Tendency to shift the blame• Built-in delays and monthly

buckets in planning system• Amplifier in planning system


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What to do?

• Recognize that demand is stable and predictable

• Establish accountability for forecast• Eliminate planning delays and/or

reduce time bucket• Alternatively, put assembly within

pull system and eliminate bulk inventory

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Wrap Up

• Case illustrates a supply chain challenge – understand why Meditech has poor customer service and high inventory, particular for new products. Context is characterized by lack of data and a some what archaic, albeit typical, planning system that obscures the problem.

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1.1 What Is A Supply Chain?

• The system of suppliers, manufacturers, transportation, distributors, and vendors that exists to transform raw materials to final products and supply those products to customers.

SupplierSupplierManufacturerManufacturerDistributorDistributorRetailerRetailerCustomerCustomer

UpstreamDownstream

What is SCM?

BuyingBuying

What is SCM?

SellingSelling

MakingMaking

MovingMoving

WarehousingWare

housing

SCM is a business network covering from buying, making, moving, warehousing to selling

SCM

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What Is the Goal of Supply Chain Management?

• Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed:– In the right quantities– To the right locations – At the right time

• In order to– Minimize total system cost – Satisfy customer service requirements

The rightProduct

HigherProfits

The rightTime

The rightCustomer

The rightQuantity

The rightStore

The rightPrice

=++ ++ +

Supply Chain Status

TIER2

TIER1

Supplier Supplier Supplier OEM

-Manual communication

(Phone/Fax/EDI)

-Spontaneous planning

-Hypothetical planning

-Tier To Tier

-Enormous inventory buffer

Supply Chain Status Prospect of supply chain

Fax/E-mail

EDI

On-line

78%

65%

28%

60%

60%

88%

2000 2002

Forrester Research, 2000

TIER3

Yet existing supply chain is managed manually, causing serious loss of efficiency and cost

SCM

Background of SCM and its effect

Background Background

Emerging new channel

Severe competition

Speed management

Internet booming

Effects Effects

Shorter product life cycle

Channel integration

Speedy adaption to change supply chain

Enhanced customer satisfaction

Supply chain integration thru web

Product life cycle management

“Competition among supply chains

not among companies”

The change in the industrial environment demands the business to adopt to SCM and it can bring the following effects

Standardization of product and tech

SCM

Components of SCM

Supply Chain Planning

Supply Chain Execution

Collaborative Planning-Supply Chain Network Design-Demand Planning & Forecasting-Supply Planning-Distribution Planning-Manufacturing Planning & Scheduling

-Warehouse Management-Transportation Management-Inventory Management-Order Management

Facilitating collaboration among participants

-Design Collaboration-Demand Collaboration-Procurement Collaboration-Retailer Collaboration

Deliver the Right Productat the Right Placeat the Right Time

SCM is devided by SCP to offer optimized planning, SCE to stable execution platform, CP to collaborate

Optimized planning for balanced supply for varied demands

Timely execution for buying, moving, making and ordering

SCM

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Recent Supply Chain Studies Suggest….

“ Only 7% of companies today are effectively managing their supply chain. However, these companies are 73% more profitable than other manufacturers. …

” Deloitte & Touche Study, October 2003“

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Notice

• Who is involved?• What is the goal?• What level of activities are

involved?• What do we mean by integration?

2SCM Architecture

SCM

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

Figure1.1 The logistics network

SCP Service

Buy Make Store Sell

Move

ObjectivesObjectives

FunctionFunction

Enhancement of customer services

Reduction of inventoryand increasing sales

Effective acquisition of raw material

Demand Planning& Fulfilment

DistributionPlanning

Manufacturing Planning

Material Planning

SCP analyze, forecast and determine the process of buying, making, transporting, warehousing and selling for balanced supply

Effective management of product resources

-Collaboration for cost reduction-Reducing VMI (Vendor managed inventory)

-Production planning considering constraints-Optimizing production scheduling

-Differentiated inventory management according to demands-Prevention of missing the sales opp.

-Demand forecasting based on statistics-Prediction of sales point on excess demand (ATP, CTP)

SCM

SCE Consulting

Logistics consulting

Cyber logistics consulting

Seamless System

Logistics center system

Transport system

The effective SCE requires re-designing of supply chain to enhance management capability

-Re-engineering of logistics process

-Analysing and designing supply chain

-Logistics cost diagnosis

-Management of logistics center

-Checking cycle time and lead time

-E-business of logistics

-Solution for integrated logistics info and seamless service

- Flow management of ordering, logistics and transfering

- Work management- Process designing- Standardization - Packaging

simulation

- Transportation scheduling

- Location system

SCM

CP Flow

DemandForecasting

Optimizingproduct mix

CapacityPlanning

ResourcePlanning

Shop FloorControl

Shop FloorControl

Warehousing

Management

Warehousing

Management

OrderingAdministratio

n

ProductionPlanning

DemandManagement

ShippingOptimization

Status ManagementStatus Management

Tactical

Tactical

Opera

tion

al

Opera

tion

al

Tra

nscctio

nal

Tra

nscctio

nal

Collaboration on Forecasting

Collaborationon Capacity

Planning

AnalyzingSupplyChain

Collaborationon Resource

Planning

InventoryTracking

InventoryPlanning

AnalyzingSupplyChain

ShippmentTracking

Order &Shipments

Collaboration is realized in each stage of stategy, management and transaction of SCM

Collaboration on Forecasting

Matchingdemand-supply

SCM

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1.3 Strategies for SCM

All of the advanced strategies, techniques,

and approaches for Supply ChainManagement focus on:

–Global Optimization–Managing Uncertainty

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Optimization

• What is it?• Why is it important?• What tools and approaches

help?

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Tools and Strategies for Optimization

•Decision Support Systems•Inventory Control•Network Design•Design for Logistics•Cross Docking Cross Docking 翻译为“直接换

装”，定义为：“物品在物流环节中，不经过中间仓库或者站点，直接从一个交通工具换载到另一个运输工具的物流衔接方式。”

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1.3.1 Global Optimization

• What is it?• Why is it different/better than local

optimization?• What are conflicting supply chain

objectives?• What tools and approaches help

with global optimization?

Procurement Planning

ManufacturingPlanning


DemandPlanning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

ManufacturingPlanning


DemandPlanning

Global Optimization

Sequential Optimization vs. Global Optimization

Source: Duncan McFarlane

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Why is Global Optimization Hard?Why is Global Optimization Hard?

• The supply chain is complex• Different facilities have conflicting

objectives• The supply chain is a dynamic

system– The power structure changes

• The system varies over time

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Supply Chain: The 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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Conflicting Objectives in the Supply Chain

1. Purchasing• Stable volume requirements • Flexible delivery time • Little variation • Large quantities

2. Manufacturing• Long run production• High quality• High productivity• Low production cost

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Conflicting Objectives in the Supply Chain

3. Warehousing• Low inventory • Reduced transportation costs• Quick replenishment capability

4. Customers• Short order lead time• High in stock• Enormous variety of products• Low prices

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Tools and Approaches for Global Optimization

• Everything for optimization, plus…

• Strategic Alliances/Supplier Partnerships

• Supply Contracts/Incentive Schemes

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1.3.2 Uncertainty

• What is variation?• What is randomness?• What tools and approaches

help us to deal with these issues?

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Can’t Forecasting Help?

• Forecasting is always wrong

• The longer the forecast horizon the worse the forecast

• End item forecasts are even more wrong

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Why Is Uncertainty Hard to Deal With?

• Matching supply and demand is difficult.• Forecasting doesn’t solve the problem.• Inventory and back-order levels typically

fluctuate widely across the supply chain.• Demand is not the only source of

uncertainty:– Lead times– Yields– Transportation times– Natural Disasters– Component Availability

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Supply Chain VariabilityV

olu

mes

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

ActualConsumerDemand

ActualConsumerDemandRetailer Warehouse

to Shop

Retailer Warehouseto ShopRetailer OrdersRetailer Orders

Production PlanProduction Plan

Manufacturer Forecastof Sales

Manufacturer Forecastof Sales

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What Management Gets...V

olu

mes

Time


ConsumerDemand

ConsumerDemand


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What Management Wants…V

olu

mes

Time


ConsumerDemand

ConsumerDemand


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Dealing with Uncertainty

• Pull Systems• Risk Pooling• Centralization• Postponement• Strategic Alliances• Collaborative Forecasting

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1.4 Why Supply Chain Management?

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Supply Chain:the Magnitude

• In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of gross domestic product).– Transportation 58%– Inventory 38%– Management 4%

• Third party logistics services grew in 1998 by 15% to nearly $40 billion

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Supply Chain:the Magnitude

• It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies.– A typical box of cereal spends more than three

months getting from factory to supermarket.– A typical new car spends 15 days traveling

from the factory to the dealership, although actual travel time is 5 days.

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Supply Chain: The Magnitude

– Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them.

– Boeing aircraft, one of America's leading capital goods producers, was forced to announce write downs of $2.6 billion in October 1997, due to “Raw material shortages, internal and supplier parts shortages…”.

Many opportunities exist to cut costs in the supply chain!

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Supply Chain: The Potential

• Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months.

• “According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of business strategy, Oct./Nov. 1997)

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Supply Chain:the Potential

• In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer.

• Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% using– Direct business model– Build-to-order strategy.

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What’s New?

• Global competition• Shorter product life cycle• New, low-cost distribution

channels• More powerful well-informed

customers• Internet and E-Business

strategies

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1.5 Key Issues

• Issues span– Strategic– Tactical– Operational

• What are the tradeoffs and issues?– Distribution Network Configuration– Inventory control– Supply Contracts– Distribution Strategies– Integration and Partnerships– Procurement Strategies and Outsourcing– Product Design– Information Technology

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Chapter 1 Introduction to Supply Chain Management Qi Xu Professor of Donghua University Tel:...

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