Supply Chain Dynamics

Basic Supply Chain

• Supply Chain is a “global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash”

The Basic Supply Chain for a Product

Three entities

• Supplier• Producer• Customer

Supplier

• Provider of goods or services or a seller with whom the buyer does business as opposed to vendor which is a generic term referring to all sellers in market place

• The supplier provides materials, energy, services, or components for use in producing a product or service

Producer

• Receives services, materials, supplies, energy and components to use in creating finished products, such as dress shirts, packaged dinners, airplanes, electric power, legal counsel, or guided tours

• Supply Chain for services may be more abstract than those for manufacturing

Customer

• Receives shipments of finished products to deliver to its customers, who wear the shirts, eat the packaged dinners, fly the planes, or turn on the lights

Structures

• Companies require their supply chain to guarantee a steady flow of supply while at the same time striving to reduce their supply chain costs

• Supply Chain cost can be as high as 50% of a company’s revenues

• Inefficiencies in the supply chain can total 25% of a firms operating cost

3 Main types of Supply Chain Strategies

• Stable• Reactive• Efficient Reactive

The Stable supply chain strategy is appropriate for chains:• With a significant history of stability between demand and

supply• That are focused on execution, efficiencies, and cost

performance• That use simple connectivity technologies and have little

need for real time information

An example is a table salt manufacturer with commodity oriented processes that use scale production and dedicated capital assets

A Reactive supply chain strategy works well when:• The chain acts to fulfill demand from trade

partners sales and marketing strategies• The chain is perceived as a cost center by all

involved• The chain needs minimal connectivity technologies

and capital assets to respond to demand• Ensuring that throughput at any cost is the chain’s

primary goal

• An Example of this strategy is a manufacturer of sports team apparel for the fans of competing rivals in the world soccer tournament. When a team makes it to the next round, more products are needed. However, for the loosing team, demand virtually disappears for their apparel

With an efficient reactive supply chain strategy, the chain:

• Supports competitive positioning by serving as an efficient, low cost, and integrated unit

• Focuses efficiency and cost management on the total delivered cost of finished goods

• Places greater importance on connectivity technology and new equipment to automate functions to reduce labor costs and improve capacity and throughput

• An example of this strategy is the supermarket chain where the shops, distribution centers, 3rd party logistics providers, and manufacturers cooperate to replace what is sold in the shops within less than 24 hours

Four Flows

• The flow of information back and forth along the chain (also back and forth within the entities and between the chain and external entities, such as governments, markets, and competitors)

• The Primary Product Flow, including physical materials and services from suppliers through the intermediate entities that transform them into consumable items for distribution to the final customer

• The primary flow of cash from the customer back upstream towards the raw material supplier

• The reverse flow of products returned for repairs, recycling, or disposal (This is called the reverse supply chain, and it is handled by reverse logistics, which involves different arrangements than the forward logistics that carried material and products in the other direction)

Manufacturing Supply Chain Model

Services also have supply chains

The Supply Chain Operational Reference (SCOR ®)Model

• A process reference model developed and endorsed by a nonprofit corporation, [the] Supply Chain Council (SCC), as the cross-industry standard diagnostic tool for supply chain management

Vertical versus Horizontal Integration

• Vertical Integration, refers to the practice of bringing the supply chain inside one organization

• Henry Ford pursued a strategy of owning and controlling as many links in the automobile supply chain as possible

• By bringing many supply chain activities in-house and putting them under corporate management, vertical integration solves the problem of who will design, plan, execute, monitor and control supply chain activities

Vertical Integration/Supply Chain Management a la Henry Ford

Horizontal/Lateral Integration

• Has replaced vertical integration as the favored approach managing the myriad activities in the supply chain

• It is difficult for one corporation to garner the expertise needed to excel in all elements of the supply chain, and it increases their risk, so corporations around the globe have turned instead to outsourcing those aspects of their business in which they judge themselves to be least effective

Reasons for relying on Lateral Supply Chain

• To achieve economies of scale and scope• To improve business focus and expertise• To leverage communication and production

competencies

What each firm gains in scale, scope and focus, it may lose in ability to see and understand the larger supply chain processes- or to care about them

Lateral/Horizontal Supply Chain

Stages of Supply Chain Management Evolution

• Stage 1- Multiple Dysfunction• Stage 2- Semi functional Enterprise• Stage 3- Integrated Enterprise• Stage 4- Extended Enterprise

Stage 1- Multiple Dysfunctional

Stage 2- Semi Functional Enterprise

Stage 3- Integrated Enterprise

Stage 4- Extended Enterprise

Supply Chain Management Objectives

• Supply Chain Management is about creating net value

• There should be value-creating activities in the supply chain that transcend the activities of particular entities in the chain

• Managing supply chains requires a balancing act among competing interests

Value Chain

• The functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment

• The intent of the value chain is to increase the value of a product or service as it passes through stages of development and distribution before reaching the end user

Value Stream

• The process of creating, producing and delivering a good or service to the market

• For a good, the value stream encompasses the raw material supplier, the manufacturer and assembly of the good, and distribution network

• For a service, the value stream consists of suppliers, support personnel and technology, the service “producer”, and distribution channel

• The value stream may be controlled by a single business or a network of several businesses

Supply Chain Management Benefits

• Improved Market knowledge• The three Vs-increase velocity, increase

visibility, and reduce variability in the flow of goods and services, funds, and information

• Integrated operations• Improve management of risk• Increase sustainability

Improved Market Knowledge

• With supply chain management in place, partners in the supply chain begin to share their knowledge about the marketplace and in particular about their customers

• It may take some time for the organizations to build trust before they share their key account information, but with time it does often occur

• Although market intelligence can be purchased from outside sources, it’s most advantageous (and less expensive) to gather it from your partners

The three Vs

Increase Visibility

• Visibility is “the ability to view important information throughout a facility or supply chain no matter where in the facility or supply chain the information is located”

• Increased visibility along the supply chain is a benefit for supply chain partners and the end customer

• With better visibility, a supply chain manager or employee can see the results of activities occurring in the chain and is made aware of minor, incremental changes via technological processes

Increase Velocity

• Velocity is a term used to indicate the relative speed of all transactions, collectively, with in a supply chain community.

• A maximum velocity is most desirable because it indicates a higher asset turnover for stakeholders and faster order-to-delivery response for customers

Methods to Increase Velocity

• Relying on more rapid modes of transportation (if there is a net benefit after the increase in transportation costs)

• Reducing the time in which inventory is not moving by using Just-in-Time delivery and Lean Manufacturing (The less time inventory spends at rest, the less likely it is to suffer damages or spoilage. Increased velocity reduces the expenses involved in warehousing inventory)

• Eliminating activities the don’t add value, thus reducing the time required to accomplish supply chain activities

• Speeding up the flow of demand and cash as well as the velocity of inventory (The more rapid payments are received from customers, the sooner the money can be put to work in the business or deposited at interest. Information about demand changes is crucial when the competitive strategy is responsiveness)

Reduce Variability

• Variability is the natural tendency of the results of all business activities to fluctuate above and below an average value, such as fluctuations around average time to completion, average no of defects, average daily sales, or average production yields

• Traditional off set against variability is safety stock

Bullwhip Effect

• The Bullwhip Effect is an extreme change in the supply position upstream that is generated by a small change in demand downstream in the supply chain

Two additional Vs

• Variety, refers to the mix of products and services in a portfolio that must alter to meet changes in customer demand

• Volume is the amount of product being produced at a given time

Integrated Operations

• Enterprise resources planning software packages enable companies around the globe to not only manage their operations in one plant but to facilitate enterprise wide integration and even cross company functionality

Improved Management of Risk

• Supply Chain Risk is based on “decisions and activities that have outcomes that could negatively affect information or goods within a supply chain”

• Risk Management is the process of identifying risk, analyzing exposures to risk, and determining how to best handle those exposures

• Risk Response Plan is a written “document defining known risks, including description, cause, likelihood, cost, and proposed responses [that] also identifies the current status of each risk

• Risk Response Planning “the process of developing a plan to avoid risks and to mitigate the effect of those that cannot be avoided”

Increased Sustainability

• Expansion of the traditional supply chain focus of cost, quality, and service to include environmental performance

• “Sustainability” and “Green” are often used as synonyms in discussion of corporate obligations that go beyond the traditional emphasis on bottom-line profits