supply chain management

Introduction to Supply Chain Management

Syed Tabish HussainIqra University

Tel: 03212971409E-mail: [email protected]

©Copyright 2002 D. Simchi-Levi

Introduction

• Materials - any commodities used directly or indirectly in producing a product or service.– Raw materials, component parts,

assemblies, finished goods, and supplies

• Supply chain - the way materials flow through different organizations from the raw material supplier to the finished goods consumer.

What is a Supply Chain?• All stages involved, directly or indirectly,

in fulfilling a customer request• Includes manufacturers, suppliers,

transporters, warehouses, retailers, and customers

• Within each company, the supply chain includes all functions involved in fulfilling a customer request (product development, marketing, operations, distribution, finance, customer service)

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What is a Supply Chain?• Customer is an essential part of the

supply chain• Includes movement of products from

suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions

• Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers

• All stages may not be present in all supply chains.

©Copyright 200

Supply Chain Management ---A River

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

SC, if not managed effectively…

PoorService

PoorAvailability

Long Lead Times for Innovations

High InventoryHigh Inventory

Poor Quality

Lower RevenueHigher CostsReduced Profitability

And, many more……

Inventory Mgmt. Inventory Flows Cost Information Flow Risk Planning RelationshipsPipeline Intergation Seamless/Visible Landed Cost Shared Shared SC Team Approach Focus on landed Cost

Vendor Manufacturing PrimaryTransportation

Warehousing CustomerSecondaryTransportation

InboundTransportation

Vendor Intermediaries Customer

New-age Supply Chain

ProductInformation

Supply Chain Management in a Manufacturing Plant

Receivingand

Inspection

RawMaterials,Parts, andIn-process

Ware-Housing

Production

FinishedGoodsWare-

housing

Inspection,Packaging,

AndShippingS

uppl

iers

Cus

tom

ers

Materials Management

PurchasingProduction

ControlWarehousing andInventory Control

Shippingand Traffic

Physical materials flowInformation flow

INTRODUCTION

• Supply chain management is the configuration, coordination and improvement of a sequentially related set of operations

• With supply chain management, the idea of satisfying an entire chain of customers becomes reality

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Flows in a Supply Chain

Customer

Information

Product

Funds

• Definition:Supply Chain Management is primarily 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 and at the right time, and so as to minimize total system cost subject to satisfying service requirements.

• Notice:– Who is involved– Cost and Service Level– It is all about integration

Supply Chain Management

Supply Chain Management• Refers to all the management functions related

to the flow of materials from the company’s direct suppliers to its direct customers.

• Includes purchasing, traffic, production control, inventory control, warehousing, and shipping.

• Two alternative names:– Materials management– Logistics management

Cross-Functional Linkages

Operations and Supply Chain

FinanceBudgeting.

Analysis.Funds.

MarketingWhat products?What volumes?Costs? Quality?

Delivery?

HumanResourcesSkills? Training?# of Employees?

AccountingPerformance measurement systems.

Planning and control.

MISWhat IT solutionsto make it all work

together?

DesignSustainability.

Quality.Manufacturabi

lity.

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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– What SC’s configuration will be , how resources

will be allocated and what process each stage will perform

– 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 uncertainties

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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

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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

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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)


Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Global Optimization

Sequential Optimization vs. Global Optimization

Global Optimization 1.Supply chain is complex network

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.


Global Optimization

2. Different facilities in the supply chain frequently have different conflicting objectives

3. Dynamic system of supply chain

buying power increase or decrease

4. System variation over time due to seasonal fluctuation , advertisement , promotion and change in pricing strategies of the competitor


Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

Your Company

Source

SCOR is structured around five distinct management processes

SCOR Model

Return Return ReturnReturn Return Return Return Return

Building Block Approach

Processes Metrics

Best Practice Technology


Cu

sto

mer

s

Su

pp

lier

s

P1 Plan Supply ChainPlan

P2 Plan Source P3 Plan Make P4 Plan Deliver

Source Make Deliver

S1 Source Stocked Products M1 Make-to-Stock

M2 Make-to-Order

M3 Engineer-to-Order

D1 Deliver Stocked Products

D2 Deliver MTO Products

D3 Deliver ETO Products

S2 Source MTO Products

S3 Source ETO Products

Supply-Chain Operations Reference-model (SCOR) 5.0 - Processes

Return Source

P5 Plan Returns

Return Deliver

Enable


Supply Chain Management Requires Many Different Functions

1-28

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)

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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.

Push/Pull View of Supply ChainsProcurement,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

1-33

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 – Dell

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

Supply Chain Macro Processes in a Firm

• Supply chain processes discussed in the two views can be classified into:– Customer Relationship Management

(CRM)– Internal Supply Chain Management

(ISCM)– Supplier Relationship Management

(SRM)• Integration among the above three

macro processes is critical for effective and successful supply chain management

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Gateway: A Direct Sales Manufacturer

• Why did Gateway have multiple production facilities in the US? What advantages or disadvantages does this strategy offer relative to Dell, which has one facility?

• What factors did Gateway consider when deciding which plants to close?

• Why does Gateway not carry any finished goods inventory at its retail stores?

• Should a firm with an investment in retail stores carry any finished goods inventory?

• Is the Dell model of selling directly without any retail stores always less expensive than a supply chain with retail stores?

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7-Eleven• What factors influence decisions of opening and

closing stores? Location of stores?• Why has 7-Eleven chosen off-site preparation of fresh

food?• Why does 7-Eleven discourage direct store delivery

from vendors?• Where are distribution centers located and how many

stores does each center serve? How are stores assigned to distribution centers?

• Why does 7-Eleven combine fresh food shipments by temperature?

• What point of sale data does 7-Eleven gather and what information is made available to store managers? How should information systems be structured?

1-37

Toyota• Where should plants be located, what degree

of flexibility should each have, and what capacity should each have?

• Should plants be able to produce for all markets?

• How should markets be allocated to plants?• What kind of flexibility should be built into the

distribution system?• How should this flexible investment be valued?• What actions may be taken during product

design to facilitate this flexibility?


Conflicting Objectives in the Supply Chain

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

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


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


The Dynamics of the Supply Chain

Ord

er

Siz

e

Time

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

CustomerDemand

CustomerDemand

Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders

Production PlanProduction Plan


The Dynamics of the Supply Chain

Ord

er

Siz

e

Time

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

CustomerDemand

CustomerDemand

Production PlanProduction Plan


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


Supply Chain: The Magnitude (continued)

• 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 104 days

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

from the factory to the dealership.


Supply Chain: The Magnitude (continued)

• 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 writedowns of $2.6 billion in October 1997.The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)


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)


Supply Chain: The Potential

• Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using

- Direct business model

- Build-to-order strategy.


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.


Supply Chain Challenges

• Achieving Global Optimization– Conflicting Objectives– Complex network of facilities– System Variations over time


Supply Chain Challenges

• Achieving Global Optimization– Conflicting Objectives– Complex network of facilities– System Variations over time

• Managing Uncertainty – Matching Supply and Demand– Demand is not the only source of

uncertainty

1-50 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Supply Management’s Impact on Net Income and the Bottom Line

Increased Sales:• Faster to Market• Improved Quality• Pricing Flexibility• InnovationLower Total Cost:• Acquisition Cost• Processing Cost• Quality Cost• Downtime Cost• Risk Cost• Cycle Time Cost• Conversion Cost• Non-value Added Cost• Supply Chain Cost• Post Ownership Cost


What’s New in Logistics?

• Global competition

• Shorter product life cycle

• New, low-cost distribution channels

• More powerful well-informed customers

• Internet and E-Business strategies


New Concepts

• Push-Pull strategies• Direct-to-Consumer• Strategic alliances• Manufacturing postponement• Dynamic Pricing• E-Procurement

Operations and Supply Chain Management and You

• Analyst• Commodity Manager• Customer Service

Manager• International Logistics

Manager• Logistics Services

Salesperson• Production Manager

• Sourcing Analyst• Logistics and Material

Planner• Systems Support

Manager (MIS)• Transportation

Manager• Process Analyst• Scheduler• Purchasing Agent

Some of the many career positions

Operations and Supply Chain Activities

• Process selection, design, and improvement

• Forecasting for decision making• Capacity planning for capital investment

and resource levels• Inventory management for amount and

location• Planning and control for work

scheduling and meeting demand• Purchasing, managing supplier

relationships• Logistics or acquisition and distribution

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