Supply Chain Management

Lecture 2

Announcements

• Summer Intern Program at Ball Aerospace– 10 week summer program that provides candidates with

• Practical experience on relevant projects while working with designated mentors

• A competitive salary • Access to state-of-the-art equipment • Possible future employment • Housing assistance • Relocation reimbursement • In-house training • Group activities  

– For more information visit• http://www.recruitingsite.com/csbsites/ball_aerospace/JobDes

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Outline

• Last Tuesday– Chapter 1

• Sections 1, 2

• Today– Chapter 1

• Sections 3, 4, 5

• Next week– Chapters 2 and 3

What is a Supply Chain?

• Flow of products and services from– Suppliers– Raw materials manufacturers– Intermediate goods manufacturers– Finished goods manufacturers– Distributors and wholesalers– Retailers– Customers

• Connected through transportation, information, and exchanges of funds

Manufacturer Distributor Retailer CustomerSupplier

Key Observations

• In order to maximize supply chain surplus– Every facility that impacts costs needs to be considered

• Suppliers’ suppliers• Customers’ customers

– Efficiency throughout the supply chain network is required using a network level approach

What is Supply Chain Management?

Supply chain management involves the management of supply chain assets and products, information, and fund flows to

maximize total supply chain surplus

What is Supply Chain Management?

Getting the right things

to the right places

at the right times

for profit

What is Supply Chain Management?• “Managing supply and demand, sourcing raw

materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer”– The Supply Chain Council

• “The design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer”– Institute for Supply Management

What is Supply Chain Management?• “Supply chain management is a set of

approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements”– Simchi-Levi et al, 2003

• Video– Ford Manufacturing Supply Chain

What is Supply Chain Management?• Supply chain management is all about

relationships– Management of relationships in order to enhance value

and reduce cost– Collaboration is an important part of effective supply

chain management

Evolution of Supply Chain Management

1950s 1960s 1970s 1980s 1990s 2000s Beyond

Traditional Mass Manufacturing

Inventory Management/Cost Optimization

JIT, TQM, BPR, Alliances

SCM Formation/Extensions

Further Refinement of

SCM Capabilities

Evolution of Supply Chain Management

• Mass production era (1900s – 1970s)– In the early 1900s, Henry Ford created the first moving assembly

line reducing the time to build a Model T from 728 hours to 1.5 hours

• Lean manufacturing era (1970s –1995)– In the early 1970s, Japanese manufacturers like Toyota changed

the rules of production from mass to lean. Lean manufacturing focuses on flexibility and quality more than on efficiency and quantity.

• Mass customization era (1995 – 2010?)– Beginning around 1995 and coinciding with the commercial

application of the Internet, manufacturers started to mass-produce customized products. Henry Ford’s famous statement “You can have any color Model T as long as it’s black” no longer applies.

Managing a Supply Chain is Not Easy

• Geographically dispersed complex network• Conflicting objectives across the supply chain• Uncertainty and risk factors• Information distortion

Managing a Supply Chain is Not Easy

• Geographically dispersed complex network

Managing a Supply Chain is Not Easy

• Convenience

• Short lead time• Large variety of

products

• Few stores

• Low inventory• Little variety• Close to DCs

• Low inventory• Few DCs

• Large shipments

• Large production

batches

• Conflicting objectives across the supply chain

Manufacturer Distributor Retailer Customer

Managing a Supply Chain is Not Easy

• Uncertainty and risk factors– 2005 Hurricane Katrina

• P&G coffee supplies from sites around New Orleans• Six month impact

– 2002 West Coast port strike • Losses of $1B/day• Store stock-outs, factory shutdowns

– 2001 India earthquake• Supply interruptions for apparel manufacturers

– 1999 Taiwan earthquake • Supply interruptions for HP and Dell

Managing a Supply Chain is Not Easy

• Information distortionManufacturer Distributor Retailer CustomerSupplier

Bullwhip effect

Why Study Supply Chain Management?

The Magnitude

• In 1998, American companies spent $898 billion in supply chain related activities (or 10.6% of Gross Domestic Product)

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

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

getting from factory to supermarket

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

• Laura Ashley turns its inventory 10 times a year, five times faster than three years ago– New information system– Centralized warehouse

The Impact

In 1996, Dell held 31 days of inventory. It now holds only 4 days of inventory.

The Impact

The Impact

• The Turning Point (The Economist, 9/20/07)– “For such a tiny part of GDP, the contents of warehouses has had a

surprisingly big effect on its volatility. When industries cut or add stocks according to demand, that adjustment magnifies the effect of the initial change in sales. Stock levels were once much larger relative to the size of the economy, so a small slip in demand could easily blow up into a recession. But thanks to improvements in technology, firms now have timelier and better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions. This makes huge stocks unnecessary and minimizes the lurches in inventories that were once so destabilizing. The entire inventory of some lean-running companies now consists of whatever FedEx or UPS is shipping on their account.Mr Cecchetti and his colleagues calculate that, on average, more than half the improvement in the stability of economic growth in the countries they studied is accounted for by diminished inventory cycles. That something so workaday as supply-chain management could have so marked an effect might seem a dull conclusion. But dullness is a virtue, because technological improvement is irreversible”

The Impact

Study of Supply Chain Management• Successful supply chain management requires

decisions on the flow of information, product, and funds that fall into three decision phases– Supply chain strategy or design– Supply chain planning– Supply chain operation

Decision Phases in a Supply Chain

TYPICAL DECISIONS

Strategic

Tactical

TYPETIME FRAME

•Supply chain network design (How many plants? Location and capacities of plants and warehouses?)•Supply chain strategies (Sell direct or through retailers? Outsource or in-house? Focus on cost or customer service?)•Product mix at each plant

years

•Workforce & Production planning •Inventory policies (safety stock level)•Which locations supply which markets•Transportation strategies

3 mo.- 1year

Operational•Production scheduling •Decisions regarding individual orders•Place replenishment orders

daily

Study of Supply Chain Management• A supply chain is a sequence of processes and

flows that take place within and between different stages – Cycle view

• The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain

– Push/pull view• The processes in a supply chain are divided into two

categories depending on whether they are executed in response or in anticipation of a customer order

Cycle View of Supply Chain Processes

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Cycle view defines the processes

involved and the owner of each process

Subprocesses in Each Cycle

Supplier markets the product

Buyer

Supplier

Buyer places an order

Supplier receivesthe order

Supplier suppliesthe order

Buyer receivesthe order

Buyer may return the product

Cycle View of Supply Chain Processes

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer Order Process1. Customer Arrival 2. Customer Order Entry3. Customer Order Fullfillment4. Customer Order Receiving

Procurement Process1. Component Order Arrival2. Production Scheduling3. Manufacturing/Shipping4. Receiving

Manufacturing Process1. Order Arrival2. Production Scheduling3. Manufacturing/Shipping4. Receiving

Replenishment Process1. Retail Order Trigger 2. Retail Order Entry3. Retail Order Fullfillment4. Retail Order Receiving

Push/Pull View of Supply Chain Processes

Customer order arrives

PULL PROCESSES

PUSH PROCESSES

Execution is initiated in response to customer orders

(reactive)

Execution is initiated in anticipation of customer orders

(speculative)

Processes are divided based on the timing of their execution relative to a customer order

Push/Pull Processes for the Supply chain of Dell

PUSH

PULL

Customer Order Cycle andManufacturing Cycle

Procurement Cycle

Customer

Manufacturer

Supplier

Push/Pull Processes for the Supply chain of Detergent

PULL

PUSH

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Are the following systems push or pull?

Soda vending machines

Amazon.com

Emergency care

Paint industry

Runway capacity at an Airport

Cycle View Versus Push/Pull View

Which view is more useful when considering operational decisions and

which view is more useful when considering strategic decisions?

Examples of Supply Chains

Celestial Seasonings

• The herbs were originally harvested by hand in the Rocky Mountains

• Currently, herbs and leafs come from growers around the world– “We’ve been working to establish sustainable harvests

and fair wages for more than 30 years”

What advantages does selling tea over the Internet provide?

What are advantages of having one production facility?

What are disadvantages of having one production facility?