What is supply chain management?

A supply chain strategy framework

Components of a SCM
Major obstacles and common problems
 Freight Transportation $352, $455 B
Transportation manager in charge
Transportation software

Inventory Expense $221, $311 B

Inventory manager in charge
Inventory software

Administrative Expense $27, $31 B Transportation and inventory managers

Logistics related activity 11%, 10.5% of GNP

$898 B spent domestically for SC activities in 1998.

$1,160 B of inventory in the US economy in the early 2000s.
 Profit
Profit 10% Supply Chain
Cost
Supply Chain Cost 20% Marketing
Cost
Marketing Cost 25%

Manufacturing Cost 45% Manufacturing

Cost

Effort spent for supply chain activities are invisible to the customers.
 Estimated that the grocery industry could save $30 billion (10% of
operating cost) by using effective logistics and supply chain strategies
A typical box of cereal spends 104 days from factory to sale
A typical car spends 15 days from factory to dealership
Faster turnaround of the goods is better?

Laura Ashley (retailer of women and children clothes) turns its inventory
10 times a year five times faster than 3 years ago
inventory is emptied 10 times a year, or an item spends about 12/10 months in
the inventory.
To be responsive, it relocated its main warehouse next to FedEx hub in
Memphis, TE.

National Semiconductor used air transportation and closed 6

warehouses, 34% increase in sales and 47% decrease in delivery lead
time.
 Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops
were not available when and where needed

P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18

months) by collaboration resulting in a better match of supply and
demand

When the 1 gig processor was introduced by AMD (Advanced Micro

Devices), the price of the 800 meg processor dropped by 30%
 AMR Research:
"The biggest issue enterprises face today is intelligent
visibility of their supply chains-both upstream and down"
Forrester Research:
"Companies need to sense and proactively respond to
unanticipated variations in supply and demand by adopting
emerging technologies such as intelligent agents. To boost their
operational agility, firms need to transform their static supply
chains into adaptive supply networks
Gartner Group:
By 2004, 90% of enterprises that fail to apply supply-chain
management technology and processes to increase their agility
will lose their status as preferred suppliers
Open ended statement. Agility can be increased continuously.
Minimizing supply chain costs
while keeping a reasonable service level
customer satisfaction/quality/on time
delivery, etc.

This is how SCM contributes to the bottom line

SCM is not strictly a cost reduction paradigm!

- A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

- achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits
 P&G or other Third Albertsons Customer wants
manufacturer party DC Supermarket detergent

Chemical
Plastic cup Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
 Material

Information
Supplier Customer
Funds

The flows resemble a chain reaction.

 Supply Chain Management (SCM) is concerned with the management and
control of the flows of material, information, and finances in supply
chains.
Cash
Products and Services
Information
THAILAND INDIA MEXICO TEXAS US
N-Tier Suppliers Suppliers Logistics Distributors Retailers

Supply Side OEM Demand Side

Demand

Supply

The task of SCM is to design, plan, and execute the activities at the different stages
so as to provide the desired levels of service to supply chain customers profitably
 In 2000, the US companies spent $1 trillion (10% of GNP) on
supply-related activities (movement, storage, and control of
products across supply chains). Source: State of Logistics Report
Frequent Supply shortages Low order fill
Inefficient rates
logistics
High
Tier 1 Manufacturer Distributor Retailer Customer stockouts
Supplier

Glitch-Wrong Material, Ineffective

Machine is Down High inventories High landed costs to
through the chain promotions the shelf
effect snowballs

Eliminating inefficiencies in supply chains can save millions of $.

 Sources: Regional Field Customers,
plants Warehouses: Warehouses: demand
vendors stocking stocking centers
ports points points sinks

Supply

Inventory

Purchase Inventory
Transportation
 Customer
Customer Order
Cycle
Retailer
Any cycle
Replenishment Cycle 0. Customer arrival
1. Customer triggers an order
Distributor 2. Supplier fulfils the order
3. Customer receives the order
Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 What instigates the movement of the work in the system?

In Push systems, work release is based on downstream

demand forecasts
Keeps inventory to meet actual demand
Acts proactively
e.g. Making generic job application resumes today (e.g.: exempli gratia)

In Pull systems, work release is based on actual demand or

the actual status of the downstream customers
May cause long delivery lead times
Acts reactively
e.g. Making a specific resume for a company after talking to the recruiter
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
Push-Pull boundary
Dell / Compaq
Dell buys some components for a product from its suppliers after
that product is purchased by a customer. Extreme case of a pull
process
Zara, Spains answer to Italys Benetton
Sells apparel with a short design-to-sale cycle, avoids markdowns.

Toyota / GM / Volkswagen, in the course notes

McMaster Carr / W.W. Grainger, sell auto parts
Amazon / Barnes and Noble
Frozen food industry/Fast food industry/5 star restaurants
Internet shopping: Webvan / Peapod
SCM Strategy
 Mission, Mission statement
The reason for existence of an organization

Strategy
A plan for achieving organizational goals
Tactics
The actions taken to accomplish strategies
Operational decisions
Day to day decisions to support tactics
Ted is an undergrad. He would like to have a career in
business, have a good job, and earn enough income to live
comfortably

Mission: Live a good life

Goal: Successful career, good income
Strategy: Obtain a masters degree
Tactics: Select a college and a concentration
Operations: Register, buy books, take
courses, study, graduate, get a job
 Competitive (Business) Strategy

Product Development Strategy Marketing Strategy

-Portfolio of products
-Frequent discounts Supply Chain Strategy
-Timing of product introductions
-Coupons

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

It relates to Technologies for
future operations (via patents)
and Set of products/services
Be the technology leader
IBM workstations
Offer many products
Dell computers
Offer products for locals
Tatas Nano at $2500=100000 rupees
Production at Singur, West Bengal, India;
l x w x h=3.1 x 1.5 x 1.6 meters;
Top speed: 105km/hr;
Engine volume 623 cc;
Mileage 50 miles/gallon;
Annual sales target 200,000.
 Marketing and sales strategy relates to positioning,
pricing and promotion of products/services
e.g. Never offer more than 40% discount
e.g. EDLP = every day low price
At Wal-Mart
e.g. Demand smoothing via coupons
BestBuy

Supply chain management strategy relates to

procurement, transportation, storage and delivery
e.g. Never use more than 1 supplier for every input
e.g. Never expedite orders just because they are late
e.g. Always use domestic suppliers within the sales season not
in advance.
 Understand the customer Wishes

Understand the Capabilities of your SC

Match the Wishes with the Capabilities

Challenge: How to meet extensive Wishes

with limited Capabilities?
 Fit SC to the customer

Understanding the Customer

Range of demand, pizza hut stable
Production lot size, seasonal products
Response time, organ transplantation
Service level, product availability
Implied (Demand)
Product variety
Innovation Uncertainty for SC
Accommodating Implied trouble
poor quality
for SC
Commodities Customized products
Detergent High Fashion Clothing
Long lead time steel Emergency steel,
for maintenance/replacement

Price Customer Need Responsiveness

Low Implied Demand Uncertainty High

Short lead times, product variety,

distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
 Responsiveness (in time, high service level and product variety)

High

Efficiency frontier

Fix responsiveness Inefficient Impossible

Inefficiency Region
Low

High Low Cost in $

Why decreasing slope (concave) for the efficiency frontier?
 WISHES CAPABILITIES

Responsive
(high cost)
Gourmet dinner
supply chain
<High margin>

Responsivenes
spectrum

Lunch buffet
<Low margin>
Efficient
(low cost)
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
 Wal-Mart: Efficiency
Target: More quality and service
Carrefour: International, ambiance

K-Mart: Confused.
Squeezed between Target and Wal-Mart
Reliance on coupon sales
Do coupons stabilize or destabilize a Supply chain?

K-Mart and Sears merged in November 2004. Now called Sears

Holdings.
K-Mart gets cash
Sears gets presence outside malls
 Multiple products in a SC. Multiple customers for a given product
Separate supply chains or Tailored supply chains
e.g. Barnes and Noble: Retailing and/or e-tailing
Product and/or customer classes
e.g. UTD library loans books for 6 months (2 weeks) to faculty (students)
Customer segmentation by pricing

Competitors: more, faster and global

UTD online programs compete globally

Product life cycle (shortening)

SCM strategy moves toward efficiency and low implied uncertainty as products
age
e.g. Air travel is becoming more efficient
e.g. Southwest airlines lead the drive for efficiency
e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005.
e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC
more efficient in June 2004.
Replacement sales
Selling to replace broken units.
e.g. AC replacement is about 50% of the market.
Macroeconomic factors for visibility
Forecasting Home Depot sales from S&P 500 price index.
Positive correlation is detected.
 Responsive
(high cost)
supply chain

Efficient
(low cost)
supply chain
Certain Uncertain
demand demand
 Integration is the central theme in SCM

Building synergies by integrating business functions,

departments and companies
 Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 How to achieve
Efficiency Responsiveness

Supply chain structure

Logistical
Inventory Transportation Facilities
Drivers

Cross-
Information Sourcing Pricing Functional
Drivers
 Convenience: Cycle inventory
No customer buys eggs one by one

Unstable demand: Seasonal inventory

Bathing suits
Xmas toys and computer sales

Randomness: Safety inventory

20% more syllabi than the class size were available in the first class
Compaqs loss in 95

Pipeline inventory
Work in process or transit
 Air
Truck
Rail
Ship
Pipeline
Electronic
 Production
Flexible vs. Dedicated
Flexibility costs
Production: Remember BMW: a sports car disguised as a sedan
Service: Can your instructor teach music as well as SCM?
Sports: A playmaker who shoots well is rare.

Inventory-like operations: Receiving, Prepackaging, Storing,

Picking, Packaging, Sorting, Accumulating, Shipping
Job Lot Storage: Need more space. Reticle storage in fabs.
Crossdocking: Wal-Mart
 Role in the supply chain
The connection between the various stages in the supply chain
Crucial to daily operation of each stage in a supply chain
E.g., production scheduling, inventory levels

Role in the competitive strategy

Allows supply chain to become more efficient and more responsive
at the same time (reduces the need for a trade-off)
Information technology
Andersen Windows
Wood window manufacturer, whose customers can choose from a
library of 50,000 designs or create their own. Customer orders
automatically sent to the factory.
Information Global Coordinated Supply Chain
Scope Decisions Success

Strategy Analytical Models $$$

Information
Accurate?
Accessible?
Up-to-date?
In the Correct form?
If not, database restricted ability. How difficult is it to import data into SAP?
 Information drives the decisions:
Good information means good decisions

IT helps: MRP, ERP, SAP, EDI

Relevant information?
How to use information?
 Strategic

Planning

Operational

Supplier Manufacturer Distributor Retailer Customer

 Strategic

Planning

Potential ERP Potential

Operational ERP ERP

Supplier Manufacturer Distributor Retailer Customer

 Strategic

SCM

Planning APS Transport & Inventory Dem Plan

Planning
Supplier
Apps
Transport execution & CRM/SFA
MES
WMS
Operational

Supplier Manufacturer Distributor Retailer Customer

 Wider focus
Push (MRP) versus Pull (demand information transmitted
quickly throughout the supply chain)
Real-time information
Coordination and Information sharing

Transactional IT
Expensive and difficult to implement
About 25% of ERP installations are cancelled within a year
About 70% of ERP installations go over the budget
500

400

300

200

100

0
1965 1973 1981 1989 1997

IT investment($B)
Source Kanakamedala,
Ramsdell, Srivatsan (2003).
McKinsey Quarterly, No 1.
 Role in the supply chain
Set of processes required to purchase goods and services in a supply chain
Supplier selection, single vs. multiple suppliers, contract negotiation

Role in the competitive strategy

Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
In-house vs. outsource decisions- improving efficiency and responsiveness
TI: More than half of the revenue spent for sourcing.
Cisco sources: Low-end products (e.g. home routers) from China.

Components of sourcing decisions

In-house versus outsource decisions
Supplier evaluation and selection
Procurement process:
Every department of a firm buy from suppliers independently, or all together.
EDS to reduce the number of officers with purchasing authorization.
 Role in the supply chain
Pricing determines the amount to charge customers in a supply chain
Pricing strategies can be used to match demand and supply
Price elasticity: Do you know yours?

Role in the competitive strategy

Use pricing strategies to improve efficiency and responsiveness
Low price and low product availability; vary prices by response times
Amazon: Faster delivery is more expensive

Components of pricing decisions

Pricing and economies of scale
Everyday low pricing versus high-low pricing
Fixed price versus menu pricing, depending on the product and
services
Packaging, delivery location, time, customer pick up
Bundling products; products and services
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost/slow/no High cost/
duplication streamlined/reliable
Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

 SC is big:
Variety of products/services
Spoiled customer
Multiple owners (Procurement, Production, Inventory, Marketing) /
multiple objectives
Globalization

Local optimization and lack of global fit

Major Obstacles to Achieving Fit

Dealing with Multiple Owners / Local Optimization

Information Coordination
Information sharing / Shyness / Legal and ethical issues
Contractual Coordination
Mechanisms to align local objectives with global ones
Coordination with (real) options
Rare in the practice
Without coordination, misleading reliance on metrics:
Average safety inventory, Average incoming shipment size, Average
purchase price of raw materials, Revenue
 Instability and Randomness:
Increasing product variety
Shrinking product life cycles
Customer fragmentation: Push for customization, segmentation
Fragmentation of Supply Chain ownership: Globalization

Increasing implied uncertainty

 Lack of relevant SCM metrics: How to measure responsiveness?
How to measure efficiency, costs, worker performance, etc?

Poor inventory status information

Theft: Major problem for furniture retailers.
Transaction errors: Retailers with inaccurate inventory records
for 65% of SKUs
Information delays, dated information, incompatible info. systems
Misplaced inventory: 16% of items cannot be found at a major retailer
Spoilage: active ingredients in the products are losing their properties
Product quality and yield
Lack of visibility in SCs
Do you know the inventory your distribution centers hold?
Do you know the inventory your fellow retailer holds?
 Poor delivery status information
Not knowing the order status

Poor IT design
Unreliable, duplicate data
Security problems: too much or too little

Ignoring uncertainties
The flight from uncertainty and ambiguity is so motivated that we often
create pseudocertainty.
Nitin Nohra, HBR February 2006 issue, p.40.

Internal customer discrimination

Giving lower priority to internal customers than external customers

Poor integration
Elusive inventory costs
Accounting systems do not capture opportunity costs

SC-insensitive product design

 Supply Chain Introduction
Competitiveness / Business strategy / SCM strategy
Components
Inventory, Transportation, Facilities, Information, Sourcing, Pricing

Challenges
A Case Study
 Largest convenience store in Japan with market value of $95 B. The third
largest retail company in the world after Wal-Mart and Home Depot.
Established in 1974.
In 2000, total sales $18,000 M, profit $620 M.
Average inventory turnover time 7-8.5 days.
Stock value increased by 3000 times from 1974 to 2000.
In 1985, there were 2000 stores in Japan, increasing by 400-500 per year.
Return on equity 14% over 2000-2004.
A SEJ store is about the half the size of a US 7-eleven store,
that is about 110 m2.
Sales:
Products
32.9% Processed food: drinks, noodles, bread and snacks
31.6% Fast food: rice ball, box lunch and hamburgers
12.0% Fresh food: diary products
25.3% Non-food: magazines, ladies stockings and batteries.
Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying
More factual info:
Average sales about twice of an average US store
SKUs offered in store: Over 3,000 (change by time of day, day of week, season)
Virtually no storage space
No food cooking at the stores

Japanese Images of Seven Eleven:

Convenient
Cheerful and lively stores
Many ready made dinner items I buy
Famous for its great boxed lunch and dinner
- On weekends, when I was single, I went to buy lunch and dinner

SC strategy:
Micro matching of supply and demand (by location, time of day, day of week, season)
 1999: 8,027
6000 2004: 10,356

5000

4000

3000 Number of Stores

2000

1000

0
85 86 87 88 89 90 91 92 93 94
1400
1200
1000
800
Net Sales
600
400
200
0
85 86 87 88 89 90 91 92 93 94
100
90
80
70
60
50 Profit
40
30
20
10
0
85 86 87 88 89 90 91 92 93 94
14
12
10
8
Inventory
6
4
2
0
85 86 87 88 89 90 91 92 93 94
Quick access to up to date information (as opposed to data):
In 1991, SEJ implemented Integrated Service Digital Network to link stores,
headquarter, DCs and suppliers

Customer checkout process

Clerk records the customers gender, (estimated) age and purchased items. These Point of
Sales (POS) data are transmitted to database at the headquarters.
Store hardware: Store computer, POS registers linked to store computer, Graphic Order
Terminals, Scanner terminals for receiving

Daily use of the data

Headquarters aggregate the data by region, products and time and pass to suppliers and
stores by next morning. Store managers deduce trend information.
Weekly use of the data
Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100
corporate managers.
Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in
Tokyo on Monday night.
Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the
strategy. Tuesday nights, field counselors return back to their regions.
 Analysis of
Sales for product categories over time
SKU (stock keeping unit)
Waste or disposal
10 day (or week) sales trend by SKU

Sales trends for new product

In the early 1990s, half-prepared fresh noodle sales were going up,
new fresh noodle products were quickly developed

Sales trend by time and day

Different sales patterns for different sizes of milk at different times of the day results in rearrangement
of the milks in the fridge. Extreme store micromanagement.
Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?).

List of slow moving items

About half of 3000 SKUs are replaced by new ones every year
 Limited storage space at stores which have only 125-150 m2 space
Frequent and small deliveries to stores

Deliveries arrive from over 200 plants.

Products are grouped by the cooling needs

Combined delivery system: frozen foods, chilled foods, room temperature and hot foods.
Such product groups are cross-docked at distribution centers (DC). Food DCs store no inventory.
A single truck brings a group of products and visits several stores within a geographical region
Aggregation: No supplier (not even coke!) delivers direct

The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000. Still,
at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners.
Have many outlets, at convenient locations, close to where customers can walk
Focus on some territories, not all: When they locate in a place they blanket (a.k.a.
clustering) the area with stores; stores open in clusters with corresponding DCs.
844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. No stores in
Kobe.
Success rate of franchise application <= 1/100
 Is food preparation a good idea at 7-eleven locations?
e.g. Compare microwave heating vs. salad preparation.

Why SEJ does not allow direct delivery from suppliers to retailers?
Point out which of the following strategies can also be used in US (or Taiwan)
Information strategy
Facilities strategy

Discuss the differences between the Japanese and US (or Taiwanese) consumers with
regard to
Frequency and amount of grocery purchase
Use of credit cards vs. cash for purchase
7-eleven inventory turnover rate is 50 in Japan and 19 in the USA.

7-eleven growing rapidly in the US so it aims to be a web depot in both the US and
Japan. Does this make sense from a supply chain perspective?
Cost vs. Responsiveness
Business strategy
What is the risk of micro-matching strategy?
No direct deliveries to SEJ, what is the potential risk of this strategy if used in the
USA?
Excerpts from
www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofr
etailing.pdf
Downloaded on Jan 30, 2008.
 De Kok, A.G., S. C. Graves (Editors). 2003. Supply Chain
Management, Coordination and Operation. Elsevier Publishing
Company, Amsterdam, Netherlands,.
Handfield, Monezka, et. al. (2011). Sourcing & Supply Chain
Management (5th edition). McGrawHill.
Wisner, et. al. (2012). Supply Chain Management: A Balanced
Approach. (International Edition). South-Western Cengage-
Learning.