SCM01 Introduction To SCM

SUPPLY CHAIN MANAGEMENT
01. INTRODUCTION
© Krishnan Subramaniam
LOGISTICS & SUPPLY CHAIN
LOGISTICS MANAGEMENT
Management of the process of moving

and storing goods and materials from
the original source to ultimate user.
RIGHT GOODS, RIGHT PLACE, RIGHT TIME, RIGHT COST
LOGISTICS MANAGEMENT
Materials Management Distribution Management
INTERMEDIARY
Production
v Raw materials
v Sub assemblies
Finished Finished
v Proprietary items Work CUSTOMER
Products Products
In OR END
v Manufactured Factory Distribution
progress
parts Warehouse Network USER
v Packing INVENTORIES
materials
CUSTOMER
Logistics Supply Chain

Materials Flows
Information Flows
What is Logistics Management?
Logistics is the process of

• strategically managing the procurement,
movement and storage of materials, parts and
finished inventory
• (and the related information flows)
• through the organization and its marketing
channels
• to maximize current and future profitability
• through cost-effective fulfillment of orders.
History 1950 – 1964
• Growth from pent up demand.
• Capacity to make and sell greater than to deliver.
• Product proliferation.
• Scrambled merchandising.
• Reactive discipline.
• Concentration on warehouse and transport.
Intro Log1:7
History 1965 – 1978
• Integrating with materials management.
• Customer service demands.
• Financial impact of decisions.
• Trade-offs with all component activities.
• Inventory management embraced.
• Computer technology.
• Proactive approach.
History 1979 - 1990
• Economic decline
• Shortage of capital
• Supply and cost of energy
• Inflation
• New distribution services
• Global requirement
• Inter-company systems
Intro Log1:9
History 1991 – Present
• Information Technology
– EDI
– EPOS
– Internet
• Strategic decision making
Logistics v/s Supply Chain
• Logistics is a planning framework that seeks to

create a single plan for the flow of products and
information through a business.
• Supply chain management builds upon this

framework and seeks to achieve linkage and co-
ordination between the Process of other entities in
the pipeline, i.e.. Suppliers and customers, and the
organization itself
What is a Supply Chain?
Supply Chains
What is a Supply Chain
………. suggestions?
Supply Chains
Try this definition …………………
A supply chain is a network of facilities and

distribution options that performs the functions of
procurement of materials; transformation of these
materials into intermediate and finished products;
and distribution of these finished products to
customers.
(Source: Ganeshan & Harrison-Introduction to Supply Chain Management)
Supply Chain Management

Management of chain of Supplies
Supply Chains – Key Points
• Acquisition of raw material
• Suppliers
• Conversion of materials into finished products
• Storage of materials and products
• Distribution of materials and products
• Customers
• Consumers
- Including all the associated facilities, activities and people
necessary to take a raw material, transform it into a finished
product (or service) and provide it to a final consumer at the
point of need
- Suppliers, Production, Storage, Distribution & Customers may
be at one or many levels within the Supply Chain.
Supply Chain Management - Definition
Integration Synchronisation Processes
The integration and synchronisation of all processes,

people and organisations directly or indirectly involved in
the profitable delivery of service to internal and external
customers.
People and Service?

Profitable?
Organisation?
Customers?
Integration
Material Flow
Information Flow
Vendors Production RDC* DC** Customers
* RDC = Regional Distribution Centre, ** DC = Distribution Centre
Synchronisation
Vendors Production RDC DCs Customers
SUPPLY CHAIN MANAGEMENT
• Concept development over many years.
• Logistics is the key to providing quality service.
• Recognition of inward flow of goods and materials as

well as traditional final distribution.
• Increasingly used by organisations dependent on:-

– Widely dispersed sources of supply.
– Large numbers of widely dispersed customers
Components of Logistics
• Purchasing
• Materials Management
• Transport
• Warehousing
• Materials Handling
• Inventory
• Protective Packaging
• Information and Communications
CUSTOMERS
FIELD WAREHOUSES
PLANT
SUPPLIERS
DISTRIBUTION
CENTRE
Packaging
Sales Warehouse
Inbound Materials Inventory Customer
forecasting Purchasing Warehousing Transport network
transport handling control service
planning
Production
planning
interface
Purpose of Inventory
1. The decoupling of supply and demand through the

creation of buffer stocks.
2. The build up of anticipation stocks to meet planned
or expected demand.
3. The build up of investment stocks to take advantage
of market exploitation.
4. The stabilisation of production and the effective use
of labour and capital equipment.
PURPOSE OF WAREHOUSE
1. A space requirement to meet the demands of all forms

of buffer stock.
2. Provide support for the achievement of production

logistics.
3. To consolidate products from a variety of suppliers for

outward delivery to a variety of customers.
4. To facilitate the distribution of goods to the final

customer overcoming time and distance constraints.
PURPOSE OF TRANSPORT
1. The movement of goods between supply points,

storage points and customers within the total
distribution system.
2. Provide the most economic means of moving
goods within the distribution system through
Method selection.
3. Provide customers with a delivery service that
meets their defined time and quality conditions.
i
PURPOSE OF INFORMATION
1. Confirms the completion of an activity in the

logistics chain.
2. Stimulates the beginning of the next activity in
the logistics chain.
3. Provides basis upon which decisions can be
made at strategic, tactical and operational
levels.
4. Provides capability to ensure measurement of
performance of all activities.
5. Flows the length of the chain in both directions.
COST ELEMENTS
MANPOWER
EQUIPMENT
SPACE
OPERATING SYSTEMS
DISTRIBUTION COST
COMPONENTS (%)
3.78
35.84 43.23
17.15
STORAGE
INVENTORY
TRANSPORT
ADMIN/PACKAGING
COST VARIATION
TOTAL COST STOCKHOLDING COSTS
OPTIMUM
WAREHOUSE FIXED COSTS
TRANSPORT (TRUNKING)
COSTS
TRANSPORT (LOCAL
DELIVERY) COSTS
0 NUMBER OF WAREHOUSES
Trade-off concepts
INTRA-FUNCTION
INTER-FUNCTION
INTER-COMPANY
‘Lead Time’ concept
Distribution
Moving
Making
Buying
Total Lead
Time
(Source to
Payment)
Order – Raw Materials

Production sub assembly
Work in Progress Inventory
Final Production
FG Inventory (Central)
Transport
FG Inventory (Regional)
Receipt Order to Cash - Payment
Gaining competitive advantage
• Value added activities
• Cost adding activities
VALUE CUSTOMER
ADDED ORDER
REGIONAL CYCLE
STOCK
RAW
MATERIAL FINISHED IN
STOCK GOODS TRANSIT
PRODUCTION
COST ADDED
Supply Chain Operating Models
The T: W Ratio
W
T
Material Flow
Information Flow
Where do you meet the Customer?
– The Decoupling Point
Stock
MTO
Driven by
Actual Demand
Stock MTO
Stock MTS (Regional)
Driven by Stock MTS (Local)

Forecast
Stock
Lean versus Agile
High
AGILE
Variety
LEAN
Low High
Predictability
Lean versus Agile
Lean Agile
Objectives Low Cost Fast response
High Utilisation Buffer Capacity
Minimum Stock Deployed Stock
Process Elimination of waste Flexibility

Characteristic Smooth operation flow Market sensitivity
s High level of efficiency A virtual network
Quality assurance Postponement
Product Functional products Innovative products

Characteristic Low variety High variety
s Low margin High margin
Push versus Pull
Supplier
Push
Push WIP Bottlenecks
Space
Waiting
Pull Customer
Pull
Examples of Supply Chains
Supply Chain Characteristics
Sourcing Market Structure

• No./ type of suppliers • No./type of customers
• Location of suppliers • Channels
• Supplier development • Service levels
Physical Structure
• No. of stocking points
• Geographical spread
Processing Assembly
Factory Regional DC DC
Plant Plant Customer
Type of products
• No. of products/SKUs
• Handling characteristics
• Product lifecycles
Level of Integration
• Ownership
• Information transparency
• Standardisation
• Collaboration
Supply Chain Models
Supplier Customer Direct Replenishment
Supplier DC Direct Replenishment
Supplier RDC Direct

Replenishment
Production DC Direct Replenishment

Supply Chain Models
Break-Bulk & Cross-Dock
Break-bulk: predominantly full single item pallets

Cross-dock: configured customer orders
Stock No Stock
RDC / DC Cross-dock / Customers

Break-bulk
Dell Computers – Supply Chain
Traditional T T T
R R R
A A A
N N N
Supplier S W’HOUSE MFG S Distributor S Customer
P P P
O O O
R R R
T T T
Dell Model
T
R
A
Supplier N Customer Time to Market
MFG
S (80% less)
P
O
R
T
WIP
Vendor owned material

Hubs ( 1, max 2) WIP
Dell owned material
International
Suppliers Local Suppliers
Source: Dell Computers
Planning process
• Discuss and map the planning process
Components of a Supply Chain
Physical Entities within the Supply Chain
Raw material Consumer

Supplier
TRANSPORT
Suppliers Customer
STOCK
Manufacturing Distributor
MATERIAL FLOW
DC MATERIAL FLOW
Assembly / Filling
Packing RDC
Components & Sources of Supply Chain Costs
Cost Production Primary RDC Secondary Local Local Cust.

Type Transport Transport DCs Delivery
Inventory ü ü ü ü ü ü ü
Facilities ü ü ü ü
Labour ü ü ü ü
Transport ü ü ü
Tax / Duty In case of international supply chains
Information flows within the Supply Chain -
examples
From the Customer From the Supplier
• Orders • Acknowledgements
• Schedules • Invoices
• Complaints • Technical specifications
• Demand forecasts • Capacity data
• Primary drivers
• Orders
• Expected Orders
(forecast)
• Secondary drivers
• Anticipated Orders
Managing the Supply Chain
Managing the Supply Chain – Introduction
• Interactions
• Trade-offs
• Orchestrating Activities
Factory Processing Assembly Regional DC DC Customer

Plant Plant
Interactions
Customer
Demand
Deployment /
Distribution Forecasts
Production Inventory
Supply Chain Requirements
Interactions
Demand on
Suppliers Replenishment
Requirements
Production
Plan
Trade-offs eg. Inventory Decisions
Distribution
Costs
Stock
INVENTORY
Availability
INVESTMENT Cost of
Lot Sizes
Order
(or set up)
Costs
Orchestrating the Supply Chain
The Planning Hierarchy
C Sales and Operations Planning S

u (Families, Budget)
u
s Forecasts Production p
t Order Mgmt.
Network
3rd Party p
o Inventory Inventory Inventory l
m i
e Policies, Processes & Procedures e
r Data and pre-requisites
Education and Training r
s Systems (SAP/APO)
s
‘Closed-Loop’ Planning
Business Strategy
Long Range
Budget
Sales & Operations Planning

Customers and Markets
Suppliers and Partners

Supply
Medium Range
Forecasting Network
& Order Planning
Management Inventory
&
Infrastructure Production &
FG* Purchase
Planning
Sales Production
Planning Scheduling
Short Range
Detailed
Material
Planning Vendor
Scheduling
* FG = Finished Goods © Krishnan Subramaniam

Supply Chain Realities –
Who is in control?
Here, Focus of senior management (S&OP)

resources are
fixed - Supply
Months or
Chain is in Fixed Strategy, resources, investment
motion
Quarters
Focus of material and capacity planners

Here, material
& capacity Planning for Days or
are demand & Weeks
committed maximum efficiency
Focus of schedulers and operations
Here, work Hours or

is in process Days
Today
The Item Level Production Plan
Purpose:
• To uncouple supply from demand
• To insert a manual (not automatic) interface
• To provide production load stability
Required Stock of finished goods Production load

Capacity
Orders
Time Time
Detailed Material Planning
Item Level What are we

going to make?
What does it take Production
to make it? Plan
What have I
already got?
Bill
Planning System
Inventory
of Balance
Materials Material
Requirements
What do I need to
make / buy?
Material Requirements Plan
Prodn. scheduling & Capacity Planning
Item level Production Plan What do we

Schedule receipts want to make
What operations Planned Orders
does it take (Order No., Item, Qty., Due
Date) What resources are
to make it? used to complete
the operations?
Production
Routings Scheduling Work
Programme Centres
What capacity
do we need?
Capacity
Requirement The sequence Production
we are going Sequence
s Plan
to make
products.
Inventory Basics
Discussion
Food Supply chain
• How much food is wasted in the world?

• At which stage is wastage maximum?
Inventory Basics
• Inventory – Asset or Liability ?

– BOTH
• Cost of holding stock
• Cost of not holding stock
Costs of holding stock
• The cost of the item - material, labour, overheads
• The cost of capital borrowed to pay for it
• The cost of the lost opportunity to invest
• Insurance
• Taxes
• Pilferage, spoilage, damage
• Obsolescence
• Storage premises, space, heating, lighting
• Handling, transport
• Security
• Counting, recording
Costs of not holding stock
• Poor customer service
• Under-utilisation of labour and equipment
• Shortages
• Emergencies cost more money
• Loss of potential discounts
• Constantly doing changeovers, disruption
• No protection against increased demand, late supply
• Higher transportation costs, partial loads
• More chasing, expediting
• More overtime
• Not always possible to quantify
Inventory Management
– The Challenge
Variables which are not

Force us to make difficult Which dictate our …
completely under our control
decisions about …
…
n Target Service and

n Customer Expectations
hence Stock Levels
n Forecast Error Required
n Degree of
n Supply Lead Time (LT) Postponement to Inventory
Implement Positioning
n Supply LT Variability
n Replenishment
n Inventory Carrying Cost
Frequency
… involves combining variables not under our control with difficult

service and operating decisions
Stock Elements (Classifications)
(i) Anticipation Stock bought in anticipation of an additional non-

standard demand or supply problem
Stock brought-in for traditional business cost

(ii) Hedging reasons. Eg., expected rises in commodity
prices or shortages
(iii) Work in Process Inventory which is being converted from one state to
another and is not available for use
(iii) Cycle (lot size) Stock bought in bigger lots to reduce item price,
optimize transports, set-ups, flush waste, etc.
Additional inventory kept to lower the risk of stock-

(iv) Safety stock out situations in case of supply and/or demand /
forecast error variations
(v) In-Transit (pipeline) Stock that fills the transportation network, including
the flow between intermediate stocking points
Driving Improvements
Elements Drivers Reduction Opportunities
Other Order Policies & Document reasons for existence

Hedging / Challenge assumptions
Measures
Anticipation Focus on total cost of ownership
In-Transit Throughput, Time, Reduce cycle time

Inventory Process improvements
Distance
Cycle Batch Sizes Reduced batch sizes through more

Stock frequent production or improved
production methods (trade-off
smaller batches versus setup cost)
Lead-time Reduce cycle time

Safety Increase forecast aggregation
Forecast Inaccuracy
Stock Implement supplier development
Lack of Supplier
programme
Reliability
ERP and Inventory
• General assumption is that
– Replenishment planning will occur daily
– Exceptions will be visible as soon as they occur
• ALL planning and scheduling systems are limited as
they take data entered at face value, assuming
• 100% inventory record accuracy
• 100% Bill of Material accuracy
• 100% Planning data accuracy (lead-times, order quantities,
capacities, etc)
– The world-class standard for these parameters is
98%
– Moreover, systems assume this is true all the time
• Data accuracy is VITAL in all system areas to ensure
planning decisions are based on up-to-date, real-time
information
Goods move
as fast as the
information
Typical organisation structure
LOGISTICS MANAGER
LOGISTICS LOGISTICS SUPPLY &

PLANNING OPERATIONS INVENTORY
AND CONTROL
Customer Service Transport Inventory Planning

Liaison with Marketing Warehousing and Control
Budget Planning Depots Demand Forecasting
and Control Order Processing Liaison with Supplier
Distribution Engineering Liaison with Production
Distribution Network and
Facilities
Inter-functional conflicts
1. Marketing
❖ High service levels 4. Purchasing
❖ Maximum flexibility ❖ Economic order quantities
❖ Product proliferation ❖ Maximum supplier
discounts
2. Finance
5. After sales service
❖ Low investment level
❖ High stock availability
❖ High levels of control
❖ Short supply lead times
❖ Optimum inventory balance
❖ Repair policy
3. Manufacturing
❖ Planned demand
❖ Long production runs
❖ High equipment utilisation
Key points
• Manage as an integrated activity
• Cost –v– service
• Get things moving
• Exploit trade-offs
• Reduce lead time
• Focus on value adding activities
• Tackle effectiveness as well as efficiency
• Gain and maintain a competitive edge
• Create the appropriate management structure

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SUPPLY CHAIN MANAGEMENT

Management of the process of moving

RIGHT GOODS, RIGHT PLACE, RIGHT TIME, RIGHT COST

Logistics Supply Chain

Logistics is the process of

• Growth from pent up demand.

• Capacity to make and sell greater than to deliver.

• Concentration on warehouse and transport.

• Customer service demands.

• Financial impact of decisions.

• Trade-offs with all component activities.

• Inventory management embraced.

• Supply and cost of energy

• New distribution services

• Strategic decision making

• Logistics is a planning framework that seeks to

• Supply chain management builds upon this

What is a Supply Chain

Try this definition …………………

A supply chain is a network of facilities and

Supply Chain Management

Integration Synchronisation Processes

The integration and synchronisation of all processes,

People and Service?

Vendors Production RDC* DC** Customers

* RDC = Regional Distribution Centre, ** DC = Distribution Centre

Vendors Production RDC DCs Customers

• Concept development over many years.

• Logistics is the key to providing quality service.

• Recognition of inward flow of goods and materials as

• Increasingly used by organisations dependent on:-

• Information and Communications

1. The decoupling of supply and demand through the

1. A space requirement to meet the demands of all forms

2. Provide support for the achievement of production

3. To consolidate products from a variety of suppliers for

4. To facilitate the distribution of goods to the final

1. The movement of goods between supply points,

1. Confirms the completion of an activity in the

WAREHOUSE FIXED COSTS

Order – Raw Materials

Vendors Production RDC DCs Customers

Stock MTS (Regional)

Driven by Stock MTS (Local)

Vendors Production RDC DCs Customers

Process Elimination of waste Flexibility

Product Functional products Innovative products

Sourcing Market Structure

Supplier Customer Direct Replenishment

Supplier DC Direct Replenishment

Supplier RDC Direct

Production DC Direct Replenishment

Break-bulk: predominantly full single item pallets

RDC / DC Cross-dock / Customers

Vendor owned material

• Discuss and map the planning process

Raw material Consumer

Cost Production Primary RDC Secondary Local Local Cust.

From the Customer From the Supplier

• Complaints • Technical specifications

• Demand forecasts • Capacity data

Factory Processing Assembly Regional DC DC Customer

C Sales and Operations Planning S