Supply Chain Management Introduction

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Outline
What

is supply chain management? A supply chain strategy framework Components of a SCM Major obstacles and common problems

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Traditional View: Cost breakdown of a manufactured good

Profit

10% Chain Cost 20%

Profit Supply Chain Cost Marketing Cost

Supply

Marketing

Cost
Cost

25%
45%
Manufacturing Cost

Manufacturing

Effort spent for supply chain activities are invisible to the customers.
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SCM Generated Value

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!

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A picture is better than 1000 words! How many words would be better than 3 pictures?
- 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
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+ + + + +
The right The right The right The right

The right

Price

Store

Quantity

Customer

Time

Higher

Profits 5

Detergent supply chain:

P&G or other manufacturer Third party DC Albertsons Supermarket Customer wants detergent

Plastic cup Producer

Tenneco Packaging

Chemical manufacturer (e.g. Oil Company)

Chemical manufacturer (e.g. Oil Company)

Paper Manufacturer

Timber Industry

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Flows in a Supply Chain

Material Information

Supplier
Funds

Customer

The flows resemble a chain reaction.

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SCM in a Supply Network

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 N-Tier Suppliers Suppliers MEXICO Logistics TEXAS Distributors US 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
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Importance of Supply Chain Management

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 Inefficient logistics

Low order fill rates

Tier 1 Supplier

Manufacturer

Distributor

Retailer

Customer

High stockouts

Glitch-Wrong Material, Machine is Down effect snowballs

High inventories through the chain

Ineffective promotions

High landed costs to the shelf

Eliminating inefficiencies in supply chains can save millions of $.

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Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Any cycle 0. Customer arrival 1. Customer triggers an order 2. Supplier fulfils the order 3. Customer receives the order

Manufacturer
Procurement Cycle

Supplier
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Push vs Pull System

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 .

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

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Push/Pull View of Supply Chains

Procurement, Manufacturing and Replenishment cycles
Customer Order Cycle

PUSH PROCESSES

PULL PROCESSES

Customer Order Arrives Push-Pull boundary

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SCM Strategy

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Mission-Strategy-Tactics-Decisions
Mission,

Mission statement

The reason for existence of an organization

Strategy

A plan for achieving organizational goals The actions taken to accomplish strategies

Tactics

Operational

decisions

Day to day decisions to support tactics

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Decision Levels: Examples

Transportation

Strategic: Mode Selection Tactical/Operational: Routing, scheduling

Location

Strategic: No. of plants and locations Tactical: Assigning inventory positions

Warehouse

Strategic: Layout, site selection Operational: Order picking

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Linking SC and Business Strategy

Competitive (Business) Strategy
Product Development Strategy Marketing Strategy -Portfolio of products -Frequent discounts -Timing of product introductions
-Coupons

Supply Chain Strategy

New Product Development

Marketing and Sales

Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

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Strategies: Product Development

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 100000 rupees

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Strategies

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.

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Fitting the SC to the customer or vice versa?

Understand

the customer Wishes the Capabilities of your SC

Understand

Match

the Wishes with the Capabilities How to meet extensive Wishes with limited Capabilities?
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Challenge:

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Achieving Strategic Fit: Consistent SCM and Competitive strategies

Fit

SC to the customer the Customer Implied (Demand) Uncertainty for SC Implied trouble for SC

Understanding

Range of demand, pizza hut stable Production lot size, seasonal products Response time, organ transplantation Service level, product availability Product variety Innovation Accommodating poor quality

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Supply Chain Drivers and Obstacles

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Drivers (Measures) of Supply Chain Performance

How to achieve Efficiency Responsiveness

Supply chain structure

Inventory

Transportation

Facilities

Logistical Drivers

Information
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Sourcing

Pricing

CrossFunctional Drivers 22

1. Inventory

Convenience: Cycle inventory

No customer buys eggs one by one

Unstable demand: Seasonal inventory

Bathing suits Xmas toys

Randomness: Safety inventory

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

Pipeline

inventory
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Work in process or transit

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2. Transportation
Air Truck Rail Ship Pipeline Electronic

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3. Facilities
Production

Flexible vs. Dedicated

Operations

like Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping

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4. Information
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

Information Accurate? Accessible? Up-to-date? In the Correct form?

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5. Sourcing

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

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.

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6. Pricing

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

Role in the competitive strategy

Use pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times

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

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Major Obstacles to Achieving Fit

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

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Major Obstacles to Achieving Fit

Dealing

with Multiple Owners / Local Optimization

Information Coordination
Information sharing / Legal and ethical issues

Contractual Coordination
Mechanisms to align local objectives with global ones

Coordination with options

Rare in the practice

Without coordination, misleading reliance on metrics:

Average safety inventory, Average incoming shipment size, Average purchase price of raw materials.

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Major obstacles to achieving fit

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

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Common problems
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?
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Common problems

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.

Internal customer discrimination

Giving lower priority to internal customers than external customers

Poor integration Elusive inventory costs

Accounting systems do not capture opportunity costs

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