Basis of Supply Chain MGMT

Supply Chain Management
Chapter 1
Understanding the Supply Chain
2007 Pearson Education
Traditional View: Logistics in the

Manufacturing Firm
Profit
Logistics Cost
4%
21%
Marketing Cost
27%
Manufacturing Cost
48%
Profit
Logistics
Cost
Marketing
Cost
Manufacturing
Cost
Supply Chain Management Benefits

Delivery Performance
16%-28% Improvement
Inventory Reduction `
25%-60% Improvement
Fulfilment Cycle Time
30%-50% Improvement
Forecast Accuracy
25%-80% Improvement
Overall Productivity
10%-16% Improvement
Lower Supply-Chain Costs 25%-50% Improvement
Fill Rates
20%-30% Improvement
Improved Capacity Realization
10%-20% Improvement
Source: Cohen & Roussel
A 1997 PRTM Integrated Supply Chain

Benchmarking Survey of 331 firms found
significant benefits to integrating the supply chain
Supply Chain Management: The

Magnitude in the Traditional View
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
Compaq estimates it lost $.5 billion to $1 billion in

sales in 1995 because laptops were not available when
and where needed
Supply Chain Management:

The True Magnitude
When the 1 gig processor was introduced by AMD,
the price of the 800 mb processor dropped by 30%
P&G estimates it saved retail customers $65 million
by collaboration resulting in a better match of supply
and demand
Laura Ashley turns its inventory 10 times a year, five
times faster than 3 years ago
"Pretty much, Apple and

Dell are the only ones in this
industry making money. They
make it by being Wal-Mart.
We make it by innovation". Steve Jobs, Apple
PCM Needs Innovation

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)
Examples: Fig. 1.1 Detergent supply chain (WalMart), Dell

P&G or other
manufacturer
Plastic
Producer
Chemical
manufacturer
(e.g. Oil Company)
third
party DC
Tenneco
Packaging
Paper
Manufacturer
Supermarket
Customer wants
detergent and goes
to Jewel
Chemical
manufacturer
(e.g. Oil Company)
Timber
Industry

Customer is an integral part of the supply chain
Supply chain is dynamic &involves constant flow of
products, information, & funds, in both directions
Probably more accurate to use the term supply
network or supply web
Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
The Objective of a Supply Chain

Maximize overall value created
Supply chain value: difference between what the final
product is worth to the customer and the effort the
supply chain expends in filling the customers request
Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply chain)

Example: Dell receives $2000 from a customer for a
computer (revenue)
Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
Supply chain profitability is total profit to be shared
across all stages of the supply chain
Supply chain success should be measured by total
supply chain profitability, not profits at an individual
stage

Sources of supply chain revenue: the customer
Sources of supply chain cost: flows of information,
products, or funds between stages of the supply chain
Supply chain management is the management of
flows between and among supply chain stages to
maximize total supply chain profitability
Decision Phases of a Supply Chain

Supply chain management requires many decision
relating to the flow of information, product & funds.
These decision fall into 3 categories
Supply chain strategy or design
Supply chain planning
Supply chain operation
Supply Chain Strategy or Design

Structuring the supply chain (after marketing & pricing plan)
Decisions about the configuration of the supply chain, how
resource will be allocated and what processes each stage will
perform
Strategic supply chain decisions
Locations and capacities of facilities

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 uncertainty
Supply Chain Planning

Definition of a set of policies that govern short-term
operations(quarter to a year)
The goal of planning is to maximize the supply chain
surplus in the planning stage given the constraints
established during the strategic or design phase.
Starts with a forecast of demand in the different
market in the coming year
Supply Chain Planning

Planning decisions:
Which markets will be supplied from which locations
Planned buildup of inventories
Subcontracting,
Inventory policies
Timing and size of marketing & price promotions
Must consider in planning decisions demand uncertainty,
exchange rates, competition over the time horizon
During this stage companies incorporate flexibility to exploit
opportunity to optimize performance
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. I.e. To handle customer order in the best
possible manner.
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)
Process View of a Supply Chain

2 different ways to view the processes performed in 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)
Cycle View of Supply Chains

Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
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)
Each cycle consists of six sub processes

Supplier stage
markets product
Buyer returns reverse
flows to supplier or
third party
Buyer stage
places order
Buyer stage
receives supply
Supplier stage
receives orde
Supplier stage
supplies order
Cycle View of a Supply Chain

Even though each cycle has the same sub processes, there are
few imp diff
In customer order cycle, demand is external & thus
uncertain where as in all other cycle, order placement is
uncertain but can be projected based on policies followed
by the particular supply chain
Scale of order increases as we down the order in supply
chain
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.
Very useful when considering operational decisions
Push/Pull View of Supply Chains

Procurement,
Manufacturing and
Replenishment cycles
PUSH PROCESSES
Customer Order
Cycle
PULL PROCESSES
Customer
Order Arrives
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 processes)
Push: execution is initiated in anticipation of customer orders
(speculative processes)
Push/pull boundary separates push processes from pull
processes
Push operates in an uncertain environment & pull operates in
certain environment but still constrained by inventory &
capacity decisions that were made in push phase.
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
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 3 macro processes
Customer Relationship Management (CRM)
All processes that focus on the interface between the
firm & its customer
Internal Supply Chain Management (ISCM)
All processes that are internal to the firm
Supplier Relationship Management (SRM)
All processes that focus on the interface between the
firm & its suppliers
The 3 macro processes manage the flow of information, product
& funds required to generate, receive & fulfill a customer request
Supply Chain Macro Processes in

a Firm
FIRM
SRM
SOURCE
NEGOTIATE
BUY
SUPPLY COLLABORATION
DESIGN COLLABORATION
ISCM
STRATEGIC PLANNING
DEMAND PLANNING
SUPPLY PLANNING
FULFILLMENT
FILED SERVICE
CRM
MARKETING
PRICING
SELLING
CALL CENTRE
ORDER MANAGEMENT
Integration among the above three macro processes is critical

for effective and successful supply chain management
The organizational structure of the firm has a strong
influence on the integration
Competitive and Supply

Chain Strategies
Competitive strategy: defines the set of customer needs a firm
seeks to satisfy through its products and services
Competitive strategy is defined based on customer priorities in
one or more target segments.
To see the relationship b/w competitive & supply chain
strategies , we start with the value chain for a organization.
Finance, Accounting, Information Technology, Human Resources
New
Product
Development
Marketing
and
Sales
Operations
Distribution
Service
Competitive and Supply

Chain Strategies
Product development strategy: specifies the portfolio of new
products that the company will try to develop
Marketing and sales strategy: specifies how the market will be
segmented and product positioned, priced, and promoted
Supply chain strategy:
determines the nature of material procurement, transportation
of materials, manufacture of product or creation of service,
distribution of product
It also should specify role played by each supply chain entity
Value chain emphasizes the close relationship between these
functional strategies within a company
Support & strategic fit between supply chain strategy,
competitive strategy, and other functional strategies is important
Achieving Strategic Fit

Strategic fit:
Consistency between customer priorities that competitive
strategy hopes to satisfy and supply chain capabilities
specified by the supply chain strategy
Competitive and supply chain strategies have the same
goals
If strategic fit is not achieved conflicts arise between different
functional goals of different supply chain stages, targeting
different customer priorities.
A company may fail because its processes and resources do not
provide the capabilities to execute the desired strategy
How is Strategic Fit Achieved?

3 basic steps to achieve this strategic fit
Step 1: Understanding the customer and supply chain
uncertainty
Step 2: Understanding the supply chain
Step 3: Achieving strategic fit
Step 1: Understanding the Customer

and Supply Chain Uncertainty
Identify the needs of the customer segment being served &
uncertainty the supply chain faces in satisfying these needs.
In general, customer demand from different segments varies along
several attributes as follows
Quantity of product needed in each lot
Response time customers will tolerate
Variety of products needed
Service level required
Price of the product
Desired rate of innovation in the product
Although there are so many attributes one single measure that
helps to define how well the supply chain is performed is Implied
demand
uncertainty
2007 Pearson
Education

Demand uncertainty: uncertainty of customer demand
for a product
Implied demand uncertainty: resulting uncertainty for
the supply chain given the portion of the demand the
supply chain plans to satisfy and the attributes the
customer desires
Implied demand uncertainty also related to customer
needs and product attributes
Impact of Customer Needs on Implied

Demand Uncertainty (Table 2.1)
Customer Need
Causes implied demand

uncertainty to increase because
Range of quantity increases
Wider range of quantity implies

greater variance in demand
Lead time decreases
Less time to react to orders
Variety of products required

increases
Demand per product becomes more

disaggregated
Number of channels increases
Total customer demand is now

disaggregated over more channels
Rate of innovation increases
New products tend to have more

uncertain demand
Required service level increases
Firm now has to handle unusual

surges in demand
Correlation Between Implied Demand

Uncertainty and Other Attributes (Table 2.2)
Attribute
Low Implied
Uncertainty
High Implied
Uncertainty
Product margin
Low
High
Avg. forecast error
10%
40%-100%
Avg. stockout rate
1%-2%
10%-40%
Avg. forced season- 0%

end markdown
10%-25%

Along with demand uncertainty, it is important to consider
uncertainty resulting from the capability of the supply chain
Supply uncertainty is also strongly affected by the life cycle
position of the product
Impact of supply source capability on supply uncertainty
Supply Source Capability
Frequent breakdowns
Unpredictable & low yields
Poor quality
Limited supply capacity
Inflexible supply capacity
Evolving production process
Causes Supply Uncertainty to

Increase
Increase
Increase
Increase
Increase
Increase
Levels of Implied Demand

Uncertainty
Create an implied uncertainty spectrum by combining the demand &
supply uncertainty
Predictable
supply and
demand
Predictable supply and uncertain

demand or uncertain supply and
predictable demand or somewhat
uncertain supply and demand
Salt at a
supermarket
An existing
automobile
model
Highly uncertain
supply and demand
A new
communication
device
Figure 2.2: The Implied Uncertainty (Demand and Supply)

Spectrum
Step 2: Understanding the

Supply Chain
How does the firm best meet demand in that uncertain
environment?
Supply chain can be categorized on 2 dimension i.e.
responsiveness & efficiency
These dimensions are influenced by following supply chain
characters
respond to wide ranges of quantities demanded
meet short lead times
handle a large variety of products
build highly innovative products
meet a very high service level
The more of these abilities a supply chain has the more
responsive
it is, but it comes at a cost
2007 Pearson
Education
Step 2: Understanding the

Supply Chain
Supply chain efficiency: is the inverse of cost of making
and delivering the product to the customer
Increasing responsiveness results in higher costs that lower
efficiency
The trade off b/w responsiveness & efficiency can be
understood through cost-responsiveness efficient frontier
Develop supply chain responsiveness spectrum
Understanding the Supply Chain: CostResponsiveness Efficient Frontier

Responsiveness
High
Efficient frontier curve
Low
High
Low
Cost
Responsiveness Spectrum
This spectrum show different categories of supply chain the company
can develop based on supply chain responsiveness & efficiency
Highly
efficient
Integrated
steel mill
Somewhat
efficient
Hanes
apparel
Somewhat
responsive
Most
automotive
production
Highly
responsive
Dell
Step 3: Achieving Strategic Fit

Final step is to ensure that the degree of supply chain
responsiveness is consistent with the implied uncertainty
i.e. high responsiveness for supply chain facing high implied
uncertainty & efficiency for a supply chain facing low implied
uncertainty
The relation ship b/w step1 & step2 is represented by Zone of
strategic fit
For high level of performance, companies should move their
competitive strategy & supply chain strategy toward the zone
of strategic fit
Achieving Strategic Fit Shown on the

Uncertainty/Responsiveness Map (Fig. 2.5)
Responsive
supply chain
of i t
e
F
n
Zo egic
t
ra
t
S
Responsiveness
spectrum
Efficient
supply chain
Certain
demand
Implied
uncertainty
spectrum
Uncertain
demand
Other Issues Affecting Strategic Fit

Multiple products and customer segments
Product life cycle
Globalization & Competitive changes over time
Multiple Products and

Customer Segments
Firms sell different products to different customer
segments (with different implied demand uncertainty)
The supply chain has to be able to balance efficiency
and responsiveness given its portfolio of products and
customer segments
Two approaches:
Different supply chains
Tailor supply chain to best meet the needs of each
products demand
Product Life Cycle

The demand characteristics of a product and the needs
of a customer segment change as a product goes
through its life cycle
Supply chain strategy must evolve throughout the life
cycle
Early: uncertain demand, high margins (time is
important), product availability is most important, cost
is secondary
Late: predictable demand, lower margins, price is
important
Product Life Cycle

Examples: pharmaceutical firms, Intel
As the product goes through the life cycle, the supply
chain changes from one emphasizing responsiveness
to one emphasizing efficiency
Competitive Changes Over Time

Competitive pressures can change over time
More competitors may result in an increased emphasis
on variety at a reasonable price
The Internet makes it easier to offer a wide variety of
products
The supply chain must change to meet these changing
competitive conditions
Drivers of Supply Chain Performance

Facilities
places where inventory is stored, assembled, or fabricated
production sites and storage sites
Inventory
raw materials, WIP, finished goods within a supply chain
inventory policies
Transportation
moving inventory from point to point in a supply chain
combinations of transportation modes and routes
Information
data and analysis regarding customer, inventory, transportation, facilities
throughout the supply chain
potentially the biggest driver of supply chain performance
Sourcing
functions a firm performs and functions that are outsourced
Pricing
Price associated with goods and services provided by a firm to the supply chain
3-48
A Framework for
Structuring Drivers
Competitive Strategy
Supply Chain
Strategy
Efficiency
Responsiveness
Supply chain structure

Logistical Drivers
Facilities
Inventory
Transportation
Information
Sourcing
Pricing
Cross Functional Drivers

3-49
Facilities
Role in the supply chain
the where of the supply chain
manufacturing or storage (warehouses)
Role in the competitive strategy

economies of scale through centralization(efficiency
priority)
larger number of smaller facilities through decentralization
(responsiveness priority)
Example 3.1: Toyota and Honda
3-50
Components of Facilities Decisions

Role
Decide whether Production facilities should be flexible,
dedicated or combination
Warehouse & DC should be based on cross docking or
storage
Location
centralization (efficiency) vs. decentralization
(responsiveness)
other factors to consider (e.g., proximity to customers,)
Capacity
Excess or limited
3-51
Facility related metrics

Capacity
Utilization
Theoretical flow/ cycle time of production
Actual average flow/cycle time
Flow time efficiency flow
Product variety
Volume contribution of top 20percent SKUs and customers
Processing/setup/down/idle time
Average production batch size
Production service level
Inventory: Role in the Supply Chain

Inventory exists because of a mismatch between supply and
demand
Imp role that inventory plays is
Increases the amount of demand that can be met
Reduce cost by exploiting economies of scale
It is a major source of cost & has huge impact of
responsiveness
3-53
Inventory: Role in Competitive

Strategy
If responsiveness is a strategic competitive priority, a
firm can locate larger amounts of inventory closer to
customers
If cost is more important, inventory can be reduced to
make the firm more efficient
3-54
Components of Inventory
Decisions
Cycle inventory
Average amount of inventory used to satisfy demand between
shipments
Depends on lot size
Safety inventory
inventory held in case demand exceeds expectations
costs of carrying too much inventory versus cost of losing sales
Seasonal inventory
inventory built up to counter predictable variability in demand
cost of carrying additional inventory versus cost of flexible production
level of product availability

costs of carrying too much inventory versus cost of losing sales
3-55
Inventory related metrics

Avg. inventory
Products with more than a specified number of days
of inventory
Avg. replenishment batch size
Avg. safety inventory
Seasonal inventory
Fill rate
Fraction of time out of stock
Transportation: Role in
the Supply Chain
Moves the product between stages in the supply chain
Impact on responsiveness and efficiency
Faster transportation allows greater responsiveness
but lower efficiency & vice versa
Type of transportation also affects inventory and
facilities locations
3-57
Transportation:
Role in the Competitive Strategy
If responsiveness is a strategic competitive priority,
then faster transportation modes can provide greater
responsiveness to customers who are willing to pay
for it
Can also use slower transportation modes for
customers whose priority is price (cost)
Can also consider both inventory and transportation to
find the right balance b/w responsiveness & efficiency
3-58
Components of
Transportation Decisions
Mode of transportation:
air, truck, rail, ship, pipeline, electronic transportation
vary in cost, speed, size of shipment, flexibility
Design of transportation network

collection of locations, routes & transportation modes
route: path along which a product is shipped
3-59
Transportation related metric

Avg. inbound transportation cost
Avg. incoming shipment size
Avg. inbound transportation cost per shipment
Avg. outbound transportation cost
Avg. outbound shipment size
Avg. outbound transportation cost per shipment
Fraction transported by mode
Information: Role in
the Supply Chain
Most important driver, affects every part of the supply
chain
Serves as the connection between the various stages in
the supply chain allows coordination between stages
Crucial to daily operation of each stage in a supply
chain e.g., production scheduling, inventory levels
3-61
Information:
Allows supply chain to become more efficient and
more responsive at the same time
The key decision is what information is most
valuable? & this vary depending on supply chain
structure as well as the target market.
3-62
Components of Information
Decisions
Push versus Pull
Different types of system requires different types of
information. Push system requires elaborate information &
pull system requires real time information.
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies
EDI(electronic data interchange)
Internet
ERP systems
Supply Chain Management software
3-63
Information related metrics

Forecast horizon
Frequency of update
Forecast error
Seasonal factors
Variance from plan
Ratio of demand variability to order variability.
Sourcing: Role in
the Supply Chain
Set of business processes required to purchase goods
and services in a supply chain
Decide which tasks will be outsourced &those
performed within the firm.
Supplier selection, single vs. multiple suppliers,
evaluation criteria, contract negotiation &
procurement.
3-65
Sourcing:
Sourcing decisions are crucial because they affect the
level of efficiency and responsiveness in a supply
chain
In some instance, firms outsource to improve
responsiveness or to improve efficiency through
economics of scale.
3-66
Components of Sourcing
Decisions
In-house vs. outsource decisions
Decision on impact it has on the supply chain profits
improving efficiency and responsiveness
Supplier evaluation and selection

Procurement process
Overall trade-off: Increase the supply chain profits
3-67
Sourcing related metrics

Days payable outstanding
Average purchase price
Range of purchase price
Average purchase quantity
Fraction on-time deliveries
Supply quality
Supply lead time
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
Affects the customers expectations
3-69
Sourcing:
Significant attribute through which firm executes its
competitive strategy.
Firms can utilize optimal pricing strategies to improve
efficiency and responsiveness
Low price and low product availability; vary prices by
response times
3-70
Components of Pricing Decisions

Pricing and economies of scale
Everyday low pricing versus high-low pricing
Fixed price versus menu pricing
Overall trade-off: Increase the firm profits
3-71
Price related metrics

Profit margin
Days sales outstanding
Avg. sale price
Avg. order size
Range of sale price
Range of periodic sales
Obstacles to Achieving
Strategic Fit
Increasing variety of products
Leads in raise in uncertainty
Decreasing product life cycles
Leads in raise in uncertainty & smaller window of opportunity
Increasingly demanding customers
Wants improvement in lead time, cost & performance
Fragmentation of supply chain ownership
Chain broken into many owners
Globalization
Adds stress to chain as facilities are farther apart, making
coordination difficult
Difficulty executing new strategies
3-73
THANK YOU

Basis of Supply Chain MGMT

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Basis of Supply Chain MGMT

Transféré par

Droits d'auteur :

Formats disponibles

Supply Chain Management

2007 Pearson Education

Traditional View: Logistics in the

2007 Pearson Education

Supply Chain Management Benefits

Source: Cohen & Roussel

2007 Pearson Education

A 1997 PRTM Integrated Supply Chain

Supply Chain Management: The

Compaq estimates it lost $.5 billion to $1 billion in

2007 Pearson Education

Supply Chain Management:

"Pretty much, Apple and

PCM Needs Innovation

What is a Supply Chain?

What is a Supply Chain?

2007 Pearson Education

What is a Supply Chain?

2007 Pearson Education

The Objective of a Supply Chain

The Objective of a Supply Chain

2007 Pearson Education

The Objective of a Supply Chain

2007 Pearson Education

Decision Phases of a Supply Chain

2007 Pearson Education

Supply Chain Strategy or Design

Locations and capacities of facilities

Supply chain design must support strategic objectives

Supply Chain Planning

2007 Pearson Education

Supply Chain Planning

Supply Chain Operation

Process View of a Supply Chain

2007 Pearson Education

Cycle View of Supply Chains

Cycle View of a Supply Chain

Customer order cycle (customer-retailer)

Each cycle consists of six sub processes

Cycle View of a Supply Chain

Push/Pull View of Supply Chains

2007 Pearson Education

2007 Pearson Education

Supply Chain Macro Processes in

Supply Chain Macro Processes in

Integration among the above three macro processes is critical

2007 Pearson Education

Competitive and Supply

2007 Pearson Education

Competitive and Supply

Achieving Strategic Fit

How is Strategic Fit Achieved?

2007 Pearson Education

Step 1: Understanding the Customer

Step 1: Understanding the Customer

2007 Pearson Education

Impact of Customer Needs on Implied

Causes implied demand

Range of quantity increases

Wider range of quantity implies

Lead time decreases

Less time to react to orders

Variety of products required