Supply Chain Management - An Overview - RG[1]

Supply Chain Management:

An Overview

Dr. Ranjan Ghosh

Indian Institute of Management

Calcutta

Some Definitions

Supply Chain Management encompasses every effort

involved in producing and delivering a final product or service, from the supplier’s supplier to the customer’s customer. Supply Chain Management includes

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, U.S.A.

Supply Sources: plants vendors ports Regional Warehouses : stocking points Field Warehouses : stocking points Customers, demand centers sinks Production/ purchase costs Inventory & warehousing costs Transportati on

costs _{Inventory &} warehousing

Transportati on

Flows in a supply chain

Customer

Information Product Funds

Some More Definitions

Supply Chain Management deals with the management of materials, information, and financial flows in a network consisting of suppliers, manufacturers, distributors and customers.

Stanford Supply Chain Forum Logistics involves “managing the flow of items, information,

cash and ideas through the coordination of supply chain

processes and through the strategic addition of place, period and pattern values.

Some More Definitions

Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that

merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total

system cost subject to satisfying service requirements. Simchi-Levi

Call it distribution or logistics or supply chain management. By

whatever name, it is the sinuous, gritty, and cumbersome process by which companies move, materials, parts, and products to customers. Fortune (1994)

Key Observations

• Integrated activity:

* Among functions such as logistics, manufacturing, distribution, design/engineering, marketing, finance,etc.

* Multiple organizations,i.e., suppliers, customers& 3 PL providers * Coordination of conflicting goals, metrics, etc.

• Responsible for multiple flows: * Information (orders, status, contracts)

* Physical (finished goods, raw material, w.i.p.) * Financial (payment, credits, etc.)

Key Observations (continued)

• Most analysis involves trade-offs

* Across different entities

* Across metrics: Cost, Service, Time, Risk, etc.

• Each interface in the supply chain represents

* Movement of goods * Information flows * Transfer of title * Purchase and sale

Notable Quotes

• In the end, all business comes down to Supply Chain vs. Supply Chain Robert Rodin, CEO, Marshall Industries

• Japanese Manufacturing Industry owes its Competitive Advantage and Strength to its Sub-Contracting Structure.

Ministry of International Trade and Industry, Japan (1992)

• Manufacturing now competes less on product and quality – which are often comparable – and more on inventory turns and speed to

market.

Philosophy of SCM

• The entire supply chain is a single, integrated

entity.

• The cost, quality and delivery requirements of

the customer are objectives shared by every

company in the chain.

• Inventory is the last resort for resolving supply

and demand imbalances.

Efficiency: Basis of

Production Management

• Efficiency leads to lower costs

• Lower cost implies

Lower Price => Greater demand => Better

market growth => Higher profits => Product/

Process development => Better market share

• 1980s and 1990s: Era of achieving excellence at

the firm level (JIT, TQM, TPM, BPR, ERP, etc)

• 2000s: Era of achieving excellence at the value

Evolution of SCM

Stage 1:

Vendor – Purchase – Production

- Distribution – Retailer

Stage 2:

Materials Management -

Logistics Management

Why is SCM Important?

• Strategic Advantage

– It Can Drive Strategy

* Manufacturing is becoming more efficient

* SCM offers opportunity for differentiation (Dell) or cost reduction (Wal-Mart or Big Bazaar)

• Globalization

– It Covers The World

*

* Increased risk of supply chain interruption

Why is SCM Important?

(continued)

• At the company level, supply chain management

impacts

* COST – For many products, 20% to 40% of total product costs are controllable logistics costs.

* SERVICE – For many products, performance factors such as inventory availability

and speed of delivery are critical to customer satisfaction.

Conflicting Objectives in the

Supply Chain

1. Purchasing

• Stable volume requirements

• Flexible delivery time

• Little variation in mix

• Large quantities

2. Manufacturing

• Long run production

• High quality

• High productivity

• Low production cost

Conflicting Objectives in the

Supply Chain

3. Warehousing

• Low inventory

• Reduced transportation costs

• Quick replenishment capability

4. Customers

• Short order lead time

• High in stock

• Enormous variety of products

• Low prices

Decision Phases in

a Supply Chain

• Supply chain strategy or design • Supply chain planning

Process view of a supply chain

• Cycle view • Push/pull view

Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retailer Distributor Manufacturer Supplier

Customer order cycle

• Customer arrival

• Customer order entry

• Customer order fulfillment • Customer order receiving

Replenishment cycle

• Retail order trigger

• Retail order entry

• Retail order fulfillment

• Retail order receiving

Manufacturing cycle

• Order arrival from the

distributor, retailer, or customer

• Production scheduling

• Manufacturing and shipping

• Receiving at the distributor,

Push/Pull View of

Supply Chains

• Pull processes

: execution is

initiated in response to a

customer order

• Push processes

: execution is

initiated in anticipation of

customer orders

Push/Pull View of Supply

Chains

SUPPLY CHAIN DESIGN:

Three Components

1. Insourcing/OutSourcing

(The Make/Buy or Vertical Integration Decision)

2. Partner Selection

(Choice of suppliers and partners for the chain)

3. The Contractual Relationship

(Arm's length, joint venture, long-term contract, strategic alliance, equity participation, etc.)

LESSONS IN

SUPPLY CHAIN DESIGN

1.

KNOW YOUR LOCATION IN THE

VALUE CHAIN.

2. UNDERSTAND THE DYNAMICS OF

VALUE CHAIN FLUCTUATIONS.

3. THINK CAREFULLY ABOUT THE

ROLE OF VERTICAL COLLABORA-

-TIVE RELATIONSHIPS.

Dell Computer’s supply chain

• Customer • Web page

• Assembly plant

• All of Dell’s suppliers and their suppliers

• Dell builds to order: customer order initiates manufacturing at Dell

• Dell does not have a retailer, wholesaler, or distributor in its supply chain

Dell Computer’s supply chain

• Dell carries only about 10 days of inventory (vs. 80 to 100 days of inventory for the competition)

• Less inventory to become obsolete, e.g., computer chips

• Less inventory to be defective (implications of small inventory and product quality)

• No finished product inventory; some parts no inventory, e.g., Sony monitors

• Dell outsources service and support to 3rd _party

Supply chain objective

• Maximize overall value generated

• Value strongly correlated to supply chain profitability – the difference between the revenue generated from the customer and the overall cost across the supply chain

• Example: A customer purchasing a computer from Dell pays $ 700 (the revenue)

• Dell and other stages of the supply chain incur cost to convey information, produce the components, store them, transport them, transfer funds, etc.

Examples of Supply Chains

• Dell / Compaq

• Toyota / GM / Ford

• Milk Distribution System of NDDB • Merry-Go-Round System of NTPC • Dabbawalas of Mumbai

The Dynamics of the Supply

Chain

The Dynamics of the Supply

Chain

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Customer Demand

Production Plan

Three Types of Integration

of the Supply Chain

• Geographical Integration

*From local to world-wide logistics

• Functional Integration

* From Function-dominated logistics to Flow-dominated logistics

• Inter-Firm Integration

Supply Chain Integration is Difficult

for two main reasons

• Different facilities in the supply chain may

have different, conflicting objectives

* For instance, the suppliers are in direct conflict with the manufacturers’ desire for flexibility.

• The supply chain is a dynamic system

that evolves over time

* Not only do demand and supplier capabilities change over time, but supply chain relationships also evolve over time.

Supply Chain: The

Magnitude

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

– Transportation 58% – Inventory 38%

– Management 4%

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

Supply Chain: The Magnitude

(continued)

• SOME ESTIMATES FOR INDIA

* Logistics Spend … IN Rs. 2,40,000 crores (approx. US $ 50 Billion)

* Share of GDP …….…… 12-13 % * Major Elements are ( Percentage of Total)

* Transportation ……… 35 * Inventories ……… 25

* Packaging ……… 11

* Handling & Warehousing ….. 9 * Others & Losses ……… 14

Supply Chain:The Magnitude

(continued)

• It is estimated that the grocery industry in USA

could save $30 billion (10% of operating cost)

by using effective logistics strategies.

– A typical box of cereal spends 104 days getting from factory to supermarket.

– A typical new car spends 15 days traveling from the factory to the dealership.

Supply Chain: The

Magnitude

• Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where

customers were ready to buy them.

• Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce write-downs of $2.6 billion in October 1997.

The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)

Supply Chain: The Potential

largest producer of milk by implementing a logistics and supply chain system that has eliminated several

intermediaries, thereby leading to a much higher

remunerative price (yield) for producers and lower price for consumers.

• As described in the FORBES magazine, the Dabbawalas of Mumbai has achieved an extremely high level of

reliability and precision (SIX SIGMA level in QA

parlance) in delivering to their customers the products earmarked for them.

Supply Chain: The

Potential

• Procter & Gamble estimates that it saved retail

customers $65 million through logistics gains over the past 18 months.

“According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together

…. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”.

Supply Chain: The Potential

• Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using - Direct business model

Supply Chain: 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.

Complexities Involved in

Supply Chain Management

• The supply chain is a complex network of

facilities and organizations with different,

conflicting objectives

• Matching supply and demand is a major

challenge

• System variations over time are also an

important consideration

• Many supply chain problems are new and there

is no clear understanding of all the issues

Supply Chain:

The Complexity

National Semiconductors:

• Production:

– Produces chips in six different locations: four in the US, one in Britain and one in Israel

– Chips are shipped to seven assembly locations in Southeast Asia.

• Distribution

– The final product is shipped to hundreds of facilities all over the world

– 20,000 different routes

– 12 different airlines are involved

– 95% of the products are delivered within 45 days – 5% are delivered within 90 days.

Supply Chain Challenges

• Achieving Global Optimization

– Conflicting Objectives

– Complex network of facilities

– System Variations over time

Procurement Planning

Manufacturing Planning

Distribution

Planning _PlanningDemand

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

Manufacturing Planning

Distribution

Planning _PlanningDemand

Global Optimization

Sequential Optimization vs.

Global Optimization

Supply Chain Challenges

• Achieving Global Optimization

– Conflicting Objectives

– Complex network of facilities

– System Variations over time

• Managing Uncertainty

– Matching Supply and Demand

Managing Uncertainty

1. Point forecasts are invariably wrong

↓

Plan for forecast range – use flexible contracts

to go up/down.

2. Aggregate forecasts are more accurate

↓

Aggregate the forecast – postponement/risk

pooling

Managing Uncertainty (cont’d)

3. Longer term forecasts are less accurate

↓

Shorten forecasting horizons – multiple

orders; early detection

4. In many cases, somebody else knows what is

going to happen

↓

What’s New in SCM?

• Global competition

• Shorter product life cycle

• New, low-cost distribution channels

• More powerful well-informed customers

• Internet and E-Business strategies

Levels of implied demand

uncertainty

Low _High

Price

Customer Need

Implied Demand Uncertainty

Long lead time steel

High Fashion Emergency steel

Understanding the Supply Chain:

Cost-Responsiveness Efficient Frontier

High Low

Low High

Responsiveness

Achieving Strategic Fit

Key Concepts

• Design, operate, and control the physical and

information flows as though the channel were

one seamless corporate entity.

• Let the activities (and costs) migrate across

corporate boundaries to where they make the

most sense.

• Rely on the benefits of channel integration to

replace the benefits of open market forces.

New Concepts

• Push-Pull strategies

• Direct-to-Consumer

• Strategic alliances

• Manufacturing postponement

• Dynamic Pricing

• E-Procurement

Dealing with Product Variety:

Mass Customization

Fragmentation of Markets

and Product Variety

• Are the requirements of all market segments served

identical?

• Are the characteristics of all products identical?

• Can a single supply chain structure be used for all products

/ customers? No! A single supply chain will fail different

Tailored Logistics

• Each Logistically Distinct Business (LDB) will have

distinct requirements in terms of

– Inventory

– Transportation – Facility

– Information

Applying the Framework

to e-commerce:

What is e-commerce?

• Commerce transacted over the Internet

– Is product information displayed on the

Internet?

– Is negotiation over the Internet?

– Is the order placed over the Internet?

– Is the order tracked over the Internet?

– Is the order fulfilled over the Internet?

– Is payment transacted over the Internet?

Existing Channels

for Commerce

• Product information

– Physical stores, EDI, catalogs, face to face, …

• Negotiation

– Face to face, phone, fax, sealed bids, …

• Order placement

– Physical store, EDI, phone, fax, face to face, …

• Order tracking

– EDI, phone, fax, …

• Order fulfillment

Revenue Impact of

E-Commerce

• Length of supply chain

• Product information

• Time to market

• Negotiating prices and contract terms

• Order placement and tracking

• Order fulfillment

• Payment

Cost Impact of E-Commerce

• Facility costs

– Site and processing cost

• Inventory costs

– Cycle, Safety, Seasonal inventory

• Transportation costs

– Inbound and outbound costs

• Information sharing

A Plethora of Approaches

• Just in Time Inventory

• Vendor Managed Inventory • Quick Response

• Collaborative Planning, Forecasting and Replenishment • Cross-docking / Flow through Centres

• Outsourcing / 3 PLs • Activity Based Costing • Internet / EDI

• Bar-Coding / RFID • Build to Order

A Plethora of Approaches

(continued)

• Collaborative Transportation Management • Cash – to – Cash Metrics

Framework for analysis

• Model Based Approach

* Use fundamental models to gain insights

* Analytical, though not necessarily Operations Research, approach

* Extensive use of case studies and real-life examples

• Total System Cost

* Avoid the silo effect of traditional logistics

* Capture and integrate across different players in SC * Service can be included

Framework for Analysis

(continued)

• Portfolio of Solutions

* Rarely is a single solution sufficient or practical * A set of solutions is usually more applicable

* The context matters

• Management of Uncertainty

* Risk can be measured, monitored, and managed

Modeling for SCM

• Forecasting Models

-

enable better planning, given the lead-time necessary for response.

• Location Models

- These models identify the optimal location of facilities such as plants and warehouses, considering the inbound and outbound transportation costs as well as the fixed and variable costs of operation at the locations under consideration. These are usually formulated as Mixed Integer Programming Models.

Modeling for SCM (cont’d)

• Distribution Network Design Models

- These models are usually comprehensive in nature, deciding between two, three and even four stages of distribution network, location of warehouses and break-bulk points, and sometimes even the transportation.

• Allocation Models

- These models help in optimally allocating commodities from sources to destinations in a multi-source, multi-destination environment. The costs considered for optimisation are production costs and warehousing costs. The constraints considered can be due to demand, capacity, route

Modeling for SCM (cont’d)

• Inventory Models

- Inventory plays a major role in SCM. - Inventory can be of various types such as:

- Batching and shipment inventories

- Buffer stocks to take care of uncertainties

- Pipeline inventory ( primary and secondary transportation )

These models minimize the total relevant cost, based on trade-offs among, inter alia, inventory carrying cost, ordering cost, stock-out cost, transportation cost, taxes & duties, etc.

Modeling for SCM (cont’d)

• Routing Models

-

transportation network from a given source to a destination. The models used are the Shortest Path Problem, the Traveling Salesman Problem and the Vehicle Routing Problem. Decision

Support Systems that interactively use the expertise of the decision maker by providing graphical support through a map (i.e., using a Geographical Information System ) are also very useful in such decisions.

Modeling for SCM (cont’d)

• Scheduling Models

- These models enable allocation of resources to

particular activities. Depending on the criteria of interest and the number of resources, the models are of aid in

evaluating appropriate rules for allocation.

• Alternative Analysis

- This model simply proposes the identification of alternatives, criteria for decision making and analysis of the alternatives

across the criteria to arrive at the best choice. Formal

approaches such as simulation and analytic hierarchy process could be used in assessing the implications of the criteria.