1-Supply Chain Management - An Overview - RG

8/13/2019 1-Supply Chain Management - An Overview - RG

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Supply Chain Management:

An Overview

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Supply Chain Management - Introduction

Say we get an order from a European retailer to produce10,000 garments. For this customer we might decide to buyyarn from a Korean producer but have it woven and dyedin Taiwan. So we pick the yarn and ship it to Taiwan. TheJapanese have the best zippers so we go to YKK, a big

Japanese zipper manufacturer, and we order the rightzippers from their Chinese plants. the best place to makethe garments is Thailand. So we ship everything there.the customer needs quick delivery, we may divide theorder across five factories in Thailand. Effectively, we are

customizing the value chain to best meet the customersneeds. (Interview of Victor Fung ofLi & Fungin HBR,Sept-Oct 1998.)

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Supply

Sources:plants

vendors

ports

RegionalWarehouses:stocking

points

FieldWarehouses:stockingpoints

Customers,demandcenterssinks

Production/purchasecosts

Inventory &warehousingcosts

Transportationcosts

Inventory &warehousingcosts

Transportationcosts

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Some More Definitions

Supply Chain Management deals with the management of

materials, information, and financial flows in a network

consisting of suppliers, manufacturers, distributors andcustomers.

Stanford Supply Chain Forum

Logistics involves managing the flow of items,

information, cash and ideas through the coordination ofsupply chain processes and through the strategic

addition of place, period and pattern values.

MIT Center for Transportation and Logistics

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A value chainis another name for asupply chain. Asupply chainis a sequence of organizations - their

facilities, functions and activities - that are involved in

producing and delivering a product or service.

Li & Fungis Hong Kongs largest export trading company.It has also been innovative in supply chain management.

In the interview example, it can be seen thatLi & Funghas

created a supply chain for the purpose of meeting a

customers needs. In general, this case is more theexception than the rule, but serves to illustrate some of the

pieces of a supply chain.

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Flows in a supply chain

Customer

Information

Product

Funds

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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 totalsystem 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)

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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.)

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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

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In a supply chain, virtually all of the members serve as

both customers as well as suppliers. In theLi & Fung

example, the Korean yarn producer and the Japanese

zipper producer are probably only suppliers and the

customers customers (folks like you and me) areprobably only customers. Every other organization in the

supply chain is both a customer and a supplier. See the

figure on slide five (green - supplier, yellow - customer,

orange - both).

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Supplier

Supplier

Supplier

Storage

}Mfg. Dist. RetailerCustomerStorage

Supplier

Supplier

Storage

}

Service Customer

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Yarn

Zippers

Factory

1

Factory2

Factory

3

Factory

4

Factory

5

The

Customer

(Retailer)

Yarn

Dying &

Weaving

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Supply chain managementdeals with linking the

organizations within the supply chain in order to meet

demand across the chain as efficiently as possible. In our

example,Li & Fungis creating and managing the links. In

non-brokered supply chains, one or more of the chains

organizations can provide the management function.

Why is supply chain management so important?

To gain efficiencies from procurement, distribution and logistics

To make outsourcing more efficient

To reduce transportation costs of inventories

To meet competitive pressures from shorter development times,

more new products, and demand for more customization

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To meet the challenge of globalization and longer supply chains

To meet the new challenges from e-commerce

To manage the complexities of supply chains

To manage the inventories needed across the supply chain

Why is supply chain management difficult?

Different organizations in the supply chain may have different,

conflicting objectives

Manufacturers: long run production, high quality, high productivity,

low production cost

Distributors: low inventory, reduced transportation costs, quick

replenishment capability

Customers: shorter order lead time, high in-stock inventory, large

variety of products, low prices

Supply chains are dynamic - they evolve and change over time

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Supply chains and vertical integration

For any organization vertical integration involves either taking on

more of the supplier activities (backward) and/or taking on more of

the distribution activities (forward)

An example of backward vertical integration would be a peanut

butter manufacturer that decides to start growing peanuts rather than

buying peanuts from a supplier

An example of forward vertical integration would be a peanut butter

manufacturer that decides to start marketing their peanut better

directly to grocery stores

In supply chains, some of the supplying and some of the distributionmight be performed by the manufacturer

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The significance of vertical integration in the supply chain is that the

activities that are performed by the manufacturer are typically moreeasily managed than those which are performed by other

organizations

Therefore, the degree of vertical integration can have an impact on

the structure and relationships between members of a supply chain

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Strategic, tactical and operating issues Strategic - long term and dealing with supply chain design

Determining the number, location and capacity of facilities

Make or buy decisions

Forming strategic alliances

Tactical - intermediate term

Determining inventory levels

Quality-related decisions

Logistics decisions

Operating - near term Production planning and control decisions

Goods and service delivery scheduling

Some make or buy decisions

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Key issues in supply chain management include

Distribution network configuration

How many warehouses do we need?

Where should these warehouses be located?

What should the production levels be at each of our plants?

What should the transportation flows be between plants andwarehouses?

Inventory control

Why are we holding inventory? Uncertainty in customer demand?

Uncertainty in the supply process? Some other reason?

If the problem is uncertainty, how can we reduce it? How good is our forecasting method?

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Distribution strategies

Direct shipping to customers?

Classical distribution in which inventory is held in warehouses and

then shipped as needed?

Cross-docking in which transshipment points are used to take stock

from suppliers deliveries and immediately distribute to point of usage?

Supply chain integration and strategic partnering

Should information be shared with supply chain partners?

What information should be shared?

With what partners should information be shared?

What are the benefits to be gained?

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Product design

Should products be redesigned to reduce logistics costs?

Should products be redesigned to reduce lead times?

Would delayed differentiation be helpful?

Information technology and decision-support systems

What data should be shared (transferred) How should the data be analyzed and used?

What infrastructure is needed between supply chain members?

Should e-commerce play a role?

Customer value

How is customer value created by the supply chain?

What determines customer value? How do we measure it?

How is information technology used to enhance customer value in the

supply chain?

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How can you assess how well your supply chain is

performing? The SCOR model - Supply Chain Operations Reference Model -

developed by the Supply Chain Council (http://www.supply-

chain.org/) can be used to assess performance

SCOR model metrics include: On-time delivery performance

Lead time for order fulfillment

Fill rate - proportion of demand met from on-hand inventory

Supply chain management cost

Warranty cost as a percentage of revenue Total inventory days of supply

Net asset turns

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http://www.supply-chain.org/http://www.supply-chain.org/http://www.supply-chain.org/http://www.supply-chain.org/http://www.supply-chain.org/


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Creating an effective supply chain

Develop strategic objectives and tactics

Integrate and coordinate activities in the internal portion of the

supply chain

Coordinate activities with suppliers and customers

Coordinate planning and execution across the supply chain Consider forming strategic partnerships

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Notable Quotes

In the end, all business comes down to

Supply Chain vs. Supply ChainRobert Rodin, CEO, Marshall Industries

Japanese Manufacturing Industry owes its Competitive Advantage

and Strength to itsSub-Contracting Structure.Ministry of International Trade and Industry, Japan (1992)

Manufacturing now competes less on product and qualitywhichare often comparableand more on inventory turns and speed to

market.

John Kasarda, Forbes, 1999

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Philosophy of SCM

The entire supply chain is a single, integratedentity.

The cost, quality, time, and deliveryrequirements of the customer are objectivesshared by every company in the chain.

Inventory is the last resort for resolving supplyand demand imbalances.

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Efficiency: Basis of

Production Management Efficiency leads to lower costs

Lower cost implies

Lower Price =>Greater demand =>Bettermarket 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

chain level (SCM, CRM, E-Commerce, etc.)

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Evolution of SCM

Stage 1:Vendor Purchase

Production - Distribution Retailer

Stage 2:Materials Management -

Logistics Management

Stage 3: Supply Chain Management

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Why is SCM Important?


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Strategic Competitive AdvantageTo

compete in the marketplace* Manufacturing is becoming more efficient

* SCM offers opportunity for differentiation (Dell) or

cost reduction (Wal-Mart or Big Bazaar)

GlobalizationWe are all interrelated,

interconnected, interdependent= Higher

competitiveness

* Requires greater coordination of production anddistribution

* Increased risk of supply chain interruption

* Increases need for robust and flexible supply chains

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(continued)

At the company level, supply chain management

impacts

* COSTFor many products, 20% to 40% oftotal product costs are controllable

logistics costs.

* SERVICEFor many products, performance

factors such as inventory availabilityand speed of delivery are critical to

customer satisfaction.

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Conflicting Objectives in the

Supply Chain1. 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 30


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Conflicting Objectives in the

Supply Chain3. Warehousing

Low inventory

Reduced transportation costs Quick replenishment capability

4. Customers

Short order lead time

High in stock Enormous variety of products

Low prices

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Decision Phases in

a Supply Chain

Supply chain strategy or

design Supply chain planning

Supply chain operation

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Process view of a supply chain

Cycle view

Push/pullview

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Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier 34


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Replenishment cycle

Retail order trigger

Retail order entry Retail order fulfillment

Retail order receiving

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Manufacturing cycle

Order arrival from thedistributor, retailer, orcustomer

Production scheduling

Manufacturing and shipping

Receiving at the distributor,retailer, or customer

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Push/Pull View of

Supply Chains

Pull processes: execution is

initiated in response toacustomer order

Push processes: executionis initiated in anticipation

ofcustomer orders

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Push/Pull View of Supply

ChainsProcurement,Manufacturing andReplenishment cycles

Customer Order

Cycle

Customer

Order Arrives

PUSH PROCESSES PULL PROCESSES

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SUPPLY CHAIN DESIGN:


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SUPPLY CHAIN DESIGN:

Three Components

1. Insourcing/OutSourcing

(The Make/Buy or Vert ical Integ rat ion Decis ion )

2. Partner Selection

(Choice of suppl iers and partners for the chain)

3. The Contractual Relationship(Arm 's leng th, joint venture, long-term con tract ,

strategic al l iance, equity part ic ipat ion , etc.)

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LESSONS IN

SUPPLY CHAIN DESIGN1. 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.

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Dell Computers supply chain

Customer

Web page

Assembly plant All of Dells suppliers and their

suppliers

Dell builds to order: customer orderinitiates manufacturing at Dell

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

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Dell Computers 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

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Supply chain objective

Maximize overall value generated

Value strongly correlated to supply

chain profitabilitythe differencebetween the revenue generated from thecustomer and the overall cost across thesupply chain

Example: A customer purchasing acomputer from Dell pays $ 700 (therevenue)

Dell and other stages of the supply chainincur cost to convey information, 44


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Examples of Supply Chains

Dell / Compaq

Toyota / GM / Ford

Milk Distribution System of NDDB

Merry-Go-Round System of NTPC

Dabbawalas of Mumbai

Amazon / Borders / Barnes and Noble

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Th D i f th S l


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The Dynamics of the Supply

Chain

OrderS

ize

Time

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

Customer

Demand

Retailer OrdersDistributor Orders

Production Plan

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The Dynamics of the Supply

Chain

OrderS

ize

Time


Customer

Demand

Production Plan

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Three Types of Integration


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yp g

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

* From a Sector-based Logistics to Inter-sector Logistics

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S l Ch i I t ti i Diffi lt


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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 withthe manufacturers desire for flexibility.

The supply chain is a dynamic systemthat evolves over time

* Not only do demand and supplier capabilities changeover time, but supply chain relationships also evolveover time.

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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

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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

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Supply Chain: The

Magnitude (continued) Compaq computer estimates it lost $500 million to $1

billion in sales in 1995 because its laptops and desktopswere not available when and where customers were readyto buy them.

Boeing Aircraft, one of Americas leading capital goodsproducers, was forced to announce write-downs of $2.6

billion in October 1997.The reason? Raw material shortages, internal and supplierparts shortages. (Wall Street Journal, Oct. 23, 1997)

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Supply Chain: The Potential

In 25 years, NDDB has enabled India to become thelargest producer of milk by implementing a logistics andsupply chain system that has eliminated several

intermediaries, thereby leading to a much higherremunerative price (yield) for producers and lower pricefor consumers.

As described in the FORBES magazine, the Dabbawalasof Mumbai has achieved an extremely high level ofreliability and precision (SIX SIGMA level in QAparlance) in delivering to their customers the productsearmarked for them.

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Dell Computer has outperformed the competition in

terms of shareholder value growth over the eight

years period, 1988-1996, by over 3,000% (seeAnderson and Lee, 1999) using

- Direct business model

- Build-to-order strategy.

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In 10 years, Wal-Mart transformed itself

by changing its logistics system. It has the

highest sales per square foot, inventoryturnover and operating profit of any

discount retailer.

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Complexities Involved in


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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 majorchallenge

System variations over time are also an

important consideration Many supply chain problems are new and there

is no clear understanding of all the issuesinvolved

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Supply Chain:


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Supply Chain:

The ComplexityNational 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

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Supply Chain Challenges

Achieving Global Optimization

Conflicting Objectives

Complex network of facilities

System Variations over time

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Sequential Optimization vs.


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Procurement

Planning

Manufacturing

Planning

Distribution

PlanningDemand

Planning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement

Planning

Manufacturing

Planning

Distribution

PlanningDemand

Planning

Global Optimization

Sequential Optimization vs.

Global Optimization

Source: Duncan McFarlane 61

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Supply Chain Challenges

Achieving Global Optimization

Conflicting Objectives

Complex network of facilities

System Variations over time

Managing Uncertainty

Matching Supply and Demand

Demand is not the only source of uncertainty

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M i U t i t


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Managing Uncertainty

1. Point forecasts are invariably wrong

Plan for forecast rangeuse flexiblecontracts to go up/down.

2. Aggregate forecasts are more accurate

Aggregate the forecastpostponement/risk pooling

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Managing Uncertainty (contd)

3. Longer term forecasts are less accurate

Shorten forecasting horizonsmultipleorders; early detection

4. In many cases, somebody else knows

what is going to happen

Collaborate

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Whats New in SCM?

Global competition

Shorter product life cycle

New, low-cost distribution channels

More powerful well-informed customers

Internet and E-Business strategies

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Levels of implied demand


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p

uncertainty

Low High

Price ResponsivenessCustomer Need

Implied Demand Uncertainty

Detergent

Long lead time steel

High Fashion

Emergency steel

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Understanding the Supply Chain: Cost-

R i Effi i t F ti


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Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost67

Achieving Strategic Fit


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Achieving Strategic Fit

Implied

uncertainty

spectrum

Responsive

supply chain

Efficient

supply chain

Certain

demand

Uncertain

demand

Responsiveness spectrum

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N C


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New Concepts

Push-Pull strategies

Direct-to-Consumer

Strategic alliances

Manufacturing postponement

Dynamic Pricing

E-Procurement

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Dealing with Product Variety:


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Mass Customization

Mass

Customization

High

HighLow

Low

Long

ShortLeadTime

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Fragmentation of Markets

d P d V i


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and Product Variety

Are the requirementsof all market segments

served identical?

Are the characteristics of all products

identical?

Can a single supply chain structure be usedfor all products / customers? No! A single

supply chain will fail different customers on

efficiency or responsiveness or both. 72

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Tailored Logistics

Each Logistically Distinct Business

(LDB) will have distinct requirements

in terms of

Inventory

Transportation

Facility

Information

Key: How to gain efficiencieswhile 73

Applying the Framework

to e-commerce:


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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?

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Revenue Impact of


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E-Commerce Length of supply chain

Product information

Time to market

Negotiating prices and contract terms

Order placement and tracking

Order fulfillment

Payment

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Cost Impact of E-Commerce


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Cost Impact of E Commerce

Facility costs

Site and processing cost

Inventory costsCycle, Safety, Seasonal inventory

Transportation costs

Inbound and outbound costs

Information sharing

Coordination77

A Plethora of Approaches


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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

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(continued)

Partnerships / Alliances

Auctions / Exchanges

Postponement Strategies

SC Software

SC Event Management

Merge-In-Transit

Collaborative Transportation Management CashtoCash Metrics

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Framework for analysis


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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

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Framework for Analysis


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(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

* Impacts sourcing, contracting, pricing, incentives, etc.

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Modeling for SCM


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ode g o SC

Forecasting Models

- These models allow prediction of demand based on past data orother parameters that are independently available. They 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 outboundtransportation costs as well as the fixed and variable costs of

operation at the locations under consideration. These areusually formulated as Mixed IntegerProgramming Models.

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Modeling for SCM (contd)


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g ( )

Distribution Network Design Models- These models are usually comprehensive in nature, deciding

between two, three and even four stages of distributionnetwork, 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 areproduction costs and warehousing costs. The constraintsconsidered can be due to demand, capacity, routerestrictions, etc.

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g ( )

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.

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g ( )

Routing Models

- These models allow optimal routing on atransportation network from a given source to a

destination. The models used are the ShortestPath Problem, the Traveling Salesman Problemand the Vehicle Routing Problem. DecisionSupport Systems that interactively use theexpertise of the decision maker by providing

graphical support through a map (i.e., using aGeographical Information System ) are also veryuseful in such decisions.

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g ( )

Scheduling Models

- These models enable allocation of resources toparticular activities. Depending on the criteria of

interest and the number of resources, the modelsare 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 alternativesacross 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.

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SCM - Inventory Management Issues

Manufacturers would like to produce in large lot sizes


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Manufacturers would like to produce in large lot sizes

because it is more cost effective to do so. The problem,however, is that producing in large lots does not allow for

flexibility in terms of product mix.

Retailers find benefits in ordering large lots such as

quantity discounts and more than enough safety stock. The downside is that ordering/producing large lots can

result in large inventories of products that are currently not

in demand while being out of stock for items that are in

demand.

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Ordering/producing in large lots can also increase the safety


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Ordering/producing in large lots can also increase the safety

stock of suppliers and its corresponding carrying cost. Itcan also create whats called the bullwhip effect.

The bullwhip effectis the phenomenon of orders and

inventories getting progressively larger (more variable)

moving backwards through the supply chain. This isillustrated graphically on the next slide.

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Order

Size

Time


CustomerDemand

Retailer OrdersDistributor Orders

Production Plan

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Some of the causes of variability that leads to the bullwhip


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Some of the causes of variability that leads to the bullwhip

effectincludes: Demand forecasting Many firms use the min-max inventory

policy. This means that when the inventory level falls to the reorder

point (min) an order is placed to bring the level back to the max, or

the order-up-to-level. As more data are observed, estimates of the

mean and standard deviation of customer demand are updated. Thisleads to changes in the safety stock and order-up-to level, and

hence, the order quantity. This leads to variability.

Lead time As lead time increases, safety stocks are increased, and

order quantities are increased. More variability.

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Batch ordering. Many firms use batch ordering such as with a


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min-max inventory policy. Their suppliers then see a large order

followed by periods of no orders followed by another large order.This pattern is repeated such that suppliers see a highly variable

pattern of orders.

Price fluctuation. If prices to retailers fluctuate, then they may try

to stock up when prices are lower, again leading to variability.

Inflated orders. When retailers expect that a product will be in

short supply, they will tend to inflate orders to insure that they will

have ample supply to meet customer demand. When the shortage

period comes to an end, the retailer goes back to the smaller orders,

thus causing more variability.

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How then can we cope with the bullwhip effect?


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Centralizing demand information occurs when customerdemand information is available to all members of the

supply chain. This information can be used to better predict

what products and volumes are needed and when they are

needed such that manufacturers can better plan forproduction. However, even though centralizing demand

information can reduce the bullwhip effect, it will not

eliminate it. Therefore, other methods are needed to cope

with the bullwhip effect.

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Methods for coping with the bullwhip effectinclude:


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p g p ff

Reducing uncertainty. This can be accomplished by centralizingdemand information.

Reducing variability. This can be accomplished by using a

technique made popular by WalMartand thenHome Depotcalled

everyday low pricing(EDLP). EDLP eliminates promotions as well

as the shifts in demand that accompany them. Reducing lead time. Order times can be reduced by using EDI

(electronic data interchange).

Strategic partnerships. The use of strategic partnerships can

change how information is shared and how inventory is managed

within the supply chain. These will be discussed later.

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Other helpful techniques for improving inventory

t i l d


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management include:

Cross-docking. This involves unloading goods arriving from a

supplier and immediately loading these goods onto outbound trucks

bound for various retailer locations. This eliminates storage at the

retailers inbound warehouse, cuts the lead time, and has been used

very successfully by WalMartandXeroxamong others.

Delayed differentiation. This involves adding differentiating

features to standard products late in the process. For example,

Bennetton decided to make all of their wool sweaters in undyed

yarn and then dye the sweaters when they had more accurate

demand data. Another term for delayed differentiationispostponement.

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Direct shipping. This allows a firm to ship directly to customers

th th th h t il Thi h li i t t i th


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rather than through retailers. This approach eliminates steps in the

supply chain and reduces lead time. Reducing one or more steps inthe supply chain is known as disintermediation. Companies such as

Delluse this approach.

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SCM - Strategic Partnering

Strategic partnering(SP) is when two or more firms that


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have complementary products or services join such thateach may realize a strategic benefit. Types of strategic

partnering include:

Quick response,

Continuous replenishment,

Advanced continuous replenishment, and

Vendor managed inventory (VMI)

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In quick responseSP vendors receive point-of-sales (POS)


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data from retailers. The data are then used to synchronizeproduction and inventory management at the supplier.

Although the retailer still prepares and submits individual

orders to the supplier, the POS data is used to improve

forecasting and scheduling.

In continuous replenishmentSP vendors again receive POS

data and use them to prepare shipments at previously agreed

to intervals as well as to maintain agreed to inventory

levels. This approach is used by WalMart.

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In advanced continuous replenishmentSP suppliers will


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gradually decrease inventory levels at the retailers locationas long as they can still meet service levels. The result is

that inventory level are continuously improved. Kmartuses

this approach.

In vendor managed inventorySP the supplier will decide onthe appropriate inventory levels for each of the products it

supplies and the appropriate inventory policies to maintain

these levels. One of the best examples of this is the SP

between WalMartandProctor & Gamble. (See summary

on next slide.)

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Criteria

Types

Decision

Maker

Inventory

Ownership

New Skills

Employed by vendors

Quick

Response

Retailer Retailer Forecasting Skills

Continuous

Replenishment

Contractually Agreed to Levels Either

Party

Forecasting & Inventory Control

Advanced

Continuous

Replenishment

Contractually agreed to & Continuously

Improved Levels

Either

Party

Forecasting & Inventory Control

VMI Vendor Either

Party

Retail

Management

Source: Simchi-Levi, Kaminsky & Simchi-Levi, Irwin McGraw Hill, 2000

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Requirements for an effective SP include:


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Advanced information systems, Top management commitment, and

Mutual trust

Steps in SP implementation include:

Contractual negotiations Ownership

Credit terms

Ordering decisions

Performance measures

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Develop or integrate information systems

Develop effective forecasting techniques


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Develop effective forecasting techniques

Develop a tactical decision support tool to assist in coordinating

inventory management and transportation policies

Advantages of SP include:

Fully utilize system knowledge

Decrease required inventory levels

Improve service levels

Decrease work duplication

Improve forecasts

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Disadvantages of SP include:


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Expensive technology is required Must develop supplier/retailer trust

Supplier responsibility increases

Expenses at the supplier also often increase

Third party logistics(3PL) involves the use of an outside

company to perform part or all of a firms materials

management and product distribution function.

Examples of companies that provide 3PL includeRyder Dedicated

LogisticsandJ.B. Hunt.

Examples of companies that use 3PL include 3M,Dow Chemical,Kodakand Sears.

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1-Supply Chain Management - An Overview - RG

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