Basics of supply chain management-1

SESSION 1Basic terminology and concepts of supply chain management.

Facilities, function, types Introduction to Introduction to Supply Chain

Need, benefits

elements

challenges

Some Estimates for India -------------------------------------------------------------------- LOGISTICS SPEND US $ 50 B SHARE OF GDP 12 - 13 % MAJOR ELEMENTS ARE ( % AGE OF TOTAL ) : TRANSPORTATION 35 INVENTORIES 25 PACKAGING 11 HANDLING & WAREHOUSING 9 OTHERS 6 LOSSES 14

-----------------------------------------------------------------------------------------------LOGISTICS COSTS CAN BE 6 - 7 % OF GROSS SALES CAN GO UP TO 14 - 15 %. FOR SECTORS LIKE CEMENT AND BULK MATERIALS.

Global Logistics IndustryCountrys spending on logistics managementCountry US Japan UK Canada Germany China Argentina Peru Logistics spend (% of GDP) 9.50 % 10.50 % 11.00 % 12.00 % 13.00 % 18.60 % 22.00 % 24.00 % 3rd Party Logistics Activities (% of total movement) 57 % 80 %

< 10 %

India

13.00 %

< 10 %

WHAT IS SUPPLY CHAIN MANAGEMENT

What Is the Supply Chain?Also referred to as the logistics network Suppliers, manufacturers, warehouses, distribution centers and retail outlets facilitiesSuppliers Manufacturers Warehouses & Customers Distribution Centers

and the Raw materials Work-in-process (WIP) inventory Finished products that flow between the facilities

Material Costs

Transportation Costs

Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs

Supply chain management-definedSupply chain management is a set of approaches utilised to efficiently integrate suppliers, manufacturers, warehouses and stores , so that merchandise is produced and distributed at the right quantities , to the right location and at the right time, in order to minimise system wide costs while satisfying service level requirements.

The Supply ChainSuppliers Manufacturers Warehouses & Distribution Centers Customers

Transportation Costs Material Costs

Transportation Costs 8

Manufacturing Costs

Transportation Costs Inventory Costs

What Is Supply Chain Management (SCM)?Plan Source Make Deliver Buy

A set of approaches used to efficiently integrate

Suppliers Manufacturers Warehouses Distribution centers In the right quantities To the right locations And at the right time

So that the product is produced and distributed

System-wide costs are minimized and Service level requirements are satisfied

FacilitiesWarehouses Factories Processing centers Distribution centers Retail outlets Offices

Functions and ActivitiesForecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service

Typical Supply ChainsProduction Distribution Purchasing Receiving Storage Operations Storage

.No ideal supply chain modelFunctional Products v/s innovative products Toothpaste Cars Soups Furniture Mobile phones

Need for Supply Chain Management1.Improve operations 2.Increasing levels of outsourcing 3.Increasing transportation costs 4.Competitive pressures 5.Increasing globalization 6.Increasing importance of e-commerce 7.Complexity of supply chains 8.Manage inventories

Benefits of Supply Chain ManagementLower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty

Elements of Supply Chain Management

History of Supply Chain Management1960s - Inventory Management Focus, Cost Control 1970s - MRP & BOM - Operations Planning 1980s - MRPII, JIT - Materials Management, Logistics 1990s - SCM - ERP - Integrated Purchasing, Financials, Manufacturing, Order Entry 2000s - Optimized Value Network with Real-Time Decision Support; Synchronized & Collaborative Extended Network

Supply chain Management : Key IssuesIssue Components

Supply contracts Comprehensive relationshipprice,discounts,volummes, deliveries distribution

Distribution network configuration multiple manufacturing, warehouses, retailStrategic alliances Distribution strategies Outsourcing and procurement strategies Product design IT Partnerships in SCM Cross-docking? Trade-off make or buy. Risks of outsourcing, e-procurement Impact on inventory, transport,lead times Data analysis,e-commerce,RFID

.No ideal supply chain modelFunctional Products v/s innovative products Toothpaste Cars Soups Furniture Mobile phones

Supply chain managementChallenges

SCM strategies can not be in isolation, have to align with another chain- the development chain (new product introduction) as well as overall org. objectives. Achieving the best solution with minimizing costs and maintaining service levels- Global optimisation Facing uncertainties and risk customer demand, travel time, break downs,

Supply chain managementChallenges - Nike Supply chain configuration

120 countries, 20000 styles/season, 800 factories

Challenge 1- Local factors- tariff resulting in consolidation, InfrastructureChallenge 2- Consumer Choices product proliferation- lean manufacturing Challenge 3- retail customers- Shorter lead times Challenge 4- Conflict- cost & flexibility offshore v/s onshore lead times

Supply chain managementNeeds to be efficient and cost effective

Across physical infrastructure Across entire system-Global optimisation

Across levels from strategic to tactical

Components of logistics management : PlanningInputs into logistics Natural resources (land, facilities, and equipments) Supplier s Human resources

Management actions Implementation Control

Outputs of logistics

Logistics management Raw In-process materials inventory Finished goods

Marketing Customer orientation (competitive s advantage) Time and place utility Efficient movement to customer

Logistics Activities Plant and warehouse site Customer Service Financial resources Demand forecasting selection Procurement Distribution Packaging Information communications Return goods handling resources Inventory control Salvage and scrap Material handling disposal Traffic and transportation Order Processing Warehousing and Parts and service storage support

Proprietary asset

SESSION 2Cycle view

Push/Pull view Process views of Supply Chain Macro processes Customer Relationship Management (CRM) Internal supply chain management (ISCM) Supplier Relationship Management (SRM)

Supply chain management-Process viewsSupply chain as a sequence of processes and flows that take place within and between diferent stages and combine to fill as customer need for a product.

Cycle view Processes are divided into a series of cycles, each performed at the interface between two successive stages . Push/Pull view Pull processes- initiated by customer orders Push processes- initiated in anticipation of customer order

Cycle View of Supply ChainsCustomerCustomer Order Cycle

toRetailer

Replenishment Cycle

to Distributor

Manufacturing Cycle

to Manufacturer

Procurement Cycle

toSupplier

Supply chain management-Cycle viewEach cycle occurs at the interface between two successive stages of the supply chain Not every supply chain will have all four cycles clearly separated Each cycle has sub-processes

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Supply chain managementPush/Pull viewsProcesses in a supply chain fall into one of the two categories depending on the timing of execution relative to end customer demand. Pull processes- Reactive with certainty of demand Push processes- Speculative processes with demand estimates

Supply chain management-Push/Pull viewsPush and Pull supply chain (Hybrid)Pushpull bound ary Push Raw Materials Pull Customer

PC manufacturer Components ( Forecast based ) Final assembly (Order based)

Cycles

PullCustomer Order

Customer arrival Customer order entry Customer order fulfilment Customer order receiving

Replenishment

Retail order trigger Retail order entry Retail order fulfilment Retail order receiving

PushManufacturing

Order arrival from distributors Production scheduling Manufacturing and Shipping Receiving (distributors, retailers, customers

Procurement

Supply chain strategiesPush (Forecast based) Pull (Demand based) Hybrid

Supply chain strategiesPush based supply chain (Forecast based) Based on long-term forecasts(retailers) Delays reactions Inability to meet demand pattern changes Obsolescence when demand disappers excess/short inveontories Lower service levels

Supply chain strategiesPull based supply chain (demand based) Based on customer demand Firm responds only to order Lesser lead time lesser inventory levels Less variability Lower service levels Difficult when lead times are high

Framework for matching products with strategiesThe right strategyDemand uncertainity Pull High Q1 Q2

Q2

Q4 Pull

Push Low Furniture Books Grossary Computer Garments Pull centrifuges soaps Toys Watches High Economies of Scale

Push Jewellery Water pumps

Demand driven supply chain strategiesDemand forecast Historical demand data Demand shaping- Impact of promotions,discounts etc. Measuring accuracy of forecast Arrive at demand (SKU wise, location wise) Analyse supply chain to match support for demand

Supply chain macro processessupplier Firm CustomerCRM CRM aims to generate customer demand and facilitate placement and tracking of orders Market Price Sell Call center Order Management

SRM

ISCM

Arranges and manages Planning of internal sources for various production and storage goods and services capacities, demand supply plans Source Negotiate Buy Design collaboration Supply collaboration Strategic planning Demand planning Supply planning Fulfillment Field service

SESSION 3Competitive and supply chain strategies

Achieving Strategic Fit Achieving strategic fit and Scope: Supply Chain Drivers and Expanding strategic scope Obstacles

Competitive and Supply Chain StrategiesCompetitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services Low cost, Rapid Response, Product Differentiation Ex: Pantaloons versus factory outlets HP versus Dell Supply chain strategy: determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important!

Competitive Strategy TypesDefender - operational efficiency Prospector - innovation

- Wal-Mart, ExxonMobil?

- Nike, Leitch Technology?

Analyzer - minimize risk through proven opportunities- Hewlett-Packard, Toyota?

Reactor - quick response to immediate market demands- ???

The Value Chain: Linking Supply Chain and Business Strategy Competitive StrategyNew Product Marketing Strategy Strategy

Supply Chain Strategy

New Product Development

Marketing and Sales

Operations

Distribution

Service

Finance, Accounting, Information Technology, Human Resources

Strategic planning 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 Traditionally, SC strategy includes -Suppliers Strategy -Operations Strategy -Logistics Strategy Involving inventory, transportation, operating facilities, information flows.

Achieving Strategic FitWhat is strategic fit? How is it achieved? Other issues affecting strategic fit

Achieving Strategic FitStrategic fit: Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies have the same goals A company may fail because of a lack of strategic fit Example of strategic fit Dell, Designer garments

How is Strategic Fit Achieved?Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain capabilities Step 3: Achieving strategic fit

Step 1: Understanding the Customer and Supply Chain UncertaintyIdentify the needs of the customer segment being served by the following attributes: 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 Ex: 7-Neighbourhood store vs. Hypermart

Step 1: Understanding the Customer and Supply Chain UncertaintyUnderstand the overall attributes of customer demand Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain due to the portion of the demand the supply chain is required to handle and attributes the customer desires Ex: A firm supplying only emergency orders for a product faces higher implied demand uncertainty then when there is long lead time. Ex: Implied demand uncertainty increases with service level, but demand uncertainty does not change.

Step 1: Understanding the Customer and Supply Chain UncertaintyImplied demand uncertainty also related to customer needs and product attributes First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

Step 1: Understanding the Customer and Supply Chain UncertaintyUnderstanding the Customer Lot size Response time Service level Product variety Price Innovation

Implied Demand Uncertainty

Impact of Customer Needs on Implied Demand UncertaintyCustomer Need Causes implied demand uncertainty to increase because Wider range of quantity implies greater variance in demand Less time to react to orders disaggregated

Range of quantity increases Lead time decreases

Variety of products required increases Demand per product becomes more Number of channels increases Rate of innovation increases Required service level increasesTotal customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand

Levels of Implied Demand UncertaintyDetergent Long lead time steel Purely functional products High Fashion Palm Pilot Entirely new products

Customer NeedPrice Responsiveness

Low

High

Implied Demand Uncertainty

Correlation Between Implied Demand Uncertainty and Other AttributesAttribute Product margin Avg. forecast error Avg. stockout rate Avg. forced seasonend markdown Examples Low Implied Uncertainty Low 10% 1%-2% 0% ?? High Implied Uncertainty High 40%-100% 10%-40% 10%-25% ??

Step 2: Understanding the Supply ChainHow does the firm best meet demand? Dimension describing the supply chain is supply chain responsiveness Supply chain responsiveness -- ability to 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

Step 2: Understanding the Supply ChainThere is a cost of achieving responsiveness Supply chain efficiency: cost of making and delivering the product to the customer Increasing responsiveness results in higher costs that lower efficiency Figure cost-responsiveness efficient frontier Figure supply chain responsiveness spectrum Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum

Understanding the Supply Chain: CostResponsiveness Efficient FrontierResponsivenessHigh

Low High Low

Cost

Responsiveness spectrumHighly efficient Somewhat efficient Somewhat responsive Highly responsive

Integrated steel plant

Apparelmake to stock

Automobiles

Retails stores stocks change during day

Physically efficient V/s responsive supply chainsPhysically efficient Primary purpose Responsive supply chains Supply predictable demand Respond quickly to efficiently at lowest possible unpredictable demand to cost minimise stockouts, markdowns and obsolete inventory High utilisation Generate high turns and mimimize inventory Shorten lead time without increasing cost Deploy excess buffer capacity Deploy significant buffer stocks of parts or finished goods Invest aggressively in ways to reduce lead time

Manufacturing focus Inventory strategy

Lead time focus Supplier selection

Primarily for cost and quality Primarily for speed, flexibility and quality

Step 3: Achieving Strategic FitStep is to ensure that what the supply chain does well is consistent with target customers needs Fig. : Zone of strategic fit Examples: Dell, maggie noodles

Achieving Strategic Fit Shown on the Uncertainty/Responsiveness MapResponsive supply chain

Responsive ness spectrum

of it e F on gic Z te tra S

Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand

Step 3: Achieving Strategic FitAll functions in the value chain must support the competitive strategy to achieve strategic fit Two extremes: Efficient supply chains (Cement) and responsive supply chains (Dell) Two key points there is no right supply chain strategy independent of competitive strategy there is a right supply chain strategy for a given competitive strategy

Other Issues Affecting Strategic FitMultiple products and customer segments Product life cycle Competitive changes over time

Multiple Products and Customer SegmentsFirms 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 if the segments are large enough Tailor supply chain to best meet the needs of each products demand, i.e., share some links.

Product Life CycleThe 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 CycleExamples: 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 TimeCompetitive 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

Expanding Strategic ScopeScope of strategic fit

The functions and stages within a supply chain that devise an integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope

Five categories:

Strategic ScopeSuppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer

Intracompany Intraoperational ScopeOne operation within a functional area in a company Each operation within each stage of the supply chain devises a strategy independently and attempts to optimize its own performance independently Usually results in different operations having conflicting objectives does not maximize total supply chain profits

Strategic Scope: Intracompany Intraoperation ScopeSuppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer

Intracompany Intrafunctional ScopeStrategic fit is expanded to include all operations within a function Attempt to maximize performance for the entire function

Strategic Scope: Intracompany Intrafunctional ScopeSuppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer

Intracompany Interfunctional ScopeAll functional strategies within a company are developed to support each other and the companys competitive strategy Strategic fit is expanded to include all functions in a firm Goal is to maximize company profit

Strategic Scope: Intracompany Interfunctional Scope Suppliers Manufacturer Distributor Retailer CustomerCompetitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

Intercompany Interfunctional ScopeThe only positive cash flow for the supply chain occurs when the customer pays for the product all other cash flows are resettling of accounts within the chain and add to total supply chain cost Supply chain surplus Difference between what the customer pays and total supply chain cost Total profit to be shared among all members of the supply chain

Intercompany Interfunctional ScopeIncreasing supply chain surplus increases the amount to be shared All stages coordinate strategy across all functions to ensure that they best meet the customers needs and maximize supply chain surplus Also provides more speed by managing the interfaces between supply chain stages Each company must evaluate its actions in the context of the entire supply chain