scm introduction.ppt

7/28/2019 scm introduction.ppt

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Supply Chain Management

Introduction


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Outline

What is supply chain management?

A supply chain strategy framework

Components of a SCM

Major obstacles and common problems

Seven Eleven Japan


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Traditional View: Supply Chains in

the Economy (1990, 1996)

Freight Transportation $352, $455 B

Transportation manager in charge

Transportation software

Inventory Expense $221, $311 B Inventory manager in charge

Inventory software

Administrative Expense $27, $31 B

Logistics related activity 11%, 10.5% of GNP

$898 B spent domestically for SC activities in 1998.

$1,160 B of inventory in the US economy in the early 2000s.

Transportation and inventory managers


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Traditional View: Cost breakdown of a

manufactured good

Profit 10%

Supply Chain Cost 20%

Marketing Cost 25%

Manufacturing Cost 45%

Profit

Supply Chain

Cost

Marketing

Cost

Manufacturing

Cost

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


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What can Supply Chain Management do?

Estimated that the grocery industry could save $30 billion (10% of operatingcost) by using effective logistics and supply chain strategies

A typicalbox of cereal spends 104 days from factory to sale

A typical carspends 15 days from factory to dealership

Faster turnaround of the goods is better?

Laura Ashley (retailer of women and children clothes) turns its inventory 10times a year five times faster than 3 years ago

inventory is emptied 10 times a year, or an item spends about 12/10 months in theinventory.

To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE.

National Semiconductorused air transportation and closed 6 warehouses, 34%increase in sales and 47% decrease in delivery lead time.


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Magnitude of Supply Chain Management

Compaq estimates it lost $0.5 B to $1 B in sales in 1995because laptops were not available when and whereneeded

P&G(Proctor&Gamble) estimates it saved retailcustomers $65 M (in 18 months) by collaborationresulting in a better match of supply and demand

When the 1 gig processor was introduced by AMD(Advanced Micro Devices), the price of the 800 meg

processor dropped by 30%


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Importance of SCM understood by some

AMR Research: "The biggest issue enterprises face today is intelligent visibility of their

supply chains-both upstream and down"

Forrester Research:

"Companies need to sense and proactively respond to unanticipated variationsin supply and demand by adopting emerging technologies such as intelligentagents. To boost their operational agility, firms need to transform their staticsupply chains into adaptive supply networks

Gartner Group:

By 2004, 90% of enterprises that fail to apply supply-chain managementtechnology and processes to increase their agility will lose their status aspreferred suppliers

Open ended statement. Agility can be increased continuously.


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Top 25

Supply Chains

AMR research http://www.amrresearch.compublishes reports on supply chainsand other issues.

The Top 25 supply chains report comesout in Novembers.

The table on the right-hand side is fromThe Second Annual Supply Chain

Top 25 prepared by Kevin Riley andReleased in November 2005.
http://www.amrresearch.com/http://www.amrresearch.com/


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SCM Generated Value

Minimizing supply chain costs

while keeping a reasonable service level

customer satisfaction/quality/on time delivery, etc.

This is how SCM contributes to the bottom line

SCM is not strictly a cost reduction paradigm!


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A picture is better than 1000 words!

How many words would be better than 3 pictures?

- A supply chain consists of

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

The right

Product

Higher

ProfitsThe right

TimeThe right

CustomerThe right

QuantityThe right

StoreThe right

Price=++ ++ +

- achieves

Supplier Manufacturer Distributor Retailer Customer

Upstream Downstream


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Detergent supply chain:

Customer wants

detergent

Albertsons

Supermarket

Third

party DC

P&G or other

manufacturer

Plastic cup

Producer

Chemical

manufacturer

(e.g. Oil Company)

Tenneco

Packaging

Paper

Manufacturer

Timber

Industry

Chemical

manufacturer

(e.g. Oil Company)


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Flows in a Supply Chain

Customer

Material

Information

Funds

The flows resemble a chain reaction.

Supplier


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SCM in a Supply Network

Supply Chain Management (SCM) is concerned with the management and control ofthe flows of material, information, and finances in supply chains.

Supply

Demand

Products and Services

Cash

Supply Side OEM Demand Side

THAILAND INDIA MEXICO TEXAS US

N-Tier Suppliers Suppliers Logistics Distributors Retailers

Information

The task ofSCM is to design, plan, and execute the activities at the different stagesso as to provide the desired levels of service to supply chain customers profitably


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Importance of Supply Chain Management

In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related

activities (movement, storage, and control of products across supply chains).Source: State of Logistics Report

Eliminating inefficiencies in supply chains can save millions of $.

Tier 1

Supplier

Manufacturer Distributor Retailer Customer

Inefficient

logistics

High

stockouts

Ineffective

promotions

Frequent Supply shortages

High landed costs to

the shelf

High inventories

through the chain

Low order fill

rates

Glitch-Wrong Material,

Machine is Down

effect snowballs


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Supply

Sources:plantsvendorsports

RegionalWarehouses:stockingpoints

FieldWarehouses:stockingpoints

Customers,demandcenterssinks

Purchase

Inventory

Transportation

Inventory

A Generic Supply Chain


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Cycle View of Supply Chains

Customer Order

Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Any cycle0. Customer arrival

1. Customer triggers an order

2. Supplier fulfils the order

3. Customer receives the order


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Push vs Pull System

What instigates the movement of the work in the system?

In Push systems, work release is based on downstream demandforecasts

Keeps inventory to meet actual demand Actsproactively

e.g. Making generic job application resumes today (e.g.: exempli gratia)

In Pull systems, work release is based on actual demand or theactual status of the downstream customers May cause long delivery lead times

Acts reactively

e.g. Making a specific resume for a company after talking to the recruiter


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Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer Order

Cycle

Customer

Order Arrives

Push-Pull boundary

PUSH PROCESSES PULL PROCESSES


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Examples of Supply Chains

Dell / Compaq

Dell buys some components for a product from its suppliers

after that product is purchased by a customer. Extreme case of a

pull process

Zara, Spains answer to Italys Benetton Sells apparel with a short design-to-sale cycle, avoids markdowns.

Toyota / GM / Volkswagen, in the course notes

McMaster Carr / W.W. Grainger, sell auto parts

Amazon / Barnes and Noble

Frozen food industry/Fast food industry/5 star restaurants

Internet shopping: Webvan / Peapod


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SCM Strategy


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Mission-Strategy-Tactics-Decisions

Mission, Mission statement The reason for existence of an organization

Strategy A plan for achieving organizational goals

Tactics The actions taken to accomplish strategies

Operational decisions Day to day decisions to support tactics


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Life Strategy for Ted

Ted is an undergrad. He would like to have a career in business, have

a good job, and earn enough income to live comfortably

Mission: Live a good lifeGoal: Successful career, good income

Strategy: Obtain a masters degree

Tactics: Select a college and a concentration

Operations: Register, buy books, takecourses, study, graduate, get a job


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Linking SC and Business Strategy

NewProduct

Development

MarketingandSales

Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Competitive (Business) Strategy

Product Development Strategy

-Portfolio of products-Timing of product introductions

Marketing Strategy

-Frequent discounts-Coupons

Supply Chain Strategy


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Strategies:

Product Development

It relates to Technologies for futureoperations (via patents) and Setof products/services

Be the technology leader

IBM workstations Offer many products

Dell computers

Offer products for localsTatas Nano at $2500=100000 rupees

Production at Singur, West Bengal, India;

l x w x h=3.1 x 1.5 x 1.6 meters;

Top speed: 105km/hr;

Engine volume 623 cc;

Mileage 50 miles/gallon;

Annual sales target 200,000.


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Strategies

Marketing and sales strategy relates to positioning, pricing and

promotion of products/services

e.g. Never offer more than 40% discount

e.g. EDLP = every day low price

At Wal-Mart

e.g. Demand smoothing via coupons

BestBuy

Supply chain management strategy relates to procurement,transportation, storage and delivery

e.g. Never use more than 1 supplier for every input

e.g. Never expedite orders just because they are late

e.g. Always use domestic suppliers within the sales season not in advance.


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Fitting the SC to the customer or vice versa?

Understand the customerWishes

Understand the Capabilities of your SC

Match the Wishes with the Capabilities

Challenge: How to meet extensive Wishes

with limited Capabilities?


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Achieving Strategic Fit: Consistent SCM

and Competitive strategies

Fit SC to the customer

Understanding the Customer

Range of demand, pizza hut stable

Production lot size, seasonal products

Response time, organ transplantation

Service level,product availability

Product variety

Innovation

Accommodating

poor quality

Implied (Demand)Uncertainty for SC

Implied troublefor SC


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Contributors to Implied Demand Uncertainty

Low High

Price ResponsivenessCustomer Need

Implied Demand Uncertainty

Commodities

Detergent

Long lead time steel

Customized products

High Fashion Clothing

Emergency steel,

for maintenance/replacement

Short lead times, product variety,

distribution channel variety, high rate of innovation and

high customer service levels all increase

the Implied Demand Uncertainty


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Understanding the Supply Chain:

Cost-Responsiveness Tradeoff

High Low

Low

High

Responsiveness (in time, high service level and product variety)

Cost in $

Efficiency frontier

InefficientFix responsiveness Impossible

Inefficiency Region

Why decreasing slope (concave) for the efficiency frontier?


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Achieving Strategic Fit: Wishes vs.Capabilities

Implied

uncertaintyspectrum

Responsive

(high cost)

supply chain

Efficient

(low cost)

supply chainCertain

demand

Uncertain

demand

Responsivenes

spectrum

Lunch buffet

Gourmet dinner


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Loosing the strategic fit: Webvan

Webvan started a merger with HomeGrocer in Sept 2000 and

completed in May 2001.

Declared bankruptcy in July 2001. Why?

Webvan was so behemoth that could deliver anything to anyone anywhere

that it lost sight of a more mundane task: pleasing grocery customers dayafter day.

Short to midterm cash mismanagement. Venture capital of $1.2 B run out.

Merger costs: duplicated work force, integration of technology, realignment

of facilities.

Peapod has the same business model but more focused in terms of

service and locations. It actually survives with its parent company

Royal Aholds (Dutch Retailer) cash.

Delivers now at a fee of $6.95 within a day.


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Top 10 Retailers Reported in 2008First 4

Source www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf
http://www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdfhttp://www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf


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Top 10 Retailers Reported in 2008First 5-10


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Big retailers Strategy

Wal-Mart: Efficiency

Target: More quality and service

Carrefour: International, ambiance

K-Mart: Confused.

Squeezed between Target and Wal-Mart

Reliance on coupon sales

Do coupons stabilize or destabilize a Supply chain?

K-Mart and Sears merged in November 2004.Now called Sears Holdings.

K-Mart gets cash

Sears gets presence outside malls


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Achieving Strategic Fit over a Lifecycle

Responsive

(high cost)

supply chain

Efficient

(low cost)

supply chainCertain

demand

Uncertain

demand


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Integration

Integration is the central theme in SCM

Building synergies by integrating business functions,departments and companies


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Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive

Strategy

Product Dev.

Strategy

Supply Chain

Strategy

Marketing

Strategy


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Supply Chain Drivers and Obstacles


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Drivers of Supply Chain Performance

Efficiency Responsiveness

Inventory Transportation Facilities

Information

Supply chain structure

Logistical

Drivers

How to achieve

Sourcing PricingCross-

Functional

Drivers


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1. Inventory

Convenience: Cycle inventory

No customer buys eggs one by one

Unstable demand: Seasonal inventory

Bathing suits Xmas toys and computer sales

Randomness: Safety inventory

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

first class

Compaqs loss in 95

Pipeline inventory

Work in process or transit


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Littles law

Long run averages = Expected values

I = R . T

I=Pipeline inventory;

R=output per time=throughput;T=delay time=flow time

Flow time? Thruput? Pipeline (work in process) Inventory?

10/minute

Spend 1 minute


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2. Transportation

Air

Truck

Rail

Ship

Pipeline

Electronic


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3. Facilities

Production

Flexible vs. Dedicated

Flexibility costs

Production: Remember BMW: a sports car disguised as a sedan Service: Can your instructor teach music as well as SCM?

Sports: A playmaker who shoots well is rare.

Inventory-like operations: Receiving, Prepackaging,Storing, Picking, Packaging, Sorting, Accumulating,

Shipping Job Lot Storage: Need more space. Reticle storage in fabs.

Crossdocking: Wal-Mart


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4. Information

Role in the supply chain

The connection between the various stages in the supply chain

Crucial to daily operation of each stage in a supply chain

E.g.,production scheduling, inventory levels Role in the competitive strategy

Allows supply chain to become more efficient and more

responsive at the same time (reduces the need for a trade-off)

Information technology Andersen Windows

Wood window manufacturer, whose customers can choose from a library of

50,000 designs or create their own. Customer orders automatically sent to

the factory.


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Quality of Information

Information drives the decisions:

Good information means good decisions

IT helps: MRP, ERP, SAP, EDI

Relevant information? How to use information?

I f i T h l i S l


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Information Technology in a Supply

Chain: Legacy Systems

Supplier CustomerRetailerDistributorManufacturer

Strategic

Planning

Operational

I f ti T h l i S l Ch i


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Information Technology in a Supply Chain:

ERP Systems


Strategic

Planning

OperationalERPPotential

ERPPotential

ERP

I f ti T h l i S l Ch i


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Information Technology in a Supply Chain:

Analytical Applications


Strategic

Planning

Operational

Supplier

Apps

SCM

MES

Dem Plan

Transport execution &

WMS

APS Transport & InventoryPlanning

CRM/SFA


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ERP Systems

Wider focus

Push (MRP) versus Pull (demand information transmitted

quickly throughout the supply chain)

Real-time information Coordination and Information sharing

Transactional IT Expensive and difficult to implement

About 25% of ERP installations are cancelled within a year

About 70% of ERP installations go over the budget


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IT Push

0

100

200

300

400

500

1965 1973 1981 1989 1997

IT investment($B)


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Supply Chain Software Push

See Top 100 under /articles.html

Source Kanakamedala,

Ramsdell, Srivatsan (2003).

McKinsey Quarterly, No 1.


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5. Sourcing


Set of processes required to purchase goods and services in a supply chain

Supplier selection, single vs. multiple suppliers, contract negotiation

Role in the competitive strategy

Sourcing is crucial. It affects efficiency and responsiveness in a supply chain

In-house vs. outsource decisions- improving efficiency and responsiveness

TI: More than half of the revenue spent for sourcing.

Cisco sources: Low-end products (e.g. home routers) from China.

Components of sourcing decisions In-house versus outsource decisions

Supplier evaluation and selection

Procurement process:

Every department of a firm buy from suppliers independently, or all together.

EDS to reduce the number of officers with purchasing authorization.


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6. Pricing


Pricing determines the amount to charge customers in a supply chain

Pricing strategies can be used to match demand and supply

Price elasticity: Do you know yours?

Role in the competitive strategy Use pricing strategies to improve efficiency and responsiveness

Low price and low product availability; vary prices by response times

Amazon: Faster delivery is more expensive

Components of pricing decisions Pricing and economies of scale

Everyday low pricing versus high-low pricing

Fixed price versus menu pricing, depending on the product and services

Packaging, delivery location, time, customer pick up

Bundling products; products and services


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Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation /

Dedicated

Proximity /

Flexibility

Information Low cost/slow/no

duplication

High cost/

streamlined/reliableSourcing Low cost sources Responsive sources

Pricing Constant price Low-high price


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Major Obstacles to Achieving Fit

SC is big:

Variety of products/services

Spoiled customer

Multiple owners (Procurement, Production, Inventory,Marketing) / multiple objectives

Globalization

Local optimization and lack of global fit


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Dealing with Multiple Owners / Local Optimization

Information Coordination

Information sharing / Shyness / Legal and ethical issues

Contractual Coordination

Mechanisms to align local objectives with global ones

Coordination with (real) options

Rare in the practice

Without coordination, misleading reliance on metrics:

Average safety inventory, Average incoming shipment size, Average

purchase price of raw materials, Revenue

Major Obstacles to Achieving Fit


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Major obstacles to achieving fit

Instability and Randomness:

Increasing product variety

Shrinking product life cycles

Customer fragmentation: Push for customization, segmentation Fragmentation of Supply Chain ownership: Globalization

Increasing implied uncertainty


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Common problems

Lack ofrelevant SCM metrics: How to measureresponsiveness?

How to measure efficiency, costs, worker performance, etc?

Poorinventory status information

Theft: Major problem for furniture retailers. Transaction errors: Retailers with inaccurate inventory records

for 65% of SKUs

Information delays, dated information, incompatible info. systems

Misplaced inventory: 16% of items cannot be found at a major retailer

Spoilage: active ingredients in the products are losing their properties

Product quality and yield

Lack of visibility in SCs

Do you know the inventory your distribution centers hold?

Do you know the inventory your fellow retailer holds?


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Common problems

Poordelivery status information Not knowing the order status

Poor IT design Unreliable, duplicate data

Security problems: too much or too little

Ignoring uncertainties The flight from uncertainty and ambiguity is so motivated that we often

createpseudocertainty. Nitin Nohra, HBR February 2006 issue, p.40.

Internal customer discrimination Giving lower priority to internal customers than external customers

Poor integration

Elusive inventory costs Accounting systems do not capture opportunity costs

SC-insensitive product design


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Summary

Supply Chain Introduction

Competitiveness / Business strategy / SCM strategy

Components

Inventory, Transportation, Facilities, Information, Sourcing, Pricing

Challenges


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Seven Eleven Japan (SEJ)

A Case Study


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Factual Information on Seven Eleven Japan (SEJ)

Largest convenience store in Japan with market value of $95 B. The third largestretail company in the world after Wal-Mart and Home Depot.

Established in 1974.

In 2000, total sales $18,000 M, profit $620 M.

Average inventory turnover time 7-8.5 days.

Stock value increased by 3000 times from 1974 to 2000. In 1985, there were 2000 stores in Japan, increasing by 400-500 per year.

Return on equity 14% over 2000-2004.

A SEJ store is about the half the size of a US 7-eleven store,

that is about 110 m2.

Sales: Products

32.9% Processed food: drinks, noodles, bread and snacks

31.6% Fast food: rice ball, box lunch and hamburgers

12.0% Fresh food: diary products

25.3% Non-food: magazines, ladies stockings and batteries.

Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying


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More on SEJ

More factual info: Average sales about twice of an average US store

SKUs offered in store: Over 3,000 (change by time of day, day of week, season)

Virtually no storage space

No food cooking at the stores

Japanese Images of Seven Eleven:

Convenient

Cheerful and lively stores

Many ready made dinner items I buy

Famous for its great boxed lunch and dinner - On weekends, when I was single, I went to buy lunch and dinner

SC strategy:

Micro matching of supply and demand (by location, time of day, day of week, season)


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Seven Eleven - Number of Stores

0

1000

2000

3000

4000

5000

6000

85 86 87 88 89 90 91 92 93 94

Number of Stores

1999: 8,0272004: 10,356

S El N t S l (B Y )


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Seven Eleven - Net Sales (B Yen)

Sales 1,963 B Yen in 2000

0

200

400

600

800

1000

1200

1400

85 86 87 88 89 90 91 92 93 94

Net Sales


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Seven Eleven - Pre tax Profit (B Yen)

0

10

20

30

40

50

6070

80

90

100

85 86 87 88 89 90 91 92 93 94

Profit


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Seven Eleven - Inventory turnover (days)

0

2

4

6

8

10

12

14

85 86 87 88 89 90 91 92 93 94

Inventory


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Information Strategy

Quick access to up to date information (as opposed to data): In 1991, SEJ implemented Integrated Service Digital Networkto link stores, headquarter,

DCs and suppliers

Customer checkout process Clerk records the customers gender, (estimated) age and purchased items. These Point of Sales

(POS) data are transmitted to database at the headquarters.

Store hardware: Store computer, POS registers linked to store computer, Graphic OrderTerminals, Scanner terminals for receiving

Daily use of the data Headquarters aggregate the data by region, products and time and pass to suppliers and stores by

next morning. Store managers deduce trend information.

Weekly use of the data Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100

corporate managers.

Tuesday morning, strategies are communicated to Operation Field Counselors who arrive inTokyo on Monday night.

Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy.Tuesday nights, field counselors return back to their regions.


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Information Analysis of POS Data

Analysis of Sales for product categories over time

SKU (stock keeping unit)

Waste or disposal

10 day (or week) sales trend by SKU

Sales trends for new product

In the early 1990s, half-prepared fresh noodle sales were going up,

new fresh noodle products were quickly developed

Sales trend by time and day

Different sales patterns for different sizes of milk at different times of the day results inrearrangement of the milks in the fridge. Extreme store micromanagement.

Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?).

List of slow moving items

About half of 3000 SKUs are replaced by new ones every year


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Facilities Strategy

Limited storage space at stores which have only 125-150 m2 space Frequent and small deliveries to stores

Deliveries arrive from over 200 plants.

Products are grouped by the cooling needs

Combined delivery system: frozen foods, chilled foods, room temperature and hot foods.

Such product groups are cross-docked at distribution centers (DC). Food DCs store noinventory.

A single truck brings a group of products and visits several stores within a geographical region

Aggregation: No supplier (not even coke!) delivers direct

The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000.Still, at least 3 fresh food deliveries per day. Goods are received faster with the use ofscanners.

Have many outlets, at convenient locations, close to where customers can walk

Focus on some territories, not all: When they locate in a place theyblanket (a.k.a.clustering) the area with stores; stores open in clusters with corresponding DCs.

844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. Nostores in Kobe.

Success rate of franchise application


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The Present and the Future

Is food preparation a good idea at 7-eleven locations? e.g. Compare microwave heating vs. salad preparation.

Why SEJ does not allow direct delivery from suppliers to retailers?

Point out which of the following strategies can also be used in US (or Taiwan) Information strategy

Facilities strategy

Discuss the differences between the Japanese and US (or Taiwanese) consumers withregard to Frequency and amount of grocery purchase

Use of credit cards vs. cash for purchase

7-eleven inventory turnover rate is 50 in Japan and 19 in the USA.

7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan.Does this make sense from a supply chain perspective?

Cost vs. Responsiveness Business strategy

What is the risk of micro-matching strategy?

No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA?


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Deloitte 2008 Global Retailers Survey

Excerpts fromwww.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf

Downloaded on Jan 30, 2008.
http://www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdfhttp://www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf

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