Supply Chain Management - An Overview - RG

7/29/2019 Supply Chain Management - An Overview - RG

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Supply Chain Management:

An Overview

Dr. Ranjan Ghosh

Indian Institute of Management

Calcutta


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Some Definitions

Supply Chain Management encompasses everyeffort involved in producing and delivering a

final product or service, from the supplierssupplier to the customers customer. SupplyChain Management includes managing supplyand demand, sourcing raw materials and parts,

manufacturing and assembly, warehousing andinventory tracking, order entry and ordermanagement, distribution across all channels,and delivery to the customer.

The Supply Chain Council, U.S.A.


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Supply

Sources:plantsvendors

ports

RegionalWarehouses:stocking

points

FieldWarehouses:stockingpoints

Customers,demandcenterssinks

Production/purchasecosts

Inventory &warehousingcosts

Transportationcosts Inventory &

warehousingcosts

Transportationcosts


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Flows in a supply chain

Customer

Information

Product

Funds


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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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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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Notable Quotes

In the end, all business comes down to

Supply Chain vs. Supply Chain

Robert Rodin, CEO, Marshall Industries

Japanese Manufacturing Industry owes its Competitive Advantage

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

Manufacturing now competes less on product and quality whichare often comparable and 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 and delivery requirements ofthe customer are objectives shared by everycompany 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 atthe firm level (JIT, TQM, TPM, BPR, ERP, etc)

2000s: Era of achieving excellence at the valuechain 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?

Strategic AdvantageIt Can Drive Strategy

* Manufacturing is becoming more efficient

* SCM offers opportunity for differentiation (Dell) or

cost reduction (Wal-Mart or Big Bazaar)

GlobalizationIt Covers The World

* Requires greater coordination of production anddistribution

* Increased risk of supply chain interruption

* Increases need for robust and flexible supply chains


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Why is SCM Important?

(continued)

At the company level, supply chain management

impacts

* COST For many products, 20% to 40% of

total product costs are controllable

logistics costs.

* SERVICE For many products, performance

factors such as inventory availability

and speed of delivery are critical to

customer satisfaction.


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Conflicting Objectives in the

Supply Chain

1. Purchasing

Stable volume requirements

Flexible delivery time Little variation in mix

Large quantities

2. Manufacturing Long run production

High quality

High productivity

Low production cost


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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


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Customer order cycle

Customer arrival

Customer order entry

Customer orderfulfillment

Customer orderreceiving


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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 the

distributor, 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 to acustomer 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

SUPPLY CHAIN DESIGN


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SUPPLY CHAIN DESIGN:

Three Components

1. Insourcing/OutSourcing(The Make/Buy or Vertical Integration Decision)

2. Partner Selection(Choice of suppliers and partners for the chain)

3. The Contractual Relationship(Arm's length, joint venture, long-term contract,

strategic alliance, equity participation, etc.)


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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 theirsuppliers

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 (implicationsof small inventory and product quality)

No finished product inventory; some partsno inventory, e.g., Sony monitors

Dell outsources service and support to 3rd

party providers


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Supply chain objective

Maximize overall value generated

Value strongly correlated to supply

chain profitability the 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,


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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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The Dynamics of the Supply

Chain

OrderSize

Time

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

Customer

Demand

Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders

Production PlanProduction Plan


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The Dynamics of the Supply

Chain

OrderSize

Time

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

Customer

Demand

Production PlanProduction Plan

Th T f I t ti


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Three Types of Integration

of the Supply Chain

Geographical Integration

*From local to world-wide logistics

Functional Integration

* From Function-dominated logistics to

Flow-dominated logistics

Inter-Firm Integration

* From a Sector-based Logistics to Inter-sector

Logistics


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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)

It is estimated that the grocery industry in USA

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

by using effective logistics strategies.

A typical box of cereal spends 104 days getting from

factory to supermarket.

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


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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 desktops

were 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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Supply Chain: The

Potential

Procter & Gamble estimates that it saved retail

customers $65 million through logistics gains over thepast 18 months.

According to P&G, the essence of its approach lies inmanufacturers and suppliers working closely together.

jointly creating business plans to eliminate the source ofwasteful practices across the entire supply chain.(Journal of Business Strategy, Oct./Nov. 1997)


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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% (see

Anderson 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

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:

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

5% are delivered within 90 days.


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Supply Chain Challenges

Achieving Global Optimization

Conflicting Objectives

Complex network of facilities

System Variations over time

S ti l O ti i ti


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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


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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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Managing Uncertainty

1. Point forecasts are invariably wrong

Plan for forecast range use flexiblecontracts to go up/down.

2. Aggregate forecasts are more accurate

Aggregate the forecast postponement/risk pooling


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Managing Uncertainty (contd)

3. Longer term forecasts are less accurate

Shorten forecasting horizons multipleorders; 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

Levels of implied demand


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Levels of implied demand

uncertainty

Low High

Price ResponsivenessCustomer Need

Implied Demand Uncertainty

Detergent

Long lead time steel

High Fashion

Emergency steel

Understanding the Supply Chain: Cost-


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Understanding the Supply Chain: Cost

Responsiveness Efficient Frontier

High Low

Low

High

Responsiveness

Cost


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Achieving Strategic Fit

Implied

uncertaintyspectrum

Responsive

supply chain

Efficient

supply chain

Certain

demand

Uncertain

demand

Responsiveness spectrum Z

oneof

Stra

tegicFit


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Key Concepts

Design, operate, and control the physical andinformation flows as though the channel wereone seamless corporate entity.

Let the activities (and costs) migrate acrosscorporate boundaries to where they make themost sense.

Rely on the benefits of channel integration toreplace the benefits of open market forces.

Share the risks and the rewards between players.


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New Concepts

Push-Pull strategies

Direct-to-Consumer

Strategic alliances

Manufacturing postponement

Dynamic Pricing

E-Procurement

Dealing with Product Variety:


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Dealing with Product Variety:

Mass Customization

Mass

Customization

Mass

Customization

High

HighLow

Low

Long

ShortLeadTime

Cost

Custo

mizatio

n

Fragmentation of Markets


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g

and Product Variety

Are the requirements of all market

segments served identical?

Are the characteristics of all products

identical? Can a single supply chain structure be

used for all products / customers? No!

A single supply chain will fail different


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Tailored Logistics

Each Logistically Distinct Business

(LDB) will have distinct requirements

in terms of

Inventory

TransportationFacility

Information

Key: How to gain efficiencies while

Applying the Framework


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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?

Existing Channels


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Existing Channels

for Commerce Product informationPhysical stores, EDI, catalogs, face to face,

Negotiation

Face to face, phone, fax, sealed bids,

Order placement

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

Order tracking

EDI, phone, fax,

Revenue Impact of


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Revenue Impact of

E-Commerce Length of supply chain

Product information

Time to market

Negotiating prices and contract terms

Order placement and tracking

Order fulfillment

Payment

C I f E C


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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

Coordination

A Pl th f A h


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A Plethora of Approaches

Just in Time Inventory

Vendor Managed Inventory

Quick Response

Collaborative Planning, Forecasting and Replenishment

Cross-docking / Flow through Centres

Outsourcing / 3 PLs

Activity Based Costing

Internet / EDI

Bar-Coding / RFID

Build to Order

A Plethora of Approaches


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A Plethora of Approaches(continued)

Partnerships / Alliances

Auctions / Exchanges

Postponement Strategies

SC Software

SC Event Management

Merge-In-Transit

Collaborative Transportation Management Cash to Cash Metrics

F k f l i


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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

Framework for Analysis


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Framework for Analysis(continued)

Portfolio of Solutions

* Rarely is a single solution sufficient or practical

* A set of solutions is usually more applicable

* The context matters

Management of Uncertainty

* Risk can be measured, monitored, and managed

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

M d li f SCM


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Modeling for SCM

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 forresponse.

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 ofoperation at the locations under consideration. These are

usually formulated as Mixed IntegerProgramming Models.

Modeling for SCM (contd)


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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, route

restrictions, etc.



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



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Scheduling Models- These models enable allocation of resources to

particular 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 alternatives

across the criteria to arrive at the best choice. Formal

approaches such as simulation and analytic hierarchy

processcould be used in assessing the implications of the criteria.

Supply Chain Management - An Overview - RG

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