Supply Chain Management Introduction

1utdallas.edu/~metin

Supply Chain Management Introduction


Outline

What is supply chain management? A supply chain strategy framework Major obstacles and common problems


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.


What can Supply Chain Management do? Estimated that the grocery industry could save $30 billion (10% of operating

cost) by using effective logistics and supply chain strategies– A typical box of cereal spends 104 days from factory to sale– A typical car spends 15 days from factory to dealership– Faster turnaround of the goods is better?

Laura Ashley (retailer of women and children clothes) turns its inventory 10 times 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 the

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

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


Magnitude of Supply Chain Management

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

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


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

variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks”

Gartner Group:– “By 2004, 90% of enterprises that fail to apply supply-chain management

technology and processes to increase their agility will lose their status as preferred suppliers”

» Open ended statement. Agility can be increased continuously.


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!


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 rightProduct

HigherProfits

The rightTime

The rightCustomer

The rightQuantity

The rightStore

The rightPrice =++ ++ +

- achieves

SupplierSupplier ManufacturerManufacturer DistributorDistributor RetailerRetailer CustomerCustomer

UpstreamDownstream


Flows in a Supply Chain

Customer

Material

Information

Funds

The flows resemble a chain reaction.

Supplier


SCM in a Supply Network Supply Chain Management (SCM) is concerned with the management and control of

the flows of material, information, and finances in supply chains.

Supply

Demand

Products and Services

Cash

Supply Side OEM Demand Side

THAILAND INDIA MEXICO TEXAS USN-Tier Suppliers Suppliers Logistics Distributors Retailers

Information

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


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 Tier 1 SupplierSupplier

ManufacturerManufacturer DistributorDistributor RetailerRetailer CustomerCustomer

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


Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Any cycle0. Customer arrival1. Customer triggers an order2. Supplier fulfils the order3. Customer receives the order


Push vs Pull System What instigates the movement of the work in the system?

In Push systems, work release is based on downstream demand forecasts– Keeps inventory to meet actual demand – Acts proactively

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

In Pull systems, work release is based on actual demand or the actual 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


Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder ArrivesPush-Pull boundary

PUSH PROCESSES PULL PROCESSES


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, Spain’s answer to Italy’s 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


SCM Strategy


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


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 life Goal: Successful career, good income Strategy: Obtain a master’s degree Tactics: Select a college and a concentration Operations: Register, buy books, take

courses, study, graduate, get a job


Linking SC and Business Strategy

NewProduct

Development

Marketingand

Sales 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


Strategies: Product Development

It relates to Technologies for future operations (via patents) and Set of products/services

Be the technology leaderIBM workstations

Offer many productsDell computers

Offer products for locals Tata’s Nano at $2500=100000 rupeesProduction 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.


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.


Fitting the SC to the customer or vice versa?

Understand the customer Wishes

Understand the Capabilities of your SC

Match the Wishes with the Capabilities

Challenge: How to meet extensive Wishes

with limited Capabilities?


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?


Achieving Strategic Fit: Wishes vs. Capabilities

Implied uncertainty spectrum

Responsive (high cost)

supply chain

Efficient (low cost)

supply chainCertain demand

Uncertain demand

Responsivenesspectrum Zone o

f

Strateg

ic Fit

<Low margin>

AOG Shipments<High margin>


Integration

Integration is the central theme in SCM Building synergies by integrating business functions,

departments and companies


Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy


Supply Chain Drivers and Obstacles


Drivers of Supply Chain Performance

Efficiency Responsiveness

Inventory Transportation Facilities

Information

Supply chain structure

LogisticalDrivers

How to achieve

Sourcing PricingCross-FunctionalDrivers


1. Inventory

Convenience: Cycle inventory– No customer buys eggs one by one

Unstable demand: Seasonal inventory– Bathing suits

– Xmas toys and computer sales

Pipeline inventory– Work in process or transit


2. Transportation

Air Truck Rail Ship Pipeline Electronic


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


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.


Characteristics of the Good Information

Information Global Scope

CoordinatedDecisions

Supply ChainSuccess

Strategy Analytical Models

$$$

Information Accurate? Accessible? Up-to-date? In the Correct form?


5. Sourcing

Role in the supply chain– 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.


6. Pricing

Role in the supply chain– 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


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/reliable

Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price


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


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


Common problems Lack of relevant SCM metrics: How to measure

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

Poor inventory 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?


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


Common problems Poor delivery 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

create pseudocertainty.”– 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


Thank You

Supply Chain Management Introduction

Documents