Chapter 1

Introduction to
Supply Chain
Management
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 What Is a Supply Chain?

Flow of products and services from:

Raw materials manufacturers
Intermediate products manufacturers
End product manufacturers
Wholesalers and distributors and
Retailers

Connected by transportation and storage

activities
Integrated through information, planning,
and integration activities
Cost and service levels

1-2
 1.1 What Is Supply Chain
Management?
Supply chain management is a set of
approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses,
and stores, so that merchandise is
produced and distributed at the right
quantities, to the right locations, and at the
right time, in order to minimize system
wide costs while satisfying service level
requirements.
1-3
 Two Other Formal Definitions
The design and management of seamless, value-
added process across organizational boundaries
to meet the real needs of the end customer
Institute for Supply Management
Managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry
and order management, distribution across all
channels, and delivery to the customer
The Supply Chain Council

1-4
 PC Industry Supply Chain
Tracingbackthescreenyoustareatforthebulkofyourtime.

1-5
Ciscos Value Network

1-6
 SCM Definition
Material Flow

Converter
Supplier Retailer
Distributor

Source
Converter Consumers
Distributor End-User
Supplier

Value-Added Services

Funds/Demand Flow

Information Flow

Reuse/Maintenance/After Sales Service Flow

1-7
 The SCM Network

FIGURE 1.1: The logistics network

1-8
 Key Observations
Every facility that impacts costs need to be
considered
Suppliers
suppliers
Customers customers

Efficiencyand cost-effectiveness throughout the

system is required
System level approach
Multiple levels of activities
Strategic Tactical Operational

1-9
 Other Related Observations
Supply chain strategy linked to the
Development Chain
Challenging to minimize system costs and
maximize system service levels
Inherent presence of uncertainty and risk

1-10
 1.2 The Development Chain
Setof activities and processes associated
with new product introduction. Includes:
product design phase
associated capabilities and knowledge
sourcing decisions
production plans

1-11
1.2 The Development Chain

FIGURE 1-2: The enterprise development and supply chain

1-12
 1.3 Global Optimization
Geographically dispersed complex network
Conflicting objectives of different facilities
Dynamic system
Variations over time
Matching demand-supply difficult
Different levels of inventory and backorders
Recent developments have increased risks
Lean production/Off-shoring/Outsourcing

1-13
 Global Apparel Value Chain
Tracing back the dress you are wearing

1-14
1-15
Globally Dispersed Manufacturing
An Illustration: How Li & Fung Limited Might Make a Dress

Product
ProductDesign
Design QC
QC& &Shipping
Shipping
[Hong
[HongKong]
Kong] [Hong
[HongKong]
Kong]

Yarn
YarnSpinning
Spinning Weaving
Weaving Stitching
Stitching
[Korea]
[Korea] [Taiwan]
[Taiwan] [Indonesia]
[Indonesia]

Zippers+
Zippers+
[Japan+]
[Japan+]

1-16
1.4 Uncertainty and Risk Factors
Matching Supply and Demand a Major
Challenge
REASONS EXAMPLES
Raw material shortages Boeing Aircrafts inventory write-
Internal and supplier parts down of $2.6 billion
shortages
Productivity inefficiencies
Sales and earnings shortfall Sales at U.S. Surgical Corporation
Larger than anticipated inventories declined 25 percent, resulting in a
loss of $22 million
Stiff competition Intel reported a 38 percent decline
General slowdown in the PC in quarterly profit
market
Higher than expected orders for EMC Corp. missed its revenue
new products over existing products guidance of $2.66 billion for the
second quarter of 2006 by around
$100 million
1-17
1.4 Uncertainty and Risk Factors
Fluctuations of Inventory and Backorders
throughout the Supply Chain

FIGURE 1-3: Order variations in the supply chain 1-18

 1.4 Uncertainty and Risk
Factors
Forecasting is not a solution
Demand is not the only source of
uncertainty
Recent trends make things more uncertain
Lean manufacturing
Outsourcing
Off-shoring

1-19
 1.4 Uncertainty and Risk
Factors
August 2005 Hurricane Katrina
P&G coffee supplies from sites around New Orleans
Six month impact
2002 West Coast port strike
Losses of $1B/day
Store stock-outs, factory shutdowns
1999 Taiwan earthquake
Supply interruptions of HP, Dell
2001 India (Gujarat state) earthquake
Supply interruptions for apparel manufacturers

1-20
 1.5 Evolution of Supply Chain
Management
Further
Refinement of
SCM Capabilities

SCM
Formation/
Extensions

JIT, TQM, BPR,

Alliances

Inventory Management/Cost
Optimization

Traditional Mass Manufacturing

1950s 1960s 1970s 1980s 1990s 2000s Beyond

1-21
Progression of Logistics Costs

FIGURE 1-4: Logistics costs share of the U.S. economy

1-22
Composition of Logistics Costs

FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
1-23
1.6 Complexity: The Magnitude
U.S. companies spend more than $1 trillion in supply-
related activities (10-15% of Gross Domestic Product)
Transportation 58%
Inventory 38%
Management 4%
The grocery industry 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 the
factory to the dealership.

1-24
 Complexity: The Magnitude
Compaq computers loss of $500 million to $1 billion in
sales in one year
Laptops and desktops were not available when and where
customers were ready to buy them
Boeings forced announcement of write-downs of $2.6b
Raw material shortages, internal and supplier parts
shortages.
Ciscos multi-billion ($2.2b) dollar write-off of inventories
in 2001-2002
Customers balked on orders due to market meltdown

1-25
 Transactional Complexity
National 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.

1-26
 PC Value Chain
Performance of Traditional PC Manufacturer

1-27
PC Value Chain: Focus on Cost
Reduction
Performance of Dell Computers

1-28
Magnitude of Supply Chain Costs
Cost Elements of a Typical Trade Book

1-29
 Magnitude of Supply Chain Costs
Example: The Apparel Industry

Cost per Percent

Shirt Saving

Manufacturer Distributor Retailer Customer $52.72 0%

Manufacturer Distributor Retailer Customer $41.34 28%

Manufacturer Distributor Retailer Customer $20.45 62%

1-30
 Supply Chain: The Potential
P&Gs estimated savings to retail customers of $65 million through logistics gains

Dell Computers outperforming of the competition in terms of shareholder value

growth over more than two decades by over 3,000% using:
Direct business model
Build-to-order strategy

Wal-Mart transformation into the worlds largest retailer by changing its logistics
system:
highest sales per square foot, inventory turnover and operating profit of any discount
retailer

1-31
 1.7 Key Issues in Supply Chain
Management
Chain Global Optimization Managing Risk and Uncertainty
Distribution Network Configuration Supply Y
Inventory Control Supply Y
Production Sourcing Supply Y
Supply Contracts Both Y Y
Distribution Strategies Supply Y Y
Strategic Partnering Development Y
Outsourcing and Offshoring Development Y
Product Design Development Y
Information Technology Supply Y Y
Customer Value Both Y Y
Smart Pricing Supply Y

TABLE 1-1: Key supply chain management issues

1-32
 1.8 Book Objectives and
Overview
Inventory management
Logistics network planning
Supply contracts for strategic as well as commodity components.
The value of information and the effective use of information in the supply chain.
Supply chain integration.
Centralized and decentralized distribution strategies.
Strategic alliances.
Outsourcing, off-shoring, and procurement strategies.
International supply chain management.
Supply chain management and product design.
Customer value.
Revenue management and pricing strategies.
Information technology and business processes.
Technical standards and their impact on the supply chain.

1-33
 Software Packages
Computerized Beer Game
Risk Pool Game
Procurement Game

1-34
 CASE: Meditech Surgical
Intent
diagnosis of supply chain
Business overview
Supply chain
Production planning
Whats wrong?
How to fix it?

1-35
 Endoscopic Surgical
Instruments
Permits minimally invasive surgery
Market created in early 80s, rapidly
growing
Old products continually updated and
replaced with new product introductions

1-36
 Business Overview
National and Meditech split the market
Compete based on product innovations,
customer service, cost
National sells to physicians; Meditech sells
to material managers
Customer preferences change slowly

1-37
 External Supply Chain

Hospitals

Domestic
Dealers

Part Meditech Meditech

suppliers Assembly Warehouse
Hospitals

Intl
Meditech
Affiliates

1-38
 Internal Supply Chain

Parts Inventory Assembly Bulk Inventory Packaging &

Sterilization FG Inventory

2 - 16 2 1
weeks weeks week

1-39
 Production Planning
Annual
Forecast

Monthly
Revision

Transfer
Requirements

Monthly
Plan

MRP

Parts Weekly
Procurement Assembly
Plan Schedule

1-40
 Monthly Production Planning
Plan

MRP

Order point;
Material
Order quantity
Plan

Parts Inventory Assembly Bulk Inventory Packaging & FG inventory

Sterilization
1-41
 Whats Wrong?
Poor service for new product introductions
Poor forecasting?
Panic ordering?
And high FG inventory

1-42
 What Is Going On?
Demand is quite predictable
Usage in hospitals is quite stable
Market share moves slowly over time
With each new product, dealer must build
inventory to fill pipeline

1-43
 Why Did Meditech Think
Demand Was Unpredictable?
Poor information systems
No one looked at demand
No one had responsibility for forecast
errors
Tendency to shift the blame
Built-in delays and monthly buckets in
planning system
Amplifier in planning system

1-44
 What to Do?
Recognize that demand is stable and
predictable
Establish accountability for forecast
Eliminate planning delays and/or reduce
time bucket
Alternatively, put assembly within pull
system and eliminate bulk inventory

1-45