Supply Chain Management

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Supply Chain Management
 A supply chain is a set of organizations directly linked
by one or more of the upstream and downstream flows
of products, services, finances, and information from a
source to a customer. Managing a supply chain is 'supply
chain management'
 Supply chain management (SCM) is the management of
a network of interconnected businesses involved in the
ultimate provision of product and service packages
required by end customers. Supply chain management
spans all movement and storage of raw materials, work-
in-process inventory, and finished goods from point of
origin to point of consumption (supply chain).

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Supply Chain Management

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The Supply Chain
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

Transportation Transportation
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory Costs Costs
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The Supply Chain – Another View

Plan Source Make Deliver Buy

Suppliers Manufacturers Warehouses & Customers

Distribution Centers

Transportation Transportation
Material Costs Costs Costs Transportation
Manufacturing Costs Inventory Costs Costs

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 Supply Chain for Service
Providers

 More difficult than manufacturing

 Does not focus on the flow of physical goods
 Focuses on human resources and support services
 More compact and less extended
Value vs. Supply Chain
 Value chain
◦ every step from raw materials to the eventual end
user
◦ ultimate goal is delivery of maximum value to the end
user
 Supply chain
◦ activities that get raw materials and subassemblies
into manufacturing operation
 Terms are used interchangeably
Supply Chain Management
(SCM)
 Managing flow of information through supply
chain in order to attain the level of
synchronization that will make it more
responsive to customer needs while lowering
costs
 Keys to effective SCM
◦ information
◦ communication
◦ cooperation
◦ trust
What Is Supply Chain Management (SCM)?

Plan Source Make Deliver Buy

 A set of approaches used to efficiently integrate

◦ Suppliers
◦ Manufacturers
◦ Warehouses
◦ Distribution centers
 So that the product is produced and distributed
◦ In the right quantities
◦ To the right locations
◦ And at the right time
 System-wide costs are minimized and
 Service level requirements are satisfied

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 WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in

the acquisition and conversion of materials to finished
products delivered to the customer"

Supplier Material Flow Customer

Management Management
Information Flow

Schedule / Stock
Conversion Delivery
Resources Deployment

Leads to Business Process Integration

 Supply chain is the system by which
organizations source, make and deliver their
products or services according to market
demand.
 Supply chain management operations and
decisions are ultimately triggered by demand
signals at the ultimate consumer level.
 Supply chain as defined by experienced
practitioners extends from suppliers’
suppliers to customers’ customers.
History of Supply Chain Management

 1960’s - Inventory Management Focus, Cost Control

 1970’s - MRP & BOM - Operations Planning
 1980’s - MRPII, JIT - Materials Management, Logistics
 1990’s - SCM - ERP - “Integrated” Purchasing,
Financials, Manufacturing, Order Entry
 2000’s - Optimized “Value Network” with Real-Time
Decision Support; Synchronized & Collaborative
Extended Network

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Why Is SCM Difficult?

Plan Source Make Deliver Buy

 Uncertainty is inherent to every supply chain

◦ Travel times
◦ Breakdowns of machines and vehicles
◦ Weather, natural catastrophe, war
◦ Local politics, labor conditions, border issues

 The complexity of the problem to globally optimize a supply

chain is significant
◦ Minimize internal costs
◦ Minimize uncertainty
◦ Deal with remaining uncertainty

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 Supply Chain Uncertainty

 One goal in SCM:  Factors that contribute to

◦ respond to uncertainty in uncertainty
customer demand without ◦ inaccurate demand forecasting
creating costly excess ◦ long variable lead times
inventory
◦ late deliveries
 Negative effects of ◦ incomplete shipments
uncertainty ◦ product changes batch ordering
◦ lateness ◦ price fluctuations and discounts
◦ incomplete orders ◦ inflated orders
 Inventory
◦ insurance against supply
chain uncertainty
CASE STUDY
WHY MANAGE SUPPLY CHAINS
DIFFERENT RESPONSES OF NOKIA
AND ERICSSON ON A FIRE AT ONE OF
THE SUPPLIER’S FACILITY

◦ Supplier was Philips Semiconductors in Albuquerque, NM

 Nokia:
◦ Changed product design to source components from
alternate suppliers
◦ For parts that could not be sourced from elsewhere,
worked with Philips to source it from their plants in China
and Netherlands
◦ All done in about five days
DIFFERENT RESPONSES OF NOKIA
AND ERICSSON ON A FIRE AT ONE OF
THE SUPPLIER’S FACILITY
 Ericsson’s experience was quite different
◦ Took 4 weeks for the news to reach upper management
◦ Realized five weeks after the fire regarding the severity of
the situation.
◦ By that time, the alternative supply of chips was already
taken by Nokia.
◦ Devastating impact on Ericsson
 $400M in potential sales was lost
 Part of the loss was covered by insurance.
 Led to component shortages
 Wrong product mix and marketing problems caused:
 $1.68B loss to Ericsson Cell Phone Division in 2000
 Forced the company to exit the cell phone market
The Need for Supply Chain
Management
 The need to improve operations.
 Increasing levels of outsourcing.
 Increasing transportation costs.
 Competitive pressures.
 Increasing importance of e-commerce.
 The need to manage inventories

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What the supply chain is not
 The definitions described and developed
earlier and recent industry collaborative
activities indicate that supply chain
management is not a standalone process.
Many supply chain efforts have fallen short of
the potential advantages because the term is
often viewed as only relating to the supply
side of the business or to the purchasing
function. As indicated above, supply chain
management is much more that just
procurement.

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Reasons for the slow growth of integrated
SCM include the following:
 Lack of guidelines for creating alliances with
supply chain partners.
 Failure to develop measures for monitoring
alliances.
 Inability to broaden the supply chain vision
beyond procurement or product distribution
to encompass larger business processes.
 Inability to integrate the company internal
procedures.

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Reasons cont…….
 Lack of trust inside and outside a company.
 Organizational resistance to the concept.
 Lack of buyin-by top managers.
 Lack of integrated information systems and
electronic commerce linking firms.

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The Importance of Supply Chain Management

 Dealing with uncertain environments – matching supply and

demand
 U.S. firms spent $898 billion (10% of GDP) on supply-chain
related activities in 1998
 Shorter product life cycles of high-technology products
 The growth of technologies such as the Internet enable greater
collaboration between supply chain trading partners
 Availability of SCM technologies on the market

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 SUPPLY CHAIN INCLUDES :

◦ MATERIAL FLOWS

◦ INFORMATION FLOWS

◦ FINANCIAL FLOWS
 SUPPLY CHAIN MANAGEMENT IS
FACILITATED BY :
◦ PROCESSES

◦ STRUCTURE

◦ TECHNOLOGY
 Supply chain serves two functions:

◦ Physical

◦ Market mediation
 Supply chain objectives may differ from
situation to situation.
 For functional products, cost efficiency is the
critical factor.
 For innovative products, responsiveness is the
important factor.
 Leanness + Agility together make up Leagility
 SUPPLY CHAIN DRIVERS

Not new.Value system of Michael Porter

• Why sudden interest?
– Demanding customers
– Shrinking product life cycles
– Proliferating product offerings
– Growing retailer power in some cases
– Doctrine of core competency
– Emergence of specialized logistics providers
– Globalization
– Information technology
 SUPPLY CHAIN ELEMENTS
• Supply Chain Design
Strategic • Resource Acquisition
• Long Term Planning (1 Year ++)

• Production/ Distribution Planning

Tactical • Resource Allocation
• Medium Term Planning (Qtrly,Monthly)

• Shipment Scheduling
Operational • Resource Scheduling
• Short Term Planning (Weekly,Daily)
Supply Chain Issues

Strategic Issues Tactical Issues Operating Issues

Design of the supply Inventory policies Quality control

chain, partnering Purchasing policies Production planning and
Production policies control
Transportation policies
Quality policies
Elements of Supply Chain Management
Element Typical Issues

Customers Determining what customers want

Forecasting Predicting quantity and timing of demand
Design Incorporating customer wants, mfg., and time
Processing Controlling quality, scheduling work
Inventory Meeting demand while managing inventory costs
Purchasing Evaluating suppliers and supporting operations
Suppliers Monitoring supplier quality, delivery, and relations
Location Determining location of facilities
Logistics Deciding how to best move and store materials
Elements of SCM
 Supply chain management involves coordinating
activities across the supply chain central to these
corresponding activities at each level of the supply
chain.
Elements Typical Issues
 Customers - Determining what products and/or
services customers want
 Forecasting - Predicting the quantity and timing
of customer demand.
 Inventory - Meeting demand requirements
while managing the costs of
holding inventory
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 Elements of SCM Cont…….
 Purchasing - Evaluating potential suppliers,
supporting the needs of operations
on purchased goods and services

 Suppliers - Monitoring supplier quality, on-time

delivery, and flexibility maintaining supplier
relations

 Location - Determining the location of facilities

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 Elements cont…..
 Logistics - Deciding how to best move
information and materials

 Capacity Planning - Matching supply and demand

 Processing - Controlling quality, scheduling work

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Supply Chain Management – Key Issues

Customer Service/
Purchasing Manufacturing Distribution
Sales

High
Low
Low Few inventories
change- invent-
pur- High service
overs ories
chase levels
price Regional
Stable Low stocks
schedules trans-
Multipl
e Long run portatio
vendors lengths n

SOURCE MAKE DELIVER SELL

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Supply Chain Management – Key Issues

ISSUE CONSIDERATIONS
Network Planning • Warehouse locations and capacities
• Plant locations and production levels
• Transportation flows between facilities to minimize cost and time
Inventory Control • How should inventory be managed?
• Why does inventory fluctuate and what strategies minimize this?

Supply Contracts • Impact of volume discount and revenue sharing

• Pricing strategies to reduce order-shipment variability

Distribution Strategies • Selection of distribution strategies (e.g., direct ship vs. cross-docking)
• How many cross-dock points are needed?
• Cost/Benefits of different strategies
Integration and Strategic • How can integration with partners be achieved?
Partnering • What level of integration is best?
• What information and processes can be shared?
• What partnerships should be implemented and in which situations?
Outsourcing & Procurement • What are our core supply chain capabilities and which are not?
Strategies • Does our product design mandate different outsourcing approaches?
• Risk management
Product Design • How are inventory holding and transportation costs affected by product
design?
• How does product design enable mass customization?
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Source: Simchi-Levi
Supply Chain Management Operations Strategies

STRATEGY WHEN TO CHOOSE BENEFITS

Make to Stock standardized products, Low manufacturing costs;
relatively predictable meet customer demands
demand quickly

Make to Order customized products, Customization; reduced

many variations inventory; improved
service levels
Configure to Order many variations on Low inventory levels; wide
finished product; range of product
infrequent demand offerings; simplified
planning

Engineer to Order complex products, unique Enables response to

customer specifications specific customer
requirements

Source: Simchi-Levi
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Supply Chain Imperatives for Success

 View the supply chain as a strategic asset and a differentiator

◦ Wal-Mart’s partnership with Proctor & Gamble to automatically
replenish inventory
◦ Dell’s innovative direct-to-consumer sales and build-to-order
manufacturing
 Create unique supply chain configurations that align with your
company’s strategic objectives
◦ Operations strategy
◦ Outsourcing strategy
◦ Channel strategy
◦ Customer service strategy Supply chain configuration components
◦ Asset network
 Reduce uncertainty
◦ Forecasting
◦ Collaboration
◦ Integration

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 Decision Phases in a Supply Chain
• Successful supply chain management requires
many decisions relating to the flow of
information, product and funds.
•Each decision should be made to raise the
supply chain surplus
•Decisions fall into three categories depending
on;
•Frequency of each decision.
•Time frame during which decision has an impact.
•Each category of decision has to consider
uncertainty over the decision horizon.
Decision Phases in a Supply Chain

1. Supply Chain Strategy or Design (long term Dcns)

•Company decides what the chain’s configuration will be, how
resources will be allocated and what processes each stage will
perform.
•Decisions made by companies include;
•Whether to outsource or perform a supply chain function in-
house.
•Location of facilities.
•Capabilities of production and warehousing facilities
•Products to be manufactured or sold at various locations
•Modes of transportation to be made available/utilized.
•Supply chain configuration should support a firms strategic
objectives and increase supply chain surplus.
Decision Phases in a Supply Chain
2. Supply Chain Planning
•Time frame considered is a quarter to a year.
•Goal is to maximize the supply chain surplus
that can be generated over the planning horizon
given the constraints of phase 1.
•Planning includes making decisions like;
•Which markets will be supplied from which locations
•Subcontracting of manufacturing
•Inventory policies to be followed
•As a result of the planning phase, companies
define a set of operating policies that govern
short-term operations
Decision Phases in a Supply Chain

3. Supply Chain Operation

•Time horizon is weekly or daily
•Companies make decisions regarding individual
customer orders.
•Supply chain configuration is considered fixed
and planning policies already defined.
•Goal of supply chain operations is to handle
incoming customer orders in the best possible
manner.
Decision Phases in a Supply Chain

3. Supply Chain Operation …

During this phase;
•Firms allocate inventory/production to individual orders.
•Set a date that an order can be fulfilled.
•Generate pick lists at a warehouse.
•Allocate an order to a particular shipping mode and
shipment.
•Set delivery schedules of trucks
•Place replenishment orders.
•Operational decisions are in the short term (minutes,
hours or days) hence there is less uncertainty about
demand information.
•Goal is to exploit the reduction of uncertainty and
optimize performance with constraints of phase 1 & 2
Value of Information
and SCM

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Information In The Supply Chain
Plan
Warehouses & Retailer
Suppliers Manufacturers
Distribution Centers

Source Make Deliver Sell

Order Lead Time  Each facility further away from

actual customer demand must
make forecasts of demand It’s estimated that
Delivery Lead Time
 Lacking actual customer buying the typical
data, each facility bases its pharmaceutical
Production Lead Time forecasts on ‘downstream’ company supply
orders, which are more variable
chain carries over
than actual demand
100 days of product
 To accommodate variability,
inventory levels are overstocked to accommodate
thus increasing inventory uncertainty
carrying costs

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Information Technology: A Supply Chain
Enabler
 Information links all aspects  Bar code and point-of-sale
of supply chain ◦ data creates an instantaneous
 E-business computer record of a sale
◦ replacement of physical  Radio frequency identification
business processes with (RFID)
electronic ones ◦ technology can send product
 Electronic data interchange data from an item to a reader
(EDI) via radio waves
◦ a computer-to-computer  Internet
exchange of business ◦ allows companies to
documents communicate with suppliers,
customers, shippers and other
businesses around the world,
instantaneously
E-business and Supply Chain
 Cost savings and price reductions
 Reduction or elimination of the role of
intermediaries
 Shortening supply chain response and
transaction times
 Gaining a wider presence and increased visibility
for companies
 Greater choices and more information for
customers
E-business and Supply Chain (cont.)
 Improved service as a result of instant
accessibility to services
 Collection and analysis of voluminous amounts
of customer data and preferences
 Creation of virtual companies
 Leveling playing field for small companies
 Gaining global access to markets, suppliers, and
distribution channels
Supply Chain Collaboration – What Is It?

 Many different definitions depending on perspective

 The means by which companies within the supply chain work
together towards mutual goals by sharing
◦ Ideas
◦ Information
◦ Processes
◦ Knowledge
◦ Information
◦ Risks
◦ Rewards
 Why collaborate?
◦ Accelerate entry into new markets
◦ Changes the relationship between cost/value/profit equation

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Supply Chain Collaboration

 Cornerstone of effective SCM

 The focus of many of today’s SCM initiatives
 The only method that has the potential to eliminate or minimize
the Bullwhip effect Retailers

Suppliers Synchronized Manufacturer

Production
Scheduling Collaborative
Distributors/
Demand
Collaborative Wholesalers
Planning
Product
Development

Collaborative Logistics Planning

•Transportation services
•Distribution center services

Logistics Providers
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Benefits of Supply Chain Collaboration

CUSTOMERS MATERIAL SUPPLIERS SERVICE

SUPPLIERS
• Reduced inventory • Reduced inventory • Lower freight costs
• Increased revenue • Lower warehousing costs • Faster and more reliable delivery
• Lower order management costs • Lower material acquisition costs • Lower capital costs
• Higher Gross Margin • Fewer stockout conditions • Reduced depreciation
• Better forecast accuracy • Lower fixed costs
• Better allocation of promotional
budgets
• Improved customer service
• More efficient use of human resources

Source: Cohen & Roussel

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Successful Supply Chain Collaboration

 Try to collaborate internally before you try external

collaboration
 Help your partners to work with you
 Share the savings
 Start small (a limited number of selected partners) and stay
focused on what you want to achieve in the collaboration
 Advance your IT capabilities only to the level that you expect
your partners to manage
 Put a comprehensive metrics program in place that allows you
to monitor your partners’ performance
 Make sure people are kept part of the equation
◦ Systems do not replace people
◦ Make sure your organization is populated with competent
professionals who’ve done this before

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Emerging Best Practices in SCM Strategy

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 Supply Chain Integration

 Information sharing among supply chain members

◦ Reduced bullwhip effect
◦ Early problem detection
◦ Faster response
◦ Builds trust and confidence
 Collaborative planning, forecasting, replenishment,
and design
◦ Reduced bullwhip effect
◦ Lower Costs (material, logistics, operating, etc.)
◦ Higher capacity utilization
◦ Improved customer service levels
 Supply Chain Integration (cont.)

 Coordinated workflow, production and

operations, procurement
◦ Production efficiencies
◦ Fast response
◦ Improved service
◦ Quicker to market
 Adopt new business models and technologies
◦ Penetration of new markets
◦ Creation of new products
◦ Improved efficiency
◦ Mass customization
 Suppliers

 Procurement
◦ purchase of goods and services from suppliers
 On-demand (direct response) delivery
◦ requires supplier to deliver goods when demanded by
customer
 Continuous replenishment
◦ supplying orders in a short period of time according to
a predetermined schedule
 Cross-enterprise teams coordinate processes
between company and supplier
 Outsourcing
 Sourcing
◦ selection of suppliers
 Outsourcing
◦ purchase of goods and services from an outside
supplier
 Core competencies
◦ what a company does best
 Single sourcing
◦ a company purchases goods and services from
only a few (or one) suppliers
 E-Procurement
 Direct purchase from suppliers over the
Internet
 Direct products go directly into production
process a product, indirect products not
 E-marketplaces
◦ web sites where companies and suppliers conduct
business-to-business activities
 Reverse auction
◦ a company posts orders on the Internet for suppliers
to bid on

Copyright 2006 John Wiley &

Sons, Inc. 10-57
 Measuring Supply Chain Performance

 Key performance indicators

◦ inventory turnover
 cost of annual sales per inventory unit
◦ inventory days of supply
 total value of all items being held in inventory
◦ fill rate
 fraction of orders filled by a distribution center within a
specific time period
Key Performance Indicators

Cost of goods sold

Inventory turns =
Average aggregate value of inventory

Average aggregate value of inventory =

=(average inventory for item i) X (unit value item i)

Average aggregate value of inventory

Days of supply =
(Costs of goods sold)/(365 days)
 Key Performance Indicators:
Example
1. Cost of goods sold: $425 million
2. Production materials and parts: $4,629,000
3. Work-in-process: $17,465,000
4. Finished goods: $12,322,000
5. Total average aggregate value of inventory (2+3+4): $34,416,000

$425, 000, 000

Inventory turns = = 12.3
$34,416,000

$34,416,000
Days of supply = = 29.6
($425,000,000)/(365)
Other Measures of Supply Chain
Performance
 Process Control
◦ used to monitor and control any process in
supply chain
 Supply Chain Operations Reference
(SCOR)
◦ establish targets to achieve “best in class”
performance
 Global Supply Chain

To compete globally requires an effective supply chain

Information technology is an “enabler” of global trade
Nations form trading groups
No tariffs or duties