Basics of Supply Chain Management

1
Definitions

2
What Is the Supply Chain?

• Also referred to as the logistics network

• Suppliers, manufacturers, warehouses, distribution
centers and retail outlets – “facilities”
• Suppliers Manufacturers Warehouses &
Distribution Centers
Customers

and the

• Raw materials
• Work-in-process (WIP) inventory
• Finished products Transportation
Material Costs
Costs
Transportation
Costs
Manufacturing Costs
Transportation
Costs
Inventory Costs

•
that flow between the facilities

3
The Supply Chain
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

Transportation Transportation
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory Costs Costs
4
The Supply Chain – Another View

Plan
Plan Source
Source Make
Make Deliver
Deliver Buy
Buy

Suppliers Manufacturers Warehouses & Customers

Distribution Centers

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

5
What Is Supply Chain Management (SCM)?

Plan Make Buy

Source Deliver

• 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

6
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

7
Why Is SCM Difficult?

Plan Make Buy

Source Deliver

• 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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The Importance of Supply Chain Management

• Dealing with uncertain environments – matching supply and

demand
– Boeing announced a $2.6 billion write-off in 1997 due to “raw
materials shortages, internal and supplier parts shortages
and productivity inefficiencies”
– U.S Surgical Corporation announced a $22 million loss in
1993 due to “larger than anticipated inventories on the
shelves of hospitals”
– IBM sold out its supply of its new Aptiva PC in 1994 costing
it millions in potential revenue
– Hewlett-Packard and Dell found it difficult to obtain important
components for its PC’s from Taiwanese suppliers in
1999 due to a massive earthquake
• U.S. firms spent $898 billion (10% of GDP) on supply-chain
related activities in 1998

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The Importance of Supply Chain Management

• Shorter product life cycles of high-technology products

– Less opportunity to accumulate historical data on customer
demand
– Wide choice of competing products makes it difficult to
predict demand
• The growth of technologies such as the Internet enable greater
collaboration between supply chain trading partners
– If you don’t do it, your competitor will
– Major buyers such as Wal-Mart demand a level of “supply
chain maturity” of its suppliers
• Availability of SCM technologies on the market
– Firms have access to multiple products (e.g., SAP, Baan,
Oracle, JD Edwards) with which to integrate internal
processes

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Supply Chain Management and Uncertainty

• Inventory and back-order levels fluctuate considerably across

the supply chain even when customer demand doesn’t vary
• The variability worsens as we travel “up” the supply chain
• Forecasting doesn’t help!


Multi-tier
Suppliers Manufacturer Wholesale Retailers Consumers
Distributors

Sales

Sales
Sales

Sales

Time Time Time

Time

Bullwhip Effect
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Factors Contributing to the Bullwhip

• Demand forecasting practices

– Min-max inventory management (reorder points to bring
inventory up to predicted levels)
• Lead time
– Longer lead times lead to greater variability in estimates of
average demand, thus increasing variability and safety
stock costs
• Batch ordering
– Peaks and valleys in orders
– Fixed ordering costs
– Impact of transportation costs (e.g., fuel costs)
– Sales quotas
• Price fluctuations
– Promotion and discount policies
• Lack of centralized information

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Today’s Marketplace Requires:

• Personalized content and services for their customers

• Collaborative planning with design partners,
distributors, and suppliers
• Real-time commitments for design, production,
inventory, and transportation capacity
• Flexible logistics options to ensure timely fulfillment
• Order tracking & reporting across multiple vendors
and carriers

Shared visibility for

trading partners
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Supply Chain Management – Key Issues

• Forecasts are never right

– Very unlikely that actual demand will exactly equal forecast
demand
–
• The longer the forecast horizon, the worse the forecast
– A forecast for a year from now will never be as accurate as a
forecast for 3 months from now
–
• Aggregate forecasts are more accurate
– A demand forecast for all CV therapeutics will be more
accurate than a forecast for a specific CV-related product


Nevertheless, forecasts (or plans, if you prefer) are

important management tools when some methods
are applied to reduce uncertainty

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Supply Chain Management – Key Issues

• Overcoming functional silos with conflicting goals

Customer
Purchasing Manufacturing Distribution Service/
Sales

High inventories
Low pur- Few change-
chase price overs High service levels

Multiple Stable Low invent- Regional stocks

vendors schedules ories
Long run
lengths Low trans-
portation

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 Partnering How can integration with partners be achieved?
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?

Does our product design mandate different outsourcing approaches?

Strategies Risk management

Product Design How are inventory holding and transportation costs affected by product design?


How does product design enable mass customization?



Source: Simchi-Levi 16
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, many Customization; reduced
variations inventory; improved service
levels
Configure to Order many variations on finished Low inventory levels; wide
product; infrequent demand range of product offerings;
simplified planning
Engineer to Order complex products, unique Enables response to specific
customer specifications customer requirements

Source: Simchi-Levi
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Supply Chain Management – Benefits

• A 1997 PRTM Integrated Supply Chain Benchmarking Survey

of 331 firms found significant benefits to integrating the
supply chain

Delivery Performance 16%-28% Improvement

Inventory Reduction 25%-60% Improvement
Fulfillment Cycle Time 30%-50% Improvement
Forecast Accuracy 25%-80% Improvement
Overall Productivity 10%-16% Improvement
Lower Supply-Chain Costs 25%-50% Improvement
Fill Rates 20%-30% Improvement
Improved Capacity Realization 10%-20% Improvement

Source: Cohen & Roussel

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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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Value of Information
and SCM

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

Source
Source Make
Make Deliver
Deliver Sell
Sell

Order Lead Time • Each facility further away from

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

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Taming the Bullwhip

Four critical methods for reducing the Bullwhip effect:

• Reduce uncertainty in the supply chain
– Centralize demand information
– Keep each stage of the supply chain provided with up-to-date
customer demand information
– More frequent planning (continuous real-time planning the
goal)
• Reduce variability in the supply chain
– Every-day-low-price strategies for stable demand patterns
• Reduce lead times
– Use cross-docking to reduce order lead times
– Use EDI techniques to reduce information lead times
• Eliminate the bullwhip through strategic partnerships
– Vendor-managed inventory (VMI)
– Collaborative planning, forecasting and replenishment (CPFR)

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Methods for Improving Forecasts
Judgment Methods
Market Research Analysis

Panels of Experts

•Internal experts
•External experts
•Market testing
•Domain experts
•Market surveys
•Delphi technique
•Focus groups
Time-Series Methods Accurate
Forecasts
Causal Analysis

•Moving average
•Exponential smoothing
•Relies on data other than
•Trend analysis
that being predicted
•Seasonality analysis
•Economic data, commodity
data, etc. 23
The Evolving Supply Chain

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Supply Chain Integration – Push Strategies

• Classical manufacturing supply chain strategy

• Manufacturing forecasts are long-range
– Orders from retailers’ warehouses
• Longer response time to react to marketplace changes
– Unable to meet changing demand patterns
– Supply chain inventory becomes obsolete as demand for
certain products disappears
• Increased variability (Bullwhip effect) leading to:
– Large inventory safety stocks
– Larger and more variably sized production batches
– Unacceptable service levels
– Inventory obsolescence
• Inefficient use of production facilities (factories)
– How is demand determined? Peak? Average?
– How is transportation capacity determined?
• Examples: Auto industry, large appliances, others?
–
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Supply Chain Integration – Pull Strategies

• Production and distribution are demand-driven

– Coordinated with true customer demand
• None or little inventory held
– Only in response to specific orders
• Fast information flow mechanisms
– POS data
• Decreased lead times
• Decreased retailer inventory
• Decreased variability in the supply chain and especially at
manufacturers
• Decreased manufacturer inventory
• More efficient use of resources
• More difficult to take advantage of scale opportunities
• Examples: Dell, Amazon

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 Supply Chain Integration – Push/Pull Strategies

• Hybrid of “push” and “pull” strategies to overcome

disadvantages of each
• Early stages of product assembly are done in a “push” manner
– Partial assembly of product based on aggregate demand
forecasts (which are more accurate than individual
product demand forecasts)
– Uncertainty is reduced so safety stock inventory is lower
• Final product assembly is done based on customer demand for
specific product configurations
• Supply chain timeline determines “push-pull boundary”
–
Push-
Pull
Boundar
“Generic” Product y “Customized” Product

Push Strategy Pull Strategy

Raw End
Materials Consumer
Supply Chain Timeline 27
Choosing Between Push/Pull Strategies

Pull High Where do the following

Industries where: Industries where:
industries fit in this
•Customization is High •Demand is uncertain model:
•Demand is uncertain •Scale economies are High 

•Scale economies are Low •Low economies of scale

• Automobile?
• Aircraft?
Demand Uncertainty

Computer Furniture • Fashion?

equipment
• Petroleum refining?
• Pharmaceuticals?
Industries where: Industries where: • Biotechnology?
•Uncertainty is low •Standard processes are the • Medical Devices?
•Low economies of scale norm •
•Push-pull supply chain •Demand is stable
•Scale economies are High

Books, CD’s Grocery,

Beverages
Push Low
Low Economies of Scale High

Pull Push
Source: Simchi-Levi 28
Characteristics of Push, Pull and Push/Pull Strategies

PUSH PULL

Objective Minimize Cost Maximize Service Level

Complexity High Low

Focus Resource Allocation Responsiveness

Lead Time Long Short

Processes Supply Chain Planning Order Fulfillment

Source: Simchi-Levi
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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
Demand Distributors/
Collaborative Planning Wholesalers
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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Supply Chain Collaboration Spectrum

Extensive Not Viable Synchronized • The green arrow

Collaboration describes increasing
complexity and
sophistication of:
– Information systems
– Systems
Extent of Collaboration

infrastructure
– Decision support
Coordinated systems
Collaboration – Planning
mechanisms
– Information sharing
Cooperative – Process
Collaboration understanding
• Higher levels of
collaboration imply the
need for both trading
partners to have
equivalent (or close)
levels of supply chain
Transactional maturity
Limited Collaboration Low Return • Synchronized
collaboration demands
Many Few joint planning, R&D and
Number of Relationships sharing of information
and processing models
– Movement to real-
Source: Cohen & Roussel time customer
33
demand
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

35
The SCOR Model

36
Collaboration and the SCOR Model

• The Supply-Chain Council (SCC) is a global, not-for-profit trade

association open to all types of organizations
– 800 world-wide members
– Multi-industry
• SCC sponsors and supports educational programs including
conferences, retreats, benchmarking studies, and
development of the Supply-Chain Operations Reference-
model (SCOR), the process reference model designed to
improve users' efficiency and productivity
• Promotes research and thought leadership in the supply chain
management area
• Adoption of common standards for reference to process,
information and material goods flows is essential to enable
trading partner collaboration
•

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 Process Reference Models
• Process reference models integrate the well-known concepts of
business process reengineering, benchmarking, and process
measurement into a cross-functional framework

Business Process Best Practices Process Reference

Reengineering Benchmarking Analysis Model
Capture the “as-is” state
Capture
Capturethethe“as-is”
“as-is” of a process and derive
state of a process
state of a process the desired “to-be” future
and
andderive
derivethe
the state
Quantify
Quantifythe
the
desired “to-be”
desired “to-be” operational
operational Quantify the operational
future
futurestate
state performance
performanceof of performance of similar
similar companies
similar companies companies and establish
and
andestablish
establish internal targets based on
internal
internaltargets
targets Characterize
Characterizethe the “best-in-class” results
based
based on“best-in-
on “best-in- management
management Characterize the
class” results
class” results practices
practices and
and management
software solutions
software solutions practices and
that
thatresult
resultinin software solutions
“best-in-class”
“best-in-class” that result in “best-in-
performance
performance class” performance

38
 SCOR Structure

Plan

Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source

Return Return Return Return Return

Return Return Return

Suppliers’ Supplier Your Company Customer Customer’s

Supplier Customer
Internal or External Internal or External

SCOR Model
Building Block Approach
Processes Metrics
Best Practice Technology

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 SCOR 7.0 Model Structure

Plan P1 Plan Supply Chain

P2 Plan Source P3 Plan Make P4 Plan Deliver P5 Plan Returns

Source Make Deliver

Suppliers

Customers
S1 Source Stocked Products M1 Make-to-Stock D1 Deliver Stocked Products

S2 Source MTO Products M2 Make-to-Order D2 Deliver MTO Products

S3 Source ETO Products M3 Engineer-to-Order D3 Deliver ETO Products

D4 Deliver Retail Products

Return Return
Source Deliver

Enable

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SCOR Implementation Roadmap

Analyze Basis •Competitive Performance

of Operations Requirements
Strategy •Performance Metrics
Competition •Supply Chain Scorecard
•Scorecard Gap Analysis
•Project Plan SCOR Level 1

•AS IS Geographic Map

Configure •AS IS Thread Diagram
supply chain Material Flow •Design Specifications
•TO BE Thread Diagram SCOR Level 2
•TO BE Geographic Map

Align
Performance
•AS IS Level 2, 3, and 4 Maps
Levels, Information
Practices, and and Work Flow
•Disconnects
•Design Specifications SCOR Level 3
Systems •TO BE Level 2, 3, and 4 Maps

Implement Develop, •Organization

Implement •Technology
supply
supplychain
chain Test, and Roll
•Process
Processes and Out
Processes and •People
Systems
Systems

41
Examples of SCOR Adoptions

• Consumer Foods
– Project Time (Start to Finish) – 3 months
– Investment - $50,000
– 1st Year Return - $4,300,000
• Electronics
– Project Time (Start to Finish) – 6 months
– Investment - $3-5 Million
– Projected Return on Investment - $ 230 Million
• Software and Planning
– SAP bases APO key performance indicators (KPIs) on SCOR
Model
• Aerospace and Defense
– SCOR Benchmarking and use of SCOR metrics to specify
performance criteria and provide basis for contracts /
purchase orders


•
42
 The SCOR Model As Context for This Course
• Pharmaceutical sales and marketing activities have their own set
of logistics related activities that can be fully described using
the SCOR model
Segment Analysis, Marketing Planning
•
Plan
Patients

armacies, Hospitals, Doctors

Source Make Deliver

Deliver Source Make Deliver Source Make Deliver Source

Return Return Return Return Return

Return Return Return

Customer’s
Suppliers’ Supplier Your Company Customer Customer
Supplier

Internal or External Internal or External

Doctors, Hospitals
Marketing Data Suppliers
Marketing and Sales Functions

43
The SCOR Model As Context for This Course
• Two interrelated “supply chains” work together to deliver drugs
to market:
– The Marketing and Sales “supply chain” which is principally
information-based
– The Logistics supply chain which is principally product-based
• Plan

Sourc Make Deliver

Sales
Deliver Source Make Deliver e Source Make Deliver Source

Return Return Return Return Return

Return Return Return

Customer’s
Suppliers’ Supplier Your Company Customer Customer
Supplier

Plan
Internal or External Internal or External

Manufacturing Deliver Source Make Deliver

Sourc
e
Make Deliver
Source Make Deliver Source

& Return Return Return

Return Return Return
Return Return

Distribution Suppliers’ Supplier Your Company Customer

Customer’s
Customer
Supplier

44
Internal or External Internal or External