Supply Chain Management

(CLO3)

1
What Is the Supply Chain?

• Also referred to as the logistics network

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

and the

• Raw materials
• Work-in-process (WIP) inventory Transportation Transportation
Costs

• Finished products
Material Costs Costs Transportation
Manufacturing Costs Inventory Costs
Costs

that flow between the facilities

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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
3
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

4
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

5
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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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 Wholesale
Suppliers Manufacturer Distributors Retailers Consumers

Sales

Sales
Sales

Sales

Time Time Time

Time

Bullwhip Effect
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• Demand forecasting practicesMin-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 Service/
Purchasing Manufacturing Distribution
Sales

High
Low pur- Few change- inventories
chase price overs
Low High service
Multiple Stable invent- levels
vendors schedules ories
Regional
Long run stocks
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 • 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?

Source: Simchi-Levi 15
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
16
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 Make Deliver Sell

Order Lead Time • Each facility further away from

actual customer demand must
It’s estimated that the
make forecasts of demand
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 variable accommodate
than actual demand uncertainty
• To accommodate variability,
inventory levels are overstocked
thus increasing inventory
carrying costs

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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) 21
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. 22
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
“Generic” Product Boundary “Customized” Product

Push Strategy Pull Strategy

Raw End
Materials Consumer
Supply Chain Timeline 26
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?
Demand Uncertainty

• Aircraft?
Computer Furniture
equipment • Fashion?
• 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 27
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
28
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

31
Supply Chain Collaboration Spectrum

Extensive Not Viable Synchronized • The green arrow describes

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

– Decision support systems

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

Source: Cohen & Roussel 32

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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