Introduction to
Supply Chain Management
Source: Designing and Managing the Supply Chain,
By D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
Sources:
plants
vendors
ports
Regional
Warehouses:
stocking
points
Field
Warehouses:
stocking
points
Customers,
demand
centers
sinks
Supply
Inventory &
warehousing
costs
Production/
purchase
costs
Transportation
costs
Inventory &
warehousing
costs
Transportation
costs
THE LOGISTICS SYSTEM
Component
Manufacturing
Final
Assembly
Distribution &
Warehousing
C
U
S
T
O
M
E
R
S
S
U
P
P
L
I
E
R
S
Physical Supply
Inbound Logistics
Physical Distribution
Outbound Logistics
Supply Chain Management


Definition:
Supply Chain Management is primarily concerned
with the efficient integration of suppliers, factories,
warehouses and stores so that merchandise is
produced and distributed in the right quantities, to
the right locations and at the right time, and so as
to minimize total system cost subject to satisfying
service requirements.
Notice:
 Everyone is involved
 Systems approach to reducing costs
 Integration is the key
Conflicting Objectives
in the Supply Chain
1. Purchasing
• Stable volume requirements
• Flexible delivery time
• Little variation in mix
• Large quantities
2. Manufacturing
• Long run production
• High quality
• High productivity
• Low production cost
Conflicting Objectives
in the Supply Chain
3. Warehousing
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
4. Customers
• Short order lead time
• High in stock
• Enormous variety of products
• Low prices
Order Size
The Dynamics of the Supply
Chain
Customer
Demand
Distributor Orders
Retailer Orders
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Order Size
What Management Gets...
Customer
Demand
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Volumes
What Management Wants…
Production Plan
Customer
Demand
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
The Dynamic Supply Chain


Increasing customer power leads to
increased demands on retailers
Increased retailer power leads to
increased demands on suppliers
Supply Chain:
The Magnitude


In 1998, American companies spent $898
billion in supply-related activities (or 10.6% of
Gross Domestic Product).

Transportation 58%

Inventory 38%

Management 4%
Third party logistics services grew in 1998 by
15% to nearly $40 billion
Dynamic Forces of the Global
Supply Chain

Information
Logistics
GLOBAL
SUPPLY
CHAIN
User Logistics
Resources
Logistics
Supply Chain:
The Magnitude

It is estimated that the grocery industry could
save $30 billion (10% of operating cost) by
using effective logistics strategies.


A typical box of cereal spends more than three
months getting from factory to supermarket.
A typical new car spends 15 days traveling from
the factory to the dealership, although actual
travel time is 5 days.
Supply Chain:
The Magnitude


Compaq computer estimates it lost $500 million to
$1 billion in sales in 1995 because its laptops and
desktops were not available when and where
customers were ready to buy them.
In 1993, IBM lost a major fraction of its potential
sales of desktop computers because it could not
purchase enough chips that control the computer
displays.
Supply Chain:
The Magnitude

Boeing Aircraft, one of America’s leading capital
goods producers, was forced to announce
writedowns of $2.6 billion in October 1997.
The reason? “Raw material shortages, internal and
supplier parts shortages…”. (Wall Street Journal, Oct.
23, 1997)
Supply Chain:
The Potential

Procter & Gamble estimates that it saved retail
customers $65 million through logistics gains over
the past 18 months.
“According to P&G, the essence of its approach lies
in manufacturers and suppliers working closely
together …. jointly creating business plans to
eliminate the source of wasteful practices across
the entire supply chain”. (Journal of Business
Strategy, Oct./Nov. 1997)
Cost Structure in
the Supply Chain
100
Margin
100 = Average Retail Price
89.2
12.1
9.8
Stores
Operating Cost
18.1
Administration
Logistics
Sales/Purchases
5.0
8.1
4.1
Marketing
9.7
Production
Cost
42.7
16.4
4.8
6.2
3.0
8.2
40.8
ACTUAL
TARGET
Supply Chain:
The Potential

In two years, National Semiconductor reduced
distribution costs by 2.5%, delivery time by 47%
and increased sales by 34% by
- Shutting six warehouses around the globe.
- Air-freighting microchips to customers from a
new
centralized distribution center.
Supply Chain:
The Potential


In 10 years, Wal-Mart transformed itself by
changing its logistics system. It has the
highest sales per square foot, inventory
turnover and operating profit of any
discount retailer.
Laura Ashley turns its inventory 10 times a
year, five times faster than three years ago.
This is achieved by using
- New Information System
- Centralized Warehouse
Supply Chain:
The Potential
“For a company with annual sales of $500
million and a 60% cost of sales, the
difference between being at median in
terms of supply chain performance and in
the top 20% is $44 million of additional
working capital.”
-- PRTM Director Mike Aghajanian
Supply Chain:
The 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.
Supply Chain:
The Complexity
1. Supply Chain Integration
• Conflicting Objectives
• The Dynamics of the Supply Chain
2. Matching Supply and Demand
3. System Variations over Time
4. Status of Logistics Knowledge
• Many problems are new
• Incomplete understanding of issues
• Methodology is rather narrow
ISSUES:
Decision Classification

Strategic Planning:
Decisions that typically involve major capital
investments and have a long-term effect.
1. Determination of the number, size and location of
new plants, distribution centers and warehouses
2. Acquisition of new production equipment and the
design of working centers within each plant
3. Design of transportation facilities, communications
equipment, data processing means, etc.
ISSUES:
Decision Classification

Tactical Planning:
Effective allocation of manufacturing and distribution
resources over a period of several months
1. Work-force size
2. Inventory policies
3. Definition of the distribution channels
4. Selection of transportation and trans-shipment
alternatives
ISSUES:
Decision Classification

Operational Control:
Includes day-to-day operational decisions
1. The assignment of customer orders to individual
machines
2. Dispatching, expediting and processing orders
3. Vehicle scheduling
ISSUES:
Why Keep Inventory?



Uncertainty in customer demands
Uncertainty in the supply
 Uncertainty in quantity and quality
 Uncertainty in delivery time
 Uncertainty in costs
Economies of scale
ISSUES:
Demand Forecast

The three principles of all forecasting techniques:



Forecasting is always wrong
The longer the forecast horizon the worse the
forecast
Aggregate forecasts are more accurate
ISSUES:
Inventory control




How much inventory to keep?
Can uncertainty be reduced?
What size should orders be?
How does forecasting tool effect
inventory level?
ISSUES: The Challenge of
Inventory Management

Matching supply and demand accurately is a
critical challenge



“Dell Computers predicts a loss; stock plunges. Dell
acknowledged that the company was sharply off in its
forecast of demand, resulting in inventory writedowns”.
(WSJ, August 1993)
“IBM continues to struggle with shortages in the Think Pad
line”. (WSJ, May 1994)
“Liz Claiborne said its unexpected earnings decline is the
consequence of higher than anticipated excess inventories”.
(WSJ, August 1993)
ISSUES:
Purchasing



What to Purchase
- In-house production Vs. external suppliers
Where to purchase
- Domestic Vs. international
From whom to purchase
- Cost
- Reliability: quality and on time delivery
- Availability and flexibility
ISSUES:
Purchasing



Centralized Vs. Decentralized
Number of suppliers:
Single sourcing Vs. Multiple sourcing
Supply contracts
ISSUES:
Production

Location of manufacturing plants

Production cost

Taxes

Incentives (by government)

Proximity to markets and raw materials

Transportation infrastructure

Political stability and culture
ISSUES:
Production

Flexibility


The ability to produce different products
simultaneously and efficiently
The ability to produce new products
efficiently
ISSUES:
Production

Efficiency



Low cost
Short lead time
Reliability


On-time delivery
Quality
ISSUES:
Distribution


The structure of the distribution
network
The distribution strategy

The Classical Strategy

Cross Docking

Direct Shipping
ISSUES:
Product Design



What role does product design play in
supply chain management?
When is redesigning products worth the
cost?
Can product design compensate for
uncertainty in customer demand?
ISSUES:
Information Systems




The advantages of advanced
information systems
The challenge of unlimited data
The roll of e-commerce
Impact of the internet
ISSUES:
What’s New in Logistics?

Global competition

Shorter product life cycle

Increasing product variety

New, low-cost distribution channels

More powerful well-informed customers
ISSUES:
What’s New in Logistics?

New communications and information
technologies POS and EDI technology

Wireless technology

Decision Support Systems

Integrated systems

Multi-modal transportation
ISSUES:
What’s New in Logistics?

New concepts in logistics

Push Vs Pull strategies

Cross docking

Strategic alliances

Manufacturing postponement

Design for Logistics