Introduction to
Supply Chain Management
©Copyright 1999 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
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
Order Size
What Management Gets...
Customer
Demand
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
Volumes
What Management Wants…
Production Plan
Customer
Demand
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
The Dynamic Supply Chain
• Increasing customer power leads to
increased demands on retailers
• Increased retailer power leads to
increased demands on suppliers
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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.
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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.
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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)
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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)
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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.
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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.
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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.
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES:
Inventory control
•
•
•
•
How much inventory to keep?
Can uncertainty be reduced?
What size should orders be?
How does forecasting tool effect
inventory level?
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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)
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES:
Purchasing
• Centralized Vs. Decentralized
• Number of suppliers:
Single sourcing Vs. Multiple sourcing
• Supply contracts
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES:
Production
• Location of manufacturing plants
– Production cost
– Taxes
– Incentives (by government)
– Proximity to markets and raw materials
– Transportation infrastructure
– Political stability and culture
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES:
Production
• Flexibility
– The ability to produce different products
simultaneously and efficiently
– The ability to produce new products
efficiently
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES:
Production
• Efficiency
– Low cost
– Short lead time
• Reliability
– On-time delivery
– Quality
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES:
Distribution
• The structure of the distribution
network
• The distribution strategy
– The Classical Strategy
– Cross Docking
– Direct Shipping
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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?
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES:
Information Systems
• The advantages of advanced
information systems
• The challenge of unlimited data
• The roll of e-commerce
• Impact of the internet
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
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
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
ISSUES: What’s New in
Logistics?
• New concepts in logistics
– Push Vs Pull strategies
– Cross docking
– Strategic alliances
– Manufacturing postponement
– Design for Logistics
©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi