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Introduction to Supply Chain Management David Simchi-Levi Professor of Engineering Systems Massachusetts Institute of Technology Customers demand centers sinks Sources: Plants vendors ports Regional warehouses: Stocking points Field warehouses: Stocking points Supply Inventory & warehousing costs Production/purchase costs Transportation costs Transportation costs Inventory & warehousing costs Image by MIT OpenCourseWare. 1 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. requirements • Notice: – Who is involved – Cost and Service Level – It is all about integration ©Copyright 2003 D. Simchi-Levi Conflicting Objectives in the Supply Chain 1 Purchasing 1. • 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 2003 D. Simchi-Levi 2 Conflicting Objectives in the Supply Chain 3 Warehousing 3. • Low inventory • Reduced transportation costs • Quick replenishment capability 4. Customers • Short order lead time • High in stock • Enormous variety of products • Low prices ©Copyright 2003 D. 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 2003 D. Simchi-Levi 3 Order Size The Dynamics of the Supply Chain Customer Demand Production Plan Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 ©Copyright 2003 D. Simchi-Levi Today’s Supply Chain Challenges • • • • Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countries Increase in logistics costs 8 4 Increase in Logistics Costs US Logistics Costs as Percent of GDP 14 13 12 15% increase 11 10 9 8 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 • • • • Rising energy prices Rail capacity pressure Truck driver shortage Security requirements 9 Total US Logistics Costs 1984 to 2007 ($ Billions) Total US Logistics Costs in $MMs Total Cost 1600 1400 52% 1200 1000 47% 800 Transportation 600 Inventory 62% 400 200 Admin 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Inv Carrying Transportation Admin Total Source: 19th Annual Logistics Report 10 5 Today’s Supply Chain Challenges • • • • • • Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countries Increase in logistics costs Importance of sustainability Unprecedented Volatility 11 Unprecedented Volatility Number of days the price of oil changed 5% or more 1990: 38 days 2008: 39 days Year In 2008 the price of oil changed 5% or more from its previous close on 39 days making it the most volatile year since 1990. Source: NYT 12 6 Supply Chain: The Magnitude • It iis esti timated t d tth hatt the th grocery ind dustry t could ld save $30 billion (10% of operating cost) by using effective logistics strategies. – A typical box of cereal spends 104 days getting from factory to supermarket. – A typical t i l new car spends d 15 days d traveling t li from f the factory to the dealership. ©Copyright 2003 D. Simchi-Levi Supply Chain: The Magnitude (continued) • 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. • Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce writedowns of $2.6 billi iin O billion October t b 1997 1997. The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997) ©Copyright 2003 D. Simchi-Levi 7 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 2003 D. Simchi-Levi Supply Chain: The Potential • Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using - Direct business model - Build-to-order strategy. ©Copyright 2003 D. Simchi-Levi 8 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. ©Copyright 2003 D. 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 2003 D. Simchi-Levi 9 Supply Chain Challenges • Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time ©Copyright 2003 D. Simchi-Levi Sequential Optimization Procurement Planning Manufacturing Planning Distribution Planning Demand Planning Global Optimization Supply Contracts / Collaboration / Information Systems and DSS Procurement Planning Manufacturing Planning Distribution Planning Demand Planning Image by MIT OpenCourseWare. 10 Supply Chain Challenges • Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time • Managing Uncertainty – Matching Supply and Demand – Demand is not the only source of uncertainty ©Copyright 2003 D. Simchi-Levi Develop pment Supp ply Chain The Enterprise Fulfillment and Development Supply Chains Plan/Design Supply •Product Architecture •Make/Buy Make/Buy •Early Supplier Involvement Source •Strategic Partnerships •Suppliers Selection •Supply Contracts Produce Distribute Sell Fulfillment Supply Chain 11 Fulfillment and Development Supply Chain Industry clock speed Innovative vs. functional products • Core competencies • Product design Make vs. buy Modular vs. integral Development Supply Chain • Plan/Design Source Supply Produce • Product architecture • Make/buy • Early supplier involvement • Strategic partnerships • Supplier selection • Supply contracts Distribute Sell Fulfillment Supply Chain • Uncertainty and variability • Lead time • Economies of scale Demand and supply Offshoring vs. onshoring Production and transportation What’s New in Logistics? • Global competition • Shorter product life cycle • New, low-cost distribution channels • More powerful well-informed customers • Internet and E-Business strategies ©Copyright 2003 D. Simchi-Levi 12 Significant Increase in Outsourcing Purchasing as % of Sales 70% % 60% 60% 57% 54% 50% 40% 34% 30% 28% 24% 22% 20% 16% Machinary Computer and telecom Food manufacturing Telecom services 10% 0% 1993 1996 ©Copyright 2003 D. Simchi-Levi New Concepts • Push-Pull Push Pull strategies • Direct-to-Consumer • Strategic alliances • Manufacturing g postp p ponement • Dynamic Pricing • E-Procurement ©Copyright 2003 D. Simchi-Levi 13 ©Copyright 2003 D. Simchi-Levi 14 MIT OpenCourseWare http://ocw.mit.edu ESD.273J / 1.270J Logistics and Supply Chain Management Fall 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.
