Section 4 part 2
The Magnitude

 In 1998, American companies spent $898 billion in
supply chain related activities (or 10.6% of Gross
Domestic Product)
 Third party logistics services grew in 1998 by 15% to
nearly $40 billion
 It is estimated that the grocery industry could save
$30 billion (10% of operating cost) by using more
effective logistics strategies
 A typical box of cereal spends more than three months
getting from factory to supermarket
The Potential
 itself by changing its
 In 10 years, Wal-Mart transformed
logistics system. It has the highest sales per square foot,
inventory turnover and operating profit of any discount
retailer
 Wal-Mart designed its supply chain with clusters of stores
around distribution centers to facilitate frequent
replenishment at its retail stores in a cost effective manner.
Frequent replenishment allows stores to match supply and
demand more efficiently than the competition. Wal-Mart
has been a leader in sharing information and collaborating
with suppliers to bring down costs and improve product
availability. The results were impressive.
The Impact

In 1996, Dell held 31 days of inventory. It
now holds only 4 days of inventory.
The Impact

 The Turning Point (The Economist, 9/20/07)
 “For such a tiny part of GDP, the contents of warehouses has had a
surprisingly big effect on its volatility. When industries cut or add
stocks according to demand, that adjustment magnifies the effect
of the initial change in sales. Stock levels were once much larger
relative to the size of the economy, so a small slip in demand could
easily blow up into a recession. But thanks to improvements in
technology, firms now have timelier and better information about
buyers. Speedier market intelligence and production in smaller
batches allows firms to match supply to changing conditions. This
makes huge stocks unnecessary and minimizes the lurches in
inventories that were once so destabilizing.
Study of Supply Chain
Management

 Successful supply chain management requires
decisions on the flow of information, product, and
funds that fall into three decision phases
 Supply chain strategy or design
 Supply chain planning
 Supply chain operation
TIME FRAME
years
3 mo.- 1year
daily
Decision Phases in a
Supply Chain

TYPE
Strategic
Tactical
Operational
TYPICAL DECISIONS
•Supply chain network design (How many plants?
Location and capacities of plants and warehouses?)
•Supply chain strategies (Sell direct or through
retailers? Outsource or in-house? Focus on cost or
customer service?)
•Product mix at each plant
•Workforce & Production planning
•Inventory policies (safety stock level)
•Which locations supply which markets
•Transportation strategies
•Production scheduling
•Decisions regarding individual orders
•Place replenishment orders
 Supply chain design, planning, and operation decisions
play a significant role in the success or failure of a firm

 Supply chain strategy or design
 Supply chain planning
 Supply chain operation
 Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty
 Supply chain planning decisions use a fixed supply chain
configuration to come up with an overall production plan
 Supply chain operation makes decisions about individual
customer orders & daily operations.
Study of Supply Chain
Management

 A supply chain is a sequence of processes and flows
that take place within and between different stages
 Cycle view
 The processes in a supply chain are divided into a series
of cycles, each performed at the interface between two
successive stages of a supply chain
 Push/pull view
 The processes in a supply chain are divided into two
categories depending on whether they are executed in
response or in anticipation of a customer order
Cycle View of Supply Chain
Processes

Customer
Customer Order Cycle
Cycle view
defines the
processes
involved and
the owner of
each process
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Subprocesses in Each
Cycle

Buyer
Supplier markets
the product
Buyer may return
the product
Buyer places
an order
Supplier receives
the order
Buyer receives
the order
Supplier supplies
the order
Supplier
Cycle View of Supply Chain
Processes

Customer Order Process
1. Customer Arrival
Customer Order Cycle
2. Customer Order Entry
3. Customer Order Fullfillment
4. Customer Order Receiving
Replenishment Cycle
Manufacturing Process
1. Order Arrival
2. Production Scheduling
3. Manufacturing/Shipping
4. Receiving
Replenishment Process
1. Retail Order Trigger
2. Retail Order Entry
3. Retail Order Fullfillment
4. Retail Order Receiving
Manufacturing Cycle
Procurement Cycle
Procurement Process
1. Component Order Arrival
2. Production Scheduling
3. Manufacturing/Shipping
4. Receiving

Differences
1.In the Customer Order Cycle demand is external
2.Scale (and frequency) of an order increases (decreases)
when moving further away from the customer
Each cycle occurs at the interface between two successive
stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Push/Pull View of Supply Chain Processes
PULL
PROCESSES

Execution is initiated in
response to customer orders
(reactive)
Customer order
arrives
PUSH
PROCESSES
Execution is initiated in
anticipation of customer orders
(speculative)
Processes are divided based on the timing of
their execution relative to a customer order

 Processes are divided based on their timing relative
to the timing of a customer order
 They key difference is the uncertainty during the two
phases
 At the time of execution of a pull process customer
demand is known
 At the time of execution of a push process customer
demand is not known (and must be forecasted)
Push/Pull Processes for the Supply chain
of Dell

PULL
Customer
Customer Order Cycle and
Manufacturing Cycle
Manufacturer
PUSH
Procurement Cycle
Supplier
Push/Pull Processes for the Supply chain
of Detergent

PULL
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
PUSH
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier