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
customer service requirements.
• Notice:
– Who is involved
– Cost and Service Level
– It is all about integration
What is Supply Chain
Management?
Managing supply chain flows and
assets, to maximize supply chain
surplus.
• What is supply chain surplus?
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
What is a supply chain?
P&G or other
manufacturer
Jewel or third
party DC
Plastic
Producer
Tenneco
Packaging
Chemical
manufacturer
(e.g. Oil Company)
Paper
Manufacturer
Jewel
Supermarket
Customer wants
detergent and goes
to Jewel
Chemical
manufacturer
(e.g. Oil Company)
Timber
Industry
Decision Phases in Supply Chain
• Supply Chain
Strategy & Design
• Supply Chain
Planning
• Supply Chain
Operations
Strategy & Design
Planning
Operations
Supply Chain Strategy & Design
• Location & capacity of production and
warehouses
• Products to manufactured and in which
locations
• Mode of transportation
• Types of information systems to be
used
• Strategic sourcing decisions
Supply Chain Planning
•
•
•
•
•
Markets to be supplied & from which location
Planned build-up of inventory
Subcontracting of manufacturing
Timing and size of market promotion
Handling uncertainty in demand, foreign
exchange fluctuations
• Establishing production plan under fixed
strategic parameters
Supply Chain Operations
• Decisions over individual customer
orders (daily, weekly)
• Less uncertainty about demand
information
• Exploit reduction of uncertainty to
optimize performance
• Establish deliver dates
• Establish order fill rate
Cycle View of Supply Chains
Customer
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Strategic Scope
Suppliers
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
Manufacturer Distributor
Retailer
Customer
Strategic Scope
• Intracompany Intraoperation Scope
– Minimize local cost view
• Intracompany Intrafunctional Scope
– Minimize functional cost view
• Intracompany Interfunctional Scope
– Minimize company profit view
• Intercompany Interfunctional Scope
– Maximize supply chain surplus view
Supply Chain Challenges
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time
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
Key Issues in Supply Chain
Management
•
•
•
•
•
Distribution Network Configuration
Inventory Control
Supply contract
Distribution Strategies
Supply Chain Integration & Strategic
Partnering
• Outsourcing & Procurement Strategies
Key Issues of SCM (cont)
• Product Design
• Information Technology & Decision
Support System
• Customer Value
Relationships between key SCM Issues
and the business environment
Global
Optimization
Dist. Conf.
Managing
Uncertainty
X
Inv. Control
X
Sup. Contract
X
Dist. Strategies
X
X
St. partnership
X
X
Outsourcing
X
Pr. Design
X
IT & DSS
X
X
Cust. Value
X
X
Prerequisites for Supply Chain
Management
• Top management understanding &
commitment
• Quest for excellence
• Effective and efficient communication
• Relationship instead of exchange
• Cross-functional teams
• Reality of team, partnerships & alliances
(based on harmony & trust)
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
Supply Chain: The Magnitude
(continued)
• 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 104 days getting
from factory to supermarket.
– A typical new car spends 15 days traveling from
the factory to the dealership.
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
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)
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.
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.
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 Management: The
Magnitude in the Traditional View
• Estimated that the grocery industry
could save $30 billion (10% of
operating cost by using effective
logistics and supply chain strategies
– A typical box of cereal spends 104 days
from factory to sale
– A typical car spends 15 days from factory
to dealership
– Laura Ashley turns its inventory 10 times a
year, five times faster than 3 years ago
Supply Chain Management: The
True Magnitude
• Compaq estimates it lost $0.5 billion to $1
billion in sales in 1995 because laptops were
not available when and where needed
• When the 1 gig processor was introduced by
AMD, the price of the 800 meg processor
dropped by 30%
• P&G estimates it saved retail customers $65
million by collaboration resulting in a better
match of supply and demand
Drivers of Supply Chain
Performance
Efficiency
Responsiveness
Supply chain structure
Inventory
Transportation
Facilities
Drivers
Information
Considerations for Supply Chain
Drivers
Driver
Efficiency
Responsiveness
Inventory
Cost of holding
Availability
Transportation
Consolidation
Speed
Facilities
Consolidation /
Proximity /
Dedicated
Flexibility
What information is best suited for
each objective
Information
Achieving Strategic Fit
• Understanding the Customer
– Lot size
– Response time
– Service level
– Product variety
– Price
– Innovation
Implied
Demand
Uncertainty
The Value Chain: Linking Supply
Chain and Business Strategy
Business Strategy
New Product Marketing
Strategy
Strategy
New
Product
Development
Supply Chain Strategy
Marketing
and
Operations Distribution
Sales
Service
Finance, Accounting, Information Technology, Human Resources
Flows in a Supply Chain
Information
Product
Customer
Funds
Sequential Optimization vs.
Global Optimization
Sequential Optimization
Procurement
Planning
Manufacturing
Planning
Distribution
Planning
Demand
Planning
Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS
Procurement
Planning
Manufacturing
Planning
Source: Duncan McFarlane
Distribution
Planning
Demand
Planning
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
The Dynamics of the Supply Chain
Customer
Demand
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998