An Introduction to
Supply Chain Management
S. Viswanathan
W. Watthayu
1
What is Supply Chain
Management?
Supply Chain Management (SCM) is concerned
with three core aspects of a company’s
operations:
Material Supply
Goods Production
Product Delivery to Customers
2
A more formal definition is:
“Integrated Supply Chain Management is a
processing-oriented, integrated approach to
procuring, producing and delivery products and
services to customers. It has a broad score that
includes sub-suppliers, suppliers, internal
operations, trade customers, retail customers, and
end users. It covers the management of material,
information and funds flows”
By Peter Metz “ Demystifying Supply Chain
Management”
3
Another description of SCM is:
“Effective SCM enables you to make
informed decisions along the entire supply
chain from acquiring raw materials to
manufacturing products to distributing
finished goods to the customers”
4
A familiar household example
Of course, supply chain management
ideas also occur in all walks of life and
thus the basic concepts will be very
familiar to the reader.
As a trivial example, consider the problem
of supplying bread and milk to a
household
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There are many options available,
for the above task e.g.
Have the items home delivered
Buy the items at the corner store each day
Pick them up at a service station when
purchasing gasoline for the family car
Purchase them in bulk every 2 or 3 days from a
large supermarket
Purchase via e-commerce over the Internet
6
There are various competing
issues that might be considered:
Reliability of supply
Freshness of the product
Cost
Convenience
Capacity to combine this task with other
functions
Availability of diversity and variety in the
products, etc.
7
SCM is the topic of importance
One can readily imagines that if one application
applies the same kind of thinking to the
manufacture of a sophisticate item, then the
issues become considerably more complex but
also potentially more important.
Indeed, one can readily understand that making
the decision could be of considerable
commercial importance and, indeed, could
sometimes make the difference between staying
in business or loosing out to competitors
“Thus SCM is the topic of importance”
8
Costs?
SCM is not a trivial matter. The costs of
taking this issues seriously can be
substantial. Hence, it is important to be
able to make the right kind of decisions
about the extent to which one embraces
this technology.
In this context, theses notes are intended
as a preliminary guide to aid decision
making.
9
Route to SCM
From the many literatures, we can identify three
routes that one might follow to introduce SCM
into a company. These are:
1. Via the optimization of the utilization of
existing facilities
2. Via the use of new technologies e.g. the
Internet and e-commerce
3. Via a major restructuring
These are further explained on the next three
slides.
10
Optimization of Existing Resources
SCM
Optimization of
the existing facilities
Little restructuring
required
11
Use of new computer and
communication technologies
New computer
Technologies,
Internet
Electronic and other
Intermediaries e-commerce
May lead to the need
for restructuring
12
Inadequate or
Old infrastructure
Major restructuring
New manufacturing
Technologies such
as agile manufacturing
Postponement, etc
13
The Supply Chain Council
A possible source of information on SCM
is the supply chain council
Supply Chain council Inc.
303 Freepport Road
Pittsburgh, PA 15215
http://www.supply-chain.org
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Characteristic of Poorly
Performing Supply Chain
Excess inventories
Long cycle times
Stockouts and product substitutions
Inefficient plant scheduling
Excess capacity
LTL deliveries
High transaction costs
etc.
15
The issue in Supply Chain
Optimization
Four core management processes
Plan
Source
Make
Deliver
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Stages in development of SCM
Inter-relating Warehousing and
Transportation
Shorter order response times via faster
warehouse handing and faster transportation
lessens the length of forecast period and
increase accuracy of forecast. Aided by
improved data communications between
different levels of warehouse (plant, regional
distribution centers, locate distribution
center).
21
Stages in development of
SCM (cont.)
Logistics Stage
Addition of manufacturing, procurement and
order management functions. Aided by
electronic data interchange, worldwide
communications, and use of computers to
store, retrieve and analyze data.
22
Stages in development of
SCM (cont.)
Integrate SCM
Add supplier and end customers. Utilizes
electronic data, electronic funds transfer,
computerized decision support systems
Key driver: Explosive development of
computer and communications technology
23
Success Stories
Some claims made for the success of SCM
principles are given below:
Inventory reduced by 50 percent
Supply chain total cost share of revenue reduced 20
percent
40 percent increase in on-time deliveries
Cumulative cycle time reduced by 27 percent
Revenues increased 17 percent
Inventory turns up 2x while out-of-stock incidents
down 9x
50 percent reduction in finished-good inventory by
postponing package
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Key factors associated with
Claimed successes
Five key factors enabling these accomplishments
1. An overriding, pervasive customer focus. At
every stage in the supply chain, the ultimate
customer’s needs are understood and forced
into the decision making
2. Advanced use of IT. Data and information
flow readily to all parts of the supply chain.
Computer-aided decision support systems
use this complex information to enable
better, faster decision that are quickly
communicated throughout the supply chain
25
Key factors (cont.)
3. Quantitatively based performance management.
Measurements of multiple performance factors
occur frequently at each stage in the supply
chain. Time and cost are key measures, but
others are used as appropriate to the specific
supply chain. All measures relate to the ultimate
supply chain goals.
4. Use of cross-functional teams. Teams of people
from the interrelated functional operations
working closely together can cut through the
normal organizational barriers to find local and
distributed improvements that benefit the
overall supply chain performance
26
Key factors (cont.)
5. Attention to human factors and organization
dynamics. Use of the best human and
organization, coordination, cooperation,
measurement, reward techniques facilities,
supply chain innovation and implementation.
This level of attention is needed to offset the
tendency of individual accountability and workunit accountability to create barriers to supply
chain cooperation.
27
Static or Dynamic SCM
SCM can be static or dynamic:
Static- i.e. based on steady state understanding
of demand, cost, location etc., or
Dynamic – supply chain reconfiguration to adapt
to changing conditions, e.g., fluctuations in cost
of raw materials, customer demands,
international exchange rates, etc.
28
Innovative Supply Chain
Strategies
Effective use of Information Flows
EDI
Bar Coding
Shipment Container Making
Strategic Supply Chain partnerships to share
information.
Advanced manufacturing technology and order
processing systems to reduce order cycle timeimprove forecasting
29
Innovative Supply chain
Strategies (cont.)
Vendor management inventory
Continuous Replenishment
Quick Response (QR) System
Efficient Consumer Response (ECR)
Category Management
Consolidation
Cross-Docking
Postponement
30
Principle of Postponement
The time of shipment and location of final product
processing in the distribution of a product
should be delayed until a customer order is
received.
Time Postponement: Avoid shipping goods in
anticipation that demand will occur. Time based
logistics.
Form Postponement: Avoid creating the final
form of the product until demand occurs. Delay
differentiate or manufacturing postponement
31
Postponement
Postponement as a concept has existed
since the 1950’s
It is only the recent past that it has
gained lot of attention due to its
application in practice
Postponement enables reducing of
inventories
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Consolidation
Enables saving in unit transportation costs
by transportation bulk quantities
Consolidate small orders into large
shipments, e.g. Federal Express
Hub and Spoke Networks
Many logistics Hub in the world acts as
consolidation points
33
Cross docking
Cross-docking: is an advanced concept in
warehouse that combines the benefit of
consolidation, without incurring the cost of
excess inventories
Product move right from the inbound to the
outbound dock without every staying in the
warehouse
Walmart practices cross-docking very effectively
34
Key enables in Supply Chain
innovations
Standard Product ID: Bar codes
e.g item, case, etc.
Electronic Data Interchange (EDI)
Electronic Commerce: The Web, private
networks
Information systems: Enterprise Resource
Planning(ERP), advanced planning and
scheduling software, data mining
35
SCM Software
A report written in 1998 (Eric Allen,
University of Texan at Austin) predicts that
the demand for SCM software will have
reached $3 billion by 2000
SCM software is aimed at:
reducing distribution cost
maximizing order deliveries
maintaining inventory balance
maintaining customer and supplier satisfaction
36
Suppliers of SCM software
include (based on 1998 data):
I2 - (founded in 1988, now with 6000
employees, sales of $184M in 1997)
Manugistics (founded in 1969 originally called
Scientific Time Sharing Corporation, sales level
of $94M in 1997)
Baan ( founded 1978, $684M in 1988)
SAP (founded Germany 1972 by 4 former IBM
employees)
People Soft (founded in 1987)
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Note that the price to implement a full
SCM solution can be large (up to a million
dollars) However, lower cost solutions are
, of course, also available.
Next we focus on a case study in SCM
solution and examine possible SCM issues.
38
Case study-Wal-mart
Leading discount retailer
Supply chain Structure: Hub-and-Spoke
arrangement of one distribution center
surrounded by several stores.
Cross Docking strategy
Very efficient Logistics Management
Every Day Low price
Vendor management inventory
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Case Study – Dell Computer
Use electronic commerce/Telemarketing
for sales, marketing, ordering and billing
Suppliers located within 15 minutes of
plant in Round Rock, Texas
Cycle time of about a day (not counting
delivery time)
Inventory equivalent to 13 days of sales
(versus 25 days for Compaq)
40
Dell-computer (cont.)
Can beat competitor’ s prices by 10-15%
Reduced number of supplier’s from 204 in
1992 to 47 in 1997
Orders parts Just-In-Time ( when order is
received)
Parts are 60 days newer that competitors
Rapid price decreases: save 6% on parts
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Dell Computer (cont.)
Converts sales into cash in less than 24
hours through use of credit cards and
electronic payment
Compaq (using dealers): 35 days
Gateway: 16.4 days
In 1996, revenue jumped 47% to $7.8B,
and profiles jumped 91% to 518M. A big
favorite in the stock market
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