Supply Chain Management
Lecture 2
Announcements
• Summer Intern Program at Ball Aerospace
– 10 week summer program that provides candidates with
• Practical experience on relevant projects while working with
designated mentors
• A competitive salary
• Access to state-of-the-art equipment
• Possible future employment
• Housing assistance
• Relocation reimbursement
• In-house training
• Group activities
– For more information visit
• http://www.recruitingsite.com/csbsites/ball_aerospace/JobDescription.
asp?JobNumber=617603
• http://www.ballaerospace.com/
Outline
• Last Tuesday
– Chapter 1
• Sections 1, 2
• Today
– Chapter 1
• Sections 3, 4, 5
• Next week
– Chapters 2 and 3
What is a Supply Chain?
• Flow of products and services from
–
–
–
–
–
–
–
Suppliers
Raw materials manufacturers
Intermediate goods manufacturers
Finished goods manufacturers
Distributors and wholesalers
Retailers
Customers
• Connected through transportation, information, and
exchanges of funds
Supplier
Manufacturer
Distributor
Retailer
Customer
Key Observations
• In order to maximize supply chain surplus
– Every facility that impacts costs needs to be considered
• Suppliers’ suppliers
• Customers’ customers
– Efficiency throughout the supply chain network is
required using a network level approach
What is Supply Chain Management?
Supply chain management involves the
management of supply chain assets and
products, information, and fund flows to
maximize total supply chain surplus
What is Supply Chain Management?
Getting the right things
to the right places
at the right times
for profit
What is Supply Chain Management?
• “Managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry
and order management, distribution across all
channels, and delivery to the customer”
– The Supply Chain Council
• “The design and management of seamless,
value-added process across organizational
boundaries to meet the real needs of the end
customer”
– Institute for Supply Management
What is Supply Chain Management?
• “Supply chain management is a set of
approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and
stores, so that merchandise is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to
minimize system wide costs while satisfying
service level requirements”
– Simchi-Levi et al, 2003
• Video
– Ford Manufacturing Supply Chain
What is Supply Chain Management?
• Supply chain management is all about
relationships
– Management of relationships in order to enhance value
and reduce cost
– Collaboration is an important part of effective supply
chain management
Evolution of Supply Chain Management
Further
Refinement of
SCM Capabilities
SCM
Formation/
Extensions
JIT, TQM, BPR,
Alliances
Inventory Management/Cost
Optimization
Traditional Mass Manufacturing
1950s
1960s
1970s
1980s
1990s
2000s
Beyond
Evolution of Supply Chain Management
• Mass production era (1900s – 1970s)
– In the early 1900s, Henry Ford created the first moving assembly
line reducing the time to build a Model T from 728 hours to 1.5
hours
• Lean manufacturing era (1970s –1995)
– In the early 1970s, Japanese manufacturers like Toyota changed
the rules of production from mass to lean. Lean manufacturing
focuses on flexibility and quality more than on efficiency and
quantity.
• Mass customization era (1995 – 2010?)
– Beginning around 1995 and coinciding with the commercial
application of the Internet, manufacturers started to mass-produce
customized products. Henry Ford’s famous statement “You can
have any color Model T as long as it’s black” no longer applies.
Managing a Supply Chain is Not Easy
•
•
•
•
Geographically dispersed complex network
Conflicting objectives across the supply chain
Uncertainty and risk factors
Information distortion
Managing a Supply Chain is Not Easy
• Geographically dispersed complex network
Managing a Supply Chain is Not Easy
• Conflicting objectives across the supply chain
Manufacturer
• Large production
batches
Distributor
• Low inventory
• Few DCs
Retailer
•
•
•
•
Few stores
Low inventory
Little variety
Close to DCs
• Large shipments
Customer
• Convenience
• Short lead time
• Large variety of
products
Managing a Supply Chain is Not Easy
• Uncertainty and risk factors
– 2005 Hurricane Katrina
• P&G coffee supplies from sites around New Orleans
• Six month impact
– 2002 West Coast port strike
• Losses of $1B/day
• Store stock-outs, factory shutdowns
– 2001 India earthquake
• Supply interruptions for apparel manufacturers
– 1999 Taiwan earthquake
• Supply interruptions for HP and Dell
Managing a Supply Chain is Not Easy
• Information distortion
Supplier
Manufacturer
Distributor
Bullwhip effect
Retailer
Customer
Why Study Supply Chain Management?
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
• 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
– New information system
– Centralized warehouse
The Impact
In 1996, Dell held 31 days of inventory. It
now holds only 4 days of inventory.
The Impact
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. The entire
inventory of some lean-running companies now consists of whatever
FedEx or UPS is shipping on their account.
Mr Cecchetti and his colleagues calculate that, on average, more than half
the improvement in the stability of economic growth in the countries they
studied is accounted for by diminished inventory cycles. That something
so workaday as supply-chain management could have so marked an
effect might seem a dull conclusion. But dullness is a virtue,
because technological improvement is irreversible”
The Impact
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
Decision Phases in a Supply Chain
TIME FRAME
years
3 mo.- 1year
daily
TYPE
Strategic
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
Tactical
•Workforce & Production planning
•Inventory policies (safety stock level)
•Which locations supply which markets
•Transportation strategies
Operational
•Production scheduling
•Decisions regarding individual orders
•Place replenishment orders
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
Buyer receives
the order
Supplier 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
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
Push/Pull Processes for the Supply chain
of Dell
PULL
Customer
Customer Order Cycle and
Manufacturing Cycle
Manufacturer
Procurement Cycle
PUSH
Supplier
Push/Pull Processes for the Supply chain
of Detergent
Customer
PULL
Customer Order Cycle
Retailer
Replenishment Cycle
Distributor
PUSH
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Are the following systems push or pull?
Soda vending machines
Amazon.com
Emergency care
Paint industry
Runway capacity at an Airport
Cycle View Versus Push/Pull View
Which view is more useful when
considering operational decisions and
which view is more useful when
considering strategic decisions?
Examples of Supply Chains
Celestial Seasonings
• The herbs were originally harvested by hand in the Rocky
Mountains
• Currently, herbs and leafs come from growers around the
world
– “We’ve been working to establish sustainable harvests
and fair wages for more than 30 years”
What are advantages of having one production facility?
What are disadvantages of having one production facility?
What advantages does selling tea over the Internet
provide?