Introduction to Supply Chain Management
David Simchi-Levi
Professor of Engineering Systems Massachusetts Institute of Technology
Customers demand centers sinks
Sources: Plants vendors ports Field warehouses: Stocking points
Regional warehouses: Stocking points
Supply
Inventory & warehousing costs
Production/purchase costs
Transportation costs Transportation costs
Inventory & warehousing costs
Image by MIT OpenCourseWare. 1
Definition:
Supply Chain Management is primarily concerned with the efficient integration of suppliers, factor
Notice:
Who is involved
Cost and Service Level
It is all about integration
©Copyright 2003 D. Simchi-Levi
Conflicting Objectives in the Supply
Chain
Purchasing
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
Manufacturing
Long run production
High quality
High productivity
Low production cost
©Copyright 2003 D. Simchi-Levi
2
Conflicting Objectives in the Supply
Chain
Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability
Customers
Short order lead time
High in stock
Enormous variety of products
Low prices
©Copyright 2003 D. Simchi-Levi
The Dynamics of the Supply Chain
Order Size
Customer Demand
Retailer Orders
Distributor Orders
Production Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 2003 D. Simchi-Levi
The Dynamics of the Supply Chain
Order Size
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
Increase in Logistics Costs
US Logistics Costs as Percent of GDP
14
15% increase
11
13
8
10 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
12
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
1600
Total Cost
1400
52%
1200
47%
1000
800
Transportation Inventory
600
62%
400
Admin
200
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
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
1990: 38 days
of oil changed 5% or more
2008: 39 days
Yea
r
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. 12
Source: NYT
Supply Chain: The Magnitude
• 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.
©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
billion in October 1997.
The reason? “Raw material shortages, internal and
supplier parts shortages…”. (Wall Street Journal, Oct.
23, 1997)
©Copyright 2003 D. Simchi-Levi
Supply Chain: The Potential
Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over t
“According to P&G, the essence of its approach lies in manufacturers and suppliers working closely
…. jointly creating business plans to eliminate the source of wasteful practices across the entire sup
(Journal of Business Strategy, Oct./Nov. 1997)
©Copyright 2003 D. Simchi-Levi
Supply Chain: The Potential
med the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Ander
©Copyright 2003 D. Simchi-Levi
Sup
In 10 years, Wal-Mart transformed itself by changing its logistics system. I
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
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 PlanningDistribution Planning Demand Planning
Global Optimization
Supply Contracts / Collaboration / Information Systems and DSS
Procurement Planning Manufacturing PlanningDistribution Planning Demand Planning
Image by MIT OpenCourseWare.
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
The Enterprise
Fulfillment and Development Supply Chains
D
ev
•Product Architecture
el Plan/Design Make/Buy
o •Early Supplier Involvement
p
m •Strategic Partnerships
Source •Suppliers Selection
en •Supply Contracts
t
S
u Supply Produce Distribute Sell
p
pl Fulfillment Supply Chain
Fulfillment and Development Supply Chain
Industry clock speed De Product architecture
Innovative vs. functional products vel Plan/Design• Make/buy
Core competencies op
Make vs. buy Early supplier involvement
me
Product design
Modular vs. integral nt Strategic partnerships
Su Source Supplier selection
ppl Supply contracts
y
Ch SupplyProduceDistribute Sell
ain
Fulfillment Supply Chain
Uncertainty and variability
Demand and supply
Lead time
Offshoring vs. onshoring
Economies of scale
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
Significant Increase in
Outsourcing
Purchasing as % of Sales
70%
% 60%
60%
57%
54%
50%
40%
34%
30%
24% 28%
20%
22%
16%
10% Machinary
Computer and telecom
0% Food manufacturing
Telecom services
1993 1996
©Copyright 2003 D. Simchi-Levi
New Concepts
Push-Pull strategies
Direct-to-Consumer
Strategic alliances
Manufacturing postponement
Dynamic Pricing
E-Procurement
©Copyright 2003 D. Simchi-Levi
©Copyright 2003 D. Simchi-Levi
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.
