Basics of Supply Chain Management

What Is the Supply Chain?

Also referred to as the logistics network Suppliers, manufacturers, warehouses, distribution centers and retail outlets facilities
Suppliers Manufacturers Warehouses & Customers Distribution Centers

and the

Raw materials Work-in-process (WIP) inventory Finished products

that flow between the facilities

Material Costs

Transportation Costs

Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs

The Supply Chain

Suppliers Manufacturers Warehouses & Distribution Centers Customers

Transportation Costs Material Costs

Transportation Costs

Manufacturing Costs

Transportation Costs Inventory Costs

The Supply Chain Another View

Plan

Source

Make

Deliver

Buy

Suppliers

Manufacturers

Warehouses & Distribution Centers

Customers

Material Costs

Transportation Transportation Costs Transportation Costs Manufacturing Costs Inventory Costs Costs

What Is Supply Chain Management (SCM)?

Plan Source Make Deliver Buy

A set of approaches used to efficiently integrate

Suppliers Manufacturers Warehouses Distribution centers In the right quantities To the right locations And at the right time

So that the product is produced and distributed

System-wide costs are minimized and Service level requirements are satisfied

History of Supply Chain Management

1960s - Inventory Management Focus, Cost Control 1970s - MRP & BOM - Operations Planning 1980s - MRPII, JIT - Materials Management, Logistics 1990s - SCM - ERP - Integrated Purchasing, Financials, Manufacturing, Order Entry 2000s - Optimized Value Network with Real-Time Decision Support; Synchronized & Collaborative Extended Network

Why Is SCM Difficult?

Plan Source Make Deliver Buy

Uncertainty is inherent to every supply chain

Travel times Breakdowns of machines and vehicles Weather, natural catastrophe, war Local politics, labor conditions, border issues

The complexity of the problem to globally optimize a supply chain is significant

Minimize internal costs Minimize uncertainty Deal with remaining uncertainty

The Importance of Supply Chain Management

Dealing with uncertain environments matching supply and demand
Boeing announced a $2.6 billion write-off in 1997 due to raw materials shortages, internal and supplier parts shortages and productivity inefficiencies U.S Surgical Corporation announced a $22 million loss in 1993 due to larger than anticipated inventories on the shelves of hospitals IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PCs from Taiwanese suppliers in 1999 due to a massive earthquake

U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998
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The Importance of Supply Chain Management

Shorter product life cycles of high-technology products
Less opportunity to accumulate historical data on customer demand Wide choice of competing products makes it difficult to predict demand

The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners
If you dont do it, your competitor will Major buyers such as Wal-Mart demand a level of supply chain maturity of its suppliers
Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes

Availability of SCM technologies on the market

Supply Chain Management and Uncertainty

Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesnt vary The variability worsens as we travel up the supply chain Forecasting doesnt help!
Multi-tier Suppliers Manufacturer Wholesale Distributors Retailers Consumers

Sales

Sales

Time

Sales

Time

Time

Sales Time

Bullwhip Effect
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Factors Contributing to the Bullwhip

Demand forecasting practices
Min-max inventory management (reorder points to bring inventory up to predicted levels) Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs

Lead time

Batch ordering

Peaks and valleys in orders Fixed ordering costs Impact of transportation costs (e.g., fuel costs) Sales quotas
Promotion and discount policies

Price fluctuations Lack of centralized information

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Todays Marketplace Requires:

Personalized content and services for their customers Collaborative planning with design partners, distributors, and suppliers Real-time commitments for design, production, inventory, and transportation capacity Flexible logistics options to ensure timely fulfillment Order tracking & reporting across multiple vendors and carriers
Shared visibility for trading partners
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Supply Chain Management Key Issues

Forecasts are never right
Very unlikely that actual demand will exactly equal forecast demand

The longer the forecast horizon, the worse the forecast

A forecast for a year from now will never be as accurate as a forecast for 3 months from now

Aggregate forecasts are more accurate

A demand forecast for all CV therapeutics will be more accurate than a forecast for a specific CV-related product

Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty
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Supply Chain Management Key Issues

Overcoming functional silos with conflicting goals
Purchasing Manufacturing Distribution Customer Service/ Sales
High inventories

Low purchase price Multiple vendors

Few changeovers Stable schedules Long run lengths

Low inventories

High service levels Regional stocks

Low transportation

SOURCE

MAKE

DELIVER

SELL

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Supply Chain Management Key Issues

ISSUE Network Planning CONSIDERATIONS
Warehouse locations and capacities Plant locations and production levels Transportation flows between facilities to minimize cost and time How should inventory be managed? Why does inventory fluctuate and what strategies minimize this? Impact of volume discount and revenue sharing Pricing strategies to reduce order-shipment variability Selection of distribution strategies (e.g., direct ship vs. cross-docking) How many cross-dock points are needed? Cost/Benefits of different strategies How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?

Inventory Control Supply Contracts Distribution Strategies

Integration and Strategic Partnering

Outsourcing & Procurement Strategies Product Design

What are our core supply chain capabilities and which are not? Does our product design mandate different outsourcing approaches? Risk management How are inventory holding and transportation costs affected by product design? How does product design enable mass customization?

Source: Simchi-Levi

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Supply Chain Management Operations Strategies

STRATEGY Make to Stock WHEN TO CHOOSE
standardized products, relatively predictable demand customized products, many variations many variations on finished product; infrequent demand

BENEFITS
Low manufacturing costs; meet customer demands quickly Customization; reduced inventory; improved service levels Low inventory levels; wide range of product offerings; simplified planning Enables response to specific customer requirements

Make to Order Configure to Order

Engineer to Order

complex products, unique customer specifications

Source: Simchi-Levi 16

Supply Chain Management Benefits

A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain Delivery Performance Inventory Reduction Fulfillment Cycle Time Forecast Accuracy Overall Productivity Lower Supply-Chain Costs Fill Rates Improved Capacity Realization
Source: Cohen & Roussel 17

16%-28% Improvement 25%-60% Improvement 30%-50% Improvement 25%-80% Improvement 10%-16% Improvement 25%-50% Improvement 20%-30% Improvement 10%-20% Improvement

Supply Chain Imperatives for Success

View the supply chain as a strategic asset and a differentiator
Wal-Marts partnership with Proctor & Gamble to automatically replenish inventory Dells innovative direct-to-consumer sales and build-to-order manufacturing

Create unique supply chain configurations that align with your companys strategic objectives
Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network Forecasting Collaboration Integration
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Supply chain configuration components

Reduce uncertainty

Value of Information and SCM

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Information In The Supply Chain

Plan
Suppliers Manufacturers Warehouses & Distribution Centers Retailer

Source

Make

Deliver

Sell

Order Lead Time Delivery Lead Time

Production Lead Time

Each facility further away from actual customer demand must make forecasts of demand Lacking actual customer buying data, each facility bases its forecasts on downstream orders, which are more variable than actual demand To accommodate variability, inventory levels are overstocked thus increasing inventory carrying costs

Its estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertainty

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Taming the Bullwhip

Four critical methods for reducing the Bullwhip effect:
Reduce uncertainty in the supply chain

Centralize demand information Keep each stage of the supply chain provided with up-to-date customer demand information More frequent planning (continuous real-time planning the goal)
Every-day-low-price strategies for stable demand patterns Use cross-docking to reduce order lead times Use EDI techniques to reduce information lead times Vendor-managed inventory (VMI) Collaborative planning, forecasting and replenishment (CPFR)
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Reduce variability in the supply chain Reduce lead times

Eliminate the bullwhip through strategic partnerships

Methods for Improving Forecasts

Judgment Methods Market Research Analysis

Panels of Experts Internal experts External experts Domain experts Delphi technique Accurate Forecasts Causal Analysis

Market testing Market surveys Focus groups

Time-Series Methods

Moving average Exponential smoothing Trend analysis Seasonality analysis

Relies on data other than that being predicted Economic data, commodity data, etc.

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The Evolving Supply Chain

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Supply Chain Integration Push Strategies

Classical manufacturing supply chain strategy Manufacturing forecasts are long-range
Orders from retailers warehouses Unable to meet changing demand patterns Supply chain inventory becomes obsolete as demand for certain products disappears Large inventory safety stocks Larger and more variably sized production batches Unacceptable service levels Inventory obsolescence How is demand determined? Peak? Average? How is transportation capacity determined?

Longer response time to react to marketplace changes

Increased variability (Bullwhip effect) leading to:

Inefficient use of production facilities (factories)

Examples: Auto industry, large appliances, others?

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Supply Chain Integration Pull Strategies

Production and distribution are demand-driven
Coordinated with true customer demand

None or little inventory held

Only in response to specific orders

POS data

Fast information flow mechanisms Decreased lead times Decreased retailer inventory Decreased variability in the supply chain and especially at manufacturers Decreased manufacturer inventory More efficient use of resources More difficult to take advantage of scale opportunities Examples: Dell, Amazon

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Supply Chain Integration Push/Pull Strategies

Hybrid of push and pull strategies to overcome disadvantages of each Early stages of product assembly are done in a push manner
Partial assembly of product based on aggregate demand forecasts (which are more accurate than individual product demand forecasts) Uncertainty is reduced so safety stock inventory is lower

Final product assembly is done based on customer demand for specific product configurations Supply chain timeline determines push-pull boundary
Generic Product Push Strategy Raw Materials
PushPull Boundary

Customized Product Pull Strategy End Consumer 26

Supply Chain Timeline

Choosing Between Push/Pull Strategies

Pull High Industries where:
Customization is High Demand is uncertain Scale economies are Low

Industries where:
Demand is uncertain Scale economies are High Low economies of scale

Where do the following industries fit in this model: Automobile? Aircraft? Fashion? Petroleum refining? Pharmaceuticals? Biotechnology? Medical Devices?

Demand Uncertainty

Computer equipment Industries where:

Uncertainty is low Low economies of scale Push-pull supply chain

Furniture

Industries where:
Standard processes are the norm Demand is stable Scale economies are High

Books, CDs Push Low Low Pull

Grocery, Beverages
High Push

Economies of Scale

Source: Simchi-Levi

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Characteristics of Push, Pull and Push/Pull Strategies

PUSH

PULL
Maximize Service Level

Objective
Complexity Focus Lead Time

Minimize Cost

High

Low

Resource Allocation

Responsiveness

Long

Short

Processes

Supply Chain Planning

Order Fulfillment

Source: Simchi-Levi 28

Supply Chain Collaboration What Is It?

Many different definitions depending on perspective The means by which companies within the supply chain work together towards mutual goals by sharing
Ideas Information Processes Knowledge Information Risks Rewards Accelerate entry into new markets Changes the relationship between cost/value/profit equation

Why collaborate?

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Supply Chain Collaboration

Cornerstone of effective SCM The focus of many of todays SCM initiatives The only method that has the potential to eliminate or minimize Retailers the Bullwhip effect
Suppliers

Synchronized Production Scheduling

Collaborative Product Development

Manufacturer

Collaborative Demand Planning

Distributors/ Wholesalers

Collaborative Logistics Planning Transportation services Distribution center services

Logistics Providers

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Benefits of Supply Chain Collaboration

CUSTOMERS
Reduced inventory Increased revenue Lower order management costs Higher Gross Margin Better forecast accuracy Better allocation of promotional budgets

MATERIAL SUPPLIERS
Reduced inventory Lower warehousing costs Lower material acquisition costs Fewer stockout conditions

SERVICE SUPPLIERS
Lower freight costs Faster and more reliable delivery Lower capital costs Reduced depreciation Lower fixed costs

Improved customer service More efficient use of human resources

Source: Cohen & Roussel 31

Successful Supply Chain Collaboration

Try to collaborate internally before you try external collaboration Help your partners to work with you Share the savings Start small (a limited number of selected partners) and stay focused on what you want to achieve in the collaboration Advance your IT capabilities only to the level that you expect your partners to manage Put a comprehensive metrics program in place that allows you to monitor your partners performance Make sure people are kept part of the equation
Systems do not replace people Make sure your organization is populated with competent professionals whove done this before

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Emerging Best Practices in SCM Strategy

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Process Reference Models

Process reference models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework
Business Process Reengineering Capture the as-is state of a process and derive the desired to-be future state Best Practices Analysis Process Reference Model Capture the as-is state of a process and derive the desired to-be future state Quantify the operational performance of similar companies and establish internal targets based on best-inclass results Quantify the operational performance of similar companies and establish internal targets based on best-in-class results Characterize the management practices and software solutions that result in best-inclass performance

Benchmarking

Characterize the management practices and software solutions that result in bestin-class performance

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