Lesson 1

Introduction to
Supply Chain Management
What Is a Supply Chain?

Flow of products and services from:

• Raw materials manufacturers
• Intermediate products manufacturers
• End product manufacturers
• Wholesalers and distributors and
• Retailers
• Connected by transportation and storage activities
• Integrated through information, planning, and integration activities
• Cost and service levels
1.1 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.
Two Other Formal Definitions
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
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
 PC Industry Supply Chain
Tracing back the screen you stare at for the bulk of your time.
Cisco’s Value Network
 SCM Definition
Material Flow

Converter
Supplier Retailer
Distributor

Source
Converter Consumers
Distributor End-User
Supplier

Value-Added Services

Funds/Demand Flow

Information Flow

Reuse/Maintenance/After Sales Service Flow

The SCM Network

FIGURE 1.1: The logistics network

Key Observations

• Every facility that impacts costs need to be

considered
• Suppliers’ suppliers
• Customers’ customers
• Efficiency and cost-effectiveness throughout the
system is required
• System level approach
• Multiple levels of activities
• Strategic – Tactical – Operational
Other Related Observations

• Supply chain strategy linked to the Development Chain

• Challenging to minimize system costs and maximize system service
levels
• Inherent presence of uncertainty and risk
1.2 The Development Chain
• Set of activities and processes associated with new product
introduction. Includes:
• product design phase
• associated capabilities and knowledge
• sourcing decisions
• production plans
1.2 The Development Chain

FIGURE 1-2: The enterprise development and supply chain

1.3 Global Optimization

• Geographically dispersed complex network

• Conflicting objectives of different facilities
• Dynamic system
• Variations over time
• Matching demand-supply difficult
• Different levels of inventory and backorders
• Recent developments have increased risks
• Lean production/Off-shoring/Outsourcing
Global Apparel Value Chain
Tracing back the dress you are wearing
Globally Dispersed Manufacturing
An Illustration: How Li & Fung Limited Might Make a Dress

Product Design QC & Shipping

[Hong Kong] [Hong Kong]

Yarn Spinning Weaving Stitching

[Korea] [Taiwan] [Indonesia]

Zippers+…
[Japan+…]
1.4 Uncertainty and Risk Factors
Matching Supply and Demand a Major
Challenge
REASONS EXAMPLES
•Raw material shortages Boeing Aircraft’s inventory write-
•Internal and supplier parts down of $2.6 billion
shortages
•Productivity inefficiencies
•Sales and earnings shortfall Sales at U.S. Surgical Corporation
•Larger than anticipated inventories declined 25 percent, resulting in a
loss of $22 million
•Stiff competition Intel reported a 38 percent decline
•General slowdown in the PC in quarterly profit
market
•Higher than expected orders for EMC Corp. missed its revenue
new products over existing guidance of $2.66 billion for the
products second quarter of 2006 by around
$100 million
1.4 Uncertainty and Risk Factors
Fluctuations of Inventory and Backorders
throughout the Supply Chain

FIGURE 1-3: Order variations in the supply chain

1.4 Uncertainty and Risk Factors
• Forecasting is not a solution
• Demand is not the only source of uncertainty
• Recent trends make things more uncertain
• Lean manufacturing
• Outsourcing
• Off-shoring
1.4 Uncertainty and Risk Factors
• August 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
• 1999 Taiwan earthquake
• Supply interruptions of HP, Dell
• 2001 India (Gujarat state) earthquake
• Supply interruptions for apparel manufacturers
1.5 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

Progression of Logistics Costs

FIGURE 1-4: Logistics costs’ share of the U.S. economy

Composition of Logistics Costs

FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
1.6 Complexity: The Magnitude
• U.S. companies spend more than $1 trillion in supply-
related activities (10-15% of Gross Domestic Product)
• Transportation 58%
• Inventory 38%
• Management 4%
• 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.
 Complexity: The Magnitude
• Compaq computer’s loss of $500 million to $1 billion in sales in
one year
• Laptops and desktops were not available when and where customers
were ready to buy them
• Boeing’s forced announcement of write-downs of $2.6b
• Raw material shortages, internal and supplier parts shortages….

• Cisco’s multi-billion ($2.2b) dollar write-off of inventories in

2001-2002
• Customers balked on orders due to market meltdown
 Transactional 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.
PC Value Chain
Performance of Traditional PC Manufacturer
PC Value Chain: Focus on Cost Reduction
Performance of Dell Computers
Magnitude of Supply Chain Costs
Cost Elements of a Typical Trade Book
Magnitude of Supply Chain Costs
Example: The Apparel Industry

Cost per Percent

Shirt Saving

Manufacturer Distributor Retailer Customer $52.72 0%

Manufacturer Distributor Retailer Customer $41.34 28%

Manufacturer Distributor Retailer Customer $20.45 62%

Supply Chain: The Potential
• P&G’s estimated savings to retail customers of $65 million through logistics gains

• Dell Computer’s outperforming of the competition in terms of shareholder value

growth over more than two decades by over 3,000% using:
• Direct business model
• Build-to-order strategy

• Wal-Mart transformation into the world’s largest retailer by changing its logistics
system:
• highest sales per square foot, inventory turnover and operating profit of any discount
retailer
1.7 Key Issues in Supply Chain
Management
Chain Global Optimization Managing Risk and Uncertainty
Distribution Network Configuration Supply Y
Inventory Control Supply Y
Production Sourcing Supply Y
Supply Contracts Both Y Y
Distribution Strategies Supply Y Y
Strategic Partnering Development Y
Outsourcing and Offshoring Development Y
Product Design Development Y
Information Technology Supply Y Y
Customer Value Both Y Y
Smart Pricing Supply Y

TABLE 1-1: Key supply chain management issues

1.8 Book Objectives and Overview

• Inventory management
• Logistics network planning
• Supply contracts for strategic as well as commodity components.
• The value of information and the effective use of information in the supply chain.
• Supply chain integration.
• Centralized and decentralized distribution strategies.
• Strategic alliances.
• Outsourcing, off-shoring, and procurement strategies.
• International supply chain management.
• Supply chain management and product design.
• Customer value.
• Revenue management and pricing strategies.
• Information technology and business processes.
• Technical standards and their impact on the supply chain.
Software Packages

• Computerized Beer Game

• Risk Pool Game
• Procurement Game
CASE: Meditech Surgical

• Intent – diagnosis of supply chain

• Business overview
• Supply chain
• Production planning
• What’s wrong?
• How to fix it?
Endoscopic Surgical Instruments

• Permits minimally invasive surgery

• Market created in early 80’s, rapidly growing
• Old products continually updated and replaced with new product
introductions
Business Overview

• National and Meditech split the market

• Compete based on product innovations, customer service, cost
• National sells to physicians; Meditech sells to material managers
• Customer preferences change slowly
 External Supply Chain

Hospitals

Domestic
Dealers

Part Meditech Meditech

suppliers Assembly Warehouse
Hospitals

Int’l
Meditech
Affiliates
 Internal Supply Chain

Parts Inventory Assembly Bulk Inventory Packaging &

Sterilization FG Inventory

2 - 16 2 1
weeks weeks week
 Production Planning
Annual
Forecast

Monthly
Revision

Transfer
Requirements

Monthly
Plan

MRP

Parts Weekly
Procurement Assembly
Plan Schedule
 Monthly
Production Planning
Plan

MRP

Material Order point;

Plan Order quantity

Parts Inventory Assembly Bulk Inventory Packaging & FG inventory

Sterilization
What’s Wrong?

• Poor service for new product introductions

• Poor forecasting?
• Panic ordering?
• And high FG inventory
What Is Going On?

• Demand is quite predictable

• Usage in hospitals is quite stable
• Market share moves slowly over time
• With each new product, dealer must build inventory to fill pipeline
Why Did Meditech Think Demand Was
Unpredictable?
• Poor information systems
• No one looked at demand
• No one had responsibility for forecast errors
• Tendency to shift the blame
• Built-in delays and monthly buckets in planning system
• Amplifier in planning system
What to Do?

• Recognize that demand is stable and predictable

• Establish accountability for forecast
• Eliminate planning delays and/or reduce time bucket
• Alternatively, put assembly within pull system and eliminate bulk
inventory