Supply Chain Management

Traditional View: Cost breakdown of a manufactured good

Profit Supply Chain Cost

10% 20%

Profit Supply Chain Cost Marketing Cost

Marketing Cost
Manufacturing Cost

25%
45%

Manufacturing Cost
Effort spent for supply chain activities are invisible to the customers.

What can Supply Chain Management do?

Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies A typical box of cereal spends 104 days from factory to sale A typical car spends 15 days from factory to dealership Faster turnaround of the goods is better? Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory. To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE.

Magnitude of Supply Chain Management

Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not available when and where needed P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand When the 1 gig processor was introduced by AMD (Advanced Micro Devices), the price of the 800 meg processor dropped by 30%

SCM Generated Value

Minimizing supply chain costs while keeping a reasonable service level customer satisfaction/quality/on time delivery, etc. This is how SCM contributes to the bottom line SCM is not strictly a cost reduction paradigm!

- A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream

Downstream

- aims to Match Supply and Demand, profitably for products and services
SUPPLY SIDE DEMAND SIDE

- achieves

+ + +
The right The right The right The right

+
The right

+
The right

Higher

Product

Price

Store

Quantity

Customer

Time

Profits

Flows in a Supply Chain

Material Information

Supplier
Funds

Customer

The flows resemble a chain reaction.

SCM in a Supply Network

Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains.
Cash Products and Services Information
THAILAND INDIA N-Tier Suppliers Suppliers MEXICO Logistics TEXAS Distributors US Retailers

Supply Side

OEM

Demand Side

Demand Supply

The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably

Importance of Supply Chain Management

In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report

Frequent Supply shortages Inefficient logistics

Low order fill rates

Tier 1 Supplier

Manufacturer

Distributor

Retailer

Customer

High stockouts

Glitch-Wrong Material, Machine is Down effect snowballs

High inventories through the chain

Ineffective promotions

High landed costs to the shelf

Eliminating inefficiencies in supply chains can save millions of $.

A Generic Supply Chain

Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks

Supply

Inventory Purchase Transportation Inventory

Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Any cycle 0. Customer arrival 1. Customer triggers an order 2. Supplier fulfils the order 3. Customer receives the order

Manufacturer
Procurement Cycle

Supplier

Push/Pull View of Supply Chains

Procurement, Manufacturing and Replenishment cycles
Customer Order Cycle

PUSH PROCESSES

PULL PROCESSES

Customer Order Arrives Push-Pull boundary

SCM Strategy

Mission-Strategy-Tactics-Decisions

Mission, Mission statement

The reason for existence of an organization

Strategy

A plan for achieving organizational goals The actions taken to accomplish strategies

Tactics

Operational decisions

Day to day decisions to support tactics

Linking SC and Business Strategy

Competitive (Business) Strategy
Product Development Strategy Marketing Strategy -Portfolio of products -Frequent discounts -Timing of product introductions
-Coupons

Supply Chain Strategy

New Product Development

Marketing and Sales

Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Fitting the SC to the customer or vice versa?

Understand the customer Demand Understand the Capabilities of your SC Match the Demand with the Capabilities Challenge: How to meet extensive Demand with limited Capabilities?

Achieving Strategic Fit: Consistent SCM and Competitive strategies

Fit SC to the customer Understanding the Customer

Range of demand, Production lot size, Response time, Service level, Product variety Innovation Accommodating poor quality

Implied (Demand) Uncertainty for SC Implied trouble for SC

Integration

Integration is the central theme in SCM Building synergies by integrating business functions, departments and companies

Supply Chain Drivers and Obstacles

Drivers of Supply Chain Performance

How to achieve Efficiency Responsiveness

Supply chain structure

Inventory

Transportation

Facilities

Logistical Drivers

Information

Sourcing

Pricing

CrossFunctional Drivers

1. Inventory

Convenience: Cycle inventory

No customer buys eggs one by one Winter clothing Xmas toys and computer sales

Unstable demand: Seasonal inventory

Randomness: Safety inventory Pipeline inventory

Work in process or transit

2. Transportation
Air Truck Rail Ship Pipeline Electronic

3. Facilities

Production Flexible vs. Dedicated Flexibility costs Production: Remember BMW: a sports car disguised as a sedan Service: Can your instructor teach painting as well as SCM? Sports: A playmaker who shoots well is rare. Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping Job Lot Storage: Need more space. Crossdocking: Wal-Mart

4. Information

Role in the supply chain The connection between the various stages in the supply chain Crucial to daily operation of each stage in a supply chain E.g., production scheduling, inventory levels Role in the competitive strategy Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Information technology Andersen Windows Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory.

Characteristics of the Good Information

Information Global Scope Coordinated Decisions Supply Chain Success

Strategy

Analytical Models

$$$

Information Accurate? Accessible? Up-to-date? In the Correct form?

If not, database restricted ability. How difficult is it to import data into SAP?

Quality of Information

Information drives the decisions:

Good information means good decisions

IT helps: MRP, ERP, SAP, EDI Relevant information? How to use information?

5. Sourcing

Role in the supply chain Set of processes required to purchase goods and services in a supply chain Supplier selection, single vs. multiple suppliers, contract negotiation Role in the competitive strategy Sourcing is crucial. It affects efficiency and responsiveness in a supply chain In-house vs. outsource decisions- improving efficiency and responsiveness Components of sourcing decisions In-house versus outsource decisions Supplier evaluation and selection Procurement process:\

6. Pricing

Role in the supply chain Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply Role in the competitive strategy Use pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times Amazon: Faster delivery is more expensive Components of pricing decisions Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing, depending on the product and services Packaging, delivery location, time, customer pick up Bundling products; products and services

Considerations for Supply Chain Drivers

Driver Inventory Transportation Facilities Information Sourcing Pricing Efficiency Cost of holding Consolidation Consolidation / Dedicated Low cost/slow/no duplication Low cost sources Constant price Responsiveness Availability Speed Proximity / Flexibility High cost/ streamlined/reliable Responsive sources Low-high price

Major Obstacles to Achieving Fit

SC is big:

Variety of products/services Spoiled customer Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives Globalization

Local optimization and lack of global fit

Common problems

Lack of relevant SCM metrics: How to measure responsiveness? How to measure efficiency, costs, worker performance, etc? Poor inventory status information Theft: Major problem for furniture retailers. Transaction errors: Retailers with inaccurate inventory records for 65% of SKUs (Stock keeping Units) Information delays, dated information, incompatible info. systems Misplaced inventory: 16% of items cannot be found at a major retailer Spoilage: active ingredients in the products are losing their properties Product quality and yield Lack of visibility in SCs Do you know the inventory your distribution centers hold? Do you know the inventory your fellow retailer holds?

Common problems

Poor delivery status information Not knowing the order status Poor IT design Unreliable, duplicate data Security problems: too much or too little Internal customer discrimination Giving lower priority to internal customers than external customers Poor integration Elusive inventory costs Accounting systems do not capture opportunity costs SC-insensitive product design