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The Role of Supply Chain Management in Economy

Supply Chain Management_Janat Shah

Learning Objectives
Why is the supply chain important? What are the key supply chain decisions made by a firm? How has the supply chain evolved over the last century? What are the unique challenges of managing a supply chain in India?

Supply Chain Management_Janat Shah

What Is a Supply Chain?


Flow of products and services from:
Raw materials manufacturers Intermediate products manufacturers End product manufacturers Wholesalers and distributors Retailers Customers

Connected by transportation and storage activities Flow of information, products and funds in both directions Cost and service levels

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The Supply Chain Network


Plan Source Make Deliver Buy

Suppliers

Manufacturers

Warehouses & Distribution Centers

Customers

Material Costs

Transportation Transportation Costs Transportation Costs Manufacturing Costs Inventory Costs Costs

Supply Chain Management_Janat Shah

Supply Chain
All facilities, functions, activities, associated with flow and transformation of goods and services from raw materials to customer, as well as the associated information flows An integrated group of processes to source, make, and deliver products

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Supply Chain Processes

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Supply Chain Management: Success Stories


Dell: Inventory turn-over ratio of 58.7 compared to industry average of 12 (Net Profitability of 5.3.%) ( Drop from 7.8% in 2006) Wal-Mart: Inventory turn-over ratio of 9.9 compared to industry average of 5.5 ( Net profitability of 3.5%) Zara Corporation: Lead-time from new product to stores is 15 to 20 days compared to industry average of six months ( Net profitability of 11.3%)

Supply Chain Management_Janat Shah

Supply Chain Management: Horror Stories


Cisco: Cisco wrote off 2.2 $ billion worth of inventory in May 2001. Biggest write-off in history. Sony: PlayStation IIa lost opportunity SONY could supply only 25% of the potential demand for Christmas market Nintendo Wii Game Console : Shortage expected in year 2007 Kmart Launched supply chain initiative in May 2000 worth $1.4 billion in software and services. In 2001-02, announced that it was abandoning most of the software purchased and taking $130 million write-off Nike- i2 Technology Controversy: Lost $100 in sales in last quarter of 2000 i2 Technologies was blamed. This is what we get for our $400 millionNike Chairman Wal-Mart: RFID Initiative
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Supply Chain Management_Janat Shah

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.

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Supply Chain Management: A Definition


Encompasses all activities associated with the transformation of goods from the raw material stage to the final stage when the goods and services reach the end customer. Involves planning, design and control of flow of material, information and finance along the chain in order to deliver value to the end customer in effective and efficient way.

Supply Chain Management_Janat Shah

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

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Supply Chain Management: A Pictorial Representation


C1 C2 C3 C4 C5 C6
VENDOR INBOUND
TRANSPORTATION

PLANTS

DISTRIBUTION OUTBOUND INTERFACILITY CUSTOMERS TRANSPORTATION TRANSPORTATION CENTERS

Supply Chain Management_Janat Shah

SCM Definition
Material Flow
Converter Distributor

Supplier Source

Retailer

Converter Supplier Distributor End-User

Consumers

Value-Added Services Funds/Demand Flow Information Flow Reuse/Maintenance/After Sales Service Flow 1 3
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Supply chain for Service Industry


More difficult than manufacturing Does not focus on the flow of physical goods Focuses on human resources and support services More compact and less extended

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P&Gs estimated savings to retail customers of $65 million through logistics gains
Dell Computers 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

Supply Chain: The Potential

Wal-Mart transformation into the worlds largest retailer by changing its logistics system: highest sales per square foot, inventory turnover and operating profit of any discount retailer

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Complexity: The Magnitude


U.S. companies spend more than $1 trillion in supply-related activities (1015% 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.

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Complexity: The Magnitude


Compaq computers 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 Boeings forced announcement of write-downs of $2.6b Raw material shortages, internal and supplier parts shortages.

Ciscos multi-billion ($2.2b) dollar write-off of inventories in 2001-2002 Customers balked on orders due to market meltdown

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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.
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Ratio of Logistics Cost to GDP for Selected Countries*

Does logistics cost capture every thing? How do we capture logistics cost of India versus China?

* Source: Raghuram and Shah 2003

Supply Chain Management_Janat Shah

Progression of Logistics Costs

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

Supply Chain Management_Janat Shah

Composition of Logistics Costs

FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
Supply Chain Management_Janat Shah

Logistics Costs for the Indian Economy*


Rs billion
Total Logistics Cost 1201.27 1261.01 1388.93 1508 1658 GDP

93-94 prices
Logistics Cost/GDP (%) 13.4 12.4 12.1 11.89 11.59

95-96 97-98 99-00 01-02 03-04

8995.63 10163.99 11485.00 12679 14305

*Source: Raghuram and Shah 2004


Supply Chain Management_Janat Shah

Logistics Costs for the US Economy


Nominal Values
Organized Sector Transportation Inventory Warehousing Packaging Losses Total Cost Logistics Cost ($ billion) GDP ($ billion) 24% 6% 11.4% 659 5,800 9.5% 957 10,080 8.7% 910 10,470 40% 37% US: 1990 50% 20% US: 2001 60% US: 2002 63%

Source: CASS Information Systems, 2002


Supply Chain Management_Janat Shah

Performance of the Indian Manufacturing Industry*

Data Source: PROWESS, CMIE


Supply Chain Management_Janat Shah

Sector-wise Industry Performance of Indian Firms*

Data Source: PROWESS, CMIE


Supply Chain Management_Janat Shah

Supply Chain Challenges for the Indian FMCG Sector


Managing Availability in the Complex Distribution Set up Working with Smaller Pack Sizes Entry of National Players in the Traditional Fresh Products Sector Dealing with a Complex Taxation Structure Dealing with Counterfeit Goods Opportunistic Games Played by the Distribution Channel Infrastructure Emergence of Third-party Logistics Provider Emergence of Modern Retail Chains Reservation for Small-scale Sector

Supply Chain Management_Janat Shah

The Marico Supply Chain

Supply Chain Management_Janat Shah

Status of Logistics Management in India


Neglected area in organizations Taxation structure drives the logistics related decision, not cost or service considerations Poor state of infrastructure Complex regulations affecting logistics decisions

Supply Chain Management_Janat Shah

Importance of The Supply Chain


Proliferation of Product Lines Shorter Product Life Cycles Cell phone, Laptop, Automobile Higher Level of Outsourcing Dell computers, Bharti Tele ventures Shift in Balance of Power in Chain Impact of organized retail chain Globalization of Manufacturing Impact of tariff structure

Supply Chain Management_Janat Shah

Why is SCM Important?


Strategic Advantage It Can Drive Strategy * Manufacturing is becoming more efficient * SCM offers opportunity for differentiation (Dell) or cost reduction (Wal-Mart or Big Bazaar) Globalization It Covers The World * Requires greater coordination of production and distribution * Increased risk of supply chain interruption * Increases need for robust and flexible supply chains

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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 Supply Chain Management_Janat Shah

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

Value vs. Supply Chain


Value chain every step from raw materials to the eventual end user ultimate goal is delivery of maximum value to the end user Supply chain activities that get raw materials and subassemblies into manufacturing operation and finished goods to the customer Terms are used interchangeably

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Dell Computers: Focus on Cost Reduction

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Dells SCM
Dell sells its computer systems directly to end customers, bypassing distributors and retailers (resellers). Dell's supply chain consists of only three stages the suppliers, the manufacturer (Dell), and end users. Dells direct contact with customers allows it to: properly identify market segments, analyze the requirements and profitability of each segment, and develop more accurate demand forecasts. Another Dells advantage is that it is able to get the customers requirements regarding software to be loaded
Supply Chain Management_Janat Shah

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

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Historical Evolution of the Supply Chain


First Revolution: (Ford Motor Co. 19101920) Single product, that is, no product variety Vertical integration Second Revolution: (Toyota Motor Co. 19601970) Wide Variety Long-term relationship with suppliers Third Revolution: (Dell Computers 1995Current) Customized products Medium-term relationship with suppliers Suppliers have to maintain technology and cost leadership

Supply Chain Management_Janat Shah

From An Automobile Manufacturer


Our aim is always to arrange the material and machinery and to simplify the operation so that practically no orders are

necessary. Our finished inventory is in transit. So is most of our


raw material inventory. Our production cycle is about eight-one hours from the mine to the finished machine (automobile) in the

freight car

Supply Chain Management_Janat Shah

Supply Chain Management


Managing flow of information through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs Keys to effective SCM information communication cooperation trust

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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

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Key Observations
Integrated activity: * Among functions such as logistics, manufacturing, distribution, design/engineering, marketing, finance,etc. * Multiple organizations,i.e., suppliers, customers & 3 PL, 4PL providers * Coordination of conflicting goals, metrics, etc. Responsible for multiple flows: * Information (orders, status, contracts) * Physical (finished goods, raw material, w.i.p.) * Financial (payment, credits, etc.)
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Key Observations (contd)


One goal in SCM:

Factors that contribute to uncertainty

respond to uncertainty in customer demand without creating costly excess inventory Negative effects of uncertainty lateness incomplete orders
Inventory insurance against supply chain uncertainty

inaccurate demand forecasting long variable lead times late deliveries incomplete shipments product changes batch ordering price fluctuations and discounts inflated orders

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Supply Chain Management_Janat Shah

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

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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

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The Development Chain

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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
Supply Chain Management_Janat Shah

SCM Key Issues


ISSUE CONSIDERATIONS

Network Planning

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

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?

Product Design

Source: Simchi-Levi

Supply Chain Management_Janat Shah

Key Issues in SCM


Distribution network Configuration How should management select warehouse locations and capacities, determine production levels for each product at each plant and set transportation flows between facilities from plant to warehouse, warehouse to retailer to minimize total production, inventory and transportation costs and satisfy service level requirements Inventory control Minimize inventory and holding costs Uncertainty in customer demand and supply process leads to maintaining inventory. Impact of forecasting tool to predict customer demand Should retailer order more than, less than or equal to the demand forecast? What inventory turnover ratio should be used? Does this ratio vary from industry to industry?
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Key Issues in SCM


Production sourcing need to balance production and transportation costs Large production batches reduce production costs resulting in some facilities producing limited products but results in higher transportation costs Alternatively, to reduce transportation costs requires each facility to produce small batches of all products increasing production costs Supply contracts Impact of supply contracts that incorporate revenue sharing and volume discount Pricing strategies that provide incentives to buyers to order more products at the same time increasing supplier profit
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Key Issues in SCM


Distribution strategies How much centralization or decentralization of the distribution system? Impact of the above on inventory levels and transportation costs as well as service levels When should products be transported by air from centralized locations to various demand points When should competing retailers selling the same brand share inventory and what would be their competing advantage?

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Key Issues in SCM


Supply chain integration and strategic partnering Integration achieved successfully by information sharing and operational planning What information should be shared and how should it be used? What is its impact on the design and operation of the supply chain? What is the degree of integration needed within the organization and with external partners What is the type of partnership that should be implemented for a given situation?
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Key Issues in SCM


Outsourcing and offshoring strategies Deciding what to make internally and what to buy from outside sources Determining internal core competencies Risks associated with outsourcing and how can they be minimized How do you ensure timely supply of products? When should you keep dual sources for the same product? When should you offshore? What is the impact of offshoring on inventory levels and cost of capital What are the risks of offshoring?
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Key Issues in SCM


Product design Effective design plays critical role in the supply chain Certain designs may increase inventory holding and transportation costs while other designs reduce manufacturing lead time How to leverage product design to compensate for uncertainty in customer demand? How to quantify the resultant savings? How to implement mass customization? What role does supply chain management play in the successful implementation of these concepts?
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Key Issues in SCM


Smart pricing Organizations integrate pricing and inventory to influence market demand and improve bottom line Can smart pricing strategies be used to improve supply chain performance? Local issues SCM impacted by local dynamics, customer preferences, government policies such as tax free zones, infrastructural constraints and strength of supply chain partners

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Key Issues in SCM


Information Technology and DS Systems Critical enabler of effective SCM What data should be transferred? How frequently should it be transferred? What infrastructure is required internally and between partners? Customer Value Measure of company contribution to its customer How does SCM contribute to enhancing customer value?

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Chain Distribution Network Contribution Inventory Control Production Sourcing Supply Contracts Distribution Strategies Outsourcing & Off shoring Product Design Information Technology Customer Value Smart Pricing Supply

Global Optimisation Y

Managing Risk & Uncertainty

Supply Supply Both Supply Development Development Development Both Supply Y Y Y Y Y Y Y

Y Y

Y Y Y

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Managing Supply Chain Operations


Demand forecasting Procurement planning Production planning Inventory management Transportation Order processing Relationship management

Supply Chain Management_Janat Shah

Todays Supply Chain Reality


Increased outsourcing Large global supply networks Increased competition Consumer driven

Lack of visibility reduces suppliers ability to handle variability Suppliers use inventory buffers to compensate increasing costs Errors in manual filling processes can cause stock-outs revenue issues can increase costs, lower customer service and reduce All of these
Supply Chain Management_Janat Shah

REASONS

EXAMPLES Boeing Aircrafts inventory write-down of $2.6 billion

Raw material shortages Internal and supplier parts shortages Productivity inefficiencies Sales and earnings shortfall Larger than anticipated inventories

Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million Intel reported a 38 percent decline in quarterly profit

Stiff competition General slowdown in the PC market


Higher than expected orders for new products
over existing products

EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 by around $100 million

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Uncertainty and Risk Factors


Fluctuations of Inventory and Backorders throughout the Supply Chain

Supply Chain Management_Janat Shah FIGURE 1-3: Order variations in the supply chain

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

Supply Chain Management_Janat Shah

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
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Summary
What is supply chain management? The supply chain encompasses all activities associated with the transformation of goods from the raw material stage to the final stage,. Supply chain management involves planning, design and control of flow of material, information and finance along the supply chain Why is the supply chain important? On account of globalization and increased competition, firms have to manage a larger number of product lines with shorter product life cycles under the situation of changed power in supply chain performance would help Indian firms equations within a chain. improvement in becoming globally competitive.
Supply Chain Management_Janat Shah