Supply chain management

Supply Chain Management

Trade-offs were made in achieving the
objectives of the firm.
If a company competed on flexibility and
quality, cost was of secondary concern.
Customers were willing to pay a premium price.
The quality revolution - flawless quality was
required at extremely competitive prices for all
products.

Changing Customer expectations

Once satisfied with a black car.

Availability
Price
Quality
Variety
wants to buy frequently

Requirements of manufacturing
Make an increasing variety of products, on
shorter lead times with smaller runs and
flawless quality. Improve ROI by automating
and introducing new technology in process
and materials so that price can be reduced to
meet local and foreign competition.
Mechanize but keep schedules flexible,
inventories low, capital costs minimal and
work force contented (Skinner, 1985)

Simultaneous priorities
Cost, flexibility, quality and delivery are not to be traded off
against one another but need to be simultaneously
prioritized.
TQM to achieve flawless quality
Flexible Manufacturing Systems (FMS) to achieve
quick response,
Agile manufacturing for low cost
Supply chain management to deliver products
quickly with low inventories

Definition
supply chain is a network of facilities
and distribution options that performs
the functions of procurement of
materials, transformation of these
materials into intermediate and finished
products, and the distribution of these
finished

What is the role of supply chain?

In todays competition

Number of new product introductions in US

food industry - 2000 (1980) to 18,000 (1991)
Number of watch models produced by Titan
Watches - 850 (1993) to over 6000 (1999)
Annual wastage arising out of poor supply
chain coordination in the US - $ 30 billion

Managing the Supply Chain

Issues
Shrinking Product Life Cycles
Computer, Electronics Goods

Shrinking time window for delivery

Non-shrinking lead times
Dramatically increasing product variety
Apparels, Fashion/Trendy Goods,
appliances

Managing the Supply Chain

Problems to be addressed

Demand uncertainty
Longer order to order lead time
Responsiveness squeeze
Cash less profit
Profit less turnover

Supply Chain Management

Areas for improvement
What are the strategies for improving my inbound logistics?
Will the structure of the supply chain any impact
on the overall performance?
What kind of planning tools are useful for SCM?
Are there workable strategies for managing
scenarios such as:
product variety?
short product life cycle?

What is a Supply Chain?

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Supplier 2 Supplier 1

Internal
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Supplier
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External
Supplier 3

Procurement
Manufacturing
Distribution

Supply Chain
Often cuts across enterprises

Purchasing
s
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Stores

M PC

Factory
Sales

Production

Warehouse

Distributors

Retailers

Customer

Supply Chain Management

In-bound logistics management
Supplier Development
Supply Management

In-house logistics management

Master Scheduling, MRP
Layout, materials handling

Out-bound logistics management

Warehousing
Distribution & Channel Management

Benefits of SCM

Organization

Benefit

Campbell Soup

Doubled inventory turnover rate

Hewlett-Packard

Cut supply costs 75%

Sport Obermeyer

Doubled profits and increased sales 60%

National Bicycle

Increased market share from 5% to 29%

Wal-Mart

Largest and most profitable retailer in the world

Supply Chain Management

Managing multiple flows
Suppliers

Manfg.

Material Flow
Information Flow
Funds Flow

Dealers

Customers

Supply Chain Issues

Strategic Issues
Design of the supply
chain, partnering
Network Design
approach

Tactical Issues
Inventory policies
Purchasing policies
Production policies
Transportation policies
Quality policies
Simulation based
approaches

Operating Issues
Quality control
Production planning and
control
Heuristic or rough cut
approach

Supply Chain Decisions

Location decisions
Production decisions
Inventory decisions
Transportation decisions.

Supply Chain structure

Involves Multi-levels & Delays
Suppliers of
Raw materials

3 days to prepare shipment

2 days for transit

7 days review
2 days to transmit order

Factory

1 day from receipt to issue

26 days for manufacturing
1 day for transit

1 day to transmit order

Factory
Warehouse

2 days from receipt to issue

1 day to prepare shipment
7 days for transit

7 days review
2 days to transmit order

Distributors

2 days from receipt to issue

1 day to prepare shipment
3 days for transit

7 days review
2 days to transmit order

Retailers

2 days from receipt to issue

Customers

Bullwhip effect

Tier 2
Suppliers

Tier 1
Suppliers

Producer

Distributor

Ordering

Amount of
inventory

Customers

What causes bull whip effect?

The more
the number of layers,
the delay,
the rate of change,

the greater the fluctuations

Each layer

updates its forecast in varying patterns

places order at different times
price fluctuations (promotions)
rationing of supply

How to avoid these effects?

Devise new strategies for minimising the
number of layers, delay in information
exchanges and rate of change
Improve quality of demand forecast update
use of point of sales data, EDI, Internet

Share sales, capacity and inventory data across

the supply chain partners
Lead time reduction, reduction in fixed costs in
ordering
Improve planning methodologies

Supply Chain Management

Supply Chain: the sequence of
organizations - their facilities, functions,
and activities - that are involved in
producing and delivering a product or
service.

Facilities

Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices

Typical Supply Chains

Production

Distribution

Purchasing ReceivingStorageOperationsStorage

Typical Supply Chain for a Manufacturer

Supplier
Supplier
Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

Typical Supply Chain for a Service

Supplier

Supplier

Storage

Service

Customer

Customers are Suppliers

Initial
Supplier

Customer

Customer

Customer

Supplier

Supplier

Supplier

Final
Customer

Need for Supply Chain Management

Improve operations
Increasing levels of outsourcing
Increasing transportation costs
Competitive pressures
Increasing globalization
Increasing importance of e-commerce
Complexity of supply chains
Manage inventories

Benefits of Supply Chain Management

Organization

Benefit

Campbell Soup

Doubled inventory turnover rate

Hewlett-Packard

Cut supply costs 75%

Sport Obermeyer

Doubled profits and increased sales 60%

National Bicycle

Increased market share from 5% to 29%

Wal-Mart

Largest and most profitable retailer in the world

Elements of Supply Chain Management

Element

Typical Issues

Customers

Determining what customers want

Forecasting

Predicting quantity and timing of demand

Design

Incorporating customer wants, mfg., and time

Processing

Controlling quality, scheduling work

Inventory

Meeting demand while managing inventory costs

Purchasing

Evaluating suppliers and supporting operations

Suppliers

Monitoring supplier quality, delivery, and relations

Location

Determining location of facilities

Logistics

Deciding how to best move and store materials

Location Decisions
The geographic placement of production
facilities
Stocking points and sourcing points
Optimization routine that considers
production costs, taxes, duties, tariffs,
distribution costs, production capacities
etc.

Production Decisions
What product to produce and which plants to
produce them in
Allocation of suppliers to plants, plants to DCs
and DCs to customers
Detailed production scheduling - Construction
of master production schedules, Scheduling on
machines, Equipment maintenance, Workload
balancing and quality control

Inventory Decisions
Raw material, semi-finished or finished goods.
In-process between locations.
To buffer against any uncertainty
Control policies, optimal level of order
quantities, reorder levels and safety stock
levels at each location based on customer
service levels.

Transportation Decisions
Trading off the cost with the indirect cost of
inventory.
Customer service levels, geographic locations
and desired buffer and inventory levels.
Transportation costs are found to be more than
30% of the logistics costs.
Shipment sizes, roueting and scheduling of
equipment are key factors

Internal Supply Chain

Suppliers

Processing

Distribution

Key:

External
Supply Chain

Customers

Internal
Supply Chain

Production-distribution planning issues

How are suppliers selected?

What criteria are used in the selection?
How many suppliers should be there for each category of items?
What kind of relationship should be established among them?
What is the volume and frequency of shipments from each supplier?
How much inventory to be held in intermediate distribution centers?
What decisions should be used to control inventory in these centers?
How many distribution centers to be operated?
Where should they be located?
Which supplier supplies in what quantities to each distribution center?

Production-distribution planning issues

What is the network configuration of the transformation process?
Where should the transformation process be located?
What effect do inventory practices of one plant have on other
plants?
What is the configuration of the distribution network?
Are there intermediate points?
How are customer demands met? Directly or through retailers?
How many distribution centers to be located?
Is there intermediate stocking points?
What is the aggregate capacity of the distribution center?
Which demands does each center meet?
What is the amount of inventory maintained at each center?
What is the inventory policy in each center?

Purchasing in Supply Chain

Increasing outsourcing
Increasing conversion to lean
production
Increasing globalization
About 60% of the cost is in purchasing

Tasks in Purchasing

Procurement requests
Solicitation and evaluation of proposals (request quote)
Supplier analysis and evaluation
Negotiation process
Contract execution, implementation and administration.
Forecasting and strategies
Material flows
Enhancing purchasing performance (identify new sources of
supply)
External and internal relationships
Administrative aspects of purchasing department
Personnel issues

Strategic Partnership between buyer and supplier

Understanding Demand Uncertainty

Low uncertainty, less margin, gasoline
High uncertainty, more margin, new
product

Understanding supply characteristics

highly efficient, 4 months planned, steel
highly responsive, days, Dell

Supply Chain Metrics

Perspective

Metrics

Reliability

On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment

Flexibility

Supply chain response time

Upside production flexibility

Expenses

Supply chain management costs

Warranty cost as a percent of revenue
Value added per employee

Assets/utilization

Total inventory days of supply

Cash-to-cash cycle time
Net asset turns

Creating an Effective Supply Chain

Develop strategic objectives and tactics
Integrate and coordinate activities in the
internal supply chain
Coordinate suppliers with customers
Coordinate planning and execution
Form strategic partnerships

Supply Chain Performance Drivers

Quality
Cost
Flexibility
Velocity
Customer service

Challenges

Barriers to integration of organizations

Getting top management on board
Dealing with trade-offs
Small businesses
Variability and uncertainty
Long lead times

Trade-offs
Lot-size-inventory
Bullwhip effect

Inventory-transportation costs
Lead time-transportation costs
Product variety-inventory
Cost-customer service

Supply Chain Benefits and Drawbacks

Problem

Potential
Improvement

Benefits

Possible
Drawbacks

Large
inventories

Smaller, more frequent

deliveries

Reduced holding
costs

Traffic congestion
Increased costs

Long lead times

Delayed differentiation
Disintermediation

Quick response

May not be feasible

May need absorb
functions

Large number of
parts

Modular

Fewer parts
Simpler ordering

Less variety

Cost
Quality

Outsourcing

Reduced cost, higher

quality

Loss of control

Variability

Shorter lead times, better

forecasts

Able to match supply

and demand

Less variety

SCM -Planning Issues

Session take aways
Supply chain structure significantly impacts
lead time and planning
Forecasting and Demand Mgmt are key
requirements for SCM
Constantly look for new means of cutting lead
time
Gainfully exploit improved data visibility
provided by ERP systems for better inventory
control

One size does not fit all

Understand the profile of the product
before you design a supply chain
strategy
primarily functional products
primarily innovative products

Choose between
an efficient supply chain &
a responsive supply chain

How to identify product profile?

Criterion
Product life cycle
Contribution
margin

Functional
> 2 years

Innovative
3 months to 1 year

5% - 20%
low (upto 20
variants per
category)

20% - 60%
high (often
thousands of
variants)

Product variety
Average forecast
error
10%
Average stock out
1% - 2%
Forced end of
season markdown
0%
Lead time for
made to order
6 months - 1 year

40% - 100%
10% - 40%
10% - 25%
1 day to 2 weeks

Source: Fisher (1997), What is the right supply chain for your product, HBR, Mar. - Apr. 1997.

Designing efficient supply chains

Strategies

Continuous replenishment programme using EDI

links for information sharing
Capture Point-of-Sale data for accurately and
immediately updating forecast
Invest in supply chain partnership programmes both
on the in-bound and out-bound side
Integrate material planning and control systems with
ERP to benefit from improved data visibility
Develop robust inventory control mechanisms to
accurately fix reorder points and order levels

Designing responsive supply chains

Strategies

Accept uncertainty in demand & large

forecast errors as the reality
Devise strategies for managing uncertainty
Improve responsiveness by cutting lead times
Postponement strategies/Delayed differentiation
Deploy standardisation, modular design and
product platform strategies

Postponement Strategies
Packaging postponement
savings in transportation (bulk containers)
handle multi-lingual requirements (HP printers)

Assembly postponement
low levels of investment in FG
ability to handle a large variety through modular
design (computer - the case of Dell)

Manufacturing postponement
final stages of manfg. delayed until firm orders are
received (Benetton dyeing of fabrics)

Supply Chain Planning framework

SCM network design

Years

Supply Planning

Allocation

Days

Demand Planning

Sales and Operations Planning

Months

Weeks

Strategic

Materials

Tactical

Order Processing
Production

Distribution

Supply Chain Execution

Transport
Operational

SCM opportunities in India

Transportation cost
35%
Handling and Warehousing 9%
Inventories 25%
Packaging 11%
Losses 14%
Others 6%
Logistics (Total) 100%

Indian Scenario

Until 1990s logistics was seen as trucking

Improving communication and telecom
Established software
BPR gave emphasis on supplier
relationships
emergence of ERP
Internet and B2B.

India - Critical SCM component

Automobiles Inbound logistics

Steel Outbound
Apparel IT
Food Retailing
FMCG Outbound
Paint Inbound and outbound
Cement Outbound