Supply Chain Management Introduction

Outline A supply chain What is supply chain management? Challenges of implementing supply chain management The development chain Global optimization

A supply chain consists ofSupplierManufacturerDistributorRetailerCustomer Upstream Downstream

A supply Chain aims to Match Supply and Demand, profitably for products and services SUPPLY SIDEDEMAND SIDE

A Supply Chain achieves The right Product Higher Profits The right Time The right Customer The right Quantity The right Store The right Price = +++++

Flows in a Supply Chain Customer Material Information Funds The flows resemble a chain reaction. Supplier

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 systemwide costs while satisfying service level requirements.

What is supply chain management?  Or in Short  Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains. 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

The definitions leads to several observations. First, supply chain management takes into consideration every facility that has an impact on cost and plays a role in making the product conform to customer requirements: from supplier and manufacturing facilities through warehouses and distribution centers to retailers and stores.

observations In some supply chain analysis, it is necessary to account for the suppliers’ suppliers and the customers’ customers because they have an impact on supply chain performance.

observations Second, the objective of supply chain management is to be efficient and cost-effective across the entire system; total systemwide costs, from transportation and distribution to inventories of raw materials, work in process, and finished goods, are to be minimized.

observations Thus, the emphasis is not on simply minimizing transportation cost or reducing inventories but, rather, on taking a systems approach to supply chain management.

observations Finally, because supply chain management revolves around efficient integration of suppliers, manufacturers, warehouses, and stores, it encompasses the firm’s activities at many levels, from the strategic level through the tactical to the operational level.

Challenges of implementing supply chain management Supply chain strategies cannot be determined in isolation. They are directly affected by another chain that most organizations have, the development chain that includes the set of activities associated with new product introduction.

Challenges of implementing supply chain management At the same time, supply chain strategies also should be aligned with the specific goals of the organization, such as maximizing market share or increasing profit. It is challenging to design and operate a supply chain so that total systemwide costs are minimized, and systemwide service levels are maintained.

Challenges of implementing supply chain management The difficulty increases exponentially when an entire system is being considered. The process of finding the best systemwide strategy is known as global optimization.

Challenges of implementing supply chain management Uncertainty and risk are inherent in every supply chain; customer demand can never be forecast exactly, travel times will never be certain, and machines and vehicles will break down. Similarly, recent industry trends, including outsourcing, offshoring, and lean manufacturing that focus on reducing supply chain costs,

Challenges of implementing supply chain management Significantly increase the level of risk in the supply chain. Thus, supply chains need to be designed and managed to eliminate as much uncertainty and risk as possible as well as deal effectively with the uncertainty and risk that remain.

The development chain The development chain is the set of activities and processes associated with new product introduction. It includes the product design phase, the associated capabilities and knowledge that need to be developed internally, sourcing decisions, and production plans.

The development chain Specifically, the development chain includes decisions such as product architecture; what to make internally and what to buy from outside suppliers, that is, make/buy decisions; supplier selection; early supplier involvement; and strategic partnerships.

The development chain The development and supply chains intersect at the production point, It is clear that the characteristics of and decisions made in the development chain will have an impact on the supply chain. Similarly, it is clear that the characteristics of the supply chain must have an impact on product design strategy and hence on the development chain.

The development chain Unfortunately, In most organizations, different managers are responsible for the different activities that are part of these chains. Eg. the Head of engineering is responsible for the development chain, the Head of manufacturing for the production portion of the chains, and the Head of supply chain or logistics for the fulfillment of customer demand.

The development chain To make matters worse, in many organizations, additional chains intersect with both the development and the supply chains. These may include the reverse logistics chain, the chain associated with returns of products or components, as well as the spare-parts chain.

Global optimization. What makes finding the best systemwide, or globally optimal, integrated solution so difficult? There are a variety of factors that make this a challenging problem

Complex network The supply chain is a complex network of facilities dispersed over a large geography, and, in many cases, all over the globe.

Different and conflicting objectives Different facilities in the supply chain frequently have different, conflicting objectives. For instance, suppliers typically want manufacturers to commit themselves to purchasing large quantities in stable volumes with flexible delivery dates. Unfortunately, although most manufacturers would like to implement long production runs, they need to be flexible to their customers’ needs and changing demands.

Different and conflicting objectives Thus, the suppliers’ goals are in direct conflict with the manufacturers’ desire for flexibility. Since production decisions are typically made without precise information about customer demand, the ability of manufacturers to match supply and demand depends largely on their ability to change supply volume as information about demand arrives.

Different and conflicting objectives Similarly, the manufacturers’ objective of making large production batches typically conflicts with the objectives of both warehouses and distribution centers to reduce inventory. To make matters worse, this latter objective of reducing inventory levels typically implies an increase in transportation costs.

The supply chain is a dynamic system The supply chain is a dynamic system that evolves over time. not only do customer demand and supplier capabilities change over time, but supply chain relationships also evolve over time. For example, as customers’ power increases, there is increased pressure placed on manufacturers and suppliers to produce an enormous variety of high- quality products and, ultimately, to produce customized products.

System variations over time System variations over time are also an important consideration. Even when demand is known precisely (e.g., because of contractual agreements), the planning process needs to account for demand and cost parameters varying over time

Different and conflicting objectives This is due to the impact of seasonal fluctuations, trends, advertising and promotions, competitors’ pricing strategies, and so forth. These time-varying demand and cost parameters make it difficult to determine the most effective supply chain strategy, the one that minimizes systemwide costs and conforms to customer requirements.

33 Defining Supply Chain Management Coordination and integration of all supply chain activities into seamless process. Enables organizations to plan and collaborate across supply chain. Goal is to deliver right product to right place at right time in order to maximize profit.

34 Strategic Advantages of Supply Chain Supply chain management includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between its environment. Goal of supply chain management is to integrate the entire process of satisfying the customer’s needs all along the supply chain.

35 Strategic Advantages of Supply Chain Management continued Supply chain costs often represent 50% or more of total operating costs Firms that have implemented supply chain management Have 45% supply chain cost advantage 50% lower inventory 17% faster delivery of final product Larger market shares and higher customer loyalty

36 Supply Chain Strategy Supply chain strategy needs to be tailored to meet the needs of its customers which isn’t always the lowest cost. In situations where the goods are basic commodities with standard benefits (food, home supplies, standard clothing), then cost reduction will be the focus. In fashion goods, timeliness should be the focus of the supply chain.

37 Strategic Need for Supply Chain Management Total supply chain costs represent better than half, and in some cases three-quarters, of the total operating expenses for most organizations. The broader concept of the supply chain includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between it and its environment.

38 Strategic Need for Supply Chain Management continued As organizations have continued to adopt more efficient production techniques such as lean manufacturing, total quality management, inventory reduction techniques to reduce costs and improve the quality, functionality, and speed of delivery of their products and services to customers, the costs and delays of procuring the requisite inputs and distributing the resulting goods and services are taking a greater and greater fraction of the total cost and time.

39 Other Factors Driving Need to Better Manage Supply Chain Increasing global competition Outsourcing E-commerce Shorter life cycles Greater supply chain complexity

40 Measures of Supply Chain Performance Lower inventories, will be reflected in less need for working capital (WC) and a higher return on asset (ROA) ratio. Lower cost to carry these inventories will be seen in a reduced cost of goods sold (CGS), and thus a higher contribution margin, return on sales (ROS), and operating income.

41 Operations-Oriented Measures Performance measures related to inventory reduction: First we calculate the aggregate inventory value (at cost) on average for the year (AAIV): AAIV = raw materials + work-in-process + finished goods % Assets in Inventories = AAIV/total assets Another inventory measure is the inventory turnover (or “turns,” as it is sometimes called): Inventory turnover (“turns”) = annual cost of goods sold/AAIV

Transportation

43 Modes of Transportation and Routing Water Rail Truck Air

44 Factors to Consider in Transportation Decisions Cost per unit shipped Ability to fill the transporting vehicle Total shipment cost Safety of contents Shipping time Availability of insurance Perishability Difficulty of arranging shipment Delivery accommodations Seasonal considerations Consolidation possibilities Size of product

45 Location Besides distributing outputs to customers by transporting them, if there is a facilitating good, we can also locate where our customers can easily obtain them. Advances in information and telecommunications technology have allowed some pure service organizations (i.e., those without a facilitating good) to reach their recipients through phone, cable, the Internet, or microwave links.

46 Trade-offs Between Transportation and Location Processing Natural Resources Large loss in size or weight during processing High economies of scale exist Raw material is perishable Immobile Outputs

47 Processing Natural Resources Organizations that process natural or basic resources as raw materials or other essential inputs to obtain their outputs will locate near their resource if one of the following conditions holds: There is a large loss in size or weight during processing. High economies of scale exist for the product. The raw material is perishable.

48 Immobile Outputs The outputs of some organizations may be relatively immobile, such as dams, roads, buildings, and bridges. The organization locates itself at the construction site and transports all required inputs to that location

49 Distribution Requirements Planning The distribution process is illustrated on the next slide where retailers order from local warehouses, the warehouses are supplied from regional centers, and the regional centers draw from the central distribution facility, which gets its inventory directly from the factory.

Chapter 7: Supply Chain Management50 Distribution Requirements Planning (DRP)

Purchasing/Procurement

52 Purchasing Activities to reliably obtain materials by the time they are needed in the product supply process. Important considerations include price, quality, lead times, and reliability. Manufacturing organizations spend an average of 55 percent of revenue for outside materials and services. These same organizations spend only 6 percent on labor and 3 percent on overhead.

53 Purchasing Versus Procurement Purchasing implies a monetary transaction. Procurement is simply the responsibility for acquiring the goods and services the organization needs.

54 Potential for Lowering Cost and Increasing Profits Total sales = $10,000,000 Purchased materials = 7,000,000 Labor and salaries = 2,000,000 Overhead = 500,000 Profit = 500,000

55 To Double Profits... Increase sales by 100 percent Increase selling price by 5 percent Decrease labor and salaries by 25 percent Decrease overhead by 100 percent Decrease purchase cost by 7.1 percent

56 Differences Between Purchasing by Individuals and Organizations Organizations purchase larger volumes and dollar amounts. Organization may be larger than its suppliers. Very few suppliers exist for certain organizational goods, whereas many typically exist for consumer goods. Certain discounts may be available to organizations.

57 Value Analysis A special responsibility of purchasing, or purchasing working jointly with engineering/design and operations (and sometimes even the supplier), is to regularly evaluate the function of purchased items or services, especially those that are expensive or used in high volumes. The goal is to either reduce the cost of the item or improve its performance.

58 Key Elements of Effective Purchasing They leverage their buying power. They commit to a small number of dependable suppliers. They work with and help their suppliers reduce total cost.

Supplier Management

60 Supplier Selection and Vendor Analysis Characteristics of a good supplier are: Deliveries are made on time and are of the quality and in the quantity specified. Prices are fair, and efforts are made to hold or reduce the price.  Able to react to unforeseen changes. Supplier continually improves products and services. Supplier is willing to share information and be an important link in the supply chain.

61 Supplier Relationships In the past, most customers purchased from the lowest bidders who could meet their quality and delivery needs. Customers are seeking a closer, more cooperative relationship with their suppliers.

62 Supplier Certification and Audits Sole-sourcing arrangements are becoming virtual partnerships with the customer. This means longer-term relationships. Suppliers are being certified or qualified so that their shipments do not need to be inspected by the customer—the items go directly to the production line.

63 Outsourcing and Global Sourcing Outsourcing is the process of contracting with external suppliers for goods and services that were formally provided internally. Global sourcing is an important aspect of supply chain outsourcing strategy and we see it occurring more and more.

64 Primary Reasons Outsourcing Occurring 1. The fall of communism and the economic insulation it had maintained. 2. The advent of telecommunications and computer technology that physically allowed work that previously had to be done locally or regionally to now be conducted overseas. Outsourcing in general is a major strategic element of SCM these days, not just for production materials but for a wide range of services as well.

The Role of Information Technology in Supply Chain Management

66 Role of Information Technology In the not-too-distant past, the primary means of communication between members of a supply chain was paper. One problem with paper-based systems has been the time and money that is wasted re- keying the same information into different computer systems. Much of this problem has been solved with UPC and RFID being used extensively.

67 Role of Information Technology More and more computing power is becoming available for less and less money, hence it is becoming omnipresent, appearing everywhere we go and in everything we buy. Growth of networks. As a result the growth of computers, which support networks, and networks that support people’s needs (business transactions, communication, blogging, etc.), has exploded.

68 Customer Relationship Management (CRM) Systems Designed to collect and interpret customer- based data. CRM systems provide comprehensive customer data so the firm can provide better customer service and design and offer the most appropriate products and services for them.

69 Enterprise Resource Planning (ERP) Systems Facilitate communication throughout the supply chain and over the Internet. The ERP system embodies much more than just the supply chain, it also includes all the electronic information concerning the various parts of the firm.

70 Successful Supply Chain Management The basic requirements for successful supply chain management are trustworthy partners, good communication, appropriate performance measures, and competent managers with vision.