Introduction to Supply Chain Management STEP-HBTI PGDM (2017-18) 17/08/17

Customers, demand centers sinks Field Warehouses: stocking points Sources: plants vendors ports Regional Warehouses: stocking points Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Transportation costs Inventory & warehousing costs

What is a Supply Chain? P&G or other manufacturer Jewel or third party DC Jewel Supermarket Customer wants detergent and goes to Jewel Plastic Producer Tenneco Packaging Chemical manufacturer (e.g. Oil Company) Notes: Supply chain involves everybody, from the customer all the way to the last supplier. Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows. Chemical manufacturer (e.g. Oil Company) Paper Manufacturer Timber Industry

What Is A Supply Chain? The system of suppliers, manufacturers, transportation, distributors, and vendors that exists to transform raw materials to final products and supply those products to customers. That portion of the supply chain which comes after the manufacturing process is sometimes known as the distribution network.

What Is the Goal of Supply Chain Management? Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed: In the right quantities To the right locations At the right time In order to Minimize total system cost Satisfy customer service requirements

Strategies for SCM Global Optimization Managing Uncertainty All of the advanced strategies, techniques, and approaches for Supply Chain Management focus on: Global Optimization Managing Uncertainty

Tools and Strategies for Optimization Decision Support Systems Inventory Control Network Design Design for Logistics Cross Docking DSS support human decisions Why is inventory control difficult in supply chains? What is a network? What impact does design have?

Global Optimization What is it? Why is it different/better than local optimization? What are conflicting supply chain objectives? What tools and approaches help with global optimization? Sequential vs. serial Centralized vs. decentralized systems – what is the impact?

Sequential Optimization vs. Global Optimization Procurement Planning Manufacturing Distribution Demand Sequential Optimization Supply Contracts/Collaboration/Information Systems and DSS Procurement Planning Manufacturing Distribution Demand Global Optimization

Why is Global Optimization Hard? The supply chain is complex Different facilities have conflicting objectives The supply chain is a dynamic system The power structure changes The system varies over time

Conflicting Objectives in the Supply Chain 1. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. Manufacturing • Long run production • High quality • High productivity • Low production cost

Conflicting Objectives in the Supply Chain 3. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4. Customers • Short order lead time • High in stock • Enormous variety of products • Low prices

What tools and approaches help us to deal with these issues? Uncertainty What is variation? What is randomness? What tools and approaches help us to deal with these issues? Contrast variation between time periods with random differences between time periods. Suggestions for tools and approaches in three slides. What about forecasting?

Can’t Forecasting Help? Forecasting is always wrong The longer the forecast horizon the worse the forecast End item forecasts are even more wrong

Why Is Uncertainty Hard to Deal With? Matching supply and demand is difficult. Forecasting doesn’t solve the problem. Inventory and back-order levels typically fluctuate widely across the supply chain. Demand is not the only source of uncertainty: Lead times Yields Transportation times Natural Disasters Component Availability Examples of Sept. 11, Taiwan earthquake

Supply Chain Variability Manufacturer Forecast of Sales Production Plan Retailer Orders Retailer Warehouse to Shop Volumes Actual Consumer Demand What is shown here is how divergent these various forecasts are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

What Management Gets... Production Plan Volumes Consumer Demand What is shown here is how divergent these various forecasting are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

What Management Wants… Production Plan Volumes Consumer Demand What is shown here is how divergent these various forecasting are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Why do we care? Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Dealing with Uncertainty Pull Systems Risk Pooling Centralization Postponement Strategic Alliances Collaborative Forecasting

Logistics in the Manufacturing Firm Profit 4% Logistics Cost 21% Marketing Cost 27% Manufacturing Cost 48% Profit Logistics Cost Marketing Cost Notes: Key message here is that logistics costs are a significant fraction of the total value of a product. The problem here is that this a purely cost based view of the supply chain and drives a firm to simply reducing logistics costs. This is an incomplete picture. Manufacturing Cost

Supply Chain: The Magnitude Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them. Boeing aircraft, one of America's leading capital goods producers, was forced to announce write downs of $2.6 billion in October 1997, due to “Raw material shortages, internal and supplier parts shortages…”.

Supply Chain: The Potential Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. “According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of business strategy, Oct./Nov. 1997) Strategic Partnerships VMI CPFAR Target – bowl ordering, where style and colored details are specified by Target close to delivery date – flexibility.

Supply Chain:the Potential In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using Direct business model Build-to-order strategy. What happened to the competitors? Kmart HP/Compaq The power of cross-docking/IT/Everyday Low Prices. The power of postponement.

Supply Chain: The 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. How big would this “optimization problem” be?

What’s New? Global competition Shorter product life cycle New, low-cost distribution channels More powerful well-informed customers Internet and E-Business strategies Are things changing faster? What are examples of these: EU Semiconductors, electronics Internet, “big box” stores How has shopping for a car changed?

New Concepts Push-Pull strategies Direct-to-Consumer Strategic alliances Manufacturing postponement Dynamic Pricing E-Procurement

Process View of a Supply Chain Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push)

Cycle View of Supply Chains Customer Customer Order Cycle Retailer Replenishment Cycle Distributor The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage. One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done. This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner. Manufacturing Cycle Manufacturer Procurement Cycle Supplier

Cycle View of a Supply Chain Each cycle occurs at the interface between two successive stages Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor) Manufacturing cycle (distributor-manufacturer) Procurement cycle (manufacturer-supplier) Cycle view clearly defines processes involved and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process.

Push/Pull View of Supply Chains Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES In this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes. They key difference is the uncertainty during the two phases. Give examples at Amazon and Borders to illustrate the two views Customer Order Arrives

Push/Pull View of Supply Chain Processes Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand Pull: execution is initiated in response to a customer order (reactive) Push: execution is initiated in anticipation of customer orders (speculative) Push/pull boundary separates push processes from pull processes

Supply Chain Performance: Achieving Strategic Fit and Scope

The Value Chain: Linking Supply Chain and Business Strategy New Product Strategy Marketing Strategy Supply Chain Strategy New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources

Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier High Low Cost High Low

Responsiveness Spectrum Highly efficient Somewhat efficient Somewhat responsive Highly responsive Integrated steel mill Hanes apparel Most automotive production Dell

HOW IS STRATEGIC FIT ACHIEVED understanding the customer and supply chain uncertainty Understanding the Supply chain Capability Achieving strategic fit

Understanding the customer and supply chain uncertainty The Quantity Of Product Needed In Each Lot The Response Time That Customer Are Willing To Tolerate. The Variety Of Product Needed The Service Level Required The Price Of The Product The Desired Rate Of Innovation Of The Product.

Understanding The Supply Chain Capability Response To Wide Range Of Quantities Demanded Meet Short Lead Time Handle A Large Variety Of Product Building High Innovative Product Meet A High Service Level Handle Supply Uncertainty

Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum Zone of Strategic Fit

Comparison of Efficient and Responsive Supply Chains Primary goal Lowest cost Quick response Product design strategy Min product cost Modularity to allow postponement Pricing strategy Lower margins Higher margins Mfg strategy High utilization Capacity flexibility Inventory strategy Minimize inventory Buffer inventory Lead time strategy Reduce but not at expense of greater cost Aggressively reduce even if costs are significant Supplier selection strategy Cost and low quality Speed, flexibility, quality Transportation strategy Greater reliance on low cost modes Greater reliance on responsive (fast) modes

Supply Chain Drivers and Obstacles

Drivers of Supply Chain Performance Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites Inventory raw materials, WIP, finished goods within a supply chain inventory policies Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes Information data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance

A Framework for Structuring Drivers Efficiency Responsiveness Facilities Transportation Inventory Information Supply chain structure Drivers

Information: Role in the Supply Chain The connection between the various stages in the supply chain – allows coordination between stages Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels

Components of Information Decisions Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain) Coordination and information sharing Forecasting and aggregate planning Enabling technologies EDI Internet ERP systems Supply Chain Management software Overall trade-off: Responsiveness versus efficiency

Considerations for Supply Chain Drivers

Obstacles to Achieving Strategic Fit Increasing variety of products Decreasing product life cycles Increasingly demanding customers Fragmentation of supply chain ownership Globalization Difficulty executing new strategies

Major Obstacles to Achieving Fit Multiple owners / incentives in a supply chain Increasing product variety / shrinking life cycles / customer fragmentation Local optimization and lack of global fit Increasing implied uncertainty

Summary What are the major drivers of supply chain performance? What is the role of each driver in creating strategic fit between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)? What are the major obstacles to achieving strategic fit? In the remainder of the course, we will learn how to make decisions with respect to these drivers in order to achieve strategic fit and surmount these obstacles

Step 1: Understanding the Customer and Supply Chain Uncertainty Identify the needs of the customer segment being served Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product

Step 1: Understanding the Customer and Supply Chain Uncertainty Overall attribute of customer demand Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires

Step 1: Understanding the Customer and Supply Chain Uncertainty Implied demand uncertainty also related to customer needs and product attributes First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

Impact of Customer Needs on Implied Demand Uncertainty Causes implied demand uncertainty to increase because … Range of quantity increases Wider range of quantity implies greater variance in demand Lead time decreases Less time to react to orders Variety of products required increases Demand per product becomes more disaggregated Number of channels increases Total customer demand is now disaggregated over more channels Rate of innovation increases New products tend to have more uncertain demand Required service level increases Firm now has to handle unusual surges in demand

Correlation Between Implied Demand Uncertainty and Other Attributes Low Implied Uncertainty High Implied Uncertainty Product margin Low High Avg. forecast error 10% 40%-100% Avg. stockout rate 1%-2% 10%-40% Avg. forced season-end markdown 0% 10%-25%

Step 2: Understanding the Supply Chain How does the firm best meet demand? Dimension describing the supply chain is supply chain responsiveness Supply chain responsiveness -- ability to respond to wide ranges of quantities demanded meet short lead times handle a large variety of products build highly innovative products meet a very high service level

Step 2: Understanding the Supply Chain There is a cost to achieving responsiveness Supply chain efficiency: cost of making and delivering the product to the customer Increasing responsiveness results in higher costs that lower efficiency strategic fit is to map the supply chain on the responsiveness spectrum

Step 3: Achieving Strategic Fit Step is to ensure that what the supply chain does well is consistent with target customer’s needs Examples: Dell, Barilla