Supply Chain Management

What is a Supply Chain ? <ul&><li&>All activities associated with the flow and transformation of goods from raw materials to end users. </li&></ul&><ul&><li&>The term supply chain refers to the entire network of companies that work together to design, produce, deliver, and service products. </li&></ul&><ul&><li&>A network of facilities including: </li&></ul&><ul&><ul&><li&>Material flow from suppliers and their “ upstream ” suppliers at all levels, </li&></ul&></ul&><ul&><ul&><li&>Transformation of materials into semi-finished and finished products ( internal process ) </li&></ul&></ul&><ul&><ul&><li&>Distribution of products to customers and their “ downstream ”customers at all levels . </li&></ul&></ul&>

Supply Chain Overview Transportation Customers Warehousing Information Vendors/plants/ports Factory Customers Information flows CR (2004) Prentice Hall, Inc. Dickson Chiu 2006 1-2

Logistics vs Supply Chain Management Council of Logistics Management “Logistics is the process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from the point of origin to point of consumption for the purpose of conforming to customer requirements.” Handfield and Nichols SCM is the integration of all activities associated with the flow and transformation of goods from raw materials through to end user, as well as information flows, through improved supply chain relationships, to achieve a sustainable competitive advantage. CR (2004) Prentice Hall, Inc. Dickson Chiu 2006

Supply Chain Management (SCM) <ul&><li&>A set of processes and sub-processes which attempt to implement and optimize the functions, connected entities, and interacting elements of a supply chain. </li&></ul&><ul&><li&>Involves: </li&></ul&><ul&><ul&><li&>Organizations, procedures, people. </li&></ul&></ul&><ul&><ul&><li&>Activities: Purchasing, delivery, packaging, checking, warehousing, etc. </li&></ul&></ul&><ul&><ul&><li&>Establishment of long-term relationships with suppliers (supply alliances) and distributors </li&></ul&></ul&><ul&><ul&><li&>Effective flow of information through the supply chain </li&></ul&></ul&><ul&><ul&><li&>Supply chain optimization </li&></ul&></ul&>

The Logistics/SCM Mission Getting the right goods or services to the right place, at the right time, and in the desired condition at the lowest cost and highest return on investment. Product / Service Utility Possession Utility - the value or usefulness that comes from a customer being able to take possession of a product Form Utility - in a form that can be used by the customer and is of value to the customer Place Utility - available where they are needed by customers Time Utility - available when they are needed by customers Logistics obviously help time and place utility Dickson Chiu 2006

Evolution of Supply Chain Management CR (2004) Prentice Hall, Inc. Dickson Chiu 2006

Supply Chain Schematic CR (2004) Prentice Hall, Inc. Dickson Chiu 2006 1-5

Critical Customer Service Loop Dickson Chiu 2006

Physical Distribution Costs Category Percent of sales $/cwt. Transportation 3.34% $26.52 Warehousing 2.02 18.06 Order entry 0.43 4.58 Administration 0.41 2.79 Inventory carrying 1.72 22.25 Total 7.65% $67.71 Logistics cost are about 10% of sales w/o purchasing costs Add one-third for inbound supply costs Source: Herb Davis & Company CR (2004) Prentice Hall, Inc. Dickson Chiu 2006

Customer Service Performance Source: Herb Davis & Company Dickson Chiu 2006

Traditional Scope of the Supply Chain Physical distribution Physical supply (Materials management) Business logistics Sources of supply Plants/ operations Customers • Transportation Inventory maintenance Order processing Acquisition Protective packaging Warehousing Materials handling Information maintenance Product scheduling Internal supply chain CR (2004) Prentice Hall, Inc. Dickson Chiu 2006 1-14

Key Activities/Processes Primary Setting customer service goals Transportation Inventory management Location Secondary, or supporting Warehousing Materials handling Acquisition (purchasing) Protective packaging Product scheduling Order processing Dickson Chiu 2006

Logistics Strategy and Planning The objectives of logistics strategy Minimize cost Minimize investment Maximize customer service Levels of logistical planning Strategic Tactical Operational Dickson Chiu 2006

The Logistics Strategy Triangle (4 problem areas) Customer service goals The product Logistics service Information sys. CR (2004) Prentice Hall, Inc. Dickson Chiu 2006

Strategic, Tactical, and Operational Decision Making Decision area Strategic Tactical Operational Transportation Mode selection Seasonal equip- Dispatching ment leasing Inventories Location, Control policies Safety stock levels Order filling Order Order entry, transmittal, Processing processing and processing system orders, Filling design back orders Purchasing Development of supplier- Contracting, Expediting buyer relations Forward buying Warehousing Handling equipment Space utilization Order picking selection, Layout design and restocking Facility Number, size, and location location of warehouses CR (2004) Prentice Hall, Inc. Dickson Chiu 2006

Relationship of Logistics to Marketing and Production Sample activities: PRODUCTION/ MARKETING · Transport Interface OPERATIONS Sample Interface · Inventory activities: Sample activities: activities: activities: · Order · Customer · · Quality control Promotion · Product processing service · · Detailed production Market scheduling · Materials standards scheduling research · Plant handling · Pricing · · Equipment maint . Product location · Packaging · Capacity planning mix · Purchasing · Retail · · Work measurement Sales force location & standards management Production- logistics Marketing- interface logistics interface Internal Supply Chain CR (2004) Prentice Hall, Inc. Dickson Chiu 2006

Three Flows in SC <ul&><li&>There are three kinds of flows in a supply chain: material , information , capital . </li&></ul&><ul&><li&>Downstream </li&></ul&><ul&><ul&><li&>Material: Products, Parts </li&></ul&></ul&><ul&><ul&><li&>Information: Capacity, Delivery Schedules </li&></ul&></ul&><ul&><ul&><li&>Finance: Invoices, Pricing, Credit Terms </li&></ul&></ul&><ul&><li&>Upstream </li&></ul&><ul&><ul&><li&>Material: Returns, Repairs, After-sales Services </li&></ul&></ul&><ul&><ul&><li&>Information: Orders, Point-of-sale Data </li&></ul&></ul&><ul&><ul&><li&>Finance: Payments </li&></ul&></ul&>

Push vs. Pull in supply chains <ul&><li&>Push or Building-to-stock(BTS): Producing stock on the basis of anticipated demand. Demand forecasting can be done via a variety of sophisticated techniques (some from the Operations Research area and some using Data Mining). </li&></ul&><ul&><li&>Pull or Building-to-order(BTO): Producing stock in response to actual demand (firm orders). </li&></ul&><ul&><li&>The Push-Pull Point: In many supply chains, upstream units employ BTS, while downstream units employ BTO strategies. The point in the supply chain where the switch-over (from BTS to BTO) occurs is called the Push-Pull point. </li&></ul&><ul&><li&>Optimally locating the Push-Pull point is a key determinant of supply chain performance. </li&></ul&><ul&><ul&><li&>Examples ? </li&></ul&></ul&>

The Push vs. Pull Model

Major Concepts <ul&><li&>Order fulfillment </li&></ul&><ul&><ul&><li&>Deliver right order on time </li&></ul&></ul&><ul&><li&>Front office operations: order taking, advertisement, CRM </li&></ul&><ul&><li&>Back office operations: Accounting, finance, inventor, packaging, logistics </li&></ul&><ul&><li&>Logistics: Managing the flow of goods, information and money along the supply chain </li&></ul&>

The Process of Order Fulfillment

The Steps of Order Fulfillment <ul&><li&>7 The Steps of Order Fulfillment <ul&><li&>7. Purchasing, warehousing </li&></ul&><ul&><li&>8. Demand forecast </li&></ul&><ul&><li&>9. Accounting, billing </li&></ul&><ul&><li&>10. Customer contacts </li&></ul&><ul&><li&>11. Returns (Reverse logistics) </li&></ul&><ul&><li&>1. Payment Clearance </li&></ul&><ul&><li&>2. In-stock availability </li&></ul&><ul&><li&>3. Packaging, shipment </li&></ul&><ul&><li&>4. Insuring </li&></ul&><ul&><li&>5. Production (planning, execution) </li&></ul&><ul&><li&>6. Plant services </li&></ul&>

Key Business Areas <ul&><li&>Enterprise performance </li&></ul&><ul&><li&>Customer service </li&></ul&><ul&><li&>Order management </li&></ul&><ul&><li&>Demand planning </li&></ul&><ul&><li&>Warehouse distribution </li&></ul&><ul&><li&>Partnerships </li&></ul&><ul&><li&>Supplier/supply base management </li&></ul&>

Benefits of SCM <ul&><li&>Reduce uncertainty along the chain </li&></ul&><ul&><li&>Proper inventory levels in the chain </li&></ul&><ul&><li&>Minimize delays </li&></ul&><ul&><li&>Eliminate rush (unplanned) activities </li&></ul&><ul&><li&>Provide good customer service </li&></ul&>

Global Supply Chain <ul&><li&>Can be very long </li&></ul&><ul&><li&>Possible cross-border problems </li&></ul&><ul&><li&>Need information technology support for: </li&></ul&><ul&><ul&><li&>communication and collaboration </li&></ul&></ul&><ul&><li&>Possible delays due to: customs, tax, translations, politics </li&></ul&>

An Illustration: How Li & Fung Limited Might Make a Dress Globally Dispersed Manufacturing An Illustration: How Li & Fung Limited Might Make a Dress QC & Shipping [Hong Kong] Product Design Zippers+… [Japan+…] Stitching [Indonesia] Weaving [Taiwan] Yarn Spinning [Korea]

Problems along the Supply Chain <ul&><li&>Delays in production, distribution etc. </li&></ul&><ul&><li&>Expensive Inventories </li&></ul&><ul&><li&>Lack of partners’ coordination </li&></ul&><ul&><li&>Uncertainties in deliveries </li&></ul&><ul&><li&>Poor demand forecast </li&></ul&><ul&><li&>Interference with production </li&></ul&><ul&><li&>Poor quality </li&></ul&>

Magnitude of Supply Chain Costs Example: The Apparel Industry Manufacturer Distributor Retailer Customer Cost per Percent Shirt Saving $52.72 0% $41.34 28% $20.45 62%

More Challenges <ul&><li&>Complexity of the supply chain network </li&></ul&><ul&><ul&><li&>e.g. large numbers of suppliers and distributors </li&></ul&></ul&><ul&><li&>Complexity in product structure and manufacturing process </li&></ul&><ul&><ul&><li&>How much product differentiation/ customization/ localization should be supported ? </li&></ul&></ul&><ul&><ul&><li&>Where do you customize a product (upstream or downstream) ? </li&></ul&></ul&><ul&><li&>decentralized control/organizational &silos& </li&></ul&><ul&><li&>increasing pressure for customer service and asset utilization </li&></ul&>

Variability in the supply chain <ul&><li&>Demand variability </li&></ul&><ul&><ul&><li&>Even the most sophisticated demand forecasting tools often fail to anticipate demand </li&></ul&></ul&><ul&><ul&><li&>Examples of demand variability problems ? </li&></ul&></ul&><ul&><li&>Process variability </li&></ul&><ul&><ul&><li&>Production unit downtimes </li&></ul&></ul&><ul&><ul&><li&>Unexpected staff absences </li&></ul&></ul&><ul&><li&>Supply variability </li&></ul&><ul&><ul&><li&>e.g., late deliveries from suppliers </li&></ul&></ul&>

The Bullwhip Effect <ul&><li&>Slight changes in actual demand create problems </li&></ul&>Babies Distributors Proctor & Gamble 3M Retailers

Bullwhip effect The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer.  These irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain.  This variance can interrupt the smoothness of the supply chain process as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations.

Common Causes of the Bullwhip Effect <ul&><li&>Demand forecast mismatches </li&></ul&><ul&><ul&><li&>Demand forecasting distributed across units in the supply chain </li&></ul&></ul&><ul&><li&>Order Batching </li&></ul&><ul&><ul&><li&>Sometimes helps achieve economies of scale </li&></ul&></ul&><ul&><li&>Price Fluctuations </li&></ul&><ul&><ul&><li&>“ forward buy” inducements through lower prices </li&></ul&></ul&><ul&><li&>Others: </li&></ul&><ul&><ul&><li&>partners build “just in case” inventories </li&></ul&></ul&><ul&><ul&><li&>lack of trust among partners </li&></ul&></ul&><ul&><ul&><li&>cannot order material from suppliers </li&></ul&></ul&>

Product design <ul&><li&>The product has been designed so that localization (or customization or differentiation) can occur as close as possible to the local market. </li&></ul&><ul&><li&>The product is built for a specific market before it is shipped out of the factory </li&></ul&>Upstream differentiation Downstream differentiation Example: The Hewlett-Packard Deskjet Printer. How might you localize ?

Technology in the SC <ul&><li&>The internet and the web can be very effective communication enhancers </li&></ul&><ul&><li&>Software includes demand forecasting tools and planning tools to allow all SC members to coordinate their activities and adjust their production levels. </li&></ul&><ul&><li&>Software can allow members to: </li&></ul&><ul&><ul&><li&>review past performance </li&></ul&></ul&><ul&><ul&><li&>monitor current performance </li&></ul&></ul&><ul&><ul&><li&>predict future production levels of products . </li&></ul&></ul&>

Web SCM <ul&><li&>Share information about consumer demand </li&></ul&><ul&><li&>Receive rapid notification of product design changes and adjustments </li&></ul&><ul&><li&>Provides specs and drawings more efficiently. </li&></ul&><ul&><li&>Increase speed of processing transactions. </li&></ul&><ul&><li&>Reduce cost of handling transactions. </li&></ul&><ul&><li&>Reduce errors in entering transaction data </li&></ul&><ul&><li&>Share information about defect rates and types. </li&></ul&>

Cisco’s Value Network

Example 2: Dell <ul&><li&>Create “Virtual integration” : the entire supply chain acts like a single integrated company. </li&></ul&><ul&><ul&><li&>Upstream partners: contract manufacturers (CM) and component suppliers </li&></ul&></ul&><ul&><ul&><li&>Downstream partners/customers (most are business corporations) </li&></ul&></ul&><ul&><li&>Share information with suppliers on inventory levels. </li&></ul&><ul&><li&>Maintain long-term relationships with key suppliers for design collaboration. </li&></ul&>

Example 2: Benefits for Dell <ul&><li&>Dell and Suppliers work together as a “Virtual Enterprise” </li&></ul&><ul&><li&>BTO benefits (low inventory) </li&></ul&><ul&><li&>Dynamic pricing: change prices rapidly in response to demand and availability </li&></ul&><ul&><li&>Strong links to corporate customers </li&></ul&>

Example 3: Covisint <ul&><li&>B2B Supply Chain Benefits </li&></ul&><ul&><ul&><li&>Automated procurement </li&></ul&></ul&><ul&><ul&><ul&><li&>lower procurement costs </li&></ul&></ul&></ul&><ul&><ul&><ul&><li&>lower inventories </li&></ul&></ul&></ul&><ul&><ul&><li&>Collaboration: </li&></ul&></ul&><ul&><ul&><ul&><li&>complete visibility </li&></ul&></ul&></ul&><ul&><ul&><ul&><li&>less bullwhip </li&></ul&></ul&></ul&><ul&><ul&><li&>Efficient market </li&></ul&></ul&><ul&><ul&><ul&><li&>More profits </li&></ul&></ul&></ul&><ul&><ul&><li&>Sell unused capacity </li&></ul&></ul&>

Supply chain integration: Benefits <ul&><li&>Tangible benefits </li&></ul&><ul&><ul&><li&>Inventory reduction, personnel reduction, productivity improvement, order management improvement, financial cycle improvements. </li&></ul&></ul&><ul&><li&>Intangible benefits </li&></ul&><ul&><ul&><li&>Information visibility, new / improved processes, customer responsiveness, standardization, flexibility, globalization, and business performance. </li&></ul&></ul&>