Supply Chain Management SYST 4050 Slides Supply Chain Management Lecture 2 Chapter 1

Announcements Summer Intern Program at Ball Aerospace SYST 4050 Slides Announcements Summer Intern Program at Ball Aerospace 10 week summer program that provides candidates with Practical experience on relevant projects while working with designated mentors A competitive salary Access to state-of-the-art equipment Possible future employment Housing assistance Relocation reimbursement In-house training Group activities   For more information visit http://www.recruitingsite.com/csbsites/ball_aerospace/JobDescription.asp?JobNumber=617603 http://www.ballaerospace.com/ Chapter 1

Outline Last Tuesday Today Next week Chapter 1 Chapters 2 and 3 SYST 4050 Slides Outline Last Tuesday Chapter 1 Sections 1, 2 Today Sections 3, 4, 5 Next week Chapters 2 and 3 Chapter 1

What is a Supply Chain? Flow of products and services from SYST 4050 Slides What is a Supply Chain? Flow of products and services from Suppliers Raw materials manufacturers Intermediate goods manufacturers Finished goods manufacturers Distributors and wholesalers Retailers Customers Connected through transportation, information, and exchanges of funds Bold definition: getting things out of the ground and back into the ground Supplier Manufacturer Distributor Retailer Customer Chapter 1

Key Observations In order to maximize supply chain surplus SYST 4050 Slides Key Observations In order to maximize supply chain surplus Every facility that impacts costs needs to be considered Suppliers’ suppliers Customers’ customers Efficiency throughout the supply chain network is required using a network level approach Chapter 1

What is Supply Chain Management? SYST 4050 Slides What is Supply Chain Management? Supply chain management involves the management of supply chain assets and products, information, and fund flows to maximize total supply chain surplus Chapter 1

What is Supply Chain Management? SYST 4050 Slides What is Supply Chain Management? Getting the right things to the right places at the right times for profit Supply chain management is the management of flows (product, information, funds, etc) between and among supply chain stages to maximize total supply chain profitability Chapter 1

What is Supply Chain Management? SYST 4050 Slides What is Supply Chain 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 “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 Chapter 1

What is Supply Chain Management? SYST 4050 Slides 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” Simchi-Levi et al, 2003 Chapter 1

SYST 4050 Slides Video Ford Manufacturing Supply Chain Chapter 1

What is Supply Chain Management? SYST 4050 Slides What is Supply Chain Management? Supply chain management is all about relationships Management of relationships in order to enhance value and reduce cost Collaboration is an important part of effective supply chain management Chapter 1

Evolution of Supply Chain Management SYST 4050 Slides Evolution of Supply Chain Management 1950s 1960s 1970s 1980s 1990s 2000s Beyond Traditional Mass Manufacturing Inventory Management/Cost Optimization JIT, TQM, BPR, Alliances SCM Formation/ Extensions Further Refinement of SCM Capabilities Mass manufacturing Little to none attention paid to creating partnerships, flexibility Inventory management MRP systems were developed. Just-in-time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated carrying costs. Total Quality Management (TQM) is a business management strategy aimed at embedding awareness of quality in all organizational processes. Business process reengineering (BPR) is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance, such as cost, quality, service, and speed Chapter 1

Evolution of Supply Chain Management SYST 4050 Slides Evolution of Supply Chain Management Mass production era (1900s – 1970s) In the early 1900s, Henry Ford created the first moving assembly line reducing the time to build a Model T from 728 hours to 1.5 hours Lean manufacturing era (1970s –1995) In the early 1970s, Japanese manufacturers like Toyota changed the rules of production from mass to lean. Lean manufacturing focuses on flexibility and quality more than on efficiency and quantity. Mass customization era (1995 – 2010?) Beginning around 1995 and coinciding with the commercial application of the Internet, manufacturers started to mass-produce customized products. Henry Ford’s famous statement “You can have any color Model T as long as it’s black” no longer applies. Mass customization (information management) era Chapter 1

Managing a Supply Chain is Not Easy SYST 4050 Slides Managing a Supply Chain is Not Easy Geographically dispersed complex network Conflicting objectives across the supply chain Uncertainty and risk factors Information distortion Chapter 1

Managing a Supply Chain is Not Easy SYST 4050 Slides Managing a Supply Chain is Not Easy Geographically dispersed complex network To make this jacket for the US market, Hong Kong garment producer Li & Fung ordered materials from factories in five countries and had them delivered to Thailand, where the jacket was stitched together. Using a network of Web sites, Li & Fung stays in touch with its worldwide suppliers and can compress the time it takes to get items into stores A YKK factory site in Macon, Ga., produces 7 million zippers a day, in a total of 1,500 styles in more than 427 standard colors. It's the largest zipper factory in the world. Chapter 1

Managing a Supply Chain is Not Easy SYST 4050 Slides Managing a Supply Chain is Not Easy Conflicting objectives across the supply chain Manufacturer Distributor Retailer Customer Large production batches Low inventory Few DCs Few stores Low inventory Little variety Close to DCs Convenience Short lead time Large variety of products Large shipments Chapter 1

Managing a Supply Chain is Not Easy SYST 4050 Slides Managing a Supply Chain is Not Easy Uncertainty and risk factors 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 2001 India earthquake Supply interruptions for apparel manufacturers 1999 Taiwan earthquake Supply interruptions for HP and Dell Chapter 1

Managing a Supply Chain is Not Easy SYST 4050 Slides Managing a Supply Chain is Not Easy Information distortion Supplier Manufacturer Distributor Retailer Customer Bullwhip effect: P&G coined the term after studying the demand for disposable diapers. As expected, babies use diapers at a fairly steady and predictable rate, and retail sales are quite uniform. But P&G found that each retailer bases his own orders on his own slightly exaggerated forecast, thereby distorting the information about real demand. Wholesalers’ order to the P&G diaper factory fluctuated even more. And P&G’s orders to 3M and other materials suppliers fluctuated even more It is one of the most important causes of inefficiency in a supply chain Bullwhip effect Chapter 1

Why Study Supply Chain Management? SYST 4050 Slides Why Study Supply Chain Management? Chapter 1

SYST 4050 Slides The Magnitude In 1998, American companies spent $898 billion in supply chain related activities (or 10.6% of Gross Domestic Product) Third party logistics services grew in 1998 by 15% to nearly $40 billion It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using more effective logistics strategies A typical box of cereal spends more than three months getting from factory to supermarket Chapter 1

SYST 4050 Slides 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 Laura Ashley turns its inventory 10 times a year, five times faster than three years ago New information system Centralized warehouse Wal-Mart designed its supply chain with clusters of stores around distribution centers to facilitate frequent replenishment at its retail stores in a cost effective manner. Frequent replenishment allows stores to match supply and demand more efficiently than the competition. Wal-Mart has been a leader in sharing information and collaborating with suppliers to bring down costs and improve product availability. The results were impressive. Chapter 1

SYST 4050 Slides The Impact Producers have streamlined their supply chain operations to hold less inventory relative to sales In 1996, Dell held 31 days of inventory. It now holds only 4 days of inventory. Chapter 1

SYST 4050 Slides The Impact Chapter 1

The Impact The Turning Point (The Economist, 9/20/07) SYST 4050 Slides The Impact The Turning Point (The Economist, 9/20/07) “For such a tiny part of GDP, the contents of warehouses has had a surprisingly big effect on its volatility. When industries cut or add stocks according to demand, that adjustment magnifies the effect of the initial change in sales. Stock levels were once much larger relative to the size of the economy, so a small slip in demand could easily blow up into a recession. But thanks to improvements in technology, firms now have timelier and better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions. This makes huge stocks unnecessary and minimizes the lurches in inventories that were once so destabilizing. The entire inventory of some lean-running companies now consists of whatever FedEx or UPS is shipping on their account. Mr Cecchetti and his colleagues calculate that, on average, more than half the improvement in the stability of economic growth in the countries they studied is accounted for by diminished inventory cycles. That something so workaday as supply-chain management could have so marked an effect might seem a dull conclusion. But dullness is a virtue, because technological improvement is irreversible” Chapter 1

SYST 4050 Slides The Impact Chapter 1

Study of Supply Chain Management SYST 4050 Slides Study of Supply Chain Management Successful supply chain management requires decisions on the flow of information, product, and funds that fall into three decision phases Supply chain strategy or design Supply chain planning Supply chain operation Each decision should be made to increase the supply chain surplus Chapter 1

Decision Phases in a Supply Chain SYST 4050 Slides Decision Phases in a Supply Chain TIME FRAME TYPE TYPICAL DECISIONS Supply chain network design (How many plants? Location and capacities of plants and warehouses?) Supply chain strategies (Sell direct or through retailers? Outsource or in-house? Focus on cost or customer service?) Product mix at each plant years Strategic Workforce & Production planning Inventory policies (safety stock level) Which locations supply which markets Transportation strategies 3 mo.- 1year Tactical Where is uncertainty the highest? Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm Supply chain strategy or design Supply chain planning Supply chain operation Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty Supply chain planning decisions use a fixed supply chain configuration to come up with an overall production plan Supply chain operation makes decisions about individual customer orders Operational Production scheduling Decisions regarding individual orders Place replenishment orders daily Chapter 1

Study of Supply Chain Management SYST 4050 Slides Study of Supply Chain Management A supply chain is a sequence of processes and flows that take place within and between different stages Cycle view The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain Push/pull view The processes in a supply chain are divided into two categories depending on whether they are executed in response or in anticipation of a customer order Chapter 1

Cycle View of Supply Chain Processes SYST 4050 Slides Cycle View of Supply Chain Processes Customer Customer Order Cycle Cycle view defines the processes involved and the owner of each process Retailer Replenishment Cycle Distributor 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) Manufacturing Cycle Manufacturer Procurement Cycle Supplier Chapter 1

Subprocesses in Each Cycle SYST 4050 Slides Subprocesses in Each Cycle Buyer Supplier markets the product Buyer may return the product Buyer places an order Buyer receives the order Supplier receives the order Supplier supplies the order Supplier Chapter 1

Cycle View of Supply Chain Processes SYST 4050 Slides Cycle View of Supply Chain Processes Customer Order Process 1. Customer Arrival 2. Customer Order Entry 3. Customer Order Fullfillment 4. Customer Order Receiving Customer Order Cycle Replenishment Process 1. Retail Order Trigger 2. Retail Order Entry 3. Retail Order Fullfillment 4. Retail Order Receiving Replenishment Cycle Manufacturing Process 1. Order Arrival 2. Production Scheduling 3. Manufacturing/Shipping 4. Receiving Differences In the CustomerOrderCycle demand is external Scale (and frequency) of an order increases (decreases) when moving further away from the customer 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) Manufacturing Cycle Procurement Process 1. Component Order Arrival 2. Production Scheduling 3. Manufacturing/Shipping 4. Receiving Procurement Cycle Chapter 1

Push/Pull View of Supply Chain Processes SYST 4050 Slides Push/Pull View of Supply Chain Processes Execution is initiated in response to customer orders (reactive) PULL PROCESSES Customer order arrives Execution is initiated in anticipation of customer orders (speculative) PUSH PROCESSES Processes are divided based on their timing relative to the timing of a customer order They key difference is the uncertainty during the two phases At the time of execution of a pull process customer demand is known At the time of execution of a push process customer demand is not known (and must be forecasted) Processes are divided based on the timing of their execution relative to a customer order Chapter 1

Push/Pull Processes for the Supply chain of Dell SYST 4050 Slides Push/Pull Processes for the Supply chain of Dell PULL Customer Make-to-order Customer Order Cycle and Manufacturing Cycle Manufacturer Procurement Cycle PUSH Supplier Chapter 1

Push/Pull Processes for the Supply chain of Detergent SYST 4050 Slides Push/Pull Processes for the Supply chain of Detergent Customer PULL Customer Order Cycle Retailer Replenishment Cycle Distributor Make-to-stock Manufacturing Cycle PUSH Manufacturer Procurement Cycle Supplier Chapter 1

Are the following systems push or pull? SYST 4050 Slides Are the following systems push or pull? Soda vending machines Amazon.com Emergency care Execution is initiated in response to customer orders Execution is initiated in anticipation of customer orders Paint industry Runway capacity at an Airport Chapter 1

Cycle View Versus Push/Pull View SYST 4050 Slides Cycle View Versus Push/Pull View Which view is more useful when considering operational decisions and which view is more useful when considering strategic decisions? Chapter 1

Examples of Supply Chains SYST 4050 Slides Examples of Supply Chains Chapter 1

SYST 4050 Slides Celestial Seasonings The herbs were originally harvested by hand in the Rocky Mountains Currently, herbs and leafs come from growers around the world “We’ve been working to establish sustainable harvests and fair wages for more than 30 years” What are advantages of having one production facility? What are disadvantages of having one production facility? What advantages does selling tea over the Internet provide? Chapter 1