Supply Chain Management Strategies

Supply-Chain Management Strategies Supply-Chain Management Defined Understanding Your Industry Model Business Alignment Defining Supply Chain Excellence SCM Ground Rules A Multi-Disciplinary Approach Operations, Finance, IT & eOPS

What is Supply-Chain Management? Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together. Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer.

Supply Chain Management Evolution Historical operational stages: From disconnected. Exclusively focus on growth/cost. Separately managed functions. Internal performance measurements. To integrated. End-to-end process approach. Customer focus, profitable growth, liquidity, functional integration.

OEM 1 OEM 2 T3 T3 T2 T3 T2 T1 T3 T2 T1 T3 T2 T1 T3 T2 T3 Consumer T3 Consumer Web Site T3 T2 OEM 1 Consumer Warehouse T3 Retailer T2 T1 Consumer T3 T2 T1 Consumer Retailer Consumer T3 T2 T1 OEM 2 Distributor/Retailer Consumer Tier 1 supplier Consumer T3 T2 Distributor Retailer Tier2 and 3 Suppliers T3 Consumer Direct Sales Force Supply Chain of a Typical Original Equipment Manufacturer

Overall Strategy A Supply Chain is fully optimized when: Bundles of well-priced products/services create unassailable levels of customer attachment (acquisition and retention). Total supply chain costs are at the lowest level. The supply chain contributes to profitable sales growth by creating cost/service advantages. Worldwide effective tax rates are at the lowest level. Capital efficiency is at the lowest level. The supply chain is made flexible to respond to changes faster than competitors and to stratify service levels by product, customer, and geography.

Supply Chain Issues The main purpose of the levels in any supply chain is to add processes to the product/service. Another purpose is to absorb the differences between the stable supply on the upstream side and the erratic demand on the downstream(consumer) side. The synchronization of the supply chain will optimize efficiency along the chain.

Matching Supply-Chains with Products Functional Products Innovative Products Efficient Supply-Chain Match Mismatch Responsive Supply-Chain Mismatch Match

IV. Continuous Flow III. Assembly Line II. Batch I. Job Shop Low Volume, One of a Kind Multiple Products, Volume Few Major Higher High Standard- ization Commercial Printer French Restaurant Heavy Equipment Coffee Shop Automobile Burger King Sugar Refinery Flexibility (High) Unit Cost (High) Flexibility (Low) Unit Cost (Low)

Supply Chain Excellence New corporate state of being: Supply chain excellence requires effective strategies, sustained management commitment, and changes in attitude, culture, and organization. More importantly, it requires superior execution.

Principles For Supply Chain Excellence Formulate a differentiated supply chain strategy by channel. For product categories, product channels, and target customers, develop an operating strategy that, when executed, makes your supply chain different from the rest. Focus on long- and short-term profitability, liquidity, and growth.

Principles For Supply Chain Excellence Organize your business unit around major processes or channels, not functions. Traditional “silos” separates work and interrupts flows which leads to inefficiency. Work collaboratively with customers, suppliers, partners, and third parties to change the way operations perform, viewed, and measured. Extended supply chain.

Principles For Supply Chain Excellence Invest/reinvest in supply chain information technology to manage flows end-to-end. IT should support both planning, analysis, and execution. Invest/reinvest in supply chain knowledge, people, skills, and learning. Supply chain practice is relatively new. Change is a constant, with innovations and problems always occurring. Organizations must invest in ongoing training, mentoring, education, and feedback systems.

Principles For Supply Chain Excellence Operate/manage by product/channel. Think in terms of product/service bundles that are sold through potentially different channels. Supply chains should be set up and driven by the characteristics of each channel. Outsource parts of the chain for flexibility and better asset management. In many cases, functions can be performed better by third parties.

Principles For Supply Chain Excellence Think globally…build regionally…operate locally. The best performing supply chains are managed with centralized planning, regional approaches, and local operations. The most critical principle: Execution!!! Focus on it, measure it daily or real time, and give people the authority and accountability to excel at it.

Supply Chain Management Approach Three items that flow through the supply chain: Information Money Materials Three areas of decision-making: Processes Logistics Two types of tools: Information Technology Operational Analysis

12 SCM Ground Rules 1. Build in flexibility. Supply chain capacity(push things off your books). Move fixed to variable costs. More flexible production methods. Improved information flows. Use subcontractors, co-packing, outsourcing. Operations capability. Management’s will to change.

12 SCM Ground Rules - continued 2. Plan and measure accurately. Total cost approach – true margins, profitability by customer segment. Enterprise-wide planning – demand-driven and supply-aware; reduce cycle times; respond quickly(for high material cost industries). Dashboard concept – 5 to 7 metrics in operational cost, time and response, margins, customer service. Benchmark 1st internally, then expand

12 SCM Ground Rules - continued 3. Develop logistically separate operations /supply chains where appropriate. Entities: suppliers, manufacturers, distributors, freight forwarders, contract carriers, 3rd-party warehousing, 3rd-party logistics partners, 3rd-party maintenance, financing companies, import/export/customs brokers. Fulfillment channels: direct-home, direct-business, retailers, value-added resellers, mass merchandisers, OEMs, service centers, integrators. Order conduits that impact process: fax, Internet, phone, sales force, POS orders, EDI, e-mail.

12 SCM Ground Rules - continued 4. Get lean by emphasizing simplicity and speed. Value Stream Map Current & Future States Reduce uniqueness (parts, designs, suppliers, processes) and variety(transportation resources, parts suppliers). Reduce cycle times and maximize inventory velocity. Key: information. Understand where value is captured and eliminate non-value

12 SCM Ground Rules - continued 5. Optimize Information. Focus on Time to Benefit and Decision Support. ERP? Multiple smaller systems? Take ownership of Customer Information. Most untapped: not articulated needs. Replace assets with Information. E.g. inventory are moved several times before reaching final destination. Replace physical movement with digital movement of customer and product information.

12 SCM Ground Rules - continued 6. Treat customers unequally: Segment and Stratify. No unnecessary excellence. 7. Operate Globally. Economic, time, tax differences. 8. Practice Virtuality (partnering) and Collaborative Manufacturing/Management. Virtuality – attempt to gain scale. Requires more management, not less.

12 SCM Ground Rules - continued 9. Exploit Electronic Commerce. Collapsing supply chain levels. E.g. distribution channel. New channel: many-to-many. Supply Web – key customers can have communities of suppliers; collaboratively plan, forecast, replenish on a real-time(or near real-time) basis. Valued-based differentiation – add value along product, information, process. master channel managers.

12 SCM Ground Rules - continued 10. Leverage People. 11. Operationalize New Product Introductions and Phaseouts. 12. Mass Customize and Postpone. Commodities vs. highly customizable products. Downstream flexibility. E.g. HP printers. Automobile. Amazon.

Performance Measurement: Operational 1. Throughput the rate at which money is generated by the system through sales: O2C 2. Inventory all the money that the system has invested in purchasing things it intends to sell 3. Operating Expenses all the money that the system spends to turn inventory into throughput 6

Inventory: Bullwhip Effect Quantity Order Time Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders The magnification of variability in orders in the supply-chain. A lot of retailers each with little variability in their orders…. …can lead to greater variability for a fewer number of wholesalers, and… …can lead to even greater variability for a single manufacturer.

Minimizing Waste: Inventory Hides Problems Work in process queues (banks) Change orders Engineering design redundancies Vendor delinquencies Scrap Design backlogs Machine downtime Decision Inspection Paperwork backlog Example: By identifying defective items from a vendor early in the production process the downstream work is saved. Example: By identifying defective work by employees upstream, the downstream work is saved.

Cost Minimization Goal Ordering Costs Holding Costs QOPT Order Quantity (Q) C O S T Annual Cost of Items (DC) Total Cost By adding the item, holding, and ordering costs together, we determine the total cost curve, which in turn is used to find the Qopt inventory order point that minimizes total costs.

ABC Classification System Items kept in inventory are not of equal importance: dollars invested profit potential $ volume stock-out penalties 30 60 A B C % of $ Value Use So, identify inventory items based on percentage of total dollar value, where “A” items are roughly top 15 %, “B” items as next 35 %, and the lower 65% are the “C” items.

Production Costs Average unit cost of output Under Utilization Over Utilization Best Operating Level Volume

Economies & Diseconomies of Scale 100-unit plant 200-unit 300-unit 400-unit Volume Average unit cost of output Economies of Scale and the Experience Curve working Diseconomies of Scale start working

Rule: Bottlenecks govern both throughput and inventory in the system. Saving Time What are the consequences of saving time at each process? Bottleneck Nonbottleneck Rule: Bottlenecks govern both throughput and inventory in the system. Rule: An hour lost at a bottleneck is an hour lost for the entire system. Rule: An hour saved at a nonbottleneck is a mirage. 17

Waste in Operations (1) Waste from overproduction (2) Waste of waiting time (3) Transportation waste (4) Inventory waste (5) Processing waste (6) Waste of motion (7) Waste from product defects

Design for Manufacturability Traditional Approach “We design it, you build it” or “Over the wall” Concurrent Engineering “Let’s work together simultaneously”

Designing for the Customer: Quality Function Deployment Interfunctional teams from marketing, design engineering, and manufacturing Voice of the Customer House of Quality

Measuring Product Development Performance Time-to-market Productivity Quality

Quality Specifications Design quality: Inherent value of the product in the marketplace Dimensions include: Performance, Features, Reliability, Durability, Serviceability, Response, Aesthetics, and Reputation. Conformance quality: Degree to which the product or service design specifications are met

Internal Failure Costs Costs of Quality External Failure Costs Appraisal Costs Prevention Costs Internal Failure Costs Costs of Quality

Example: Pareto Analysis Can be used to find when 80% of the problems may be attributed to 20% of the causes. 80% Frequency Design Assy. Instruct. Purch. Training Other

Performance Measurement: Financial Net profit an absolute measurement in dollars Return on investment a relative measure based on investment Cash flow a survival measurement 5

Formulas for Measuring Supply-Chain Performance Inventory Turnover = Cost of goods sold Average aggregate inventory value Weeks of Supply = 52 Weeks Average aggregate inventory

The Context of E-Ops Business Model Operations “How we make our money?” Operations “How do we manage production of the product or service?” Information System Architecture “The set of tools used to support processes.”

Business Web Models B-Web Model Example Marketplace Ebay Aggregator E-Trade Alliance AOL Value Chain Dell Computers Distributive Network UPS

Traditional vs. Electronic Commerce Purchasing Process Step Traditional Electronic Commerce Acquire product information Magazines, flyers, online catalogues Web pages Send order Fax, mail E-mail, Web pages Check inventory at warehouse Printed form, phone form Online database, Web pages Buyer sends payment Mail EDI

The Shape of Things to Come Old Model Plan – Execute - Plan I2, Manugistics, Oracle, SAP New Model Plan – Execute – Measure - Plan I2, Manugistics, Oracle, SAP, SeeCommerce