MEV 425 Supply Chain Management Introduction

Launched across 93 countries simultaneously

Delivering 1,75,000 lunchboxes (dabbas) across Mumbai both on forward and reverse direction daily

8,50,000 SKUs

Tata Motors Winners of 2006 SCM award Established in 1945, Tata Motors' presence indeed cuts across the length and breadth of India. Over 5.9 million Tata vehicles ply on Indian roads, since the first rolled out in 1954. The company's manufacturing base in India is spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar (Uttarakhand) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005, it has set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to produce both Fiat and Tata cars and Fiat powertrains. The company has established a new plant at Sanand (Gujarat). The company's dealership, sales, services and spare parts network comprises over 3500 touch points; Tata Motors also distributes and markets Fiat branded cars in India.

Dell Computers Selling computer systems directly to customers, Dell ships more than 110,000 systems every day to customers in 180 countries — that’s more than one every second. Partnerships with a wide variety of key industry software, hardware and component suppliers give us a uniquely broad perspective on the computing landscape

Management Functions Planning - defining goals, establishing strategies for achieving those goals, and developing plans to integrate and coordinate activities Organizing - determining what tasks are to be done, who is to do them, how the tasks are to be grouped, who reports to whom, and where decisions are made Leading - directing and motivating all involved parties and dealing with employee behavior issues Controlling - monitoring activities to ensure that they are going as planned

Level of Management

Four functions of Management Planning Choose goals Controlling Monitor and Measure Organizing Working together Leading

History of Supply Chain Management 1960’s - Inventory Management Focus, Cost Control 1970’s - MRP & BOM - Operations Planning 1980’s - MRPII, JIT - Materials Management, Logistics 1990’s - SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order Entry 2000’s - Optimized “Value Network” with Real-Time Decision Support; Synchronized & Collaborative Extended Network

Types of Inventory Raw material Work-in-process Finished goods

Costs of Inventory Item cost Carrying costs Ordering costs Stock out costs Systematic costs

Inventory Models Economic Order Quantity – A trade off between carrying cost and ordering cost Economic Batch Quantity – A trade off between carrying cost and setup cost

Value Chain

Operations as a Transformation Process INPUT Material Machines Labor Management Capital OUTPUT Goods Services TRANSFORMATION PROCESS Feedback

Supply chain management

Reference Books Christopher, M., Logistics and Supply Chain Management, Pitman Publishing Company, London, 1993. EVOLUTION OF SUPPLY CHAIN MANAGEMENT Chopra, S., and Meindl, P., Supply chain Management: Strategy, Planning and Operations. Second Edition, Pearson Education (Singapore) Pte. Ltd, 2004. INTRODUCTORY ASPECTS, MANAGING UNCERTAINITY (SUPPLY AND DEMAND), FACILITY NETWORK DESIGN, TRANSPORTATION, Doebler, D.W. and Burt, D.N., Purchsing and Supply Chain Management: Text and Cases, McGraw-Hill Publishing Company Limited, New Delhi, 1996. PURCHASE AND PROCUREMENT Tersine, R.J., Principles of Inventory and Materials Management, 4th edition, Prentice-Hall Inc., New Jersey, 1994. INVENTORY CONTROL AND MANAGEMENT

What Is the Supply Chain? Also referred to as the logistics network Suppliers, manufacturers, warehouses, distribution centers and retail outlets – “facilities” and the Raw materials Work-in-process (WIP) inventory Finished products that flow between the facilities Suppliers Manufacturers Warehouses & Distribution Centers Customers Material Costs Transportation Costs Inventory Costs Manufacturing Costs

The Supply Chain Suppliers Manufacturers Warehouses & Distribution Centers Customers Material Costs Transportation Costs Inventory Costs Manufacturing Costs

The Supply Chain – Another View Plan Source Make Deliver Buy Suppliers Manufacturers Warehouses & Distribution Centers Customers Material Costs Transportation Costs Inventory Costs Manufacturing Costs

What Is Supply Chain Management (SCM)? Plan Source Make Deliver Buy A set of approaches used to efficiently integrate Suppliers Manufacturers Warehouses Distribution centers So that the product is produced and distributed In the right quantities To the right locations And at the right time System-wide costs are minimized and Service level requirements are satisfied

Why Is SCM Difficult? Uncertainty is inherent to every supply chain Plan Source Make Deliver Buy Uncertainty is inherent to every supply chain Travel times Breakdowns of machines and vehicles Weather, natural catastrophe, war Local politics, labor conditions, border issues The complexity of the problem to globally optimize a supply chain is significant Minimize internal costs Minimize uncertainty Deal with remaining uncertainty

The Objective of a Supply Chain Maximize overall value created Supply chain value: difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer’s request Value is correlated to supply chain profitability (difference between revenue generated from the customer and the overall cost across the supply chain)

The Objective of a Supply Chain Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) Supply chain profitability is total profit to be shared across all stages of the supply chain Supply chain success should be measured by total supply chain profitability, not profits at an individual stage

The Objective of a Supply Chain Sources of supply chain revenue: the customer Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability

Decision Phases of a Supply Chain Supply chain strategy or design Supply chain planning Supply chain operation

Supply Chain Strategy or Design Decisions about the structure of the supply chain and what processes each stage will perform Strategic supply chain decisions Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty

Supply Chain Planning Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year

Supply Chain Planning Planning decisions: Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

Supply Chain Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon)

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.

Customer Order Cycle Involves all processes directly involved in receiving and filling the customer’s order Customer arrival Customer order entry Customer order fulfillment Customer order receiving

Replenishment Cycle All processes involved in replenishing retailer inventories (retailer is now the customer) Retail order trigger Retail order entry Retail order fulfillment Retail order receiving

Manufacturing Cycle All processes involved in replenishing distributor (or retailer) inventory Order arrival from the distributor, retailer, or customer Production scheduling Manufacturing and shipping Receiving at the distributor, retailer, or customer

Procurement Cycle All processes necessary to ensure that materials are available for manufacturing to occur according to schedule Manufacturer orders components from suppliers to replenish component inventories However, component orders can be determined precisely from production schedules (different from retailer/distributor orders that are based on uncertain customer demand) Important that suppliers be linked to the manufacturer’s production schedule

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

Push/Pull View of Supply Chain Processes Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders Can combine the push/pull and cycle views L.L. Bean (Figure 1.6) Dell (Figure 1.7) The relative proportion of push and pull processes can have an impact on supply chain performance

Summary of Learning Objectives What are the cycle and push/pull views of a supply chain? How can supply chain macro processes be classified? What are the three key supply chain decision phases and what is the significance of each? What is the goal of a supply chain and what is the impact of supply chain decisions on the success of the firm?

Element Traditional management Supply chain management (1)Inventory management Independent efforts Joint reduction of channel approach inventories (2)Total cost approach Minimize firm costs Channel-wide cost efficiencies (3)Time horizon Short term Long term (4)Amount of information Limited to needs of current As required for planning and sharing and monitoring transaction monitoring processes (5)Amount of coordination Single contact for the transaction Multiple contacts between levels in of multiple levels in the between channel pairs firms and levels of channel channel (6)Joint planning Transaction-based Ongoing (7)Compatibility of Not relevant Compatibility at least for key corporate philosophies relationships (8)Breadth of supplier base Large to increase competition Small to increase coordination and spread risks (9)Channel leadership Not needed Needed for coordination focus (10)Amount of sharing risks Each on its own Risks and rewards shared over rewards the long term (11)Speed of operations, “Warehouse” orientation “Distribution center” orientation information and (storage, safety stock) (inventory velocity) interconnecting inventory levels interrupted by barriers to flows; flows; JIT, quick response across localized to channel pairs the channel

Decision areas of SCM There are four major decision areas in 1) location, 2) production, 3) inventory, and 4) transportation (distribution), and There are both strategic and operational elements in each of these decision areas

Supply chain in construction Time measurement to detect and analyze time buffers in a part of a supply chain process of concrete wall elements including the excavation and delivery of sand, the fabrication and delivery of elements, and the site installation of elements.

Supply chain in construction After having assessed the supply chain, the SCM methodology suggests redesign (reconfiguring the supply chain’s structure), control (coordinating the supply chain according to the new configuration) and continuous improvement. For instance, towards suppliers, the methodology could include reengineering the procurement process, installing joint coordination of logistics and recurring product development programs. Typically, such activities include joint activities between separate actors in the supply chain.

Supply chain in construction

The Importance of Supply Chain Management Dealing with uncertain environments – matching supply and demand Boeing announced a $2.6 billion write-off in 1997 due to “raw materials shortages, internal and supplier parts shortages and productivity inefficiencies” U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals” IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998

Supply Chain Management and Uncertainty Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesn’t vary The variability worsens as we travel “up” the supply chain Forecasting doesn’t help! Manufacturer Wholesale Distributors Consumers Multi-tier Suppliers Retailers Time Sales Bullwhip Effect

Today’s Marketplace Requires: Personalized content and services for their customers Collaborative planning with design partners, distributors, and suppliers Real-time commitments for design, production, inventory, and transportation capacity Flexible logistics options to ensure timely fulfillment Order tracking & reporting across multiple vendors and carriers Shared visibility for trading partners

Supply Chain Management – Key Issues Forecasts are never right Very unlikely that actual demand will exactly equal forecast demand The longer the forecast horizon, the worse the forecast A forecast for a year from now will never be as accurate as a forecast for 3 months from now Aggregate forecasts are more accurate A demand forecast for all CV therapeutics will be more accurate than a forecast for a specific CV-related product Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty

Achieving Strategic Fit

Outline Competitive and supply chain strategies Achieving strategic fit Expanding strategic scope

What is Supply Chain Management? Managing supply chain flows and assets, to maximize supply chain surplus What is supply chain surplus? Notes: Supply chain surplus refers to what the customer has paid - total cost expended by supply chain in filling order.

The Value Chain: Linking Supply Chain and Business Strategy

Competitive and Supply Chain Strategies Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services Product development strategy: specifies the portfolio of new products that the company will try to develop Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted Supply chain strategy: determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important

Achieving Strategic Fit Introduction How is strategic fit achieved? Other issues affecting strategic fit

Achieving Strategic Fit Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies have the same goals A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy Example of strategic fit -- Dell

How is Strategic Fit Achieved? Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain Step 3: Achieving strategic fit

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 Table 2.1 Figure 2.2 Table 2.2 First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum

Achieving Strategic Fit Understanding the Customer Lot size Response time Service level Product variety Price Innovation Implied Demand Uncertainty

Impact of Customer Needs on Implied Demand Uncertainty (Table 2.1) 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

Levels of Implied Demand Uncertainty

Correlation Between Implied Demand Uncertainty and Other Attributes (Table 2.2) 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 Figure 2.3: cost-responsiveness efficient frontier Figure 2.4: supply chain responsiveness spectrum Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum

Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier: Fig 2.3 High Low Cost High Low

Step 3: Achieving Strategic Fit Step is to ensure that what the supply chain does well is consistent with target customer’s needs Fig. 2.5: Uncertainty/Responsiveness map Fig. 2.6: Zone of strategic fit Examples: Dell, Barilla

Responsiveness Spectrum (Figure 2.4) Highly efficient Somewhat efficient Somewhat responsive Highly responsive Integrated steel mill Hanes apparel Most automotive production Dell

Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map (Fig. 2.5) Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiveness spectrum Zone of Strategic Fit

Step 3: Achieving Strategic Fit All functions in the value chain must support the competitive strategy to achieve strategic fit – Fig. 2.7 Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) – Table 2.4 Two key points there is no right supply chain strategy independent of competitive strategy there is a right supply chain strategy for a given competitive strategy

Comparison of Efficient and Responsive Supply Chains (Table 2.4) 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

Other Issues Affecting Strategic Fit Multiple products and customer segments Product life cycle Competitive changes over time

Multiple Products and Customer Segments Firms sell different products to different customer segments (with different implied demand uncertainty) The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments Two approaches: Different supply chains Tailor supply chain to best meet the needs of each product’s demand

Product Life Cycle The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle Supply chain strategy must evolve throughout the life cycle Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary Late: predictable demand, lower margins, price is important

Product Life Cycle Examples: pharmaceutical firms, Intel As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency

Company Strategy/Issues Drive-through restaurants Product Life Cycle Introduction Growth Maturity Decline Company Strategy/Issues Best period to increase market share R&D engineering is critical Practical to change price or quality image Strengthen niche Poor time to change image, price, or quality Competitive costs become critical Defend market position Cost control critical Internet search engines Sales Xbox 360 Drive-through restaurants CD-ROMs 3 1/2” Floppy disks LCD & plasma TVs Analog TVs iPods

Product Life Cycle Introduction Growth Maturity Decline OM Strategy/Issues Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focus Enhance distribution Standardization Less rapid product changes – more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity

Competitive Changes Over Time Competitive pressures can change over time More competitors may result in an increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions

Expanding Strategic Scope Scope of strategic fit The functions and stages within a supply chain that devise an integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly Five categories: Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope

Different Scopes of Strategic Fit Across a Supply Chain

Summary of Learning Objectives Why is achieving strategic fit critical to a company’s overall success? How does a company achieve strategic fit between its supply chain strategy and its competitive strategy? What is the importance of expanding the scope of strategic fit across the supply chain?

Supply Chain Drivers and Obstacles

Outline Drivers of supply chain performance A framework for structuring drivers Facilities Inventory Transportation Information Sourcing Pricing Obstacles to achieving fit

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 Sourcing functions a firm performs and functions that are outsourced Pricing Price associated with goods and services provided by a firm to the supply chain

A Framework for Structuring Drivers

Facilities Role in the supply chain Role in the competitive strategy the “where” of the supply chain manufacturing or storage (warehouses) Role in the competitive strategy economies of scale (efficiency priority) larger number of smaller facilities (responsiveness priority) Example 3.1: Toyota and Honda Components of facilities decisions

Components of Facilities Decisions Location centralization (efficiency) vs. decentralization (responsiveness) other factors to consider (e.g., proximity to customers) Capacity (flexibility versus efficiency) Manufacturing methodology (product focused versus process focused) Warehousing methodology (SKU storage, job lot storage, cross-docking) Overall trade-off: Responsiveness versus efficiency

Facility Related Metrics Capacity – maximum amount a facility can process Utilization – the fraction of capacity utilized Theoretical flow/cycle time of production – time required to process a unit Actual / average flow / cycle time – the average actual time taken Flow time efficiency: ratio of the above two Product Variety Processing/Setup/Down/Idle time Average production batch Production service level: measures the fraction of production orders completed on time and in full.

Inventory Role in the supply chain Role in the competitive strategy Components of inventory decisions

Inventory: Role in the Supply Chain Inventory exists because of a mismatch between supply and demand Source of cost and influence on responsiveness Impact on material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain throughput rate at which sales to end consumers occur I = RT (Little’s Law) I = inventory; R = throughput; T = flow time Example Inventory and throughput are “synonymous” in a supply chain

Inventory: Role in Competitive Strategy If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers If cost is more important, inventory can be reduced to make the firm more efficient Trade-off Example 3.2 – Nordstrom

Components of Inventory Decisions Cycle inventory Average amount of inventory used to satisfy demand between shipments Depends on lot size Safety inventory inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales Seasonal inventory inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production Overall trade-off: Responsiveness versus efficiency more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness

Inventory Related Metrics Average Inventory – Measured in units, days of demand, and financial value Average replenishment batch size – the average amount in each replenishment order. Measured by SKUin both units and days of demand Average safety Inventory – measures the average amount of inventory when a replenishment order arrives. Measured by SKU in both units and days of demand Fill rate – measures the fraction of orders/demand met on time from Inventory. Measured in terms of specified number of units. Fraction of time out of stock Seasonal Inventory Products with more than a specified number of days of inventory

Transportation Role in the supply chain Role in the competitive strategy Components of transportation decisions

Transportation: Role in the Supply Chain Moves the product between stages in the supply chain Impact on responsiveness and efficiency Faster transportation allows greater responsiveness but lower efficiency Also affects inventory and facilities

Transportation: Role in the Competitive Strategy If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it Can also use slower transportation modes for customers whose priority is price (cost) Can also consider both inventory and transportation to find the right balance Example 3.3: Laura Ashley

Components of Transportation Decisions Mode of transportation: air, truck, rail, ship, pipeline, electronic transportation vary in cost, speed, size of shipment, flexibility Route and network selection route: path along which a product is shipped network: collection of locations and routes In-house or outsource Overall trade-off: Responsiveness versus efficiency

Transportation Related Metrics Average Inbound transportation cost – the cost of bringing product into the facility as a percentage of sales or cost of goods sold Average incoming shipment size – measured in terms of units or monetary value Average inbound transportation cost per shipment – measures the average transportation cost of each incoming delivery

Information Role in the supply chain Role in the competitive strategy Components of information decisions

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

Information: Role in the Competitive Strategy Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Information technology What information is most valuable? Example 3.4: Andersen Windows Example 3.5: Dell

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

Information related Metrics Forecast Horizon Frequency of Update Forecast error Seasonal factors Variance from plan: Identifies the difference between the planned production/inventories and the actual values Ratio of demand variability to order variability – Measures the standard deviation of incoming demand and supply orders placed. A ratio less than one indicates the existence of bullwhip effect

Reasons for IT in Supply Chain Spatial Spread Time Element Efficient, reliable and timely data capture and data availability for decision making

E-Business Impact of E-Business on cost Inventory costs - Decrease Transportation costs - Increase Facility costs - Decrease Information costs - Large initial investment with lower processing costs

Sourcing Role in the supply chain Role in the competitive strategy Components of sourcing decisions

Sourcing: Role in the Supply Chain Set of business processes required to purchase goods and services in a supply chain Supplier selection, single vs. multiple suppliers, contract negotiation

Sourcing: Role in the Competitive Strategy Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain In-house vs. outsource decisions- improving efficiency and responsiveness Example 3.6: Cisco

Components of Sourcing Decisions In-house versus outsource decisions Supplier evaluation and selection Procurement process Overall trade-off: Increase the supply chain profits

Sourcing Related Metrics Days payable outstanding Average Purchase price Range of purchase price Average purchase quantity Fraction on-time deliveries Supply quality Supply lead time

Pricing Role in the supply chain Role in the competitive strategy Components of pricing decisions

Pricing: Role in the Supply Chain Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply

Pricing: Role in the Competitive Strategy Firms can utilize optimal pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times Example 3.7: Amazon

Components of Pricing Decisions Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing Overall trade-off: Increase the firm profits

Pricing Related Metrics Profit margin Days sales outstanding Incremental fixed cost per order Incremental variable cost per order/unit Average order size Range of sale price

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

SCM Drivers Summary Facilities Inventory Location: Centralization Vs Decentralization Capacity: Flexible Vs Efficient Manufacturing : Product focus Vs Process focus Warehousing methodology Inventory Cycle stock: When to order? Safety stock : How much to order? How often to monitor the inventory status Trade off is between cost and responsivness

SCM Drivers Summary Transportation Information Modes Route and Network selection In-house or outsource Trade-off is between cost and speed Information Push Vs Pull approach Coordination and information sharing Forecasting and aggregate planning

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

Logistic Management

Supply Chain Management – Key Issues Overcoming functional silos with conflicting goals Purchasing Manufacturing Distribution Customer Service/ Sales Few change- overs Stable schedules Long run lengths High inventories High service levels Regional stocks SOURCE MAKE DELIVER SELL Low pur- chase price Multiple vendors Low invent- ories Low trans- portation

Definition Logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flow through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost effective fulfillment of orders.

Logistic Management Logistics By the Council of Logistics Management: Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services and related information from point of origin to point of consumption (including inbound, outbound, internal, and external movements) for the purpose of conforming to customer requirements. The Rule of Seven Rs: Logistics is ensuring the availability of the right product , in the right quantity and right condition, at the right place, at the right time , for the right customer , at the right cost.

Sample Logistics System

Logistics Supply Chain

Logistic Management Design and Operation of the physical, managerial and informational systems needed to allow goods to overcome time and space, from the producer to the customer. It requires an integrated view of a number of different activities and functions. From a firm’s point of view, these activities are represented as part of the value chain called the generic value chain by Michael Porter.

DECISIONS IN LOGISTICS MANAGEMENT Product design Plant location Choice of market/sources Production structure Distribution/Dealer Network Design Location of Warehouses Plant layout and logistics

DECISIONS IN LOGISTICS MANAGEMENT Allocation decisions Production Planning Inventory Management Transportation mode choice, shipment size, routing decision and transport contracting Packaging Materials Handling Warehouse Operations

KEY ACTORS IN LOGISTICS MANAGEMENT Shippers (Users of logistics) Suppliers (of logistics services) carriers (rail, road, air, water, pipeline, rope way) Warehouse providers Freight forwarders Terminal Operators (Ports) Government (Regulator of logistics)

CLASSIFICATION OF LOGISTICS APPLICATIONS Decision-wise Actor-wise Inbound logistics and outbound logistics Single vs Multiple plants Nature of Product - Bulk vs Packaged products - Perishable vs Non-perishable products - Durable vs Non-durable products - Single vs multiple products - Industrial vs consumer products Made to stock vs Made to order

ELEMENTS OF LOGISTICS COST: Product Inventory cost at source Pipeline Inventory cost Product Inventory cost at warehouses and dealers Transit losses/Insurance cost Storage losses/Insurance cost Handling and warehouse operations cost Packaging cost Transportation cost Customer’s shopping cost

LOGISTICS MANAGEMENT TO SUPPLY CHAIN MANAGEMENT: Evolution from logistics management to SCM involves the following: The Financial system is explicitly added to the scope of analysis - Mechanisms of credit and advance payments - Pricing of products and services i.e. sensitive to demand (cooperation between players) - Joint investments across different entities that could yield benefits, which are shared

LOGISTICS MANAGEMENT TO SUPPLY CHAIN MANAGEMENT 2. Services are considered as part of value delivered - Pure service elements such as installation, providing information about product features and availability, after sales service etc. are increasing in their importance. The scope of SCM is enlarged to consider the entire gamut of activities from vendor to customer. Effectiveness of delivery to the customer is the primary focus of SCM, Logistics is concerned with efficiency to achieve certain goals of service at minimum cost.

SUPPLY CHAIN MANAGEMENT A Supply Chain consists of all stages involved directly or indirectly in fulfilling a customer request. It includes the manufacturer, supplier, transporters, distributors, retailers and customers. Focus of SCM: - Co-operation and trust - Recognition that properly managed, the whole can be greater than the sum of its parts in terms of benefits. - Management of relationships in order to achieve a more profitable outcome for all parties in the chain.

- The management of upstream and downstream Definition of SCM: - The management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole. - A network of connected and interdependent organizations mutually and co-operatively working together to control, manage and improve the flow of materials and information from suppliers to end users.

- Maximize the overall value generated. OBJECTIVE OF SCM: - Maximize the overall value generated. Maximize the profitability. Profitability = Revenue generated – Overall cost What SCM is not ? SCM is Not Vertical Integration

Logistics Vs SCM Logistics is primarily concerned with optimizing flows within the organization SCM recognizes that internal integration by itself is not sufficient.

- Respond to wide ranges of qualities demanded Supply chain’s Responsiveness and Efficiency Responsiveness - Respond to wide ranges of qualities demanded - Meet short lead times - Handle a large variety of products - Build highly innovative products - Meet a very high service level Efficiency - Cost of making and delivering a product to the customer

Supply Chain of IBM Europe

FUNDAMENTAL FEATURES OF SCM Single entity - a single group for planning and control INVENTORY PERSPECTIVE - Inventory is a buffer to be used as a last resort STRATEGIC DECISION MAKING - Decisions in the supply chain are viewed as having strategic implications, rather than just operational. e.g. Long term contracts with transporters.

SYSTEMS APPROACH - A single integrated system Doing what one can do best - Building effective partnerships - Implications on outsourcing and insourcing

Thrust areas of SCM Minimizing Uncertainty Supply uncertainty: due to unreliability of suppliers. It can be reduced through vendor development, sharing of production planning information and joint attention to transport arrangement Process Uncertainty: due to machine breakdowns, uncertain yields and absenteeism. It can be reduced through better maintenance practices, better technology etc. Demand uncertainty: It can be reduced by using better forecasting techniques and by better communication with customers.

Thrust areas of SCM Reducing Lead Times Can be achieved by faster modes of transport, better planning practices and process technologies Minimizing the Number of Stages Makes the coordination of decisions easier. Can be achieved by using Business Process Reengineering

Thrust areas of SCM Improving Flexibility Improving Process Quality Involves reducing setup or change over times in various processes and the use of flexible manufacturing and assembly techniques In transport, smaller vehicles enable dispatching at short notice without being constrained by batching economies Improving Process Quality Involves doing the things right at the first time Use of statistical process control, robust design techniques etc.

Thrust areas of SCM Minimizing Variety Managing Demand Modularize product designs so that variety is offered in a controlled way and some economies of scale can be exploited. Standardise product and service offerings Managing Demand Uncertainty and anticipated variations in demand should be dealt with by appropriate promotion and branding

Thrust areas of SCM Delaying Differentiation Postponing value addition through product differentiation as far possible, so that precise customer needs can be met without holding committed stocks in the entire chain. Examples: Shipping of component level goods to major points and assembling according to customer needs. Postponing finishing operations like grinding and mixing of additives to cement till near the point of consumption

Thrust areas of SCM Kitting of Supplies In assembly systems, a major source of delay is the staging delay where some components for assembly have to wait since matching components are not available Vendors or internal facilities that supply components can be arranged so all components required for an assembly are manufactured or supplied at one stage, where they are kitted into sets of matching components, ready for assembly and further operations This could involved some restructuring of vendors or internal activities and some vertical integration

Thrust areas of SCM Planning for Multiple Supply Chains Different supply chains for different customer segments based on response requirements Modifying Performance Measures Move from single actor focused to multi-actor focused Examples: In a warehouse, instead of warehouse space utilization as the measure, retrieval time can be a useful measure, since it focuses on both the warehouse and downstream actor A transporter like railways would focus more on time taken for delivering a wagon/rake to a customer from the time the indent is placed, rather than wagon utilization / turnaround

Thrust areas of SCM Competing on Service Considering service aspects of value added delivery Moving from Functions to Process Integrated process orientation rather than functional orientation Job rotation, flatter and lean organization Taking Initiatives at an Industry Level Required for dealing with poor infrastructure Industry-level, rather than firm-level initiatives in specific product categories can focus on say, transport and/or warehousing inadequacies and develop appropriate service providers Opportunity for third party logistics services

Performance measures for SCM Total Supply Chain Cost Supply Chain Profitability: total profitability shared across all supply chain stages Process Capability: Measured in terms of variability of the outcome with respect to the desired target. It captures the technology and engineering aspects of activities Customer Retention: Measured in terms of the value aspect of the supply chain process. Example: Fill rate (proportion of ordered items met from available inventory) Process Lead Time: It captures the organization aspect of activities Lead time to deliver a certain promised range of products indicate how quickly and reliably the supply chain can respond to needs as and when they arise While inventories can be a contingency plan, process lead times measure the primary effectiveness of the demand fulfillment process.

Supply Chain Management – Key Issues CONSIDERATIONS Network Planning Warehouse locations and capacities Plant locations and production levels Transportation flows between facilities to minimize cost and time Inventory Control How should inventory be managed? Why does inventory fluctuate and what strategies minimize this? Supply Contracts Impact of volume discount and revenue sharing Pricing strategies to reduce order-shipment variability Distribution Strategies Selection of distribution strategies (e.g., direct ship vs. cross-docking) How many cross-dock points are needed? Cost/Benefits of different strategies Integration and Strategic Partnering How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations? Outsourcing & Procurement Strategies What are our core supply chain capabilities and which are not? Does our product design mandate different outsourcing approaches? Risk management Product Design How are inventory holding and transportation costs affected by product design? How does product design enable mass customization? Source: Simchi-Levi

Supply Chain Management Operations Strategies STRATEGY WHEN TO CHOOSE BENEFITS Make to Stock standardized products, relatively predictable demand Low manufacturing costs; meet customer demands quickly Make to Order customized products, many variations Customization; reduced inventory; improved service levels Configure to Order many variations on finished product; infrequent demand Low inventory levels; wide range of product offerings; simplified planning Engineer to Order complex products, unique customer specifications Enables response to specific customer requirements Source: Simchi-Levi

Supply Chain Management – Benefits A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain Delivery Performance 16%-28% Improvement Inventory Reduction 25%-60% Improvement Fulfillment Cycle Time 30%-50% Improvement Forecast Accuracy 25%-80% Improvement Overall Productivity 10%-16% Improvement Lower Supply-Chain Costs 25%-50% Improvement Fill Rates 20%-30% Improvement Improved Capacity Realization 10%-20% Improvement Source: Cohen & Roussel

Supply Chain Imperatives for Success View the supply chain as a strategic asset and a differentiator Wal-Mart’s partnership with Proctor & Gamble to automatically replenish inventory Dell’s innovative direct-to-consumer sales and build-to-order manufacturing Create unique supply chain configurations that align with your company’s strategic objectives Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network Reduce uncertainty Forecasting Collaboration Integration Supply chain configuration components

Summary Evolution of Supply chain management Perspective of supply chain management Perspective of materials management Decision Phases in Supply chain Performance measures of Supply chain Competitive and supply chain strategies Achieving a strategic fit Supply chain drivers and obstacles Information technology and SCM