1. Introduction to Supply Chain Management

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

24. Supply Chain: The Complexity
National Semiconductors:
Production:
Produces chips in six different locations: four in the US, one in Britain and one in Israel
Chips are shipped to seven assembly locations in Southeast Asia.
Distribution
The final product is shipped to hundreds of facilities all over the world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within 45 days
5% are delivered within 90 days.
How big would this “optimization problem” be?

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

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

27. 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)

28. 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

29. 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.

30. 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

31. 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

32. Supply Chain Performance: Achieving Strategic Fit and Scope

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

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

35. Demand Characteristics
Functional Innovative
Low demand variability High
Easy forecasting Difficult
Long life cycle Short
Low inventory cost High
Low margins High
Low product variety High
Low stockout cost High
Low obsolescence High

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

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

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

39. Supply Chain Drivers and Obstacles

40. 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

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

42. 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

43. 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

44. Considerations for Supply Chain Drivers

45. 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

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

47. 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

48. 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

49. 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

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

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

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

53. 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

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

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