1. Introduction to Supply Chain Management
David Simchi-Levi
Philip Kaminsky
Edith Simchi-Levi

2. 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.

3. 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

4. What level of activities are involved? What do we mean by integration?
Notice:
Who is involved?
What is the goal?
What level of activities are involved?
What do we mean by integration?
Every facility is involved.
Efficiency across the entire system is the goal. What issues does this raise?
What makes SCM hard?
Complexity
Ownership
Uncertainty

5. 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

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. What tools and approaches help?
Optimization
What is it?
Why is it important?
What tools and approaches help?
Finding a good solution vs. finding the best solution.
Finding solutions to complex problems.
Finding solutions to dynamic, stochastic problems.
Implementing these solutions.

8. 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?

9. 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?

10. 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
Source: Duncan McFarlane

11. 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

12. 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

13. 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

14. Tools and Approaches for Global Optimization
Everything for optimization, plus…
Strategic Alliances/Supplier Partnerships
Supply Contracts/Incentive Schemes
Examples:
VMI
Joint inventories
Buyback schemes/ Revenue sharing – video stores

15. 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?

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

17. 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

18. 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

19. 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

20. 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

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

22. Supply Chain:the Magnitude
In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of gross domestic product).
Transportation 58%
Inventory 38%
Management 4%
Third party logistics services grew in 1998 by 15% to nearly $40 billion

23. Supply Chain:the Magnitude
It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies.
A typical box of cereal spends more than three months getting from factory to supermarket.
A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days.
Why do these times in the system matter?

24. 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…”.

25. 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.

26. 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.

27. 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?

28. 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?

29. Key Issues Issues span What are the tradeoffs and issues? Strategic
Tactical
Operational
What are the tradeoffs and issues?
Distribution Network Configuration
Inventory control
Supply Contracts
Distribution Strategies
Integration and Partnerships
Procurement Strategies and Outsourcing
Product Design
Information Technology
Strategic: long-lasting effect (Warehouses)
Tactical: quarterly to annually (Purchasing/Production decisions, inventory policies, transportation strategies)
Operational: scheduling, lead time quotation, routing, etc.
For each issue:
Why bother?
What are the tradeoffs?
How can this be improved or help?
Specifically:
Distribution Network: Discuss sample network
Inventory control: Why hold inventory? How much?
Supply contracts: Why is this different
Distribution strategies: cross-docking, direct shipment
Partnerships: Advantages and disadvantages
Outsourcing: When?

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