1. Chapter 1 Introduction to Supply Chain Management
Qi Xu
Professor of Donghua University
Tel:

2. Meditech Surgical Case 1
Case describes a scenario with typical symptoms – inventories are too high and customer service is poor.
Initial explanation is that the problems are due to poor forecasting of customer demand. There’s a perception that demand is highly variable and unpredictable, possibly due to irrational customer behavior, e. g., panic ordering. … if only Meditech could forecast what the customers will order, then they could improve customer service and reduce inventories….
Case describes a scenario with typical symptoms – inventories are too high and customer service is poor.
Initial explanation is that the problems are due to poor forecasting of customer demand. There’s a perception that demand is highly variable and unpredictable, possibly due to irrational customer behavior, e. g., panic ordering. … if only Meditech could forecast what the customers will order, then they could improve customer service and reduce inventories….
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3. Outline Intent – diagnosis of supply chain Business overview
Case 1
Outline
Intent – diagnosis of supply chain
Business overview
Supply chain
Production planning
What’s wrong?
How to fix it?
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4. Endoscopic Surgical Instruments
Case 1
Permits minimally invasive surgery
Market created in early 80’s, rapidly growing
Old products continually updated and replaced with new product introductions
Meditech, 6 years old, spun off from Largo, produces endoscopic surgical instruments.
Market doubling every 5 years; continual innovation as products get smaller and products created for more applications
创伤最小的介入式治疗方法
创造了8亿美元的市场规模。但问题是：推出新产品时不能及时满足客户需求。产能变得越来越紧张，交付服务不足，影响了公司的声誉。
Cross Docking”翻译为“直接换装”，定义为：“物品在物流环节中，不 经过中间仓库或者站点，直接从一个交通工具换载到另一个运输工具的物流衔接方式。” 在国外，“直接换装”已经被广泛使用，最主要的是被使用在先进的配送中心中。
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5. Copyright Stephen C. Graves, 2002. All rights reserved
Business Overview
Case 1
National and Meditech split the market
Compete based on product innovations, customer service, cost
National sells to physicians; Meditech sells to material managers
Customer preferences change slowly
Meditech has majority of market .
Physicians concerned with product features; materials managers concerned about cost and delivery.
Physicians get accustomed to the feel of a product and won’t change easily.
Hospitals/mat’ls managers set up long term supply contracts to lock in supplier at a good price
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Copyright Stephen C. Graves, All rights reserved

6. Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
External Supply Chain
Hospitals
Domestic Dealers
Meditech Assembly plants
Part suppliers
Meditech
Warehouse:autonomous regional warehouses
4 Meditech assembly plants
4 or 5 domestic dealers, each operates with many autonomous regional warehouses
Each regional warehouse stocks many different products, so as to provide full service to hospitals
Regional warehouses order directly on Meditech
Int’l Meditech affiliates operate like the domestic dealers. 国际联属企业
Hospitals
Int’l Meditech
Affiliates
Copyright Stephen C. Graves, All rights reserved

7. Copyright Stephen C. Graves, 2002. All rights reserved
Internal Supply Chain
Case 1
Assembly organized into multiple flexible lines, manual .
Packaging and sterilization have adequate capacity
Packaging &
Sterilization
Parts Inventory
Assembly
Bulk Inventory
FG Inventory
Assembly organized into multiple flexible lines, manual
Packaging and sterilization have adequate capacity
Not clear how much bulk inventory they keep – from the way they plan (push each month), might expect 2 weeks inventory here on average.
In finished goods they target 3 weeks inventory 2
weeks 1
week
2 - 16
weeks
Copyright Stephen C. Graves, All rights reserved

8. Annual forecast determined by marketing and finance
Case 1
Production Planning
Annual
Forecast
Annual forecast determined by marketing and finance
Revision done at beginning of month by marketing and central planning
Monthly
Revision
Transfer
Requirements
Monthly plan sent to business units, who input it into MRP to get material plans and assembly schedules
Transfer requirements = forecast – FG inventory +safety stock (3 weeks of demand), done by central planning
Monthly
Plan
Annual forecast determined by marketing and finance
Revision done at beginning of month by marketing and central planning
Transfer requirements = forecast – FG inventory +safety stock (3 weeks of demand), done by central planning
从未包装的库存转移到成品库存的产品数量
Transfer requirements = the imputed demand on the bulk inventory ---how much is to be transferred to FGs
Monthly plan agreed to by organization, 1 – 2 weeks into month
Monthly plan sent to business units, who input it into MRP to get material plans and assembly schedules
MRP re-run several times in month to update schedules…
MRP
Parts
Procurement
Plan
Weekly
Assembly
Schedule
Copyright Stephen C. Graves, All rights reserved

9. focusing on information flows
Production Planning
Monthly
Plan
focusing on information flows
MRP
Order point;
Order quantity
Material
Plan
Another way of looking at production planning --- focusing on information flows.
Note assembly and material plan are ‘push’ to meet forecast and monthly plan
Packaging and assembly are ‘pull’
Not clear how OP, or OQ are set, other than 3 weeks of safety stock
Packaging &
Sterilization
Parts Inventory
Assembly
Bulk Inventory
FG inventory
Copyright Stephen C. Graves, All rights reserved

10. Copyright Stephen C. Graves, 2002. All rights reserved
What’s wrong?
Case 1
Poor service for new product introductions
Poor forecasting?
Panic ordering?
And high FG inventory
对预测准确度没有进行数据跟踪，也没有保存预测和需求的信息
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Copyright Stephen C. Graves, All rights reserved

11. Copyright Stephen C. Graves, 2002. All rights reserved
What is going on?
Case 1
Demand is quite predictable
Usage in hospitals is quite stable
Market share moves slowly over time
With each new product, dealer must build inventory to fill pipeline
What causes the spikes? Look at exhibit 2.
Look again at exhibit 3 – see overshoot in production, and see production variation exceeds demand variation
Planners misinterpret the demand spike as an increase in demand rate.
Look at exhibits 6 and 7 (not in case)
There is no panic ordering.
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Copyright Stephen C. Graves, All rights reserved

12. Why did Meditech think demand was unpredictable?
Case 1
Poor information systems
No one looked at demand
No one had responsibility for forecast errors
Tendency to shift the blame
Built-in delays and monthly buckets in planning system
Amplifier in planning system
No one had looked at the data – not easy to get at; also monthly buckets obscures a lot of what is going on.
Transfer req’s = month forecast + 3 weeks of demand – FG inventory
Suppose month forecast = 100, and FG inv = 75; then
Transfer req’s = – 75 = 100
But what if forecast increases to 150:
Transfer req’s = – 75 = 188
Thus, forecast increase by 50%, leads to increase of 88%
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Copyright Stephen C. Graves, All rights reserved

13. What to do? Recognize that demand is stable and predictable
Case 1
Recognize that demand is stable and predictable
Establish accountability for forecast
Eliminate planning delays and/or reduce time bucket
Alternatively, put assembly within pull system and eliminate bulk inventory
Not clear why there is a bulk inventory – what is its purpose?
ROP may also be too high at 3 weeks of demand??
Try to get visibility of hospital demand
Wrap Up: Case illustrates a supply chain challenge – understand why Meditech has poor customer service and high inventory, particular for new products. Context is characterized by lack of data and a some what archaic, albeit typical, planning system that obscures the problem.
Need do diagnosis of what is happenings and why; this then leads to remedies.
Accountability: 责任；
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14. Case 1
Wrap Up
Case illustrates a supply chain challenge – understand why Meditech has poor customer service and high inventory, particular for new products. Context is characterized by lack of data and a some what archaic, albeit typical, planning system that obscures the problem.
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15. 1.1 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.
Supplier
Manufacturer
Distributor
Retailer
Customer
Upstream
Downstream
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16. SCM What is SCM? What is SCM?
SCM is a business network covering from buying, making, moving, warehousing to selling
Making
Buying
Moving
What is SCM?
Selling
Ware
housing

17. 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
The right
Product
Higher
Profits
Time
Customer
Quantity
Store
Price = +
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18. Prospect of supply chain
SCM
Supply Chain Status
Yet existing supply chain is managed manually, causing serious loss of efficiency and cost T I E R 3 T I E R 2 T I E R 1
Supplier
Supplier
Supplier
OEM
Supply Chain Status
Prospect of supply chain
Manual communication (Phone/Fax/EDI)
Spontaneous planning
Hypothetical planning
Tier To Tier
Enormous inventory buffer
2000
2002
Fax/
78%
60%
65%
EDI
60%
28%
On-line
88%
Forrester Research, 2000

19. customer satisfaction
SCM
Background of SCM and its effect
The change in the industrial environment demands the business to adopt to SCM and it can bring the following effects
Background
Effects
Emerging new channel
Channel integration
Standardization of
product and tech
Speedy adaption
to change supply chain
“Competition among
supply chains
not among companies”
Severe competition
Enhanced
customer satisfaction
Speed management
Supply chain
integration thru web
Internet booming
Shorter product
life cycle
Product life cycle
management

20. Supply Chain Execution Collaborative Planning
Components of SCM
SCM
SCM is devided by SCP to offer optimized planning, SCE to stable execution platform, CP to collaborate
Supply Chain Execution
Timely execution for buying, moving, making and ordering
Deliver
the Right Product
at the Right Place
at the Right Time
Supply Chain Planning
Warehouse Management
Transportation Management
Inventory Management
Order Management
Optimized planning for balanced supply for varied demands
Collaborative Planning
Supply Chain Network Design
Demand Planning & Forecasting
Supply Planning
Distribution Planning
Manufacturing Planning
& Scheduling
Facilitating collaboration among participants
Design Collaboration
Demand Collaboration
Procurement Collaboration
Retailer Collaboration

21. Recent Supply Chain Studies Suggest….
“Only 7% of companies today are effectively managing their supply chain. However, these companies are 73% more profitable than other manufacturers. …
” Deloitte & Touche Study, October 2003“
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22. Notice Who is involved? What is the goal?
What level of activities are involved?
What do we mean by integration?
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23. SCM 2
SCM Architecture

24. Figure1.1 The logistics network
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
Figure1.1 The logistics network

25. SCM
SCP Service
SCP analyze, forecast and determine the process of buying, making, transporting, warehousing and selling for balanced supply
Buy
Make
Store
Sell
Move
Objectives
Effective acquisition
of raw material
Effective management
of product resources
Reduction of inventory
and increasing sales
Enhancement of
customer services
Function
Material
Planning
Manufacturing
Planning
Distribution
Planning
Demand Planning
& Fulfilment
-Collaboration for cost
reduction
-Reducing VMI
(Vendor managed
inventory)
-Production planning
considering constraints
-Optimizing production
scheduling
-Differentiated inventory
management according
to demands
-Prevention of missing
the sales opp.
-Demand forecasting
based on statistics
-Prediction of sales
point on excess demand
(ATP, CTP)

26. Cyber logistics consulting
SCE Consulting
SCM
The effective SCE requires re-designing of supply chain to enhance management capability
Logistics consulting
Seamless System
-Re-engineering of logistics process
-Analysing and designing supply chain
-Logistics cost diagnosis
-Management of logistics center
-Checking cycle time and lead time
- Flow management of ordering, logistics and transfering
Logistics center
system
Work management
Process designing
Standardization
Packaging simulation
-E-business of logistics
-Solution for integrated logistics
info and seamless service
Transport system
Transportation scheduling
Location system
Cyber logistics consulting

27. SCM
CP Flow
Collaboration is realized in each stage of stategy, management and transaction of SCM
Tactical
Tactical
Demand
Forecasting
Optimizing
product mix
Collaboration
on Forecasting
Collaboration
on Forecasting
Matching
demand
-supply
Collaboration
on Capacity
Planning
Capacity
Planning
Resource
Planning
Analyzing
Supply
Chain
Operational
Operational
Production
Planning
Analyzing
Supply
Chain
Demand
Management
Shipping
Optimization
Inventory
Planning
Status Management
Collaboration
on Resource
Planning
Transcctional
Transcctional
Shippment
Tracking
Shop Floor
Control
Warehousing
Management
Ordering
Administration
Inventory
Tracking
Order &
Shipments

28. 1.3 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
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29. 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.
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30. 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?
Cross Docking”翻译为“直接换装”，定义为：“物品在物流环节中，不 经过中间仓库或者站点，直接从一个交通工具换载到另一个运输工具的物流衔接方式。” 在国外，“直接换装”已经被广泛使用，最主要的是被使用在先进的配送中心中。
Cross Docking翻译为“直接换装”，定义为：“物品在物流环节中，不 经过中间仓库或者站点，直接从一个交通工具换载到另一个运输工具的物流衔接方式。”
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31. 1.3.1 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?
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32. 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

33. 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
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34. 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?
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35. Conflicting Objectives in the Supply Chain
1. Purchasing
• Stable volume requirements
• Flexible delivery time
• Little variation
• Large quantities
2. Manufacturing
• Long run production
• High quality
• High productivity
• Low production cost
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36. 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
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37. 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
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38. 1.3.2 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?
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39. Can’t Forecasting Help?
Forecasting is always wrong
The longer the forecast horizon the worse the forecast
End item forecasts are even more wrong
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40. 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
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41. 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
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42. 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
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43. 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
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44. Dealing with Uncertainty
Pull Systems
Risk Pooling
Centralization
Postponement
Strategic Alliances
Collaborative Forecasting
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45. 1.4 Why Supply Chain Management?
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46. 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
Magnitude规模
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47. 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?
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48. 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…”.
Many opportunities exist to cut costs in the supply chain!
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49. 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
Target – bowl ordering, where style and colored details are specified by Target close to delivery date – flexibility.
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50. 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% 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.
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51. 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?
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52. 1.5 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?
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