1. Supply Chain Management Introduction

2. Outline What is supply chain management?
A supply chain strategy framework
Major obstacles and common problems
Notes:

3. Traditional View: Cost breakdown of a manufactured good
Profit 10%
Supply Chain Cost 20%
Marketing Cost 25%
Manufacturing Cost 45%
Profit
Supply Chain
Cost
Marketing
Manufacturing
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.
Effort spent for supply chain activities are invisible to the customers.

4. What can Supply Chain Management do?
Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies
A typical box of cereal spends 104 days from factory to sale
A typical car spends 15 days from factory to dealership
Faster turnaround of the goods is better?
Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago
inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory.
To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE.
National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time.

5. Magnitude of Supply Chain Management
Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not available when and where needed
P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand

6. Importance of SCM understood by some
AMR Research:
"The biggest issue enterprises face today is intelligent visibility of their supply chains-both upstream and down"
Forrester Research:
"Companies need to sense and proactively respond to unanticipated variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks”
Gartner Group:
“By 2004, 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers”
Open ended statement. Agility can be increased continuously.

7. SCM Generated Value Minimizing supply chain costs
while keeping a reasonable service level
customer satisfaction/quality/on time delivery, etc.
This is how SCM contributes to the bottom line
SCM is not strictly a cost reduction paradigm!

8. A picture is better than 1000 words
A picture is better than 1000 words! How many words would be better than 3 pictures?
- A supply chain consists of
Supplier
Manufacturer
Distributor
Retailer
Customer
Upstream
Downstream
SUPPLY SIDE
DEMAND SIDE
- aims to Match Supply and Demand, profitably for products and services
- achieves
The right
Product
Higher
Profits
Time
Customer
Quantity
Store
Price = +

9. Flows in a Supply Chain Supplier Customer Material Information Funds
The flows resemble a chain reaction.

10. SCM in a Supply Network
Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains.
Supply
Demand
Products and Services
Cash
Supply Side OEM Demand Side
THAILAND INDIA MEXICO TEXAS US
N-Tier Suppliers Suppliers Logistics Distributors Retailers
Information
The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably

11. Importance of Supply Chain Management
In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report
Tier 1 Supplier
Manufacturer
Distributor
Retailer
Customer
Inefficient logistics
High stockouts
Ineffective promotions
Frequent Supply shortages
High landed costs to the shelf
High inventories through the chain
Low order fill rates
Glitch-Wrong Material, Machine is Down – effect snowballs
Eliminating inefficiencies in supply chains can save millions of $.

12. Cycle View of Supply Chains
Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
Any cycle
0. Customer arrival
1. Customer triggers an order
2. Supplier fulfils the order
3. Customer receives the order
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.

13. Push vs Pull System
What instigates the movement of the work in the system?
In Push systems, work release is based on downstream demand forecasts
Keeps inventory to meet actual demand
Acts proactively
e.g. Making generic job application resumes today (e.g.: exempli gratia)
In Pull systems, work release is based on actual demand or the actual status of the downstream customers
May cause long delivery lead times
Acts reactively
e.g. Making a specific resume for a company after talking to the recruiter

14. 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 boundary

15. Examples of Supply Chains
Dell / Compaq
Dell buys some components for a product from its suppliers after that product is purchased by a customer. Extreme case of a pull process
Zara, Spain’s answer to Italy’s Benetton
Sells apparel with a short design-to-sale cycle, avoids markdowns.
Toyota / GM / Volkswagen, in the course notes
McMaster Carr / W.W. Grainger, sell auto parts
Amazon / Barnes and Noble
Frozen food industry/Fast food industry/5 star restaurants
Internet shopping: Webvan / Peapod
Dell has three production sites worldwide and builds to order. Compaq does both. Consider some decisions involved - where to locate facilities? How to size them? Where is the push/pull boundary? What modes of transport to use? How much inventory to carry? In what form? Where to source from?

16. SCM Strategy

17. Mission-Strategy-Tactics-Decisions
Mission, Mission statement
The reason for existence of an organization
Strategy
A plan for achieving organizational goals
Tactics
The actions taken to accomplish strategies
Operational decisions
Day to day decisions to support tactics

18. Life Strategy for Ted Mission: Live a good life
Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably
Mission: Live a good life
Goal: Successful career, good income
Strategy: Obtain a master’s degree
Tactics: Select a college and a concentration
Operations: Register, buy books, take courses, study, graduate, get a job

19. Linking SC and Business Strategy
Competitive (Business) Strategy
Product Development Strategy
Portfolio of products
Timing of product introductions
Marketing Strategy
-Frequent discounts
-Coupons
Supply Chain Strategy
New
Product
Development
Marketing
and
Sales
Operations
Distribution
Service
Competitive strategy: a set of customer needs that a company emphasizes and concentrates on while producing / servicing. Compare Wal-Mart, 7 eleven, Sam’s club.
Finance, Accounting, Information Technology, Human Resources

20. Strategies: Product Development
It relates to Technologies for future operations (via patents) and Set of products/services
Be the technology leader
IBM workstations
Offer many products
Dell computers
Offer products for locals
Tata’s Nano at $2500= rupees
Production at Singur, West Bengal, India;
l x w x h=3.1 x 1.5 x 1.6 meters;
Top speed: 105km/hr;
Engine volume 623 cc;
Mileage 50 miles/gallon;
Annual sales target 200,000.

21. Strategies
Marketing and sales strategy relates to positioning, pricing and promotion of products/services
e.g. Never offer more than 40% discount
e.g. EDLP = every day low price
At Wal-Mart
e.g. Demand smoothing via coupons
BestBuy
Supply chain management strategy relates to procurement, transportation, storage and delivery
e.g. Never use more than 1 supplier for every input
e.g. Never expedite orders just because they are late
e.g. Always use domestic suppliers within the sales season not in advance.

22. Fitting the SC to the customer or vice versa?
Understand the customer Wishes
Understand the Capabilities of your SC
Match the Wishes with the Capabilities
Challenge: How to meet extensive Wishes
with limited Capabilities?

23. Understanding the Supply Chain: Cost-Responsiveness Tradeoff
Responsiveness (in time, high service level and product variety)
High
Efficiency frontier
Inefficient
Impossible
Fix responsiveness
Inefficiency Region
Low
Cost in $
High
Low
Why decreasing slope (concave) for the efficiency frontier?

24. Achieving Strategic Fit: Wishes vs. Capabilities
Responsive (high cost) supply chain
AOG Shipments
<High margin>
Responsivenesspectrum
Zone of Strategic Fit
<Low margin>
Efficient
(low cost)
supply chain
Certain demand
Implied uncertainty spectrum
Uncertain demand

25. Integration Integration is the central theme in SCM
Building synergies by integrating business functions, departments and companies

26. Strategic Scope Suppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Strategic scope must cover all boxes, at least at the supply chain end. Each stage must have fit across its vertical boxes and supply chain strategy spanning all players. This fit allows the countering of multiple owners and helps avoid local optimization.
Marketing Strategy

27. Supply Chain Drivers and Obstacles

28. Drivers of Supply Chain Performance
How to achieve
Efficiency
Responsiveness
Supply chain structure
Inventory
Transportation
Facilities
Logistical
Drivers
How does a supply chain make the efficiency / responsiveness tradeoff and position at the appropriate point - using Inventory, Transportation, Facilities, and Information decisions.
Cross-
Functional
Drivers
Information
Sourcing
Pricing

29. 1. Inventory Convenience: Cycle inventory
No customer buys eggs one by one
Unstable demand: Seasonal inventory
Bathing suits
Xmas toys and computer sales
Pipeline inventory
Work in process or transit

30. 2. Transportation
Air
Truck
Rail
Ship
Pipeline
Electronic

31. 3. Facilities Production
Flexible vs. Dedicated
Flexibility costs
Production: Remember BMW: “a sports car disguised as a sedan”
Service: Can your instructor teach music as well as SCM?
Sports: A playmaker who shoots well is rare.
Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping
Job Lot Storage: Need more space. Reticle storage in fabs.
Crossdocking: Wal-Mart

32. 4. Information Role in the supply chain
The connection between the various stages in the supply chain
Crucial to daily operation of each stage in a supply chain
E.g., production scheduling, inventory levels
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
Andersen Windows
Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory.

33. Characteristics of the Good Information
Strategy
Analytical Models
$$$
Information
Accurate?
Accessible?
Up-to-date?
In the Correct form?

34. 5. Sourcing Role in the supply chain Role in the competitive strategy
Set of processes required to purchase goods and services in a supply chain
Supplier selection, single vs. multiple suppliers, contract negotiation
Role in the competitive strategy
Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
In-house vs. outsource decisions- improving efficiency and responsiveness
TI: More than half of the revenue spent for sourcing.
Cisco sources: Low-end products (e.g. home routers) from China.
Components of sourcing decisions
In-house versus outsource decisions
Supplier evaluation and selection
Procurement process:
Every department of a firm buy from suppliers independently, or all together.
EDS to reduce the number of officers with purchasing authorization.

35. 6. Pricing Role in the supply chain Role in the competitive strategy
Pricing determines the amount to charge customers in a supply chain
Pricing strategies can be used to match demand and supply
Price elasticity: Do you know yours?
Role in the competitive strategy
Use pricing strategies to improve efficiency and responsiveness
Low price and low product availability; vary prices by response times
Amazon: Faster delivery is more expensive
Components of pricing decisions
Pricing and economies of scale
Everyday low pricing versus high-low pricing
Fixed price versus menu pricing, depending on the product and services
Packaging, delivery location, time, customer pick up
Bundling products; products and services

36. Considerations for Supply Chain Drivers

37. Major Obstacles to Achieving Fit
SC is big:
Variety of products/services
Spoiled customer
Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives
Globalization
Local optimization and lack of global fit

38. Major Obstacles to Achieving Fit
Dealing with Multiple Owners / Local Optimization
Information Coordination
Information sharing / Shyness / Legal and ethical issues
Contractual Coordination
Mechanisms to align local objectives with global ones
Coordination with (real) options
Rare in the practice
Without coordination, misleading reliance on metrics:
Average safety inventory, Average incoming shipment size, Average purchase price of raw materials, Revenue

39. Common problems
Lack of relevant SCM metrics: How to measure responsiveness?
How to measure efficiency, costs, worker performance, etc?
Poor inventory status information
Theft: Major problem for furniture retailers.
Transaction errors: Retailers with inaccurate inventory records
for 65% of SKUs
Information delays, dated information, incompatible info. systems
Misplaced inventory: 16% of items cannot be found at a major retailer
Spoilage: active ingredients in the products are losing their properties
Product quality and yield
Lack of visibility in SCs
Do you know the inventory your distribution centers hold?
Do you know the inventory your fellow retailer holds?

40. Major obstacles to achieving fit
Instability and Randomness:
Increasing product variety
Shrinking product life cycles
Customer fragmentation: Push for customization, segmentation
Fragmentation of Supply Chain ownership: Globalization
Increasing implied uncertainty

41. Common problems Poor delivery status information Poor IT design
Not knowing the order status
Poor IT design
Unreliable, duplicate data
Security problems: too much or too little
Ignoring uncertainties
“The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty.”
Nitin Nohra, HBR February 2006 issue, p.40.
Internal customer discrimination
Giving lower priority to internal customers than external customers
Poor integration
Elusive inventory costs
Accounting systems do not capture opportunity costs
SC-insensitive product design

42. Thank You