Supply Chain Management

Introduction

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 Outline

 What is supply chain management?

 A supply chain strategy framework
 Major obstacles and common problems

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 Traditional View: Cost breakdown of a
manufactured good

Profit
 Profit 10%
Supply Chain
Cost
 Supply Chain Cost 20% Marketing
Cost

 Marketing Cost 25%

Manufacturing
 Manufacturing Cost 45% Cost

Effort spent for supply chain activities are invisible to the customers.
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 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.

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 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

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 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.

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 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!

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 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

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

- achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits

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 Flows in a Supply Chain

Material

Information
Supplier Customer
Funds

The flows resemble a chain reaction.

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 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.
Cash
Products and Services
Information
THAILAND INDIA MEXICO TEXAS US
N-Tier Suppliers Suppliers Logistics Distributors Retailers

Supply Side OEM Demand Side

Demand

Supply

 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

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 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

Frequent Supply Low order fill

shortages Inefficient rates
logistics
High
Tier 1 Manufacturer Distributor Retailer Customer stockouts
Supplier

Glitch-Wrong Material, Ineffective

Machine is Down – High inventories High landed costs
through the chain promotions to the shelf
effect snowballs

 Eliminating inefficiencies in supply chains can save millions of $.

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

Manufacturer
Procurement Cycle
Supplier
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 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

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 Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
Push-Pull boundary
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 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
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 SCM Strategy

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 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

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 Life Strategy for Ted
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
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 Linking SC and Business Strategy
Competitive (Business) Strategy

Product Development Strategy Marketing Strategy

-Portfolio of products
-Frequent discounts Supply Chain Strategy
-Timing of product introductions
-Coupons

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

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 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=100000 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. 20
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 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.
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 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?

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 Understanding the Supply Chain:
Cost-Responsiveness Tradeoff
Responsiveness (in time, high service level and product variety)

High

Efficiency frontier

Fix responsiveness Inefficient Impossible

Inefficiency Region
Low

High Low Cost in $

Why decreasing slope (concave) for the efficiency frontier?
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 Achieving Strategic Fit: Wishes vs. Capabilities

Responsive
(high cost)
AOG Shipments
supply chain
<High margin>

Responsivenes e o f it
n F
spectrum Zo egic
t
t ra
S

<Low margin>
Efficient
(low cost)
supply chain
Certain Implied Uncertain
demand uncertainty demand
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 Integration
 Integration is the central theme in SCM
 Building synergies by integrating business functions,
departments and companies

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 Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy

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 Supply Chain Drivers and Obstacles

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 Drivers of Supply Chain Performance
How to achieve
Efficiency Responsiveness

Supply chain structure

Logistical
Inventory Transportation Facilities
Drivers

Cross-
Information Sourcing Pricing Functional
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Drivers 28
 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

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 2. Transportation
 Air
 Truck
 Rail
 Ship
 Pipeline
 Electronic

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 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
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 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.

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 Characteristics of the Good Information

Information Global Coordinated Supply Chain

Scope Decisions Success

Strategy Analytical $$$

Models
Information
 Accurate?
 Accessible?
 Up-to-date?
 In the Correct form?

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 5. Sourcing
 Role in the supply chain
– 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.

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 6. 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
» 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
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 Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost/slow/no High cost/
duplication streamlined/reliable
Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

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 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
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 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

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 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?
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 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
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 Common problems
 Poor delivery status information
» 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
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 Thank You

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