Supply Chain

Management

Chapters 1, 2, & 3
Supply Chain Management
by Chopra

1
Outline

• Background of supply chain

• General concepts of supply chain & Supply Chain

Management

• Supply chain decisions

• Supply chain strategy

2
 General Background
• Business Administration; Management: a program of
studies in a college or university providing general
knowledge of business principles and practices

• Business: a commercial or an industrial enterprise

• Enterprise; Firm: any organization or individual

engaged in economic activity with the aim of
producing goods or services for sale to others; a
business or company.

• Economics: a social science concerned chiefly with

description and analysis of the production, distribution,
and consumption of goods and services 3
• Production Management

• Operations Management: the direction and

control of the processes that transform
inputs into products and services

• Operations: flow of materials

• Process: any activities or group of activities

that takes one or more inputs, transforms
and adds value to them, and provides one
or more outputs for its customers

4
System

Process
Inputs Operation Outputs

5
History
• Modern capitalism: Adam Smith (Wealth of
Nations, 1776).

• Domestic system, apprenticeship.

• First industrial revolution: Steam engine

(James Watt,1765)
- Mass production
- Standardization
- Interchangeable parts (Eli Whitney, 18C)

• Second industrial revolution (1850-1880):

Innovations in transportation and
communication (railroad, steamship,
telegraph) Mass distribution. 6
• Frederick W. Taylor (1865-1915): Father of
scientific management

• Taylorism:
- Development of a true science
- Scientific selection of worker
- Scientific education and development
- Friendly cooperation between management and
men

• Reductionist method: analyze systems by

breaking them down into component parts and
study each one.

• Holistic or systems perspective: JIT, SCM 7

 Movement to SCM
•Before 1980’s: Intra-firm Improvement
(OR, TQM, MRP, MRPII, JIT, and BPR)
•After 1980’s: Inter-firm Improvement (QR,
ECR, VMI, and CPFR)

•Two major lines of movement

- Information Technology
- Supply Chain Management

8
Supply Chain Management
• Definition:
Supply Chain Management is primarily 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 and at the right time, and so as to minimize
total system cost subject to satisfying service
requirements.
• Main points:
• Everyone is involved
• Systems approach to reduce costs and increase revenue
• Focus on interaction and relationship
• Integration is the key

9
 Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points

Supply

Inventory &
warehousing
costs
Production/
purchase Transportati
on Transportati
on
costs costs Inventory & costs
warehousing
costs 10
 The New Focus: Entire Supply Chain!

Customer

Supplier
Customer
Distributor
Supplier Firm Customer

Supplier Firm Distributor Customer

Supplier Customer
Firm
Distributor
Customer
Supplier

Customer

11
Logistics

Logistics is the process that plans,

implements, and controls the efficient,
effective flow and storage of goods,
services and related information from the
point of origin to point of consumption in
order to meet customers’ requirements

Council of Logistics Management, 1998 http://www.CLM1.org

12
SCM vs. Logistics

• Logistics is to manage the flow of materials

in perspective of a single organization.

• SCM is
1) Integration of logistics within a supply
chain
2) to pursue the effective management of
major
business operations within a supply chain
system

• Logistics is considered to be a part of 13

Major Business Processes in Supply
Chain
• Customer relationship management
• Demand management
• Order fulfillment
• Manufacturing flow management
• Procurement
• New product development and
commercialization
• Reverse logistics (handling returns,
salvage, scrap, etc.)

14
Logistics in the Manufacturing
Firm
Profit
• Profit 4%
Logistics
Cost
• Logistics Cost 21%
Marketing
Cost
• Marketing Cost 27%

• Manufacturing Cost 48%

Manufacturing
Cost

15
Supply Chain Management: The
Magnitude

• Estimated that the grocery industry

could save $30 billion (10% of operating
cost) by using effective logistics and
supply chain strategies
• Compaq estimates it lost $.5 billion to
$1 billion in sales in 1995 because
laptops were not available when and
where needed
• P&G estimates it saved retail customers
$65 million by collaboration resulting in
a better match of supply and demand
16
Objective of a Supply Chain

• Maximize overall value created

• Supply chain value: difference between what the final
product is worth to the customer and the effort the
supply chain expends in filling the customer’s request
• Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply chain)

17
Supply Chain Decisions:
Structuring Drivers

Strategy
(Design)

Planning

Operation

18
 Supply Chain Strategy or Design
• Decisions about the structure of the supply chain
and what processes each stage will perform
• Strategic supply chain decisions
• Locations and capacities of facilities
• Products to be made or stored at various
locations
• Modes of transportation
• Information systems
• Supply chain design must support strategic
objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account
market uncertainty 19
Supply Chain Planning

• Planning decisions:
• Which markets will be supplied from
which locations
• Planned buildup of inventories
• Subcontracting, backup locations
• Inventory policies
• Timing and size of market promotions
• Must consider in planning decisions
demand uncertainty, exchange rates,
competition over the time horizon
20
 Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and
operating policies are determined
• Goal is to implement the operating policies as
effectively as possible
• Allocate orders to inventory or production, set
order due dates, generate pick lists at a
warehouse, allocate an order to a particular
shipment, set delivery schedules, place
replenishment orders
• Much less uncertainty (short time horizon)
21
 Value Chain
Business Strategy

New Product Marketing

Strategy Strategy Supply Chain Strategy

New Marketing
Product and Operations Distribution Service
Development Sales

inance, Accounting, Information Technology, Human Resources

22
Cost-Responsiveness Efficient
Frontier
Responsiveness

High

Low
Cost
High Low
23
Uncertainty/Responsiveness Map
Responsive
supply
chain

of c
Responsive n e gi
ness Zo ate
r t
spectrum St Fi

Efficient
supply
chain
Certain Implied Uncertain
demand uncertainty demand
spectrum 24
 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 25