Supply chain management (1)

Supply Chain Management

A presentation

by

A.V. Vedpuriswar

SUPPLY CHAIN

MANAGEMENT

• Value Chain

• Supply side- raw materials, inbound

logistics and production processes

• Demand side- outbound logistics,

marketing and sales.

WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in

the acquisition and conversion of materials to finished

products delivered to the customer"

Supplier

Management

Schedule /

ResourcesConversion

Stock

Deployment Delivery

Customer

Management

Leads to Business Process Integration

Material Flow

Information Flow

• Supply chain is the system by which

organizations source, make and deliver

their products or services according to

market demand.

• Supply chain management operations and

decisions are ultimately triggered by

demand signals at the ultimate consumer

level.

• Supply chain as defined by experienced

practitioners extends from suppliers’

suppliers to customers’ customers.

• SUPPLY CHAIN INCLUDES :

– MATERIAL FLOWS

– INFORMATION FLOWS

– FINANCIAL FLOWS

• SUPPLY CHAIN MANAGEMENT IS

FACILITATED BY :

– PROCESSES

– STRUCTURE

– TECHNOLOGY

• Supply chain serves two functions:

– Physical

– Market mediation

• Supply chain objectives may differ from

situation to situation.

• For functional products, cost efficiency is

the critical factor.

• For innovative products, responsiveness

is the important factor.

• Leanness + Agility together make up

Leagility

Supply Chain Structure

Information Flow

Raw Materials

RETAILERFACTORY DC RDCSUPPLIER

Finished Goods

Supply Chain and Demand Chain

• Demand chain is defined as the system by

which organizations manage sales and

distribution of products and services to end

users.

• Conceptually incorrect to look at demand

chain separately

• Look at the pipe as a whole.

• But is there a pipe at all?

– More a network

– Not necessarily linear

• Value chain orchestration rather than

controlling the flow through the pipe

• A network of independent and interdependent

organizations mutually and cooperatively

working together to control, manage and

improve the flow of materials and information

from suppliers to end users

SUPPLY CHAIN DRIVERS

Not new. Value system of Michael Porter

• Why sudden interest?

– Demanding customers

– Shrinking product life cycles

– Proliferating product offerings

– Growing retailer power in some cases

– Doctrine of core competency

– Emergence of specialized logistics providers

– Globalization

– Information technology

SUPPLY CHAIN ELEMENTS

• Supply Chain Design

• Resource Acquisition

• Long Term Planning (1 Year ++)

Strategic

• Production/ Distribution Planning

• Resource Allocation

• Medium Term Planning (Qtrly,Monthly)Tactical

• Shipment Scheduling

• Resource Scheduling

• Short Term Planning (Weekly,Daily)

Operational

• Supply Chain Goals

Efficient supply chain management

must result in tangible business

improvements. It is characterized by a

sharp focus on

– Revenue growth

– Better asset utilization

– Cost reduction.

Reduce Overall Cycle Time : Improve Response

Supply Chain

Management

Underlying Principles

Compression

Conformance

Co-operation

Communication

(Planning/Manufacturing/Supply)

(Forecasts/Plans/Distribution)

(Cross -Functional)

(Real Time Data)

Changing Paradigm

• Functional vs Process

• Products vs Customers

• Revenues vs Performance

• Inventory vs Information

• Transactions vs Relationships

Critical Success Factors today

• Cross functional management and

planning skills

• Ability to define, measure and manage

service requirements by market

segment

• Information systems

• Relationship management and win win

orientation

PUTTING IN PLACE A WELL OILED SUPPLY

CHAIN

• Supply chain as an efficient customer

satisfying process

• Effectiveness of the whole supply chain is

more important than the efficiency of each

individual department.

.

The steps involved

• Step1- Designing the supply chain

– Determine the supply chain network

– Identify the levels of service required

Step 2 - Optimizing the supply chain

• Determine pathways from suppliers to

the end customer

– Customer markets to Distribution centers

– Distribution centers to production plants

– Raw material sources to production plants

– Identify constraints at vendors, plants and

distribution centers

– Get the big picture

– Plan the procurement, production and

distribution of product groups rather than

individual products in large time periods-

quarters or years

Step 3- Material flow planning

• Determine the exact flow and timing of

materials

• Arrive at decisions by working back from the

projected demand through the supply chain to

the raw material resources

• Techniques

• ERP

Step 4 - Transaction processing and

short term scheduling

• Customer orders arrive at random

• This is a day to day accounting system which

tracks and schedules every order to meet

customer demand

• Order entry, order fulfillment and physical

replenishment

Information flows in Supply Chain Management

• Information is overriding element

• Need for databases

• Master files: Information about customers, products,

materials, suppliers, transportation, production and

distribution data- do not require frequent processing

• Status files- heart of transaction processing- track

orders and infrastructure status- updated daily.

• Essentially using the same information to make all

plans right from structuring the network to

processing every day supply chain tasks.

THE VIRTUAL VALUE CHAIN

• The value chain connects a company’s

supply side with its demand side.

• Traditionally information has been a

supporting function.

• Information however can be managed

far more creatively.

• There are various stages of using value

added information processes.

• Visibility : See physical operations more

effectively through information. Information

can be used for effective coordination of

value chain activities.

• Mirroring capability : In this stage, virtual

activities are substituted for physical ones. A

parallel value chain is created.

• New customer relationships : The company

can draw on the flow of information in the

virtual value chain to deliver value to

customers in new ways.

Dealer Management

Conventional functions

• Inventory ownership and management

• Sales and technical support

• Order handling

• Credit

Contemporary Trends

• Channels being divided into two- Fulfillment

and Franchised agent

• Fulfillment channel- responsible for getting

the manufacturer’s product from the plant to

the end user through a highly efficient

logistics and inventory management system

Contemporary Trends

• Fulfillment channel may not take ownership

of the product but may perform these

functions on a per box fee structure

• Franchised agents responsible for sales and

sales support but will not write the order or

supply the product

Issues in customer management

• Penetration vs Spread

• Concentration is necessary to commit the

necessary resources for true customer

integration

• Depth of customer contact

– R&D - sharing information vs developing new

products together

– Logistics - Pros and cons of methods of

transportation vs reengineering the logistics

process

Implementation: Points to keep in mind

• Recognize the difficulty of change.

• Prepare a blueprint for change that maps linkages

among initiatives.

• Assess the entire supply chain from supplier

relationships to internal operations to the market

place, including customers, competitors and

industry as a whole.

IS THE SUPPLY CHAIN WORKING?

• Does our manufacturing strategy increase product

line flexibility while continuing to drive down

overall production costs?

• When was the last time we measured lost sales to

end customers?

• Do we have an efficient system to get POS data

from retailers?

• Are we testing our products with end customers?

Do we use the resulting data to adjust our

forecasting and supply positions?

• Is the ratio of returned orders to sales

increasing?

The New Model of Relationships

• Hard bargaining vs shared destiny

• Exit vs Voice

• Arms length relations vs Involving dealers and

suppliers in product development

• Piling up vs Replenishing dealer inventory more

frequently

• In short working together as partners to cut

costs, boost efficiencies, innovate and share

value

• Adversarial vs partnerships

• Short term vs long term contracts

• Large vs small order quantity

• Full truck load vs small parcels

• Inspection vs no inspection

• Written order vs understanding

• Many vs few suppliers

• Design and then invite quote from

vendor vs involving vendor in

development

• Bargaining, holding cards close to chest

vs Shared destiny, transparency

Summary

• Segmentation of customers based on service

needs

• Customization of logistics network

• Listen to signals of market demand and plan

accordingly.

• Differentiate product close to the customer

• Source strategically

• Develop a supply chain wide technology

strategy

• Accept channel spanning performance

measures

• The Bullwhip Phenomenon

• Volatility amplification along the network

• Increase in demand variability as we move

upstream away from the market

• Mainly because of lack of communication and

coordination

• Delays in information and material flows

• Bullwhip effect occurs because of various

reasons:

• Order Batching- Accumulate orders

• Shortage gaming- Ask for more than what is

needed

• Demand forecast updating

Important points to keep in mind

• Segment customers based on service needs.

• Modify the supply chain to meet these service

requirements profitably.

• Customize the logistics network.

• Develop forecasts collaboratively involving every

link of the supply chain.

• Locate the leverage point where the product is

unalterably configured to meet a single

requirement

• Delay product differentiation till the last possible

moment.

• Assess options such as modularized design

or modification of manufacturing processes

that can increase flexibility.

• Cultivate warm relationships with suppliers.

• Efficient supply chain management has to be

accompanied by a technology strategy.

ITALIAN CLOTHING MANUFACTURE

• Warehousing and transportation 6

• Inventory 5

• Late delivery returns 2

• Obsolescence 20

• Lost sales 60

• Need to minimize obsolescence costs

• Minimize product range flexibility

• Reduce product development cycle

Dell’s Direct Business Model of

Virtual Integration

• Advantages of a tightly coordinated supply chain

traditionally facilitated by vertical integration.

• Combined with focus and specialization.

• Leveraging on investments others have made and

focusing on delivering solutions and systems to

customers

• Fewer things to manage - fewer things go wrong

• Suppliers’ engineers part of Dell’s Design team

• Have only a few partners

Dell’s Direct Business Model of

Virtual Integration

• Share information with partners in Real time

fashion.

• Stitch together a business with partners that are

treated as if they are inside the company.

• Change focus from how much inventory there is to

how fast it is moving

• Assets collect risks around them one way or the

other.

• Limited or no testing - Eg. Sony Monitors

Dell’s Direct Business Model of

Virtual Integration

• Only three Manufacturing centers - Austin, Ireland

and Malaysia.

• Inventory levels and replenishment needs

sometimes conveyed to vendors on hourly basis.

• Substitute information for inventory and ship only

when we have real demand from real end

customers

• Clever segmentation - Focus on institutional

markets - 70% to very large customers with

annual purchases exceeding $1 million.

Dell’s Direct Business Model of

Virtual Integration• Exit from retail business after wrong entry in 1989.

• Segmentation - closeness to customers and

access to valuable information.

• Demand forecasting as a critical sales skill

• Help global customers, manage their total

purchase of PCs by selling them a standard

product

• Dell server loads software on customers’

computers

• Meet customers’ needs faster and more efficiently

than any other model.

Li and Fung, Hong Kong

• Founded in 1906

• Today 35 offices in 20 countries

• 1997 revenues of $ 1.7 billion

• Largest export trading company in Hong

Kong

• Customers- American and European retailers

• Sources clothing and other consumer goods

ranging from toys to fashion accessories to

luggage

• Order from Europe

• Buy yarn from Korea

• Weave and dye in Taiwan

• Buy Japanese zippers made in China

• Make the garments in Thailand in five different

factories

• Pulling apart the value chain and optimizing at

each step

• Victor Fung

“ Today, assembly is the easy part. The hard part is

managing your suppliers and the flow of parts.“

Good supply chain management strips away time

and cost from product delivery cycles. Our

customers have become more fashion driven,

working with six or seven seasons a year instead

of just two or three. Once you move to shorter life

cycles, the problem of obsolete inventory

increases dramatically. With customer tastes

changing rapidly and markets segmenting into

narrow niches, it’s not just fashion products that

are becoming increasingly time sensitive.”

• Endorsement by Stan Shih, CEO, Acer

• Buying right things

• Reaching into suppliers to ensure that certain

things happen on time and at the right quality

level.

• Buyer informs five weeks before delivery.

• Reserve undyed yarn from yarn supplier.

• Lock up capacity in weaving and dyeing mills.

• Outsourcing not same as leaving suppliers to do the

worrying.

• Single factories are too small to have much buying

power and to demand faster deliveries from

suppliers.

• To shorten delivery cycle, need to go upstream to

organize production.

• Li & Fung able to delay commitment to a particular

fashion trend.

• Integrated logistics management

• Elimination of consolidators in container

shipments

• Smokeless factory

– Design

– Procurement

– Inspection of raw materials

– Production planning

– Line balancing

– Inspection of finished goods

– No worker ownership

– No labour management

“ If we don’t own factories, can we say we are in

manufacturing? Absolutely, because of the 15

steps in the manufacturing value chain, we

probably do 10.”

• Basic operating unit is the division.

• Divisions focused on serving single customers or

groups of small customers.

• Less emphasis on geographic grouping

• Merchandising decisions decentralized

• Financial controls and operating procedures tightly

centralized.

• Strong focus on inventory and working capital

management.

• “As far as I am concerned, inventory is the root of

all evil. At a minimum, it increases the complexity

of managing any business. So it’s a word we don’t

tolerate around here.”

• Need for sophisticated information systems. Li &

Fung working to create a database to

systematically track all supplier relationships.

• “ Someone might steal our database but when

they call up a supplier, they don’t have the long

relationship with the supplier that Li & Fung has. It

makes a difference to suppliers when they know

that you are dedicated to the business, that you

have been honoring your commitments for 90

years.”

• Broadening the middle

• Better prices and better margins for customers

• Tackling the soft $3 in the cost structure. $3

represents the inefficiency in the supply chain for

a consumer product priced at $4. Look at costs

throughout distribution channels than just in

factory

Thank You