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Introduction to Supply Chain ManagementSupply Chain Management
David Simchi-Levi
Professor of Engineering SystemsMassachusetts Institute of Technology
1
Sources:Plants vendors
portsRegional warehouses:
Stocking points
Field warehouses:Stocking points
Customers demandcenters sinks
Transportation costsTransportation costs
Inventory & warehousingcosts
Inventory & warehousingcosts
Production/purchasecosts
Supply
Image by MIT OpenCourseWare.
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 requirementsservice requirements.
• Notice: – Who is involved – Cost and Service Level – It is all about integration
©Copyright 2003 D. Simchi-Levi
Conflicting Objectives in the Supply Chain
1 Purchasing1. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities
2. Manufacturing2. Manufacturing • Long run production • High quality • High productivity • Low production cost
©Copyright 2003 D. Simchi-Levi
2
Ord
er S
ize
Conflicting Objectives in the Supply Chain
3 Warehousing3. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability
4. Customers • Short order lead time Short order lead time • High in stock • Enormous variety of products • Low prices
©Copyright 2003 D. Simchi-Levi
The Dynamics of the Supply Chain
Customer Demand
Retailer Orders Distributor Orders
Production Plan
Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 2003 D. Simchi-Levi
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Ord
er S
ize
The Dynamics of the Supply Chain
Customer Demand
Production Plan
Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
©Copyright 2003 D. Simchi-Levi
Today’s Supply Chain Challenges
• Global supply chain with long lead times • Rising and shifting customer expectations • Increase in labor costs in developing countriesIncrease in labor costs in developing countries • Increase in logistics costs
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4
Increase in Logistics Costs
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US Logistics Costs as Percent of GDP
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9
10
11
12
15% increase
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
• Rising energy prices • Rail capacity pressure • Truck driver shortage • Security requirements 9
Total US Logistics Costs 1984 to 2007 ($ Billions)
1400
1600
Total US Logistics Costs in $MMs
52%
Total Cost
600
800
1000
1200
Transportation
47%
62%Inventory
0
200
400
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Inv Carrying Transportation Admin Total
Source: 19th Annual Logistics Report 10
Admin
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Today’s Supply Chain Challenges
• Global supply chain with long lead times • Rising and shifting customer expectations • Increase in labor costs in developing countriesIncrease in labor costs in developing countries • Increase in logistics costs • Importance of sustainability • Unprecedented Volatility
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Unprecedented Volatility
Number of days the price of oil changed 5% or more 1990: 38 days of oil changed 5% or more
2008: 39 days
Year In 2008 the price of oil changed 5% or more from its previous close on 39 days making it the most volatile year since 1990.
Source: NYT 12
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t t t t t
Supply Chain: The Magnitude
• It i It is estiimatedd thhat ththe grocery iinddustry could ld save $30 billion (10% of operating cost) by using effective logistics strategies. – A typical box of cereal spends 104 days getting
from factory to supermarket.
A t i l d 15 d t li f– A typical new car spends 15 days traveling from the factory to the dealership.
©Copyright 2003 D. Simchi-Levi
Supply Chain: The Magnitude (continued)
• 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 writedowns of $2.6 billi i O t b 1997billion in October 1997.The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)
©Copyright 2003 D. Simchi-Levi
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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 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)
©Copyright 2003 D. Simchi-Levi
Supply Chain: The Potential
• Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using
- Direct business model
- Build-to-order strategy.
©Copyright 2003 D. Simchi-Levi
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Supply Chain: The Potential • In 10 yyears,, 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.
©Copyright 2003 D. Simchi-Levi
Supply Chain: The Complexity National Semiconductors: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 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.
©Copyright 2003 D. Simchi-Levi
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©Copyright 2003 D. Simchi-Levi
Supply Chain Challenges
Achieving Global Optimization• Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time
Image by MIT OpenCourseWare.
Procurement Planning Manufacturing Planning Distribution Planning Demand Planning
Procurement Planning Manufacturing Planning Distribution Planning Demand Planning
Sequential Optimization
Global Optimization
Supply Contracts / Collaboration / Information Systems and DSS
Supply Chain Challenges •• Achieving Global Optimization Achieving Global Optimization
– Conflicting Objectives – Complex network of facilities – System Variations over time
• Managing Uncertainty – Matching Supply and Demand – Demand is not the only source of
uncertainty
©Copyright 2003 D. Simchi-Levi
The EnterpriseFulfillment and Development Supply Chains
Plan/Design •Product Architecture •Make/Buy
Develop Plan/Design
Source
Make/Buy •Early Supplier Involvement
•Strategic Partnerships •Suppliers Selection •Supply Contracts
pment Suppply C
hain
Supply Produce Distribute Sell
Fulfillment Supply Chain
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Fulfillment and Development Supply Chain
• Industry clock speed � Innovative vs. functional
products • Core competencies
� Make vs. buy Make vs. buy • Product design
� Modular vs. integral
Development SSupply Chain Supply
Plan/Design • Product architecture • Make/buy • Early supplier involvement
• Strategic partnerships
Produce Distribute
Source Strategic partnerships
• Supplier selection • Supply contracts
Fulfillment Supply Chain
Sell
• Uncertainty and variability � Demand and supply
• Lead time � Offshoring vs. onshoring
• Economies of scale � Production and transportation
What’s New in Logistics?
• Global competition
• Shorter product life cycle
• New, low-cost distribution channels
• More powerful well-informed customers
• Internet and E-Business strategies
©Copyright 2003 D. Simchi-Levi
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Significant Increase in Outsourcing Purchasing as % of SalesPurchasing as % of Sales
54%
28%
60%
57%
34% 30%
40%
50%
60%
70% %
0%
10%
20% 22%24%
16% Machinary Computer and telecom Food manufacturing Telecom services
1993 1996
©Copyright 2003 D. Simchi-Levi
New Concepts
•• Push Pull strategies Push-Pull strategies
• Direct-to-Consumer
• Strategic alliances
• Manufacturing postpponementg p
• Dynamic Pricing
• E-Procurement
©Copyright 2003 D. Simchi-Levi
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MIT OpenCourseWarehttp://ocw.mit.edu
ESD.273J / 1.270J Logistics and Supply Chain Management Fall 2009
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