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Copyright 2002 D. Simchi-Levi
Introduction toSupply Chain Management
(first lecture) MUHAMMAD HASHIM KHAN
Event Management (Monash UniversityAustralia)
MBA -M.Phil (Supply ChainManagement)
BBA-H (Marketing) Contact # 03218116006
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Copyright 2002 D. Simchi-Levi
LEARNING OBJECTIVES Demonstrate your understanding
of the linkages between supply
chain management and thevarious functional areas ofbusiness
Describe the historicaldevelopment of supply chainmanagement
Describe supply chain
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Copyright 2002 D. Simchi-Levi
LEARNING OBJECTIVES Describe supply chain
management configuration
strategies Describe supply chain
management coordination
strategies Describe supply chain
management improvement
strategies
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Copyright 2002 D. Simchi-Levi
Supply Chain Management ---ARiver
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Supply
Sources:plantsvendorsportsRegionalWarehouses:stockingpoints
FieldWarehouses:stockingpoints
Customers,demandcenterssinks
Production/purchasecosts
Inventory &warehousingcosts
Transportationcosts
Inventory &warehousingcosts
Transportationcosts
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Supply Chain Management in aManufacturing Plant
ReceivingReceiving
andand
InspectionInspection
RawRaw
Materials,Materials,
Parts, andParts, and
In-processIn-process
Ware-Ware-
HousingHousing
ProductionProduction
FinishedFinished
GoodsGoods
Ware-Ware-
housinghousing
Inspection,Inspection,
Packaging,Packaging,
AndAnd
ShippingShippingS
upp
lie
rs
C
us
tomers
Materials Management
PurchasinPurchasingg ProductionProductionControlControl
WarehousingWarehousing
andandInventoryInventory
ControlControl
ShippingShipping
andandTrafficTraffic
Physical materials flowPhysical materials flow
Information flowInformation flow
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Supply Chain management A supply chain consist of all parties
involved directly or in directly , in
fulfilling a customer requirement. Manufacturer
Supplier
Transporter
Warehouse Retailer
customer
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INTRODUCTION Supply chain management is the
configuration, coordination and
improvement of a sequentiallyrelated set of operations
With supply chain management,
the idea of satisfying an entirechain of customers becomesreality
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Procurement
Planning
Manufacturing
Planning
Distribution
Planning
DemandPlanning
Sequential Optimization
Supply Contracts/Collaboration/Information Systems and DSS
Procurement
Planning
Manufacturing
Planning
Distribution
PlanningDemandPlanning
Global Optimization
Sequential Optimization vs.
Global Optimization
Source: Duncan McFarlane
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Definition: Supply Chain Management is primarily
concerned with the efficient integration of
suppliers, factories, warehouses and stores sothat merchandise is produced and distributedin the right quantities, to the right locationsand at the right time, and so as to minimizetotal system cost subject to satisfying service
requirements.Notice:
Who is involved
Cost and Service Level
It is all about integration
Supply Chain Management
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Copyright 2002 D. Simchi-Levi
Supply Chain Management Refers to all the management functions
related to the flow of materials from thecompanys direct suppliers to its directcustomers.
Includes purchasing, traffic, productioncontrol, inventory control, warehousing, andshipping.
Two alternative names: Materials management
Logistics management
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Customers
Suppliers
P1 Plan Supply Chain
PlanPlan
P2 Plan Source P3 Plan Make P4 Plan Deliver
Source Make Deliver
S1 Source Stocked Products M1 Make-to-Stock
M2 Make-to-Order
M3 Engineer-to-Order
D1 Deliver Stocked Products
D2 Deliver MTO Products
D3 Deliver ETO Products
S2 Source MTO Products
S3 Source ETO Products
Supply-Chain Operations Reference-model(SCOR) 5.0 - Processes
ReturnSource
P5 Plan Returns
ReturnDeliver
Enable
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Supply Chain Management
Requires Many Different FunctionsPurchasing Logistics
Production
MaterialsMarketing
Distributio
n Transporta
tion
Warehousin
gStore
Information
Systems
Operation
s
Procurement
Engineerin
g
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Integrating Operations Management withOther Functions
Supply Chain Management: FromHenry Ford to E-Commerce
Supply-Chain Management Decisions
Supply Chain Configuration Strategies
Supply-Chain Coordination Strategies
Improving Supply Chains: Seven
Principles
Integrating OperationsManagement with Other Functions
Functional Areasof Business
Fi
nance
Accounting
Human
Resource
Marketing
Engineering
Management
In
formation
System
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Conflicting Objectives in the
Supply Chain3. Warehousing Low inventory
Reduced transportation costs Quick replenishment capability4. Customers Short order lead time
High in stock Enormous variety of products Low prices
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The Dynamics of the Supply Chain
Order S
ize
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders
Production PlanProduction Plan
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The Dynamics of the Supply Chain
Order S
ize
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
Production PlanProduction Plan
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Supply Chain: The
Magnitude(continued)
It is estimated that the grocery industrycould save $30 billion (10% of
operating cost) by using effectivelogistics strategies. A typical box of cereal spends 104 days
getting from factory to supermarket.
A typical new car spends 15 daystraveling from the factory to thedealership.
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Supply Chain: The
Magnitude(continued)
Compaq computer estimates it lost $500 millionto $1 billion in sales in 1995 because itslaptops and desktops were not available whenand where customers were ready to buy them.
Boeing Aircraft, one of Americas leading capitalgoods producers, was forced to announcewritedowns of $2.6 billion in October 1997.
The reason? Raw material shortages, internaland supplier parts shortages . (Wall Street
Journal, Oct. 23, 1997)
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Supply Chain: The
Potential
Procter & Gamble estimates that it saved retail
customers $65 million through logistics gainsover the past 18 months. According to P&G, the essence of itsapproach lies in manufacturers and suppliers
working closely together . jointly creatingbusiness plans to eliminate the source ofwasteful practices across the entire supplychain .(Journal of Business Strategy, Oct./Nov.1997)
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Supply Chain: The
Potential
Dell Computer has outperformed thecompetition in terms of shareholder value
growth over the eight years period, 1988-1996, by over 3,000% (see Anderson andLee, 1999) using
- Direct business model
- Build-to-order strategy.
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Supply Chain: The
PotentialIn 10 years, Wal-Mart transformed
itself by changing its logistics
system. It has the highest salesper square foot, inventoryturnover and operating profit ofany discount retailer.
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Supply Chain: The
ComplexityNational Semiconductors:
Production:
Produces chips in six different locations:
four in the US, one in Britain and one inIsrael
Chips are shipped to seven assembly
locations in Southeast Asia.
Distribution
The final product is shipped to hundredsof facilities all over the world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within
45 days
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Supply Chain Challenges Achieving Global Optimization
Conflicting Objectives
Complex network of facilities
System Variations over time
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Return onInvestments
10.0%
Total assets$4,000,000
Sales
$5,000,000
Divided by
Profitmargin
8%
Assetturnover
rate1.25
Multiply
Cash$300,000
Accountreceivable$300,000
Inventories$500,000
Assets
Labor$700,000
Materials$2,300,000
Overhead
$800,000Operatingcostelemen
ts
($515,000)
($3,685,000)($2,185,000)(10.3%)
(1.26)
($3,975,000)
($1,075,000)
($475,000)
(13.0%)
What if wedecreasematerials costby 5%?(or $115,000)Sales
$5,000,000
Net income$400,000
Divided by
Fixed assets$2,900,000
Currentassets
$1,100,000
Plus
Other costs$800,000
Sales$5,000,000
Cost ofGoods Sold$3,800,000
Minus
Plus
Supply Management and
Return on Investment
Figure 1-4Figure 1-4
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The Impact on ROI of Reducing
Materials Costs vs. Increasing Sales If the same profit increase were to
be generated by increasing sales,
what sales increase would berequired?
At the existing 8% profit margin,
the following calculation providesthe answer
Profit increase = new sales X .08
$115,000 = new sales X .08
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The Impact on ROI of Reducing
Materials Costs vs. Increasing Sales therefore..
($1,437,500 / $5,000,000) X 100 =
28.8%
or a sales increase of 28.8% isrequired to match the profit
increase generated by a 5%reduction in materials cost
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Whats New inLogistics?
Global competition
Shorter product life cycleNew, low-cost distribution
channels
More powerful well-informedcustomers
Internet and E-Business strategies
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New Concepts
Push-Pull strategiesDirect-to-ConsumerStrategic alliancesManufacturing postponementDynamic Pricing
E-Procurement
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Second-Tier Suppliers
Automobile Industry
Customer with Needfor a Vehicle
Retailers
Distribution Centers
Assembly /Manufacturer
Second-TierSuppliers Second-Tier Suppliers
First-Tier Suppliers First-Tier Suppliers
Key:
Product Material Flow
Information / Data Flow
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Supply Chain for Steel in an Automobile Door
MININGMININGCOMPANYCOMPANY
Mines iron oreMines iron ore
STEELSTEEL
MILLMILL
Forms steelForms steelingotingot
STEELSTEEL
COMPANYCOMPANY
Forms sheetForms sheetmetalmetal
IronIronoreore
SteelSteelingotsingots
AUTOMOTIVEAUTOMOTIVESUPPLIERSUPPLIER
Makes doorMakes door
AUTOMOBILEAUTOMOBILEMANUFACTURMANUFACTUR
ERER
MakesMakesautomobileautomobile
CARCARDEALERSHIPDEALERSHIP
DoesDoespreparationpreparation
CarCar
doordoor
CarCar
FINALFINALCONSUMERCONSUMER
DrivesDrivesautomobileautomobile
PreparedPrepared
carcar
SheetSheet
metalmetal