INTRODUCTION TO SUPPLY CHAIN MANAGEMENT. Flows in a Supply Chain Customer Information Product Funds

INTRODUCTION TO SUPPLY CHAIN INTRODUCTION TO SUPPLY CHAIN MANAGEMENTMANAGEMENT

Flows in a Supply ChainFlows in a Supply Chain

Customer

Information

Product

Funds

What is Knowledge?What is Knowledge? A collection of data is not information.

A collection of information is not knowledge.

A collection of knowledge is not wisdom.

A collection of wisdom is not truth.

In the first half of the twentieth In the first half of the twentieth century industry replaced agriculture, in century industry replaced agriculture, in the second half of the twentieth century the second half of the twentieth century

–“service” has replaced “manufacturing” –“service” has replaced “manufacturing” -and right now, the knowledge industry is -and right now, the knowledge industry is

beginning to replace the others. beginning to replace the others.

−−−−George KotzmetzkGeorge Kotzmetzk

Chapter OutlineChapter Outline

* Introduction* What is Supply Chain Management?* Why is Supply Chain Management important?* The origins of Supply Chain Management* Important Elements of Supply Chain Management:

- Purchasing- Operations- Distribution- Integration

* Strategies for Supply Chain Management* Future Trends in Supply Chain Management* The Beer Game

What is a Supply Chain?What is a Supply Chain?

A supply chain consists of the flow of products and services from/to:

--Raw materials manufacturers SEE FIGURE 1.1--Intermediate products manufacturers--End product manufacturers--Wholesalers and distributors--Retailers and, --End customers

Connected by agents, transportation and storage activities, and

Integrated through sharing of information, planning, and processing activities\

Examples???

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

Figure 1.1 A Generic Supply Chain

End product manufacturer

Wholesalers,

distributorsIntermediate

component mfgs.

Raw material

suppliers

Retailers

End

customers

Product & service flow

Information and planning

Typical Supply ChainsTypical Supply Chains

Purchasing Receiving Storage Operations Storage

Production Distribution

Typical Supply Chain for a ManufacturerTypical Supply Chain for a Manufacturer

Supplier

Supplier

Supplier

Storage} Mfg. Storage Dist. Retailer Customer

Supplier

Supplier

} Storage Service Customer

Typical Supply Chain for a ServiceTypical Supply Chain for a Service

What is Supply Chain Management?What is Supply Chain Management?

Here are two definitions:

The design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer

-- Institute for Supply Management

Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer

-- The Supply Chain Council

What Is the Goal of Supply Chain What Is the Goal of Supply Chain Management?.Management?.

Supply chain management is 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 – At the right time

In order to– Minimize total system cost– Satisfy customer service requirements

Importance of Supply Chain Importance of Supply Chain ManagementManagement

* Firms have discovered value-enhancing and long term benefits

* Who benefits most? Firms with: - Large inventories

- Large number of suppliers

- Complex products

- Customers with large purchasing budgets

* Benefits

- Lower purchasing/inventory costs, higher quality/customer service

Importance of Supply Chain Mgt. –Importance of Supply Chain Mgt. –Cont.Cont.

Firms practicing Supply Chain Management:

1. Start with key suppliers

2. Move on to other suppliers, customers, and shippers

3. Integrate second tier suppliers and customers (second tier refers to the customer’s customers and the supplier’s suppliers)

Importance of Supply Chain Mgt. –Importance of Supply Chain Mgt. –Cont.Cont.

* Cost savings and better coordination of resources are reasons to employ Supply Chain Management

-- Bullwhip Effect- the magnification of safety stocks and costs based on separate forecasts and uncoordinated planning and sharing of information along the supply chain (Ex. 1.1)

* Reducing the bullwhip effect occurs through:

-- Process integration- Interdependent activities can lead to improved quality, reduced cycle time, better production methods, better forecasts, less safety stock, etc.

Important Elements of SCMImportant Elements of SCM

Purchasing- Supplier alliances, supplier management, strategic sourcing

Operations- Demand management, MRP, ERP, JIT, TQM

Distribution- Transportation management, customer relationship management, network design, service response logistics

Integration- Coordination/Integration activities, global integration problems, performance measurement

Important Elements of SCM-Cont.Important Elements of SCM-Cont.

Purchasing:

•Long term relationships•Supplier management- improved performance through-

-- Supplier evaluation (determining supplier capabilities and performance)

-- Supplier certification (third party or internal certification to assure product quality and service compliance)

•Strategic partnerships- successful and trusting, long-term relationships with top-performing suppliers

Important Elements of Supply Chain Important Elements of Supply Chain Management-Cont.Management-Cont.

Operations:-- Demand management- match demand to available capacity

-- Linking buyers & suppliers via MRP and ERP systems

-- Use JIT to improve the “pull” of materials to reduce inventory levels

-- Employ TQM to improve quality compliance among buyers and suppliers


Distribution:-- Transportation management- tradeoff decisions between cost & timing of delivery/customer service via trucks, rail, water & air

-- Customer relationship management- strategies to ensure deliveries, resolve complaints, improve communications, & determine service requirements

-- Network design- creating distribution networks based on tradeoff decisions between cost & sophistication of distribution system


Integration:

-- Supply Chain Integration- when supply chain participants work for common goals. Requires intrafirm functional integration. Based on efforts to change attitudes & adversarial relationships

-- Global Supply Chains- advantages that accrue from sourcing from larger global market e.g., lower cost & higher quality suppliers. May involve operating exposure, which is risk found in foreign settings

-- Supply Chain Performance Measurement- Crucial for firms to know if procedures are working

Strategies for SCMStrategies for SCM

All of the advanced strategies, techniques,

and approaches for Supply Chain

Management focus on:

Global Optimization

Managing Uncertainty

OptimizationOptimization

* What is it?

* Why is it important?

* What tools and approaches help?

Tools and Strategies for Tools and Strategies for OptimizationOptimization

• Decision Support Systems• Inventory Control• Network Design• Design for Logistics• Cross Docking

Global OptimizationGlobal Optimization

What is it? Why is it different/better than local optimization? What are conflicting supply chain objectives? What tools and approaches help with global optimization?

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Global Optimization

Sequential Optimization vs. Sequential Optimization vs. Global OptimizationGlobal Optimization

Source: Duncan McFarlane

Why is Global Optimization Hard?Why is Global Optimization Hard?

–The supply chain is complex–Different facilities have conflicting objectives–The supply chain is a dynamic system–The power structure changes–The system varies over time

UncertaintyUncertainty

• What is variation?• What is randomness?• What tools and approaches help us to

deal with these issues?

Can’t Forecasting Help?Can’t Forecasting Help?

Forecasting is always wrong The longer the forecast horizon the worse the

forecast End item forecasts are even more wrong

Why Is Uncertainty Hard to Deal With?Why Is Uncertainty Hard to Deal With?

* Matching supply and demand is difficult.* Forecasting doesn’t solve the problem.* Inventory and back-order levels typically fluctuate widely

across the supply chain.* Demand is not the only source of uncertainty:

– Lead times– Yields– Transportation times– Natural Disasters– Component Availability

Supply Chain VariabilitySupply Chain VariabilityV

olu

mes

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

ActualConsumerDemand

ActualConsumerDemandRetailer Warehouse

to Shop

Retailer Warehouseto ShopRetailer OrdersRetailer Orders

Production PlanProduction Plan

Manufacturer Forecastof Sales

Manufacturer Forecastof Sales

What Management Gets...What Management Gets...

Vo

lum

es

Time


ConsumerDemand

ConsumerDemand


What Management Wants…What Management Wants…

Vo

lum

es

Time


ConsumerDemand

ConsumerDemand


Dealing with UncertaintyDealing with Uncertainty

• Pull Systems• Risk Pooling• Centralization• Postponement• Strategic Alliances• Collaborative Forecasting

Supply Chain:the MagnitudeSupply Chain:the Magnitude

• In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of gross domestic product).– Transportation 58%– Inventory 38%– Management 4%

• Third party logistics services grew in 1998 by 15% to nearly $40 billion

Supply Chain:the MagnitudeSupply Chain:the Magnitude

It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies.

–A typical box of cereal spends more than three months getting from factory to supermarket.

A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days.

Supply Chain: The MagnitudeSupply Chain: The Magnitude

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 write downs of $2.6 billion in October 1997, due to “Raw material shortages, internal and supplier parts shortages…”.

Supply Chain: The PotentialSupply 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 …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of business strategy, Oct./Nov. 1997)

Supply Chain:the PotentialSupply Chain:the Potential

• In 10 years, 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.

• 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.

What’s New?What’s New?

• Global competition• Shorter product life cycle• New, low-cost distribution channels• More powerful well-informed customers• Internet and E-Business strategies

H&B Wood Bats ProcessH&B Wood Bats Process

ERP5Overview—Supply System at Hillerich & Bradsby

Technology/LogisticsTechnology/Logistics

LO2American President Line

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INTRODUCTION TO SUPPLY CHAIN MANAGEMENT. Flows in a Supply Chain Customer Information Product Funds