Supply Chain Management Introduction

OutlineA supply chainWhat is supply chain management?Challenges of implementing supply

chain managementThe development chainGlobal optimization

A supply chain consists ofSupplierSupplier ManufacturerManufacturer DistributorDistributor RetailerRetailer CustomerCustomer

Upstream

Downstream

A supply Chain aims to Match Supply and Demand, profitably for products and services

SUPPLY SIDE DEMAND SIDE

A Supply Chain achieves

The rightProduct

HigherProfitsThe right

TimeThe rightCustomer

The rightQuantity

The rightStore

The rightPrice

=++ ++ +

Flows in a Supply Chain

Customer

Material

Information

Funds

The flows resemble a chain reaction.

Supplier

What is supply chain management?Supply chain management is a set of

approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores,

so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time,

in order to minimize systemwide costs while satisfying service level requirements.

What is supply chain management? Or in Short Supply Chain Management (SCM) is

concerned with the management and control of the flows of material, information, and finances in supply chains.

The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably

The definitions leads to several observations. First, supply chain management takes into

consideration every facility that has an impact on cost and plays a role in making the product conform to customer requirements:

from supplier and manufacturing facilities through warehouses and distribution centers to retailers and stores.

observationsIn some supply chain analysis, it is necessary

to account for the suppliers’ suppliers and the customers’ customers

because they have an impact on supply chain performance.

observationsSecond, the objective of supply chain

management is to be efficient and cost-effective across the entire system;

total systemwide costs, from transportation and distribution to inventories of raw materials, work in process, and finished goods, are to be minimized.

observationsThus, the emphasis is not on simply

minimizing transportation cost or reducing inventories

but, rather, on taking a systems approach to supply chain management.

observationsFinally, because supply chain management

revolves around efficient integration of suppliers, manufacturers, warehouses, and stores,

it encompasses the firm’s activities at many levels, from the strategic level through the tactical to the operational level.

Challenges of implementing supply chain managementSupply chain strategies cannot be

determined in isolation. They are directly affected by another chain

that most organizations have, the development chain

that includes the set of activities associated with new product introduction.

Challenges of implementing supply chain managementAt the same time, supply chain strategies also

should be aligned with the specific goals of the organization,

such as maximizing market share or increasing profit.

It is challenging to design and operate a supply chain so that total systemwide costs are minimized,

and systemwide service levels are maintained.

Challenges of implementing supply chain managementThe difficulty increases exponentially when

an entire system is being considered. The process of finding the best systemwide

strategy is known as global optimization.

Challenges of implementing supply chain managementUncertainty and risk are inherent in every

supply chain;customer demand can never be forecast

exactly, travel times will never be certain, and machines and vehicles will break down.

Similarly, recent industry trends, including outsourcing, offshoring, and lean manufacturing that focus on reducing supply chain costs,

Challenges of implementing supply chain managementSignificantly increase the level of risk in the

supply chain. Thus, supply chains need to be designed and

managed to eliminate as much uncertainty and risk as possible as well as deal effectively with the uncertainty and risk that remain.

The development chainThe development chain is the set of activities

and processes associated with new product introduction.

It includes the product design phase, the associated capabilities and knowledge that need to be developed internally, sourcing decisions, and production plans.

The development chainSpecifically, the development chain includes

decisions such as product architecture; what to make internally and what to buy from

outside suppliers, that is, make/buy decisions; supplier selection;early supplier involvement; and strategic partnerships.

The development chainThe development and supply chains intersect

at the production point, It is clear that the characteristics of and

decisions made in the development chain will have an impact on the supply chain.

Similarly, it is clear that the characteristics of the supply chain must have an impact on product design strategy and hence on the development chain.

The development chainUnfortunately, In most organizations,

different managers are responsible for the different activities that are part of these chains.

Eg. the Head of engineering is responsible for the development chain,

the Head of manufacturing for the production portion of the chains, and

the Head of supply chain or logistics for the fulfillment of customer demand.

The development chainTo make matters worse, in many

organizations, additional chains intersect with both the development and the supply chains.

These may include the reverse logistics chain, the chain associated with returns of products

or components, as well as the spare-parts chain.

Global optimization.What makes finding the best systemwide, or

globally optimal, integrated solution so difficult?

There are a variety of factors that make this a challenging problem

Complex networkThe supply chain is a complex network of

facilities dispersed over a large geography, and, in many cases, all over the globe.

Different and conflicting objectivesDifferent facilities in the supply chain

frequently have different, conflicting objectives.

For instance, suppliers typically want manufacturers to commit themselves to purchasing large quantities in stable volumes with flexible delivery dates.

Unfortunately, although most manufacturers would like to implement long production runs, they need to be flexible to their customers’ needs and changing demands.

Different and conflicting objectivesThus, the suppliers’ goals are in direct

conflict with the manufacturers’ desire for flexibility.

Since production decisions are typically made without precise information about customer demand,

the ability of manufacturers to match supply and demand depends largely on their ability to change supply volume as information about demand arrives.

Different and conflicting objectivesSimilarly, the manufacturers’ objective of

making large production batches typically conflicts with the objectives of both warehouses and distribution centers to reduce inventory.

To make matters worse, this latter objective of reducing inventory levels typically implies an increase in transportation costs.

The supply chain is a dynamic systemThe supply chain is a dynamic system that

evolves over time.not only do customer demand and supplier

capabilities change over time, but supply chain relationships also evolve over time.

For example, as customers’ power increases, there is increased pressure placed on manufacturers and suppliers to produce an enormous variety of high-quality products and,

ultimately, to produce customized products.

System variations over timeSystem variations over time are also an

important consideration.Even when demand is known precisely (e.g.,

because of contractual agreements), the planning process needs to account for

demand and cost parameters varying over time

Different and conflicting objectivesThis is due to the impact of seasonal

fluctuations, trends, advertising and promotions, competitors’ pricing strategies, and so forth.

These time-varying demand and cost parameters make it difficult to determine the most effective supply chain strategy,

the one that minimizes systemwide costs and conforms to customer requirements.

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Defining Supply Chain Management

Coordination and integration of all supply chain activities into seamless process.

Enables organizations to plan and collaborate across supply chain.

Goal is to deliver right product to right place at right time in order to maximize profit.

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Strategic Advantages of Supply Chain Supply chain management includes

the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between its environment.

Goal of supply chain management is to integrate the entire process of satisfying the customer’s needs all along the supply chain.

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Strategic Advantages of Supply Chain Management continued Supply chain costs often represent 50%

or more of total operating costs Firms that have implemented supply

chain management Have 45% supply chain cost advantage 50% lower inventory 17% faster delivery of final product Larger market shares and higher

customer loyalty

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Supply Chain Strategy Supply chain strategy needs to be tailored

to meet the needs of its customers which isn’t always the lowest cost.

In situations where the goods are basic commodities with standard benefits (food, home supplies, standard clothing), then cost reduction will be the focus.

In fashion goods, timeliness should be the focus of the supply chain.

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Strategic Need for Supply Chain Management

Total supply chain costs represent better than half, and in some cases three-quarters, of the total operating expenses for most organizations.

The broader concept of the supply chain includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between it and its environment.

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Strategic Need for Supply Chain Management continued

As organizations have continued to adopt more efficient production techniques

such as lean manufacturing, total quality management, inventory reduction techniques

to reduce costs and improve the quality, functionality, and speed of delivery of their products and services to customers,

the costs and delays of procuring the requisite inputs and distributing the resulting goods and services are taking a greater and greater fraction of the total cost and time.

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Other Factors Driving Need to Better Manage Supply Chain Increasing global competition Outsourcing E-commerce Shorter life cycles Greater supply chain complexity

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Measures of Supply Chain Performance

Lower inventories, will be reflected in less need for working capital (WC) and a higher return on asset (ROA) ratio.

Lower cost to carry these inventories will be seen in a reduced cost of goods sold (CGS), and thus a higher contribution margin, return on sales (ROS), and operating income.

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Operations-Oriented Measures Performance measures related to inventory reduction:

First we calculate the aggregate inventory value (at cost) on average for the year (AAIV):AAIV = raw materials + work-in-process +

finished goods % Assets in Inventories = AAIV/total assets Another inventory measure is the inventory

turnover (or “turns,” as it is sometimes called):

Inventory turnover (“turns”) = annual cost of goods sold/AAIV

Transportation

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Modes of Transportation and Routing Water Rail Truck Air

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Factors to Consider in Transportation Decisions

Cost per unit shipped

Ability to fill the transporting vehicle

Total shipment cost Safety of contents Shipping time Availability of

insurance Perishability

Difficulty of arranging shipment

Delivery accommodations

Seasonal considerations

Consolidation possibilities

Size of product

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Location Besides distributing outputs to

customers by transporting them, if there is a facilitating good, we can also locate where our customers can easily obtain them.

Advances in information and telecommunications technology have allowed some pure service organizations (i.e., those without a facilitating good) to reach their recipients through phone, cable, the Internet, or microwave links.

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Trade-offs Between Transportation and Location Processing Natural

Resources Large loss in size

or weight during processing

High economies of scale exist

Raw material is perishable

Immobile Outputs

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Processing Natural Resources Organizations that process natural or basic

resources as raw materials or other essential inputs to obtain their outputs will locate near their resource if one of the following conditions holds: There is a large loss in size or weight

during processing. High economies of scale exist for the

product. The raw material is perishable.

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Immobile Outputs The outputs of some organizations may be

relatively immobile, such as dams, roads, buildings, and bridges.

The organization locates itself at the construction site and transports all required inputs to that location

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Distribution Requirements Planning The distribution process is illustrated on the

next slide where retailers order from local warehouses, the warehouses are supplied from regional centers, and the regional centers draw from the central distribution facility, which gets its inventory directly from the factory.

Chapter 7: Supply Chain Management 50

Distribution Requirements Planning (DRP)

Purchasing/Procurement

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Purchasing Activities to reliably obtain materials by

the time they are needed in the product supply process.

Important considerations include price, quality, lead times, and reliability.

Manufacturing organizations spend an average of 55 percent of revenue for outside materials and services.

These same organizations spend only 6 percent on labor and 3 percent on overhead.

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Purchasing Versus Procurement Purchasing implies a monetary transaction.

Procurement is simply the responsibility for acquiring the goods and services the organization needs.

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Potential for Lowering Cost and Increasing Profits Total sales = $10,000,000

Purchased materials = 7,000,000

Labor and salaries = 2,000,000

Overhead = 500,000

Profit = 500,000

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To Double Profits ... Increase sales by 100 percent Increase selling price by 5 percent Decrease labor and salaries by 25 percent Decrease overhead by 100 percent Decrease purchase cost by 7.1 percent

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Differences Between Purchasing by Individuals and Organizations

Organizations purchase larger volumes and dollar amounts.

Organization may be larger than its suppliers.

Very few suppliers exist for certain organizational goods, whereas many typically exist for consumer goods.

Certain discounts may be available to organizations.

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Value Analysis A special responsibility of purchasing, or

purchasing working jointly with engineering/design and operations (and sometimes even the supplier), is to regularly evaluate the function of purchased items or services, especially those that are expensive or used in high volumes.

The goal is to either reduce the cost of the item or improve its performance.

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Key Elements of Effective Purchasing They leverage their buying power. They commit to a small number of

dependable suppliers. They work with and help their suppliers

reduce total cost.

Supplier Management

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Supplier Selection and Vendor Analysis Characteristics of a good supplier are:

Deliveries are made on time and are of the quality and in the quantity specified.

Prices are fair, and efforts are made to hold or reduce the price.

Able to react to unforeseen changes. Supplier continually improves products

and services. Supplier is willing to share information

and be an important link in the supply chain.

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Supplier Relationships In the past, most customers purchased from

the lowest bidders who could meet their quality and delivery needs.

Customers are seeking a closer, more cooperative relationship with their suppliers.

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Supplier Certification and Audits Sole-sourcing arrangements are

becoming virtual partnerships with the customer.

This means longer-term relationships. Suppliers are being certified or

qualified so that their shipments do not need to be inspected by the customer—the items go directly to the production line.

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Outsourcing and Global Sourcing Outsourcing is the process of

contracting with external suppliers for goods and services that were formally provided internally.

Global sourcing is an important aspect of supply chain outsourcing strategy and we see it occurring more and more.

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Primary Reasons Outsourcing Occurring

1. The fall of communism and the economic insulation it had maintained.

2. The advent of telecommunications and computer technology that physically allowed work that previously had to be done locally or regionally to now be conducted overseas.

Outsourcing in general is a major strategic element of SCM these days, not just for production materials but for a wide range of services as well.

The Role of Information Technology in Supply Chain Management

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Role of Information Technology In the not-too-distant past, the primary

means of communication between members of a supply chain was paper.

One problem with paper-based systems has been the time and money that is wasted re-keying the same information into different computer systems.

Much of this problem has been solved with UPC and RFID being used extensively.

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Role of Information Technology More and more computing power is

becoming available for less and less money, hence it is becoming omnipresent, appearing everywhere we go and in everything we buy.

Growth of networks. As a result the growth of computers, which

support networks, and networks that support people’s needs (business transactions, communication, blogging, etc.), has exploded.

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Customer Relationship Management (CRM) Systems

Designed to collect and interpret customer-based data.

CRM systems provide comprehensive customer data so the firm can provide better customer service and design and offer the most appropriate products and services for them.

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Enterprise Resource Planning (ERP) Systems

Facilitate communication throughout the supply chain and over the Internet.

The ERP system embodies much more than just the supply chain, it also includes all the electronic information concerning the various parts of the firm.

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Successful Supply Chain Management The basic requirements for successful

supply chain management are trustworthy partners, good communication, appropriate performance measures, and competent managers with vision.