SupplyChainManagement Supply Chain Management

Lecture01onFeb06,2012 ,

WhatIsSupplyChainManagement?
Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, suppliers manufacturers warehouses and stores, so that merchandise is produced and distributed at the right quantities to the right quantities, locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.

TwoOtherFormalDefinitions
The design and management of seamless, valueadded process across organizational boundaries to meet the real needs of the end customer pp y g InstituteforSupplyManagement 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 d l h TheSupplyChainCouncil

WhatisaSupplyChain?
Flowofproductsandservicesfrom: p
Rawmaterialsmanufacturers Intermediateproductsmanufacturers Endproductmanufacturers End product manufacturers Wholesalersanddistributorsand Retailers

Connectedbytransportationandstorage activities I t Integratedthroughinformation,planning,and t d th hi f ti l i d integrationactivities

SupplyChainComponents pp y p
Suppliers Manufacturingcenters Warehouses Distributioncenters Retailoutlets R t il tl t Rawmaterial WorkinProcessinventory W ki P i Finishedproducts

SimplifiedSupply Chain Simplified SupplyChain

VISA

Material Flow

Credit Flow

Supplier S pplier

Manufacturing Man fact ring

Retailer

Consumer Cons mer

Supplier Schedules Order Flow

Wholesaler Cash Flow

Retailer

TheSupplyChain The Supply Chain

Supplier
Market research data Scheduling information Engineering and design data Order flow and cash flow Ideas and d i to Id d design satisfy end customer Material flow Credit flow

Customer

Inventory

Supplier

Manufacturer
Inventory

Customer

Supplier

Inventory

Distributor
Inventory

Customer

EvolutionofSupplyChainManagement
FurtherRefinement of SCMCapabilities SCMFormation/ Extensions JIT,TQM,BPR, Alliances InventoryManagement/Cost Optimization TraditionalMassManufacturing

1950s

1960s

1970s

1980s

1990s

2000s

Beyond y

SCMChronology
AncientTimes 300BC 1151 1305 1621 1904 1956 19601975 19751990 1980 The Barter System evolved as an answer to the trading requirements. This was the first supply chain. Caesar made trading posts in East Asia to grow his trade. This was the first retailer supplier relationship.Establishment of the silk route to India. First known fire and plague insurance offered in Iceland. House of Taxis operated courier messenger service for the rich European clients. (A kind of primitive Outsourcing) Dutch West India Co. formed to trade with (A pseudo third party logistics (3PL) by the Dutch Companies.) America and West Africa.

Charles S Rolls became selling agent for cars made by F Henry Royce (The first traces of outsourcing) S. F. Royce. outsourcing). Warren Buffet started investment partnership in Omaha with money from family and friends and he went on to become a billionaire. (An overseas 3PL) The essence of SCM understood. This first phase is characterized as an inventory 'push' era that focused primarily on physical distribution of finished goods. The earlier approach changed. Companies began migrating from an inventory push to a customer pull channel as power began to move the downstream to the customer. In the last phase, companies realized that the productivity could be increased significantly by managing relationships, information and material flow across enterprise borders. This resulted in the present concept of supply chain management. IBM outsourced almost all of its activities and built a full computer. WalMart introduced the concept of Cross Docking and replaced KMart as the leader in retail stores. Cisco removed itself from the supply chain by providing to the customer directly from the vendor. Computer changed the way business is done. Internet revolutionized the information pathway and the distribution system of the business. The concept of ecommerce changed the definition of business itself. Currently concepts like tcommerce and digital TV are beginning to take shape.

1981 1985 1985 1990 1996 1998 2000

2002-2012 2002 2012

SCOR VSM BSC tComm DNA M d l Model Blue Ocean RFID

LogisticsManagement Logistics Management

Integrates all materials functions Integratesallmaterialsfunctions
Purchasing Inventorymanagement y g Productioncontrol Inboundtraffic Warehousingandstores Incomingqualitycontrol

Objective:Efficient,lowcostoperations

GoodsMovementOptions Goods Movement Options

Trucking Railways Airfreight if i h Waterways Pipelines

WhatManagementWants h

Vo olumes

ProductionPlan

Customer Demand

Time Ti
Source:TomMcGuffry,ElectronicCommerceandValueChainManagement,1998

WhatManagementGets... What Management Gets...

OrderSize

Customer Demand

ProductionPlan

Time Ti
Source:TomMcGuffry,ElectronicCommerceandValueChainManagement,1998

SupplyChain: TheMagnitude
ItisestimatedthattheUSgroceryindustrycould save$30billion(10%ofoperatingcost)byusing save $30 billion (10% of operating cost) by using effectivelogisticsstrategies.
Atypicalboxofcerealspendsmorethanthreemonths yp p gettingfromfactorytosupermarket. Atypicalnewcarspends15daystravelingfromthe factorytothedealership,althoughactualtraveltimeis 5days.

SupplyChain: pp y TheMagnitude
Compaqcomputerestimatesitlost$500millionto$1billion p q p $ $ insalesin1995becauseitslaptopsanddesktopswerenot availablewhenandwherecustomerswerereadytobuythem. In1993,IBMlostamajorfractionofitspotentialsalesof desktopcomputersbecauseitcouldnotpurchaseenough chipsthatcontrolthecomputerdisplays. chips that control the computer displays

SupplyChain: pp y TheMagnitude
Boeing Aircraft one of Americas leading capital goods BoeingAircraft,oneofAmericasleadingcapitalgoods producers,wasforcedtoannouncewritedownsof$2.6 billioninOctober1997 Thereason?Rawmaterialshortages,internalandsupplier partsshortages (Wall Street Journal, Oct. 23, 1997) parts shortages(WallStreetJournal,Oct.23,1997)

SupplyChain: ThePotential
In two years, National Semiconductor reduced distribution Intwoyears,NationalSemiconductorreduceddistribution costsby2.5%,deliverytimeby47%andincreasedsalesby 34%by Shuttingsixwarehousesaroundtheglobe. Airfreightingmicrochipstocustomersfromanew centralizeddistributioncenter. centralized distribution center

SupplyChain: ThePotential
In10years,WalMarttransformeditselfby changingitslogisticssystem.Ithasthehighest salespersquarefoot,inventoryturnoverand sales per square foot inventory turnover and operatingprofitofanydiscountretailer.

SupplyChain: TheComplexity Th C l it
1. SupplyChainIntegration(network) ConflictingObjectives TheDynamicsoftheSupplyChain The Dynamics of the Supply Chain 2. MatchingSupplyandDemand 3 Syste 3. SystemVariationsoverTime(parameters) a at o s o e e (pa a ete s) 4.StatusofLogisticsKnowledge Manyproblemsarenew Incompleteunderstandingofissues f Methodologyisrathernarrow Nohistoricaldataavailable

Example
Nationalsemiconductor:
oneoftheworldslargestchipmakers shortleadtime In1994,95%demandsreceivedwithin45days, theremaining5%receivedwithin90days 12differentairlinecarriers 20 000 diff 20,000differentroutes t t Whowillbeinthelucky5%?

ISSUES: Purchasing
WhattoPurchase Inhouse production Vs. external suppliers In houseproductionVs.externalsuppliers Wheretopurchase Domestic Vs international DomesticVs.international Fromwhomtopurchase
Cost Reliability:qualityandontimedelivery Availability and flexibility Availabilityandflexibility

ISSUES: Purchasing
CentralizedVs.Decentralized Numberofsuppliers: SinglesourcingVs.Multiplesourcing Single sourcing Vs. Multiple sourcing Supplycontracts

ISSUES: Production
Locationofmanufacturingplants
Production cost Productioncost Taxes Incentives(bygovernment) Proximitytomarketsand/orrawmaterials Transportationinfrastructure Politicalstabilityandculture y

ISSUES: Production
Flexibility
Theabilitytoproducedifferentproducts simultaneouslyandefficiently simultaneously and efficiently Theabilitytoproducenewproductsefficiently

ISSUES: Production
Efficiency
Lowcost Shortleadtime

Reliability
Ontimedelivery Quality

ISSUES: ProductDesign P d tD i
Productdesignscanaffect:
inventoryholdingcost transportationcosts leadtime

Wh t l d Whatroledoesproductdesignplayinsupply d td i l i l chainmanagement? When is redesigning products worth the cost? Whenisredesigningproductsworththecost? Canproductdesigncompensateforuncertaintyin customerdemand? customer demand?

ISSUES: InformationSystems f
The advantages of advanced information Theadvantagesofadvancedinformation systems The challenge of unlimited data and data Thechallengeofunlimiteddataanddata analysis Th Therollofecommerce ll f Impactoftheinternet Decisionsupportsystem(DSS)

ISSUES: WhatsNewinLogistics?
Globalcompetition Shorterproductlifecycle Increasingproductvariety New,lowcostdistributionchannels More powerful well informed customers Morepowerfulwellinformedcustomers

TraditionalView:Costbreakdownofa manufacturedgood f d d
Profit SupplyChainCost MarketingCost ManufacturingCost 10% 20% 25% 45%
Manufacturing Cost Profit Supply Chain Cost Marketing Cost

Effort spent for supply chain activities are invisible to the customers.

 Asupplychainconsistsof pp y
Supplier Manufacturer Distributor Retailer Customer

Upstream

Downstream

- aims to Match Supply and Demand, profitably for products and services
SUPPLYSIDE SUPPLY SIDE DEMANDSIDE DEMAND SIDE

- achieves

Theright

Product

+ + +
Theright Theright

Theright

Price

Store

Quantity

Theright

Customer

Theright

Time

Higher

Profits

FlowsinaSupplyChain Flows in a Supply Chain

Material Information

Supplier
Funds

Customer

The flows resemble a chain reaction.

SCMinaSupplyNetwork SCM i S l N t k
SupplyChainManagement(SCM) isconcernedwiththemanagementandcontrolofthe flowsofmaterial,information,andfinancesinsupplychains. flows of material information and finances in supply chains
Cash ProductsandServices Information
THAILANDINDIAMEXICOTEXASUS NTierSuppliersSuppliersLogisticsDistributorsRetailers

SupplySide

OEM

DemandSide

Demand

Supply

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

ImportanceofSupplyChainManagement
In2000,theUScompaniesspent$1trillion(10%ofGNP)onsupplyrelated activities(movement,storage,andcontrolofproductsacrosssupplychains).Source:
StateofLogisticsReport FrequentSupplyshortages Inefficientlogistics g Loworderfillrates

Tier1 Supplier

Manufacturer

Distributor

Retailer

Customer

Highstockouts

GlitchWrongMaterial,Machineis Down effectsnowballs

Highinventoriesthroughthechain

Ineffective promotions

Highlandedcoststotheshelf

Eliminating inefficiencies in supply chains can save millions of $.

CycleViewofSupplyChains Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer R t il
Replenishment Cycle

Distributor Di t ib t
Manufacturing Cycle

Any cycle 0. Customer arrival 1. Customer triggers an order gg 2. Supplier fulfils the order 3. Customer receives the order

Manufacturer
Procurement Cycle

Supplier

PushvsPullSystem P h P ll S
Whatinstigatesthemovementoftheworkinthesystem? InPush systems,workreleaseisbasedondownstreamdemandforecasts
Keepsinventorytomeetactualdemand Actsproactively
e.g.Makinggenericjobapplicationresumestoday(e.g.:exempligratia)

InPull systems,workreleaseisbasedonactualdemandortheactual In Pull systems work release is based on actual demand or the actual statusofthedownstreamcustomers
Maycauselongdeliveryleadtimes Acts reactively Actsreactively
e.g.Makingaspecificresumeforacompanyaftertalkingtotherecruiter

TheDevelopmentChain The Development Chain

Theenterprisedevelopmentandsupplychain

GlobalOptimization Global Optimization

Geographically dispersed complex network Geographicallydispersedcomplexnetwork Conflictingobjectivesofdifferentfacilities Dynamic system Dynamicsystem
Variationsovertime Matching demandsupply difficult Matchingdemandsupplydifficult Differentlevelsofinventoryandbackorders

Recent developments have increased risks Recentdevelopmentshaveincreasedrisks

Leanproduction/Offshoring/Outsourcing

GlobalApparelValueChain
Tracingbackthedressyouarewearing Tracing back the dress you are wearing

UncertaintyandRiskFactors
MatchingSupplyandDemandaMajorChallenge
REASONS EXAMPLES
Boeing Aircrafts inventory writedown of $2.6 billion Sales at U.S. Surgical Corporation declined 25 percent, resulting in a p g loss of $22 million Intel reported a 38 percent decline in quarterly profit EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 b around d t f by d $100 million

Raw material shortages Internal and supplier p shortages pp parts g Productivity inefficiencies Sales and earnings shortfall Larger than anticipated inventories Stiff competition General slowdown in the market Higher than expected orders for new products over existing products

UncertaintyandRiskFactors
Fluctuations of Inventory and ackorders FluctuationsofInventoryandBackorders throughouttheSupplyChain

Ordervariationsinthesupplychain

UncertaintyandRiskFactors Uncertainty and Risk Factors

Forecasting is not a solution Forecastingisnotasolution Demandisnottheonlysourceofuncertainty Recenttrendsmakethingsmoreuncertain d k hi i
Leanmanufacturing Outsourcing Offshoring

MagnitudeofSupplyChainCosts
Example:TheApparelIndustry Example: The Apparel Industry
Cost per Shirt Percent Saving

Manufacturer

Distributor Di t ib t

Retailer

Customer

$52.72 $ 2 2

0%

Manufacturer

Distributor Di t ib t

Retailer

Customer

$41.34 $41 34

28%

Manufacturer M f t

Distributor Di t ib t

Retailer

Customer

$20.45 $20 45

62%

E Commerce ECommerce
Theuseofcomputernetworks,primarilythe internet,tobuyandsellproducts,services, i t t t b d ll d t i andinformation.

E CommerceDefinitions ECommerce Definitions

Businesstobusiness(B2B)Bothsidesofthe B i t b i (B2B) B th id f th transactionarebusinesses,nonprofit organizations,orgovernments. organizations or governments Businesstoconsumer(B2C)Ecommerce transactionswherecustomersareindividual consumers Consumertoconsumer(C2C)Consumerssell directlytoeachother. y Consumertobusiness(C2B)Individualssellservices orgoodstobusinesses

IssuesinSupplyChain Issues in Supply Chain

Globalizationresultinginlongleadtimes Globalization resulting in long lead times Rising&ChangingCustomerexpectations Increaseinlaborcostsindevelopingcountries i l b i d l i i Increaseinlogisticscosts Sustainability Unprecedentedvolatility Unprecedented volatility

ThankYou