CTL.

SC1x -Supply Chain & Logistics Fundamentals

Introduction to Logistics & Supply

Chain Management

MIT Center for

Transportation & Logistics

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CTL.SC1x
- Supply Chain and Logistics Fundamentals
Lesson: Introduction to Supply Chains
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Five Questions
1.
2.
3.
4.
5.

What is a supply chain?

What are logistics and supply chain management?
How should you view SCM?
What are the challenges
Why should you care?

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

What is a Supply Chain?

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

What is a Supply Chain?

Two or more parties linked by a flow of resources
typically material, information, and money that ultimately
fulfill a customer request.
Information (order)

Information (status)
Material (delivery)

Money (payment)
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

What is a supply chain?

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

What is a Supply Chain?

Customer
Rubber
Mfg

Tire
Supplier

Supplier

Gear
Supplier

Retailer
Hardware
Supplier
Wholesaler
Customer

Supplier

Smelter

Pedal
Supplier

Bicycle

Casting
Plant

Retailer

Wholesaler
Frame
Supplier

Pigment
Supplier

Customer

Retailer

Paint
Supplier

Retailer

Customer

Chemical
Mfg

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

What is a Supply Chain?

The primary purpose of a SC is to satisfy customer needs.
n
n
n

Only one source of revenue the customer

Payments between parties are just fund exchanges
Division of intra-SC payments are a function of power, market
conditions, etc.

Supply Chains try to maximize the total value generated

n

= [What customer pays] [Total effort expended to fulfill]

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

Logistics versus Supply Chain Mgmt

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

What is Supply Chain Management?

Logistics involves . . . managing the flow of items, information, cash
and ideas through the coordination of supply chain processes and
through the strategic addition of place, period and pattern values.
MIT Center for Transportation & Logistics
Supply Chain Management deals with the management of materials,
information, and financial flows in a network consisting of suppliers,
manufacturers, distributors, and customers.
Stanford Supply Chain Forum
Call it distribution or logistics or supply chain management. By
whatever name it is the sinuous, gritty, and cumbersome process by
which companies move material, parts, and products to customers.
Fortune (1994)
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

10

Logistics vs. SCM

According to the Council of Supply Chain Management Professionals . . .
n

Logistics management is that part of supply chain management that

plans, implements, and controls the efficient, effective forward and reverse
flow and storage of goods, services and related information between the
point of origin and the point of consumption in order to meet customers'
requirements.
Supply chain management encompasses the planning and
management of all activities involved in sourcing and procurement,
conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can
be suppliers, intermediaries, third party service providers, and customers.
In essence, supply chain management integrates supply and demand
management within and across companies.

Source: Used by permission, Council of Supply Chain Management Professionals, http://cscmp.org/.

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

11

Supply Chain Management

Perspectives
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

12

Supply Chain Perspectives

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CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

13

Supply Chain Perspectives

Customers

Manufacturers

Suppliers

CTL.SC1x - Supply Chain and Logistics Fundamentals

Distributors

Lesson: Introduction to Supply Chains

14

Process View of Supply Chains

Customer

Four Primary Cycles

n
n
n
n

Customer Order Cycle

Customer Order Cycle

Replenishment cycle
Manufacturing Cycle
Procurement Cycle

Retailer

Cycles Occur Between Stages

n

Interactions differ at each stage

Not every SC will have all 4 Cycles

Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle
Adapted from Chopra & Meindl Supply Chain Management

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

Supplier
15

Supplier

Firm
SRM
source
Supplier Relationship
Management
n
n
n
n

Sourcing
Negotiation
Buying
Design and Supply
Collaboration

ISCM
make, move, store
Internal Supply Chain
Management
n
n
n
n

Strategic Planning
Demand Planning
Supply Planning
Fulfillment

CRM
sell

Customer

Macro Process (Software) Perspective

Customer Relationship
Management
n
n
n
n

Marketing
Selling
Call Centers
Order Management

Different macro processes should be aligned

n

Fall under different groups (Marketing-CRM, ManufacturingISCM, Purchasing-SRM)

Forecasts, schedules, design, etc. should be coordinated

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

16

Supply-Chain Operations Reference (SCOR) Model

Plan

P1 Plan Supply Chain

P3 Plan Make

Source
S1 Source Stocked Products

S2 Source MTO Products

S3 Source ETO Products

P4 Plan Deliver

P5 Plan Returns

Make

Deliver
D1 Deliver Stocked Products

M1 Make-to-Stock

M2 Make-to-Order

M3 Engineer-to-Order

D2 Deliver MTO Products

D3 Deliver ETO Products

Customers

Suppliers

P2 Plan Source

Return
Deliver

Return
Source

Enable
Source: Supply Chain Council
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

17

Traditional Functional Perspective

Purchasing / Procurement Order Processing
n
n

What to buy from who

Corporate vs Group

n
n

Inventory Control
n
n
n

How much to stock where

Trigger points
Replenishment plan

Warehousing
n
n
n

Storage, Mixing, Break bulk

Pick Pack and Ship
What to stock where in WH

Materials Handling
n
n
n

How to move product

Packaging, containerization
Storage layout

CTL.SC1x - Supply Chain and Logistics Fundamentals

Receiving, Entry & Status

Order Management

Transportation
n
n
n

Inbound versus Outbound

Domestic versus International
Modal control (Rail, TL, LTL,
Parcel, Air, etc.)

Customer Service
n
n

Geographic
Product Line Specific

Planning Group
n
n
n

Facility Location
Network Design
Demand Planning

Lesson: Introduction to Supply Chains

18

Systems Perspective
of Supply Chains
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

19

Supply Chain as a System

Take an Engineering Systems Perspective
n
n
n

What is a variable and what is a constraint?

Continuous expansion of decision variables
Increases potential for improvement but increases both
complexity and coordination requirements
Customer Svc

Transportation

Order Processing

Material Handling

Inventory Mgmt

Warehousing

Purchasing

Objective: Deliver at lowest transport cost

Variable:
wSelect carrier to tender each load to
Constraints:
wShip everything each day
wMust deliver within specified windows
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

20

Supply Chain as a System

Take an Engineering Systems Perspective
n
n
n

What is a variable and what is a constraint?

Continuous expansion of decision variables
Increases potential for improvement but increases both
complexity and coordination requirements
Customer Svc

Transportation

CTL.SC1x - Supply Chain and Logistics Fundamentals

Order Processing

Material Handling

Inventory Mgmt

Warehousing

Purchasing

Objective: Deliver at lowest total cost

Variables:
wSelect carrier to tender each load to
wSelect time windows to deliver
wSelect when to ship what from where
Constraints:
wDeliver within negotiated time frame

Objective: Deliver at lowest transport cost

Variables:
wSelect carrier to tender each load to
wSelect time windows to deliver
Constraints:
wShip everything each day

Lesson: Introduction to Supply Chains

21

Supply Chain as a System

Take an Engineering Systems Perspective
n
n
n

What is a variable and what is a constraint?

Continuous expansion of decision variables
Increases potential for improvement but increases both
complexity and coordination requirements
Customer Svc

Transportation

Order Processing

Material Handling

Inventory Mgmt

Warehousing

Purchasing

Manufacturing

Product Design

CTL.SC1x - Supply Chain and Logistics Fundamentals

Objective:
wDesign, build, and deliver at lowest total cost
Variables:
wSelect carrier to tender each load to
wSelect time windows to deliver
wSelect when to ship what from where
wSelect where to stock which form of product
Constraints:
wDeliver within negotiated time frame

Lesson: Introduction to Supply Chains

22

Supply Chain as a System

Take an Engineering Systems Perspective
n
n
n

What is a variable and what is a constraint?

Continuous expansion of decision variables
Increases potential for improvement but increases both
complexity and coordination requirements

Retailer

CTL.SC1x - Supply Chain and Logistics Fundamentals

Customer Svc

Transportation

Order Processing

Material Handling

Inventory Mgmt

Warehousing

Purchasing

Manufacturing

Product Design

Supplier

Why is this so hard to do?

Objective:
wMaximize on-shelf availability
Variables:
wSelect carrier to tender each load to
wSelect time windows to deliver
wSelect when to ship what from where
wSelect where to stock which form of
product
wSelect contract relationships
wSelect who should control replenishment
wWhich channel member should perform
which function
Constraints:
wTotal delivered cost to shelf

Lesson: Introduction to Supply Chains

23

What are the major challenges?

(Why is it so hard?)
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

24

Why is it so difficult? 1/2

Metrics How do you measure a system?
n
n

Trade-off of Breadth vs. Validity of metrics

Outcome Based Logistics - Perfect order, Perfect Shelf

Politics and Power of Players - Who wins?

n
n

Mom & Pop Shop versus Mega-Stores

Mega Retailers vs. Mega CPG Manufacturers

Visibility Who can see what and how quickly?

n
n
n

Data are stored separately

All parties do not have equal access to data
Massive data Shared & accessible information

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

25

Why is it so difficult? 2/2

Uncertainty - Who knows what is going to happen?
n
n
n
n

Variable demand of product (shorter lifecycles)

Variable manufacturing yield
Unreliable sourcing of raw materials
Inconsistent transit lead times

Increased complexity Why is it getting harder?

n
n
n

Exploding number of Stock Keeping Units (SKUs)

Higher and diverging customer demands
New & merging channels (Omni-Channel)

Global operations Why dont we ever close?

n
n

Most firms source & sell across globe

Multiple regions, time zones, languages, & cultures

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

26

Why do we care?

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

27

Why do we care?
Supply Chains . . .
n
n
n

Span the globe and cannot be managed as an isolated function,

Have become critical to any organizations operations, and
Connect functions, divisions, and business units within a firm
as well as across firms.

Evolved into being both a Bridge and a Shock Absorber

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- Supply Chain and Logistics Fundamentals
Lesson: Introduction to Supply Chains
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28

Example: Variability of #2 Diesel Pricing

4.8
4.6

On Highway Price of #2 Diesel ($/gallon)

4.4
4.2
4
3.8
3.6
3.4
3.2
3
2.8
2.6
2.4
2.2
2
Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 May-14 Nov-14
Data Source: U.S. Energy Information Administration, http://www.eia.gov/petroleum/gasdiesel/diesel_proc-methods.cfm
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

29

Logistics Costs per GDP

16.0%

Percentage of US GDP

14.0%

Year
1981
1985
1990
1995
2000
2005
2010
2013

GDP Inv Cost Trans Cost

($T)
($B)
($B)
3.21
259
228
4.35
227
274
5.98
283
351
7.66
302
441
10.29
385
594
13.1
410
739
14.96
429
769
16.8
469
862

12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
1980

1985

1990

1995

2000

2005

2010

2015

Year
US Inventory Holding Cost

US Transportation Cost

Total US Logistics Cost

Data Sources: Council of Supply Chain Management (2014) 25th Annual State of Logistics Report
CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

30

Still, why do we care?

Functional

Logistics

Supply Chain

Key Skills

Technically Narrow

Influence

Local & Controllable

Across entire Supply Chain

Leadership

Hierarchical, Direct,
Hard

Influential, Indirect, Soft

Risk Management
Measurement

Robust or Reactionary

Coordination

Planned Response & Flexibility

Single Focus

Technology
Approach

Isolated Optimization

Technology
Platform

Self-Hosted, On-site

Scope / Reach

Regional / National

Multi-faceted
Visibility & Coordination
Cloud or SaaS
Global / Multi-National

Supply Chain Management is a growing and evolving discipline.

CTL.SC1x - Supply Chain and Logistics Fundamentals

Lesson: Introduction to Supply Chains

31

CTL.SC1x -Supply Chain & Logistics Fundamentals

Questions, Comments, Suggestions?

Use the Discussion!

caplice@mit.edu

MIT Center for

Transportation & Logistics

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