The Supply-Chain

Supply Chain Management

SCM
This presentation is based on the work and materials of:
ƒ Marshall L. Fisher, Professor & co-director of the Fishman-David Center for service and Operation management at The Wharton School.
ƒ David Simchi-Levy, professor at the MIT, President and CEO of Logic Tools.

Sept. 2001
Slide 2 Elee – Shanghai
 Index
ƒ Supply Chain - Definitions
ƒ The objectives of SCM
ƒ Traditional vs. new SC models
ƒ Why inventories in the Supply chain
ƒ SCM strategies
ƒ The fundamentals of SCM
ƒ What does it take to implement SCM
ƒ The benefits gained through SCM
Sept. 2001
Slide 3 Elee – Shanghai
 Supply chain
-
Definitions

Sept. 2001
Slide 4 Elee – Shanghai
 What is the Supply Chain?

ƒ The supply-chain
is a complex sequence
of events and decisions,
which connects sourcing raw materials
with manufacturing and the end consumer.

ƒ Logistics
is the management
of this end-to-end supply-chain.

Sept. 2001
Slide 5 Elee – Shanghai
 The Logistics network
A complex network
of
Factories, Warehouses, Distribution Centers and Retail…

Manufacturers Distribution centers Customers

Suppliers Plant direct shipments Retailers
Ports of entries Cross-dock facilities Demand points
Assembly plants Assembly plants Product destination
Sept. 2001
Slide 6 Elee – Shanghai
 Supply Chain Management

Supply Chain Management covers flows of goods from suppliers

through manufacturing and distribution up to the customers

* Work in process Inventories

Finished
Raw Stock
WIP* Product
Material points
Stock

Purchase Manufactory Factory Distribute Customer

Supplier Customer
orders orders orders orders orders

Supply chain time line

The time spent by items from the purchase of raw materials
up to the delivery of product to customer

Sept. 2001
Slide 7 Elee – Shanghai
 Supply Chain Management (SCM)

…..is primarily 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 damage-free conditions
and
so as to minimize the total System cost of a
company subject to satisfying service
requirements.
Sept. 2001
Slide 8 Elee – Shanghai
 The objectives
of
Supply Chain Management

Sept. 2001
Slide 9 Elee – Shanghai
 The objectives of SCM

It is fundament for organizations

to adopt
the logistics and supply chain model
to balance the costs (direct & indirect)
of holding (or not) inventories against
the need to serve end-consumers
quickly and reliably.
Sept. 2001
Slide 10 Elee – Shanghai
 Bridging the gaps

ƒ When is a product desired

DEMAND
ƒ Where is a product wanted
ƒ How much or how many are needed
ƒ What mix of products is called for
ƒ How is it desired

ƒ When is a product made

SUPPLY

ƒ Where it is made or sourced

ƒ How much or how many are made or acquired
ƒ What product mix is made or scheduled to be received
ƒ How is it delivered

Sept. 2001
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 The objectives of SCM

The objectives of the supply chain are to optimize

pre and post-production inventory levels,
obtain greater efficiency from labor,
equipment and space
across the company
and
provide flexible planning and control mechanisms.

Sept. 2001
Slide 12 Elee – Shanghai
 The objectives of SCM

Supply Chain management tries to:

¾ Set free capital tied up in inventories in the

whole pipeline from supplier to customer,

¾ While minimizing the transportation costs,

¾ Without sacrificing the desired levels of

customer service.

Sept. 2001
Slide 13 Elee – Shanghai
 The objectives of SCM

SCM aims at minimizing the systemwide

costs of a company subject to
satisfying service level requirements.

Company costs Service levels

Manufacturing
Manufacturing Theresponse
The responsetime
timeexpressed
expressed
Fixedassets
Fixed assets intime
in timeunits
units decided
decidedby
by
Inventories
Inventories demandpatterns.
demand patterns.
Transportation
Transportation Hours//Days
Hours Days Week
Week//Months
Months

Sept. 2001
Slide 14 Elee – Shanghai
 SCM helps companies make better decisions

SCM helps companies make better decisions faster,

answering questions like:

ƒ What is the best price to charge for my product?

ƒ Should I change the price if I have excess inventory?
ƒ If so, by how much?
ƒ If I am short of a product, where should I allocate supply?
ƒ Which suppliers should I buy parts from?
ƒ Which factory should I manufacture the product?

Sept. 2001
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 Traditional
versus
new supply chain
models
Sept. 2001
Slide 16 Elee – Shanghai
 Traditional approach of SCM

Supply chain partners operate in silos

Suppliers Manufacturers Warehouse Retailers Customers

Interface between entities

Traditional organizations set performance goals for each function

to be managed in isolation with no or little attention given
to inter-functional relationships.

Sept. 2001
Slide 17 Elee – Shanghai
 Traditional approach of SCM
By making use of local information to make demand forecasts
and passing them onto downstream partners,
information distortion is created.

Suppliers Manufacturers Warehouse Retailers Customers

Over Over Over Over Over

forecasting forecasting forecasting forecasting forecasting

Over Over Over Over Over

purchasing purchasing purchasing purchasing purchasing

Over Over Over Over Over

producing producing producing producing producing

Over Over Over Over Over

stocking stocking stocking stocking stocking

Unwanted inventories

Sept. 2001
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 Efficient implementation of the Supply Chain

Supply Chain Management concept accepts the

whole supply chain as a single entity & enable a total
transparency of demand information across all
business partners
Push-pull
boundary

Push Pull Pull Pull

orders
are
received

Retailers
Suppliers

Manufacturers

customers
Warehouses

The product is pulled by demand.

Sept. 2001
Slide 19 Elee – Shanghai
 Supply Chain Management (SCM)

Ensuring free flow is the core essence of

the Supply Chain concept.

Cross-functional collaboration is of
utmost importance
for such an organization to be effective.

Sept. 2001
Slide 20 Elee – Shanghai
 Efficient implementation of the Supply Chain

All functions
along the chain share the common objective of supply
and are involved in strategic decision-making

Push-pull
boundary
Push Pull Pull Pull
orders
are
Manufacturers

Warehouses

customers
Suppliers

Retailers
received

Sept. 2001
Slide 21 Elee – Shanghai
 Why
do we have
inventories in the
Supply Chain?

Sept. 2001
Slide 22 Elee – Shanghai
 Why inventories in the supply-chain?
But also,
promotions, seasonality,
Numerous reasons among batch process, tight capacities etc..
which,

ƒ Demand variability
ƒ Product nature
ƒ Desired service levels (90% - 99%)
ƒ High fluctuation of product demand Stock
ƒ Suppliers long delivery time (Safety
ƒ High delivery variability or
ƒ Information distortion unwanted)

Sept. 2001
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 Inventory is a symptom

To decrease inventories,
one needs
to address the root cause of
Why
inventories are high in the
Supply-Chain
Sept. 2001
Slide 24 Elee – Shanghai
 Demand patterns

Different demand patterns

generate

Different inventory levels

Next day delivery High level of service

Low cost network Plant to customers

Sept. 2001
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 Type of Products

Different products

induce
Different distribution
Different distribution
patterns
patterns

Sept. 2001
Slide 26 Elee – Shanghai
 Service levels

Two different types of

products
with
similar service requirements
“NEXT DAY DELIVERY”
induce different storing patterns.

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 Case study – Food cans vs. Hi-tech

Low value - Low margins

Many DCs close to customers

High Inventory levels

Sept. 2001
Slide 28 Elee – Shanghai
 Grocery products – functional products
Stable, predictable demand patterns & cycle life times

NEXT - DAY SERVICE

Many DCs to be close to customers

Each inventory in warehouses

has to hold safety stock to protect against
demand variability
Bulk shipments
Weekly trucks

High buffer
inventory levels

Replenishment by weekly trucks

Remote inventory base (4 weeks)
(Next day delivery)

Manufacturing site
Points of sales
 High tech products

High values, High margins

Minimized inventories
Premium transport service

Sept. 2001
Slide 30 Elee – Shanghai
High tech products – short cycle life time
Great variety

NEXT-DAY
Unpredictable demand

Direct Premium Air-freight

No remote buffer inventory

Less warehouse implies

SERVICE
higher geographic Premium
trucking
coverage of each warehouse service

Premium Air freight service

Manufacturing site
Points of sales
 Supply chain
Management
Strategies

Sept. 2001
Slide 32 Elee – Shanghai
 ƒ What SCM is looking for is to develop
production & delivery mechanisms and processes
that can produce goods
to the actual end-user rate of demand
for the smallest time-period manageable.

ƒ Ensure that the variety of products

reaching the market place
matches what customers want to buy.

Sept. 2001
Slide 33 Elee – Shanghai
 The functions of the SMC

¾ A physical function
Production Procurement
Storage Transportation

¾ A Market interface function

Ensure that the following conditions are met:

the right product at the right place

at the right time in the right quantity,
exactly as per Customers’ needs and expectations.

Sept. 2001
Slide 34 Elee – Shanghai
 Supply-Chain strategies
Made-to-stock environment
Efficient SC to market demand

Push
Product Functional products
characteristics typically…
Inventory of Retail products,
ƒ Stable, predictable Food cans,
demand Finished goods beer, drinks
& life cycle time Pasta,
ƒ Low level of demand All production and baby diapers
uncertainty distribution decisions are Etc…
ƒ Low margin made on long-term
forecasts

The problems 1/ Forecast are always wrong,

with long-term 2/ The longer the forecast horizon, the worst the forecast
forecasts 3/ Aggregate forecast are more accurate. (risk-pulling concept.)

Sept. 2001
Slide 35 Elee – Shanghai
 New Supply-Chain strategies
Made-to-order environment
Responsive SC to market demand

Inventory of
Innovative products parts All sorts of industries
High tech industries
¾ Unpredictable demand Assembly Computer (Dell)
¾ Short life cycle time
Fashion
¾ Great variety
..etc …
¾ High margins Decisions based
on accurate customer
demand.
Ensure that the variety of
products reaching the market
place matches what customers
want to buy

Sept. 2001
Slide 36 Elee – Shanghai
 What Strategy for your products?

ƒ Is your product functional or innovative?

ƒ Should your SC be physically efficient or responsive to the

market?

ƒ Where in the SC to position inventory and available

production capacity in order to hedge against uncertain
demand?

Sept. 2001
Slide 37 Elee – Shanghai
 Physically Efficient vs. Market-Responsive SC

Physically Efficient Market-Response

process Process

Primary purpose Supply predictable Respond quickly to unpredictable

Demand efficiently at the demand to minimize forced
lowest possible cost markdowns, obsolete inventories

Manufacturing focus Maintain high average Deploy excess buffer capacity

utilization rate

Inventory strategy Generate high returns & Deploy significant buffer

minimize inventory stocks of parts or finished
throughout the SC goods

Lead-time focus Shorten lead times as long Invest aggressively in ways to

as it does not increase cost reduce lead times

Approach to choosing Select primarily for cost & Select primarily for speed,
suppliers quality flexibility and quality

Product design strategy Maximize performance & Use modular design to postpone
minimize cost product differentiation as long as
Sept. 2001 possible Slide 38 Elee – Shanghai
 Matching SC with products

Functional products Innovative products

Supply chain
Efficient

match mismatch
Supply chain
Responsive

mismatch match

Sept. 2001
Slide 39 Elee – Shanghai
 The Push - Pull Strategy
Push based strategies Pull based strategies

Parts
Parts Assembly
Assembly

Responsive SC
Efficient SC
model

replenishment
replenishment made on
made on

model
made
made accurate customer
accurate customer
on forecast
on forecast demands
demands

The push-pull boundary

It is the point at which the product goes from being pushed

in anticipation of customer order,
to being pulled by actual demand.

Sept. 2001
Slide 40 Elee – Shanghai
 What is the appropriate strategy for a company?

ƒ The higher the demand uncertainty, ƒ The lower the demand uncertainty,
the more we want to use the more we want to use
Pull based strategies. Push based strategies
(high predictability)

ƒ The higher the transport cost*, ƒ The lower the transport costs*,
the more we want to make use of we more we are willing to use
Push based strategies. Pull based strategies.
(aggregate shipments possibility)

(*Transport costs as a percentage of a unit cost)

Sept. 2001
Slide 41 Elee – Shanghai
 Raw Materials The Pull-Push boundary

Car Some Retail Traditional

End customer
Furniture Dell industry Amazone retailers

Production Assembly Manufacturer Distributor Store

DC DC

It is the inflection point where demand information exerts its influence on…..

Sept. 2001
Slide 42 Elee – Shanghai
 The furniture industry
ƒƒ High level
High level of
of demand
demand uncertainty
uncertainty
ƒƒ High delivery
High delivery cost
cost (%
(% to
to the
the unit
unit price)
price)

Many different type of fabrics, colors

decided on order.

Made
Inventory

Inventory
Raw Materials

End customer
on Consolidation of bulky shipments
order

Production Assembly Manufacturer Distributor Store

DC DC

Sept. 2001
Slide 43 Elee – Shanghai
 Dell - the Pull-Push boundary
ƒƒ High level
High level of
of demand
demand uncertainty
uncertainty
ƒƒ Low delivery
Low delivery cost
cost (%
(% to
to the
the unit
unit price)
price)

Demand
Pull from customer demand
forecast
made
No inventory
Raw Materials

End customer
at
Push
assembly of
finished products
Parts inventory
made on forecast

Production Assembly Manufacturer Distributor Store

DC DC

Sept. 2001
Slide 44 Elee – Shanghai
 Traditional computer industry
ƒƒ High level
High level of
of demand
demand uncertainty
uncertainty
ƒƒ Low delivery
Low delivery cost
cost (%
(% to
to the
the unit
unit price)
price)

Demand forecast made on long

term forecast

Manufacturing
Inventory
Push
Raw Materials

End customer
of Inventory
finished Inventory
of
products finished of
finished
products
products

Production Assembly Manufacturer Distributor Store

DC DC

Sept. 2001
Slide 45 Elee – Shanghai
 Car industry
ƒƒ High level
High level of
of demand uncertainty
uncertainty
In which demand
case the business model would look like
ƒƒ High delivery
High delivery cost
cost (%
(% to
to the
the
something unit price)
unit
like…. price)

Demand forecast made on long

term forecast

Orders received through Internet

Manufacturing
Demand
forecast Inventory
Push
Raw Materials

customer
made of Inventory

Endcustomer
finished Inventory
Push at of to end-customer
Raw Materials

Direct delivery
products finished of
manufacturing
…But today, some web-sites No propose
products
finished
inventory
of products
on-line ordering of

End
Parts inventory finished products
made on forecast

Production customized
Assembly Manufacturermodels….
Distributor Sales
Production Assembly DC
Manufacturer DC
Distributor Point
Store
DC DC

Sept. 2001
Slide 46 Elee – Shanghai
 The Grocery Pull-Push boundary
ƒƒ Low level
Low level of
of demand
demand uncertainty
uncertainty
Pasta
ƒƒ High delivery
High delivery cost
cost (%
(% to
to the
the unit
unit price)
price) Soup
drinks
Very predictable distribution patterns.
Because high level of predictability, Demand
orders can be made on long-term forecast forecast
made
at Pull from
customer
Raw Materials

End customer
Push Distributor
demand
DC

Production Assembly Manufacturer Distributor Store

DC DC

Sept. 2001
Slide 47 Elee – Shanghai
 The Grocery Pull-Push boundary
ƒƒ Low level
Low level of
of demand
demand uncertainty
uncertainty
ƒƒ High delivery
High delivery cost
cost (%
(% to
to the
the unit
unit price)
price)

Very predictable distribution patterns. Demand

Because high level of predictability, forecast
orders can be made on long-term forecast made
at
Raw Materials

End customer
Store
Push
DC

Production Assembly Manufacturer Distributor Store

DC DC

Sept. 2001
Slide 48 Elee – Shanghai
 The basics
of
Supply Chain Management

Sept. 2001
Slide 49 Elee – Shanghai
 Management of the Supply Chain

The management of
the supply chain relates
to two
levels of decision

Sept. 2001
Slide 50 Elee – Shanghai
 Management of the Supply Chain

Strategic decision
Strategic decision

Optimal number
of
warehouses

Sept. 2001
Slide 51 Elee – Shanghai
 Strategic Network design

ƒ Pick the optimal number of location size of warehouse

ƒ Optimize the trade-offs between nr of facilities & service levels

ƒ Optimize the trade-offs between transportations and

warehousing costs

ƒ Determine optimal sourcing strategy

> (Which vendor should produce which products?)

ƒ Determine best distribution channels

> (Which warehouse should service which customer?)

Sept. 2001
Slide 52 Elee – Shanghai
 Which network suits your business model best ?
Low margin functional products
High tech high value products Many DCs to be close to customers
Innovative, short cycle life times Stable & predictable demand patterns
Great variety
Each inventory in warehouses
has to hold safety stock to protect against
Direct Premium Air-freight demand variability
No remote buffer inventory

Less warehouse implies High buffer

higher geographic inventory levels
coverage of each warehouse

Sept. 2001
Slide 53 Elee – Shanghai
 Management of the Supply Chain

Tactical decision
Tactical decision

Optimal flows
of
products
Sept. 2001
Slide 54 Elee – Shanghai
 Tactical Network design

ƒ Optimize the flow of product through the supply chain

ƒ Analyze impact of strategies for seasonal products or

volatile demand
(When will we run out of space and which warehouse/plant?)

ƒ Optimize the trade-offs between capacities and inventory

ƒ Analyze the alternatives for dealing with a shortage of

warehouse space or production capacities
> Should we add capacities? / Should we build inventory?
> Should we re-align territories?

Sept. 2001
Slide 55 Elee – Shanghai
 What
does it take
to implement a successful
Supply Chain Management

Sept. 2001
Slide 56 Elee – Shanghai
 For transforming a traditional company with
functional organization to a successful
Supply Chain Organization,
the key challenge is to build a platform,
(the SC network)
that will facilitate the 3 flows i.e.

material, information, financial flows.

Sept. 2001
Slide 57 Elee – Shanghai
 Supply Chain Management (SCM)
Financial flows

Expected
Supplier Production
Customer
Capacity Capacity
orders

Finished
Goods To customer
Products
From
Production Availability

From Components Availability Customer

Supplier Orders
Availability Raw material Goods in hand

Information flow in both directions

Material flow from supplier to customer

A platform that facilitates the 3 flows:

Materials, information and financials

Sept. 2001
Slide 58 Elee – Shanghai
 Supply chain integration a reality

Four key dimensions

will have to be
implemented.

Sept. 2001
Slide 59 Elee – Shanghai
 Workflow coordination

Streamlining workflow activities

among supply chain partners.
-
Workflow coordination encompasses
of a host of activities
including procurement, order execution,
engineering change,
design optimization and financial exchanges.

Sept. 2001
Slide 60 Elee – Shanghai
 Synchronization

The goal of synchronization

in SC integration
is to develop production,
delivery mechanisms and processes
that can produce goods
to the actual end-users rate.

Sept. 2001
Slide 61 Elee – Shanghai
 Information integration
ƒ Information is the enabler of
supply chain integration.

ƒ It refers to sharing & exploiting

the information collectively
so that the entire chain is driven
by true consumer demand.

ƒ The business platform should provide

both connectivity and the ability
to integrate a large variety
of operational systems

Sept. 2001
Slide 62 Elee – Shanghai
 The trust factor
ƒ Trust is the quality that allows cooperation and
coordination to take place both within the organization
and across the supply chain partners.

ƒ Trust is essential to the free and open flow

of information needed
to respond to the customer needs
at each point of interaction.

ƒ Without openness,
the network will not be responsive
and not being put at an economic advantage.
Sept. 2001
Slide 63 Elee – Shanghai
 The benefits
gained through
the implementation
of Supply Chain
solutions.
Sept. 2001
Slide 64 Elee – Shanghai
 The benefits gained through SCM solutions

ƒ Increased visibility
Provide with some ways to see an aggregated view across the
constituents of the Supply Chain. Companies have greater
visibility into inventories (including suppliers inventories).
Visibility combined with coordination and synchronization is the
basic enabler to supply chain implementation.

ƒ Increased reliability
Companies can make accurate promises of availability to their
customers. They can fulfill on those promises to get the goods
into customer’s hands fast and at the lowest cost.

Sept. 2001
Slide 65 Elee – Shanghai
 The benefits gained through SCM solutions

ƒ Squeeze inefficiencies
Through the efficient matching of supply and demand, one
reduces obsolete or unwanted inventories deriving savings,
energy savings, reduced pollution.

ƒ Increase the velocity of business

Information flows faster through the extended supply chain
enabling faster response lead times inducing faster response
time to customer requirements

ƒ ….Savings and revenue improvements…..

Sept. 2001
Slide 66 Elee – Shanghai
 Why is the SMC so important?

Effective management of the

supply chain
can lead to up to
5% cost decrease that
has the same impact on profit as
30% increase in sales.

Sept. 2001
Slide 67 Elee – Shanghai