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INTRODUCTION TO SUPPLY CHAIN

MANAGEMENT

Flows in a Supply Chain

Information
Product
Funds

Customer

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


century industry replaced agriculture, in
the second half of the twentieth century
service has replaced manufacturing
-and right now, the knowledge industry is
beginning to replace the others.

George Kotzmetzk

Chapter 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?


A supply chain consists of the flow of products and
services from/to:
--Raw materials manufacturers
--Intermediate products manufacturers
--End product manufacturers
--Wholesalers and distributors
--Retailers and,
--End customers

SEE FIGURE 1.1

Connected by agents, transportation and storage


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

Sources:
plants
vendors
ports

Customers,
demand
centers
Field
Regional
Warehouses: sinks
Warehouses: stocking
stocking
points
points

Supply

Inventory &
warehousing
costs
Production/
purchase
costs

Transportati
Transportatio
on
n
costs
Inventory & costs
warehousing
costs

Figure 1.1 A Generic Supply Chain

Product & service flow

End
customers

End product manufacturer

Raw material

Intermediate

Wholesalers,

suppliers

component mfgs.

distributors

Information and planning

Retailers

Typical Supply Chains


Production

Distribution

Purchasing Receiving Storage Operations Storage

Typical Supply Chain for a Manufacturer

Supplier
Supplier
Supplier

Storage

Mfg.

Storage

Dist.

Retailer

Customer

Typical Supply Chain for a Service


Supplier

Supplier

Storage

Service

Customer

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


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


Management
* 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.


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
customers customers and the
suppliers suppliers)

Importance of Supply Chain Mgt.


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 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.


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


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

Important Elements of Supply Chain


Management-Cont.
Distribution:
-- Transportation management- tradeoff
decisions between cost & timing of
delivery/customer service via trucks, rail,
water & air
-- Customer relationship managementstrategies 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

Important Elements of Supply Chain


Management-Cont.
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 SCM


All of the advanced strategies, techniques,
and approaches for Supply Chain
Management focus on:
Global Optimization
Managing Uncertainty

Optimization

* What is it?
* Why is it important?
* What tools and approaches help?

Tools and Strategies for


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

Global 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?

Sequential Optimization vs.


Global Optimization
Sequential Optimization
Procurement
Planning

Manufacturing
Planning

Distribution
Planning

Demand
Planning

Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS

Procurement
Planning

Manufacturing
Planning

Source: Duncan McFarlane

Distribution
Planning

Demand
Planning

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

Uncertainty

What is variation?
What is randomness?
What tools and approaches help us to
deal with these issues?

Cant 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?


* Matching supply and demand is difficult.
* Forecasting doesnt 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 Variability

Volumes

Manufacturer
Manufacturer Forecast
Forecast
of
of Sales
Sales

Retailer
Retailer Orders
Orders

Retailer
RetailerWarehouse
Warehouse
to
toShop
Shop

Actual
Actual
Consumer
Consumer
Demand
Demand

Production
ProductionPlan
Plan

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

Volumes

What Management Gets...

Consumer
Consumer
Demand
Demand

Production
ProductionPlan
Plan

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

Volumes

What Management Wants

Production
ProductionPlan
Plan
Consumer
Consumer
Demand
Demand

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

Dealing with Uncertainty

Pull Systems
Risk Pooling
Centralization
Postponement
Strategic Alliances
Collaborative Forecasting

Supply 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 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 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 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 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.

Whats 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 Process

ERP5
OverviewSupply System at Hillerich & Bradsby

Technology/Logistics

LO2
American President Line