Introduction to Supply Chain & Logistics Management

BY DR. SWATANTRA KUMAR

What we are talking about

Supply Chain & Logistics Management

It is a major function of Operations Management

Grown in significance because of globalization,

better customer service requirements & shorter product life cycles. Now it happens to be a strategic function Efficient management of Logistics and supply chains reduces system wise costs and improves customer service

The genesis
Earliest cases War time supply chains

Ramayana Lord Rama build a bridge to make his

army reach Lanka to rescue Sita (Mythology). Modern supply chains can be divided into two parts Pre Internet era (Before 1990s) Post Internet era (After 1990s)

The Growth of the Internet, Measured by Number of Internet Hosts with Domain Names
Slide 1-4

Figure 1.3, Page 20

Internet has changed the way business was done by creating transparency across the supply chains.

Copyright 2004 Pearson Education, Inc.

The pre internet era

Average time required to process & deliver the

merchandise to a customer from a warehouse inventory 15 to 30 days (Sometimes even longer) Order creation and transfer through Telephone, Fax, or Public mail If everything as per plans time taken was 15 to 30 days, if anything goes wrong (only God knows)

The pre internet era

Long lead times led to accumulation of inventory (by

retailers, wholesalers & Manufacturers). Product variations led to situation of out of stock for most of them! Lack of alternatives It became a common practice to accumulate inventory

Post Internet Era

The industrial world no longer characterized by

scarcity. Consumer seeking greater degree of customization They are active participants in the process rather than passive recipients. Transportation capacity & operational performance have increasingly become more economical and reliable

Post Internet Era

Information Technology brought in the massive change

in the way logistics and SCM operations were practiced. The world of business was irrevocably impacted by computerization, internet and a range of inexpensive information transmission capabilities during the decade of 1990s Information characterized by speed, accessibility, accuracy, and relevancy became the norm. Internet has become a common and economical way to complete B2B transactions. Internet also contributing to rapid globalization

Example: National semiconductor

National semiconductor whose supplier list includes

Motorola, Compaq, Ford, IBM, Siemens & Intel is one of the largest chip makers in the world Its product is used in fax machines, cellular phones, computers and cars Four wafer fabrication facilities : 3 in US, One in Britain, & assembly sites in Malaysia and Singapore. Post manufacturing products are sent to over 100 manufacturing facilities all over the world. Highly competitive industry: short lead time specification and due date delivery are critical

Contd..
In 1994, 95% of NS customers received orders within

45 days from the time order was placed Remaining 5% received orders within 90 days. Tight lead times required the company to involve 12 different airline carriers using about 20,000 different routes. The difficulty: No customer knew that he will under 95% (Delivery within time) or 5% delivery beyond due date. Such is the complexity of SCM

Information Age
High business connectivity

Transformation of all business processes

Marketing, manufacturing, purchasing and logistics High degree of customization is possible Zero Defect (Six Sigma) with in reach Perfect orders delivering the desired assortment and quantity of products to the right location on time, damage free, and correctly invoiced.

The Supply Chain Revolution

Supply Chain Revolution

Logistical renaissance (Revival)

Integrated logistics management Vertical ownership gave way to core competent

business orientation (Increased role of expertise)

Traditional versus Integrated SCM Approaches

Independent inventory management policies Minimization of firm costs Short-term focus Information sharing limited to current transaction Corporate philosophies not relevant Each to their own success or failure Independent actions and information systems Joint reduction of channel inventories Channel-wide cost savings Long-term perspective As required for planning and monitoring Compatible corporate philosophies Sharing of risks and rewards Channel leadership and compatible information systems

Make/Buy Considerations
Reasons for Making
1. 2. 3. 4. 5.

Reasons for Buying

1. 2. 3. 4. 5.

Maintain core competencies and protect personnel from layoff Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution

Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity

2004 Superfactory. All Rights Reserved.

14

Mission of the Supply Chain:

Enhancing the customers experience through excellence in delivering the right products, services, resources and information seamlessly to the right place at the right time!
Nowadays, its supply chains that compete with supply chains!
Price Waterhouse Coopers

Supply Chain Management

Consists of firms collaborating to leverage strategic

positioning and to improve operating efficiency. For each firm involved the supply chain relationship reflects a strategic choice. A supply Chain strategy is a channel and business organizational arrangement based on acknowledged dependency and collaboration. Supply Chain Operations require managerial processes that span functional areas within individual firms and links suppliers, trading partners, and customers across organizational boundaries.

Generalized supply chain model

Relationship Management Information, product, service, financial, and knowledge flows M A T E R I A L S
Supply Network

Integrated enterprise
Procurement

Market Distribution Network

Customer Accommodation Logistics

C O N S U M E R S

Manufacturing

Capacity, Information, core competencies, capital and Human Resource Constraints

Levi & Levi

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 system wise costs while satisfying service level requirements.

More definitions
Upstream the processes which occur before manufacturing or production into a deliverable product or service, typically processes dedicated to getting raw materials from suppliers Downstream the processes which occur after manufacturing or production, typically those processes dedicated to getting goods and services to customers and consumers

Integrative Management
Traditionally Functional focus

Now Focus on process achievement

Lowest total cost through trade-offs that exists

between functions Focus of Integrative Management Lowest total process cost

Three important facets

Resulting from increased attention to integrated

management

Collaboration Enterprise extension, and Integrated service providers

Collaboration
Among Suppliers, Manufacturers and customers

Cross organizational sharing of information,

technology and risk. New innovative operational arrangements came into being
Like Enterprise extension

Enterprise extension
Information sharing paradigm

Process specialization paradigm

Integrated service providers

Outsourcing

To specialists (Transportation, Warehousing)

Described as value added services 3PL (asset based) Having their own physical

resources, and 4PL (non asset based) Information service providers

Responsiveness
Traditional Anticipatory Business Model

Contemporary Responsive Business Model

Postponement strategies

Anticipatory Business Model

Forecast based

Forecast

Buy components & Materials

Manufacture

Warehouse

Sell

Deliver

Responsive Business Model

Joint planning and rapid exchange of information

between supply chain partners (Dell Computers) Time based competition Fewer steps (less cost & lass elapsed time) Dell (2004), sold computers in US, Build to order in China, Delivered in US, Five day order to delivery cycle.
Sell Buy components & materials Manufacture Deliver

Postponement
Working arrangements, which allow postponement

of final manufacturing or distribution of a product unit receipt of a customer order, reduce the incidence of wrong manufacturing or incorrect deployment . Two Types (1) Manufacturing or form postponement and (2) Geographical, or logistics postponement. Economies of scope (different form conversions), e.g. paint mixing on customer demand.

Contd..
Geographical postponement when material or

goods are forwarded only when the order arrives.

Barriers to implementing responsive systems

Sales pressures load the channel

De-loading is difficult to achieve in established firms

It is easier to implement responsive systems in new

organizations because of no pressures of inventory De-loading. Collaboration challenge (not easy to implement collaborative practices) The answer Combine anticipatory and responsive practices to supply chain arrangements Uncertainty by non demand sources

Example
In September, 1999, a massive earthquake

devastated Taiwan. Initially, 80% of the Islands power was lost. Companies such as HP & Dell, who source variety of components from Taiwanese manufacturers, were impacted by supply interruptions Similarly fabric shipments from India were delayed in the wake of Jan 26 earthquake in the Indian state of Gujarat, impacting many US apparel manufacturers.

Logistics
Stems from Greek word Logisticos, which means

The science of computing and calculating First used in Military Science Webster: The procurement, maintenance and transportation of military materials, facilities and personnel Websters Dictionary, 1963

Contd..
U.S. Air Force technical report (1981) defines as the

science of planning and carrying out the movement and maintenance of forces In 1991, the Council of Logistics Management (CLM), a prestigious professional organization, modified its 1976 definition of Physical Distribution Management by first changing the term to logistics and then changing the definition as follows -

Logistics by CLM
Logistics is the process of planning, implementing

and controlling of efficient, effective flow and storage of goods, service and related information from the point-of-origin to the point of consumption for the purpose of conforming to customer requirements

Boversox & Closs (1996)

Logistics Management includes the design and

administration of system to control the flow of materials, work-in-process, and finished inventory to support business unit strategy

The crux
The major features of Logistics Management may be

drawn as

It ensures a smooth flow of all types of goods such as RM, WIP and finished goods It has the ability to meet customer expectations and requirements of goods It ensures the delivery of quality product It offers the best possible customer service at the least possible cost

The crux Contd..

It is an integration of various managerial functions

for optimization of resources. It deals with movement and storage of goods in appropriate quantity It enhances productivity and profitability

Evolution of Logistics concept

Independent business function era (Till 1950s)

Limited Internally Integrated business function era

(1960-70) Fully internally integrated business function era (1980s) Externally Integrated Business Function Era (1990s)

Independent Business Function (till 1950s)

Outcome Aggressive preaching skills

Inventory Control

Sales

Objective Maximization of profit by Sales volume

Procurement

Distribution

Manufacturing

Limited Integrated Business Function (1960s 70s)

Output Price based competition

Manufacturing Management

Materials Management

Objective Cost Control

Physical Distribution & Sales Mgt.

Internally Integrated Business function (1980s) Logistics Management

Output Increased productivity, Profitability and market share

Manufacturing Management

Materials Management

Objective Maximization of profitable sales volume and cost reduction

Marketing & Distribution Mgt.

Externally Integrated business function (1990s onwards) - SCM

Objective Core Competency

Vendors
Output Customer Value and Harmonious relationships

Logistics

Customers

The stages of Transformation

Independent Business Function (till 1950s)
Transformation

Limited Integrated business function (1960s-70s)

Transformation

Transformation

Internally Integrated Business function (1980s) Logistics Management

Transformation

Externally Integrated Business Function (1990s onwards) Supply Chain Management

Logistics
Within a firms supply chain management, logistics

is the work required to move and geographically position inventory. As such logistics is a subset of and occurs within the broader framework of a supply chain. Logistics is a process that creates value by timing and positioning inventory.

Contd..
Logistics is a combination of firms order

management, inventory, transportation, warehousing, materials handling, and packaging as integrated throughout a facility network. Integrated logistics serves to link and synchronize the overall supply chain as a continuous process and is essential for effective supply chain connectivity.

Growing Importance of Logistics and SCM

At the macro level, India spends nearly 13% of its

GDP on logistics, as compared to an average 10% in developing economies. Transportation and inventory costs constitute over 50% of the value added in India. Worldwide, the logistics costs have decreased from 12.2% in 1992 to 11.7% as a result of better SCM.

An Indian Case
MUL: Normally, the inventory cycle time was 20

days. After implementing the detailed logistics system specifying uninterrupted flow of parts and materials at each stage of assembly line for different models, it has now been reduced to 14 days. Inventory cost (1995-96) 243 crore Inventory Cost (1996-97) 204 crore

The linkage
Supply Chain Management & Logistics Management

Supply Chain strategy establishes the operating

framework within which logistics is performed.

The confusion around SCM

A lot has been written

Lack of structure
Lack of common vocabulary What constitutes SCM?

Extent of integration?
Best practices?

The traditional distribution channel practice

Business challenges led to collaborative practices

Harness benefits of specialization Core competency Economy of scale

Vertical ownership integration to collaboration

Value through Integration

Three perspectives of value Economic Value Market Value Relevancy

Economic Value Lowest total cost Economy of Scale efficiency Product/service creation

Market Value Attractive assortment Economy of scope effectiveness Product service presentation

Relevancy Value Customization Segmental diversity Product service positioning Supply Chain strategy

Procurement/Manufac Market Distribution turing strategy strategy

Financial sophistication
Time based strategies (Responsive business systems)

are great But, how fast is fast enough? How much speed is desirable? The answer lies with financial impact Three aspects of financial sophistication are cashto-cash conversion, dwell time maximization, and cash spin

Cash to Cash conversion

Time required to convert raw material or inventory

purchases into sales revenue is referred to as cashto-cash conversion Related to inventory turn Higher the inventory turn quicker the cash conversion Goal of SCM is to reduce and control receiptto delivery time in an effort to accelerate inventory turns

Dwell Time Minimization

Dwell time is the ratio of time that an asset sits idle

to the time required to satisfy its designated supply chain mission. Used in case of inventory Interdependence of supply chain partners in a supply chain allows for dwell time minimization. Firms must look forward to eliminate duplicate and non value added work.

Cash Spin
A popular term for describing the potential benefits

of reducing assets across a supply chain is CASH SPIN. Sometimes referred to as FREE CASH SPIN.

Globalization
Global marketplace offers significant opportunity to

strategically source RM and components. Significant labor advantages can be gained by locating manufacturing and distribution facilities in developing nations (offshoring). Favorable tax laws can make the performance of value adding operations in specific countries highly attractive.

Internationalization of Logistics
Four significant differences in comparison to

national or even regional operations 1. The distance is fairly longer 2. Documentation more complex 3. Diverse local environments 4. Cultural variations in demand

Few Success stories

P&G

Proctor & Gamble estimates that it saved retail

customers & 65 million is a recent 18 month supply chain initiative 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.

National Semiconductor
In two years National Semiconductor reduced

distribution costs by 2.5%, increased delivery time by 47%, and increased sales by 34% by closing six warehouses around the globe and air-freighting microchips to customers from a new centralized distribution centre in Singapore.

Wal-Mart
In 1979 Kmart was one of the leading companies in

the retail industry, with 1,891 stores and average revenues per store of $7.25 million. At that time Wal-Mart was a small niche retailer in the south with only 229 stores and average revenues about half those of Kmart stores. In 10 years had transformed itself; in 1992 it had the highest sales per square foot and the highest inventory turnover and operating profit of any discount retailer.

Wal-Mart Contd..
Today Wal-Mart is the largest and the highest-profit

retailer in the world. In fact, as of 1999, Wal-Mart accounted for nearly 5% of the US retail spending. How did Wal-Mart do it? The starting point was relentless focus on satisfying customer focus. Wal-Marts goal was to provide the customers with access of goods when and where they wanted and to develop cost structures that enable competitive pricing.

The cross-docking
The key to achieving the goal was to make the way the

company replenishes inventory the centerpiece of its strategy. This was done by using a logistics technique known as cross-docking. In this strategy, goods are continuously delivered to WalMarts warehouses, from where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Marts cost of sales significantly and made it possible to offer everyday low prices to their customers.

Question
If cross docking is such a wonderful strategy, why

not everybody in the industry is using it?