Introduction to Supply Chain

Management
 What is a SCM?
Flow of products and services from:
– Raw materials manufacturers
– Intermediate products manufacturers
– End product manufacturers
– Wholesalers and distributors and
– Retailers
• Connected by transportation and storage
activities
• Integrated through information, planning, and
integration activities
• Cost and service levels
 What Is Supply Chain Management?

• 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 wide costs while satisfying
service level requirements.
 Two Other Formal 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
 PC Industry Supply Chain
Tracing back
PCtheIndustry
screen you stare
Supplyat for the bulk of your time.
Chain
Cisco’s Value Network
 SCM Definition
Material Flow

Converter
Supplier Retailer
Distributor

Source
Converter Consumers
Distributor End-User
Supplier

Value-Added Services

Funds/Demand Flow

Information Flow

Reuse/Maintenance/After Sales Service Flow

The SCM Network
 Key Observations
• Every facility that impacts costs need to be
considered
– Suppliers’ suppliers
– Customers’ customers
• Efficiency and cost-effectiveness throughout the
system is required
– System level approach
• Multiple levels of activities
– Strategic – Tactical – Operational
 Challenges
• Supply chain strategy linked to the
Development Chain
• Challenging to minimize system costs and
maximize system service levels
• Inherent presence of uncertainty and risk
 The Development Chain
• Set of activities and processes associated with
new product introduction. Includes:
– product design phase
– associated capabilities and knowledge
– sourcing decisions
– production plans
Intersection of SCM and The Development
Chain

The enterprise development and supply chain

 Global Optimization
• Geographically dispersed complex network
• Conflicting objectives of different facilities
• Dynamic system
– Variations over time
– Matching demand-supply difficult
– Different levels of inventory and backorders
• System Variations over time
-Seasonal fluctuations, trends, advertising and
promotions. Competitors’ pricing strategies etc.
 Global Apparel Value Chain
Tracing back the dress you are wearing
 Globally Dispersed Manufacturing
• An Illustration: How Li & Fung Limited
Might Make a Dress
Product
ProductDesign
Design QC
QC& &Shipping
Shipping
[Hong
[HongKong]
Kong] [Hong
[HongKong]
Kong]

Yarn
YarnSpinning
Spinning Weaving
Weaving Stitching
Stitching
[Korea]
[Korea] [Taiwan]
[Taiwan] [Indonesia]
[Indonesia]

Zippers+…
Zippers+…
[Japan+…]
[Japan+…]
 Uncertainty and Risk Factors: Challenges

• 1. Matching supply and demand

• REASON(1)
• Raw material shortages
• Internal and supplier parts shortages
• Productivity inefficiencies
• EXAMPLE
• Boeing Aircraft’s inventory write-down of $2.6 billion
in Oct 1997 due to ‘raw material shortages, internal
& supplier parts shortages & productivity
inefficiencies.
REASONS(2,3,4) EXAMPLES

•Sales and earnings shortfall Sales at U.S. Surgical Corporation

•Larger than anticipated inventories declined 25 percent, resulting in a
loss of $22 million

•Stiff competition Intel reported a 38 percent decline

•General slowdown in the PC in quarterly profit
market

•Higher than expected orders for EMC Corp. missed its revenue
new products over existing guidance of $2.66 billion for the
products second quarter of 2006 by around
$100 million
 Uncertainty and Risk Factors contd….
2. Fluctuations of Inventory and Backorders throughout the
Supply Chain
Uncertainty and Risk Factors contd…
3. Forecasting is not a solution
4. Demand is not the only source of uncertainty-
delivery lead times, manufacturing yields,
transportation times, component availability
etc.
5. Recent trends make things more uncertain-
focus on cost reduction
– Lean manufacturing
– Outsourcing
– Off-shoring
 Uncertainty and Risk Factors
• August 2005 – Hurricane Katrina
– P&G coffee supplies from sites around New Orleans
– Six month impact
• 2002 West Coast port strike
– Losses of $1B/day
– Store stock-outs, factory shutdowns
• 1999 Taiwan earthquake
– Supply interruptions of HP, Dell
• 2001 India (Gujarat state) earthquake
– Supply interruptions for apparel manufacturers
 Evolution of Supply Chain Management
• Further
Refinement of
• SCM Capabilities

• SCM
Formation/
• Extensions

• JIT, TQM, BPR,

• Alliances

• Inventory Management/Cost
• Optimization

• Traditional Mass Manufacturing

• 1950s• 1960s• 1970s • 1980s• 1990s• 2000s

• Beyond
 Complexity: The Magnitude
• Compaq computer’s loss of $500 million to $1 billion in sales
in one year
– Laptops and desktops were not available when and where customers
were ready to buy them
• Boeing’s forced announcement of write-downs of $2.6b
– Raw material shortages, internal and supplier parts shortages….

• Cisco’s multi-billion ($2.2b) dollar write-off of inventories in

2001-2002
– Customers balked on orders due to market meltdown
 Complexity: The Magnitude
• U.S. companies spend more than $1 trillion in supply-related
activities (10-15% of Gross Domestic Product)
– Transportation 58%
– Inventory 38%
– Management 4%
• The grocery industry could save $30 billion (10% of operating
cost) by using effective logistics strategies
• A typical box of cereal spends 104 days getting from factory to
supermarket.
• A typical new car spends 15 days traveling from the factory to
the dealership.
 Supply Chain Management:
The True Magnitude
• Compaq estimates it lost $.5 billion to $1
billion in sales in 1995 because laptops were
not available when and where needed
• P&G estimates it saved retail customers $65
million by collaboration resulting in a better
match of supply and demand
 Transactional Complexity
National Semiconductors:
• Production:
– Produces chips in six different locations: four in the US, one in
Britain and one in Israel
– Chips are shipped to seven assembly locations in Southeast Asia.
• Distribution
– The final product is shipped to hundreds of facilities all over the
world
– 20,000 different routes
– 12 different airlines are involved
– 95% of the products are delivered within 45 days
– 5% are delivered within 90 days.
 PC Value Chain
Performance of Traditional PC Manufacturer
PC Value Chain: Focus on Cost Reduction
Performance of Dell Computers
 Magnitude of Supply Chain Costs
Cost Elements of a Typical Trade Book
 Magnitude of Supply Chain Costs
Example: The Apparel Industry
• Cost per
Percent
• Shirt
Saving

• Manufac • Distributor • Retailer • Customer

• $52.72
turer 0%

• $41.34
• Manufac • Retailer • Customer
• Distributor 28%
turer

• $20.45
62%
• Manufac • Distributor • Retailer • Customer
turer
 Supply Chain: The Potential
• P&G’s estimated savings to retail customers of $65 million through
logistics gains

• Dell Computer’s outperforming of the competition in terms of shareholder

value growth over more than two decades by over 3,000% using:
– Direct business model
– Build-to-order strategy

• Wal-Mart transformation into the world’s largest retailer by changing its

logistics system:
– highest sales per square foot, inventory turnover and operating profit of any
discount retailer
 The Complexity
Three critical abilities that successful firms must
possess:
1. The ability to match supply chain strategies
with product strategies
2. The ability to replace traditional supply chain
strategies-globally optimized supply chain.
3. The ability to effectively manage uncertainty
and risk.
 Key issues in SCM
• 1.The strategic Level deals with the decisions
that have a long-lasting effect on the firm.
• 2. The tactical level includes decisions that are
typically updated anywhere b/w once every Q
or once every yr.
• 3. The operational level refers to day-to-day
decisions.
• Strategic level-product design, what to make
internally & what to outsource, supplier
selection, strategic partnering as well as
decisions on the number, location & capacity
of warehouses & manufacturing plants and
the flow of material through the logistic
network.
• Tactical level- purchasing and production
decisions, inventory policies, transportation
strategies.
• Operational level- scheduling, lead time
quotations, routing etc.
 Key Issues in SCM
• Distribution Network Configuration
• Inventory Control
• Production Sourcing
• Distribution Strategies
• SC Integration & Strategic Partnering
• Outsourcing and Offshoring Strategies
• Product Design
• IT and Decision Support Systems
• Customer Value
• Smart Pricing
• Local Issues
Distribution Network Configuration
• How to select a set of warehouse locations
and capacities, determine production level foe
each and set transportation flow in order to
minimize total prodn, inventory and TC and
satisfy service level requirements- a complex
optimization problem
 Inventory Control
• Why should the retailer hold inventory at the
first place?
• What is the impact of forecasting?
• What inventory turnover ratio should be
used?
 Production Sourcing
• Balance Transportation and Manufacturing
cost
 Supply Contracts
• Relationship b/w supplier and buyer is
established that specifies pricing & volume
discounts, delivery lead times, quality returns..
 Distribution Strategies
• How much to centralize
• What is the impact of each strategy on the
Inventory, transportation and service level?
 SC Integration & Strategic Partnering

• Information Sharing and Operational planning

are the keys
 Product Design
• Certain product design may increase inventory
holding or TC while others may facilitate
manufacturing lead time
 IT and Decision-Support Systems
• Which data to be transferred?
• How frequently should data be transferred
and analyzed?
• Role of Internet, E-commerce
• Can these technologies be viewed as the main
tools used to achieve competitive advantage
in the market?
 Customer Value

• Measure of a company’s contribution to its

customer
 Smart Pricing
• The firm integrates pricing and inventory to
influence market demand and improve the
bottom line.
 Local issues
• Supply and distribution of common use like
food and water
• Skill sets- an understanding of local dynamics,
customer preferences, government policies,
infrastructural constraints and Strengths &
weaknesses of SC partners.
• Issues- Reverse logistics and environment
concerns
 Key Issues in Supply Chain Management
Chain Global Optimization Managing risk & uncertainty

• Chain • Managing Risk and Uncertainty

• •
Distribution Network Configuration Supply • Y
• Inventory Control • Supply • Y
• Production Sourcing • Supply • Y
• Supply Contracts • Both • Y • Y
• Distribution Strategies • Supply • Y • Y
• SC Integration & • Development • Y
• Strategic Partnering • Y
• Outsourcing and Offshoring • Development • Y
• Product Design • Development • Y • Y
• Information Technology & • Supply • Y • Y
• Decision Support Systems
• Y
• Customer Value • Both
• Smart Pricing • Supply