WHAT IS A SUPPLY CHAIN ?

Contents
 What is Supply Chain Management?
 Basic Entities and Flows in SCM
 Vertical and Horizontal Supply Chains
 Value Stream and Value Mapping
 Objectives of the Supply Chain
 Functional vs. Innovative Products
 Inventory
 Transportation
 Forecasting
 Risk management
 SOME JARGON

 Push, Pull
 Upstream, Downstream
 Tier 1, Tier 2
 Functional vs. Innovative Products
 Glocalization
 3PL, 4PL
 Engineered Flow
 SUPPLY CHAIN MANAGEMENT
=
MANAGEMENT OF THE CHAIN OF
SUPPLIES
What is Supply Chain Management?

 Let us first understand What is Supply Chain

Management?
A supply chain is a global network used to deliver products
and services from raw materials (point of source of origin)
to end customers (point of source of consumption) through
an engineered flow of information, physical distribution, and
cash.
The SCM Network
Losing Sight of the Common
Objective
I'm glad that the hole
is not on our side!
3 Entities, 4 Flows
Basic Supply Chain: Three Entities

Supplier
Supplier Producer
Producer Customer
Customer

 Raw  Products  Retailer

materials  Power  Wholesaler
 Energy  Professional  Distributor
 Services services  End user
 Components  Government
services
 Educational
services
Basic Supply Chain: Four Flows

Information flow
Invoices, sales lit, specs, blueprints, receipts, orders, rules and regs, etc.

Primary product flow

Material, components, supplies, services, energy, finished products.

Primary cash flow

Payments
Material, components, for products,
supplies, supplies,
services, etc.
energy, finished products

Reverse product flow

Returns for repair, replacement, recycling, disposal, etc.
Suppliers’
Suppliers Producer Retailer Customer
Suppliers

Growers Wholesale food Street vendor: Street vendor: Consumers

distributor cooking the stand and
Miners operations its employees
Utilities
Utilities
Builders
Manufacturers
Other merchants
Manufacturing Supply Chain Model

Information flow
Tier 2 materials
supplier
Tier 1 materials
supplier
Customer

Tier 2 materials Distributor

supplier
Customer
Tier 2 service Tier 1 materials
supplier supplier
Manufacturer

Customer
Tier 2 materials
supplier Distributor
Tier 1 service
supplier Customer
Tier 2 service
supplier
Primary Primary
product cash
flow flow
Services Also Have Supply Chains

Fuel supplies

Other
Electric backup utilities
power

Electric
Electrical Power Home
transformers
customers
Utility

Facility
maintenance
Commercial
customers
Programming
services

Janitorial
services
Summing Up

 Supply Chains:
− Stretch from raw materials to consumers
− Include various entities and processes
− Run in reverse as well as toward end user
− Contain cash, product, and information flows
− Connect to outside stakeholders.
Two Types of Supply Chain
Management

Vertical Lateral (Horizontal)

Integration Integration
Degree to which a firm directly Coordinated management of
controls multiple links in the separately owned links in the
supply chain from raw material supply chain; “outsourcing”
extraction to retail sales

Retail sales Raw Production

Components Retail
materials Distribution
Products sales
extraction Services
Distribution

Production
Components/products/services

Raw materials extraction

Vertical Integration

Integrated
Integrated automotive
automotive company: Benefits of vertical integration
ownership, management,
company: ownership,
marketing/sales, finance
management, marketing No dealing with competitors for
supplies, etc.
Showroom Customer
Enhanced visibility into operations
Distribution
Control
Plant Primary
materials/
Same ownership and
Component product flow
management for all activities in
production
supply chain
Raw materials
Lateral Integration

Information flow

Raw Components Plant Distribution Retail Customers

materials

Primary product flows Primary cash flows

Benefits of lateral integration

Economies of scale and scope
Improved business focus
Leveraging communication and
production competencies
Objectives of the Supply Chain
Management
 Creating net value
 Building a competitive infrastructure
 Leveraging worldwide logistics
 Synchronizing supply with demand, and
 Measuring performance globally.
Value Stream and its Mapping

Processes that create, produce, and

Value stream deliver a product or service

Value stream Drawing the existing and desired

value streams to aid process
mapping
improvement
Objective #1: Add Value for Customers
and Stakeholders
• Financial
value
Supplie
Supplier Produc
Producer Customer • Customer
r er value
• Social
value
Balanced Varied Stakeholder Values

Firms in SC Profit, market share, image

Product and service quality, affordability,
End customers availability
Investors Return on investment, quality of communications

Lenders Interest, long-term stability, return of principal

Communities/ Tax base, environment, jobs
environment
Governments Laws, regulation, overall impact
Job security, compensation, opportunity,
Employees working conditions
Increasing Financial Value

 Cut costs that yield net gains at the bottom line.

 “It takes money to make money” (such as

investments in upgrades).

 Gains should be equitably

distributed (with all
stakeholders in mind).
Enhancing Customer Value

Quality Affordability Availability Service Sustainability

Most resources are invested in creating the value

of greatest importance to the market.
Objective #2: Improve Customer
Service

Fundamental attributes:
 Availability
 Operational performance
 Customer satisfaction
Objective #3: Effectively Use
Systemwide Resources
High
Effectiveness:
Getting the right Thrive
product and the right

Effectiveness
amount to the right
customer at the right
time. Low

Low High
 Employees
 Raw materials Efficiency

 Equipment
Objective #4: Efficiently Use
Systemwide Resources
High
Efficiency:
A measurement of the Thrive
actual output compared

Effectiveness
to the standard output
expected; measures
how well something is Low

performing relative to Low High

existing standards. Efficiency

Objective #5: Leverage Partner
Strengths
Strong partnerships:
 Add value to products
 Improve market access
 Build financial strength
 Add technological strength
 Strengthen operations
 Enhance strategic growth
 Improve organizational skills.
Bullwhip Effect

Supplier Factory
Distributor
Retailer
Customer

Small demand uncertainty becomes more and more distorted.

 Bullwhip Effect : Facial Tissue
Quantity ordered

Time
Causes of the Bullwhip Effect

Lack of collaboration and information sharing

Demand forecast errors

Lead times

Order batching

Price fluctuations and promotions

Rationing and shortage gaming

 ility
i ab
V ar
=
V el
+ oci
ty
The Three Vs
ity
ibil
Vis
Sources of Demand Variability

Competition

Distance Seasonal effects

Demand Economic and

Disasters other external
Variability trends

Life cycle trends

Promotions and customer
expectations

Internet
Sources of Supply Variability

Global
expansion and
complexity
Natural
cycles and raw
Supplier failures material
availability

Supply Economic and

System
other external
nervousness Variability trends

Supply planning Bullwhip effect

failures

Demand plan
error or bias
Supply Chain Strategies Topic 1: Basic Supply Chain

Three Main Types

Stable Reactive Efficient reactive

supply chain supply chain supply chain
Strategic Impact vs. Supply Chain
Difficulty

High
Direct/Core
Difficulty (Supply Risk)

Bottleneck
Competency
Materials
Materials

Commodity Leveragable
Materials Materials
Low
Low High
Strategic Importance (Profit Impact)
The Need for Inventory

Inventory

Production Customer Service

 Raw materials Supporting Activities  Finished goods

 Work-in-process  Spare parts
items  Maintenance
 Repair
 Operating supplies
Inventory Management KPIs

Hit customer
service targets

Reduce Quality
inventory costs Availability
On-time delivery
Holding
Ordering
Transporting
Types of Inventory

(1) Raw (2) Work-in- (3) Finished

materials process (WIP) goods (FG)

(4) MRO

Raw
Component End
materials Manufacturer Distributor
supplier customer
supplier

(5) In-transit
Why Have Inventory?

Anticipation inventory

Decoupling Safety stock

Inventory
Buffer inventory
functions
Lot-size or cycle stock

Hedge inventory
Inventory Costs

 Acquisition costs: order quantity × unit cost

 Landed costs: product cost plus logistics costs
 Carrying (holding) costs:
− Storage costs: rent, depreciation, operating cost,
taxes, material-handling expenses, equipment leases,
power, operating costs
− Capital costs: interest, financing, payments to
creditors and investors
− Risk costs: insurance, inventory value reductions
and write-offs
The Role of Logistics in SCM

Reverse Logistics
Supply Chain Community
1 2 3 4 5 6
Raw
Manu- Distribu- Whole- End
material Retailers
suppliers
facturer tors salers users

Obtain Produce Distribute

All tasks necessary to get the Logistics functions:

right product in the right quantity  Transportation
and right condition at the right  Warehousing
place at the right time for the  3PLs and 4PLs
right customer at the right price  Reverse logistics
Logistics Value Proposition

SERVICE COST
Five Modes of transportation
Five modes of transportation and Their Advantages
Five modes of transportation and Their Advantages and
disadvantages
Third-Party Logistics Providers (3PLs)

Machine tools 3PL rail 3PL 3PL-owned

supplier freight PLANT piggyback warehouse

Electronics 3PL air 3PL Retailer

supplier express trucker customer

Logistics manager arranges

transportation separately with several
third-party logistics providers.
How 3PLs and 4PLs Are Related

Machine tools 3PL rail 3PL 3PL-owned

supplier freight PLANT piggyback warehouse

Electronics 4PL air 3PL Retailer

supplier express trucker customer

4PL express carrier acts as consultant,

arranges all logistics for plant, and provides
express air—its core competency.
The Reverse Logistics Hierarchy

Reduce

Reuse

Recycle

Recover energy

Dispose in responsible landfill

Principles of Forecasting

Forecasts are:
Monthly
 Necessary (sometimes) Demand

 Wrong (almost always, and

they should include an
estimate of error)
 More accurate for groups
than for single items
 More accurate for near term Forecast
than for long term. Actual
Demand Components

 Trend: linear, geometric,

exponential Trend

 Seasonality: holidays,
weather
 Random variation: Cycle Demand Seasonality
data fluctuation caused
by random occurrences
 Cycle: increases/
Random
decreases in economy variation
Quantitative Approaches to
Forecasting Demand

Intrinsic Extrinsic
 Based upon internal  Based upon factors
factors; incorporate data related to demand for
collected during set product, such as impact
intervals of time of housing starts on
furniture sales or leading/
lagging economic
indicators
Service Sector Forecasting

Service businesses, such as Some restaurant

restaurants, may track variables
“seasonal” demand in units  Workers per shift
as short as minutes.  Registers in operation
Lunchtime Dinnertime  Number of available
20%
tables
% of
demand
15%
 Space requirements
by hour
of day 10%  Amount and types of
5%
foods
11-12 12-1 1-2 2-3 3-4 4-5 5-6 6-7 7-8 8-9 9-10
Hour of day
Qualitative Approaches to Forecasting
Demand
 Personal insight When to use
qualitative forecasting
 Sales force estimate methods:

 Management estimate For new products

 Market research When hard data are

lacking
 Delphi method Combination
methods: as a check
on quantitative
forecasts
Risk Management

The systematic identification, assessment,

and quantification of potential supply chain
disruptions with the objective to control
exposure to risk or reduce its negative impact
on supply chain performance.
– Supply Chain Council
Forms of Risk

Categorization Identification

Clustering Brainstorming
risks possible risks

Definition

Time horizon
and scope
Risk Tolerance

Tolerance

• Organizations range from

risk-tolerant to risk-averse.
• Risk tolerance includes
speculation, hedging,
flexible supply chain
strategies.
• Risk tolerance level affects
choice of risk response.
Risk Level
Risk Level = Probability of Occurrence × Magnitude of Loss

High probability of
occurrence, high
Probability of Occurrence

High probability of
magnitude of loss
occurrence, low
magnitude of loss
Low probability of
occurrence, high
Low probability of
magnitude of loss
occurrence, low
magnitude of loss
Loss
ag n i t ud e o f
M
Basic Risk Responses

Avoid Accept
Changing a Take no
plan to action or
eliminate risk or unable to
its impact form plan

Transfer Mitigate Preventive

Insurance or measures to
contractual reduce
transfer to SC probability or
partner severity of
risks
Risk Responses

Preventive action Contingent action

Risk response that occurs before a Risk response that occurs during or
harmful risk event occurs; intent is after a harmful risk event; intent is
to reduce probability or severity of to minimize monetary, physical, or
the risk. reputation damage.

Risk event
Best-cost outcome
Cost of Occurrence vs. Cost of Mitigation
× Probability