INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

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INTRODUCTION TO SUPPLY CHAIN MANAGEMENT
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Flows in a Supply Chain
Information
Product
Customer
Funds
Supply Chain
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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.

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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
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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

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What is a Supply Chain?

• A supply chain consists of the flow of products
  and services from/to
• --Raw materials manufacturers SEE FIGURE 1.1
• --Intermediate products manufacturers
• --End product manufacturers
• --Wholesalers and distributors
• --Retailers and,
• --End customers
• Connected by agents, transportation and storage
  activities, and
• Integrated through sharing of information,
  planning, and processing activities\
• Examples???

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Customers, demand centers sinks
Sources plants vendors ports
Field Warehouses stocking points
Regional Warehouses stocking points
Supply
Inventory warehousing costs
Production/ purchase costs
Transportation costs
Transportation costs
Inventory warehousing costs
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Typical Supply Chains
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Typical Supply Chain for a Manufacturer
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Typical Supply Chain for a Service
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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

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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

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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

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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)

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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.

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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

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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

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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

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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 management- strategies
  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

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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

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Strategies for SCM

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

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Optimization

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

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Tools and Strategies for Optimization

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

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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?

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Sequential Optimization vs. Global Optimization
Source Duncan McFarlane
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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

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Uncertainty

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

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Cant Forecasting Help?

• Forecasting is always wrong
• The longer the forecast horizon the worse the
  forecast
• End item forecasts are even more wrong

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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

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Supply Chain Variability
Volumes
Time
Source Tom Mc Guffry, Electronic Commerce and
Value Chain Management, 1998
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What Management Gets...
Volumes
Time
Source Tom Mc Guffry, Electronic Commerce and
Value Chain Management, 1998
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What Management Wants
Volumes
Time
Source Tom Mc Guffry, Electronic Commerce and
Value Chain Management, 1998
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Dealing with Uncertainty

• Pull Systems
• Risk Pooling
• Centralization
• Postponement
• Strategic Alliances
• Collaborative Forecasting

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Supply Chainthe 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

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Supply Chainthe 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.

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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.

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Supply Chain The Potential

• Procter Gamble estimates that it saved retail
  customers 65 million through logistics gains
  over the past 18 months.According to PG, 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)

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Supply Chainthe 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.

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Whats New?

• Global competition
• Shorter product life cycle
• New, low-cost distribution channels
• More powerful well-informed customers
• Internet and E-Business strategies

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HB Wood Bats Process
ERP5 OverviewSupply System at Hillerich Bradsby
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Technology/Logistics
LO2 American President Line