Supply Chain Management Introduction
Outline <ul><li>What is supply chain management? </li></ul><ul><li>A supply chain strategy framework  </li></ul><ul><li>Co...
Traditional View: Supply Chains in the Economy (1990, 1996) <ul><li>Freight Transportation $352, $455 B </li></ul><ul><ul>...
Traditional View: Cost breakdown of a manufactured good <ul><li>Profit 10% </li></ul><ul><li>Supply Chain Cost 20% </li></...
What can Supply Chain Management do? <ul><li>Estimated that the grocery industry could save $30 billion (10% of operating ...
Magnitude of Supply Chain Management <ul><li>Compaq  estimates it lost  $0.5 B to $1 B  in sales in 1995 because laptops w...
Importance of SCM understood by some <ul><li>AMR Research: </li></ul><ul><ul><li>&quot;The biggest issue enterprises face ...
Top 25  Supply Chains AMR research  http://www.amrresearch.com   publishes reports on supply chains and other issues. The ...
SCM Generated Value <ul><li>Minimizing  supply chain costs   </li></ul><ul><li>while keeping  a reasonable service level <...
A picture is better than 1000 words! How many words would be better than 3 pictures? <ul><li>- A supply chain consists of ...
Detergent supply chain: Customer wants detergent  Albertson’s Supermarket Third party DC P&G or other manufacturer Plastic...
Flows in a Supply Chain Customer Material Information Funds The flows resemble a chain reaction. Supplier
SCM in a  Supply Network <ul><li>Supply Chain Management (SCM)  is concerned with the management and control of the flows ...
Importance of Supply Chain Management <ul><li>In 2000, the US companies spent $1 trillion (10% of GNP)  on supply-related ...
A Generic Supply Chain Supply Sources: plants vendors ports Regional Warehouses: stocking  points Field  Warehouses: stock...
Cycle View of Supply Chains Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retail...
Push vs Pull System <ul><li>What instigates the movement of the work in the system? </li></ul><ul><li>In  Push  systems, w...
Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Ar...
Examples of Supply Chains <ul><li>Dell  / Compaq </li></ul><ul><ul><li>Dell buys some components for a product from its su...
SCM Strategy
Mission-Strategy-Tactics-Decisions <ul><li>Mission , Mission statement </li></ul><ul><ul><li>The reason for existence of a...
Life Strategy for Ted <ul><li>Ted is an undergrad. He would like to have a career in business, have a good job, and earn e...
Linking SC and Business Strategy Finance, Accounting, Information Technology, Human Resources Competitive (Business) Strat...
Strategies:  Product Development <ul><li>It relates to Technologies for future operations (via patents) and Set of product...
Strategies <ul><li>Marketing and sales strategy  relates to positioning, pricing and promotion of products/services </li><...
Fitting the SC to the customer or vice versa? <ul><li>Understand the customer  Wishes   </li></ul><ul><li>Understand the  ...
Achieving Strategic Fit: Consistent SCM and Competitive strategies <ul><li>Fit SC to the customer </li></ul><ul><li>Unders...
Contributors to Implied Demand Uncertainty Low High Price Responsiveness Customer Need Implied Demand Uncertainty Commodit...
Understanding the Supply Chain:  Cost-Responsiveness Tradeoff High Low Low High Responsiveness (in time, high service leve...
Achieving Strategic Fit:  Wishes  vs.   Capabilities Implied uncertainty spectrum Responsive (high cost) supply chain Effi...
Loosing the strategic fit: Webvan <ul><li>Webvan  started a merger with HomeGrocer in Sept 2000 and completed in May 2001....
Top 10 Retailers Reported in 2008 – First 4 Source  www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.p...
Top 10 Retailers Reported in 2008 – First 5-10
Big retailers’ Strategy <ul><li>Wal-Mart:  Efficiency </li></ul><ul><li>Target:  More quality and service </li></ul><ul><l...
Other Factors <ul><li>Multiple  products in a SC.  Multiple   customers for a given product </li></ul><ul><ul><li>Separate...
Achieving Strategic Fit over a Lifecycle Responsive (high cost) supply chain Efficient  (low cost)  supply chain Certain d...
Integration <ul><li>Integration is the central theme in SCM </li></ul><ul><li>Building  synergies  by integrating business...
Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Cha...
Supply Chain Drivers and Obstacles
Drivers of Supply Chain Performance Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain...
1. Inventory <ul><li>Convenience : Cycle inventory </li></ul><ul><ul><li>No customer  buys eggs one by one </li></ul></ul>...
Little’s law <ul><li>Long run averages = Expected values </li></ul><ul><li>I = R . T </li></ul><ul><li>I=Pipeline inventor...
2. Transportation <ul><li>Air </li></ul><ul><li>Truck </li></ul><ul><li>Rail </li></ul><ul><li>Ship </li></ul><ul><li>Pipe...
3. Facilities <ul><li>Production </li></ul><ul><ul><li>Flexible  vs.  Dedicated </li></ul></ul><ul><ul><li>Flexibility cos...
4. Information <ul><li>Role in the supply chain </li></ul><ul><ul><li>The  connection  between the various stages in the s...
Characteristics of the Good Information  Strategy Analytical Models $$$ <ul><li>Information </li></ul><ul><li>Accurate? </...
Quality of Information <ul><li>Information drives the decisions: </li></ul><ul><ul><li>Good information means good decisio...
Information Technology in a Supply Chain: Legacy Systems
Information Technology in a Supply Chain: ERP Systems Supplier Customer Retailer Distributor Manufacturer Strategic Planni...
Information Technology in a Supply Chain: Analytical Applications Supplier Customer Retailer Distributor Manufacturer Stra...
ERP Systems <ul><li>Wider focus </li></ul><ul><li>Push  (MRP) versus  Pull  (demand information transmitted quickly throug...
IT Push
Supply Chain Software Push See Top 100 under /articles.html  Source Kanakamedala,  Ramsdell, Srivatsan (2003).  McKinsey Q...
5. Sourcing <ul><li>Role in the supply chain </li></ul><ul><ul><li>Set of processes required to purchase goods and service...
6. Pricing <ul><li>Role in the supply chain </li></ul><ul><ul><li>Pricing determines the amount to charge customers in a s...
Considerations for Supply Chain Drivers
Major Obstacles to Achieving Fit <ul><li>SC is big :   </li></ul><ul><ul><li>Variety of products/services </li></ul></ul><...
<ul><li>Dealing with Multiple Owners / Local Optimization </li></ul><ul><ul><li>Information Coordination </li></ul></ul><u...
Major obstacles to achieving fit <ul><li>Instability  and  Randomness :  </li></ul><ul><ul><li>Increasing product variety ...
Common problems <ul><li>Lack of  relevant SCM metrics : How to measure responsiveness? </li></ul><ul><ul><ul><li>How to me...
Common problems <ul><li>Poor  delivery status information </li></ul><ul><ul><ul><li>Not knowing the order status </li></ul...
Summary <ul><li>Supply Chain Introduction  </li></ul><ul><li>Competitiveness / Business strategy / SCM strategy </li></ul>...
Seven Eleven Japan (SEJ) A Case Study
Factual Information on Seven Eleven Japan (SEJ) <ul><li>Largest convenience store in Japan with  market value of $95 B . T...
More on SEJ <ul><li>More factual info:  </li></ul><ul><li>Average sales about twice of an average US store </li></ul><ul><...
Seven Eleven - Number of Stores 1999:  8,027 2004: 10,356
Seven Eleven - Net Sales (B Yen) Sales 1,963 B Yen in 2000
Seven Eleven - Pre tax Profit (B Yen)
Seven Eleven - Inventory turnover (days)
Information Strategy <ul><li>Quick access to up to date information (as opposed to data): </li></ul><ul><li>In 1991, SEJ i...
 
Information Analysis of POS Data <ul><li>Analysis of  </li></ul><ul><ul><li>Sales for product categories over time </li></...
Facilities Strategy <ul><li>Limited storage space  at stores which have only 125-150 m 2  space </li></ul><ul><ul><li>Freq...
The Present and the Future <ul><li>Is food preparation a good idea at 7-eleven locations? </li></ul><ul><ul><li>e.g. Compa...
Deloitte 2008 Global Retailers Survey Excerpts from   www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing...
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  • Supply Chain Management

    1. 1. Supply Chain Management Introduction
    2. 2. Outline <ul><li>What is supply chain management? </li></ul><ul><li>A supply chain strategy framework </li></ul><ul><li>Components of a SCM </li></ul><ul><li>Major obstacles and common problems </li></ul><ul><li>Seven Eleven Japan </li></ul>
    3. 3. Traditional View: Supply Chains in the Economy (1990, 1996) <ul><li>Freight Transportation $352, $455 B </li></ul><ul><ul><li>Transportation manager in charge </li></ul></ul><ul><ul><li>Transportation software </li></ul></ul><ul><li>Inventory Expense $221, $311 B </li></ul><ul><ul><li>Inventory manager in charge </li></ul></ul><ul><ul><li>Inventory software </li></ul></ul><ul><li>Administrative Expense $27, $31 B </li></ul><ul><li>Logistics related activity 11%, 10.5% of GNP </li></ul><ul><li>$898 B spent domestically for SC activities in 1998. </li></ul><ul><li>$1,160 B of inventory in the US economy in the early 2000s. </li></ul>Transportation and inventory managers
    4. 4. Traditional View: Cost breakdown of a manufactured good <ul><li>Profit 10% </li></ul><ul><li>Supply Chain Cost 20% </li></ul><ul><li>Marketing Cost 25% </li></ul><ul><li>Manufacturing Cost 45% </li></ul>Effort spent for supply chain activities are invisible to the customers. Profit Supply Chain Cost Marketing Cost Manufacturing Cost
    5. 5. What can Supply Chain Management do? <ul><li>Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies </li></ul><ul><ul><li>A typical box of cereal spends 104 days from factory to sale </li></ul></ul><ul><ul><li>A typical car spends 15 days from factory to dealership </li></ul></ul><ul><ul><li>Faster turnaround of the goods is better? </li></ul></ul><ul><li>Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago </li></ul><ul><ul><li>inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory. </li></ul></ul><ul><ul><li>To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE. </li></ul></ul><ul><li>National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time. </li></ul>
    6. 6. Magnitude of Supply Chain Management <ul><li>Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not available when and where needed </li></ul><ul><li>P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand </li></ul><ul><li>When the 1 gig processor was introduced by AMD (Advanced Micro Devices) , the price of the 800 meg processor dropped by 30% </li></ul>
    7. 7. Importance of SCM understood by some <ul><li>AMR Research: </li></ul><ul><ul><li>&quot;The biggest issue enterprises face today is intelligent visibility of their supply chains-both upstream and down&quot; </li></ul></ul><ul><li>Forrester Research: </li></ul><ul><ul><li>&quot;Companies need to sense and proactively respond to unanticipated variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks ” </li></ul></ul><ul><li>Gartner Group: </li></ul><ul><ul><li>“ By 2004, 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers ” </li></ul></ul><ul><ul><ul><li>Open ended statement. Agility can be increased continuously. </li></ul></ul></ul>
    8. 8. Top 25 Supply Chains AMR research http://www.amrresearch.com publishes reports on supply chains and other issues. The Top 25 supply chains report comes out in Novembers. The table on the right-hand side is from The Second Annual Supply Chain Top 25 prepared by Kevin Riley and Released in November 2005.
    9. 9. SCM Generated Value <ul><li>Minimizing supply chain costs </li></ul><ul><li>while keeping a reasonable service level </li></ul><ul><li>customer satisfaction/quality/on time delivery, etc. </li></ul><ul><li>This is how SCM contributes to the bottom line </li></ul><ul><li>SCM is not strictly a cost reduction paradigm! </li></ul>
    10. 10. A picture is better than 1000 words! How many words would be better than 3 pictures? <ul><li>- A supply chain consists of </li></ul>- aims to Match Supply and Demand, profitably for products and services - achieves SUPPLY SIDE DEMAND SIDE The right Product Higher Profits The right Time The right Customer The right Quantity The right Store The right Price = + + + + + Supplier Manufacturer Distributor Retailer Customer Upstream Downstream
    11. 11. Detergent supply chain: Customer wants detergent Albertson’s Supermarket Third party DC P&G or other manufacturer Plastic cup Producer Chemical manufacturer (e.g. Oil Company) Tenneco Packaging Paper Manufacturer Timber Industry Chemical manufacturer (e.g. Oil Company)
    12. 12. Flows in a Supply Chain Customer Material Information Funds The flows resemble a chain reaction. Supplier
    13. 13. SCM in a Supply Network <ul><li>Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains. </li></ul><ul><li>The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably </li></ul>Supply Demand Products and Services Cash Supply Side OEM Demand Side THAILAND INDIA MEXICO TEXAS US N-Tier Suppliers Suppliers Logistics Distributors Retailers Information
    14. 14. Importance of Supply Chain Management <ul><li>In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report </li></ul><ul><li>Eliminating inefficiencies in supply chains can save millions of $. </li></ul>Tier 1 Supplier Manufacturer Distributor Retailer Customer Inefficient logistics High stockouts Ineffective promotions Frequent Supply shortages High landed costs to the shelf High inventories through the chain Low order fill rates Glitch-Wrong Material, Machine is Down – effect snowballs
    15. 15. A Generic Supply Chain Supply Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Purchase Inventory Transportation Inventory
    16. 16. Cycle View of Supply Chains Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retailer Distributor Manufacturer Supplier Any cycle 0. Customer arrival 1. Customer triggers an order 2. Supplier fulfils the order 3. Customer receives the order
    17. 17. Push vs Pull System <ul><li>What instigates the movement of the work in the system? </li></ul><ul><li>In Push systems, work release is based on downstream demand forecasts </li></ul><ul><ul><li>Keeps inventory to meet actual demand </li></ul></ul><ul><ul><li>Acts proactively </li></ul></ul><ul><ul><ul><li>e.g. Making generic job application resumes today (e.g.: exempli gratia) </li></ul></ul></ul><ul><li>In Pull systems, work release is based on actual demand or the actual status of the downstream customers </li></ul><ul><ul><li>May cause long delivery lead times </li></ul></ul><ul><ul><li>Acts reactively </li></ul></ul><ul><ul><ul><li>e.g. Making a specific resume for a company after talking to the recruiter </li></ul></ul></ul>
    18. 18. Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives Push-Pull boundary PUSH PROCESSES PULL PROCESSES
    19. 19. Examples of Supply Chains <ul><li>Dell / Compaq </li></ul><ul><ul><li>Dell buys some components for a product from its suppliers after that product is purchased by a customer. Extreme case of a pull process </li></ul></ul><ul><li>Zara, Spain’s answer to Italy’s Benetton </li></ul><ul><ul><li>Sells apparel with a short design-to-sale cycle, avoids markdowns. </li></ul></ul><ul><li>Toyota / GM / Volkswagen, in the course notes </li></ul><ul><li>McMaster Carr / W.W. Grainger, sell auto parts </li></ul><ul><li>Amazon / Barnes and Noble </li></ul><ul><li>Frozen food industry/Fast food industry/5 star restaurants </li></ul><ul><li>Internet shopping: Webvan / Peapod </li></ul>
    20. 20. SCM Strategy
    21. 21. Mission-Strategy-Tactics-Decisions <ul><li>Mission , Mission statement </li></ul><ul><ul><li>The reason for existence of an organization </li></ul></ul><ul><li>Strategy </li></ul><ul><ul><li>A plan for achieving organizational goals </li></ul></ul><ul><li>Tactics </li></ul><ul><ul><li>The actions taken to accomplish strategies </li></ul></ul><ul><li>Operational decisions </li></ul><ul><ul><li>Day to day decisions to support tactics </li></ul></ul>
    22. 22. Life Strategy for Ted <ul><li>Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably </li></ul><ul><li>Mission : Live a good life </li></ul><ul><li>Goal: Successful career, good income </li></ul><ul><li>Strategy: Obtain a master’s degree </li></ul><ul><li>Tactics: Select a college and a concentration </li></ul><ul><li>Operations: Register, buy books, take courses, study, graduate, get a job </li></ul>
    23. 23. Linking SC and Business Strategy Finance, Accounting, Information Technology, Human Resources Competitive (Business) Strategy <ul><li>Product Development Strategy </li></ul><ul><li>Portfolio of products </li></ul><ul><li>Timing of product introductions </li></ul>Marketing Strategy - Frequent discounts -Coupons Supply Chain Strategy New Product Development Marketing and Sales Operations Distribution Service
    24. 24. Strategies: Product Development <ul><li>It relates to Technologies for future operations (via patents) and Set of products/services </li></ul><ul><li>Be the technology leader </li></ul><ul><ul><li>IBM workstations </li></ul></ul><ul><li>Offer many products </li></ul><ul><ul><li>Dell computers </li></ul></ul><ul><li>Offer products for locals </li></ul><ul><ul><li>Tata’s Nano at $2500=100000 rupees </li></ul></ul><ul><ul><li>Production at Singur, West Bengal, India; </li></ul></ul><ul><ul><li>l x w x h=3.1 x 1.5 x 1.6 meters; </li></ul></ul><ul><ul><li>Top speed: 105km/hr; </li></ul></ul><ul><ul><li>Engine volume 623 cc; </li></ul></ul><ul><ul><li>Mileage 50 miles/gallon; </li></ul></ul><ul><ul><li>Annual sales target 200,000. </li></ul></ul>
    25. 25. Strategies <ul><li>Marketing and sales strategy relates to positioning, pricing and promotion of products/services </li></ul><ul><ul><li>e.g. Never offer more than 40% discount </li></ul></ul><ul><ul><li>e.g. EDLP = every day low price </li></ul></ul><ul><ul><ul><li>At Wal-Mart </li></ul></ul></ul><ul><ul><li>e.g. Demand smoothing via coupons </li></ul></ul><ul><ul><ul><li>BestBuy </li></ul></ul></ul><ul><li>Supply chain management strategy relates to procurement, transportation, storage and delivery </li></ul><ul><ul><li>e.g. Never use more than 1 supplier for every input </li></ul></ul><ul><ul><li>e.g. Never expedite orders just because they are late </li></ul></ul><ul><ul><li>e.g. Always use domestic suppliers within the sales season not in advance. </li></ul></ul>
    26. 26. Fitting the SC to the customer or vice versa? <ul><li>Understand the customer Wishes </li></ul><ul><li>Understand the Capabilities of your SC </li></ul><ul><li>Match the Wishes with the Capabilities </li></ul><ul><li>Challenge: How to meet extensive Wishes </li></ul><ul><li>with limited Capabilities ? </li></ul>
    27. 27. Achieving Strategic Fit: Consistent SCM and Competitive strategies <ul><li>Fit SC to the customer </li></ul><ul><li>Understanding the Customer </li></ul><ul><ul><li>Range of demand, pizza hut stable </li></ul></ul><ul><ul><li>Production lot size, seasonal products </li></ul></ul><ul><ul><li>Response time, organ transplantation </li></ul></ul><ul><ul><li>Service level, product availability </li></ul></ul><ul><ul><li>Product variety </li></ul></ul><ul><ul><li>Innovation </li></ul></ul><ul><ul><li>Accommodating </li></ul></ul><ul><ul><li>poor quality </li></ul></ul>Implied (Demand) Uncertainty for SC Implied trouble for SC
    28. 28. Contributors to Implied Demand Uncertainty Low High Price Responsiveness Customer Need Implied Demand Uncertainty Commodities Detergent Long lead time steel Customized products High Fashion Clothing Emergency steel, for maintenance/replacement Short lead times, product variety, distribution channel variety, high rate of innovation and high customer service levels all increase the Implied Demand Uncertainty
    29. 29. Understanding the Supply Chain: Cost-Responsiveness Tradeoff High Low Low High Responsiveness (in time, high service level and product variety) Cost in $ Efficiency frontier Inefficient Fix responsiveness Impossible Inefficiency Region Why decreasing slope (concave) for the efficiency frontier?
    30. 30. Achieving Strategic Fit: Wishes vs. Capabilities Implied uncertainty spectrum Responsive (high cost) supply chain Efficient (low cost) supply chain Certain demand Uncertain demand Responsivenesspectrum Zone of Strategic Fit Lunch buffet <Low margin> Gourmet dinner <High margin>
    31. 31. Loosing the strategic fit: Webvan <ul><li>Webvan started a merger with HomeGrocer in Sept 2000 and completed in May 2001. </li></ul><ul><li>Declared bankruptcy in July 2001. Why? </li></ul><ul><ul><li>“ Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day”. </li></ul></ul><ul><ul><li>Short to midterm cash mismanagement. Venture capital of $1.2 B run out. </li></ul></ul><ul><ul><li>Merger costs: duplicated work force, integration of technology, realignment of facilities. </li></ul></ul><ul><li>Peapod has the same business model but more focused in terms of service and locations. It actually survives with its parent company Royal Ahold’s (Dutch Retailer) cash. </li></ul><ul><ul><li>Delivers now at a fee of $6.95 within a day. </li></ul></ul>
    32. 32. Top 10 Retailers Reported in 2008 – First 4 Source www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf
    33. 33. Top 10 Retailers Reported in 2008 – First 5-10
    34. 34. Big retailers’ Strategy <ul><li>Wal-Mart: Efficiency </li></ul><ul><li>Target: More quality and service </li></ul><ul><li>Carrefour: International, ambiance </li></ul><ul><li>K-Mart: Confused. </li></ul><ul><ul><li>Squeezed between Target and Wal-Mart </li></ul></ul><ul><ul><li>Reliance on coupon sales </li></ul></ul><ul><ul><li>Do coupons stabilize or destabilize a Supply chain? </li></ul></ul><ul><li>K-Mart and Sears merged in November 2004. Now called Sears Holdings. </li></ul><ul><ul><ul><li>K-Mart gets cash </li></ul></ul></ul><ul><ul><ul><li>Sears gets presence outside malls </li></ul></ul></ul>
    35. 35. Other Factors <ul><li>Multiple products in a SC. Multiple customers for a given product </li></ul><ul><ul><li>Separate supply chains or Tailored supply chains </li></ul></ul><ul><ul><ul><li>e.g. Barnes and Noble: Retailing and/or e-tailing </li></ul></ul></ul><ul><ul><li>Product and/or customer classes </li></ul></ul><ul><ul><ul><li>e.g. UTD library loans books for 6 months (2 weeks) to faculty (students) </li></ul></ul></ul><ul><ul><ul><li>Customer segmentation by pricing </li></ul></ul></ul><ul><li>Competitors : more, faster and global </li></ul><ul><ul><ul><li>UTD online programs compete globally </li></ul></ul></ul><ul><li>Product life cycle (shortening) </li></ul><ul><ul><li>SCM strategy moves toward efficiency and low implied uncertainty as products age </li></ul></ul><ul><ul><ul><li>e.g. Air travel is becoming more efficient </li></ul></ul></ul><ul><ul><ul><ul><li>e.g. Southwest airlines lead the drive for efficiency </li></ul></ul></ul></ul><ul><ul><ul><ul><li>e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005. </li></ul></ul></ul></ul><ul><ul><ul><li>e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC more efficient in June 2004. </li></ul></ul></ul><ul><ul><li>Replacement sales </li></ul></ul><ul><ul><ul><li>Selling to replace broken units. </li></ul></ul></ul><ul><ul><ul><ul><li>e.g. AC replacement is about 50% of the market. </li></ul></ul></ul></ul><ul><ul><li>Macroeconomic factors for visibility </li></ul></ul><ul><ul><ul><li>Forecasting Home Depot sales from S&P 500 price index. </li></ul></ul></ul><ul><ul><ul><ul><li>Positive correlation is detected. </li></ul></ul></ul></ul>
    36. 36. Achieving Strategic Fit over a Lifecycle Responsive (high cost) supply chain Efficient (low cost) supply chain Certain demand Uncertain demand Zone of Strategic Fit
    37. 37. Integration <ul><li>Integration is the central theme in SCM </li></ul><ul><li>Building synergies by integrating business functions, departments and companies </li></ul>
    38. 38. Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy
    39. 39. Supply Chain Drivers and Obstacles
    40. 40. Drivers of Supply Chain Performance Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Logistical Drivers How to achieve Sourcing Pricing Cross- Functional Drivers
    41. 41. 1. Inventory <ul><li>Convenience : Cycle inventory </li></ul><ul><ul><li>No customer buys eggs one by one </li></ul></ul><ul><li>Unstable demand : Seasonal inventory </li></ul><ul><ul><li>Bathing suits </li></ul></ul><ul><ul><li>Xmas toys and computer sales </li></ul></ul><ul><li>Randomness : Safety inventory </li></ul><ul><ul><li>20% more syllabi than the class size were available in the first class </li></ul></ul><ul><ul><li>Compaq’s loss in 95 </li></ul></ul><ul><li>Pipeline inventory </li></ul><ul><ul><li>Work in process or transit </li></ul></ul>
    42. 42. Little’s law <ul><li>Long run averages = Expected values </li></ul><ul><li>I = R . T </li></ul><ul><li>I=Pipeline inventory; </li></ul><ul><li>R=output per time=throughput; </li></ul><ul><li>T=delay time=flow time </li></ul><ul><li>Flow time? Thruput? Pipeline (work in process) Inventory? </li></ul>10/minute Spend 1 minute
    43. 43. 2. Transportation <ul><li>Air </li></ul><ul><li>Truck </li></ul><ul><li>Rail </li></ul><ul><li>Ship </li></ul><ul><li>Pipeline </li></ul><ul><li>Electronic </li></ul>
    44. 44. 3. Facilities <ul><li>Production </li></ul><ul><ul><li>Flexible vs. Dedicated </li></ul></ul><ul><ul><li>Flexibility costs </li></ul></ul><ul><ul><ul><li>Production: Remember BMW: “a sports car disguised as a sedan” </li></ul></ul></ul><ul><ul><ul><li>Service: Can your instructor teach music as well as SCM? </li></ul></ul></ul><ul><ul><ul><li>Sports: A playmaker who shoots well is rare. </li></ul></ul></ul><ul><li>Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping </li></ul><ul><ul><li>Job Lot Storage: Need more space. Reticle storage in fabs. </li></ul></ul><ul><ul><li>Crossdocking: Wal-Mart </li></ul></ul>
    45. 45. 4. Information <ul><li>Role in the supply chain </li></ul><ul><ul><li>The connection between the various stages in the supply chain </li></ul></ul><ul><ul><li>Crucial to daily operation of each stage in a supply chain </li></ul></ul><ul><ul><ul><li>E.g., production scheduling, inventory levels </li></ul></ul></ul><ul><li>Role in the competitive strategy </li></ul><ul><ul><li>Allows supply chain to become more efficient and more responsive at the same time ( reduces the need for a trade-off ) </li></ul></ul><ul><ul><li>Information technology </li></ul></ul><ul><ul><ul><li>Andersen Windows </li></ul></ul></ul><ul><ul><ul><ul><li>Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory. </li></ul></ul></ul></ul>
    46. 46. Characteristics of the Good Information Strategy Analytical Models $$$ <ul><li>Information </li></ul><ul><li>Accurate? </li></ul><ul><li>Accessible? </li></ul><ul><li>Up-to-date? </li></ul><ul><li>In the Correct form? </li></ul><ul><ul><ul><li>If not, database restricted ability. How difficult is it to import data into SAP? </li></ul></ul></ul>
    47. 47. Quality of Information <ul><li>Information drives the decisions: </li></ul><ul><ul><li>Good information means good decisions </li></ul></ul><ul><li>IT helps: MRP, ERP, SAP, EDI </li></ul><ul><li>Relevant information? </li></ul><ul><li>How to use information? </li></ul>
    48. 48. Information Technology in a Supply Chain: Legacy Systems
    49. 49. Information Technology in a Supply Chain: ERP Systems Supplier Customer Retailer Distributor Manufacturer Strategic Planning Operational ERP Potential ERP Potential ERP
    50. 50. Information Technology in a Supply Chain: Analytical Applications Supplier Customer Retailer Distributor Manufacturer Strategic Planning Operational Supplier Apps SCM MES Dem Plan Transport execution & WMS APS Transport & Inventory Planning CRM/SFA
    51. 51. ERP Systems <ul><li>Wider focus </li></ul><ul><li>Push (MRP) versus Pull (demand information transmitted quickly throughout the supply chain) </li></ul><ul><li>Real-time information </li></ul><ul><li>Coordination and Information sharing </li></ul><ul><li>Transactional IT </li></ul><ul><li>Expensive and difficult to implement </li></ul><ul><ul><li>About 25% of ERP installations are cancelled within a year </li></ul></ul><ul><ul><li>About 70% of ERP installations go over the budget </li></ul></ul>
    52. 52. IT Push
    53. 53. Supply Chain Software Push See Top 100 under /articles.html Source Kanakamedala, Ramsdell, Srivatsan (2003). McKinsey Quarterly, No 1.
    54. 54. 5. Sourcing <ul><li>Role in the supply chain </li></ul><ul><ul><li>Set of processes required to purchase goods and services in a supply chain </li></ul></ul><ul><ul><li>Supplier selection, single vs. multiple suppliers, contract negotiation </li></ul></ul><ul><li>Role in the competitive strategy </li></ul><ul><ul><li>Sourcing is crucial. It affects efficiency and responsiveness in a supply chain </li></ul></ul><ul><ul><li>In-house vs. outsource decisions- improving efficiency and responsiveness </li></ul></ul><ul><ul><ul><li>TI: More than half of the revenue spent for sourcing. </li></ul></ul></ul><ul><ul><ul><li>Cisco sources: Low-end products (e.g. home routers) from China. </li></ul></ul></ul><ul><li>Components of sourcing decisions </li></ul><ul><ul><li>In-house versus outsource decisions </li></ul></ul><ul><ul><li>Supplier evaluation and selection </li></ul></ul><ul><ul><li>Procurement process: </li></ul></ul><ul><ul><ul><li>Every department of a firm buy from suppliers independently, or all together. </li></ul></ul></ul><ul><ul><ul><ul><li>EDS to reduce the number of officers with purchasing authorization . </li></ul></ul></ul></ul>
    55. 55. 6. Pricing <ul><li>Role in the supply chain </li></ul><ul><ul><li>Pricing determines the amount to charge customers in a supply chain </li></ul></ul><ul><ul><li>Pricing strategies can be used to match demand and supply </li></ul></ul><ul><ul><ul><li>Price elasticity: Do you know yours? </li></ul></ul></ul><ul><li>Role in the competitive strategy </li></ul><ul><ul><li>Use pricing strategies to improve efficiency and responsiveness </li></ul></ul><ul><ul><li>Low price and low product availability; vary prices by response times </li></ul></ul><ul><ul><ul><li>Amazon: Faster delivery is more expensive </li></ul></ul></ul><ul><li>Components of pricing decisions </li></ul><ul><ul><li>Pricing and economies of scale </li></ul></ul><ul><ul><li>Everyday low pricing versus high-low pricing </li></ul></ul><ul><ul><li>Fixed price versus menu pricing, depending on the product and services </li></ul></ul><ul><ul><ul><li>Packaging, delivery location, time, customer pick up </li></ul></ul></ul><ul><ul><ul><li>Bundling products; products and services </li></ul></ul></ul>
    56. 56. Considerations for Supply Chain Drivers
    57. 57. Major Obstacles to Achieving Fit <ul><li>SC is big : </li></ul><ul><ul><li>Variety of products/services </li></ul></ul><ul><ul><li>Spoiled customer </li></ul></ul><ul><ul><li>Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives </li></ul></ul><ul><ul><li>Globalization </li></ul></ul>Local optimization and lack of global fit
    58. 58. <ul><li>Dealing with Multiple Owners / Local Optimization </li></ul><ul><ul><li>Information Coordination </li></ul></ul><ul><ul><ul><li>Information sharing / Shyness / Legal and ethical issues </li></ul></ul></ul><ul><ul><li>Contractual Coordination </li></ul></ul><ul><ul><ul><li>Mechanisms to align local objectives with global ones </li></ul></ul></ul><ul><ul><li>Coordination with (real) options </li></ul></ul><ul><ul><ul><li>Rare in the practice </li></ul></ul></ul><ul><ul><li>Without coordination, misleading reliance on metrics: </li></ul></ul><ul><ul><ul><li>Average safety inventory, Average incoming shipment size, Average purchase price of raw materials, Revenue </li></ul></ul></ul>Major Obstacles to Achieving Fit
    59. 59. Major obstacles to achieving fit <ul><li>Instability and Randomness : </li></ul><ul><ul><li>Increasing product variety </li></ul></ul><ul><ul><li>Shrinking product life cycles </li></ul></ul><ul><ul><li>Customer fragmentation: Push for customization, segmentation </li></ul></ul><ul><ul><li>Fragmentation of Supply Chain ownership: Globalization </li></ul></ul>Increasing implied uncertainty
    60. 60. Common problems <ul><li>Lack of relevant SCM metrics : How to measure responsiveness? </li></ul><ul><ul><ul><li>How to measure efficiency, costs, worker performance, etc? </li></ul></ul></ul><ul><li>Poor inventory status information </li></ul><ul><ul><ul><li>Theft : Major problem for furniture retailers. </li></ul></ul></ul><ul><ul><ul><li>Transaction errors : Retailers with inaccurate inventory records </li></ul></ul></ul><ul><ul><ul><li>for 65% of SKUs </li></ul></ul></ul><ul><ul><ul><li>Information delays , dated information, incompatible info. systems </li></ul></ul></ul><ul><ul><ul><li>Misplaced inventory : 16% of items cannot be found at a major retailer </li></ul></ul></ul><ul><ul><ul><li>Spoilage: active ingredients in the products are losing their properties </li></ul></ul></ul><ul><ul><ul><li>Product quality and yield </li></ul></ul></ul><ul><ul><ul><li>Lack of visibility in SCs </li></ul></ul></ul><ul><ul><ul><ul><li>Do you know the inventory your distribution centers hold? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Do you know the inventory your fellow retailer holds? </li></ul></ul></ul></ul>
    61. 61. Common problems <ul><li>Poor delivery status information </li></ul><ul><ul><ul><li>Not knowing the order status </li></ul></ul></ul><ul><li>Poor IT design </li></ul><ul><ul><ul><li>Unreliable, duplicate data </li></ul></ul></ul><ul><ul><ul><li>Security problems: too much or too little </li></ul></ul></ul><ul><li>Ignoring uncertainties </li></ul><ul><ul><li>“ The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty .” </li></ul></ul><ul><ul><ul><ul><ul><li>Nitin Nohra, HBR February 2006 issue, p.40. </li></ul></ul></ul></ul></ul><ul><li>Internal customer discrimination </li></ul><ul><ul><ul><li>Giving lower priority to internal customers than external customers </li></ul></ul></ul><ul><li>Poor integration </li></ul><ul><li>Elusive inventory costs </li></ul><ul><ul><ul><li>Accounting systems do not capture opportunity costs </li></ul></ul></ul><ul><li>SC-insensitive product design </li></ul>
    62. 62. Summary <ul><li>Supply Chain Introduction </li></ul><ul><li>Competitiveness / Business strategy / SCM strategy </li></ul><ul><li>Components </li></ul><ul><ul><ul><li>Inventory, Transportation, Facilities, Information, Sourcing, Pricing </li></ul></ul></ul><ul><li>Challenges </li></ul>
    63. 63. Seven Eleven Japan (SEJ) A Case Study
    64. 64. Factual Information on Seven Eleven Japan (SEJ) <ul><li>Largest convenience store in Japan with market value of $95 B . The third largest retail company in the world after Wal-Mart and Home Depot. </li></ul><ul><li>Established in 1974. </li></ul><ul><li>In 2000, total sales $18,000 M, profit $620 M. </li></ul><ul><li>Average inventory turnover time 7-8.5 days. </li></ul><ul><li>Stock value increased by 3000 times from 1974 to 2000. </li></ul><ul><li>In 1985, there were 2000 stores in Japan, increasing by 400-500 per year. </li></ul><ul><li>Return on equity 14% over 2000-2004. </li></ul><ul><li>A SEJ store is about the half the size of a US 7-eleven store, </li></ul><ul><li>that is about 110 m 2 . </li></ul><ul><li>Sales: </li></ul><ul><ul><li>Products </li></ul></ul><ul><ul><ul><li>32.9% Processed food: drinks, noodles, bread and snacks </li></ul></ul></ul><ul><ul><ul><li>31.6% Fast food: rice ball, box lunch and hamburgers </li></ul></ul></ul><ul><ul><ul><li>12.0% Fresh food: diary products </li></ul></ul></ul><ul><ul><ul><li>25.3% Non-food: magazines, ladies stockings and batteries. </li></ul></ul></ul><ul><ul><li>Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying </li></ul></ul>
    65. 65. More on SEJ <ul><li>More factual info: </li></ul><ul><li>Average sales about twice of an average US store </li></ul><ul><li>SKU’s offered in store: Over 3,000 (change by time of day, day of week, season) </li></ul><ul><li>Virtually no storage space </li></ul><ul><li>No food cooking at the stores </li></ul><ul><li>Japanese Images of Seven Eleven: </li></ul><ul><li>Convenient </li></ul><ul><li>Cheerful and lively stores </li></ul><ul><li>Many ready made dinner items I buy </li></ul><ul><li>Famous for its great boxed lunch and dinner </li></ul><ul><li>- On weekends, when I was single, I went to buy lunch and dinner </li></ul><ul><li>SC strategy: </li></ul><ul><li>Micro matching of supply and demand (by location, time of day, day of week, season) </li></ul>
    66. 66. Seven Eleven - Number of Stores 1999: 8,027 2004: 10,356
    67. 67. Seven Eleven - Net Sales (B Yen) Sales 1,963 B Yen in 2000
    68. 68. Seven Eleven - Pre tax Profit (B Yen)
    69. 69. Seven Eleven - Inventory turnover (days)
    70. 70. Information Strategy <ul><li>Quick access to up to date information (as opposed to data): </li></ul><ul><li>In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter, DCs and suppliers </li></ul><ul><li>Customer checkout process </li></ul><ul><ul><li>Clerk records the customer’s gender, (estimated) age and purchased items . These Point of Sales (POS) data are transmitted to database at the headquarters. </li></ul></ul><ul><ul><ul><li>Store hardware : Store computer, POS registers linked to store computer, Graphic Order Terminals, Scanner terminals for receiving </li></ul></ul></ul><ul><li>Daily use of the data </li></ul><ul><ul><li>Headquarters aggregate the data by region, products and time and pass to suppliers and stores by next morning. Store managers deduce trend information. </li></ul></ul><ul><li>Weekly use of the data </li></ul><ul><ul><li>Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100 corporate managers. </li></ul></ul><ul><ul><li>Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo on Monday night. </li></ul></ul><ul><ul><li>Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy. Tuesday nights, field counselors return back to their regions. </li></ul></ul>
    71. 72. Information Analysis of POS Data <ul><li>Analysis of </li></ul><ul><ul><li>Sales for product categories over time </li></ul></ul><ul><ul><li>SKU (stock keeping unit) </li></ul></ul><ul><ul><li>Waste or disposal </li></ul></ul><ul><ul><li>10 day (or week) sales trend by SKU </li></ul></ul><ul><li>Sales trends for new product </li></ul><ul><ul><li>In the early 1990s, half-prepared fresh noodle sales were going up, </li></ul></ul><ul><ul><li>new fresh noodle products were quickly developed </li></ul></ul><ul><li>Sales trend by time and day </li></ul><ul><ul><li>Different sales patterns for different sizes of milk at different times of the day results in rearrangement of the milks in the fridge. Extreme store micromanagement. </li></ul></ul><ul><ul><ul><li>Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?). </li></ul></ul></ul><ul><li>List of slow moving items </li></ul><ul><ul><li>About half of 3000 SKUs are replaced by new ones every year </li></ul></ul>
    72. 73. Facilities Strategy <ul><li>Limited storage space at stores which have only 125-150 m 2 space </li></ul><ul><ul><li>Frequent and small deliveries to stores </li></ul></ul><ul><li>Deliveries arrive from over 200 plants. </li></ul><ul><li>Products are grouped by the cooling needs </li></ul><ul><ul><li>Combined delivery system: frozen foods, chilled foods, room temperature and hot foods. </li></ul></ul><ul><ul><li>Such product groups are cross-docked at distribution centers (DC). Food DCs store no inventory. </li></ul></ul><ul><ul><li>A single truck brings a group of products and visits several stores within a geographical region </li></ul></ul><ul><ul><li>Aggregation: No supplier (not even coke!) delivers direct </li></ul></ul><ul><li>The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000. Still, at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners. </li></ul><ul><li>Have many outlets , at convenient locations, close to where customers can walk </li></ul><ul><li>Focus on some territories, not all: When they locate in a place they blanket (a.k.a. clustering) the area with stores; stores open in clusters with corresponding DC’s. </li></ul><ul><ul><li>844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. No stores in Kobe. </li></ul></ul><ul><ul><li>Success rate of franchise application <= 1/100 </li></ul></ul>
    73. 74. The Present and the Future <ul><li>Is food preparation a good idea at 7-eleven locations? </li></ul><ul><ul><li>e.g. Compare microwave heating vs. salad preparation. </li></ul></ul><ul><li>Why SEJ does not allow direct delivery from suppliers to retailers? </li></ul><ul><li>Point out which of the following strategies can also be used in US (or Taiwan) </li></ul><ul><ul><li>Information strategy </li></ul></ul><ul><ul><li>Facilities strategy </li></ul></ul><ul><li>Discuss the differences between the Japanese and US (or Taiwanese) consumers with regard to </li></ul><ul><ul><li>Frequency and amount of grocery purchase </li></ul></ul><ul><ul><li>Use of credit cards vs. cash for purchase </li></ul></ul><ul><ul><li>7-eleven inventory turnover rate is 50 in Japan and 19 in the USA. </li></ul></ul><ul><li>7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan. Does this make sense from a supply chain perspective? </li></ul><ul><ul><li>Cost vs. Responsiveness </li></ul></ul><ul><ul><li>Business strategy </li></ul></ul><ul><li>What is the risk of micro-matching strategy? </li></ul><ul><li>No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA? </li></ul>
    74. 75. Deloitte 2008 Global Retailers Survey Excerpts from www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf Downloaded on Jan 30, 2008.
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