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Chapter 1
 

Chapter 1

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  • I lead discussion with more direction than usual – due to time and level (?) of preparation. Case based project Bryan did in 94 for LFM internship Case describes a scenario with typical symptoms – inventories are too high and customer service is poor. Initial explanation is that the problems are due to poor forecasting of customer demand. There’s a perception that demand is highly variable and unpredictable, possibly due to irrational customer behavior, e. g., panic ordering. … if only Meditech could forecast what the customers will order, then they could improve customer service and reduce inventories….
  • Meditech, 6 years old, spun off from Largo, produces endoscopic surgical instruments. Market doubling every 5 years; continual innovation as products get smaller and products created for more applications
  • How does meditech compete? How does meditech differ from national? What factors are important to customers? Meditech has majority of market . Physicians concerned with product features; materials managers concerned about cost and delivery. Physicians get accustomed to the feel of a product and won’t change easily. Hospitals/mat’ls managers set up long term supply contracts to lock in supplier at a good price (also impact of GPO’s, group procurement organizations?)
  • 4 Meditech assembly plants 4 or 5 domestic dealers, each operates with many autonomous regional warehouses Each regional warehouse stocks many different products, so as to provide full service to hospitals Regional warehouses order directly on Meditech Int’l Meditech affiliates operate like the domestic dealers. What purpose do the dealers fill?
  • Assembly organized into multiple flexible lines, manual Packaging and sterilization have adequate capacity How much bulk inventory would you expect? Not clear how much bulk inventory they keep – from the way they plan (push each month), might expect 2 weeks inventory here on average. In finished goods they target 3 weeks inventory Note – they seem to maintain 3 inventories. Might always ask – why? For what purpose?
  • Annual forecast determined by marketing and finance Revision done at beginning of month by marketing and central planning Transfer requirements = forecast – FG inventory +safety stock (3 weeks of demand), done by central planning Transfer requirements = the imputed demand on the bulk inventory, i. e., how much to transfer from bulk to to FGs Monthly plan agreed to by organization, 1 – 2 weeks into month Monthly plan sent to business units, who input it into MRP to get material plans and assembly schedules MRP re-run several times in month to update schedules…
  • Another way of looking at production planning --- focusing on information flows. Note assembly and material plan are ‘push’ to meet forecast and monthly plan. Packaging and assembly are ‘pull’ Not clear how OP, or OQ are set, other than 3 weeks of safety stock
  • Look at exhibit 3 What are the symptoms? Poor service; poor forecasts; high FGs; more variable production
  • What causes the spikes? Look at exhibit 2. Look again at exhibit 3 – see overshoot in production, and see production variation exceeds demand variation Planners misinterpret the demand spike as an increase in demand rate. Look at exhibits 6 and 7 (not in case) There is no panic ordering.
  • No one had looked at the data – not easy to get at; also monthly buckets obscures a lot of what is going on. Transfer req’s = month forecast + 3 weeks of demand – FG inventory Suppose month forecast = 100, and FG inv = 75; then Transfer req’s = 100 + 75 – 75 = 100 But what if forecast increases to 150: Transfer req’s = 150 + 113 – 75 = 188 Thus, forecast increase by 50%, leads to increase of 88% in TRs
  • Not clear why there is a bulk inventory – what is its purpose? ROP may also be too high at 3 weeks of demand?? Try to get visibility of hospital demand Wrap Up: Case illustrates a supply chain challenge – understand why Meditech has poor customer service and high inventory, particular for new products. Context is characterized by lack of data and a some what archaic, albeit typical, planning system that obscures the problem. Need do diagnosis of what is happenings and why; this then leads to remedies.

Chapter 1 Chapter 1 Presentation Transcript

  • Introduction to Supply Chain Management Chapter 1
  • What Is a Supply Chain?
    • 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
  • 1.1 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 the screen you stare at for the bulk of your time.
  • Cisco’s Value Network
  • SCM Definition Source Supplier Supplier Distributo r Distributor Retailer End-User Converte r Converter Consumers Information Flow Funds/Demand Flow Value-Added Services Material Flow Reuse/Maintenance/After Sales Service Flow
  • The SCM Network FIGURE 1.1: The logistics 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
  • Other Related Observations
    • Supply chain strategy linked to the Development Chain
    • Challenging to minimize system costs and maximize system service levels
    • Inherent presence of uncertainty and risk
    • Set of activities and processes associated with new product introduction. Includes:
      • product design phase
      • associated capabilities and knowledge
      • sourcing decisions
      • production plans
    1.2 The Development Chain
  • 1.2 The Development Chain FIGURE 1-2: The enterprise development and supply chain
  • 1.3 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
    • Recent developments have increased risks
      • Lean production/Off-shoring/Outsourcing
  • Global Apparel Value Chain Tracing back the dress you are wearing
  •  
  • An Illustration: How Li & Fung Limited Might Make a Dress Globally Dispersed Manufacturing QC & Shipping [Hong Kong] Product Design [Hong Kong] Zippers+… [Japan+…] Stitching [Indonesia] Weaving [Taiwan] Yarn Spinning [Korea]
  • 1.4 Uncertainty and Risk Factors Matching Supply and Demand a Major Challenge EXAMPLES REASONS EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 by around $100 million
    • Higher than expected orders for new products over existing products
    Intel reported a 38 percent decline in quarterly profit
    • Stiff competition
    • General slowdown in the PC market
    Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million
    • Sales and earnings shortfall
    • Larger than anticipated inventories
    Boeing Aircraft’s inventory write-down of $2.6 billion
    • Raw material shortages
    • Internal and supplier parts shortages
    • Productivity inefficiencies
  • 1.4 Uncertainty and Risk Factors Fluctuations of Inventory and Backorders throughout the Supply Chain FIGURE 1-3: Order variations in the supply chain
    • Forecasting is not a solution
    • Demand is not the only source of uncertainty
    • Recent trends make things more uncertain
      • Lean manufacturing
      • Outsourcing
      • Off-shoring
    1.4 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
    1.4 Uncertainty and Risk Factors
  • 1.5 Evolution of Supply Chain Management 1950s 1960s 1970s 1980s 1990s 2000s Beyond Traditional Mass Manufacturing Inventory Management/Cost Optimization JIT, TQM, BPR, Alliances SCM Formation/ Extensions Further Refinement of SCM Capabilities
  • Progression of Logistics Costs FIGURE 1-4: Logistics costs’ share of the U.S. economy
  • Composition of Logistics Costs FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
  • 1.6 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.
  • 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
  • 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 Manufacturer Distributor Retailer Customer Cost per Percent Shirt Saving $52.72 0% $41.34 28% $20.45 62% Manufacturer Distributor Retailer Customer Manufacturer Distributor Retailer Customer
  • 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
  • 1.7 Key Issues in Supply Chain Management TABLE 1-1: Key supply chain management issues Chain Global Optimization 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 Strategic Partnering Development Y Outsourcing and Offshoring Development Y Product Design Development Y Information Technology Supply Y Y Customer Value Both Y Y Smart Pricing Supply Y
  • 1.8 Book Objectives and Overview • Inventory management • Logistics network planning • Supply contracts for strategic as well as commodity components. • The value of information and the effective use of information in the supply chain. • Supply chain integration. • Centralized and decentralized distribution strategies. • Strategic alliances. • Outsourcing, off-shoring, and procurement strategies. • International supply chain management. • Supply chain management and product design. • Customer value. • Revenue management and pricing strategies. • Information technology and business processes. • Technical standards and their impact on the supply chain.
  • Software Packages
    • Computerized Beer Game
    • Risk Pool Game
    • Procurement Game
  • CASE: Meditech Surgical
    • Intent – diagnosis of supply chain
    • Business overview
    • Supply chain
    • Production planning
    • What’s wrong?
    • How to fix it?
  • Endoscopic Surgical Instruments
    • Permits minimally invasive surgery
    • Market created in early 80’s, rapidly growing
    • Old products continually updated and replaced with new product introductions
  • Business Overview
    • National and Meditech split the market
    • Compete based on product innovations, customer service, cost
    • National sells to physicians; Meditech sells to material managers
    • Customer preferences change slowly
  • External Supply Chain Part suppliers Meditech Assembly Meditech Warehouse Domestic Dealers Int’l Meditech Affiliates Hospitals Hospitals
  • Internal Supply Chain Parts Inventory Assembly Bulk Inventory FG Inventory Packaging & Sterilization 2 - 16 weeks 2 weeks 1 week
  • Production Planning Annual Forecast Monthly Revision Transfer Requirements Monthly Plan MRP Parts Procurement Plan Weekly Assembly Schedule
  • Production Planning Parts Inventory Assembly Bulk Inventory Packaging & Sterilization FG inventory Monthly Plan MRP Order point; Order quantity Material Plan
  • What’s Wrong?
    • Poor service for new product introductions
    • Poor forecasting?
    • Panic ordering?
    • And high FG inventory
  • What Is Going On?
    • Demand is quite predictable
    • Usage in hospitals is quite stable
    • Market share moves slowly over time
    • With each new product, dealer must build inventory to fill pipeline
  • Why Did Meditech Think Demand Was Unpredictable?
    • Poor information systems
    • No one looked at demand
    • No one had responsibility for forecast errors
    • Tendency to shift the blame
    • Built-in delays and monthly buckets in planning system
    • Amplifier in planning system
  • What to Do?
    • Recognize that demand is stable and predictable
    • Establish accountability for forecast
    • Eliminate planning delays and/or reduce time bucket
    • Alternatively, put assembly within pull system and eliminate bulk inventory