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  1. 1. Operations Management (MD021) Supply Chain Management
  2. 2. Agenda <ul><li>Basics of SCM </li></ul><ul><li>Drivers of SCM </li></ul><ul><li>Elements of SCM </li></ul><ul><li>E-Commerce Impact on SCM </li></ul><ul><li>Performance Measurement </li></ul><ul><li>Collaboration in SCM </li></ul><ul><li>Purchasing </li></ul><ul><li>How to Choose and Evaluate Suppliers </li></ul>
  3. 3. Basic Concepts of Supply Chain Management
  4. 4. Supply Chain Management <ul><li>Supply Chain: </li></ul><ul><ul><li>The sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service. </li></ul></ul>Sometimes referred to as value chains
  5. 5. The Value Chain internal to a company Purchasing Receiving Storage Operations Storage Production Distribution
  6. 6. Typical Supply Chain activities for a Manufacturer supply chain management (SCM) concerns supplier activities, internal value chain activities, and demand chain activities Supplier Supplier Supplier Storage } Mfg. Storage Dist. Retailer Customer supply chain demand chain internal value chain
  7. 7. Typical Supply Chain for a Service Supplier Supplier } Storage Service Customer
  8. 8. Goal of SCM <ul><li>Goal of SCM </li></ul><ul><ul><li>To link all components of the supply chain so that market demand will be met as efficiently as possible across the entire chain </li></ul></ul><ul><ul><li>Match supply to demand at each stage of the supply chain </li></ul></ul>
  9. 9. Supply network encompasses a number of facilities <ul><li>Warehouses </li></ul><ul><li>Factories </li></ul><ul><li>Processing centers </li></ul><ul><li>Distribution centers </li></ul><ul><li>Retail outlets </li></ul><ul><li>Offices </li></ul>
  10. 10. Supply network performs various functions and activities <ul><li>Forecasting </li></ul><ul><li>Purchasing </li></ul><ul><li>Inventory management </li></ul><ul><li>Information management </li></ul><ul><li>Quality assurance </li></ul><ul><li>Scheduling </li></ul><ul><li>Production and delivery </li></ul><ul><li>Customer service </li></ul>
  11. 11. Supply Chain Management Issues Quality control Production planning and control Inventory policies Purchasing policies Production policies Transportation policies Quality policies Design of the supply chain, partnering Operating Issues Tactical Issues Strategic Issues
  12. 12. Drivers of Supply Chain Management
  13. 13. History of SCM <ul><li>Why attempt to manage supply chains? </li></ul><ul><ul><li>In the not too distant past (i.e. pre-1990s), many companies didn’t manage their supply chains </li></ul></ul><ul><ul><li>Some advanced companies realized that huge inefficiency resulted from no/poor SCM </li></ul></ul><ul><ul><ul><li>In particular, identified the “Bullwhip Effect” </li></ul></ul></ul>
  14. 14. Bullwhip Effect Tier 2 Suppliers Tier 1 Suppliers Producer Distributor Retailer Final Customer “I’ll buy 2” “I’ll order 2 more.” “ Hmm. Last period they ordered 1. Maybe demand is up. I had better order 8.” “Wow! 8! I better build 30!” “@%*$! We are really behind. Build 100!” “The sky is falling! Build 250!” Amount of inventory =
  15. 15. Bullwhip Effect Tier 2 Suppliers Tier 1 Suppliers Producer Distributor Retailer Final Customer “I’ll buy 0” “I’ll order 0 more. I have 2 in stock.” “0?. But I’ve got 6 left. Don’t buy any more.” “0? But I’ve got 22 in stock! Stop the line.” “ 0? @%*$! What are we gonna do with the 70 we have?” “0? But we’ve got 150 in stock!” Amount of inventory =
  16. 16. Result of the Bullwhip Effect At each stage of the supply chain, a pattern like the above develops, of huge inventory buildups (and costs), followed by periods of huge stockouts and backordering (and mad customers + backordering costs) Time Inventory Backorder
  17. 17. Benefits of Supply Chain Management <ul><li>Counteract the Bullwhip Effect </li></ul><ul><ul><li>Lower inventories </li></ul></ul><ul><ul><li>Higher productivity </li></ul></ul><ul><ul><li>Greater agility </li></ul></ul><ul><ul><li>Shorter lead times </li></ul></ul><ul><ul><li>Higher profits </li></ul></ul><ul><ul><li>Greater customer loyalty </li></ul></ul>
  18. 18. Today, many other problems can also drive Supply Chain Management <ul><li>Improve operations </li></ul><ul><li>Increasing levels of outsourcing </li></ul><ul><li>Increasing transportation costs </li></ul><ul><li>Competitive pressures </li></ul><ul><li>Increasing globalization </li></ul><ul><li>Increasing importance of e-commerce </li></ul><ul><li>Complexity of supply chains </li></ul><ul><li>Manage inventories </li></ul>
  19. 19. Supply Chain Benefits and Drawbacks Less variety Able to match supply and demand Shorter lead times, better forecasts Variability Loss of control Reduced cost, higher quality Outsourcing Cost Quality Less variety Fewer parts Simpler ordering Modular Large number of parts May not be feasible May need absorb functions Quick response Delayed differentiation Disintermediation Long lead times Traffic congestion Increased costs Reduced holding costs Smaller, more frequent deliveries Large inventories Possible Drawbacks Benefits Potential Improvement Operational Problem
  20. 20. Examples of SCM Benefits at Various Companies Largest and most profitable retailer in the world Wal-Mart Increased market share from 5% to 29% National Bicycle Doubled profits and increased sales 60% Sport Obermeyer Cut supply costs 75% Hewlett-Packard Doubled inventory turnover rate Campbell Soup Benefit Organization
  21. 21. As a result of competitors working on SCM, SCM has become strategic <ul><li>Strategic importance </li></ul><ul><ul><li>Cost </li></ul></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Agility </li></ul></ul><ul><ul><li>Customer service </li></ul></ul><ul><ul><li>Competitive advantage </li></ul></ul>
  22. 22. But, SCM projects can be very risky to undertake <ul><li>Technology management drives SCM Adoption/Success/Failure </li></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><ul><li>SCM packages, when adopted well, can transform an organization’s operations </li></ul></ul></ul><ul><ul><li>Risks </li></ul></ul><ul><ul><ul><li>Poorly planned for/implemented SCM packages can wreck a company’s operations </li></ul></ul></ul><ul><ul><ul><li>Very expensive to install these pages – many millions of dollars </li></ul></ul></ul>
  23. 23. Elements of SCM
  24. 24. SCM involves coordinating activities across supply chain Deciding how to best move and store materials Logistics Determining location of facilities Location Monitoring supplier quality, delivery, and relations Suppliers Evaluating suppliers and supporting operations Purchasing Meeting demand while managing inventory costs Inventory Controlling quality, scheduling work Processing Incorporating customer wants, mfg., and time Design Predicting quantity and timing of demand Forecasting Determining what customers want Customers Typical Issues Element
  25. 25. Logistics <ul><li>Logistics </li></ul><ul><ul><li>Refers to the movement of materials and information within a facility and to incoming and outgoing shipments of goods and materials in a supply chain </li></ul></ul><ul><ul><ul><li>Raw materials </li></ul></ul></ul><ul><ul><ul><li>Work in process </li></ul></ul></ul><ul><ul><ul><li>Finished goods </li></ul></ul></ul><ul><ul><ul><li>Support items – fuel, equipment, parts, tools, etc. </li></ul></ul></ul>
  26. 26. Logistics <ul><li>Movement within the facility </li></ul><ul><li>Traffic planning for incoming and outgoing shipments </li></ul><ul><li>Bar coding </li></ul><ul><li>EDI </li></ul><ul><li>Distribution </li></ul><ul><li>JIT Deliveries </li></ul>0 214800 232087768
  27. 27. Materials Movement RECEIVING Storage Work center Work center Work center Storage Work center Storage Shipping
  28. 28. Distribution Requirements Planning (DRP) <ul><li>Distribution requirements planning (DRP) is a system for inventory management and distribution planning </li></ul><ul><li>Extends the concepts of MRPII to multiechelon warehouse inventories </li></ul>
  29. 29. Uses of DRP <ul><li>Management uses DRP to plan and coordinate: </li></ul><ul><ul><li>Transportation </li></ul></ul><ul><ul><li>Warehousing </li></ul></ul><ul><ul><li>Workers </li></ul></ul><ul><ul><li>Equipment </li></ul></ul><ul><ul><li>Financial flows </li></ul></ul>
  30. 30. Electronic Data Interchange (EDI) <ul><li>EDI </li></ul><ul><ul><li>The direct transmission of inter-organizational transactions, computer-to-computer, including purchase orders, shipping notices, and debit or credit memos. </li></ul></ul>
  31. 31. Electronic Data Interchange <ul><li>Increased productivity </li></ul><ul><li>Reduction of paperwork </li></ul><ul><li>Lead time and inventory reduction </li></ul><ul><li>Facilitation of just-in-time systems </li></ul><ul><li>Electronic transfer of funds </li></ul><ul><li>Improved control of operations </li></ul><ul><li>Reduction in clerical labor </li></ul><ul><li>Increased accuracy </li></ul>
  32. 32. Third Party Logistics (3PL) <ul><li>3PL </li></ul><ul><ul><li>The outsourcing of logistics management </li></ul></ul><ul><ul><li>Companies turn over their warehouse and distribution to companies that specialize in these areas </li></ul></ul>
  33. 33. E-Commerce Impact on SCM
  34. 34. E-Commerce <ul><li>E-Commerce: </li></ul><ul><ul><li>The use of electronic technology (e.g., WWW, Web Services, mobile devices) to facilitate business transactions </li></ul></ul><ul><li>Applications include </li></ul><ul><ul><li>Internet buying and selling </li></ul></ul><ul><ul><li>E-mail </li></ul></ul><ul><ul><li>Order and shipment tracking </li></ul></ul><ul><ul><li>Electronic data interchange </li></ul></ul>
  35. 35. SCM Benefits of E-Commerce <ul><li>Companies can: </li></ul><ul><ul><li>Have a global presence </li></ul></ul><ul><ul><li>Improve competitiveness and quality </li></ul></ul><ul><ul><li>Analyze customer interests </li></ul></ul><ul><ul><li>Collect detailed information </li></ul></ul><ul><ul><li>Shorten supply chain response times </li></ul></ul><ul><ul><li>Realize substantial cost savings </li></ul></ul><ul><ul><li>Create virtual companies </li></ul></ul><ul><ul><li>Level the playing field for small companies </li></ul></ul>
  36. 36. SCM Challenges of E-Commerce <ul><li>Customer expectations </li></ul><ul><ul><li>Order quickly -> fast delivery </li></ul></ul><ul><li>Order fulfillment </li></ul><ul><ul><li>Order rate often exceeds ability to fulfill it </li></ul></ul><ul><li>Inventory holding </li></ul><ul><ul><li>Outsourcing loss of control </li></ul></ul><ul><ul><li>Internal holding costs </li></ul></ul>
  37. 37. How to Measure SCM Performance?
  38. 38. Successful SCM has certain characteristics <ul><li>Trust among trading partners </li></ul><ul><li>Effective communications </li></ul><ul><li>Supply chain visibility </li></ul><ul><ul><li>Access to real-time data on inventory levels, shipping status, related information </li></ul></ul><ul><ul><li>Requires data sharing between trading partners </li></ul></ul><ul><li>Event-management capability </li></ul><ul><ul><li>The ability to detect and respond to unplanned events </li></ul></ul><ul><li>Performance metrics </li></ul><ul><ul><li>Measure the system to make sure you are doing well </li></ul></ul>
  39. 39. Overall Objectives for Supply Chain Performance <ul><li>Cost </li></ul><ul><li>Quality </li></ul><ul><li>Flexibility </li></ul><ul><li>Velocity </li></ul><ul><li>Customer service </li></ul>
  40. 40. Velocity <ul><li>Inventory velocity </li></ul><ul><ul><li>The rate at which inventory (material) goes through the supply chain </li></ul></ul><ul><li>Information velocity </li></ul><ul><ul><li>The rate at which information is communicated in a supply chain </li></ul></ul>
  41. 41. Trade-offs Between Performance Measures <ul><li>Lot-size vs. inventory </li></ul><ul><ul><li>Ordering economies vs. inventory held </li></ul></ul><ul><ul><li>Risks the Bullwhip effect </li></ul></ul><ul><li>Inventory vs. transportation costs </li></ul><ul><ul><li>Shippers prefer to ship full truckloads, which increases inventory carrying costs </li></ul></ul><ul><ul><li>Solutions: combine orders, smaller trucks, cross-docking </li></ul></ul><ul><li>Lead time vs. transportation costs </li></ul><ul><ul><li>Waiting for a full truck increases production lead times </li></ul></ul><ul><li>Product variety vs. inventory </li></ul><ul><ul><li>Higher variety leads to smaller lot sizes, more setups, other costs </li></ul></ul><ul><ul><li>Solution: Delayed differentiation </li></ul></ul><ul><li>Cost vs. customer service </li></ul><ul><ul><li>Large volumes reduce cost, but can hurt customer service </li></ul></ul><ul><ul><li>Solution: Disintermediation </li></ul></ul>
  42. 42. Cross-Docking <ul><li>Cross-docking </li></ul><ul><ul><li>Goods arriving at a warehouse from a supplier are unloaded from the supplier’s truck and loaded onto outbound trucks </li></ul></ul>
  43. 43. Delayed Differentiation <ul><li>Delayed differentiation </li></ul><ul><ul><li>Production of standard components and subassemblies, which are held until late in the process to add differentiating features </li></ul></ul>
  44. 44. Disintermediation <ul><li>Disintermediation </li></ul><ul><ul><li>Reducing one or more steps in a supply chain by cutting out one or more intermediaries </li></ul></ul>
  45. 45. SCM Performance Measures <ul><li>SCOR (Supply Chain Operations Reference) Model </li></ul><ul><li>Plan, Source, Make Deliver, Return </li></ul><ul><li>SCOR addresses … </li></ul><ul><ul><li>Product from supplier’s to customer’s </li></ul></ul><ul><li>SCOR does not address … </li></ul><ul><ul><li>Sales, Marketing, R&D, Support </li></ul></ul>
  46. 46. SCOR Metrics provide a standard way to measure SCM Total inventory days of supply Cash-to-cash cycle time Net asset turns Assets/utilization Supply chain management costs Warranty cost as a percent of revenue Value added per employee Expenses Supply chain response time Upside production flexibility Flexibility On-time delivery Order fulfillment lead time Fill rate (fraction of demand met from stock) Perfect order fulfillment Reliability Metrics Perspective
  47. 47. SCOR’s SCM Performance Metrics <ul><li>Reliability – delivery performance, fill rate, perfect fulfillment </li></ul><ul><li>Responsiveness – order fill lead time </li></ul><ul><li>Flexibility – SC response time, ops flexibility </li></ul><ul><li>Cost – warranty cost, productivity, CGS, SCM cost </li></ul><ul><li>Assets – turns, inventory days, cash cycle </li></ul>
  48. 48. Collaborative Approaches to SCM
  49. 49. Creating an Effective Supply Chain Involves Partnerships <ul><li>Develop strategic objectives and tactics </li></ul><ul><li>Integrate and coordinate activities in the internal supply chain </li></ul><ul><li>Coordinate activities with suppliers with customers </li></ul><ul><li>Coordinate planning and execution across the supply chain </li></ul><ul><li>Form strategic partnerships </li></ul>
  50. 50. Collaboration Assumes Your Supplier can be a Partner Nearness is important Widely dispersed Location Relatively high Relatively low Flexibility High May be low Volume of business At the source; vendor certified May be unreliable; buyer inspects Quality High Low Openness High May not be high Reliability Moderately important Major consideration Low price Long-term May be brief Length of relationship One or a few Many Number of suppliers Partner Adversary Aspect
  51. 51. Partnerships with suppliers can improve your own operations <ul><li>Ideas from suppliers could lead to improved competitiveness </li></ul><ul><ul><li>Reduce cost of making the purchase </li></ul></ul><ul><ul><li>Reduce transportation costs </li></ul></ul><ul><ul><li>Reduce production costs </li></ul></ul><ul><ul><li>Improve product quality </li></ul></ul><ul><ul><li>Improve product design </li></ul></ul><ul><ul><li>Reduce time to market </li></ul></ul><ul><ul><li>Improve customer satisfaction </li></ul></ul><ul><ul><li>Reduce inventory costs </li></ul></ul><ul><ul><li>Introduce new products or services </li></ul></ul>
  52. 52. Efficient Consumer Response <ul><li>Efficient Consumer Response (ECR) </li></ul><ul><ul><li>A supply chain management initiative specific to the food industry </li></ul></ul><ul><li>Reflects companies’ efforts to achieve quick response using EDI and bar codes </li></ul>
  53. 53. CPFR <ul><li>Collaborative Planning, Forecasting, and Replenishment (CPFR) </li></ul><ul><ul><li>Focuses on information sharing among trading partners </li></ul></ul><ul><ul><li>Forecasts can be frozen and then converted into a shipping plan </li></ul></ul><ul><ul><li>Eliminates typical order processing </li></ul></ul>
  54. 54. CPFR Process <ul><li>Step 1 – Front-end agreement on structure of CPFR collaboration </li></ul><ul><li>Step 2 – Develop joint business plan for collaborators </li></ul><ul><li>Steps 3-5 – Sales forecast collaboration </li></ul><ul><li>Steps 6-8 – Order forecast collaboration </li></ul><ul><li>Step 9 – Order generation/delivery execution </li></ul>
  55. 55. CPFR Results <ul><li>Nabisco and Wegmans </li></ul><ul><ul><li>50% increase in category sales </li></ul></ul><ul><li>Wal-mart and Sara Lee </li></ul><ul><ul><li>14% reduction in store-level inventory </li></ul></ul><ul><ul><li>32% increase in sales </li></ul></ul><ul><li>Kimberly-Clark and Kmart </li></ul><ul><ul><li>Increased category sales that exceeded market growth </li></ul></ul>
  56. 56. Challenges to Collaboration <ul><li>Barriers to integration of organizations </li></ul><ul><li>Getting top management on board </li></ul><ul><li>Dealing with trade-offs </li></ul><ul><li>Small businesses – no money to invest, no time, no slack resources, insufficient technology </li></ul><ul><li>Actions that create more variability and uncertainty </li></ul><ul><li>Long lead times hinder the ability of a supply chain to respond to changing customer demands </li></ul>
  57. 57. Purchasing
  58. 58. Purchasing <ul><li>Purchasing is responsible for obtaining the materials, parts, and supplies and services needed to produce a product or provide a service. </li></ul><ul><li>Goal of Purchasing </li></ul><ul><ul><li>Develop and implement purchasing plans for products and services that support operations strategies </li></ul></ul><ul><ul><ul><li>Quality of materials purchased is sufficient for operations </li></ul></ul></ul><ul><ul><ul><li>Timing of deliveries supports operations </li></ul></ul></ul>
  59. 59. Fun Facts About Purchasing <ul><li>Institute for Supply Management </li></ul><ul><ul><li>> 60% cost of finished manufactured goods is purchased </li></ul></ul><ul><ul><li>>90% cost of retail & wholesale goods is purchased </li></ul></ul>
  60. 60. Duties of Purchasing <ul><li>Identifying sources of supply </li></ul><ul><li>Negotiating contracts </li></ul><ul><li>Maintaining a database of suppliers </li></ul><ul><li>Obtaining goods and services </li></ul><ul><li>Managing supplies </li></ul>
  61. 61. Purchasing interfaces with other functions and with external suppliers Uses materials Negotiates contracts Pays for materials Specifies quality of materials Inspects incoming shipments Purchasing Legal Accounting Operations Data processing Design & Engineering Receiving Suppliers
  62. 62. Purchasing follows a cycle of activities <ul><li>Requisition received </li></ul><ul><li>Supplier selected </li></ul><ul><li>Order is placed with supplier </li></ul><ul><li>Monitor orders </li></ul><ul><li>Receive orders </li></ul>Purchasing Legal Accounting Operations Data process- ing Design Receiving Suppliers
  63. 63. Centralized vs. Decentralized Purchasing <ul><li>Centralized purchasing </li></ul><ul><ul><li>Purchasing is handled by one special department </li></ul></ul><ul><li>Decentralized purchasing </li></ul><ul><ul><li>Individual departments or separate locations handle their own purchasing requirements </li></ul></ul>
  64. 64. How to Choose and Evaluate Suppliers?
  65. 65. Management of Supplier Network Involves Several Activities <ul><li>Choosing suppliers </li></ul><ul><li>Evaluating sources of supply </li></ul><ul><li>Supplier audits </li></ul><ul><li>Supplier certification </li></ul><ul><li>Supplier relationships </li></ul><ul><li>Supplier partnerships </li></ul>
  66. 66. Factors in Choosing a Supplier <ul><li>Quality and quality assurance </li></ul><ul><li>Flexibility </li></ul><ul><li>Location </li></ul><ul><li>Price </li></ul><ul><li>Product or service changes </li></ul><ul><li>Reputation and financial stability </li></ul><ul><li>Lead times and on-time delivery </li></ul><ul><li>Other accounts </li></ul>
  67. 67. Evaluating Sources of Supply <ul><li>Vendor Analysis - evaluating the sources of supply in terms of … </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Services </li></ul></ul><ul><ul><li>Location </li></ul></ul><ul><ul><li>Inventory policy </li></ul></ul><ul><ul><li>Flexibility </li></ul></ul>