SCM- Basics


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SCM- Basics

  1. 1. Supply Chain Management [SCM] 1 Understanding the Supply Chain Management • Concept of Supply Chain Management – Define Supply – Define Supply Chain – Define Supply Chain Management This can best be done by discussing the general Operating process of organizations with examples from day to day activities. SCM-LN-060213
  2. 2. Operation of an Organization Rando m Fluc tuatio ns Inputs Late Deliveries [Trans fo rme d Re s o urc e s ] Staff Turnover 3. Mate rials Pow / Equipm failure er ent Exte rnal Pro duc ts 4. Info rmation 5. Cus to me rs The Trans fo rmatio n Outputs Cus to me rs Pro c e s s 1. Fac ilitie s 2. Ene rg y & Utilitie s S e rvic e s Inte rnal 3. Technology Government 4. Staff Regulations etc. Inputs Enviro nme nt [Trans fo rming A g e ne ral Input – Transformation Process– Re s o urc e s ] Output Ope ratio ns mo de l
  3. 3. Supply Chain Management [SCM] 2 Process of buying / purchasing Products Computer Raw material Supplier Computer Show Room Distributor Customer Manufacturer [Retailer] Component Supplier Toilet Soap Raw material Soap Supermarket Distributor Customer Supplier Manufacturer [Retailer] Fuel Crude Oil Refinery Petrol/Diesel Pump Customer Supplier [Manufacturer] [Retailer]
  4. 4. Supply Chain Management [SCM] 3 Process of buying / purchasing Services Vehicle Repair Raw material Supplier Vehicle Spares Service Centre Customer Manufacturer Distributor [Retailer] Component Supplier Pest Control Maintenance Raw material Pest control products Pest control products Supplier Distributor Company Customer Manufacturer [Retailer] Electricity Home Water Customer [Nature] Generating Station Distribution Company Commercial [Producer] [Retailer] Customer Fuel Supplier Industrial Customer
  5. 5. Supply Chain Management [SCM] 4 Supply The Customer expects that there will be supply of Products / Services whenever the need arises. -Definition of Supply [APICS Dictionary 11th edition] 1] The quantity of goods available for use 2] The actual or planned replenishment of product or component. The replenishment quantities are created in response to demand for the product or component or in anticipation of such a demand.
  6. 6. What is a Supply Chain? Customer wants P&G or other Jewel or third Jewel detergent and goes manufacturer party DC Supermarket to Jewel Chemical Plastic Tenneco manufacturer Producer Packaging (e.g. Oil Company) Chemical Paper Timber manufacturer Manufacturer Industry (e.g. Oil Company)
  7. 7. Supply Chain Management [SCM] 5 Supply Chain The buying process begins with customer order and ends when the satisfied customer pays for the product / service. It has the following typical entities / stages: •Customers •Retailers •Wholesalers / Distributors •Transporters •Manufacturers / Producers •Component / Raw material Suppliers These entities are connected to each other along a chain. Hence the name Supply Chain system.
  8. 8. Objectives of Organizations To meet the needs of various customers and stakeholders. To maximize the overall value generated. Value generated = Worthiness of product – Effort the supply chain expends. Value is correlated with supply chain profitability. Value = Revenue from customer – Overall cost across the supply chain. Organizations have to acquire many of the materials, equipment, facilities, and supplies from other organizations and or individuals. Thus the performance of an organization depends not only on its own performance but on the performance of other organizations which supply the resources. This makes it clear that an organization cannot exist in isolation. To be successful, organizations have to be interdependent. Cooperation among firms is a must. Supply chain success should be measured in terms of supply chain profitability and not in terms of profit at an individual stage.
  9. 9. Supply Chain Management [SCM] 6 Supply Chain Basic Supply Chain Model Information Flow Return of Product Return of Product Supplier Producer Customer Primary Product Flow Primary Product Flow Primary Cash Flow Supplier – Producer – Customer are connected by Product, Information & Payment Flows • Flow of physical materials and services from suppliers through intermediate entities to customers • Flow of Cash from customer through intermediate entities to supplier • Flow of Information back and forth along the chain • Reverse flow of products returned for replacement, repairs, recycling, or disposal
  10. 10. Supply Chain Management [SCM] 7 Supply Chain Organizations: •Supplier – materials / energy / services / components •Producer – finished products / services •Retailer – receives finished products and delivers to customers Flows that connect the entities: •Physical materials / services •Cash from customer •Information – back and forth •Reverse flow of products – repair / recycling / disposal / replacement
  11. 11. Supply Chain Management [SCM] 8 Definition of Supply Chain The global network used to deliver products and services from raw materials to end customers through an engineered flow of Information, Physical Distribution and Cash. [APICS Dictionary 11th edition] •SC involves directly or indirectly, everyone and everything required to deliver products and services from raw materials to end customers •SC includes Customers, Retailers, Wholesalers / Distributors, Transporters, Manufacturers / Producers, Component / Raw material Suppliers •SC can be viewed as processes – marketing data analysis, invoicing, shipping, order processing cutting across entities •Outside stakeholders – government, public at large, trade associations, universities, competitors etc.
  12. 12. Supply Chain Management [SCM] 9 Supply Chain Management The design, planning, execution, control and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging world wide logistics, synchronizing supply with demand and measuring performance globally. [APICS dictionary 11th edition]
  13. 13. Some more definitions of SCM Oliver and Webber (1982) – SCM covers the flow of goods from supplier through manufacturing and distribution channels to end user. Jones and Riley (1987) – SCM techniques deal with the planning and control of total materials flow from suppliers to through end users. Ellram (1991) – An integrative approach to dealing with the planning and control of the materials flow from suppliers to end users. Christopher (1992) – SCM is the management of a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer. Ayers (2000) – SCM is the design, maintenance and operation of supply chain processes for satisfaction of end users. Sunil Chopra and Peter Meindl (2001) – SCM involves the management of flows between and among stages in a supply chain to maximize total profitability.
  14. 14. Supply Chain Management [SCM] 10 A generalized SC Model Distribution Tier 2 Distribution Tier 1 Retailer Customer Raw Materials Supplier Supplier Distributor Retailer Customer Tier 2 Tier 1 Manufacturer Supplier Supplier Tier 2 Tier 1 Distributor Retailer Customer Components Retailer Customer
  15. 15. Supply Chain Management [SCM] 10A Types of Supply Chain 1 – Horizontal (lateral) integration The stages of SC [Physical Supply, Manufacturing & Physical] are carried out by different organizations – discussed earlier. 2 – Vertical Integration Bringing the SC inside one organization Ford motor company pursued this strategy for their famous model T - car. Ownership Management What Ford practised. Later divested. Marketing / Sales Finance Show Room Ford Customer Distribution Plant Now horizontal integration Component Production is the favoured approach. Raw material Extraction
  16. 16. Supply Chain Management [SCM] 11 Evolution of Supply Chain Management Stage 1 – Multiple Dysfunction Purchasing Marketing / Sales Customer Supplier Supplier Production Control Customer Supplier Logistics Distribution Customer Materials / Service Payments Lacks clear internal definitions and goals – No external links other than transactional ones
  17. 17. Supply Chain Management [SCM] 12 Evolution of Supply Chain Management Stage 2 – Semi functional Enterprise Information Supplier Customer Production Marketing / Purchasing Logistics Distribution Control Sales Supplier Customer Materials / Service Payments Improving efficiency, effectiveness, quality etc within functional areas – No overlap / consulting in decision making from one department to another – Department wise Maximising
  18. 18. Supply Chain Management [SCM] 13 Evolution of Supply Chain Management Stage 3 – Integrated Enterprise ERP Supplier Customer Production Marketing / Purchasing Logistics Distribution Control Sales Supplier Customer Materials / Service Payments Breaks down silo walls and brings functional areas together in processes such as Sales & Operations Planning (S&OP), CPFR – Company wide processes rather than individual functions – late 1980s to early 1990s. MRP(1950s) – MRPII(1960s) – ERP(1990s).
  19. 19. Supply Chain Management [SCM] 13A Why Process Integration is needed? To make maximum profit a company must have the following objectives: - Provide best customer service - Provide lowest production costs - Provide lowest inventory investment - Provide lowest distribution costs These objectives create conflict among marketing, production & finance departments: Function Objective Implication Marketing - High revenue High - High Product Availability Customer Service Low Production - Low Production Cost Many - High Level Production Production Disruption - Long Production Run Few Finance - Low Investment and Cost High - Fewer Fixed Costs Inventories - Low Inventories Low
  20. 20. Supply Chain Management [SCM] 14 Evolution of Supply Chain Management Stage 4 – Extended Enterprise Networked Information Flow Suppliers’ Internal Customers’ Suppliers Customers Suppliers Chain Customers Materials / Service Payments Integration of internal network with selected SCM partners’ internal network to improve efficiency, quality of products / services.
  21. 21. 5.2. The Objectives of a Supply Chain • Maximize overall value created • Supply chain value: difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer’s request • Value is correlated to supply chain profitability (difference between revenue generated from the customer and the overall cost across the supply chain)
  22. 22. The Objective of a Supply Chain • Example: Dell receives $2000 from a customer for a computer (revenue) • Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) • Difference between $2000 and the sum of all of these costs is the supply chain profit • Supply chain profitability is total profit to be shared across all stages of the supply chain • Supply chain success should be measured by total supply chain profitability, not profits at an individual stage
  23. 23. Supply Chain Management [SCM] 17 Creating Value through Supply Chain Management The primary purpose for the existence of any SCM is to satisfy customer needs, in the process generating profits for itself. Maximise the overall value generated. Value generated = what the product/service worth to the customer – the effort SC expends in fulfilling the customer needs. Correlated with SC Profitability (SCP). SCP = Revenue generated – Overall cost across SC Value depends on the product’s utility to the customer. Types of utility: •Form Utility - Operation •Place Utility - Logistics •Time Utility - Logistics •Possession Utility - Sales During value generation SC has to satisfy all the stakeholders – Customer, Investor, Employee, Public at large, Government etc.
  24. 24. Supply Chain Management [SCM] 18 Creating Value through Supply Chain Management Financial Value • Cost Reduction may be self defeating • Gains must be equitably distributed Customer Value • Quality •Affordability •Availability •Service Social value •Socially Desired and useful product / service •Avoiding or reducing negative environmental side effects of activities such as extraction, processing and construction
  25. 25. The Objective of a Supply Chain • Sources of supply chain revenue: the customer • Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain • Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability
  26. 26. Supply Chain Management [SCM] 19 Importance / Benefits of SCM •To achieve economies of scale and scope – Costs are significant •To improve business focus and expertise •Customer Expectations are increasing •Supply and Distribution Lines are lengthening with complexity •Adds Significant Customer value •Customers Increasingly Want Quick & Customised Response
  27. 27. Supply Chain Management [SCM] 20 Importance / Benefits of SCM •To achieve economies of scale and scope – Costs are significant Internal SC functions lack economies of scale when compared with the potential capacity of an independent provider of the same product / service. Eg: Computer Monitor / Chip / Hard drive Attractive pricing – volume leverage. •To improve business focus and expertise Vertical integration multiplies the complexities of managing disparate businesses. An independent company that focuses entirely on a particular business can develop more expertise than an in-house department Ford divested their Iron Ore company, Steel Mill etc Higher Quality, Attractive Pricing or both
  28. 28. Supply Chain Management [SCM] 22 Importance / Benefits of SCM •Customer Expectations are increasing - Rapid processing of Customer Request - Quick delivery (shorter Order Cycle Time) - High degree of Product Availability - Lower Prices •Supply and Distribution lines are lengthening with greater complexity - Cut costs and expand markets - Trend towards an integrated world market - Designing products for world market & producing them wherever raw material, labour, components, overhead etc are lower - Political arrangements : European Union, ASEAN, SAARC etc - Globalization of industries depends on logistic performance and cvosts
  29. 29. Supply Chain Management [SCM] 23 Importance / Benefits of SCM •Adds significant Customer Value - A product or service is of no value to the customer, if not available when required Goods customers want are not produced where they want to consume OR goods are not accessible when customers want to consume Value Through Responsibility Form Converting raw materials Engineering & and components to the Manufacturing required Form, Fit & Function Time Production scheduling & Manufacturing & Logistics moving Place Moving & making Engineering & Logistics transportable Possession Advertising, Pricing, Marketing, Finance & Technical Support Engineering
  30. 30. Supply Chain Management [SCM] 24 Importance / Benefits of SCM •Customers Increasingly want Quick Customised Response - Customers expect that products / services can be made available in shorter times. Guided by Fast Food, ATM, E-Mail etc. - Improved IS and flexible manufacturing processes have led to mass customisation - One Size Fit all philosophy is not appreciated always - Manufacturers / Suppliers are offering products that meet individual needs
  31. 31. Decision Phases of a Supply Chain • Supply chain strategy or design • Supply chain planning • Supply chain operation
  32. 32. Supply Chain Strategy or Design • Decisions about the structure of the supply chain and what processes each stage will perform • Strategic supply chain decisions – Locations and capacities of facilities – Products to be made or stored at various locations – Modes of transportation – Information systems • Supply chain design must support strategic objectives • Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty
  33. 33. Supply Chain Planning • Definition of a set of policies that govern short-term operations • Fixed by the supply configuration from previous phase • Starts with a forecast of demand in the coming year
  34. 34. Supply Chain Planning • Planning decisions: – Which markets will be supplied from which locations – Planned buildup of inventories – Subcontracting, backup locations – Inventory policies – Timing and size of market promotions • Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon
  35. 35. Supply Chain Operation • Time horizon is weekly or daily • Decisions regarding individual customer orders • Supply chain configuration is fixed and operating policies are determined • Goal is to implement the operating policies as effectively as possible • Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders • Much less uncertainty (short time horizon)
  36. 36. 5.3. Process View of Supply Chain Management: Cyclic View SC is a sequence of processes and flows that take place within and between different SC stages and combine to fulfil a customer need for a product / service. These processes are divided into a series of cycles (cyclic view), each performed at the interface between two successive stages / entities of SC. Cycles Stage/Entity Customer Customer Arrival Customer Order Receiving Customer Order Cycle Customer Order Entry Customer Order Fulfilment Retailer Replenishment Retail Order Trigger Retail Order Receiving Cycle Retail Order Entry Retail Order Fulfilment Distributor Order Arrival from D/R/C Receiving by D/R/C Manufacturing Cycle Production Scheduling Manufacturing & Shipping Manufacturer Procurement Order from Manufacturer Receiving at Manufacturer Cycle Supplier Supplier Prodn Scheduling RM / Comp. Mfg & Shipping
  37. 37. Push/Pull View of Supply Chains Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES Customer Order Arrives
  38. 38. Supply Chain Management [SCM] 24A Process View of a Supply Chain: Push – Pull View LL Bean DELL PULL PULL Process Process Customer Order Cycle Cust Order & Mfrg Customer order arrives Cycle Repl & Mfrg Cycle Customer order arrives Procurement Procurement Cycle Cycle PUSH PUSH Process Process
  39. 39. Supply Chain Macro Processes in a Firm SRM ISCM CRM •Source •Strategic planning •Market •Negotiate •Demand planning •Sell •Buy •Supply planning •Call centre •Design Collaboration •Fulfilment •Order management •Supply Collaboration •Field service Purchasing Manufacturing Marketing Supplier selection Production planning Generate demand Supplier evaluation Storage planning Facilitate New orders Demand-Supply placement planning Track orders
  40. 40. 5.4. Supply Chain Drivers • Drivers of supply chain performance • A framework for structuring drivers • Facilities • Inventory • Transportation • Information • Obstacles to achieving fit
  41. 41. Drivers of Supply Chain Performance • Facilities – places where inventory is stored, assembled, or fabricated – production sites and storage sites • Inventory – raw materials, WIP, finished goods within a supply chain – inventory policies • Transportation – moving inventory from point to point in a supply chain – combinations of transportation modes and routes • Information – data and analysis regarding inventory, transportation, facilities throughout the supply chain – potentially the biggest driver of supply chain performance
  42. 42. A Framework for Structuring Drivers Efficiency Responsiveness Supply chain structure Facilities Transportation Inventory Information Drivers
  43. 43. Supply Chain Decisions: Structuring Drivers Strategy (Design) Planning Operation
  44. 44. Facilities • Role in the supply chain – the “where” of the supply chain – manufacturing or storage (warehouses) • Role in the competitive strategy – economies of scale (efficiency priority) – larger number of smaller facilities (responsiveness priority) • Example 3.1: Toyota and Honda • Components of facilities decisions
  45. 45. Components of Facilities Decisions • Location – centralization (efficiency) vs. decentralization (responsiveness) – other factors to consider (e.g., proximity to customers) • Capacity (flexibility versus efficiency) • Manufacturing methodology (product focused versus process focused) • Warehousing methodology (SKU storage, job lot storage, cross-docking) • Overall trade-off: Responsiveness versus efficiency
  46. 46. Inventory • Role in the supply chain • Role in the competitive strategy • Components of inventory decisions
  47. 47. Inventory: Role in the Supply Chain • Inventory exists because of a mismatch between supply and demand • Source of cost and influence on responsiveness • Impact on – material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain – throughput • rate at which sales to end consumers occur • I = RT (Little’s Law) • I = inventory; R = throughput; T = flow time • Example • Inventory and throughput are “synonymous” in a supply chain
  48. 48. Inventory: Role in Competitive Strategy • If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers • If cost is more important, inventory can be reduced to make the firm more efficient • Trade-off • Example 3.2 – Nordstrom
  49. 49. Components of Inventory Decisions • Cycle inventory – Average amount of inventory used to satisfy demand between shipments – Depends on lot size • Safety inventory – inventory held in case demand exceeds expectations – costs of carrying too much inventory versus cost of losing sales • Seasonal inventory – inventory built up to counter predictable variability in demand – cost of carrying additional inventory versus cost of flexible production • Overall trade-off: Responsiveness versus efficiency – more inventory: greater responsiveness but greater cost – less inventory: lower cost but lower responsiveness
  50. 50. Transportation • Role in the supply chain • Role in the competitive strategy • Components of transportation decisions
  51. 51. Transportation: Role in the Supply Chain • Moves the product between stages in the supply chain • Impact on responsiveness and efficiency • Faster transportation allows greater responsiveness but lower efficiency • Also affects inventory and facilities
  52. 52. Transportation: Role in the Competitive Strategy • If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it • Can also use slower transportation modes for customers whose priority is price (cost) • Can also consider both inventory and transportation to find the right balance • Example 3.3: Laura Ashley
  53. 53. Components of Transportation Decisions • Mode of transportation: – air, truck, rail, ship, pipeline, electronic transportation – vary in cost, speed, size of shipment, flexibility • Route and network selection – route: path along which a product is shipped – network: collection of locations and routes • In-house or outsource • Overall trade-off: Responsiveness versus efficiency
  54. 54. Information • Role in the supply chain • Role in the competitive strategy • Components of information decisions
  55. 55. Information: Role in the Supply Chain • The connection between the various stages in the supply chain – allows coordination between stages • Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels
  56. 56. Information: Role in the Competitive Strategy • Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) • Information technology • What information is most valuable? • Example 3.4: Andersen Windows • Example 3.5: Dell
  57. 57. Components of Information Decisions • Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain) • Coordination and information sharing • Forecasting and aggregate planning • Enabling technologies – EDI – Internet – ERP systems – Supply Chain Management software • Overall trade-off: Responsiveness versus efficiency
  58. 58. Considerations for Supply Chain Drivers Driver Efficiency Responsiveness Inventory Cost of holding Availability Transportation Consolidation Speed Facilities Consolidation / Proximity / Dedicated Flexibility Information What information is best suited for each objective
  59. 59. Obstacles to Achieving Strategic Fit • Increasing variety of products • Decreasing product life cycles • Increasingly demanding customers • Fragmentation of supply chain ownership • Globalization • Difficulty executing new strategies
  60. 60. Major Obstacles to Achieving Fit • Multiple owners / incentives in a supply chain Local optimization and lack of global fit • Increasing product variety / shrinking life cycles / customer fragmentation Increasing implied uncertainty