• Value Chain
• Supply side- raw materials, inbound
logistics and production processes
• Demand side- outbound logistics,
marketing and sales.
WHAT IS SUPPLY CHAIN MANAGEMENT
" Is the strategic management of activities involved in
the acquisition and conversion of materials to finished
products delivered to the customer"
Leads to Business Process Integration
• Supply chain is the system by which
organizations source, make and deliver
their products or services according to
• Supply chain management operations
and decisions are ultimately triggered by
demand signals at the ultimate consumer
• Supply chain as defined by experienced
practitioners extends from suppliers’
suppliers to customers’ customers.
• SUPPLY CHAIN INCLUDES :
– MATERIAL FLOWS
– INFORMATION FLOWS
– FINANCIAL FLOWS
• SUPPLY CHAIN MANAGEMENT IS
FACILITATED BY :
• Supply chain objectives may differ from
situation to situation.
• For functional products, cost efficiency is
the critical factor.
• For innovative products, responsiveness
is the important factor.
• Leanness + Agility together make up
Supply Chain Structure
RETAILERFACTORY DC RDCSUPPLIER
Supply Chain and Demand Chain
• Demand chain is defined as the system by
which organizations manage sales and
distribution of products and services to end
• Conceptually incorrect to look at demand
• Look at the pipe as a whole.
• But is there a pipe at all?
– More a network
– Not necessarily linear
• Value chain orchestration rather than
controlling the flow through the pipe
• A network of independent and interdependent
organizations mutually and cooperatively
working together to control, manage and
improve the flow of materials and information
from suppliers to end users
SUPPLY CHAIN DRIVERS
Not new. Value system of Michael Porter
• Why sudden interest?
– Demanding customers
– Shrinking product life cycles
– Proliferating product offerings
– Growing retailer power in some cases
– Doctrine of core competency
– Emergence of specialized logistics providers
– Information technology
• Supply Chain Goals
Efficient supply chain management
must result in tangible business
improvements. It is characterized by a
sharp focus on
– Revenue growth
– Better asset utilization
– Cost reduction.
Reduce Overall Cycle Time : Improve Response
(Real Time Data)
• Functional vs Process
• Products vs Customers
• Revenues vs Performance
• Inventory vs Information
• Transactions vs Relationships
Critical Success Factors today
• Cross functional management and
• Ability to define, measure and manage
service requirements by market
• Information systems
• Relationship management and win win
PUTTING IN PLACE A WELL OILED SUPPLY
• Supply chain as an efficient customer
• Effectiveness of the whole supply chain is
more important than the efficiency of each
The steps involved
• Step1- Designing the supply chain
– Determine the supply chain network
– Identify the levels of service required
Step 2 - Optimizing the supply chain
• Determine pathways from suppliers to
the end customer
– Customer markets to Distribution centers
– Distribution centers to production plants
– Raw material sources to production plants
– Identify constraints at vendors, plants and
– Get the big picture
– Plan the procurement, production and
distribution of product groups rather than
individual products in large time periods-
quarters or years
Step 3- Material flow planning
• Determine the exact flow and timing of
• Arrive at decisions by working back from the
projected demand through the supply chain to
the raw material resources
Step 4 - Transaction processing and
short term scheduling
• Customer orders arrive at random
• This is a day to day accounting system which
tracks and schedules every order to meet
• Order entry, order fulfillment and physical
Information flows in Supply Chain Management
• Information is overriding element
• Need for databases
• Master files: Information about customers, products,
materials, suppliers, transportation, production and
distribution data- do not require frequent processing
• Status files- heart of transaction processing- track
orders and infrastructure status- updated daily.
• Essentially using the same information to make all
plans right from structuring the network to
processing every day supply chain tasks.
THE VIRTUAL VALUE CHAIN
• The value chain connects a company’s
supply side with its demand side.
• Traditionally information has been a
• Information however can be managed
far more creatively.
• There are various stages of using value
added information processes.
• Visibility : See physical operations more
effectively through information. Information
can be used for effective coordination of
value chain activities.
• Mirroring capability : In this stage, virtual
activities are substituted for physical ones. A
parallel value chain is created.
• New customer relationships : The company
can draw on the flow of information in the
virtual value chain to deliver value to
customers in new ways.
• Inventory ownership and management
• Sales and technical support
• Order handling
• Channels being divided into two- Fulfillment
and Franchised agent
• Fulfillment channel- responsible for getting
the manufacturer’s product from the plant to
the end user through a highly efficient
logistics and inventory management system
• Fulfillment channel may not take ownership
of the product but may perform these
functions on a per box fee structure
• Franchised agents responsible for sales and
sales support but will not write the order or
supply the product
Issues in customer management
• Penetration vs Spread
• Concentration is necessary to commit the
necessary resources for true customer
• Depth of customer contact
– R&D - sharing information vs developing new
– Logistics - Pros and cons of methods of
transportation vs reengineering the logistics
Implementation: Points to keep in mind
• Recognize the difficulty of change.
• Prepare a blueprint for change that maps linkages
• Assess the entire supply chain from supplier
relationships to internal operations to the market
place, including customers, competitors and
industry as a whole.
IS THE SUPPLY CHAIN WORKING?
• Does our manufacturing strategy increase product
line flexibility while continuing to drive down
overall production costs?
• When was the last time we measured lost sales to
• Do we have an efficient system to get POS data
• Are we testing our products with end customers?
Do we use the resulting data to adjust our
forecasting and supply positions?
• Is the ratio of returned orders to sales
The New Model of Relationships
• Hard bargaining vs shared destiny
• Exit vs Voice
• Arms length relations vs Involving dealers and
suppliers in product development
• Piling up vs Replenishing dealer inventory more
• In short working together as partners to cut
costs, boost efficiencies, innovate and share
• Adversarial vs partnerships
• Short term vs long term contracts
• Large vs small order quantity
• Full truck load vs small parcels
• Inspection vs no inspection
• Written order vs understanding
• Many vs few suppliers
• Design and then invite quote from
vendor vs involving vendor in
• Bargaining, holding cards close to chest
vs Shared destiny, transparency
• Segmentation of customers based on service
• Customization of logistics network
• Listen to signals of market demand and plan
• Differentiate product close to the customer
• Source strategically
• Develop a supply chain wide technology
• Accept channel spanning performance
• The Bullwhip Phenomenon
• Volatility amplification along the network
• Increase in demand variability as we move
upstream away from the market
• Mainly because of lack of communication and
• Delays in information and material flows
• Bullwhip effect occurs because of various
• Order Batching- Accumulate orders
• Shortage gaming- Ask for more than what is
• Demand forecast updating
Important points to keep in mind
• Segment customers based on service needs.
• Modify the supply chain to meet these service
• Customize the logistics network.
• Develop forecasts collaboratively involving every
link of the supply chain.
• Locate the leverage point where the product is
unalterably configured to meet a single
• Delay product differentiation till the last possible
• Assess options such as modularized design
or modification of manufacturing processes
that can increase flexibility.
• Cultivate warm relationships with suppliers.
• Efficient supply chain management has to be
accompanied by a technology strategy.
ITALIAN CLOTHING MANUFACTURE
• Warehousing and transportation 6
• Inventory 5
• Late delivery returns 2
• Obsolescence 20
• Lost sales 60
• Need to minimize obsolescence costs
• Minimize product range flexibility
• Reduce product development cycle
Dell’s Direct Business Model of
• Advantages of a tightly coordinated supply chain
traditionally facilitated by vertical integration.
• Combined with focus and specialization.
• Leveraging on investments others have made and
focusing on delivering solutions and systems to
• Fewer things to manage - fewer things go wrong
• Suppliers’ engineers part of Dell’s Design team
• Have only a few partners
Dell’s Direct Business Model of
• Share information with partners in Real time
• Stitch together a business with partners that are
treated as if they are inside the company.
• Change focus from how much inventory there is to
how fast it is moving
• Assets collect risks around them one way or the
• Limited or no testing - Eg. Sony Monitors
Dell’s Direct Business Model of
• Only three Manufacturing centers - Austin, Ireland
• Inventory levels and replenishment needs
sometimes conveyed to vendors on hourly basis.
• Substitute information for inventory and ship only
when we have real demand from real end
• Clever segmentation - Focus on institutional
markets - 70% to very large customers with
annual purchases exceeding $1 million.
Dell’s Direct Business Model of
• Exit from retail business after wrong entry in 1989.
• Segmentation - closeness to customers and
access to valuable information.
• Demand forecasting as a critical sales skill
• Help global customers, manage their total
purchase of PCs by selling them a standard
• Dell server loads software on customers’
• Meet customers’ needs faster and more efficiently
than any other model.
Li and Fung, Hong Kong
• Founded in 1906
• Today 35 offices in 20 countries
• 1997 revenues of $ 1.7 billion
• Largest export trading company in Hong
• Customers- American and European retailers
• Sources clothing and other consumer goods
ranging from toys to fashion accessories to
• Order from Europe
• Buy yarn from Korea
• Weave and dye in Taiwan
• Buy Japanese zippers made in China
• Make the garments in Thailand in five different
• Pulling apart the value chain and optimizing at
• Victor Fung
“ Today, assembly is the easy part. The hard part
is managing your suppliers and the flow of
parts.“ Good supply chain management strips
away time and cost from product delivery cycles.
Our customers have become more fashion
driven, working with six or seven seasons a year
instead of just two or three. Once you move to
shorter life cycles, the problem of obsolete
inventory increases dramatically. With customer
tastes changing rapidly and markets segmenting
into narrow niches, it’s not just fashion products
that are becoming increasingly time sensitive.”
• Endorsement by Stan Shih, CEO, Acer
• Buying right things
• Reaching into suppliers to ensure that certain
things happen on time and at the right quality
• Buyer informs five weeks before delivery.
• Reserve undyed yarn from yarn supplier.
• Lock up capacity in weaving and dyeing mills.
• Outsourcing not same as leaving suppliers to do the
• Single factories are too small to have much buying
power and to demand faster deliveries from
• To shorten delivery cycle, need to go upstream to
• Li & Fung able to delay commitment to a particular
• Integrated logistics management
• Elimination of consolidators in container
• Smokeless factory
– Inspection of raw materials
– Production planning
– Line balancing
– Inspection of finished goods
– No worker ownership
– No labour management
“ If we don’t own factories, can we say we are in
manufacturing? Absolutely, because of the 15
steps in the manufacturing value chain, we
probably do 10.”
• Basic operating unit is the division.
• Divisions focused on serving single customers or
groups of small customers.
• Less emphasis on geographic grouping
• Merchandising decisions decentralized
• Financial controls and operating procedures tightly
• Strong focus on inventory and working capital
• “As far as I am concerned, inventory is the root of
all evil. At a minimum, it increases the complexity
of managing any business. So it’s a word we don’t
tolerate around here.”
• Need for sophisticated information systems. Li &
Fung working to create a database to
systematically track all supplier relationships.
• “ Someone might steal our database but when
they call up a supplier, they don’t have the long
relationship with the supplier that Li & Fung has. It
makes a difference to suppliers when they know
that you are dedicated to the business, that you
have been honoring your commitments for 90
• Broadening the middle
• Better prices and better margins for customers
• Tackling the soft $3 in the cost structure. $3
represents the inefficiency in the supply chain for
a consumer product priced at $4. Look at costs
throughout distribution channels than just in