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Supply Chain Management, Basics


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Supply Chain Management, Basics ,
Presentations By Rajendran Ananda Krishnan,

Published in: Business, Technology

Supply Chain Management, Basics

  1. 1. Supply Chain Management-Basics. Rajendran Ananda Krishnan
  2. 2. Topics to be covered Introduction to Supply Chain Management : Supply Chain – objectives, Importance Decision Phases, Process view, Competitive and supply chain strategies, achieving strategic fit Supply chain drivers, obstacles, framework Facilities, inventory, transportation, information, sourcing, pricing prettythings
  3. 3. Supply Chain- Meaning The supply chain encompasses all activities involved in the transformation of goods from the raw material stage to the final stage, when the goods and services reach the end customer. Supply chain management involves planning, design and control of flow of material, information and finance along the supply chain to deliver superior value to the end customer in an effective and efficient manner. prettythings
  4. 4. DefinitionMohanty and Deshmukh define supply chain management as a loop: It starts with the customer and ends with the customer. Through the loop flow all materials, finished goods, information and all transactions. It requires looking at the business as one continuous, seamless process. This process absorbs distinct functions such as forecasting, purchasing, manufacturing and distribution, sales and marketing into a continuous business interaction. prettythings
  5. 5. Definition Management of material, funds and information flows both in and between facilities such as vendors, manufacturing and assembly plants and distribution centers. – Thomas and Griffin The objective of managing the supply is to synchronize the requirements of the customer with the flow of materials from suppliers in order to affect a balance between what are often seen as conflicting goals of high customer service, low inventory management and low unit cost. - Stevens prettythings
  6. 6.  For a simple product like soap, the HUL supply chain involves ingredient suppliers, transporters, the company’s manufacturing plants, carrying and forwarding agents, wholesalers, distributors and retailers. A supply chain is dynamic and involves the constant flow of information, product and funds between different stages. Of late, firms have realized that it is not the firms themselves but their supply chains that vie with each other in the marketplace. prettythings
  7. 7. Order Delivery Lead TimeOrder Customerpenetration order Order delivery leadpoint time Make Source component Assembly Delivery s Supply chain lead time A typical firm sources material, manufactures components, assembles the product and delivers the finished product to the end customer. Total time required for the supply chain to carry out all activities from the beginning to the end is the supply chain lead time. Time required for the supply chain to deliver the order to the customer after they place it is the order delivery lead time. prettythings
  8. 8. Order penetration point based supplychain typology Customer order Make Source Assembly Deliver Made to components Stock Customer (FMCG order Products) Make Made to Source Assembly Deliver components Order (Equipment Customer Manufacturer) order Make Configure to Source Assembly Deliver components Order (Pizza Manufacturer, Laptop Manufacturer) prettythings
  9. 9. Objectives of Supply chain The objective of every supply chain should be to maximize the overall value generated. The value a supply chain generates is the difference between what the final product is worth to the customer and the costs the supply chain incurs in filling the customer’s request. Supply chain profitability is the difference between the revenue generated from the customer and the overall cost across the supply chain. The higher the supply chain profitability, the more successful is the supply chain. prettythings
  10. 10.  Supply chain success should be measured in terms of supply chain profitability and not in terms of the profits at an individual stage. For any supply chain, there is only one source of revenue: the customer. All flows of information, product or funds generate costs within the supply chain. Thus the appropriate management of these flows is a key to supply chain success. Effective supply chain management involves the management of supply chain assets and product, information and fund flows to maximize total supply prettythings
  11. 11.  The small size of Indian retail outlets limits the amount of inventory they can hold, thus requiring frequent replenishment. The only way for a manufacturer to keep transportation costs low is to bring full truckloads of product close to the market and then distribute locally using milk runs with smaller vehicles. The presence of an intermediary who can receive a full truckload shipment, break bulk, and then make smaller deliveries to the retailers is crucial if transportation costs are to be kept low. Distributors in India are also able to reduce transportation costs for outbound delivery to the retailer by aggregating products across multiple manufacturers during the delivery prettythings
  12. 12. Supply Chain Stages Supplier Manufacturer Distributor Customer RetailerA typical supply chain may involve a variety of stages. These supply chain stages include: Customers, Retailers, Wholesalers/distributors, Manufacturers, Raw material suppliers.Each stage in a supply chain is connected through the flow of products, information, and funds. These flows often occur in both directions and may be managed by one of the stages or an intermediary. prettythings
  13. 13. Importance of Supply Chain Decisions  Helps in achieving success – Companies being a leader at using supply chain design, planning and operation help in achieving success.  Effective flow of goods and information – Companies like Walmart who have invested heavily in transportation and information infrastructure help in achieving effective flow of goods and information.  Reduces the level of Inventory with the manufacturer – Dell centralizes manufacturing and inventories in a few locations and postpones final assembly until orders arrive. Thus, Dell is able to provide a large variety of PC configurations while keeping very low prettythings
  14. 14.  Improved match between supply and demand – To improve the match between supply and demand, Dell makes an active effort to steer customers in real time, on the phone or via the internet, toward PC configurations that can be built given the components available. Reason for company’s success – For the Companies like Dell, Toyota etc., the supply chain design, and its management of product, information and cash flows play a key role in the company’s success. prettythings
  15. 15. Reasons for Growing Importance of Supply ChainFirms that do not manage their supply chain will incur huge inventory costs and eventually end up losing a lot of customers because the right products are not available at the right place and time.Five major trends that have emerged to make supply chain management a critical success factor in most industries. Proliferation in product lines – Companies have realized that more and more product variety is needed to satisfy the growing range of customer tastes and requirements. Companies like HUL, in their personal care products, manage, on an average, 1200 SKU’s. Chains like Foodworld manage about 6000 SKU’s. With increasing product variety, it becomes rather difficult to forecast accurately. Hence, retailers and other organizations involved in the business are forced to either maintain greater amount of inventories or lose customers. prettythings
  16. 16.  Shorter product life cycles – With increased competition, product life cycles across all industries are becoming shorter. So a firm like Dell, which has, on an average, just 7 days of inventory, as compared to the industry average of 35 days, does not have to worry about product and component obsolescence. Its competitors with higher inventories end up writing off huge amounts of stocks every year as obsolete. Higher level of outsourcing – Firms increasingly focus on their core activities and outsource non-core activities to other competent players. This trend towards outsourcing is irreversible but a higher level of outsourcing makes supply chains more vulnerable, thereby forcing firms to develop different types of supply chain capabilities within the organization. prettythings
  17. 17.  Shift in power structure in the chain – In every industry, the entities closer to customers are becoming more powerful. With increasing competition, a steadily rising number of products are chasing the same retail shelf space. Retail shelf space has not increased at the pace at which product variety has increased. So there have been case of retailers asking for slotting allowance when manufacturers introduce new products in the market place. Retailers have realized that they are powerful entities in the chain and hence expect the manufacturers to be more responsive to their demands and needs. Globalization of manufacturing – Over the past decade, tariff levels have come down significantly. Many companies are restructuring their production facilities to be at par with global standards. Unlike in the past, when firms used to source components, produce goods and sell them locally, now firms are integrating their supply chain for the entire world market. This has made managing supply chains extremely complicated. prettythings
  18. 18. Decision Phases in a SupplyChainSuccessful supply chain management requires many decisions relating to the flow of information, products and funds. Each decision should be made to raise the supply chain surplus. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame during which the decision phase has an impact. prettythings
  19. 19. Supply Chain Strategy or Design – Itdecides what the chain’s configuration willbe, how resources will be allocated andwhat processes each stage will perform.Strategic decisions made by companiesinclude whether to outsource or perform asupply chain function in-house, the locationand capacities of production andwarehousing facilities, the products to bemanufactured or stored at various locations,the modes of transportation to be madeavailable along different shipping legs andthe type of information system to be utilized.Cisco’s decisions regarding its choice ofsupply sources for components, contractmanufacturers for manufacturing and thelocation and capacity of its warehouses areall supply chain design or strategicdecisions. prettythings
  20. 20. 2. Supply Chain Planning – The goalof planning is to maximize the supplychain surplus that can be generatedover the planning horizon given theconstraints established during thestrategic or design phase. Planningincludes making decisions regardingwhich markets will be supplied fromwhich locations, the subcontracting ofmanufacturing, the inventory policies tobe followed and the timing and size ofmarketing and price promotions. Dell’sdecisions regarding markets supplied bya production facility and targetproduction quantities at each locationare classified as planning decisions. prettythings
  21. 21. Supply Chain Operation – Thegoal of supply chain operations isto handle incoming customerorders in the best possible manner.During this phase, firms allocateinventory or production toindividual orders, set a date that anorder is to be filled, generate picklists at a warehouse, allocate anorder to a particular shippingmode and shipment, set deliveryschedules of trucks and placereplenishment orders. prettythings
  22. 22. Process ViewA supply chain is a sequence of processes and flows that take place within and between different stages and combine to fill a customer need for a product. There are two different ways to view the processes performed in a supply chain. Cycle View – The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. Push/Pull View – Pull processes are initiated in response to a customer order, whereas push processes are initiated and performed in anticipation of customer orders. prettythings
  23. 23. All supply chain processes can be broken down into four process cycles: Customer order cycle Replenishment cycle Manufacturing cycle Procurement cycleEach cycle occurs at the interface between two successive stages of the supply chain. prettythings
  24. 24. Supply Chain Process Cycles prettythings
  25. 25. Sub processes in Each SupplyChain Process CycleSupplier stage Buyer returns markets reverse flows to product supplier or third party Buyer stage Buyer stage places order receives supplySupplier stage Supplier stagereceives order supplies order prettythings
  26. 26.  Each cycle starts with the supplier marketing the product to customers. A buyer then places an order that is received by the supplier. The supplier supplies the order, which is received by the buyer. The buyer may return some of the product or other recycled material to the supplier or a third party. prettythings
  27. 27.  Within each cycle, the goal of the buyer is to ensure product availability and to achieve economies of scale in ordering. The supplier attempts to forecast customer orders and reduce the cost of receiving the order. The supplier then works to fill the order on time and improve efficiency and accuracy of the order fulfillment process. The buyer then works to reduce the cost of the receiving process. prettythings
  28. 28. Few differences between cycles: In the customer order cycle, demand is external to the supply chain and thus uncertain. In all other cycles, order placement is uncertain but can be projected based on policies followed by the particular supply chain stage. As we move from the customer to the supplier, the number of individual orders declines and the size of each order increases. prettythings
  29. 29. Push/Pull View of Supply ChainProcesses With pull processes, execution is initiated in response to a customer order. With pull processes, execution is initiated in anticipation of customer orders. At the time of execution of a pull process, customer demand is known with certainty, whereas at the time of execution of a push process, demand is not known and must be forecast. prettythings
  30. 30.  Pull processes may also be referred to as reactive processes because they react to customer demand. Push processes may also be referred to as speculative processes because they respond to speculated rather than actual demand. Push/Pull Boundary Push Pull Processes Processes Customer Order Arrives prettythings
  31. 31. Examples of Push and Pull Processes Make to stock Companies like HP – Executes all processes in the customer order cycle after the customer arrives. All processes that are part of the customer order cycle are thus pull processes. All processes in the replenishment cycle, manufacturing and procurement cycle are performed in anticipation of demand and are thus push processes. prettythings
  32. 32.  Build to order computer manufacturer like Dell – All processes in the customer order, replenishment and manufacturing cycle at Dell are classified as pull processes because they are initiated by customer arrival. Dell, however, does not place component orders in response to a customer order. Inventory is replenished in anticipation of customer demand. All processes in the procurement cycle for Dell are thus classified as push processes, because they are in response to a forecast. prettythings
  33. 33. Competitive and Supply ChainStrategies A company’s competitive strategy defines, relative to its competitors, the set of customer needs that it seeks to satisfy through its products and services. For eg. Wal Mart aims to provide high availability of a variety of products of reasonable quality at low prices. Most products sold at Wal Mart are common- place and can be purchased elsewhere. What Wal Mart provides is a low price and product availability. prettythings
  34. 34. Contd. Dell has stressed customization and variety at a reasonable cost, with customers having to wait approximately one week to get their product. In contrast, a customer can walk into a computer retailer, be helped by a salesperson, and leave the same day with HP computer. The amount of variety and customization available at the retailer, however, is limited. In each case, the competitive strategy is defined based on how the customer prioritizes product cost, delivery time, variety and quality. A Dell customer, purchasing online, places great emphasis on product variety and customization. A customer purchasing HP laptop is most concerned with price, fast response time and help in product selection. prettythings
  35. 35.  A firm’s competitive strategy will be defined based on its customer’s priorities. Competitive strategy targets one or more customer segments and aims to provide products and services that satisfy these customer’s needs. To see the relationship between competitive and supply chain strategies, we start with the value chain for a typical organization. prettythings
  36. 36. The Value Chain in aCompanyFinance, Accounting, Information Technology, Human ResourcesNew Product MarketingDevelopment and Sales Operation Distribution Service s prettythings
  37. 37. Value Chain It begins with new product development, which creates specifications for the product. Marketing and sales generate demand by publicizing the customer priorities that the products and services will satisfy. Marketing also brings customer input back to new product development. Using new product specifications, operations transforms inputs to outputs to create the product. Distribution either takes the product to the customer or brings the customer to the product. Service responds to customer requests during or after the sale. prettythings
  38. 38.  A product development strategy specifies the portfolio of new products that a company will try to develop. It also dictates whether the development effort will be made internally or outsourced. A marketing and sales strategy specifies how the market will be segmented and how the product will be positioned, priced and promoted. A supply chain strategy determines the nature of procurement of raw materials, transportation of materials to and from the company, manufacture of the product or operation to provide the service, and distribution of the product to the customer, along with any follow-up service and a specification of whether these processes will be performed in-house or outsourced. prettythings
  39. 39. Achieving Strategic FitStrategic fit means that both the competitive and supply chain strategies have aligned goals. It refers to consistency between the customer priorities that the competitive strategy hopes to satisfy and the supply chain capabilities that the supply chain strategy aims to build.A company may fail either because of a lack of strategic fit or because its overall supply chain design, processes and resources do not provide the capabilities to support the desired strategic fit. prettythings
  40. 40. All processes and functions that are part of a company’s value chain contribute to its success or failure. A company’s success or failure is thus closely linked to the following keys: The competitive strategy and all functional strategies must fit together to form a coordinated overall strategy. Each functional strategy must support other functional strategies and help a firm reach its competitive strategy goal. The different functions in a company must appropriately structure their processes and resources to be able to execute these strategies successfully. The design of the overall supply chain and the role of each stage must be aligned to support the supply chain strategy. prettythings
  41. 41. How is Strategic FitAchieved? A competitive strategy will specify, either explicitly or implicitly, one or more customer segments that a company hopes to satisfy. To achieve strategic fit, a company must ensure that its supply chain capabilities support its ability to satisfy the targeted customer segments. prettythings
  42. 42. Three basic steps to achieve strategic fit:1. Understanding the customer and supply chain Uncertainty – First, a company must understand the customer needs for each targeted segment and the uncertainty the supply chain faces in satisfying these needs. These needs help the company define the desired cost and service requirements. The supply chain uncertainty helps the company identify the extent of the unpredictability of demand, disruption and delay that the supply prettythings
  43. 43. Demand uncertainty reflects the uncertainty of customer demand for a product. An example of product with low demand uncertainty is common salt. Salt has a very low margin, accurate demand forecasts, low stockout rates, and virtually no markdowns. It is a product with highly certain demand. On the other end of the spectrum, a new palmtop computer has high demand uncertainty. It will likely have a high margin, very inaccurate demand forecasts, high stockout rates and large markdowns. prettythings
  44. 44. Implied Demand uncertainty is often correlated with other characteristics of demand, as follows: Products with uncertain demand are often less mature and have less direct competition. As a result margins, tend to be high. Forecasting is more accurate when demand has less uncertainty. Increased implied demand uncertainty leads to increased difficulty in matching supply with demand. Markdowns are high for products with high implied demand uncertainty because oversupply often results. prettythings
  45. 45. There is uncertainty resulting from the capability of the supply chain. For eg, when a new component is introduced in the PC industry, the quality yields of the production process tend to be low and breakdowns are frequent. As a result, companies have difficulty delivering according to a well-defined schedule, resulting in high supply uncertainty for PC manufacturers.As the production technology matures and yields improve, companies are able to follow a fixed delivery schedule, resulting in low supply uncertainty. prettythings
  46. 46. The Uncertainty(Demand and Supply) Spectrum Predictable supply and uncertain demand or uncertain Predictable supply supply and predictable Highly uncertain and demand demand or somewhat supply and uncertain supply and demand demandSalt at a An existing A newsupermarke automobile communicationt model device prettythings
  47. 47. 2. Understanding the Supply Chain Capabilities –Creating strategic fit is all about creating a supply chain strategy that best meets the demand a company has targeted given the uncertainty it faces.Supply chain responsiveness includes a supply chain’s ability to do the following:• Respond to wide ranges of quantities demanded.• Meet short lead times• Handle a large variety of products• Build highly innovative products• Meet a high service level• Handle supply uncertaintyResponsiveness, however comes at a cost. For instance, to respond to a wider range of quantities demanded, capacity must be increased, which increases cost.Supply chain efficiency is the inverse of the cost of making and delivering a product to the customer. For every strategic choice to increase responsiveness, there are additional costs that lower efficiency. prettythings
  48. 48. Cost-Responsiveness EfficientFrontier Responsivenes s High Low Hig Cost Low h prettythings
  49. 49. The Responsiveness Spectrum Highly Somewha Somewhat Highly efficient t responsive responsiv efficien e tIntegrated steel Apparel: A traditional Most automotive Reliancemills : make-to-stock production: Delivering aFresh:Production manufacturer with large variety of products Changingscheduled production lead time in a couple of weeks merchandiweeks in of several weeks se mix byadvance with locationlittle variety and time of day prettythings
  50. 50. Achieving Strategic Fit – The final step is To ensure that the degree of supply chain responsiveness is consistent with the implied uncertainty. The goal is to target high responsiveness for a supply chain facing high implied uncertainty and efficiency for a supply chain facing low implied uncertainty.For eg. The competitive strategy of Dell targets customers who value having customized PCs delivered within days. Given the vast variety of PCs, the high level of innovation and rapid delivery, demand from Dell customers is having high demand uncertainty. Some supply uncertainty also exists, especially for newly introduced components. Building a responsive supply chain, will allow Dell to meet its customer’s needs. prettythings
  51. 51. On the other hand, salt is a product with relatively stable customer demand, giving it a low implied demand uncertainty. Supply is also quite predictable. It will be in a much better position if it designs a more efficient supply chain with a focus on cost reduction. prettythings
  52. 52.
  53. 53. Drivers of Supply chain Performance To understand how a company can improve supply chain performance in terms of responsiveness and efficiency, the logistical and cross functional drivers of supply chain performance must be examined.  Facilities – Actual physical locations in the supply chain network where product is stored, assembled or fabricated. The two major types of facilities are production sites and storage sites. Decisions regarding the role, location, capacity and flexibility of facilities have a significant impact on supply chain’s performance. For instance, an auto parts distributor striving for responsiveness could have many warehousing facilities located close to customers even though this practice reduces efficiency.  Inventory – It encompasses all raw materials, work in process and finished goods within a supply chain. Changing inventory policies can dramatically alter the supply chain’s efficiency and responsiveness. A clothing retailer can make itself more responsive by stocking large amounts of inventory, however, it increases the retailer’s cost, thereby making it less efficient. prettythings
  54. 54.  Transportation – It entails moving inventory from point to point in the supply chain. Transportation can take the form of many combinations of modes and routes, each with its own performance and characteristics. Companies can use faster modes of transportation which increases responsiveness but also less efficient. Information – It consists of data and analysis concerning facilities, inventory, costs, prices and customers throughout the supply chain. Information is potentially the biggest driver of performance in the supply chain because it directly affects each of the other drivers. Information presents management with the opportunity to make supply chains more prettythings
  55. 55.  Sourcing – It is the choice of who will perform a particular supply chain activity such as production, storage, transportation or the management of information. At the strategic level, these decisions determine what functions a firm performs and what functions the firm outsources. Outsourcing the activities to an economic third party will make the supply chain efficient but at the same time its responsiveness suffer because of the long distance. Pricing – It determines how much a firm will charge for goods and services that it makes available in the supply chain. Pricing affects the behavior of the buyer of the good or service, thus affecting supply chain performance. Customers who value efficiency will order early and who value responsiveness wait and order just before they need a product transported. prettythings
  56. 56. Framework for StructuringDrivers Competitive Strategy Supply Chain Strategy Supply Chain Structure Supply Chain Efficiency Structure Responsiveness Logistical Drivers Facilities Inventory Transportation Information Sourcing Pricing Cross-Functional Drivers prettythings
  57. 57. Most companies begin with a competitive strategy and then decide what their supply chain strategy ought to be. The supply chain strategy determines how the supply chain should perform with respect to efficiency and responsiveness. The supply chain must then use the three logistical and three cross-functional drivers to reach the performance level the supply chain strategy dictates and maximize the supply chain profits. prettythings
  58. 58. Framework – Walmart as an example Wal Mart’s competitive strategy is to be a reliable, low- cost retailer for a wide variety of mass-consumption goods. This strategy dictates that the ideal supply chain will emphasize efficiency but also maintains an adequate level of responsiveness. Pioneered cross-docking, a system in which inventory is not stocked in a warehouse but rather is shipped to stores from the manufacturer. Runs its own fleet of trucks, to keep responsiveness high. Benefits in terms of reduced inventory and improved product availability justify this cost. Makes use of Hub and spoke model, uses centrally located DCs within its network of stores to decrease the number of facilities and increase efficiency at each DC. Practices EDLP for its products. Invested significantly more than its competitors in information technology. Identifies efficient sources for each product it sells and feeds them large orders. prettythings
  59. 59. Obstacles to achieving Strategic Fit Increasing variety of products – Increase in product variety and more customised products complicate the supply chain by making forecasting much more difficult. Increased variety tends to raise uncertainty and increased uncertainty hurts both efficiency and responsiveness within the supply chain. Decreasing Product Life Cycles – Makes the job of achieving strategic fit more difficult, as the supply chain must constantly adapt to manufacture and deliver new products, in addition to coping with these product’s demand uncertainty. Increasingly Demanding Customers – Customers are constantly demanding improvements in delivery lead times, cost, product quality and product performance. If they do not receive these improvements, they move on to new suppliers. Supply chain must provide more to maintain its business. prettythings
  60. 60.  Fragmentation of Supply Chain Ownership – The new ownership structure, due to outsourcing many of the noncore functions, has made managing the supply chain more difficult. With the chain broken into many owners, each with its own policies and interests, the chain is more difficult to coordinate. Globalization – Adds stress to the chain, because facilities within the chain are farther apart, making coordination much more difficult. Difficulty Executing new Strategies – Toyota’s Production System, which is a supply chain strategy, has been widely known and understood and many other competitors have figured it out. The difficulty other firms have had in executing that strategy. prettythings
  61. 61.