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Supply Chain Management
This document provides an introduction and overview of supply chain management. It begins by defining key terms like supply chain, supply chain management, logistics, and related concepts. It then discusses the importance of SCM in reducing costs and increasing profits. The objectives of SCM are outlined as maximizing overall value created across the supply chain and reducing costs. It notes how the focus of SCM has expanded over time to include more tiers of suppliers and customers as well as greater integration through information and communication technologies. The document also covers SCM organizations, decision phases in SCM including strategy, planning and operations, and how effective SCM can provide competitive advantage.
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Supply Chain Management
- 1. Supply Chain Management TheIntroduction
- 2. Outline • What isSupply Chain • Definitions of Terminologies • Process view of SCM • Importance of SCM • Objectives of SCM • Focus of SCM • SCM organization • Supply Chain Decisions • Competitive advantage through SCM • Expanding strategic scope of SCM 2
- 3. A Supply Chainfor Bread 3
- 4. What is SupplyChain Upstream Downstream Information End- product Producer Distributor/ Wholesaler RetailerSupplier’s supplier Suppliers End Customer Product & Service Flow Fund Third Party Companies • Information Systems Firms •Transportation Firms • Warehousing Firms • Clearing Agents etc. 4
- 5. 5 What is aSupply Chain? • Customer is an integral part of the supply chain • Includes movement of products from suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions • Probably more accurate to use the term “supply network” or “supply web” • Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers • All stages may not be present in all supply chains (e.g., no retailer or distributor for Dell)
- 6. Definition of SupplyChain Management 6 • Supply chain management (SCM) is the structuring and coordination of relationships and activities across firms to deliver value in an information and technology intensive global environment • Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability – Chopra & Meindl • Supply chain management is a set of approaches used to efficiently integrate suppliers, manufacturers, warehouses, and customers 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 – Simchi-Levi et al.
- 7. Terminology • (Business) Logistics •Physical distribution • Transportation • Supply chain management • Operations Management • Operations Research 7
- 8. 8 Logistics (CLM) Logistics isthe process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming customer requirements. Ballou - include services, exclude production processes Terminology
- 9. 9 Supply chain management(Chopra and Meindl) Management of all flows between and among stages in a supply chain to maximize total profitability Physical distribution (Apics) The activities associated with the movement of material, usually finished goods or service parts, from the manufacturer to the customer Operations Research / Management Science The study of quantitative methods intended to improve management decision making Terminology
- 10. 10 Operations Management (Apics) Theplanning, scheduling and control of activities that transform inputs into finished goods and services Transportation (adapted from Apics) The function of planning, scheduling and controlling activities related to mode, vendor and movement of goods and people Terminology
- 11. Demand forecasting Purchasing Requirements planning Productionplanning Manufacturing inventory Warehousing Material handling Packaging Finished goods inventory Distribution planning Order processing Transportation Customer service Strategic planning Information services Marketing/sales Finance Supply Chain Management Supply Chain Management Logistics Purchasing/ Materials Management Physical Distribution Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+ Demand forecasting Purchasing Requirements planning Production planning Manufacturing inventory Warehousing Material handling Packaging Finished goods inventory Distribution planning Order processing Transportation Customer service Strategic planning Information services Marketing/sales Finance Supply Chain Management Supply Chain Management Logistics Purchasing/ Materials Management Physical Distribution Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+ Evolution of Supply Chain Management 11
- 12. Relationship of Logisticsto Marketing Product Price Promotion Place-Customer service levels Inventory carrying costs Lot quantity costs Order processing and information costs Transport costs Warehousing costs MarketingLogistics 12
- 13. 1-13 Process View ofa Supply Chain • Cycle view: – processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retailer Distributor Manufacturer Supplier Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives PUSH PROCESSES PULL PROCESSES • Push/pull view: – processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push)
- 14. 1-14 Push/Pull View of SupplyChain Processes • Pull: execution is initiated in response to a customer order (reactive) • Push: execution is initiated in anticipation of customer orders (speculative) • Push/pull boundary separates push processes from pull processes • The relative proportion of push and pull processes can have an impact on supply chain performance
- 15. 1-15 Share of Logisticscost in the Manufacturing Firm • Profit 4% • Logistics Cost 21% • Marketing Cost 27% • Manufacturing Cost 48% Why Supply Chain Management
- 16. 1-16 • Estimated thatthe grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies – A typical box of cereal spends 104 days from factory to sale – A typical car spends 15 days from factory to dealership Why Supply Chain Management
- 17. 1-17 • Compaq estimatesit lost $.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed • P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand Why Supply Chain Management
- 18. Why Supply ChainManagement • End Customer is the true source of income • No firm can be best in all the Value added Activities • Focus on Core Capabilities to survive • Create alliance or strategic partnerships with other winning chain members 18
- 19. 1-19 The Objective ofa Supply Chain 1. 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)
- 20. 1-20 The Objective ofa Supply Chain 2. Supply chain reduces costs – (information, storage, transportation, components, assembly, etc.) 3. 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
- 21. Where is thefocus: Future 1. Expanding the supply chain to second and third tier suppliers and customers 2. Utilization of ICT & Web for further integration 3. Increasing supply chain responsiveness (quick response, mass customization, JIT, TQM) 4. Greening of Supply Chain (Environment friendliness, Recycling and Reverse Supply chain) 5. Reducing Supply Chain Cost (Blue ocean strategy) 21
- 22. 22 SCM Organizations CLM -Council of Logistics Management (now Council of Supply chain management) APICS - American Production Inventory Control Society (now American Operations Management Society) POMS – Production Operations Management Society SOLE - Society of Logistics Engineers IIE - Institute of Industrial Engineers INFORMS – The US Society of OR & Management Science
- 23. 1-23 Decision Phases ofa Supply Chain • Supply chain strategy or design • Supply chain planning • Supply chain operation
- 24. 1-24 Supply Chain Strategyor 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
- 25. 1-25 Supply Chain Planning •Planning decisions: – Forecasting of demand – 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
- 26. 26 Supply Chain Operation •Time horizon is weekly or daily • Decisions regarding individual customer orders • Supply chain configuration is fixed and operating policies are determined. Here the 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)
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- 29. 29 Competitive Advantage andSCM Source: Ohmae, K, The Mind of the Strategist, Penguin Books, 1983 Customer Needs seeking benefits at acceptable prices Competitor Assets & utilization Company Assets & utilization Cost differentials Value Value “….A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors.”------- Porter, M.E., Competitive Advantage, Free Press, 1985
- 30. 30 The Two Vectorsof Strategic Direction •The most profitable competitor in any industry sector tends to be the lowest cost producer or the supplier providing a product with the greatest perceived differentiated values To gain competitive advantage over its rivals, a firm must deliver value to its customers through performing those activities more efficiently than its competitors or by performing the activities in a unique way that create greater differentiation. ValueAdvantage Cost Advantage High High Low Low
- 31. Understanding the SupplyChain: Cost-Responsiveness Efficient Frontier • Supply chain responsiveness :ability to – respond to wide ranges of quantities demanded – meet short lead times – handle a large variety of products – build highly innovative products – meet a very high service level 1-31 High Low Low High Responsiveness Cost Efficiency • There is a cost to achieving responsiveness
- 32. 1-32 Achieving Strategic Fit •Strategic fit: – Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy – Competitive and supply chain strategies have the same goals • A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy
- 33. 1-33 How is StrategicFit Achieved? • Step 1: Understanding the customer and supply chain uncertainty • Step 2: Understanding the supply chain • Step 3: Achieving strategic fit
- 34. 1-34 Step 1: Understandingthe Customer • Identify the needs of the customer segment being served • Quantity of product needed in each lot • Response time customers will tolerate • Variety of products needed • Service level required • Price of the product • Desired rate of innovation in the product
- 35. 1-35 Step 1: Understandingthe Customer’s Implied Demand Uncertainty • Demand uncertainty: uncertainty of customer demand for a product • Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and attributes the customer desires • Implied demand uncertainty also related to customer needs and product attributes • First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum
- 36. 1-36 Step 1: Understandingthe Customer • Understanding the Customer – Lot size – Response time – Service level – Product variety – Price – Innovation Implied Demand Uncertainty
- 37. 2-37 Impact of CustomerNeeds on Implied Demand Uncertainty Customer Need Causes implied demand uncertainty to increase because … Range of quantity increases Wider range of quantity implies greater variance in demand Lead time decreases Less time to react to orders Variety of products required increases Demand per product becomes more disaggregated Number of channels increases Total customer demand is now disaggregated over more channels Rate of innovation increases New products tend to have more uncertain demand Required service level increases Firm now has to handle unusual surges in demand
- 38. 2-38 Step 2: Understandingthe Supply Chain • Two extreme of supply chain is Efficient Supply Chain and Responsive Supply Chain • There is a cost to achieving responsiveness • Supply chain efficiency: cost of making and delivering the product to the customer • Increasing responsiveness results in higher costs that lower efficiency • Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum
- 39. 1-39 Comparison of Efficientand Responsive Supply Chains Efficient Responsive Primary goal Lowest cost Quick response Product design strategy Min product cost Modularity to allow postponement Pricing strategy Lower margins Higher margins Mfg strategy High utilization Capacity flexibility Inventory strategy Minimize inventory Buffer inventory Lead time strategy Reduce but not at expense of greater cost Aggressively reduce even if costs are significant Supplier selection strategy Cost and low quality Speed, flexibility, quality Transportation strategy Greater reliance on low cost modes Greater reliance on responsive (fast) modes
- 40. 1-40 Step 3: AchievingStrategic Fit • Step is to ensure that what the supply chain does well is consistent with target customer’s needs Integrated steel mill Seven Eleven Highly efficient Highly responsive Somewhat efficient Somewhat responsive Hanes apparel Most automotive production Responsiveness Spectrum
- 41. 2-41 Achieving Strategic FitShown on the Uncertainty/Responsiveness Map Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiven ess spectrum Zone of Strategic Fit Barilla Dell
- 42. 2-42 Step 3: AchievingStrategic Fit • All functions in the value chain must support the competitive strategy to achieve strategic fit • Two extremes: Efficient supply chains (Barilla) and responsive supply chains (Dell) • Two key points – there is no right supply chain strategy independent of competitive strategy – there is a right supply chain strategy for a given competitive strategy
- 43. Issues affecting strategicfit 1. Multiple products and customer segments supply chains for each product or not? 2. Product life cycle characteristics of product supply chain should change over its life (introduction, growth, mature, out phasing) 3. Competitive strategy changes over time in economic downtimes people go for a low cost retailer, in uptimes they go for special products (high end retailer) 43
- 44. 2-44 Expanding Strategic Scope •Scope of strategic fit – The functions and stages within a supply chain that devise an integrated strategy with a shared objective – One extreme: each function at each stage develops its own strategy – Other extreme: all functions in all stages devise a strategy jointly • Five categories: – Intracompany intraoperation scope – Intracompany intrafunctional scope – Intracompany interfunctional scope – Intercompany interfunctional scope – Flexible interfunctional scope
- 45. Expanding strategic scope •Intracompanyintra-operation scope miminize local cost view (per operation, e.g. warehouse) •Intracompany intra-functional scope minimize functional cost view (over operations e.g. warehousing and transportation) •Intracompany inter-functional scope maximize company profit view (over functions: marketing and distribution) •Intercompany inter-functional scope maximize supply chain surplus view (over companies) 45
- 46. 46 Expanding strategic scope CustomerService Purchasing Material Control Production Sales Distribution Materials management Manufacturing management Distribution Purchasing Internal Supply Chain Suppliers Distribution Manufacturing management Materials management Material flow Stage one: baseline Stage Two: functional integration Stage Three: internal integration Stage Four: external integration
Editor's Notes
- #5 Slide by Wisner + own Information Flow: Information/ Planning/ Activity integration
- #7 First Def: Presentation of Supply chain Texas Third Def: 28_Industry supply chain presentation
- #9 Council of Logistical Management (now Councit of Supply Chain Management)
- #12 Source : Ballou
- #13 Source : Ballou
- #14 Cycle View: The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage. One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done. Cycle view clearly defines processes involved and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process. This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner. Push-Pull View: In this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes. They key difference is the uncertainty during the two phases. Give examples at Amazon and Borders to illustrate the two views
- #15 # Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand
- #16 Notes: Key message here is that logistics costs are a significant fraction of the total value of a product. The problem here is that this a purely cost based view of the supply chain and drives a firm to simply reducing logistics costs. This is an incomplete picture. Logistics Related Activity 10%, 10.1% of GNP
- #19 The only one true source of income is the end customer. So if companies want to harness the highest revenue, they have to satisfy the end consumer better than their competitors. But consumers buy products based on cost, quality, availability, maintainability and reputation. To better satisfy the consumer at lowest cost companies optimize its operation. But the price consumers pay is the total cost of the supply chain of the product. Thus when individual firms in the supply chain make business decisions that ignore the interests of other chain members, this sub-optimization only transfers costs and additional waiting time along the supply chain, ultimately leading to higher end-product prices, lower supply chain service levels and consequently lower end-customer demand To counter this problem one option is to undertake complete supply chain by a single firm (vertically integrated firm) in a optimized way which has proven very difficult or impossible. To survive in the increasing global competition, organizations thus focus more on core capabilities while trying to create alliances or strategic partnerships with other chain members who are good at what they do. Here comes the importance of understanding Supply chain management Successful supply chain integration Reduce BULLWHIP EFFECT Enable process integration to reduce cost & improve quality Factors encouraged SC integration Global Competition ICT Development Factors necessary for success full SCM Corporate Culture Accurate ICT Trust, Co-operation, Collaboration and honesty
- #22 Source : wisner 12
- #28 Strategic Competitiveness When a firm successfully formulates and implements a value-creating strategy. Competitive Advantage When a firm implements a strategy that its competitors are unable to duplicate or find too costly to try to imitate.
- #30 Competitive Advantage: A position of enduring superiority over competitors in terms of customers preference.
- #44 Multiple Products and Customer Segments Firms sell different products to different customer segments (with different implied demand uncertainty) The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments Two approaches: Different supply chains Tailor supply chain to best meet the needs of each product’s demand Product Life Cycle The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle Supply chain strategy must evolve throughout the life cycle Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary Late: predictable demand, lower margins, price is important As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency Competitive Changes Over Time Competitive pressures can change over time. More competitors may result in an increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions
- #47 The Mission of Supply chain Management