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  1. 1. Supply Chain Management- Basics. Prof. Veerendra Narasalagi BLDEA’S, V.P.Dr.P.G.Halakatti colege of Engineering and Technology Bijapur Prof.Veerendra.PGHCET
  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 Prof.Veerendra.PGHCET
  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. Prof.Veerendra.PGHCET
  4. 4. Definition Mohanty 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. Prof.Veerendra.PGHCET
  5. 5.  SCM deals with design, planning, execution, control and monitoring of supply chain activities with the objective of creating the value.  SCM is a system approach to managing the entire flow of information, materials and services from raw material supplier through factories and warehouses to the end customer. Prof.Veerendra.PGHCET
  6. 6. 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 Prof.Veerendra.PGHCET
  7. 7. Prof.Veerendra.PGHCET
  8. 8.  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. Prof.Veerendra.PGHCET
  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. Prof.Veerendra.PGHCET
  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 chain profitability. Prof.Veerendra.PGHCET
  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 runs. Prof.Veerendra.PGHCET
  12. 12. Supply Chain Stages A 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. Supplier Manufacturer Distributor Retailer Customer Prof.Veerendra.PGHCET
  13. 13. Objectives of Supply chain  Service orientation  Competitiveness and efficiency  Minimising work-in-progress  Improving visibility of demand  Reduce transportation cost  Minimising the time  Rationalize supplier base  Improving the quality  Improving the value Prof.Veerendra.PGHCET
  14. 14. Importance of Supply Chain Decisions 1. Helps in achieving success – Companies being a leader at using supply chain design, planning and operation help in achieving success. 2. 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. 3. 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 levels of inventory. Prof.Veerendra.PGHCET
  15. 15. 4. 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. 5. 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. Prof.Veerendra.PGHCET
  16. 16. Reasons for Growing Importance of Supply Chain Firms 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. 1. 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. Prof.Veerendra.PGHCET
  17. 17. 2. 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. 3. 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. Prof.Veerendra.PGHCET
  18. 18. 4. 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. 4.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. Prof.Veerendra.PGHCET
  19. 19. 5. Costs are significant 6. Supply and distribution lines are lengthening with greater complexity 7. Supply chain/Logistics add significant value 8. Customer service expectations are increasing 9. Supply chain is important to strategy 10.Customers increasingly want quick customized response Prof.Veerendra.PGHCET
  20. 20. Functions of SCM  Supply chain management is a cross-functional approach to manage the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and then the movement of finished goods out of the organization toward the end- consumer.  As organizations strive to focus on core competencies and becoming more flexible, they have reduced their ownership of raw materials sources and distribution channels. Prof.Veerendra.PGHCET
  21. 21. Supply chain activities can be grouped into strategic, tactical, and operational levels of activities: 1) Strategic Function i) Strategic network optimization, including the number, location, and size of warehouses, centers and facilities. distribution ii) Strategic partnership with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third party logistics. iii) Product designs co-ordination, so that new and existing products can be optimally integrated into thesupply chain, load management. iv) Information Technology infrastructure, to support supply chain operations. Where-to-make and what-to-make-or-buy decisions. vi) Aligning overall organizational strategy with supply strategy. Prof.Veerendra.PGHCET
  22. 22. 2) Tactical Function I) Sourcing contracts and other purchasing decisions. ii) Production decisions, including contracting, scheduling, and planning process definition. iii) Inventory decisions, including quantity, location, and quality of inventory. iv) Transportation strategy, including frequency, routes, and contracting. v) Benchmarking of all operations against competitors and implementation of best practices throughoutthe enterprise. vi) Milestone payments. vii) Focus on customer demand. Prof.Veerendra.PGHCET
  23. 23. 3) Operational Function i) Daily production and distribution planning, including all nodes in the supply chain. ii) Production scheduling for each manufacturing facility in the supply chain (minute by minute). iii) Demand planning and forecasting, co-ordinating the demand forecast of all customers and sharing the forecast with all suppliers. iv) Sourcing planning, including current inventory and forecast demand, in collaboration suppliers. v) Inbound operations, including transportation from suppliers and receiving inventory vi) Production operations, including the consumption of materials and flow of finished goods. vii) Outbound operations, including all fulfillment activities and transportation to customers. viii) Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities, distribution centers, and other customers. Prof.Veerendra.PGHCET
  24. 24. Components of SCM Prof.Veerendra.PGHCET
  25. 25. Process View A 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. Prof.Veerendra.PGHCET
  26. 26. All supply chain processes can be broken down into four process cycles:  Customer order cycle  Replenishment cycle  Manufacturing cycle  Procurement cycle Each cycle occurs at the interface between two successive stages of the supply chain. Prof.Veerendra.PGHCET
  27. 27. Supply Chain Process Cycles Prof.Veerendra.PGHCET
  28. 28. Prof.Veerendra.PGHCET Usually at the customer interface and included all the processes directly involved in receiving and filling a customer order. The customer will usually initiate the order and start the demand process. The customer order cycle can be further broken-down into processes such as customer arrival, order entry, order fulfillment, and order receiving. The processes involved in the customer order cycle are shown in figure 1.3 and include: i) Customer arrival ii) Customer order entry, iii) Customer order fulfillment, iv) Customer order receiving.
  29. 29. Prof.Veerendra.PGHCET This will describe the interface between product provider and a first tier supplier replenishing the product. This cycle is initiated either by an order from the product provider or, more effectively, by the customer order in the first cycle. The first tier supplier is then tasked to replenish goods and services to demand at a minimum cost while providing the necessary quality and product availability. The cycle includes the processes of order trigger (either by customer or product and service provider), order entry, order fulfillment and order receiving. i) Retail order trigger, ii) Retail order entry, iii) Retail order fulfillment, iv) Retail order receiving.
  30. 30. Prof.Veerendra.PGHCET Manufacturing Cycle: A process between producer of a good/service provider (a first tier supplier) and the product provider (in some cases the end consumer can directly interface with the producerr) The cycle involves all th processes necessary to offer products for the replenishment cycle. The cycle will typically involve 1.Order arrival 2.Production scheduling 3.Manufacturing and shipping Receiving at the distributor, retailer or customer. (in some cases the end consumer can directly inte
  31. 31. Prof.Veerendra.PGHCET 4) Procurement Cycle: This is the interface between the first tier supplier (or the producer of a good) and the second tier supplier to that producer. It includes all the processes necessary to ensure materials or components are available for the production cycle and the first tier supplier. The second tier supplier provides inputs to replenish the production and delivery cycle. However, this supplier is operating more precise dependent demand based upon known quantities of the final finished product or service (rather than independent demand faced by the product provider and/or the first tier supplier). The cycle processes here will be similar to those of the production and delivery cycle.
  32. 32. Sub processes in Each Supply Chain Process Cycle Supplier stage markets product Buyer stage places order Supplier stage receives order Supplier stage supplies order Buyer stage receives supply Buyer returns reverse flows to supplier or third party Prof.Veerendra.PGHCET
  33. 33.  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. Prof.Veerendra.PGHCET
  34. 34.  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. Prof.Veerendra.PGHCET
  35. 35. 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. Prof.Veerendra.PGHCET
  36. 36.  The processes in a supply chain are dividing into two categories depending on whether they are executed in response to a customer order or in anticipation of customer orders.  Pull process are initiated by a customer order, whereas push process are initiated and performed in anticipation of customer orders.  In recent years the trend towards more efficient operations has accelerated as technology transforms consumer choice, and consumer choice inturn affects corporate strategy.  The consumer need-based business model is forcing a fundamental shift from a traditional manufacturing push-based model (also called build-to-stock) to a pull based model (build- to-order). Prof.Veerendra.PGHCET
  37. 37. Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives PUSH PROCESSES PULL PROCESSES
  38. 38. Push/Pull View of Supply Chain Processes  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. Prof.Veerendra.PGHCET
  39. 39. 1) Pull Concept: A pull process is activated in response to a confirmed order from a customer. This includews make to order or a Just-in-Time (JIT) manufacturing process. As shown in figure , in a pull process the supplier does not stock finished products but holds higher quantity of semi-finished materials and often higher supply capacity so that order fulfillment can be achieved rapidly. The orders arrive at or after the planning cycle as if bypassing a few steps of the traditional ERP process. Prof.Veerendra.PGHCET
  40. 40. Prof.Veerendra.PGHCET
  41. 41.  A pull process is also associated with Kanban and Lean Thinking or Lean Manufacturing.  In essence, a lean manufacturing requires materials to arrive into each stage of production just when required and no buffer stocks of inwards or outwards stocks of materials are held.  The lean approach is also referred to s JIT.  Pull processes control the flow of resources in the production process by replacing only what as been consumed.  Production schedules are based on actual demand and consumption rather than forecasts.  With lean manufacturing there is no room for errors in specification, production or late delivery. Prof.Veerendra.PGHCET
  42. 42.  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 Processes Pull Processes Push/Pull Boundary Customer Order Arrives Prof.Veerendra.PGHCET
  43. 43. Push Concept Prof.Veerendra.PGHCET
  44. 44. 2) Push Concept: A push process conforms to a conventional supply chain management system going through typical stages in sequence. As shown in figure , orders arrive at or after the demand cycle b always before the planning and procurement cycle and process is activated by a forecast or demand plan. Both raw and packaging materials are stored before production and products are manufactured to stock. The order fulfillment is achieved from the inventory of finished products. In push system, production and distribution are based on forecasts. The problem is that forecasts are often wrong. Customer or demand push is usually defined as a business response in anticipation of customer demand. Prof.Veerendra.PGHCET
  45. 45. 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. Prof.Veerendra.PGHCET
  46. 46.  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. Prof.Veerendra.PGHCET
  47. 47. Competitive and Supply Chain Strategies  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. Prof.Veerendra.PGHCET
  48. 48. 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. Prof.Veerendra.PGHCET
  49. 49.  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. Prof.Veerendra.PGHCET
  50. 50. The Value Chain in a Company Finance, Accounting, Information Technology, Human Resources New Product Development Marketing and Sales Operation s Distribution Service Prof.Veerendra.PGHCET
  51. 51. 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. Prof.Veerendra.PGHCET
  52. 52.  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. Prof.Veerendra.PGHCET
  53. 53. Achieving Strategic Fit  Strategic 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. Prof.Veerendra.PGHCET
  54. 54.  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. Prof.Veerendra.PGHCET
  55. 55. How is Strategic Fit Achieved?  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. Prof.Veerendra.PGHCET
  56. 56. Three basic steps to achieve strategic fit: Prof.Veerendra.PGHCET
  57. 57. 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 chain must be prepared for. Prof.Veerendra.PGHCET
  58. 58.  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. Prof.Veerendra.PGHCET
  59. 59. 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. Prof.Veerendra.PGHCET
  60. 60. 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. Prof.Veerendra.PGHCET
  61. 61. The Uncertainty(Demand and Supply) Spectrum Predictable supply and demand Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat uncertain supply and demand Highly uncertain supply and demand Salt at a supermarke t An existing automobile model A new communication device Prof.Veerendra.PGHCET
  62. 62. 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.  Market variables determine six key attributes of any supply chain structure and they are as follows: 1) Volume: Quantities demanded by the customer. 1) Volume: Quantities demanded by the customer 2) Time: The customer is willing to wait for fulfillment of the order. 3) Variety: Determines the number of suppliers. 4) Service Level Required: High, medium, or low product availability. 5) Price: How sensitive the product is to price changes. 6) Rate of Change, Innovation, and New Product Development: Customers buying fashion expect ne products, whereas customers buying standard apparel that is functional do not. Prof.Veerendra.PGHCET
  63. 63.  Understanding the customer is only the first step to designing strategic fit. Meeting demand is the next step.  The question is how responsive is the supply chain to the customer's demand?  Supply chains have many characteristics but all supply chains have two important attributes-different cost and service.  In this respect we can we equate cost with responsiveness rather than a narrower definition of service level availability. Supply chain responsiveness is a measure of ability to: • Respond to volume changes in demand • 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 uncertainty  Responsiveness, 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. Prof.Veerendra.PGHCET
  64. 64. Cost-Responsiveness Efficient Frontier Responsivenes s High Low Cost Hig h Low Prof.Veerendra.PGHCET
  65. 65. The Responsiveness Spectrum Highly efficient Somewha t efficien t Somewhat responsive Highly responsiv e Integrated steel mills : Production scheduled weeks in advance with little variety Apparel: A traditional make-to-stock manufacturer with production lead time of several weeks Most automotive production: Delivering a large variety of products in a couple of weeks Reliance Fresh: Changing merchandi se mix by location and time of day Prof.Veerendra.PGHCET
  66. 66. 3. 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. Prof.Veerendra.PGHCET
  67. 67.  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. Prof.Veerendra.PGHCET
  68. 68. Achieving Strategic Fit Implied uncertainty spectrum Responsive supply chain Efficient supply chain Certain demand Uncertain demand Responsiven ess spectrum
  69. 69. 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. Prof.Veerendra.PGHCET
  70. 70.  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 responsiveness and more efficient. Prof.Veerendra.PGHCET
  71. 71.  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. Prof.Veerendra.PGHCET
  72. 72. Prof.Veerendra.PGHCET
  73. 73. Framework for Structuring Drivers Efficiency Responsiveness Competitive Strategy Supply Chain Strategy Supply Chain Structure Supply Chain Structure Facilities Inventory Transportation Logistical Drivers Information Sourcing Pricing Cross-Functional Drivers Prof.Veerendra.PGHCET
  74. 74.  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. Prof.Veerendra.PGHCET
  75. 75. 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. Prof.Veerendra.PGHCET
  76. 76. 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. Prof.Veerendra.PGHCET
  77. 77.  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. Prof.Veerendra.PGHCET
  78. 78. Issues in achieving strategic fit  Multiple products and customer segments  Product life cycle  Competitive change over time  Changing customer expectation  Global issues  Growing supply chain uncertainty  Environment and sustainability Prof.Veerendra.PGHCET
  79. 79. Prof.Veerendra.PGHCET