Introduction to Supply Chain Management

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Introduction to Supply Chain Management

Professor Guojun JiUniversity of Washington, GTTL

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Motivation of Supply Chain Evolution

Short life cycle heightened expectations of customers advances in communication and

transportation technologies mobile communication overnight delivery

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Supply Chain Components

Suppliers Manufacturing centers Warehouses Distribution centers Retail outlets Raw material Work-in-Process inventory Finished products

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

Logistics Network

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Network Design

The Key Issues:

1. Number of warehouses

2. Location of each warehouse

3. Size of each warehouse

4. Allocation of products to the different warehouses

5. Allocation space for products in each warehouses

6. Allocation of customers to each warehouse

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Network Design

The objective is to balance service level subject to:

Production/ purchasing costs

Inventory holding costs

Facility costs (storage, handling and fixed costs)

Transportation costs (different transportation mode)

That is, we would like to find a minimal-annual-cost configuration of the distribution network that satisfies product demands at specified customer service levels.

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The More Warehouse, the more ...

Improvement in service level inventory costs due to increased safety stock overhead and setup costs reduction in outbound transportation costs

(from warehouses to customers) inbound transportation costs (from plants to

warehouses)

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Inventory (1/2)

Where do we hold inventory? Suppliers and manufacturers warehouses and distribution centers retailers

Types of Inventory WIP raw materials finished goods

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Inventory (2/2)

Why do we hold inventory? Uncertainty in customer demand

short life cycle implies that historical data may not be available

many competing products in the marketplace

Uncertainty in quantity and quality of the supply, supplier costs, and delivery times

Economies of scale offered by transportation companies

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Definition:

Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service level requirements.

Notice: Everyone is involved Systems approach to reducing costs Integration is the key

Supply Chain Management

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Conflicting Objectives in the Supply Chain

1. Purchasing• Stable volume requirements • Flexible delivery time• Little variation in mix• Large quantities

2. Manufacturing• Long run production• High quality• High productivity• Low production cost

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Conflicting Objectives in the Supply Chain

3. Warehousing• Low inventory • Reduced transportation costs• Quick replenishment capability

4. Customers• Short order lead time• High in stock• Enormous variety of products• Low prices

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The Effect of Demand Uncertainty (1/2)

Most companies treat the world as if it were predictable: Production and inventory planning are based on

forecasts of demand made far in advance of the selling season

Companies are aware of demand uncertainty when they create a forecast, but they design their planning process as if the forecast truly represents reality

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The Effect of Demand Uncertainty (1/2)

Recent technological advances have increased the level of demand uncertainty: Short product life cycles Increasing product variety

The three principles of all forecasting techniques:

Forecasting is always wrong The longer the forecast horizon the worst is the forecast Aggregate forecasts are more accurate

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Market Two

Risk Pooling

Consider these two systems:

Supplier

Warehouse One

Warehouse Two

Market One

Market Two

Supplier Warehouse

Market OneLT = 1 week

1500 products, 10000 accounts

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Risk Pooling

For the same service level, which system will require more inventory? Why?

For the same total inventory level, which system will have better service? Why?

What are the factors that affect these answers?

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The Dynamics of the Supply Chain

Ord

er

Siz

e

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

CustomerDemand

Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders

Production PlanProduction Plan

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What Management Gets...

Ord

er

Siz

e

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

CustomerDemand

Production PlanProduction Plan

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What Management Wants…

Vo

lum

es

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Production PlanProduction PlanCustomerDemand

CustomerDemand

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The Bullwhip Effect

2

2221

)(

)(

P

L

P

L

DVar

QVar

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The bullwhip effect is an extreme change in the supply position upstream generated by a small change or no change in customer demand. Inventory can shift quickly from being highly backordered to being excess.

Observations show that the variation of inventory and order quantities increases up the supply chain from customer to supplier. In addition, the longer the lead times of goods, date, and control flow are, the stronger the bullwhip effect is. Figure 2.3.4.2 shows this effect.

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A famous example, analyzed and published by Procter&Gamble, is demand for Pampers disposal diapers. The bullwhip effect is caused mainly by information processing obstacles in the logistics network; the obstacles are information time lag and distortion (by the actual orders). An appropriate countermeasure is adapting manufacturing lead times (see here [Solo03]), based on rapid information exchange on consumption, or demand, by point-of-sale scanning.

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Var(q)/Var(D):For Various Lead Times

L=5

L=3

L=1

0

2

4

6

8

10

12

14

0 5 10 15 20 25 30

L=5

L=3

L=1

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The Dynamic Supply Chain

Increasing customer power leads to increased demands on retailers

Increased retailer power leads to increased demands on suppliers

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Example 1

A Korean manufacturer of electrical products is facing: 70% service level 4 turnover rate

Leading electronic companies: 9 turnover rate

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Supply Chain: The Magnitude

In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product). Transportation 58% Inventory 38% Management 4%

Third party logistics services grew in 1998 by 15% to nearly $40 billion

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Supply Chain: The Magnitude

Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them.

In 1993, IBM lost a major fraction of its potential sales of desktop computers because it could not purchase enough chips that control the computer displays.

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Supply Chain: The Potential

Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months.

“According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct./Nov. 1997)

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Supply Chain: The Complexity

National Semiconductors:• Production:

– Produces chips in six different locations: four in the US, one in Britain and one in Israel

– Chips are shipped to seven assembly locations in Southeast Asia.

• Distribution– The final product is shipped to hundreds of facilities all

over the world– 20,000 different routes– 12 different airlines are involved– 95% of the products are delivered within 45 days– 5% are delivered within 90 days.

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Supply Chain: The Complexity

1. Supply Chain Integration (network)• Conflicting Objectives• The Dynamics of the Supply Chain

2. Matching Supply and Demand3. System Variations over Time (parameters)4. Status of Logistics Knowledge

• Many problems are new• Incomplete understanding of issues• Methodology is rather narrow• No historical data available

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Example 2

National semiconductor: one of the world’s largest chipmakers short lead time In 1994, 95% demands received within 45

days, the remaining 5% received within 90 days

12 different airline carriers 20,000 different routes Who will be in the lucky 5%?

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ISSUES:Decision Classification

Strategic Planning:Decisions that typically involve major capital investments and have a long-term effect.

1. Determination of the number, size and location of new plants, distribution centers and warehouses

2. Acquisition of new production equipment and the design of working centers within each plant

3. Design of transportation facilities, communications equipment, data processing means, etc.

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ISSUES:Decision Classification

Tactical Planning:Effective allocation of manufacturing and distribution resources over a period of several months

1. Purchasing and production decisions

2. Work-force size

3. Inventory policies

4. Definition of the distribution channels

5. Selection of transportation and trans-shipment alternatives

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ISSUES:Decision Classification

Operational Control:Includes day-to-day operational decisions

1. The assignment of customer orders to individual

machines

2. Dispatching, expediting and processing orders

3. Vehicle scheduling, routing

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ISSUES: Distribution Strategies

The structure of the distribution network

The distribution strategy

The Classical Strategy

Cross Docking (Wal-Mart)

Direct Shipping

merge-in-transit

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Integration and Strategic Partnering

Successful Keys: Information sharing Operational planning

What information should be shared? How should it be used?

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Advantages of Alliance (1/2)

Adding value to product Improve time to market, distribution times, repair times, complementary product lines

Improving market access better advertising new market channels

Strengthening operations complementary seasonal products

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Advantages of Alliance (2/2)

Adding technological strength Enhancing strategic growth: overcome barriers Enhancing organizational skills: organization

learning Building financial strength

shared administrative costs reduced owing to the expertise risk sharing

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Disadvantages of Alliance

IBM entered the PC market in 1981. Outsourcing:

CPU: Intel OS: Microsoft

Market share: 1985: 40% 1995: 8%; Compaq: 10%

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Types of Strategic Alliances

Third-Party Logistics (3PL) Retailer-Supplier Partnerships (RSP) Distributor Integration (DI)

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Types of Retailer-Supplier Partnerships (RSP)

Quick Response: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

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Types of Retailer-Supplier Partnerships (RSP)

Continuous Replenishment (rapid replenishment): Vendors receive POS data and use it prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory.

Wal-Mart, Kmart

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Types of Retailer-Supplier Partnerships (RSP)

Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.

Kmart

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Types of Retailer-Supplier Partnerships (RSP)

Vendor Managed Inventory (VMI) (Vendor Managed Replenishment, VMR) : The supplier decide on the appropriate

inventory levels of each products and the appropriate inventory policies.

The goal of VME is to eliminate retailers’ orders. VMI Projects at Dillard Department Stores, J.C.

Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements.

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Increasing Globalization

1/5 of output of US firms produced abroad US Companies hold $500 Billion in foreign

asset stocks (7% annual growth) 1/4 of US imports between foreign affiliates

and US parent companies Over half of US companies increased the

number of countries in which they operate (late 80’s to early 90’s)

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Taxonomy of International Supply Chains (1/2)

International distribution: domestic: manufacturing overseas: marketing

International suppliers: domestic: final assembly overseas: raw materials, components,

marketing

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Taxonomy of International Supply Chains (2/2)

Off-shore manufacturing domestic: warehouses, marketing overseas: manufacturing

Fully integrated global supply chain product are produced, manufactured, and distributed

from various facilities located throughout the world supply chain was designed without regard to

national boundaries

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Forces Driving Globalization

Global Market Forces Technological Forces Global Cost Forces Political and Economic Forces

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Global Market Forces

Foreign competition in local markets pressures by foreign competitors opportunities by foreign customers

Growth in foreign demand Global presence as a defensive tool

Nestle’s and Kellogg’s Global proliferation of information:

overnight mail, internet Presence in state-of-the-art markets

Japan -- consumer electronics Germany -- machine tools US: software

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Technological Forces

Diffusion of knowledge Many high tech components developed overseas Need close relationships with foreign suppliers

Gain access to technology or markets: joint location collaborations

Global location of R&D facilities Close to production (as cycles get shorter) Close to expertise (Indian programmers?)

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Global Cost Forces Low unskilled labor cost

Diminishing importance (offset by operating facilities costs in remote locationas)

Other cost priorities Integrated supplier infrastructure Skilled labor

Capital intensive facilities government actions: tax breaks, cost sharing joint ventures price breaks

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Political and Economic Forces (1/2)

Exchange rate fluctuations and operating flexibility Regional trade agreements (Europe, North

America, Pacific Rim) Value of being in a country in one of these regions Implications for supply network design Reevaluation of foreign facilities (Production processes

designed to avoid tariffs)

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Political and Economic Forces (2/2)

Trade protection mechanisms Tariffs (finished goods) Quotas Voluntary export restrictions: Lexus, Infiniti Local content requirements

TI/Intel factories in EuropeJapanese automakers in the EU

Health/environmental regulationsJapanese refused to import US skis (different snow)

Government procurement policiesUp to 50% advantage for American companies on US

Defense contracts

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Issues In Global SCM Regional vs. International Products

regional-specific products: cars true global products: Coca-cola, McDonald

Local Autonomy vs. Central Control Short term expectations

Miscellaneous dangers harder to administer offshore facilities cheap labor masks the low productivity collaborators become competitors

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Regional Differences in Logistics (1/2)

Culture differences: beliefs and values customs languages

Infrastructure highway systems, ports, communication and

information systems road widths, bridge heights, communication protocols geography distances

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Regional Differences in Logistics (2/2)

Performance expectation and evaluation: formal partnership contract operating standards

Information system availability: POS, automation tools, PC, EDI

Human resources: managerial personnel technical personnel unskilled labors

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Design For Logistics

Design for Logistics uses product design to address logistics costs

Key Concepts of Design for Logistics Economic packaging and transportation Concurrent/Parallel Processing Postponement

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Economic Transportation, Storage, and Transportation

Design products so that they can be efficiently packed and stored

Packed more compactly Design products to efficiently utilize retail

space Design packaging so that products can be

consolidated at cross docking points

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Examples

Ikea World’s largest furniture retailer 131 stores in 21 countries Large stores, centralized manufacturing,

compactly and efficiently packed products Rubbermaid

Clear Classic food containers - designed to fit 14x14” Wal-Mart shelves

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Concurrent / Parallel Processing

Objective is to minimize manufacturing lead times

Achieved by redesigning products so that several manufacturing steps can take place in parallel

Modularity/Decoupling is key to implementation Enables different inventory levels for different

parts

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The Network Printer Example

Stage 1(Europe) Stage 2

Integration (Far East)

Customer(Europe)

Board Printer

Stage 1(Europe)

Integration (Europe)

Customer(Europe)

Board

Printer

Plastics, motors, etc.

Stage 2(Far East)

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Traditional Manufacturing

Set schedules as early as possible Use large lot sizes to make efficient use of

equipment and minimize costs Large centralized facilities take advantage of

economies of scale

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It is hard to be flexible when... Lead times are long Retailers are committed to purchasing early

orders Purchasing plans for raw materials are

based upon extrapolating from 10% of the orders

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Postponement

Manufacturing process starts by making a generic or family product which is later differentiated into a specific end product.

Concepts of implementing delayed differentiation: resequencing commonality modularity standardization

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Resequencing: BenettonOld Manufacturing Process

Spin or Purchase Yarn

Dye Yarn

Finish Yarn

Manufacture Garment Parts

Join Parts

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Resequencing: BenettonNew Manufacturing Process

Spin or Purchase Yarn

Manufacture Garment Parts

Join Parts

Dye Garment

Finish Garment

This step is postponed

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Benetton Postponement Why the change?

The change enables Benetton to start manufacturing before color choices are made

What does the change result in? Delayed forecasts of specific colors Still use aggregate forecasts to start manufacturing early React to customer demand and suggestions

Issues with postponement Costs are 10% higher for manufacturing New processes had to be developed New equipment had to be purchased

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Postponement: Key Concepts

Delay differentiation of products in the same family as late as possible

Enables the use of aggregate forecasts Enables the delay of detailed forecasts Reduces scrapped or obsolete inventory,

increases customer service May require new processes or product design

with associated costs

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Information Technology

Competitive advantage through advanced IT Banking Retail (Wal-Mart - satellite connected IT) Airlines (American Airlines Reservation System,

Sabre) Trucking and Shipping (FedEx - tracking)

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Goals of IT in SCM (1/3)

Collect and store information on each product from production to delivery/purchase point Provide complete visibility Tracking Alerting

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Goals of IT in SCM (2/3)

Access any data in the system from a single point of contact. This is complicated by the fact that one may need information which resides in various locations within one company in different companies

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Goals of IT in SCM (3/3)

Analyze and plan activities based on total supply chain information.

Decision Support Systems Advanced Planning Systems

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How are these Goals Achieved?

1. Standardization

2. Infrastructure

3. Electronic Commerce

4. Supply Chain System Components

5. Integration-related issues

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1. Standardization various forces are making this happen

market forces interconnectivity reduced costs in software Internet-based standards economies of scale

Examples: email, EDI

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ERP System Providers

SAP Oracle J.D. Edwards PeopleSoft Baan

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2. Infrastructure

The software and hardware around which the IT system is built

Components include hardware interface/presentation devices: PC, voice

mail, terminals, Internet devices, PDAsanywhere, anytimegraphical displayWintel standards vs. Java standards

communicatons: email, EDI, groupware, location tracking

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3. Electronic Commerce

The replacement of physical processes with electronic ones

The creation of new models for collaboration between customers and suppliers

Examples include:

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Taxonomy: level 1: one-way communication: email, FTP,

browser level 2: database access: inquireies, forms,

purchasing, tracking level 3: data exchange: EDI, clearinghouse level 4: sharing processes: CRPT, business

communities, VCI

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4. Supply Chain Component

DSS for Supply Chain Processes: Demand planning tools Supply Chain Design Production planning Distribution planning Transportation planning

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5. Integrating Supply Chain IT

Manugistics’s Supply Chain Compass Model: Stage I: Fundamentals - focus on quality Stage II: Cross-functional teams - serve customers Stage III: Integrated Enterprise - drive business

efficiency Stage IV: Extended supply chain - create market

value Stage V: Supply chain communities: be a market

leader

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ISSUES: What’s New in Logistics?

Global competition

Shorter product life cycle

Increasing product variety

New, low-cost distribution channels

More powerful well-informed customers

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ISSUES: What’s New in Logistics?

New communications and information technologies POS and EDI technology Wireless technology

Decision Support Systems Integrated systems Multi-modal transportation

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ISSUES: What’s New in Logistics?

New concepts in logistics

Push Vs Pull strategies

Cross docking

Strategic alliances

Manufacturing postponement

Design for Logistics