Supply Chain Management

Management Information System 1

Supply Chain Management

MIS







The Inventory Cycle

Profile of Inventory Level Over Time

Quantityon hand

Q

Receive order

Placeorder

Receive order

Placeorder

Receive order

Lead time

Reorderpoint

Demand rate

Time

Constant Demand


Dynamics of Material Flow

Supplier Plant Warehouse Logistics Retailer

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Dynamics of Order Flow

















Some Definitions

Supply Chain Management encompasses every effort involved in producing and delivering a final product or service, from the supplier’s supplier to the customer’s customer. Supply Chain Management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.

The Supply Chain Council, U.S.A.





Supply chain objective• Maximize overall value generated• Value strongly correlated to supply chain

profitability – the difference between the revenue generated from the customer and the overall cost across the supply chain

• Example: A customer purchasing a computer from Dell pays $ 700 (the revenue)

• Dell and other stages of the supply chain incur cost to convey information, produce the components, store them, transport them, transfer funds, etc.


Why is SCM Important?

• Strategic Advantage – It Can Drive Strategy

* Manufacturing is becoming more efficient

* SCM offers opportunity for differentiation (Dell) or cost reduction (Wal-Mart or Big Bazaar)

• Globalization – It Covers The World

* Requires greater coordination of production and distribution

* Increased risk of supply chain interruption

* Increases need for robust and flexible supply chains


Why is SCM Important?(continued)

• At the company level, supply chain management impacts

* COST – For many products, 20% to 40% of total product costs are controllable logistics costs.

* SERVICE – For many products, performance factors such as inventory availability and speed of delivery are critical to customer satisfaction.







What is Supply Chain Planning ?

Supply Chain is a set of activities (e.g. purchasing,manufacturing, logistics, distribution, marketing) that perform the function of delivering value to end customer

Traditionally, all the business units along a supply chain have their own objectives and these are often conflicting

There is no single plan to carry out supply chain activities


What is Supply Chain Planning ?

There is need for a mechanism through which the execution of various business activities along a supply chain can be planned in an integrated fashion.

The supply chain planning is an effort to achieve the primary goal of “producing and distributing the merchandise at the right quantity, to the right locations, and at the right time with minimum systemwide cost” in the presence of conflicting goals of various business units


Supply Chain Planning Processes

Demand PlanningMaterial Requirement PlanningDemand Forecasting


ProductionPlan

ComponentRequirement

Order Management



Supply Chain Planning Decisions

OPERATIONAL

TACTICAL

STRATEGIC

Procurement DistributionManufacturing Logistics


Supply Chain Planning Decisions

• Supplier Selection•Allocation of Suppliers to the Plants

•Location, Number, Capacity of Plants •What Products to Produce•Which Plants to Produce them

•Location, Number, Size of Warehouses

• Mode of Shipment

• Port Selection

• Procurement Policy

•Warehouse Allocation• Inventory Decisions• Manufacturing Policy

• Customer Allocation• Distribution Policy

• Vehicle Routing

• Fleet Size

• Production Schedule•Scheduling on Machines• Workload Balancing

• Finished Goods Inventory

• Vehicle Routing

Uncertainty in Supply Chain

• Wrong Forecasts

• Late Deliveries

• Poor Quality

• Machine Breakdowns

• Canceled Orders

• Erroneous information


Managing Uncertainty

1. Point forecasts are invariably wrong↓

Plan for forecast range – use flexible contracts to go up/down.

2. Aggregate forecasts are more accurate ↓

Aggregate the forecast – postponement/risk pooling

Managing Uncertainty (cont’d)

3. Longer term forecasts are less accurate ↓

Shorten forecasting horizons – multiple orders; early detection

4. In many cases, somebody else knows what is going to happen

↓Collaborate

Complexities Involved in Supply Chain Management

• The supply chain is a complex network of facilities and organizations with different, conflicting objectives

• Matching supply and demand is a major challenge

• System variations over time are also an important consideration

• Many supply chain problems are new and there is no clear understanding of all the issues involved


Process ViewCustomer

Retailer

Distributor

Manufacturer

Supplier

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Pull

Push

Customer order cycle

• Customer arrival• Customer order entry• Customer order fulfillment• Customer order receiving

Replenishment cycle

• Retail order trigger• Retail order entry• Retail order fulfillment• Retail order receiving

Manufacturing cycle

• Order arrival from the distributor, retailer, or customer

• Production scheduling• Manufacturing and shipping• Receiving at the distributor,

retailer, or customer

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

Decisions in SCM

• Location Decisions

• Production Decisions

• Inventory Decisions

• Transportation Decisions



Modeling for SCM

• Forecasting Models- These models allow prediction of demand based on past data or other parameters that are independently available. They enable better planning, given the lead-time necessary for response.

• Location Models- These models identify the optimal location of facilities such as plants and warehouses, considering the inbound and outbound transportation costs as well as the fixed and variable costs of operation at the locations under consideration. These are usually formulated as Mixed Integer Programming Models.


Modeling for SCM (cont’d)

• Distribution Network Design Models- These models are usually comprehensive in nature, deciding

between two, three and even four stages of distribution network, location of warehouses and break-bulk points, and sometimes even the transportation.

• Allocation Models- These models help in optimally allocating commodities from

sources to destinations in a multi-source, multi-destination environment. The costs considered for optimisation are production costs and warehousing costs. The constraints considered can be due to demand, capacity, route restrictions, etc.



• Inventory Models- Inventory plays a major role in SCM.

- Inventory can be of various types such as:

- Batching and shipment inventories

- Buffer stocks to take care of uncertainties

- Pipeline inventory ( primary and secondary transportation )

These models minimize the total relevant cost, based on trade-offs among, inter alia, inventory carrying cost, ordering cost, stock-out cost, transportation cost, taxes & duties, etc.



• Routing Models- These models allow optimal routing on a transportation network from a given source to a destination. The models used are the Shortest Path Problem, the Traveling Salesman Problem and the Vehicle Routing Problem. Decision Support Systems that interactively use the expertise of the decision maker by providing graphical support through a map (i.e., using a Geographical Information System ) are also very useful in such decisions.


Modeling for SCM (cont’d)• Scheduling Models

- These models enable allocation of resources to particular activities. Depending on the criteria of interest and the number of resources, the models are of aid in evaluating appropriate rules for allocation.

• Alternative Analysis- This model simply proposes the identification of alternatives, criteria for decision making and analysis of the alternatives across the criteria to arrive at the best choice. Formal approaches such as simulation and analytic hierarchy process could be used in assessing the implications of the criteria.

Evolution of SCM

Stage 1: Vendor – Purchase – Production - Distribution – Retailer

Stage 2: Materials Management -

Logistics Management

Stage 3: Supply Chain Management

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Sequential Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Global Optimization

Sequential Optimization vs. Global Optimization