• 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 customer service requirements.

• Notice:– Who is involved– Cost and Service Level– It is all about integration

Supply Chain Management

What is Supply Chain Management?

Managing supply chain flows

and assets, to maximize supply

chain surplus.

• What is supply chain surplus?

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs Inventory &

warehousing costs

Transportation costs

What is a supply chain?Customer wants

detergent and goes to Jewel

Customer wantsdetergent and goes

to Jewel

JewelSupermarket

JewelSupermarket

Jewel or thirdparty DC

Jewel or thirdparty DC

P&G or othermanufacturerP&G or othermanufacturer

PlasticProducer

PlasticProducer

Chemicalmanufacturer

(e.g. Oil Company)

Chemicalmanufacturer

(e.g. Oil Company)

TennecoPackagingTenneco

Packaging

Paper Manufacturer

Paper Manufacturer

TimberIndustryTimber

Industry

Chemicalmanufacturer

(e.g. Oil Company)

Chemicalmanufacturer

(e.g. Oil Company)

Decision Phases in Supply Chain

• Supply Chain Strategy & Design

• Supply Chain Planning

• Supply Chain Operations

Strategy & Design

Planning

Operations

Supply Chain Strategy & Design

• Location & capacity of production and warehouses

• Products to manufactured and in which locations

• Mode of transportation• Types of information systems to be

used• Strategic sourcing decisions

Supply Chain Planning

• Markets to be supplied & from which location

• Planned build-up of inventory• Subcontracting of manufacturing• Timing and size of market promotion• Handling uncertainty in demand, foreign

exchange fluctuations• Establishing production plan under fixed

strategic parameters

Supply Chain Operations

• Decisions over individual customer orders (daily, weekly)

• Less uncertainty about demand information

• Exploit reduction of uncertainty to optimize performance

• Establish deliver dates• Establish order fill rate

Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

Strategic Scope

• Intracompany Intraoperation Scope– Minimize local cost view

• Intracompany Intrafunctional Scope– Minimize functional cost view

• Intracompany Interfunctional Scope– Minimize company profit view

• Intercompany Interfunctional Scope– Maximize supply chain surplus view

Supply Chain Challenges

• Achieving Global Optimization– Conflicting Objectives– Complex network of facilities– System Variations over time

Supply Chain Challenges

• Achieving Global Optimization– Conflicting Objectives– Complex network of facilities– System Variations over time

• Managing Uncertainty – Matching Supply and Demand– Demand is not the only source of

uncertainty

Key Issues in Supply Chain Management

• Distribution Network Configuration• Inventory Control• Supply contract• Distribution Strategies• Supply Chain Integration & Strategic

Partnering• Outsourcing & Procurement

Strategies

Key Issues of SCM (cont)

• Product Design• Information Technology & Decision

Support System• Customer Value

Relationships between key SCM Issues and the business environment

Global Optimization

Managing Uncertainty

Dist. Conf. X

Inv. Control X

Sup. Contract X

Dist. Strategies

X X

St. partnership

X X

Outsourcing X

Pr. Design X

IT & DSS X X

Cust. Value X X

Prerequisites for Supply Chain Management

• Top management understanding & commitment

• Quest for excellence• Effective and efficient communication• Relationship instead of exchange• Cross-functional teams• Reality of team, partnerships &

alliances (based on harmony & trust)

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

Supply Chain: The Magnitude (continued)

• It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies.– A typical box of cereal spends 104 days

getting from factory to supermarket.

– A typical new car spends 15 days traveling from the factory to the dealership.

Supply Chain: The Magnitude (continued)

• 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.

• Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce writedowns of $2.6 billion in October 1997.The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)

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)

Supply Chain: The Potential

• Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using

- Direct business model

- Build-to-order strategy.

Supply Chain: The Potential

• In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer.

Supply Chain: The ComplexityNational 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.

Supply Chain Management: The Magnitude in the Traditional View• Estimated that the 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– Laura Ashley turns its inventory 10 times a

year, five times faster than 3 years ago

Supply Chain Management: The True Magnitude

• Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed

• When the 1 gig processor was introduced by AMD, the price of the 800 meg processor dropped by 30%

• P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand

Drivers of Supply Chain Performance

Efficiency Responsiveness

Inventory Transportation Facilities Information

Supply chain structure

Drivers

Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation /Dedicated

Proximity /Flexibility

Information What information is best suited foreach objective

Achieving Strategic Fit

• Understanding the Customer– Lot size– Response time– Service level– Product variety– Price– Innovation

ImpliedDemand

Uncertainty

The Value Chain: Linking Supply Chain and Business Strategy

NewProduct

Development

Marketingand

Sales Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Business Strategy

New ProductStrategy

MarketingStrategy Supply Chain Strategy

Flows in a Supply Chain

Customer

Information

Product

Funds

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

Source: Duncan McFarlane

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

The Dynamics of the Supply Chain

Ord

er

Siz

e

Time

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

CustomerDemand

CustomerDemand

Production PlanProduction Plan