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Supply Chain ManagementSupply Chain Management
Chapter 1
Understanding the Supply Chain
1-1IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe
What is a Supply Chain?What is a Supply Chain?
� Consists of all stages involved, directly or indirectly, in fulfilling a customer request
� SC includes manufacturers, suppliers, transporters, warehouses, retailers, and customers
� Example: Fig. 1.1 Detergent supply chain (Wal-Mart)
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-2
What is a Supply Chain?What is a Supply Chain?
Customer wants
detergent and goes
to Wal-Mart
Wal-Mart
Supermarket
Wal-Mart
or third
party DC
P&G or other
manufacturer
Plastic
Producer
Chemical
manufacturer
(e.g. Oil Company)
Tenneco
Packaging
Paper
Manufacturer
Timber
Industry
Chemical
manufacturer
(e.g. Oil Company)
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-3
Flows in a Supply ChainFlows in a Supply Chain
Customer
Information
Product
Funds
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-4
What is a Supply Chain?What is a Supply Chain?
� Customer is an integral part of the supply chain
� Includes movement of information, funds, and products in both directions
� Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers
� All stages may not present in all supply chains(e.g., no retailer or distributor for Dell)
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-5
Supply Chain StagesSupply Chain Stages
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe
Supplier ManufacturerWholesaler/
DistributerRetailer Customer
Supplier ManufacturerWholesaler/
DistributerRetailer Customer
Supplier ManufacturerWholesaler/
DistributerRetailer Customer
1-6
Dell ComputerDell Computer
� Customer ���� Dell’s web site ���� Dell assembly plant ���� Dell’s suppliers
� Web site provides the customer with information regarding pricing, product variety and product availability.
� Customer can enter the order, pay for the product and check the status of the order
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-7
The Objective of a Supply ChainThe Objective of a Supply Chain
� 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 (supply chain surplus): difference between revenue generated from the customer and the overall cost across the supply chain
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-8
The Objective of a Supply ChainThe Objective of a Supply Chain
� Example: Dell receives $2000 from a customer for a computer (revenue)
� Supply chain incurs costs (information, storage, transportation, components, assembly, etc.)
� Difference between $2000 and the sum of all of these costs is the supply chain profit
� 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
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-9
The Objective of a Supply ChainThe Objective of a Supply Chain
� Sources of supply chain revenue: the customer
� Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain
� Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-10
Decision Phases of a Supply ChainDecision Phases of a Supply Chain
� Supply chain design, planning and operation decisions play a significant role in the success or failure of a firm.
� SC decision phases may be categorized as (depending on the time frame during which the decisions made apply)◦ Supply chain strategy or design
◦ Supply chain planning
◦ Supply chain operation
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-11
Supply Chain Strategy or DesignSupply Chain Strategy or 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 decisions are long-term and expensive to reverse – must take into account market uncertainty
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-12
Supply Chain PlanningSupply Chain Planning
� Definition of a set of policies that govern short-term operations
� Fixed by the supply configuration from previous phase
� Starts with a forecast of demand in the coming year
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-13
Supply Chain PlanningSupply Chain Planning
� Planning decisions:◦ 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
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-14
Supply Chain OperationSupply Chain Operation
� Time horizon is weekly or daily� Decisions regarding individual customer orders� Supply chain configuration is fixed and operating policies are determined
� 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)IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-15
Process View of a Supply ChainProcess View of a 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
� 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)
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-16
Cycle View of Supply Chain ProcessesCycle View of Supply Chain Processes
Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-17
Cycle View of a Supply ChainCycle View of a Supply Chain
� Each cycle occurs at the interface between two successive stages◦ Customer order cycle (customer-retailer)◦ Replenishment cycle (retailer-distributor)◦ Manufacturing cycle (distributor-manufacturer)◦ Procurement cycle (manufacturer-supplier)
� Cycle view clearly defines processes involved and the owners of each process.
� Useful considering operational decisions because it specifies the roles and responsibilities of each member of the supply chain and the desired outcome of each process.
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-18
Customer Order CycleCustomer Order Cycle
� Involves all processes directly involved in receiving and filling the customer’s order
◦ Customer arrival
◦ Customer order entry
◦ Customer order fulfillment
◦ Customer order receiving
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-19
Replenishment CycleReplenishment Cycle
� All processes involved in replenishing retailer inventories (retailer is now the customer)
◦ Retail order trigger
◦ Retail order entry
◦ Retail order fulfillment
◦ Retail order receiving
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-20
Manufacturing CycleManufacturing Cycle
� All processes involved in replenishing distributor (or retailer) inventory
◦ Order arrival from the distributor, retailer, or customer
◦ Production scheduling
◦ Manufacturing and shipping
◦ Receiving at the distributor, retailer, or customer
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-21
Procurement CycleProcurement Cycle
� All processes necessary to ensure that materials are available for manufacturing to occur according to schedule
� Manufacturer orders components from suppliers to replenish component inventories
� However, component orders can be determined precisely from production schedules (different from retailer /distributor orders that are based on uncertain customer demand)
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-22
Push/Pull View of Supply Chain ProcessesPush/Pull View of Supply Chain Processes
� Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand
� 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
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-23
Push/Pull View of Supply ChainsPush/Pull View of Supply Chains
(make(make--toto--stock environment)stock environment)
Procurement,Manufacturing and
Replenishment cycles
Customer Order
Cycle
Customer
Order Arrives
PUSH PROCESSES PULL PROCESSES
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-24
Push/Pull View of Supply Chain Push/Pull View of Supply Chain
ProcessesProcesses
� Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders
� The relative proportion of push and pull processes can have an impact on supply chain performance
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-25
Supply Chain Macro Processes in a Firm Supply Chain Macro Processes in a Firm
� Supply chain processes discussed in the two views can be classified into:
◦ Customer Relationship Management (CRM)
◦ Internal Supply Chain Management (ISCM)
◦ Supplier Relationship Management (SRM)
� Integration among the above three macro processes is critical for effective and successful supply chain management
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-26
Supply Chain Macro ProcessesSupply Chain Macro Processes
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-27
SRM
Supplier Relationship
Management
ISCM
Internal Supply Chain
Management
CRM
Customer Relationship
Management
Supplier Firm Customer
�Source
�Negotiate
�Buy
�Design Collaboration
�Supply Collaboration
�Strategic Planning
�Demand Planning
�Supply Planning
�Fulfillment
�Field Service
�Market
�Sell
�Call Center
�Order Management
Examples of Supply ChainsExamples of Supply Chains
� Gateway: a direct sales manufacturer
� Zara: apparel manufacturing and retail
� W. W. Grainger and McMAster-Carr: MRO suppliers
� Toyota: a global auto manufacturer
� Amazon.com: an e-business
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-28
GatewayGateway� Manufacturer of PCs, founded in 1985
� Started as a direct sales manufacturer with no retail
� In 1996, it was one of the first PC manufacturers to start selling PCs online.
� In 1999, it had 3 plants in US, one in Ireland, one in Malaysia.
� In the late 1990s, it introduced an aggressive strategy of opening Gateway retail stores throughout the US.
� By 2002, it had ~280 retail stores in the US.
� Avoid carrying any finished-goods inventory in retail stores.
� Simply uses these stores for customers to try the PCs and help in deciding on the right configuration to purchase.
� When customers placed their order, PCs were manufactured to order and shipped from one of the assembly plants.IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-29
GatewayGateway� Initially, investors rewarded Gateway for this strategy and
raised the stock price to more than $80 per share in late 1999s.
� By November 2002, Gateway shares had dropped to less than $4 and lose a significant amount of money.
� Plants in Salt Lake City, Ireland and Malaysia were shut.
� By 2004, it had closed all its retail outlets and reduced the number of configurations offered to customers.
� In August 2007, Taiwan’s Acer purchased Gateway for a price of $710 million.
� By 2008, Gateway computers were sold through over ten different retail outlets including Best Buy and Circuit City.
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-30
GatewayGateway
� Why did Gateway have multiple production facilities in the US?
� What advantage or disadvantages does increasing the number of production facilities offer?
� How does Gateway decide which production facility will produce and ship a customer order?
� What factors did Gateway consider when deciding which plants to close?
� Why did Gateway choose not to carry any finished-product inventory at its retail stores?
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-31
GatewayGateway
� Should a firm with an investment in retail stores carry any finished-goods inventory?
� What are the characteristics of products that are most suitable to be carried in finished-goods inventory?
� What characterizes products that are best manufactured to order?
� Is the Dell model of selling directly without retail stores always less expensive than a supply chain with retail stores?
� What are the supply chain implications of Gateway’s decision to offer fewer configurations?
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-32
ZaraZara� Chain of fashion stores owned by Inditex, Spain’s largest apparel manufacturer and retailer.
� In 2007 � sales of about 9.5 million Euros from more than 3600 retail outlets in 68 countries.
� In 2007, company opened about two new stores for each day.
� With a volatile customer demand, Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices.
� Design-to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of four to six weeks.
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-33
ZaraZara� Thus, Zara’s products on display match customer preferences much more closely than the competition.
� As a result, Zara sells most of its products at full price and has about half the markdowns in its stores compared to the competition.
� Zara manufactures its apparel using a combination of flexible and quick sources in Europe and low cost sources in Asia.
� This contrasts with most apparel manufacturers, who have moved most of their manufacturing in Asia.
� ~%40 of the manufacturing capacity is owned by Inditex and the rest is outsourced.
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-34
ZaraZara
� More than 40% of its finished-goods purchases and most of its in-house production occur after the sales season starts.
� For a typical retailer this amount is less than %20.
� The responsiveness and the postponement of decisions until after trends are known allow Zara to reduce inventories and forecast error.
� Zara has also invested heavily in information technology to ensure that the latest sales data are available to derive replenishment and production decisions.
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-35
ZaraZara
� In 2007 � 8 distribution centers located in Spain serve for all over the world
� Averaged delivery time � 24 hours for European stores, up to a maximum of 40 hours for stores in America or Asia
� Shipments from the DCs to stores were made several times a week � allows inventory to closely match customer demand
� In 2007 � globally 627 million garments are distributed
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-36
ZaraZara
� What advantage does Zara gain against the competition by having a very responsive supply chain?
� Why has Inditex chosen to have both in-house manufacturing and outsourced manufacturing?
� Why has Inditex maintained manufacturing capacity in Europe even though manufacturing in Asia is much cheaper?
� Why does Zara source products with uncertain demand from local manufacturers and products with predictable demand from Asian manufacturers?
� What advantage does Zara gain from replenishing its stores multiple times a week compared to a less frequent schedule?
� How does the frequency of replenishment affect the design of its distribution system?
� What information infrastructure does Zara need in order to operate its production, distribution, and retail network effectively?
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-37
AmazonAmazon� Amazon. Com � sells books, music and other items over the internet
� Based in Seattle, fills all orders using books purchased from a distributor in respond to customer orders
� Different than traditional bookstore, which usually purchases directly from publishers and stocks book in anticipation of customer orders.
� In 2008 � 8 warehouses in the U.S. and 15 warehousesin the rest of the world
� Uses U.S. postal service, UPS and FedEx to send books to customers
� Expand the set of products � toys, apparel, electronics, jewelry and shoes.
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-38
AmazonAmazon
� Has been profitable since 2003.
� Several bricks-and-mortar players (such as Borders and Barnes & Noble) have also started selling using the internet channel.
� Borders � used Amazon
� BarnesandNoble.com �initially a separate company (Original strategy)
� Barnes & Noble � the retail and online supply chains shares warehousing and transportation to some extent
� Departure from the company’s original strategy
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-39
AmazonAmazon
� Why is Amazon building more warehouses as it grows?
� How many warehouses should it have and where should they be located?
� What advantages does selling books via the internet provide over a traditional bookstore?
� Are there any disadvantages to selling via the internet?
� Should Amazon stock every book it sells?
� What advantage can bricks-and-mortar players derive from setting up an online channel?
� How should they use the two channels to gain maximum advantage?
� For what products does the e-commerce channel offer the geratest advantage? What characterizes these products?
IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-40