Introduction to Supply Chain & Logistics Management

8/3/2019 Introduction to Supply Chain & Logistics Management

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B Y

D R . S W A T A N T R A K U M A R

Introduction to Supply Chain &

Logistics Management


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What we are talking about

Supply Chain & Logistics Management

It is a major function of Operations Management

Grown in significance because of globalization,

better customer service requirements & shorterproduct life cycles.

Now it happens to be a strategic function

Efficient management of Logistics and supply chainsreduces system wise costs and improves customerservice


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The genesis

Earliest cases War time supply chains

Ramayana Lord Rama build a bridge to make hisarmy reach Lanka to rescue Sita (Mythology).

Modern supply chains can be divided into two parts Pre Internet era (Before 1990s)

Post Internet era (After 1990s)


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The Growth of the Internet, Measured by Number ofInternet Hosts with Domain Names

Copyright 2004 Pearson Education, Inc.

Slide1-4

Figure 1.3, Page 20

Internet has changed the waybusiness was done by creating

transparency across the supplychains.


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The pre internet era

Average time required to process & deliver themerchandise to a customer from a warehouseinventory 15 to 30 days (Sometimes even longer)

Order creation and transfer through Telephone,Fax, or Public mail

If everything as per plans time taken was 15 to 30days, if anything goes wrong (only God knows)


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The pre internet era

Long lead times led to accumulation of inventory (byretailers, wholesalers & Manufacturers).

Product variations led to situation of out of stock for

most of them! Lack of alternatives

It became a common practice to accumulateinventory


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Post Internet Era

The industrial world no longer characterized byscarcity.

Consumer seeking greater degree of customization

They are active participants in the process ratherthan passive recipients.

Transportation capacity & operational performancehave increasingly become more economical and

reliable


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Post Internet Era

Information Technology brought in the massive changein the way logistics and SCM operations were practiced.

The world of business was irrevocably impacted bycomputerization, internet and a range of inexpensive

information transmission capabilities during the decadeof 1990s

Information characterized by speed, accessibility,accuracy, and relevancy became the norm.

Internet has become a common and economical way tocomplete B2B transactions.

Internet also contributing to rapid globalization


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Example: National semiconductor

National semiconductor whose supplier list includesMotorola, Compaq, Ford, IBM, Siemens & Intel isone of the largest chip makers in the world

Its product is used in fax machines, cellular phones,

computers and cars Four wafer fabrication facilities : 3 in US, One in

Britain, & assembly sites in Malaysia and Singapore.

Post manufacturing products are sent to over 100manufacturing facilities all over the world.

Highly competitive industry: short lead timespecification and due date delivery are critical


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Contd..

In 1994, 95% of NS customers received orders within45 days from the time order was placed

Remaining 5% received orders within 90 days.

Tight lead times required the company to involve 12different airline carriers using about 20,000different routes.

The difficulty: No customer knew that he will under

95% (Delivery within time) or 5% delivery beyonddue date.

Such is the complexity of SCM


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Information Age

High business connectivity

Transformation of all business processes Marketing, manufacturing, purchasing and logistics

High degree of customization is possible Zero Defect (Six Sigma) with in reach

Perfect orders delivering the desired assortmentand quantity of products to the right location ontime, damage free, and correctly invoiced.


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The Supply Chain Revolution

Supply Chain Revolution

Logistical renaissance (Revival)

Integrated logistics management

Vertical ownership gave way to core competentbusiness orientation (Increased role of expertise)


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Traditional versus Integrated SCMApproaches

Independent inventorymanagement policies

Minimization of firm costs

Short-term focus

Information sharing limited to

current transaction Corporate philosophies not

relevant

Each to their own success orfailure

Independent actions andinformation systems

Joint reduction of channelinventories

Channel-wide cost savings

Long-term perspective

As required for planning and

monitoring Compatible corporate

philosophies

Sharing of risks and rewards

Channel leadership andcompatible informationsystems


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14 2004 Superfactory. All Rights Reserved.

Make/Buy Considerations

1. Maintain core competencies and protectpersonnel from layoff

2. Lower production cost

3. Unsuitable suppliers4. Assure adequate supply

5. Utilize surplus labor and make a marginalcontribution

1. Frees management to deal with itsprimary business

2. Lower acquisition cost

3. Preserve supplier commitment4. Obtain technical or management ability

5. Inadequate capacity

Reasons for Making Reasons for Buying


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Enhancing the customers experiencethrough excellence in delivering the rightproducts, services, resources andinformation seamlesslyto the right place atthe right time!

Mission of the Supply Chain:

Nowadays, its supply chains that competewith supply chains!Price Waterhouse Coopers


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Supply Chain Management

Consists of firms collaborating to leverage strategicpositioning and to improve operating efficiency.

For each firm involved the supply chain relationshipreflects a strategic choice.

A supply Chain strategy is a channel and businessorganizational arrangement based on acknowledgeddependency and collaboration.

Supply Chain Operations require managerial processesthat span functional areas within individual firms andlinks suppliers, trading partners, and customers acrossorganizational boundaries.


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Generalized supply chain model

Information, product, service, financial, and knowledge flows

Integratedenterprise

Supply Network

Market DistributionNetwork

MAT

ERIALS

CON

SUMERS

Capacity, Information, core competencies, capital and Human Resource Constraints

Procurement CustomerAccommodation

Manufacturing

Logistics

Relationship Management


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Levi & Levi

Supply Chain Management is a set ofapproaches utilized to efficiently integrate

suppliers, manufacturers, Warehouses, andstores, so that merchandise is produced and

distributed at the right quantities, to the rightlocations, and at the right time, in order to

minimize system wise costs while satisfying

service level requirements.


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More definitions

Upstream the processes which occur beforemanufacturing or production into a deliverable productor service, typically processes dedicated to getting raw

materials from suppliers

Downstream the processes which occur aftermanufacturing or production, typically those processesdedicated to getting goods and services to customers and

consumers


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Integrative Management

Traditionally Functional focus

Now Focus on process achievement

Lowest total cost through trade-offs that exists

between functions Focus of Integrative Management Lowest total

process cost


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Three important facets

Resulting from increased attention to integratedmanagement

Collaboration

Enterprise extension, and

Integrated service providers


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Collaboration

Among Suppliers, Manufacturers and customers

Cross organizational sharing of information,technology and risk.

New innovative operational arrangements came intobeing Like Enterprise extension


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Enterprise extension

Information sharing paradigm

Process specialization paradigm


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Integrated service providers

Outsourcing

To specialists (Transportation, Warehousing)

Described as value added services

3PL (asset based) Having their own physicalresources, and

4PL (non asset based) Information service providers


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Responsiveness

Traditional Anticipatory Business Model

Contemporary Responsive Business Model

Postponement strategies


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Anticipatory Business Model

Forecast based

ForecastBuy

components& Materials

Manufacture Warehouse Sell Deliver


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Responsive Business Model

Joint planning and rapid exchange of informationbetween supply chain partners (Dell Computers)

Time based competition

Fewer steps (less cost & lass elapsed time) Dell (2004), sold computers in US, Build to order in

China, Delivered in US, Five day order to deliverycycle.

SellBuy

components& materials

Manufacture Deliver


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Postponement

Working arrangements, which allow postponementof final manufacturing or distribution of a productunit receipt of a customer order, reduce theincidence of wrong manufacturing or incorrectdeployment .

Two Types (1) Manufacturing or formpostponement and (2) Geographical, or logistics

postponement. Economies of scope (different form conversions), e.g.

paint mixing on customer demand.


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Contd..

Geographical postponement when material orgoods are forwarded only when the order arrives.


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Barriers to implementing responsive systems

Sales pressures load the channel De-loading is difficult to achieve in established firms

It is easier to implement responsive systems in neworganizations because of no pressures of inventoryDe-loading.

Collaboration challenge (not easy to implementcollaborative practices)

The answer Combine anticipatory and responsivepractices to supply chain arrangements

Uncertainty by non demand sources


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Example

In September, 1999, a massive earthquakedevastated Taiwan. Initially, 80% of the Islandspower was lost.

Companies such as HP & Dell, who source variety ofcomponents from Taiwanese manufacturers, wereimpacted by supply interruptions

Similarly fabric shipments from India were delayed

in the wake of Jan 26 earthquake in the Indian stateof Gujarat, impacting many US apparelmanufacturers.


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Logistics

Stems from Greek word Logisticos, which means The science of computing and calculating

First used in Military Science

Webster: The procurement, maintenance andtransportation of military materials, facilitiesand personnel Websters Dictionary, 1963


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Contd..

U.S. Air Force technical report (1981) defines as thescience of planning and carrying out the movementand maintenance of forces

In 1991, the Council of Logistics Management(CLM), a prestigious professional organization,modified its 1976 definition ofPhysicalDistribution Managementby first changing the

term to logistics and then changing the definition asfollows -


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Logistics by CLM

Logistics is the process of planning, implementingand controlling of efficient, effective flow and storageof goods, service and related information from thepoint-of-origin to the point of consumption for thepurpose of conforming to customer requirements


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Boversox & Closs (1996)

Logistics Management includes the design andadministration of system to control the flow ofmaterials, work-in-process, and finished inventory tosupport business unit strategy


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The crux

The major features of Logistics Management may bedrawn as

It ensures a smooth flow of all types of goods such as RM, WIPand finished goods

It has the ability to meet customer expectations andrequirements of goods

It ensures the delivery of quality product

It offers the best possible customer service at the least possible

cost


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The crux Contd..

It is an integration of various managerial functionsfor optimization of resources.

It deals with movement and storage of goods in

appropriate quantity It enhances productivity and profitability


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Evolution of Logistics concept

Independent business function era (Till 1950s)

Limited Internally Integrated business function era(1960-70)

Fully internally integrated business function era(1980s)

Externally Integrated Business Function Era (1990s)


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Independent Business Function (till 1950s)

InventoryControl

Sales

Procurement Distribution

Manufacturing

OutcomeAggressive preaching skills

ObjectiveMaximization of profit bySales volume

Limited Integrated Business Function (1960s


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Limited Integrated Business Function (1960s 70s)

ManufacturingManagement

MaterialsManagement

PhysicalDistribution &

Sales Mgt.

OutputPrice based competition

ObjectiveCost Control

Internally Integrated Business function (1980s)


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Internally Integrated Business function (1980s) Logistics Management

Manufacturing

Management

Materials

Management

Marketing &Distribution

Mgt.

OutputIncreased productivity,Profitability and marketshare

Objective

Maximization ofprofitable sales volumeand cost reduction

Externally Integrated business function (1990s


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Externally Integrated business function (1990sonwards) - SCM

Vendors Logistics Customers

ObjectiveCore Competency

OutputCustomer ValueandHarmoniousrelationships


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The stages of Transformation

Transformation

Independent Business Function (till 1950s)

Transformation

Limited Integrated business function (1960s-70s)

Transformation

Internally Integrated Business function (1980s) Logistics Management

Transformation

Externally Integrated Business Function (1990s onwards) Supply Chain Management


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Logistics

Within a firms supply chain management, logisticsis the work required to move and geographicallyposition inventory.

As such logistics is a subset of and occurs within thebroader framework of a supply chain.

Logistics is a process that creates value by timing andpositioning inventory.


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Contd..

Logistics is a combination of firms ordermanagement, inventory, transportation,

warehousing, materials handling, and packaging asintegrated throughout a facility network.

Integrated logistics serves to link and synchronizethe overall supply chain as a continuous process andis essential for effective supply chain connectivity.


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Growing Importance of Logistics and SCM

At the macro level, India spends nearly 13% of itsGDP on logistics, as compared to an average 10% indeveloping economies.

Transportation and inventory costs constitute over50% of the value added in India.

Worldwide, the logistics costs have decreased from12.2% in 1992 to 11.7% as a result of better SCM.


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An Indian Case

MUL: Normally, the inventory cycle time was 20days.

After implementing the detailed logistics systemspecifying uninterrupted flow of parts and materialsat each stage of assembly line for different models, ithas now been reduced to 14 days.

Inventory cost (1995-96) 243 crore

Inventory Cost (1996-97) 204 crore


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The linkage

Supply Chain Management & Logistics Management

Supply Chain strategy establishes the operatingframework within which logistics is performed.


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The confusion around SCM

A lot has been written

Lack of structure

Lack of common vocabulary

What constitutes SCM? Extent of integration?

Best practices?


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The traditional distribution channel practice

Business challenges led to collaborative practices

Harness benefits of specialization

Core competency

Economy of scale

Vertical ownership integration to collaboration


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Value through Integration

Three perspectives of value Economic Value

Market Value

Relevancy

Economic Value Market Value Relevancy Value

Lowest total cost Attractive assortment Customization

Economy of Scaleefficiency

Economy of scopeeffectiveness

Segmental diversity

Product/service creation Product servicepresentation

Product servicepositioning

Procurement/Manufac

turing strategy

Market Distribution

strategy

Supply Chain strategy


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Financial sophistication

Time based strategies (Responsive business systems)are great

But, how fast is fast enough?

How much speed is desirable? The answer lies with financial impact

Three aspects of financial sophistication are cash-to-cash conversion, dwell time maximization,

and cash spin


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Cash to Cash conversion

Time required to convert raw material or inventorypurchases into sales revenue is referred to as cash-to-cash conversion

Related to inventory turn

Higher the inventory turn quicker the cashconversion

Goal of SCM is to reduce and control receiptto

delivery time in an effort to accelerate inventoryturns


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Dwell Time Minimization

Dwell time is the ratio of time that an asset sits idleto the time required to satisfy its designated supplychain mission.

Used in case of inventory

Interdependence of supply chain partners in a supplychain allows for dwell time minimization.

Firms must look forward to eliminate duplicate and

non value added work.


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Cash Spin

A popular term for describing the potential benefitsof reducing assets across a supply chain is CASHSPIN.

Sometimes referred to as FREE CASH SPIN.


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Globalization

Global marketplace offers significant opportunity tostrategically source RM and components.

Significant labor advantages can be gained bylocating manufacturing and distribution facilities indeveloping nations (offshoring).

Favorable tax laws can make the performance ofvalue adding operations in specific countries highly

attractive.


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Internationalization of Logistics

Four significant differences in comparison tonational or even regional operations

1. The distance is fairly longer

2. Documentation more complex 3. Diverse local environments

4. Cultural variations in demand


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Few Success stories

P&G

Proctor & Gamble estimates that it saved retailcustomers & 65 million is a recent 18 month supplychain initiative

According to P&G, the essence of its approach liesin manufacturers and suppliers working closelytogether .jointly creating business plans to

eliminate the source of wasteful practices across theentire supply chain.


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National Semiconductor

In two years National Semiconductor reduceddistribution costs by 2.5%, increased delivery time by47%, and increased sales by 34% by closing six

warehouses around the globe and air-freighting

microchips to customers from a new centralizeddistribution centre in Singapore.


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Wal-Mart

In 1979 Kmart was one of the leading companies inthe retail industry, with 1,891 stores and averagerevenues per store of $7.25 million.

At that time Wal-Mart was a small niche retailer inthe south with only 229 stores and average revenuesabout half those of Kmart stores.

In 10 years had transformed itself; in 1992 it had the

highest sales per square foot and the highestinventory turnover and operating profit of anydiscount retailer.


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Wal-Mart Contd..

Today Wal-Mart is the largest and the highest-profitretailer in the world.

In fact, as of 1999, Wal-Mart accounted for nearly 5%of the US retail spending.

How did Wal-Mart do it? The starting point was relentless focus on satisfying

customer focus.

Wal-Marts goal was to provide the customers withaccess of goods when and where they wanted and todevelop cost structures that enable competitivepricing.


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The cross-docking

The key to achieving the goal was to make the way thecompany replenishes inventory the centerpiece of itsstrategy.

This was done by using a logistics technique known as

cross-docking. In this strategy, goods are continuously delivered to Wal-

Marts warehouses, from where they are dispatched tostores without ever sitting in inventory.

This strategy reduced Wal-Marts cost of salessignificantly and made it possible to offer everyday lowprices to their customers.


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Question

If cross docking is such a wonderful strategy, whynot everybody in the industry is using it?


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Documents

Introduction to Supply Chain & Logistics Management