2. 2r
Outline
What is supply chain management?
A supply chain strategy framework
Components of a SCM
Major obstacles and common problems
Seven Eleven Japan
3. 3r
Traditional View: Supply Chains in
the Economy (1990, 1996)
Freight Transportation $352, $455 B
– Transportation manager in charge
– Transportation software
Inventory Expense $221, $311 B
– Inventory manager in charge
– Inventory software
Administrative Expense $27, $31 B
Logistics related activity 11%, 10.5% of GNP
$898 B spent domestically for SC activities in 1998.
$1,160 B of inventory in the US economy in the early 2000s.
Transportation and inventory managers
4. 4r
Traditional View: Cost breakdown of a
manufactured good
Profit 10%
Supply Chain Cost 20%
Marketing Cost 25%
Manufacturing Cost 45%
Profit
Supply Chain
Cost
Marketing
Cost
Manufacturing
Cost
Effort spent for supply chain activities are invisible to the customers.
5. 5r
What can Supply Chain Management do?
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
– Faster turnaround of the goods is better?
Laura Ashley (retailer of women and children clothes) turns its inventory 10
times a year five times faster than 3 years ago
– inventory is emptied 10 times a year, or an item spends about 12/10 months in the
inventory.
– To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE.
National Semiconductor used air transportation and closed 6 warehouses, 34%
increase in sales and 47% decrease in delivery lead time.
6. 6r
A picture is better than 1000 words!
How many words would be better than 3 pictures?
- A supply chain consists of
- aims to Match Supply and Demand,
profitably for products and services
SUPPLY SIDE DEMAND SIDE
The right
Product
Higher
Profits
The right
Time
The right
Customer
The right
Quantity
The right
Store
The right
Price
=++ ++ +
- achieves
SupplierSupplier ManufacturerManufacturer DistributorDistributor RetailerRetailer CustomerCustomer
Upstream
Downstream
7. 7r
Detergent supply chain:
Customer wants
detergent
Customer wants
detergent
Albertson’s
Supermarket
Albertson’s
Supermarket
Third
party DC
Third
party DC
P&G or other
manufacturer
P&G or other
manufacturer
Plastic cup
Producer
Plastic cup
Producer
Chemical
manufacturer
(e.g. Oil Company)
Chemical
manufacturer
(e.g. Oil Company)
Tenneco
Packaging
Tenneco
Packaging
Paper
Manufacturer
Paper
Manufacturer
Timber
Industry
Timber
Industry
Chemical
manufacturer
(e.g. Oil Company)
Chemical
manufacturer
(e.g. Oil Company)
8. 8r
Flows in a Supply Chain
Customer
Material
Information
Funds
The flows resemble a chain reaction.
Supplier
9. 9r
SCM in a Supply Network
Supply Chain Management (SCM) is concerned with the management and control of
the flows of material, information, and finances in supply chains.
Supply
Demand
Products and Services
Cash
Supply Side OEM Demand Side
THAILAND INDIA MEXICO TEXAS US
N-Tier Suppliers Suppliers Logistics Distributors Retailers
Information
The task of SCM is to design, plan, and execute the activities at the different stages
so as to provide the desired levels of service to supply chain customers profitably
10. 10r
Importance of Supply Chain Management
In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related
activities (movement, storage, and control of products across supply chains).
Source: State of Logistics Report
Eliminating inefficiencies in supply chains can save millions of $.
Tier 1Tier 1
SupplierSupplier
ManufacturerManufacturer DistributorDistributor RetailerRetailer CustomerCustomer
Inefficient
logistics
High
stockouts
Ineffective
promotions
Frequent Supply
shortages
High landed costs
to the shelf
High inventories
through the chain
Low order fill
rates
Glitch-Wrong Material,
Machine is Down –
effect snowballs
12. 12r
Cycle View of Supply Chains
Customer Order
Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
Any cycle
0. Customer arrival
1. Customer triggers an order
2. Supplier fulfils the order
3. Customer receives the order
13. 13r
Push vs Pull System
What instigates the movement of the work in the system?
In Push systems, work release is based on downstream demand
forecasts
– Keeps inventory to meet actual demand
– Acts proactively
» e.g. Making generic job application resumes today (e.g.: exempli gratia)
In Pull systems, work release is based on actual demand or the
actual status of the downstream customers
– May cause long delivery lead times
– Acts reactively
» e.g. Making a specific resume for a company after talking to the recruiter
14. 14r
Push/Pull View of Supply Chains
Procurement,
Manufacturing and
Replenishment cycles
Customer Order
Cycle
Customer
Order Arrives
Push-Pull boundary
PUSH PROCESSES PULL PROCESSES
17. 17r
Mission-Strategy-Tactics-Decisions
Mission, Mission statement
– The reason for existence of an organization
Strategy
– A plan for achieving organizational goals
Tactics
– The actions taken to accomplish strategies
Operational decisions
– Day to day decisions to support tactics
18. 18r
Life Strategy for Ted
Ted is an undergrad. He would like to have a career in business, have
a good job, and earn enough income to live comfortably
Mission: Live a good life
Goal: Successful career, good income
Strategy: Obtain a master’s degree
Tactics: Select a college and a concentration
Operations: Register, buy books, take
courses, study, graduate, get a job
19. 19r
Linking SC and Business Strategy
New
Product
Development
Marketing
and
Sales
Operations Distribution Service
Finance, Accounting, Information Technology, Human Resources
Competitive (Business) Strategy
Product Development Strategy
-Portfolio of products
-Timing of product introductions
Marketing Strategy
-Frequent discounts
-Coupons
Supply Chain Strategy
20. 20r
Strategies:
Product Development
It relates to Technologies for future
operations (via patents) and Set
of products/services
Be the technology leader
IBM workstations
Offer many products
Dell computers
Offer products for locals
Tata’s Nano at $2500=100000 rupees
Production at Singur, West Bengal, India;
l x w x h=3.1 x 1.5 x 1.6 meters;
Top speed: 105km/hr;
Engine volume 623 cc;
Mileage 50 miles/gallon;
Annual sales target 200,000.
21. 21r
Strategies
Marketing and sales strategy relates to positioning, pricing and
promotion of products/services
– e.g. Never offer more than 40% discount
– e.g. EDLP = every day low price
» At Wal-Mart
– e.g. Demand smoothing via coupons
» BestBuy
Supply chain management strategy relates to procurement,
transportation, storage and delivery
– e.g. Never use more than 1 supplier for every input
– e.g. Never expedite orders just because they are late
– e.g. Always use domestic suppliers within the sales season not in advance.
22. 22r
Fitting the SC to the customer or vice versa?
Understand the customer Wishes
Understand the Capabilities of your SC
Match the Wishes with the Capabilities
Challenge: How to meet extensive Wishes
with limited Capabilities?
23. 23r
Achieving Strategic Fit: Consistent SCM
and Competitive strategies
Fit SC to the customer
Understanding the Customer
– Range of demand, pizza hut stable
– Production lot size, seasonal products
– Response time, organ transplantation
– Service level, product availability
– Product variety
– Innovation
– Accommodating
poor quality
Implied (Demand)
Uncertainty for SC
Implied trouble
for SC
24. 24r
Contributors to Implied Demand Uncertainty
Low High
Price ResponsivenessCustomer Need
Implied Demand Uncertainty
Commodities
Detergent
Long lead time
steel
Customized products
High Fashion Clothing
Emergency steel,
for maintenance/replacement
Short lead times, product variety,
distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
25. 25r
Understanding the Supply Chain:
Cost-Responsiveness Tradeoff
High Low
Low
High
Responsiveness (in time, high service level and product variety)
Cost in $
Efficiency frontier
InefficientFix responsiveness Impossible
Inefficiency Region
Why decreasing slope (concave) for the efficiency frontier?
26. 26r
Achieving Strategic Fit: Wishes vs. Capabilities
Implied
uncertainty
spectrum
Responsive
(high cost)
supply chain
Efficient
(low cost)
supply chain
Certain
demand
Uncertain
demand
Responsivenes
spectrum Zone of
Strategic Fit
Lunch buffet
<Low margin>
Gourmet dinner
<High margin>
27. 27r
Loosing the strategic fit: Webvan
Webvan started a merger with HomeGrocer in Sept 2000 and
completed in May 2001.
Declared bankruptcy in July 2001. Why?
– “Webvan was so behemoth that could deliver anything to anyone anywhere
that it lost sight of a more mundane task: pleasing grocery customers day
after day”.
– Short to midterm cash mismanagement. Venture capital of $1.2 B run out.
– Merger costs: duplicated work force, integration of technology, realignment
of facilities.
Peapod has the same business model but more focused in terms of
service and locations. It actually survives with its parent company
Royal Ahold’s (Dutch Retailer) cash.
– Delivers now at a fee of $6.95 within a day.
Notes: Traditionally logistics and supply chain management have been measured in terms of transportation and inventory costs and the administration required to manage both. Traditionally firms would have an inventory manager and a transportation manager. This view is very narrow and causes significant problems in the proper functioning of the supply chain.
Notes: Key message here is that logistics costs are a significant fraction of the total value of a product. The problem here is that this a purely cost based view of the supply chain and drives a firm to simply reducing logistics costs. This is an incomplete picture.
Notes:
Supply chain involves everybody, from the customer all the way to the last supplier.
Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows.
A customer is a supplier for some other company. A supplier is a customer for some other company. Not all pieces of a supply chain belongs to the same company.
The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage.
One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done.
This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner.
In this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes.
They key difference is the uncertainty during the two phases.
Give examples at Amazon and Borders to illustrate the two views
Competitive strategy: a set of customer needs that a company emphasizes and concentrates on while producing / servicing. Compare Wal-Mart, 7 eleven, Sam’s club.
