01 introduction to supply chain management

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introducing SCM Managing Chain Prof. Manoj K Srivastava Operations Management Area Management Development Institute-Gurgaon Supply Chain Management Chapter-01 mks [email protected] http:// www.mks507.vistapanel .net

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Page 1: 01 Introduction to Supply Chain Management

introducing

SCM

Managing Chain

Prof. Manoj K SrivastavaOperations Management Area

Management Development Institute-Gurgaon

Supply Chain Management

Chapter-01

[email protected]://www.mks507.vistapanel.net

Page 2: 01 Introduction to Supply Chain Management

Teaser

Part

00

Page 3: 01 Introduction to Supply Chain Management

1. Apple2. Procter & Gamble3. Cisco Systems 4. Wal-Mart Stores 5. Dell 6. PepsiCo 7. Samsung Electronics 8. IBM 9. Research In Motion 10. Amazon.com 11. McDonald’s12. Microsoft 13. The Coca-Cola Company 14. Johnson & Johnson15. Hewlett-Packard 16. Nike 17. Colgate-Palmolive 18. Intel 19. Nokia 20. Tesco

Source: AMR research, 2009 http://www.amrresearch.com

Top 20 Supply Chains

2009

Page 4: 01 Introduction to Supply Chain Management

If Supply Chain Management is the answer…..

What is the question?

Page 5: 01 Introduction to Supply Chain Management

Why Implementing Supply Chain?

Spee

d?

Variety?

Quantity?

Page 6: 01 Introduction to Supply Chain Management

The rightProduct

HigherProfits

The rightTime

The rightCustomer

The rightQuantity

The rightStore

The rightPrice

=++ ++ +

De

sig

nQ

ua

lity

Fit

Lo

ca

tio

n

Fo

reca

sti

ng

Re

ach

De

live

ry

Co

st

Op

tim

iza

tio

n

Flexibility

Delivery Reliability Delivery

Time Lead time Invent

ory Level

ProductVolume

Mix Place

Time

Page 7: 01 Introduction to Supply Chain Management

Products: Create new products and services

Platforms: Create modular platforms and strategic control points

Solutions: End-to-end solution for customers

Customers: Find new customer segments or unmet customer needs

Customer Experience: Change how customers interact with you

Revenue Model: Change how you get paid

Processes: Innovate on operating processes

Value Chain: Change position or scope of value chain participation

Logistics/Supply Chain: Change the way you source & ship products

Channels: Change how you go to market with your products

Networking: Change how you connect with customers or products

R&D: Create new technologies, materials, products or processes

Direction for Business Innovation

Page 8: 01 Introduction to Supply Chain Management

Understand it

Part

01

Page 9: 01 Introduction to Supply Chain Management

• To achieve economies of scale and scope – Costs are significant

• To improve business focus and expertise

• Customer Expectations are increasing

• Supply and Distribution Lines are lengthening with complexity

• Adds Significant Customer value

• Customers Increasingly Want Quick & Customised Response

Today’s Challenges…

Page 10: 01 Introduction to Supply Chain Management

A supply chain consists of the flow of products and services from:– Raw materials manufacturers– Intermediate products manufacturers– End product manufacturers– Wholesalers and distributors and– Retailers

Connected by transportation and storage activities, and

Integrated through information, planning, and integration activities

entities…activities…problem spots…linkages…?

Page 11: 01 Introduction to Supply Chain Management

SCM is a set of approaches –

To integrate Suppliers, Manufacturing Centers , Warehouses,

Dist. Centers, Retail Outlets

Merchandise is produced & distributed

Right quantities, to right locations, at right time

Aim: To minimize system-wide cost, while satisfying

service level requirements

wishes are unlimited…resources are not..?

Page 12: 01 Introduction to Supply Chain Management

Some more definitions of SCM

Oliver and Webber (1982)

SCM covers the flow of goods from supplier through manufacturing and distribution channels to end user.

Jones and Riley (1987)

SCM techniques deal with the planning and control of total materials flow from suppliers to through end users.

Christopher (1992)

SCM is the management of a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.

Ayers (2000)

SCM is the design, maintenance and operation of supply chain processes for satisfaction of end users.

Sunil Chopra and Peter Meindl (2001)

SCM involves the management of flows between and among stages in a supply chain to maximize total profitability.

Page 13: 01 Introduction to Supply Chain Management
Page 14: 01 Introduction to Supply Chain Management

Fuel Supplier Industrial

Customer

Raw material Supplier

Component Supplier

Vehicle Manufacturer

SparesDistributor

Service Centre[Retailer]

Customer

Vehicle Repair

Raw material Supplier

Pest control products Manufacturer

Pest control productsDistributor

Maintenance Company [Retailer]

Customer

Pest Control

Water [Nature]

Generating Station[Producer]

Distribution Company[Retailer]

HomeCustomer

Electricity

CommercialCustomer

Page 15: 01 Introduction to Supply Chain Management

Supply Chain: Manufacturing Example

Cereal Manufacturer

FlourProcessor

Cereal Manufacturer

ChemicalProcessor

Farmer

Oil Company

ForestLumberProvider

CorrugatedManufacturer

GroceryDistributor

RetailGrocer

Consumer

1st Tier Supplier

2nd Tier Supplier

2nd Tier Customer

1st Tier Customer

3rd Tier Supplier

3rd Tier Customer

Products and Services

Cash

Information

DemandSupply

UpstreamInternal

Downstream

Focal Company

customer / consumer / client manage relationship with whom….in which order? CRM???

Page 16: 01 Introduction to Supply Chain Management

CUSTOMER

CONSUMER

CLIENT

CRM???understand context and hence the relative preference accordingly….

Page 17: 01 Introduction to Supply Chain Management

THE FOCAL COMPANY'S ALTERNATIVES FOR INVOLVEMENT

WITH LINK 2Alternative 1) Integrate with and actively manage Link 2.

Alternative 2) Monitor the procedures of Company A and Company B for integrating and managing Link 2.

Alternative 3)Not involved, leave the integration and management up to Company A and Company B.

Focal Company

Company

A

Company

B

Company

B

Company

B

Link 2

Link 2

Link 1 Link 2

When to monitor… when to let them own.. When to dictate…?

Page 18: 01 Introduction to Supply Chain Management

Imm. Suppliers Imm. CustomerThe Firm

1st Tier Suppliers

The Firm

2nd Tier Suppliers

2nd Tier Customer

1st Tier Customer

1st Tier Suppliers

The Firm

2nd Tier Suppliers

2nd Tier Customer

1st Tier Customer

nth Tier Suppliers

nth Tier Customer

…......…......

Supply Chain

Extended Supply Chain

Ultimate Supply Chain

can we manage ultimate supply chain?

Page 19: 01 Introduction to Supply Chain Management

Supply Chains Components The supply chain involves THREE segments:

UPSTREAM, where sourcing or procurement from external suppliers occur INTERNAL, where packaging, assembly, or manufacturing take place DOWNSTREAM, where distribution or dispersal take place, frequently by

external distributors.

movement of information and money and the procedures supporting the movement of a product or a service.

Organizations and individuals are also part of the chain

in which industry, which segment to be focused more?

Page 20: 01 Introduction to Supply Chain Management

Supply Chain Flows

Supply Chain Flows Materials flows are all physical products, new materials, and supplies that

flow along the chain.

Information flows relates to all data associated with demand, shipments, orders, returns and schedules.

Financial flows include all transfers of money, payments, credit card information, payment schedules, e-payments and credit-related data.

Supply chain refers to the flow of materials, information, payments, and services from raw material suppliers, through factories and warehouses (Value Chain), to the final consumer (Demand Chain).

It includes tasks such as purchasing, payment flow, materials handling, production planning & control, logistics & warehousing, inventory control, and distribution. When it is managed electronically it is referred to as an e-supply chain.

flow speed?... quantum?... precedence?

Page 21: 01 Introduction to Supply Chain Management

Supply Chain

UPSTREAM DOWNSTREAMINTERAL

Demand Chain

Value Chain

why it should not be termed as demand chain management?

Page 22: 01 Introduction to Supply Chain Management

The FirmKey Suppliers

The Firm Key Customer

Key Suppliers Key Customer

Key Suppliers Key Customer

The Firm

Suppliers CustomerThe Firm

The Firm

Purchasing Production MarketingR & D Logistics

Most companies are working to create seamless processes within their own four walls. (47%)

Some companies house SCM inmarketing & focus on integrationwith key customers. (11%)

Many companies house SCM in purchasing & focus on integration with first-tier suppliers (34%)

Few companies systematicallyintegrate up & downstream (8%)

Collaboration from suppliers' supplier to customers' customer is a vision not yet fully realized!!!

Common

Rare

Supply Chain

Integration

rare makes a difference….but needs a delicate balance among sensitive relations?

Page 23: 01 Introduction to Supply Chain Management

From the operations perspective – 90% satisfaction

Customer requirements

Product/ service available?

Product/ service appropriate?

Meets price and delivery

requirements?Customer orders?

Produced as promised?

Received as promised?

100

80

20

Y

N

70

10

Y

N

20

50

Y

N

10

40Y

N

10

10

Y

N9

1Y

N

8

1

Y

N

Customer satisfactionFrom the customer’s perspective – 8% satisfaction

Taking a customer perspective of supply performance can lead to very different conclusions

8

8

1Y

N

9

1

Y

N

making false impression…promotion tactics?

Page 24: 01 Introduction to Supply Chain Management

INPUT

OUTPUT

PERFORMANCE

OUTCOME

IMPACT

EFFICIENCY

EFFICACY

EFFECTIVENESS

Utilization =Input Used

Input Available

Productivity =Actual Outputs

Inputs Used

Performance =Actual Outputs

Planned Outputs

Customer Satisfaction =Actual Inputs

Expected Inputs

Supplier Performance =Actual Inputs

Expected Inputs

Value Added Process

Ou

tsid

e t

he

firm

Wit

hin

th

e f

irm

Source: Mentzer, J. T., Supply Chain Management, Response Books, New Delhi, 2001

Productivity

impact assessment analysis…

Page 25: 01 Introduction to Supply Chain Management

Automotive Supply Chain

managing so many flows…yet at the time they are needed..

Page 26: 01 Introduction to Supply Chain Management

Porter’s Value Chain Model

buyer’s mkt vs seller’s mkt…shrinking profit margins?

Page 27: 01 Introduction to Supply Chain Management

The Activity SystemPrimary and Support Activities

Page 28: 01 Introduction to Supply Chain Management

is it not blurring boundaries of concepts in present?

Page 29: 01 Introduction to Supply Chain Management

Historical Evolution of the Supply Chain

First Revolution: (Ford Motor Co. 1910–1920) Single product, that is, no product variety Vertical integration

Second Revolution: (Toyota Motor Co. 1960–1970) Wide Variety Long-term relationship with suppliers

Third Revolution: (Dell Computers 1995–Current) Customized products Medium-term relationship with suppliers Suppliers have to maintain technology and cost leadership

always existed a leader thereto make footprint on sand of supply chain landscape …?

Page 30: 01 Introduction to Supply Chain Management

1. Location

2. Transportation and Logistics

3. Inventory and Forecasting

4. Marketing and Channel Restructuring

5. Sourcing and Supplier Management

6. Information and Electronic Mediated Environments

7. Product Design and New Product Introduction

8. Service and After Sales Support

9. Reverse Logistics and Green Issues

10. Outsourcing and Strategic Alliances

11. Metrics and Incentives

12. Global Issues.

Source: Pyke, D.F., A Framework for Teaching Supply Chain Management, 2000

Major Issues in SCMMajor Issues in SCM

learn what constitutes in total known as supply chain management ?

Page 31: 01 Introduction to Supply Chain Management

Views of 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) in anticipation of a customer order (push)

basis of views…why…how…

Page 32: 01 Introduction to Supply Chain Management

Cycle View of Supply Chains

Manufacturer

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Supplier

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. Specifies the roles and responsibilities of each member and the desired outcome of each process.

pred

icta

bilit

y of

ord

ers

size

of o

rder

can they be synchronized them….quanitywise…timewise….anticipationwise…?

Page 33: 01 Introduction to Supply Chain Management

In Push systems, work release is based on downstream demand forecasts– Keeps inventory to meet actual demand – Acts proactively Making generic job application resumes today

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 Making a specific resume for a company after talking to the recruiter

produces only in response to customer demand signals

Produces using a forecast of sales and moves them to points of sale where they are stored as finished goods inventory.

will you push the rope or pull it…?depends…

Page 34: 01 Introduction to Supply Chain Management

Push/Pull View of Supply Chains

Procurement, Manufacturing, Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Order ArrivesCustomer

Pu

sh

/Pu

ll

Bo

un

da

ry

Customer Order cycles

Page 35: 01 Introduction to Supply Chain Management

Supply Chain Push-Pull Systems and Boundaries

Where to pin decoupling point… ?

Page 36: 01 Introduction to Supply Chain Management

Supply Chain Macro Processes in a Firm

Supply chain processes discussed in the two views can be classified into

Supplier Relationship Management (SRM) Internal Supply Chain Management (ISCM) Customer Relationship Management (CRM)

Integration among the above three macro processes is critical for effective and successful supply chain management

Page 37: 01 Introduction to Supply Chain Management

Role of Logistics in Supply Chain

Part

02

Page 38: 01 Introduction to Supply Chain Management

Logistics Defined

Logistics Management is that part of Supply Chain Management

that plans, implements, and controls the efficient, effective

forward and reverse flow and storage of goods, services and

related information between the point of origin and the point of

consumption in order to meet customers' requirements.Four Subdivisions of Logistics Business logistics Military logistics Event logistics Service logistics

Page 39: 01 Introduction to Supply Chain Management

Value-Added Roles of LogisticsThe five principal types of economic utility which add value to a product or service :

FormTimePlaceQuantityPossession

While form and possession utility are not specifically related to logistics, neither would be possible without getting the right items needed for consumption or production to the right place at the right time and in the right condition at the right cost. These "five rights of logistics," credited to E. Grosvenor Plowman, are the essence of the two utilities provided by logistics: time and place utility.

what?

How much?

why?

where?when?

Page 40: 01 Introduction to Supply Chain Management

Logistics in the Firm: Factors Affecting the Cost and Importance of Logistics

Competitive Relationships Inventory / order cycle length. Inventory / lost sales effect Transportation / lost sales effect

Product Relationships Product dollar value / logistics costs. Weight density / logistics costs. Susceptibility to loss & damage / logistics costs.

Spatial Relationships

Page 41: 01 Introduction to Supply Chain Management

Inventory/order cycle length

Inventory / lost sales effect

Inventory level

1 2

Page 42: 01 Introduction to Supply Chain Management

Transportation/lost sales effect

3

Page 43: 01 Introduction to Supply Chain Management

Product dollar value / logistics costs

Weight density / logistics costs

54

Page 44: 01 Introduction to Supply Chain Management

Susceptibility to loss & damage/logistics costs

6

Page 45: 01 Introduction to Supply Chain Management

Spatial Relationships:

Spatial Relationships are extremely significant to logistics is spatial relationships, the location of fixed points in the logistics system with respect to demand and supply points. Spatial relationships are very important to transportation costs, since these costs tend to increase with distance.

Page 46: 01 Introduction to Supply Chain Management

Type of Supply Chain

Part

03

Page 47: 01 Introduction to Supply Chain Management

Typology of Supply Chain• On the basis of decoupling point (ETO, MTO, ATO, MTS) supply chain• Push vs. Pull supply chain• Lean vs. Agile supply chain• Efficient vs. Responsive supply chain

Page 48: 01 Introduction to Supply Chain Management

P:D ratios and differences

P-time (Production time)The time it takes to pass a product or service through supply chainincluding the time needed to procure the longest lead time parts and the total manufacturing time

D-time (Demand time)The time for which a customer is willing to wait to have their demand fulfilledShort D-times face increased supply chain challenges compared with those who have long D-times.

P-time = customer raises order deliver product to customer

D-time [expected minimum, expected maximum]

Page 49: 01 Introduction to Supply Chain Management

P:D ratios and differences

Page 50: 01 Introduction to Supply Chain Management

Practices to cope when P-time ≥ D-time

• Control

• Simplify

• Compress

• Integrate

• Coordinate

• Automate

Optimizing throughput and improving process capability

Untangling process flows and reducing product complexity

straightening process flows and reducing batch sizes

Improving communications and implementing teams

Adding customer-specific parts as late as possible

Using robots and IT systems

Page 51: 01 Introduction to Supply Chain Management

On the basis of OPP / Decoupling point

Source Make Assemble Deliver

Supplier Raw Material WIP Finished Goods

ETO MTO ATO MTS

Long Short

Customer Decoupling Point

Customer Lead Time

Customer Decoupling Point

Customer Decoupling Point

Schedule Orders Schedule Modules Schedule Finished Goods

Page 52: 01 Introduction to Supply Chain Management

Long Short

Fab

MTSStocked Locally

Procurement Lead Time

DesignLead Time Production

Lead TimeDelivery

Lead TimeOrder

Lead Time

Assembly

MTSStocked Centrally

ATO

MTOStocked Materials

MTOPurchased Materials

ETO

Total Fulfillment Lead Time

Customer receives product

Page 53: 01 Introduction to Supply Chain Management
Page 54: 01 Introduction to Supply Chain Management

Push-Pull Strategy

Page 55: 01 Introduction to Supply Chain Management

Push / Pull Boundary

Page 56: 01 Introduction to Supply Chain Management

Furniture SC

Page 57: 01 Introduction to Supply Chain Management

Grocery SC

Page 58: 01 Introduction to Supply Chain Management

Traditional PC Industry

Page 59: 01 Introduction to Supply Chain Management

Dell - the Pull-Push boundary

Page 60: 01 Introduction to Supply Chain Management

Vir

tual

Inte

gra

tio

n

Customer

Dell

Suppliers

Dell Supply Chain

PUSH

PULL

Typical PC Supply Chain(Compaq, HP, IBM, etc.)

Customer

DistributionChannels

Manufacturer

Suppliers

PUSH

PULL

PC SUPPLY CHAINS

Page 61: 01 Introduction to Supply Chain Management
Page 62: 01 Introduction to Supply Chain Management

ATOMTS

Assembly made on accurate customer

demands

Parts replenishment made on forecast

Efficient supply chain Responsive supply chain

Page 63: 01 Introduction to Supply Chain Management

Lean vs Agile Strategy

Page 64: 01 Introduction to Supply Chain Management

Supply chain dynamics

Supply chains with different end objectives need to be managed in different ways

Match product characteristics with supply chain characteristics

Page 65: 01 Introduction to Supply Chain Management

Designing the Supply Chain

• Efficient supply chains are designed for efficiency and low cost by minimizing inventory and maximizing efficiencies in process flow. (Lean)

• Responsive supply chains focus on flexibility and responsive service and are able to react quickly to changing market demand and requirements. (Agile)

Page 66: 01 Introduction to Supply Chain Management

Matching the supply chain with market requirements

Lean

supply chain management

Mismatch

Mismatch

Agile

supply chain management

Nature of demandFunctional products Innovative products

PredictableFew changesLow varietyPrice stableLong lead-timesLow margin

UnpredictableMany changesHigh varietyPrice markdownsShort lead-timesHigh margin

Su

pp

ly c

hai

n o

bje

cti

ves

Res

pons

ive

Effi

cien

t

Low

cos

tH

igh

utili

zatio

nM

inim

um in

vent

ory

Low

-cos

t sup

plie

rs

Low

thro

ughp

ut ti

mes

Hig

h ut

iliza

tion

Dep

loye

d in

vent

ory

Fle

xibl

e su

pplie

rs

Page 67: 01 Introduction to Supply Chain Management
Page 68: 01 Introduction to Supply Chain Management

Low implieddemand uncertainty

Somewhat certain demand

Somewhat uncertain demand

High implieddemand uncertainty

Purely functional: e.g. petrol

Established goods: e.g. soap powder

New models of existing goods: e.g. new TV set

Entirely new product: e.g. fashion item

Highlyefficient

Somewhat efficient

Somewhat responsive

Highlyresponsive

Textile millTraditional apparel

manufacturerVertically integrated apparel

manufacturerQuick response manufacturer of

fashion apparel

Page 69: 01 Introduction to Supply Chain Management

Campbell's Soup Fashion Apparel

Life cycle

Contribution margin

Variety

Forecast error

Stock-out rate

Forced markdowns

Make-to-order LT

Product Characteristics

Page 70: 01 Introduction to Supply Chain Management

Product Life-Cycle: Soup

1969

1999

1989

1979

2009

Page 71: 01 Introduction to Supply Chain Management

Product Life-Cycle: Fashion

Fall Winter

Spring

Page 72: 01 Introduction to Supply Chain Management

Margins?

Retail Price: $139.50Retail Price: $1.39

<

Page 73: 01 Introduction to Supply Chain Management

Variety? New Design?

<Differed in color, size, style, etc.,

95% newUnchanged over years, only 5%

Page 74: 01 Introduction to Supply Chain Management

Forecasting Error?

<High forecast error, 40-100%

errorHighly predictable, service

level of 98%

Page 76: 01 Introduction to Supply Chain Management

Markdowns?

<Deep discount in the end of the seasonRare

Page 77: 01 Introduction to Supply Chain Management

Functional Products(Soup)

Innovative Products(Fashion clothing)

Demand Uncertainty Low (forecast error) High (forecast error)

Life Cycle Long Short

Risk of Obsolescence Low High

Profit Margin Low High

Variety Low High

Demand volume High Low

Two Types of Products

Page 78: 01 Introduction to Supply Chain Management

Efficient vs Responsive

Page 79: 01 Introduction to Supply Chain Management

ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS

Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable, low forecast errors Unpredictable, high forecast errors

Competitive priorities

Low cost

consistent quality

on-time delivery

Development speed, fast delivery times

Customization, volume flexibility

variety, top quality

New-service/product introduction Infrequent Frequent

Contribution margins Low High

Product variety Low High

Page 80: 01 Introduction to Supply Chain Management

Factor Efficient Supply Chains Responsive Supply Chains

Operation strategyMake-to-stock or standardized services or products; emphasize high volumes

Make-to-order, or customized service or products; emphasize variety

Capacity cushion Low High

Inventory investment Low; enable high inventory turns If needed to enable fast delivery time

Lead time Shorten, but do not increase costs Shorten aggressively

Supplier selection Emphasize low prices, consistent quality, on-time delivery

Emphasize fast delivery time, customization, variety, volume flexibility, top quality

Page 81: 01 Introduction to Supply Chain Management

Lean vs Agile

Page 82: 01 Introduction to Supply Chain Management

Distinguishing attributes Lean supply Agile supply

Typical products Commodities Fashion goods

Marketplace demand Predictable Volatile

Product variety Low High

Product life cycle Long Short

Customer drivers Cost Availability

Profit margin Low High

Dominant costs Physical costs Marketability costs

Stockout penalties Long-term contractual Immediate and volatile

Purchasing policy Buy materials Assign capacity

Information enrichment Highly desirable Obligatory

Forecasting mechanism Algorithmic Consultative

Page 83: 01 Introduction to Supply Chain Management

Characteristic Lean Agile 

Logistics focus Eliminate waste Customers and markets 

Partnerships Long-term, stable Fluid clusters 

Key measures Output measures like productivity and cost

Measure capabilities, and focus on customer satisfaction

 

Process focus Work standardization, conformance to standards

Focus on operator self-management to maximize autonomy

 

Logistics planning Stable, fixed periods Instantaneous response 

Volumes Predictable volumes and usage patterns

Unpredictable volumes and usage patterns 

Key drivers Economies of scale - high volumes, low cost Consolidation of global volumes

Ability to deliver - short and reliable lead timesAbility to respond at short notice

 

Customisation Low - generic items High - customized items 

Supplier positioning Anywhere - search for low costs Close to the integration centre - search for responsiveness

 

Page 84: 01 Introduction to Supply Chain Management

Supply Chain Strategy

Part

04

Page 85: 01 Introduction to Supply Chain Management

CUSTOMER ACCEPTANCE

CRITERIA

What to focus? Need or Requirement?

Page 86: 01 Introduction to Supply Chain Management

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?

Page 87: 01 Introduction to Supply Chain Management

Fit SC to the customerUnderstanding 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 trouble for SC

Achieving Strategic Fit:Consistent SCM and Competitive strategies

Implied (Demand) Uncertainty for

SC

Page 88: 01 Introduction to Supply Chain Management

Issues Affecting Strategic Fit Multiple products and customer

segments

Product life cycle

Competitive changes over time

Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary

Late: predictable demand, lower margins, price is important

Shift from responsiveness to efficiency

increased emphasis on varietyInternet

Page 89: 01 Introduction to Supply Chain Management

The Strategic Fit

Page 90: 01 Introduction to Supply Chain Management

Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier

Low

High

Re

sp

on

siv

en

ess

Cost (Efficiency) LowHigh

DELL

WAL-MART

Efficiency Frontier

Page 91: 01 Introduction to Supply Chain Management

Achieving Strategic Fit Uncertainty/Responsiveness

Map

Implied uncertainty spectrum

Responsive supply chain

Efficient supply chain

Certain demand Uncertain demand

Responsiveness spectrum

Zone of

Strategic Fit

Low Cost

High CostCompanies try to move Zone of Strategic fit

INTRODUCTION

MATURING COMMODITY

Page 92: 01 Introduction to Supply Chain Management

The Strategic Fit Framework

Page 93: 01 Introduction to Supply Chain Management

for achieving strategic fit in Supply Chain Strategy

A Framework for Structuring Drivers

Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Facilities Inventory Transportation Information Sourcing Pricing

Cross functional “drivers”

Supply Chain Structure

Page 94: 01 Introduction to Supply Chain Management

• Information exchange is necessary for the most extensive modes of coordination sought in contemporary supply chains. It allows the supply chain to improve simultaneously its efficiency and responsiveness.

• Information-related decisions– Push vs. pull– Extent and modes of information sharing and coordination– Forecasting and Aggregate Planning schemes– Pricing and revenue management policies– Enabling Technologies:

• Electronic Data Interchange (EDI): Enables paperless transactions, primarily for “backend” operations of the SC.

• The Internet and the WWW.• Enterprise Resource Planning (ERP): enables transactional tracking and global visibility of

information in the SC.• Supply Chain Management (SCM) software: decision support tools.

The role of Information

Page 95: 01 Introduction to Supply Chain Management

Drivers of Supply Chain Performance• Facilities

– places where inventory is stored, assembled, or fabricated– production sites and storage sites

• Inventory– raw materials, WIP, finished goods within a supply chain– inventory policies

• Transportation– moving inventory from point to point in a supply chain– combinations of transportation modes and routes

• Information– data and analysis regarding inventory, transportation, facilities throughout the supply chain– potentially the biggest driver of supply chain performance

• Sourcing– functions a firm performs and functions that are outsourced

• Pricing– Price associated with goods and services provided by a firm to the supply chain

Page 96: 01 Introduction to Supply Chain Management

Facilities• Role in the supply chain

– the “where” of the supply chain– manufacturing or storage (warehouses)

• Role in the competitive strategy– economies of scale (efficiency priority)– larger number of smaller facilities

(responsiveness priority)

Components of facilities decisions

• Location

– centralization (efficiency) vs. decentralization (responsiveness)

– other factors to consider (e.g., proximity to customers)

• Capacity (flexibility versus efficiency)

• Manufacturing methodology (product focused versus process focused)

• Warehousing methodology (SKU storage, job lot storage, cross-docking)

Page 97: 01 Introduction to Supply Chain Management

InventoryUnexpected changes in customer demand (always hard to predict, and uncertainty is growing)

Short product life cyclesProduct proliferation

Uncertain supplyQuantityQualityCostsDelivery time

Inventory exists because of a mismatch between supply and demand

Source of cost and influence on responsiveness

If you move your inventory faster, you don’t need as much inventory (inventory velocity)

If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers

If cost is more important, inventory can be reduced to make the firm more efficient

Trade-off: More inventory increases responsiveness, less inventory increases efficiency (reduces cost).

Types of InventoryCycle inventory

• Average amount of inventory used to satisfy demand between shipments

• Depends on lot size

Safety inventory• inventory held in case demand exceeds expectations• costs of carrying too much inventory versus cost of losing

sales

Seasonal inventory• inventory built up to counter predictable variability in demand• cost of carrying additional inventory versus cost of flexible

production

Opportunistic Inventory: • Takes advantage of “bargains”.

Page 98: 01 Introduction to Supply Chain Management

ShortageExcess

Page 99: 01 Introduction to Supply Chain Management

• Moves the product between stages in the supply chain

• Impact on responsiveness and efficiency

• Faster transportation allows greater responsiveness but lower efficiency

• Also affects inventory and facilities

• If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it

• Can also use slower transportation modes for customers whose priority is price (cost)

Transportation

Mode(s) of TransportationAir: fastest but most expensiveTruck: Relatively quick, inexpensive and very flexible modeRail: Inexpensive mode to be used for large quantitiesShip: Slowest but often the most economical Pipeline: Used (primarily) for oil and gasElectronic transportation: for goods as music and movies

Route and Network Selectionroute: path along which a product is shippednetwork: collection of locations and routes

Insource or Outsource to some 3PL provider

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Transportation Networks

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• The connection between the various stages in the supply chain – allows coordination between stages

• Crucial to daily operation of each stage in a supply chain: e.g., production scheduling, inventory levels

• Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off)

Information Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain)

Coordination and information sharing

Forecasting and aggregate planning

Extent and modes of information sharing and coordination

Pricing and revenue management policies

Enabling technologiesEDIInternetERP systemsSupply Chain Management software

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• Set of business processes required to purchase goods and services in a supply chain

• Supplier selection, single vs. multiple suppliers, contract negotiation

• In-house vs. outsource

• Supplier evaluation and selection

• Procurement process

Sourcing• Pricing strategies can be used to

match demand and supply

• Firms can utilize optimal pricing strategies to improve efficiency and responsiveness

• Low price and low product availability; vary prices by response times

• Pricing and economies of scale

• Everyday low pricing versus high-low pricing

• Fixed price versus menu pricing

Pricing

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Considerations for Supply Chain Drivers

Driver Efficiency (Cost) Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation/Dedicated Proximity / Flexibility

Information Low cost/slow High cost/streamlined/ reliable

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Strategic Scope

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Expanding Strategic Scope

Scope of strategic fit The functions and stages within a supply chain that devise an

integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly

Five categories: Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope

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Strategic Scope:Intracompany Intraoperation Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Strategic Scope:Intracompany Intrafunctional Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Strategic Scope: Intracompany Interfunctional Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Strategic Scope: Intercompany Interfunctional Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

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Different Scopes of Strategic Fit Across a Supply Chain

Suppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

Intracompany intraoperation

Intracompany intrafunctional

Intracompany interfunctional

Intercompany interfunctional