chapter one
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• 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
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