an overview on supply chain management
TRANSCRIPT
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Supply Chain Management
Introduction
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Outline
What is supply chain management?
A supply chain strategy framework
Components of a SCM
Major obstacles and common problems
Seven Eleven Japan
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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
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Traditional View: Cost breakdown of a
manufactured good
Profit 10%
Supply Chain Cost 20%
Marketing Cost 25%
Manufacturing Cost 45%
Profit
Supply ChainCost
MarketingCost
ManufacturingCost
Effort spent for supply chain activities are invisible to the customers.
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What can Supply Chain Management do?
Estimated that the grocery industry could save $30 billion (10% of operatingcost) 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 10times 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 theinventory.
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.
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Magnitude of Supply Chain Management
Compaq estimates it lost $0.5 B to $1 B in sales in 1995because laptops were not available when and whereneeded
P&G(Proctor&Gamble) estimates it saved retailcustomers $65 M (in 18 months) by collaborationresulting in a better match of supply and demand
When the 1 gig processor was introduced by AMD(Advanced Micro Devices), the price of the 800 megprocessor dropped by 30%
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Importance of SCM understood by some
AMR Research: "The biggest issue enterprises face today is intelligent visibility of their
supply chains-both upstream and down"
Forrester Research:
"Companies need to sense and proactively respond to unanticipated variationsin supply and demand by adopting emerging technologies such as intelligentagents. To boost their operational agility, firms need to transform their staticsupply chains into adaptive supply networks
Gartner Group:
By 2004, 90% of enterprises that fail to apply supply-chain managementtechnology and processes to increase their agility will lose their status aspreferred suppliers
Open ended statement. Agility can be increased continuously.
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Top 25
Supply Chains
AMR research http://www.amrresearch.compublishes reports on supply chainsand other issues.
The Top 25 supply chains report comesout in Novembers.
The table on the right-hand side is fromThe Second Annual Supply Chain
Top 25 prepared by Kevin Riley andReleased in November 2005.
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SCM Generated Value
Minimizing supply chain costs
while keeping a reasonable service level
customer satisfaction/quality/on time delivery, etc.
This is how SCM contributes to the bottom line
SCM is not strictly a cost reduction paradigm!
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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
ProfitsThe right
TimeThe right
CustomerThe right
QuantityThe right
StoreThe right
Price=++ ++ +
- achieves
Supplier Manufacturer Distributor Retailer Customer
Upstream Downstream
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Detergent supply chain:
Customer wantsdetergent
AlbertsonsSupermarket
Thirdparty DC
P&G or othermanufacturer
Plastic cupProducer
Chemicalmanufacturer
(e.g. Oil Company)
TennecoPackaging
PaperManufacturer
TimberIndustry
Chemicalmanufacturer
(e.g. Oil Company)
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Flows in a Supply Chain
Customer
Material
Information
Funds
The flows resemble a chain reaction.
Supplier
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SCM in a Supply Network
Supply Chain Management (SCM) is concerned with the management and control ofthe 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 ofSCM is to design, plan, and execute the activities at the different stagesso as to provide the desired levels of service to supply chain customers profitably
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Importance of Supply Chain Management
In 2000, the US companies spent $1 trillion (10% of GNP) on supply-relatedactivities (movement, storage, and control of products across supply chains).Source: State of Logistics Report
Eliminating inefficiencies in supply chains can save millions of $.
Tier 1
Supplier
Manufacturer Distributor Retailer Customer
Inefficientlogistics
Highstockouts
Ineffective
promotions
Frequent Supply shortages
High landed costs to
the shelf
High inventories
through the chain
Low order fillrates
Glitch-Wrong Material,
Machine is Down
effect snowballs
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Supply
Sources:plantsvendorsports
RegionalWarehouses:stockingpoints
FieldWarehouses:stockingpoints
Customers,demandcenterssinks
Purchase
Inventory
Transportation
Inventory
A Generic Supply Chain
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Cycle View of Supply Chains
Customer OrderCycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
Any cycle0. Customer arrival
1. Customer triggers an order
2. Supplier fulfils the order
3. Customer receives the order
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Push vs Pull System
What instigates the movement of the work in the system?
In Push systems, work release is based on downstream demandforecasts
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 theactual 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
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Push/Pull View of Supply Chains
Procurement,Manufacturing andReplenishment cycles
Customer OrderCycle
CustomerOrder Arrives
Push-Pull boundary
PUSH PROCESSES PULL PROCESSES
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Examples of Supply Chains
Dell / Compaq
Dell buys some components for a product from its suppliers
after that product is purchased by a customer. Extreme case of a
pull process
Zara, Spains answer to Italys Benetton Sells apparel with a short design-to-sale cycle, avoids markdowns.
Toyota / GM / Volkswagen, in the course notes
McMaster Carr / W.W. Grainger, sell auto parts
Amazon / Barnes and Noble
Frozen food industry/Fast food industry/5 star restaurants
Internet shopping: Webvan / Peapod
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SCM Strategy
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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
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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 lifeGoal: Successful career, good income
Strategy: Obtain a masters degree
Tactics: Select a college and a concentration
Operations: Register, buy books, takecourses, study, graduate, get a job
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Linking SC and Business Strategy
NewProduct
Development
Marketingand
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
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Strategies:
Product Development
It relates to Technologies for futureoperations (via patents) and Setof products/services
Be the technology leader
IBM workstations Offer many products
Dell computers
Offer products for localsTatas 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.
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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.
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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?
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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 troublefor SC
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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
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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?
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Achieving Strategic Fit: Wishes vs.Capabilities
Implied
uncertaintyspectrum
Responsive
(high cost)
supply chain
Efficient
(low cost)
supply chainCertain
demand
Uncertain
demand
Responsivenes
spectrum
Lunch buffet
Gourmet dinner
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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 dayafter 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 Aholds (Dutch Retailer) cash.
Delivers now at a fee of $6.95 within a day.
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Top 10 Retailers Reported in 2008First 4
Source www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf
http://www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdfhttp://www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf -
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Top 10 Retailers Reported in 2008First 5-10
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Big retailers Strategy
Wal-Mart: Efficiency
Target: More quality and service
Carrefour: International, ambiance
K-Mart: Confused. Squeezed between Target and Wal-Mart
Reliance on coupon sales
Do coupons stabilize or destabilize a Supply chain?
K-Mart and Sears merged in November 2004.Now called Sears Holdings.
K-Mart gets cash
Sears gets presence outside malls
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Other Factors
Multiple products in a SC. Multiplecustomers for a given product Separate supply chains or Tailored supply chains
e.g. Barnes and Noble: Retailing and/or e-tailing
Product and/or customer classes e.g. UTD library loans books for 6 months (2 weeks) to faculty (students)
Customer segmentation by pricing
Competitors: more, faster and global UTD online programs compete globally
Product life cycle (shortening) SCM strategy moves toward efficiency and low implied uncertainty as products age
e.g. Air travel is becoming more efficient e.g. Southwest airlines lead the drive for efficiency e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005.
e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make itsSC more efficient in June 2004.
Replacement sales Selling to replace broken units.
e.g. AC replacement is about 50% of the market.
Macroeconomic factors for visibility
Forecasting Home Depot sales from S&P 500 price index. Positive correlation is detected.
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Achieving Strategic Fit over a Lifecycle
Responsive
(high cost)
supply chain
Efficient
(low cost)
supply chainCertain
demand
Uncertain
demand
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Integration
Integration is the central theme in SCM
Building synergies by integrating business functions,departments and companies
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Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer
Competitive
Strategy
Product Dev.
Strategy
Supply Chain
Strategy
Marketing
Strategy
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Supply Chain Drivers and Obstacles
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Drivers of Supply Chain Performance
Efficiency Responsiveness
Inventory Transportation Facilities
Information
Supply chain structure
Logistical
Drivers
How to achieve
Sourcing PricingCross-
Functional
Drivers
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Littles law
Long run averages = Expected values
I = R . T
I=Pipeline inventory;
R=output per time=throughput;T=delay time=flow time
Flow time? Thruput? Pipeline (work in process) Inventory?
10/minute
Spend 1 minute
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2. Transportation
Air
Truck
Rail
Ship
Pipeline
Electronic
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3. Facilities
Production
Flexible vs. Dedicated
Flexibility costs
Production: Remember BMW: a sports car disguised as a sedan Service: Can your instructor teach music as well as SCM?
Sports: A playmaker who shoots well is rare.
Inventory-like operations: Receiving, Prepackaging,Storing, Picking, Packaging, Sorting, Accumulating,
Shipping Job Lot Storage: Need more space. Reticle storage in fabs.
Crossdocking: Wal-Mart
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4. Information
Role in the supply chain
The connection between the various stages in the supply chain
Crucial to daily operation of each stage in a supply chain
E.g.,production scheduling, inventory levels Role in the competitive strategy
Allows supply chain to become more efficient and more
responsive at the same time (reduces the need for a trade-off)
Information technology Andersen Windows
Wood window manufacturer, whose customers can choose from a library of
50,000 designs or create their own. Customer orders automatically sent to
the factory.
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Characteristics of the Good Information
nformation Global
Scope
Coordinated
Decisions
Supply Chain
Success
Strategy Analytical Models $$$
Information
Accurate?
Accessible? Up-to-date?
In the Correct form? If not, database restricted ability. How difficult is it to import data into SAP?
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Quality of Information
Information drives the decisions:
Good information means good decisions
IT helps: MRP, ERP, SAP, EDI
Relevant information? How to use information?
I f i T h l i S l
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Information Technology in a Supply
Chain: Legacy Systems
Supplier CustomerRetaileristributorManufacturer
Strategic
Planning
Operational
I f i T h l i S l Ch i
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Information Technology in a Supply Chain:
ERP Systems
Supplier CustomerRetailerDistributorManufacturer
Strategic
Planning
OperationalERPPotential
ERPPotential
ERP
I f ti T h l i S l Ch i
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Information Technology in a Supply Chain:
Analytical Applications
Supplier CustomerRetailerDistributorManufacturer
Strategic
Planning
Operational
SupplierApps
SCM
MES
Dem Plan
Transport execution &
WMS
APS Transport & InventoryPlanning
CRM/SFA
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ERP Systems
Wider focus
Push (MRP) versus Pull (demand information transmitted
quickly throughout the supply chain)
Real-time information Coordination and Information sharing
Transactional IT Expensive and difficult to implement
About 25% of ERP installations are cancelled within a year
About 70% of ERP installations go over the budget
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IT Push
0
100
200
300
400
500
1965 1973 1981 1989 1997
IT investment($B)
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Supply Chain Software Push
See Top 100 under /articles.html
Source Kanakamedala,
Ramsdell, Srivatsan (2003).
McKinsey Quarterly, No 1.
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5. Sourcing
Role in the supply chain
Set of processes required to purchase goods and services in a supply chain
Supplier selection, single vs. multiple suppliers, contract negotiation
Role in the competitive strategy
Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
In-house vs. outsource decisions- improving efficiency and responsiveness
TI: More than half of the revenue spent for sourcing.
Cisco sources: Low-end products (e.g. home routers) from China.
Components of sourcing decisions In-house versus outsource decisions
Supplier evaluation and selection
Procurement process:
Every department of a firm buy from suppliers independently, or all together.
EDS to reduce the number of officers with purchasing authorization.
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6. Pricing
Role in the supply chain
Pricing determines the amount to charge customers in a supply chain
Pricing strategies can be used to match demand and supply
Price elasticity: Do you know yours?
Role in the competitive strategy Use pricing strategies to improve efficiency and responsiveness
Low price and low product availability; vary prices by response times
Amazon: Faster delivery is more expensive
Components of pricing decisions Pricing and economies of scale
Everyday low pricing versus high-low pricing
Fixed price versus menu pricing, depending on the product and services
Packaging, delivery location, time, customer pick up
Bundling products; products and services
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Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability
Transportation Consolidation Speed
Facilities Consolidation /
Dedicated
Proximity /
Flexibility
Information Low cost/slow/no
duplication
High cost/
streamlined/reliableSourcing Low cost sources Responsive sources
Pricing Constant price Low-high price
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Major Obstacles to Achieving Fit
SC is big:
Variety of products/services
Spoiled customer
Multiple owners (Procurement, Production, Inventory,Marketing) / multiple objectives
Globalization
Local optimization and lack of global fit
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Major obstacles to achieving fit
Instability and Randomness:
Increasing product variety
Shrinking product life cycles
Customer fragmentation: Push for customization, segmentation Fragmentation of Supply Chain ownership: Globalization
Increasing implied uncertainty
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Common problems
Lack ofrelevant SCM metrics: How to measureresponsiveness?
How to measure efficiency, costs, worker performance, etc?
Poor inventory status information
Theft: Major problem for furniture retailers. Transaction errors: Retailers with inaccurate inventory records
for 65% of SKUs
Information delays, dated information, incompatible info. systems
Misplaced inventory: 16% of items cannot be found at a major retailer
Spoilage: active ingredients in the products are losing their properties
Product quality and yield
Lack of visibility in SCs
Do you know the inventory your distribution centers hold?
Do you know the inventory your fellow retailer holds?
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Common problems
Poor delivery status information Not knowing the order status
Poor IT design Unreliable, duplicate data
Security problems: too much or too little
Ignoring uncertainties The flight from uncertainty and ambiguity is so motivated that we often
create pseudocertainty. Nitin Nohra, HBR February 2006 issue, p.40.
Internal customer discrimination Giving lower priority to internal customers than external customers
Poor integration
Elusive inventory costs Accounting systems do not capture opportunity costs
SC-insensitive product design
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Summary
Supply Chain Introduction
Competitiveness / Business strategy / SCM strategy
Components
Inventory, Transportation, Facilities, Information, Sourcing, Pricing
Challenges
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Seven Eleven Japan (SEJ)
A Case Study
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More on SEJ
More factual info: Average sales about twice of an average US store
SKUs offered in store: Over 3,000 (change by time of day, day of week, season)
Virtually no storage space
No food cooking at the stores
Japanese Images of Seven Eleven:
Convenient
Cheerful and lively stores
Many ready made dinner items I buy
Famous for its great boxed lunch and dinner - On weekends, when I was single, I went to buy lunch and dinner
SC strategy:
Micro matching of supply and demand (by location, time of day, day of week, season)
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Seven Eleven - Number of Stores
0
1000
2000
3000
4000
5000
6000
85 86 87 88 89 90 91 92 93 94
Number of Stores
1999: 8,0272004: 10,356
S El N t S l (B Y )
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Seven Eleven - Net Sales (B Yen)
Sales 1,963 B Yen in 2000
0
200
400
600
800
1000
1200
1400
85 86 87 88 89 90 91 92 93 94
Net Sales
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Seven Eleven - Pre tax Profit (B Yen)
0
10
20
30
40
50
6070
80
90
100
85 86 87 88 89 90 91 92 93 94
Profit
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Seven Eleven - Inventory turnover (days)
0
24
6
8
10
12
14
85 86 87 88 89 90 91 92 93 94
Inventory
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Information Strategy
Quick access to up to date information (as opposed to data): In 1991, SEJ implemented Integrated Service Digital Networkto link stores, headquarter,
DCs and suppliers
Customer checkout process Clerk records the customers gender, (estimated) age and purchased items. These Point of Sales
(POS) data are transmitted to database at the headquarters.
Store hardware: Store computer, POS registers linked to store computer, Graphic OrderTerminals, Scanner terminals for receiving
Daily use of the data Headquarters aggregate the data by region, products and time and pass to suppliers and stores by
next morning. Store managers deduce trend information.
Weekly use of the data Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100corporate managers.
Tuesday morning, strategies are communicated to Operation Field Counselors who arrive inTokyo on Monday night.
Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy.Tuesday nights, field counselors return back to their regions.
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Information Analysis of POS Data
Analysis of Sales for product categories over time
SKU (stock keeping unit)
Waste or disposal
10 day (or week) sales trend by SKU
Sales trends for new product
In the early 1990s, half-prepared fresh noodle sales were going up,
new fresh noodle products were quickly developed
Sales trend by time and day
Different sales patterns for different sizes of milk at different times of the day results inrearrangement of the milks in the fridge. Extreme store micromanagement.
Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?).
List of slow moving items
About half of 3000 SKUs are replaced by new ones every year
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Facilities Strategy
Limited storage space at stores which have only 125-150 m2 space Frequent and small deliveries to stores
Deliveries arrive from over 200 plants.
Products are grouped by the cooling needs
Combined delivery system: frozen foods, chilled foods, room temperature and hot foods.
Such product groups are cross-docked at distribution centers (DC). Food DCs store noinventory.
A single truck brings a group of products and visits several stores within a geographical region
Aggregation: No supplier (not even coke!) delivers direct
The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000.Still, at least 3 fresh food deliveries per day. Goods are received faster with the use ofscanners.
Have many outlets, at convenient locations, close to where customers can walk
Focus on some territories, not all: When they locate in a place they blanket (a.k.a.clustering) the area with stores; stores open in clusters with corresponding DCs.
844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. Nostores in Kobe.
Success rate of franchise application
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The Present and the Future
Is food preparation a good idea at 7-eleven locations? e.g. Compare microwave heating vs. salad preparation.
Why SEJ does not allow direct delivery from suppliers to retailers?
Point out which of the following strategies can also be used in US (or Taiwan) Information strategy
Facilities strategy
Discuss the differences between the Japanese and US (or Taiwanese) consumers withregard to Frequency and amount of grocery purchase
Use of credit cards vs. cash for purchase
7-eleven inventory turnover rate is 50 in Japan and 19 in the USA.
7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan.Does this make sense from a supply chain perspective?
Cost vs. Responsiveness Business strategy
What is the risk of micro-matching strategy?
No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA?
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Deloitte 2008 Global Retailers Survey
Excerpts fromwww.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf
Downloaded on Jan 30, 2008.
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