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Chapter 1 Introduction to Supply Chain Management
Qi Xu
Professor of Donghua University
Tel: 021-62378860E-mail: [email protected]
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Meditech Surgical
• Case describes a scenario with typical symptoms – inventories are too high and customer service is poor.
• Initial explanation is that the problems are due to poor forecasting of customer demand. There’s a perception that demand is highly variable and unpredictable, possibly due to irrational customer behavior, e. g., panic ordering. … if only Meditech could forecast what the customers will order, then they could improve customer service and reduce inventories….
Case 1
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Outline
• Intent – diagnosis of supply chain• Business overview• Supply chain• Production planning• What’s wrong?• How to fix it?
Case 1
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Endoscopic Surgical Instruments
• Permits minimally invasive surgery
• Market created in early 80’s, rapidly growing
• Old products continually updated and replaced with new product introductions
Case 1
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Business Overview
• National and Meditech split the market
• Compete based on product innovations, customer service, cost
• National sells to physicians; Meditech sells to material managers
• Customer preferences change slowly
Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
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External Supply Chain
Part suppliers
Meditech Assembly plants
MeditechWarehouse:autonomous regional warehouses
Domestic Dealers
Int’l MeditechAffiliates
Hospitals
Hospitals
Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
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Internal Supply Chain
Parts Inventory Assembly Bulk InventoryFG Inventory
Packaging &Sterilization
2 - 16weeks
2weeks
1 week
Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
Assembly organized into multiple flexible lines, manual .
Packaging and sterilization have adequate capacity
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Production PlanningAnnual Forecast
Monthly Revision
TransferRequirements
MonthlyPlan
MRP
PartsProcurement
Plan
WeeklyAssemblySchedule
Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
Annual forecast determined by marketing and finance
Revision done at beginning of month by marketing and central planning
Transfer requirements = forecast – FG inventory +safety stock (3 weeks of demand), done by central planning
Monthly plan sent to business units, who input it into MRP to get material plans and assembly schedules
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Production Planning
Parts Inventory Assembly Bulk Inventory Packaging &Sterilization
FG inventory
MonthlyPlan
MRP
Order point;Order quantity
MaterialPlan
Copyright Stephen C. Graves, 2002. All rights reserved
focusing on information flows
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What’s wrong?
• Poor service for new product introductions
• Poor forecasting?• Panic ordering?• And high FG inventory
Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
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What is going on?What is going on?
• Demand is quite predictable• Usage in hospitals is quite
stable• Market share moves slowly over
time• With each new product, dealer
must build inventory to fill pipeline
Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
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Why did Meditech think demand was unpredictable?
• Poor information systems• No one looked at demand• No one had responsibility for
forecast errors• Tendency to shift the blame• Built-in delays and monthly
buckets in planning system• Amplifier in planning system
Copyright Stephen C. Graves, 2002. All rights reserved
Case 1
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What to do?
• Recognize that demand is stable and predictable
• Establish accountability for forecast• Eliminate planning delays and/or
reduce time bucket• Alternatively, put assembly within
pull system and eliminate bulk inventory
Case 1
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Wrap Up
• Case illustrates a supply chain challenge – understand why Meditech has poor customer service and high inventory, particular for new products. Context is characterized by lack of data and a some what archaic, albeit typical, planning system that obscures the problem.
Case 1
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1.1 What Is A Supply Chain?
• The system of suppliers, manufacturers, transportation, distributors, and vendors that exists to transform raw materials to final products and supply those products to customers.
SupplierSupplierManufacturerManufacturerDistributorDistributorRetailerRetailerCustomerCustomer
UpstreamDownstream
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What is SCM?
BuyingBuying
What is SCM?
SellingSelling
MakingMaking
MovingMoving
WarehousingWare
housing
SCM is a business network covering from buying, making, moving, warehousing to selling
SCM
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What Is the Goal of Supply Chain Management?
• Supply chain management is 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 – At the right time
• In order to– Minimize total system cost – Satisfy customer service requirements
The rightProduct
HigherProfits
The rightTime
The rightCustomer
The rightQuantity
The rightStore
The rightPrice
=++ ++ +
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Supply Chain Status
TIER2
TIER1
Supplier Supplier Supplier OEM
-Manual communication
(Phone/Fax/EDI)
-Spontaneous planning
-Hypothetical planning
-Tier To Tier
-Enormous inventory buffer
Supply Chain Status Prospect of supply chain
Fax/E-mail
EDI
On-line
78%
65%
28%
60%
60%
88%
2000 2002
Forrester Research, 2000
TIER3
Yet existing supply chain is managed manually, causing serious loss of efficiency and cost
SCM
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Background of SCM and its effect
Background Background
Emerging new channel
Severe competition
Speed management
Internet booming
Effects Effects
Shorter product life cycle
Channel integration
Speedy adaption to change supply chain
Enhanced customer satisfaction
Supply chain integration thru web
Product life cycle management
“Competition among supply chains
not among companies”
The change in the industrial environment demands the business to adopt to SCM and it can bring the following effects
Standardization of product and tech
SCM
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Components of SCM
Supply Chain Planning
Supply Chain Execution
Collaborative Planning-Supply Chain Network Design-Demand Planning & Forecasting-Supply Planning-Distribution Planning-Manufacturing Planning & Scheduling
-Warehouse Management-Transportation Management-Inventory Management-Order Management
Facilitating collaboration among participants
-Design Collaboration-Demand Collaboration-Procurement Collaboration-Retailer Collaboration
Deliver the Right Productat the Right Placeat the Right Time
SCM is devided by SCP to offer optimized planning, SCE to stable execution platform, CP to collaborate
Optimized planning for balanced supply for varied demands
Timely execution for buying, moving, making and ordering
SCM
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Recent Supply Chain Studies Suggest….
“ Only 7% of companies today are effectively managing their supply chain. However, these companies are 73% more profitable than other manufacturers. …
” Deloitte & Touche Study, October 2003“
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Notice
• Who is involved?• What is the goal?• What level of activities are
involved?• What do we mean by integration?
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2SCM Architecture
SCM
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Supply
Sources:plantsvendorsports
RegionalWarehouses:stocking points
Field Warehouses:stockingpoints
Customers,demandcenterssinks
Production/purchase costs
Inventory &warehousing costs
Transportation costs Inventory &
warehousing costs
Transportation costs
Figure1.1 The logistics network
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SCP Service
Buy Make Store Sell
Move
ObjectivesObjectives
FunctionFunction
Enhancement of customer services
Reduction of inventoryand increasing sales
Effective acquisition of raw material
Demand Planning& Fulfilment
DistributionPlanning
Manufacturing Planning
Material Planning
SCP analyze, forecast and determine the process of buying, making, transporting, warehousing and selling for balanced supply
Effective management of product resources
-Collaboration for cost reduction-Reducing VMI (Vendor managed inventory)
-Production planning considering constraints-Optimizing production scheduling
-Differentiated inventory management according to demands-Prevention of missing the sales opp.
-Demand forecasting based on statistics-Prediction of sales point on excess demand (ATP, CTP)
SCM
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SCE Consulting
Logistics consulting
Cyber logistics consulting
Seamless System
Logistics center system
Transport system
The effective SCE requires re-designing of supply chain to enhance management capability
-Re-engineering of logistics process
-Analysing and designing supply chain
-Logistics cost diagnosis
-Management of logistics center
-Checking cycle time and lead time
-E-business of logistics
-Solution for integrated logistics info and seamless service
- Flow management of ordering, logistics and transfering
- Work management- Process designing- Standardization - Packaging
simulation
- Transportation scheduling
- Location system
SCM
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CP Flow
DemandForecasting
Optimizingproduct mix
CapacityPlanning
ResourcePlanning
Shop FloorControl
Shop FloorControl
Warehousing
Management
Warehousing
Management
OrderingAdministratio
n
ProductionPlanning
DemandManagement
ShippingOptimization
Status ManagementStatus Management
Tactical
Tactical
Opera
tion
al
Opera
tion
al
Tra
nscctio
nal
Tra
nscctio
nal
Collaboration on Forecasting
Collaborationon Capacity
Planning
AnalyzingSupplyChain
Collaborationon Resource
Planning
InventoryTracking
InventoryPlanning
AnalyzingSupplyChain
ShippmentTracking
Order &Shipments
Collaboration is realized in each stage of stategy, management and transaction of SCM
Collaboration on Forecasting
Matchingdemand-supply
SCM
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1.3 Strategies for SCM
All of the advanced strategies, techniques,
and approaches for Supply ChainManagement focus on:
–Global Optimization–Managing Uncertainty
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Optimization
• What is it?• Why is it important?• What tools and approaches
help?
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Tools and Strategies for Optimization
•Decision Support Systems•Inventory Control•Network Design•Design for Logistics•Cross Docking Cross Docking 翻译为“直接换
装”,定义为:“物品在物流环节中,不 经过中间仓库或者站点,直接从一个交通工具换载到另一个运输工具的物流衔接方式。”
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1.3.1 Global Optimization
• What is it?• Why is it different/better than local
optimization?• What are conflicting supply chain
objectives?• What tools and approaches help
with global optimization?
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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
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Why is Global Optimization Hard?Why is Global Optimization Hard?
• The supply chain is complex• Different facilities have conflicting
objectives• The supply chain is a dynamic
system– The power structure changes
• The system varies over time
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Supply Chain: The Complexity
• National 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.
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Conflicting Objectives in the Supply Chain
1. Purchasing• Stable volume requirements • Flexible delivery time • Little variation • Large quantities
2. Manufacturing• Long run production• High quality• High productivity• Low production cost
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Conflicting Objectives in the Supply Chain
3. Warehousing• Low inventory • Reduced transportation costs• Quick replenishment capability
4. Customers• Short order lead time• High in stock• Enormous variety of products• Low prices
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Tools and Approaches for Global Optimization
• Everything for optimization, plus…
• Strategic Alliances/Supplier Partnerships
• Supply Contracts/Incentive Schemes
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1.3.2 Uncertainty
• What is variation?• What is randomness?• What tools and approaches
help us to deal with these issues?
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Can’t Forecasting Help?
• Forecasting is always wrong
• The longer the forecast horizon the worse the forecast
• End item forecasts are even more wrong
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Why Is Uncertainty Hard to Deal With?
• Matching supply and demand is difficult.• Forecasting doesn’t solve the problem.• Inventory and back-order levels typically
fluctuate widely across the supply chain.• Demand is not the only source of
uncertainty:– Lead times– Yields– Transportation times– Natural Disasters– Component Availability
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Supply Chain VariabilityV
olu
mes
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
ActualConsumerDemand
ActualConsumerDemandRetailer Warehouse
to Shop
Retailer Warehouseto ShopRetailer OrdersRetailer Orders
Production PlanProduction Plan
Manufacturer Forecastof Sales
Manufacturer Forecastof Sales
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What Management Gets...V
olu
mes
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
ConsumerDemand
ConsumerDemand
Production PlanProduction Plan
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What Management Wants…V
olu
mes
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
ConsumerDemand
ConsumerDemand
Production PlanProduction Plan
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Dealing with Uncertainty
• Pull Systems• Risk Pooling• Centralization• Postponement• Strategic Alliances• Collaborative Forecasting
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1.4 Why Supply Chain Management?
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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
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Supply Chain:the Magnitude
• 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 more than three
months getting from factory to supermarket.– A typical new car spends 15 days traveling
from the factory to the dealership, although actual travel time is 5 days.
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Supply Chain: The Magnitude
– 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 write downs of $2.6 billion in October 1997, due to “Raw material shortages, internal and supplier parts shortages…”.
Many opportunities exist to cut costs in the supply chain!
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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)
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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.
• Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% using– Direct business model– Build-to-order strategy.
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What’s New?
• Global competition• Shorter product life cycle• New, low-cost distribution
channels• More powerful well-informed
customers• Internet and E-Business
strategies
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1.5 Key Issues
• Issues span– Strategic– Tactical– Operational
• What are the tradeoffs and issues?– Distribution Network Configuration– Inventory control– Supply Contracts– Distribution Strategies– Integration and Partnerships– Procurement Strategies and Outsourcing– Product Design– Information Technology