Supply Chain Management

Prof.G.PurandaranM.Tech (I.I.T-Madras)

PGDM (I.I.M-Bangalore)

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• .SUPPLY CHAIN MANAGEMENT

Module : 1 INTRODUCTION TO

SUPPLY CHAIN MANAGEMENT

SCM

• What is Supply Chain Management?• Supply Chain Management is the process of

strategically managing the flow of goods, services and information and the relationships within and among organizations, in order to deliver greater economic value and enhanced customer service.

SCM

• It includes the interaction of logistics and transport, operations, purchasing, and some elements of marketing and information technology. It focuses on serving relevant stakeholders, including customers, suppliers, shareholders, employees, communities, and policy makers.

SCM

• Several major forces have driven the development of supply chain management, including:

• the increased complexity of organizations• the globalization of commerce• the evolution of information technology

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What Is a Supply Chain?

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

• Integrated through information, planning, and integration activities

• Cost and service levels

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1.1 What Is Supply Chain Management?

• Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.

The Objective of a Supply Chain

• Maximize overall value created• Supply chain value: difference between what

the final product is worth to the customer and the effort the supply chain expends in filling the customer’s request

• Value is correlated to supply chain profitability (difference between revenue generated from the customer and the overall cost across the supply chain)

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The Objective of a Supply Chain• Example: Dell receives $2000 from a customer

for a computer (revenue)• Supply chain incurs costs (information, storage,

transportation, components, assembly, etc.)• Difference between $2000 and the sum of all of

these costs is the supply chain profit• Supply chain profitability is total profit to be

shared across all stages of the supply chain• Supply chain success should be measured by

total supply chain profitability, not profits at an individual stage

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The Objective of a Supply Chain

• Sources of supply chain revenue: the customer• Sources of supply chain cost: flows of

information, products, or funds between stages of the supply chain

• Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability

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PC Industry Supply Chain

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QC & Shipping[Hong Kong]

QC & Shipping[Hong Kong]

Product Design[Hong Kong]

Product Design[Hong Kong]

Zippers+…[Japan+…]

Zippers+…[Japan+…]

Stitching[Indonesia]

Stitching[Indonesia]

Weaving[Taiwan]

Weaving[Taiwan]

Yarn Spinning[Korea]

Yarn Spinning[Korea]

An Illustration: How Li & Fung Limited Might Make a Dress

Globally Dispersed Manufacturing

Source

Supplier

Supplier

Distributor

Distributor

Retailer

End-User

Converter

Converter Consumers

Information Flow

Funds/Demand Flow

Value-Added Services

Material Flow

Reuse/Maintenance/After Sales Service Flow

SCM Definition

Key Issues

• Key issues in supply chain management include– Distribution network configuration• How many warehouses do we need?• Where should these warehouses be located?• What should the production levels be at each of our

plants?• What should the transportation flows be between

plants and warehouses?– Inventory control• Why are we holding inventory? Uncertainty in

customer demand? Uncertainty in the supply process? Some other reason?• If the problem is uncertainty, how can we reduce it?• How good is our forecasting method?

Key Issues

– Distribution strategies• Direct shipping to customers?• Classical distribution in which inventory is held in

warehouses and then shipped as needed?• Cross-docking in which transshipment points are used

to take stock from suppliers’ deliveries and immediately distribute to point of usage?

– Supply chain integration and strategic partnering• Should information be shared with supply chain

partners?• What information should be shared?• With what partners should information be shared?• What are the benefits to be gained?

Key Issues– Product design

• Should products be redesigned to reduce logistics costs?• Should products be redesigned to reduce lead times?• Would delayed differentiation be helpful?

– Information technology and decision-support systems• What data should be shared (transferred)• How should the data be analyzed and used?• What infrastructure is needed between supply chain members?• Should e-commerce play a role?

– Customer value• How is customer value created by the supply chain?• What determines customer value? How do we measure it?• How is information technology used to enhance customer value in

the supply chain?

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Process View A supply chain is a sequence of processes and flows that

take place within and between different stages and combine to fill a customer need for a product. There are two different ways to view the processes performed in a supply chain.

• Cycle View – The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain.

• Push/Pull View – Pull processes are initiated in response to a customer order, whereas push processes are initiated and performed in anticipation of customer orders.

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All supply chain processes can be broken down into four process cycles:

• Customer order cycle• Replenishment cycle• Manufacturing cycle• Procurement cycleEach cycle occurs at the interface between

two successive stages of the supply chain.

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Supply Chain Process Cycles

Top 25 Supply Chain CompanyIn the year 2005

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 rightProduct

HigherProfits

The rightTime

The rightCustomer

The rightQuantity

The rightStore

The rightPrice =++ ++ +

- achieves

Supplier Manufacturer Distributor Retailer Customer

UpstreamDownstream

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 3-28

A Framework for Structuring Drivers

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Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

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SC-Bridge• Supply chain is a bridge between:– sales and customers, – suppliers and production, – production and customers, – facilities and other facilities. – It’s also a bridge between revenue and profitability, – promises and responses, – commitments and satisfaction. – It is the thread through a business that must fill :

• the cracks and inconsistencies between supplier capabilities,• inconsistent demands, resource volatility, location variations, • schedule modifications, customer needs and preferences – to

balance actions against profitability.

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

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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)• Overall trade-off: Responsiveness versus efficiency

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Inventory

• Role in the supply chain• Role in the competitive strategy• Components of inventory decisions

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Inventory: Role in the Supply Chain• Inventory exists because of a mismatch between supply

and demand• Source of cost and influence on responsiveness• Impact on

– material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain

– throughput• rate at which sales to end consumers occur• I = RT (Little’s Law)• I = inventory; R = throughput; T = flow time• Example• Inventory and throughput are “synonymous” in a supply chain

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Inventory: Role in Competitive Strategy

• 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

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Components of Inventory Decisions

• Cycle 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

• Overall trade-off: Responsiveness versus efficiency– more inventory: greater responsiveness but greater cost– less inventory: lower cost but lower responsiveness

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Transportation

• Role in the supply chain• Role in the competitive strategy• Components of transportation decisions

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Transportation: Role inthe Supply Chain

• 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

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Transportation: Role in the Competitive Strategy

• 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)

• Can also consider both inventory and transportation to find the right balance

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Components ofTransportation Decisions

• Mode of transportation: – air, truck, rail, ship, pipeline, electronic transportation– vary in cost, speed, size of shipment, flexibility

• Route and network selection– route: path along which a product is shipped– network: collection of locations and routes

• In-house or outsource• Overall trade-off: Responsiveness versus

efficiency

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Information

• Role in the supply chain• Role in the competitive strategy• Components of information decisions

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Information: Role inthe Supply Chain

• 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

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Information: 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• What information is most valuable?

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Components of Information Decisions

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

• Coordination and information sharing• Forecasting and aggregate planning• Enabling technologies

– EDI– Internet– ERP systems– Supply Chain Management software

• Overall trade-off: Responsiveness versus efficiency

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Sourcing

• Role in the supply chain• Role in the competitive strategy• Components of sourcing decisions

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Sourcing: Role inthe Supply Chain

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

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

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Sourcing: Role in the Competitive Strategy

• Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain

• In-house vs. outsource decisions- improving efficiency and responsiveness

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Components of Sourcing Decisions

• In-house versus outsource decisions• Supplier evaluation and selection• Procurement process• Overall trade-off: Increase the supply chain

profits

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Pricing

• Role in the supply chain• Role in the competitive strategy• Components of pricing decisions

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Pricing: Role inthe Supply Chain

• Pricing determines the amount to charge customers in a supply chain

• Pricing strategies can be used to match demand and supply

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Sourcing: Role in the Competitive Strategy

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

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

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Components of Pricing Decisions

• Pricing and economies of scale• Everyday low pricing versus high-low pricing• Fixed price versus menu pricing• Overall trade-off: Increase the firm profits

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Obstacles to Achieving Strategic Fit

• Increasing variety of products• Decreasing product life cycles• Increasingly demanding customers• Fragmentation of supply chain ownership• Globalization• Difficulty executing new strategies

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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

Inefficient

Fix responsiveness Impossible

Inefficiency Region

Why decreasing slope (concave) for the efficiency frontier?

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Achieving Strategic Fit: Wishes vs. Capabilities

Implied uncertainty spectrum

Responsive (high cost)

supply chain

Efficient (low cost)

supply chainCertain demand

Uncertain demand

Responsivenesspectrum Zone of

Strategic Fit

Lunch buffet<Low margin>

Gourmet dinner<High margin>

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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/reliable

Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

Customer Relationship Management

• Customer relationship management (CRM) involves managing all aspects of a customer’s relationship with an organization to increase customer loyalty and retention and an organization's profitability

• Many organizations, such as Charles Schwab and Kaiser Permanente, have obtained great success through the implementation of CRM systems

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Customer Relationship Management

• CRM is not just technology, but a strategy, process, and business goal that an organization must embrace on an enterprisewide level

• CRM can enable an organization to:– Identify types of customers– Design individual customer marketing campaigns – Treat each customer as an individual– Understand customer buying behaviors

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Customer Relationship Management

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Charles Schwab’s CRM Case

• Charles Schwab recouped the cost of a multimillion-dollar CRM system in less than two years–The system allowed Schwab to segment its customers in terms

of serious and non-serious investors –The CRM system looked for customers that had automatic

withdrawal from a bank account as a sign of a serious investor–The CRM system looked for stagnant balances as a sign of a

non-serious investor–Charles Schwab could then focus efforts on selling to serious

investors, and spend less time attempting to sell to non-serious investors