supply chain management
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Supply Chain Management_Janat Shah
The Role of Supply Chain Management in
Economy
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Supply Chain Management_Janat Shah
Learning Objectives
Why is the supply chain important?
What are the key supply chain decisions made by a firm?
How has the supply chain evolved over the last century?
What are the unique challenges of managing a supply chain in
India?
Supply Chain Management_Janat Shah
What Is a Supply Chain?
Flow of products and services from: Raw materials manufacturers
Intermediate products manufacturers
End product manufacturers
Wholesalers and distributors
Retailers
Customers
• Connected by transportation and storage activities
• Flow of information, products and funds in both directions
• Cost and service levels
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The Supply Chain Network
Suppliers Manufacturers Warehouses & Distribution Centers
Customers
Material Costs
Transportation Costs
Transportation Costs Transportation
Costs Inventory Costs Manufacturing Costs
Plan Source Make Deliver Buy
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Supply Chain
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All facilities, functions, activities, associated
with flow and transformation of goods and
services from raw materials to customer, as
well as the associated information flows
An integrated group of processes to ―source,‖
―make,‖ and ―deliver‖ products
Supply Chain Management_Janat Shah
Supply Chain Processes
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Supply Chain Management: Success Stories
Dell: Inventory turn-over ratio of 58.7 compared to industry
average of 12 (Net Profitability of 5.3.%) ( Drop from 7.8% in
2006)
Wal-Mart: Inventory turn-over ratio of 9.9 compared to
industry average of 5.5 ( Net profitability of 3.5%)
Zara Corporation: Lead-time from new product to stores is 15
to 20 days compared to industry average of six months ( Net
profitability of 11.3%)
Supply Chain Management_Janat Shah
Supply Chain Management: Horror Stories
Cisco: Cisco wrote off 2.2 $ billion worth of inventory in May 2001. Biggest write-off in history.
Sony: PlayStation II–a lost opportunity
SONY could supply only 25% of the potential demand for Christmas market
Nintendo Wii Game Console : Shortage expected in year 2007
Kmart Launched supply chain initiative in May 2000 worth $1.4 billion in software and services. In 2001-02, announced that it was abandoning most of the software purchased and taking $130 million write-off
Nike- i2 Technology Controversy: Lost $100 in sales in last quarter of 2000 i2 Technologies was blamed. ― This is what we get for our $400 million‖—Nike Chairman
Wal-Mart: RFID Initiative -
Supply Chain Management_Janat Shah
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.
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Supply Chain Management: A Definition
Encompasses all activities associated with the transformation of
goods from the raw material stage to the final stage when the
goods and services reach the end customer.
Involves planning, design and control of flow of material,
information and finance along the chain in order to deliver value
to the end customer in effective and efficient way.
Supply Chain Management_Janat Shah
Two Other Formal Definitions
The design and management of seamless, value-added process
across organizational boundaries to meet the real needs of the end
customer
Institute for Supply Management
Managing supply and demand, sourcing raw materials and parts,
manufacturing and assembly, warehousing and inventory
tracking, order entry and order management, distribution across
all channels, and delivery to the customer
The Supply Chain Council
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Supply Chain Management: A Pictorial Representation
C1
C2
C3
C4
C5
C6
VENDOR INBOUND TRANSPORTATION
PLANTS INTERFACILITY
TRANSPORTATION
DISTRIBUTION
CENTERS OUTBOUND TRANSPORTATION
CUSTOMERS
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SCM Definition
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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
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Supply chain for Service
Industry
More difficult than manufacturing
Does not focus on the flow of physical goods
Focuses on human resources and support services
More compact and less extended
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Supply Chain: The Potential P&G’s estimated savings to retail customers of $65 million
through logistics gains
Dell Computer’s outperforming of the competition in terms of shareholder value growth over more than two decades by over 3,000% using:
Direct business model
Build-to-order strategy
Wal-Mart transformation into the world’s largest retailer by changing its logistics system:
highest sales per square foot, inventory turnover and operating profit of any discount retailer
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Complexity: The Magnitude
U.S. companies spend more than $1 trillion in supply-related activities (10-15% of Gross Domestic Product)
Transportation 58%
Inventory 38%
Management 4%
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.
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Complexity: The Magnitude
Compaq computer’s loss of $500 million to $1 billion in sales in one year
Laptops and desktops were not available when and where customers were ready to buy them
Boeing’s forced announcement of write-downs of $2.6b Raw material shortages, internal and supplier parts
shortages….
Cisco’s multi-billion ($2.2b) dollar write-off of inventories in 2001-2002 Customers balked on orders due to market meltdown
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Transactional Complexity
National Semiconductors:
• Production:
– Produces chips in six different locations: four in the US, one in
Britain and one in Israel
– Chips are shipped to seven assembly locations in Southeast Asia.
• Distribution
– The final product is shipped to hundreds of facilities all over the
world
– 20,000 different routes
– 12 different airlines are involved
– 95% of the products are delivered within 45 days
– 5% are delivered within 90 days.
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Ratio of Logistics Cost to GDP for
Selected Countries*
* Source: Raghuram and Shah 2003
• Does logistics cost capture every thing?
• How do we capture logistics cost of India versus
China?
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Progression of Logistics Costs
FIGURE 1-4: Logistics costs’ share of the U.S. economy
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Composition of Logistics Costs
FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
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Logistics Costs for the Indian Economy*
Rs billion
*Source: Raghuram and Shah 2004
Total
Logistics
Cost
GDP Logistics
Cost/GDP
(%)
95-96 1201.27 8995.63 13.4
97-98 1261.01 10163.99 12.4
99-00 1388.93 11485.00 12.1
01-02 1508 12679 11.89
03-04 1658 14305 11.59
93-94 prices
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Logistics Costs for the US Economy
Organized Sector US: 1990 US: 2001 US: 2002
Transportation 50% 60% 63%
Inventory 20%
40% 37%
Warehousing
24% Packaging
Losses 6%
Total Cost 11.4% 9.5% 8.7%
Logistics Cost
($ billion)
659
957
910
GDP ($ billion) 5,800 10,080 10,470
Nominal Values
Source: CASS Information Systems, 2002
Logistics Costs for the US Economy
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Performance of the Indian
Manufacturing Industry*
Data Source: PROWESS, CMIE
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Sector-wise Industry Performance of
Indian Firms*
Data Source: PROWESS, CMIE
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Supply Chain Challenges for the
Indian FMCG Sector
Managing Availability in the Complex Distribution Set up
Working with Smaller Pack Sizes
Entry of National Players in the Traditional Fresh Products
Sector
Dealing with a Complex Taxation Structure
Dealing with Counterfeit Goods
Opportunistic Games Played by the Distribution Channel
Infrastructure
Emergence of Third-party Logistics Provider
Emergence of Modern Retail Chains
Reservation for Small-scale Sector
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The Marico Supply Chain
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Status of Logistics Management in India
Neglected area in organizations
Taxation structure drives the logistics related decision, not cost
or service considerations
Poor state of infrastructure
Complex regulations affecting logistics decisions
Supply Chain Management_Janat Shah
Importance of The Supply Chain
Proliferation of Product Lines
Shorter Product Life Cycles
Cell phone, Laptop, Automobile
Higher Level of Outsourcing
Dell computers, Bharti Tele ventures
Shift in Balance of Power in Chain
Impact of organized retail chain
Globalization of Manufacturing
Impact of tariff structure
Supply Chain Management_Janat Shah
Why is SCM Important?
Strategic Advantage – It Can Drive Strategy
* Manufacturing is becoming more efficient
* SCM offers opportunity for differentiation (Dell) or cost
reduction (Wal-Mart or Big Bazaar)
Globalization – It Covers The World
* Requires greater coordination of production and distribution
* Increased risk of supply chain interruption
* Increases need for robust and flexible supply chains
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Benefits
A 1997 PRTM Integrated Supply Chain Benchmarking Survey
of 331 firms found significant benefits to integrating the supply
chain
Delivery Performance 16%-28% Improvement
Inventory Reduction 25%-60% Improvement
Fulfillment Cycle Time 30%-50% Improvement
Forecast Accuracy 25%-80% Improvement
Overall Productivity 10%-16% Improvement
Lower Supply-Chain Costs 25%-50% Improvement
Fill Rates 20%-30% Improvement
Improved Capacity Realization 10%-20% Improvement
Source: Cohen & Roussel
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Value vs. Supply Chain
Value chain
every step from raw materials to the eventual end user
ultimate goal is delivery of maximum value to the end user
Supply chain
activities that get raw materials and subassemblies into manufacturing operation and finished goods to the customer
Terms are used interchangeably
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Dell Computers: Focus on Cost
Reduction
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Dell’s SCM
Dell sells its computer systems directly to end customers, bypassing
distributors and retailers (resellers). Dell's supply chain consists of
only three stages— the suppliers, the manufacturer (Dell), and end
users.
Dell’s direct contact with customers allows it to:
• properly identify market segments,
• analyze the requirements and profitability of each segment, and
• develop more accurate demand forecasts.
Another Dell’s advantage is that it is able to get the customers
requirements regarding software to be loaded
Supply Chain Management_Janat Shah
1950s 1960s 1970s 1980s 1990s 2000s Beyond
Traditional Mass Manufacturing
Inventory Management/Cost
Optimization
JIT, TQM, BPR,
Alliances
SCM
Formation/
Extensions
Further
Refinement of
SCM Capabilities
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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
Supply Chain Management_Janat Shah
From An Automobile Manufacturer
Our aim is always to arrange the material and machinery and to
simplify the operation so that practically no orders are
necessary. Our finished inventory is in transit. So is most of our
raw material inventory. Our production cycle is about eight-one
hours from the mine to the finished machine (automobile) in the
freight car
Supply Chain Management_Janat Shah
Supply Chain
Management
Managing flow of information through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs
Keys to effective SCM
information
communication
cooperation
trust
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Key Observations
Every facility that impacts costs need to be considered
Suppliers’ suppliers
Customers’ customers
Efficiency and cost-effectiveness throughout the system is
required
System level approach
Multiple levels of activities
Strategic – Tactical – Operational
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Key Observations
Integrated activity:
* Among functions such as logistics, manufacturing, distribution,
design/engineering, marketing, finance,etc.
* Multiple organizations,i.e., suppliers, customers & 3 PL, 4PL
providers
* Coordination of conflicting goals, metrics, etc.
Responsible for multiple flows:
* Information (orders, status, contracts)
* Physical (finished goods, raw material, w.i.p.)
* Financial (payment, credits, etc.)
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Key Observations (contd)
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One goal in SCM:
respond to uncertainty in customer demand without creating costly excess inventory
Negative effects of uncertainty
lateness
incomplete orders
Inventory
insurance against supply chain uncertainty
Factors that contribute to uncertainty
inaccurate demand
forecasting
long variable lead times
late deliveries
incomplete shipments
product changes batch ordering
price fluctuations and discounts
inflated orders
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Other Related Observations
Supply chain strategy linked to the Development Chain
Challenging to minimize system costs and maximize
system service levels
Inherent presence of uncertainty and risk
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The Development Chain
Set of activities and processes associated with new product
introduction. Includes:
product design phase
associated capabilities and knowledge
sourcing decisions
production plans
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The Development Chain
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Today’s Marketplace Requires:
Personalized content and services for their customers
Collaborative planning with design partners,
distributors, and suppliers
Real-time commitments for design, production,
inventory, and transportation capacity
Flexible logistics options to ensure timely fulfillment
Order tracking & reporting across multiple vendors
and carriers
Shared visibility for trading partners
Supply Chain Management_Janat Shah
SCM – Key Issues ISSUE CONSIDERATIONS
Network Planning Warehouse locations and capacities
Plant locations and production levels
Transportation flows between facilities to minimize cost and time
Inventory Control How should inventory be managed?
Why does inventory fluctuate and what strategies minimize this?
Supply Contracts Impact of volume discount and revenue sharing
Pricing strategies to reduce order-shipment variability
Distribution Strategies Selection of distribution strategies (e.g., direct ship vs. cross-docking)
How many cross-dock points are needed?
Cost/Benefits of different strategies
Integration and Strategic Partnering How can integration with partners be achieved?
What level of integration is best?
What information and processes can be shared?
What partnerships should be implemented and in which situations?
Outsourcing & Procurement Strategies What are our core supply chain capabilities and which are not?
Does our product design mandate different outsourcing approaches?
Risk management
Product Design How are inventory holding and transportation costs affected by product design?
How does product design enable mass customization?
Source: Simchi-Levi
Supply Chain Management_Janat Shah
Key Issues in SCM
Distribution network Configuration
How should management select warehouse locations and capacities, determine production levels for each product at each plant and set transportation flows between facilities from plant to warehouse, warehouse to retailer to minimize total production, inventory and transportation costs and satisfy service level requirements
Inventory control
Minimize inventory and holding costs
Uncertainty in customer demand and supply process leads to maintaining inventory.
Impact of forecasting tool to predict customer demand
Should retailer order more than, less than or equal to the demand forecast?
What inventory turnover ratio should be used?
Does this ratio vary from industry to industry?
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Key Issues in SCM
Production sourcing
need to balance production and transportation costs
Large production batches reduce production costs resulting in some facilities producing limited products but results in higher transportation costs
Alternatively, to reduce transportation costs requires each facility to produce small batches of all products increasing production costs
Supply contracts
Impact of supply contracts that incorporate revenue sharing and volume discount
Pricing strategies that provide incentives to buyers to order more products at the same time increasing supplier profit
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Key Issues in SCM
Distribution strategies
How much centralization or decentralization of the distribution system?
Impact of the above on inventory levels and transportation costs as well as service levels
When should products be transported by air from centralized locations to various demand points
When should competing retailers selling the same brand share inventory and what would be their competing advantage?
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Key Issues in SCM
Supply chain integration and strategic partnering
Integration achieved successfully by information sharing and operational planning
What information should be shared and how should it be used?
What is its impact on the design and operation of the supply chain?
What is the degree of integration needed within the organization and with external partners
What is the type of partnership that should be implemented for a given situation?
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Key Issues in SCM
Outsourcing and offshoring strategies
Deciding what to make internally and what to buy from outside sources
Determining internal core competencies
Risks associated with outsourcing and how can they be minimized
How do you ensure timely supply of products?
When should you keep dual sources for the same product?
When should you offshore?
What is the impact of offshoring on inventory levels and cost of capital
What are the risks of offshoring?
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Key Issues in SCM
Product design
Effective design plays critical role in the supply chain
Certain designs may increase inventory holding and transportation costs while other designs reduce manufacturing lead time
How to leverage product design to compensate for uncertainty in customer demand?
How to quantify the resultant savings?
How to implement mass customization?
What role does supply chain management play in the successful implementation of these concepts?
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Key Issues in SCM
Smart pricing
Organizations integrate pricing and inventory to influence market demand and improve bottom line
Can smart pricing strategies be used to improve supply chain performance?
Local issues
SCM impacted by local dynamics, customer preferences, government policies such as tax free zones, infrastructural constraints and strength of supply chain partners
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Key Issues in SCM
Information Technology and DS Systems
Critical enabler of effective SCM
What data should be transferred?
How frequently should it be transferred?
What infrastructure is required internally and between partners?
Customer Value
Measure of company contribution to its customer
How does SCM contribute to enhancing customer value?
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Chain Global Optimisation Managing Risk &
Uncertainty
Distribution Network
Contribution
Supply Y
Inventory Control Supply Y
Production Sourcing Supply Y
Supply Contracts Both Y Y
Distribution Strategies Supply Y Y
Outsourcing & Off
shoring
Development Y
Product Design Development Y
Information
Technology
Development Y Y
Customer Value Both Y Y
Smart Pricing Supply Y
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Managing Supply Chain Operations
• Demand forecasting
• Procurement planning
• Production planning
• Inventory management
• Transportation
• Order processing
• Relationship management
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Today’s Supply Chain Reality
•Lack of visibility reduces suppliers’ ability to handle variability
•Suppliers use inventory buffers to compensate increasing costs
•Errors in manual filling processes can cause stock-outs
•All of these issues can increase costs, lower customer service and reduce revenue
Increased outsourcing
Large global supply networks
Increased competition
Consumer driven
Supply Chain Management_Janat Shah
REASONS EXAMPLES
•Raw material shortages
•Internal and supplier parts shortages
•Productivity inefficiencies
Boeing Aircraft’s inventory write-down of $2.6
billion
•Sales and earnings shortfall
•Larger than anticipated inventories
Sales at U.S. Surgical Corporation declined 25
percent, resulting in a loss of $22 million
•Stiff competition
•General slowdown in the PC market
Intel reported a 38 percent decline in quarterly
profit
•Higher than expected orders for new products
over existing products
EMC Corp. missed its revenue guidance of $2.66
billion for the second quarter of 2006 by around
$100 million
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Uncertainty and Risk Factors Fluctuations of Inventory and Backorders
throughout the Supply Chain
FIGURE 1-3: Order variations in the supply chain
Supply Chain Management_Janat Shah
Forecasting is not a solution
Demand is not the only source of uncertainty
Recent trends make things more uncertain
Lean manufacturing
Outsourcing
Off-shoring
Uncertainty and Risk Factors
Supply Chain Management_Janat Shah
Uncertainty and Risk Factors
August 2005 – Hurricane Katrina
P&G coffee supplies from sites around New Orleans
Six month impact
2002 West Coast port strike
Losses of $1B/day
Store stock-outs, factory shutdowns
1999 Taiwan earthquake
Supply interruptions of HP, Dell
2001 India (Gujarat state) earthquake
Supply interruptions for apparel manufacturers
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Summary
What is supply chain management?
The supply chain encompasses all activities associated with
the transformation of goods from the raw material stage to
the final stage,.
Supply chain management involves planning, design and
control of flow of material, information and finance along
the supply chain
Why is the supply chain important?
On account of globalization and increased competition,
firms have to manage a larger number of product lines with
shorter product life cycles under the situation of changed
power in supply chain performance would help Indian firms
equations within a chain.
improvement in becoming globally competitive.