Supply Chain Management - An Overview - Rg[1]

Supply Chain Management: An Overview Dr. Ranjan Ghosh Indian Institute of Management Calcutta

Some Definitions Supply Chain Management encompasses every effort involved in producing and delivering a final product or service, from the supplier’s supplier to the customer’s customer. Supply Chain Management includes 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, U.S.A.

Sources: plants vendors ports

Field Regional Warehouses : Warehouses : stocking stocking points points

Customers, demand centers sinks

Supply

Inventory & warehousing costs Production/ Transportati Transportati purchase on on costs costs Inventory & costs warehousing costs

Flows in a supply chain Information Product Funds

Customer

Some More Definitions Supply Chain Management deals with the management of materials, information, and financial flows in a network consisting of suppliers, manufacturers, distributors and customers. Stanford Supply Chain Forum Logistics involves “managing the flow of items, information, cash and ideas through the coordination of supply chain processes and through the strategic addition of place, period and pattern values. MIT Center for Transportation and Logistics

Some More Definitions 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 service requirements. SimchiLevi Call it distribution or logistics or supply chain management. By whatever name, it is the sinuous, gritty, and cumbersome process by which companies move, materials, parts, and products to customers. Fortune (1994)

Key Observations • Integrated activity: * Among functions such as logistics, manufacturing, distribution, design/engineering, marketing, finance,etc. * Multiple organizations,i.e., suppliers, customers& 3 PL 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.)

Key Observations (continued) • Most analysis involves trade-offs * Across

different entities * Across metrics: Cost, Service, Time, Risk, etc.

• Each interface in the supply chain represents Movement of goods * Information flows * Transfer of title * Purchase and sale *

Notable Quotes • In the end, all business comes down to Supply Chain vs. Supply Chain Robert Rodin, CEO, Marshall Industries •

Japanese Manufacturing Industry owes its Competitive Advantage and Strength to its Sub-Contracting Structure. Ministry of International Trade and Industry, Japan (1992)

•

Manufacturing now competes less on product and quality – which are often comparable – and more on inventory turns and speed to market. John Kasarda, Forbes, 1999

Philosophy of SCM • The entire supply chain is a single, integrated entity. • The cost, quality and delivery requirements of the customer are objectives shared by every company in the chain. • Inventory is the last resort for resolving supply and demand imbalances.

Efficiency: Basis of Production Management • Efficiency leads to lower costs • Lower cost implies Lower Price => Greater demand => Better market growth => Higher profits => Product/ Process development => Better market share • 1980s and 1990s: Era of achieving excellence at the firm level (JIT, TQM, TPM, BPR, ERP, etc) • 2000s: Era of achieving excellence at the value chain level (SCM, CRM, E-Commerce, etc.)

Evolution of SCM Stage 1: Vendor – Purchase – Production - Distribution – Retailer Stage 2: Materials Management Logistics Management Stage 3: Supply Chain Management

Why is SCM Important? • Strategic Advantage – It Can Drive Strategy * Manufacturing is becoming more efficient * SCM offers opportunity for differentiation (Dell) or 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

cost

Why is SCM Important? (continued) • At the company level, supply chain management impacts * COST – For many products, 20% to 40% of total product costs are controllable logistics costs. * SERVICE – For many products, performance factors such as inventory availability and speed of delivery are critical to customer satisfaction.

Conflicting Objectives in the Supply Chain 1. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. Manufacturing • Long run production • High quality • High productivity • Low production cost

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

Decision Phases in a Supply Chain • Supply chain strategy or design • Supply chain planning • Supply chain operation

Process view of a supply chain • Cycle view • Push/pull view

Cycle View of Supply Chains Customer Customer Order Cycle

Retailer Replenishment Cycle

Distributor Manufacturing Cycle

Manufacturer Procurement Cycle

Supplier

Customer order cycle • • • •

Customer arrival Customer order entry Customer order fulfillment Customer order receiving

Replenishment cycle • • • •

Retail order trigger Retail order entry Retail order fulfillment Retail order receiving

Manufacturing cycle • Order arrival from the distributor, retailer, or customer • Production scheduling • Manufacturing and shipping • Receiving at the distributor, retailer, or customer

Push/Pull View of Supply Chains • Pull processes: execution is initiated in response to a customer order • Push processes: execution is initiated in anticipation of customer orders

Push/Pull View of Supply Chains Customer Order Procurement,

Manufacturing and Replenishment cycles

PUSH PROCESSES

Cycle

PULL PROCESSES

Customer Order Arrives

SUPPLY CHAIN DESIGN: Three Components 1. Insourcing/OutSourcing (The Make/Buy or Vertical Integration Decision) 2. Partner Selection (Choice of suppliers and partners for the chain) 3. The Contractual Relationship (Arm's length, joint venture, long-term contract, strategic alliance, equity participation, etc.)

LESSONS IN SUPPLY CHAIN DESIGN 1. KNOW YOUR LOCATION IN THE VALUE CHAIN. 2. UNDERSTAND THE DYNAMICS OF VALUE CHAIN FLUCTUATIONS. 3. THINK CAREFULLY ABOUT THE ROLE OF VERTICAL COLLABORA-TIVE RELATIONSHIPS.

Dell Computer’s supply chain • • • • •

Customer Web page Assembly plant All of Dell’s suppliers and their suppliers Dell builds to order: customer order initiates manufacturing at Dell • Dell does not have a retailer, wholesaler, or distributor in its supply chain

Dell Computer’s supply chain • Dell carries only about 10 days of inventory (vs. 80 to 100 days of inventory for the competition) • Less inventory to become obsolete, e.g., computer chips • Less inventory to be defective (implications of small inventory and product quality) • No finished product inventory; some parts no inventory, e.g., Sony monitors • Dell outsources service and support to 3rd party providers

Supply chain objective • Maximize overall value generated • Value strongly correlated to supply chain profitability – the difference between the revenue generated from the customer and the overall cost across the supply chain • Example: A customer purchasing a computer from Dell pays $ 700 (the revenue) • Dell and other stages of the supply chain incur cost to convey information, produce the components, store them, transport them, transfer funds, etc.

Examples of Supply Chains • • • • • •

Dell / Compaq Toyota / GM / Ford Milk Distribution System of NDDB Merry-Go-Round System of NTPC Dabbawalas of Mumbai Amazon / Borders / Barnes and Noble

Order Size

The Dynamics of the Supply Chain

Customer Demand Distributor Distributor Orders Orders

Retailer Retailer Orders Orders

Production ProductionPlan Plan

Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Order Size

The Dynamics of the Supply Chain

Customer Demand

Production ProductionPlan Plan

Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Three Types of Integration of the Supply Chain • Geographical Integration *From local to world-wide logistics

• Functional Integration * From Function-dominated logistics to Flow-dominated logistics

• Inter-Firm Integration * From a Sector-based Logistics to Inter-sector Logistics

Supply Chain Integration is Difficult for two main reasons • Different facilities in the supply chain may have different, conflicting objectives * For instance, the suppliers are in direct conflict with the manufacturers’ desire for flexibility.

• The supply chain is a dynamic system that evolves over time * Not only do demand and supplier capabilities change over time, but supply chain relationships also evolve over time.

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)

• SOME ESTIMATES FOR INDIA * Logistics Spend … IN Rs. 2,40,000 crores US $ 50 Billion) * Share of GDP …….…… 12-13 % * Major Elements are ( Percentage of Total) * Transportation ……… * Inventories ……… 25 * Packaging ……… 11 * Handling & Warehousing ….. * Others & Losses ………

35

9 14

(approx.

Supply Chain:The Magnitude (continued)

• It is estimated that the grocery industry in USA 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 write-downs 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 • In 25 years, NDDB has enabled India to become the largest producer of milk by implementing a logistics and supply chain system that has eliminated several intermediaries, thereby leading to a much higher remunerative price (yield) for producers and lower price for consumers. • As described in the FORBES magazine, the Dabbawalas of Mumbai has achieved an extremely high level of reliability and precision (SIX SIGMA level in QA parlance) in delivering to their customers the products earmarked for them.

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, 19881996, 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.

Complexities Involved in Supply Chain Management • The supply chain is a complex network of facilities and organizations with different, conflicting objectives • Matching supply and demand is a major challenge • System variations over time are also an important consideration • Many supply chain problems are new and there is no clear understanding of all the issues involved

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.

Supply Chain Challenges • Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time

Sequential Optimization vs. Global Optimization

Sequential Optimization Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Global Optimization Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

Manufacturing Planning

Source: Duncan McFarlane

Distribution Planning

Demand Planning

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

Managing Uncertainty 1. Point forecasts are invariably wrong ↓ Plan for forecast range – use flexible contracts to go up/down. 2. Aggregate forecasts are more accurate ↓ Aggregate the forecast – postponement/risk pooling

Managing Uncertainty (cont’d) 3. Longer term forecasts are less accurate ↓ Shorten forecasting horizons – multiple orders; early detection 4. In many cases, somebody else knows what is going to happen ↓ Collaborate

What’s New in SCM? • Global competition • Shorter product life cycle • New, low-cost distribution channels • More powerful well-informed customers • Internet and E-Business strategies

Levels of implied demand uncertainty Detergent Long lead time steel

Price

High Fashion Emergency steel

Customer Need Responsiveness

Low

High

Implied Demand Uncertainty

Understanding the Supply Chain: CostResponsiveness Efficient Frontier Responsiveness High

Low High

Low

Cost

Responsive supply chain

Achieving Strategic Fit

o f it e F n Zo egic t a r St

Responsivenes s spectrum

Efficient supply chain Certain demand

Implied uncertainty spectrum

Uncertain demand

Key Concepts • Design, operate, and control the physical and information flows as though the channel were one seamless corporate entity. • Let the activities (and costs) migrate across corporate boundaries to where they make the most sense. • Rely on the benefits of channel integration to replace the benefits of open market forces. • Share the risks and the rewards between players.

New Concepts • Push-Pull strategies • Direct-to-Consumer • Strategic alliances • Manufacturing postponement • Dynamic Pricing • E-Procurement

Lead Time

Dealing with Product Variety: Mass Customization Long

to s Cu

Low

Short

Mass Customization on High i t Low za i m

Co st

High

Fragmentation of Markets and Product Variety • Are the requirements of all market segments served identical? • Are the characteristics of all products identical? • Can a single supply chain structure be used for all products / customers? No! A single supply chain will fail different customers on efficiency or responsiveness or both.

Tailored Logistics • Each Logistically Distinct Business (LDB) will have distinct requirements in terms of – Inventory – Transportation – Facility – Information

Key: How to gain efficiencies while tailoring logistics?

Applying the Framework to e-commerce: What is e-commerce?

• Commerce transacted over the Internet – Is product information displayed on the Internet? – Is negotiation over the Internet? – Is the order placed over the Internet? – Is the order tracked over the Internet? – Is the order fulfilled over the Internet? – Is payment transacted over the Internet?

•

Existing Channels for Commerce

Product information –

•

Negotiation –

•

Physical store, EDI, phone, fax, face to face, …

Order tracking –

•

Face to face, phone, fax, sealed bids, …

Order placement –

•

Physical stores, EDI, catalogs, face to face, …

EDI, phone, fax, …

Order fulfillment –

Customer pick up, physical delivery

Revenue Impact of E-Commerce • • • • • • •

Length of supply chain Product information Time to market Negotiating prices and contract terms Order placement and tracking Order fulfillment Payment

Cost Impact of E-Commerce • Facility costs – Site and processing cost

• Inventory costs – Cycle, Safety, Seasonal inventory

• Transportation costs – Inbound and outbound costs

• Information sharing – Coordination

A Plethora of Approaches • • • • • • • • • •

Just in Time Inventory Vendor Managed Inventory Quick Response Collaborative Planning, Forecasting and Replenishment Cross-docking / Flow through Centres Outsourcing / 3 PLs Activity Based Costing Internet / EDI Bar-Coding / RFID Build to Order

A Plethora of Approaches (continued) • • • • • • • •

Partnerships / Alliances Auctions / Exchanges Postponement Strategies SC Software SC Event Management Merge-In-Transit Collaborative Transportation Management Cash – to – Cash Metrics

Framework for analysis • Model Based Approach * Use fundamental models to gain insights * Analytical, though not necessarily Operations Research, approach * Extensive use of case studies and real-life examples

• Total System Cost * Avoid the silo effect of traditional logistics * Capture and integrate across different players in SC * Service can be included

Framework for Analysis (continued) • Portfolio of Solutions * Rarely is a single solution sufficient or practical * A set of solutions is usually more applicable * The context matters

• Management of Uncertainty * Risk can be measured, monitored, and managed * Impacts sourcing, contracting, pricing, incentives, etc.

Modeling for SCM • Forecasting Models

- These models allow prediction of demand based on past data or other parameters that are independently available. They enable better planning, given the lead-time necessary for response.

• Location Models - These models identify the optimal location of facilities such as plants and warehouses, considering the inbound and outbound transportation costs as well as the fixed and variable costs of operation at the locations under consideration. These are usually formulated as Mixed Integer Programming Models.

Modeling for SCM (cont’d) • Distribution Network Design Models - These models are usually comprehensive in nature, deciding between two, three and even four stages of distribution network, location of warehouses and break-bulk points, and sometimes even the transportation.

• Allocation Models - These models help in optimally allocating commodities from sources to destinations in a multi-source, multi-destination environment. The costs considered for optimisation are production costs and warehousing costs. The constraints considered can be due to demand, capacity, route restrictions, etc.

Modeling for SCM (cont’d) • Inventory Models - Inventory plays a major role in SCM. - Inventory can be of various types such as: - Batching and shipment inventories - Buffer stocks to take care of uncertainties - Pipeline inventory ( primary and secondary transportation ) These models minimize the total relevant cost, based on tradeoffs among, inter alia, inventory carrying cost, ordering cost, stock-out cost, transportation cost, taxes & duties, etc.

Modeling for SCM (cont’d) • Routing Models - These models allow optimal routing on a

transportation network from a given source to a destination. The models used are the Shortest Path Problem, the Traveling Salesman Problem and the Vehicle Routing Problem. Decision Support Systems that interactively use the expertise of the decision maker by providing graphical support through a map (i.e., using a Geographical Information System ) are also very useful in such decisions.

Modeling for SCM (cont’d) • Scheduling Models - These models enable allocation of resources to particular activities. Depending on the criteria of interest and the number of resources, the models are of aid in evaluating appropriate rules for allocation.

• Alternative Analysis - This model simply proposes the identification of alternatives, criteria for decision making and analysis of the alternatives across the criteria to arrive at the best choice. Formal approaches such as simulation and analytic hierarchy process could be used in assessing the implications of the criteria.