M1 SCM Introduction)

7/31/2019 M1 SCM Introduction)

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References: References:

Chopra & MeindlChopra & Meindl

Shridhara bhatShridhara bhat

InternetInternet

Supply Chain Management Supply Chain Management

Introduction

Introduction

Chapter 1Chapter 1



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Lecture OutlineLecture Outline

Supply Chain Management

SCM objectives and importanceSCM objectives and importance

decision phases – process view – decision phases – process view – competitive and supply chain strategies – competitive and supply chain strategies – achieving strategic fitachieving strategic fit

supply chain drivers & obstaclessupply chain drivers & obstacles

framework – framework – facilities – inventory – transportationfacilities – inventory – transportation

– information – sourcing – pricing – information – sourcing – pricing



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What is a Supply Chain?What is a Supply Chain?

All stages involved, directly or indirectly, in fulfilling aAll stages involved, directly or indirectly, in fulfilling acustomer requestcustomer request

Includes manufacturers, suppliers, transporters,Includes manufacturers, suppliers, transporters,warehouses, retailers, and customerswarehouses, retailers, and customers

Within each company, the supply chain includes allWithin each company, the supply chain includes allfunctions involved in fulfilling a customer requestfunctions involved in fulfilling a customer request

(product development, marketing, operations,(product development, marketing, operations,distribution, finance, customer service)distribution, finance, customer service)



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What is a Supply Chain?What is a Supply Chain?

Customer is an integral part of the supply chainCustomer is an integral part of the supply chain Includes movement of products from suppliers toIncludes movement of products from suppliers to

manufacturers to distributors, but also includesmanufacturers to distributors, but also includesmovement of information, funds, and products in bothmovement of information, funds, and products in bothdirectionsdirections

Probably more accurate to use the term “supplyProbably more accurate to use the term “supplynetwork” or “supply web”.network” or “supply web”.

Typical supply chain stages:Typical supply chain stages:

suppliers, manufacturers, distributors, retailers,suppliers, manufacturers, distributors, retailers,customerscustomers



Supply chain for a manufacturingSupply chain for a manufacturing

organizationorganization

SupplieSupplier ar a

Supplier bSupplier b

Supplier cSupplier c

storagestorage mfgmfg storagestorageDistributor Distributor

RRetaileetailer r CustCust



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Supply Chain IllustrationSupply Chain Illustration


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SupplySupplyChainChain

for for

DenimDenimJeansJeans



SupplySupplyChainChainfor for

DenimDenimJeansJeans(cont.)(cont.)



Supply ChainSupply Chain

All facilities, functions, activities, All facilities, functions, activities,

associated with flow and transformationassociated with flow and transformationof goods and services from raw materialsof goods and services from raw materials

to customer, as well as the associatedto customer, as well as the associated

information flowsinformation flows

An integrated group of processes to An integrated group of processes to“source,” “make,” and “deliver” products“source,” “make,” and “deliver” products



Supply Chain ManagementSupply Chain Management

SCM is a set of approaches utilized to efficiently integrateSCM is a set of approaches utilized to efficiently integrate

suppliers, manufacturers, warehouses and stores, so thatsuppliers, manufacturers, warehouses and stores, so that

merchandise is produced and distributed at the rightmerchandise is produced and distributed at the rightquantities, to the right locations, and at the right time, in order quantities, to the right locations, and at the right time, in order

to minimize system-wide costs while satisfying customer to minimize system-wide costs while satisfying customer

requirements.requirements.

(David Simchi – Levi)(David Simchi – Levi)

(SCM) is the management of a network of interconnected

businesses involved in the ultimate provision of product and

service packages required by end customers (Harland, 1996)

by Wikipedia

http://en.wikipedia.org/wiki/Business

http://en.wikipedia.org/wiki/Product_(business)

http://en.wikipedia.org/wiki/Service_(economics)

http://en.wikipedia.org/wiki/Service_(economics)

http://en.wikipedia.org/wiki/Product_(business)

http://en.wikipedia.org/wiki/Business



The Objective of a Supply ChainThe Objective of a Supply Chain

Maximize overall value createdMaximize overall value created

((Supply chain value: difference between what the final product isSupply chain value: difference between what the final product is

worth to the customer and the effort the supply chain expends inworth to the customer and the effort the supply chain expends infilling the customer’s requestfilling the customer’s request))

To achieve maximum supply chain profitabilityTo achieve maximum supply chain profitability

((total profit to be shared across all supply chain stagestotal profit to be shared across all supply chain stages))

To reduce supply chain cost to the minimum possibleTo reduce supply chain cost to the minimum possiblelevel.level.



The Objective of a Supply ChainThe Objective of a Supply Chain

Sources of supply chain revenue: the customerSources of supply chain revenue: the customer

Sources of supply chain cost: flows of information,Sources of supply chain cost: flows of information,

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

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

tota l supply chain profitability



Traditional View: Logistics inTraditional View: Logistics in

the Economy (1990, 1996)the Economy (1990, 1996)

Goods TransportationGoods Transportation $352, $455 Billion$352, $455 Billion

Inventory ExpenseInventory Expense $221, $311 Billion$221, $311 Billion Administrative ExpenseAdministrative Expense $27, $31 Billion$27, $31 Billion

Logistics Related ActivityLogistics Related Activity 11%, 10.5% of GNP11%, 10.5% of GNP

Source: Cass LogisticsSource: Cass Logistics



Supply Chain Management:Supply Chain Management:

The True MagnitudeThe True Magnitude Compaq estimates it lost $.5 billion to $1 billionCompaq estimates it lost $.5 billion to $1 billion

in sales in 1995 because laptops were notin sales in 1995 because laptops were not

available when and where neededavailable when and where needed P&G estimates it saved retail customers $65P&G estimates it saved retail customers $65

million by collaboration resulting in a bettermillion by collaboration resulting in a better

match of supply and demandmatch of supply and demand



The Importance of Supply Chain Mgmt.The Importance of Supply Chain Mgmt.

It integrates the logistic requirement of supply chainIt integrates the logistic requirement of supply chainstages.stages.

It reduces the supply chain cycle time, reduce inventory,It reduces the supply chain cycle time, reduce inventory,reduce cost and insure better deliveries.reduce cost and insure better deliveries.

A promising area for cost reduction.A promising area for cost reduction. It relates the process internal and external to theIt relates the process internal and external to the

organization effectively.organization effectively. It reduce the uncertainty and risk in supply chain.It reduce the uncertainty and risk in supply chain. Ensure right stuff to right place at right time.Ensure right stuff to right place at right time. Increase competitivenessIncrease competitiveness Minimize waste and maximize value.Minimize waste and maximize value.



Decision Phases of a Supply ChainDecision Phases of a Supply Chain

Successful supply chain management requiresSuccessful supply chain management requires

many decision relating to flow of product,many decision relating to flow of product,

information and fund. These decision fall into threeinformation and fund. These decision fall into threecategories.categories.

Supply chain strategy or designSupply chain strategy or design

Supply chain planningSupply chain planning Supply chain operationSupply chain operation



Supply Chain Strategy or DesignSupply Chain Strategy or Design

Decisions about how to structure the supply chain andDecisions about how to structure the supply chain andwhat processes each stage will performwhat processes each stage will perform

Strategic supply chain decisionsStrategic supply chain decisions Locations and capacities of facilitiesLocations and capacities of facilities Products to be made or stored at various locationsProducts to be made or stored at various locations Modes of transportationModes of transportation

Information systemsInformation systems Supply chain design decisions are long-term andSupply chain design decisions are long-term andexpensive – must take into account market uncertaintyexpensive – must take into account market uncertainty



Supply Chain PlanningSupply Chain Planning

Time Frame considered is 3-6 months.Time Frame considered is 3-6 months.

Definition of a set of policies that govern short-termDefinition of a set of policies that govern short-term

operationsoperations Fixed by the supply configuration from previous phaseFixed by the supply configuration from previous phase

Starts with a forecast of demand in the coming yearStarts with a forecast of demand in the coming year



Supply Chain PlanningSupply Chain Planning

Planning decisions:Planning decisions: Which markets will be supplied from which locationsWhich markets will be supplied from which locations Planned buildup of inventoriesPlanned buildup of inventories Subcontracting, backup locationsSubcontracting, backup locations Inventory policiesInventory policies

Timing and size of market promotionsTiming and size of market promotions

Must consider in planning decisions demandMust consider in planning decisions demanduncertainty, exchange rates, competition over the timeuncertainty, exchange rates, competition over the timehorizonhorizon



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Supply Chain OperationSupply Chain Operation

Time horizon is weekly or dailyTime horizon is weekly or daily Decisions regarding individual customer ordersDecisions regarding individual customer orders

Supply chain configuration is fixed and operatingSupply chain configuration is fixed and operatingpolicies are determinedpolicies are determined

Goal is to implement the operating policies asGoal is to implement the operating policies aseffectively as possibleeffectively as possible

Allocate orders to inventory or production, set orderAllocate orders to inventory or production, set orderdue dates, generate pick lists at a warehouse, allocatedue dates, generate pick lists at a warehouse, allocatean order to a particular shipment, set deliveryan order to a particular shipment, set deliveryschedules, place replenishment ordersschedules, place replenishment orders

Much less uncertainty (short time horizon)Much less uncertainty (short time horizon)



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Process View of a Supply ChainProcess View of a Supply Chain

Cycle view: processes in a supply chain are dividedCycle view: processes in a supply chain are dividedinto a series of cycles, each performed at theinto a series of cycles, each performed at the

interfaces between two successive supply chaininterfaces between two successive supply chainstagesstages

Push/pull view: processes in a supply chain are dividedPush/pull view: processes in a supply chain are dividedinto two categories depending on whether they areinto two categories depending on whether they are

executed in response to a customer order (pull) or inexecuted in response to a customer order (pull) or inanticipation of a customer order (push)anticipation of a customer order (push)



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Cycle View of Supply ChainsCycle View of Supply Chains

Customer Order CycleCustomer Order Cycle

Replenishment CycleReplenishment Cycle

Manufacturing CycleManufacturing Cycle

Procurement CycleProcurement Cycle

Customer Customer

Retailer Retailer

Distributor Distributor

Manufacturer Manufacturer

Supplier Supplier



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Cycle View of a Supply ChainCycle View of a Supply Chain

Each cycle occurs at the interface between twoEach cycle occurs at the interface between twosuccessive stagessuccessive stages

Customer order cycle (customer-retailer)Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor)Replenishment cycle (retailer-distributor)

Manufacturing cycle (distributor-manufacturer)Manufacturing cycle (distributor-manufacturer)

Procurement cycle (manufacturer-supplier)Procurement cycle (manufacturer-supplier)

Cycle view clearly defines processes involved and theCycle view clearly defines processes involved and theowners of each process. Specifies the roles andowners of each process. Specifies the roles andresponsibilities of each member and the desiredresponsibilities of each member and the desiredoutcome of each process.outcome of each process.



Push/Pull View of SupplyPush/Pull View of Supply

ChainsChains

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 10-10-2424



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Push/Pull View of Push/Pull View of

Supply Chain ProcessesSupply Chain Processes Supply chain processes fall into one of two categoriesSupply chain processes fall into one of two categories

depending on the timing of their execution relative todepending on the timing of their execution relative to

customer demandcustomer demand Pull: execution is initiated in response to a customerPull: execution is initiated in response to a customer

order (reactive)order (reactive)

Push: execution is initiated in anticipation of customerPush: execution is initiated in anticipation of customer

orders (speculative)orders (speculative)



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Supply Chain Macro Processes in aSupply Chain Macro Processes in a

FirmFirm Supply chain processes can be classified intoSupply chain processes can be classified into

Customer Relationship Management (CRM)Customer Relationship Management (CRM)

Internal Supply Chain Management (ISCM)Internal Supply Chain Management (ISCM) Supplier Relationship Management (SRM)Supplier Relationship Management (SRM)

Integration among the above three macro processes isIntegration among the above three macro processes iscritical for effective and successful supply chaincritical for effective and successful supply chain

managementmanagement



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Source: Adapted from Garrison Wieland for “Wal-Mart’s Supply

Chain,” Harvard Business Review 70(2; March–April 1992),

pp. 60–71.

Relationship between Facilities and Functionsalong the Wal-Mart Supply Chain



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Amazon.com



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Competitive and SupplyCompetitive and Supply

Chain StrategiesChain Strategies Competitive strategy: defines the set of customer needs a firmCompetitive strategy: defines the set of customer needs a firm

seeks to satisfy through its products and servicesseeks to satisfy through its products and services

Product development strategy: specifies the portfolio of newProduct development strategy: specifies the portfolio of new

products that the company will try to developproducts that the company will try to develop

Marketing and sales strategy: specifies how the market will beMarketing and sales strategy: specifies how the market will be

segmented and product positioned, priced, and promotedsegmented and product positioned, priced, and promoted

Supply chain strategy:Supply chain strategy:

determines the nature of material procurement, transportationdetermines the nature of material procurement, transportationof materials, manufacture of product or creation of service,of materials, manufacture of product or creation of service,

distribution of productdistribution of product Consistency and support between supply chain strategy,Consistency and support between supply chain strategy,

competitive strategy, and other functional strategies iscompetitive strategy, and other functional strategies is

importantimportant



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Achieving Strategic FitAchieving Strategic Fit

Strategic fit:Strategic fit:

Competitive and supply chain strategies have the sameCompetitive and supply chain strategies have the same

goalsgoals

A company may fail because of a lack of strategic fit or because A company may fail because of a lack of strategic fit or because

its processes and resources do not provide the capabilities toits processes and resources do not provide the capabilities to

execute the desired strategyexecute the desired strategy



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How is Strategic Fit Achieved?How is Strategic Fit Achieved?

Step 1: Understanding the customer and supply chainStep 1: Understanding the customer and supply chainuncertaintyuncertainty

Step 2: Understanding the supply chainStep 2: Understanding the supply chain Step 3: Achieving strategic fitStep 3: Achieving strategic fit



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Step 1: Understanding the Customer Step 1: Understanding the Customer

and Supply Chain Uncertaintyand Supply Chain Uncertainty

Identify the needs of the customer segment being servedIdentify the needs of the customer segment being served

Quantity of product needed in each lotQuantity of product needed in each lot

Response time customers will tolerateResponse time customers will tolerate Variety of products neededVariety of products needed

Service level requiredService level required

Price of the productPrice of the product

Desired rate of innovation in the productDesired rate of innovation in the product



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Achieving Strategic FitAchieving Strategic Fit

Understanding the CustomerUnderstanding the Customer Lot sizeLot size

Response timeResponse time Service levelService level Product varietyProduct variety PricePrice InnovationInnovation

Implied Implied

Demand Demand

Uncertainty Uncertainty



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Impact of Customer Needs on ImpliedImpact of Customer Needs on ImpliedDemand UncertaintyDemand Uncertainty

Customer Need Causes implied demand uncertaintyto increase because …

Range of quantity increases Wider range of quantity implies greater variance in demand

Lead time decreases Less time to react to orders

Variety of products required increases Demand per product becomes moredisaggregated

Number of channels increases Total customer demand is nowdisaggregated over more channels

Rate of innovation increases New products tend to have moreuncertain demand

Required service level increases Firm now has to handle unusual surges

in demand



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Levels of Implied DemandLevels of Implied Demand

UncertaintyUncertainty Predictable

supply and

demand

Salt at a

supermarket

A newcommunicatio

device

Highly uncertain

supply and deman

Figure 2.2: The Implied Uncertainty (Demand and Supply)

Predictable supply and uncertaindemand or uncertain supply and

predictable demand or somewhat

uncertain supply and demand

An existing

automobile

model



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Step 2: Understanding theStep 2: Understanding the

Supply ChainSupply Chain

How does the firm best meet demand?How does the firm best meet demand?

Supply chain responsiveness -- ability toSupply chain responsiveness -- ability to

respond to wide ranges of quantities demandedrespond to wide ranges of quantities demanded meet short lead timesmeet short lead times handle a large variety of productshandle a large variety of products build highly innovative productsbuild highly innovative products meet a very high service levelmeet a very high service level



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Step 2: Understanding theStep 2: Understanding the

Supply ChainSupply Chain There is a cost to achieving responsivenessThere is a cost to achieving responsiveness

Supply chain efficiency: cost of making and deliveringSupply chain efficiency: cost of making and delivering

the product to the customerthe product to the customer Increasing responsiveness results in higher costs thatIncreasing responsiveness results in higher costs that

lower efficiencylower efficiency



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Understanding the Supply Chain: Cost-Understanding the Supply Chain: Cost-Responsiveness Efficient Frontier Responsiveness Efficient Frontier

HighHigh Low Low

Low Low

HighHigh

ResponsivenessResponsiveness

CostCost



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Step 3: Achieving Strategic FitStep 3: Achieving Strategic Fit

Step is to ensure that what the supplyStep is to ensure that what the supplychain does well is consistent with targetchain does well is consistent with targetcustomer’s needscustomer’s needs



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Responsiveness SpectrumResponsiveness Spectrum

(Figure 2.4)(Figure 2.4)

Integrated Integrated

steel mill steel mill

Dell Dell

Highly Highly

efficient efficient

Highly Highly

responsiveresponsive

Somewhat Somewhat

efficient efficient

Somewhat Somewhat

responsiveresponsive

HanesHanes

apparel apparel

Most Most

automotiveautomotive

production production



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Obstacles to AchievingObstacles to Achieving

Strategic FitStrategic Fit Increasing variety of productsIncreasing variety of products

Decreasing product life cyclesDecreasing product life cycles

Increasingly demanding customersIncreasingly demanding customers Fragmentation of supply chain ownershipFragmentation of supply chain ownership

GlobalizationGlobalization

Difficulty executing new strategiesDifficulty executing new strategies



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Drivers of Supply Chain PerformanceDrivers of Supply Chain Performance FacilitiesFacilities

places where inventory is stored, assembled, or fabricatedplaces where inventory is stored, assembled, or fabricated production sites and storage sitesproduction sites and storage sites

InventoryInventory raw materials, WIP, finished goods within a supply chainraw materials, WIP, finished goods within a supply chain inventory policiesinventory policies

TransportationTransportation moving inventory from point to point in a supply chainmoving inventory from point to point in a supply chain combinations of transportation modes and routescombinations of transportation modes and routes

InformationInformation data and analysis regarding inventory, transportation, facilitiesdata and analysis regarding inventory, transportation, facilities

throughout the supply chainthroughout the supply chain potentially the biggest driver of supply chain performancepotentially the biggest driver of supply chain performance

SourcingSourcing functions a firm performs and functions that are outsourcedfunctions a firm performs and functions that are outsourced

PricingPricing Price associated with goods and services provided by a firm toPrice associated with goods and services provided by a firm to

the supply chainthe supply chain



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A Framework for Structuring DriversA Framework for Structuring Drivers

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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FacilitiesFacilities

Role in the supply chainRole in the supply chain the “where” of the supply chainthe “where” of the supply chain

manufacturing or storage (warehouses)manufacturing or storage (warehouses) Role in the competitive strategyRole in the competitive strategy

economies of scale (efficiency priority)economies of scale (efficiency priority) larger number of smaller facilities (responsivenesslarger number of smaller facilities (responsiveness

priority)priority)



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InventoryInventory

Role in the supply chainRole in the supply chain

Role in the competitive strategyRole in the competitive strategy Components of inventory decisionsComponents of inventory decisions



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Inventory: Role in the Supply ChainInventory: Role in the Supply Chain

Inventory exists because of a mismatch between supply andInventory exists because of a mismatch between supply and

demanddemand

Source of cost and influence on responsivenessSource of cost and influence on responsiveness



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Inventory: Role in CompetitiveInventory: Role in CompetitiveStrategyStrategy

If responsiveness is a strategic competitive priority, aIf responsiveness is a strategic competitive priority, afirm can locate larger amounts of inventory closer tofirm can locate larger amounts of inventory closer to

customerscustomers If cost is more important, inventory can be reduced toIf cost is more important, inventory can be reduced to

make the firm more efficientmake the firm more efficient



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TransportationTransportation


Role in the competitive strategyRole in the competitive strategy Components of transportation decisionsComponents of transportation decisions

T t ti R l iT t ti R l i



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Transportation: Role inTransportation: Role inthe Supply Chainthe Supply Chain

Moves the product between stages in theMoves the product between stages in thesupply chainsupply chain

Impact on responsiveness and efficiencyImpact on responsiveness and efficiency

Faster transportation allows greaterFaster transportation allows greater

responsiveness but lower efficiencyresponsiveness but lower efficiency

Also affects inventory and facilitiesAlso affects inventory and facilities



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Transportation:Transportation:Role in the Competitive StrategyRole in the Competitive Strategy

If responsiveness is a strategic competitive priority,If responsiveness is a strategic competitive priority,then faster transportation modes can provide greaterthen faster transportation modes can provide greater

responsiveness to customers who are willing to pay forresponsiveness to customers who are willing to pay foritit

Can also use slower transportation modes forCan also use slower transportation modes forcustomers whose priority is price (cost)customers whose priority is price (cost)

Can also consider both inventory and transportation toCan also consider both inventory and transportation tofind the right balancefind the right balance



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Components of Components of

Transportation DecisionsTransportation Decisions Mode of transportation:Mode of transportation:

air, truck, rail, ship, pipeline, electronicair, truck, rail, ship, pipeline, electronic

transportationtransportation vary in cost, speed, size of shipment, flexibilityvary in cost, speed, size of shipment, flexibility

Route and network selectionRoute and network selection route: path along which a product is shippedroute: path along which a product is shipped network: collection of locations and routesnetwork: collection of locations and routes

In-house or outsourceIn-house or outsource

Overall trade-off: Responsiveness versus efficiencyOverall trade-off: Responsiveness versus efficiency



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InformationInformation


Role in the competitive strategyRole in the competitive strategy Components of information decisionsComponents of information decisions



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Information:Information:Role in the Competitive StrategyRole in the Competitive Strategy

Allows supply chain to become more efficient andAllows supply chain to become more efficient andmore responsivemore responsive at the same timeat the same time (reduces the need(reduces the need

for a trade-off)for a trade-off) Information technologyInformation technology

What information is most valuable?What information is most valuable?



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SourcingSourcing


Role in the competitive strategyRole in the competitive strategy Components of sourcing decisionsComponents of sourcing decisions



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Sourcing: Role inSourcing: Role in

the Supply Chainthe Supply Chain Set of business processes required toSet of business processes required to

purchase goods and services in a supplypurchase goods and services in a supplychainchain

Supplier selection, single vs. multipleSupplier selection, single vs. multiplesuppliers, contract negotiationsuppliers, contract negotiation

S iS i



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Sourcing:Sourcing:Role in the CompetitiveRole in the Competitive

StrategyStrategy Sourcing decisions are crucial becauseSourcing decisions are crucial because

they affect the level of efficiency andthey affect the level of efficiency andresponsiveness in a supply chainresponsiveness in a supply chain

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

Example 3.6: CiscoExample 3.6: Cisco



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Components of SourcingComponents of Sourcing

DecisionsDecisions In-house versus outsource decisionsIn-house versus outsource decisions

Supplier evaluation and selectionSupplier evaluation and selection Procurement processProcurement process

Overall trade-off: Increase the supplyOverall trade-off: Increase the supply

chain profitschain profits



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PricingPricing


Role in the competitive strategyRole in the competitive strategy Components of pricing decisionsComponents of pricing decisions



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Pricing: Role inPricing: Role in

the Supply Chainthe Supply Chain Pricing determines the amount to chargePricing determines the amount to charge

customers in a supply chaincustomers in a supply chain

Pricing strategies can be used to matchPricing strategies can be used to matchdemand and supplydemand and supply

S iS i



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Sourcing:Sourcing:Role in the CompetitiveRole in the Competitive

StrategyStrategy Firms can utilize optimal pricingFirms can utilize optimal pricing

strategies to improve efficiency andstrategies to improve efficiency andresponsivenessresponsiveness

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



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Components of PricingComponents of Pricing

DecisionsDecisions Pricing and economies of scalePricing and economies of scale

Everyday low pricing versus high-lowEveryday low pricing versus high-lowpricingpricing

Fixed price versus menu pricingFixed price versus menu pricing

Overall trade-off: Increase the firm profitsOverall trade-off: Increase the firm profits



Thank youThank you

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