Supply Chains for Competitve Advantage

Supply Chain Management

for

Competitive AdvantageMichael Hugos

CIONetwork Services [email protected]

© 2005 Michael Hugos 2

What is a Supply Chain?

• “A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers.”– Ganeshan and Harrison, 1995


Old Supply Chains vs. New

Raw Materials

Transportation

Manufacturing

Distribution

Retail Show Room

Slow Moving, Industrial

Mass Markets

Vertically Integrated

Conglomerate

Fragmented, Fast Moving

Markets

Raw Materials Company

Manufacturing

Company

Transportation

Company

Independent

Distributor

Independent Retailer

VERTICAL INTEGRATION has given way to “VIRTUAL INTEGRATION” Companies now focus on their core competencies, and partner with other companies to create supply chains for fast moving markets.


Supply Chain Structure

Producers

Distributors

Retailers

Customers

Service

Providers Logistics Finance Market

Research Product Design Information

Technology

Supplier Company Customer

Ultimate Supplier

Supplier Company Customer Ultimate Customer

ServiceProviders

Simple Supply Chain

Extended Supply Chain

Raw Mat’l Producer

Manufctr Distributor Retailer Retail Customer

Logistics Provider

FinanceProvider

Business Customer

Market Research

Product Designer

Example of an Extended Supply Chain


Major Supply Chain Drivers

1.PRODUCTIONWhat, how, and when to produce

1.PRODUCTIONWhat, how, and when to produce

2.INVENTORYHow much to

make and how much to store

2.INVENTORYHow much to

make and how much to store

3.LOCATION

Where best to do what activity

3.LOCATION

Where best to do what activity

4.TRANSPORTATIO

NHow and when

to move product

4.TRANSPORTATIO

NHow and when

to move product

5.INFORMATIO

NThe basis for making these

decisions

RESPONSIVENESS vs.

EFFICIENCY

“Increase throughput while simultaneously reducing inventory and operating expense.”

- Goldratt, 1984


What is Supply Chain Management?

• “Supply chain management is the coordination of production, inventory location, transportation, and information among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.”– Hugos, 2002


Aligning Supply Chain & Strategy

1. Understand the requirements of your customers

2. Define core competencies and roles your company will play to serve your customers

3. Develop supply chain capabilities to support the roles your company has chosen


Responsiveness vs. Efficiency

Responsiveness Efficiency

1. Production -Excess capacity-Flexible manufacturing-Many smaller plants

-Little excess capacity-Narrow focus-Few central plants

2. Inventory -High inventory levels-Wide range of items

-Low inventory levels-Fewer items

3. Location -Many locations close to customers

- Few central locations serve wide areas

4. Transportation -Frequent shipments-Fast & Flexible mode

-Few large shipments-Slow, cheaper modes

5. Information - Collect & share timely, accurate data

- Cost of information drops , other costs rise


What Did Wal-Mart Do?

• Tactic of expanding around central DCs– Look for areas to support a group of stores

• Using EDI and RFID with suppliers– Lower operating costs, greater control

• “Big Box” store format– Combines a warehouse with a store, lowers costs

• “Everyday low prices”– Smoothes out demand swings, better forecasting

• Creates a supply chain that drives their business model (mass market, low price)


Markets & Required Performance

SUPPLY

MATURE

• Customer Service• Internal Efficiency• Demand Flexibility

STEADY

• Customer Service• Internal Efficiency

DEVELOPING

• Customer Service• Product Development

GROWTH

• Customer Service

D E M A N D


Performance Measures

Build to Stock CUSTOMER SERVICE Build to Order

• Order & line item fill rate• On time delivery rate• Return rate

• Quoted lead time & completion rate

• On time delivery rate• Warranty returns & repairs

INTERNAL EFFICIENCY

• Inventory value• Inventory turns

• Return on sales• Cash-to-cash cycle time

DEMAND FLEXIBILITY

• Activity cycle times• Upside flexibility

• Outside flexibility

PRODUCT DEVELOPMENT

• % of sales from new products• % of SKUs as new products

• Cycle time for new product development/introduction


The “Bullwhip Effect”

1200

Customer Demand 900

For Product 600

300

0 4 8 12 16 20 24 Mo.

1200

Retailer Orders 900

To Distributor 600

300

0 4 8 12 16 20 24 Mo.

1200

Distributor Orders 900

To Manufacturer 600

300

0 4 8 12 16 20 24 Mo.


Why The Bullwhip?

1. Demand Forecasting– Based on orders received not end user demand

2. Order Batching– Companies place periodic orders based on EOQ,

etc

3. Product Rationing– Allocation of available supply as % of amount

ordered

4. Product Pricing– Promotional pricing causes distortions in demand

5. Performance Incentives– Qtrly and yearly quotas and sales bonuses


Benefits of Data Sharing

• Company A may have high levels of customer service

• But success may be short-lived if its customer is not the end use customer the supply chain ultimately serves.

High

InventoryLevels

Company ‘A’

Low Service Levels High


Benefits of Data Sharing (cont.)

• Company A may be part of Supply Chain X which has to hold more inventory than Supply Chain Y to deliver similar levels of customer service.

High

InventoryLevels

Supply Chains ‘X’ & ‘Y’

• Bullwhip distortions drive up inventory

Low Service Levels High


Supply Chain Collaboration

• Companies perform operations in one or more of these supply chain activities

• Entire supply chains are more efficient if each company improves their performance

• Collaborative Planning, Forecasting & Replenishment (CPFR)

PLAN Demand

Forecasting Product

Pricing Inventory

Mgmt.

PLAN Demand

Forecasting Product

Pricing Inventory

Mgmt.

SOURCE Procurement Credit &

Collections

SOURCE Procurement Credit &

Collections

MAKE Product

Design Production

Scheduling Facility

Management

MAKE Product

Design Production

Scheduling Facility

Management

DELIVER Order

Management Delivery

Scheduling

DELIVER Order

Management Delivery

Scheduling


The Synchronized Supply Chain

Market demand sets the drum beat or pace. Manage uncertainty with a buffer of inventory or capacity. Reduce uncertainty and keep buffers low by sharing market data. Data is the rope that ties the supply chain together

(Slides excerpted from my book, Essentials of Supply Chain Management, John Wiley & Sons publisher, 2003)

Flow of Inventory

Raw Mat’l

Manfctr

Distr Retailer

Market Demand

Buffer

Buffer

Buffer

Buffer

Sales & Forecast Data

“Drum – Buffer – Rope”


Network Services Company’s

Supply Chain Strategy


Our Supply Chain Goal

• Create the low cost and highly responsive supply chain that we need in order to be the distributor of choice in the markets we serve – Automate all routine processing of common

transactions (orders, invoices, product masters, advance ship notices, price books) so as to increase productivity and decrease errors

– Focus people on more value added activities such as customer service, inventory management, and sales


Use UPCs to Communicate

Eliminate the COST, the ERRORS, and the WASTED TIME by using common item numbers…use UPC #s

NP&PC

ASNINVOICE

PO

ASN

MemberMember

Members

PO

INVOICE

PO

INVOICE

SupplierSupplier

Suppliers

Customers

POASNINVOICE

PO

INVOICE

POPRICE BKS

PRICE BKS

PRICE BKS


Use UPCs to Communicate (cont.)

• Members can still use their item numbers for internal transactions

• Use UPCs when communicating with Network, Customers, and Suppliers

• Benefits– Eliminate errors in ordering, packing, and

invoicing– Reductions in time spent finding product and

resolving discrepancies – Better customer service– Reductions in days sales outstanding (DSO)


Keep it Super Simple (KISS)

• ASCII Flat Files - every computer system can read & write these files, great format to exchange data

• Internet & FTP - these two technologies make data transfer easy and cheap

• Batch Interfaces - batch data transfer every hour, every ½ hour, every 10 minutes approaches real-time at a fraction of the cost of true real-time

• Relational Databases - provide powerful means to store, retrieve, and display data and are easily interfaced to spreadsheets and web pages


Network’s Supply Chain System• We combine simple technology to create a

cost effective and scalable supply chain system:– Use of Internet & FTP to transport data– Adoption of ASCII flat files as common format

(can be upgraded to XML when needed)– Batch interfaces to ERP and other systems– Data warehouse accessed via LAN and web


Supply Chain System Components

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMt.

ProspectLocation

NSCMt.

ProspectLocation

NetLink

NetLink

NetLink is a two-way, Internet-based data transfer system that links member company computer systems



NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMt.

ProspectLocation

NSCMt.

ProspectLocation

NetLink

NetLink

Data Whse

Data Whse

The data warehouses support web-based systems and coordination among NSC member companies



NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMt.

ProspectLocation

NSCMt.

ProspectLocation

NetLink

NetLink

Data Whse

Data Whse

NSC Virtual Private NetworkThe VPN

provides data security for our business transactions



NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMt.

ProspectLocation

NSCMt.

ProspectLocation

NetLink

NetLink

Data Whse

Data Whse

NSC Virtual Private Network

Order Entry

Customer Service

Product Catalog

Sales History

Inventory Status

Order Status

Web-Based E-Commerce

SystemsWeb-based systems currently provide product catalogs, order entry, and sales reporting


Network Services’ Supply Chain

CUSTOMER

Order Entry

Customer Service

Product Catalog

Sales History

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMemberCompany

NSCMt.

ProspectLocation

NSCMt.

ProspectLocation

CUSTOMER

CUSTOMER

CUSTOMER

CUSTOMER

NSC Virtual Private Network

Web-Based E-Commerce

SystemsNetLin

k

NetLink

Data Whse

SUPPLIER

SUPPLIER

SUPPLIER

Data Whse

Inventory Status

Order Status


Timely Data Enables Collaboration

Strategic Market View

Tactical Company View

Operations View

Data Warehouse

Reports to Suppliers

Reports to Customer

s

The data warehouse provides different views of the data to support senior executives, line managers, and staff. It also facilitates sharing of data with supply chain partners.


Business Benefits

• Data is entered only once• Reduction in both cost of order processing

and error rates • Automatic routing of orders, invoices, and

other data between all parties• Electronic integration with systems used

by customers, members, and suppliers


Business Results

• The data visibility enables us to be more responsive to customer, and suppliers needs

• We now sell supply chain management services along with our products

• Our position as the electronically connected “middleman” is what makes this all possible

• Slides excerpted from my books: Essentials of Supply Chain Management, John Wiley & Sons publisher, 2003Building The Real-Time Enterprise: An Executive Briefing, John Wiley & Sons publisher, 2005

Supply Chains for Competitve Advantage

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