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
© 2005 Michael Hugos 3
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.
© 2005 Michael Hugos 4
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
© 2005 Michael Hugos 5
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
© 2005 Michael Hugos 6
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
© 2005 Michael Hugos 7
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
© 2005 Michael Hugos 8
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
© 2005 Michael Hugos 9
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)
© 2005 Michael Hugos 10
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
© 2005 Michael Hugos 11
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
© 2005 Michael Hugos 12
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.
© 2005 Michael Hugos 13
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
© 2005 Michael Hugos 14
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
© 2005 Michael Hugos 15
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
© 2005 Michael Hugos 16
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
© 2005 Michael Hugos 17
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”
© 2005 Michael Hugos 18
Network Services Company’s
Supply Chain Strategy
© 2005 Michael Hugos 19
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
© 2005 Michael Hugos 20
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
© 2005 Michael Hugos 21
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)
© 2005 Michael Hugos 22
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
© 2005 Michael Hugos 23
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
© 2005 Michael Hugos 24
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
© 2005 Michael Hugos 25
Supply Chain System Components
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
© 2005 Michael Hugos 26
Supply Chain System Components
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
© 2005 Michael Hugos 27
Supply Chain System Components
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
© 2005 Michael Hugos 28
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
© 2005 Michael Hugos 29
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.
© 2005 Michael Hugos 30
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
© 2005 Michael Hugos 31
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
Top Related