BIS 544 Supply Chain Management Chapter 1 Understanding

Traditional View: Logistics in the Economy (1990, 1996) u u Freight Transportation Inventory Expense Administrative Expense Logistics Related Activity $352, $455 Billion $221, $311 Billion $27, $31 Billion 11%, 10. 5% of GNP Source: Cass Logistics © 2004 Prentice-Hall, Inc. 1 -2

Traditional View: Logistics in the Manufacturing Firm Profit 4% u Logistics Cost 21% u Marketing Cost 27% u u Manufacturing Cost © 2004 Prentice-Hall, Inc. 48% Profit Logistics Cost Marketing Cost Manufacturing Cost 1 -3

Supply Chain Management: The Magnitude in the Traditional View u Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies – A typical box of cereal spends 104 days from factory to sale – A typical car spends 15 days from factory to dealership u Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago © 2004 Prentice-Hall, Inc. 1 -4

Supply Chain Management: The True Magnitude u u u Compaq estimates it lost $. 5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed When the 1 gig processor was introduced by AMD, the price of the 800 mb processor dropped by 30% P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand © 2004 Prentice-Hall, Inc. 1 -5

Critical Operations Management Decisions u u u u u Goods & Service Design Quality Management Process & Capacity Design Location Selection Layout Design Human Resource Management Supply Chain Management Inventory Management Scheduling Maintenance © 2004 Prentice-Hall, Inc. 1 -6

Gaining Competitive Advantage Strategies involve: u u u Better Product Differentiation Faster Response Lower

Outline u u u What is a Supply Chain? Decision Phases in a Supply

What is a Supply Chain? u All stages involved, directly or indirectly, in fulfilling a customer request – – – Suppliers, manufacturers, wholesalers/distributers, retailers, Customers as well as transporters. u Examples: Wal-Mart, Dell © 2004 Prentice-Hall, Inc. 1 -9

Supply Chain Supplier Manufacturer Wholesaler/ Distributer Retailer Customer Information Product Funds © 2004 Prentice-Hall,

What is a Supply Chain? u Customer is an integral part of the supply chain u Includes movement of information, funds, and products in both directions u Probably more accurate to use the term “supply network” or “supply web” u All stages may not be present in all supply chains (e. g. , no retailer or distributor for Dell) © 2004 Prentice-Hall, Inc. 1 -11

What is a Supply Chain? P&G or other manufacturer Wall Mart or Third party DC Plastic Producer Tenneco Packaging Chemical manufacturer (e. g. Oil Company) © 2004 Prentice-Hall, Inc. Paper Manufacturer Wall Mart Supermarket Customer wants detergent and goes to Wall Mart Chemical manufacturer (e. g. Oil Company) Timber Industry 1 -12

The Objective of a Supply Chain u The aim of SCM is to maximize SC surplus, i. e. , the value created by the SC SC Surplus = Customer Value – SC Cost Customer Value is different for each customer and can be estimated by the max. amount the customer is willing to pay. SC costs are the costs in filling the customer’s request. u Part of the SC Surplus is left with the consumer as Consumer Surplus=Customer Value - Product Price u SC Profitability = Revenue generated from the customer - Overall cost across the SC SC Surplus or SC Value is highly correlated to SC profitability for profit making SCs. u © 2004 Prentice-Hall, Inc. 1 -13

The Objective of a Supply Chain u u u Example: Dell receives $2000 from a customer for a computer (revenue) Supply chain incurs costs (information, storage, transportation, components, assembly, etc. ) Difference between $2000 and the sum of all of these costs is the supply chain profit. Supply chain profitability is total profit to be shared across all stages of the supply chain Supply chain success should be measured by total supply chain profitability, not profits at an individual stage! © 2004 Prentice-Hall, Inc. 1 -14

The Objective of a Supply Chain u Sources of supply chain revenue: the customer u Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain u Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability © 2004 Prentice-Hall, Inc. 1 -15

Value, Revenue, Cost u Value obtained by a customer purchasing a detergent from Wal -Mart depends on – Quality of the detergent – Distance the costomer has to travel – Availability of the detergent at the stock u u A growth in SC surplus increases the size of total pie, allowing the parties in the SC to benefit. SC decisions should be analyzed in terms of their impact in the SC surplus. – Ex: The impact of introducing a distributor to a fast moving goods retail SC in USA and India are different! Why? © 2004 Prentice-Hall, Inc. 1 -16

Decision Phases of a Supply Chain u u u Supply chain strategy or design

Supply Chain Strategy or Design u u Decisions about the structure of the supply chain and what processes each stage will perform over the next several “years”. Strategic supply chain decisions – – u u Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty © 2004 Prentice-Hall, Inc. 1 -18

Supply Chain Planning u Definition of a set of policies that govern short-term operations u Fixed by the supply configuration from previous phase u Starts with a forecast of demand in the coming year u Usually time horizon is the “quarter of a year”. © 2004 Prentice-Hall, Inc. 1 -19

Supply Chain Planning u Planning decisions: – – – u Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon © 2004 Prentice-Hall, Inc. 1 -20

Supply Chain Operation u u Time horizon is “weekly or daily”. Decisions regarding individual customer orders – Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders u u u Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Much less uncertainty (short time horizon) © 2004 Prentice-Hall, Inc. 1 -21

Process View of a Supply Chain u Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages u Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in “response” to a customer order (pull) or in “anticipation” of a customer order (push) © 2004 Prentice-Hall, Inc. 1 -22

Cycle View of Supply Chains Customer Order Cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle

Cycle View of a Supply Chain u Each cycle occurs at the interface between two successive stages – – u Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor) Manufacturing cycle (distributor-manufacturer) Procurement cycle (manufacturer-supplier) Cycle view clearly defines processes involved and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process. © 2004 Prentice-Hall, Inc. 1 -24

Customer Order Cycle u u Involves all processes directly involved in receiving and filling the customer’s order Customer arrival Customer order entry Customer order fulfillment Customer order receiving © 2004 Prentice-Hall, Inc. 1 -25

Replenishment Cycle u u All processes involved in replenishing retailer inventories (retailer is now the customer) Retail order trigger Retail order entry Retail order fulfillment Retail order receiving © 2004 Prentice-Hall, Inc. 1 -26

Manufacturing Cycle u u All processes involved in replenishing distributor (or retailer) inventory Order arrival from the distributor, retailer, or customer Production scheduling Manufacturing and shipping Receiving at the distributor, retailer, or customer © 2004 Prentice-Hall, Inc. 1 -27

Procurement Cycle u u All processes necessary to ensure that materials are available for manufacturing to occur according to schedule Manufacturer orders components from suppliers to replenish component inventories However, component orders can be determined precisely from production schedules (different from retailer/distributor orders that are based on uncertain customer demand) Important that suppliers be linked to the manufacturer’s production schedule © 2004 Prentice-Hall, Inc. 1 -28

Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles PUSH PROCESSES Customer Order

Push/Pull View of Supply Chain Processes u u u Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand Pull: execution is initiated in response to a customer order (reactive). Also called make-to-order Push: execution is initiated in anticipation of customer orders (speculative). Also called make-to-stock Push processes are for uncertain demand environments whereas pull is for known demand Push/pull boundary separates push processes from pull processes © 2004 Prentice-Hall, Inc. 1 -30

Push/Pull View of Supply Chain Processes u u Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders Can combine the push/pull and cycle views – L. L. Bean – Dell u The relative proportion of push and pull processes can have an impact on supply chain performance © 2004 Prentice-Hall, Inc. 1 -31

Ex: L. L. Bean, a mail order company Customer PULL PROCESSES Customer Order Cycle Customer order arrives Replenishment and Manufacturing Cycle L. L. Bean Manufacturer PUSH PROCESSES Procurement Cycle Supplier © 2004 Prentice-Hall, Inc. 1 -32

Ex: Dell Computers PULL PROCESSES Customer Order and Manufacturing Cycle Manufacturer Customer order arrives

Supply Chain Macro Processes u All SC processes can be classified into three categories. Their integration is crutial for a successful SCM. Supplier SRM Supplier Relationship Management u. Source u. Negotiate u. Buy u. Design Collaboration u. Supply Collaboration © 2004 Prentice-Hall, Inc. Customer Firm ISCM CRM Internal Supply Chain Customer Relationship Management u. Strategic Planning u. Demand Planning u. Supply Planning u. Fulfillment u. Field Service u. Market u. Price u. Sell u. Call Center u. Order Management 1 -34

The Importance of Supply Chain Flows u u Supply chain decisions on design and management of supply chain flows can play a significant role in the success or failure of a firm. The goal is to identify an appropriate push/pull boundary such that the supply chain can match supply and demand effectively. Ex: Paint industry: processes are produce base, mix colors, pack – Past: Manufacturing of paints was a push process, produced in anticipation of demand, based on a forecast. – Present: Base production is a push process, whereas mixing colors and packing are made at the retailer as a pull process. © 2004 Prentice-Hall, Inc. 1 -35

Examples of Supply Chains: Gateway and Apple © 2004 Prentice-Hall, Inc. 1 -36

Summary of Learning Objectives u u What are the cycle and push/pull views of a supply chain? How can supply chain macro processes be classified? What are three key supply chain decision phases and what is the significance of each? What is the goal of a supply chain and what is the impact of supply chain decisions on the success of the firm? © 2004 Prentice-Hall, Inc. 1 -37

Amazon. com u u u Why is Amazon building more warehouses as it grows? How many warehouses should it have and where should they be located? What advantages does selling books via the Internet provide? Are there disadvantages? Why does Amazon stock bestsellers while buying other titles from distributors? Does an Internet channel provide greater value to a bookseller like Borders or to an Internet-only company like Amazon? Should traditional booksellers like Borders integrate e-commerce into their current supply? For what products does the e-commerce channel offer the greatest benefits? What characterizes these products? © 2004 Prentice-Hall, Inc. 1 -38