SUPPLY CHAIN MANAGEMENT 1 MODULE 1 Supply chain

SUPPLY CHAIN MANAGEMENT 1

MODULE 1 • Supply chain, objectives, importance, decision phases, process view, competitive and supply chain strategies, achieving strategic fit, supply chain drivers, obstacles, frame work, facilities, inventory, transportation, information, sourcing and pricing. 2

SUPPLY CHAIN MANAGEMENT Supply-chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers 3

• Supply chain includes all activities in transforming natural resources, raw materials and components into a finished products and delivering it to the end customer. • Supply chain is a sequence of suppliers, transporters, warehouses, manufacturers, wholesalers/distributors, retailers and final customers. 4

• According to the Council of Supply Chain Management Professionals (CSCMP), • Supply Chain Management encompasses the planning and management of all activities involved in Sourcing, Procurement, Conversion, and Logistics management. • It also includes the crucial components of coordination and collaboration with channel partners, which can be Suppliers, Intermediaries, third-party service providers, 5 and Customers.

Supply Chain Structure SUPPLIER Raw Materials FFACTORY DC C RDCC C RETAILER CUSTOMER Finished Goods Information Flow 6

TYPICAL SUPPLY CHAIN upstream downstream 7

BASICS OF SUPPLY CHAIN 8

BASICS OF SUPPLY CHAIN • The supply chain has three main links: 1. Materials flow from suppliers and their “upstream” suppliers at all levels 2. Transformation of materials into semi finished and finished products through the organization’s own production process 3. Distribution of products to customers and their “downstream” customers at all levels 9

SUPPLY CHAIN 10

OBJECTIVES OF SCM • Enhancing Customer Service • Expanding Sales Revenue • Reducing Inventory Cost • Improving On-Time Delivery • Reducing Order to Delivery Cycle Time • Reducing Lead Time • Reducing Transportation Cost • Reducing Warehouse Cost • Expanding Width / Depth of Distribution “The main objective of SCM is to provide the right products, in the right time, in the right quantities, at the right place at the right cost. ” 11

IMPORTANCE OF SCM • Maximizing product value and reducing total cost. • Ensuring speed and certainty of response to the market. • To have Competitive Edge through Core Competencies – creating niches and specialization in core areas. • Maximize the supply chin profitability. 12

• Businesses now not only need to operate at a lower cost to compete, it must also develop its own core competencies to distinguish itself from competitors and stand out in the market. • In creating the competitive edge, companies need to divert its resources to focus on what they do best and outsource the process and task that is not important to the overall objective of the company. • SCM has allowed company to rethink their entire operation and restructure it so that they can focus on its core competencies and outsource processes that are not within the core competencies of the company. 13

SCM FLOW • Supply chain management flows can be divided into three main flows: • The product flow • The information flow • The finances flow • The product flow includes the movement of goods from a supplier to a customer. • The information flow involves transmitting, Understanding, updating the status of delivery. • The financial flow consists of credit terms, payment schedules, and consignment and title ownership arrangements. 14

Flows in a Supply Chain Material Supplier Information Customer Funds The flows resemble a chain reaction. 15

DECISION PHASES IN SUPPLY CHAIN Mainly there are three decision Phases • Supply chain strategic or design decision • Supply chain planning • Supply chain operation 16

SUPPLY CHAIN DECISION Strategic • Supply Chain Design • Resource Acquisition • Long Term Planning (1 Year ++ Tactical • Production/ Distribution Planning • Resource Allocation • Medium Term Planning (Q’trly, Monthly) Operational • Shipment Scheduling • Resource Scheduling • Short Term Planning (Weekly, Daily) 17

SC Strategic /Design Decision: (Long term) • Location, capacities of production, warehousing facilities. • Modes of transportation for different shipping • Types of information systems to use SC Planning: ( Short Term Operating Policies) • Inventory and replenishment of inventory polices • Which market to be served form which location • Sub contracting of activities • SC Operation: (weekly or daily) • Allocating individual orders to production/inventory • Setting Schedules/dates for fulfilling orders • Allocating trucks for shipments 18

Process View of a Supply Chain A supply chain is a sequence of processes and flows that take place within and between different supply chain stages and combine to fill a customer need for a product. • Cycle view • Push/Pull view 19

Cycle view • • The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain. Customer order cycle Replenishment cycle Manufacturing cycle Procurement cycle 20

Cycle View of Supply Chains Customer Order Cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle Manufacturer Procurement Cycle Supplier 21

Customer Order Cycle Customer order cycle Interface between customer-retailer 22

Replenishment Cycle Replenishment cycle Interface between –retailer and distributor 23

Manufacturing Cycle Manufacturing cycle interface between distributor and manufacturer 24

Procurement Cycle Procurement cycle interface between manufacturer and supplier 25

Push- Pull view 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) 26

Push Based Supply Chain • With a push-based supply chain, products are pushed through the channel, from the production side up to the retailer. The manufacturer sets production at a level in accord with historical ordering patterns from retailers. • It takes longer for a push-based supply chain to respond to changes in demand, which can result in overstocking or bottlenecks and delays (the Bullwhip effect), unacceptable Service levels and product obsolescence. 27

• Pull Based Supply Chain • In a pull-based supply chain, procurement, production and distribution are demand driven so that they are coordinated with actual customer orders, rather than forecast demand. 28

COMPETITIVE STRATEGY AND SUPPLY CHAIN STRATEGY • A company's competitive strategy defines the set of customer needs a firm seeks to satisfy through its products and services. • Product development strategy: specifies the portfolio of new products that the company will try to develop • Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted • Whereas, supply chain strategy includes design decisions regarding inventory, transportation, operating facilities, and information flows in the supply chain. 29

The Value Chain: Linking Supply Chain and Business Strategy Competitive Strategy New Product Marketing Strategy New Product Development Marketing and Sales Supply Chain Strategy Operations Distribution Service Finance, Accounting, Information Technology, Human Resources 30

ACHIEVING STRATEGIC FIT • Strategic Fit means that both the Competitive and Supply Chain Strategies have aligned goals. It also refers to the consistency between the customer priorities that the Competitive strategy hopes to satisfy and - the Supply chain capabilities that the Supply chain strategy aims to build. • It means competitive and supply chain strategies have the same goals. • For example Pizza Hut and Walmart 31

HOW TO ACHIEVE STRATEGIC FIT ? Step 1: Understanding the customer needs and supply chain uncertainty. Step 2: Understanding the supply chain capabilities Step 3: Achieving strategic fit. Making decision on the supply chain to best serve the needs of the customers. 32

Step 1: Understanding the Customer and Supply Chain Uncertainty Identify the needs of the customer segment being served • Quantity of product needed in each lot. • Response time the customers are willing to tolerate. • Variety of products needed. • Service level required. • Price of the product. • Desired rate of innovation in the product. 33

• There are many attributes of the supply system which are to be understood from customer point of view and built into the supply chain, one key measure is implied demand uncertainty. It is different from demand uncertainty. Demand uncertainty reflects the uncertainty of customer demand for a product. Where as Implied demand uncertainty is uncertainty for the supply chain. Implied demand uncertainty is the uncertainty that exists due to the portion of demand that the supply chain is required to meet. 34

What is implied demand uncertainty? • Implied Demand uncertainty is the resulting uncertainty for only that portion of demand that the supply chain plans to satisfy the attributes of the customer desire. • Example: A firm supplying only emergency order for a product will face a higher demand uncertainty than a firm that supplies the same product with long lead time, as the second firm has the opportunity to fulfill the orders evenly over the long lead time. • Another example is a firm supplying medicines, 24 hours versus a firm that supplies only during normal day hours. The implied demand uncertainty for the 24 hour firm can be high as on some days there is heavy demand some days very less demand also the demand for specific medicines can be high on some days and can be even zero on some days. 35

Step 2: Understanding the Supply Chain Capabilities • How does the firm meet customers demand? • Creating strategic fit is creating a supply chain strategy to respond to the customers demand. • Supply chain responsiveness means the ability to – respond to wide ranges of quantities demanded – meet short lead times – handle a large variety of products – build highly innovative products – meet a very high service level 36

Supply chain efficiency means cost of making and delivering the product to the customer. Increasing responsiveness results in higher costs that lower efficiency. • The firm has to tradeoff between the efficiency and responsiveness. • An efficient supply chain lowers cost by eliminating some of its responsive capabilities. 37

Cost-Responsiveness Tradeoff Responsiveness (in time, high service level and product variety) High Efficiency Frontier Impossible Fix responsiveness Inefficiency Region Low High Low Cost 38

Step 3: Achieving Strategic Fit • Third Step is to match the customer needs with that of supply chain strategies to ensure that the degree of supply chain responsiveness is consistent with the customer needs. In short – Understand the customer wishes, understand Supply chain capabilities, match wishes with capabilities. Two key points to remember: – there is no right supply chain strategy independent of competitive strategy – there is a right supply chain strategy for a given competitive strategy 39

Achieving Strategic Fit: Mapping Uncertainty / Responsiveness Responsive (high cost) supply chain High Margin f it o ne ic F o Z teg ra t S Responsiveness spectrum Efficient (low cost) supply chain Low Margin Certain demand Implied uncertainty spectrum Uncertain demand 40

SUPPLY CHAIN DRIVERS: SCM drivers determines supply chain performance. For each driver managers must make trade offs between efficiency (cost) & responsiveness. Supply chain drivers are: Facilities, Inventory, Transportation, Information, Sourcing Pricing 41

FACILITIES: These are places within the Supply chain where inventory is stored, assembled or fabricated. Decisions on locations capacity and flexibility of facilities have a significant impact on performance. . 42

Facility impact: Facilities either store inventory between Supply chain stages( ware houses, distribution centers, Retailers) or transforms inventory into another stage ie. fabrication or assembling plants. Centralization of facilities uses economies of scale to increase supply chain efficiency ( fewer the locations less is the inventory) usually at the expense of responsiveness. Ie. Distance from customers. 43

Facility decision: Location: Centralize to gain the economies in scale or decentralize to be more responsive. Other issues includes cost and quality of workers, cost of facility, infrastructure, taxes, quality of life etc. Capacity: Excess capacity allows a company to be more responsive to the changes in the level of demand, but at the expense of efficiency. 44

Manufacturing methodology: Decision between a product or functional focus, between flexible or dedicated capacity. Warehousing methodology Choose between Stock Keeping Unit storage ie. Storing all one type of materials together, Job Lot Storage ie. To store different types of materials to satisfy particular customer order or Cross docking. 45

FACILITIES DRIVER 46

INVENTORY : Includes all types of the Raw Materials, work in progress and Finished goods with in the Supply chain. Inventory policies can dramatically alter Supply chain efficiency & responsiveness. • Why we hold inventory ? To meet unexpected changes in customers demand – It is hard to predict. 47

What is the Inventory impact? • Inventory can increase amount of demand that can be met by increasing product availability. • Inventory can reduce cost by exploiting economies in the scale of production, transportation and purchasing. • Inventory can be used to support a firms competitive strategy. More inventory increases responsiveness, less inventory increases efficiency ( reduced cost) “if you move your inventory faster you do not need as much inventory”. 48

INVENTORY DRIVER 49

TRANSPORTATION: Modes & routes for moving inventories throughout the Supply chain. Faster transportation allows a Supply chain to be more responsive but generally less efficient. Less than full truck load allows to be more responsive but generally less efficient. Transportation can be used to support a firms competitive strategy. Customers may demand willing to pay for a high level of responsiveness. 50

• Transportation decisions: • Mode of transportation is the manner in which a product is moved( Air, Rail, Road etc. ) each mode differs with respect to speed, size of shipment, cost and flexibility. • Routes are the paths along with which the products can be shipped. • Transportation may be either inhouse or outsourced. 51

TRANSPORTATION DRIVER 52

INFORMATION: Data & analysis regarding inventory, transportation, facilities and customers through out the Supply chain. It is potentially the biggest driver since it affects all other drivers. 53

ROLE OF INFORMATION • Information connects various supply chain stages and allows them to coordinate supply chain activities. • Information is crucial to the daily operations of each stage of supply chain • Information system can enable a firm to get a high variety of customized products to customers rapidly. • An information system can enable a firm to understand changing needs of the customers more accurately. 54

INFORMATION DRIVER 55

SOURCING • Role in the supply chain – Set of processes required to purchase goods and services in a supply chain – Supplier selection, single vs. multiple suppliers, contract negotiation • Role in the competitive strategy – Sourcing is crucial. It affects efficiency and responsiveness in a supply chain – In-house vs. outsource decisions- improving efficiency and responsiveness • Components of sourcing decisions – In-house versus outsource decisions – Supplier evaluation and selection – Procurement process: • Every department of a firm buy from suppliers independently, or all together. – EDS to reduce the number of officers with purchasing 56 authorization.

PRICING • Role in the supply chain – Pricing determines the amount to charge customers in a supply chain – Pricing strategies can be used to match demand supply • Price elasticity: Do you know yours? • Role in the competitive strategy – Use pricing strategies to improve efficiency and responsiveness – Low price and low product availability; vary prices by response times • Amazon: Faster delivery is more expensive • Components of pricing decisions – Pricing and economies of scale – Everyday low pricing versus high-low pricing – Fixed price versus menu pricing, depending on the product and services • Packaging, delivery location, time, customer pick up • Bundling products; products and services 57

Considerations for The Four Supply Chain Drivers 3 -58

• • Supply Chain Decisions We classify the decisions for supply chain management into two broad categories -- strategic and operational. strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy and guide supply chain policies from a design perspective. operational decisions are short term, and focus on activities over a day-to-day basis. The effort in these type of decisions is to effectively and efficiently manage the product flow in the "strategically" planned supply chain. 59

• Location Decisions The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. The location of facilities involves a commitment of resources to a long-term plan. Once the size, number, and location of these are determined, so are the possible paths by which the product flows through to the final customer. These decisions are of great significance to a firm since they represent the basic strategy for accessing customer markets, and will have a considerable impact on revenue, cost, and level of service. These decisions should be determined by an optimization routine that considers production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. 60

Production Decisions • The strategic decisions include what products to produce, and which plants to produce, allocation of suppliers to plants, plants to Distribution Channels and DC's to customer markets. • These decisions have a big impact on the revenues, costs and customer service levels of the firm. These decisions assume the existence of the facilities, but determine the exact path through which a product flows to and from these facilities. • These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility. 61

Inventory Decisions • These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw materials, semi-finished or finished goods. They can also be in-process between locations. Their primary purpose to buffer against any uncertainty that might exist in the supply chain. • Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. It is strategic in the sense that top management sets goals. These include deployment strategies (push versus pull), control policies, the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels. 62

Transportation Decisions • These are closely linked to the inventory decisions, since the best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Therefore customer service levels, and geographic location play vital roles in such decisions. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense. Shipment sizes (consolidated bulk shipments versus Lotfor-Lot), routing and scheduling of equipment are key in effective management of the firm's transport strategy. 63

Obstacles to Achieving Strategic Fit • Increasing variety of products • Decreasing product life cycles • Increasingly demanding customers • Fragmentation of supply chain ownership • Globalization (has both beneficial and detrimental effects) • Difficulty executing new strategies 64

• Increasing variety of products Customers demanding ever more customized products …. • Decreasing product life cycles Today there are products whose life cycles can be measured in months , compared to the old standard of years. 65

• Increasingly demanding customers Customers are constantly demanding improvements in delivery lead times, cost and product performance. • Fragmentation of supply chain ownership Most firms have become less vertically integrated. as companies have shed noncore functions, they have been able to take advantage of suppliers & customer competencies that they themselves did not have. 66

• Globalization Adds stress to the chain, because facilities within the chain are farther apart, making coordination much more difficult. • Difficulty in executing new strategies Once the good strategy is formulated , the execution of the strategy can be more difficult 67

FRAMEWORK • The Supply Chain Management (SCM) framework is based on a functional model of the SCM system. It is a development tool that assists in the development of a well-integrated SCM system in an organization. The framework consists of several components that define key functions, processes, and best practices. 68

Drivers of Supply Chain Performance Supply chain structure How to achieve Efficiency Responsiveness Facilities Information Inventory Sourcing Transportation Pricing Logistical Drivers Cross. Functional Drivers 69

Thank You 70