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Supply Chain Management • Definition: Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying customer service requirements. • Notice: – Who is involved – Cost and Service Level – It is all about integration
What is Supply Chain Management? Managing supply chain flows and assets, to maximize supply chain surplus. • What is supply chain surplus?
Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Inventory & warehousing costs Transportation costs
What is a supply chain? P&G or other manufacturer Plastic Producer Chemical manufacturer (e. g. Oil Company) Jewel or third party DC Tenneco Packaging Paper Manufacturer Jewel Supermarket Customer wants detergent and goes to Jewel Chemical manufacturer (e. g. Oil Company) Timber Industry
Decision Phases in Supply Chain • Supply Chain Strategy & Design • Supply Chain Planning • Supply Chain Operations Strategy & Design Planning Operations
Supply Chain Strategy & Design • Location & capacity of production and warehouses • Products to manufactured and in which locations • Mode of transportation • Types of information systems to be used • Strategic sourcing decisions
Supply Chain Planning • • • Markets to be supplied & from which location Planned build-up of inventory Subcontracting of manufacturing Timing and size of market promotion Handling uncertainty in demand, foreign exchange fluctuations • Establishing production plan under fixed strategic parameters
Supply Chain Operations • Decisions over individual customer orders (daily, weekly) • Less uncertainty about demand information • Exploit reduction of uncertainty to optimize performance • Establish deliver dates • Establish order fill rate
Cycle View of Supply Chains Customer Order Cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle Manufacturer Procurement Cycle Supplier
Strategic Scope Suppliers Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Manufacturer Distributor Retailer Customer
Strategic Scope • Intracompany Intraoperation Scope – Minimize local cost view • Intracompany Intrafunctional Scope – Minimize functional cost view • Intracompany Interfunctional Scope – Minimize company profit view • Intercompany Interfunctional Scope – Maximize supply chain surplus view
Supply Chain Challenges • Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time
Supply Chain Challenges • Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time • Managing Uncertainty – Matching Supply and Demand – Demand is not the only source of uncertainty
Key Issues in Supply Chain Management • • • Distribution Network Configuration Inventory Control Supply contract Distribution Strategies Supply Chain Integration & Strategic Partnering • Outsourcing & Procurement Strategies
Key Issues of SCM (cont) • Product Design • Information Technology & Decision Support System • Customer Value
Relationships between key SCM Issues and the business environment Global Optimization Dist. Conf. Managing Uncertainty X Inv. Control X Sup. Contract X Dist. Strategies X X St. partnership X X Outsourcing X Pr. Design X IT & DSS X X Cust. Value X X
Prerequisites for Supply Chain Management • Top management understanding & commitment • Quest for excellence • Effective and efficient communication • Relationship instead of exchange • Cross-functional teams • Reality of team, partnerships & alliances (based on harmony & trust)
Supply Chain: The Magnitude • In 1998, American companies spent $898 billion in supply-related activities (or 10. 6% of Gross Domestic Product). – Transportation 58% – Inventory 38% – Management 4% • Third party logistics services grew in 1998 by 15% to nearly $40 billion
Supply Chain: The Magnitude (continued) • It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies. – A typical box of cereal spends 104 days getting from factory to supermarket. – A typical new car spends 15 days traveling from the factory to the dealership.
Supply Chain: The Magnitude (continued) • Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them. • Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce writedowns of $2. 6 billion in October 1997. The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)
Supply Chain: The Potential • Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. “According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct. /Nov. 1997)
Supply Chain: The Potential • Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988 -1996, by over 3, 000% (see Anderson and Lee, 1999) using - Direct business model - Build-to-order strategy.
Supply Chain: The Potential • In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer.
Supply Chain: The Complexity National Semiconductors: • Production: – Produces chips in six different locations: four in the US, one in Britain and one in Israel – Chips are shipped to seven assembly locations in Southeast Asia. • Distribution – The final product is shipped to hundreds of facilities all over the world – 20, 000 different routes – 12 different airlines are involved – 95% of the products are delivered within 45 days – 5% are delivered within 90 days.
Supply Chain Management: The Magnitude in the Traditional View • 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 – Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago
Supply Chain Management: The True Magnitude • Compaq estimates it lost $0. 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 meg processor dropped by 30% • P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand
Drivers of Supply Chain Performance Efficiency Responsiveness Supply chain structure Inventory Transportation Facilities Drivers Information
Considerations for Supply Chain Drivers
Achieving Strategic Fit • Understanding the Customer – Lot size – Response time – Service level – Product variety – Price – Innovation Implied Demand Uncertainty
The Value Chain: Linking Supply Chain and Business Strategy New Product Marketing Strategy New Product Development Supply Chain Strategy Marketing and Operations Distribution Sales Service Finance, Accounting, Information Technology, Human Resources
Flows in a Supply Chain Information Product Funds Customer
Sequential Optimization vs. Global Optimization Sequential Optimization Procurement Planning Manufacturing Planning Distribution Planning Demand Planning Global Optimization Supply Contracts/Collaboration/Information Systems and DSS Procurement Planning Manufacturing Planning Source: Duncan Mc. Farlane Distribution Planning Demand Planning
Order Size The Dynamics of the Supply Chain Customer Demand Distributor Orders Retailer Orders Production Plan Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Order Size The Dynamics of the Supply Chain Customer Demand Production Plan Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998