Introduction to

Supply Chain Management

David Simchi-Levi
Professor of Engineering Systems
Massachusetts Institute of Technology

Customers demand centers sinks Sources: Plants vendors ports Regional warehouses: Stocking points Field warehouses: Stocking points

Supply

Inventory & warehousing costs Production/purchase costs Transportation costs Transportation costs

Inventory & warehousing costs

Image by MIT OpenCourseWare.

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
service requirements. requirements
Notice: Who is involved Cost and Service Level It is all about integration
Copyright 2003 D. Simchi-Levi

Conflicting Objectives in the Supply Chain

1. 1 Purchasing Stable volume requirements Flexible delivery time Little variation in mix Large quantities 2. Manufacturing Long run production High quality High productivity Low production cost
Copyright 2003 D. Simchi-Levi

Conflicting Objectives in the Supply Chain

3. 3 Warehousing Low inventory Reduced transportation costs Quick replenishment capability 4. Customers Short order lead time High in stock Enormous variety of products Low prices
Copyright 2003 D. Simchi-Levi

The Dynamics of the Supply Chain

Order Size

Customer Demand Retailer Orders

Distributor Orders

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Copyright 2003 D. Simchi-Levi

The Dynamics of the Supply Chain

Order Size

Customer Demand

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Copyright 2003 D. Simchi-Levi

Todays Supply Chain Challenges

Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countries Increase in logistics costs

Increase in Logistics Costs

US Logistics Costs as Percent of GDP
14

13

12

15% increase
11

10

8 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Rising energy prices Rail capacity pressure Truck driver shortage Security requirements

Total US Logistics Costs 1984 to 2007 ($ Billions)

Total US Logistics Costs in $MMs
1600

Total Cost
52%

1400

1200

1000

47%

800

Transportation
600 400

62%

Inventory

200

Admin
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Inv Carrying Transportation Admin Total

Source: 19th Annual Logistics Report

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Todays Supply Chain Challenges

Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countries Increase in logistics costs Importance of sustainability Unprecedented Volatility

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Unprecedented Volatility

Number of days the price of oil changed 5% or more

1990: 38 days 2008: 39 days

Year

In 2008 the price of oil changed 5% or more from its previous close on 39 days making it the most volatile year since 1990.
Source: NYT
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Supply Chain: The Magnitude

It i estimated that the grocery industry could is ti t d th t th d t ld 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 t i l new car spends 15 days traveling from d d t li f the factory to the dealership.

Copyright 2003 D. Simchi-Levi

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 Americas leading capital goods producers, was forced to announce writedowns of $2.6 billion in October 1997.
billi i O t b 1997 The reason? Raw material shortages, internal and
supplier parts shortages. (Wall Street Journal, Oct.
23, 1997)

Copyright 2003 D. Simchi-Levi

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)
Copyright 2003 D. Simchi-Levi

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.

Copyright 2003 D. Simchi-Levi

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.

Copyright 2003 D. Simchi-Levi

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.
Copyright 2003 D. Simchi-Levi

Supply Chain Challenges

Achieving Global Optimization
Conflicting Objectives Complex network of facilities System Variations over time

Copyright 2003 D. Simchi-Levi

Sequential Optimization
Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

Global Optimization
Supply Contracts / Collaboration / Information Systems and DSS

Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Image by MIT OpenCourseWare.

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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
Copyright 2003 D. Simchi-Levi

The Enterprise Fulfillment and Development Supply Chains

Product Architecture Make/Buy Make/Buy Early Supplier Involvement Strategic Partnerships Suppliers Selection Supply Contracts

Develop pment Supply Chain p

Plan/Design

Source

Supply

Produce

Distribute

Sell

Fulfillment Supply Chain

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Fulfillment and Development Supply Chain

Development Supply Chain S

Industry clock speed

Innovative vs. functional products Make vs. buy Modular vs. integral

Plan/Design

Core competencies

Product architecture Make/buy Early supplier involvement Strategic partnerships Supplier selection Supply contracts

Product design

Source

Supply

Produce

Distribute

Sell

Fulfillment Supply Chain

Uncertainty and variability

Demand and supply Offshoring vs. onshoring Production and transportation

Lead time

Economies of scale

Whats New in Logistics?

Global competition Shorter product life cycle New, low-cost distribution channels More powerful well-informed customers Internet and E-Business strategies
Copyright 2003 D. Simchi-Levi

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Significant Increase in Outsourcing

Purchasing as % of Sales
70%

%
60% 57% 50% 40% 34% 30% 24% 20% 16% 10% 0%
1993

60% 54%

28% 22%
Machinary Computer and telecom Food manufacturing Telecom services
1996

Copyright 2003 D. Simchi-Levi

New Concepts
Push Pull strategies Push-Pull Direct-to-Consumer Strategic alliances Manufacturing postponement gp p Dynamic Pricing E-Procurement
Copyright 2003 D. Simchi-Levi

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Copyright 2003 D. Simchi-Levi

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MIT OpenCourseWare http://ocw.mit.edu

ESD.273J / 1.270J Logistics and Supply Chain Management

Fall 2009

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