Supply Chain Management

Introduction

Outline

What is supply chain management?

A supply chain strategy framework
Components of a SCM
Major obstacles and common problems
Seven Eleven Japan

Traditional View: Cost breakdown of

a manufactured good
Profit

10%

Supply Chain Cost

20%

Marketing Cost

25%

Manufacturing Cost

45%

Profit
Supply Chain
Cost
Marketing
Cost

Manufacturing
Cost

Effort spent for supply chain activities are invisible to the customers.

What can Supply Chain Management

do?
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
Faster turnaround of the goods is better?

Magnitude of Supply Chain

Management
Compaq estimates it lost $0.5 B to $1 B in sales in
1995 because laptops were not available when
and where needed

P&G (Proctor&Gamble) estimates it saved retail

customers $65 M (in 18 months) by collaboration
resulting in a better match of supply and demand
When the 1 gig processor was introduced by AMD
(Advanced Micro Devices), the price of the 800
meg processor dropped by 30%

Importance of SCM understood by

some
AMR Research:
"The biggest issue enterprises face today is intelligent visibility of their
supply chains-both upstream and down"

Forrester Research:
"Companies need to sense and proactively respond to unanticipated
variations in supply and demand by adopting emerging technologies
such as intelligent agents. To boost their operational agility, firms need
to transform their static supply chains into adaptive supply networks

Gartner Group:
By 2004, 90% of enterprises that fail to apply supply-chain
management technology and processes to increase their agility will
lose their status as preferred suppliers
Open ended statement. Agility can be increased continuously.

Top 25
Supply Chains
AMR research http://www.amrresearch.com
publishes reports on supply chains
and other issues.
The Top 25 supply chains report comes
out in Novembers.

SCM Generated Value

Minimizing supply chain costs
while keeping a reasonable service level
customer satisfaction/quality/on time delivery, etc.

This is how SCM contributes to the bottom line

SCM is not strictly a cost reduction paradigm!

A picture is better than 1000 words!

How many words would be better than 3 pictures?
- A supply chain consists of
Supplier

Manufacturer

Distributor

Upstream

Retailer

Customer

Downstream

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE

- achieves

The right

Product

+ + + + +

DEMAND SIDE

The right

The right

The right

The right

The right

Higher

Price

Store

Quantity

Customer

Time

Profits

Flows in a Supply Chain

Material

Supplier

Information
Funds

The flows resemble a chain reaction.

Customer

SCM in a Supply Network

Supply Chain Management (SCM) is concerned with the management and control of the
flows of material, information, and finances in supply chains.
Cash
Products and Services

Information
THAILAND
INDIA
N-Tier Suppliers Suppliers

Supply Side

MEXICO
Logistics

TEXAS
Distributors

OEM

US
Retailers

Demand Side

Demand
Supply

The task of SCM is to design, plan, and execute the activities at the different stages so
as to provide the desired levels of service to supply chain customers profitably

Push vs Pull System

What instigates the movement of the work in the system?
In Push systems, work release is based on downstream demand
forecasts
Keeps inventory to meet actual demand
Acts proactively
e.g. Making generic job application resumes today

In Pull systems, work release is based on actual demand or the

actual status of the downstream customers
May cause long delivery lead times
Acts reactively
e.g. Making a specific resume for a company after talking to the recruiter

A Generic Supply Chain

Sources:
plants
vendors
ports

Regional
Warehouses:
stocking
points

Field
Warehouses:
stocking
points

Supply

Inventory
Purchase
Transportation

Inventory

Customers,
demand
centers
sinks

Cycle View of Supply Chains

Customer
Customer Order
Cycle

Retailer

Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier

Any cycle
0. Customer arrival
1. Customer triggers an order
2. Supplier fulfils the order
3. Customer receives the order

SCM Strategy

Mission-Strategy-Tactics-Decisions
Mission, Mission statement

The reason for existence of an organization

Strategy

A plan for achieving organizational goals

Tactics

The actions taken to accomplish strategies

Operational decisions

Day to day decisions to support tactics

Life Strategy for Ted

Mr.A is an undergrad. He would like to have a career in business, have
a good job, and earn enough income to live comfortably

Mission:
Goal:
Strategy:
Tactics:

Operations:

Live a good life

Successful career, good income
Obtain a masters degree
Select a college and a
concentration
Register, buy books, take courses,
study, graduate, get a job

Linking SC and Business Strategy

Competitive (Business) Strategy
Product Development Strategy Marketing Strategy
-Portfolio of products
-Frequent discounts
-Timing of product introductions

New
Product
Development

Supply Chain Strategy

-Coupons

Marketing
and
Sales

Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Strategies:
Product
Development

It relates to Technologies for future

operations (via patents) and Set
of products/services
Be the technology leader
IBM workstations

Offer many products

Dell computers

Offer products for locals

Tatas Nano at $2500=100000 rupees
Production at Singur, West Bengal, India;
l x w x h=3.1 x 1.5 x 1.6 meters;
Top speed: 105km/hr;
Engine volume 623 cc;
Mileage 50 miles/gallon;
Annual sales target 200,000.

Business Models for TATA NANO

Dream of Sri RATAN TATA, a car cheap enough for
motor cycle buyers.
TATA adopted COLLABORATIVE APPROACH which
usually believes in vertically integrated approach and
company believes it could do everything better than
others.
Business Process Outsourcing
Outsourcing was into New product development, SCM,
Design and styling of its product also.
Refined the manufacturing process by breaking down
the component of the car into smallest pieces.
Eliminates everything that was unnecessary.

Strategies
Marketing and sales strategy relates to positioning, pricing and
promotion of products/services
e.g. Never offer more than 40% discount
e.g. EDLP = every day low price
At Wal-Mart

e.g. Demand smoothing via coupons

BestBuy

Supply chain management strategy relates to procurement,

transportation, storage and delivery
e.g. Never use more than 1 supplier for every input
e.g. Never expedite orders just because they are late
e.g. Always use domestic suppliers within the sales season not in advance.

Fitting the SC to the customer or vice versa?

Understand the customer Wishes
Understand the Capabilities of your SC
Match the Wishes with the Capabilities
Challenge: How to meet extensive Wishes
with limited Capabilities?

Achieving Strategic Fit: Consistent SCM

and Competitive strategies
Fit SC to the customer
Understanding the Customer
Range of demand,
Production lot size,
Response time,
Service level,
Product variety
Innovation

Implied (Demand)
Uncertainty for SC
Implied trouble
for SC

Supply Chain Drivers and

Obstacles

Drivers of Supply Chain Performance

How to achieve
Efficiency
Responsiveness

Supply chain structure

Inventory

Information

Transportation

Sourcing

Facilities

Pricing

Logistical
Drivers

CrossFunctional
Drivers

Considerations for Supply Chain

Drivers
Driver

Efficiency

Responsiveness

Inventory

Cost of holding

Availability

Transportation

Consolidation

Speed

Facilities

Sourcing

Consolidation /
Dedicated
Low cost/slow/no
duplication
Low cost sources

Proximity /
Flexibility
High cost/
streamlined/reliable
Responsive sources

Pricing

Constant price

Low-high price

Information

Supply Chain Problems

Problems Along Supply Chains

Consumer
Demand

Retailer

Distributor

Wholesaler

Manufacturer

Poor demand
forecasts

Price
fluctuations

Price
fluctuations

Rationing of
supply

Demand
fluctuations

Order
batching

Order
batching

Special
sales

Rationing of
supply

Rationing
of supply

Supply Chain Problems

Problems Along Supply Chains

Uncertainties
demand forecasts
influenced by competition, prices, weather conditions, technological
development, and customers general confidence

delivery times
depend on several factors ranging from machine failures to road
conditions and traffic jams, that way interfere with shipments

Symptoms of poor SCM

poor customer service, which hinders people from getting
the product or service when and where needed, or gives
them a product of poor quality
High cost, low (or no) profit
The Bullwhip Effect

Supply Chain Problems

The Bullwhip Effect
A Small
Demand
Shift

Huge Variation in
Orders and Inventories

Leads To

Retailer

Distributor

Wholesaler

Huge Variation
in On-Hand Inventory
and Manufacturing

The Bullwhip
Effect

Manufacturer

Major Obstacles to Achieving Fit

SC is big:
Variety of products/services
Spoiled customer
Multiple owners (Procurement, Production,
Inventory, Marketing) / multiple objectives
Globalization
Local optimization and lack of global fit

Major Obstacles to Achieving Fit

Dealing with Multiple Owners / Local
Optimization
Information Coordination
Information sharing / Shyness / Legal and ethical issues

Contractual Coordination
Mechanisms to align local objectives with global ones

Coordination with (real) options

Rare in the practice

Without coordination, misleading reliance on metrics:

Average safety inventory, Average incoming shipment size,
Average purchase price of raw materials, Revenue

Major obstacles to achieving fit

Instability and Randomness:
Increasing product variety
Shrinking product life cycles
Customer fragmentation: Push for customization,
segmentation
Fragmentation of Supply Chain ownership:
Globalization
Increasing implied uncertainty

Common problems
Lack of relevant SCM metrics: How to measure
responsiveness?

How to measure efficiency, costs, worker performance, etc?

Poor inventory status information

Theft: Major problem for furniture retailers.

Transaction errors: Retailers with inaccurate inventory records
for 65% of SKUs
Information delays, dated information, incompatible info. systems
Misplaced inventory: 16% of items cannot be found at a major
retailer
Spoilage: active ingredients in the products are losing their
properties
Product quality and yield
Lack of visibility in SCs
Do you know the inventory your distribution centers hold?
Do you know the inventory your fellow retailer holds?

Common problems
Poor delivery status information
Not knowing the order status

Poor IT design
Unreliable, duplicate data
Security problems: too much or too little

Ignoring uncertainties
The flight from uncertainty and ambiguity is so motivated that we often
create pseudocertainty.
Nitin Nohra, HBR February 2006 issue, p.40.

Internal customer discrimination

Giving lower priority to internal customers than external customers

Poor integration
Elusive inventory costs
Accounting systems do not capture opportunity costs

SC-insensitive product design