Supply Chain Management Introduction

1. Supply Chain Management Introduction

2. Outline • What is supply chain management? • A supply chain strategy framework • Major obstacles and common problems

3. Profit Supply Chain Cost Marketing Cost Manufacturing Cost Traditional View: Cost breakdown of a manufactured good • Profit 10% • Supply Chain Cost20% • Marketing Cost 25% • Manufacturing Cost 45% Effort spent for supply chain activities are invisible to the customers.

4. 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? • Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago • inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory. • To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE. • National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time.

5. 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

6. 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.

7. 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!

8. Supplier Manufacturer Distributor Retailer Customer Upstream Downstream SUPPLY SIDE DEMAND SIDE = + + + + + Higher Profits The right Product The right Price The right Store The right Quantity The right Customer The right Time A picture is better than 1000 words!How many words would be better than 3 pictures? - A supply chain consists of - aims to Match Supply and Demand, profitably for products and services - achieves

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

10. Cash Products and Services Information THAILAND INDIA MEXICO TEXAS US N-Tier Suppliers Suppliers Logistics Distributors Retailers Supply Side OEM Demand Side Demand Supply 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. • 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

11. Frequent Supply shortages Low order fill rates Inefficient logistics Tier 1 Supplier Manufacturer Distributor Retailer Customer High stockouts Glitch-Wrong Material, Machine is Down – effect snowballs Ineffective promotions High inventories through the chain High landed costs to the shelf Importance of Supply Chain Management • In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report • Eliminating inefficiencies in supply chains can save millions of $.

12. Customer Customer Order Cycle Retailer Any cycle 0. Customer arrival 1. Customer triggers an order 2. Supplier fulfils the order 3. Customer receives the order Replenishment Cycle Distributor Manufacturing Cycle Manufacturer Procurement Cycle Supplier Cycle View of Supply Chains

13. 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 (e.g.: exempli gratia) • 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

14. Push/Pull View of Supply Chains Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES Customer Order Arrives Push-Pull boundary

15. Examples of Supply Chains Dell / Compaq • Dell buys some components for a product from its suppliers after that product is purchased by a customer. Extreme case of a pull process • Zara, Spain’s answer to Italy’s Benetton • Sells apparel with a short design-to-sale cycle, avoids markdowns. • Toyota / GM / Volkswagen, in the course notes • McMaster Carr / W.W. Grainger, sell auto parts • Amazon / Barnes and Noble • Frozen food industry/Fast food industry/5 star restaurants • Internet shopping: Webvan / Peapod

16. SCM Strategy

17. 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

18. Life Strategy for Ted Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: Live a good life • Goal: Successful career, good income • Strategy: Obtain a master’s degree • Tactics: Select a college and a concentration • Operations: Register, buy books, take courses, study, graduate, get a job

19. New Product Development Marketing and Sales Operations Distribution Service Linking SC and Business Strategy Competitive (Business) Strategy • Product Development Strategy • Portfolio of products • Timing of product introductions Marketing Strategy -Frequent discounts -Coupons Supply Chain Strategy Finance, Accounting, Information Technology, Human Resources

20. 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 Tata’s 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.

21. 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.

22. 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?

23. Understanding the Supply Chain: Cost-Responsiveness Tradeoff Responsiveness (in time, high service level and product variety) High Efficiency frontier Inefficient Impossible Fix responsiveness Inefficiency Region Low Cost in $ High Low Why decreasing slope (concave) for the efficiency frontier?

24. Achieving Strategic Fit: Wishes vs.Capabilities Responsive (high cost) supply chain AOG Shipments <High margin> Zone of Strategic Fit Responsivenesspectrum <Low margin> Efficient (low cost) supply chain Certain demand Implied uncertainty spectrum Uncertain demand

25. Integration • Integration is the central theme in SCM • Building synergies by integrating business functions, departments and companies

26. Strategic Scope Manufacturer Distributor Retailer Customer Suppliers Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy

27. Supply Chain Drivers and Obstacles

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

29. 1. Inventory • Convenience: Cycle inventory • No customer buys eggs one by one • Unstable demand: Seasonal inventory • Bathing suits • Xmas toys and computer sales • Pipeline inventory • Work in process or transit

30. 2. Transportation • Air • Truck • Rail • Ship • Pipeline • Electronic

31. 3. Facilities • Production • Flexible vs. Dedicated • Flexibility costs • Production: Remember BMW: “a sports car disguised as a sedan” • Service: Can your instructor teach music as well as SCM? • Sports: A playmaker who shoots well is rare. • Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping • Job Lot Storage: Need more space. Reticle storage in fabs. • Crossdocking: Wal-Mart

32. 4. Information • Role in the supply chain • The connection between the various stages in the supply chain • Crucial to daily operation of each stage in a supply chain • E.g.,production scheduling, inventory levels • Role in the competitive strategy • Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) • Information technology • Andersen Windows • Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory.

33. Characteristics of the Good Information Strategy Analytical Models $$$ Information • Accurate? • Accessible? • Up-to-date? • In the Correct form?

34. 5. 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 • TI: More than half of the revenue spent for sourcing. • Cisco sources: Low-end products (e.g. home routers) from China. • 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 authorization.

35. 6. 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 and 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

36. Considerations for Supply Chain Drivers

37. 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

38. 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

39. 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?

40. 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

41. 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

42. Thank You