Supply Chain Management

Lecture 2

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Outline
Last Tuesday
Chapter 1
Sections 1, 2

Today
Chapter 1
Sections 3, 4, 5

Next week
Chapters 2 and 3

What is a Supply Chain?

Flow of products and services from
Suppliers Raw materials manufacturers Intermediate goods manufacturers Finished goods manufacturers Distributors and wholesalers Retailers Customers

Connected through transportation, information, and exchanges of funds

Supplier Manufacturer Distributor Retailer Customer

Key Observations
In order to maximize supply chain surplus
Every facility that impacts costs needs to be considered
Suppliers suppliers Customers customers

Efficiency throughout the supply chain network is required using a network level approach

What is Supply Chain Management?

Supply chain management involves the management of supply chain assets and products, information, and fund flows to maximize total supply chain surplus

What is Supply Chain Management?

Getting the right things to the right places at the right times for profit

What is Supply Chain Management?

Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer
The Supply Chain Council

The design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer
Institute for Supply Management

What is Supply Chain Management?

Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements
Simchi-Levi et al, 2003

 Video
Ford Manufacturing Supply Chain

What is Supply Chain Management?

Supply chain management is all about relationships
Management of relationships in order to enhance value and reduce cost Collaboration is an important part of effective supply chain management

Evolution of Supply Chain Management

Further Refinement of SCM Capabilities SCM Formation/ Extensions JIT, TQM, BPR, Alliances Inventory Management/Cost Optimization Traditional Mass Manufacturing

1950s

1960s

1970s

1980s

1990s

2000s

Beyond

Evolution of Supply Chain Management

Mass production era (1900s 1970s)
In the early 1900s, Henry Ford created the first moving assembly line reducing the time to build a Model T from 728 hours to 1.5 hours

Lean manufacturing era (1970s 1995)

In the early 1970s, Japanese manufacturers like Toyota changed the rules of production from mass to lean. Lean manufacturing focuses on flexibility and quality more than on efficiency and quantity.

Mass customization era (1995 2010?)

Beginning around 1995 and coinciding with the commercial application of the Internet, manufacturers started to mass-produce customized products. Henry Fords famous statement You can have any color Model T as long as its black no longer applies.

Managing a Supply Chain is Not Easy

Geographically dispersed complex network Conflicting objectives across the supply chain Uncertainty and risk factors Information distortion

Managing a Supply Chain is Not Easy

Geographically dispersed complex network

Managing a Supply Chain is Not Easy

Conflicting objectives across the supply chain
Manufacturer Distributor Retailer Customer

Large production batches

Low inventory Few DCs

Few stores Low inventory Little variety Close to DCs

Convenience Short lead time Large variety of products

Large shipments

Managing a Supply Chain is Not Easy

Uncertainty and risk factors
2005 Hurricane Katrina
P&G coffee supplies from sites around New Orleans Six month impact

2002 West Coast port strike

Losses of $1B/day Store stock-outs, factory shutdowns

2001 India earthquake

Supply interruptions for apparel manufacturers

1999 Taiwan earthquake

Supply interruptions for HP and Dell

Managing a Supply Chain is Not Easy

Information distortion
Supplier Manufacturer Distributor Retailer Customer

Bullwhip effect

Why Study Supply Chain Management?

The Magnitude
In 1998, American companies spent $898 billion in supply chain related activities (or 10.6% of Gross Domestic Product) Third party logistics services grew in 1998 by 15% to nearly $40 billion It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using more effective logistics strategies
A typical box of cereal spends more than three months getting from factory to supermarket

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 Laura Ashley turns its inventory 10 times a year, five times faster than three years ago
New information system Centralized warehouse

The Impact

In 1996, Dell held 31 days of inventory. It now holds only 4 days of inventory.

The Impact

The Impact
The Turning Point (The Economist, 9/20/07)
For such a tiny part of GDP, the contents of warehouses has had a surprisingly big effect on its volatility. When industries cut or add stocks according to demand, that adjustment magnifies the effect of the initial change in sales. Stock levels were once much larger relative to the size of the economy, so a small slip in demand could easily blow up into a recession. But thanks to improvements in technology, firms now have timelier and better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions. This makes huge stocks unnecessary and minimizes the lurches in inventories that were once so destabilizing. The entire inventory of some lean-running companies now consists of whatever FedEx or UPS is shipping on their account. Mr Cecchetti and his colleagues calculate that, on average, more than half the improvement in the stability of economic growth in the countries they studied is accounted for by diminished inventory cycles. That something so workaday as supply-chain management could have so marked an effect might seem a dull conclusion. But dullness is a virtue, because technological improvement is irreversible

The Impact

Study of Supply Chain Management

Successful supply chain management requires decisions on the flow of information, product, and funds that fall into three decision phases
Supply chain strategy or design Supply chain planning Supply chain operation

Decision Phases in a Supply Chain

TIME FRAME TYPE TYPICAL DECISIONS Supply chain network design (How many plants? Location and capacities of plants and warehouses?) Supply chain strategies (Sell direct or through retailers? Outsource or in-house? Focus on cost or customer service?) Product mix at each plant

years

Strategic

3 mo.- 1year

Tactical

Workforce & Production planning Inventory policies (safety stock level) Which locations supply which markets Transportation strategies
Production scheduling Decisions regarding individual orders Place replenishment orders

daily

Operational

Study of Supply Chain Management

A supply chain is a sequence of processes and flows that take place within and between different stages
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

Push/pull view
The processes in a supply chain are divided into two categories depending on whether they are executed in response or in anticipation of a customer order

Cycle View of Supply Chain Processes

Customer
Customer Order Cycle

Cycle view defines the processes involved and the owner of each process

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier

Subprocesses in Each Cycle

Buyer
Supplier markets the product Buyer places an order Buyer may return the product Buyer receives the order

Supplier receives the order

Supplier supplies the order

Supplier

Cycle View of Supply Chain Processes

Customer Order Process 1. Customer Arrival Customer Order Cycle 2. Customer Order Entry 3. Customer Order Fullfillment 4. Customer Order Receiving

Replenishment Cycle
Manufacturing Process 1. Order Arrival 2. Production Scheduling 3. Manufacturing/Shipping 4. Receiving

Replenishment Process 1. Retail Order Trigger 2. Retail Order Entry 3. Retail Order Fullfillment 4. Retail Order Receiving

Manufacturing Cycle
Procurement Process 1. Component Order Arrival 2. Production Scheduling 3. Manufacturing/Shipping 4. Receiving

Procurement Cycle

Push/Pull View of Supply Chain Processes

PULL PROCESSES

Execution is initiated in response to customer orders (reactive)

Customer order arrives

PUSH PROCESSES

Execution is initiated in anticipation of customer orders (speculative)

Processes are divided based on the timing of their execution relative to a customer order

Push/Pull Processes for the Supply chain of Dell

PULL

Customer
Customer Order Cycle and Manufacturing Cycle

Manufacturer
Procurement Cycle

PUSH

Supplier

Push/Pull Processes for the Supply chain of Detergent

Customer
PULL
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
PUSH
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier

Are the following systems push or pull?

Soda vending machines Amazon.com Emergency care Paint industry Runway capacity at an Airport

Cycle View Versus Push/Pull View

Which view is more useful when considering operational decisions and which view is more useful when considering strategic decisions?

Examples of Supply Chains

Celestial Seasonings
The herbs were originally harvested by hand in the Rocky Mountains Currently, herbs and leafs come from growers around the world Weve been working to establish sustainable harvests and fair wages for more than 30 years What are advantages of having one production facility? What are disadvantages of having one production facility? What advantages does selling tea over the Internet provide?