Supply Chain Management

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Lecture - 1
Introduction
 Lecture Organization
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 Lecturing
 Group exercises
 Quizzes/Assignments/Tutorials
 Case discussion
 Case study presentations
 Grading Policy
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 Grading
 Presentations 5%

 Mini-project 10%

 Mid term Exam 25%

 End Exam 60%

 Mini-project
 Mini-project in supply chain

 Presentation on a relevant topic on supply chain

 Case Presentation
 Text Books/ References
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 Chopra, S. and Meindl, P., Supply Chain Management: Strategy, Planning

and Operation, Pearson Education, Inc., Singapore, Second Edition, 2004.
 Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., and Ravi Shankar,
Designing and Managing the supply chain, Tata McGraw Hill Education
Private Limited, New Delhi, 2008.
 Shah, Janat., Supply chain management: Text and Cases. New Delhi:
Pearson Education, 2009.
 J.T. Mentzer "Supply Chain Management " Response books, 2001.
 San Diego, Manish Govil and Jean – Marie Prop. "Supply Chain Design
and Management : Strategic and Technical Perspectives," Academic Press.
 Joel D Wishner, G. Keong Leong, Keah – Choon Tan. "Principles of Supply
Chain ManagemenT", Thomson, New Yark, 2005.
 Jan Stentoft Arlbjorn, Arni Halldorsson, Marionne, Jahre, Karen Spens &
Gunnar Stefansson, "Nordic Case reader in Logistics & Supply Chain
Management," University Press of Southern Denmark, 2009.
 Outline
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 What is a Supply Chain?

 Decision Phases in a Supply Chain
 Process View of a Supply Chain
 The Importance of Supply Chain Flows
 Examples of Supply Chains
 What is a Supply Chain?
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 Introduction
 The objective of a supply chain
 Why is SCM Important?
 What is a Supply Chain?
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 All stages involved, directly or indirectly, in fulfilling

a customer request
 Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
 Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)
 Examples: Detergent supply chain (Wal-Mart), Dell
 What is a Supply Chain?
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 Customer is an integral part of the supply chain

 Includes movement of products from suppliers to
manufacturers to distributors, but also includes
movement of information, funds, and products in
both directions
 Probably more accurate to use the term “supply
network” or “supply web”
 Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
 All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
 What is a Supply Chain?
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Customer wants
P&G or other Big Bazar/ third Big Bazar
detergent and goes
manufacturer party DC Supermarket
to Big Bazar

Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
 What Is the Goal of Supply Chain
Management?
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 Supply chain management is 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
 At the right time
 In order to
 Minimize total system cost
 Satisfy customer service requirements
 Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: 1-11 stocking sinks
vendors stocking points
ports points

The picture can't be display ed.

Supply

Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
Flows in a Supply Chain
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Information

Product
Customer
Funds
 The Objective of a Supply Chain
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 Maximize overall value created

 Supply chain value: difference between what the
final product is worth to the customer and the effort
the supply chain expends in filling the customer’s
request
 Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply
chain)
 The Objective of a Supply Chain
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 Example: Dell receives $2000 from a customer for a

computer (revenue)
 Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
 Difference between $2000 and the sum of all of
these costs is the supply chain profit
 Supply chain profitability is total profit to be shared
across all stages of the supply chain
 Supply chain success should be measured by total
supply chain profitability, not profits at an individual
stage
 The Objective of a Supply Chain
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 Sources of supply chain revenue: the customer

 Sources of supply chain cost: flows of information,
products, or funds between stages of the supply
chain
 Supply chain management is the
management of flows between and among
supply chain stages to maximize total
supply chain profitability
 Why is SCM Important?
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 Strategic Advantage – It Can Drive Strategy

* SCM offers opportunity for differentiation (Dell) or
cost reduction (Wal-Mart or Big Bazaar)
 Globalization – It Covers The World
* Requires greater coordination of production and
distribution
* Increased risk of supply chain interruption
* Increases need for robust and flexible supply chains
 Why is SCM Important?
(continued)
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 At the company level, supply chain management

impacts
* COST – For many products, 20% to 40% of
total product costs are controllable
logistics costs.
* SERVICE – For many products, performance
factors such as inventory availability and speed of
delivery are critical to customer satisfaction.
 What can Supply Chain Management do?
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 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.
 Magnitude of Supply Chain Management
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 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%
 Supply Chain: The Potential
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 In 25 years, National Dairy Development Board's

(NDDB) has enabled India to become the largest
producer of milk by implementing a logistics and
supply chain system that has eliminated several
intermediaries, thereby leading to a much higher
remunerative price (yield) for producers and lower
price for consumers.
 As described in the FORBES magazine, the
Dabbawalas of Mumbai has achieved an extremely
high level of reliability and precision (SIX SIGMA
level in QA parlance) in delivering to their customers
the products earmarked for them.
 Supply Chain:1-21The 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:1-22The 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.
 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.

The table on the right-hand side is from

The Second Annual Supply Chain
Top 25 prepared by Kevin Riley and
Released in November 2005.

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 Traditional View: Supply Chains in the
Economy (1990, 1996)

 Freight Transportation $352, $455 B

 Transportation manager in charge
 Transportation software
 Inventory Expense $221, $311 B
 Inventory manager in charge
 Inventory software
 Administrative Expense $27, $31 B Transportation and inventory managers

 Logistics related activity 11%, 10.5% of

GNP

$898 B spent domestically for SC activities in 1998.

$1,160 B of inventory in the US economy in the early 2000s.
 Traditional View: Cost breakdown of a
manufactured
1-25 good

 Profit 10% Profit

Supply Chain
Cost
 Supply Chain Cost 20%
Marketing
Cost
 Marketing Cost 25%

 Manufacturing Cost 45% Manufacturing

Cost

Effort spent for supply chain activities are invisible to the customers.
Supply Chain Management: The True Magnitude
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SOME ESTIMATES FOR INDIA

 Logistics Spend … IN Rs. 2,40,000 crores (approx.
US $ 50 Billion)
 Share of GDP …….…… 12-13 %
 Major Elements are ( Percentage of Total)
* Transportation …………… 35
* Inventories ………………… 25
* Packaging ……… ………… 11
* Handling & Warehousing ….. 9
* Others & Losses …………… 14
 Decision Phases 1-27
of a Supply Chain
 Supply chain strategy or design
 Supply chain planning
 Supply chain operation
 Supply Chain Strategy or Design
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 Decisions about the structure of the supply chain

and what processes each stage will perform
 Strategic supply chain decisions
 Locations and capacities of facilities
 Products to be made or stored at various locations
 Modes of transportation
 Information systems
 Supply chain design must support strategic
objectives
 Supply chain design decisions are long-term and
expensive to reverse – must take into account
market uncertainty
 Supply Chain Planning
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 Definition of a set of policies that govern short-term

operations
 Fixed by the supply configuration from previous
phase
 Starts with a forecast of demand in the coming year
 Supply Chain Planning
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 Planning decisions:
 Which markets will be supplied from which locations

 Planned buildup of inventories

 Subcontracting, backup locations

 Inventory policies

 Timing and size of market promotions

 Must consider in planning decisions demand

uncertainty, exchange rates, competition over the
time horizon
 Supply Chain Operation
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 Time horizon is weekly or daily

 Decisions regarding individual customer orders
 Supply chain configuration is fixed and operating
policies are determined
 Goal is to implement the operating policies as
effectively as possible
 Allocate orders to inventory or production, set order
due dates, generate pick lists at a warehouse,
allocate an order to a particular shipment, set
delivery schedules, place replenishment orders
 Much less uncertainty (short time horizon)
 Process View of a Supply Chain
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 Cycle view: processes in a supply chain are divided

into a series of cycles, each performed at the
interfaces between two successive supply chain
stages
 Push/pull view: processes in a supply chain are
divided into two categories depending on whether
they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)
 Cycle View of Supply Chains
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Difference is in size of order

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 Cycle View of a Supply Chain
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 Each cycle occurs at the interface between two

successive stages
 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)
 Cycle view clearly defines processes involved and the
owners of each process. Specifies the roles and
responsibilities of each member and the desired
outcome of each process.
Customer order cycle
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 Customer arrival
 Customer order entry
 Customer order
fulfillment
 Customer order receiving
Replenishment cycle
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 Retail order trigger

 Retail order entry
 Retail order fulfillment
 Retail order receiving
 Manufacturing cycle
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 Order arrival from the

distributor, retailer, or
customer
 Production scheduling
 Manufacturing and shipping
 Receiving at the distributor,
retailer, or customer
 Push/Pull View of
Supply Chains
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 Pull processes: execution is initiated in

response to a customer order (reactive)
 Push processes: execution is initiated in
anticipation of customer orders
(speculative)

• In this view processes are divided based on their

timing relative to the timing of a customer order.
• They key difference is the uncertainty during the
two phases.
• Push/pull boundary separates push processes from
pull processes
 Push/Pull View of Supply Chains
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Procurement, Customer Order

Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
 Push/Pull View of
Supply Chain Processes
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 Useful in considering strategic decisions relating to

supply chain design – more global view of how
supply chain processes relate to customer orders
 Can combine the push/pull and cycle views
 The relative proportion of push and pull processes
can have an impact on supply chain performance
 Supply Chain Macro Processes in a Firm
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 Supply chain processes discussed in the two views

can be classified into :
 Customer Relationship Management (CRM)
 Internal Supply Chain Management (ISCM)
 Supplier Relationship Management (SRM)
 Integration among the above three macro processes
is critical for effective and successful supply chain
management
 Examples of Supply Chains
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 Gateway
 Zara
 Dabbawalas of Mumbai
 McMaster Carr / W.W. Grainger
 Toyota
 Amazon
 Webvan / Peapod / Jewel

What are some key issues in these supply chains?

 Complexities Involved in
Supply Chain1-43Management
 The supply chain is a complex network of facilities
and organizations with different, conflicting
objectives
 Matching supply and demand is a major challenge
 System variations over time are also an important
consideration
 Many supply chain problems are new and there is no
clear understanding of all the issues involved
 Supply Chain: 1-44
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.
 Uncertainty
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What is variation?
What is randomness?
What tools and approaches help
us to deal with these issues?
 Can’t Forecasting Help?
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 Forecasting is always wrong

 The longer the forecast horizon the
worse the forecast
 End item forecasts are even more
wrong
 Why Is Uncertainty Hard to Deal With?
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 Matching supply and demand is difficult.

 Forecasting doesn’t solve the problem.
 Inventory and back-order levels typically fluctuate
widely across the supply chain.
 Demand is not the only source of uncertainty:
 Lead times
 Yields
 Transportation times
 Natural Disasters
 Component Availability
 Supply Chain Variability
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Manufacturer Forecast
of Sales
Volumes

Actual
Consumer
Retailer Warehouse Demand
Retailer Orders to Shop

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 What Management Gets...
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Volumes

Consumer
Demand

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 What Management Wants…
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Volumes

Production Plan
Consumer
Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Dealing with Uncertainty
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 Pull Systems
 Risk Pooling
 Centralization
 Postponement
 Strategic Alliances
 Collaborative Forecasting
 What’s New
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in SCM?

 Global competition

 Shorter product life cycle

 New, low-cost distribution channels

 More powerful well-informed customers

 Internet and E-Business strategies

 Reference for slides:
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 Chopra, S. and Meindl, P., Supply Chain

Management: Strategy, Planning and Operation,
Pearson Education, Inc., Singapore, Second
Edition, 2004.