Supply Chain Management

Course Instructor:
Dr. Arun Kaushal

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 Traditional View: Logistics in the Economy
(1990, 1996)
• Freight Transportation $352, $455 Billion
• Inventory Expense $221, $311 Billion
• Administrative Expense $27, $31 Billion
• Logistics Related Activity 11%, 10.5% of
GNP

Source: Cass Logistics

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 Traditional View: Logistics in the
Manufacturing Firm

Profit
• Profit4% Logistics
Cost

• Logistics Cost 21% Marketing

Cost

• Marketing Cost 27%

Manufacturing
Cost
• Manufacturing Cost 48%
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 Supply Chain Management: The Magnitude
in the Traditional View
• 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

• Laura Ashley turns its inventory 10 times a year,

five times faster than 3 years ago

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 Supply Chain Management:
The True Magnitude
• Compaq estimates it lost $.5 billion to $1 billion
in sales in 1995 because laptops were not
available when and where needed
• When the 1 gig processor was introduced by
AMD, the price of the 800 mb processor
dropped by 30%
• P&G estimates it saved retail customers $65
million by collaboration resulting in a better
match of supply and demand
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 Outline
• 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

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 What is a Supply Chain?
• Introduction
• The objective of a supply chain

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 What is a Supply Chain?
• 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: Fig. 1.1 Detergent supply chain (Wal-Mart),
Dell
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 What is a Supply Chain?
• 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 (Fig. 1.2)
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
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 What is a Supply Chain?
Customer wants
P&G or other Jewel or third Jewel
detergent and goes
manufacturer party DC Supermarket
to Jewel

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

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)

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Flows in a Supply Chain

Information

Product
Customer
Funds

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 The Objective of a Supply Chain
• 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)
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 The Objective of a Supply Chain
• 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
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 The Objective of a Supply Chain
• 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

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 Decision Phases of a Supply Chain

• Supply chain strategy or design

• Supply chain planning
• Supply chain operation

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 Supply Chain Strategy or Design
• 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
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 Supply Chain Planning
• 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

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 Supply Chain Planning
• 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
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 Supply Chain Operation
• 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)
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 Process View of a Supply Chain
• 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)
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Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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 Cycle View of a Supply Chain
• 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)
• Figure 1.3
• 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.
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Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
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 Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes
from pull processes
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 Push/Pull View of
Supply Chain Processes
• 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
– L.L. Bean (Figure 1.6)
– Dell (Figure 1.7)
• The relative proportion of push and pull processes
can have an impact on supply chain performance

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Supply Chain Macro Processes in a Firm

• Supply chain processes discussed in the two

views can be classified into (Figure 1.8):
– 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

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 Examples of Supply Chains
• Gateway
• Zara
• McMaster Carr / W.W. Grainger
• Toyota
• Amazon / Borders / Barnes and Noble
• Webvan / Peapod / Jewel

What are some key issues in these supply chains?

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 Gateway: A Direct Sales Manufacturer
• Why did Gateway have multiple production facilities in the US?
What advantages or disadvantages does this strategy offer
relative to Dell, which has one facility?
• What factors did Gateway consider when deciding which
plants to close?
• Why does Gateway not carry any finished goods inventory at
its retail stores?
• Should a firm with an investment in retail stores carry any
finished goods inventory?
• Is the Dell model of selling directly without any retail stores
always less expensive than a supply chain with retail stores?
• What are the supply chain implications of Gateway’s decision
to offer fewer configurations?
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 7-Eleven
• What factors influence decisions of opening and closing stores?
Location of stores?
• Why has 7-Eleven chosen off-site preparation of fresh food?
• Why does 7-Eleven discourage direct store delivery from vendors?
• Where are distribution centers located and how many stores does
each center serve? How are stores assigned to distribution
centers?
• Why does 7-Eleven combine fresh food shipments by
temperature?
• What point of sale data does 7-Eleven gather and what
information is made available to store managers? How should
information systems be structured?
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 W.W. Grainger and McMaster Carr
• How many DCs should there be and where should they be
located?
• How should product stocking be managed at the DCs? Should
all DCs carry all products?
• What products should be carried in inventory and what
products should be left at the supplier?
• What products should Grainger carry at a store?
• How should markets be allocated to DCs?
• How should replenishment of inventory be managed at
various stocking locations?
• How should Web orders be handled?
• What transportation modes should be used?

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 Toyota
• Where should plants be located, what degree of
flexibility should each have, and what capacity
should each have?
• Should plants be able to produce for all markets?
• How should markets be allocated to plants?
• What kind of flexibility should be built into the
distribution system?
• How should this flexible investment be valued?
• What actions may be taken during product design
to facilitate this flexibility?
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 Summary of Learning Objectives
• What are the cycle and push/pull views of a
supply chain?
• How can supply chain macro processes be
classified?
• What are the three key supply chain decision
phases and what is the significance of each?
• What is the goal of a supply chain and what is
the impact of supply chain decisions on the
success of the firm?
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 Amazon.com
• Why is Amazon building more warehouses as it grows? How many
warehouses should it have and where should they be located?
• What advantages does selling books via the Internet provide? Are
there disadvantages?
• Why does Amazon stock bestsellers while buying other titles from
distributors?
• Does an Internet channel provide greater value to a bookseller like
Borders or to an Internet-only company like Amazon?
• Should traditional booksellers like Borders integrate e-commerce
into their current supply?
• For what products does the e-commerce channel offer the
greatest benefits? What characterizes these products?

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