Introduction to Supply Chain Management

Designing & Managing the Supply Chain

Chapter 1

Byung-Hyun Ha

bhha@pusan.ac.kr

Outline

Introduction

Global Optimization

Uncertainty

Case: Meditech Surgical

Introduction

Investment and interest in supply chain Economy issues

• Fierce competition in today’s global market

• Introduction of products with shorter and shorter life cycles

• Heightened expectations of customers

Technology issues• Advances in communications and transportation technologies

Introduction

Supply chain (logistics network) The system of suppliers, manufacturers, transportation,

distributors, and vendors that exists to transform raw materials to final products and supply those products to customers

That portion of the supply chain which comes after the manufacturing process is sometimes known as the distribution network

Introduction

Goal of supply chain management 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

Supply

Sources:plantsvendorsports

RegionalWarehouses:stocking points

Field Warehouses:stockingpoints

Customers,demandcenterssinks

Production/purchase costs

Inventory &warehousing costs

Transportation costs

Inventory &warehousing costs

Transportation costs

Logistic Network

Strategies for SCM

All of the advanced strategies, techniques, and approaches for supply chain management focus on:

Global optimization

Managing uncertainty

Global Optimization

Issues Why is it different/better than local optimization? What are conflicting supply chain objectives?

Why is global optimization hard? The supply chain is complex network Different facilities in supply chain network have different and

conflicting objectives The supply chain is a dynamic system

• The power structure changes

The system varies over time• e.g. Demand and cost variation due to seasonal factors, trend,

advertising and promotion, competitors’ pricing strategies, …

Global Optimization

Tools and strategies Decision support systems Inventory control Network design Design for logistics Cross docking Strategic alliances / supplier partnerships Supply contracts / incentive schemes

Sequential vs. Global Optimization

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

ManufacturingPlanning

DistributionPlanning

DemandPlanning

Sequential optimization

Global optimization

Conflicting Objectives in the Supply Chain

Purchasing Stable volume requirements / flexible delivery time Little variation in mix / large quantities

Manufacturing Long run production / high quality High productivity / low production cost

Warehousing Low inventory / reduced transportation costs Quick replenishment capability

Customers Short order lead time / high in stock Enormous variety of products / low prices

Uncertainty

Why is uncertainty hard to deal with? 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

Forecasting Forecasting is always wrong The longer the forecast horizon the worse the forecast End item forecasts are even more wrong

Uncertainty

Time

ActualConsumerDemand

ActualConsumerDemandRetailer Warehouse

to Shop

Retailer Warehouseto ShopRetailer OrdersRetailer Orders

Production PlanProduction Plan

Manufacturer Forecastof Sales

Manufacturer Forecastof Sales

Supply Chain Variability

Uncertainty

Time

ConsumerDemand

ConsumerDemand

Production PlanProduction Plan

What Management Gets...

Uncertainty

Vo

lum

es

Time

ConsumerDemand

ConsumerDemand

Production PlanProduction Plan

What Management Wants…

Uncertainty

Dealing with uncertainty Pull systems Risk pooling Centralization Postponement Strategic alliances Collaborative forecasting

Key Issues

Issues span Strategic, tactical, operational

What are the tradeoffs and issues? Distribution network configuration Inventory control Supply contracts Distribution strategies Integration and partnerships Procurement strategies and outsourcing Product design Information technology

Case: Meditech Surgical

Case overview Intent – diagnosis of supply chain Business overview Supply chain Production planning What’s wrong? How to fix it?

Meditech Surgical

Background Endoscopic surgical instrument maker

• Minimally invasive surgery

Parent company: Largo Healthcare Company• Spun off 3 years ago

Primary competitor: National Medical Corporation• Market created in early 80’s, rapidly growing

• National sells to physicians

• Meditech sells to material managers as well as physicians

• Customer preferences change slowly

Old products continually updated• Replaced with new product introductions

Compete based on product innovations, customer service, cost

Meditech Surgical

Problems New production introduction needs to be flawless Consistently fail to keep up with demand during initial order Customers wait over six weeks to have orders delivered

Dan Franklin, manager of Customer Service & Dist. Recognizing growing customer dissatisfaction

Distribution

Central warehouse

Two primary channels to hospitals Domestic dealers

• Order and receive products from multiple manufacturers

• Independent and autonomous entities

International affiliates• Subsidiaries of Largo Healthcare

• Similar to domestic dealers from Meditech’s point of view

Internal Operations

Assembly Manually intensive Using component parts in inventory Assembly line with a team of cross-trained production workers Cycle time for assembly of a batch of instruments

• 2 weeks

Lead time for component parts• 2-16 weeks

Packaging Using machine

Sterilization Cobalt radiation sterilizer, about 1 hour

Operation Organization

Production Planning & Scheduling

Broken down two parts Assembly & component parts order based on monthly forecast Packaging & sterilization based on finished goods inventory level

Forecast Annual: during the fourth quarter of each fiscal year Monthly: using annual forecast broken down proportionately

• At the beginning of each month: adjustments of forecast

Planning of assembly Using monthly demand forecasts transfer req. =

month forecast – finished goods inventory + safety stock

Approved throughout the organization after 1 to 2 weeks

Production Planning & Scheduling

MRP systems Planning assembly schedules and parts order Calculation may be run several times each week

• Notification of change at least 1 weeks before

Packaging & sterilization process Order point/order quantity (OP/OQ)

Parts Inventory Assembly Bulk Inventory FG InventoryPackaging &Sterilization

2 – 16 weeks 2 weeks 1 weekpush pull

High Inventory Level of Finished Goods

In case of representative stable product

Var. in Production vs. Var. in Demand

Variation in production schedules often exceeded variation in demand

New Product Introduction

Poor service level Poor forecasting? Panic ordering? And high FG inventory

Poor Service Level

What is going on? Demand is quite predictable Usage in hospitals is quite stable Market share moves slowly over time With each new product, dealer must build inventory to fill pipelin

e

Why did Meditech think demand was unpredictable? Poor information systems No one looked at demand No one had responsibility for forecast errors Tendency to shift the blame Built-in delays and monthly buckets in planning system Amplifier in planning system

Poor Service Level

What to do? Recognize that demand is stable and predictable Establish accountability for forecast Eliminate planning delays and/or reduce time bucket Alternatively, put assembly within pull system and eliminate bulk

inventory

HW#1

All homework should be prepared by handwriting and be submitted at the next class

Discussion questions 5, 7, 8, 9 (p. 13)

Case discussion question 3 (p. 21)