Introduction to Supply Chain Management (SCM)

Rev: Feb, 2012

Euiho (David) Suh, Ph.D.

POSTECH Strategic Management of Information and Technology Laboratory(POSMIT: http://posmit.postech.ac.kr)

Dept. of Industrial & Management EngineeringPOSTECH

※ Discussion Questions

1 Introduction

2 Motivation in SCM

3 Strategic approaches of SCM

4 Roles of SCM

5 Case Study

Contents

3

Discussion Questions

■ Why do you think implementing SCM is difficult?

■ Find a successful case of SCM and explain it.

■ EDI involves the electronic exchange business transaction documents over the Internet or other networks between supply chain trading partners.

■ What is the concept explained in the below pharagraph?– A cross-functional interenterprise system that uses information technology to help

support and manage the links between some of the organization's key business pro-cesses and those of its suppliers, customers, and partners. The intent is to create a fast, efficient, and low-cost network of business relationships to get an organization's products and services from concept to market.

4

What is a Supply Chain?

■ Definition– The interrelationships with suppliers, customers, distributors, and other businesses

that are needed to design, build, and sell a product make up the network of business entities, relationships, and processes

Suppliers Manufacturers Warehouses &Distribution Centers

Customers

Material Costs

TransportationCosts

TransportationCosts Transportation

CostsInventory CostsManufacturing Costs

1. Introduction

5

Supply Chain Management

■ Definition– Applying a total systems approach to the entire flow of information, materials and ser-

vice throughout the supply chain to provide the right quantities of right stuff, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements

Customer Relationship Man-agement

Satisfaction of order-ing

Supply

Management production

Management cus-tomer services

Management demand

1. Introduction

6

Sales Strategy vs. Production Strategy

■ What would sales & production costs have to be to double net income? Which is easier?

■ Solution

Current Situa-tion Sales Strategy Production

Strategy

Sale $10 $ ? $ 10

Production $8 (80%) $ (80%) $ ?

Marketing $1 (10%) $ (10%) $ (10%)

Net In-come $1 $2 $ 2

Current Situa-tion Sales Strategy Production

Strategy

Sale $10 $ 20 $ 10

Production $8 (80%) $ (80%) $ 7

Marketing $1 (10%) $ (10%) $ (10%)

Net In-come $1 $2 $ 2

Increase sales 100% Reduce production costs by 12%Reducing production costs is more feasible.

Percentages are % of sales

2. Motivation in SCM

7

The Importance of Supply Chain Management (1/2)

■ Dealing with uncertain environments – matching supply and demand– Boeing announced a $2.6 billion write-off in 1997 due to “raw materials shortages, in-

ternal and supplier parts shortages and productivity inefficiencies”– U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than an-

ticipated inventories on the shelves of hospitals”– IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential rev-

enue– Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s

from Taiwanese suppliers in 1999 due to a massive earthquake

■ U.S. firms spent $898 billion (10% of GDP) on supply-chain related ac-tivities in 1998

2. Motivation in SCM

8

The Importance of Supply Chain Management (2/2)

■ Shorter product life cycles of high-technology products– Less opportunity to accumulate historical data on customer demand– Wide choice of competing products makes it difficult to predict demand

■ The growth of technologies such as the Internet enable greater col-laboration between supply chain trading partners– If you don’t do it, your competitor will– Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its suppli-

ers

■ Availability of SCM technologies on the market– Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with

which to integrate internal processes

2. Motivation in SCM

9

History of Supply Chain Management

1960’s Inventory Management Focus, Cost Control

1970’s MRP & BOM – Operations Planning

1980’s MRPII, JIT - Materials Management, Logistics

1990’s

SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order Entry

2000’s

Optimized “Value Network” with Real-Time Decision Support; Synchronized & Collaborative Extended Network

2. Motivation in SCM

10

Supply Chain Technology Market

2008 2012

$ 6.5B

$ 9.2BGrow 7% an-nually

(source : AMR research, 2008)

 “The supply chain, and the technologies

that support it, will play an important role

in helping companies deal and thrive in

an economy that is going to be quite un-

like anything we’ve seen in the post-war

era,”

- John Fontanella - vice president of research at AMR Research

2. Motivation in SCM

11

Why Is SCM Difficult?

■ Uncertainty is inherent to every supply chain– Travel times– Breakdowns of machines and vehicles– Weather, natural catastrophe, war– Local politics, labor conditions, border issues

■ The complexity of the problem to globally optimize a supply chain is significant– Minimize internal costs– Minimize uncertainty– Deal with remaining uncertainty

Plan Source Make Deliver Buy

2. Motivation in SCM

12

Electronic Data Interchange (EDI)

■ The electronic exchange of business transaction documents between supply chain trading partners

■ One of the earliest uses of information technology for supply chain manage-ment

■ The almost complete automation of an e-commerce supply chain process■ Many transactions occur over the Internet, using secure virtual private net-

works■ A communications standard for sharing business documents and set-

tlement information among firms

3. Strategic approaches of SCM

13

Today’s Marketplace Requires:

■ Personalized content and services for their customers■ Collaborative planning with design partners, distributors, and suppliers■ Real-time commitments for design, production, inventory, and transportation

capacity■ Flexible logistics options to ensure timely fulfillment ■ Order tracking & reporting across multiple vendors and carriers

Shared visibility for trading partners

3. Strategic approaches of SCM

14

Supply Chain Management – Key Issues (1/3)

■ Forecasts are never right– Very unlikely that actual demand will exactly equal forecast demand

■ The longer the forecast horizon, the worse the forecast– A forecast for a year from now will never be as accurate as a forecast for 3 months

from now

■ Aggregate forecasts are more accurate– A demand forecast for all CV therapeutics will be more accurate than a forecast for a

specific CV-related product

■ Nevertheless, forecasts (or plans, if you prefer) are important man-agement tools when some methods are applied to reduce uncertainty

3. Strategic approaches of SCM

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Supply Chain Management – Key Issues (2/3)

■ Overcoming functional silos with conflicting goals

Purchasing Manufacturing Distribution Customer Service/Sales

Few change- overs

Stable sched-ules

Long run lengths

High in-ventories

High ser-vice levels

Regional stocks

SOURCE MAKE DELIVER SELL

Low pur-chase price

Multiple vendors

Low in-vent-ories

Low trans-portation

3. Strategic approaches of SCM

16

Supply Chain Management – Key Issues (3/3)

ISSUE CONSIDERATIONS

Network Planning• Warehouse locations and capacities• Plant locations and production levels• Transportation flows between facilities to minimize cost and time

Inventory Control• How should inventory be managed?• Why does inventory fluctuate and what strategies minimize this?

Supply Contracts• Impact of volume discount and revenue sharing• Pricing strategies to reduce order-shipment variability

Distribution Strategies

• Selection of distribution strategies (e.g., direct ship vs. cross-docking)• How many cross-dock points are needed?• Cost/Benefits of different strategies

Integration and Strategic Partnering

• How can integration with partners be achieved?• What level of integration is best?• What information and processes can be shared?• What partnerships should be implemented and in which situations?

Outsourcing & Procurement Strategies

• What are our core supply chain capabilities and which are not?• Does our product design mandate different outsourcing approaches?• Risk management

Product Design

• How are inventory holding and transportation costs affected by product design?• How does product design enable mass customization?

3. Strategic approaches of SCM

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Supply Chain Management Operations Strategies

STRATEGY WHEN TO CHOOSE BENEFITS

Make to Stockstandardized products, relatively predictable demand

Low manufacturing costs; meet customer demands quickly

Make to Order customized products, many variations

Customization; reduced inventory; improved service levels

Configure to Order

many variations on finished product; infrequent demand

Low inventory levels; wide range of product offerings; simplified planning

Engineer to Order

complex products, unique customer specifications

Enables response to specific customer requirements

3. Strategic approaches of SCM

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Role and Goals of SCM

■ Role of SCM– SCM management helps a company get the right products to the right place at the

right time, in the proper quantity and at an acceptable cost.

■ Goals of SCM– To manage a process efficiently by forecasting demand– Controlling inventory– Enhancing the network of business relationships with customers, suppliers, distribu-

tors, and others– Receiving feedback on the status of every link in the supply chain

4. Roles of SCM

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Supply Chain Management – Benefits

■ A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain

Delivery Performance 16%-28% Improvement

Inventory Reduction 25%-60% Improvement

Fulfillment Cycle Time 30%-50% Improvement

Forecast Accuracy 25%-80% Improvement

Overall Productivity 10%-16% Improvement

Lower Supply-Chain Costs 25%-50% Improvement

Fill Rates 20%-30% Improvement

Improved Capacity Realization 10%-20% Improvement

Source: Cohen & Roussel

4. Roles of SCM

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Benefits and Challenges of SCM

■ Key Benefits– Faster, more accurate order processing– Strategic relationships with supplier– Lower transaction and materials cost– Quicker times to market– Reductions in inventory levels

■ Key Challenges– Lack of demand planning knowledge, tools, and guidelines

– Inaccurate data provided by other information systems

– Lack of collaboration among marketing, production, and inventory management

– SCM tools are immature, incomplete, and hard to implement

4. Roles of SCM

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Case Study

■ In the Text book – Real World Case 3 : Perdue Farms and Others: Supply Chain Management Meets the Ho

liday Season

■ Domestic Case

Click Here

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Reference

■ O’Brien & Marakas, “Introduction to Information Systems – Fifteenth Edition”, McGraw – Hill, Chapter 7, pp. 276~281

■ Keebom Kang, “Global Logistics and Information Technology(PPTSlide)”, Graduate School of Business Naval Postgraduate School

■ Keebom Kang, “B2B: Applications for Improving Supplier Selection(PPTSlide)”, Graduate School of Business Naval Postgraduate School

■ “Basics of Supply Chain Management(PPTSlide)”, Stevens Institute of Technology