Microsoft PowerPoint - The Supply Chain

Sept. 2001Slide 2 Elee – Shanghai

The Supply-Chain

Supply Chain Management

SCM

This presentation is based on the work and materials of:Marshall L. Fisher, Professor & co-director of the Fishman-David Center for service and Operation management at The Wharton School.David Simchi-Levy, professor at the MIT, President and CEO of Logic Tools.


I n d e x

What does it take to implement SCM

Supply Chain - Definitions

The objectives of SCM

Why inventories in the Supply chain

SCM strategies

The fundamentals of SCM

The benefits gained through SCM

Traditional vs. new SC models


Supply chain

-

Definitions


What is the Supply Chain?

The supply-chain is a complex sequence

of events and decisions, which connects sourcing raw materials

with manufacturing and the end consumer.

Logistics is the management

of this end-to-end supply-chain.


ManufacturersSuppliers

Ports of entriesAssembly plants

Distribution centersPlant direct shipmentsCross-dock facilities

Assembly plants

Customers Retailers

Demand pointsProduct destination

The Logistics networkA complex network

of

Factories, Warehouses, Distribution Centers and Retail…


CustomerCustomerorders

Distributeorders

Factoryorders

Manufactoryorders

PurchaseordersSupplier

Stockpoints

FinishedProductStock

WIP*RawMaterial

Supply Chain Management covers flows of goods from suppliers

through manufacturing and distribution up to the customers

* Work in process

Supply chain time line

The time spent by items from the purchase of raw materialsup to the delivery of product to customer


I n v e n t o r i e s


…..is primarily 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 damage-free conditions and

so as to minimize the total System cost of a company subject to satisfying service

requirements.

Supply Chain Management (SCM)


The objectives

of



It is fundament for organizations

to adopt

the logistics and supply chain model

to balance the costs (direct & indirect)

of holding (or not) inventories against

the need to serve end-consumers

quickly and reliably.



DEM

AND

SUPP

LYWhen is a product desired

Where is a product wanted

How much or how many are needed

What mix of products is called for

How is it desired

When is a product made

Where it is made or sourced

How much or how many are made or acquired

What product mix is made or scheduled to be received

How is it delivered

Bridging the gaps


The objectives of the supply chain are to optimize

pre and post-production inventory levels,

obtain greater efficiency from labor,

equipment and space

across the company

and

provide flexible planning and control mechanisms.



Supply Chain management tries to:

Set free capital tied up in inventories in the whole pipeline from supplier to customer,

While minimizing the transportation costs,

Without sacrificing the desired levels of customer service.




SCM aims at minimizing the systemwide

costs of a company subject to

satisfying service level requirements.

The response time expressed in time units decided by

demand patterns.Hours / Days Week / Months

The response time expressed in time units decided by

demand patterns.Hours / Days Week / Months

Manufacturing Fixed assetsInventories

Transportation

Manufacturing Fixed assetsInventories

Transportation

Company costs Service levels


SCM helps companies make better decisions faster,

answering questions like:

What is the best price to charge for my product?

Should I change the price if I have excess inventory?

If so, by how much?

If I am short of a product, where should I allocate supply?

Which suppliers should I buy parts from?

Which factory should I manufacture the product?

SCM helps companies make better decisions


Traditional

versus

new supply chain

models


Traditional approach of SCM

Supply chain partners operate in silos

Suppliers

Interface between entities

Manufacturers Warehouse Retailers Customers

Traditional organizations set performance goals for each function

to be managed in isolation with no or little attention given

to inter-functional relationships.


Traditional approach of SCM

Overstocking

Overproducing

Overpurchasing

Overforecasting

Overstocking

Overproducing

Overpurchasing

Overforecasting

Overstocking

Overproducing

Overpurchasing

Overforecasting

Overstocking

Overproducing

Overpurchasing

Overforecasting

Overstocking

Overproducing

Overpurchasing

Overforecasting

Unwanted inventories

Suppliers Manufacturers Warehouse Retailers Customers

By making use of local information to make demand forecasts

and passing them onto downstream partners,

information distortion is created.


Efficient implementation of the Supply Chain

The product is pulled by demand.

Man

ufactu

rers

Push PullPullPull

orders are

receivedSuppliers

Wareh

ouses

custo

mers

Retailers

Push-pull boundary

Supply Chain Management concept accepts the whole supply chain as a single entity & enable a total

transparency of demand information across all business partners


Ensuring free flow is the core essence of

the Supply Chain concept.

Cross-functional collaboration is of

utmost importance

for such an organization to be effective.



Man

ufactu

rers

Push PullPullPullorders

are received

Suppliers

Wareh

ouses

custo

mers

Retailers

Push-pull boundary

All functions

along the chain share the common objective of supply

and are involved in strategic decision-making

Efficient implementation of the Supply Chain


Why

do we have

inventories in the

Supply Chain?


Why inventories in the supply-chain?

Stock(Safety

or unwanted)

Demand variability

Product nature

Desired service levels (90% - 99%)

High fluctuation of product demand

Suppliers long delivery time

High delivery variability

Information distortion

Numerous reasons among which,

But also,

promotions, seasonality,

batch process, tight capacities etc..


Inventory is a symptom

To decrease inventories,

one needs

to address the root cause of

Why

inventories are high in the

Supply-Chain


Different inventory levels

Next day delivery High level of service

Low cost network Plant to customers

Different demand patterns

generate

Demand patterns


Different distribution

patternsDifferent distribution

patterns

Different products

induce

Type of Products


Two different types of

products

with

similar service requirements

“NEXT DAY DELIVERY”

induce different storing patterns.

Service levels


Low value - Low margins

Case study – Food cans vs. Hi-tech

Many DCs close to customers

High Inventory levels

Grocery products – functional productsStable, predictable demand patterns & cycle life times

Many DCs to be close to customersN

EXT -D

AY

SERV

ICE

Bulk shipments

Weekly trucks

Remote inventory base (4 weeks)(Next day delivery)

Manufacturing site

Points of sales

Replenishment by weekly trucks

Each inventory in warehouses

has to hold safety stock to protect against

demand variability

High buffer inventory levels


High values, High margins

High tech products

Minimized inventories

Premium transport service

High tech products – short cycle life timeGreat variety

Unpredictable demand

Manufacturing site

Points of sales

Premium Air freight service

NEXT-D

AY S

ERVIC

E

Direct Premium Air-freightNo remote buffer inventory

Premium trucking service

Less warehouse implies

higher geographic

coverage of each warehouse


Supply chain

Management

Strategies


What SCM is looking for is to develop

production & delivery mechanisms and processes

that can produce goods

to the actual end-user rate of demand

for the smallest time-period manageable.

Ensure that the variety of products

reaching the market place

matches what customers want to buy.


The functions of the SMC

Ensure that the following conditions are met:

A Market interface function

at the right place

in the right quantity,

the right product

at the right time

exactly as per Customers’ needs and expectations.

A physical functionProcurement

TransportationStorage

Production


All production and distribution decisions are

made on long-term forecasts

Supply-Chain strategies

Inventory of

Finished goods

Functional productstypically…

Retail products,

Food cans,

beer, drinks

Pasta,

baby diapers

Etc…

Made-to-stock environment

1/ Forecast are always wrong, 2/ The longer the forecast horizon, the worst the forecast3/ Aggregate forecast are more accurate. (risk-pulling concept.)

The problems

with long-term

forecasts

PushProduct

characteristics

Stable, predictable demand

& life cycle time

Low level of demand uncertainty

Low margin

Efficient SC to market demand


New Supply-Chain strategiesMade-to-order environment

Inventory of

parts All sorts of industries

High tech industries

Computer (Dell)

Fashion

..etc …Decisions based on accurate customer

demand.Ensure that the variety of

products reaching the market place matches what customers

want to buy

Assembly

Innovative products

Unpredictable demand

Short life cycle time

Great variety

High margins

Responsive SC to market demand


Is your product functional or innovative?

Should your SC be physically efficient or responsive to the market?

Where in the SC to position inventory and available

production capacity in order to hedge against uncertain

demand?

What Strategy for your products?


Physically Efficient vs. Market-Responsive SC

Primary purpose

Approach to choosing suppliers

Lead-time focus

Inventory strategy

Manufacturing focus

Product design strategy

Supply predictableDemand efficiently at the lowest possible cost

Maintain high average utilization rate

Generate high returns & minimize inventory throughout the SC

Shorten lead times as long as it does not increase cost

Select primarily for cost & quality

Maximize performance & minimize cost

Respond quickly to unpredictable demand to minimize forced markdowns, obsolete inventories

Deploy excess buffer capacity

Deploy significant buffer stocks of parts or finished goods

Invest aggressively in ways to reduce lead times

Use modular design to postpone product differentiation as long as possible

Select primarily for speed, flexibility and quality

Physically Efficient process

Market-Response Process


matchmismatch

mismatchmatch

Eff

icie

nt

Supply

chai

n

Res

ponsi

ve

Supply

chai

nFunctional products Innovative products

Matching SC with products


The push-pull boundary

Push based strategies

Parts replenishment

made on forecast

Parts replenishment

made on forecast

Pull based strategies

Assembly made on

accurate customer demands

Assembly made on

accurate customer demands

The Push - Pull Strategy

It is the point at which the product goes from being pushed in anticipation of customer order, to being pulled by actual demand.

Effic

ient

SC

mod

el

Responsive SC

model


The higher the demand uncertainty,

the more we want to use

Pull based strategies.

The lower the transport costs*,

we more we are willing to use

Pull based strategies.

The higher the transport cost*,

the more we want to make use of

Push based strategies.

The lower the demand uncertainty,

the more we want to use

Push based strategies

What is the appropriate strategy for a company?

(aggregate shipments possibility)

(high predictability)

(*Transport costs as a percentage of a unit cost)


Raw

Mat

eria

ls

End

cust

omer

Production Assembly Manufacturer

DC

Distributor

DC

Store

Traditional

retailers

Some Retail

AmazoneDellFurniture

Car

industry

The Pull-Push boundary

It is the inflection point where demand information exerts its influence on…..



DC

Distributor

DC

Store

The furniture industryHigh level of demand uncertaintyHigh delivery cost (% to the unit price)High level of demand uncertaintyHigh delivery cost (% to the unit price)

Madeon

order

Raw

Mat

eria

ls

End

cust

omer

Many different type of fabrics, colors

decided on order.

Consolidation of bulky shipments Inventory

Inve

ntor

y


End

cust

omer


DC

Distributor

DC

Store

Dell - the Pull-Push boundary

High level of demand uncertaintyLow delivery cost (% to the unit price)High level of demand uncertaintyLow delivery cost (% to the unit price)

Demandforecast made

at assembly

No inventory

of

finished products

Push

Pull from customer demand

Raw

Mat

eria

ls

Parts inventory made on forecast


End

cust

omer


DC

Distributor

DC

Store

Traditional computer industryHigh level of demand uncertaintyLow delivery cost (% to the unit price)High level of demand uncertaintyLow delivery cost (% to the unit price)

Demand forecast made on longterm forecast

Inventory of

finished products

Push

Raw

Mat

eria

ls

Inventory of

finished products

Inventory of

finished products

Man

ufa

cturing


End

cust

omer

Production Sales Point

Car industryHigh level of demand uncertaintyHigh delivery cost (% to the unit price)High level of demand uncertaintyHigh delivery cost (% to the unit price)

Demand forecast made on longterm forecast

Inventory of

finished products

Push

Raw

Mat

eria

ls

Inventory of

finished products

Inventory of

finished products

Man

ufa

cturing

Assembly ManufacturerDC

DistributorDC

…But today, some web-sites propose

on-line ordering of

customized models….

In which case the business model would look like something like….

End

cust

omer


DC

Distributor

DC

Store

Demandforecast made

at manufacturing

No inventory of

finished products

Push

Orders received through Internet

Raw

Mat

eria

ls

Parts inventory made on forecast

Direct delivery to end-customer


End

cust

omer


DC

Distributor

DC

Store

The Grocery Pull-Push boundaryLow level of demand uncertaintyHigh delivery cost (% to the unit price)Low level of demand uncertaintyHigh delivery cost (% to the unit price)

Demandforecast made

at Distributor

DCPush

Pull from customer demand

Raw

Mat

eria

ls

Very predictable distribution patterns.Because high level of predictability,

orders can be made on long-term forecast

PastaSoup drinks


End

cust

omer


DC

Distributor

DC

Store

The Grocery Pull-Push boundary

Low level of demand uncertaintyHigh delivery cost (% to the unit price)Low level of demand uncertaintyHigh delivery cost (% to the unit price)

Demandforecast made

at StoreDCPush

Raw

Mat

eria

ls

Very predictable distribution patterns.Because high level of predictability,

orders can be made on long-term forecast


The basics

of



The management of

the supply chain relates

to two

levels of decision

Management of the Supply Chain


Optimal number

of

warehouses

Strategic decisionStrategic decision



Pick the optimal number of location size of warehouse

Optimize the trade-offs between nr of facilities & service levels

Optimize the trade-offs between transportations and

warehousing costs

Determine optimal sourcing strategy > (Which vendor should produce which products?)

Determine best distribution channels > (Which warehouse should service which customer?)

Strategic Network design


Each inventory in warehouses

has to hold safety stock to protect against

demand variability

High buffer inventory levels

Direct Premium Air-freightNo remote buffer inventory

Less warehouse implies

higher geographic

coverage of each warehouse

Which network suits your business model best ?Low margin functional products

Many DCs to be close to customersStable & predictable demand patterns

High tech high value productsInnovative, short cycle life times

Great variety


Optimal flows

of

products

Tactical decisionTactical decision



Optimize the flow of product through the supply chain

Analyze impact of strategies for seasonal products or volatile demand (When will we run out of space and which warehouse/plant?)

Optimize the trade-offs between capacities and inventory

Analyze the alternatives for dealing with a shortage of warehouse space or production capacities

> Should we add capacities? / Should we build inventory?> Should we re-align territories?

Tactical Network design


What

does it take

to implement a successful



For transforming a traditional company with

functional organization to a successful

Supply Chain Organization,

the key challenge is to build a platform,

(the SC network)

that will facilitate the 3 flows i.e.

material, information, financial flows.


Finished

Products

AvailabilityFrom

Production

Availability

Raw material

Components

Goods

Goods To customer

ExpectedCustomerorders

ProductionCapacity

SupplierCapacity

FromSupplierAvailability

CustomerOrdersin hand


Material flow from supplier to customer

Information flow in both directions

A platform that facilitates the 3 flows: Materials, information and financials

Financial flows


Four key dimensions

will have to be

implemented.

Supply chain integration a reality


Workflow coordination

Streamlining workflow activities

among supply chain partners.

-

Workflow coordination encompasses

of a host of activities

including procurement, order execution,

engineering change,

design optimization and financial exchanges.


Synchronization

The goal of synchronization

in SC integration

is to develop production,

delivery mechanisms and processes

that can produce goods

to the actual end-users rate.


Information integration

Information is the enabler of supply chain integration.

It refers to sharing & exploiting the information collectively

so that the entire chain is driven by true consumer demand.

The business platform should provide both connectivity and the ability

to integrate a large variety of operational systems


The trust factor

Trust is the quality that allows cooperation and coordination to take place both within the organization

and across the supply chain partners.

Trust is essential to the free and open flow of information needed

to respond to the customer needs at each point of interaction.

Without openness, the network will not be responsive

and not being put at an economic advantage.


The benefits

gained through

the implementation

of Supply Chain

solutions.


Companies can make accurate promises of availability to their customers. They can fulfill on those promises to get the goods into customer’s hands fast and at the lowest cost.

Increased reliability

Increased visibilityProvide with some ways to see an aggregated view across the constituents of the Supply Chain. Companies have greater visibility into inventories (including suppliers inventories).Visibility combined with coordination and synchronization is thebasic enabler to supply chain implementation.

The benefits gained through SCM solutions


….Savings and revenue improvements…..

Information flows faster through the extended supply chain enabling faster response lead times inducing faster response time to customer requirements

Through the efficient matching of supply and demand, one reduces obsolete or unwanted inventories deriving savings, energy savings, reduced pollution.

Squeeze inefficiencies

Increase the velocity of business

The benefits gained through SCM solutions


Effective management of the

supply chain

can lead to up to

5% cost decrease that

has the same impact on profit as

30% increase in sales.

Why is the SMC so important?

Microsoft PowerPoint - The Supply Chain

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