supply Chain Management

Supply Chain Management_Janat Shah

The Role of Supply Chain Management in

Economy

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Learning Objectives

Why is the supply chain important?

What are the key supply chain decisions made by a firm?

How has the supply chain evolved over the last century?

What are the unique challenges of managing a supply chain in

India?


What Is a Supply Chain?

Flow of products and services from: Raw materials manufacturers

Intermediate products manufacturers

End product manufacturers

Wholesalers and distributors

Retailers

Customers

• Connected by transportation and storage activities

• Flow of information, products and funds in both directions

• Cost and service levels

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The Supply Chain Network

Suppliers Manufacturers Warehouses & Distribution Centers

Customers

Material Costs

Transportation Costs

Transportation Costs Transportation

Costs Inventory Costs Manufacturing Costs

Plan Source Make Deliver Buy


Supply Chain

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All facilities, functions, activities, associated

with flow and transformation of goods and

services from raw materials to customer, as

well as the associated information flows

An integrated group of processes to ―source,‖

―make,‖ and ―deliver‖ products


Supply Chain Processes

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Supply Chain Management: Success Stories

Dell: Inventory turn-over ratio of 58.7 compared to industry

average of 12 (Net Profitability of 5.3.%) ( Drop from 7.8% in

2006)

Wal-Mart: Inventory turn-over ratio of 9.9 compared to

industry average of 5.5 ( Net profitability of 3.5%)

Zara Corporation: Lead-time from new product to stores is 15

to 20 days compared to industry average of six months ( Net

profitability of 11.3%)


Supply Chain Management: Horror Stories

Cisco: Cisco wrote off 2.2 $ billion worth of inventory in May 2001. Biggest write-off in history.

Sony: PlayStation II–a lost opportunity

SONY could supply only 25% of the potential demand for Christmas market

Nintendo Wii Game Console : Shortage expected in year 2007

Kmart Launched supply chain initiative in May 2000 worth $1.4 billion in software and services. In 2001-02, announced that it was abandoning most of the software purchased and taking $130 million write-off

Nike- i2 Technology Controversy: Lost $100 in sales in last quarter of 2000 i2 Technologies was blamed. ― This is what we get for our $400 million‖—Nike Chairman

Wal-Mart: RFID Initiative -


What Is Supply Chain

Management?

Supply chain management is a set of approaches utilized to

efficiently integrate suppliers, manufacturers, warehouses,

and stores, so that merchandise is produced and distributed at

the right quantities, to the right locations, and at the right

time, in order to minimize system wide costs while satisfying

service level requirements.

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Supply Chain Management: A Definition

Encompasses all activities associated with the transformation of

goods from the raw material stage to the final stage when the

goods and services reach the end customer.

Involves planning, design and control of flow of material,

information and finance along the chain in order to deliver value

to the end customer in effective and efficient way.


Two Other Formal Definitions

The design and management of seamless, value-added process

across organizational boundaries to meet the real needs of the end

customer

Institute for Supply Management

Managing supply and demand, sourcing raw materials and parts,

manufacturing and assembly, warehousing and inventory

tracking, order entry and order management, distribution across

all channels, and delivery to the customer

The Supply Chain Council

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Supply Chain Management: A Pictorial Representation

C1

C2

C3

C4

C5

C6

VENDOR INBOUND TRANSPORTATION

PLANTS INTERFACILITY

TRANSPORTATION

DISTRIBUTION

CENTERS OUTBOUND TRANSPORTATION

CUSTOMERS


SCM Definition

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Source

Supplier

Supplier

Distributor

Distributor

Retailer

End-User

Converter

Converter Consumers

Information Flow

Funds/Demand Flow

Value-Added Services

Material Flow

Reuse/Maintenance/After Sales Service Flow


Supply chain for Service

Industry

More difficult than manufacturing

Does not focus on the flow of physical goods

Focuses on human resources and support services

More compact and less extended

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Supply Chain: The Potential P&G’s estimated savings to retail customers of $65 million

through logistics gains

Dell Computer’s outperforming of the competition in terms of shareholder value growth over more than two decades by over 3,000% using:

Direct business model

Build-to-order strategy

Wal-Mart transformation into the world’s largest retailer by changing its logistics system:

highest sales per square foot, inventory turnover and operating profit of any discount retailer

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Complexity: The Magnitude

U.S. companies spend more than $1 trillion in supply-related activities (10-15% of Gross Domestic Product)

Transportation 58%

Inventory 38%

Management 4%

The grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies

A typical box of cereal spends 104 days getting from factory to supermarket.

A typical new car spends 15 days traveling from the factory to the dealership.

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Complexity: The Magnitude

Compaq computer’s loss of $500 million to $1 billion in sales in one year

Laptops and desktops were not available when and where customers were ready to buy them

Boeing’s forced announcement of write-downs of $2.6b Raw material shortages, internal and supplier parts

shortages….

Cisco’s multi-billion ($2.2b) dollar write-off of inventories in 2001-2002 Customers balked on orders due to market meltdown

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Transactional 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.

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Ratio of Logistics Cost to GDP for

Selected Countries*

* Source: Raghuram and Shah 2003

• Does logistics cost capture every thing?

• How do we capture logistics cost of India versus

China?


Progression of Logistics Costs

FIGURE 1-4: Logistics costs’ share of the U.S. economy


Composition of Logistics Costs

FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005


Logistics Costs for the Indian Economy*

Rs billion

*Source: Raghuram and Shah 2004

Total

Logistics

Cost

GDP Logistics

Cost/GDP

(%)

95-96 1201.27 8995.63 13.4

97-98 1261.01 10163.99 12.4

99-00 1388.93 11485.00 12.1

01-02 1508 12679 11.89

03-04 1658 14305 11.59

93-94 prices


Logistics Costs for the US Economy

Organized Sector US: 1990 US: 2001 US: 2002

Transportation 50% 60% 63%

Inventory 20%

40% 37%

Warehousing

24% Packaging

Losses 6%

Total Cost 11.4% 9.5% 8.7%

Logistics Cost

($ billion)

659

957

910

GDP ($ billion) 5,800 10,080 10,470

Nominal Values

Source: CASS Information Systems, 2002

Logistics Costs for the US Economy


Performance of the Indian

Manufacturing Industry*

Data Source: PROWESS, CMIE


Sector-wise Industry Performance of

Indian Firms*

Data Source: PROWESS, CMIE


Supply Chain Challenges for the

Indian FMCG Sector

Managing Availability in the Complex Distribution Set up

Working with Smaller Pack Sizes

Entry of National Players in the Traditional Fresh Products

Sector

Dealing with a Complex Taxation Structure

Dealing with Counterfeit Goods

Opportunistic Games Played by the Distribution Channel

Infrastructure

Emergence of Third-party Logistics Provider

Emergence of Modern Retail Chains

Reservation for Small-scale Sector


The Marico Supply Chain


Status of Logistics Management in India

Neglected area in organizations

Taxation structure drives the logistics related decision, not cost

or service considerations

Poor state of infrastructure

Complex regulations affecting logistics decisions


Importance of The Supply Chain

Proliferation of Product Lines

Shorter Product Life Cycles

Cell phone, Laptop, Automobile

Higher Level of Outsourcing

Dell computers, Bharti Tele ventures

Shift in Balance of Power in Chain

Impact of organized retail chain

Globalization of Manufacturing

Impact of tariff structure


Why is SCM Important?

Strategic Advantage – It Can Drive Strategy

* Manufacturing is becoming more efficient

* 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

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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


Value vs. Supply Chain

Value chain

every step from raw materials to the eventual end user

ultimate goal is delivery of maximum value to the end user

Supply chain

activities that get raw materials and subassemblies into manufacturing operation and finished goods to the customer

Terms are used interchangeably

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Dell Computers: Focus on Cost

Reduction

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Dell’s SCM

Dell sells its computer systems directly to end customers, bypassing

distributors and retailers (resellers). Dell's supply chain consists of

only three stages— the suppliers, the manufacturer (Dell), and end

users.

Dell’s direct contact with customers allows it to:

• properly identify market segments,

• analyze the requirements and profitability of each segment, and

• develop more accurate demand forecasts.

Another Dell’s advantage is that it is able to get the customers

requirements regarding software to be loaded


1950s 1960s 1970s 1980s 1990s 2000s Beyond

Traditional Mass Manufacturing

Inventory Management/Cost

Optimization

JIT, TQM, BPR,

Alliances

SCM

Formation/

Extensions

Further

Refinement of

SCM Capabilities

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Historical Evolution of the Supply Chain

First Revolution: (Ford Motor Co. 1910–1920)

Single product, that is, no product variety

Vertical integration

Second Revolution: (Toyota Motor Co. 1960–1970)

Wide Variety

Long-term relationship with suppliers

Third Revolution: (Dell Computers 1995–Current)

Customized products

Medium-term relationship with suppliers

Suppliers have to maintain technology and cost leadership


From An Automobile Manufacturer

Our aim is always to arrange the material and machinery and to

simplify the operation so that practically no orders are

necessary. Our finished inventory is in transit. So is most of our

raw material inventory. Our production cycle is about eight-one

hours from the mine to the finished machine (automobile) in the

freight car


Supply Chain

Management

Managing flow of information through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs

Keys to effective SCM

information

communication

cooperation

trust

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Key Observations

Every facility that impacts costs need to be considered

Suppliers’ suppliers

Customers’ customers

Efficiency and cost-effectiveness throughout the system is

required

System level approach

Multiple levels of activities

Strategic – Tactical – Operational

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Key Observations

Integrated activity:

* Among functions such as logistics, manufacturing, distribution,

design/engineering, marketing, finance,etc.

* Multiple organizations,i.e., suppliers, customers & 3 PL, 4PL

providers

* Coordination of conflicting goals, metrics, etc.

Responsible for multiple flows:

* Information (orders, status, contracts)

* Physical (finished goods, raw material, w.i.p.)

* Financial (payment, credits, etc.)

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Key Observations (contd)

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One goal in SCM:

respond to uncertainty in customer demand without creating costly excess inventory

Negative effects of uncertainty

lateness

incomplete orders

Inventory

insurance against supply chain uncertainty

Factors that contribute to uncertainty

inaccurate demand

forecasting

long variable lead times

late deliveries

incomplete shipments

product changes batch ordering

price fluctuations and discounts

inflated orders


Other Related Observations

Supply chain strategy linked to the Development Chain

Challenging to minimize system costs and maximize

system service levels

Inherent presence of uncertainty and risk

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The Development Chain

Set of activities and processes associated with new product

introduction. Includes:

product design phase

associated capabilities and knowledge

sourcing decisions

production plans

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The Development Chain

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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


SCM – Key Issues 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?

Source: Simchi-Levi


Key Issues in SCM

Distribution network Configuration

How should management select warehouse locations and capacities, determine production levels for each product at each plant and set transportation flows between facilities from plant to warehouse, warehouse to retailer to minimize total production, inventory and transportation costs and satisfy service level requirements

Inventory control

Minimize inventory and holding costs

Uncertainty in customer demand and supply process leads to maintaining inventory.

Impact of forecasting tool to predict customer demand

Should retailer order more than, less than or equal to the demand forecast?

What inventory turnover ratio should be used?

Does this ratio vary from industry to industry?

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Key Issues in SCM

Production sourcing

need to balance production and transportation costs

Large production batches reduce production costs resulting in some facilities producing limited products but results in higher transportation costs

Alternatively, to reduce transportation costs requires each facility to produce small batches of all products increasing production costs

Supply contracts

Impact of supply contracts that incorporate revenue sharing and volume discount

Pricing strategies that provide incentives to buyers to order more products at the same time increasing supplier profit

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Key Issues in SCM

Distribution strategies

How much centralization or decentralization of the distribution system?

Impact of the above on inventory levels and transportation costs as well as service levels

When should products be transported by air from centralized locations to various demand points

When should competing retailers selling the same brand share inventory and what would be their competing advantage?

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Key Issues in SCM

Supply chain integration and strategic partnering

Integration achieved successfully by information sharing and operational planning

What information should be shared and how should it be used?

What is its impact on the design and operation of the supply chain?

What is the degree of integration needed within the organization and with external partners

What is the type of partnership that should be implemented for a given situation?

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Key Issues in SCM

Outsourcing and offshoring strategies

Deciding what to make internally and what to buy from outside sources

Determining internal core competencies

Risks associated with outsourcing and how can they be minimized

How do you ensure timely supply of products?

When should you keep dual sources for the same product?

When should you offshore?

What is the impact of offshoring on inventory levels and cost of capital

What are the risks of offshoring?

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Key Issues in SCM

Product design

Effective design plays critical role in the supply chain

Certain designs may increase inventory holding and transportation costs while other designs reduce manufacturing lead time

How to leverage product design to compensate for uncertainty in customer demand?

How to quantify the resultant savings?

How to implement mass customization?

What role does supply chain management play in the successful implementation of these concepts?

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Key Issues in SCM

Smart pricing

Organizations integrate pricing and inventory to influence market demand and improve bottom line

Can smart pricing strategies be used to improve supply chain performance?

Local issues

SCM impacted by local dynamics, customer preferences, government policies such as tax free zones, infrastructural constraints and strength of supply chain partners

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Key Issues in SCM

Information Technology and DS Systems

Critical enabler of effective SCM

What data should be transferred?

How frequently should it be transferred?

What infrastructure is required internally and between partners?

Customer Value

Measure of company contribution to its customer

How does SCM contribute to enhancing customer value?

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Chain Global Optimisation Managing Risk &

Uncertainty

Distribution Network

Contribution

Supply Y

Inventory Control Supply Y

Production Sourcing Supply Y

Supply Contracts Both Y Y

Distribution Strategies Supply Y Y

Outsourcing & Off

shoring

Development Y

Product Design Development Y

Information

Technology

Development Y Y

Customer Value Both Y Y

Smart Pricing Supply Y

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Managing Supply Chain Operations

• Demand forecasting

• Procurement planning

• Production planning

• Inventory management

• Transportation

• Order processing

• Relationship management


Today’s Supply Chain Reality

•Lack of visibility reduces suppliers’ ability to handle variability

•Suppliers use inventory buffers to compensate increasing costs

•Errors in manual filling processes can cause stock-outs

•All of these issues can increase costs, lower customer service and reduce revenue

Increased outsourcing

Large global supply networks

Increased competition

Consumer driven


REASONS EXAMPLES

•Raw material shortages

•Internal and supplier parts shortages

•Productivity inefficiencies

Boeing Aircraft’s inventory write-down of $2.6

billion

•Sales and earnings shortfall

•Larger than anticipated inventories

Sales at U.S. Surgical Corporation declined 25

percent, resulting in a loss of $22 million

•Stiff competition

•General slowdown in the PC market

Intel reported a 38 percent decline in quarterly

profit

•Higher than expected orders for new products

over existing products

EMC Corp. missed its revenue guidance of $2.66

billion for the second quarter of 2006 by around

$100 million

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Uncertainty and Risk Factors Fluctuations of Inventory and Backorders

throughout the Supply Chain

FIGURE 1-3: Order variations in the supply chain


Forecasting is not a solution

Demand is not the only source of uncertainty

Recent trends make things more uncertain

Lean manufacturing

Outsourcing

Off-shoring

Uncertainty and Risk Factors


Uncertainty and Risk Factors

August 2005 – Hurricane Katrina

P&G coffee supplies from sites around New Orleans

Six month impact

2002 West Coast port strike

Losses of $1B/day

Store stock-outs, factory shutdowns

1999 Taiwan earthquake

Supply interruptions of HP, Dell

2001 India (Gujarat state) earthquake

Supply interruptions for apparel manufacturers

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Summary

What is supply chain management?

The supply chain encompasses all activities associated with

the transformation of goods from the raw material stage to

the final stage,.

Supply chain management involves planning, design and

control of flow of material, information and finance along

the supply chain

Why is the supply chain important?

On account of globalization and increased competition,

firms have to manage a larger number of product lines with

shorter product life cycles under the situation of changed

power in supply chain performance would help Indian firms

equations within a chain.

improvement in becoming globally competitive.

supply Chain Management

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