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Supply Chain Management

A presentation

byA.V. Vedpuriswar

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SUPPLY CHAIN

MANAGEMENT

Value Chain

Supply side- raw materials, inboundlogistics and production processes

Demand side- outbound logistics,marketing and sales.

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WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in

the acquisition and conversion of materials to finished

products delivered to the customer"

Supplier

Management

Schedule /

ResourcesConversion

StockDeployment Delivery

Customer

Management

Leads to Business Process Integration

Material Flow

Information Flow

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Supply chain is the system by whichorganizations source, make and delivertheir products or services according tomarket demand.

Supply chain management operationsand decisions are ultimately triggered bydemand signals at the ultimate consumerlevel.

Supply chain as defined by experiencedpractitioners extends from supplierssuppliers to customers customers.

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SUPPLY CHAIN INCLUDES :

MATERIAL FLOWS

INFORMATION FLOWS

FINANCIAL FLOWS

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SUPPLY CHAIN MANAGEMENT ISFACILITATED BY :

PROCESSES

STRUCTURE

TECHNOLOGY

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Supply chain serves two functions:

Physical

Market mediation

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Supply chain objectives may differ fromsituation to situation.

For functional products, cost efficiency isthe critical factor.

For innovative products, responsivenessis the important factor.

Leanness + Agility together make upLeagility

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Supply Chain Structure

Information Flow

Raw Materials

RETAILERFACTORY DC RDC

SUPPLIER

Finished Goods

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Supply Chain and Demand Chain

Demand chain is defined as the system bywhich organizations manage sales anddistribution of products and services to end

users. Conceptually incorrect to look at demand

chain separately

Look at the pipe as a whole.

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But is there a pipe at all?

More a network

Not necessarily linear

Value chain orchestration rather than

controlling the flow through the pipe

A network of independent and interdependentorganizations mutually and cooperativelyworking together to control, manage andimprove the flow of materials and informationfrom suppliers to end users

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SUPPLY CHAIN DRIVERS

Not new. Value system of Michael Porter

Why sudden interest? Demanding customers

Shrinking product life cycles Proliferating product offerings

Growing retailer power in some cases

Doctrine of core competency

Emergence of specialized logistics providers

Globalization

Information technology

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SUPPLY CHAIN ELEMENTS

Supply Chain Design

Resource Acquisition Long Term Planning (1 Year ++)

Strategic

Production/ Distribution Planning Resource Allocation Medium Term Planning (Qtrly,Mon

Tactical

Shipment Scheduling

Resource Scheduling Short Term Planning (Weekly,Daily

Operational

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Supply Chain Goals

Efficient supply chain managementmust result in tangible businessimprovements. It is characterized by a

sharp focus on Revenue growth

Better asset utilization

Cost reduction.

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Reduce Overall Cycle Time : Improve Response

Supply Chain

Management

Underlying Principles

Compression

Conformance

Co-operation

Communication

(Planning/Manufacturing/Supply)

(Forecasts/Plans/Distribution)

(Cross -Functional)

(Real Time Data)

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Changing Paradigm

Functional vs Process

Products vs Customers

Revenues vs Performance

Inventory vs Information Transactions vs Relationships

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Critical Success Factors today

Cross functional management andplanning skills

Ability to define, measure and manage

service requirements by marketsegment

Information systems

Relationship management and win winorientation

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PUTTING IN PLACE A WELL OILED SUPPLY

CHAIN

Supply chain as an efficient customersatisfying process

Effectiveness of the whole supply chain ismore important than the efficiency of eachindividual department.

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.

The steps involved

Step1- Designing the supply chain

Determine the supply chain network

Identify the levels of service required

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Step 2 - Optimizing the supply chain

Determine pathways from suppliers to

the end customer Customer markets to Distribution centers

Distribution centers to production plants

Raw material sources to production plants

Identify constraints at vendors, plants anddistribution centers

Get the big picture

Plan the procurement, production anddistribution of product groups rather thanindividual products in large time periods-

quarters or years

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Step 3- Material flow planning

Determine the exact flow and timing ofmaterials

Arrive at decisions by working back from theprojected demand through the supply chain tothe raw material resources

Techniques

ERP

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Step 4 - Transaction processing and

short term scheduling

Customer orders arrive at random

This is a day to day accounting system whichtracks and schedules every order to meetcustomer demand

Order entry, order fulfillment and physical

replenishment

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Information flows in Supply Chain Management

Information is overriding element Need for databases

Master files: Information about customers, products,

materials, suppliers, transportation, production anddistribution data- do not require frequent processing

Status files- heart of transaction processing- trackorders and infrastructure status- updated daily.

Essentially using the same information to make allplans right from structuring the network toprocessing every day supply chain tasks.

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THE VIRTUAL VALUE CHAIN

The value chain connects a companyssupply side with its demand side.

Traditionally information has been asupporting function.

Information however can be managed far

more creatively. There are various stages of using value

added information processes.

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Visibility : See physical operations more

effectively through information. Informationcan be used for effective coordination ofvalue chain activities.

Mirroring capability : In this stage, virtual

activities are substituted for physical ones. Aparallel value chain is created.

New customer relationships : The company

can draw on the flow of information in thevirtual value chain to deliver value to

customers in new ways.

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Dealer Management

Conventional functions

Inventory ownership and management

Sales and technical support

Order handling Credit

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Contemporary Trends

Channels being divided into two- Fulfillmentand Franchised agent

Fulfillment channel- responsible for gettingthe manufacturers product from the plant to

the end user through a highly efficientlogistics and inventory management system

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Contemporary Trends

Fulfillment channel may not take ownershipof the product but may perform thesefunctions on a per box fee structure

Franchised agents responsible for sales andsales support but will not write the order orsupply the product

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Issues in customer management

Penetration vs Spread

Concentration is necessary to commit thenecessary resources for true customer

integration

Depth of customer contact

R&D - sharing information vs developing new

products together

Logistics - Pros and cons of methods oftransportation vs reengineering the logistics

process

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Implementation: Points to keep in mind

Recognize the difficulty of change. Prepare a blueprint for change that maps linkages

among initiatives.

Assess the entire supply chain from supplierrelationships to internal operations to the marketplace, including customers, competitors and

industry as a whole.

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IS THE SUPPLY CHAIN WORKING?

Does our manufacturing strategy increase product

line flexibility while continuing to drive down overallproduction costs?

When was the last time we measured lost sales toend customers?

Do we have an efficient system to get POS data fromretailers?

Are we testing our products with end customers? Do

we use the resulting data to adjust our forecastingand supply positions?

Is the ratio of returned orders to sales increasing?

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The New Model of Relationships

Hard bargaining vs shared destiny Exit vs Voice

Arms length relations vs Involving dealers and

suppliers in product development Piling up vs Replenishing dealer inventory more

frequently

In short working together as partners to cutcosts, boost efficiencies, innovate and sharevalue

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Adversarial vs partnerships

Short term vs long term contracts

Large vs small order quantity

Full truck load vs small parcels

Inspection vs no inspection

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Written order vs understanding

Many vs few suppliers

Design and then invite quote fromvendor vs involving vendor in

development Bargaining, holding cards close to chest

vs Shared destiny, transparency

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Summary

Segmentation of customers based on serviceneeds

Customization of logistics network

Listen to signals of market demand and plan

accordingly. Differentiate product close to the customer

Source strategically

Develop a supply chain wide technologystrategy

Accept channel spanning performancemeasures

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The Bullwhip Phenomenon

Volatility amplification along the network

Increase in demand variability as we moveupstream away from the market

Mainly because of lack of communication and

coordination Delays in information and material flows

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Bullwhip effect occurs because of various

reasons: Order Batching- Accumulate orders

Shortage gaming- Ask for more than what is

needed Demand forecast updating

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Important points to keep in mind

Segment customers based on service needs. Modify the supply chain to meet these service

requirements profitably.

Customize the logistics network. Develop forecasts collaboratively involving every

link of the supply chain.

Locate the leverage point where the product isunalterably configured to meet a singlerequirement

Delay product differentiation till the last possible

moment.

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Assess options such as modularized designor modification of manufacturing processesthat can increase flexibility.

Cultivate warm relationships with suppliers.

Efficient supply chain management has to be

accompanied by a technology strategy.

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ITALIAN CLOTHING MANUFACTURE

Warehousing and transportation 6 Inventory 5

Late delivery returns 2

Obsolescence 20 Lost sales 60

Need to minimize obsolescence costs

Minimize product range flexibility

Reduce product development cycle

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Dells Direct Business Model ofVirtual Integration

Advantages of a tightly coordinated supply chaintraditionally facilitated by vertical integration.

Combined with focus and specialization.

Leveraging on investments others have made andfocusing on delivering solutions and systems tocustomers

Fewer things to manage - fewer things go wrong Suppliers engineers part of Dells Design team

Have only a few partners

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Dells Direct Business Model ofVirtual Integration

Share information with partners in Real timefashion.

Stitch together a business with partners that aretreated as if they are inside the company.

Change focus from how much inventory there is tohow fast it is moving

Assets collect risks around them one way or theother.

Limited or no testing - Eg. Sony Monitors

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Dells Direct Business Model ofVirtual Integration

Only three Manufacturing centers - Austin, Irelandand Malaysia.

Inventory levels and replenishment needssometimes conveyed to vendors on hourly basis.

Substitute information for inventory and ship onlywhen we have real demand from real end

customers Clever segmentation - Focus on institutional

markets - 70% to very large customers withannual purchases exceeding $1 million.

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Dells Direct Business Model ofVirtual Integration

Exit from retail business after wrong entry in 1989. Segmentation - closeness to customers and access to

valuable information.

Demand forecasting as a critical sales skill

Help global customers, manage their total purchase ofPCs by selling them a standard product

Dell server loads software on customers computers

Meet customers needs faster and more efficiently thanany other model.

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Li and Fung, Hong Kong

Founded in 1906

Today 35 offices in 20 countries

1997 revenues of $ 1.7 billion Largest export trading company in Hong

Kong

Customers- American and European retailers Sources clothing and other consumer goods

ranging from toys to fashion accessories to

luggage

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Order from Europe

Buy yarn from Korea

Weave and dye in Taiwan Buy Japanese zippers made in China

Make the garments in Thailand in five differentfactories

Pulling apart the value chain and optimizing ateach step

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Victor Fung

Today, assembly is the easy part. The hard part is managing yoursuppliers and the flow of parts. Good supply chain management

strips away time and cost from product delivery cycles. Ourcustomers have become more fashion driven, working with six or

seven seasons a year instead of just two or three. Once you move to

shorter life cycles, the problem of obsolete inventory increases

dramatically. With customer tastes changing rapidly and markets

segmenting into narrow niches, its not just fashion products that

are becoming increasingly time sensitive.

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Endorsement by Stan Shih, CEO, Acer

Buying right things

Reaching into suppliers to ensure that certainthings happen on time and at the right qualitylevel.

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Buyer informs five weeks before delivery.

Reserve undyed yarn from yarn supplier. Lock up capacity in weaving and dyeing mills.

Outsourcing not same as leaving suppliers to do theworrying.

Single factories are too small to have much buyingpower and to demand faster deliveries fromsuppliers.

To shorten delivery cycle, need to go upstream toorganize production.

Li & Fung able to delay commitment to a particularfashion trend.

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Integrated logistics management

Elimination of consolidators in container

shipments Smokeless factory

Design

Procurement

Inspection of raw materials

Production planning

Line balancing

Inspection of finished goods No worker ownership

No labour management

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If we dont own factories, can we say we are inmanufacturing? Absolutely, because of the 15

steps in the manufacturing value chain, we

probably do 10.

Basic operating unit is the division.

Divisions focused on serving single customers or

groups of small customers. Less emphasis on geographic grouping

Merchandising decisions decentralized

Financial controls and operating procedures tightlycentralized.

Strong focus on inventory and working capitalmanagement.

A f I d i t i th t f

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As far as I am concerned, inventory is the root ofall evil. At a minimum, it increases the complexity

of managing any business. So its a word we dont

tolerate around here.

Need for sophisticated information systems. Li &Fung working to create a database to

systematically track all supplier relationships. Someone might steal our database but when

they call up a supplier, they dont have the long

relationship with the supplier that Li & Fung has. It

makes a difference to suppliers when they knowthat you are dedicated to the business, that you

have been honoring your commitments for 90

years.

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Broadening the middle

Better prices and better margins for customers Tackling the soft $3 in the cost structure. $3represents the inefficiency in the supply chain fora consumer product priced at $4. Look at costs

throughout distribution channels than just infactory

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Thank You