2 Outline What is supply chain management? A supply chain strategy frameworkComponents of a SCMMajor obstacles and common problemsSeven Eleven JapanNotes:
3 Traditional View: Supply Chains in the Economy (1990, 1996) Freight Transportation $352, $455 BTransportation manager in chargeTransportation softwareInventory Expense $221, $311 BInventory manager in chargeInventory softwareAdministrative Expense $27, $31 BLogistics related activity 11%, 10.5% of GNPTransportation and inventory managersNotes: Traditionally logistics and supply chain management have been measured in terms of transportation and inventory costs and the administration required to manage both. Traditionally firms would have an inventory manager and a transportation manager. This view is very narrow and causes significant problems in the proper functioning of the supply chain.$898 B spent domestically for SC activities in 1998.$1,160 B of inventory in the US economy in the early 2000s.
4 Traditional View: Cost breakdown of a manufactured good Profit 10%Supply Chain Cost 20%Marketing Cost 25%Manufacturing Cost 45%ProfitSupply ChainCostMarketingManufacturingNotes: Key message here is that logistics costs are a significant fraction of the total value of a product. The problem here is that this a purely cost based view of the supply chain and drives a firm to simply reducing logistics costs. This is an incomplete picture.Effort spent for supply chain activities are invisible to the customers.
5 What can Supply Chain Management do? Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategiesA typical box of cereal spends 104 days from factory to saleA typical car spends 15 days from factory to dealershipFaster turnaround of the goods is better?Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years agoinventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory.To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE.National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time.
6 Magnitude of Supply Chain Management Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not available when and where neededP&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demandWhen the 1 gig processor was introduced by AMD (Advanced Micro Devices), the price of the 800 meg processor dropped by 30%
7 Importance of SCM understood by some AMR Research:"The biggest issue enterprises face today is intelligent visibility of their supply chains-both upstream and down"Forrester Research:"Companies need to sense and proactively respond to unanticipated variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks”Gartner Group:“By 2004, 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers”Open ended statement. Agility can be increased continuously.
8 Top 25 Supply ChainsAMR research publishes reports on supply chains and other issues.The Top 25 supply chains report comes out in Novembers.The table on the right-hand side is from The Second Annual Supply Chain Top 25 prepared by Kevin Riley and Released in November 2005.
9 SCM Generated Value Minimizing supply chain costs while keeping a reasonable service levelcustomer satisfaction/quality/on time delivery, etc.This is how SCM contributes to the bottom lineSCM is not strictly a cost reduction paradigm!
10 A picture is better than 1000 words A picture is better than 1000 words! How many words would be better than 3 pictures?- A supply chain consists ofSupplierManufacturerDistributorRetailerCustomerUpstreamDownstreamSUPPLY SIDEDEMAND SIDE- aims to Match Supply and Demand, profitably for products and services- achievesThe rightProductHigherProfitsTimeCustomerQuantityStorePrice=+
11 Detergent supply chain: P&G or othermanufacturerThirdparty DCAlbertson’sSupermarketCustomer wantsdetergentPlastic cupProducerTennecoPackagingChemicalmanufacturer(e.g. Oil Company)Notes:Supply chain involves everybody, from the customer all the way to the last supplier.Key flows in the supply chain are - information, product, and cash. It is through these flows that a supply chain fills a customer order. The management of these flows is key to the success or failure of a firm. Give Dell & Compaq example, Amazon & Borders example to bring out the fact that all supply chain interaction is through these flows.Chemicalmanufacturer(e.g. Oil Company)PaperManufacturerTimberIndustry
12 Flows in a Supply Chain Supplier Customer Material Information Funds The flows resemble a chain reaction.
13 SCM in a Supply NetworkSupply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains.SupplyDemandProducts and ServicesCashSupply Side OEM Demand SideTHAILAND INDIA MEXICO TEXAS USN-Tier Suppliers Suppliers Logistics Distributors RetailersInformationThe task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably
14 Importance of Supply Chain Management In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics ReportTier 1 SupplierManufacturerDistributorRetailerCustomerInefficient logisticsHigh stockoutsIneffective promotionsFrequent Supply shortagesHigh landed costs to the shelfHigh inventories through the chainLow order fill ratesGlitch-Wrong Material, Machine is Down – effect snowballsEliminating inefficiencies in supply chains can save millions of $.
15 A Generic Supply Chain Sources: plants vendors ports Regional Warehouses:stockingpointsFieldWarehouses:stockingpointsCustomers,demandcenterssinksSupplyA customer is a supplier for some other company. A supplier is a customer for some other company. Not all pieces of a supply chain belongs to the same company.InventoryPurchaseInventoryTransportation
16 Cycle View of Supply Chains Customer Order CycleReplenishment CycleManufacturing CycleProcurement CycleCustomerRetailerDistributorManufacturerSupplierAny cycle0. Customer arrival1. Customer triggers an order2. Supplier fulfils the order3. Customer receives the orderThe supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain. Each cycle involves the customer stage placing an order and receiving it after it has been supplied by the supplier stage.One difference is in size of order. Second difference is in predictability of orders - orders in the procurement cycle are predictable once manufacturing planning has been done.This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner.
17 Push vs Pull SystemWhat instigates the movement of the work in the system?In Push systems, work release is based on downstream demand forecastsKeeps inventory to meet actual demandActs proactivelye.g. Making generic job application resumes today (e.g.: exempli gratia)In Pull systems, work release is based on actual demand or the actual status of the downstream customersMay cause long delivery lead timesActs reactivelye.g. Making a specific resume for a company after talking to the recruiter
18 Push/Pull View of Supply Chains Procurement,Customer OrderManufacturing andCycleReplenishment cyclesPUSH PROCESSESPULL PROCESSESIn this view processes are divided based on their timing relative to the timing of a customer order. Define push and pull processes.They key difference is the uncertainty during the two phases.Give examples at Amazon and Borders to illustrate the two viewsCustomerOrder ArrivesPush-Pull boundary
19 Examples of Supply Chains Dell / CompaqDell buys some components for a product from its suppliers after that product is purchased by a customer. Extreme case of a pull processZara, Spain’s answer to Italy’s BenettonSells apparel with a short design-to-sale cycle, avoids markdowns.Toyota / GM / Volkswagen, in the course notesMcMaster Carr / W.W. Grainger, sell auto partsAmazon / Barnes and NobleFrozen food industry/Fast food industry/5 star restaurantsInternet shopping: Webvan / PeapodDell has three production sites worldwide and builds to order. Compaq does both. Consider some decisions involved - where to locate facilities? How to size them? Where is the push/pull boundary? What modes of transport to use? How much inventory to carry? In what form? Where to source from?
21 Mission-Strategy-Tactics-Decisions Mission, Mission statementThe reason for existence of an organizationStrategyA plan for achieving organizational goalsTacticsThe actions taken to accomplish strategiesOperational decisionsDay to day decisions to support tactics
22 Life Strategy for Ted Mission: Live a good life Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortablyMission: Live a good lifeGoal: Successful career, good incomeStrategy: Obtain a master’s degreeTactics: Select a college and a concentrationOperations: Register, buy books, take courses, study, graduate, get a job
23 Linking SC and Business Strategy Competitive (Business) StrategyProduct Development StrategyPortfolio of productsTiming of product introductionsMarketing Strategy-Frequent discounts-CouponsSupply Chain StrategyNewProductDevelopmentMarketingandSalesOperationsDistributionServiceCompetitive strategy: a set of customer needs that a company emphasizes and concentrates on while producing / servicing. Compare Wal-Mart, 7 eleven, Sam’s club.Finance, Accounting, Information Technology, Human Resources
24 Strategies: Product Development It relates to Technologies for future operations (via patents) and Set of products/servicesBe the technology leaderIBM workstationsOffer many productsDell computersOffer products for localsTata’s Nano at $2500= rupeesProduction at Singur, West Bengal, India;l x w x h=3.1 x 1.5 x 1.6 meters;Top speed: 105km/hr;Engine volume 623 cc;Mileage 50 miles/gallon;Annual sales target 200,000.
25 StrategiesMarketing and sales strategy relates to positioning, pricing and promotion of products/servicese.g. Never offer more than 40% discounte.g. EDLP = every day low priceAt Wal-Marte.g. Demand smoothing via couponsBestBuySupply chain management strategy relates to procurement, transportation, storage and deliverye.g. Never use more than 1 supplier for every inpute.g. Never expedite orders just because they are latee.g. Always use domestic suppliers within the sales season not in advance.
26 Fitting the SC to the customer or vice versa? Understand the customer WishesUnderstand the Capabilities of your SCMatch the Wishes with the CapabilitiesChallenge: How to meet extensive Wisheswith limited Capabilities?
27 Achieving Strategic Fit: Consistent SCM and Competitive strategies Fit SC to the customerUnderstanding the CustomerRange of demand, pizza hut stableProduction lot size, seasonal productsResponse time, organ transplantationService level, product availabilityProduct varietyInnovationAccommodatingpoor qualityImplied (Demand)Uncertainty for SCImplied troublefor SC
28 Contributors to Implied Demand Uncertainty Commodities DetergentLong lead time steelCustomized products High Fashion ClothingEmergency steel,for maintenance/replacementPriceCustomer NeedResponsivenessLowImplied Demand UncertaintyHighShort lead times, product variety,distribution channel variety, high rate of innovation andhigh customer service levels all increasethe Implied Demand Uncertainty
29 Understanding the Supply Chain: Cost-Responsiveness Tradeoff Responsiveness (in time, high service level and product variety)HighEfficiency frontierInefficientImpossibleFix responsivenessInefficiency RegionLowCost in $HighLowWhy decreasing slope (concave) for the efficiency frontier?
31 Loosing the strategic fit: Webvan Webvan started a merger with HomeGrocer in Sept 2000 and completed in May 2001.Declared bankruptcy in July Why?“Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day”.Short to midterm cash mismanagement. Venture capital of $1.2 B run out.Merger costs: duplicated work force, integration of technology, realignment of facilities.Peapod has the same business model but more focused in terms of service and locations. It actually survives with its parent company Royal Ahold’s (Dutch Retailer) cash.Delivers now at a fee of $6.95 within a day.
32 Top 10 Retailers Reported in 2008 – First 4 Source
34 Big retailers’ Strategy Wal-Mart: EfficiencyTarget: More quality and serviceCarrefour: International, ambianceK-Mart: Confused.Squeezed between Target and Wal-MartReliance on coupon salesDo coupons stabilize or destabilize a Supply chain?K-Mart and Sears merged in November Now called Sears Holdings.K-Mart gets cashSears gets presence outside malls
35 Other FactorsMultiple products in a SC. Multiple customers for a given productSeparate supply chains or Tailored supply chainse.g. Barnes and Noble: Retailing and/or e-tailingProduct and/or customer classese.g. UTD library loans books for 6 months (2 weeks) to faculty (students)Customer segmentation by pricingCompetitors: more, faster and globalUTD online programs compete globallyProduct life cycle (shortening)SCM strategy moves toward efficiency and low implied uncertainty as products agee.g. Air travel is becoming more efficiente.g. Southwest airlines lead the drive for efficiencye.g. Airbus announced A380 accommodating people on Jan 17, 2005.e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC more efficient in June 2004.Replacement salesSelling to replace broken units.e.g. AC replacement is about 50% of the market.Macroeconomic factors for visibilityForecasting Home Depot sales from S&P 500 price index.Positive correlation is detected.
36 Achieving Strategic Fit over a Lifecycle Responsive (high cost) supply chainZone of Strategic FitEfficient(low cost)supply chainCertain demandUncertain demand
37 Integration Integration is the central theme in SCM Building synergies by integrating business functions, departments and companies
38 Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive StrategyProduct Dev. StrategySupply Chain StrategyStrategic scope must cover all boxes, at least at the supply chain end. Each stage must have fit across its vertical boxes and supply chain strategy spanning all players. This fit allows the countering of multiple owners and helps avoid local optimization.Marketing Strategy
40 Drivers of Supply Chain Performance How to achieveEfficiencyResponsivenessSupply chain structureInventoryTransportationFacilitiesLogisticalDriversHow does a supply chain make the efficiency / responsiveness tradeoff and position at the appropriate point - using Inventory, Transportation, Facilities, and Information decisions.Cross-FunctionalDriversInformationSourcingPricing
41 1. Inventory Convenience: Cycle inventory No customer buys eggs one by oneUnstable demand: Seasonal inventoryBathing suitsXmas toys and computer salesRandomness: Safety inventory20% more syllabi than the class size were available in the first classCompaq’s loss in 95Pipeline inventoryWork in process or transit
42 Little’s law Long run averages = Expected values I = R . T I=Pipeline inventory;R=output per time=throughput;T=delay time=flow timeFlow time? Thruput? Pipeline (work in process) Inventory?10/minuteSpend 1 minute
44 3. Facilities Production Flexible vs. DedicatedFlexibility costsProduction: Remember BMW: “a sports car disguised as a sedan”Service: Can your instructor teach music as well as SCM?Sports: A playmaker who shoots well is rare.Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, ShippingJob Lot Storage: Need more space. Reticle storage in fabs.Crossdocking: Wal-Mart
45 4. Information Role in the supply chain The connection between the various stages in the supply chainCrucial to daily operation of each stage in a supply chainE.g., production scheduling, inventory levelsRole in the competitive strategyAllows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off)Information technologyAndersen WindowsWood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory.
46 Characteristics of the Good Information StrategyAnalytical Models$$$InformationAccurate?Accessible?Up-to-date?In the Correct form?If not, database restricted ability. How difficult is it to import data into SAP?
47 Quality of Information Information drives the decisions:Good information means good decisionsIT helps: MRP, ERP, SAP, EDIRelevant information?How to use information?
48 Information Technology in a Supply Chain: Legacy Systems
49 Information Technology in a Supply Chain: ERP Systems StrategicPlanningPotentialERPPotentialOperationalERPERPSupplierManufacturerDistributorRetailerCustomer
50 Information Technology in a Supply Chain: Analytical Applications StrategicSCMPlanningAPSTransport & InventoryDem PlanPlanningSupplierAppsCRM/SFATransport execution &MESWMSOperationalSupplierManufacturerDistributorRetailerCustomer
51 ERP Systems Wider focus Push (MRP) versus Pull (demand information transmitted quickly throughout the supply chain)Real-time informationCoordination and Information sharingTransactional ITExpensive and difficult to implementAbout 25% of ERP installations are cancelled within a yearAbout 70% of ERP installations go over the budget
53 Supply Chain Software Push See Top 100 under /articles.html Source Kanakamedala,Ramsdell, Srivatsan (2003).McKinsey Quarterly, No 1.
54 5. Sourcing Role in the supply chain Role in the competitive strategy Set of processes required to purchase goods and services in a supply chainSupplier selection, single vs. multiple suppliers, contract negotiationRole in the competitive strategySourcing is crucial. It affects efficiency and responsiveness in a supply chainIn-house vs. outsource decisions- improving efficiency and responsivenessTI: More than half of the revenue spent for sourcing.Cisco sources: Low-end products (e.g. home routers) from China.Components of sourcing decisionsIn-house versus outsource decisionsSupplier evaluation and selectionProcurement process:Every department of a firm buy from suppliers independently, or all together.EDS to reduce the number of officers with purchasing authorization.
55 6. Pricing Role in the supply chain Role in the competitive strategy Pricing determines the amount to charge customers in a supply chainPricing strategies can be used to match demand and supplyPrice elasticity: Do you know yours?Role in the competitive strategyUse pricing strategies to improve efficiency and responsivenessLow price and low product availability; vary prices by response timesAmazon: Faster delivery is more expensiveComponents of pricing decisionsPricing and economies of scaleEveryday low pricing versus high-low pricingFixed price versus menu pricing, depending on the product and servicesPackaging, delivery location, time, customer pick upBundling products; products and services
57 Major Obstacles to Achieving Fit SC is big:Variety of products/servicesSpoiled customerMultiple owners (Procurement, Production, Inventory, Marketing) / multiple objectivesGlobalizationLocal optimization and lack of global fit
58 Major Obstacles to Achieving Fit Dealing with Multiple Owners / Local OptimizationInformation CoordinationInformation sharing / Shyness / Legal and ethical issuesContractual CoordinationMechanisms to align local objectives with global onesCoordination with (real) optionsRare in the practiceWithout coordination, misleading reliance on metrics:Average safety inventory, Average incoming shipment size, Average purchase price of raw materials, Revenue
59 Major obstacles to achieving fit Instability and Randomness:Increasing product varietyShrinking product life cyclesCustomer fragmentation: Push for customization, segmentationFragmentation of Supply Chain ownership: GlobalizationIncreasing implied uncertainty
60 Common problemsLack of relevant SCM metrics: How to measure responsiveness?How to measure efficiency, costs, worker performance, etc?Poor inventory status informationTheft: Major problem for furniture retailers.Transaction errors: Retailers with inaccurate inventory recordsfor 65% of SKUsInformation delays, dated information, incompatible info. systemsMisplaced inventory: 16% of items cannot be found at a major retailerSpoilage: active ingredients in the products are losing their propertiesProduct quality and yieldLack of visibility in SCsDo you know the inventory your distribution centers hold?Do you know the inventory your fellow retailer holds?
61 Common problems Poor delivery status information Poor IT design Not knowing the order statusPoor IT designUnreliable, duplicate dataSecurity problems: too much or too littleIgnoring uncertainties“The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty.”Nitin Nohra, HBR February 2006 issue, p.40.Internal customer discriminationGiving lower priority to internal customers than external customersPoor integrationElusive inventory costsAccounting systems do not capture opportunity costsSC-insensitive product design
64 Factual Information on Seven Eleven Japan (SEJ) Largest convenience store in Japan with market value of $95 B. The third largest retail company in the world after Wal-Mart and Home Depot.Established in 1974.In 2000, total sales $18,000 M, profit $620 M.Average inventory turnover time days.Stock value increased by 3000 times from 1974 to 2000.In 1985, there were 2000 stores in Japan, increasing by per year.Return on equity 14% overA SEJ store is about the half the size of a US 7-eleven store,that is about 110 m2.Sales:Products32.9% Processed food: drinks, noodles, bread and snacks31.6% Fast food: rice ball, box lunch and hamburgers12.0% Fresh food: diary products25.3% Non-food: magazines, ladies stockings and batteries.Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying
65 More on SEJ More factual info: Average sales about twice of an average US storeSKU’s offered in store: Over 3,000 (change by time of day, day of week, season)Virtually no storage spaceNo food cooking at the storesJapanese Images of Seven Eleven:ConvenientCheerful and lively storesMany ready made dinner items I buyFamous for its great boxed lunch and dinner- On weekends, when I was single, I went to buy lunch and dinnerSC strategy:Micro matching of supply and demand (by location, time of day, day of week, season)
66 Seven Eleven - Number of Stores 1999: 8,0272004: 10,356
67 Seven Eleven - Net Sales (B Yen) Sales 1,963 B Yen in 2000
70 Information StrategyQuick access to up to date information (as opposed to data):In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter, DCs and suppliersCustomer checkout processClerk records the customer’s gender, (estimated) age and purchased items. These Point of Sales (POS) data are transmitted to database at the headquarters.Store hardware: Store computer, POS registers linked to store computer, Graphic Order Terminals, Scanner terminals for receivingDaily use of the dataHeadquarters aggregate the data by region, products and time and pass to suppliers and stores by next morning. Store managers deduce trend information.Weekly use of the dataMonday morning, the CEO chairs a weekly strategy formulation meeting attended by 100 corporate managers.Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo on Monday night.Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy. Tuesday nights, field counselors return back to their regions.
72 Information Analysis of POS Data Sales for product categories over timeSKU (stock keeping unit)Waste or disposal10 day (or week) sales trend by SKUSales trends for new productIn the early 1990s, half-prepared fresh noodle sales were going up,new fresh noodle products were quickly developedSales trend by time and dayDifferent sales patterns for different sizes of milk at different times of the day results in rearrangement of the milks in the fridge. Extreme store micromanagement.Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?).List of slow moving itemsAbout half of 3000 SKUs are replaced by new ones every year
73 Facilities StrategyLimited storage space at stores which have only m2 spaceFrequent and small deliveries to storesDeliveries arrive from over 200 plants.Products are grouped by the cooling needsCombined delivery system: frozen foods, chilled foods, room temperature and hot foods.Such product groups are cross-docked at distribution centers (DC). Food DCs store no inventory.A single truck brings a group of products and visits several stores within a geographical regionAggregation: No supplier (not even coke!) delivers directThe number of truck deliveries per day is reduced by a factor of 7 from 1974 to Still, at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners.Have many outlets, at convenient locations, close to where customers can walkFocus on some territories, not all: When they locate in a place they blanket (a.k.a. clustering) the area with stores; stores open in clusters with corresponding DC’s.844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in No stores in Kobe.Success rate of franchise application <= 1/100
74 The Present and the Future Is food preparation a good idea at 7-eleven locations?e.g. Compare microwave heating vs. salad preparation.Why SEJ does not allow direct delivery from suppliers to retailers?Point out which of the following strategies can also be used in US (or Taiwan)Information strategyFacilities strategyDiscuss the differences between the Japanese and US (or Taiwanese) consumers with regard toFrequency and amount of grocery purchaseUse of credit cards vs. cash for purchase7-eleven inventory turnover rate is 50 in Japan and 19 in the USA.7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan. Does this make sense from a supply chain perspective?Cost vs. ResponsivenessBusiness strategyWhat is the risk of micro-matching strategy?No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA?
75 Deloitte 2008 Global Retailers Survey Excerpts fromDownloaded on Jan 30, 2008.