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Introduction to Supply Chain Management

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1 Introduction to Supply Chain Management
June 27, 2014

2 Definition and Meaning
According to Investopedia: Supply Chain Management (SCM) is the streamlining of a business' supply-side activities to maximize customer value and to gain a competitive advantage in the marketplace. Supply chain management (SCM) represents an effort by suppliers to develop and implement supply chains that are as efficient and economical as possible. Supply chains cover everything from production, to product development, to the information systems needed to direct these undertakings.

3 Logistics Versus SCM LOGISTICS SCM
Management of a network of interconnected businesses involved in final provision of products/services Not synonymous to logistics. It’s a chain and extension to logistics Requires coordination and implementation through various organizations Effective SCM facilitates decrease in operating costs, improves asset productivity and reduces order cycle time SCM is new and focuses on monitoring flow of information across all organizations till the product/services reaches the customer A broad concept Focuses on actual transportation and storage of goods Not a sub-category of SCM but a specialized part of SCM Used within a single organization Logistics adds value when inventory is correctly positioned to facilitate sales Logistics is an older concept than SCM A narrower concept

4 Supply Chain Participants
Components/Raw Material and (intermediate) Product Suppliers Manufacturers Wholesalers and Distributors Retailers Customers Logistics Service Providers (inventory management, transportation, storage, order fulfillment and related functions Technology Indirect Material Suppliers (consumables, tools and supplies) Financial institutions Government Agencies & regulatory authorities Industry associations DIRECT STAKEHOLDERS FACILITATORS

5 Supply Chain Participants (Contd…)
M E R TIER III Rubber Farming TIER II (metal working) Stamping Rubber For Tyres Plastic Molding Assembling Dealers TIER I Sub-dealers Tyres to Auto Co. Distributors Retailers In-house Supply Chain Outbound Supply Chain Inbound Supply Chain Similar Tiers for different components inspection Welding Painting DIRECT STAKEHOLDERS FACILITATORS

6 Conventional Supply Chain
Customer place order for a certain product Based on demand forecast (Remember: Lead, Lag and Match?) for a particular time period, finished goods are transported from warehouse to distributor to the retail outlet/customer Based on demand projections, production schedule is decided ad order for supplies are placed Demand is estimated and accordingly catered

7 Problems with Conventional Supply Chain

8 The Beer Game 4 Stations A brewery A distributor A wholesaler A Beer Retailer Beer retailer draws (50 times) a number indicating weekly customer demand Players on the other stations write down their expected demand on their slips The teams circulates the slips and move beer cases through the supply chain WITHOUT communicating directly with each other (only through slips) Each team’s four stations are penalized for an accumulation on inventory – Rs. 50 per case of beer per week And for unfilled backorders stations are penalized Rs 100 per case of beer per week

9 Biscuits’ Game – JIT/KANBAN
Two stations – Incoming dock and Outgoing Dock Incoming dock has 4 stations Each station maintains 4 cases of (sugar-boiled) candies (peppermints) Each station rolls the dice 20 times to represent 20 working days in a month If a station rolls the dice to 3, then 3 cases are moved to the outgoing station without directly communicating to each other If a station rolls a dice more than 4 (to 5 or 6), then all the four cases are moved to the outgoing station If one station has finished working for 20 days, the chips of the station are passed to the next (immediate) station (simulating full truck load shipments) Add Bhakti’s Variation to the game (Impromptu) NOTE: The game involves NO verbal communications. (Hint: Use KANBAN)

10 Beer Game - Review Estimated Demand = Inventory
Actual Demand = Fluctuations Flow of Beer Cases: Retailer -> Brewery -> Distributor -> Wholesaler -> Retailer Communication was only via demand slips across this flow Two Teams Retailers: Nayanika, Nikita and Rajani (A) Retailers: Joel, Josh and Vishisht (B) Team A, initially took the flow for granted and made it brewery’s responsibility to pass demand slips and beer cases to Retailer. This was rectified Team B, initially did not know which team was brewery and passed on demand slips to the wholesaler. This was rectified Team B did not receive any beer cases but received estimated demand slips from the distributor who did not receive any beer cases from the brewery Team B’s brewery was not aware that Beer cases had to passed along with invoice slips to the distributor Team B smiled and the class had a good laugh! - Nonetheless, it means they are not very attentive Team A had few unfulfilled orders but loses were not as exorbitant as Team B

11 Supply Chain Strategies
Lean strategy – Preserving Value with Less Work Agile Strategy – Flexibility, Speed and Accuracy to changing needs and demands Postponement Strategy – Postponing delivery supported by demand forecasting with integrated Agile Strategy Speculation Strategy – Bulk Supply to create economies of scale…Complement of Postponement

12 Example: Lean Strategy (Toyotism)
Idea was realized from a supermarket A customer in a super market takes the desired amount of goods off the shelf and purchases them. The store restocks the shelf with enough new product to fill up the shelf space Supermarket Idea in Toyota’s Plant A work-center needing parts would go to a 'store shelf' (the inventory storage point) for the particular part and 'buy' (withdraw) the quantity it needed. The 'shelf' would be 'restocked' by the work-center that produced the part, making only enough to replace the inventory that had been withdrawn. JIT and KANBAN are approaches introduced under in Toyota Production Systems (TPS) OR Doing More With Less

13 Example: Agile Strategy
Walmart uses cross-docking to actively respond to the latest store demand Cross docking is a logistics procedure where products from a supplier or manufacturing plant are distributed directly to a customer or retail chain with marginal to no handling or storage time. Cross docking takes place in a distribution docking terminal; usually consisting of trucks and dock doors on two (inbound and outbound) sides with minimal storage space. The name ‘cross docking’ explains the process of receiving products through an inbound dock and then transferring them across the dock to the outbound transportation dock Lean cannot deal with volatile demand except if complemented with agile strategy

14 Cross Docking Image 1

15 Cross Docking Image 2

16 Lean Versus Agile Supply Chain Strategies
Demand is meant to be constant (or predictable) Focuses on low inventory costs and low wastes Meant for supplying basic and functional products like food Product Variety is Low Product life Cycle is long Forecast approach is calculative Demand fluctuates and volumes are high Focuses on assortment Meant for supplying innovative products Product variety is high Product life cycle is short Forecast approach is consultative (Requires market research)

17 Lean and Agile – Together?
A  firm may establish a store-based inventory policy using the lean principle to cover the supply lead-time from the primary warehouse to the store While lean design drives their standard replenishment to the store, the process to handle exceptions to manage stock-outs may leverage agile principles, allowing priority replenishments to the store from a set of alternate sources in order to avoid losing substantial sales revenues. Walmart uses inventory optimization (lean) and transportation optimization (agile)

18 Example: Postponement Strategy
Avon declined to label their bottles themselves for a long time, viewing this as additional cost and complexity. However, after developing an end-to-end supply chain visibility, Avon saw the opportunity in postponing the creation of its final product by placing the labels in the desired target language. It successfully deployed an idea that had been pushed out earlier, after understanding that this allowed them to postpone the production of final finished goods and better align their supplies to the end-demand without tremendously increasing their inventory. Dell has mastered the art of postponement for their custom-designed machines for individual consumers. When Dell started, this was not necessarily the case in the industry, however, Dell invented a new business model and leveraged postponement as a business model – not as a supply chain strategy – though, it then designed their supply chain to support this business model.  Postponement is not an absolute choice, it is an imperative forced by the type of industry, assortment, and demand patterns. Can you postpone medical supplies to a trauma center or food to a grocery store?

19 Example: Speculation Strategy
The speculation strategy reduces the cost of logistics by maximizing the usage of resources like warehouses and trucks, and reduces the cost of manufacturing by running large production batches that improve throughput by reducing the cost of set-up changes and by reducing the raw material costs by buying in bulk. Fast Food Restaurants? Full-service Restuarants? Discuss D&B’s IR Team

20 Bull-Whip Effect


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