Supply Chain Management Supply chain management deals with the management of materials, information and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers (Stanford Supply Chain Forum, 1999) Supply chain management is a set of approaches utilized efficiently to integrate suppliers, manufacturers, warehouses, and stores so that merchandise is 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 (Simchi-Levi et al) A supply chain consists of all stages involved, directly and indirectly, in fulfilling a customer request. Supply chain management involves the management of flows between and among stages in a supply chain to maximize total profitability (Chopra and Meindl)

Typical supply chain upstream downstream

Toshiba PC supply chain upstream downstream Intel, AMD Seagate, IBM Microsoft, Red Hat Toshiba America Irvine, California Europe DC Toshiba Turkey North America DC Best Buy

How is SCM different? Builds on traditional fields such as production management, operations management or logistics management. The key differentiator is the systems approach of the supply chain management SCM considers every stage and facility in the supply chain and the interactions between them, whether they belong to different companies or different organizations within a company SCM considers the total costs in the supply chain Since SCM deals with all stages of the supply chain and their integration, it encompasses the firm’s activities at many levels: strategic, tactical and operational

Other operational processes Product Life-cycle Management (PLM) Supply Chain Management (SCM) Customer Relationship Management (CRM) Supplier Relationship Management (SRM)

Why supply chain management? In 1997, American companies spent $862 billion, or about 10% of GNP on supply chain related activities which include the cost of movement, storage and control of products across the supply chain. Most of these costs include unnecessary cost components due to redundant stock, inefficient transportation strategies, and other wasteful strategies in the supply chain

Example: Wal-Mart In 1979, Kmart was one of the leading companies in the retail industry, with 1,891 stores and average revenues per store of $7.25 million. At that time Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those of Kmart stores. In 10 years Wal-Mart transformed itself; in 1992 it had the highest sales per square foot and the highest inventory turnover and operating profit of any discount retailer. Today Wal-Mart is the largest and highest profit retailer in the world. How did Wal-Mart do it? The starting point was a relentless focus on satisfying customer needs; Wal-Mart’s goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. This was done by using a logistics technique known as cross-docking. In this strategy, goods are continuously delivered to Wal-Mart’s warehouses from where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.

Example: Home Depot The Home Depot Inc. moves over 85 percent of its merchandise directly from suppliers to stores, avoiding warehouses altogether (http://www.informationweek.com/708/08iukil6.htm) The strategy saves money by eliminating an expensive network of DCs. But it also carries substantial risks in terms of customer service. A poorly managed supply chain can result in heavy stock-outs. (http://www.supplychainbrain.com/archives/7.02.homedepot.htm?adcode=5)

Example: Dell’s direct business model Selling PCs direct to customer Outsourcing component manufacturing Virtual integration with the suppliers resulting in less inventory. The third party logistics company matches the Sony monitors with Dell computers and deliver it to the customer Direct relationship with customer enables Dell to understand the customer needs and segment the market to offer value added services Compaq, IBM and HP all move to emulate Dell business model Dell carries 8 days of inventory, while Compaq, IBM and Dell have targets to carry 4 weeks of inventory

Why is SCM difficult? Global Optimization Managing Uncertainty Global and complex supply chains Different, conflicting objectives Supply chain is dynamic System variations over time Managing Uncertainty Matching supply and demand Bullwhip effect Forecasts are inaccurate Uncertainties in suppliers, logistics

Key (popular) issues in SCM Supply chain design Where to locate manufacturing facilities, distribution centers, stores so as to minimize overall costs and improve service Supply contracts How to establish relationships between manufacturers and retailers so that the whole supply chain can increase profits? Distribution strategies Cross-docking Direct shipments to customers Pull based, push based, pull-push based systems Vendor managed inventory

Key (popular) issues in SCM Supply chain integration and strategic partnership Coordinating different stages of the supply chain Value of information and information sharing Outsourcing and procurement strategies Managing product variety Product postponement Component commonality and modularity Information technology and decision support systems Managing customers Customer segmentation, revenue management

Product postponement – a storage devices manufacturer example Production Process Occurring over Time End Product Is Completed PCB Board that Differentiates The Final Product is Inserted Assembly Phase Testing Phase Testing Phase End Product Is Completed Assembly Phase Production Process Occurring over Time Generic PCB Board is Inserted to Enable Testing PCB Board that Differentiates The Final Product is Inserted to Replace the Generic Board Used to Testing