Introduction to Supply Chain Management David Simchi-Levi Philip Kaminsky Edith Simchi-Levi

What Is A Supply Chain? The system of suppliers, manufacturers, transportation, distributors, and vendors that exists to transform raw materials to final products and supply those products to customers. That portion of the supply chain which comes after the manufacturing process is sometimes known as the distribution network.

What Is the Goal of Supply Chain Management? Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed: In the right quantities To the right locations At the right time In order to Minimize total system cost Satisfy customer service requirements

What level of activities are involved? What do we mean by integration? Notice: Who is involved? What is the goal? What level of activities are involved? What do we mean by integration? Every facility is involved. Efficiency across the entire system is the goal. What issues does this raise? What makes SCM hard? Complexity Ownership Uncertainty

Customers, demand centers sinks Field Warehouses: stocking points Sources: plants vendors ports Regional Warehouses: stocking points Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Transportation costs Inventory & warehousing costs

Strategies for SCM Global Optimization Managing Uncertainty All of the advanced strategies, techniques, and approaches for Supply Chain Management focus on: Global Optimization Managing Uncertainty

What tools and approaches help? Optimization What is it? Why is it important? What tools and approaches help? Finding a good solution vs. finding the best solution. Finding solutions to complex problems. Finding solutions to dynamic, stochastic problems. Implementing these solutions.

Tools and Strategies for Optimization Decision Support Systems Inventory Control Network Design Design for Logistics Cross Docking DSS support human decisions Why is inventory control difficult in supply chains? What is a network? What impact does design have?

Global Optimization What is it? Why is it different/better than local optimization? What are conflicting supply chain objectives? What tools and approaches help with global optimization? Sequential vs. serial Centralized vs. decentralized systems – what is the impact?

Sequential Optimization vs. Global Optimization Procurement Planning Manufacturing Distribution Demand Sequential Optimization Supply Contracts/Collaboration/Information Systems and DSS Procurement Planning Manufacturing Distribution Demand Global Optimization Source: Duncan McFarlane

Why is Global Optimization Hard? The supply chain is complex Different facilities have conflicting objectives The supply chain is a dynamic system The power structure changes The system varies over time

Conflicting Objectives in the Supply Chain 1. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. Manufacturing • Long run production • High quality • High productivity • Low production cost

Conflicting Objectives in the Supply Chain 3. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4. Customers • Short order lead time • High in stock • Enormous variety of products • Low prices

Tools and Approaches for Global Optimization Everything for optimization, plus… Strategic Alliances/Supplier Partnerships Supply Contracts/Incentive Schemes Examples: VMI Joint inventories Buyback schemes/ Revenue sharing – video stores

What tools and approaches help us to deal with these issues? Uncertainty What is variation? What is randomness? What tools and approaches help us to deal with these issues? Contrast variation between time periods with random differences between time periods. Suggestions for tools and approaches in three slides. What about forecasting?

Can’t Forecasting Help? Forecasting is always wrong The longer the forecast horizon the worse the forecast End item forecasts are even more wrong

Why Is Uncertainty Hard to Deal With? Matching supply and demand is difficult. Forecasting doesn’t solve the problem. Inventory and back-order levels typically fluctuate widely across the supply chain. Demand is not the only source of uncertainty: Lead times Yields Transportation times Natural Disasters Component Availability Examples of Sept. 11, Taiwan earthquake

Supply Chain Variability Manufacturer Forecast of Sales Production Plan Retailer Orders Retailer Warehouse to Shop Volumes Actual Consumer Demand What is shown here is how divergent these various forecasts are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

What Management Gets... Production Plan Volumes Consumer Demand What is shown here is how divergent these various forecasting are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

What Management Wants… Production Plan Volumes Consumer Demand What is shown here is how divergent these various forecasting are in relation to real demand. Why?? Because they are developed independently from each other and are dated, and unconnected to each other and the daily fluctuations in the market Why do we care? Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Dealing with Uncertainty Pull Systems Risk Pooling Centralization Postponement Strategic Alliances Collaborative Forecasting

Supply Chain:the Magnitude In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of gross domestic product). Transportation 58% Inventory 38% Management 4% Third party logistics services grew in 1998 by 15% to nearly $40 billion

Supply Chain:the Magnitude It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies. A typical box of cereal spends more than three months getting from factory to supermarket. A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days. Why do these times in the system matter?

Supply Chain: The Magnitude Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them. Boeing aircraft, one of America's leading capital goods producers, was forced to announce write downs of $2.6 billion in October 1997, due to “Raw material shortages, internal and supplier parts shortages…”.

Supply Chain: The Potential Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. “According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of business strategy, Oct./Nov. 1997) Strategic Partnerships VMI CPFAR Target – bowl ordering, where style and colored details are specified by Target close to delivery date – flexibility.

Supply Chain:the Potential In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using Direct business model Build-to-order strategy. What happened to the competitors? Kmart HP/Compaq The power of cross-docking/IT/Everyday Low Prices. The power of postponement.

Supply Chain: The 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. How big would this “optimization problem” be?

What’s New? Global competition Shorter product life cycle New, low-cost distribution channels More powerful well-informed customers Internet and E-Business strategies Are things changing faster? What are examples of these: EU Semiconductors, electronics Internet, “big box” stores How has shopping for a car changed?

Key Issues Issues span What are the tradeoffs and issues? Strategic Tactical Operational What are the tradeoffs and issues? Distribution Network Configuration Inventory control Supply Contracts Distribution Strategies Integration and Partnerships Procurement Strategies and Outsourcing Product Design Information Technology Strategic: long-lasting effect (Warehouses) Tactical: quarterly to annually (Purchasing/Production decisions, inventory policies, transportation strategies) Operational: scheduling, lead time quotation, routing, etc. For each issue: Why bother? What are the tradeoffs? How can this be improved or help? Specifically: Distribution Network: Discuss sample network Inventory control: Why hold inventory? How much? Supply contracts: Why is this different Distribution strategies: cross-docking, direct shipment Partnerships: Advantages and disadvantages Outsourcing: When?

New Concepts Push-Pull strategies Direct-to-Consumer Strategic alliances Manufacturing postponement Dynamic Pricing E-Procurement