Lecture 21 Overview of Supply Chain Management 1

Reasons for which you might consider a supply chain management career A typical box of cereal spends ____ days getting from factory to supermarket. A typical new car spends ___ days traveling from the factory to the dealership. Cisco’s $____ dollar write-off of inventories in

Internal Supply Chains SuppliersCustomers RMFG Material Flow Inventory Management Yield Management Supply Contracts Manufacturer The Goal of SCM: Matching Supply with Demand! Information Flow Value of Information

Outline Why is a Supply Chain Important? What comprises a Supply Chain? Supply Chain Optimization Managing Uncertainty Supply Chain Network Design

Supply Chain: The Magnitude In 1998, American companies spent $898 billion in supply- related activities (or 10.6% of gross domestic product). - Transportation __% - Inventory __%, - Management __% Third party logistics services grew in 1998 by 15% to nearly $40 billion It is estimated that the grocery industry could save $______(10% of operating cost) by using effective logistics strategies. 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 $_______ in October 1997, due to “ Raw material shortages, internal and supplier parts shortages …”.

Progression of Logistics Costs Total U.S. logistics costs between 1984 and 2005

Magnitude of Supply Chain Costs – A $25 book

Supply Chain: The Potential Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, , by over 3,000% using Direct business model Build-to-order strategy 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 ”.

Guess Who?

Critical Success Factors EDLP Strategy Channel Master EDI-INT, IT Strategy _______’s level of supply chain management is so efficient that there is almost no need for warehouses. Inventory is moved from one location to another quickly and efficiently, thereby cutting costs.

What Is a Supply Chain? Flow of products and services from: Raw materials manufacturers Intermediate products manufacturers End product manufacturers Wholesalers and distributors and Retailers Connected by transportation and storage activities Integrated through information, planning, and integration activities

The Supply Chain Network Price & product availability

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 At the right price To the right locations At the right time In order to: Minimize total system cost Maximize total system revenue Satisfy customer service requirements Supply chain management is to match supply and demand better!

Customer Information Products/Services Funds Flows in a Supply Chain Source: Supply Chain Management (Chopra and Meindl)

Why supply chain management is difficult? Supply chain strategy linked to the Development Chain Challenging to minimize system costs and maximize system service levels globally (Global Optimization) Inherent presence of uncertainty and risk All of the advanced strategies, techniques, and approaches for Supply Chain Management focus on: - Global Optimization - Managing Uncertainty

The Development Chain The enterprise development and supply chain

Global Optimization is Hard The supply chain is a geographically dispersed complex network Different facilities have conflicting objectives The supply chain is a dynamic system The system varies over time

Global Optimization - Complex Network National Semiconductors Production: – Produces chips in six different locations in the US, Britain and 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.

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 3. Warehousing Low inventory Reduced transportation costs Quick replenishment capability 4. Customers Short order lead time Enormous variety of products Low prices

Tools and Approaches for Global Optimization Everything for optimization, plus… Strategic Alliances/Supplier Partnerships Supply Contracts/Incentive Schemes

Demand is not the only source of uncertainty Lead times Capacity Transportation times Natural disasters Component availability Forecasting does not solve the problem Forecasting is always wrong The longer the forecast horizon the worse the forecast Recent trends make things more uncertain Lean manufacturing Outsourcing Off-shoring Uncertainty and Risk Factors

August 2005 – Hurricane Katrina P&G coffee supplies from sites around New Orleans Six month impact 2002 West Coast port strike Losses of $1B/day Store stock-outs, factory shutdowns 1999 Taiwan earthquake Supply interruptions of HP, Dell 2001 India (Gujarat state) earthquake Supply interruptions for apparel manufacturers Uncertainty and Risk Factors

Dealing with Uncertainty Pull Systems Centralization Postponement Strategic Alliances Collaborative Forecasting

Supply Chain Variability Volumes Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 Actual Consumer Demand Actual Consumer Demand Retailer Orders to Warehouse Warehouse Orders Production Plan Manufacturer Forecast of Sales Manufacturer Forecast of Sales

What Management Gets... Volumes Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 Consumer Demand Consumer Demand Production Plan

What Management Wants… Volumes Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 Consumer Demand Consumer Demand Production Plan

Supply Chain Network Design: Key Issues Pick the optimal number, location, and size of warehouses and/or plants Determine optimal sourcing strategy Which plant/vendor should produce which product Determine best distribution channels Which warehouses should service which customers The objective is to balance service level against Production and purchasing costs Inventory carrying costs Facility costs (handling and fixed costs) Transportation costs That is, we would like to find a minimal-annual-cost configuration of the distribution network that satisfies product demands at specified customer service levels.

Mapping Allows You to Visualize Your Supply Chain

Service Level Within Promised Time Transportation Cost Buildup as a Function of Facilities Cost of Operations Number of Facilities Inventory Facilities Total Costs Labor 5-30

Supply Chain — A Contemporary View Network Perspective Source: “The Supply Chain Management Effect” (Kopczak and Johnson) End Customer Retailers Distributors Manufacturers Suppliers Design Product, Process, and Supply Chain Introduce Product Promote, Price, and Merchandise Product Fulfill Product Demand Recycle, Reuse, or Dispose of Product Product Life Cycle View Functional SC View Products, Information, and Finances Flow Across All Process and Supply Chain Players