Introduction to Supply Chain Management Designing & Managing the Supply Chain Chapter 1 Byung-Hyun Ha

Outline  Introduction  Global Optimization  Uncertainty  Case: Meditech Surgical

Introduction  Investment and interest in supply chain  Economy issues Fierce competition in today’s global market Introduction of products with shorter and shorter life cycles Heightened expectations of customers  Technology issues Advances in communications and transportation technologies

Introduction  Supply chain (logistics network)  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

Introduction  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

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

Strategies for SCM  All of the advanced strategies, techniques, and approaches for supply chain management focus on:  Global optimization  Managing uncertainty

Global Optimization  Issues  Why is it different/better than local optimization?  What are conflicting supply chain objectives?  Why is global optimization hard?  The supply chain is complex network  Different facilities in supply chain network have different and conflicting objectives  The supply chain is a dynamic system The power structure changes  The system varies over time e.g. Demand and cost variation due to seasonal factors, trend, advertising and promotion, competitors’ pricing strategies, …

Global Optimization  Tools and strategies  Decision support systems  Inventory control  Network design  Design for logistics  Cross docking  Strategic alliances / supplier partnerships  Supply contracts / incentive schemes

Sequential vs. Global Optimization Procurement Planning Manufacturing Planning Distribution Planning Demand Planning Supply Contracts/Collaboration/Information Systems and DSS Procurement Planning Manufacturing Planning Distribution Planning Demand Planning  Sequential optimization  Global optimization

Conflicting Objectives in the Supply Chain  Purchasing  Stable volume requirements / flexible delivery time  Little variation in mix / large quantities  Manufacturing  Long run production / high quality  High productivity / low production cost  Warehousing  Low inventory / reduced transportation costs  Quick replenishment capability  Customers  Short order lead time / high in stock  Enormous variety of products / low prices

Uncertainty  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  Forecasting  Forecasting is always wrong  The longer the forecast horizon the worse the forecast  End item forecasts are even more wrong

Uncertainty Time Actual Consumer Demand Actual Consumer Demand Retailer Warehouse to Shop Retailer Warehouse to Shop Retailer Orders Production Plan Manufacturer Forecast of Sales Manufacturer Forecast of Sales  Supply Chain Variability

Uncertainty Time Consumer Demand Consumer Demand Production Plan  What Management Gets...

Uncertainty Volumes Time Consumer Demand Consumer Demand Production Plan  What Management Wants…

Uncertainty  Dealing with uncertainty  Pull systems  Risk pooling  Centralization  Postponement  Strategic alliances  Collaborative forecasting

Key Issues  Issues span  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

Case: Meditech Surgical  Case overview  Intent – diagnosis of supply chain  Business overview  Supply chain  Production planning  What’s wrong?  How to fix it?

Meditech Surgical  Background  Endoscopic surgical instrument maker Minimally invasive surgery  Parent company: Largo Healthcare Company Spun off 3 years ago  Primary competitor: National Medical Corporation Market created in early 80’s, rapidly growing National sells to physicians Meditech sells to material managers as well as physicians Customer preferences change slowly  Old products continually updated Replaced with new product introductions  Compete based on product innovations, customer service, cost

Meditech Surgical  Problems  New production introduction needs to be flawless  Consistently fail to keep up with demand during initial order  Customers wait over six weeks to have orders delivered  Dan Franklin, manager of Customer Service & Dist.  Recognizing growing customer dissatisfaction

Distribution  Central warehouse  Two primary channels to hospitals  Domestic dealers Order and receive products from multiple manufacturers Independent and autonomous entities  International affiliates Subsidiaries of Largo Healthcare Similar to domestic dealers from Meditech’s point of view

Internal Operations  Assembly  Manually intensive  Using component parts in inventory  Assembly line with a team of cross-trained production workers  Cycle time for assembly of a batch of instruments 2 weeks  Lead time for component parts 2-16 weeks  Packaging  Using machine  Sterilization  Cobalt radiation sterilizer, about 1 hour

Operation Organization

Production Planning & Scheduling  Broken down two parts  Assembly & component parts order based on monthly forecast  Packaging & sterilization based on finished goods inventory level  Forecast  Annual: during the fourth quarter of each fiscal year  Monthly: using annual forecast broken down proportionately At the beginning of each month: adjustments of forecast  Planning of assembly  Using monthly demand forecasts  transfer req. = month forecast – finished goods inventory + safety stock  Approved throughout the organization after 1 to 2 weeks

Production Planning & Scheduling  MRP systems  Planning assembly schedules and parts order  Calculation may be run several times each week Notification of change at least 1 weeks before  Packaging & sterilization process  Order point/order quantity (OP/OQ) Parts Inventory Assembly Bulk InventoryFG Inventory Packaging & Sterilization 2 – 16 weeks2 weeks1 week pushpull

High Inventory Level of Finished Goods  In case of representative stable product

Var. in Production vs. Var. in Demand  Variation in production schedules often exceeded variation in demand

New Product Introduction  Poor service level  Poor forecasting?  Panic ordering?  And high FG inventory

Poor Service Level  What is going on?  Demand is quite predictable  Usage in hospitals is quite stable  Market share moves slowly over time  With each new product, dealer must build inventory to fill pipeline  Why did Meditech think demand was unpredictable?  Poor information systems  No one looked at demand  No one had responsibility for forecast errors  Tendency to shift the blame  Built-in delays and monthly buckets in planning system  Amplifier in planning system

Poor Service Level  What to do?  Recognize that demand is stable and predictable  Establish accountability for forecast  Eliminate planning delays and/or reduce time bucket  Alternatively, put assembly within pull system and eliminate bulk inventory

HW#1  All homework should be prepared by handwriting and be submitted at the next class  Discussion questions 5, 7, 8, 9 (p. 13)  Case discussion question 3 (p. 21)