1. INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

2. Flows in a Supply Chain Supply Chain Customer Information Product
Funds
Supply Chain

3. Chapter Outline Introduction What is Supply Chain Management?
Why is Supply Chain Management important?
The origins of Supply Chain Management
Important Elements of Supply Chain Management:
- Purchasing
- Operations
- Distribution
- Integration
Strategies for Supply Chain Management
Future Trends in Supply Chain Management
The Beer Game

4. What is a Supply Chain?
A supply chain consists of the flow of products and services from/to:
--Raw materials manufacturers
--Intermediate products manufacturers
--End product manufacturers
--Wholesalers and distributors
--Retailers and,
--End customers
Connected by agents, transportation and storage activities, and
Integrated through sharing of information, planning, and processing activities\

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

6. Figure 1.1 A Generic Supply Chain End product manufacturer
Wholesalers,
distributors
Intermediate
component
mfgs .
Raw material
suppliers
Retailers
End
customers
Product & service flow
Information and planning

7. Typical Supply Chains Purchasing Receiving Storage Operations
Production
Distribution

8. Typical Supply Chain for a Manufacturer
Supplier
Storage }
Mfg.
Dist.
Retailer
Customer

9. Typical Supply Chain for a Service
Supplier }
Storage
Service
Customer

10. What is Supply Chain Management?
Here are two definitions:
The design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer
-- Institute for Supply Management
Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer
-- The Supply Chain Council

11. 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

12. Importance of Supply Chain Management
Firms have discovered value-enhancing and long term benefits
Who benefits most? Firms with:
- Large inventories
- Large number of suppliers
- Complex products
- Customers with large purchasing budgets
Benefits
- Lower purchasing/inventory costs, higher quality/customer service

13. Importance of Supply Chain Mgt. –Cont.
Firms practicing Supply Chain Management:
1. Start with key suppliers
2. Move on to other suppliers, customers, and shippers
3. Integrate second tier suppliers and customers (second tier refers to the customer’s customers and the supplier’s suppliers)

14. Importance of Supply Chain Mgt. –Cont.
Cost savings and better coordination of resources are reasons to employ Supply Chain Management
-- Bullwhip Effect- the magnification of safety stocks and costs based on separate forecasts and uncoordinated planning and sharing of information along the supply chain (Ex. 1.1)
Reducing the bullwhip effect occurs through:
-- Process integration- Interdependent activities can lead to improved quality, reduced cycle time, better production methods, better forecasts, less safety stock, etc.

15. Important Elements of SCM
Purchasing- Supplier alliances, supplier management, strategic sourcing
Operations- Demand management, MRP, ERP, JIT, TQM
Distribution- Transportation management, customer relationship management, network design, service response logistics
Integration- Coordination/Integration activities, global integration problems, performance measurement

16. Important Elements of SCM-Cont.
Purchasing:
Long term relationships
Supplier management- improved performance through-
-- Supplier evaluation (determining supplier capabilities and performance)
-- Supplier certification (third party or internal certification to assure product quality and service compliance)
Strategic partnerships- successful and trusting, long-term relationships with top-performing suppliers

17. Important Elements of Supply Chain Management-Cont.
Operations:
-- Demand management- match demand to available capacity
-- Linking buyers & suppliers via MRP and ERP systems
-- Use JIT to improve the “pull” of materials to reduce inventory levels
-- Employ TQM to improve quality compliance among buyers and suppliers

18. Important Elements of Supply Chain Management-Cont.
Distribution:
-- Transportation management- tradeoff decisions between cost & timing of delivery/customer service via trucks, rail, water & air
-- Customer relationship management- strategies to ensure deliveries, resolve complaints, improve communications, & determine service requirements
-- Network design- creating distribution networks based on tradeoff decisions between cost & sophistication of distribution system

19. Important Elements of Supply Chain Management-Cont.
Integration:
-- Supply Chain Integration- when supply chain participants work for common goals. Requires intrafirm functional integration. Based on efforts to change attitudes & adversarial relationships
-- Global Supply Chains- advantages that accrue from sourcing from larger global market e.g., lower cost & higher quality suppliers. May involve operating exposure, which is risk found in foreign settings
-- Supply Chain Performance Measurement- Crucial for firms to know if procedures are working

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

21. 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?

22. 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

23. 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

24. 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?

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

26. 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

27. 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

28. 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

29. 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

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

31. 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

32. 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?

33. 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…”.

34. 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.

35. 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, , 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.

36. 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?