Supply Chain Management

A presentation by A.V. Vedpuriswar

SUPPLY CHAIN MANAGEMENT

Value Chain Supply side- raw materials, inbound logistics and production processes Demand side- outbound logistics, marketing and sales.

WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in the acquisition and conversion of materials to finished products delivered to the customer"

Supplier Management

Material Flow Information Flow

Customer Management

Schedule / Resources

Conversion

Stock Deployment

Delivery

Leads to Business Process Integration

 Supply chain is the system by which organizations source, make and deliver their products or services according to market demand. Supply chain management operations and decisions are ultimately triggered by demand signals at the ultimate consumer level. Supply chain as defined by experienced practitioners extends from suppliers suppliers to customers customers.

 SUPPLY CHAIN INCLUDES :

MATERIAL FLOWS INFORMATION FLOWS FINANCIAL FLOWS

 SUPPLY CHAIN MANAGEMENT FACILITATED BY :

PROCESSES STRUCTURE TECHNOLOGY

IS

 Supply chain serves two functions:

Physical Market mediation

 Supply chain objectives may differ from situation to situation. For functional products, cost efficiency is the critical factor. For innovative products, responsiveness is the important factor. Leanness + Agility together make up Leagility

Supply Chain Structure

SUPPLIER FACTORY DC RDC RETAILER

Raw Materials

Finished Goods Information Flow

Supply Chain and Demand Chain

Demand chain is defined as the system by which organizations manage sales and distribution of products and services to end users. Conceptually incorrect to look at demand chain separately Look at the pipe as a whole.

 But is there a pipe at all?

More a network Not necessarily linear Value chain orchestration rather controlling the flow through the pipe than

A network of independent and interdependent organizations mutually and cooperatively working together to control, manage and improve the flow of materials and information from suppliers to end users

SUPPLY CHAIN DRIVERS Not new. Value system of Michael Porter

Why sudden interest?
Demanding customers Shrinking product life cycles Proliferating product offerings Growing retailer power in some cases Doctrine of core competency Emergence of specialized logistics providers Globalization Information technology

SUPPLY CHAIN ELEMENTS

Strategic Supply Chain Design Resource Acquisition Long Term Planning (1 Year ++)

Tactical

Production/ Distribution Planning Resource Allocation Medium Term Planning (Qtrly,Month

Operational

Shipment Scheduling Resource Scheduling Short Term Planning (Weekly,Daily)

 Supply Chain Goals Efficient supply chain management must result in tangible business improvements. It is characterized by a sharp focus on
Revenue growth Better asset utilization Cost reduction.

Supply Chain Management Underlying Principles

Compression (Planning/Manufacturing/Supply) Conformance (Forecasts/Plans/Distribution) Co-operation (Cross -Functional) Communication (Real Time Data)

Reduce Overall Cycle Time : Improve Response

Changing Paradigm
Functional vs Process Products vs Customers Revenues vs Performance Inventory vs Information Transactions vs Relationships

Critical Success Factors today

Cross functional management and planning skills Ability to define, measure and manage service requirements by market segment Information systems Relationship management and win win orientation

PUTTING IN PLACE A WELL OILED SUPPLY CHAIN Supply chain as an efficient customer satisfying process Effectiveness of the whole supply chain is more important than the efficiency of each individual department.

The steps involved

Step1- Designing the supply chain
Determine the supply chain network Identify the levels of service required

Step 2 - Optimizing the supply chain Determine pathways from suppliers to the end customer
Customer markets to Distribution centers Distribution centers to production plants Raw material sources to production plants Identify constraints at vendors, plants and distribution centers Get the big picture Plan the procurement, production and distribution of product groups rather than individual products in large time periodsquarters or years

Step 3- Material flow planning

Determine the exact flow and timing of materials Arrive at decisions by working back from the projected demand through the supply chain to the raw material resources Techniques
ERP

Step 4 - Transaction processing and short term scheduling

Customer orders arrive at random This is a day to day accounting system which tracks and schedules every order to meet customer demand Order entry, order fulfillment and physical replenishment

Information flows in Supply Chain Management Information is overriding element Need for databases Master files: Information about customers, products, materials, suppliers, transportation, production and distribution data- do not require frequent processing Status files- heart of transaction processing- track orders and infrastructure status- updated daily. Essentially using the same information to make all plans right from structuring the network to processing every day supply chain tasks.

THE VIRTUAL VALUE CHAIN The value chain connects a companys supply side with its demand side. Traditionally information has been a supporting function. Information however can be managed far more creatively. There are various stages of using value added information processes.

 Visibility : See physical operations more effectively through information. Information can be used for effective coordination of value chain activities. Mirroring capability : In this stage, virtual activities are substituted for physical ones. A parallel value chain is created. New customer relationships : The company can draw on the flow of information in the virtual value chain to deliver value to customers in new ways.

Dealer Management
Conventional functions Inventory ownership and management Sales and technical support Order handling Credit

Contemporary Trends Channels being divided into two- Fulfillment and Franchised agent Fulfillment channel- responsible for getting the manufacturers product from the plant to the end user through a highly efficient logistics and inventory management system

Contemporary Trends Fulfillment channel may not take ownership of the product but may perform these functions on a per box fee structure Franchised agents responsible for sales and sales support but will not write the order or supply the product

Issues in customer management

Penetration vs Spread Concentration is necessary to commit the necessary resources for true customer integration Depth of customer contact
R&D - sharing information vs developing new products together Logistics - Pros and cons of methods of transportation vs reengineering the logistics process

Implementation: Points to keep in mind

Recognize the difficulty of change. Prepare a blueprint for change that maps linkages among initiatives. Assess the entire supply chain from supplier relationships to internal operations to the market place, including customers, competitors and industry as a whole.

IS THE SUPPLY CHAIN WORKING?

Does our manufacturing strategy increase product line flexibility while continuing to drive down overall production costs? When was the last time we measured lost sales to end customers? Do we have an efficient system to get POS data from retailers? Are we testing our products with end customers? Do we use the resulting data to adjust our forecasting and supply positions? Is the ratio of returned orders to sales increasing?

The New Model of Relationships

Hard bargaining vs shared destiny Exit vs Voice Arms length relations vs Involving dealers and suppliers in product development Piling up vs Replenishing dealer inventory more frequently In short working together as partners to cut costs, boost efficiencies, innovate and share value

Adversarial vs partnerships Short term vs long term contracts Large vs small order quantity Full truck load vs small parcels Inspection vs no inspection

 Written order vs understanding Many vs few suppliers Design and then invite quote from vendor vs involving vendor in development Bargaining, holding cards close to chest vs Shared destiny, transparency

Summary
Segmentation of customers based on service needs Customization of logistics network Listen to signals of market demand and plan accordingly. Differentiate product close to the customer Source strategically Develop a supply chain wide technology strategy Accept channel spanning performance measures

 The Bullwhip Phenomenon

Volatility amplification along the network Increase in demand variability as we move upstream away from the market Mainly because of lack of communication and coordination Delays in information and material flows

 Bullwhip effect occurs because of various reasons: Order Batching- Accumulate orders Shortage gaming- Ask for more than what is needed Demand forecast updating

Important points to keep in mind Segment customers based on service needs. Modify the supply chain to meet these service requirements profitably. Customize the logistics network. Develop forecasts collaboratively involving every link of the supply chain. Locate the leverage point where the product is unalterably configured to meet a single requirement Delay product differentiation till the last possible moment.

 Assess options such as modularized design or modification of manufacturing processes that can increase flexibility. Cultivate warm relationships with suppliers. Efficient supply chain management has to be accompanied by a technology strategy.

ITALIAN CLOTHING MANUFACTURE

Warehousing and transportation Inventory Late delivery returns Obsolescence Lost sales 6 5 2 20 60

Need to minimize obsolescence costs Minimize product range flexibility Reduce product development cycle

Dells Direct Business Model of Virtual Integration

Advantages of a tightly coordinated supply chain traditionally facilitated by vertical integration. Combined with focus and specialization. Leveraging on investments others have made and focusing on delivering solutions and systems to customers Fewer things to manage - fewer things go wrong Suppliers engineers part of Dells Design team Have only a few partners

Dells Direct Business Model of Virtual Integration

Share information with partners in Real time fashion. Stitch together a business with partners that are treated as if they are inside the company. Change focus from how much inventory there is to how fast it is moving Assets collect risks around them one way or the other. Limited or no testing - Eg. Sony Monitors

Dells Direct Business Model of Virtual Integration

Only three Manufacturing centers - Austin, Ireland and Malaysia. Inventory levels and replenishment needs sometimes conveyed to vendors on hourly basis. Substitute information for inventory and ship only when we have real demand from real end customers Clever segmentation - Focus on institutional markets - 70% to very large customers with annual purchases exceeding $1 million.

 Exit from retail business after wrong entry in 1989. Segmentation - closeness to customers and access to valuable information. Demand forecasting as a critical sales skill Help global customers, manage their total purchase of PCs by selling them a standard product Dell server loads software on customers computers Meet customers needs faster and more efficiently than any other model.

Dells Direct Business Model of Virtual Integration

Li and Fung, Hong Kong

Founded in 1906 Today 35 offices in 20 countries 1997 revenues of $ 1.7 billion Largest export trading company in Hong Kong Customers- American and European retailers Sources clothing and other consumer goods ranging from toys to fashion accessories to luggage

Order from Europe Buy yarn from Korea Weave and dye in Taiwan Buy Japanese zippers made in China Make the garments in Thailand in five different factories Pulling apart the value chain and optimizing at each step

 Victor Fung Today, assembly is the easy part. The hard part is
managing your suppliers and the flow of parts. Good supply chain management strips away time and cost from product delivery cycles. Our customers have become more fashion driven, working with six or seven seasons a year instead of just two or three. Once you move to shorter life cycles, the problem of obsolete inventory increases dramatically. With customer tastes changing rapidly and markets segmenting into narrow niches, its not just fashion products that are becoming increasingly time sensitive.

 Endorsement by Stan Shih, CEO, Acer Buying right things Reaching into suppliers to ensure that certain things happen on time and at the right quality level.

Buyer informs five weeks before delivery. Reserve undyed yarn from yarn supplier. Lock up capacity in weaving and dyeing mills. Outsourcing not same as leaving suppliers to do the worrying. Single factories are too small to have much buying power and to demand faster deliveries from suppliers. To shorten delivery cycle, need to go upstream to organize production. Li & Fung able to delay commitment to a particular fashion trend.

 Integrated logistics management Elimination of consolidators in container shipments Smokeless factory

Design Procurement Inspection of raw materials Production planning Line balancing Inspection of finished goods No worker ownership No labour management

 If we dont own factories, can we say we are in manufacturing? Absolutely, because of the 15 steps in the manufacturing value chain, we probably do 10. Basic operating unit is the division. Divisions focused on serving single customers or groups of small customers. Less emphasis on geographic grouping Merchandising decisions decentralized Financial controls and operating procedures tightly centralized. Strong focus on inventory and working capital management.

 As far as I am concerned, inventory is the root of all evil. At a minimum, it increases the complexity of managing any business. So its a word we dont tolerate around here. Need for sophisticated information systems. Li & Fung working to create a database to systematically track all supplier relationships. Someone might steal our database but when they call up a supplier, they dont have the long relationship with the supplier that Li & Fung has. It makes a difference to suppliers when they know that you are dedicated to the business, that you have been honoring your commitments for 90 years.

 Broadening the middle Better prices and better margins for customers Tackling the soft $3 in the cost structure. $3 represents the inefficiency in the supply chain for a consumer product priced at $4. Look at costs throughout distribution channels than just in factory

Thank You