Chapter 1

Introduction to Supply Chain Management

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Copyright 2002 D. Simchi-Levi

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Introduction

Materials - any commodities used directly or indirectly in producing a product or service.

Raw materials, component parts, assemblies, finished goods, and supplies

Supply chain - the way materials flow through different organizations from the raw material supplier to the finished goods consumer.
Copyright 2002 D. Simchi-Levi
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Basic Supply Chain: Four Flows

Flow of Materials and Services Flow of Cash Flow of information Reverse flow of products

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Supply Chain Management [SCM] 6

Supply Chain
Supply Chain Model
Information Flow Return of Product Return of Product

Basic

Supplier
Primary Product Flow

Producer

Customer
Primary Product Flow

Primary Cash Flow

Supplier Producer Customer are connected by Product, Information & Payment Flows

1. Flow of physical materials and services from suppliers through intermediate entities to customers 2. Flow of Cash from customer through intermediate entities to supplier

3. Flow of Information back and forth along the chain

4. Reverse flow of products returned for replacement, repairs, recycling, or disposal
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Basic Supply Chain : Three Entities

A supplier
A provider of goods and services [or a] seller with whom buyer does business, as opposed to vendor, which is a generic term referring to all sellers in marketplace Apics Dictionary, 12th Edition

A producer
A retailer
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Supply Chain Management [SCM] 7

Supply Chain
Organizations:
Supplier materials / energy / services / components Producer finished products / services Retailer receives finished products and delivers to customers

Flows that connect the entities:

Physical materials / services Cash from customer Information back and forth

Reverse flow of products repair / recycling / disposal / replacement

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Supply Chain Management ---A River

Copyright 2002 D. Simchi-Levi

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New-age Supply Chain

Vendor

Inbound Transportation

Manufacturing

Primary Transportation

Warehousing

Secondary Transportation

Customer

Inventory Mgmt. Inventory Flows Pipeline Intergation Seamless/Visible

Vendor

Cost Landed Cost

Information Flow Shared

Intermediaries

Risk Shared

Planning Relationships SC Team Approach Focus on landed Cost

Customer

Product

Information

Copyright 2002 D. Simchi-Levi

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Supply Chain Management in a Manufacturing Plant

Receiving and Inspection Raw Materials, Parts, and In-process WareHousing

Production

Finished Goods Warehousing

Inspection, Packaging, And Shipping

Materials Management Purchasing Production Control Warehousing and Shipping Inventory Control and Traffic

Physical materials flow Information flow

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Customers

Suppliers

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 Cost and service levels
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What Is Supply Chain Management?

Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.
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Two Other Formal Definitions

The design and management of seamless, valueadded 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

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Sequential Optimization vs. Global Optimization

Sequential Optimization
Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS

Procurement Planning

Manufacturing Planning

Distribution Planning

Demand Planning

Source: Duncan McFarlane

Copyright 2002 D. Simchi-Levi
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Global Optimization
Geographically dispersed complex network Conflicting objectives of different facilities Dynamic system

Variations over time Matching demand-supply difficult Different levels of inventory and backorders

Recent developments have increased risks

Lean production/Off-shoring/Outsourcing
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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
Copyright 2002 D. Simchi-Levi
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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

Copyright 2002 D. Simchi-Levi

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Supply Chain Processes

Most widely known supply chain process oriented Model : Supply Chain Operating Model (SCOR 9.0) Assumptions:

Applies to All customer interactions from order entry through paid invoice All product transactions (defined as physical materials and services, including equipment, spare parts, bulk product and software etc All market interactions from understanding aggregate demand through order fulfillment

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SCOR

Does not apply to :

Sales and Marketing Research and Technology Development Product Development Some elements of Post-Delivery customer support (But it does include returns as fundamental process)

Does Not address

Training Quality Information Technology Administration (other than SCM administration)
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Supply-Chain Operations Reference-model (SCOR) 5.0 - Processes

Plan
P2 Plan Source P1 Plan Supply Chain P3 Plan Make P4 Plan Deliver P5 Plan Returns

Suppliers

Source
S1 Source Stocked Products

Make
M1 Make-to-Stock

Deliver
D1 Deliver Stocked Products

S2 Source MTO Products

M2 Make-to-Order

D2 Deliver MTO Products

S3 Source ETO Products

M3 Engineer-to-Order

D3 Deliver ETO Products

Return Source

Return Deliver

Enable

Customers

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SCOR is structured around five distinct management processes

Plan

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source Return

Make

Deliver Return

Source Return

Suppliers Supplier

Supplier
Internal or External

Your Company

Customer
Internal or External

Customers Customer

SCOR Model
Building Block Approach Processes Best Practice Metrics Technology

Copyright 2002 D. Simchi-Levi

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Supply Chain Management Requires Many Different Functions

Copyright 2002 D. Simchi-Levi

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Supply Managements Impact on Net Income and the Bottom Line

Increased Sales:

Faster to Market Improved Quality Pricing Flexibility Innovation Acquisition Cost Processing Cost Quality Cost Downtime Cost Risk Cost Cycle Time Cost Conversion Cost Non-value Added Cost Supply Chain Cost Post Ownership Cost

Lower Total Cost:

SM

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Supply Management and Return on Investment

Labor $700,000 Operating cost elements Sales $5,000,000 Minus Cost of Goods Sold $3,800,000 ($3,685,000) Plus Net income $400,000 ($515,000) Divided by Sales $5,000,000 Profit margin 8% (10.3%) Materials $2,300,000 ($2,185,000) Overhead $800,000

Other costs $800,000

What if we decrease materials cost by 5%? (or $115,000)

Return on Investments 10.0% (13.0%)

Multiply

Inventories $500,000 ($475,000) Account receivable $300,000 Assets Current assets $1,100,000 ($1,075,000) Plus

Sales $5,000,000 Divided by Total assets $4,000,000 ($3,975,000) Asset turnover rate 1.25 (1.26)

Cash $300,000

Fixed assets $2,900,000

SM

Figure 1-4
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The Impact on ROI of Reducing Materials Costs vs. Increasing Sales

If the same profit increase were to be generated by increasing sales, what sales increase would be required? At the existing 8% profit margin, the following calculation provides the answer Profit increase = new sales X .08 $115,000 = new sales X .08 new sales = $1,437,500

Copyright 2002 D. Simchi-Levi

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The Impact on ROI of Reducing Materials Costs vs. Increasing Sales

therefore.. ($1,437,500 / $5,000,000) X 100 = 28.8% or a sales increase of 28.8% is required to match the profit increase generated by a 5% reduction in materials cost

Copyright 2002 D. Simchi-Levi

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The SCM Network

FIGURE 1.1: The logistics network

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Ciscos Value Network

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Key Observations

Every facility that impacts costs need to be considered

Suppliers suppliers Customers customers

Efficiency and cost-effectiveness throughout the system is required

System level approach

Strategic Tactical Operational

Multiple levels of activities

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The Development Chain

Set of activities and processes associated with new product introduction. Includes:
product design phase associated capabilities and knowledge sourcing decisions production plans

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The Development Chain

FIGURE 1-2: The enterprise development and supply chain

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Global Apparel Value Chain

Tracing back the dress you are wearing

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Uncertainty and Risk Factors

Matching Supply and Demand a Major Challenge
REASONS EXAMPLES
Boeing Aircrafts inventory writedown of $2.6 billion

Raw material shortages Internal and supplier parts

shortages Productivity inefficiencies

Sales and earnings shortfall Larger than anticipated

inventories

Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million

Stiff competition General slowdown in the PC

market

Intel reported a 38 percent decline in quarterly profit

EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 by around $100 million

Higher than expected orders for

new products over existing products

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Uncertainty and Risk Factors

Forecasting is not a solution Demand is not the only source of uncertainty Recent trends make things more uncertain

Lean manufacturing Outsourcing Off-shoring

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Uncertainty and Risk Factors

August 2005 Hurricane Katrina

P&G coffee supplies from sites around New Orleans Six month impact Losses of $1B/day Store stock-outs, factory shutdowns Supply interruptions of HP, Dell Supply interruptions for apparel manufacturers

2002 West Coast port strike

1999 Taiwan earthquake

2001 India (Gujarat state) earthquake

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Evolution of Supply Chain Management

Further Refinement of SCM Capabilities SCM Formation/ Extensions JIT, TQM, BPR, Alliances Inventory Management/Cost Optimization Traditional Mass Manufacturing

1950s

1960s

1970s

1980s

1990s

2000s

Beyond

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Complexity: The Magnitude

U.S. companies spend more than $1 trillion in supplyrelated activities (10-15% of Gross Domestic Product)

Transportation 58% Inventory 38% Management 4%

The grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies A typical box of cereal spends 104 days getting from factory to supermarket. A typical new car spends 15 days traveling from the factory to the dealership.

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Complexity: The Magnitude

Compaq computers loss of $500 million to $1 billion in sales in one year

Laptops and desktops were not available when and where customers were ready to buy them Raw material shortages, internal and supplier parts shortages.

Boeings forced announcement of write-downs of $2.6b

Ciscos multi-billion ($2.2b) dollar write-off of inventories in 2001-2002

Customers balked on orders due to market meltdown

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Transactional 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.

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PC Value Chain: Focus on Cost Reduction

Performance of Dell Computers

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Magnitude of Supply Chain Costs

Example: The Apparel Industry
Cost per Shirt Percent Saving

Manufacturer

Distributor

Retailer

Customer

$52.72

0%

Manufacturer

Distributor

Retailer

Customer

$41.34

28%

Manufacturer

Distributor

Retailer

Customer

$20.45

62%

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Supply Chain: The Potential

P&Gs estimated savings to retail customers of $65 million through logistics gains
Dell Computers outperforming of the competition in terms of shareholder value growth over more than two decades by over 3,000% using:

Direct business model Build-to-order strategy

Wal-Mart transformation into the worlds largest retailer by changing its logistics system:

highest sales per square foot, inventory turnover and operating profit of any discount retailer

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SC, if not managed effectively

Reduced Profitability Higher Costs Poor Quality Poor Availability

Lower Revenue

Poor Service High Inventory High Inventory Long Lead Times for Innovations

And, Copyright 2002 D. Simchi-Levi many more

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Supply Chain Management [SCM] 11

Evolution of Supply Chain Management

Stage 1 Multiple Dysfunction

Supplier Supplier

Purchasing

Marketing / Sales

Customer

Production Control

Customer Distribution Customer

Supplier

Logistics

Materials / Service

Payments

Lacks clear internal definitions and goals No external links other than transactional ones

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Supply Chain Management [SCM] 12

Evolution of Supply Chain Management

Stage 2 Semi functional Enterprise Information
Supplier Purchasing Supplier Logistics Customer

Production Control

Marketing / Sales

Distribution Customer

Materials / Service

Payments

Improving efficiency, effectiveness, quality etc within functional areas No overlap / consulting in decision making from one department to another Department wise Maximising

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Supply Chain Management [SCM] 13

Evolution of Supply Chain Management

Stage 3 Integrated Enterprise ERP
Supplier Purchasing Supplier Logistics Customer

Production Control

Marketing / Sales

Distribution Customer

Materials / Service

Payments

Breaks down silo walls and brings functional areas together in processes such as Sales & Operations Planning (S&OP), CPFR Company wide processes rather than individual functions late 1980s to early 1990s. MRP(1950s) MRPII(1960s) ERP(1990s).

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Supply Chain Management [SCM] 13A

Why Process Integration is needed? To make maximum profit a company must have the following objectives: - Provide best customer service - Provide lowest inventory investment - Provide lowest production costs - Provide lowest distribution costs

These objectives create conflict among marketing, production & finance departments:

Function Marketing

Objective - High revenue - High Product Availability - Low Production Cost - High Level Production - Long Production Run - Low Investment and Cost - Fewer Fixed Costs - Low Inventories High

Implication Customer Service

Low
Production Many Production Disruption

Few
High Inventories Low

Finance

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Supply Chain Management [SCM] 14

Evolution of Supply Chain Management

Stage 4 Extended Enterprise Networked Information Flow

Suppliers Suppliers

Suppliers

Internal Chain

Customers

Customers Customers

Materials / Service

Payments

Integration of internal network with selected SCM partners internal network to improve efficiency, quality of products / services.

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Supply Chain Management [SCM] 18

Creating Value through Supply Chain Management

Financial Value Cost Reduction may be self defeating Gains must be equitably distributed

Customer Value
Quality Affordability Availability

Service
Social value Socially Desired and useful product / service Avoiding or reducing negative environmental side effects of activities such as extraction, processing and construction

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The Objective of a Supply Chain

Sources of supply chain revenue: the customer Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability
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Supply Chain Management [SCM] 10A

Types of Supply Chain

1 Horizontal (lateral) integration The stages of SC [Physical Supply, Manufacturing & Physical] are carried out by different organizations discussed earlier.

2 Vertical Integration
Bringing the SC inside one organization Ford motor company pursued this strategy for their famous model T - car.
Ownership Management Marketing / Sales Finance Show Room Distribution Plant

What Ford practised. Later divested.

Ford Customer

Now horizontal integration

Component Production

is the favoured approach.

Raw material Extraction 1-53

Lateral Integration
To achieve economies of scale and scope To improve business focus and expertise Because its possible

Technology Video Conference Visibility Velocity

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Supply Chain Management [SCM] 19

Importance / Benefits of SCM

To achieve economies of scale and scope Costs are significant

To improve business focus and expertise

Customer Expectations are increasing Supply and Distribution Lines are lengthening with complexity Adds Significant Customer value Customers Increasingly Want Quick & Customised Response

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Supply Chain Management [SCM] 20

Importance / Benefits of SCM

To achieve economies of scale and scope Costs are significant
Internal SC functions lack economies of scale when compared with the potential capacity of an independent provider of the same product / service. Eg: Computer Monitor / Chip / Hard drive Attractive pricing volume leverage.

To improve business focus and expertise

Vertical integration multiplies the complexities of managing disparate businesses. An independent company that focuses entirely on a particular business can develop more expertise than an in-house department
Ford divested their Iron Ore company, Steel Mill etc Higher Quality, Attractive Pricing or both
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Supply Chain Management [SCM] 22

Importance / Benefits of SCM

Customer Expectations are increasing
- Rapid processing of Customer Request - Quick delivery (shorter Order Cycle Time) - High degree of Product Availability

- Lower Prices

Supply and Distribution lines are lengthening with greater complexity - Cut costs and expand markets
- Trend towards an integrated world market - Designing products for world market & producing them wherever raw material, labour, components, overhead etc are lower - Political arrangements : European Union, ASEAN, SAARC etc - Globalization of industries depends on logistic performance and cvosts
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Supply Chain Management [SCM] 23

Importance / Benefits of SCM

Adds significant Customer Value - A product or service is of no value to the customer, if not available
when required
Goods customers want are not produced where they want to consume OR goods are not accessible when customers want to consume Value Form Through Converting raw materials and components to the required Form, Fit & Function Production scheduling & moving Moving & making transportable Responsibility Engineering & Manufacturing

Time Place

Manufacturing & Logistics Engineering & Logistics

Possession

Advertising, Pricing, Technical Support

Marketing, Finance & Engineering

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Supply Chain Management [SCM] 24

Importance / Benefits of SCM

Customers Increasingly want Quick Customised Response
- Customers expect that products / services can be made available in shorter times. Guided by Fast Food, ATM, E-Mail etc. - Improved IS and flexible manufacturing processes have led to mass customisation

- One Size Fit all philosophy is not appreciated always - Manufacturers / Suppliers are offering products that meet individual needs

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Career in Supply Chain Management

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