Supply Chain Management: Introduction

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1 Supply Chain Management: Introduction Donglei Du Faculty of Business Administration, University of New Brunswick, NB Canada Fredericton E3B 9Y2 Donglei Du (UNB) SCM 1 / 44

2 Table of contents I 1 What is supply chain? 2 What is Supply Chain Management (SCM)? Supply chian management 3 What are the difficulties in SCM? The development chain Global Optimization Uncertainty 4 Why do we need supply chain management anyway?! 5 Key Issues in SCM Donglei Du (UNB) SCM 2 / 44

3 Section 1 What is supply chain? Donglei Du (UNB) SCM 3 / 44

4 Supply Chain (SC) A Supply Chain (SC) is a network of organizations their facilities, functions, and activities that are involved, through upstream and downstream linkages in the different processes and activities, in producing and delivering a product or service in the hand of the ultimate consumer. The sequence begins with suppliers of raw materials and extends all the way to the final customer. Each organization on the chain is both a supplier and a demander except the first and the last on the chain. Three flow forms in a SC Material flow: thus also known as logistics chain Information flow: thus also known as information chain Finance flow: thus also know as Value Chain. Donglei Du (UNB) SCM 4 / 44

5 A bird s eye view of a typical SC Transportation Transportation Transportation plants cost warehouses cost retailers cost customers Production/ purchase costs Inventory & warehousing costs Inventory & warehousing costs Material flow Information flow finance flow Donglei Du (UNB) SCM 5 / 44

6 An eagle s eye view at one facility in a SC uptream dow nstream facility uptream Lead Time(l) Yield C apacity ( C ) Cost ( K, c, h, sπ, ) Demand ( ξ ) Contract dow nstream Donglei Du (UNB) SCM 6 / 44

7 Some Supply Chain Examples I A bulldozer supply chain Platfrom Group FenderGroupC hassis/platfrom Track RollerFram e RolloverGroup Fram ea ssem bly Case BrakeGroup Case& Fram e Transm ission CommonSubassenm bly Main A ssem bly Final A ssem bly DriveGroup FinalDrive& Brake PlantCarrier Engine G oggiea ssem bly Dressed-outEngine Suspension Group Fans Pin A ssem bly Source:S.C.Graves and S.P.W ilem s (2003) Donglei Du (UNB) SCM 7 / 44

8 Some Supply Chain Examples II A battery supply chain Packaging A Pack SK U A EastDC A CentralDC A WestDC A EM D PackagingB Pack SK U A EastDC B Spun Zinc CentralDC B Separator WestDC B NailW ire PackagingC Pack SK U A EastDCC Label CentralDCC Otherraw materials BulkBattery M anufacturing Source:S.C.Graves and S.P.W ilem s (2003) WestDCC Donglei Du (UNB) SCM 8 / 44

9 Section 2 What is Supply Chain Management (SCM)? Donglei Du (UNB) SCM 9 / 44

10 Subsection 1 Supply chian management Donglei Du (UNB) SCM 10 / 44

11 Supply Chain Management Supply Chain Management (SCM) is a set of approaches utilized to efficiently integrate organization units suppliers, manufacturers, warehouses and stores along a SC, and coordinate flows material, information and financial flows so that merchandises is produced and distributed at the right quantities to the right locations at the right time In order to optimize system-wide performance satisfy customer service level requirements. Donglei Du (UNB) SCM 11 / 44

12 Section 3 What are the difficulties in SCM? Donglei Du (UNB) SCM 12 / 44

13 What are the difficulties in SCM? I The development chain: Supply chain strategies cannot be determined in isolation. They are directly affected by another chain that most organizations have, the development chain that includes the set of activities associated with new product introduction. Global Optimization: The process of finding the best systemwide strategy is known as global optimization. It is challenging to design and operate a SC so that total systemwide costs are minimized and systemwide service levels are maintained. Uncertainty Management: The process of effectively dealing with uncertainty. It is challenging to eliminate uncertainty from a SC. Uncertainty arises as different forms Donglei Du (UNB) SCM 13 / 44

14 What are the difficulties in SCM? II certainty: no uncertainty risk: known probability distribution strict uncertainty: unknow probability distribution (a.k.a. random) Donglei Du (UNB) SCM 14 / 44

15 Subsection 1 The development chain Donglei Du (UNB) SCM 15 / 44

16 The development chain I The development chain is the set of activities and processes associated with new product introduction. It includes product design phase: product architecture, make/buy decisions, and earlier supplier involvement the associated capacities and knowledge that need to be developed internally: sourcing decisions: supplier selection, supply contracts, and strategic partnerships production plans: Donglei Du (UNB) SCM 16 / 44

17 The development chain II The development and supply chains interact at the production point: Development chain Plan/design Product architecture Make/buy Early supplier involvement Source Strategic partnerships Supplier selection Supply chain contracts Supply Produce Distribute Sell Supply chain Donglei Du (UNB) SCM 17 / 44

18 The development chain III In most organizations, different mangers are responsible for the different activities that are part of the development and supply chains VP of engineering: development chain VP of manufacturing: production portions of the chains VP of supply chain or logistics: fulfillment of customer demands Misalignment of product design and supply chain strategies are typical. To make things worse, additional chains, such as the reverse logistics chain, and spare-parts chain, interact with both the development and the supply chains. Donglei Du (UNB) SCM 18 / 44

19 Subsection 2 Global Optimization Donglei Du (UNB) SCM 19 / 44

20 Global Optimization Why is it different/better than local optimization? Sequential Optimization Procurement Planning Global Optimization Manufacturing Planning Distribution Planning Demand Planning Supply Contracts/Collaboration/Information Systems and DSS Procurement Planning Manufacturing Planning Distribution Planning Source: Duncan McFarlane Demand Planning Donglei Du (UNB) SCM 20 / 44

21 Why is Global Optimization Hard? The supply chain is complex: facilities are dispersed over a large geography, and in many cases, all over the globe (more on next page). Different facilities have conflicting objectives (more later) The supply chain is a dynamic system that evolves over time: not only customer demands and supplier capacities change over time, but supply chain relationships also evolve over time. For example, as customers power increases, there is increased pressure placed on manufacturers and suppliers to produce enormous variety of high-variety of high-quality products and ultimately to produce customized products. Donglei Du (UNB) SCM 21 / 44

22 An example showing the complexities of a supply chain: 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. Competitors: Motorola Inc. Intel Corp. Donglei Du (UNB) SCM 22 / 44

23 What are conflicting supply chain objectives? I Purchasing (supplier) 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 Donglei Du (UNB) SCM 23 / 44

24 What are conflicting supply chain objectives? II Customers Short order lead time High in stock Enormous variety of products Low prices Donglei Du (UNB) SCM 24 / 44

25 What tools and approaches help with global optimization? Everything for optimization (Throughout this course, particularly Chapters 2 and 3)) Strategic Alliances/Supplier Partnerships (Chapter 6) Supply Contracts/Incentive Schemes (Chapter 3) Donglei Du (UNB) SCM 25 / 44

26 Subsection 3 Uncertainty Donglei Du (UNB) SCM 26 / 44

27 Uncertainty I What is variation? What is randomness? Supply Chain Variability Manufacturer Forecast of Sales Volumes Retailer Orders Retailer Warehouse to to Shop Actual Consumer Demand Production Plan Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 Donglei Du (UNB) SCM 27 / 44

28 Uncertainty II What Management Gets... Volumes Cons umer Demand Production Plan Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 Time Donglei Du (UNB) SCM 28 / 44

29 Uncertainty III What Management Wants Volumes Production Plan Cons umer Demand Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 Donglei Du (UNB) SCM 29 / 44

30 Can t Forecasting Help? three golden rules on forecasting Rule 1: Forecasting is always wrong. Rule 2: The longer the forecast horizon, the worse the forecast. Rule 3: Aggregate forecasts are more accurate. Donglei Du (UNB) SCM 30 / 44

31 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 Donglei Du (UNB) SCM 31 / 44

32 What tools and approaches help us to deal with these issues? Decision theory: decision making under uncertainty Pull Systems Risk Pooling Centralization Postponement Strategic Alliances Collaborative Forecasting Donglei Du (UNB) SCM 32 / 44

33 Section 4 Why do we need supply chain management anyway?! Donglei Du (UNB) SCM 33 / 44

34 Why do we need supply chain management anyway?! I Reducing cost is at its full potential already by using strategies such as jist-in-time, lean manufacturing, total quality management, and others before 1990 s. Effective supply chain management is considered to be the next step in increasing profit and market share. In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of gross domestic product). Among them Transportation 58% Inventory 38% Management 4% In 2000, this cost increased to $1 trillion and $6 billion. Donglei Du (UNB) SCM 34 / 44

35 Why do we need supply chain management anyway?! II Third party logistics services grew in 1998 by 15% to nearly $40 billion Unfortunately, this huge investment typically includes many unnecessary cost components in the supply chain due to redundant stock inefficient transportation strategies other wasteful practices For example, it is believed that the grocery industry can save about $30 billion, or 10% of its annuanl operating cost by using more effective supply chain strategies. It takes a typical box of cereal more than three months to get from the factory to a supermarket. Donglei Du (UNB) SCM 35 / 44

36 Why do we need supply chain management anyway?! III It takes a typical new car, on average, 15 days to travel from the factory to the dealership. This should be compared to the actual travel time, which is no more than four to five days. Therefore, many opportunities exist to cut costs in the supply chain. Not supprisingly, a number of companies have been able to substantially increase revenue or decrease costs through effective supply chain managment. We will see a few examples now. Donglei Du (UNB) SCM 36 / 44

37 Examples of effective SCM I Procter & Gamble estimates that it saved retail customers $65 million in a recent 18-moth supply chain initiative. According to Procter & Gamble, the essence of its approach lies in manufacturers and suppliers working closely together by forming strategic partnerships to jointly create business plans to eliminate the source of wasteful practices across the entire supply chain. In two years National Semiconductor reduced distribution costs by 2.5 per cent, decreased delivery time by 47 percent and increased sales by 34 percent by closing six warehouses around the globe and air-freighting microchips to customers from a new centralized distribution center in Singapore. This is achieved by a careful trade-off analysis between inventory and transportation costs, which leads to the centralized warehousing. Donglei Du (UNB) SCM 37 / 44

38 Examples of effective SCM II Home depot Inc s direct shipping: The Home Depot moves about 85% of its merchandises directly from suppliers to stores, avoiding warehouses altogther. In addition, since such a high volume of goods moves through its stores ($44 million in annunal sales on average), the products frequently are shipped in full trucks for addtional savings (econmy of scales). Wal-mark s success: In 1979 Kmart was one of the leading companies in the retail industry, with 1891 stores and average revenue per store of $7.25 million. At that time Wal-mart was a small niche retailer in the South with only 229 stores and average revenues about half of those of Kmart stores. Donglei Du (UNB) SCM 38 / 44

39 Examples of effective SCM III In 10 years Wal-mart had transformed itself; in 1992, it had the highest sales per square foot and highest inventory turnover and operating profit of any discount retailer. Today Wal-mart is the largest and highest-profit retailer in the world. In fact, as of 1999, Wal-mark accounted for nearly 5 percent of US retail spending. How did Wal-mark do it? The starting point was a relentless focus on satisfying customer needs; Wal-marlk s goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. This was done by using a logistics techniques known as cross-docking. Donglei Du (UNB) SCM 39 / 44

40 Examples of effective SCM IV In this strategy, goods are continuously delivered to Wal-mart s warehouses, from where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-mart s cost of sales significantly and made it possible to offer everyday low price to their customers. Donglei Du (UNB) SCM 40 / 44

41 Section 5 Key Issues in SCM Donglei Du (UNB) SCM 41 / 44

42 Key Issues in SCM I Three-level Issues in SCM Strategic Issues Tactical Issues Operating Issues Design of the supply chain, partnering Inventory policies Purchasing policies Production policies Transportation policies Quality policies Quality control Production planning and control Issues span Donglei Du (UNB) SCM 42 / 44

43 Key Issues in SCM II Strategic: Decisions that have long-term effect on the firm, such as the number, the location and capacity of warehouses and manufacturing plants and the flow of the materials through the logistics network. Tactical: decisions that are typically updated anywhere between once every quarter and once every year, such as the purchasing, production, inventory and transportation decisions. Operational: day-to-day decisions such as scheduling, lead time quotations, routing, and truck loading. Donglei Du (UNB) SCM 43 / 44

44 Tradeoffs and issues Distribution Network Configuration Inventory control Supply Contracts Distribution Strategies Integration and Partnerships Procurement Strategies and Outsourcing Product Design Information Technology customer value Global optimization Uncertainty Level Strategic Operational Tactical Tactical Strategic Tactical Tactical Strategic Strategic Donglei Du (UNB) SCM 44 / 44

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