LOGISTICS & SUPPLY CHAIN MANAGEMENT Section 1 Understanding the Supply Chain and its logistics activities C O R R A D O C E R R U T I
What is Logistics? Logistics takes care of the activities and the decisions releted to: Physical flows Information flow from the raw materials suppliers till the customers. Logistics activities are splitted among: inbound logistics plant logistics outbound logistics 2
What is a Supply Chain? Supply Chain includes all the activities involved, directly or indirectly, in fulfilling a customer request (there including also logistics) Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers Within each company, the supply chain interacts with all functions involved in fulfilling a customer request (product development, marketing, operations, distribution, finance, customer service) 3
The Supply Chain 4
What is a Supply Chain? Detergent supply chain at Wal-Mart P&G or other manufacturer Wal-Mart or third party DC Wal-Mart Supermarket Customer wants detergent and goes to Wal-Mart Plastic Producer Tenneco Packaging Chemical manufacturer (e.g. Oil Company) Tier 1 Chemical manufacturer (e.g. Oil Company) Paper Manufacturer Timber Industry Tier 3 Tier 2 5
Metaphors of the Supply Chain The Chain The Network or the Web The Stream The Pipeline 6
The objective of a Supply Chain Maximize overall value created Supply chain value (or supply chain surplus): difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer s request Value is correlated to supply chain profitability (difference between revenue generated from the customer and the overall cost across the supply chain) 7
The objective of a Supply Chain Example: Dell receives 2000 from a customer for a computer (revenue) Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) Difference between 2000 and the sum of all of these costs is the supply chain profit Supply chain profitability is total profit to be shared across all stages of the supply chain Supply chain success should be measured by total supply chain profitability, not profits at an individual stage 8
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 9
The objective of Logistics Maximize overall value created by this function/department by: Minimizing logistics costs Maximizing revenues through an outstanding logistics service Managing the trade-offs between logistics costs and revenues Logistics performance might be a key target for the company or a nice-to-have 10
Decision Phases of a Supply Chain There are three major decision phases in a supply chain, with different time horizons: Supply chain strategy or design (long-term) Supply chain planning (medium-term) Supply chain operation (short-term) 11
Supply Chain Strategy or Design Decisions about the structure of the supply chain and what processes each stage will perform Strategic supply chain decisions Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse must take into account market uncertainty 12
Supply Chain Planning (1) Definition of a set of policies that govern medium and short-term operations (time frame: 12 months down to 3 months) Fixed by the supply configuration from previous phase. Supply chain configuration establishes constraints! Starts with a forecast of demand in the coming year and is deployed over different time horizons from a rough check on the overall capacity and requirements down to specific plans. 13
Supply Chain Planning (2) Planning decisions: Which markets will be supplied from which locations Subcontracting of manufacturing Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon As a result, companies define a set of operating policies that govern short-term operations. 14
Supply Chain Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon) 15
Process View of a Supply Chain Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push) 16
Cycle View of Supply Chains Customer Customer Order Cycle Retailer Replenishment Cycle Distributor Manufacturing Cycle Manufacturer Procurement Cycle Supplier 17
Cycle View of a Supply Chain Each cycle occurs at the interface between two successive stages Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor) Manufacturing cycle (distributor-manufacturer) Procurement cycle (manufacturer-supplier) Cycle view clearly specifies the roles and responsibilities of each member and the desired outcome of each process. 18
Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle PUSH PROCESSES PULL PROCESSES Customer Order Arrives 19
Push/Pull Capitolo I. Il concetto View di strategia of Supply Chain Processes Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand Pull: execution is initiated in response to a customer order (reactive processes). It operates in an uncertain environment (customer demand is not yet known) Push: execution is initiated in anticipation of customer orders (speculative or forecasted processes). Here customer demand is known Push/pull boundary separates push processes from pull processes. It is a firm s choice to select the position of the push/pull boundary The relative proportion of push and pull processes can have an impact on supply chain performance 20
Push/Pull processes for Dell (customized PCs) Customer Order and Manufacturing Cycle Procurement Cycle PULL PROCESSES Customer Order Arrives PUSH PROCESSES Customer Order and Manufacturing Cycle Procurement Cycle 21
The traditional view: Push-oriented Strategies Classical manufacturing supply chain strategy Manufacturing forecasts are long-range Orders from retailers warehouses Longer response time to react to marketplace changes Unable to meet changing demand patterns Supply chain inventory becomes obsolete as demand for certain products disappears Increased variability (Bullwhip effect) leading to: Large inventory safety stocks Larger and more variably sized production batches Unacceptable service levels Inventory obsolescence Inefficient use of production facilities (factories) How is demand determined? Peak? Average? How is transportation capacity determined? Examples: Auto industry, large appliances, others? 22
The modern view: Pull-oriented Strategies Production and distribution are demand-driven Coordinated with true customer demand None or little inventory held Only in response to specific orders Fast information flow mechanisms Point-of-Sale (POS) data Decreased lead times Decreased retailer inventory Decreased variability in the supply chain and especially at manufacturers Decreased manufacturer inventory More efficient use of resources More difficult to take advantage of scale opportunities Examples: Dell, Amazon 23
The Hybrid Solution: Push/Pull Strategies Grant, L'analisi strategica per le decisioni aziendali, Il Mulino, 2011 Hybrid of push and pull strategies to overcome disadvantages of each Early stages of product assembly are done in a push manner Partial assembly of product based on aggregate demand forecasts (which are more accurate than individual product demand forecasts) Uncertainty is reduced so safety stock inventory is lower Final product assembly is done based on customer demand for specific product configurations Supply chain timeline determines push-pull boundary Generic Product Push- Pull Boundary Customized Product Raw Materials Push Strategy Pull Strategy Supply Chain Timeline 24 End Consumer
Achieving an Integrated Supply Chain Stage One: Baseline Material flow Customer service Material Purchasing Production Sales Distribution Control Time Stage Two: Functional Integration Material flow Materials Management Manufacturing Management 25% Customer service Distribution Stage Three: Internal Integration Material flow Materials Management Manufacturing Management MRP Distribution Customer service ERP Stage Four: External Integration Material flow Suppliers Internal Supply Chain Customers Customer service Strategic buffer (Source: Stevens 1989)
Supply Chain Capitolo I. Il concetto Macro di strategia Processes in a Firm Supply chain processes discussed can be classified into three macro categories. Supplier Firm Customer Supplier Relationship Management (SRM) Source Negotiate Buy Design Collaboration Supply Collaboration Internal Supply Chain Management (ISCM) Strategic Planning Demand Planning Supply Planning Fulfillment Field Service Customer Relationship Management (CRM) Market Price Sell Call Center Order Management 26