Business Mantras
Structure Followed
What is Supply chain?
Objective of a supply chain
Supply Chain Management
Bull Whip effect
Drivers of Supply chain performance
Inventory policies
Types of Distribution networks
What is Supply chain?
Supplier Manufacturer Distributor Retailer Customer
Consists of all parties involved,
directly or indirectly, in fulfilling a
customer request
Information
Product
Customer
Funds
Is supply chain so
simple?
Supplier Manufacturer Distributor Retailer Customer
Supplier Manufacturer Distributor Retailer Customer
Supplier Manufacturer Distributor Retailer Customer
Upstream Downstream
Conventional Network
Materials Customer
Vendor Finished Customer
DC Store
DC Goods DC DC
Customer
Component Store
Vendor Manufacturin
DC g Plant Customer Customer
Warehouse DC Store
Components
DC Customer
Vendor Store
DC Finished
Customer
Goods DC
Final DC Customer
Assembly Store
5-6
Why is SCM
Important?
Strategic Advantage – It Can Drive Strategy
* Manufacturing is becoming more efficient
* SCM offers opportunity for or cost reduction (Wal-Mart or
Big Bazaar)
Globalization – It Covers The World
* Requires greater coordination of production and
distribution
* Increased risk of supply chain interruption
* Increases need for robust and flexible supply chains
Why is SCM
Important?
(continued)
At the company level, supply chain
management impacts
* COST – For many products, 20% to 40% of
total product costs are controllable
logistics costs.
* SERVICE – For many products, performance
factors such as inventory
availability and speed of delivery
are critical to customer satisfaction.
Process View
Customer
Customer
Order Cycle Pull
Retailer
Replenishment
Cycle
Distributor
Manufacturing
Cycle
Manufacturer Push
Procurement
Cycle
Supplier
Cycle I
Supplier
Manufacturer
Cycle II
Cycle IV
Customer
Retailer Distributor
Cycle III
Module 1:Supply Chain Managemen
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)
Figure (see previous power point)
Cycle view clearly defines processes involved and
the owners of each process. Specifies the roles
and responsibilities of each member and the
desired outcome of each process.
1-11
Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Push/Pull View of
Supply Chains
Pull processes: execution is
initiated in response to a
customer order
Push processes: execution is
initiated in anticipation of
customer orders
Push/Pull View of
Supply Chains Customer Order
Procurement,
Manufacturing and Cycle
Replenishment cycles
PUSH PROCESSES PULL PROCESSES
Customer
Order Arrives
Push View of SCM
A push-based SCM takes longer to react to the
changing market place
In a push-based supply chain, production decisions
are usually based on long-term forecasts
In push-based strategies, SCM experience
increased transportation costs, high inventory
levels and high manufacturing costs Pull View of SCM
In a pull-based supply chain, manufacturing is demand driven
so that it is coordinated with actual external customer
demand rather than a forecast
Lead-time reduction occurs as the variabilities
are better monitored in pull-based SCM
Pull-based systems are often difficult to implement when lead times
are so long that it is impractical to react to demand information
Module 1:Supply Chain Managemen
Objective of a Supply
Chain
Maximise overall profit
Profit
Revenue generated from customer - costs
incurred along the entire chain
(e.g. manufacturing / storing / distributing
the product)
When is Supply chain effective?
Manage Product, Information and Fund flow
Why not max. individual
profitability? Buy Back
Manufacturer Manufacturer
No risk Cost = Rs. 1 Cost = Rs. 1
Buy Back
Profit Rs. 4000 Sharing Profit Rs. 5520 at Rs. 3
Retailer Retailer
Cost = Rs. 5
of Cost = Rs. 5
Bears Q = 1000 Q = 1200
All risk risks
Profit Rs. 4000 Profit Rs. 5160
Customer Customer
Cost = Rs. 10 Cost = Rs. 10
Demand = 900 Demand = 1080
So, what is SCM?
Objective is to be able to have the right
products in the right quantities (at the
right place) at the right moment at minimal
cost.
Bull Whip Effect
Each organisation seek to solve the problem from
its own perspective
Small changes in consumer demand result in
large variations in orders placed upstream
Dramatic order size variation
Amplification of order size variation as one moves
up the supply chain
Delay 2 weeks Delay 2 weeks Delay 2 weeks
Supplier Manufacturer Distributor Retailer Customer
Orders 40 Orders 25 Orders 15 Buys 10
The Dynamics of the Supply
Chain
Order Size
Customer
Demand
Retailer
Retailer Orders
Orders
Distributor
Distributor Orders
Orders
Production
ProductionPlan
Plan
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
The Bullwhip Effect
and its Impact on the Supply
Chain
Consider the order pattern of a single
color television model sold by a large
electronics manufacturer to one of its
accounts, a national retailer.
Figure 1. Order
Stream
Huang at el. (1996), Working Paper, Philips Lab
Higher Variability in Orders Placed by
Computer Retailer to Manufacturer Than
Actual Sales
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
Increasing Variability of
Orders
Up the Supply Chain
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
Causes
Little or no communication between supply
chain partners.
Delay times between order processing,
demand, and receipt of products.
Over reacting to the backlog orders.
Inaccurate demand forecasts.
[Link]
Drivers determine supply chain
performance. For each driver,
managers must make tradeoffs
between efficiency (cost) and
responsiveness.
Considerations for Supply Chain
Drivers
Driver Efficiency Responsiveness
(Cost)
Inventory Cost of holding Availability
Transportation Consolidation Speed
Facilities Consolidation / Proximity / Flexibility
Dedicated
Information Low cost / slow High cost / streamlined
/ reliable
Responsiveness
High
Low
Cost
High Low
Drivers of Supply Chain Performance
Inventory
Transportation
Facilities
Information
Halliburton in Iraq
Facilities
Places within the supply chain where inventory is
stored, assembled, or fabricated. Decisions on
location, capacity, and flexibility of facilities have
a significant impact on performance.
Service and Number of
Facilities
Response
Time
Number of Facilities
Costs and Number of
Facilities
Inventory
Facility costs
Costs
Transportation
Number of facilities
Variation in Logistics Costs and Response
Time with Number of Facilities (Fig. 4.5)
Response Time
Total Logistics Costs
Number of Facilities
Cost Build-up as a function of facilities
Total Costs
Percent Service
Cost of Operations
Level Within
Promised Time
Facilities
Inventory
Transportatio
nLabor
Number of Facilities
Facilities Impact
Facilities either store inventory between supply
chain stages (warehouses, distribution centers,
retailers) or transform inventory into another
state (fabrication or assembly plants).
Centralization of facilities uses economies of scale to increase supply chain
efficiency (fewer locations and less inventory) usually at the expense of
responsiveness (distance from customer).
Facility Decisions
Location. Centralize to gain economies of scale
or decentralize to be more responsive. Other
issues include quality and cost of workers, cost of
facility, infrastructure, taxes, quality of life, etc.
Capacity. Excess capacity allows a company to be more responsive to
changes in the level of demand, but at the expensive of efficiency.
Facility Decisions
Manufacturing Methodology. Decisions between a product
or functional focus, between flexible or dedicated capacity.
Warehousing Methodology. Chose between SKU storage (stores all of
one type of product together), Job lot storage (stores different products
together to satisfy a particular customer or job), or cross-docking.
Inventory
All of the raw materials, work in process (WIP), and finished goods within
the supply chain. Inventory policies can dramatically alter a supply chain’s
efficiency and responsiveness.
Why hold inventory?
Unexpected changes in customer demand
(always hard to predict, and uncertainty is
growing)
Short product life cycles
Product proliferation
Why hold inventory?
Uncertain supply
Quantity
Quality
Costs
Delivery time
Why hold inventory?
What if there was no uncertainty in supply or
demand—would it still be necessary to hold
inventory?
Inventory’s Impact
Inventory can increase amount of demand that
can be met by increasing product availability.
Inventory can reduce costs by exploiting economies of scale in production,
transportation, and purchasing.
Inventory can be used to support a firm’s competitive strategy. More inventory
increases responsiveness, less inventory increases efficiency (reduces cost).
Inventory’s Impact
Inventory can significantly affect material
flow/cycle/ throughput time.
Little’s law: Inventory = flow time x throughput rate.
In other words: If you move your inventory faster, you don’t need as much
inventory (inventory velocity)
Decisions
When to order
How much to order
Types of System
Continuous Review
Periodic Review
Transportation
Modes and routes for moving inventory
throughout the supply chain.
Transportation’s Impact
Faster transportation allows a supply chain to be
more responsive but generally less efficient.
Less than full truckloads allows a supply chain to be more responsive but
generally less efficient.
Transportation can be used to support a firm’s competitive strategy. Customers
may demand and be willing to pay for a high level of responsiveness.
Transportation Decisions
Mode of transportation is the manner in which
a product is moved (air, truck, rail, ship, pipeline,
electronic). Each mode differs with respect to
speed, size of shipments, cost, and flexibility.
Routes are paths along which a product can be shipped.
In house or outsource the transportation function. Many companies
use third-party logistics providers (3PL) to perform some or all of their
transportation activities
Total
costs
Transportation
Cost
Transport
costs
Inventory
costs
Rail Air
Information
Data and analysis regarding inventory,
transportation, facilities, and customers
throughout the supply chain. It is potentially the
biggest driver since it affects all the other drivers.
Information’s Role
Information connects various supply chain stages and
allows them to coordinate activities.
Information is crucial to the daily operations of each
stage of the supply chain.
An information system can enable a firm to get a high
variety of customized products to customers rapidly
An information system can enable a firm to understand
changing consumer needs more quickly
Information Decision
Components
Push versus Pull. Push systems (like MRP) need
information on anticipated demand to create production and
purchasing schedules. Pull system (like JIT) need accurate
and quick information on actual demand to move inventory
and schedule production in the chain.
Coordination and Information Sharing. How will the goal of
maximizing supply chain profitability be achieved through the coordination
of activities and sharing of appropriate information?
Information Decision
Components
Forecasting and Aggregate Planning. How will future demand and
market conditions be forecast, and to what extent will collaborative
forecasting be used? How will aggregate planning be used to meet
forecasted demand and to what extent will it be shared throughout the
supply chain?
Enabling Technologies. Which information technologies will be
used and integrated throughout the supply chain? electronic data
interchange (EDI), the Internet, enterprise resource planning
(ERP) systems, supply chain management (SCM) software.
Common Problesm
Lack of SCM metrics :How do we measure
responsiveness?
Poor IT design
Poor delivery status information
Ignoring uncertainties
Internal customer discrimination
Poor integration
Elusive inventory costs
SC-insensitive product design
Decisions
When to order
How much to order
Types of System
Continuous Review
Periodic Review
Information Sources
[Link]
[Link] .. Open Courseware
[Link]
The Goal
Eliyahu M. Goldratt
Kelkar library
POM/SCM
THE NEW BCLUB WEBSITE
[Link]
EOQ: A View of Inventory
Note:
• No Stockouts
• Order when no inventory
• Order Size determines policy
Inventory
Order
Size
Time
EOQ - Cost Minimization Goal
The Total-Cost Curve is U-Shaped
Annual Cost
Holding Costs
Ordering Costs
Order Quantity
QO (optimal order quantity)
or EOQ (Q)
EOQ: Important
Observations
Tradeoff between set-up costs and
holding costs when determining order
quantity.
Total Cost is not particularly sensitive
Order Quantity 50%
80% 90% 100% 110% 120% 150% 200%
to the optimal order quantity
Cost Increase 125% 103% 101% 100% 101% 102% 108% 125%
Types of System –
Continuous Review
Continuously monitored
R – Reorder point, L – Lead time
Q – Order quantity
Time b/w orders vary but Q is fixed
Periodic Review
Monitored at periodic intervals of length “r”
Quantity set as the amount consumed during
this interval
Time b/w orders fixed
Distribution
Steps taken to move and store a product from
supplier to customer
Design Options
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and
in-transit merge
Distributor storage with package carrier
delivery
Manufacturer storage with direct
shipping
Manufacturer
Retailer
Customers
Drop Shipping
Manufacturer storage with direct
shipping and in-transit merge
Manufacturer
Retailer In-transit Merge by carriers
Customers
Distributor storage with carrier
delivery
Manufacturer
Warehouse Storage by
Distributor/Retailer
Customers
To Summarize
Components of supply chain (SC)
Objective of SC is to max. profit
Bull whip effect
Facilities decisions
Inventory policies
Distribution networks
Information Sources
[Link]
[Link] .. Open Courseware
[Link]
The Goal
Eliyahu M. Goldratt
Kelkar library
POM/SCM
THE NEW BCLUB WEBSITE
[Link]