Chapter 1
Introduction to
Supply Chain
Management
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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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1.1 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, value-
added 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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SCM Definition
Material Flow
Converter
Supplier Retailer
Distributor
Source
Converter Consumers
Distributor End-User
Supplier
Value-Added Services
Funds/Demand Flow
Information Flow
Reuse/Maintenance/After Sales Service Flow
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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
Multiple levels of activities
Strategic – Tactical – Operational
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Other Related Observations
Supply chain strategy linked to the
Development Chain
Challenging to minimize system costs and
maximize system service levels
Inherent presence of uncertainty and risk
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1.2 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
1-8
1.2 The Development Chain
FIGURE 1-2: The enterprise development and supply chain
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1.3 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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1.4 Uncertainty and Risk Factors
Matching Supply and Demand a Major
Challenge
REASONS EXAMPLES
•Raw material shortages Boeing Aircraft’s inventory write-
•Internal and supplier parts down of $2.6 billion
shortages
•Productivity inefficiencies
•Sales and earnings shortfall Sales at U.S. Surgical Corporation
•Larger than anticipated inventories declined 25 percent, resulting in a
loss of $22 million
•Stiff competition Intel reported a 38 percent decline
•General slowdown in the PC in quarterly profit
market
•Higher than expected orders for EMC Corp. missed its revenue
new products over existing guidance of $2.66 billion for the
products second quarter of 2006 by around
$100 million
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1.4 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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1.4 Uncertainty and Risk
Factors
August 2005 – Hurricane Katrina
P&G coffee supplies from sites around New Orleans
Six month impact
2002 West Coast port strike
Losses of $1B/day
Store stock-outs, factory shutdowns
1999 Taiwan earthquake
Supply interruptions of HP, Dell
2001 India (Gujarat state) earthquake
Supply interruptions for apparel manufacturers
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1.5 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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Supply Chain: The Potential
P&G’s estimated savings to retail customers of $65 million
through logistics gains
Dell Computer’s 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 world’s 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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1.7 Key Issues in Supply Chain
Management
Chain Global Optimization Managing Risk and Uncertainty
Distribution Network Configuration Supply Y
Inventory Control Supply Y
Production Sourcing Supply Y
Supply Contracts Both Y Y
Distribution Strategies Supply Y Y
Strategic Partnering Development Y
Outsourcing and Offshoring Development Y
Product Design Development Y
Information Technology Supply Y Y
Customer Value Both Y Y
Smart Pricing Supply Y
TABLE 1-1: Key supply chain management issues
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