Introduction to

Supply Chain Management

Professor Guojun Ji
University of Washington, GTTL

1
 Motivation of Supply Chain
Evolution
 Short life cycle
 heightened expectations of customers

 advances in communication and

transportation technologies
mobile communication
overnight delivery

2
 Supply Chain Components
 Suppliers
 Manufacturing centers

 Warehouses

 Distribution centers

 Retail outlets

 Raw material

 Work-in-Process inventory

 Finished products

3
Logistics Network Field
Customers,
demand
centers
Sources: Regional Warehouses:
plants Warehouses: stocking sinks
vendors stocking points
ports points

Supply

Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
 Network Design

The Key Issues:

1. Number of warehouses

2. Location of each warehouse

3. Size of each warehouse

4. Allocation of products to the different warehouses

5. Allocation space for products in each warehouses

6. Allocation of customers to each warehouse 5

 Network Design
The objective is to balance service level subject to:
 Production/ purchasing costs
 Inventory holding costs
 Facility costs (storage, handling and fixed costs)
 Transportation costs (different transportation mode)
That is, we would like to find a minimal-annual-cost
configuration of the distribution network that satisfies
product demands at specified customer service levels.

6
 The More Warehouse, the more ...
 Improvement in service level
 inventory costs due to increased safety stock

 overhead and setup costs

 reduction in outbound transportation costs

(from warehouses to customers)
 inbound transportation costs (from plants to
warehouses)
7
 Inventory (1/2)
 Where do we hold inventory?
Suppliers and manufacturers
warehouses and distribution centers
retailers
 Types of Inventory
WIP
raw materials
finished goods
8
 Inventory (2/2)
 Why do we hold inventory?
Uncertainty in customer demand
 short life cycle implies that historical data may not be
available
 many competing products in the marketplace

Uncertainty in quantity and quality of the supply,

supplier costs, and delivery times
Economies of scale offered by transportation
companies
9
Supply Chain Management
 Definition:
Supply Chain Management is primarily concerned with the efficient
integration of suppliers, factories, warehouses and stores so that
merchandise is produced and distributed in the right quantities, to
the right locations and at the right time, and so as to minimize total
system cost subject to satisfying service level requirements.
 Notice:
 Everyone is involved
 Systems approach to reducing costs
 Integration is the key

10
 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 11
 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
12
 The Effect of
Demand Uncertainty (1/2)
 Most companies treat the world as if it were
predictable:
Production and inventory planning are based on
forecasts of demand made far in advance of the
selling season
Companies are aware of demand uncertainty when
they create a forecast, but they design their planning
process as if the forecast truly represents reality

13
 The Effect of
Demand Uncertainty (1/2)
 Recent technological advances have
increased the level of demand uncertainty:
Short product life cycles
Increasing product variety
 The three principles of all forecasting techniques:

 Forecasting is always wrong

 The longer the forecast horizon the worst is the forecast
 Aggregate forecasts are more accurate
14
 Risk Pooling
 Consider these two systems:
Warehouse One Market One
Supplier
Warehouse Two Market Two

LT = 1 week
Market One
Supplier Warehouse

Market Two 15
1500 products, 10000 accounts
 Risk Pooling
 For the same service level, which system will
require more inventory? Why?
 For the same total inventory level, which system
will have better service? Why?
 What are the factors that affect these answers?

16
 The Dynamics of the Supply Chain
Order Size

Customer
Customer
Demand
Demand

Retailer
RetailerOrders
Orders
Distributor
Distributor Orders
Orders

Production
ProductionPlan
Plan

Time
17
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 What Management Gets...
Order Size

Customer
Customer
Demand
Demand

Production
ProductionPlan
Plan

Time
18
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 What Management Wants…
Volumes

Production
ProductionPlan
Plan
Customer
Customer
Demand
Demand

Time
19
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
The Bullwhip Effect

2
Var (Q ) 2L 2L
 1  2
Var ( D) P P

20
 The bullwhip effect is an extreme change in the supply
position upstream generated by a small change or no
change in customer demand. Inventory can shift quickly
from being highly backordered to being excess.
 Observations show that the variation of inventory and order
quantities increases up the supply chain from customer to
supplier. In addition, the longer the lead times of goods,
date, and control flow are, the stronger the bullwhip effect
is. Figure [Link] shows this effect.

21
 A famous example, analyzed and published by
Procter&Gamble, is demand for Pampers disposal diapers.
The bullwhip effect is caused mainly by information
processing obstacles in the logistics network; the obstacles
are information time lag and distortion (by the actual
orders). An appropriate countermeasure is adapting
manufacturing lead times (see here [Solo03]), based on
rapid information exchange on consumption, or demand,
by point-of-sale scanning.

22
 Var(q)/Var(D):
For Various Lead Times
14
L=5
12

10

8 L=3
6

4 L=1
L=1
2

0
0 5 10 15 20 25 30
23
 The Dynamic Supply Chain
 Increasing customer power leads to
increased demands on retailers
 Increased retailer power leads to increased
demands on suppliers

24
 Example 1
 A Korean manufacturer of electrical
products is facing:
70% service level
4 turnover rate
 Leading electronic companies:
9 turnover rate

25
 Supply Chain:
The Magnitude
 In 1998, American companies spent $898
billion in supply-related activities (or 10.6% of
Gross Domestic Product).
 Transportation 58%
 Inventory 38%
 Management 4%
 Third party logistics services grew in 1998 by
15% to nearly $40 billion
26
 Supply Chain:
The Magnitude
 Compaq computer estimates it lost $500 million to $1
billion in sales in 1995 because its laptops and desktops
were not available when and where customers were
ready to buy them.
 In 1993, IBM lost a major fraction of its potential sales of
desktop computers because it could not purchase
enough chips that control the computer displays.

27
 Supply Chain:
The Potential

 Procter & Gamble estimates that it saved retail customers

$65 million through logistics gains over the past 18 months.

“According to P&G, the essence of its approach lies in

manufacturers and suppliers working closely together ….
jointly creating business plans to eliminate the source of
wasteful practices across the entire supply chain”. (Journal of
Business Strategy, Oct./Nov. 1997)

28
 Supply Chain:
The 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
29
– 5% are delivered within 90 days.
 Supply Chain:
The Complexity
1. Supply Chain Integration (network)
• Conflicting Objectives
• The Dynamics of the Supply Chain
2. Matching Supply and Demand
3. System Variations over Time (parameters)
4. Status of Logistics Knowledge
• Many problems are new
• Incomplete understanding of issues
• Methodology is rather narrow
• No historical data available
30
 Example 2
 National semiconductor:
one of the world’s largest chipmakers
short lead time
In 1994, 95% demands received within 45
days, the remaining 5% received within 90
days
12 different airline carriers
20,000 different routes
Who will be in the lucky 5%?
31
 ISSUES:
Decision Classification
 Strategic Planning:
Decisions that typically involve major capital investments
and have a long-term effect.
1. Determination of the number, size and location of new
plants, distribution centers and warehouses
2. Acquisition of new production equipment and the design
of working centers within each plant
3. Design of transportation facilities, communications
equipment, data processing means, etc.
32
 ISSUES:
Decision Classification
 Tactical Planning:
Effective allocation of manufacturing and distribution
resources over a period of several months
1. Purchasing and production decisions
2. Work-force size
3. Inventory policies
4. Definition of the distribution channels
5. Selection of transportation and trans-shipment alternatives
33
 ISSUES:
Decision Classification
 Operational Control:
Includes day-to-day operational decisions

1. The assignment of customer orders to individual

machines

2. Dispatching, expediting and processing orders

3. Vehicle scheduling, routing

34
 ISSUES:
Distribution Strategies
 The structure of the distribution network
 The distribution strategy
 The Classical Strategy

 Cross Docking (Wal-Mart)

 Direct Shipping

 merge-in-transit

35
 Integration and Strategic
Partnering
 Successful Keys:
Information sharing
Operational planning
 What information should be shared?
 How should it be used?

36
 Advantages of Alliance (1/2)
 Adding value to product
Improve time to market, distribution times, repair times,
complementary product lines
 Improving market access
better advertising
new market channels
 Strengthening operations
complementary seasonal products

37
 Advantages of Alliance (2/2)
 Adding technological strength
 Enhancing strategic growth: overcome barriers

 Enhancing organizational skills: organization

learning
 Building financial strength
shared administrative costs
reduced owing to the expertise
risk sharing

38
 Disadvantages of Alliance
 IBM entered the PC market in 1981.
 Outsourcing:
CPU: Intel
OS: Microsoft
 Market share:
1985: 40%
1995: 8%; Compaq: 10%
39
 Types of Strategic Alliances
 Third-Party Logistics (3PL)
 Retailer-Supplier Partnerships (RSP)

 Distributor Integration (DI)

40
 Types of Retailer-Supplier
Partnerships (RSP)
Quick Response: Vendors receive POS
data from retailers, and use this
information to synchronize production
and inventory activities at the supplier.
In this strategy, the retailer still prepares
individual orders, but the POS data is
used by the supplier to improve
forecasting and scheduling.
41
 Types of Retailer-Supplier
Partnerships (RSP)
 Continuous Replenishment (rapid
replenishment): Vendors receive POS
data and use it prepare shipments at
previously agreed upon intervals to
maintain agreed to levels of inventory.
Wal-Mart, Kmart

42
 Types of Retailer-Supplier
Partnerships (RSP)
 Advanced Continuous Replenishment:
Suppliers may gradually decrease inventory
levels at the retailer’s store or distribution
center as long as service levels are met.
Inventory levels are thus continuously
improved in a structured way.
Kmart

43
 Types of Retailer-Supplier
Partnerships (RSP)
 Vendor Managed Inventory (VMI) (Vendor
Managed Replenishment, VMR) :
The supplier decide on the appropriate
inventory levels of each products and the
appropriate inventory policies.
The goal of VME is to eliminate retailers’ orders.
 VMI Projects at Dillard Department Stores, J.C.
Penney, and Wal-Mart have shown sales
increases of 20 to 25 percent, and 30 percent
inventory turnover improvements.
44
 Increasing Globalization
 1/5 of output of US firms produced abroad
 US Companies hold $500 Billion in foreign
asset stocks (7% annual growth)
 1/4 of US imports between foreign affiliates
and US parent companies
 Over half of US companies increased the
number of countries in which they operate
(late 80’s to early 90’s)

45
Taxonomy of International Supply
Chains (1/2)
 International distribution:
domestic: manufacturing
overseas: marketing
 International suppliers:
domestic: final assembly
overseas: raw materials, components,
marketing

46
Taxonomy of International Supply
Chains (2/2)
 Off-shore manufacturing
domestic: warehouses, marketing
overseas: manufacturing
 Fully integrated global supply chain
product are produced, manufactured, and distributed
from various facilities located throughout the world
supply chain was designed without regard to
national boundaries
47
 Forces Driving Globalization
 Global Market Forces
 Technological Forces

 Global Cost Forces

 Political and Economic Forces

48
 Global Market Forces
 Foreign competition in local markets
pressures by foreign competitors
opportunities by foreign customers
 Growth in foreign demand
 Global presence as a defensive tool
Nestle’s and Kellogg’s
 Global proliferation of information:
overnight mail, internet
 Presence in state-of-the-art markets
Japan -- consumer electronics
Germany -- machine tools
US: software

49
 Technological Forces
 Diffusion of knowledge
Many high tech components developed overseas
Need close relationships with foreign suppliers
 Gain access to technology or markets:
joint location collaborations
 Global location of R&D facilities
Close to production (as cycles get shorter)
Close to expertise (Indian programmers?)

50
 Global Cost Forces
 Low unskilled labor cost
Diminishing importance (offset by operating
facilities costs in remote locationas)
 Other cost priorities
Integrated supplier infrastructure
Skilled labor
 Capital intensive facilities
government actions: tax breaks, cost sharing
joint ventures
51
price breaks
 Political and Economic Forces
(1/2)
 Exchange rate fluctuations and operating flexibility
 Regional trade agreements (Europe, North
America, Pacific Rim)
 Value of being in a country in one of these regions
 Implications for supply network design
 Reevaluation of foreign facilities (Production processes
designed to avoid tariffs)

52
 Political and Economic Forces
(2/2)
 Trade protection mechanisms
Tariffs (finished goods)
Quotas
Voluntary export restrictions: Lexus, Infiniti
Local content requirements
 TI/Intel factories in Europe
 Japanese automakers in the EU
Health/environmental regulations
 Japanese refused to import US skis (different snow)
Government procurement policies
 Up to 50% advantage for American companies on US 53
Defense contracts
 Issues In Global SCM
 Regional vs. International Products
 regional-specific products: cars
 true global products: Coca-cola, McDonald
 Local Autonomy vs. Central Control
 Short term expectations
 Miscellaneous dangers
 harder to administer offshore facilities
 cheap labor masks the low productivity
 collaborators become competitors

54
Regional Differences in Logistics
(1/2)
 Culture differences:
beliefs and values
customs
languages
 Infrastructure
highway systems, ports, communication and
information systems
road widths, bridge heights, communication protocols
geography distances

55
Regional Differences in Logistics
(2/2)
 Performance expectation and evaluation:
formal partnership contract
operating standards
 Information system availability:
POS, automation tools, PC, EDI
 Human resources:
managerial personnel
technical personnel
unskilled labors

56
 Design For Logistics
 Design for Logistics uses product design
to address logistics costs
 Key Concepts of Design for Logistics
Economic packaging and transportation
Concurrent/Parallel Processing
Postponement

57
 Economic Transportation,
Storage, and Transportation
 Design products so that they can be
efficiently packed and stored
 Packed more compactly

 Design products to efficiently utilize retail

space
 Design packaging so that products can be
consolidated at cross docking points
58
 Examples
 Ikea
World’s largest furniture retailer
131 stores in 21 countries
Large stores, centralized manufacturing, compactly
and efficiently packed products
 Rubbermaid
Clear Classic food containers - designed to fit
14x14” Wal-Mart shelves
59
Concurrent / Parallel Processing
 Objective is to minimize manufacturing lead
times
 Achieved by redesigning products so that several
manufacturing steps can take place in parallel
 Modularity/Decoupling is key to implementation

 Enables different inventory levels for different

parts

60
The Network Printer Example
Board Printer
Customer
Stage 1
(Europe)
(Europe) Stage 2
Integration (Far East)

Stage 1
(Europe) Board
Printer
Stage 2 Customer
(Far East) (Europe)

Integration (Europe)
Plastics, 61
motors, etc.
 Traditional Manufacturing
 Set schedules as early as possible
 Use large lot sizes to make efficient use of
equipment and minimize costs
 Large centralized facilities take advantage of
economies of scale

62
 It is hard to be flexible when...
 Lead times are long
 Retailers are committed to purchasing early
orders
 Purchasing plans for raw materials are
based upon extrapolating from 10% of the
orders

63
 Postponement
 Manufacturing process starts by making a
generic or family product which is later
differentiated into a specific end product.
 Concepts of implementing delayed
differentiation:
 resequencing
 commonality
 modularity
 standardization

64
 Resequencing: Benetton
Old Manufacturing Process
Spin or Purchase Yarn

Dye Yarn

Finish Yarn

Manufacture Garment Parts

Join Parts 65
 Resequencing: Benetton
New Manufacturing Process
Spin or Purchase Yarn

Manufacture Garment Parts

Join Parts

Dye Garment This step is postponed

Finish Garment 66
 Benetton Postponement
 Why the change?
 The change enables Benetton to start manufacturing before color
choices are made
 What does the change result in?
 Delayed forecasts of specific colors
 Still use aggregate forecasts to start manufacturing early
 React to customer demand and suggestions
 Issues with postponement
 Costs are 10% higher for manufacturing
 New processes had to be developed
 New equipment had to be purchased

67
 Postponement: Key Concepts
 Delay differentiation of products in the same family
as late as possible
 Enables the use of aggregate forecasts

 Enables the delay of detailed forecasts

 Reduces scrapped or obsolete inventory,

increases customer service
 May require new processes or product design with
associated costs
68
 Information Technology
 Competitive advantage through advanced IT
Banking
Retail (Wal-Mart - satellite connected IT)
Airlines (American Airlines Reservation System,
Sabre)
Trucking and Shipping (FedEx - tracking)

69
 Goals of IT in SCM (1/3)
 Collect and store information on each
product from production to
delivery/purchase point
Provide complete visibility
Tracking
Alerting

70
 Goals of IT in SCM (2/3)
 Access any data in the system from a
single point of contact. This is complicated
by the fact that one may need information
which resides
in various locations within one company
in different companies

71
 Goals of IT in SCM (3/3)
 Analyze and plan activities based on total
supply chain information.

Decision Support Systems

Advanced Planning Systems

72
 How are these Goals
Achieved?
1. Standardization
2. Infrastructure
3. Electronic Commerce
4. Supply Chain System Components
5. Integration-related issues

73
 1. Standardization
 various forces are making this happen
market forces
interconnectivity
reduced costs in software
Internet-based standards
economies of scale
 Examples: email, EDI

74
 ERP System Providers
 SAP
 Oracle

 J.D. Edwards

 PeopleSoft

 Baan

75
 2. Infrastructure
 The software and hardware around which the IT
system is built
 Components include
hardware interface/presentation devices: PC, voice mail,
terminals, Internet devices, PDAs
 anywhere, anytime
 graphical display
 Wintel standards vs. Java standards
communicatons: email, EDI, groupware, location
tracking

76
 3. Electronic Commerce
 The replacement of physical processes with
electronic ones
 The creation of new models for collaboration
between customers and suppliers
 Examples include:

77
 Taxonomy:
level 1: one-way communication: email, FTP,
browser
level 2: database access: inquireies, forms,
purchasing, tracking
level 3: data exchange: EDI, clearinghouse
level 4: sharing processes: CRPT, business
communities, VCI
78
 4. Supply Chain Component
DSS for Supply Chain Processes:
 Demand planning tools

 Supply Chain Design

 Production planning

 Distribution planning

 Transportation planning

79
 5. Integrating Supply Chain IT
 Manugistics’s Supply Chain Compass Model:
Stage I: Fundamentals - focus on quality
Stage II: Cross-functional teams - serve customers
Stage III: Integrated Enterprise - drive business
efficiency
Stage IV: Extended supply chain - create market
value
Stage V: Supply chain communities: be a market
leader

80
 ISSUES:
What’s New in Logistics?
 Global competition
 Shorter product life cycle
 Increasing product variety
 New, low-cost distribution channels
 More powerful well-informed customers 81
 ISSUES: What’s New in
Logistics?
 New communications and information
technologies POS and EDI technology
Wireless technology
 Decision Support Systems
 Integrated systems
 Multi-modal transportation
82
 ISSUES: What’s New in
Logistics?
 New concepts in logistics
Push Vs Pull strategies

Cross docking

Strategic alliances

Manufacturing postponement

Design for Logistics

83