Supply Chain and Logistics Management

IEng4181
 What Is a Supply
Chain?
 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
 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.
 Evolution of supply chain
• Traditionally, firms view themselves as having customers and
suppliers.
• Historically, a firm did not consider the potential for either its supplier
or its customer to become a partner
• Beginning in the 1960s and 1970s firms began to view themselves as
closely linked functions whose joint purpose was to serve their
customers.
 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

The SCM Network
 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
 Supply Chain Management
Supply Chain Management is
the design and management of processes
across organizational boundaries
with the goal of matching supply and demand
in the most cost effective way.

Supply Demand

Mission impossible: Matching Supply and Demand

 Why so Difficult
to Match Supply and Demand?
• Uncertainty in demand and/or supply
• Changing customer requirements
• Decreasing product life cycles
• Fragmentation of supply chain ownership
• Conflicting objectives in the supply chain
• Conflicting objectives even within a single firm
• Marketing/Sales wants: more FGI inventory, fast delivery, many
package types, special wishes/promotions
• Production wants: bigger batch size, depots at factory, latest ship date,
decrease changeovers, stable production plan
• Distribution wants: full truckload, low depot costs, low distribution
costs, small # of SKUs, stable distribution plan
 Logistics

Definition
“Logistics…
plans, implements, and controls the efficient,
effective forward and reverse flow and storage of
goods, services, and related information between the
point of origin and the point of consumption in order
to meet customers' requirements”
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 Logistics vs Supply Chain Management
Council of Logistics Management
• “Logistics is the process of planning, implementing and
controlling the efficient, cost-effective flow and storage of raw
materials, in-process inventory, finished goods and related
information from the point of origin to point of consumption
for the purpose of conforming to customer requirements.”
Handfield and Nichols
• SCM is the integration of all activities associated with the flow
and transformation of goods from raw materials through to
end user, as well as information flows, through improved
supply chain relationships, to achieve a sustainable
competitive advantage.
 Logistics vs. Supply Chain Management
What is the difference?
 
• A Supply chain is the network of:
• facilities (warehouses, factories, terminals, ports, stores, homes)
• vehicles (trucks, trains, planes, ships)
• logistics information systems
  connecting suppliers’ suppliers with its customers’ customers.

• Logistics is:
• “what happens in the supply chain”
• “putting the right material in the right place at the right time“
• it provides much of the Supply Chain’s value-added.

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Evolution, Scope, Importance &
Decision Phases
History of Logistics

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Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.
Phases of Logistics Development
1. Workplace Logistics

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Phases of Logistics Development
1. Workplace Logistics

Definition:
• the flow of material at a single workstation.

Objective:
• to streamline the movements of an individual working at a
machine or assembly line.

Origins:
• Principles developed by fathers of Industrial Engineering
during and after WWII.
• Also known as: Ergonomics.
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Phases of Logistics Development
2. Facility Logistics

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Phases of Logistics Development
2. Facility Logistics
Definition:
• the flow of material between work stations within the four
walls of a facility (interworkstation, intra facility).
• Facility can be a factory, terminal, warehouse, distribution
center (DC).
Origins:
• developed in mass production assembly lines in 1950’s,
60’s and 70’s.

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Phases of Logistics Development
3. Corporate Logistics
(Soda Manufacturer)

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Phases of Logistics Development
3. Corporate Logistics
 Definition:
• the flow of material and information between the facilities
and processes of a corporation. (inter workstation, inter-
facility, intra-corporate).
 
Objective:
• Develop and maintain a profitable customer service policy
while maintaining and reducing total logistics cost.

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Phases of Logistics Development
4. Supply Chain Logistics

Supplier Manufacturer Wholesaler Retailer Customer

Supply chain is optimized when material,

information and money flow simultaneously,
in real time, and paperless.

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Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.
Phases of Logistics Development
5. Global Logistics
 Definition:
• The flow of material, information, and money between
countries.
• Connects suppliers’ suppliers with its customers’ customers
internationally.
• Much more complicated than domestic logistics given the
many languages, laws, currencies, time zones, cultures, etc.

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Phases of Logistics Development
5. Global Logistics
 

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 St
Decision Phases in Supply Chain
ra
te
gy
• Supply Chain &
Strategy & Design D
• Supply Chain es
ig
Planning Planning
n
• Supply Chain
Operations
Operations
 Supply Chain Strategy & Design
• Location & capacity of production and warehouses
• Products to manufactured and in which locations
• Mode of transportation
• Types of information systems to be used
• Strategic sourcing decisions
 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
Global Apparel Value Chain
Tracing back the dress you are wearing
Global Apparel Value Chain
Tracing back the dress you are wearing
Globally Dispersed Manufacturing
An Illustration: How Li & Fung Limited Might Make a Dress

Product Design QC & Shipping

[Hong Kong] [Hong Kong]

Yarn Spinning Weaving Stitching

[Korea] [Taiwan] [Indonesia]

Zippers+…
[Japan+…]
Supply Chain Planning
• Markets to be supplied & from which location
• Planned build-up of inventory
• Subcontracting of manufacturing
• Timing and size of market promotion
• Handling uncertainty in demand, foreign exchange fluctuations
• Establishing production plan under fixed strategic parameters
Supply Chain Operations
• Decisions over individual customer orders (daily, weekly)
• Less uncertainty about demand information
• Exploit reduction of uncertainty to optimize performance
• Establish deliver dates
• Establish order fill rate
Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 Strategic Scope

Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 Drivers of Supply Chain
Performance and Obstacles
Drivers of Supply Chain Performance
How to achieve
Efficiency Responsiveness

Supply chain structure

Logistical
Inventory Transportation Facilities
Drivers

Cross-
Information Sourcing Pricing Functional
Drivers
1. Inventory
• Convenience: Cycle inventory
• No customer buys eggs one by one
• Unstable demand: Seasonal inventory
• Bathing suits
• Xmas toys and computer sales
• Randomness: Safety inventory
• Pipeline inventory
• Work in process or transit
2. Transportation
• Air
• Truck
• Rail
• Ship
• Pipeline
• Electronic
3. Facilities
• Production
• Flexible vs. Dedicated
• Flexibility costs
• Production: Remember BMW: “a sports car disguised as a
sedan”
• Service: Can your instructor teach music as well as SCM?
• Sports: A playmaker who shoots well is rare.

• Inventory-like operations: Receiving, Prepackaging, Storing, Picking,

Packaging, Sorting, Accumulating, Shipping
• Job Lot Storage: Need more space. Reticle storage in fabs.
4. Information
• Role in the supply chain
• The connection between the various stages in the supply chain
• Crucial to daily operation of each stage in a supply chain
• E.g., production scheduling, inventory levels
• Role in the competitive strategy
• Allows supply chain to become more efficient and more responsive at
the same time (reduces the need for a trade-off)
• Information technology
• Andersen Windows
• Wood window manufacturer, whose customers can choose from a
library of 50,000 designs or create their own. Customer orders
automatically sent to the factory.
Characteristics of the Good Information

Strategy Analytical $$$

Models
Information
 Accurate?
 Accessible?
 Up-to-date?
 In the Correct form?
 If not, database restricted ability. How difficult is it to import data into
SAP?
Quality of Information
• Information drives the decisions:
• Good information means good decisions
• IT helps: MRP, ERP, SAP, EDI
• Relevant information?
• How to use information?
 5. Sourcing
• Role in the supply chain
• Set of processes required to purchase goods and services in a supply chain
• Supplier selection, single vs. multiple suppliers, contract negotiation
• Role in the competitive strategy
• Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
• In-house vs. outsource decisions- improving efficiency and responsiveness
• TI: More than half of the revenue spent for sourcing.
• Cisco sources: Low-end products (e.g. home routers) from China.
• Components of sourcing decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process:
• Every department of a firm buy from suppliers independently, or all together.
6. Pricing
• Role in the supply chain
• Pricing determines the amount to charge customers in a supply chain
• Pricing strategies can be used to match demand and supply
• Price elasticity: Do you know yours?
• Role in the competitive strategy
• Use pricing strategies to improve efficiency and responsiveness
• Low price and low product availability; vary prices by response times
• Amazon: Faster delivery is more expensive
• Components of pricing decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing, depending on the product and services
• Packaging, delivery location, time, customer pick up
• Bundling products; products and services
Considerations for Supply Chain Drivers
Major Obstacles to Achieving Fit
• SC is big:
• Variety of products/services
• Spoiled customer
• Multiple owners (Procurement, Production, Inventory, Marketing) / multiple
objectives
• Globalization

Local optimization and lack of

global fit
Major Obstacles to Achieving Fit
• Dealing with Multiple Owners / Local Optimization
• Information Coordination
• Information sharing / Shyness / Legal and ethical issues
• Contractual Coordination
• Mechanisms to align local objectives with global ones
• Coordination with (real) options
• Rare in the practice
• Without coordination, misleading reliance on metrics:
• Average safety inventory, Average incoming shipment size,
Average purchase price of raw materials, Revenue
Major obstacles to achieving fit
• Instability and Randomness:
• Increasing product variety
• Shrinking product life cycles
• Customer fragmentation: Push for customization, segmentation
• Fragmentation of Supply Chain ownership: Globalization

Increasing implied
uncertainty
Common problems
• Lack of relevant SCM metrics: How to measure responsiveness?
• How to measure efficiency, costs, worker performance, etc?
• Poor inventory status information
• Theft: Major problem for furniture retailers.
• Transaction errors: Retailers with inaccurate inventory records
for 65% of SKUs
• Information delays, dated information, incompatible info. systems
• Misplaced inventory: 16% of items cannot be found at a major retailer
• Spoilage: active ingredients in the products are losing their properties
• Product quality and yield
• Lack of visibility in SCs
• Do you know the inventory your distribution centers hold?
• Do you know the inventory your fellow retailer holds?
Common problems
• Poor delivery status information
• Not knowing the order status
• Poor IT design
• Unreliable, duplicate data
• Security problems: too much or too little
• Ignoring uncertainties
• “The flight from uncertainty and ambiguity is so motivated that we often
create pseudocertainty.”
• Nitin Nohra, HBR February 2006 issue, p.40.

• Internal customer discrimination

• Giving lower priority to internal customers than external customers
• Poor integration
• Elusive inventory costs
• Accounting systems do not capture opportunity costs
• SC-insensitive product design
REVERSE LOGISTICS
Definitions
 Logistics (Forward)
“Process of planning, implementing and controlling the efficient, cost-effective flow of
raw materials, in-process inventory, finished goods and related information from the
point of origin to the point of consumption for the purpose of conforming to customer
requirements”
- Council of Logistics, 1988 -

 Reverse Logistics
“Process of planning, implementing and controlling the efficient, cost-effective flow of
raw materials, in-process inventory, finished goods and related information from the
point of consumption to the point of origin for the purpose of recapturing value or
proper disposal”
- Rogers and Tibben-Lembke -
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Reverse Logistics Activities

 Handling of returned merchandise

• Damage
• Seasonal inventory
• Resell via outlet
• Salvage of outdated products
• Stock–balancing returns

 Recycling and reuse

• Material reuse
• Remanufacturing / refurbishing

 Hazardous materials disposition

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The Reverse Logistics Process

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Forward vs. Reverse Logistics

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 STRATEGIC USE OF REVERSE LOGISTICS

• Reverse Logistics as a Strategic Weapon

• Many firms have not yet decided to emphasize reverse logistics as a
strategic variable.

• The handling of reverse logistics challenges is an strategic capability.

Reverse logistics is strategically used to:

 Reduce the risk of buying products that

may not be “hot selling” items.

 Increase the switching costs of changing

suppliers.

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 STRATEGIC USE OF REVERSE LOGISTICS

• Competitive Reasons

• Liberal return policies over the last few years due

of competitive pressures.

• Taking back unwanted products or products

customers believe do not meet needs.

Source: Rogers and Tibben-Lembke, Going Backwards: Reverse Logistics Trends and Practices, 1998
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 STRATEGIC USE OF REVERSE LOGISTICS

• Clean Channel

• Clean out customer inventories, so that they can purchase more new goods.
• Fresher inventories can demand better prices, which in turn, protects margin.

 Recapture Value and Recover Assets

Large portion of bottom-line profits is derived from

asset recovery programs.

Profit derived from materials that were previously

discarded.

 Legal Disposal Issues

o As landfill fees increase, and options for disposal of hazardous material decrease, legally
disposing of non-salvageable materials becomes more difficult.

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 Assignment

REVERSE LOGISTICS CHALLENGES ?

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