4.8 Supply Chain Management

1. 4.8 Supply Chain Management My Perspective Don Shannon Designated Master Logistician

2. Intro • Supply Chain Management is NOT something new .. Rather it is a refinement of processes that have existed for years • Many credit it with being an extension of the “Toyota” Kaisan(continuous improvement) process • SCM restructures the traditional logistics organization and focuses on incremental improvements in each area • Reduced inventory costs • More responsive processing time • Also includes Japanese preference for relationship-based business arrangements.

3. WHY Supply Chain Management

4. First Came Logistics • Logistics is the art and science of management, engineering and technical activities concerned with requirements, design and supplying, maintaining resources to support objectives, plans and operation • Or … Ensuring the correct • Items in the correct • Quantities in the correct • Condition in the correct • Location at the correct • Time

5. Traditional (Lifecycle) Logistics • Logistics Engineering • Reliability and maintainability analysis • Failure mode analysis (FMECA) • Mean time to failure (MTTF) • Mean time to repair (MTTR) • Spares requirements • Personnel requirements (including training) • Maintenance philosophy • Warehousing and Distribution • Transportation • Packaging and preservation • Maintenance and repair • Servicing • Inspection • Lubrication • Organizational, intermediate, and depot support • Demilitarizing and disposition

6. Then Came SCM • Supply chain management is the intersection (integration) of: • Logistics • Purchasing • Business Management • The Goal: optimize the supply chain • Reduced costs • Better customer satisfaction • More efficient use of resources

7. SCM is …. • 1. Supply chain -- a set of three of more entities (organizations or individuals) involved in the upstream and downstream flows of products, services, finances, and/or information from a source to a customer. • 2. Supply chain management -- the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. SOLEtech December 2001 Volume 4.12Newsletter Published By SOLE - The International Society Of Logistics 8100 Professional Place, Suite 211, Hyattsville, MD 20785

8. Formal Definition • Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. 1 1. Council of Supply Chain Management Professionals – Official Website

9. Supply Chain Management and Logistics • SCM overlaps / integrates the traditional Logistics functions of • Estimating Demand • Warehousing • Distribution • Transportation

10. SCM Innovations • SCM seeks to leverage data systems and transportation networks to: • Increase probability of items being in stock when needed • Inventories are kept at reasonable (economical) levels

11. SCM Innovations (cont) • SCM also seeks to streamline the procurement function • Reduce procurement lead-time • Obtain reasonable but not always the lowest price • Establish relationships with key suppliers and Business Partners

12. Inventory Management

13. Inventory is (Dead) Money • Material in inventory is money that could be used elsewhere • Business goal is to maintain minimum investment in stock level • Accurate prediction of use • Dependable replenishment time • Identification of “must have” vs “nice to have” items • Awareness of inventory holding costs • Business impact if out-of-stock

14. The (Traditional) Inventory Cycle • Demand Estimation • Order Placement • Order Processing • Shipment • Receipt • Physical Receipt • Inspection • Placement into Inventory • Inventory (Stock) Management • Inventory level • Operating Stock • Safety Stock • Emergency Stock • Re-order points

15. Inventory Cycle • Cycle Stock – (operating inventory) is consumed and replenished on a recurring basis • Consumption is tracked by various means • Sales Orders • Point of Sale • Stock levels are replenished as needed • Re-order point • Economic order quantity • Inventory is periodically counted to verify levels • Annual inventory • Cycle count (1/52 of stock counted each week) • Levels are adjusted based on physical inventory

16. How SCM Improved the Ordering Process • Demand Forecast & Tracking • Integrated with Enterprise Data Systems • J.D Edwards / SAP (Manufacturing) • Point of Sale systems (Retail) • Bill of Material Take-Off • Sales Projections • On-line vs. manual systems • Instantaneous entry into order processing system • Instant credit / payment info • Instant knowledge of availability • Requirements often determined by automated re-order system • Order sent direct to warehouse • Pick and pack • Integrated with shipping system • No manual preparation of shipping documents • Shipping method pre-determined

17. SCM Improvements (Con’t) • Order tracking • During order processing • Back-order status • Shipping status • Delivery status • Receiving • Typically no receiving inspection required • Inspected at source • Certificate of conformance • Stock Management • Every item is bar coded or RF Tagged • Inventory is updated when item placed in stock or removed for use. • Stock is centralized or distributed (or both) to optimize use

18. SCM Purchasing Enhancements • Better definition of requirements through automated inventory • Point of sale updates • Automated re-order points • Central management of stock levels possible • RFID and extensive use of barcodes • On-line purchasing • Reverse auctions • Zone Contracting

19. Inventory Terms • Stock Level • Cycle Stock (Normal operations) • Safety Stock (Minimum) • Critical Stock • Emergency Stock • Inventory Turn-over (Cycle time) • Economic order quantity • Just-in-Time • Holding Costs • Obsolescence • Physical storage • Capital costs • Distributed Inventory • Held at point of use • Principally used in manufacturing or service environment • Bench stock

20. Common Warehousing Terms • Stock-out • Back-Order • Cross-Docking • Bill of Lading • Expediting • Forward Procurement • Certificate of Conformance

21. Inventory Management • Two dominant models of inventory management • Push – upstream source sends periodic shipments based on anticipated usage • Pull – Upstream source sends specific items in response to consumption

22. Push vs. Pull Inventory System • Push System • Simple to set-up and administer • Optimal use of (infrequent) transportation • Based on predictions of sales or consumption • Can result in too many of the wrong items in stock with too few of those items needed • Pull System • Needs data system to track and report consumption • More frequent (small) shipments • Reduced inventory level at downstream • Still have risk of stock-out (Backorder)

23. Relationship Based Business Agreements

24. Purchase Agreements • Purchasing agreements with key suppliers • Exclusive • Preferred suppliers list • Win-Win strategies i.e., mutually beneficial agreement • Acceptable – but not always lowest - pricing

25. Purchasing Agreements • Seller’s Perspective • Assured sales volume and revenue • Reduced sales / marketing costs • Interaction with customer to improve product quality • Buyer’s Perspective • Assured pricing and supply • Reduced transaction costs • Reduced inventory requirements • Inspected at source – no incoming inspection required

26. Improve the Value Chain • Value chain is a string of companies or players working together to satisfy market demands for a product. • Optimize value at each step in the process • Raw Materials • Manufacturer • Distributor • Retailer (Wal-Mart) • Customer feedback and continuous improvement

27. Conclusion • SCM is not a new discipline • Refinement of existing processes • Leveraging technology • Transportation enabled • Like many “new” concepts is really old concept with new terminology • Arose from Toyota and the kaisan(continuous improvement) process.