An Introduction to Supply Chain Management

1. An Introduction to Supply Chain Management S. Viswanathan W. Watthayu

2. What is Supply Chain Management? Supply Chain Management (SCM) is concerned with three core aspects of a company’s operations: • Material Supply • Goods Production • Product Delivery to Customers

3. A more formal definition is: “Integrated Supply Chain Management is a processing-oriented, integrated approach to procuring, producing and delivery products and services to customers. It has a broad score that includes sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end users. It covers the management of material, information and funds flows” By Peter Metz “ Demystifying Supply Chain Management”

4. Another description of SCM is: “Effective SCM enables you to make informed decisions along the entire supply chain from acquiring raw materials to manufacturing products to distributing finished goods to the customers”

5. A familiar household example • Of course, supply chain management ideas also occur in all walks of life and thus the basic concepts will be very familiar to the reader. • As a trivial example, consider the problem of supplying bread and milk to a household

6. There are many options available, for the above task e.g. • Have the items home delivered • Buy the items at the corner store each day • Pick them up at a service station when purchasing gasoline for the family car • Purchase them in bulk every 2 or 3 days from a large supermarket • Purchase via e-commerce over the Internet

7. There are various competing issues that might be considered: • Reliability of supply • Freshness of the product • Cost • Convenience • Capacity to combine this task with other functions • Availability of diversity and variety in the products, etc.

8. SCM is the topic of importance One can readily imagines that if one application applies the same kind of thinking to the manufacture of a sophisticate item, then the issues become considerably more complex but also potentially more important. Indeed, one can readily understand that making the decision could be of considerable commercial importance and, indeed, could sometimes make the difference between staying in business or loosing out to competitors “Thus SCM is the topic of importance”

9. Costs? • SCM is not a trivial matter. The costs of taking this issues seriously can be substantial. Hence, it is important to be able to make the right kind of decisions about the extent to which one embraces this technology. • In this context, theses notes are intended as a preliminary guide to aid decision making.

10. Route to SCM From the many literatures, we can identify three routes that one might follow to introduce SCM into a company. These are: • Via the optimization of the utilization of existing facilities • Via the use of new technologies e.g. the Internet and e-commerce • Via a major restructuring These are further explained on the next three slides.

11. Optimization of Existing Resources Optimization of the existing facilities Little restructuring required SCM

12. Use of new computer and communication technologies New computer Technologies, Internet Electronic and other Intermediaries e-commerce May lead to the need for restructuring

13. Inadequate or Old infrastructure Major restructuring New manufacturing Technologies such as agile manufacturing Postponement, etc

14. The Supply Chain Council • A possible source of information on SCM is the supply chain council Supply Chain council Inc. 303 Freepport Road Pittsburgh, PA 15215 http://www.supply-chain.org

15. Characteristic of Poorly Performing Supply Chain • Excess inventories • Long cycle times • Stockouts and product substitutions • Inefficient plant scheduling • Excess capacity • LTL deliveries • High transaction costs • etc.

16. The issue in Supply Chain Optimization Four core management processes Plan Source Deliver Make

21. Stages in development of SCM • Inter-relating Warehousing and Transportation • Shorter order response times via faster warehouse handing and faster transportation lessens the length of forecast period and increase accuracy of forecast. Aided by improved data communications between different levels of warehouse (plant, regional distribution centers, locate distribution center).

22. Stages in development of SCM (cont.) • Logistics Stage • Addition of manufacturing, procurement and order management functions. Aided by electronic data interchange, worldwide communications, and use of computers to store, retrieve and analyze data.

23. Stages in development of SCM (cont.) • Integrate SCM • Add supplier and end customers. Utilizes electronic data, electronic funds transfer, computerized decision support systems • Key driver: Explosive development of computer and communications technology

24. Success Stories • Some claims made for the success of SCM principles are given below: • Inventory reduced by 50 percent • Supply chain total cost share of revenue reduced 20 percent • 40 percent increase in on-time deliveries • Cumulative cycle time reduced by 27 percent • Revenues increased 17 percent • Inventory turns up 2x while out-of-stock incidents down 9x • 50 percent reduction in finished-good inventory by postponing package

25. Key factors associated with Claimed successes Five key factors enabling these accomplishments • An overriding, pervasive customer focus. At every stage in the supply chain, the ultimate customer’s needs are understood and forced into the decision making • Advanced use of IT. Data and information flow readily to all parts of the supply chain. Computer-aided decision support systems use this complex information to enable better, faster decision that are quickly communicated throughout the supply chain

26. Key factors (cont.) 3. Quantitatively based performance management. Measurements of multiple performance factors occur frequently at each stage in the supply chain. Time and cost are key measures, but others are used as appropriate to the specific supply chain. All measures relate to the ultimate supply chain goals. 4. Use of cross-functional teams. Teams of people from the interrelated functional operations working closely together can cut through the normal organizational barriers to find local and distributed improvements that benefit the overall supply chain performance

27. Key factors (cont.) 5. Attention to human factors and organization dynamics. Use of the best human and organization, coordination, cooperation, measurement, reward techniques facilities, supply chain innovation and implementation. This level of attention is needed to offset the tendency of individual accountability and work-unit accountability to create barriers to supply chain cooperation.

28. Static or Dynamic SCM • SCM can be static or dynamic: • Static- i.e. based on steady state understanding of demand, cost, location etc., or • Dynamic – supply chain reconfiguration to adapt to changing conditions, e.g., fluctuations in cost of raw materials, customer demands, international exchange rates, etc.

29. Innovative Supply Chain Strategies • Effective use of Information Flows • EDI • Bar Coding • Shipment Container Making • Strategic Supply Chain partnerships to share information. • Advanced manufacturing technology and order processing systems to reduce order cycle time- improve forecasting

30. Innovative Supply chain Strategies (cont.) • Vendor management inventory • Continuous Replenishment • Quick Response (QR) System • Efficient Consumer Response (ECR) • Category Management • Consolidation • Cross-Docking • Postponement

31. Principle of Postponement The time of shipment and location of final product processing in the distribution of a product should be delayed until a customer order is received. • Time Postponement: Avoid shipping goods in anticipation that demand will occur. Time based logistics. • Form Postponement: Avoid creating the final form of the product until demand occurs. Delay differentiate or manufacturing postponement

32. Postponement • Postponement as a concept has existed since the 1950’s • It is only the recent past that it has gained lot of attention due to its application in practice • Postponement enables reducing of inventories

33. Consolidation • Enables saving in unit transportation costs by transportation bulk quantities • Consolidate small orders into large shipments, e.g. Federal Express • Hub and Spoke Networks • Many logistics Hub in the world acts as consolidation points

34. Cross docking • Cross-docking: is an advanced concept in warehouse that combines the benefit of consolidation, without incurring the cost of excess inventories • Product move right from the inbound to the outbound dock without every staying in the warehouse • Walmart practices cross-docking very effectively

35. Key enables in Supply Chain innovations • Standard Product ID: Bar codes e.g item, case, etc. • Electronic Data Interchange (EDI) • Electronic Commerce: The Web, private networks • Information systems: Enterprise Resource Planning(ERP), advanced planning and scheduling software, data mining

36. SCM Software • A report written in 1998 (Eric Allen, University of Texan at Austin) predicts that the demand for SCM software will have reached $3 billion by 2000 • SCM software is aimed at: • reducing distribution cost • maximizing order deliveries • maintaining inventory balance • maintaining customer and supplier satisfaction

37. Suppliers of SCM software include (based on 1998 data): • I2 - (founded in 1988, now with 6000 employees, sales of $184M in 1997) • Manugistics (founded in 1969 originally called Scientific Time Sharing Corporation, sales level of $94M in 1997) • Baan ( founded 1978, $684M in 1988) • SAP (founded Germany 1972 by 4 former IBM employees) • People Soft (founded in 1987)

38. Note that the price to implement a full SCM solution can be large (up to a million dollars) However, lower cost solutions are , of course, also available. • Next we focus on a case study in SCM solution and examine possible SCM issues.

39. Case study-Wal-mart • Leading discount retailer • Supply chain Structure: Hub-and-Spoke arrangement of one distribution center surrounded by several stores. • Cross Docking strategy • Very efficient Logistics Management • Every Day Low price • Vendor management inventory

40. Case Study – Dell Computer • Use electronic commerce/Telemarketing for sales, marketing, ordering and billing • Suppliers located within 15 minutes of plant in Round Rock, Texas • Cycle time of about a day (not counting delivery time) • Inventory equivalent to 13 days of sales (versus 25 days for Compaq)

41. Dell-computer (cont.) • Can beat competitor’ s prices by 10-15% • Reduced number of supplier’s from 204 in 1992 to 47 in 1997 • Orders parts Just-In-Time ( when order is received) • Parts are 60 days newer that competitors • Rapid price decreases: save 6% on parts

42. Dell Computer (cont.) • Converts sales into cash in less than 24 hours through use of credit cards and electronic payment • Compaq (using dealers): 35 days • Gateway: 16.4 days • In 1996, revenue jumped 47% to $7.8B, and profiles jumped 91% to 518M. A big favorite in the stock market