Supply chain Management Rabindranath Bhattacharya

Indian Institute of Technology Madras3 rd September,2011

Supply chain consists of all links/stages involved directly or indirectly in fulfilling customer’s

request /order

Integrated Supply chain Management encompasses suppliers’ suppliers to customers’ customers

What’s Supply chain Management ?

Supply chain Management is a set of approaches to efficiently integrate

Suppliers,Manaufacturers,Warehouses and stores so that the merchandise is produced

and distributed at right time of right qualities, at right locations in order to

minimize system wide costs while satisfying service level requirements of customers

What’s Supply chain ?

What’s Supply chain ?

What’s Objective of Supply chain Management ?

To Maximize overall value generated or Profitability of Supply chain .

Profitability = Revenue received from the customers - the sum of costs incurred in the supply chain to

produce and distribute the products to customers

Supply chain Management is nothing but managing the flow throughout the chain

Major Questions asked on developing a SCM

Supply Chain Evolution(National)

Supply chain Evolution

Purchase Manageme

nt

Materials Manageme

nt

Integrated SCM

SCM

Closed Loop SCM

Next?

•Green Supply Chain• Sustainable supply

chain• Lean supply chain

Supply chain Evolution

Pre 1980 Level 1(Purchase Management) is focused on internal improvement, including taking costs out

of sourcing and logistics. The efforts tend to be confined within a particular business unit. It was a

sellers’ market

1980 – 1990 Level 2(Materials Management), with the entry of Japanese manufacturers in India, starts to break down internal walls, and works on corporate integration. The various parts of the company start to

cooperate to align purchases, processing and shipping.

Supply chain Evolution1990 Level 3(Supply chain Management) businesses start to take an external view that includes a closer

focus on the customer. Customer satisfaction becomes one of the metrics that measure the supply

chain’s success. It became a buyers’ market

2000 Level 4(Supply chain Management) brings trading partners and suppliers into the discussions about how to reach customers. Whereas previous relationships between the trading partners were about buying and selling, the partners now start collaborating and sharing information to reach a

common customer.

Supply chain Evolution2005 Level 5 (Integrated Supply chain Management ) is a move toward truly

automated connections between businesses. Partners share information electronically, which lowers production cycle times. Inventory can be viewed on a real-time basis so forecasting errors

can be diminished. 2005 Level 6 (Integrated closed loop supply

chain ) stats looking at salvaging values out of returned products to bring down the cost

further to ward off the competitors

Supply Chain Evolution(Global)

Challenges and Risks in Supply Chain

Mother Dairy- a case for SCMMilk collected from Hundreds of cooperative all over Gujarat, Haryana,

Rajasthan,Punjab,Utttar Pradesh• Transported to Plant in East Delhi every day

• Homogenized, pasteurized and stored in special tanks inside 650,000 liters/day plant

• Supply in 100 tankers for distribution to 568 booths in the city • Also sells loose milk through 200 insulated containers/ 300 Cycle

Rickshaws• Sells through 850 retail shops in poly packs ( both half and one liter)

• Wide variety of products like skimmed,toned,double toned ,full cream etc • Sell 30 flavors of ice cream

Mother Dairy- Challenges

Supplying milk everyday without fail is a challenge indeed in view of

• Short life cycle(Perishable goods)•Complex planning process for in bound and out bound

Logistics for movement of products • Demand fluctuation

• Production scheduling (Variety increases complexity)Finally managing flow of information, fund, product

seamlessly across different entities is crucial for growth and profitability of the organization

Risks and uncertainties

in supply chain

Decision Phases of Supply chain

Decision Phases of Supply chain

Decision Phases of Supply chain

Supply Chain Decision Phases

Supply Chain Decision Phases

Supply Chain Decision Phases

Supply chain Design /strategy

Supply chain planning

Supply chain operations

Supply chain Design /strategy

Governs long term operation • Location and capacities of production

and warehousing facilities • Products to be manufactured and stored• Type of information systems to be

employed • Modes of transportation to be used at

each strategy

Supply chain Planning ?Governs short term operations to implement long

term strategy like

• Forecast for the year of demand in different markets

• Which market from which locations?• Planned build up of inventories

• Make /Buy• Exchange rate of fluctuation• Expected competition

Supply chain Operation ?

Governs operation daily or weekly in the best possible manner as per planning • Allocate shipping orders

• Set delivery schedule of trucks• Place replenishment orders

• allocate individual orders for inventory or production

• Generate pick list at ware houses • set a date when order is to be fulfilled

Supply Chain Drivers

What are the drivers of Supply chain ?

3-40

Outline

Drivers of supply chain performanceA framework for structuring drivers• Facilities• Inventory• Transportation• Information• Sourcing• Pricing

Added recently

3-41

Drivers of Supply Chain Performance• Facilities

– places where inventory is stored, assembled, or fabricated– production sites and storage sites

• Inventory– raw materials, WIP, finished goods within a supply chain– inventory policies

• Transportation– moving inventory from point to point in a supply chain– combinations of transportation modes and routes

• Information– data and analysis regarding inventory, transportation, facilities throughout the supply

chain– potentially the biggest driver of supply chain performance

• Sourcing– functions a firm performs and functions that are outsourced-affects bottom line

• Pricing– Price associated with goods and services provided by a firm to the supply chain-affects

top line

3-42

A Framework for Structuring Drivers

Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Facilities Inventory Transportation

Information

Supply chain structure

Cross Functional Drivers

Sourcing Pricing

Logistical Drivers

Supply Chain Strategy and Strategic fit

Types of Strategies

Competitive Strategy

R & D Strategy

Marketing

IT HR

Finance

Supply chain

Supply chain Strategy Determines the nature of

procurement of raw materials and transportation of the same to and from the company ,manufacture of

the products or operation to provide the service and distribution of the products to the customers along

with any follow up service

What’s Strategic fit ?

It means that both the Business /Competitive strategy of the company and supply chain strategy should have

the same goal .It refers to the consistency between customer priorities that the competitive strategy is designed

to satisfy and the supply chain capabilities that the supply chain

strategy aims to build up .

Steps for strategic fit

• Know your customers

•Know your supply chain

•Achieve strategic fit

Demand uncertainty vs other Attributes

Attribute Low Implied uncertainty

High Implied uncertainty

Product Margin Low High

Forecast error(Avg)

10% 40 to 100%

Average stock out rate

1 to 2% 10 to 40%

Season end markdown

0% 10 to 25%

Understand your supply chain

Responsiveness

Cost LowHigh

High

Low

Cost responsive Efficient frontier

Wal-Mart

Dell

Achieve strategic fit

Responsiveness

Implied uncertainDemand Uncertain demand Certain

Demand

High

Low

Zone of strategic fit

Obstacles to Achieving strategic fit

• Increasing variety of products • Fragmentation of supply chain

ownership•Decreasing product life cycles

• Increasingly demanding customers • Globalization

•Difficulty executing new strategies

Performance Measures

Performance Measures(Post Process)

• Inventory Turn Over ratio(TO) = (Total Inventory/Annual Sales)*100 • No of inventory turns(TN) = Annual sales / Total Inventory• Total Inventory days (TID)= (Total inventory/Annual sales) *365 • Days of sales outstanding(DSO) = (Accounts receivable/Annual Sales )*365• Days of payables outstanding (DPO) =(Accounts payable/Annual sales)*365• Cash to cash to cycle time (Days) = TID+DSO- DPO

Performance measures (sharper focus)

• RM Inventory days =( RM Inventory/Value of RM consumed )*365

• WIP inventory days = (WIP Inventory /Value of production )*365

• FG Inventory = Finished goods Value /Annual sales) *365

SCOR Model

The supply chain operations reference model (SCOR) is a management tool used to address, improve, and communicate supply chain management decisions within a company and with suppliers and customers of the company. The model describes

the business processes required to satisfy a customer’s demands. It also helps to explain the processes along the entire supply

chain and provides a basis for how to improve those processes.

SCOR Model

Other Performance measures (Process) Reliability Responsiveness flexibility Cost Asset

Delivery Performance *

Fill rate *

Order fulfillment *

Order fulfillment Lead time *

Supply chain response time *

Production flexibility *

SCM cost *

Cost of goods sold *

Value added productivity *

Warranty cost *

Returns Processing cost *

Cash to cash cycle time *

Inventory days of supply *

Asst turns *

Customer facing Internal Facing

On time delivery index

Delivery date committed = AActual date of delivery =B

B-A <= 0 : 5B-A <= 1 week : 3B-A <= 2 week : 2B-A >= 2 weeks : 0

OTD % =100 *Cumulative points for orders/(5xTotal no of orders)

Process view of A Supply Chain

A Process orientation

PLAN SOURCE MAKE DELIVER RETURN

• Demand Management• MPS• MRP

• Capacity Planning

• Distribution planning

• Supplier development• Supply management• Joint cost

reduction• Target costing• Value Engg• Import substitution

• Facilities and layout

management• Materials

handng • Quality Management • Maintenance management

• Logistics•Ware housing• Distribution• Channel Management • Customer

Interface

• Logistics• Warehousing• Remanufacture• Segregation• Scrap disposal

In –House In –Bound In –House In –Bound Out –Bound

Forecasting of Demand

Why it’s important?

Forecast of future demand forms the basis of all strategic and planning

decisions in a Supply chain

• Qualitative Methods• Time series methods

1> Static 2> Adoptive

• Causal Methods• Simulation

Which one to be used under what circumstances or a combination of these to minimize the error?

Forecasting Method

Questions and Answers

1. What is the difference between functional products

and innovative products? • Functional products

– Stable & predictable demand – Long life cycles (More than 2 years ). – Low (10-20 variants per category)– Stock out rate: 1% to 2% – Low profit margins – Lead time : 6 months to 1 year – Ex: products bought in grocery stores and gas stations

• Innovative products– Volatile & unpredictable demand– Shorter life cycles (3 months to 1 year )– High (often millions of variants per category) – Stock out rate: 10% to 40% – High profit margins– Lead time: 1 day to 2 weeks– Ex: Fashion apparel and personal computers

How to gain margins for functional products? Give examples

• By making the products more innovative.• By introducing high levels of variability in the products.

• Eg: IBM ThinkPad introduced a novel cursor control in the middle of the keyboard that required users to interact with the keyboard in an unfamiliar way. This created a very high demand for the Thinkpads.

What kind of initiatives Campbell Soup adopted to reduce supply chain costs?

• Continuous replenishment program –EDI (Electronics

Data Interchange).

• Initiating the retailers to adopt forward buying.

• Reducing the inventory at each stage of the supply

chain.

Give real life examples other than mentioned in the

paper. • Functional product– Automobile engines

• Innovative product– Mobile phones– Hard disk drives– Computer chips– Operating system

2. What is the ideal strategy for both kinds of products?

• Efficient process functional products– Maximize performance– Minimize cost

• Responsive process innovative products – Minimize stock outs, forced markdowns, and

obsolete inventory – Use modular design in order to postpone product

differentiation for as long as possible

5. What is meant by markdown?

• Temporary reduction in selling price of an item to stimulate its demand or to drive a competitor out of a market.

• Permanent markdowns are created to remove a slow-selling item from inventory.

What are the consequences of markdown on supply chain?

• As a result of markdown demand will rise which will lead to reduced inventory followed by stock-outs.

• This will have an effect on the whole supply chain.

• Induce larger replenishment from buyers.

In real life, which industry faces the problem of markdown to maximum extent?

• Industries involved in – FMCG products– Automobiles (cars)– Electronic goods (cellphones, laptops etc.)

6. Name the tools which can be used for responsive supply of innovative products?

• To accept that uncertainty is inherent in innovative products.

• To strive to reduce uncertainty so that the demand for components becomes more predictable.

• It can avoid uncertainty by cutting lead times and increasing the supply chain's flexibility.

• It can hedge against the remaining residual uncertainty with buffers of inventory or excess capacity.

7. How the supply chain strategy for National Bicycle is

different from Sport Obermeyer supply chain strategy?

• National Bicycle: Mass customization- building the ability to customize a large volume of products and deliver them at close to mass-production prices.

• Sport Obermeyer : blends the three strategies of reducing, avoiding, and hedging against uncertainty. Their approach is called accurate response.

Identify two companies in real life following similar supply chain strategies.

• Mass customization– Dell– Motorola

Reading MaterialsThe following appeared in the March-April, 1997,

issue of THE HARVARD BUSINESS REVIEW:

WHAT IS THE RIGHT SUPPLYCHAIN FOR YOUR PRODUCT?

A Simple Framework Can Help

You Figure Out the Answer

BY MARSHALL L. FISHER

Supply Chain Management By

Sunil Chopra and Peter Meindl

Designing and Managing the Supply Chain By

David Simchi-Levi,P. Kaminsky and Edith Simchi-Levi

Procurement cycle

Procurement cycle