ESD.273J, Introduction to supply chain management · Introduction to Supply Chain ManagementChain...

Introduction to Supply Chain ManagementSupply Chain Management

David Simchi-Levi

Professor of Engineering SystemsMassachusetts Institute of Technology

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Sources:Plants vendors

portsRegional warehouses:

Stocking points

Field warehouses:Stocking points

Customers demandcenters sinks

Transportation costsTransportation costs

Inventory & warehousingcosts

Inventory & warehousingcosts

Production/purchasecosts

Supply

Image by MIT OpenCourseWare.

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 requirementsservice requirements.

• Notice: – Who is involved – Cost and Service Level – It is all about integration

©Copyright 2003 D. Simchi-Levi

Conflicting Objectives in the Supply Chain

1 Purchasing1. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities

2. Manufacturing2. Manufacturing • Long run production • High quality • High productivity • Low production cost


2

Ord

er S

ize

Conflicting Objectives in the Supply Chain

3 Warehousing3. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability

4. Customers • Short order lead time Short order lead time • High in stock • Enormous variety of products • Low prices


The Dynamics of the Supply Chain

Customer Demand

Retailer Orders Distributor Orders

Production Plan

Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998


3

Ord

er S

ize

The Dynamics of the Supply Chain

Customer Demand

Production Plan

Time Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998


Today’s Supply Chain Challenges

• Global supply chain with long lead times • Rising and shifting customer expectations • Increase in labor costs in developing countriesIncrease in labor costs in developing countries • Increase in logistics costs

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4

Increase in Logistics Costs

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US Logistics Costs as Percent of GDP

8

9

10

11

12

15% increase

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

• Rising energy prices • Rail capacity pressure • Truck driver shortage • Security requirements 9

Total US Logistics Costs 1984 to 2007 ($ Billions)

1400

1600

Total US Logistics Costs in $MMs

52%

Total Cost

600

800

1000

1200

Transportation

47%

62%Inventory

0

200

400

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Inv Carrying Transportation Admin Total

Source: 19th Annual Logistics Report 10

Admin

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Today’s Supply Chain Challenges

• Global supply chain with long lead times • Rising and shifting customer expectations • Increase in labor costs in developing countriesIncrease in labor costs in developing countries • Increase in logistics costs • Importance of sustainability • Unprecedented Volatility

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Unprecedented Volatility

Number of days the price of oil changed 5% or more 1990: 38 days of oil changed 5% or more

2008: 39 days

Year In 2008 the price of oil changed 5% or more from its previous close on 39 days making it the most volatile year since 1990.

Source: NYT 12

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t t t t t

Supply Chain: The Magnitude

• It i It is estiimatedd thhat ththe grocery iinddustry could ld save $30 billion (10% of operating cost) by using effective logistics strategies. – A typical box of cereal spends 104 days getting

from factory to supermarket.

A t i l d 15 d t li f– A typical new car spends 15 days traveling from the factory to the dealership.


Supply Chain: The Magnitude (continued)

• 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.

• Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce writedowns of $2.6 billi i O t b 1997billion in October 1997.The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)


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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 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)


Supply Chain: The Potential

• Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using

- Direct business model

- Build-to-order strategy.


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Supply Chain: The Potential • In 10 yyears,, Wal-Mart transformed itself

by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer.


Supply Chain: The Complexity National Semiconductors: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 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 – 5% are delivered within 90 days.


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Supply Chain Challenges

Achieving Global Optimization• Achieving Global Optimization – Conflicting Objectives – Complex network of facilities – System Variations over time

Image by MIT OpenCourseWare.

Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

Sequential Optimization

Global Optimization

Supply Contracts / Collaboration / Information Systems and DSS

Supply Chain Challenges •• Achieving Global Optimization Achieving Global Optimization

– Conflicting Objectives – Complex network of facilities – System Variations over time

• Managing Uncertainty – Matching Supply and Demand – Demand is not the only source of

uncertainty


The EnterpriseFulfillment and Development Supply Chains

Plan/Design •Product Architecture •Make/Buy

Develop Plan/Design

Source

Make/Buy •Early Supplier Involvement

•Strategic Partnerships •Suppliers Selection •Supply Contracts

pment Suppply C

hain

Supply Produce Distribute Sell

Fulfillment Supply Chain

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Fulfillment and Development Supply Chain

• Industry clock speed � Innovative vs. functional

products • Core competencies

� Make vs. buy Make vs. buy • Product design

� Modular vs. integral

Development SSupply Chain Supply

Plan/Design • Product architecture • Make/buy • Early supplier involvement

• Strategic partnerships

Produce Distribute

Source Strategic partnerships

• Supplier selection • Supply contracts

Fulfillment Supply Chain

Sell

• Uncertainty and variability � Demand and supply

• Lead time � Offshoring vs. onshoring

• Economies of scale � Production and transportation

What’s New in Logistics?

• Global competition

• Shorter product life cycle

• New, low-cost distribution channels

• More powerful well-informed customers

• Internet and E-Business strategies


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Significant Increase in Outsourcing Purchasing as % of SalesPurchasing as % of Sales

54%

28%

60%

57%

34% 30%

40%

50%

60%

70% %

0%

10%

20% 22%24%

16% Machinary Computer and telecom Food manufacturing Telecom services

1993 1996


New Concepts

•• Push Pull strategies Push-Pull strategies

• Direct-to-Consumer

• Strategic alliances

• Manufacturing postpponementg p

• Dynamic Pricing

• E-Procurement


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