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Transcript of Introduction to Supply Chain Management Source: Designing and Managing the Supply Chain, By D....
Introduction to Supply Chain Management
Source: Designing and Managing the Supply Chain,
By D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi
Supply
Sources:plantsvendorsports
RegionalWarehouses:stocking points
Field Warehouses:stockingpoints
Customers,demandcenterssinks
Production/purchase costs
Inventory &warehousing costs
Transportation costs Inventory &
warehousing costs
Transportation costs
SUPPLIERS
ComponentManufacturing
FinalAssembly
Distribution &Warehousing
CUSTOMERS
Physical SupplyInbound Logistics
Physical DistributionOutbound Logistics
THE LOGISTICS SYSTEM
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 requirements.
Notice: Everyone is involved Systems approach to reducing costs Integration is the key
Supply Chain Management
Conflicting Objectives in the Supply Chain
1. Purchasing• Stable volume requirements • Flexible delivery time• Little variation in mix• Large quantities
2. Manufacturing• Long run production• High quality• High productivity• Low production cost
Conflicting Objectives
in the Supply Chain
3. Warehousing• Low inventory • Reduced transportation costs• Quick replenishment capability
4. Customers• Short order lead time• High in stock• Enormous variety of products• Low prices
The Dynamics of the Supply Chain
Ord
er
Siz
e
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
CustomerDemand
Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders
Production PlanProduction Plan
What Management Gets...
Ord
er
Siz
e
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
CustomerDemand
Production PlanProduction Plan
What Management Wants…
Vo
lum
es
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Production PlanProduction PlanCustomerDemand
CustomerDemand
The Dynamic Supply Chain
Increasing customer power leads to increased demands on retailers
Increased retailer power leads to increased demands on suppliers
Supply Chain: The Magnitude
In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product). Transportation 58% Inventory 38% Management 4%
Third party logistics services grew in 1998 by 15% to nearly $40 billion
Dynamic Forces of the Global Supply Chain
GLOBALSUPPLY
CHAIN
ResourcesLogistics
User Logistics
InformationLogistics
Supply Chain: The Magnitude
It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies. A typical box of cereal spends more than
three months getting from factory to supermarket.
A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days.
Supply Chain: The Magnitude
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.
In 1993, IBM lost a major fraction of its potential sales of desktop computers because it could not purchase enough chips that control the computer displays.
Supply Chain: The Magnitude
Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce writedowns of $2.6 billion in October 1997.
The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)
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 …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct./Nov. 1997)
Cost Structure in the Supply Chain
Margin 12.1
18.1
5.08.1
4.1
9.7
42.7
StoresOperating Cost
Administration
LogisticsSales/Purchases
Marketing
ProductionCost
ACTUAL TARGET
9.8
16.4
4.8
6.23.08.2
40.8
100 100 = Average Retail Price
89.2
Supply Chain: The Potential
In two years, National Semiconductor reduced distribution costs by 2.5%, delivery time by 47% and increased sales by 34% by
- Shutting six warehouses around the globe.
- Air-freighting microchips to customers from a new centralized distribution center.
Supply Chain: The Potential
In 10 years, 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.
Laura Ashley turns its inventory 10 times a year, five times faster than three years ago. This is achieved by using- New Information System- Centralized Warehouse
“For a company with annual sales of $500 million and a 60% cost of sales, the difference between being at median in terms of supply chain performance and in the top 20% is $44 million of additional working capital.”
-- PRTM Director Mike Aghajanian
Supply Chain: The Potential
Supply Chain: The Complexity
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 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.
Supply Chain: The Complexity
1. Supply Chain Integration• Conflicting Objectives• The Dynamics of the Supply Chain
2. Matching Supply and Demand3. System Variations over Time4. Status of Logistics Knowledge
• Many problems are new• Incomplete understanding of issues• Methodology is rather narrow
ISSUES:Decision Classification
Strategic Planning:Decisions that typically involve major capital investments and have a long-term effect.
1. Determination of the number, size and location of new plants, distribution centers and warehouses
2. Acquisition of new production equipment and the design of working centers within each plant
3. Design of transportation facilities, communications equipment, data processing means, etc.
ISSUES:Decision Classification
Tactical Planning:Effective allocation of manufacturing and distribution resources over a period of several months
1. Work-force size
2. Inventory policies
3. Definition of the distribution channels
4. Selection of transportation and trans-shipment alternatives
ISSUES:Decision Classification
Operational Control:Includes day-to-day operational decisions
1. The assignment of customer orders to
individual machines
2. Dispatching, expediting and processing orders
3. Vehicle scheduling
ISSUES:Why Keep Inventory?
Uncertainty in customer demands
Uncertainty in the supply Uncertainty in quantity and quality Uncertainty in delivery time Uncertainty in costs
Economies of scale
ISSUES:Demand Forecast
The three principles of all forecasting techniques:
Forecasting is always wrong The longer the forecast horizon the worse the
forecast Aggregate forecasts are more accurate
ISSUES:Inventory control
How much inventory to keep? Can uncertainty be reduced? What size should orders be? How does forecasting tool effect
inventory level?
ISSUES: The Challenge of Inventory Management
Matching supply and demand accurately is a critical challenge
“Dell Computers predicts a loss; stock plunges. Dell acknowledged that the company was sharply off in its forecast of demand, resulting in inventory writedowns”. (WSJ, August 1993)
“IBM continues to struggle with shortages in the Think Pad line”. (WSJ, May 1994)
“Liz Claiborne said its unexpected earnings decline is the consequence of higher than anticipated excess inventories”.(WSJ, August 1993)
ISSUES: Purchasing
What to Purchase- In-house production Vs. external suppliers
Where to purchase- Domestic Vs. international
From whom to purchase- Cost- Reliability: quality and on time delivery- Availability and flexibility
ISSUES: Purchasing
Centralized Vs. Decentralized
Number of suppliers:Single sourcing Vs. Multiple sourcing
Supply contracts
ISSUES: Production
Location of manufacturing plants Production cost Taxes Incentives (by government) Proximity to markets and raw materials Transportation infrastructure Political stability and culture
ISSUES: Production
Flexibility
The ability to produce different products simultaneously and efficiently
The ability to produce new products efficiently
ISSUES: Production
Efficiency Low cost Short lead time
Reliability On-time delivery Quality
ISSUES: Distribution
The structure of the distribution network
The distribution strategy
The Classical Strategy
Cross Docking
Direct Shipping
ISSUES:Product Design
What role does product design play in supply chain management?
When is redesigning products worth the cost?
Can product design compensate for uncertainty in customer demand?
ISSUES:Information Systems
The advantages of advanced information systems
The challenge of unlimited data The roll of e-commerce Impact of the internet
ISSUES: What’s New in Logistics?
Global competition
Shorter product life cycle
Increasing product variety
New, low-cost distribution channels
More powerful well-informed customers
ISSUES: What’s New in Logistics?
New communications and information technologies POS and EDI technology Wireless technology
Decision Support Systems Integrated systems Multi-modal transportation
ISSUES: What’s New in Logistics?
New concepts in logistics Push Vs Pull strategies
Cross docking
Strategic alliances
Manufacturing postponement
Design for Logistics