Supply Chain Management

A presentation

by

A.V. Vedpuriswar

SUPPLY CHAIN MANAGEMENT

• Value Chain

• Supply side- raw materials, inbound logistics and production processes

• Demand side- outbound logistics, marketing and sales.

WHAT IS SUPPLY CHAIN MANAGEMENT

" Is the strategic management of activities involved in the acquisition and conversion of materials to finished products delivered to the customer"

SupplierManagement

Schedule /Resources Conversion

Stock Deployment Delivery

CustomerManagement

Leads to Business Process Integration

Material Flow

Information Flow

• Supply chain is the system by which organizations source, make and deliver their products or services according to market demand.

• Supply chain management operations and decisions are ultimately triggered by demand signals at the ultimate consumer level.

• Supply chain as defined by experienced practitioners extends from suppliers’ suppliers to customers’ customers.

• SUPPLY CHAIN INCLUDES :

– MATERIAL FLOWS

– INFORMATION FLOWS

– FINANCIAL FLOWS

• SUPPLY CHAIN MANAGEMENT IS FACILITATED BY :

– PROCESSES

– STRUCTURE

– TECHNOLOGY

• Supply chain serves two functions:

– Physical

– Market mediation

• Supply chain objectives may differ from situation to situation.

• For functional products, cost efficiency is the critical factor.

• For innovative products, responsiveness is the important factor.

• Leanness + Agility together make up Leagility

Supply Chain Structure

Information Flow

Raw Materials

RETAILERFACTORY DC RDC

SUPPLIER

Finished Goods

Supply Chain and Demand Chain

• Demand chain is defined as the system by which organizations manage sales and distribution of products and services to end users.

• Conceptually incorrect to look at demand chain separately

• Look at the pipe as a whole.

• But is there a pipe at all?– More a network– Not necessarily linear

• Value chain orchestration rather than controlling the flow through the pipe

• A network of independent and interdependent organizations mutually and cooperatively working together to control, manage and improve the flow of materials and information from suppliers to end users

SUPPLY CHAIN DRIVERS

Not new. Value system of Michael Porter• Why sudden interest?

– Demanding customers– Shrinking product life cycles– Proliferating product offerings– Growing retailer power in some cases– Doctrine of core competency– Emergence of specialized logistics providers– Globalization– Information technology

SUPPLY CHAIN ELEMENTS

• Supply Chain Design• Resource Acquisition• Long Term Planning (1 Year ++)

Strategic

• Production/ Distribution Planning• Resource Allocation• Medium Term Planning (Qtrly,Monthly)

Tactical

• Shipment Scheduling• Resource Scheduling• Short Term Planning (Weekly,Daily)

Operational

• Supply Chain Goals

Efficient supply chain management must result in tangible business improvements. It is characterized by a sharp focus on – Revenue growth– Better asset utilization – Cost reduction.

Reduce Overall Cycle Time : Improve Response

Supply Chain Management

Underlying Principles

Compression

Conformance

Co-operation

Communication

(Planning/Manufacturing/Supply)

(Forecasts/Plans/Distribution) (Cross -Functional)

(Real Time Data)

Changing Paradigm

• Functional vs Process• Products vs Customers• Revenues vs Performance• Inventory vs Information• Transactions vs Relationships

Critical Success Factors today

• Cross functional management and planning skills

• Ability to define, measure and manage service requirements by market segment

• Information systems

• Relationship management and win win orientation

PUTTING IN PLACE A WELL OILED SUPPLY CHAIN

• Supply chain as an efficient customer satisfying process

• Effectiveness of the whole supply chain is more important than the efficiency of each individual department.

. The steps involved

• Step1- Designing the supply chain– Determine the supply chain network– Identify the levels of service required

Step 2 - Optimizing the supply chain• Determine pathways from suppliers to

the end customer– Customer markets to Distribution centers– Distribution centers to production plants– Raw material sources to production plants– Identify constraints at vendors, plants and

distribution centers– Get the big picture– Plan the procurement, production and

distribution of product groups rather than individual products in large time periods- quarters or years

Step 3- Material flow planning

• Determine the exact flow and timing of materials

• Arrive at decisions by working back from the projected demand through the supply chain to the raw material resources

• Techniques• ERP

Step 4 - Transaction processing and

short term scheduling

• Customer orders arrive at random• This is a day to day accounting system which

tracks and schedules every order to meet customer demand

• Order entry, order fulfillment and physical replenishment

Information flows in Supply Chain Management

• Information is overriding element• Need for databases• Master files: Information about customers, products,

materials, suppliers, transportation, production and distribution data- do not require frequent processing

• Status files- heart of transaction processing- track orders and infrastructure status- updated daily.

• Essentially using the same information to make all plans right from structuring the network to processing every day supply chain tasks.

THE VIRTUAL VALUE CHAIN

• The value chain connects a company’s supply side with its demand side.

• Traditionally information has been a supporting function.

• Information however can be managed far more creatively.

• There are various stages of using value added information processes.

• Visibility : See physical operations more effectively through information. Information can be used for effective coordination of value chain activities.

• Mirroring capability : In this stage, virtual activities are substituted for physical ones. A parallel value chain is created.

• New customer relationships : The company can draw on the flow of information in the virtual value chain to deliver value to customers in new ways.

Dealer Management

Conventional functions

• Inventory ownership and management

• Sales and technical support

• Order handling

• Credit

Contemporary Trends

• Channels being divided into two- Fulfillment and Franchised agent

• Fulfillment channel- responsible for getting the manufacturer’s product from the plant to the end user through a highly efficient logistics and inventory management system

Contemporary Trends

• Fulfillment channel may not take ownership of the product but may perform these functions on a per box fee structure

• Franchised agents responsible for sales and sales support but will not write the order or supply the product

Issues in customer management

• Penetration vs Spread

• Concentration is necessary to commit the necessary resources for true customer integration

• Depth of customer contact– R&D - sharing information vs developing new

products together– Logistics - Pros and cons of methods of

transportation vs reengineering the logistics process

Implementation: Points to keep in mind

• Recognize the difficulty of change.• Prepare a blueprint for change that maps linkages

among initiatives.

• Assess the entire supply chain from supplier relationships to internal operations to the market place, including customers, competitors and industry as a whole.

IS THE SUPPLY CHAIN WORKING?• Does our manufacturing strategy increase product

line flexibility while continuing to drive down overall production costs?

• When was the last time we measured lost sales to end customers?

• Do we have an efficient system to get POS data from retailers?

• Are we testing our products with end customers? Do we use the resulting data to adjust our forecasting and supply positions?

• Is the ratio of returned orders to sales increasing?

The New Model of Relationships

• Hard bargaining vs shared destiny• Exit vs Voice• Arms length relations vs Involving dealers and

suppliers in product development• Piling up vs Replenishing dealer inventory more

frequently• In short working together as partners to cut

costs, boost efficiencies, innovate and share value

• Adversarial vs partnerships

• Short term vs long term contracts

• Large vs small order quantity

• Full truck load vs small parcels

• Inspection vs no inspection

• Written order vs understanding

• Many vs few suppliers

• Design and then invite quote from vendor vs involving vendor in development

• Bargaining, holding cards close to chest vs Shared destiny, transparency

Summary• Segmentation of customers based on service

needs• Customization of logistics network• Listen to signals of market demand and plan

accordingly.• Differentiate product close to the customer• Source strategically• Develop a supply chain wide technology

strategy• Accept channel spanning performance

measures

• The Bullwhip Phenomenon

• Volatility amplification along the network• Increase in demand variability as we move

upstream away from the market• Mainly because of lack of communication and

coordination• Delays in information and material flows

• Bullwhip effect occurs because of various reasons:

• Order Batching - Accumulate orders• Shortage gaming- Ask for more than what is

needed• Demand forecast updating

Important points to keep in mind

• Segment customers based on service needs.• Modify the supply chain to meet these service

requirements profitably.• Customize the logistics network.• Develop forecasts collaboratively involving every

link of the supply chain.• Locate the leverage point where the product is

unalterably configured to meet a single requirement

• Delay product differentiation till the last possible moment.

• Assess options such as modularized design or modification of manufacturing processes that can increase flexibility.

• Cultivate warm relationships with suppliers.• Efficient supply chain management has to be

accompanied by a technology strategy.

ITALIAN CLOTHING MANUFACTURE

• Warehousing and transportation 6• Inventory 5• Late delivery returns 2• Obsolescence 20• Lost sales 60

• Need to minimize obsolescence costs• Minimize product range flexibility• Reduce product development cycle

Dell’s Direct Business Model of Virtual Integration

• Advantages of a tightly coordinated supply chain traditionally facilitated by vertical integration.

• Combined with focus and specialization.• Leveraging on investments others have made and

focusing on delivering solutions and systems to customers

• Fewer things to manage - fewer things go wrong• Suppliers’ engineers part of Dell’s Design team• Have only a few partners

Dell’s Direct Business Model of Virtual Integration

• Share information with partners in Real time fashion.

• Stitch together a business with partners that are treated as if they are inside the company.

• Change focus from how much inventory there is to how fast it is moving

• Assets collect risks around them one way or the other.

• Limited or no testing - Eg. Sony Monitors

Dell’s Direct Business Model of Virtual Integration

• Only three Manufacturing centers - Austin, Ireland and Malaysia.

• Inventory levels and replenishment needs sometimes conveyed to vendors on hourly basis.

• Substitute information for inventory and ship only when we have real demand from real end customers

• Clever segmentation - Focus on institutional markets - 70% to very large customers with annual purchases exceeding $1 million.

Dell’s Direct Business Model of Virtual Integration

• Exit from retail business after wrong entry in 1989.

• Segmentation - closeness to customers and access to valuable information.

• Demand forecasting as a critical sales skill

• Help global customers, manage their total purchase of PCs by selling them a standard product

• Dell server loads software on customers’ computers

• Meet customers’ needs faster and more efficiently than any other model.

Li and Fung, Hong Kong

• Founded in 1906

• Today 35 offices in 20 countries

• 1997 revenues of $ 1.7 billion

• Largest export trading company in Hong Kong

• Customers- American and European retailers

• Sources clothing and other consumer goods ranging from toys to fashion accessories to luggage

• Order from Europe• Buy yarn from Korea• Weave and dye in Taiwan• Buy Japanese zippers made in China• Make the garments in Thailand in five different

factories• Pulling apart the value chain and optimizing at

each step

• Victor Fung

“ Today, assembly is the easy part. The hard part is managing your suppliers and the flow of parts.“ Good supply chain management strips away time and cost from product delivery cycles. Our customers have become more fashion driven, working with six or seven seasons a year instead of just two or three. Once you move to shorter life cycles, the problem of obsolete inventory increases dramatically. With customer tastes changing rapidly and markets segmenting into narrow niches, it’s not just fashion products that are becoming increasingly time sensitive.”

• Endorsement by Stan Shih, CEO, Acer• Buying right things• Reaching into suppliers to ensure that certain

things happen on time and at the right quality level.

• Buyer informs five weeks before delivery.• Reserve undyed yarn from yarn supplier.• Lock up capacity in weaving and dyeing mills.• Outsourcing not same as leaving suppliers to do the

worrying.• Single factories are too small to have much buying

power and to demand faster deliveries from suppliers.

• To shorten delivery cycle, need to go upstream to organize production.

• Li & Fung able to delay commitment to a particular fashion trend.

• Integrated logistics management• Elimination of consolidators in container

shipments• Smokeless factory

– Design– Procurement– Inspection of raw materials– Production planning– Line balancing– Inspection of finished goods– No worker ownership– No labour management

“ If we don’t own factories, can we say we are in manufacturing? Absolutely, because of the 15 steps in the manufacturing value chain, we probably do 10.”

• Basic operating unit is the division.• Divisions focused on serving single customers or

groups of small customers.• Less emphasis on geographic grouping• Merchandising decisions decentralized• Financial controls and operating procedures tightly

centralized.• Strong focus on inventory and working capital

management.

• “As far as I am concerned, inventory is the root of all evil. At a minimum, it increases the complexity of managing any business. So it’s a word we don’t tolerate around here.”

• Need for sophisticated information systems. Li & Fung working to create a database to systematically track all supplier relationships.

• “ Someone might steal our database but when they call up a supplier, they don’t have the long relationship with the supplier that Li & Fung has. It makes a difference to suppliers when they know that you are dedicated to the business, that you have been honoring your commitments for 90 years.”

• Broadening the middle• Better prices and better margins for customers• Tackling the soft $3 in the cost structure. $3

represents the inefficiency in the supply chain for a consumer product priced at $4. Look at costs throughout distribution channels than just in factory

Thank You