Supply-Chain Management

Class 10,11

Supply-Chain Management Measuring Supply-Chain Performance Bullwhip Effect Outsourcing Value Density Mass Customization

Supply-Chain Management

What is Supply-Chain Management ?

Supply-chain can be described as the network covering various stages in the provision of products or services to the customer. Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer.

Supply-Chain

Supply-chain consists
Suppliers Manufacturers Distributors Retailers Whose combined effort results in production, selling and delivery of products and services.

SCM Definitions
Supply Chain Management encompasses every effort involved in producing and delivering a final product or service, from the suppliers supplier to the customers customer. Supply Chain Management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer.
The Supply Chain Council, U.S.A.

SCM Network
Suppliers Manufacturers Warehouses & Distribution Centers Customers

Transportation Costs Material Costs

Transportation Costs

Manufacturing Costs

Transportation Costs Inventory Costs

Supply Chain Management deals with the management of materials, information, and financial flows in a network consisting of suppliers, manufacturers, distributors and customers. Stanford Supply Chain Forum Logistics involves managing the flow of items, information, cash and ideas through the coordination of supply chain processes and through the strategic addition of place, period and pattern values. Some More Definitions MIT Center for Transportation and Logistics

The entire supply chain is a single, integrated entity.

The cost, quality and delivery requirements of the customer are objectives shared by every company in the chain.

Inventory is the last resort for resolving Philosophy of SCM supply and demand imbalances.

Strategic Advantage It Can Drive Strategy

* Manufacturing is becoming more efficient * SCM offers opportunity for differentiation (Dell) or cost reduction (Wal-Mart or Big Bazaar)

distribution * Increased risk of supply chain interruption * Increases need for robust and flexible supply Why is SCM Important? chains

Globalization It Covers The World * Requires greater coordination of production and

At the company level, supply chain management impacts

* COST For many products, 20% to 40% of total product costs are controllable logistics costs. * SERVICE For many products, performance factors such as inventory availability and speed of delivery are critical to Important? customer satisfaction. Why is SCM

(continued)

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

 Cycle

view
view

Push/pull

Process view of a supply chain

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle Cycle View of Supply Chains

Supplier

Customer arrival Customer order entry Customer order fulfillment Customer order receiving

Customer order cycle

Retail Retail Retail Retail

order order order order

trigger entry fulfillment receiving

Replenishment cycle

Order arrival from the distributor, retailer, or customer Production scheduling Manufacturing and shipping Receiving at the distributor, retailer, or customer

Manufacturing cycle

Pull processes: execution is initiated in response to a customer order

Push processes: execution is initiated in anticipation of customer orders Push/Pull View of

Supply Chains

Procurement, Manufacturing and Replenishment cycles

Customer Order Cycle

PUSH PROCESSES

PULL PROCESSES

Push/Pull View of Customer Supply Chains Order Arrives

1. Insourcing/OutSourcing (The Make/Buy or Vertical Integration Decision) 2. Partner Selection (Choice of suppliers and partners for the chain)

3. The Contractual Relationship (Arm's length, joint venture, long-term contract, strategic alliance, equity participation, etc.)

SUPPLY CHAIN DESIGN: Three Components

Key drivers of Supply Chain Performance

Competitive Strategy

Supply Chain Strategy

Efficiency
Supply Chain Structure

Responsiveness

Inventory

Transportation

Facilities

Information

Key Drivers

Formulas for Measuring SupplyChain Performance

Inventory Turnover = Cost of goods sold . Average aggregate inventory value X

Weeks of Supply = Average aggregate inventory

value

Cost of goods sold (52 Weeks)

Example of Measuring SupplyChain Performance

Suppose a companys new annual report claims their costs of goods sold for the year is Rs.160 million and their total average inventory (production materials + work-in-process) is worth Rs.35 million. This company is used to having any inventory turnover ratio of 10. What is this years Inventory Turnover ratio? What does it mean?

Example of Measuring SupplyChain Performance (Continued)

Inventory Turnover
= Cost of goods sold/Average aggregate inventory value = Rs.160/Rs.35

= 4.57

Since the company is used to an inventory turnover of 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry.

Supply-Chain Performance
Dell computer reported the following information in its 1999 annual report ( all amounts are expressed in millions): Calculate the inventory turnover and the no. of weeks of supply. Net Revenue ( FY-1999) Cost of sales 18243 14137

Cost of production materials

6423

Cost of production materials on hand 234 Work in progress and finished goods Production material days of supply 39 6 days

Bullwhip Effect
The magnification of variability in orders in the supply-chain.

Retailers Orders

Wholesalers Orders

Manufacturers Orders

Time

Time

Time

A lot of retailers each with little variability in their orders.

can lead to greater variability for a fewer number of wholesalers, and

can lead to even greater variability for a single manufacturer.

Matching Supply-Chains with Products

Functional Innovative

Products
Efficient Supply-Chain Match

Products

Mismatch

Responsive Supply-Chain Mismatch Match

What is Outsourcing

Outsourcing is defined as the act of moving a firms internal activities and decision responsibility to outside

providers.

Reasons to Outsource

Organizationally-driven Improvement-driven Financially-driven Revenue-driven Cost-driven

Employee-driven

Value Density
Value density is defined as the value of an item per pound of weight. It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped.

Mass Customization
Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers. The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network.

Mass Customization

Product should be so designed that it can be assembled into different forms of the product easily. Manufacturing and service processes should be designed so that, they consist of independent modules that can be moved or rearranged easily to support different distribution network design. Supply net work ( Flexible &

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

SOME ESTIMATES FOR INDIA

* Logistics Spend IN Rs. 2,40,000 crores (approx. US $ 50 Billion) * Share of GDP . 12-13 % * Major Elements are ( Percentage of Total)
* * * * * Transportation Inventories 25 Packaging 11 Handling & Warehousing .. 9 Others & Losses 35

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Supply Chain: The Magnitude (continued)

Supply Chain:The Magnitude (continued)

It is estimated that the grocery industry in USA could 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 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 Americas 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)

In 25 years, NDDB has enabled India to become the largest producer of milk by implementing a logistics and supply chain system that has eliminated several intermediaries, thereby leading to a much higher remunerative price (yield) for producers and lower price for consumers. As described in the FORBES magazine, the Dabbawalas of Mumbai has achieved an extremely high level of reliability and precision (SIX SIGMA level in QA parlance) in delivering to their customers the products earmarked for them.

Supply Chain: The Potential

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)

Supply Chain: The Potential

Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 19881996, by over 3,000% (see Anderson and Lee, 1999) using - Direct business model - Build-to-order strategy.

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.

The supply chain is a complex network of facilities and organizations with different, conflicting objectives Matching supply and demand is a major challenge System variations over time are also an important consideration Many supply chain problems are new and there is no clear understanding of all the issues involved

Complexities Involved in Supply Chain Management

Thank You