Supply Chain Management

Muhammad Zahid Malik

zahid.malik@iqra.edu.pk
 Outline
• What is supply chain management?
• A supply chain strategy framework
• Components of a SCM
• Major obstacles and common problems
• Seven Eleven Japan
Traditional View: Cost breakdown of a
manufactured good

Profit
• Profit 10% Supply Chain
Cost
• Supply Chain Cost 20%
Marketing
Cost
• Marketing Cost 25%

• Manufacturing Cost 45%

Manufacturing
Cost

Effort spent for supply chain activities are invisible to the customers.
What can Supply Chain Management do?
• Estimated that the grocery industry could save $30 billion (10% of operating cost)
by using effective logistics and supply chain strategies
• A typical box of cereal spends 104 days from factory to sale
• A typical car spends 15 days from factory to dealership
• Faster turnaround of the goods is better?

• Laura Ashley (retailer of women and children clothes) turns its inventory 10 times
a year five times faster than 3 years ago
• inventory is emptied 10 times a year, or an item spends about 12/10 months in the
inventory.
• To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE.

• National Semiconductor used air transportation and closed 6 warehouses, 34%

increase in sales and 47% decrease in delivery lead time.
 Magnitude of Supply Chain Management

• Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not
available when and where needed

• P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months)

by collaboration resulting in a better match of supply and demand

• When the 1 gig processor was introduced by AMD (Advanced Micro Devices), the
price of the 800 meg processor dropped by 30%
Importance of SCM understood by
some
• AMR Research:
• "The biggest issue enterprises face today is intelligent visibility of
their supply chains-both upstream and down"
• Forrester Research:
• "Companies need to sense and proactively respond to unanticipated
variations in supply and demand by adopting emerging technologies
such as intelligent agents. To boost their operational agility, firms
need to transform their static supply chains into adaptive supply
networks”
• Gartner Group:
• “By 2004, 90% of enterprises that fail to apply supply-chain
management technology and processes to increase their agility will
lose their status as preferred suppliers”
• Open ended statement. Agility can be increased continuously.
Top 25
Supply Chains

AMR research http://www.amrresearch.com

publishes reports on supply chains
and other issues.

The Top 25 supply chains report comes

out in Novembers.

The table on the right-hand side is from

The Second Annual Supply Chain
Top 25 prepared by Kevin Riley
SCM Generated Value

Minimizing supply chain costs

while keeping a reasonable service level
customer satisfaction/quality/on time
delivery, etc.

This is how SCM contributes to the bottom line

SCM is not strictly a cost reduction paradigm!

A picture is better than 1000 words!
How many words would be better than 3 pictures?
- A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream

- aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

- achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
The right
Time
= Higher
Profits
What Is Supply Chain Management?

Supply chain management is a set of approaches

utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that
merchandise is produced and distributed at the right
quantities, to the right locations, and at the right
time, in order to minimize system wide costs while
satisfying service level requirements.
Two Other Formal Definitions
The design and management of seamless, value-
added process across organizational boundaries to
meet the real needs of the end customer
Institute for Supply Management
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
 Flows in a Supply Chain

Material

Information
Supplier Customer
Funds

The flows resemble a chain reaction.

 SCM in a Supply Network
 Supply Chain Management (SCM) is concerned with the management and control of
the flows of material, information, and finances in supply chains.
Cash
Products and Services
Information
THAILAND INDIA MEXICO TEXAS US
N-Tier Suppliers Suppliers Logistics Distributors Retailers

Supply Side OEM Demand Side

Demand

Supply

 The task of SCM is to design, plan, and execute the activities at the different stages
so as to provide the desired levels of service to supply chain customers profitably
 Importance of Supply Chain Management
 In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related
activities (movement, storage, and control of products across supply
chains). Source: State of Logistics Report
Frequent Supply shortages Low order fill
Inefficient rates
logistics
High
Tier 1 Manufacturer Distributor Retailer Customer stockouts
Supplier

Glitch-Wrong Material, Ineffective

Machine is Down – High inventories High landed costs to
through the chain promotions the shelf
effect snowballs

 Eliminating inefficiencies in supply chains can save millions of $.

A Generic Supply Chain
Sources: Regional Field Customers,
plants Warehouses: Warehouses: demand
vendors stocking stocking centers
ports points points sinks

Supply

Inventory

Purchase Inventory
Transportation
Cycle View of Supply Chains
Customer
Customer Order
Cycle
Retailer
Any cycle
Replenishment Cycle 0. Customer arrival
1. Customer triggers an order
Distributor 2. Supplier fulfils the order
3. Customer receives the order
Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 Push vs Pull System
• What instigates the movement of the work in the system?

• In Push systems, work release is based on downstream demand

forecasts
• Keeps inventory to meet actual demand
• Acts proactively
• e.g. Making generic job application resumes today (e.g.: exempli gratia)

• In Pull systems, work release is based on actual demand or the

actual status of the downstream customers
• May cause long delivery lead times
• Acts reactively
• e.g. Making a specific resume for a company after talking to the recruiter
Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
Push-Pull boundary
Examples of Supply Chains
Dell / Compaq
• Dell buys some components for a product from its suppliers after that
product is purchased by a customer. Extreme case of a pull process
• Zara, Spain’s answer to Italy’s Benetton
• Sells apparel with a short design-to-sale cycle, avoids markdowns.
• Toyota / GM / Volkswagen, in the course notes
• McMaster Carr / W.W. Grainger, sell auto parts
SCM Strategy
Mission-Strategy-Tactics-
Decisions
•Mission, Mission statement
• The reason for existence of an organization

•Strategy
• A plan for achieving organizational goals
•Tactics
• The actions taken to accomplish strategies
• Operational decisions
• Day to day decisions to support tactics
Life Strategy for Ted
Ahmed is an undergrad. He would like to have a career in
business, have a good job, and earn enough income to live
comfortably

Mission: Live a good life

•Goal: Successful career, good income

•Strategy: Obtain a master’s degree

•Tactics: Select a college and a concentration

•Operations: Enroll, buy books, take

courses, study, graduate, get a job
 Linking SC and Business Strategy
Competitive (Business) Strategy

Product Development Strategy Marketing Strategy

-Portfolio of products
-Frequent discounts Supply Chain Strategy
-Timing of product introductions
-Coupons

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

Strategies:
Product Development
It relates to Technologies for
future operations (via patents)
and Set of products/services
• Be the technology leader
IBM workstations
• Offer many products
Dell computers
• Offer products for locals
Tata’s Nano at $2500=100000 rupees
Production at Singur, West Bengal, India;
l x w x h=3.1 x 1.5 x 1.6 meters;
Top speed: 105km/hr;
Engine volume 623 cc;
Mileage 50 miles/gallon;
Annual sales target 200,000.
Strategies
• Marketing and sales strategy relates to positioning, pricing
and promotion of products/services
• e.g. Never offer more than 40% discount
• e.g. EDLP = every day low price
• At Wal-Mart
• e.g. Demand smoothing via coupons
• BestBuy

• Supply chain management strategy relates to procurement,

transportation, storage and delivery
• e.g. Never use more than 1 supplier for every input
• e.g. Never expedite orders just because they are late
• e.g. Always use domestic suppliers within the sales season not in
advance.
 Fitting the SC to the customer or vice
versa?
• Understand the customer Wishes

• Understand the Capabilities of your SC

• Match the Wishes with the Capabilities

• Challenge: How to meet extensive Wishes

with limited Capabilities?
 Achieving Strategic Fit: Consistent
SCM and Competitive strategies
• Fit SC to the customer

• Understanding the Customer

• Range of demand, pizza hut stable
• Production lot size, seasonal products
• Response time, organ transplantation
• Service level, product availability
• Product variety Implied (Demand)
• Innovation Uncertainty for SC
• Accommodating
poor quality
Implied trouble
for SC
 Contributors to Implied Demand
Uncertainty

Commodities Customized products

Detergent High Fashion Clothing
Long lead time steel Emergency steel,
for maintenance/replacement

Price Customer Need Responsiveness

Low Implied Demand Uncertainty High

Short lead times, product variety,

distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
 Understanding the Supply Chain:
Cost-Responsiveness Tradeoff
Responsiveness (in time, high service level and product variety)

High

Efficiency frontier

Fix responsiveness Inefficient Impossible

Inefficiency Region
Low

High Low Cost in $

Why decreasing slope (concave) for the efficiency frontier?
Achieving Strategic Fit: Wishes vs. Capabilities

Responsive
(high cost)
Gourmet dinner
supply chain
<High margin>

Responsivenes
spectrum

Lunch buffet
<Low margin>
Efficient
(low cost)
supply chain
Certain Implied Uncertain
demand uncertainty demand
spectrum
Top 10 Retailers Reported

Source www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf
Top 10 Retailers Reported
Big retailers’ Strategy
• Wal-Mart: Efficiency
• Target: More quality and service
• Carrefour: International, ambiance

• K-Mart: Confused.
• Squeezed between Target and Wal-Mart
• Reliance on coupon sales
• Do coupons stabilize or destabilize a Supply chain?

• K-Mart and Sears merged in November 2004. Now called Sears

Holdings.
• K-Mart gets cash
• Sears gets presence outside malls
 Other Factors
• Multiple products in a SC. Multiple customers for a given product
• Separate supply chains or Tailored supply chains
• e.g. Barnes and Noble: Retailing and/or e-tailing
• Product and/or customer classes
• e.g. UTD library loans books for 6 months (2 weeks) to faculty (students)
• Customer segmentation by pricing
• Competitors: more, faster and global
• UTD online programs compete globally

• Product life cycle (shortening)

• SCM strategy moves toward efficiency and low implied uncertainty as products age
• e.g. Air travel is becoming more efficient
• e.g. Southwest airlines lead the drive for efficiency
• e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005.
• e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC more
efficient in June 2004.
• Replacement sales
• Selling to replace broken units.
• e.g. AC replacement is about 50% of the market.
• Macroeconomic factors for visibility
• Forecasting Home Depot sales from S&P 500 price index.
• Positive correlation is detected.
Achieving Strategic Fit over a
Lifecycle
Responsive
(high cost)
supply chain

Efficient
(low cost)
supply chain
Certain Uncertain
demand demand
Integration
• Integration is the central theme in SCM

• Building synergies by integrating business functions,

departments and companies
 Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
SUPPLY CHAIN
DRIVERS AND
OBSTACLES
 Drivers of Supply Chain
Performance
How to achieve
Efficiency Responsiveness

Supply chain structure

Logistical
Inventory Transportation Facilities
Drivers

Cross-
Information Sourcing Pricing Functional
Drivers
 1. Inventory
• Convenience: Cycle inventory
• No customer buys eggs one by one
• Unstable demand: Seasonal inventory
• Bathing suits
• Xmas toys and computer sales

• Randomness: Safety inventory

• 20% more syllabi than the class size were available in the first class
• Compaq’s loss in 95

• Pipeline inventory
• Work in process or transit
Little’s law
Long run averages = Expected values
I = R .T
I=Pipeline inventory;
R=output per time=throughput;
T=delay time=flow time

10/minute
Spend 1 minute

Flow time? Thruput? Pipeline (work in process) Inventory?

2. Transportation
• Air
• Truck
• Rail
• Ship
• Pipeline
• Electronic
3. Facilities
• Production
• Flexible vs. Dedicated
• Flexibility costs
• Production: Remember BMW: “a sports car disguised as a sedan”
• Service: Can your instructor teach music as well as SCM?
• Sports: A playmaker who shoots well is rare.

• Inventory-like operations: Receiving, Prepackaging, Storing,

Picking, Packaging, Sorting, Accumulating, Shipping
• Job Lot Storage: Need more space. Reticle storage in fabs.
• Crossdocking: Wal-Mart
4. Information
• Role in the supply chain
• The connection between the various stages in the supply chain
• Crucial to daily operation of each stage in a supply chain
• E.g., production scheduling, inventory levels

• Role in the competitive strategy

• Allows supply chain to become more efficient and more responsive at the
same time (reduces the need for a trade-off)
• Information technology
• Andersen Windows
• Wood window manufacturer, whose customers can choose from a library of 50,000
designs or create their own. Customer orders automatically sent to the factory.
Characteristics of the Good Information

Information Global Coordinated Supply Chain

Scope Decisions Success

Strategy Analytical Models $$$

Information
 Accurate?
 Accessible?
 Up-to-date?
 In the Correct form?
» If not, database restricted ability. How difficult is it to import data into SAP?
Quality of Information
• Information drives the decisions:
• Good information means good decisions
• IT helps: MRP, ERP, SAP, EDI
• Relevant information?
• How to use information?
 Information Technology in a
Supply Chain: Legacy Systems
Strategic

Planning

Operational

Supplier Manufacturer Distributor Retailer Customer

Information Technology in a Supply Chain:
ERP Systems
Strategic

Planning

Potential ERP Potential

Operational ERP ERP

Supplier Manufacturer Distributor Retailer Customer

Information Technology in a Supply Chain:
Analytical Applications

Strategic

SCM

Planning APS Transport & Inventory Dem Plan

Planning
Supplier
Apps
Transport execution & CRM/SFA
MES
WMS
Operational

Supplier Manufacturer Distributor Retailer Customer

ERP Systems
• Wider focus
• Push (MRP) versus Pull (demand information transmitted quickly
throughout the supply chain)
• Real-time information
• Coordination and Information sharing

• Transactional IT
• Expensive and difficult to implement
• About 25% of ERP installations are cancelled within a year
• About 70% of ERP installations go over the budget
IT Push
500

400

300

200

100

0
1965 1973 1981 1989 1997

IT investment($B)
Supply Chain Software Push
See Top 100 under /articles.html

Source Kanakamedala,
Ramsdell, Srivatsan (2003).
McKinsey Quarterly, No 1.
 5. Sourcing
• Role in the supply chain
• Set of processes required to purchase goods and services in a supply chain
• Supplier selection, single vs. multiple suppliers, contract negotiation

• Role in the competitive strategy

• Sourcing is crucial. It affects efficiency and responsiveness in a supply chain
• In-house vs. outsource decisions- improving efficiency and responsiveness
• TI: More than half of the revenue spent for sourcing.
• Cisco sources: Low-end products (e.g. home routers) from China.

• Components of sourcing decisions

• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process:
• Every department of a firm buy from suppliers independently, or all together.
• EDS to reduce the number of officers with purchasing authorization.
 6. Pricing
• Role in the supply chain
• Pricing determines the amount to charge customers in a supply chain
• Pricing strategies can be used to match demand and supply
• Price elasticity: Do you know yours?

• Role in the competitive strategy

• Use pricing strategies to improve efficiency and responsiveness
• Low price and low product availability; vary prices by response times
• Amazon: Faster delivery is more expensive

• Components of pricing decisions

• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing, depending on the product and services
• Packaging, delivery location, time, customer pick up
• Bundling products; products and services
Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost/slow/no High cost/
duplication streamlined/reliable
Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

Major Obstacles to Achieving Fit

• SC is big:
• Variety of products/services
• Spoiled customer
• Multiple owners (Procurement, Production, Inventory, Marketing) /
multiple objectives
• Globalization

Local optimization and lack of global fit

Major Obstacles to Achieving Fit

• Dealing with Multiple Owners / Local Optimization

• Information Coordination
• Information sharing / Shyness / Legal and ethical issues
• Contractual Coordination
• Mechanisms to align local objectives with global ones
• Coordination with (real) options
• Rare in the practice
• Without coordination, misleading reliance on metrics:
• Average safety inventory, Average incoming shipment size, Average purchase
price of raw materials, Revenue
Major obstacles to achieving fit
• Instability and Randomness:
• Increasing product variety
• Shrinking product life cycles
• Customer fragmentation: Push for customization, segmentation
• Fragmentation of Supply Chain ownership: Globalization

Increasing implied uncertainty

 Common problems
• Lack of relevant SCM metrics: How to measure responsiveness?
• How to measure efficiency, costs, worker performance, etc?

• Poor inventory status information

• Theft: Major problem for furniture retailers.
• Transaction errors: Retailers with inaccurate inventory records
for 65% of SKUs
• Information delays, dated information, incompatible info. systems
• Misplaced inventory: 16% of items cannot be found at a major retailer
• Spoilage: active ingredients in the products are losing their properties
• Product quality and yield
• Lack of visibility in SCs
• Do you know the inventory your distribution centers hold?
• Do you know the inventory your fellow retailer holds?
 Common problems
• Poor delivery status information
• Not knowing the order status
• Poor IT design
• Unreliable, duplicate data
• Security problems: too much or too little
• Ignoring uncertainties
• “The flight from uncertainty and ambiguity is so motivated that we often create
pseudocertainty.”
• Nitin Nohra, HBR February 2006 issue, p.40.

• Internal customer discrimination

• Giving lower priority to internal customers than external customers
• Poor integration
• Elusive inventory costs
• Accounting systems do not capture opportunity costs
• SC-insensitive product design
Summary
• Supply Chain Introduction
• Competitiveness / Business strategy / SCM strategy
• Components
• Inventory, Transportation, Facilities, Information, Sourcing, Pricing

• Challenges
SEVEN ELEVEN JAPAN
(SEJ)
A Case Study
Factual Information on Seven Eleven Japan (SEJ)

• Largest convenience store in Japan with market value of $95 B. The third largest retail
company in the world after Wal-Mart and Home Depot.
• Established in 1974.
• In 2000, total sales $18,000 M, profit $620 M.
• Average inventory turnover time 7-8.5 days.
• Stock value increased by 3000 times from 1974 to 2000.
• In 1985, there were 2000 stores in Japan, increasing by 400-500 per year.
• Return on equity 14% over 2000-2004.
• A SEJ store is about the half the size of a US 7-eleven store,
that is about 110 m2.
• Sales:
• Products
• 32.9% Processed food: drinks, noodles, bread and snacks
• 31.6% Fast food: rice ball, box lunch and hamburgers
• 12.0% Fresh food: diary products
• 25.3% Non-food: magazines, ladies stockings and batteries.
• Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying
 More on SEJ
More factual info:
• Average sales about twice of an average US store
• SKU’s offered in store: Over 3,000 (change by time of day, day of week, season)
• Virtually no storage space
• No food cooking at the stores

Japanese Images of Seven Eleven:

• Convenient
• Cheerful and lively stores
• Many ready made dinner items I buy
• Famous for its great boxed lunch and dinner
• - On weekends, when I was single, I went to buy lunch and dinner

SC strategy:
Micro matching of supply and demand (by location, time of day, day of week, season)
Seven Eleven - Number of Stores
1999: 8,027
6000 2004: 10,356

5000

4000

3000 Number of Stores

2000

1000

0
85 86 87 88 89 90 91 92 93 94
Seven Eleven - Net Sales (B Yen)
Sales 1,963 B Yen in 2000

1400
1200
1000
800
Net Sales
600
400
200
0
85 86 87 88 89 90 91 92 93 94
Seven Eleven - Pre tax Profit (B Yen)

100
90
80
70
60
50 Profit
40
30
20
10
0
85 86 87 88 89 90 91 92 93 94
Seven Eleven - Inventory turnover
(days)

14
12
10
8
Inventory
6
4
2
0
85 86 87 88 89 90 91 92 93 94
 Information Strategy
Quick access to up to date information (as opposed to data):
• In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter,
DCs and suppliers

• Customer checkout process

• Clerk records the customer’s gender, (estimated) age and purchased items. These Point of Sales
(POS) data are transmitted to database at the headquarters.
• Store hardware: Store computer, POS registers linked to store computer, Graphic Order
Terminals, Scanner terminals for receiving

• Daily use of the data

• Headquarters aggregate the data by region, products and time and pass to suppliers and stores by
next morning. Store managers deduce trend information.
• Weekly use of the data
• Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100
corporate managers.
• Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo
on Monday night.
• Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy.
Tuesday nights, field counselors return back to their regions.
Information Analysis of POS Data
• Analysis of
• Sales for product categories over time
• SKU (stock keeping unit)
• Waste or disposal
• 10 day (or week) sales trend by SKU

• Sales trends for new product

• In the early 1990s, half-prepared fresh noodle sales were going up,
new fresh noodle products were quickly developed

• Sales trend by time and day

• Different sales patterns for different sizes of milk at different times of the day results in
rearrangement of the milks in the fridge. Extreme store micromanagement.
• Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?).

• List of slow moving items

• About half of 3000 SKUs are replaced by new ones every year
Facilities Strategy
• Limited storage space at stores which have only 125-150 m2 space
• Frequent and small deliveries to stores

• Deliveries arrive from over 200 plants.

• Products are grouped by the cooling needs
• Combined delivery system: frozen foods, chilled foods, room temperature and hot foods.
• Such product groups are cross-docked at distribution centers (DC). Food DCs store no
inventory.
• A single truck brings a group of products and visits several stores within a geographical region
• Aggregation: No supplier (not even coke!) delivers direct
• The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000. Still,
at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners.
• Have many outlets, at convenient locations, close to where customers can walk
• Focus on some territories, not all: When they locate in a place they blanket (a.k.a.
clustering) the area with stores; stores open in clusters with corresponding DC’s.
• 844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. No
stores in Kobe.
• Success rate of franchise application <= 1/100
 The Present and the Future
• Is food preparation a good idea at 7-eleven locations?
• e.g. Compare microwave heating vs. salad preparation.
• Why SEJ does not allow direct delivery from suppliers to retailers?
• Point out which of the following strategies can also be used in US (or Taiwan)
• Information strategy
• Facilities strategy
• Discuss the differences between the Japanese and US (or Taiwanese) consumers with
regard to
• Frequency and amount of grocery purchase
• Use of credit cards vs. cash for purchase
• 7-eleven inventory turnover rate is 50 in Japan and 19 in the USA.
• 7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan.
Does this make sense from a supply chain perspective?
• Cost vs. Responsiveness
• Business strategy
• What is the risk of micro-matching strategy?
• No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA?