Supply Chain Management

By Amit Agarwal

Overview
Supply Chain Supply Chain Management (SCM) Need for & benefits of SCM Elements of SCM Bullwhip Effect
Factors Contributing & methods of reducing

Key Issues in SCM Information Technology: A Supply Chain Enabler Supply Chain Imperatives for Success Distribution & Warehouse Management System Supply Chain Integration Supply Chain Collaboration Measuring Supply Chain Performance Supply Chain Strategies & E-Procurement Supply Chain Management Software Global Supply Chain

What is Supply Chain?

All facilities, functions, activities, associated with flow and transformation of goods and services from raw materials to customer, as well as the associated information flows An integrated group of processes to source, make, and deliver products Supply chains are linkages of partially discrete, yet interdependent entities that collectively transform raw materials into finished products.

Supply Chain Illustration

The Supply Chain

Suppliers Manufacturers Warehouses & Distribution Centers Customers

Transportation Costs Material Costs

Transportation Costs

Manufacturing Costs

Transportation Costs Inventory Costs

Supply Chain is

A supply chain is a network of facilities and activities that performs the functions of product development, procurement of material from suppliers, the movement of materials between facilities, the manufacturing of products, the distribution of finished goods to customers, and after-market support for sustainment

(Mabert and Venkataraman)

Sometimes referred to as value chains

The Supply Chain

Plan

Source

Make

Deliver

Buy

Suppliers

Manufacturers

Warehouses & Distribution Centers

Customers

Material Costs

Transportation Transportation Costs Costs Inventory Manufacturing Costs Costs

Transportation Costs

Supply Chain Processes

Supply Chain for Service Providers

More difficult than manufacturing Does not focus on the flow of physical goods Focuses on human resources and support services More compact and less extended

Supplier Supplier

Storage

Service

Customer

Facilities, Functions and Activities

Facilities: Warehouses Factories Processing centers Distribution centers Retail outlets Offices Functions & Activities: Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service

Supply Chain flowchart

Supply Chain Planning
Demand Forecasting & Planning Product Research Supply Planning Inventory Planning

Production Planning

Procurement Planning Indigenous Material

Import of Material

Raw Material Procurement Relationship with Suppliers Agreements Product Support Product Training Product Promos.

Production and Procurement Supply Chain Management

Transport Management Warehouse Management Inventory Management Stores Operations E-mall Retail Chain Management Order Fulfillment

Order Management
Inquiry from Prospects Order from Customers

Distribution Management
Customer Relationship Management Relationship with Distributors Service Maintenance

Supply Chain Management (SCM) is

Plan

Source

Make

Deliver

Buy

A set of approaches used to efficiently integrate

Suppliers Manufacturers Warehouses Distribution centers

So that the product is produced and distributed

In the right quantities To the right locations And at the right time

System-wide costs are minimized and Service level requirements are satisfied

Keys to Effective SCM

Managing flow of information Communication Cooperation trust through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs

Need for Supply Chain Management

Improve operations Increasing levels of outsourcing Increasing transportation costs Competitive pressures Increasing globalization Increasing importance of e-commerce Complexity of supply chains Manage inventories

Benefits of Supply Chain Management

Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty

Elements of Supply Chain Management

Element
Customers Forecasting Design Processing Inventory Purchasing Suppliers Location Logistics

Typical Issues
Determining what customers want Predicting quantity and timing of demand Incorporating customer wants, mfg., and time Controlling quality, scheduling work Meeting demand while managing inventory costs Evaluating suppliers and supporting operations Monitoring supplier quality, delivery, and relations Determining location of facilities Deciding how to best move and store materials

Todays Marketplace Requires:

Personalized content and services for their customers Collaborative planning with design partners, distributors, and suppliers Real-time commitments for design, production, inventory, and transportation capacity Flexible logistics options to ensure timely fulfillment Order tracking & reporting across multiple vendors and carriers

Shared visibility for trading partners

Why Is SCM Difficult?

Plan

Source

Make

Deliver

Buy

Uncertainty is inherent to every supply chain

Travel times Breakdowns of machines and vehicles Weather, natural catastrophe, war Local politics, labor conditions, border issues

The complexity of the problem to globally optimize a supply chain is significant

Minimize internal costs Minimize uncertainty Deal with remaining uncertainty

Supply Chain Uncertainty

Factors that contribute to uncertainty inaccurate demand forecasting long variable lead times late deliveries incomplete shipments product changes batch ordering price fluctuations and discounts inflated orders One goal in SCM: respond to uncertainty in customer demand without creating costly excess inventory Negative effects of uncertainty: lateness & incomplete orders Inventory: insurance against supply chain uncertainty

Bullwhip Effect
Occurs when slight demand variability is magnified as information moves back upstream
Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesnt vary

The variability worsens as we travel up the supply chain

Factors Contributing to the Bullwhip

Demand forecasting practices Min-max inventory management (reorder points to bring inventory up to predicted levels) Lead time Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs Batch ordering Peaks and valleys in orders Fixed ordering costs Impact of transportation costs (e.g., fuel costs) Sales quotas Price fluctuations Promotion and discount policies Lack of centralized information

Taming the Bullwhip

Four critical methods for reducing the Bullwhip effect:
Reduce uncertainty in the supply chain Centralize demand information Keep each stage of the supply chain provided with up-to-date customer demand information More frequent planning (continuous real-time planning the goal) Reduce variability in the supply chain Every-day-low-price strategies for stable demand patterns Reduce lead times Use cross-docking to reduce order lead times Use EDI techniques to reduce information lead times Eliminate the bullwhip through strategic partnerships Vendor-managed inventory (VMI) Collaborative planning, forecasting and replenishment (CPFR)

Supply Chain Management Key Issues

Forecasts are never right Very unlikely that actual demand will exactly equal forecast demand The longer the forecast horizon, the worse the forecast A forecast for a year from now will never be as accurate as a forecast for 3 months from now Aggregate forecasts are more accurate A demand forecast for all car models will be more accurate than a forecast for a specific car model
Nevertheless, forecasts (or plans) are important management tools when some methods are applied to reduce uncertainty

Methods for Improving Forecasts

Judgment Methods Market Research Analysis

Panels of Experts Internal experts External experts Domain experts Delphi technique Time-Series Methods

Market testing Market surveys Focus groups Accurate Forecasts Causal Analysis

Moving average Exponential smoothing Trend analysis Seasonality analysis

Relies on data other than that being predicted Economic data, commodity data, etc.

Supply Chain Management Key Issues

Overcoming functional silos with conflicting goals

Purchasing Manufacturing Distribution Customer Service/ Sales

Low purchase price Multiple vendors

Few changeovers Stable schedules Long run lengths Low inventories Low transportation

High inventories High service levels Regional stocks

SOURCE

MAKE

DELIVER

SELL

Supply Chain Management Key Issues

ISSUE Network Planning CONSIDERATIONS
Warehouse locations and capacities Plant locations and production levels Transportation flows between facilities to minimize cost and time How should inventory be managed? Why does inventory fluctuate and what strategies minimize this? Impact of volume discount and revenue sharing Pricing strategies to reduce order-shipment variability Selection of distribution strategies (e.g., direct ship vs. cross-docking) How many cross-dock points are needed? Cost/Benefits of different strategies How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?

Inventory Control Supply Contracts Distribution Strategies

Integration and Strategic Partnering

Outsourcing & Procurement Strategies Product Design

What are our core supply chain capabilities and which are not? Does our product design mandate different outsourcing approaches? Risk management How are inventory holding and transportation costs affected by product design? How does product design enable mass customization?

Supply Chain Imperatives for Success

View the supply chain as a strategic asset and a differentiator
direct-to-consumer sales and build-to-order manufacturing

Create unique supply chain configurations that align with your companys strategic objectives
Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network

Supply chain configuration components

Reduce uncertainty
Forecasting Collaboration Integration

Information In The Supply Chain

Plan
Suppliers Manufacturers Warehouses & Distribution Centers Retailer

Source

Make

Deliver

Sell

Order Lead Time Delivery Lead Time

Production Lead Time

Each facility farther away from actual customer demand, must make forecasts of demand Lacking actual customer buying data, each facility bases its forecasts on downstream orders, which are more variable than actual demand To accommodate variability, inventory levels are overstocked thus increasing inventory carrying costs

Its estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertainty

Information Technology: A Supply Chain Enabler

Information links all aspects of supply chain E-business replacement of physical business processes with electronic ones Electronic data interchange (EDI) a computer-to-computer exchange of business documents

Bar code and point-of-sale

data creates an instantaneous computer record of a sale

Radio frequency identification (RFID)

technology can send product data from an item to a reader via radio waves

Internet
allows companies to communicate with suppliers, customers, shippers and other businesses around the world, instantaneously

E-business and Supply Chain

Cost savings and price reductions Reduction or elimination of the role of intermediaries Shortening supply chain response and transaction times Gaining a wider presence and increased visibility for companies Greater choices and more information for customers Improved service as a result of instant accessibility to services Collection and analysis of voluminous amounts of customer data and preferences Creation of virtual companies Leveling playing field for small companies Gaining global access to markets, suppliers, and distribution channels

E- Supply Chain

Supply Chain Processes Customer sales Production

Past / Existing Method Pushsell from inventory stock Goal of even and stable production Mass approach

E- method Pullbuild-to-order Focus on customer demand, respond with supply chain flexibility Fast, reliable, and customized to get cars to specific customer location Shared by dealers and manufacturers Small inventories with shared information and strategically placed parts inventories Orders made in real time based on availableto-promise information Simplified products based on better information about what customers want

Distribution

Customer relationship Managing uncertainty Procurement

Dealer-owned Large inventory at dealers

Batch-oriented; dealers order based on allocations Complex products dont match customer needs

Product design

Supply Chain Integration

Information sharing among supply chain members Reduced bullwhip effect Early problem detection Faster response Builds trust and confidence Collaborative planning, forecasting, replenishment, and design Reduced bullwhip effect Lower Costs (material, logistics, operating, etc.) Higher capacity utilization Improved customer service levels

Supply Chain Integration (cont.)

Coordinated workflow, production and operations, procurement Production efficiencies Fast response Improved service Quicker to market Adopt new business models and technologies Penetration of new markets Creation of new products Improved efficiency Mass customization

Collaborative Planning, Forecasting, and Replenishment

Process for two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand Parties electronically exchange past sales trends point-of-sale data on-hand inventory scheduled promotions forecasts

Suppliers

Procurement purchase of goods and services from suppliers On-demand (direct response) delivery requires supplier to deliver goods when demanded by customer Continuous replenishment supplying orders in a short period of time according to a predetermined schedule Cross-enterprise teams coordinate processes between company and supplier

Outsourcing

Sourcing selection of suppliers Outsourcing purchase of goods and services from an outside supplier Core competencies what a company does best Single sourcing a company purchases goods and services from only a few (or one) suppliers

E-Procurement

Direct purchase from suppliers over the Internet Direct products go directly into production process a product, indirect products not E-marketplaces web sites where companies and suppliers conduct business-tobusiness activities Reverse auction a company posts orders on the Internet for suppliers to bid on

Relationship between Facilities and Functions along the Supply Chain

Distribution

Encompasses all channels, processes, and functions, including warehousing and transportation, that a product passes on its way to final customer Often called logistics Logistics transportation and distribution of goods and services Refers to the movement of materials and information within a facility and to incoming and outgoing shipments of goods and materials in a supply chain

Warehouse Management Systems

Highly automated system that runs day-to-day operations of a DC Controls item putaway, picking, packing, and shipping Features transportation management order management yard management labor management warehouse optimization

A WMS

Vendor-Managed Inventory

Manufacturers generate orders, not distributors or retailers Stocking information is accessed using EDI A first step towards supply chain collaboration Increased speed, reduced errors, and improved service

Collaborative Logistics and Distribution Outsourcing

Collaborative planning, forecasting, and replenishment create greater economies of scale Internet-based exchange of data and information Significant decrease in inventory levels and more efficient logistics Companies focus on core competencies

Supply Chain Collaboration What Is It?

The means by which companies within the supply chain work together towards mutual goals by sharing Ideas Information Processes Knowledge Information Risks Rewards Why collaborate? Accelerate entry into new markets Changes the relationship between cost/value/profit equation The only method that has the potential to eliminate or minimize the Bullwhip effect

Benefits of Supply Chain Collaboration

CUSTOMERS

MATERIAL SUPPLIERS

SERVICE SUPPLIERS

Reduced inventory Increased revenue Lower order management costs Higher Gross Margin Better forecast accuracy Better allocation of promotional budgets

Reduced inventory Lower warehousing costs Lower material acquisition costs Fewer stockout conditions

Lower freight costs Faster and more reliable delivery Lower capital costs Reduced depreciation Lower fixed costs

Improved customer service More efficient use of human resources

Successful Supply Chain Collaboration

Try to collaborate internally before you try external collaboration Help your partners to work with you Share the savings Start small (a limited number of selected partners) and stay focused on what you want to achieve in the collaboration Advance your IT capabilities only to the level that you expect your partners to manage Put a comprehensive metrics program in place that allows you to monitor your partners performance Make sure people are kept part of the equation Systems do not replace people Make sure your organization is populated with competent professionals whove done this before

Measuring Supply Chain Performance

Key performance indicators inventory turnover cost of annual sales per inventory unit inventory days of supply total value of all items being held in inventory fill rate fraction of orders filled by a distribution center within a specific time period

Key Performance Indicators

Inventory turns =

Cost of goods sold Average aggregate value of inventory

Average aggregate value of inventory = =E (average inventory for item i) X (unit value item i) Average aggregate value of inventory (Costs of goods sold)/(365 days)

Days of supply =

Other Measures of Supply Chain Performance

Process Control used to monitor and control any process in supply chain Supply Chain Operations Reference (SCOR) establish targets to achieve best in class performance

SCOR Model Processes

Plan Develop a course of action that best meets sourcing, production and delivery requirements

Source Procure goods and services to meet planned or actual demand

Make Transform product to a finished state to meet planned or actual demand

Deliver Provide products to meet demand, including order management, transportation and distribution Return Return products, post-delivery customer support

SCOR: Customer Facing

Performance Attribute Supply Chain Delivery Reliability Performance Metric Delivery performance Definition Percentage of orders delivered on time and in full to the customer Percentage of orders shipped within24 hours of order receipt Percentage of orders delivered on time and in full, perfectly matched with order with no errors Number of days from order receipt to customer delivery

Fill rate

Perfect order fulfillment

Supply Chain Responsiveness

Order fulfillment lead time

Supply Chain Flexibility

Supply chain response time

Number of days for supply chain to respond to an unplanned significant change in demand without a cost penalty

Production flexibility

Number of days to achieve an unplanned 20% change in orders without a cost penalty

SCOR: Internal Facing

Performance Attribute Supply Chain Cost Performance Metric Definition

Supply chain management cost

Direct and indirect cost to plan, source and deliver products and services Direct cost of material and labor to produce a product or service Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory Number of days that cash is tied up as working capital Number of days that cash is tied up as inventory Revenue divided by total assets including working capital and fixed assets

Cost of goods sold

Value-added productivity

Warranty/returns processing cost

Supply Chain Asset Management Efficiency

Cash-to-cash cycle time

Inventory days of supply Asset turns

Supply Chain Benefits and Drawbacks

Problem
Large inventories Long lead times Large number of parts Cost Quality Variability

Potential Improvement
Smaller, more frequent deliveries Delayed differentiation Disintermediation Modular

Benefits
Reduced holding costs Quick response

Possible Drawbacks
Traffic congestion Increased costs May not be feasible May need absorb functions Less variety

Fewer parts Simpler ordering Reduced cost, higher quality Able to match supply and demand

Outsourcing

Loss of control

Shorter lead times, better forecasts

Less variety

Supply Chain Management

Improved information helps enterprises to plan ahead and be more competitive

Information Demand forecasts Customer delivery requirements Inputs supply markets Supply chain services

Financial Planning & acquisition of physical assets and Physical Cash flow impact and financial risks in the Assets

supply chain Enterprise

Human Resources

Management: Planning Executing Monitoring

Networks and Relation- Strategic supply chain alliances ships

Securing & developing SCM expertise Supplier development programs

Supply Chain Management

Supply Chain Management

Its about people, expertise and performance Not just about process.

Supply Chain Management

And Finally ..
There is a need to recognise the reality of relationships within supply chain management -its a RISK and a REVENUE Sharing Relationship.