Supply Chain Management

By
P.Parthiban
Department of Production Engg
National Institute of Technology
Tiruchirappalli-15,TN

Evolution of Supply Chain Management

Fundamentals of Supply Chain Management
Supply Chain Networks
Supply Chain Flows
Supply chain planning: Strategic, operational
and tactical.
Decision phases in supply chain
Overview of supply chain models and
modeling systems

Historical Background

Inventory lot-sizing models

Time-series forecasting
Production Planning & Control
Purchasing
Sales & Distribution

All these functions have existed for a

century !

The Transition (1970

1995)

Inventory models came under attack (70s)

Enter MRP MRP II ERP
And from Japan, JIT, TQM, Kaizen, etc.

What happened thereafter?

The Motive ?
Better coordination /integration of functions
Shorter time to manufacture
Globalization
Emergence of IT
Led to the evolution of Supply Chain Management

Evolution

Supply Chain Management

Enterprise Resource Planning
Manufacturing Resource Planning
Material Requirements Planning
Lot-Size Models
Thumb - Rules

Ancient Times

The first supply chain was the barter system

Traces of outsourcing was seen when Charles S. Rolls
became selling agent for cars made by F. Henry Royce

1904

The essence of SCM was understood with the first phase

characterized as an inventory push era that focused
primarily on physical distribution of finished goods

1960-1975

Companies began migrating from an inventory push to

a customer pull channel

1975-1990
1980

Emergence of SCM

1985

WalMart introduced the concept of Cross Docking

1996
1998

Internet revolutionized the distribution system of

the business
Concept of e-commerce changed the definition of
business

Why Supply Chain ?

Earlier
Companies No two companies at the

Today

Competition at all levels.

same level of competition.

Customer

The main motive was to

increase
production.

Main motive is customer

service.

Production differentiation
very early
and far from customer.

Product differentiated nearer

the
customer.

Reaction approach of
industries.
Customer did not care about
specifications.

Action approach of industries.

Less market moving powers

More power devolved to the

customer

Customers demand exact

specifications.

SUPPLY CHAIN MANAGEMENT

What is it?
.More than Technology
Customers

Total system approach to

managing the entire flow of
information, materials and
services from raw material
suppliers through factories,
the distribution centers and
warehouses to end customer.

Supplier

Distributor
s

Factories/
Plants

An Example - General
Motors
In the early 80s GMs Service Parts Operation
was very efficient as their Parts Distribution
Centers used scientific inventory management
techniques and sophisticated transportation
algorithms to manage their routing schedules. Yet
GMs service to end customers was
consistently poorer than their competitors.

WHY?

...And the answer is...

the inventory control of
the GM dealers was bad!
Therein lay their

supply chain problem.

While GMs services to their immediate customers, the
dealers, was impeccable and factory performance
great , because of poor inventory control at the
dealers , the wrong parts were stocked and
the information system on inventory and part
usage were largely out of date!

Postponement
High

Before Postponement

Inventory
After Postponement

Goal
Low
Poor

Service

Excellent

The
right
product
s

In the right At the right At

quantities moment
minimal
cost

Flexibility

Delivery
Reliability

Delivery Inventory
Level
time/
Lead
time

Overview of Supply chain

Supply /Inbound Logistics Production Distribution/Outbound logistics
SUPPLIERS

MANUFACTURERS

THIRD PARTY
LOGISTICS

CUSTOMERS

DISTRIBUTORS/
WAREHOUSES
Product Flow
Information Flow
Cash Flow
Process/Work Flow
People Flow

Supply Chain Relays

Suppliers

Manufacturer

Inventory?
New Technology?

Distributor

Special Order?
Increased Demand?

Retailer

Customer

Warranty?
International Sales?

Background
A supply chain
Acquire raw materials and parts

An integrated system
which synchronizes
a series of interrelated business
processes in order to

Transform these raw materials and parts into finished

products
Add value to these products
Distribute and promote products to either retailers/customers
Facilitate information exchange among various business
entities

Main objective

To enhance the operational efficiency, profitability and

competitive position of a firm and its supply chain partners

Background
Supply Chain Management : definition
The integration of key business processes
from end-users through original suppliers
that provide products, services, and information and add value
for customers and other stakeholders(Cooper(1997))

The supply chain process

Third Party Logistics Providers

Suppliers

Manufacturers

Inbound Logistics
Materials Management

Distributors

Retailers

Outbound Logistics
Physical Distribution

Customers

Background
Supply Chain
Material management(inbound logistics)
The acquisition and storage of raw materials, parts, and supplies
The complete cycle of material flow from the purchase and internal control of
production materials to the planning and control of WIP

Physical distribution(outbound logistics)

All outbound logistics activities related to providing customer service.
Order receipt and processing, inventory deployment, storage and handling,
outbound transportation, consolidation, pricing, promotional support, returned
product handling, and life cycle support

Background
The successful integration of the entire SC process
Depends heavily on the availability of accurate and timely
information that can be shared by all members of the SC.

Functions Associated with

Supply Chain Management

Forecasting demand
Selecting suppliers
Ordering materials
Inventory control
Scheduling
production

Shipping &
delivery
Information
management
Quality
management
Customer service

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

Creating an Effective Supply Chain

Develop strategic objectives and tactics
Integrate and coordinate activities in the
internal supply chain
Coordinate suppliers with customers
Coordinate planning and execution
Form strategic partnerships

Challenges
Barriers to integration of organizations
Getting top management on board
Dealing with trade-offs
Small businesses
Variability and uncertainty
Long lead times

Trade-offs

Lot-size-inventory
Bullwhip effect
Inventory-transportation costs
Lead time-transportation costs
Product variety-inventory
Cost-customer service

Supply Chains
Benefits
There are many benefits to integrating functional systems.

Tangible benefits:

Inventory reduction
Personnel reduction
Productivity improvement
Order management improvement
Financial-close cycle improvements
IT cost reduction
Procurement cost reduction
Cash management improvements
Revenue/profit increases
Transportation logistics cost reduction
Maintenance reduction
On-time delivery improvement.

Supply Chains Benefits

Continued

Intangible benefits:

Information visibility
New/improved processes
Customer responsiveness
Standardization
Flexibility
Globalization
Business performance
Reduction in duplication of entries
controls and reconciliation are enhanced
rapid assimilation of data into the organization

Systems can be integrated internally and externally. Internal

integration refers to integration between applications inside a
company, whereas external integration refers to integration of
applications among business partners.

The type of a Supply Chain partnership

Autonomous channel captains or strategic business units
Actually perform operational and/or managerial activities
Create a specific product or service for a particular customer
or market

Primary
partner

Companies that simply provide resources, knowledge, and utility

Transportation carriers, consulting firms
Third-party logistics providers, IT service providers
On-line brokers, and educational institutions

Secondary
partner

Structural dimensions of the Supply Chain Network

Horizontal structure

The number of tiers across the SC

Vertical structure

The number of suppliers and customers represented

within each tier

Characteristics of Supply Chain links

Managed PL

The firm integrates a SC process with one or more customer/suppliers

Connect multi-tier SC partners as the firm is actively involved in the
management of tier one and a number of other links beyond tier one

Monitored PL

Not fully controlled by a firm

The firm is involved in monitoring or auditing how the link is integrated
and managed

Not managed PL

The firm neither actively manages, nor monitors

The firm fully trusts its partners ability to manage the process links
appropriately

Non-member PL

Between both partners and non-members of the companys SC

Not integral parts of the firms SC structure, but can dictate the
performance of the firm

*PL : Process Links

Supply Chain constraints

Financial
Production
Supply

Capacity

Service compliance
The extent of
demand

Delivery time windows

Manufacturing due dates

Vertical integration of SC

Technical capability
Available space for inventory stocking
and manufacturing

Maximum holding time for backorders

The number of driving hours for truck
drivers

 Supply chain decision variables

Location

Where *** should be located

Allocation

Which *** should serve which customers, market segments

Network structure

Centralization/decentralization of distribution network

The exact timing of expansion or elimination of mfg. or dist.
facilities

Number of facilities
and equipment

Number of
stages(echelons)

How many *** are needed

The number of stages by combing or separating them

 Supply chain decision variables-contd

Service sequence

Delivery or pickup routes

Schedules of vehicles serving customers

Volume

Inventory level

Size of
workforce

The extent of
outsourcing

Optimal purchasing volume, production, shipping volume

Optimal amount of every raw material, part, WIP, finished goods, SKU
The number of truck drivers or order pickers

Which suppliers, IT service providers, third-party logistics providers

should be used for long-term outsourcing contacts and single/multiple
sourcing

Supply Chain Planning

Strategic decisions (location,
capacities, available modes, product
assignments) fixed
Forecast for coming year

Assignment of markets to supply points

Inventory accumulation plan (e.g., seasonal goods)
Manufacturing subcontracting
Backup locations for inventory in stockouts

Less uncertainty than design phase

Establishes guidelines within which supply chain
will operate

Classification of
Supply Chain Decisions
Decisions

Temporal

Strategic
Tactical/Planning
Operational

Functional

Procurement
Replenishment
Production
Distribution
Logistics
Global

Supply Chain Execution with

Decisions
Forecasting
Aggregate
Inventory
Planning
Capacity
Planning

Replenishment
Decisions

MPS/Sourcing
Order Entry
and Processing

Order
Confirmation

Order Decisions

Fulfillment
Planning

Inventory
Availability
-Schedule
Production
Allocate
Inventory
- Priority
Orders

Production Decisions

Production
Scheduling
Distribution
Scheduling

Pick and
Load

Schedule
Delivery

Distribution Decisions

Customer
Service

Temporal Decisions
Strategic decisions
1. These decisions target the long term objectives.
2. Involves design and planning.

Tactical decisions
1. Manages the supply chain
2. Time interval ranges from weeks to months.

Operational decisions
1. Short term decisions focused on the real time
activities of the supply chain

Functional Decisions
Procurement decisions
1) Supplier selection
2) Direct delivery from suppliers
3) Vendor Managed Inventories

Manufacturing/ Production
decisions
1)
2)
3)
4)

Plant location
Product selection
Capacity planning
Production Scheduling

Functional Decisions
Distribution decisions
1) Configuration of distribution facilities
2) Location
3) Customer allocation

Logistics decisions
1) Selection of ports
2) Direct delivery
3) Mode of transport

Global decisions
1) Planning under uncertainty
2) Product and process selection

Supply Chain Decision

Taxonomy
Strategic

SCM
APS

Planning

Demand Plan
Transport & Inventory
Planning

Supplier
Apps

Operational
Supplier

Manuf
Execution
System

Manufacturer

Transport execution &

CRM/SFA

WMS

Distributor

Retailer

Customer

SCM Supply Chain Management

APS Advanced Planning and Scheduling
CRM Customer Relationship Management
SFA Sales Force Automation
WMS Warehouse Management System

Decisions in Supply Chain

Product design
Production structure
Plant location - Plant layout and logistics
Production planning
Packaging
Choice of markets / sources
Distribution / dealer network design
Location of warehouses
Allocation decision
Inventory management - stocking levels
Transportation - mode choice, shipment size and
routing decision, and transport contracting

Supply chain Decision

Hierarchy
Location-allocation decisions
Demand planning
Distribution channel planning
Strategic alliances
New product development

Competitive
Strategy

Inventory control
Production/distribution
coordination
Order/freight consolidation

Tactical Plans

Operational
Routines

Vehicle routing/scheduling
Workforce scheduling

Outsourcing
Supplier selection
Information technology(IT) selection
Pricing
Network restructuring

Material handling
Equipment selection
Layout design

Record keeping
Packaging

Pitfalls in SCM
Inadequate inventory management
Inadequate definition of customer service
Lack of logistic skills
Inefficient Information system
Ignoring the impact of uncertainties]
Organizational barriers
Inadequate Information Sharing
Incomplete supply chain
Big-bang approach
Globalization

WALMART Supply Chain

Suppliers

Manufacturer

Cross Dock

Inventory?

Special Order?

New Technology?

Increased Demand?

Retailer

Customer

Warranty?

Dell Computer Supply

Chain

Suppliers

Dell Assembly

Customer

Sony

Inventory?

Special Order?

New Technology?

Increased Demand?

Warranty?
International Sales?

Comparison of Dell and Ford Supply Chain

Customers
Institutional
Customers
Dealers

DELL

T3

Suppliers

T2

T1
FORD

Suppliers
Individual
Customers

(in Tiers)

Source: Austin, Robert, D., Ford Motor Company: Supply Chain Management Teaching Note. HBS No. 601172. Copyright 2001 President and Fellows Harvard College.
Ford Motor Company Exhibit TN-1; Slide 1 of 1

Supply Chain Optimization

Optimization is used to improve a companys
supply chain performance in variety of areas
Reduced Supply Costs
Improved Product Margins
(Profit per additional unit produced)
Increased Manufacturing Throughput
(Production at all levels)
Better Return on Assets
(Net income after expenses/interest)

SCM Model
SCM focuses on
Globalization
Information management tools
SCM integrates
The supply chain operations: Plan, Source, Make, Deliver &
Return
SCM transforms
Ideas into deliverable products and services.
Supply Chain Planning (SCP) Model / Software
Supply Chain Execution (SCE) Model / Software

Scope of Supply Chain

Modeling
Three levels of decision hierarchy
Location-allocation decisions
Demand planning
Distribution channel planning
Strategic alliances
New product development

Competitive
Strategy

Inventory control
Production/distribution
coordination
Order/freight consolidation

Tactical Plans

Operational
Routines

Vehicle routing/scheduling
Workforce scheduling

Outsourcing
Supplier selection
Information technology(IT) selection
Pricing
Network restructuring

Material handling
Equipment selection
Layout design

Record keeping
Packaging

Optimization need Model

Guess..What model is this ?

min i j cijxij
s.t. j xij < si, i,
i xij > dj, j,
xij > 0, i, j.

This is a way to lose a student !

Transportation Model !
min i j cijxij
s.t. j xij < si, i,
i xij > dj, j,
xij > 0, i, j.
Costs
Supplier
Kumar
Ganesh
Sudhir
Gopal
Capacity

Chennai
21
35
55
43
200,000

PLANT
Bearings
Madurai
Cochin
Coimbatore Available
50
40
35
275,000
30
22
42
400,000
20
25
70
300,000
25
37
58
500,000
600,000
225,000
350,000

Model
Model
ss

The essence of Operations Research lies in the construction and use

of models.
A model is a simplified representation of something real.
There are different types of models.

Types of
Optimization
Models

Model Formulations
Different types of optimization model formulations exist:
Baseline model formulation
Linear Programming formulation
Classical non-linear formulation
Goal Programming formulation
Compromise Decision Support Problem formulation
etc.
Basic classifications are:
Constrained versus unconstrained
Linear versus non-linear
Single objective versus multi-objective
Another classification can be made by variables:
Continuous / discrete / mixed-integer

Modeling Approaches to SCM

Supply Chain Modeling

Deterministic Stochastic

Network
Design

MIP
Optimization

Hybrid Heuristic IT Driven Simulation

Optimal
Control
Theory

Dynamic
Programming

WMS

ERP

GIS

WMS Warehouse Management System

ERP Enterprise Resource Planning
GIS Geographic Information System

Deterministic Models
Assumption:
Model parameters are known with certainty.

(i) Network Models.

Determine location of production, stocking, and sourcing facilities,
and channels through which the products flow.

(ii) Mixed-Integer Programming (MIP) Models.

Includes models for

vehicle routing and scheduling,

facility location and sizing,
shipment routing and scheduling,
freight consolidation and
selection of the mode of transportation.

np-complete - not amenable to optimization.

Modeling become
NP - complete
&
NP- hard

What is P ?
P = Set of problems than can be solved in
polynomial time

What is NP ?
NP = Set of problems for which a solution
can be verified in polynomial time

What is Polynomial Time ?

Reasonable Time

Traveling Salesman Problem (TSP)

1

Depot

Traveling Salesman
Problem
A salesperson has to visit a number of cities
(S)He can start at any city and must finish at that
same city
The salesperson must visit each city only once
The number of possible routes is (n!)/2 (where n is
the number of cities)

Combinatorial Explosion

Combinatorial Explosion

Combinatorial Explosion
A 10 city TSP has 181,000 possible solutions
A 20 city TSP has 10,000,000,000,000,000
possible solutions
A 50 City TSP has
100,000,000,000,000,000,000,000,000,000,00
0,000,000,000,000,000,000,000,000,000,000
possible solutions
There are 1,000,000,000,000,000,000,000
litres of water on the planet
Mchalewicz, Z, Evolutionary Algorithms for Constrained Optimization Problems, CEC 2000 (Tutorial)

91.9 CPU years on a

Intel Xeon 2.8 GHz processor

What is NP Complete ?
Minesweeper
TSP

What is NP-Hard
Health Care Supply Chain Allocation
Problem
5
Patient 1

Hospital 1
4

Patient 2

6
3

Hospital 2

? Commonly Believed Relationship

NP
NP Complete

NP Hard

When modeling become

np-complete
&
np-hard
We need.

Heuristic
Algorithm Procedural Steps
All heuristics are algorithms
But, All algorithms are not heuristic
Heuristic Problem Specific Algorithm
Eg. Vogels Approximation Method to solve
transportation problem

Heuristic Models
Intelligent approach that attempts to find good
solutions.
Empirical approached problem solving
Thumb Rule
Quick and Effective
No guarantee of optimum
Adequate for real life

Metaheuristic
General Specific Algorithms

Stochastic Programming
Some of the variables are not deterministic.
Such models are appropriate
When data evolve over time and
Decisions need to be made prior to observing the
entire data stream.

Robust Optimization Models

Uncertainty about problem data is treated as unknownbut-bounded.
Intervals of confidence for the data are considered.

Simulation Models
Both strategic & operational elements.
Evaluate alternative policies or decisions.
Dynamic nature of supply chains

Hybrid models
Both deterministic & stochastic models.
Inventory-theoretic & simulation models
Deal both certainty and uncertainty

IT Driven Models

Warehouse management system (WMS)

Transportation management systems (TMS)
Integrated transportation tracking,
Collaborative planning and forecasting
replenishment (CPFR),
Material requirement planning (MRP),
Distribution resource planning (DRP),
Enterprise resource planning (ERP), and
Geographic information systems (GIS).

The Future

Soft issues.
Multi-objective formulations
Dynamic decision rules
Theory of Constraints (TOC)

Design of model-based Decision Support System

Shall we dream of an IT-driven,

Customer-friendly, People-sensitive
Supply Chain Management System ?

WHERE DOES SCM STAND

TODAY?
Fragmented studies
Managers don't know enough IT

IT people don't know enough

Management

UNIT II

Process View of Supply Chain

Supply chain strategies
Achieving strategic fit
Supply chain drivers and obstacles
Supply Chain Performance Measurement
Which is the Right SC for your Product

Outsourcing
Purchasing aspects of supply chain
Supply chain Performance Metrics
Strategic Alliances

Process View of a
Supply Chain
Two different ways of viewing processes:
CYCLE VIEW
Series of cycles at the interface between two
successive stages
PUSH/PULL VIEW
Push In anticipation of customer order
Pull In response to a customer order

Push / Pull View of Supply

Chains
Procurement,
Manufacturing and
Replenishment cycles

PUSH PROCESSES

Customer Order
Cycle

PULL PROCESSES

Customer
Order Arrives

Cycles
Customer Order
Cycle
Replenishment
Cycle

Stages
Customer
Retailer
Distributor

Manufacturing
Cycle

Manufacturer
Procurement
Cycle

Supplier

Supply Chain Strategy

Competitive Strategy

Supply Chain Strategy

Efficiency

Inventory Transportation Facilities

Responsivenes
s
Information

Achieving Strategic Fit

Strategic fit means both the competitive and
supply chain strategy have the same goals
All functional strategies must fit together (be
aligned) to form a coordinated overall strategy
If alignment is not achieved at the strategic
level, then conflicts arise between different
functional goals

How is Strategic Fit

Achieved?
Understanding the Customer
By mapping customer demand on the implied uncertainty
spectrum

Understanding the Supply Chain

By mapping the supply chain on the responsiveness spectrum

Achieving Strategic Fit

Identify the zone of strategic fit

Implied Demand
Uncertainty
Demand uncertainty reflects the uncertainty
of customer demand for a product.
Implied demand uncertainty is the resulting
uncertainty given the portion of demand that
the supply chain must handle and the
attributes the customer desires.

Understanding the
Customer
Understanding the Customer

Lot size
Response time
Service level
Product variety
Price
Innovation

Implied
Demand
Uncertainty

Implied Uncertainty
Spectrum
Low implied
demand
uncertainty

Purely
functional
products
(gasoline)

Somewhat
certain
demand

Established
goods
(Toothpaste)

Somewhat
uncertain
demand

New
models of
existing
goods
(New car
model)

High implied
demand
uncertainty

Entirely new
products
(palmtop)

Understanding the Supply Chain

Supply Chain Responsiveness

(ability to do the following)

Respond to wide ranges of quantities demanded

Meet short lead times
Handle a large variety of products
Build highly innovative products
Meet a very high service level

Supply Chain Efficiency

Responsiveness comes at a cost, while efficiency
targets the least cost alternative.

Cost-Responsiveness
Efficient Frontier
The cost-responsiveness efficient
frontier is the curve showing the
lowest possible cost for a given
level of responsiveness.

Responsiveness
High

Low
High

Low

Cost

Highly
Efficient

The Responsiveness
Spectrum

Integrated
Steel Mills:
Production
scheduled
weeks or
months in
advance with
little variety
or flexibility

Somewhat
Efficient

Traditional
make-to-stock
manufacturer
with production
lead time of
several weeks

Somewhat
responsive

Most
automotive
production:

Highly
Responsive

Dell: Custom
made PCs
and servers
in a few days

Achieving
Strategic Fit
Responsive
supply chain

THE DEGREE OF SUPPLY

CHAIN RESPONSIVENESS
MUST BE CONSISTENT WITH
THE IMPLIED DEMAND
UNCERTAINTY

Responsiveness
spectrum

Efficient supply
chain
Certain
demand

Implied
uncertainty
spectrum

Uncertain
demand

Responsive
supply chain

Achieving
Strategic Fit
of it
e
n ic F
o
Z eg
t
ra
t
S

Responsiveness
spectrum

Efficient supply
chain
Certain
demand

Implied
uncertainty
spectrum

Uncertain
demand

Product Life Cycle

Beginning Stages of a Product:
1. Demand is very uncertain
2. High margins; and time is crucial to gaining sales
3. Product availability is crucial to capture market
share
4. Cost is of secondary consideration

Supply Chain Goal

Responsiveness with high product availability

Product Life Cycle

Later Stages of a Product:
1. Demand has become more certain
2. Low margins due to increased competition
3. Price becomes a significant factor in customer
choice

Supply Chain Goal

Efficiency becomes the most important
characteristic

Chain
Strategy

Responsive
supply chain

(over the PLC)

of it
e
n ic F
o
Z eg
t
ra
t
S

Responsiveness
spectrum

As products mature, the supply

chain strategy should, in
general, move from being
responsive to being efficient.

Efficient supply
chain
Certain
demand

Implied
uncertainty
spectrum

Uncertain
demand

Major Obstacles to Achieving Fit

Multiple owners

Local optimization and lack of global

fit

Increasing product variety / shrinking

life cycles / customer fragmentation
Increasing implied uncertainty

Supply Chain Drivers

Customer
service
initiatives

Product
availability
Response time

Asset utilization
Monetary
value

Return-oninvestment(ROI)
Cost behavior

Inventory days of supply

Order fill rate

Time-to-market
On-time delivery
Order processing time

Transit time
Cash-to-cash cycle time
Downtime

Net asset turns

Inventory turns

Order-accuracy rate

Cube utilization

The ratio of net profit to capital

The ratio of earnings in direct proportion to an investment
Activity-based
costing(ABC)

Target costing
Cost of quality(COQ)

Supply Chain Drivers (Contd)

Information/
knowledge
transactions

Real-time
communication
Technology
transfers
Risk of quality
failure

Risk elements
Risk of info.
failure

The rate of EDI transactions

The % of suppliers accepting
electronic orders / payment

Save R&D cost and time

Inter-dependence of SC
partners

Bullwhip effect

Considerations for Supply

Chain Drivers
Driver

Efficiency

Responsiveness

Inventory

Cost of holding

Availability

Transportation

Consolidation

Speed

Facilities

Consolidation /
Proximity /
Dedicated
Flexibility
What information is best suited for
each objective

Information

Supply-Chain Obstacles /
Uncertainty
External
ExternalCauses
CausesofofUncertainty
Uncertainty

Volume changes
Volume changes
Product/service mix changes
Product/service mix changes
Late deliveries
Late deliveries
Underfilled shipments
Underfilled shipments

Internal
InternalCauses
CausesofofUncertainty
Uncertainty

Internally generated shortages

Internally generated shortages
Engineering changes
Engineering changes
New product/service introductions
New product/service introductions
Product/service promotions
Product/service promotions
Information errors
Information errors

Obstacles to an effective
Supply Chain
no clear guidelines for creating or
terminating alliances
failure to develop and implement
measures for monitoring alliances
inability to broaden supply chain vision
needs to encompass more than logistics

Difficulties in
Supply Chain
implementation

Implementation
Difficulty
SCM requires.
Common interest
Openness
Mutual help
Clear expectations
Leadership

Implementation
Difficulty
SCM requires.
Co-operation, not Competition
Trust
Benefit sharing
Technology

SCM requires.
Lightness of data transferring only essential
information (GIGO)
Speed of information,
Accurate
Timely access
Defining the right amount of information for each
level

SCM requires.
Information to right people
To ensure that information reached the
recipient
To prevent and control data seepage

Trade-off between
Accessibility
and
Security

Problems Solved and Created

by SCM

Problem

Potential
Improvement

Benefits

Possible
Drawbacks

Large
inventories

Smaller, more
frequent deliveries

Reduced holding
costs

Traffic congestion
Increased costs

Long lead
times

Delayed
differentiation
Disintermediation

Quick response

May not always

be possible

Large
number of
parts

Modular

Fewer parts
Simpler ordering

Less variety

Cost
Quality

Outsourcing

Reduced cost,
higher quality

Loss of control

Variability

Shorter lead times,

better forecasts

Able to match
supply and
demand

Less variety

Supply Chain
Modeling &
Optimization
TECHNOLOGY

Optimization

Science (Knowledge)

Engineering (Action)

Supply Chain Performance

Measurement

Formulas for Measuring

Supply-Chain
Performance
Inventory Turnover =

Cost of goods sold

.
Average aggregate inventory value

Weeks of Supply = Average aggregate inventory value (52 Weeks)

Cost of goods sold

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

What type of Supply Chain will

be right for your product?

Flow of presentation
What type is your product?
Comparison
What functions does Supply Chain perform?
Comparison
Devising Ideal Supply Chain strategy
Examples

What type is your product ?

Functional

Innovative

Functional
Demand Type
P redictable
P roduct life cycle
more than 2 year
Contribution Margin 5% to 20%
P roduct Variety
Low
Forecast Error
10%
Average stockout rate 1% to 2%

Innovative
Unpredictable
3 mths to 1 year
20% to 60%
High
40% to 100%
10% to 40%

What types of function does Supply Chain

perform ?
A supply chain performs two different types of
functions :
Physical function - Physical efficient process
Market mediation - Market responsive process

Physically Effi cient

M arket Responsive

process
Primary purpose Supply predictable demand
efficiently at lowest possible
cost
M anufacturing M aintain high average
focus
utilization rate
Inventory
generate high turns and min.

process
Respond quickly to unpredicted
demand balancing stock/excess
inventory
deploy excess buffer capacity

strategy
inventory throughout the chain
Lead time focus shorten lead time as long as it
doesnot increase cost
Approach to
select primary for cost and
choosing
supplier
quality
Product design maximize performance and
strategy
minimize cost

parts or finished goods

invest aggresively in ways to
reduce lead time
select primarily for speed,

deploy significant buffer stock of

flexibility and quality

use modular design to postpone
product differentiation

Devising the Ideal Supply Chain Strategy

Responsive
supply chain

Efficient supply
chain

Matching Supply-Chains with

Products
Functional product

Innovative product

match

mismatch

mismatch

match

Getting out of right hand cell

FP
Match
ESCM
RSCM

Mismatch

IP
RHC

Match

Eg : automobiles, computers etc;

BMW 3 is a functional product & BMW Z3 an innovative
product so it can go for specific parts whether its IP or FP.

Efficient Supply of Functional Products

Eg; Campbell Soups
It used Comprehensive- Replenishment
Program(CRP) by using Electronic Data Interchange
(EDI) links.

Responsive Supply of Innovative Product

Eg:; National Bicycles , Japan.
Through Mass Customization using Accurate
Response

What is Outsourcing?
Defined
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

Mass Customization
Defined
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.

Purchasing
In Supply Chain
For resale

Select,
add profit and sell

For consumption /
conversion

Integrate with product development

Make or buy decisions
Source selection
Production and sales

Objectives of Purchasing
Provide uninterrupted flow of materials
Buy competitively and wisely
Minimize inventory holding costs
Source development
To develop good vendor relationships
Achieve maximum integration with other departments
Train purchase personnel
To develop policies and procedures to achieve objectives
(1-7)

 Purchasing must provide material of

of the

Right Quality

from the

Right Source

at the

Right Price

of the

Right Quantity

at the

Right time

Right Quality
Involves many factors:
Price, installation cost, maintenance cost,
expectancy, market availability, workability
attitude of users

life
and

Must balance three major considerations

How to determine ?
How to define ?
How to control ?

Engineering Versus Economic

Describe such that vendor understands

Right Source
Influences the other 4 Rights
Supplier goodwill
Supplier identification (yellow pages),
evaluation / rating and selection

Buyer

Seller relationships and ethics

Factors to be considered include

Quality, cost, delivery, credit terms distance etc

Right Price
In periods of stability, prosperity,
recession
Economics

Perfect competition
Imperfect competition
Monopoly

Methods

Analyze price lists

Competitive bidding
Negotiation

Contracts

Fixed price
Cost type

Discounts

Quantity, seasonal, cash

- Challenge is here

Right Quantity
Inventory Control traditional
approach
Material Requirement Planning (MRP)
Just In Time (JIT) and Zero Inventory

Right Time

Timing Policies:

1.

Purchase according to current requirements (1 to 3

Months)

2.

Purchase according to market conditions

1. Hand-to-mouth buying
2. Forward buying (3 to 12 months)
3. Speculative buying

3.

Depends on lead times

4.

Decides When to order

5.

JIT concepts

Functions of Purchasing
Department
1. Issuing purchase orders
2. Interviewing salesman
3. Negotiating with vendors
4. Selecting vendors
5. Analysing bids and prices
(contd.)

Functions of Purchasing Department

(Contd.,)

6. Making adjustment with vendors

7. Maintaining records of vendors
8. Developing new sources of supply
9. Following-up on orders
10.Maintaining catalog library

(contd.)

Functions of Purchasing Department

(Contd.,)

11.Disposing of scrap and surplus material

12.Checking and approving invoices
13.Scheduling purchases and deliveries
14.Determining time to buy
15.Market studies and cost analysis
(contd.)

Functions of Purchasing Department

(Contd.,)
21. Inventory control

22. Negotiating purchase or construction

contracts for buildings, production facilities
etc.
23. Incoming traffic control
24. Storekeeping
25. Standardization

(contd.)

Functions of Purchasing Department

(Contd.,)
26. Filing transportation claims
27. Setting specifications
28. Selecting capital equipment
29. Receiving
30. Customs work
31. Negotiating leases
32. Inspecting and testing incoming material
33. Purchasing insurance

Purchasing Departments Role in

Materials Management
Scheduling purchases and deliveries
Inventory control
Incoming traffic control
Storekeeping
Filing transportation claims
Receiving
Inspecting and testing incoming material

SCM PERFORMANCE METRICS

The common SCM metric used in industries to track their
supply chain performance are Fill Rate Measurement
On-time Metrics
Performance to promise dates
Back Order Reporting
Inventory Turnover
Upside Flexibility
Cycle Time
Transportation Metrics
Benchmarking

Fill Rate Measurement - It is the ratio of the portion of the

order shipped in the first shipment to the total order. Depending on
the material ordered, unit order quantity, various measures of fill
rate are Line Count Fill Rate
SKU Fill Rate
Case Fill Rate
Value Fill Rate
On-time Metrics - It is the ratio of the portion of the order
shipped on or before the scheduled time to the total order. The
various parameters under on-time metrics are On-time Line Count
On-time SKU Count
On-time Case Count
On-time Value Rate

Performance to promise date - It is a measure of the ability

of the manufacturer to fulfill his promise (original or revised) i.e.
the proportion of the promises the manufacturer is able to fulfil.
Backorder Reporting - It is the ratio of the portion of the
order shipped as backorder. It may be expressed in pieces, SKUs
or value. It may be tracked at a variety of levels i.e customer wise,
division wise or the total company as a whole.
Inventory Turnover - The number of times a companys
inventory cycles or turns over in a financial year.
Upside Flexibility - The ability of a manufacturer to meet
additional demand requirements. This is usually compared as a
percentage over the original order. It is protection for the buyer as
it allows some buffer between the actual demand and the
forecasted quantity.

Cycle Time - The various parameters by which the cycle time is

measured are Customer Order Cycle Time - The average time taken to fill a
customers purchase order. The measure starts when the customers
order is received and ends either at the time of shipment or at the time
of delivery to the customer. This "actual" cycle time should be compared
to the "promised" cycle time.
Manufacturing Cycle Time - The average time consumed to complete
the production from the time when the order has been received.
Inventory Replenishment Cycle Time - It is the measure of the
manufacturing cycle time plus the time included in deploying the product
to the appropriate distribution center.
Cash to Cash Cycle Time - The number of days between paying for
raw materials and getting paid for product.
Supply Chain Cycle Time - The total time it would take to satisfy a
customer order if all inventory levels were zero. It is calculated by
adding up the longest lead times in each stage of the cycle.

Transportation Metrics - The various parameters of transportation

metrics areFreight cost per unit shipped - It is calculated by dividing total freight
costs by the number of units shipped per period. It can be calculated
transportation mode wise i.e. barge, rail,ocean, truckload, air freight,
etc.
Outbound freight costs as percentage of net sales - It is calculated by
dividing the outbound freight costs by the net sales.
Inbound freight costs as percentage of purchases - It is calculated by
dividing the inbound freight costs by the cost of the purchases.
Transit time - It is duration between the time a shipment leaves our
location and the time it arrives at the customer's location.
Optimal Mode selection - It is ratio of the number of shipments sent
by the optimal mode by the total number of shipments for the period.

Claims as a % of freight costs - It is calculated by dividing total loss

and damage claims by total freight costs for each carrier for a given
period of time. A high number generally indicates packaging or handling
problems with the carrier.
Freight bill accuracy - It is calculated by dividing the number of errorfree freight bills by the total number of freight bills in a given period. The
errors may include incorrect pricing, incorrect weights, incomplete
information, etc. It is generally measured in total and for each carrier
over a period of time.
Accessories as percent of total freight - It is ratio of the accessories
and surcharges levied by the transporter to the total freight expenditures
for the given period. Often, these are extra costs incurred due to
inefficient processes.
Percent of truckload capacity utilized - It is the ratio of the total quantity
shipped to the theoretical maximum shipment capacity.

Truck turnaround time - It is the average time elapsed between a

truck's arrival at a facility and its departure. This is an indicator of the
efficiency of cargo handling and the dock door space.
Number of carriers per mode - It Is the total number of freight
carriers used in a given period by a particular mode i.e. ocean, barge,
rail, intermodal, truckload, etc. This is an indication of the volume
leverage available and control over the transportation function.
On-time pickups - It is the ratio of the number of pick-ups made ontime by a particular freight carrier to the total number of shipments in
a period. This is an indication of freight carriers performance and its
affect on the overall shipping operations and customer service.

Benchmarking - It is the process of setting high standards of performance

in relation to the supply chain context. The benchmarks are to be fixed in
comparison to other companies in similar business. Various softwares like
PMG are available for benchmarking.
The five SMART goals for effective benchmarking are Specific - It is required to provide enough detail so that there is no doubt
on what is being measured and how a metric is calculated.
Measurable - It is important that a reliable system is in place that will
accurately measure the performance.
Attainable - The standards set should be high but attainable with
adequate dedication. The person setting the goal and the person
responsible for achieving the goal should agree with the target.
Realistic - The supply chain goals should be challenging, but realistic in
relation to the improvement goals that are in place, i.e. plan a few things
and be successful.
Time Frame - It is needed to identify the time frame in which we are
planning to hit the goal.

CONCLUSIONS ON SCM METRICS

The values calculated for the various parameters of SCM metrics

are indicators that may be used to focus on improving the
efficiency of the supply chain as a whole.

In the initial stages of operations, it may be difficult for a

company to achieve the industry benchmarks. Nevertheless, the
metrics may be used as indicators of improvement.

Even the established companies earning satisfactory profits may

further enhance their return on investment by improving on the
weaker links of their supply chain network.

The parameters discussed are not exhaustive. Other self-defined

parameters may also be used as a measure of performance.

Supply Chain Perspective &

Metrics
Perspective

Metrics

Reliability

On-time delivery
Order fulfillment lead time
Fill rate (fraction of demand met from stock)
Perfect order fulfillment

Flexibility

Supply chain response time

Upside production flexibility

Expenses

Supply chain management costs

Warranty cost as a percent of revenue
Value added per employee

Assets/utilization

Total inventory days of supply

Cash-to-cash cycle time
Net asset turns