bba 1584 scm

BBA 1564

Supply Chain Management

Prof. Dr. Prem

What Is a Supply Chain?

Flow of products and services from:

– Raw materials manufacturers

– Intermediate products manufacturers

– End product manufacturers

– Wholesalers and distributors and

– Retailers

• Connected by transportation and storage activities

• Integrated through information, planning, and integration activities

• Cost and service levels

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

PC Industry Supply Chain

Cisco’s Value Network

• Supply chain - ―A network of organizations connected in their

processes and activities, with the ultimate goal of delivering value

to the final customer.‖ (Christopher, 2005 p57.)

• This new discipline was a response to changes in prevailing trends

in business strategy, which in turn demanded that internal functional

self-interests be put aside to achieve a greater good of delivering

better value to customers

Supply Chain Management

1. Lee, (2000) Creating value through supply chain integration. Supply Chain Management Review. v4 i4. 30-36.

2. Christopher M (2005) Logistics and supply chain management: creating value-adding networks. 3rd edn, FT Prentice Hall.

Supply Chain: Manufacturing Example

Supply Chain Management Defined

Supply chain management is the design and

management of seamless, value-added processes

across organizational boundaries to meet the real

needs of the end customer.

- Institute for Supply Management

Internal Value Chain: Local Focus

10

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

Internal Value Chain: Company Focus

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

Upstream

Suppliers

Downstream

Customers

SCM: Linked Value Chains

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

Focal Firm Supplier

Supplier’s

Supplier

Customer

Customer’s

Customer

Total Supply Chain

Supplier Organization Customer

Ultimate

supplier

Ultimate customer

Financial Provider Market Research

3rd Party Logistic Supplier

Source – Prof. Dr. Ted Lee’s Class Presentation - 2010

Key Observations

• Every facility that impacts costs need to be

considered

– Suppliers‘ suppliers

– Customers‘ customers

• Efficiency and cost-effectiveness

throughout the system is required

– System level approach

• Multiple levels of activities

– Strategic – Tactical – Operational

Other Related Observations

• Supply chain strategy linked to the Development

Chain

• Challenging to minimize system costs and

maximize system service levels

• Inherent presence of uncertainty and risk

• Set of activities and processes associated with new

product introduction. Includes:

– product design phase

– associated capabilities and knowledge

– sourcing decisions

– production plans

The Development Chain

The Development Chain

The enterprise development and supply chain

Global Optimization

• Geographically dispersed complex network

• Conflicting objectives of different facilities

• Dynamic system

– Variations over time

– Matching demand-supply difficult

– Different levels of inventory and backorders

• Recent developments have increased risks

– Lean production/Off-shoring/Outsourcing

Input Providers

Farmers Trade

Providers Nestle Distributors Retails Consumers

Upstream, Downstream

Global Apparel Value Chain Tracing back the dress you are wearing

• 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 CV therapeutics will be more accurate

than a forecast for a specific CV-related product

Nevertheless, forecasts (or plans, if you prefer) are important management

tools when some methods are applied to reduce uncertainty

Supply Chain Management – Key Issues

Key Business Challenges

Competitive Pressures are Intense –

• In a crowded marketplace, an firm must execute flawlessly to

make gains on the competition.

• With buyers viewing products as commodities, the ability to

compete more effectively or differentiate their value to

customers is crucial to continued success.

Need to Increase Business Agility –

• Business agility is a strategic imperative as firms try to

respond quickly to changing business needs, governing

regulation or the competitive marketplace.

• Organization must build new processes into rigid and

inflexible infrastructures in order to address these needs

effectively.

Key Business Challenges

Focus on Customer as Partners in Business

(build experience)

• Firms must understand all too well the impact a

negative customer service experience can have on

their bottom line.

• As a result, many firms are working to improve

their customer service and deliver a cohesive

service experience to customers and business

partners.

The Supply Chain Problem has Changed

Demand-driven focus

Synchronization with business partners

Manufacturing

optimization focus:

Efficiency

Supply chain and procurement

organizations

Operations

Today Focus in Early 2000

Logistics and materials as the constraints

Inventory as the buffer

Manufacturing as the

constraint

Variability is escalating for both demand and

supply. How do I create agility?

Need to constantly refine the plan

Control

-Traditionally supply chains have been characterized by arms-

length, even adversarial relationships between the different

players.

- There has been limited history of sharing information either with

suppliers or customers.

- Conventionally supply chains have often been designed to

optimise for cost and/or customer service

- Many organisations are at risk because their response times to

demand changes or supply disruption are too long.

Conventional Supply Chains

Types of supply chains

• Product oriented (e.g. making and selling beer) – Manufacturing centric

– Capital intensive (usually) & geographically concentrated

– Physical product

– Separation of provision and consumption, therefore movement

– Inventory buffers demand variability

• Service oriented (e.g. professional services; house purchase) – People centric

– Not capital intensive & geographically more dispersed

– Intangible

– Customer and provider interact as part of the fulfilment process

– Capacity buffers demand variability

• Hybrids (e.g. equipment maintenance & repair/ construction/ retailing)

– Both product and people skills equally required to deliver the solution

– Capacity and inventory both important in managing demand variability

Comparison of Product and Service Supply Chains

Product based Supply Chains Service based Supply Chains

Tangible, physical Intangible

Transported from production to

point of consumption

‗Consumed‘ at point of production

Customer removed from

production process

Customer contributes to

production process

Inventory buffers variability of

demand (& supply)

Resources buffer variability of

demand

Capital intensive Resource intensive

Standard & mass produced Unique & customised

Linear; sequential Networked; non-sequential

Article review – Retail Supply Chain outlook 2012

1. Summarize the article and reflect it to the

Malaysian Logistics Industry.

2. What is the relationship between new hours of

service rulemaking and its impact to movement of

goods.

3. List some of the innovation in Logistics in the

recent years.

Article review- The Internet-Enabled Supply Chain

1. Elaborate ―The Internet harness the ability to

connect buyers and suppliers‖ and relate it to the

definition of SC

2. Prof Dr Hau Lee claims that ―Competition now

occurs at the supply Chain level, not just company

versus company‖

3. Briefly explain POS, WMS and Order

Management system.

4. Visibility is the key for Information management in

Supply Chain. Explain how visibility can be

achieved in a downstream and upstream.

INVENTORY MANAGEMENT

Inventory Categories

Source: Bernard, Paul. Integrated Inventory Management (John Wiley & Sons, Inc., 1999).

Operating Inventory Target Days Supply varies by part and is shorter

for expensive items and longer for inexpensive items.

Excess Inventory encompasses any part inventory which

exceeds the Operating Inventory level but still has a reasonable

chance of being used within the planning time frame.

Surplus Inventory may have some possibility of being

used within 12-18 months but probably would not have

been stocked based on perfect hindsight.

Inven

tory

Bala

nce

Time

If the part remains in inventory until there is no longer any product or

Service part demand, any remaining balance will become “obsolete”.

Inventory will probably

never be used.

Operating

Inventory

Excess

Inventory

Surplus

Inventory

Inactive

Inventory

Classifying Inventory: ABC Analysis

• Ranking system

– Developed in 1951 by H. Ford Dicky of General

Electric3.

– Suggested that GE classify items according to

relative sales volume, cash flows, lead time, or

stockout cost.

– Most important inventory put in Group A.

– Lesser impact goods put in Groups B and C

respectively.


• Pareto‘s Rule (80-20 Rule)

– Based on a nineteenth century mathematician‘s

observation that many situations were

dominated by a very few elements.

– Conversely, most elements had very little

influence in most situations.

– Separates the ―trivial many‖ from the ―vital few‖.


• 80-20 Rule

– 80% of sales will come from 20% of the inventory

SKUs.

– 20% of sales will come from 80% of the inventory

SKUs.

• The 80-20 Rule has been found to explain many

phenomena that interest managers.

– For example, 80% of sales come from 20% of

customers; and vice versa.

ABC Inventory Analysis

ABC Analysis for Renault Car Sales

ABC Analysis for Renault car sales

Model Annual sales $

Million % of Annual

Sales Cumulative Sales

% % Items

Clasification Category

101 6,800 68% 68% 10% 201 1,200 301 500 401 400 501 200 601 200 701 200 801 200 901 150

1001 150

10,000 100%

Bullwhip Effect

Bullwhip Effect

Factors contributing to the Bullwhip Effect:

• Forecast Errors

• Lead Time Variability

• Batch Ordering

• Price Fluctuations

• Product Promotions

• Inflated Orders

Methods intended to reduce uncertainty, variability, and lead time:

• Vendor Managed Inventory (VMI)

• Just In Time replenishment (JIT)

• Strategic partnership

10/1/2014 40

Bullwhip Effect

Causes of Bullwhip Effect

Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered)

Order Batching (to realise logistic Economies of scale + Reducing order processing costs)

Price Fluctuations (resulting in over-reactions)

Supply Rationing (Proportionate rationing; unrestricted order acceptance + free return policy)

10/1/2014 43

Counter-Measures for BWE

• Avoid multiple demand forecasts

– Order based on ultimate customer demand

– Use EDI+POS+VMI

– Choose a good forecasting method (PLC has a

major say)

– Move from decentralized DM to centralized

planning (visibility+control is better)

– Remove layers in channel if possible

• Eg: HP, Apple, IBM, P&G/Walmart

10/1/2014 44

Counter-Measures for BWE

• Break order batches

Increase frequency of ordering (OP costs reduced by EDI)

Resort to standardization to minmize OP costs

Use 3PL to make small batch replenishments economical

Aggregate across retail outlets to utilize FTL EoS

Reduce safety stocks by cutting lead times

Eg: 3PL using Fedex, P&G Stabilize prices

EDLP (P&G)

Special purchase contracts

• Eliminate shortage gaming

Allocate based on past sales (Sun)

Share capacity and information (HP, Motorola)

Limit flexibility wrt time (HP, Seagate)

10/1/2014 45

ERP for Organizational Value Chain

− Stream of activities

− Applies to both products and services

Pro

fit

Marg

in

Support:

Primary:

Infrastructure, HR, R&D, Procurement

Inbound

logistics Operations

Outbound

logistics

Marketing

& Sales Service

Push/Pull Strategies

Hig

h

Low

Low High

Economies of scale

De

ma

nd

of u

nce

rta

inty

Pull

Push

Pull Push

• Customization is High

• Demand is uncertain

• Scale economies are

Low

• E.g., Computer

Peripherals

• Demand is uncertain

• Scale economies are

High

• Low economies of scale

• E.g., Furniture

• Uncertainty is low

• Low economies of scale

• Push-pull supply chain

• E.g., Stationeries

(Books, Pens, CDs)

• Standard processes are

the norm

• Demand is stable

• Scale economies are High

• E.g., Vegetables, Soft

drinks

Characteristics of Push/Pull strategies

48

Push Pull

Objective Minimize cost Maximize service

level

Complexity High Low

Focus Resource

allocation Responsiveness

Lead time Long Short

Processes Supply chain

planning Order fulfillment

Operation strategies – SCM

Strategy When to choose Benefits

Make to Stock

Standardized

products, relatively

predictable

demand

Low

manufacturing

costs; meet

customer

demands quickly

Make to Order Customized

products, many

variations

Customization;

reduced

inventory;

improved service

levels

Configure to

order

Many variations on

finished product;

infrequent demand

Low inventory

levels; wide range

of product

offerings; simplified

planning

Engineer to

order

Complex products,

unique customer

specifications

Enables

response to

specific customer

requirements

Production Planning

Annual

Forecast

Monthly

Revision

Transfer

Requirements

Monthly

Plan

MRP

Parts

Procurement

Plan

Weekly

Assembly

Schedule

Production Planning

Parts Inventory Assembly Bulk Inventory Packaging &

Sterilization FG inventory

Monthly

Plan

MRP

Material

Plan Order point;

Order quantity

What’s Wrong?

• Poor service for new product introductions

• Poor forecasting?

• Panic ordering?

• And high FG inventory

What Is Going On?

• Demand is quite predictable

• Usage in hospitals is quite stable

• Market share moves slowly over time

• With each new product, dealer must build inventory

to fill pipeline

What to Do?

• Recognize that demand is stable and predictable

• Establish accountability for forecast

• Eliminate planning delays and/or reduce time

bucket

• Alternatively, put assembly within pull system and

eliminate bulk inventory

Business Process Management

Visibility

Analytics

15

Inbound Mfg

10

Distributor

100

Customer

5

Business Activity Monitoring

Optimization

The Five Most Important Capabilities in

SCM

Customer Experience

• Engage in the Process

• Embrace Innovation/CI

• Remove Hurdles

• Increase Partnership

• Embedded Business Rules

• Service Levels & Treatments

• End User Experiences

• Champion/Challenge

• Automate Mundane Tasks

• Intelligently Engage Users

• Systematically Drive Policies

• Fund the Business Case

• Key Processing Systems

• Common Processes

• Data Sources

• Channel Delivery Systems

Empower the Business Encourage Specialization

Automate Processes Leverage the Infrastructure

Customer

Experience

The Hierarchy of Supply Chain Metrics:

Operational Excellence

The Hierarchy of Supply Chain Metrics: Innovation

Excellence

Supply Chain Performance Measures

Source/Make Cycle

Time

The cumulative time to build a shippable product from scratch—if you start with

no inventory on hand or on order. Consists of total sourcing lead time, release-to-

start build, total build cycle time, and complete build-to-ship time

Customer Inquiry

Response Time

The average elapsed time between receipt of a customer call and connection with

the appropriate company representative

Customer Inquiry

Resolution Time

The average elapsed time required to completely resolve a customer inquiry

Order Fulfillment

Cycle Time

The average actual lead times consistently achieved, in calendar days, from

customer order to customer delivery. Includes, order authorization to entry, entry

to release, release to shippable, shippable to customer receipt, and receipt to

customer acceptance

On-Shelf In-Stock

Percentage

The percentage of time that a product is available on the shelf, rack, or wherever

the customer expects to find and buy it. Measures the supply chain’s ultimate

ability to satisfy the end customer

Value-Added

Productivity

Total company revenues generated less the value of externally sourced materials

expressed as a ratio of total company headcount

10/1/2014 59

Performance Metrics

SC Performance Attribute Metric

Delivery Reliability •Delivery performance

•Fill rates

•Perfect order fulfillment

Responsiveness •Order fulfillment lead-times

Flexibility •Supply chain response time

•Production/vendor flexibility

Costs •Cost of goods sold

•Total SC management costs

•Value-added productivity

•Warranty/returns processing costs

Asset Management Efficiency •Cash-to-cash cycle time

•Inventory days of supply

•Asset turns

Supply Chain Performance Measures

SC Inventory

Days of Supply

Total number of days of inventory required to support the supply chain—

from raw materials to the final customer acquisition. Expressed as

calendar days of supply based on recent actual daily cost of sales

Supply-Chain

Response Time

The theoretical number of days required to recognize a major shift in

market demand and increase production by 20 percent

Total Supply

Chain Cost

The sum of all the costs incurred in planning, designing, sourcing,

making, and delivering a product broken down for each member of the

supply chain

Cash-to-Cash

Cycle Time

The time required to convert a dollar spent to acquire raw materials into

a dollar collected for finished product. (Total Inventory Days of Supply +

Days Sales Outstanding – Days Payables Outstanding).

Perfect Order

Fulfillment

A perfect order is an order that is delivered complete, on time, in perfect

condition, and with accurate and complete documentation. Fulfillment is

the percent of orders that are perfect (Perfect orders/Total orders).

Inventory Dwell

Time

The ratio of days inventory sits idle to days inventory is being

productively used or positioned 10/1/2014 61

Efficient and Responsive Supply Chains

Efficient Responsive

Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow

postponement

Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at

expense of greater cost

Aggressively reduce even

if costs are significant

Supplier selection

strategy

Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low

cost modes

Greater reliance on

responsive (fast) modes

Summary

• Increased outsourcing network of suppliers Brand owning companies

• Efficiency vs. Responsiveness

• Agile Supply Chain Measurement -Production Flexibility

– Upside Flexibility

– Downside Flexibility

• Decision making speed must also be increased

– Implement collaborative supply chain solutions

• Supply chain centric private exchanges enable more agile supply chains

– Participate in private exchanges ASAP or develop your own

Supply Chain Top 10 Companies

Source: Gartner (2010)