SE 492:Supply Chain Systems Modeling

Dr. Mohamed Ben DayaProfessor of Industrial Engineering & Operations ResearchSystems Engineering DepartmentKING FAHD UNIVERSITY OF PETROLEUM AND MINERALS

Introduction to Supply Chain Management

What is SCM?

Supply Chain Management - is the “art” of managing the flow of materials and products, information, and financial resources from source to user.

Integrated Supply Chain Management - refers to the integrated set of processes completed by supply chain participants where technology is used to seamlessly share information from end-to-end.

Three key items flow between the supply chain participants

There are five key participants in a supply chain

Definition:

Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements.

Notice: Everyone is involved Systems approach to reducing costs Integration is the key

Supply Chain Management

A Supply Chain Example Did you ever wonder where a television comes from?

A variety of companies in different countries play a role in building the components, assembling the product, and moving it through the supply chain. The goal of the supply chain is to have the television available when you’re ready to purchase it from your

favorite store or website.

Who are the SC participants?

Suppliers are the source of raw materials, component parts, semi-manufactured products, and other items.

Manufacturers are the makers of products. Many consider them to be the driver or leaderdriver or leader of the supply chain.

Distributors are responsible for the packaging, storing, and handling of materials at receiving docks, warehouses, and retail outlets.

Retailers are the manufacturer's customers - the stores and eCommerce companies that buy the actual products.

Consumers are the ultimate product users - the people who buy the product.

Manufacturing Distribution Retailer ConsumerSuppliers

Interest in SCM

Action taken by one member of the chain can influence the profitability of all others in the chain.

As firms streamline their own operations, the next opportunity for improvement is through better coordination with their suppliers and customers.

Supply Chain:The Magnitude

Supply Chain: The Magnitude

In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product). Transportation 58% Inventory 38% Management 4%

Third party logistics services grew in 1998 by 15% to nearly $40 billion

Supply Chain: The Magnitude

It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies. A typical box of cereal spends more than three

months getting from factory to supermarket.

A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days.

Supply Chain: The Magnitude

Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them.

In 1993, IBM lost a major fraction of its potential sales of desktop computers because it could not purchase enough chips that control the computer displays.

Supply Chain: The Magnitude

Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce write-downs of $2.6 billion in October 1997.

The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)

Supply Chain:The Potential

Supply Chain: The Potential

Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months.

“According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct./Nov. 1997)

Supply Chain: The Potential

In two years, National Semiconductor reduced distribution costs by 2.5%, delivery time by 47% and increased sales by 34% by

- Shutting six warehouses around the globe.

- Air-freighting microchips to customers from a new centralized distribution center.

Supply Chain: The Potential

In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer.

Laura Ashley turns its inventory 10 times a year, five times faster than three years ago. This is achieved by using

- New Information System

- Centralized Warehouse

“For a company with annual sales of $500 million and a 60% cost of sales, the difference between being at median in terms of supply chain performance and in the top 20% is $44 million of additional working capital.”

-- PRTM Director Mike Aghajanian

Supply Chain: The Potential

Supply Chain:The Complexity

Supply Chain: The Complexity

GM:• Production:

– 20,000 supplier plants– 133 parts plants– 31 assembly plants

• Distribution– 11,000 dealers

– Freight transportation: $4.1 billion– Inventory: $7.4 billion (70% WIP)

Supply Chain: The Complexity

GM:• Production:

– 20,000 supplier plants– 133 parts plants– 31 assembly plants

• Distribution– 11,000 dealers

– Freight transportation: $4.1 billion– Inventory: $7.4 billion (70% WIP)

Supply Chain: The Complexity

GM: Produces nearly 900,000 vehicles annually Over 35 manufacturing plants in 25

countries outside of Japan For plants in the U.S., supply parts are

shipped across the Pacific, and transported on rail

Deliveries are scheduled to the minute to keep inventories low (Just-in-time)

Complicated network with uncertainties

Supply Chain: The Complexity

1. Supply Chain Integration• Conflicting Objectives• The Dynamics of the Supply Chain

2. Matching Supply and Demand3. System Variations over Time

4. Status of Logistics The management of the details of an operation Knowledge• Many problems are new• Incomplete understanding of issues• Methodology is rather narrow

Why is SCM important?

SCM Provides a Strategic Response to Changing World

Business is moving from “push” to “pull” inventory system

Companies have squeezed every possible penny out of manufacturing costs

Customers are demanding customized products, fast cycle times, and low cost

Product life cycles are shrinking

SCM Helps An Organization. . .

Rationalize the flow of product from source point to ultimate consumption

Execute flawlessly Reduce cycle time Drive out cost and

waste 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%

Telecom

Semiconductor

Pharmaceutical

Packaged Goods

Computer

Chemical

Appliances

Automotive

% of company revenue spent on supply-chain activities

Average

Best in Class

Is SCM a reality today?

No… Many Companies Haven’t Taken Action Yet

Formal Supply Chain Strategy

53%

No Formal Supply Chain

Strategy47%

Source: Energizing the Supply Chain, Deloitte Consulting, 1999.

Supply Chain Development

FunctionalExcellence

ProcessExcellence

ChannelExcellenceIntegration

Excellence

Time

Value Performance

Deliver Value

Effective

Efficient

Deliver Product

NetworkExcellence

Integrate

Collaborate

Synchronize

Supply Chain Development

SCM must be implemented one step at a time Integration … within the business firmCollaboration … between firms/organizations

in the supply chainSynchronization … system-wide relationships;

formation of a “value net” to produce visibility throughout the supply chain

“The obstacles to supply chain coordination encountered within the organization are far more difficult to overcome than the external challenges.” Bud LaLonde, Professor Emeritus, OSU

What SCM issues exist?

ISSUES:Decision Classification Strategic Planning:

Decisions that typically involve major capital investments and have a long-term effect.

1. Determination of the number, size and location of new plants, distribution centers and warehouses

2. Acquisition of new production equipment and the design of working centers within each plant

3. Design of transportation facilities, communications equipment, data processing means, etc.

ISSUES:Decision Classification

Tactical Planning:Effective allocation of manufacturing and distribution resources over a period of several months

1. Work-force size

2. Inventory policies

3. Definition of the distribution channels

4. Selection of transportation and trans-shipment alternatives

ISSUES:Decision Classification

Operational Control:Includes day-to-day operational decisions

1. The assignment of customer orders to individual

machines

2. Dispatching, expediting and processing orders

3. Vehicle scheduling

ISSUES:Why Keep Inventory?

Uncertainty in customer demands

Uncertainty in the supply Uncertainty in quantity and quality Uncertainty in delivery time Uncertainty in costs

Economies of scale

ISSUES:Demand Forecast

The three principles of all forecasting techniques:

Forecasting is always wrong The longer the forecast horizon the worse the

forecast Aggregate forecasts are more accurate

ISSUES:Inventory control How much inventory to keep? Can uncertainty be reduced? What size should orders be? How does forecasting tool effect inventory

level?

ISSUES: The Challenge of Inventory Management

Matching supply and demand accurately is a critical challenge “Dell Computers predicts a loss; stock plunges. Dell

acknowledged that the company was sharply off in its forecast of demand, resulting in inventory writedowns”. (WSJ, August 1993)

“IBM continues to struggle with shortages in the Think Pad line”. (WSJ, May 1994)

“Liz Claiborne said its unexpected earnings decline is the consequence of higher than anticipated excess inventories”.(WSJ, August 1993)

ISSUES: Purchasing

What to Purchase- In-house production Vs. external suppliers

Where to purchase

- Domestic Vs. international

From whom to purchase- Cost

- Reliability: quality and on time delivery

- Availability and flexibility

ISSUES: Purchasing

Centralized Vs. Decentralized

Number of suppliers:Single sourcing Vs. Multiple sourcing

Supply contracts

ISSUES: Production

Location of manufacturing plantsProduction cost

Taxes

Incentives (by government)

Proximity to markets and raw materials

Transportation infrastructure

Political stability and culture

ISSUES: Production

Flexibility

The ability to produce different products simultaneously and efficiently

The ability to produce new products efficiently

ISSUES: Production

EfficiencyLow costShort lead time

ReliabilityOn-time deliveryQuality

ISSUES: Distribution

The structure of the distribution network

The distribution strategy

The Classical Strategy

Cross Docking

Direct Shipping

ISSUES:Product Design What role does product design play in

supply chain management? When is redesigning products worth the

cost? Can product design compensate for

uncertainty in customer demand?

ISSUES:Information Systems The advantages of advanced information

systems The challenge of unlimited data The roll of e-commerce Impact of the internet

ISSUES: What’s New in Logistics?

Global competition

Shorter product life cycle

Increasing product variety

New, low-cost distribution channels

More powerful well-informed customers

ISSUES: What’s New in Logistics?

New communications and information technologies POS and EDI technologyWireless technology

Decision Support Systems Integrated systems Multi-modal transportation

ISSUES: What’s New in Logistics?

New concepts in logistics

Push Vs Pull strategies

Cross docking

Strategic alliances

Manufacturing postponement

Design for Logistics

How should organizations move toward SCM?

SCM Success Prescription Commit top management Develop a broad vision

from customer’s customer to supplier’s supplier Conduct a reality check

the good, bad, & ugly of our operations Choose the right partners

linkages with groups of compatible enterprises

SCM Success Prescription Develop appropriate management structure

improve flow-through Measure and monitor performance

remove time, inventory, waste Make information available

timely, accurate, forward focused Refine and improve supply chain

Quality improvementQuality improvement

Technology deploymentTechnology deployment

Total cost reductionTotal cost reduction

Customer satisfactionCustomer satisfaction

SCM BenefitsSCM Benefits

Properly implemented SCM promotes….