introduction to supply chain management (scm)

Introduction to Supply Chain Management (SCM) Fundamentals

3 Hours Training for non supply chain people

• 9-10 am • Definitions• History of Supply Chain Management

• 10-11am• Views of Supply Chain Management Models and

possible applications• The 4 rules

•11-11.15am: Break

• 11.15-12.30am• Supply Chain and Value Chain• the 7 Principles of SCM

Definitions of Supply Chain Management

Traditionally, the supply chain of a company consists of different departments, ranging from procurement of materials to customer service: Purchasing and Procurement Sales Forecasting Production planning and control Material Handling Inventory Management Distribution Customer Service

This is what you will find under the supply chain scope in many companies.

In SYNC, A Supply Chain is defined as a group of capacity units in one or more plants, dedicated to a product group (e.g. AVIVA, films). All items produced on this capacity group belong to the SC, including their demand and pipeline inventory. In the first phase of SYNC implementation, a single plant is considered as „SC“.

Definitions of Supply Chain ManagementTerminology

Purchasing and Procurement: including the Sourcing or not, Purchasing can be differentiated from the Procurement and more or less centralized.

• The differentiation comes from the replenishment function of the Procurement which, opposite to the Purchasing, does not involve supplier relationship and negotiation.

• The level of integration of the 3 functions is dependent of the company strategy: one pattern is a centralized Sourcing and Purchasing department, with local procurement department who replenish on blanket orders negotiated annually in central.

• The replenishment can be fully automated thanks to the ERPs

Sales Forecasting: the process of forecasting has traditionally been allocated to Sales & Marketing with more or less success.

• Forecasting is a KEY input process in the Supply Chain because it triggers the whole chain.

• Its ownership and accountancy should be a shared responsibility because it requires the understanding and agreement on several key concepts:

– Market Demand– Annual Budget– Forecast– Validated Demand.


Production planning and control: has been at the heart of the main latest productivity gains thanks to methodologies like TPM, 6 sigma and Lean.

• Tremendous improvements in production lead-time and quality have been recorded these past 20 years.

• They are one part of the Supply Chain: the manufacturing.

Material Handling: it can cover different aspects of the material flow in the supply chain

• Raw materials or components• Work in Progress (WIP)• Finished goods storageHere again, important improvements in the cycle time have been achieved and

companies have massively invested resources to reduce their cost of material handling.


Inventory Management: usually handled by the Logistics Departments, it has been widely automated through inventory management systems, RFID and ERP systems.

• Inventory is closely looked at in quantity and mix.• Inventory is the exact difference between Validated (produced) forecast and

actual sales.• Inventory belongs to the Sales departments, and partly to the Production or

Purchasing if minimum quantities are required, that are superior to the Demand.

Distribution: handled internally or not, the final storage and transportation of finished goods is widely constrained by legal frameworks.

• The configuration of the distribution network is a constant rebalancing between optimization of inventory by centralization and the transportation cost and constraints.

• Concepts like cross docking, 3PL and 4PL partnership have been developed in the past 20 years and companies have now methodologies and tools to make the best choice for their distribution.

• Distribution network configuration remains a challenging question for many companies and market changes create the need to raise the question regularly.


Customer Service: usually considered as an Order Processing department, its importance is often overlooked.

• It is regularly transferred from the scope of Sales & Marketing, to Supply Chain, then back to Sales & Marketing, back and forth.

• Its processing cycle time is an important part of the total Supply Chain cycle time, often longer than the manufacturing and distribution time itself.

• Its processes optimization is an important leverage in the Supply Chain responsiveness.

But Supply Chain is more than the juxtaposition of independent working departments:

It is actually the opposite


Supply Chain Management is:

– ‘simply the process of optimizing the delivery of goods, services and information from supplier to customer, balancing supply and demand.’

– Gartner Group, 1999

– ‘the management of all internal and external processes or functions or enablers necessary to satisfy a customer’s order (from raw materials through conversion / manufacture through shipment)’

– Supply Chain Council, 1999


• The key point to remember is that at the beginning of any initiative in your organization related to SCM, various parties may have different understanding of what SCM means.

• This means that effort (workshop/training/education etc.) is required to align each participant’s view of SCM, and set the definition and scope of SCM in your particular case.

There are different possible physical supply chain configurations and different possible ways of

managing them.




•11-11.15am: Break


History of SCM (1/2)

Supply chain management is the logical progression of developments in Logistics management:

Historically, Logistics originates from the military function, as the “need to supply themselves with arms, ammunition and rations as they moved from their base to a forward position” (Wikipedia).

1st phase: the Physical Distribution management has integrated Warehousing and Transportation Physical Distribution has then become Logistics. 2nd phase: Logistics has integrated, in addition, the Manufacturing, Procurement, and the Order

Management functions

Around 1995-1996 leading companies started to look beyond the boundaries of their own company for areas where they could improve:

– First books appeared with titles including Supply Chain Management.– Supply Chain Council (worldwide organization) was formed end of 1996 .

The third - and current -phase is the "integrated supply chain management phase”: The internal processes need to be integrated with suppliers at one end and customers at the other end. We also talk about extended Supply Chain.

History of SCM (1/2) There are two visions for the next phase in supply chain

management:

The Connectivity Vision, The “Virtual Enterprise”• Centrally planned, fully integrated, seamlessly linked supply chains that — fueled by

real-time data — will coordinate and ultimately optimize supply chain networks across the extended enterprise.

The Federated supply chain• Based on the federalist view of collaboration among independent entities, which

recognizes each supply chain partner as an independent entity working to maximize its own objectives and trade-offs as a “citizen” of multiple supply networks.

From within the organization to across organizations

Credit & Finance

Distribution

Support Services

ERP

Engineering

Billing Production

Throughout the nineties companies have been breaking down walls between their departments within their own organization. (concepts of “silos”)


The Entreprise Resources Planning (ERP) systems have allowed companies to start sharing data simultaneously.

Thanks to ERP systems, the concept of Planning has also been widely disseminated.

But the experience shows that many companies still analyze their data through excel sheets, because they are unable to plan their operations directly from the ERP system. Most of it, ERP is used as a data repository only.

o Users’ requirements and processes have often been overlooked in the past in order to cater to the ERP systems’ constraints.

o Users work on unclean data.

And ERP systems have not removed the silos concept, with departments working on different:

Objectives Deadlines Budgets Marketing Plans Cost reference …

The walls within companies departments still exist when there is no established alignment process, led by the Top Management.


SCM is about breaking walls within and between companies

The history shows also that the walls between companies amplify the walls within companies – and they lead to enormous costs, errors, inventories, and delays.

What has been overlooked?

Basically, the core concept of the CHAIN.

From the customer’s order to its fulfilment, numerous simultaneous or consecutive processes have to be organized, not only inside the company but also with all its partners.

A Supply Chain is as strong as its weakest point, because the breakage of any of the link will bring disruption to the

whole chain.

2 Definitions of Supply Chain Management

Supply Chain Management is:

– ‘simply the process of optimizing the delivery of goods, services and information from supplier to customer, balancing supply and demand.’

– Gartner Group, 1999

– ‘the management of all internal and external processes or functions or enablers necessary to satisfy a customer’s order (from raw materials through conversion / manufacture through shipment)’

– Supply Chain Council, 1999




•11-11.15am: Break


Three Views of SCM Model

Functional viewSystem view Process view

M.E. Porter’s Value Chain (80s) Functional view of the organization

Primary Activities

Seco

ndar

y Ac

tiviti

es

General administration

Human resource management

Research, technology, and systems development

Procurement

Inboundlogistics

Operations Outboundlogistics

Marketingandsales

Service

Margin

Margin

Five Disciplines and 11 Topics – System view

Orientation TopicsDemand Management 1. Demand Planning

2. Collaborative Demand Planning

Production Management 3. Enterprise Production Planning4. Materials Handling

Procurement Management

5. Purchasing and Supplier Management6. Outsourcing and Strategic Alliances

Distribution Management 7. Distribution System Design and Strategies8. Inventory Management9. Transportation, Warehousing and Logistics

Fulfillment Management 10. Order Promising11. Service and Support, and Returns

Management

Cross-Functional Process



INPUT

FROM

CUSTOMER

OUTPUT

TO

CUSTOMER

FUNCTION 1 OPTIMIZATION

FUNCTION2 OPTIMIZATION



SUM OF OPTIMIZATION FUNCTION ≠OPTIMIZED PROCESS

Rummler & Brache (90s): Cross-Functional Process vs. Functional Silos

SCOR® ModelThe Process View

Processes

Best Practice

sMetrics Technolo

gy

SCOR® Model: The Process View and the concept of integrated Supply Chain

Integrated Supply Chain

SCM is an important leverage for competitive advantage:

There are not so many ways companies can differentiate themselves and stand out from their competitors: Better in sales / customer relationships Better in innovation / product development Better in delivering the right product, to the right location at

the right time for the right cost = supply chain excellence, but companies have traditionally looked at SCM only as a way to cut cost; however lower cost is just one area a supply chain should be competitive in.

Leading companies are using SCM to compete on:• availability of the product to end customers• responsiveness, flexibility and adaptability to market

changes

Why integrating SCM ?

SCM allows companies to compete beyond the normal boundaries

Most companies focus on competing in a ‘better, faster, cheaper 'way but only through small gradual steps and within existing structures for their market, product and customer buying experience.

Leading companies have used SCM to introduce new business models and offer an entirely new way of engaging customers and thereby achieving a huge competitive advantage.

Why integrating SCM ?

Dell:–By changing the existing industry supply chain model from make-to-stock (using distributors and retailers) to a direct make-to-order model, Dell over the years has more than outperformed its competitors.

Examples of companies who have created new business model through the SCM

Wall Mart:–Having a world class Supply Chain allowed Wall Mart to execute its ‘every day low price’ strategy.This not only made Wall Mart the leading company in its industry but also drove some of its competitors to bankruptcy (K-Mart). Zara:–The apparel Spanish manufacturer has developed an extremely flexible Supply Chain that allows the fast replenishment of small batch of goods.This creates a tantalizing sense of exclusivity to the customer who never knows if the item that has caught their eye will appear again in the shop or is available into another shop.

Examples of companies who have created new business model through the SCM

HORIZONTAL INTEGRATION

• Strategy used by business that seeks to sell a type of product in numerous markets

• Horizontal integration occurs when a company in the same country and in the same stage of production is being taken over or merged with another company at the same stage of production.

• Example: when one steel company takes over another steel company

VERTICAL INTEGRATION

• Vertically integrated companies are united through a hierarchy and share a common owner

• each member of this hierarchy produces a different product or service and the products combine to satisfy a common need.

Source: LinkedIn slideshare




•11-11.15am: Break


Key Rules (1/4) Only ‘total supply chain cost’ matters

o Companies do not compete, their supply chains do.

o The end-customer ultimately pays for all costs incurred in the supply chain and all inventory held, wherever it is.

o Merely shifting the cost or the inventory from one party in the supply chain to another does not reduce the overall supply chain cost.

If there are 5 parties in the supply chain, and each cost is 10 dollars [10 + 10 + 10 +10 +10], the total cost in the supply chain is 50 dollars. If one strong company then pushes its own cost to one of its suppliers, you may get following pattern: [10 + 15 + 5 + 10 + 10] of cost in supply chain. But overall cost for end consumer is 50 dollars still. This is an example of win-lose collaboration, with no improvement of the whole supply chain.What SCM encourages is win-win collaboration. By working with suppliers (or distributors) to reduce non-value added, to really take cost out of the supply chain. Then the total SCM cost could be [10 + 8 + 8 + 10 + 10] = 46 for example, and customer would benefit . And this supply chain would offer better value than other supply chain that might still have 50 overall cost.

Key Rules (2/4)

Trade-offs are necessaryo Companies must select some performance attributes to

favor at the expense of others. o Companies can’t be best-in-class in all areas.o It is a strategy

For example: serving 99,99% of the market demand will require a high inventory to face all types of demand. a low inventory strategy will require a higher production flexibility or delivery lead-time.

Key Rules (3/4)

Uncertainty will remain, so “buffers" will still be neededo Now that modern communication and IT technologies move

information faster, the main benefit is that companies face a shorter period of uncertainty; but there still is a period of uncertainty.

o To mitigate the effects of uncertainty, “buffers” are still required.

Only three types of buffers exist:

• inventory• "excess" capacity (above the amount needed on average)• customer waiting time

Key Rules (4/4)

Education is the overlooked supply chain barrier

o As we all know—but tend to forget in the midst of day-to-day execution—a lack of education poses a barrier to better systems and practices.

o If you don't focus on education, and on implementing the right operating model, all the technology in the world isn't going to solve your problems.

Obstacles of integrating SCM No clear set guidelines for creating/terminating alliance with

supply chain partners.o The supplier partnership strategy must remain flexible so that it does

not become a disadvantage to the company when the market conditions change.

Failure to develop and implement measures for monitoring allianceso Lack of win/win mindset (one partner will try to take advantage on the

other)o Lack of a common set of metrics that can be applied and shared

across the chain, so that the total improvement can’t be measured.

Inability to broaden the supply chain visiono Most companies stop at the logistics function, instead of the entire

‘cash-to-cash’ business cycle. Donald J. Bowersox




•11-11.15am: Break


Supply Chain and Value Chain

Porter’s Value Chain:A value chain is a chain of activity in a

company, where products pass through, gaining value each time

The subjectivity of the concept of Value:

Understanding the customer requirements allows a tightest

adjustment of the resources to the Demand

Supply Chain and Value Chain

The primary focus in Supply Chains is on the costs and efficiencies of supply, and the flow of materials from their various sources to their final destinations. Efficient supply chains reduce costs.

‘The primary focus in Value Chains is the understanding of the appreciation and awareness of customer needs and values, and the organization of the firm’s activities around efficiently providing for those needs – quickly, accurately, and at minimum cost.’Feller, Shunk and Callarman – 2006 -

The primary difference between a supply chain and a value chain is a fundamental difference in focus from the supply base to the customer.

They are of course perfectly

supplementary




•11-11.15am: Break


The 7 principles of SCM Principle 1:

Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.

Segmentation has traditionally grouped customers by:• industry• product • trade channel

and then taken a one-size-fits-all approach to serving them, averaging costs and profitability within and across segments. The typical result, is that no one fully understands the relative value customers place on the service offerings.

The other consequence is that companies spend too much on a service level not really required by their customers.

Principle 2:

Customize the logistics network to the service requirements and profitability of customer segments.

Companies have traditionally taken a monolithic approach to logistics network design in organizing their inventory, warehouse, and transportation activities to meet a single standard:

For some, the logistics network has been designed to meet the average service requirements of all customers

for others, to satisfy the toughest requirements of a single customer segment.

Neither approach can achieve superior asset utilization or accommodate the segment-specific logistics necessary for excellent supply chain management.

The 7 principles of SCM


Principle 3:

Align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation.

Experience shows that the forecast improvement is the action bringing the highest impact in SCM, because it is the triggering point of the whole chain.

The informal approach of forecasting by sales bring inconsistency that could be easily corrected before the estimated market demand is processed.

The absence of a structured Demand Review process creates the common situation where Sales and Production don’t work on the same demand plan.

Reconciling Statistical and Intuitive approach optimizes the forecast process.


Differentiate product closer to the customer and speed up the conversion of raw materials to finished products across the supply chain.

This concept refers to postponement and mass customization:

In mass retail industry, keep your product standard as long as possible alongside the chain, turning it into multiple SKUs at the latest moment, for example for packaging.

The conventional belief that lead-times are fixed is challenged and, coupled with the concept of late customization, customers can be served faster.

The key is to find the differentiation decoupling point in the chain.


Manage sources of supply strategically to reduce the total cost of owning materials and services.

Traditional view is to get as many suppliers as possible competing to get the best price:

This “cheaper price” approach can be excellent for Purchasing Managers’ results, but very damaging and costly for the company.

Referring back to the Principle that only total SC Cost matters; pushing suppliers to provide non reasonable conditions will just

increase your company’s cost in due time, or will push the supplier to cheat on quality, or will bring the supplier to financial failure, cutting one of your source.

Differentiating the suppliers relationship depending on their criticality to your supply chain is a soundest way to approach purchasing.

Principle 6:

Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives a clear view of the flow of products, services, and information.

What information do you need to run your business?

Short Term: information that allow you to run your day-to-day business, capturing the latest market demand and re-aligning the supply in consequence.

Mid Term: aggregated information that facilitate master scheduling and resources allocation.

Long Term: ‘what if’ scenario function to make strategic analysis.

The paradox is that the most crucial information to a company’s supply chain is outside of its system… it lies in market knowledge.



Adopt channel-spanning performance measures to gauge collective success in reaching the end-user effectively and efficiently.

How do you measure your Supply Chain Performance?

Adopt a high standard of measurement: the Perfect Order Fulfillment rate.

Apply Activity Based Costing to the Key Accounts and calculate its profitability.

Align the company departments goals by standardizing the reporting: the Balance Scorecard.

Agenda

• The importance of Planning• Identifying the major constraint in term of cost for the company

• Working on the right parameters

2015-2016 50

The importance of Planning

50

- Execution- Anticipated and prepared flexibility- number of teams / temporary staff- Production and Supply Plan- etc

Operational Tactical Strategic

- Implementation- Tied to the annual budget process- Process- Technology investment- Recruitment, training- Financing- Projects

- Long term target- Investments, Mergers, Acquisitions- Technology: market and product evolution- IT- location, in-source, out-source- legislation, currency exchanges.

Long term Vision and GoalsObjectives and FrameworkActivities and ‘how”

The importance of Planning STRATEGIC:

Strategic Company Planning sets the direction for the company.

Timing and key strategy for the Plan period (up to 10 years) Strategic allocation of resources

Globalization and access to new markets and resources has created numerous opportunities. New communication means also access to places where business was not possible before.

But it has also incredibly increased complexity: Extended Networks More choice, more indecision. Greater need for flexibility Greater need of information Financial Market volatility. Higher expected returns by investors

The importance of Planning TACTICAL:

Tactical Planning is an output of the Strategic Planning: it is tied to the Annual Business Plan, translated into Objectives and Framework

Timing is usually 12 to 18 months. Strategy is cascaded into objectives, by Organizations,

Departments, People. Framework is set by Processes, Standard Operating Procedures,

Rules and Regulations.

Tactical Planning turns Strategy into reality, and build projections, in term of budget, and must take into consideration:

Existing environment. Available expertise Available resources What is known of future strategy, in order to remain flexible.

Set up of the reporting is an important step of the Tactical Planning, as it allows correct tracking of the company performance and actions to be taken when variation to the KPIs is reported.

The importance of Planning OPERATIONAL:

Operational Planning deals with the day to day routine, in an organized manner and in order to achieve the Plan.

Annual Plan or Budget is cascaded into short term plans (months or weeks), like production plan, inventory plan, sales plan.

Operational Period At Activities level. ‘How’: staffing, equipment, operating hours, materials…

The main idea behind Operational is EXECUTION of operations.

Many companies have difficulties turning Plans into Operations:

Misalignment of Plans (dollars / quantities / cost…) Misalignment of Objectives (Sourcing at lowest cost against Quality

requirements, Sales need for production flexibility against Production need for capacity optimization…)

Lack of Process.

Identifying the major constraint in term of cost for the company

… ‘Misalignment of Objectives’: It can be considered that Supply Chain brings revenue to

the company: The physical delivery triggers the invoicing and the

payment by the customer. Reducing its cost is an increase in the revenue.

Only a holistic approach of the Supply Chain allows the managers to grab the impact of their initiatives on the whole chain. There are common conflicts of interests between:

• Purchasing and Quality departments (lowest cost vs. non quality cost)

• Production and Sales (optimization of the production tool vs. need for reactive small production batches)

• The cost of carrying inventory or executing urgent order vs. the cost of non or partial delivery to the customer.

• The cost of slowing down or stopping a factory vs. the cost of carrying extra inventory.

Working on the right parameters:Some examples of not so obvious parameters or constraints:• Product substitution: in food distribution, the

customer will easily substitute a product for another, based on the availability and price. Companies have to multiply SKUs to retain the customer, creating huge product database and inherent difficulties in forecasting and inventory management.

• Engineer or make to order products, or high technology products: warranty management, maintenance and possible re-work must be taken into account into the Supply Chain configuration and the chain cost.

• 3PL and 4PL: the capacity planning and its usage optimization is crucial because of the asset immobilization. Market Intelligence (market trend research) is key.