Quality in Supply Chain Design

Lecture 1: Introduction to SCM

2

Outline

Supply Chain Management

SCM Challenges in Today’s Global Economy

Magnitude of Supply Chain Costs

Topics Covered

What Is a Supply Chain?• Flow of products and services from raw

materials manufacturers; intermediate products manufacturers; end product manufacturers; wholesalers and distributorsand; retailers

• Connected by transportation and storageactivities

• Integrated through information, planning, and coordination activities

3

Source

Supplier

Supplier

Distributor

Distributor

Retailer

End-User

Converter

Converter Consumers

Information Flow

Funds/Demand Flow

Value-Added Services

Material Flow

Reuse/Maintenance/After Sales Service Flow

What Is a Supply Chain?

4

Supply Chain for a Car

Components

Raw material suppliers. For instance, suppliers for steel, rubber, plastics, etc.

Parts suppliers. For instance, suppliers for engines, steering wheels, seats, and electronic components, etc.

Automobile manufacturer. For instance, Ford.

Automobile dealers. For instance, Hayward Ford.

5

Supply Chain for a Car

6

Supply Chain for a Consumer Mortgage

The supply chain for a consumer mortgage offered by a bank may involve various components.

Marketing companies that handle solicitation to potential customers.

Credit reporting agencies that evaluate potential customers.

The bank that extends the mortgage loans.

Mortgage brokers through which the loans are distributed.

7

Product vs. Service Supply ChainThere are a number of differences between the two types of

supply chains. For instance:

In a product supply chain, there is both a flow of information and physical products. In a service supply chain, it is primarily information.

Contrary to a service supply chain, transportation and inventory are major cost components in a product supply chain.

Services typically cannot be held in inventory, so matching capacity with demand is frequently more important in a service supply chain.

In a service supply chain, the (explicit) cost of information is higher than in a product supply chain.

8

Supply Chain Goals & Strategies

All companies involved in the supply chain want to maximize their respective profits by increasing revenue and decreasing cost.

However, companies may employ different strategies in order to achieve this goal.

Some of them focus on customer satisfaction and quick delivery, while others may be more concerned about minimizing inventory holding costs.

9

Supply Chain for a Car

Typically, the automobile dealer would like to offer a variety of car colors and configurations to accommodate different customer preferences, and meanwhile have a short delivery lead time from the manufacturer.

However, in order to maximize the length of production runs, and utilize resources more efficiently, the manufacturer would like to aggregate orders from different dealers and offer less variety in car configurations.

Multi-objective Optimization

10

Supply Chain for a Consumer Mortgage

The marketing companies strive to increase the response rate from homebuyers in order to maximize their returns.

Banks aim at a customer portfolio with a relatively low risk, healthy flow of payments and low average loan maturity date.

The brokers would like to maximize their sales commissions

Multi-objective Optimization

11

Source

Supplier

Supplier

Distributor

Distributor

Retailer

End-User

Converter

Converter Consumers

Information Flow

Funds/Demand Flow

Value-Added Services

Material Flow

Reuse/Maintenance/After Sales Service Flow

What Is a Supply Chain?

12

Supply Chain: A Simplified View

Two pictures:

(1) components and

(2) flow

One goal: Optimization

(1) minimize cost

(2) maintain service levels

13

SCM: A Systems Approach

The Supply Chain network 14

SCM: A Systems Approach

Every facility that impacts costs need to be considered

Multiple levels of activities

Strategic – Tactical – Operational

15

Supply Chain ManagementSimchi-Levi’s Definition:

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.

16

SCM: Other Definition

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

17

SCM: Other Definition

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

18

19

Outline

Supply Chain Management

SCM Challenges in Today’s Global Economy

Magnitude of Supply Chain Costs

Topics Covered

SCM Challenges:

Optimization, integration and synchronization with

development chain

complex, large scale network

facilities with difference, conflicting objectives

dynamic systems

20

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

21

The Development Chain

The Supply Chain network 22

The Development Chain

The enterprise development and supply chain

23

SCM Challenges:

Optimization, integration and synchronization with

development chain

complex, large scale network

facilities with difference, conflicting objectives

dynamic systems

24

Large Scale Complex NetworksGeographically dispersed complex network

25

Global Apparel Supply ChainTracing back the dress you are wearing

26

27

QC & Shipping

[Hong Kong]

Product Design

[Hong Kong]

Zippers+…

[Japan+…]

Stitching

[Indonesia]

Weaving

[Taiwan]

Yarn Spinning

[Korea]

An Illustration: How Li & Fung Limited Might Make a Dress

Globally Dispersed Manufacturing

28

Transactional Complexity

National Semiconductors:• Production:

– Produces chips in six different locations: four in the US, one in

Britain and one in Israel

– Chips are shipped to seven assembly locations in Southeast

Asia.

• Distribution

– The final product is shipped to hundreds of facilities all over

the world

– 20,000 different routes

– 12 different airlines are involved

– 95% of the products are delivered within 45 days

– 5% are delivered within 90 days.

29

SCM Challenges:

Optimization, integration and synchronization with

development chain

complex, large scale network

facilities with difference, conflicting objectives

dynamic systems

30

31

Decentralized environments

A

B

C

32

Decentralized environments

Airport FacilityScheduling

SCM Challenges:

Optimization, integration and synchronization with

development chain

complex, large scale network

facilities with difference, conflicting objectives

dynamic systems

33

SCM Challenges

Dynamic system: uncertainty and risk Variations over time

Matching demand-supply is difficult

34

Uncertainty and Risk FactorsMatching Supply and Demand a Major Challenge

REASONS EXAMPLES

•Raw material shortages

•Internal and supplier parts

shortages

•Productivity inefficiencies

Boeing Aircraft’s inventory write-

down of $2.6 billion

•Sales and earnings shortfall

•Larger than anticipated inventories

Sales at U.S. Surgical Corporation

declined 25 percent, resulting in a

loss of $22 million

•Stiff competition

•General slowdown in the PC

market

Intel reported a 38 percent decline

in quarterly profit

•Higher than expected orders for

new products over existing

products

EMC Corp. missed its revenue

guidance of $2.66 billion for the

second quarter of 2006 by around

$100 million35

Uncertainty and Risk FactorsFluctuations of Inventory and Backorders

Order variations in the supply chain

36

Forecasting is not a solution

Demand is not the only source of uncertainty

Recent trends make things more uncertain

Lean manufacturing

Outsourcing

Off-shoring

Uncertainty and Risk Factors

37

Uncertainty and Risk Factors

38

2002 West Coast port strike Losses of $1B/day

Store stock-outs, factory shutdowns

1999 Taiwan earthquake Supply interruptions of HP, Dell

2001 India (Gujarat state) earthquake Supply interruptions for apparel manufacturers

Uncertainty and Risk Factors

39

Uncertainty and Risk Factors

40

41

Outline

Supply Chain Management

SCM Challenges in Today’s Economy

Magnitude of Supply Chain Costs

Topics Covered

Magnitude of Supply Chain CostsCost Elements of a Typical Trade Book

42

Magnitude of Supply Chain CostsExample: The Apparel Industry

Manufacturer Distributor Retailer Customer

Cost per Percent

Shirt Saving

$52.72 0%

$41.34 28%

$20.45 62%

Manufacturer Distributor Retailer Customer

Manufacturer Distributor Retailer Customer

43

The Magnitude

U.S. companies spend more than $1 trillion in supply-related activities (10-15% of Gross Domestic Product) Transportation 58%

Inventory 38%

Management 4%

The grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies

A typical box of cereal spends 104 days getting from factory to supermarket.

A typical new car spends 15 days traveling from the factory to the dealership.

44

The Magnitude

Compaq computer’s loss of $500 million to $1 billion in sales in one year

Laptops and desktops were not available when and where customers were ready to buy them

Boeing’s forced announcement of write-downs of $2.6b Raw material shortages, internal and supplier parts shortages….

Cisco’s multi-billion ($2.2b) dollar write-off of inventories in 2001-2002 Customers balked on orders due to market meltdown

45

Composition of Logistics Costs

Total U.S. logistics costs between 1984 and 2005 46

Progression of Logistics Costs

Logistics costs’ share of the U.S. economy

47

Supply Chain: The Potential

P&G’s estimated savings to retail customers of $65 million through logistics gains

Dell Computer’s outperforming of the competition in terms of shareholder value growth over more than two decades by over 3,000% using:

Direct business model

Build-to-order strategy

Wal-Mart transformation into the world’s largest retailer by changing its logistics system:

highest sales per square foot, inventory turnover and operating profit of any discount retailer

48

Cross-Docking

Product vs. Service Supply Chain

50

A Narrowcasting

Environment

Retail Store

51

Expressive Commerce: Strategic Sourcing at Procter & Gamble

52

Outline

Supply Chain Management

SCM Challenges in Today’s Economy

Magnitude of Supply Chain Costs

Topics Covered

SCM Challenges & Solutions

53

DevelopmentChain

Distributed Large scale

Conflicting Objectives

Dynamic Environment

Inventory

Risk Pooling

Value of InformationTech Standard

Strategic Alliance

Smart Pricing

Procurement

Supply Contracts

eMarkets

Distribution

SCM Challenges & Solutions

54

DevelopmentChain

Distributed Large scale

Conflicting Objectives

Dynamic Environment

Inventory

Risk Pooling

Value of InformationTech Standard

Strategic Alliance

Smart Pricing

Procurement

Supply Contracts

eMarkets

Distribution

55

Summary

Supply Chain Management

SCM Challenges in Today’s Economy

Magnitude of Supply Chain Costs

Topics Covered

Materials of some slides are taken from David Simchi-Levi; Philip Kaminsky; Edith Simchi-Levi. "Designing and Managing the Supply Chain". McGraw-Hill Higher Education, 2008. ISBN-13: 9780073341521 (ISBN-10: 0073341525)

Used by Permission.