Supply Chain Management-

Module -1 (Syllabus heads)• - Supply Chain • - Objectives• - Importance• - Decision phases• - Process view• - Competitive and supply chain Strategies• - Achieving Strategic Fit• - Supply chain drivers-

Syllabus heads (…. Continued)

• - Obstacles• - Frame Work• - Facilities• - Inventory• -Transportation• - Information• - sourcing • - Pricing

SC - Simple definition

All activities involved in the transformation of goods from the RM stage to FP stage, when the goods and services reach the end customer.

Involves planning, design and control of ‘Flow of material , Information and Finance’.

To deliver superior value to end customers.

Timber Co

Paper Manufacturer

TennecoPackaging

P& G WallMart

Plastic Mfr

Chemical Mfr

CustomerWallMart Stores

SC Concept – Stages of Detergent Supply Chain

Transporter

Supply Chain StagesSupply Chain Stages include:

• Customers Funds/Information

• Retailers

• Wholesalers/ Distributers

• Manufacturers

• Suppliers

Products

Source of Revenue and Cost

• Only one source of Revenue for all – Customer• All other cash flows - Fund exchange in SC • Effective SCM involves Mgt of assets, Product,

Information and funds – in order to maximize total SC profitability.

Value added 1.Supply, 2.Production & 3. Delivery

Simplified SC:

ManufacturerSupplier Customer Customer’s Customer

Delivery of a supplier Value: Quality, FlexibilityInnovation & Value Flow to Customer

Supplier’s Supplier

Demands for low pricing, high Quality: Customer-SupplierIntegration across responsive and flexible SC

1 2 3

What Flows? Who stocks?

• Flow of Products , Information & funds• Customer’s need and the role played by each stage of SC• In - direct supply( Del), Customer order initiates

manufacture• Intermediate stage, Retailer builds stock (LL Bean)• Wholesaler, Distributor fills Retailer stocks

Objectives

• To maximize the overall value generated• Value of SC = What the final product is worth to customer &

the SC cost in filling customers request • To look for source of revenue and cost- Only Customer• Flow of Information, product and Funds• Appropriate management of these flows- is the key to

success of SC • Management of assets and 3 flows ( P.I.F) to result in SC

total profitability

SC Surplus and Distributors

• SC decisions Vs Impact on SC surplus• SC structure of fast moving consumer items in

US and India• US distributers play small role, where as

opposite in India

Aggregating and consolidating• Retailing is consolidated in US. Large chains buy sufficient

‘Scale’ from manufacturers. No room to distributer.• Millions of small retail outlets prevail in India• These outlets limit their inventories, requires frequent

replenishments• These replenishments equal(=) weekly grocery shopping for a

family in US• One truck load delivery- local distribution by small vans• Transportation cost to be low • When the retailing in India, begins to consolidate-the role of

distributers will diminish

Importance of Supply Chain Decisions

Successful SCs built by: - Wal- Mart (Invest in Transport. Information)

- Dell Computer ( Direct supply)

- Seven Eleven Japan ( Functional Fit) Failure of e- businesses – Web van - Quaker Oates acquired Snapple (1994),but failedReason for Success/ Failure:SC design and Planning, Operation of SC

Success stories of SC• Wal-mart -1980 – Annual Sales $1 Billion 2004 – Annual Sales -$250 Billion• Income – 9 Billion – Annual compounded Growth

Rate 26%• Dell Computer- World’s largest PC mfr• 2004 – Income of $ 2.6 Billion, Sales $41B• Dell by passes Distributors, sells directly to

customers• Strength-Understanding customers needs, &

Developing better fore casts

Wal-mart Operations

• Investment on Transportation and Information• Clusters of stores around distribution centers to facilitate• Frequent replenishment• Sharing Information with suppliers- Product availability and

low cost, achieved• Sales:

– 1 billion in 1980, 250 billion in 2004, Revenue 9 billion– Compounded growth rate 26%

Dell’s Operations• Dell Centralized Manufacturing and Inventories• Large varieties of PC configurations – with low

Inventory – 5 days stock – Cash conversion cycle –minus 36 days ie, Dell ran biz on others M

• New products – reach customer fast– Intel’s new chip-reaches customer immediate,no Inv’

• Price drop, no much impact– Sony’s monitors, NIL Inventory for Dell

• Transporter operates from suppliers premises– Transporter co, picks up from Dells Austin, Texas plants

and monitors from Sony’s factory in Mexico

Dell’s Operations

• Dell, became world’s largest PC manufacturer• Close interaction with customer, understands needs• Centralization of manufacturing and Inventory• Postponing final assembly, on receipt of Order• Large variety of PCs, with less than 5 days Inventory

Web Vans Failure in SC Design

• Web van and Kozmo’s inability to design appropriate NW

• Large W/Hs in several cities of US. Groceries stored and delivered to customers by local trucks.(more transp. cost)

• Traditional Supermarkets, by full truck loads, made available all items to customers. (more carrying cost)

• In 2001, Web van folded with in 2.5 years

Synergizing 2 distribution Systems

• 1994 Quaker Oats purchased Snapple, bottled and Natured drinks such as Tea- functioned in North East and West coast-Us

• Quaker had already manufacturing set-up for sport drink -‘Gatorade’ in South and Southwest of USA- most successful.

• Major motivation of merger – potential synergy between 2 distribution systems

• Causes: 1. manufacturing 2. Customer type

Two SCs Synergy – Reason for failure

• Gatroda was manufactured by Quaker Oats’s own plant, where as Snapple’s beverage, by contract- outside plants.

• Quaker Oaks sold thro’: Supermarkets & Grocery stores, Snapple’s beverage by Restaurants and retailers

• After 28 months, Sold to Triarc companies at $300 USD ( purchase price @ $1700 @17.5%) –Reason: Inability to synergize

Decision Phases in SC

• 1. Design: – How to structure SC next few years?– How resources will be allocated? – Out source or In house?

• 2. SC Planning: – Time frame – Quarter to one year.– Goal is to maximize Sc surplus.– Demand in different markets?– Which market to be supplied from which location?– Make or buy? – Inventory? Timing? Size of Market? Price and Promotions?

Decision Phases in SC – (contd)

• SC Operation:– Configuration is fixed, policies are defined.– Incoming orders, to be handled with at most care– Allocate stock, or plan production against

individual orders, set delivery schedule of trucks and place replenishment orders.

– Design, planning and operation of SC have strong impact on overall profitability& success

Process Views of SC

• Sequence of processes and flows take place between different stages.

• 1. Cycle view: Processes are divided into series of cycles, each performed in 2 successive stages of SC

• 2. Push / Pull View: – a. Whether the order is executed against response

to ‘Customer Order’ or ‘ against anticipation of customer order’

Cycle View

1

5. Customer

4.Retailer

3. Distributer

2. Manufacturer

1. Supplier

3

5

4

12

6

32 5

16

4

3

65

42

1

4

52

61

3

1. Procurement Cycle

2. Manufacturing cycle

3. Replenishment Cycle

4. Customer Order Cycle

5. Stages

4. Cycles

Stages of SC Varies

Each cycle occurs at the interface between 2 successive stages of SC

5 Stages results in 4 SC Process Cycles

Grocery SC: Customer -Retailer - Distributer – Manufacturer - ( 4 Stages)

Dell : Manufacture- -Customer - ( 2 Stages )

Sub Processes in Each SC

Each Cycle consists of 6 Processes

1. Supplier offers the product to Customer

2. Buyer places the Order

3. Supplier receives the Order

4. Supplier supplies the materials

5. Buyer receives the Materials

6. Return of recycled materials

1

6 5

2

4

3

Goals of Buyers and sellers in Sub Process

• Buyer• Economies of scale in

Ordering• To reduce the cost of

receiving• Arranging reverse flow

– returning defects, recycling materials

• Seller• Ensures Product

availability• Forecast demand• Order fulfillment

process• Cost of transport &

delivery

Differences between Cycles

• In Customer Order Cycle, demand is external- uncertain

• Scale of an Order: Customer requirement, meager

compared to other SC members

• In other cycles. Order placement is uncertain – forecasted

• Order Quantity-gradually multiplies from user to dealer, dealer to distributor, distributor to manufacturer

A cycle view of SC defines processes and the owners of each. Specifies roles and responsibilities each member and desired outcome for each process.

Push and Pull View of the SC •

•

P3P2P1 K1K NN-1

Push Process Pull Process

Push / Pull Boundrey

Customer order Arrives

Push and Pull View of SC Process1. Pull Process

• Execution is initiated in response to customer order

• Customer demand is known with certainty

• Reactive process, because they react to customers demand

• Operates, when demand is known

• No inventory, No concern on Capacity utilization

2. Push Process

• Execution is in anticipation of customer order

• Customer demand is not known, and must be forecasted

• Speculative process, they respond to forecast rather than actual demand

• Operates, demand is unknown

• Constrained by Inventory & Capacity decision

A boundary line separates ‘ Pull and Push’ processes.

L. L. Bean’s Supply Chain

• L.L.Bean’s SC Customer order

Cycle

Replenishment and Mfg Cycle

ProcurementCycle

Pull Process

Push Process

customer

L.L.Bean

Manufacturer

Supplier

Customer Order cycle

Procurement,Manufacturing,ReplenishmentCycles

Customer Order Arrives

L.L. Bean’s -‘make to stock’

• L.L Beans executes all processes before customer order arrives (customer order cycle)

• Order fulfillment takes place, from built inventory ( Replenishment cycle)

• Goal of replenishment cycle is ‘ensure availability, when customer order arrives’

• The same principle follows in Manufacturing cycle, procurement circle etc,.

Dell’s build to Order

Dell’s SC

Customer order & Manufacturing

Cycle

ProcurementCycle

Pull Process

Push Process

customer

Dell

Customer OrderManufacturing, cycle

Procurement,Cycles

Customer Order Arrives

Dell’s Build-to-Order• Dell supplies computers directly to customers• Demand is filled from production( not fm stk)• Order recd- mfg cycle is part of customer order

cycle. • Only 2 cycles work:

– 1. customer order cycle & Mfg cycle– 2. Procurement CycleAll processes are PULL processGoal is ,to identify the appropriate Push/Pull boundary,

such away that demand & supply match effectively

Adjusting Push /Pull BoundaryUsage in SC Strategic decisions: (Case)Until 1990, Processes of paint manufacture was done in

large factories Stages: Base mfr –color mixing – can transportation –

packing (Push process)Uncertainty in matching ‘supply & demand’After 1990, SC restructured – Mixing at outlet stores, after

customers placing orders(Pull) Color mixing was pushed from Push to Pull

Key Point

• In response to customer order = Pull• In anticipation of customer order = Push

• Advantages:– 1. customers get their ‘specific shades’– 2. paint inventories, got reduced-across SC

3 SC Macro Processes

• 1. Customer Relationship Management-CRM– Processes interfacing between Firm & customers

• 2. Internal Supply Chain Management- ISCM– Processes with in the firm- Internal customer

• 3. Supplier Relationship Management-SRM – Processes interfacing between Firm & suppliers

Managing flow of information, product and funds required to generate, receive & fulfill customer request.

Supply Chain Macro Process

SRM ISCM CRM

SourceNegotiateBuyDesign CollaborationSupply Collaboration

Strategic PlanningDemand PlanningSupply PlanningFulfillmentField Service

MarketPriceSellCall CenterOrder Management

Supplier Firm Customer

Supply Chain Macro Process• CRM Process includes Marketing, Pricing, Sales,

Order Management, Web site and call center management.

• ISCM aims to fulfill demand generated by CRM, timely and at low cost. Production-storage – demand/supply plans, fulfillment of actual orders.

• SRM Macro process aims, Sourcing of goods & Services. Evaluation of suppliers, negotiating terms, communication on new products to suppliers

KEY Point

CRM- In charge -Marketing, ISCM-In charge -Manufacturing SRM- In charge -Purchase

With in a firm, all SC activities belong to one of the 3 (CRM ,ISCM, & SRM). Integration is important, for SC success

Examples of Supply Chain

• 1. Gateway – ‘Direct Sales’ Manufacturer– 1985- No retail point – First Online sale Co.-1990- Aggressive strategy

of opening retail stores – 1999 - 3 plants in US, 1 in Ireland, 1 in Malaysia. 2002,retail stores

became 280- No finished stock inventory- for customer deciding right configuration- PCs made to order

– 1990 share price $80-dropped to $4 in 2004 - 3 plants & all retail out lets closed – Sold thro’ retailers like Best buy & Circuit city.

2. Zara: Spain’s largest apparel manufacturing and retailer3. w. w. Grainger and Mc Master Carr: MRO suppliers4. Amazon com: e- Business

Competitive and SC Strategies

• Company’s competitive strategy – relative to its competitors – ‘customer needs’, get satisfied through products and services

• Wal-mart’ aim to provide availability of products , more varieties, at lower cost to customers

• McMaster sells MRO (Maintenance- Repair- Operations) products.(400,000 products, thro catalogue and a web site)

• McMaster does not compete on low price. Wal-Mart competitive strategy is different from McMaster’s.

• Mc Master’s=emphasis on product variety & response time• Wal-Mart=greater emphasis on Cost

Competitive Strategy-based on Customer’s Priority

Dell – Build to order

• e Machine PC, Direct

• Customization, Plenty• Delivery, One week • Product Variety and response• Mc Master Carr (MRO)• Product Variety and response

Gateway – thro’ retailer

• E Machine PC, thro retailers• Customization , limited• Same day• Price, same day delivery

• Wal-Mart• Cost

Competitive Strategy is based on how customer prioritizes Product , Delivery time, Variety and Quality .

The Value Chain in a Company

The Relationship between Competitiveness and SC Strategies:

New Product Development – Specification of Product Marketing & Sales create ‘Demand’Operations Dept produces with Spec, and market feed backDistributor brings ‘market and Product’ together Finance, Accounting, Information Technology, Human Resources = Support Function All functions develop its own Strategies individually, Which operates WELL?

Core Function

Integration of Functions (In-house Or Out-source)’

• Product development Strategy = specifies the portfolio of new product development.

– Manufacturing= In house Or Out-Sourcing?– Marketing Strategy= Segmentation + Positioning– SC Strategy determines = RM Procurement + Transportation +

Manufacture of Products +Distribution + Service– After Integration= Process within the Co + processes of each

SC entity

Value Chain specification• Cisco’s SC: Component mfr + assembly - to be out-sourced.• What Cisco focuses?• What Operations, distribution, service functions are to be in-house

or outsourced?• ‘Supplier Strategy, Operations Strategy, Logistics Strategy’• Cisco SC: Use contract manufacturer• Dell SC: to sell directly• Gateway : thro’ retailers• Amazon: To build w/h stock( p-A) and distributor stock (p-B)

(different products)• Toyota: To have production facility at each market• Seven Hills: Excellent Fit among different strategies

Achieving Strategic Fit• SC strategy and Competitive Strategy must ‘fit together’• Strategic fit means SC Strategy and Competitive strategy have aligned

goals.• All processes and functions, are the part of value chain, contribute for

the success or failure of SC. They do not operate in isolation. There are 3 Keys:– 1. Competitive Strategy and Functional Strategy must fit together to form a

coordinated Overall Strategy. One helps the other.– 2. Functions to structure their ‘ processes and resources’ to execute strategies. – 3. Design of overall SC and the role of each stage must be aligned to support Sc

strategy

How is Strategic fit achieved?( 3 Steps )

• 1. Understanding the customer and SC uncertainty• 2. Understanding the Sc capabilities• 3. Achieving Strategic Fit1. • 1. Understanding the customer and SC uncertainty:

– Quantity of Product needed in each lot– Response time that customers are willing to tolerate– Variety of Products needed– Service level required– Price of the Product– Desired rate of Innovation in the product

Implied Demand Uncertainty

• Implied Demand Uncertainty: A portion of the Demand, that the SC is targeting- (not the entire demand)

• Firm A: supplying only emergency Orders ( will face higher implied demand uncertainty)

• Firm B: supplying same product, with long lead time ( Can supply evenly )

Competitive Strategy & SC Strategy

• 1. First step in achieving ‘Strategic Fit’ between competitive strategy and SC strategies is to understand customer and supply chain uncertainty.

• Uncertainty from customer and SC can be mapped on the implied uncertainty spectrum

• 2. Second step is to understand the SC and map on the responsiveness spectrum

2. Understanding SC Capability and Efficiency

• SC Responsiveness:– 1. Respond to wide range of quantity demanded– 2. Meet short lead times– 3. Handle large variety of products– 4. Build highly innovative products– 5. Meet high service level– 6. Handle supply uncertainty

SC Efficiency:1. Increase in Cost, lower efficiency (1 to 5 - increase cost)

3. Achieving Strategic Fit

Responsive SC

Responsiveness spectrum

Efficient SC

Certain demand

Implied uncertainty Spectrum

Uncertain demand

Zone of

Strategic

Fit

Supplier Manufacturer Retailer

Supplier Manufacturer Retailer

Extent of Implied Uncertainty for the Supply Chain

Supplier absorbs least Implied uncertainty- Very Efficient

Mfr absorbs less Implied uncertainty-Somewhat Efficient

Retailer absorbs most implied Uncertainty- Very Responsive

SC-1

SC - 2

Supplier absorbs less Implied uncertainty- Some what Efficient

Mfr absorbs most implied Uncertainty- Very Responsive

Retailer absorbs least Implied uncertainty- Very Efficient

Different Roles of Implied Uncertainty for SC Responsiveness

SC StrategyManufacturing InventoryLead TimePurchasingTransportation

Information Technology Strategy

Finance Strategy

Human Resource Strategy

Competitive Strategy

Product development Strategy

Marketing and Sales Strategy

Fit between Competitive and Functional Strategy

Sl No.

Strategy Efficient Supply Chain Responsive Supply Chain

1 Primary Goal Supply demand at the lowest cost

Respond quickly to demand

2 Design Strategy

Maximum performance @ a minimum Product cost

Product differentiation @ high cost

3 Pricing Strategy

Lower margin – price , prime customer driver

High margin, price is not prime customer driver

4 Mfg Strategy Lower cost thro high utilization

Maintain spare capacity, for demand/ supply uncertainty

5 Inventory Minimum Inventory to lower cost

Maintain buffer inventory to deal with demand/ supply uncertainty

6 Lead time strategy

Reduce, but not @ the expense of cost

Reduce aggressively, at any cost

7 Supplier Strategy

Select based on cost & quality Select based on speed, flexibility, reliability and quality

Supply Chain Drivers

Responsiveness Efficiency

Functional strategy To be balanced Competitive Strategy

To achieve these 2, we need to understand ‘ Logistical and Cross functional drivers’.

1. Facilities 2. Inventories3. Transportation4. Information 5. Sourcing6. Pricing

To be balanced

Competitive Strategy

Supply Chain Strategy

Facilities Inventory Transportation

Information Sourcing Pricing

Supply Chain StructureEfficiency Responsiveness

Logistic Drivers

Cross functional Drivers

Supply Chain Decision – Making Frame Work