supply chain management

Operations Management-104

Supply Chain Management

Debabrata Ghosh

*Images available in the public domain


C1

DISTRIBUTION

CENTERS

C2

C3

C4

C5

C6

VENDORS INBOUND

TRANSPORTATIONPLANTS

CUSTOMERSINTERFACILITY

TRANSPORTATION

OUTBOUND

TRANSPORTATION

DISTRBUTION

CENTRES

What is a supply chain?

2

Flow of Material

Flow of Cash

Flow of Information

Flow of Information

Source: Supply Chain Management: Text and Cases Janat Shah, Pearson Education India, 2009


A detergent supply chain stages

Unilever or other

manufacturer

Spencers or Third Part DC

Spencers store Customer

Tenco PackagingPaper

ManufacturerTimber

Company

Plastic ProducerChemical

Manufacturer

3

Operations Management-104 4


QC & Shipping[Hong Kong]

Product Design[Hong Kong]

Zippers+[Japan+]

Stitching[Indonesia]

Weaving[Taiwan]

Yarn Spinning[Korea]

Globally Dispersed Manufacturing

5


What is supply chain management?

6

A set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses and stores so that merchandize 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.

Global Optimization of a complex network leading to challenges in system wide costs reduction

Maintaining service levels at every stage of the supply chain

Coordination between supply chain players to achieve optimal system performance

Uncertainties of demand and supply side resulting in getting it right extremely difficult

Challenges

Source: Designing and Managing the supply chain, Simchi-Levi et.al., Mc-Graw Hill, 3rd Ed., 2008


Sources of SCM uncertainties

7

Supply side Uncertainty:Manufacturing yieldsTransportation TimesComponent availabilityNatural and Man-made disasters

Demand side Uncertainty:Forecasts are only reliable to an extentChanging consumer behaviour

In September 1999, a massive earthquake devastated Taiwan. Companies like Hewlett-Packard and Dell which sourced a variety of components were severely affected.

2012 and subsequent devastating fires in the apparel manufacturing factories of global retail players not only indicated a severe gap in safety standards of the workers in those factories but also brought global brands under pressure for quality audits and maintenance of safety standards of supplier facilities.

2013 report of fall in demand (post Diwali) for automobiles led to an inventory pile up of over Rs. 20,000 crore forcing several automakers like Maruti and GM in India to either plan a production cut or periodic plant shutdowns.

Stiff competition General slowdown in the PC market

Intel reported a 38 percent

decline in quarterly profit in 2006


Why Supply Chain Management ?

8

By 1990s companies discovered that new manufacturing technologies and strategies that allowed them to reduce costs and better compete in the markets such as Just-in-Time , Kanban, Lean Manufacturing Techniques, Quality Management etc. had outlasted the needs of the present times.

Vast amount of resources and investments were made on these methods and further reduction of costs and improvement in quality were only possible through a different outlook.

While MRP, ERP and the advancement of computing techniques had helped production facilities, the need was to look beyond the boundaries of the firm.

The need to understand and improve operations beyond the boundaries of the firm while dynamically focussing on various components of the chain, has led to growth of supply chain management studies and practice.


Progression of Logistics Costs

Logistics costs share of the U.S. economy

9


Composition of Logistics Costs

Total U.S. logistics costs between 1984 and 2005

10


Complexity

U.S. companies spent 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 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.

11


Process views of a supply chain

Distributor

Manufacturer

Supplier

12

Retailer

Customer

Procurement Cycle

Manufacturing Cycle

Replenishment Cycle

Customer Order Cycle

Cyclic view of a supply chainSource: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008


Process views of a supply chain

13

Push -Pull view of a supply chain

Source Make components Assembly Delivery



MTS

MTO

CTO

Customer Order

Customer Order

Customer Order



Dells Supply Chain

14

Dell builds, tests and packages the productsUsual Time Frame: 8 hours

Dell sends an orders to a manufacturing plant

Dell processes orders and performs credit checking and configuration evaluation

Usual time frame: 2 to 3 days

Customer places an order with Dell

Dell ships and delivers the products

Usual time frame: no later than 5 days after receipt of orders

Launched by Michael Dell in 1983

Developed an unprecedented model of

direct distribution in the PC Industry

Collaboration with suppliers for planning

and execution, share information about

component forecasts, seasonality, market

movements etc.

Evaluated suppliers on inventory-

velocity, e-business collaboration, low-cost

manufacturing and technology leadership.

Inventory Management: Removed

warehouses, carried only a few days of

inventory throughout supply chain

enabled through real time monitoring of

inventory and orders across suppliers.

Source: Designing and Managing the supply chain, Simchi-Levi et.al., Mc-Graw Hill, 3rd Ed., 2008


DELL Inc. - TIMELINE

1983-- Michael Dell starts business of pre-formatting IBM PC HDs on weekends

1985-- $6 million sales, upgrading IBM compatibles for local businesses

1986-- $70 million sales; focus on assembling own line of PCs

1990-- $500 million sales; with an extensive line of products

1996-- Dell goes online; $1 million per day in online sales; $5.3B in annual sales

1997-- Dell online sales at $3 million per day; 50% growth rate for 3rd

consecutive year, $7.8B in total annual sales.

2005-- $49.2B in sales

15


Measuring Supply Chain Performance

The following two performance measures can be calculated using financial data:

Inventory Turns = (Cost of Goods sold/Average aggregate value of inventory) Average aggregate value of inventory includes total value of all items at cost including raw materials, work-in-process inventory and finished goods = (average inventory for item i * unit value of item i) Inventory Days of Supply = (Average aggregate value of inventory/ Cost of Goods sold ) * 365 days

1996 1997 1998 1999 2000 2001 2002 2003

Revenue (billion $)

5.3 7.8 12.3 18.2 25.3 31.9 31.2 35.4

Cost of goods sold(billion $)

4.2 6.1 9.6 14.1 20.1 25.5 25.7 29.1

Total Inventory (million $)

356.7 217.3 184.1 231.8 330.4 349.3 307 306

16

Dell Computers financial data 1996-2003:

Source: Operations Management, James R Evans & David A collier, Thomson, 2007


Supply Chain Evolution

First Revolution.: Ford Motor Co. 1910-1920.

Single Product.

Vertical Integration

Second Revolution: Toyota Motor Co. 1960-1970.

Wide Variety

Long term relationship with suppliers.

Third Revolution. 1990s- 2000s.

Dell Computers

Customization.

Medium term relationship with suppliers

Suppliers have to maintain technology and cost leadership.

Bharti-Airtel

Strategic Outsourcing : Network Management with Nokia & Ericsson & IT

Management with IBM

17



Inventory Turns 2009

1. Apple 1. Apple 74.1 1. Apple

2. McDonalds 2. Amazon 10.0 2. Dell

3. Amazon 3. McDonald's 142.4 3. P&G

4. Unilever 4. Dell 35.6 4.IBM

5. Intel 5. P&G 5.5 5. CISCO

6.P&G 6. Coca-Cola 5.8 6.Nokia

7. CISCO 7.Intel 5.0 7.Wal-Mart

8. Samsung 8. Cisco Systems 11.0 8.Samsung

9. Coca-Cola 9. Wal-Mart Stores 8.3 9. PepsiCo

10. Colgate-Palmolive 10. Unilever 6.0 10. Toyota

18

The Gartner Supply Chain Top 10

Source: Supply Chain Management Review, Sep-Oct 2012


Semiconductor

1995 1996 1997 1998 1999 2000 2001

-40%

-20%

0%

20%

40%

60%

80%

PC

Semiconductor

Equipment

Changes in

demand

Semiconductor

1995 1996 1997 1998 1999 2000 2001

-40%

-20%

0%

20%

40%

60%

80%

PC

Semiconductor

Equipment

Changes in

demand

Annual percentage changes in demand (in $s) at three levels of the semiconductor supply chain: personal computers, semiconductors and semiconductor manufacturing equipment.

Bullwhip Effect in the US PC supply chain

19

Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012


Causes of the Bullwhip Effect

Supplier Practices

Incentives offered to buy-in-bulk Price Promotions Sales force incentive

Supplier behaviour uncertainty Shortage Handling Price Fluctuations

Supplier Inefficiency

Buyer PracticesForecasting of future trends in demand

Updating of future demand based on recent demandPromotion plans

Order Batching considering economies of scale of production

Large production runs Buying in large batches

OrderOrder

20



Impact of Bullwhip Effect

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Increase in manufacturing cost and significant rise in inventories.

Increase in replenishment lead times.

Increase in stock outs.

Increase in Labour costs.

Ways to combat the Bullwhip Effect

Information sharing:

Collaborative Planning, Forecasting and Replenishment (CPFR)

Vendor Managed Inventory (VMI): delegation of stocking decisions

Continuous Replenishment

Efficient Promotions

Alignment of Incentives Contracts benefitting supply chain partners

Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008


Re-visiting Newsvendor Problem

For a product under the newsboy settings:c: costp: selling prices: salvage valueCu = Underage costCo = Overage cost

CoCu

CuQF

*)(

Expected overstock from an order for Normally distributed demand with mean and s.d. = (Q*-)Fs[(Q*- )/]+ fs [(Q*- )/]

= (Q*-)NORMDIST[(Q*- )/,0,1,1]+ NORMDIST[(Q*- )/],0,1,0]

Expected understock from an order for Normally distributed demand with mean and s.d. = ( - Q*)[1-Fs{(Q*- )/}]+ fs [(Q*- )/]

= ( - Q*)[ 1-NORMDIST{(Q*- )/,0,1,1}]+ NORMDIST[(Q*- )/,0,1,0]

22Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008


Re-visiting Newsvendor Problem

Expected Profit from an order for Normally distributed demand with mean and s.d.

= (p-s)Fs {(Q*- )/} (p-s) fs {(Q*- )/} - Q*(c-s)F(Q*,,) + Q*(p-c)[1- F(Q*,,) ]

= (p-s) NORMDIST[{Q*- )/} 0,1,1] (p-s) NORMDIST [{Q*- )/} 0,1,0] - Q*(c-s)NORMDIST(Q*,,) + Q*(p-c)[1- NORMDIST(Q*,,) ]

23Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008


Supply Chain Contracting at Umbra Visage (UV)

Example:

Zamatia makes sunglass at a cost of $35 and sells them to UV for $75.

UV sells them for $115 and salvages left over inventory for $25 per unit.

Demand is normal with mean 250 and standard deviation 125.

UV faces a newsvendor problem.

UV:

Cu = 115 - 75 = 40, Co =75 - 25 = 50, Critical ratio = 40 / 90 = 0.44

Q = + Z* = 250 + (-0.13)*125 = 234

Expected Profit of UV= $5580

Profit of Zamatia = 40*234 = $9360

Total supply chain profit = $14940

24

Supply chain:

Cu = 115 - 35 = 80, Co =35 - 25 = 10, Critical ratio = 80 / 90 = 0.89

Supply chains critical ratio is much higher than UVs critical ratio!

Q = + Z* = 250 + (1.23)*125 = 404

Expected Profit = $ 17830

What is the order quantity if a single firm made the decision for the supply chain?


Operations Management-104 25




Suboptimal supply chain performance occurs because

Each firm makes decisions based on their own margin, not the supply chains margin.

This is called double marginalization.


26

Buy-Back Contracts

Let Zamatia offer Umbra to buy back the leftover sunglasses at the end of the season at a price of $75

UV incurs a cost of $1.50 per pair for shipping leftover inventory to Zamatia

Zamatias salvages these sunglasses for $26.50

Cu = 115 - 75 = 40, Co =1.50, Critical ratio = 40 / 41.5 = 0.9639

Q = 475

UVs expected profit = $9580

Expected Leftover Inventory = 227

Zamatias expected profit = (475*75) (475*35) (227*75) + (227* 26.5) = $7991

Total supply chain profit = $9580 + $ 7991 = $17571



There is a wholesale/buy back price combination that makes both firms better off!

Buy-Back Contracts

27

Let Zamatia offer Umbra to buy back the leftover sunglasses at the end of the season at a price of $65

UV incurs a cost of $1.50 per pair for shipping leftover inventory to Zamatia

Zamatias salvages these sunglasses for $26.50

Cu = 115 - 75 = 40, Co =1.50 + 75-65 = 11.50, Critical ratio = 0.7767

Q = 346

UVs expected profit = $8072

Expected Leftover Inventory = 112

Zamatias expected profit = 9528

Total supply chain profit = $17600



Suppose Zamatia offers to buy-back unsold sunglasses at b per unit:

Choose b to make UVs critical ratio equal the supply chains critical ratio:

-

Buy back price Shipping cost Price

Price Salvage valuePrice Wholesale price

Price Cost

$115 $25

$1.5 $115 $115 $75 $71.5$115 $35

Buy back price

28

Buy-Back Contracts

Buy Back Contracts Summary:

What are they?

Retailer is allowed to return to the supplier goods left over at the end of the selling season.

How do they improve supply chain performance?

The retailers overage cost is reduced, so the retailer stocks more.

Allows for the redistribution of inventory risk across the supply chain.

Could protect the suppliers brand image by avoiding markdowns.

What are the costs of buy-backs?

Administrative costs plus additional shipping and handling costs.

Where are they used?

books, cosmetics, music CDs, agricultural chemicals, electronics

Other Contracts: Revenue Sharing, Quantity Flexibility


supply chain management

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