SUPPLY CHAIN MANAGEMENT

01. INTRODUCTION

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LOGISTICS & SUPPLY CHAIN

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 LOGISTICS MANAGEMENT

Management of the process of moving

and storing goods and materials from
the original source to ultimate user.

RIGHT GOODS, RIGHT PLACE, RIGHT TIME, RIGHT COST

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 LOGISTICS MANAGEMENT
Materials Management Distribution Management

INTERMEDIARY
Production

v Raw materials
v Sub assemblies
Finished Finished
v Proprietary items Work CUSTOMER
Products Products
In OR END
v Manufactured Factory Distribution
progress
parts Warehouse Network USER
v Packing INVENTORIES
materials

CUSTOMER

Logistics Supply Chain

Materials Flows
Information Flows

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 What is Logistics Management?

Logistics is the process of

• strategically managing the procurement,
movement and storage of materials, parts and
finished inventory
• (and the related information flows)
• through the organization and its marketing
channels
• to maximize current and future profitability
• through cost-effective fulfillment of orders.

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 History 1950 – 1964

• Growth from pent up demand.

• Capacity to make and sell greater than to deliver.

• Product proliferation.

• Scrambled merchandising.

• Reactive discipline.

• Concentration on warehouse and transport.

Intro Log1:7
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 History 1965 – 1978
• Integrating with materials management.

• Customer service demands.

• Financial impact of decisions.

• Trade-offs with all component activities.

• Inventory management embraced.

• Computer technology.

• Proactive approach.

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 History 1979 - 1990
• Economic decline

• Shortage of capital

• Supply and cost of energy

• Inflation

• New distribution services

• Global requirement

• Inter-company systems

Intro Log1:9
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 History 1991 – Present
• Information Technology

– EDI
– EPOS
– Internet

• Strategic decision making

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 Logistics v/s Supply Chain

• Logistics is a planning framework that seeks to

create a single plan for the flow of products and
information through a business.

• Supply chain management builds upon this

framework and seeks to achieve linkage and co-
ordination between the Process of other entities in
the pipeline, i.e.. Suppliers and customers, and the
organization itself

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What is a Supply Chain?

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Supply Chains

What is a Supply Chain

………. suggestions?

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 Supply Chains

Try this definition …………………

A supply chain is a network of facilities and

distribution options that performs the functions of
procurement of materials; transformation of these
materials into intermediate and finished products;
and distribution of these finished products to
customers.
(Source: Ganeshan & Harrison-Introduction to Supply Chain Management)

Supply Chain Management

Management of chain of Supplies
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 Supply Chains – Key Points
• Acquisition of raw material
• Suppliers
• Conversion of materials into finished products
• Storage of materials and products
• Distribution of materials and products
• Customers
• Consumers
- Including all the associated facilities, activities and people
necessary to take a raw material, transform it into a finished
product (or service) and provide it to a final consumer at the
point of need
- Suppliers, Production, Storage, Distribution & Customers may
be at one or many levels within the Supply Chain.

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 Supply Chain Management - Definition

Integration Synchronisation Processes

The integration and synchronisation of all processes,

people and organisations directly or indirectly involved in
the profitable delivery of service to internal and external
customers.

People and Service?

Profitable?
Organisation?
Customers?

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 Integration

Material Flow

Information Flow

Vendors Production RDC* DC** Customers

* RDC = Regional Distribution Centre, ** DC = Distribution Centre

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 Synchronisation

Vendors Production RDC DCs Customers

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 SUPPLY CHAIN MANAGEMENT

• Concept development over many years.

• Logistics is the key to providing quality service.

• Recognition of inward flow of goods and materials as

well as traditional final distribution.

• Increasingly used by organisations dependent on:-

– Widely dispersed sources of supply.
– Large numbers of widely dispersed customers

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Components of Logistics

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 Components of Logistics
• Purchasing

• Materials Management

• Transport

• Warehousing

• Materials Handling

• Inventory

• Protective Packaging

• Information and Communications

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 Components of Logistics
CUSTOMERS
FIELD WAREHOUSES

PLANT
SUPPLIERS
DISTRIBUTION
CENTRE

Packaging

Sales Warehouse
Inbound Materials Inventory Customer
forecasting Purchasing Warehousing Transport network
transport handling control service
planning

Production
planning
interface

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 Purpose of Inventory

1. The decoupling of supply and demand through the

creation of buffer stocks.
2. The build up of anticipation stocks to meet planned
or expected demand.
3. The build up of investment stocks to take advantage
of market exploitation.
4. The stabilisation of production and the effective use
of labour and capital equipment.

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 PURPOSE OF WAREHOUSE

1. A space requirement to meet the demands of all forms

of buffer stock.

2. Provide support for the achievement of production

logistics.

3. To consolidate products from a variety of suppliers for

outward delivery to a variety of customers.

4. To facilitate the distribution of goods to the final

customer overcoming time and distance constraints.

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 PURPOSE OF TRANSPORT

1. The movement of goods between supply points,

storage points and customers within the total
distribution system.
2. Provide the most economic means of moving
goods within the distribution system through
Method selection.
3. Provide customers with a delivery service that
meets their defined time and quality conditions.

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 i
PURPOSE OF INFORMATION

1. Confirms the completion of an activity in the

logistics chain.
2. Stimulates the beginning of the next activity in
the logistics chain.
3. Provides basis upon which decisions can be
made at strategic, tactical and operational
levels.
4. Provides capability to ensure measurement of
performance of all activities.
5. Flows the length of the chain in both directions.

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 COST ELEMENTS

MANPOWER

EQUIPMENT

SPACE

OPERATING SYSTEMS

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 DISTRIBUTION COST
COMPONENTS (%)

3.78

35.84 43.23

17.15

STORAGE
INVENTORY
TRANSPORT
ADMIN/PACKAGING

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 COST VARIATION
TOTAL COST STOCKHOLDING COSTS

OPTIMUM

WAREHOUSE FIXED COSTS

TRANSPORT (TRUNKING)
COSTS

TRANSPORT (LOCAL
DELIVERY) COSTS

0 NUMBER OF WAREHOUSES

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 Trade-off concepts

INTRA-FUNCTION

INTER-FUNCTION

INTER-COMPANY

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 ‘Lead Time’ concept

Distribution

Moving

Making
Buying
Total Lead
Time
(Source to
Payment)

Order – Raw Materials

Production sub assembly
Work in Progress Inventory
Final Production
FG Inventory (Central)
Transport
FG Inventory (Regional)
Receipt Order to Cash - Payment

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 Gaining competitive advantage
• Value added activities
• Cost adding activities

VALUE CUSTOMER
ADDED ORDER
REGIONAL CYCLE
STOCK
RAW
MATERIAL FINISHED IN
STOCK GOODS TRANSIT

PRODUCTION

COST ADDED

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Supply Chain Operating Models

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 The T: W Ratio

W
T

Material Flow

Information Flow

Vendors Production RDC DCs Customers

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Where do you meet the Customer?
– The Decoupling Point

Stock
MTO
Driven by
Actual Demand
Stock MTO

Stock MTS (Regional)

Driven by Stock MTS (Local)

Forecast
Stock

Vendors Production RDC DCs Customers

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 Lean versus Agile

High

AGILE
Variety

LEAN

Low High
Predictability

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 Lean versus Agile

Lean Agile
Objectives Low Cost Fast response
High Utilisation Buffer Capacity
Minimum Stock Deployed Stock

Process Elimination of waste Flexibility

Characteristic Smooth operation flow Market sensitivity
s High level of efficiency A virtual network
Quality assurance Postponement

Product Functional products Innovative products

Characteristic Low variety High variety
s Low margin High margin

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 Push versus Pull
Supplier
Push
Push WIP Bottlenecks

Space

Waiting

Pull Customer
Pull

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Examples of Supply Chains

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 Supply Chain Characteristics

Sourcing Market Structure

• No./ type of suppliers • No./type of customers
• Location of suppliers • Channels
• Supplier development • Service levels

Physical Structure
• No. of stocking points
• Geographical spread

Processing Assembly
Factory Regional DC DC
Plant Plant Customer

Type of products
• No. of products/SKUs
• Handling characteristics
• Product lifecycles

Level of Integration
• Ownership
• Information transparency
• Standardisation
• Collaboration
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 Supply Chain Models

Supplier Customer Direct Replenishment

Supplier DC Direct Replenishment

Supplier RDC Direct

Replenishment

Production DC Direct Replenishment

Vendors Production RDC DCs Customers

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 Supply Chain Models
Break-Bulk & Cross-Dock

Break-bulk: predominantly full single item pallets

Cross-dock: configured customer orders

Stock No Stock

RDC / DC Cross-dock / Customers

Break-bulk

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 Dell Computers – Supply Chain

Traditional T T T
R R R
A A A
N N N
Supplier S W’HOUSE MFG S Distributor S Customer
P P P
O O O
R R R
T T T

Dell Model
T
R
A
Supplier N Customer Time to Market
MFG
S (80% less)
P
O
R
T

WIP

Vendor owned material

Hubs ( 1, max 2) WIP
Dell owned material
International
Suppliers Local Suppliers
Source: Dell Computers
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 Planning process

• Discuss and map the planning process

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Components of a Supply Chain

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 Physical Entities within the Supply Chain

Raw material Consumer

Supplier
TRANSPORT

Suppliers Customer

STOCK
Manufacturing Distributor

MATERIAL FLOW

DC MATERIAL FLOW
Assembly / Filling

Packing RDC

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Components & Sources of Supply Chain Costs

Cost Production Primary RDC Secondary Local Local Cust.

Type Transport Transport DCs Delivery

Inventory ü ü ü ü ü ü ü
Facilities ü ü ü ü
Labour ü ü ü ü
Transport ü ü ü
Tax / Duty In case of international supply chains
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Information flows within the Supply Chain -
examples

From the Customer From the Supplier

• Orders • Acknowledgements

• Schedules • Invoices

• Complaints • Technical specifications

• Demand forecasts • Capacity data

• Primary drivers
• Orders
• Expected Orders
(forecast)
• Secondary drivers
• Anticipated Orders
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Managing the Supply Chain

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Managing the Supply Chain – Introduction

• Interactions
• Trade-offs
• Orchestrating Activities

Factory Processing Assembly Regional DC DC Customer

Plant Plant

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 Interactions
Customer
Demand
Deployment /
Distribution Forecasts

Production Inventory
Supply Chain Requirements
Interactions

Demand on
Suppliers Replenishment
Requirements
Production
Plan

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 Trade-offs eg. Inventory Decisions

Distribution
Costs

Stock
INVENTORY
Availability

INVESTMENT Cost of
Lot Sizes

Order
(or set up)
Costs
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 Orchestrating the Supply Chain
The Planning Hierarchy

C Sales and Operations Planning S

u (Families, Budget)
u
s Forecasts Production p
t Order Mgmt.
Network
3rd Party p
o Inventory Inventory Inventory l
m i
e Policies, Processes & Procedures e
r Data and pre-requisites
Education and Training r
s Systems (SAP/APO)
s
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 ‘Closed-Loop’ Planning

Business Strategy
Long Range

Budget

Sales & Operations Planning

Customers and Markets

Suppliers and Partners

Supply
Medium Range

Forecasting Network
& Order Planning
Management Inventory
&
Infrastructure Production &
FG* Purchase
Planning
Sales Production
Planning Scheduling
Short Range

Detailed
Material
Planning Vendor
Scheduling

* FG = Finished Goods © Krishnan Subramaniam

 Supply Chain Realities –
Who is in control?

Here, Focus of senior management (S&OP)

resources are
fixed - Supply
Months or
Chain is in Fixed Strategy, resources, investment
motion
Quarters

Focus of material and capacity planners

Here, material
& capacity Planning for Days or
are demand & Weeks
committed maximum efficiency
Focus of schedulers and operations

Here, work Hours or

is in process Days

Today
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 The Item Level Production Plan

Purpose:
• To uncouple supply from demand
• To insert a manual (not automatic) interface
• To provide production load stability

Required Stock of finished goods Production load

Capacity

Orders

Time Time

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 Detailed Material Planning

Item Level What are we

going to make?
What does it take Production
to make it? Plan
What have I
already got?

Bill
Planning System
Inventory
of Balance
Materials Material
Requirements

What do I need to
make / buy?
Material Requirements Plan

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 Prodn. scheduling & Capacity Planning

Item level Production Plan What do we

Schedule receipts want to make
What operations Planned Orders
does it take (Order No., Item, Qty., Due
Date) What resources are
to make it? used to complete
the operations?

Production
Routings Scheduling Work
Programme Centres

What capacity
do we need?
Capacity
Requirement The sequence Production
we are going Sequence
s Plan
to make
products.
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Inventory Basics

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 Discussion
Food Supply chain

• How much food is wasted in the world?

• At which stage is wastage maximum?

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 Inventory Basics

• Inventory – Asset or Liability ?

– BOTH

• Cost of holding stock

• Cost of not holding stock

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 Costs of holding stock
• The cost of the item - material, labour, overheads
• The cost of capital borrowed to pay for it
• The cost of the lost opportunity to invest
• Insurance
• Taxes
• Pilferage, spoilage, damage
• Obsolescence
• Storage premises, space, heating, lighting
• Handling, transport
• Security
• Counting, recording
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 Costs of not holding stock
• Poor customer service
• Under-utilisation of labour and equipment
• Shortages
• Emergencies cost more money
• Loss of potential discounts
• Constantly doing changeovers, disruption
• No protection against increased demand, late supply
• Higher transportation costs, partial loads
• More chasing, expediting
• More overtime
• Not always possible to quantify

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 Inventory Management
– The Challenge

Variables which are not

Force us to make difficult Which dictate our …
completely under our control
decisions about …
…

n Target Service and

n Customer Expectations
hence Stock Levels
n Forecast Error Required
n Degree of
n Supply Lead Time (LT) Postponement to Inventory
Implement Positioning
n Supply LT Variability
n Replenishment
n Inventory Carrying Cost
Frequency

… involves combining variables not under our control with difficult

service and operating decisions

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 Stock Elements (Classifications)

(i) Anticipation Stock bought in anticipation of an additional non-

standard demand or supply problem

Stock brought-in for traditional business cost

(ii) Hedging reasons. Eg., expected rises in commodity
prices or shortages

(iii) Work in Process Inventory which is being converted from one state to
another and is not available for use

(iii) Cycle (lot size) Stock bought in bigger lots to reduce item price,
optimize transports, set-ups, flush waste, etc.

Additional inventory kept to lower the risk of stock-

(iv) Safety stock out situations in case of supply and/or demand /
forecast error variations

(v) In-Transit (pipeline) Stock that fills the transportation network, including
the flow between intermediate stocking points

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 Driving Improvements

Elements Drivers Reduction Opportunities

Other Order Policies & Document reasons for existence

Hedging / Challenge assumptions
Measures
Anticipation Focus on total cost of ownership

In-Transit Throughput, Time, Reduce cycle time

Inventory Process improvements
Distance

Cycle Batch Sizes Reduced batch sizes through more

Stock frequent production or improved
production methods (trade-off
smaller batches versus setup cost)

Lead-time Reduce cycle time

Safety Increase forecast aggregation
Forecast Inaccuracy
Stock Implement supplier development
Lack of Supplier
programme
Reliability
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 ERP and Inventory
• General assumption is that
– Replenishment planning will occur daily
– Exceptions will be visible as soon as they occur
• ALL planning and scheduling systems are limited as
they take data entered at face value, assuming
• 100% inventory record accuracy
• 100% Bill of Material accuracy
• 100% Planning data accuracy (lead-times, order quantities,
capacities, etc)
– The world-class standard for these parameters is
98%
– Moreover, systems assume this is true all the time
• Data accuracy is VITAL in all system areas to ensure
planning decisions are based on up-to-date, real-time
information
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Goods move
as fast as the
information
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 Typical organisation structure
LOGISTICS MANAGER

LOGISTICS LOGISTICS SUPPLY &

PLANNING OPERATIONS INVENTORY
AND CONTROL

Customer Service Transport Inventory Planning

Liaison with Marketing Warehousing and Control
Budget Planning Depots Demand Forecasting
and Control Order Processing Liaison with Supplier
Distribution Engineering Liaison with Production
Distribution Network and
Facilities

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 Inter-functional conflicts
1. Marketing
❖ High service levels 4. Purchasing
❖ Maximum flexibility ❖ Economic order quantities
❖ Product proliferation ❖ Maximum supplier
discounts
2. Finance
5. After sales service
❖ Low investment level
❖ High stock availability
❖ High levels of control
❖ Short supply lead times
❖ Optimum inventory balance
❖ Repair policy
3. Manufacturing
❖ Planned demand
❖ Long production runs
❖ High equipment utilisation

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 Key points
• Manage as an integrated activity
• Cost –v– service
• Get things moving
• Exploit trade-offs
• Reduce lead time
• Focus on value adding activities
• Tackle effectiveness as well as efficiency
• Gain and maintain a competitive edge
• Create the appropriate management structure

© Krishnan Subramaniam