Supply Chain Management: Introduction

Donglei Du
([email protected])

Faculty of Business Administration, University of New Brunswick, NB Canada Fredericton

E3B 9Y2

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Table of contents I

1 What is supply chain?

2 What is Supply Chain Management (SCM)?

Supply chian management

3 What are the difficulties in SCM?

The development chain
Global Optimization
Uncertainty

4 Why do we need supply chain management anyway?!

5 Key Issues in SCM

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 Section 1

What is supply chain?

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Supply Chain (SC)

A Supply Chain (SC) is a network of organizations—their

facilities, functions, and activities—that are involved, through
upstream and downstream linkages in the different processes and
activities, in producing and delivering a product or service in the
hand of the ultimate consumer.
The sequence begins with suppliers of raw materials and extends
all the way to the final customer. Each organization on the
chain is both a supplier and a demander—except the first and
the last on the chain.
Three flow forms in a SC
Material flow: thus also known as logistics chain
Information flow: thus also known as information chain
Finance flow: thus also know as Value Chain.

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A bird’s eye view of a typical SC

Transportation Transportation Transportation

plants cost warehouses cost retailers cost customers

Production/ Inventory & Inventory &

purchase warehousing warehousing
costs costs costs

Material flow

Information flow

finance flow

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An eagle’s eye view at one facility in a SC

uptream dow nstream

facility
Capacity
Lead Tim e(l) (C ) D em and (ξ )
uptream Y ield dow nstream
Cost Contract
(K ,c,h,s,π )

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Some Supply Chain Examples I

A bulldozer supply chain

Platfrom G roup

Track RollerFram e
FenderG roupChassis/Platfrom

RolloverG roup
Fram eA ssem bly

Case& Fram e
Case
BrakeG roup Transm ission Com m on Subassenm bly M ain A ssem bly FinalA ssem bly

D riveG roup FinalD rive& Brake

PlantCarrier
Engine
G oggie A ssem bly

D ressed -outEngine
Suspension G roup

Fans Pin A ssem bly

Source:S.C .G raves and S.P.W illem s (2003)

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Some Supply Chain Examples II
A battery supply chain

Packaging A Pack SK U A EastD C A

CentralD C A

W estD C A

EM D Packaging B Pack SK U A EastD C B

Spun Zinc CentralD C B

Separator W estD C B

N ailW ire Packaging C Pack SK U A EastD C C

Label CentralD C C

O therraw m aterials W estD C C

Bulk Battery
M anufacturing
Source:S.C .G raves and S.P.W illem s (2003)

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 Section 2

What is Supply Chain Management (SCM)?

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 Subsection 1

Supply chian management

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Supply Chain Management

Supply Chain Management (SCM) is a set of approaches

utilized to efficiently integrate organization units—suppliers,
manufacturers, warehouses and stores— along a SC, and
coordinate flows—material, information and financial flows—so
that merchandises is produced and distributed
at the right quantities
to the right locations
at the right time
In order to
optimize system-wide performance
satisfy customer service level requirements.

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 Section 3

What are the difficulties in SCM?

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What are the difficulties in SCM? I

The development chain: Supply chain strategies cannot be

determined in isolation. They are directly affected by another
chain that most organizations have, the development chain that
includes the set of activities associated with new product
introduction.
Global Optimization: The process of finding the best
systemwide strategy is known as global optimization.
It is challenging to design and operate a SC so that total
systemwide costs are minimized and systemwide service levels
are maintained.
Uncertainty Management: The process of effectively dealing
with uncertainty.
It is challenging to eliminate uncertainty from a SC.
Uncertainty arises as different forms
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What are the difficulties in SCM? II

certainty: no uncertainty
risk: known probability distribution
strict uncertainty: unknow probability distribution (a.k.a.
random)

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 Subsection 1

The development chain

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The development chain I

The development chain is the set of activities and processes

associated with new product introduction. It includes
product design phase: product architecture, make/buy
decisions, and earlier supplier involvement
the associated capacities and knowledge that need to be
developed internally:
sourcing decisions: supplier selection, supply contracts, and
strategic partnerships
production plans:

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The development chain II
The development and supply chains interact at the production
point:
Development
chain • Product architecture
Plan/design • Make/buy
• Early supplier involvement

• Strategic partnerships
Source • Supplier selection
• Supply chain contracts

Supply Produce Distribute Sell

Supply chain

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The development chain III

In most organizations, different mangers are responsible for the

different activities that are part of the development and supply
chains
VP of engineering: development chain
VP of manufacturing: production portions of the chains
VP of supply chain or logistics: fulfillment of customer demands
Misalignment of product design and supply chain strategies are
typical.
To make things worse, additional chains, such as the reverse
logistics chain, and spare-parts chain, interact with both the
development and the supply chains.

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 Subsection 2

Global Optimization

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Global Optimization

Why is it different/better than local optimization?

Sequential Optimization

Procurement Manufacturing Distribution

Demand
Planning Planning Planning
Planning
Global Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurement Manufacturing Distribution

Demand
Planning Planning Planning
Planning

Source: Duncan McFarlane

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Why is Global Optimization Hard?

The supply chain is complex: facilities are dispersed over a large

geography, and in many cases, all over the globe (more on next
page).
Different facilities have conflicting objectives (more later)
The supply chain is a dynamic system that evolves over time:
not only customer demands and supplier capacities change over
time, but supply chain relationships also evolve over time. For
example, as customers’ power increases, there is increased
pressure placed on manufacturers and suppliers to produce
enormous variety of high-variety of high-quality products and
ultimately to produce customized products.

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An example showing the complexities of a supply
chain: 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.
Competitors:
Motorola Inc.
Intel Corp.
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What are conflicting supply chain objectives? I
Purchasing (supplier)
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
Manufacturing
Long run production
High quality
High productivity
Low production cost

Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability
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What are conflicting supply chain objectives? II

Customers
Short order lead time
High in stock
Enormous variety of products
Low prices

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 What tools and approaches help with global
optimization?

Everything for optimization (Throughout this course, particularly

Chapters 2 and 3))
Strategic Alliances/Supplier Partnerships (Chapter 6)
Supply Contracts/Incentive Schemes (Chapter 3)

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 Subsection 3

Uncertainty

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Uncertainty I
What is variation? What is randomness?

Supply Chain Variability

Manufacturer
Manufacturer Forecast
Forecast
of
of Sales
Sales
Volumes

Actual
Actual
Consumer
Consumer
Retailer
RetailerWarehouse
Warehouse Demand
Demand
Retailer
Retailer Orders
Orders to
toShop
Shop

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

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Uncertainty II

Volumes
What Management Gets...

Cons
Consumer
umer
Demand
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

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Uncertainty III

Volumes What Management Wants…

Production
ProductionPlan
Plan
Cons
Consumer
umer
Demand
Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

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 Can’t Forecasting Help?—three golden rules
on forecasting

Rule 1: Forecasting is always wrong.

Rule 2: The longer the forecast horizon, the worse the forecast.
Rule 3: Aggregate forecasts are more accurate.

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Why is uncertainty hard to deal With?

Matching supply and demand is difficult.

Forecasting doesn’t solve the problem.
Inventory and back-order levels typically fluctuate widely across
the supply chain.
Demand is not the only source of uncertainty:
Lead times
Yields
Transportation times
Natural Disasters
Component Availability

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What tools and approaches help us to deal with
these issues?

Decision theory: decision making under uncertainty

Pull Systems
Risk Pooling
Centralization
Postponement
Strategic Alliances
Collaborative Forecasting

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 Section 4

Why do we need supply chain management

anyway?!

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Why do we need supply chain management
anyway?! I

Reducing cost is at its full potential already by using strategies

such as jist-in-time, lean manufacturing, total quality
management, and others—before 1990’s.
Effective supply chain management is considered to be the next
step in increasing profit and market share.
In 1998, American companies spent $898 billion in
supply-related activities (or 10.6% of gross domestic product).
Among them
Transportation 58%
Inventory 38%
Management 4%
In 2000, this cost increased to $1 trillion and $6 billion.

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Why do we need supply chain management
anyway?! II
Third party logistics services grew in 1998 by 15% to nearly $40
billion
Unfortunately, this huge investment typically includes many
unnecessary cost components in the supply chain due to
redundant stock
inefficient transportation strategies
other wasteful practices
For example, it is believed that the grocery industry can save
about $30 billion, or 10% of its annuanl operating cost by using
more effective supply chain strategies.
It takes a typical box of cereal more than three months to get
from the factory to a supermarket.

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Why do we need supply chain management
anyway?! III

It takes a typical new car, on average, 15 days to travel from

the factory to the dealership. This should be compared to the
actual travel time, which is no more than four to five days.
Therefore, many opportunities exist to cut costs in the supply
chain. Not supprisingly, a number of companies have been able
to substantially increase revenue or decrease costs through
effective supply chain managment. We will see a few examples
now.

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Examples of effective SCM I

Procter & Gamble estimates that it saved retail customers $65

million in a recent 18-moth supply chain initiative. According to
Procter & Gamble, the essence of its approach lies in
manufacturers and suppliers working closely together by forming
strategic partnerships to jointly create business plans to eliminate
the source of wasteful practices across the entire supply chain.
In two years National Semiconductor reduced distribution costs
by 2.5 per cent, decreased delivery time by 47 percent and
increased sales by 34 percent by closing six warehouses around
the globe and air-freighting microchips to customers from a new
centralized distribution center in Singapore. This is achieved by
a careful trade-off analysis between inventory and transportation
costs, which leads to the centralized warehousing.

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Examples of effective SCM II

Home depot Inc’s direct shipping: The Home Depot moves

about 85% of its merchandises directly from suppliers to stores,
avoiding warehouses altogther. In addition, since such a high
volume of goods moves through its stores ($44 million in
annunal sales on average), the products frequently are shipped in
full trucks for addtional savings (econmy of scales).
Wal-mark’s success:
In 1979 Kmart was one of the leading companies in the retail
industry, with 1891 stores and average revenue per store of
$7.25 million.
At that time Wal-mart was a small niche retailer in the South
with only 229 stores and average revenues about half of those
of Kmart stores.

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Examples of effective SCM III
In 10 years Wal-mart had transformed itself; in 1992, it had the
highest sales per square foot and highest inventory turnover and
operating profit of any discount retailer. Today Wal-mart is the
largest and highest-profit retailer in the world. In fact, as of
1999, Wal-mark accounted for nearly 5 percent of US retail
spending.
How did Wal-mark do it?
The starting point was a relentless focus on satisfying customer
needs; Wal-marlk’s goal was simply to provide customers with
access to goods when and where they want them and to
develop cost structures that enable competitive pricing.
The key to achieving this goal was to make the way the
company replenishes inventory the centerpiece of its strategy.
This was done by using a logistics techniques known as
cross-docking.

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Examples of effective SCM IV

In this strategy, goods are continuously delivered to Wal-mart’s

warehouses, from where they are dispatched to stores without
ever sitting in inventory.
This strategy reduced Wal-mart’s cost of sales significantly and
made it possible to offer everyday low price to their customers.

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 Section 5

Key Issues in SCM

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Key Issues in SCM I

Three-level Issues in SCM

Strategic Issues Tactical Issues Operating Issues

Design of the supply Inventory policies Quality control

chain, partnering Purchasing policies Production planning and
Production policies control
Transportation policies
Quality policies

Issues span

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Key Issues in SCM II

Strategic: Decisions that have long-term effect on the firm,

such as the number, the location and capacity of warehouses
and manufacturing plants and the flow of the materials through
the logistics network.
Tactical: decisions that are typically updated anywhere between
once every quarter and once every year, such as the purchasing,
production, inventory and transportation decisions.
Operational: day-to-day decisions such as scheduling, lead time
quotations, routing, and truck loading.

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Tradeoffs and issues
Global Uncertainty Level
opti-
mization
√
Distribution Network Config- Strategic
uration
√
Inventory control Operational
√
Supply Contracts Tactical
√ √
Distribution Strategies Tactical
√
Integration and Partnerships Strategic
√
Procurement Strategies and Tactical
Outsourcing
√
Product Design Tactical
√ √
Information Technology Strategic
√ √
customer value Strategic

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