Supply Chain Management Introduction: Supply Chain Management Introduction


Outline: Outline What is supply chain management? A supply chain strategy framework Components of a SCM Major obstacles and common problems Seven Eleven Japan


Traditional View: Supply Chains in the Economy (1990, 1996): Traditional View: Supply Chains in the Economy (1990, 1996) Freight Transportation $352, $455 B Transportation manager in charge Transportation software Inventory Expense $221, $311 B Inventory manager in charge Inventory software Administrative Expense $27, $31 B Logistics related activity 11%, 10.5% of GNP $898 B spent domestically for SC activities in 1998. $1,160 B of inventory in the US economy in the early 2000s. Transportation and inventory managers


Traditional View: Cost breakdown of a manufactured good: Traditional View: Cost breakdown of a manufactured good Profit 10% Supply Chain Cost 20% Marketing Cost 25% Manufacturing Cost 45% Effort spent for supply chain activities are invisible to the customers.


What can Supply Chain Management do?: What can Supply Chain Management do? Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies A typical box of cereal spends 104 days from factory to sale A typical car spends 15 days from factory to dealership Faster turnaround of the goods is better? Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory. To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE. National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time.


Magnitude of Supply Chain Management: Magnitude of Supply Chain Management Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not available when and where needed P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand When the 1 gig processor was introduced by AMD (Advanced Micro Devices), the price of the 800 meg processor dropped by 30%


Importance of SCM understood by some: Importance of SCM understood by some AMR Research: "The biggest issue enterprises face today is intelligent visibility of their supply chains-both upstream and down" Forrester Research: "Companies need to sense and proactively respond to unanticipated variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks” Gartner Group: “By 2004, 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers” Open ended statement. Agility can be increased continuously.


Top 25 Supply Chains: Top 25 Supply Chains AMR research http://www.amrresearch.com publishes reports on supply chains and other issues. The Top 25 supply chains report comes out in Novembers. The table on the right-hand side is from The Second Annual Supply Chain Top 25 prepared by Kevin Riley and Released in November 2005.


SCM Generated Value: SCM Generated Value Minimizing supply chain costs while keeping a reasonable service level customer satisfaction/quality/on time delivery, etc. This is how SCM contributes to the bottom line SCM is not strictly a cost reduction paradigm!


A picture is better than 1000 words!How many words would be better than 3 pictures?: A picture is better than 1000 words! How many words would be better than 3 pictures? - A supply chain consists of - aims to Match Supply and Demand, profitably for products and services - achieves


Detergent supply chain:: Detergent supply chain:


Flows in a Supply Chain: Flows in a Supply Chain Customer Material Information Funds The flows resemble a chain reaction. Supplier


SCM in a Supply Network: SCM in a Supply Network Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains. The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably


Importance of Supply Chain Management: Importance of Supply Chain Management In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report Eliminating inefficiencies in supply chains can save millions of $.


A Generic Supply Chain: Supply Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Purchase Inventory Transportation Inventory A Generic Supply Chain


Cycle View of Supply Chains: Cycle View of Supply Chains


Push vs Pull System: Push vs Pull System What instigates the movement of the work in the system? In Push systems, work release is based on downstream demand forecasts Keeps inventory to meet actual demand Acts proactively e.g. Making generic job application resumes today (e.g.: exempli gratia) In Pull systems, work release is based on actual demand or the actual status of the downstream customers May cause long delivery lead times Acts reactively e.g. Making a specific resume for a company after talking to the recruiter


Push/Pull View of Supply Chains: Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives Push-Pull boundary PUSH PROCESSES PULL PROCESSES


Examples of Supply Chains: Examples of Supply Chains Dell / Compaq Dell buys some components for a product from its suppliers after that product is purchased by a customer. Extreme case of a pull process Zara, Spain’s answer to Italy’s Benetton Sells apparel with a short design-to-sale cycle, avoids markdowns. Toyota / GM / Volkswagen, in the course notes McMaster Carr / W.W. Grainger, sell auto parts Amazon / Barnes and Noble Frozen food industry/Fast food industry/5 star restaurants Internet shopping: Webvan / Peapod


Slide20: SCM Strategy


Mission-Strategy-Tactics-Decisions: Mission-Strategy-Tactics-Decisions Mission, Mission statement The reason for existence of an organization Strategy A plan for achieving organizational goals Tactics The actions taken to accomplish strategies Operational decisions Day to day decisions to support tactics


Life Strategy for Ted: Life Strategy for Ted Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: Live a good life Goal: Successful career, good income Strategy: Obtain a master’s degree Tactics: Select a college and a concentration Operations: Register, buy books, take courses, study, graduate, get a job


Linking SC and Business Strategy: Linking SC and Business Strategy Finance, Accounting, Information Technology, Human Resources Competitive (Business) Strategy Product Development Strategy Portfolio of products Timing of product introductions Marketing Strategy -Frequent discounts -Coupons Supply Chain Strategy


Strategies: Strategies Product development strategy relates to Set of products/services and technologies for future operations e.g. Be the technology leader IBM workstations e.g. Offer many products Dell computers Marketing and sales strategy relates to positioning, pricing and promotion of products/services e.g. Never offer more than 40% discount e.g. EDLP = every day low price At Wal-Mart e.g. Demand smoothing via coupons BestBuy Supply chain management strategy relates to procurement, transportation, storage and delivery e.g. Never use more than 1 supplier for every input e.g. Never expedite orders just because they are late e.g. Always use domestic suppliers within the sales season not in advance.


Fitting the SC to the customer or vice versa?: Fitting the SC to the customer or vice versa? Understand the customer Wishes Understand the Capabilities of your SC Match the Wishes with the Capabilities Challenge: How to meet extensive Wishes with limited Capabilities?


Achieving Strategic Fit: Consistent SCM and Competitive strategies: Achieving Strategic Fit: Consistent SCM and Competitive strategies Fit SC to the customer Understanding the Customer Range of demand, pizza hut stable Production lot size, seasonal products Response time, organ transplantation Service level, product availability Product variety Innovation Accommodating poor quality Implied (Demand) Uncertainty for SC Implied trouble for SC


Contributors to Implied Demand Uncertainty: Contributors to Implied Demand Uncertainty Low High Price Responsiveness Customer Need Implied Demand Uncertainty Commodities Detergent Long lead time steel Customized products High Fashion Clothing Emergency steel, for maintenance/replacement Short lead times, product variety, distribution channel variety, high rate of innovation and high customer service levels all increase the Implied Demand Uncertainty


Understanding the Supply Chain: Cost-Responsiveness Tradeoff: Understanding the Supply Chain: Cost-Responsiveness Tradeoff High Low Low High Responsiveness (in time, high service level and product variety) Cost in $ Efficiency frontier Inefficient Fix responsiveness Impossible Inefficiency Region Why decreasing slope (concave) for the efficiency frontier?


Achieving Strategic Fit: Wishes vs. Capabilities: Achieving Strategic Fit: Wishes vs. Capabilities Implied uncertainty spectrum Responsive (high cost) supply chain Efficient (low cost) supply chain Certain demand Uncertain demand Responsivenesspectrum Zone of Strategic Fit Lunch buffet Gourmet dinner


Loosing the strategic fit: Webvan: Loosing the strategic fit: Webvan Webvan started a merger with HomeGrocer in Sept 2000 and completed in May 2001. Declared bankruptcy in July 2001. Why? “Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day”. Short to midterm cash mismanagement. Venture capital of $1.2 B run out. Merger costs: duplicated work force, integration of technology, realignment of facilities. Peapod has the same business model but more focused in terms of service and locations. It actually survives with its parent company Royal Ahold’s (Dutch Retailer) cash. Delivers now at a fee of $6.95 within a day.


Big retailers’ Strategy: Big retailers’ Strategy Wal-Mart: Efficiency Target: More quality and service Carrefour: International, ambiance K-Mart: Confused. Squeezed between Target and Wal-Mart Reliance on coupon sales Do coupons stabilize or destabilize a Supply chain? K-Mart and Sears merged in November 2004 K-Mart gets cash Sears gets presence outside malls


Other Factors: Other Factors Multiple products in a SC. Multiple customers for a given product Separate supply chains or Tailored supply chains e.g. Barnes and Noble: Retailing and/or e-tailing Product and/or customer classes e.g. UTD library loans books for 6 months (2 weeks) to faculty (students) Customer segmentation by pricing Competitors: more, faster and global UTD online programs compete globally Product life cycle (shortening) SCM strategy moves toward efficiency and low implied uncertainty as products age e.g. Air travel is becoming more efficient e.g. Southwest airlines lead the drive for efficiency e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005. e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC more efficient in June 2004. Replacement sales Selling to replace broken units. e.g. AC replacement is about 50% of the market. Macroeconomic factors for visibility Forecasting Home Depot sales from S&P 500 price index. Positive correlation is detected.


Achieving Strategic Fit over a Lifecycle: Achieving Strategic Fit over a Lifecycle Responsive (high cost) supply chain Efficient (low cost) supply chain Certain demand Uncertain demand Zone of Strategic Fit


Integration: Integration Integration is the central theme in SCM Building synergies by integrating business functions, departments and companies


Strategic Scope: Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy


Supply Chain Drivers and Obstacles: Supply Chain Drivers and Obstacles


Drivers of Supply Chain Performance: Drivers of Supply Chain Performance Efficiency Responsiveness Inventory Transportation Facilities Information Supply chain structure Logistical Drivers How to achieve Sourcing Pricing Cross- Functional Drivers


1. Inventory: 1. Inventory Convenience: Cycle inventory No customer buys eggs one by one Unstable demand: Seasonal inventory Bathing suits Xmas toys and computer sales Randomness: Safety inventory 20% more syllabi than the class size were available in the first class Compaq’s loss in 95 Pipeline inventory Work in process or transit


Little’s law: Little’s law Long run averages = Expected values I = R . T I=Pipeline inventory; R=output per time=throughput; T=delay time=flow time Flow time? Thruput? Pipeline (work in process) Inventory? 10/minute Spend 1 minute


2. Transportation: 2. Transportation Air Truck Rail Ship Pipeline Electronic


3. Facilities: 3. Facilities Production Flexible vs. Dedicated Flexibility costs Production: Remember BMW: “a sports car disguised as a sedan” Service: Can your instructor teach music as well as SCM? Sports: A playmaker who shoots well is rare. Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping Job Lot Storage: Need more space. Reticle storage in fabs. Crossdocking: Wal-Mart


4. Information: 4. Information Role in the supply chain The connection between the various stages in the supply chain Crucial to daily operation of each stage in a supply chain E.g., production scheduling, inventory levels Role in the competitive strategy Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Information technology Andersen Windows Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory.


Characteristics of the Good Information : Characteristics of the Good Information Strategy Analytical Models $$$ Information Accurate? Accessible? Up-to-date? In the Correct form? If not, database restricted ability. How difficult is it to import data into SAP?


Quality of Information: Quality of Information Information drives the decisions: Good information means good decisions IT helps: MRP, ERP, SAP, EDI Relevant information? How to use information?


Information Technology in a Supply Chain: Legacy Systems: Information Technology in a Supply Chain: Legacy Systems


Information Technology in a Supply Chain: ERP Systems: Information Technology in a Supply Chain: ERP Systems Supplier Customer Retailer Distributor Manufacturer Strategic Planning Operational ERP Potential ERP Potential ERP


Information Technology in a Supply Chain: Analytical Applications: Information Technology in a Supply Chain: Analytical Applications Supplier Customer Retailer Distributor Manufacturer Strategic Planning Operational Supplier Apps SCM MES Dem Plan Transport execution & WMS APS Transport & Inventory Planning CRM/SFA


ERP Systems: ERP Systems Wider focus Push (MRP) versus Pull (demand information transmitted quickly throughout the supply chain) Real-time information Coordination and Information sharing Transactional IT Expensive and difficult to implement About 25% of ERP installations are cancelled within a year About 70% of ERP installations go over the budget


IT Push: IT Push


Supply Chain Software PushSee Top 100 under /articles.html : Supply Chain Software Push See Top 100 under /articles.html Source Kanakamedala, Ramsdell, Srivatsan (2003). McKinsey Quarterly, No 1.


5. Sourcing: 5. Sourcing Role in the supply chain Set of processes required to purchase goods and services in a supply chain Supplier selection, single vs. multiple suppliers, contract negotiation Role in the competitive strategy Sourcing is crucial. It affects efficiency and responsiveness in a supply chain In-house vs. outsource decisions- improving efficiency and responsiveness TI: More than half of the revenue spent for sourcing. Cisco sources: Low-end products (e.g. home routers) from China. Components of sourcing decisions In-house versus outsource decisions Supplier evaluation and selection Procurement process: Every department of a firm buy from suppliers independently, or all together. EDS to reduce the number of officers with purchasing authorization.


6. Pricing: 6. Pricing Role in the supply chain Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply Price elasticity: Do you know yours? Role in the competitive strategy Use pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times Amazon: Faster delivery is more expensive Components of pricing decisions Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing, depending on the product and services Packaging, delivery location, time, customer pick up Bundling products; products and services


Considerations for Supply Chain Drivers: Considerations for Supply Chain Drivers


Major Obstacles to Achieving Fit: Major Obstacles to Achieving Fit SC is big: Variety of products/services Spoiled customer Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives Globalization Local optimization and lack of global fit


Slide55: Dealing with Multiple Owners / Local Optimization Information Coordination Information sharing / Shyness / Legal and ethical issues Contractual Coordination Mechanisms to align local objectives with global ones Coordination with (real) options Rare in the practice Without coordination, misleading reliance on metrics: Average safety inventory, Average incoming shipment size, Average purchase price of raw materials, Revenue Major Obstacles to Achieving Fit


Major obstacles to achieving fit: Major obstacles to achieving fit Instability and Randomness: Increasing product variety Shrinking product life cycles Customer fragmentation: Push for customization, segmentation Fragmentation of Supply Chain ownership: Globalization Increasing implied uncertainty


Common problems: Common problems Lack of relevant SCM metrics: How to measure responsiveness? How to measure efficiency, costs, worker performance, etc? Poor inventory status information Theft: Major problem for furniture retailers. Transaction errors: Retailers with inaccurate inventory records for 65% of SKUs Information delays, dated information, incompatible info. systems Misplaced inventory: 16% of items cannot be found at a major retailer Spoilage: active ingredients in the products are losing their properties Product quality and yield Lack of visibility in SCs Do you know the inventory your distribution centers hold? Do you know the inventory your fellow retailer holds?


Common problems: Common problems Poor delivery status information Not knowing the order status Poor IT design Unreliable, duplicate data Security problems: too much or too little Ignoring uncertainties “The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty.” Nitin Nohra, HBR February 2006 issue, p.40. Internal customer discrimination Giving lower priority to internal customers than external customers Poor integration Elusive inventory costs Accounting systems do not capture opportunity costs SC-insensitive product design


Summary: Summary Supply Chain Introduction Competitiveness / Business strategy / SCM strategy Components Inventory, Transportation, Facilities, Information, Sourcing, Pricing Challenges


Seven Eleven Japan (SEJ): Seven Eleven Japan (SEJ) A Case Study


Factual Information on Seven Eleven Japan (SEJ): Factual Information on Seven Eleven Japan (SEJ) Largest convenience store in Japan with market value of $95 B. The third largest retail company in the world after Wal-Mart and Home Depot. Established in 1974. In 2000, total sales $18,000 M, profit $620 M. Average inventory turnover time 7-8.5 days. Stock value increased by 3000 times from 1974 to 2000. In 1985, there were 2000 stores in Japan, increasing by 400-500 per year. Return on equity 14% over 2000-2004. A SEJ store is about the half the size of a US 7-eleven store, that is about 110 m2. Sales: Products 32.9% Processed food: drinks, noodles, bread and snacks 31.6% Fast food: rice ball, box lunch and hamburgers 12.0% Fresh food: diary products 25.3% Non-food: magazines, ladies stockings and batteries. Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying


More on SEJ: More on SEJ More factual info: Average sales about twice of an average US store SKU’s offered in store: Over 3,000 (change by time of day, day of week, season) Virtually no storage space No food cooking at the stores Japanese Images of Seven Eleven: Convenient Cheerful and lively stores Many ready made dinner items I buy Famous for its great boxed lunch and dinner - On weekends, when I was single, I went to buy lunch and dinner SC strategy: Micro matching of supply and demand (by location, time of day, day of week, season)


Seven Eleven - Number of Stores: Seven Eleven - Number of Stores 1999: 8,027 2004: 10,356


Seven Eleven - Net Sales (B Yen)Sales 1,963 B Yen in 2000: Seven Eleven - Net Sales (B Yen) Sales 1,963 B Yen in 2000


Seven Eleven - Pre tax Profit (B Yen): Seven Eleven - Pre tax Profit (B Yen)


Seven Eleven - Inventory turnover (days): Seven Eleven - Inventory turnover (days)


Information Strategy: Information Strategy Quick access to up to date information (as opposed to data): In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter, DCs and suppliers Customer checkout process Clerk records the customer’s gender, (estimated) age and purchased items. These Point of Sales (POS) data are transmitted to database at the headquarters. Store hardware: Store computer, POS registers linked to store computer, Graphic Order Terminals, Scanner terminals for receiving Daily use of the data Headquarters aggregate the data by region, products and time and pass to suppliers and stores by next morning. Store managers deduce trend information. Weekly use of the data Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100 corporate managers. Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo on Monday night. Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy. Tuesday nights, field counselors return back to their regions.


Information Analysis of POS Data: Information Analysis of POS Data Analysis of Sales for product categories over time SKU (stock keeping unit) Waste or disposal 10 day (or week) sales trend by SKU Sales trends for new product In the early 1990s, half-prepared fresh noodle sales were going up, new fresh noodle products were quickly developed Sales trend by time and day Different sales patterns for different sizes of milk at different times of the day results in rearrangement of the milks in the fridge. Extreme store micromanagement. Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?). List of slow moving items About half of 3000 SKUs are replaced by new ones every year


Facilities Strategy: Facilities Strategy Limited storage space at stores which have only 125-150 m2 space Frequent and small deliveries to stores Deliveries arrive from over 200 plants. Products are grouped by the cooling needs Combined delivery system: frozen foods, chilled foods, room temperature and hot foods. Such product groups are cross-docked at distribution centers (DC). Food DCs store no inventory. A single truck brings a group of products and visits several stores within a geographical region Aggregation: No supplier (not even coke!) delivers direct The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000. Still, at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners. Have many outlets, at convenient locations, close to where customers can walk Focus on some territories, not all: When they locate in a place they blanket (a.k.a. clustering) the area with stores; stores open in clusters with corresponding DC’s. 844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. No stores in Kobe. Success rate of franchise application <= 1/100


The Present and the Future: The Present and the Future Is food preparation a good idea at 7-eleven locations? e.g. Compare microwave heating vs. salad preparation. Why SEJ does not allow direct delivery from suppliers to retailers? Point out which of the following strategies can also be used in US (or Taiwan) Information strategy Facilities strategy Discuss the differences between the Japanese and US (or Taiwanese) consumers with regard to Frequency and amount of grocery purchase Use of credit cards vs. cash for purchase 7-eleven inventory turnover rate is 50 in Japan and 19 in the USA. 7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan. Does this make sense from a supply chain perspective? Cost vs. Responsiveness Business strategy What is the risk of micro-matching strategy? No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA?