1.0 Introduction to supply chain management (SCM)

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Supply Chain Management Introduction :

Supply Chain Management Introduction 1

What is Supply Chain Management?:

What is Supply Chain Management? Here are two definitions : The design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer -- Institute for Supply Management Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer -- The Supply Chain Council 2

Supply Chain Management :

Supply Chain Management Supply chain Management: Integration of various activities encompassed by the supply chain through improved supply chain relationships to achieve a sustainable competitive advantage . Supply chain: A sequence of suppliers, warehouses, operations and retail outlets, i.e., Organistions that are involved in producing and delivering a product or service . A basic purpose of supply chain management is to control inventory by managing the flow of materials throughout the supply chain.

Objectives of a Supply Chain :

Objectives of a Supply Chain The objectives are : To maximize the overall value generated. The value a supply chain generates is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer’s request . To achieve maximum supply chain profitability . Supply chain profitability is the total profit to be shared across all supply chain stages . To reduce the supply chain costs to the minimum possible level.

Supply Chain Dynamics:

Supply Chain Dynamics Three key points about supply chain dynamics are : The supply chain is a highly interactive system . There is an accelerator effect of demand changes . The best way to improve the supply chain is to reduce the total replenishment time and to feed back actual demand information to all levels.

What Is the Goal of Supply Chain Management?.:

What Is the Goal of Supply Chain Management ?. Supply chain management is concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed: In the right quantities To the right locations At the right time In order to Minimize total system cost Satisfy customer service requirements 6

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% Profit Supply Chain Cost Marketing Cost Manufacturing Cost Effort spent for supply chain activities are invisible to the customers. 7

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 SUPPLY SIDE DEMAND SIDE The right Product Higher Profits The right Time The right Customer The right Quantity The right Store The right Price = + + + + + - achieves Supplier Manufacturer Distributor Retailer Customer Upstream Downstream 8

Detergent supply chain::

Detergent supply chain: Customer wants detergent and goes to Jewel Jewel Supermarket Jewel or third party DC P&G or other manufacturer Plastic Producer Chemical manufacturer (e.g. Oil Company) Tenneco Packaging Paper Manufacturer Timber Industry Chemical manufacturer (e.g. Oil Company) 9

Flows in a Supply Chain:

Flows in a Supply Chain Customer Material Information Funds The flows resemble a chain reaction. Supplier 10

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. Supply Demand Products and Services Cash Supply Side OEM Demand Side THAILAND INDIA MEXICO TEXAS US N-Tier Suppliers Suppliers Logistics Distributors Retailers Information 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 11

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, 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 12

What is a Supply Chain?:

What is a Supply Chain? A supply chain consists of the flow of products and services from/to: --Raw materials manufacturers --Intermediate products manufacturers --End product manufacturers --Wholesalers and distributors --Retailers and, --End customers Connected by agents, transportation and storage activities, and Integrated through sharing of information, planning, and processing activities 13

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Figure 1.1 A Generic Supply Chain End product manufacturer Wholesalers, distributors Intermediate component mfgs . Raw material suppliers Retailers End customers Product & service flow Information and planning 14

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Supply Sources: plants vendors ports Regional Warehouses: stocking points Field Warehouses: stocking points Customers, demand centers sinks Production/ purchase costs Inventory & warehousing costs Transportation costs Inventory & warehousing costs Transportation costs 15

Typical Supply Chains:

Typical Supply Chains Purchasing Receiving Storage Operations Storage Production Distribution 16

Typical Supply Chain for a Manufacturer:

Typical Supply Chain for a Manufacturer Supplier Supplier Supplier Storage } Mfg . Storage Dist . Retailer Customer 17

Supply Chain for Steel in an Automobile Door:

Supply Chain for Steel in an Automobile Door MINING COMPANY Mines iron ore STEEL MILL Forms steel ingot STEEL COMPANY Forms sheet metal Iron ore Steel ingots AUTOMOTIVE SUPPLIER Makes door AUTOMOBILE MANUFACTURER Makes automobile CAR DEALERSHIP Does preparation Car door Car FINAL CONSUMER Drives automobile Prepared car Sheet metal 18

Supply Chain Management in a Manufacturing Plant:

Supply Chain Management in a Manufacturing Plant Receiving and Inspection Raw Materials, Parts, and In-process Ware- Housing Production Finished Goods Ware- housing Inspection, Packaging, And Shipping Suppliers Customers Materials Management Purchasing Production Control Warehousing and Inventory Control Shipping and Traffic Physical materials flow Information flow 19

Typical Supply Chain for a Service:

Supplier Supplier } Storage Service Customer Typical Supply Chain for a Service 20

Importance of Supply Chain Management:

Importance of Supply Chain Management Firms have discovered value-enhancing and long term benefits Who benefits most ? Firms with: - Large inventories - Large number of suppliers - Complex products - Customers with large purchasing budgets Benefits - Lower purchasing/inventory costs, higher quality/customer service 21

Importance of Supply Chain Mgt. –Cont.:

Importance of Supply Chain Mgt. –Cont. Firms practicing Supply Chain Management : 1. Start with key suppliers 2. Move on to other suppliers, customers, and shippers 3. Integrate second tier suppliers and customers (second tier refers to the customer’s customers and the supplier’s suppliers) 22

Importance of Supply Chain Mgt. –Cont.:

Importance of Supply Chain Mgt. –Cont. Cost savings and better coordination of resources are reasons to employ Supply Chain Management -- Bullwhip Effect- the magnification of safety stocks and costs based on separate forecasts and uncoordinated planning and sharing of information along the supply chain. . Reducing the bullwhip effect occurs through: -- Process integration- Interdependent activities can lead to improved quality, reduced cycle time, better production methods, better forecasts, less safety stock, etc. 23

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The Bullwhip Phenomenon Volatility amplification along the network Increase in demand variability as we move upstream away from the market Mainly because of lack of communication and coordination Delays in information and material flows Bullwhip effect occurs because of various reasons: Order Batching - Accumulate orders Shortage gaming- Ask for more than what is needed Demand forecast updating 24

Supply Chain: the Magnitude:

Supply Chain: the Magnitude In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of gross domestic product). Transportation 58% Inventory 38% Management 4% Third party logistics services grew in 1998 by 15% to nearly $40 billion 25

Supply Chain: the Magnitude:

Supply Chain: the Magnitude It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies. A typical box of cereal spends more than three months getting from factory to supermarket. A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days. 26

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% 27

What can Supply Chain Management do?:

What can Supply Chain Management do? 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 . 28

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 . 29

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! 30

Supply Chain: The Potential:

Supply Chain: The Potential Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. “ According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of business strategy, Oct./Nov. 1997) 31

Supply Chain: the Potential:

Supply Chain: the Potential In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using Direct business model Build-to-order strategy. 32

What is a Supply Chain?:

What is a Supply Chain? Customer is an integral part of the supply chain Includes movement of products from suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions Probably more accurate to use the term “supply network” or “supply web ” Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers . All stages may not be present in all supply chains (e.g., no retailer or distributor for Dell ) 33

Decision Phases of a Supply Chain:

Decision Phases of a Supply Chain Supply chain strategy or design Supply chain planning Supply chain operation 34

Supply Chain Strategy or Design:

Supply Chain Strategy or Design Decisions about the structure of the supply chain and what processes each stage will perform Strategic supply chain decisions Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty 35

Supply Chain Planning:

Supply Chain Planning Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year 36

Supply Chain Planning:

Supply Chain Planning Planning decisions: Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon 37

Supply Chain Operation:

Supply Chain Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon) 38

Process View of a Supply Chain:

Process View of a Supply Chain Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push) 39

Cycle View of Supply Chains:

Cycle View of Supply Chains Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Customer Retailer Distributor Manufacturer Supplier 40

Cycle View of a Supply Chain:

Cycle View of a Supply Chain Each cycle occurs at the interface between two successive stages Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor) Manufacturing cycle (distributor-manufacturer) Procurement cycle (manufacturer-supplier) Cycle view clearly defines processes involved and the owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process. 41

Push/Pull View of Supply Chains:

Push/Pull View of Supply Chains Procurement, Manufacturing and Replenishment cycles Customer Order Cycle Customer Order Arrives PUSH PROCESSES PULL PROCESSES 42

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 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 43


SUPPLY CHAIN MANAGEMENT Supply side- raw materials, inbound logistics and production processes Demand side- outbound logistics, marketing and sales. 44

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SUPPLY CHAIN DRIVERS Why sudden interest? Demanding customers Shrinking product life cycles Proliferating product offerings Growing retailer power in some cases Doctrine of core competency Emergence of specialized logistics providers Globalization Information technology 45

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SUPPLY CHAIN ELEMENTS Supply Chain Design Resource Acquisition Long Term Planning (1 Year ++) Strategic Production/ Distribution Planning Resource Allocation Medium Term Planning ( Qtrly , Monthly ) Tactical Shipment Scheduling Resource Scheduling Short Term Planning ( Weekly, Daily ) Operational 46

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Supply Chain Goals Efficient supply chain management must result in tangible business improvements. It is characterized by a sharp focus on Revenue growth Better asset utilization Cost reduction. 47

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Reduce Overall Cycle Time : Improve Response Supply Chain Management Underlying Principles Compression Conformance Co-operation Communication (Planning/Manufacturing/Supply) (Forecasts/Plans/Distribution) (Cross -Functional) (Real Time Data) C 48

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Changing Paradigm Functional vs Process Products vs Customers Revenues vs Performance Inventory vs Information Transactions vs Relationships 49

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Critical Success Factors today Cross functional management and planning skills Ability to define, measure and manage service requirements by market segment Information systems Relationship management and win win orientation 50

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PUTTING IN PLACE A WELL OILED SUPPLY CHAIN Supply chain as an efficient customer satisfying process Effectiveness of the whole supply chain is more important than the efficiency of each individual department. 51

The steps involved :

The steps involved Step1 - Designing the supply chain Determine the supply chain network Identify the levels of service required 52

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Step 2 - Optimizing the supply chain Determine pathways from suppliers to the end customer Customer markets to Distribution centers Distribution centers to production plants Raw material sources to production plants Identify constraints at vendors, plants and distribution centers Get the big picture Plan the procurement, production and distribution of product groups rather than individual products in large time periods- quarters or years 53

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Step 3- Material flow planning Determine the exact flow and timing of materials Arrive at decisions by working back from the projected demand through the supply chain to the raw material resources Techniques ERP 54

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Step 4 – Transaction processing and short term scheduling Customer orders arrive at random This is a day to day accounting system which tracks and schedules every order to meet customer demand Order entry, order fulfillment and physical replenishment 55

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Information flows in Supply Chain Management Information is overriding element Need for databases Master files: Information about customers, products, materials, suppliers, transportation, production and distribution data- do not require frequent processing Status files- heart of transaction processing- track orders and infrastructure status- updated daily. Essentially using the same information to make all plans right from structuring the network to processing every day supply chain tasks. 56

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Visibility : See physical operations more effectively through information. Information can be used for effective coordination of value chain activities. Mirroring capability : In this stage, virtual activities are substituted for physical ones. A parallel value chain is created. New customer relationships : The company can draw on the flow of information in the virtual value chain to deliver value to customers in new ways. 57

Dealer Management:

Dealer Management Conventional functions : Inventory ownership and management Sales and technical support Order handling Credit 58

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Contemporary Trends Channels being divided into two- Fulfillment and Franchised agent Fulfillment channel- responsible for getting the manufacturer’s product from the plant to the end user through a highly efficient logistics and inventory management system 59

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Contemporary Trends Fulfillment channel may not take ownership of the product but may perform these functions on a per box fee structure Franchised agents responsible for sales and sales support but will not write the order or supply the product 60

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Issues in customer management Concentration is necessary to commit the necessary resources for true customer integration Depth of customer contact R&D - sharing information vs developing new products together Logistics - Pros and cons of methods of transportation vs reengineering the logistics process 61

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Implementation: Points to keep in mind Recognize the difficulty of change. Prepare a blueprint for change that maps linkages among initiatives. Assess the entire supply chain from supplier relationships to internal operations to the market place, including customers, competitors and industry as a whole. 62


IS THE SUPPLY CHAIN WORKING? Does our manufacturing strategy increase product line flexibility while continuing to drive down overall production costs? When was the last time we measured lost sales to end customers? Do we have an efficient system to get POS data from retailers? Are we testing our products with end customers? Do we use the resulting data to adjust our forecasting and supply positions? Is the ratio of returned orders to sales increasing? 63

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The New Model of Relationships Hard bargaining vs shared destiny Arms length relations vs Involving dealers and suppliers in product development Piling up vs Replenishing dealer inventory more frequently In short working together as partners to cut costs, boost efficiencies, innovate and share value 64

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Adversarial vs partnerships Short term vs long term contracts Large vs small order quantity Full truck load vs small parcels Inspection vs no inspection 65

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Written order vs understanding Many vs few suppliers Design and then invite quote from vendor vs involving vendor in development Bargaining, holding cards close to chest vs Shared destiny, transparency 66

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Important points to keep in mind Segment customers based on service needs. Modify the supply chain to meet these service requirements profitably. Customize the logistics network. Develop forecasts collaboratively involving every link of the supply chain. Locate the leverage point where the product is unalterably configured to meet a single requirement Delay product differentiation till the last possible moment . Assess options such as modularized design or modification of manufacturing processes that can increase flexibility. 67

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Important points to keep in mind ( contd ….) Cultivate warm relationships with suppliers. Efficient supply chain management has to be accompanied by a technology strategy. Customization of logistics network Listen to signals of market demand and plan accordingly. Differentiate product close to the customer Source strategically Develop a supply chain wide technology strategy 68

The End Thanks for your attention! :

The End Thanks for your attention! 69

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