4.8 Supply Chain Management

My PerspectiveDon Shannon

Designated Master Logistician

Intro

• Supply Chain Management is NOT something new .. Rather it is a refinement of processes that have existed for years

• Many credit it with being an extension of the “Toyota” Kaisan (continuous improvement) process

• SCM restructures the traditional logistics organization and focuses on incremental improvements in each area– Reduced inventory costs– More responsive processing time– Also includes Japanese preference for relationship-based

business arrangements.

WHY SUPPLY CHAIN MANAGEMENT

First Came Logistics• Logistics is the art and science of

management, engineering and technical activities concerned with requirements, design and supplying, maintaining resources to support objectives, plans and operation

• Or … Ensuring the correct – Items in the correct– Quantities in the correct– Condition in the correct– Location at the correct– Time

Traditional (Lifecycle) Logistics

• Logistics Engineering– Reliability and

maintainability analysis– Failure mode analysis

(FMECA)– Mean time to failure

(MTTF)– Mean time to repair (MTTR)– Spares requirements– Personnel requirements

(including training)– Maintenance philosophy

• Warehousing and Distribution

• Transportation• Packaging and preservation• Maintenance and repair

– Servicing– Inspection– Lubrication– Organizational, intermediate,

and depot support

• Demilitarizing and disposition

Then Came SCM

• Supply chain management is the intersection (integration) of:– Logistics– Purchasing– Business Management

• The Goal: optimize the supply chain– Reduced costs– Better customer satisfaction– More efficient use of

resources

SCM is ….• 1. Supply chain -- a set of three of more

entities (organizations or individuals) involved in the upstream and downstream flows of products, services, finances, and/or information from a source to a customer.

• 2. Supply chain management -- the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.

SOLEtech December 2001 Volume 4.12Newsletter Published By SOLE - The International Society Of Logistics 8100 Professional Place, Suite 211, Hyattsville, MD 20785

Formal Definition

• Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. 1

1. Council of Supply Chain Management Professionals – Official Website

Supply Chain Management and Logistics

• SCM overlaps / integrates the traditional Logistics functions of– Estimating Demand– Warehousing– Distribution– Transportation

SCM Innovations

• SCM seeks to leverage data systems and transportation networks to:– Increase probability of

items being in stock when needed

– Inventories are kept at reasonable (economical) levels

SCM Innovations (cont)

• SCM also seeks to streamline the procurement function– Reduce procurement

lead-time– Obtain reasonable but

not always the lowest price

– Establish relationships with key suppliers and Business Partners

INVENTORY MANAGEMENT

Inventory is (Dead) Money• Material in inventory is money

that could be used elsewhere• Business goal is to maintain

minimum investment in stock level– Accurate prediction of use– Dependable replenishment

time– Identification of “must have” vs

“nice to have” items– Awareness of inventory holding

costs– Business impact if out-of-stock

The (Traditional) Inventory Cycle• Demand Estimation• Order Placement• Order Processing• Shipment• Receipt

– Physical Receipt– Inspection– Placement into Inventory

• Inventory (Stock) Management– Inventory level

• Operating Stock• Safety Stock• Emergency Stock

– Re-order points

Inventory Cycle• Cycle Stock – (operating inventory) is

consumed and replenished on a recurring basis

• Consumption is tracked by various means– Sales Orders– Point of Sale

• Stock levels are replenished as needed– Re-order point– Economic order quantity

• Inventory is periodically counted to verify levels– Annual inventory– Cycle count (1/52 of stock counted each

week)

• Levels are adjusted based on physical inventory

How SCM Improved the Ordering Process

• Demand Forecast & Tracking– Integrated with Enterprise Data Systems

• J.D Edwards / SAP (Manufacturing)• Point of Sale systems (Retail)

– Bill of Material Take-Off– Sales Projections

• On-line vs. manual systems– Instantaneous entry into order processing

system– Instant credit / payment info– Instant knowledge of availability– Requirements often determined by

automated re-order system

• Order sent direct to warehouse– Pick and pack – Integrated with shipping system

• No manual preparation of shipping documents

• Shipping method pre-determined

SCM Improvements (Con’t)• Order tracking

– During order processing– Back-order status– Shipping status – Delivery status

• Receiving– Typically no receiving inspection

required– Inspected at source– Certificate of conformance

• Stock Management– Every item is bar coded or RF Tagged– Inventory is updated when item

placed in stock or removed for use.– Stock is centralized or distributed (or

both) to optimize use

SCM Purchasing Enhancements

• Better definition of requirements through automated inventory– Point of sale updates– Automated re-order points

• Central management of stock levels possible– RFID and extensive use of

barcodes

• On-line purchasing• Reverse auctions• Zone Contracting

Inventory Terms• Stock Level

– Cycle Stock (Normal operations)– Safety Stock (Minimum)– Critical Stock – Emergency Stock

• Inventory Turn-over (Cycle time)• Economic order quantity• Just-in-Time• Holding Costs

– Obsolescence– Physical storage– Capital costs

• Distributed Inventory– Held at point of use– Principally used in manufacturing or

service environment– Bench stock

Common Warehousing Terms

• Stock-out• Back-Order• Cross-Docking• Bill of Lading• Expediting• Forward Procurement• Certificate of

Conformance

Inventory Management

• Two dominant models of inventory management– Push – upstream source

sends periodic shipments based on anticipated usage

– Pull – Upstream source sends specific items in response to consumption

Push vs. Pull Inventory System

• Push System– Simple to set-up and

administer– Optimal use of

(infrequent) transportation

– Based on predictions of sales or consumption

– Can result in too many of the wrong items in stock with too few of those items needed

• Pull System– Needs data system to

track and report consumption

– More frequent (small) shipments

– Reduced inventory level at downstream

– Still have risk of stock-out (Backorder)

RELATIONSHIP BASED BUSINESS AGREEMENTS

Purchase Agreements

• Purchasing agreements with key suppliers– Exclusive– Preferred suppliers list

• Win-Win strategies i.e., mutually beneficial agreement

• Acceptable – but not always lowest - pricing

Purchasing Agreements

• Seller’s Perspective– Assured sales volume

and revenue– Reduced sales /

marketing costs– Interaction with

customer to improve product quality

• Buyer’s Perspective– Assured pricing and

supply– Reduced transaction

costs– Reduced inventory

requirements– Inspected at source – no

incoming inspection required

Improve the Value Chain

• Value chain is a string of companies or players working together to satisfy market demands for a product.

• Optimize value at each step in the process– Raw Materials– Manufacturer– Distributor– Retailer (Wal-Mart)

• Customer feedback and continuous improvement

Conclusion

• SCM is not a new discipline

• Refinement of existing processes – Leveraging technology– Transportation enabled

• Like many “new” concepts is really old concept with new terminology

• Arose from Toyota and the kaisan (continuous improvement) process.