CHAPTER 1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENTCopyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Introduction to
Flow of products and services from:
Raw materials manufacturers
Intermediate products manufacturers
Retailers
Integrated through information, planning, and integration activities
Cost and service levels
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1.1 What Is Supply Chain Management?
Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.
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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
PC Industry Supply Chain
Tracing back the screen you stare at for the bulk of your time.
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Suppliers’ suppliers
Customers’ customers

System level approach
Multiple levels of activities

Challenging to minimize system costs and maximize system service levels

Inherent presence of uncertainty and risk

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Set of activities and processes associated with new product introduction. Includes:
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product design phase
associated capabilities and knowledge

sourcing decisions
. . .
production plans
. .
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1.3 Global Optimization
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Geographically dispersed complex network
Conflicting objectives of different facilities
Dynamic system
Variations over time
Matching demand-supply difficult
Different levels of inventory and backorders
Recent developments have increased risks
Lean production/Off-shoring/Outsourcing
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Tracing back the dress you are wearing


An Illustration: How Li & Fung Limited Might Make a Dress
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Globally Dispersed Manufacturing

1.4 Uncertainty and Risk Factors
Matching Supply and Demand a Major Challenge
REASONS
EXAMPLES
Raw material shortages Internal and supplier parts shortages Productivity inefficiencies
Boeing Aircraft’s inventory write-down of $2.6 billion 2600000000 $
Sales and earnings shortfall Larger than anticipated inventories
Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million 25 22
Stiff competition General slowdown in the PC market
Intel reported a 38 percent decline in quarterly profit 38
Higher than expected orders for new products over existing products
EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 by around $100 millionEMC 2.66 2006 100000000 $
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Fluctuations of Inventory and Backorders throughout the Supply Chain
1.4 Backorders
FIGURE 1-3: Order variations in the supply chain
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Forecasting is not a solution
Demand is not the only source of uncertainty
Recent trends make things more uncertain
Lean manufacturing
Outsourcing
August 2005 – Hurricane Katrina
Six month impact
Losses of $1B/day
2005 -
P & G

1B /
1999


FIGURE 1-4: Logistics costs’ share of the U.S. economy
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FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005
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1.6 Complexity: The Magnitude
U.S. companies spend more than $1 trillion in supply-related activities (10-15% of Gross Domestic Product)
Transportation 58%
Inventory 38%
Management 4%
The grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies
A typical box of cereal spends 104 days getting from factory to supermarket.
A typical new car spends 15 days traveling from the factory to the dealership.
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Complexity: The Magnitude
Compaq computer’s loss of $500 million to $1 billion in sales in one year
Laptops and desktops were not available when and where customers were ready to buy them
Boeing’s forced announcement of write-downs of $2.6b
Raw material shortages, internal and supplier parts shortages….
Cisco’s multi-billion ($2.2b) dollar write-off of inventories in 2001-2002
Customers balked on orders due to market meltdown
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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
95% of the products are delivered within 45 days
5% are delivered within 90 days.
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Performance of Dell Computers
Cost Elements of a Typical Trade Book
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Example: The Apparel Industry
Supply Chain: The Potential
P&G’s estimated savings to retail customers of $65 million through logistics gains
Dell Computer’s outperforming of the competition in terms of shareholder value growth over more than two decades by over 3,000% using:
Direct business model
Build-to-order strategy
Wal-Mart transformation into the world’s largest retailer by changing its logistics system:
highest sales per square foot, inventory turnover and operating profit of any discount retailer
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Chain
• Inventory management
• Supply contracts for strategic as well as commodity components.
• The value of information and the effective use of information in the supply chain.
• Supply chain integration.
• Strategic alliances.
• International supply chain management.
• Customer value.
• Technical standards and their impact on the supply chain.
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Business overview
Supply chain
Production planning
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I lead discussion with more direction than usual – due to time and level (?) of preparation.
Case based project Bryan did in 94 for LFM internship
Case describes a scenario with typical symptoms – inventories are too high and customer service is poor.
Initial explanation is that the problems are due to poor forecasting of customer demand. There’s a perception that demand is highly variable and unpredictable, possibly due to irrational customer behavior, e. g., panic ordering. … if only Meditech could forecast what the customers will order, then they could improve customer service and reduce inventories….
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Meditech, 6 years old, spun off from Largo, produces endoscopic surgical instruments.
Market doubling every 5 years; continual innovation as products get smaller and products created for more applications
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Compete based on product innovations, customer service, cost
National sells to physicians; Meditech sells to material managers
Customer preferences change slowly
Meditech has majority of market .
Physicians concerned with product features; materials managers concerned about cost and delivery.
Physicians get accustomed to the feel of a product and won’t change easily.
Hospitals/mat’ls managers set up long term supply contracts to lock in supplier at a good price (also impact of GPO’s, group procurement organizations?)
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4 Meditech assembly plants
4 or 5 domestic dealers, each operates with many autonomous regional warehouses
Each regional warehouse stocks many different products, so as to provide full service to hospitals
Regional warehouses order directly on Meditech
Int’l Meditech affiliates operate like the domestic dealers.
What purpose do the dealers fill?
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Packaging and sterilization have adequate capacity
How much bulk inventory would you expect? Not clear how much bulk inventory they keep – from the way they plan (push each month), might expect 2 weeks inventory here on average.
In finished goods they target 3 weeks inventory
Note – they seem to maintain 3 inventories. Might always ask – why? For what purpose?
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Annual forecast determined by marketing and finance
Revision done at beginning of month by marketing and central planning
Transfer requirements = forecast – FG inventory +safety stock (3 weeks of demand), done by central planning
Transfer requirements = the imputed demand on the bulk inventory, i. e., how much to transfer from bulk to to FGs
Monthly plan agreed to by organization, 1 – 2 weeks into month
Monthly plan sent to business units, who input it into MRP to get material plans and assembly schedules
MRP re-run several times in month to update schedules…
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Another way of looking at production planning --- focusing on information flows.
Note assembly and material plan are ‘push’ to meet forecast and monthly plan.
Packaging and assembly are ‘pull’
Not clear how OP, or OQ are set, other than 3 weeks of safety stock
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Poor forecasting?
Panic ordering?
Look at exhibit 3
What are the symptoms? Poor service; poor forecasts; high FGs; more variable production
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Usage in hospitals is quite stable
Market share moves slowly over time
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What causes the spikes? Look at exhibit 2.
Look again at exhibit 3 – see overshoot in production, and see production variation exceeds demand variation
Planners misinterpret the demand spike as an increase in demand rate.
Look at exhibits 6 and 7 (not in case)
There is no panic ordering.
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Poor information systems
No one had responsibility for forecast errors
Tendency to shift the blame
Built-in delays and monthly buckets in planning system
Amplifier in planning system
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No one had looked at the data – not easy to get at; also monthly buckets obscures a lot of what is going on.
Transfer req’s = month forecast + 3 weeks of demand – FG inventory
Suppose month forecast = 100, and FG inv = 75; then
Transfer req’s = 100 + 75 – 75 = 100
But what if forecast increases to 150:
Transfer req’s = 150 + 113 – 75 = 188
Thus, forecast increase by 50%, leads to increase of 88% in TRs
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Establish accountability for forecast
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Not clear why there is a bulk inventory – what is its purpose?
ROP may also be too high at 3 weeks of demand??
Try to get visibility of hospital demand
Wrap Up: Case illustrates a supply chain challenge – understand why Meditech has poor customer service and high inventory, particular for new products. Context is characterized by lack of data and a some what archaic, albeit typical, planning system that obscures the problem.