Supply Chain Decision Phases

Supply Chain Decision PhasesSection 4 part 2The MagnitudeIn 1998, American companies spent $898 billion in supply chain related activities (or 10.6% of Gross Domestic Product)Third party logistics services grew in 1998 by 15% to nearly $40 billionIt is estimated that the grocery industry could save $30 billion (10% of operating cost) by using more effective logistics strategiesA typical box of cereal spends more than three months getting from factory to supermarketSYST 4050 SlidesChapter 12The PotentialIn 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 retailerWal-Mart designed its supply chain with clusters of stores around distribution centers to facilitate frequent replenishment at its retail stores in a cost effective manner. Frequent replenishment allows stores to match supply and demand more efficiently than the competition. Wal-Mart has been a leader in sharing information and collaborating with suppliers to bring down costs and improve product availability. The results were impressive.

SYST 4050 SlidesChapter 13The ImpactIn 1996, Dell held 31 days of inventory. It now holds only 4 days of inventory.

SYST 4050 SlidesChapter 14Producers have streamlined their supply chain operations to hold less inventory relative to sales The ImpactThe Turning Point (The Economist, 9/20/07)For such a tiny part of GDP, the contents of warehouses has had a surprisingly big effect on its volatility. When industries cut or add stocks according to demand, that adjustment magnifies the effect of the initial change in sales. Stock levels were once much larger relative to the size of the economy, so a small slip in demand could easily blow up into a recession. But thanks to improvements in technology, firms now have timelier and better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions. This makes huge stocks unnecessary and minimizes the lurches in inventories that were once so destabilizing. SYST 4050 SlidesChapter 15Study of Supply Chain ManagementSuccessful supply chain management requires decisions on the flow of information, product, and funds that fall into three decision phasesSupply chain strategy or designSupply chain planningSupply chain operationSYST 4050 SlidesChapter 16Each decision should be made to increase the supply chain surplusDecision Phases in a Supply ChainTYPICAL DECISIONSStrategicTacticalTYPETIME FRAMESupply chain network design (How many plants? Location and capacities of plants and warehouses?)Supply chain strategies (Sell direct or through retailers? Outsource or in-house? Focus on cost or customer service?)Product mix at each plantyearsWorkforce & Production planning Inventory policies (safety stock level)Which locations supply which marketsTransportation strategies3 mo.- 1yearOperationalProduction scheduling Decisions regarding individual ordersPlace replenishment ordersdailySYST 4050 SlidesChapter 17Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm

Supply chain strategy or designSupply chain planningSupply chain operation

Supply chain design decisions are long-term and expensive to reverse must take into account market uncertaintySupply chain planning decisions use a fixed supply chain configuration to come up with an overall production planSupply chain operation makes decisions about individual customer orders & daily operations.

Study of Supply Chain ManagementA supply chain is a sequence of processes and flows that take place within and between different stages Cycle viewThe processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chainPush/pull viewThe processes in a supply chain are divided into two categories depending on whether they are executed in response or in anticipation of a customer order

SYST 4050 SlidesChapter 19Cycle View of Supply Chain ProcessesCustomer Order CycleReplenishment CycleManufacturing CycleProcurement CycleCustomerRetailerDistributorManufacturerSupplierCycle view defines the processes involved and the owner of each processSYST 4050 SlidesChapter 110Each cycle occurs at the interface between two successive stagesCustomer order cycle (customer-retailer)Replenishment cycle (retailer-distributor)Manufacturing cycle (distributor-manufacturer)Procurement cycle (manufacturer-supplier)

1) Supply chain strategy or design.In this phase, we must consider how to structure the supply chain. Location, capacities of production and warehousing facilities will be considered in this phase too. 2) Supply chain planningIn this phase, companies define a set of operating policies that govern short-term operations. They collect data and produce market and inventory level forecast. And they decide whether they need subcontract some of manufacturing or not in this phase. 3) Supply chain operationIn this phase companies make decisions regarding individual customer orders. Then, allocate individual orders to inventory or production. And they also manage shipments, delivery and schedules of trucks.

Subprocesses in Each CycleSupplier markets the productBuyerSupplierBuyer places an orderSupplier receivesthe orderSupplier suppliesthe orderBuyer receivesthe orderBuyer may return the productSYST 4050 SlidesChapter 113Cycle View of Supply Chain ProcessesCustomer Order CycleReplenishment CycleManufacturing CycleProcurement CycleCustomer Order Process1. Customer Arrival 2. Customer Order Entry3. Customer Order Fullfillment4. Customer Order ReceivingProcurement Process1. Component Order Arrival2. Production Scheduling3. Manufacturing/Shipping4. ReceivingManufacturing Process1. Order Arrival2. Production Scheduling3. Manufacturing/Shipping4. ReceivingReplenishment Process1. Retail Order Trigger 2. Retail Order Entry3. Retail Order Fullfillment4. Retail Order ReceivingSYST 4050 SlidesChapter 114DifferencesIn the Customer Order Cycle demand is externalScale (and frequency) of an order increases (decreases) when moving further away from the customer

Each cycle occurs at the interface between two successive stagesCustomer order cycle (customer-retailer)Replenishment cycle (retailer-distributor)Manufacturing cycle (distributor-manufacturer)Procurement cycle (manufacturer-supplier)Push/Pull View of Supply Chain ProcessesCustomer order arrivesPULL PROCESSESPUSH PROCESSESExecution is initiated in response to customer orders (reactive)Execution is initiated in anticipation of customer orders(speculative) Processes are divided based on the timing of their execution relative to a customer orderSYST 4050 SlidesChapter 116Processes are divided based on their timing relative to the timing of a customer orderThey key difference is the uncertainty during the two phasesAt the time of execution of a pull process customer demand is knownAt the time of execution of a push process customer demand is not known (and must be forecasted)

Push/Pull Processes for the Supply chain of DellPUSHPULL Customer Order Cycle andManufacturing CycleProcurement CycleCustomerManufacturerSupplierSYST 4050 SlidesChapter 118Make-to-orderPush/Pull Processes for the Supply chain of DetergentPULL PUSH Customer Order CycleReplenishment CycleManufacturing CycleProcurement CycleCustomerRetailerDistributorManufacturerSupplierSYST 4050 SlidesChapter 119Make-to-stock