supply chain management rabindranath bhattacharya indian institute of technology madras 3 rd...
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Supply chain Management Rabindranath Bhattacharya
Indian Institute of Technology Madras3 rd September,2011
Supply chain consists of all links/stages involved directly or indirectly in fulfilling customer’s
request /order
Integrated Supply chain Management encompasses suppliers’ suppliers to customers’ customers
What’s Supply chain Management ?
Supply chain Management is a set of approaches to efficiently integrate
Suppliers,Manaufacturers,Warehouses and stores so that the merchandise is produced
and distributed at right time of right qualities, at right locations in order to
minimize system wide costs while satisfying service level requirements of customers
What’s Supply chain ?
What’s Supply chain ?
What’s Objective of Supply chain Management ?
To Maximize overall value generated or Profitability of Supply chain .
Profitability = Revenue received from the customers - the sum of costs incurred in the supply chain to
produce and distribute the products to customers
Supply chain Management is nothing but managing the flow throughout the chain
Major Questions asked on developing a SCM
Supply Chain Evolution(National)
Supply chain Evolution
Purchase Manageme
nt
Materials Manageme
nt
Integrated SCM
SCM
Closed Loop SCM
Next?
•Green Supply Chain• Sustainable supply
chain• Lean supply chain
Supply chain Evolution
Pre 1980 Level 1(Purchase Management) is focused on internal improvement, including taking costs out
of sourcing and logistics. The efforts tend to be confined within a particular business unit. It was a
sellers’ market
1980 – 1990 Level 2(Materials Management), with the entry of Japanese manufacturers in India, starts to break down internal walls, and works on corporate integration. The various parts of the company start to
cooperate to align purchases, processing and shipping.
Supply chain Evolution1990 Level 3(Supply chain Management) businesses start to take an external view that includes a closer
focus on the customer. Customer satisfaction becomes one of the metrics that measure the supply
chain’s success. It became a buyers’ market
2000 Level 4(Supply chain Management) brings trading partners and suppliers into the discussions about how to reach customers. Whereas previous relationships between the trading partners were about buying and selling, the partners now start collaborating and sharing information to reach a
common customer.
Supply chain Evolution2005 Level 5 (Integrated Supply chain Management ) is a move toward truly
automated connections between businesses. Partners share information electronically, which lowers production cycle times. Inventory can be viewed on a real-time basis so forecasting errors
can be diminished. 2005 Level 6 (Integrated closed loop supply
chain ) stats looking at salvaging values out of returned products to bring down the cost
further to ward off the competitors
Supply Chain Evolution(Global)
Challenges and Risks in Supply Chain
Mother Dairy- a case for SCMMilk collected from Hundreds of cooperative all over Gujarat, Haryana,
Rajasthan,Punjab,Utttar Pradesh• Transported to Plant in East Delhi every day
• Homogenized, pasteurized and stored in special tanks inside 650,000 liters/day plant
• Supply in 100 tankers for distribution to 568 booths in the city • Also sells loose milk through 200 insulated containers/ 300 Cycle
Rickshaws• Sells through 850 retail shops in poly packs ( both half and one liter)
• Wide variety of products like skimmed,toned,double toned ,full cream etc • Sell 30 flavors of ice cream
Mother Dairy- Challenges
Supplying milk everyday without fail is a challenge indeed in view of
• Short life cycle(Perishable goods)•Complex planning process for in bound and out bound
Logistics for movement of products • Demand fluctuation
• Production scheduling (Variety increases complexity)Finally managing flow of information, fund, product
seamlessly across different entities is crucial for growth and profitability of the organization
Risks and uncertainties
in supply chain
Decision Phases of Supply chain
Decision Phases of Supply chain
Decision Phases of Supply chain
Supply Chain Decision Phases
Supply Chain Decision Phases
Supply Chain Decision Phases
Supply chain Design /strategy
Supply chain planning
Supply chain operations
Supply chain Design /strategy
Governs long term operation • Location and capacities of production
and warehousing facilities • Products to be manufactured and stored• Type of information systems to be
employed • Modes of transportation to be used at
each strategy
Supply chain Planning ?Governs short term operations to implement long
term strategy like
• Forecast for the year of demand in different markets
• Which market from which locations?• Planned build up of inventories
• Make /Buy• Exchange rate of fluctuation• Expected competition
Supply chain Operation ?
Governs operation daily or weekly in the best possible manner as per planning • Allocate shipping orders
• Set delivery schedule of trucks• Place replenishment orders
• allocate individual orders for inventory or production
• Generate pick list at ware houses • set a date when order is to be fulfilled
Supply Chain Drivers
What are the drivers of Supply chain ?
3-40
Outline
Drivers of supply chain performanceA framework for structuring drivers• Facilities• Inventory• Transportation• Information• Sourcing• Pricing
Added recently
3-41
Drivers of Supply Chain Performance• Facilities
– places where inventory is stored, assembled, or fabricated– production sites and storage sites
• Inventory– raw materials, WIP, finished goods within a supply chain– inventory policies
• Transportation– moving inventory from point to point in a supply chain– combinations of transportation modes and routes
• Information– data and analysis regarding inventory, transportation, facilities throughout the supply
chain– potentially the biggest driver of supply chain performance
• Sourcing– functions a firm performs and functions that are outsourced-affects bottom line
• Pricing– Price associated with goods and services provided by a firm to the supply chain-affects
top line
3-42
A Framework for Structuring Drivers
Competitive Strategy
Supply Chain Strategy
Efficiency Responsiveness
Facilities Inventory Transportation
Information
Supply chain structure
Cross Functional Drivers
Sourcing Pricing
Logistical Drivers
Supply Chain Strategy and Strategic fit
Types of Strategies
Competitive Strategy
R & D Strategy
Marketing
IT HR
Finance
Supply chain
Supply chain Strategy Determines the nature of
procurement of raw materials and transportation of the same to and from the company ,manufacture of
the products or operation to provide the service and distribution of the products to the customers along
with any follow up service
What’s Strategic fit ?
It means that both the Business /Competitive strategy of the company and supply chain strategy should have
the same goal .It refers to the consistency between customer priorities that the competitive strategy is designed
to satisfy and the supply chain capabilities that the supply chain
strategy aims to build up .
Steps for strategic fit
• Know your customers
•Know your supply chain
•Achieve strategic fit
Demand uncertainty vs other Attributes
Attribute Low Implied uncertainty
High Implied uncertainty
Product Margin Low High
Forecast error(Avg)
10% 40 to 100%
Average stock out rate
1 to 2% 10 to 40%
Season end markdown
0% 10 to 25%
Understand your supply chain
Responsiveness
Cost LowHigh
High
Low
Cost responsive Efficient frontier
Wal-Mart
Dell
Achieve strategic fit
Responsiveness
Implied uncertainDemand Uncertain demand Certain
Demand
High
Low
Zone of strategic fit
Obstacles to Achieving strategic fit
• Increasing variety of products • Fragmentation of supply chain
ownership•Decreasing product life cycles
• Increasingly demanding customers • Globalization
•Difficulty executing new strategies
Performance Measures
Performance Measures(Post Process)
• Inventory Turn Over ratio(TO) = (Total Inventory/Annual Sales)*100 • No of inventory turns(TN) = Annual sales / Total Inventory• Total Inventory days (TID)= (Total inventory/Annual sales) *365 • Days of sales outstanding(DSO) = (Accounts receivable/Annual Sales )*365• Days of payables outstanding (DPO) =(Accounts payable/Annual sales)*365• Cash to cash to cycle time (Days) = TID+DSO- DPO
Performance measures (sharper focus)
• RM Inventory days =( RM Inventory/Value of RM consumed )*365
• WIP inventory days = (WIP Inventory /Value of production )*365
• FG Inventory = Finished goods Value /Annual sales) *365
SCOR Model
The supply chain operations reference model (SCOR) is a management tool used to address, improve, and communicate supply chain management decisions within a company and with suppliers and customers of the company. The model describes
the business processes required to satisfy a customer’s demands. It also helps to explain the processes along the entire supply
chain and provides a basis for how to improve those processes.
SCOR Model
Other Performance measures (Process) Reliability Responsiveness flexibility Cost Asset
Delivery Performance *
Fill rate *
Order fulfillment *
Order fulfillment Lead time *
Supply chain response time *
Production flexibility *
SCM cost *
Cost of goods sold *
Value added productivity *
Warranty cost *
Returns Processing cost *
Cash to cash cycle time *
Inventory days of supply *
Asst turns *
Customer facing Internal Facing
On time delivery index
Delivery date committed = AActual date of delivery =B
B-A <= 0 : 5B-A <= 1 week : 3B-A <= 2 week : 2B-A >= 2 weeks : 0
OTD % =100 *Cumulative points for orders/(5xTotal no of orders)
Process view of A Supply Chain
A Process orientation
PLAN SOURCE MAKE DELIVER RETURN
• Demand Management• MPS• MRP
• Capacity Planning
• Distribution planning
• Supplier development• Supply management• Joint cost
reduction• Target costing• Value Engg• Import substitution
• Facilities and layout
management• Materials
handng • Quality Management • Maintenance management
• Logistics•Ware housing• Distribution• Channel Management • Customer
Interface
• Logistics• Warehousing• Remanufacture• Segregation• Scrap disposal
In –House In –Bound In –House In –Bound Out –Bound
Forecasting of Demand
Why it’s important?
Forecast of future demand forms the basis of all strategic and planning
decisions in a Supply chain
• Qualitative Methods• Time series methods
1> Static 2> Adoptive
• Causal Methods• Simulation
Which one to be used under what circumstances or a combination of these to minimize the error?
Forecasting Method
Questions and Answers
1. What is the difference between functional products
and innovative products? • Functional products
– Stable & predictable demand – Long life cycles (More than 2 years ). – Low (10-20 variants per category)– Stock out rate: 1% to 2% – Low profit margins – Lead time : 6 months to 1 year – Ex: products bought in grocery stores and gas stations
• Innovative products– Volatile & unpredictable demand– Shorter life cycles (3 months to 1 year )– High (often millions of variants per category) – Stock out rate: 10% to 40% – High profit margins– Lead time: 1 day to 2 weeks– Ex: Fashion apparel and personal computers
How to gain margins for functional products? Give examples
• By making the products more innovative.• By introducing high levels of variability in the products.
• Eg: IBM ThinkPad introduced a novel cursor control in the middle of the keyboard that required users to interact with the keyboard in an unfamiliar way. This created a very high demand for the Thinkpads.
What kind of initiatives Campbell Soup adopted to reduce supply chain costs?
• Continuous replenishment program –EDI (Electronics
Data Interchange).
• Initiating the retailers to adopt forward buying.
• Reducing the inventory at each stage of the supply
chain.
Give real life examples other than mentioned in the
paper. • Functional product– Automobile engines
• Innovative product– Mobile phones– Hard disk drives– Computer chips– Operating system
2. What is the ideal strategy for both kinds of products?
• Efficient process functional products– Maximize performance– Minimize cost
• Responsive process innovative products – Minimize stock outs, forced markdowns, and
obsolete inventory – Use modular design in order to postpone product
differentiation for as long as possible
5. What is meant by markdown?
• Temporary reduction in selling price of an item to stimulate its demand or to drive a competitor out of a market.
• Permanent markdowns are created to remove a slow-selling item from inventory.
What are the consequences of markdown on supply chain?
• As a result of markdown demand will rise which will lead to reduced inventory followed by stock-outs.
• This will have an effect on the whole supply chain.
• Induce larger replenishment from buyers.
In real life, which industry faces the problem of markdown to maximum extent?
• Industries involved in – FMCG products– Automobiles (cars)– Electronic goods (cellphones, laptops etc.)
6. Name the tools which can be used for responsive supply of innovative products?
• To accept that uncertainty is inherent in innovative products.
• To strive to reduce uncertainty so that the demand for components becomes more predictable.
• It can avoid uncertainty by cutting lead times and increasing the supply chain's flexibility.
• It can hedge against the remaining residual uncertainty with buffers of inventory or excess capacity.
7. How the supply chain strategy for National Bicycle is
different from Sport Obermeyer supply chain strategy?
• National Bicycle: Mass customization- building the ability to customize a large volume of products and deliver them at close to mass-production prices.
• Sport Obermeyer : blends the three strategies of reducing, avoiding, and hedging against uncertainty. Their approach is called accurate response.
Identify two companies in real life following similar supply chain strategies.
• Mass customization– Dell– Motorola
Reading MaterialsThe following appeared in the March-April, 1997,
issue of THE HARVARD BUSINESS REVIEW:
WHAT IS THE RIGHT SUPPLYCHAIN FOR YOUR PRODUCT?
A Simple Framework Can Help
You Figure Out the Answer
BY MARSHALL L. FISHER
Supply Chain Management By
Sunil Chopra and Peter Meindl
Designing and Managing the Supply Chain By
David Simchi-Levi,P. Kaminsky and Edith Simchi-Levi
Procurement cycle
Procurement cycle