SCM Overview

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SCM Overview

• 2002.4.9
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Contents

• Evolution of the Integrated Logistics Concept
• The Achilles Heel of SCM
• What is the Right Supply Chain for Your Product?
• Making Supply Meet Demand in an Uncertain World
• Mass Customization at HP The power of
  postponement
• The Power of Virtual Integration An interview
  with Dell Computers Michael Dell

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Evolution of the Integrated Logistics Concepts

• Bernard J.La Londe Ohio State University
• Integrated Distribution Management-The American
  Perspective
• Long Range Planning No.1 (December 1969)
• 1993 revision

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History

• Begin
• Rome, Napoleon(logistique), World War 1,2
• Industrial revolution ??? ?? ??, specialized
  middleman

• Three Questions
• What is integrated Logistics management?
• Why did the issue of integrated logistics become
  important?
• How has integrated logistics evolved over the
  past 3 decades?

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What?

• Raw material
• Subassemblies
• Manufactured part
• Racking materials

Goods in Process Inventory
Finished Goods Inventory
Field Inventory
Customer

• Physical distribution
• Post-World War 2 business management
• The movement and handling of goods from the
  point of production
• to the point on production to the point of
  consumption or user

• Materials Management
• All materials employed in the production of the
  finished product
• Inventory control, purchasing, traffic,
  materials handling, receiving

• Business logistics
• Emerged during 1980s1990s as strategy
• From raw material through finished goods
  inventory

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Why?

• Pressure on cost reduction
• During the late 1950s1960s
• Increasing marketing costs, well advanced
  production technology
• Relatively untouched areas ? distribution(1030)
  
• Data processing technology
• Computer technology became increasingly powerful,
  less costly
• Automated inventory control
• Customer focus
• Right time in the right quantity
• Particular importance for those companies selling
  relatively homogeneous products
• Profit Leverage
• 5 cost reduction ? more than 5 revenue increase

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How?
Physical Distribution (40)
Procurement (30)
Customer
Vendor
Operations (30)
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• Physical Distribution
• 1950s1960s
• Focus to meet customer expectation at lowest
  possible cost
• Why the integration process started with finished
  goods
• The Largest single segment on inventory(40)
• Directly impacts customer service
• Without venturing into production processes
• Low risk, high gain
• Limitation
• Internal Linkages
• Around 1985
• 60100 of the firm's total inventory could be
  better managed
• Elimination of buffer inventories between loops
• External Linkages
• Efficiencies in relationships with vendors,
  customers, third parties
• EDI, JIT, DRP

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Future-two trends

• Cycles-time-to-market
• Removal of time
• Reducing the design-build-ship cycle
• Process setup elimination
• Supply Chain Management
• Last half of the 1990s2000s
• Both internal and external units are forged
  together
• Low-cost and high-value performance to the
  consumer
• More responsive inventory systems

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The Achilles Heel of SCM
Ananth Raman Pro. at Harvard Business School in
Boston Nicole DeHoratius, Zeynep Ton Doctoral
candidates at HBS Harvard Business Review
(JulyAugust 2000)
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New technology

• Retailer

• Automatically track the flow of goods
• Electronically transmit replenishment orders
• Fewer stockouts

• Bar code scanners
• Electronic inventory

• Supplier

• Synchronize production schedules to real-
• time demand data
• Fewer inventory

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Data Inaccurate

• Data error
• 35 leading retailer - 2/3 of SKU
• Reduced the companys overall profits by 10
• Phantom stockouts
• Employees routinely put products in the wrong
  places
• 16 stockouts but the items available
• Why?
• Human nature
• Retailers distribution centers
• Wrong quantities for 29 of the SKUs, deviation
  from actual supplies of 25
• Items shipped in error that cost less than a
  certain amount
• Most stores perform audits solely for financial
  reasons, to measure the shrink of goods that
  have been lost or pilfered.
• Measure inventory by dollar value, not by item

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What is the Right Supply Chain for Your Product?
Marshall L.Fisher Wharton School University of
Pennsylvania, Philadelphia, Pennsylvania Harvard
Business Review (MarchApril 1997)
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Introduction

• Global competition
• Faster product development
• Variety of products

New Concept
New Technology

• Point-of-sale scanners
• Electronic data interchange
• Flexible manufacturing
• Automated warehousing
• Rapid logistic

• Quick response
• Efficient consumer response
• Accurate response
• Mass customization
• Lean manufacturing
• Agile manufacturing

But

• Excess and shortage of products
• Markdowns and stockouts
• ex) U.S. food industry, poor coordination is
  wasting 30billion

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First step-Product

• Nature of the demand

Type Functional Innovative
Aspects of Demand Predictable Unpredictable
Product life cycle more than 2 years 3 month 1year
Contribution margin 520 2060
Product variety low(1020) high(often millions)
Error in forecast 10 40100
Stockout rate 12 1040
Markdown 0 1025
Lead time required for made-to-order products 6month1year 1day2weeks
Example Gro Fashion apparel
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Second step-Supply chain

• Physical function
• Function
• Converting raw materials into parts, component,
  finished goods
• Transporting all of them from one point in the
  supply chain to next
• Cost
• Production, transportation, inventory storage
• Market mediation function
• Function
• matched what consumers want to buy
• Cost
• markdown, stockouts dissatisfied customer

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• Supply Chain focus

Type Physically Efficient Process Market-Responsive Process
Primary purpose at lowest possible cost minimize stockouts markdowns
Manufacturing focus maintain high average utilization deploy excess buffer capacity
Inventory strategy high turns, minimum inventory deploy significant buffer stocks
Lead-time shorten lead time as long as it doesnt increase cost invest aggressively in ways to reduce lead time
Choosing suppliers cost and quality speed, flexibility, quality
Product-design maximize performance, minimize cost modular design in order to postpone product differentiation
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Third step-Matching

• Matching Supply Chains with Products

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Case

• Efficient supply of functional products
• Campbell Soup
• 5 of products are new
• Highly predictable,
• More than 98 service level
• Responsive supply of innovative products
• Obermeyer
• 95 of products new
• 200 forecast error

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• Functional ? Innovative
• Why?
• customer needs
• to avoid low margin
• Automobile
• Many options(color, interior,configuration,..)?act
  ually 20 million versions
• Full option lead time8 weeks? 90 customer buy
  the car off the lot
• needs responsive supply chain
• Innovative ? Functional
• Computer
• 20 years ago,IBM 360 mainframe 14-month lead time
  
• Now lead time dropped to days by physical
  efficiency

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Making Supply Meet Demand in an Uncertain World
Marshall L.Fisher Wharton School University of
Pennsylvania, Philadelphia, Pennsylvania Janice
H. Hammond, Ananth Raman Harvard Business School
Walter R.Obermeyer a principal of Sport
Obermeyer Ltd. , in Aspen, Colorado, a graduate
of the Harvard Harvard Business Review (MayJune
1994)
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Introduction

• global competition
• faster product development
• variety of products

• inaccurate forecast
• markdown, stockouts

New concept

• fast direct response to demand Quick response,
  JIT
• MRP rapidly change the schedules

Limitation

• too large capacity in order to response to actual
  demand
• dependent on an unresponsive suppliers
• the supply chain has already been filled based on
  the old one

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Markdowns
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Why?

• Problems
• Most companies still treat the world as if it
  were predictable
• Poor job of incorporating demand uncertainty into
  their production planning processes
• Design their planning processes as if that
  initial forecast truly represented reality. why?
• its complicated to factor multiple demand
  scenarios into planning
• most companies simply dont know how to do it
• Frequent introductions of new products have two
  side effects
• reduce the average lifetime of products
• demand is divided over a growing number of SKUs
• ex) GM Cadillac(Seville and Eldorado) vs. Buicks
  and Olds mobiles

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• Accurate response
• Improve forecast
• Redesign planning processes to minimize the
  impact of inaccurate forecasts

costs per unit of stockouts and markdowns, missed
opportunity cost
predictable well
make in advance
unpredictable
postpone decisions, early in the selling season
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Case - Sport Obermeyer

• Obermeyer
• leading suppliers in the US fashion sky apparel
  market
• newly designed each year
• difficult to predict weather, fashion, trends,
  economy

Until the mid-1980s

• design and show samples to retailers in March
• place production orders with suppliers in March
  April
• receive goods an D/C in SeptemberOctober
• ship to retail outlets

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Limitations

• First step Shorten lead time - Quick response
• Computerized systems order process time, time
  to compute material requirements
• Anticipate what materials it would require
• pre-position in a warehouse
• Air freight to expedite delivery
• Early Write
• persuaded some of important retailer customers to
  place orders sooner
• 20 of total sales
• Second step Improving forecast
• Buying committee
• Group of company managers from a range of
  functional area
• Sales exceed by 200, less than 15 of the
  forecast

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Accurate response

• Changing Buying committee
• Single consensus forecast for each style and
  color
• ? Each member makes an independent forecast for
  each style and color

Accuracy Pandora gt Entice
forecasts
?A way to estimate which styles were accurately
forecast
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Accurate response

• Update Early Write order
• Overall buying patterns of retailers were
  remarkably similar
• Updating the buying committees forecasts using
  Early Write

sales
sales
Early Writer 20 Updating
80 Updating
initial forecasts
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Accurate response

• Risk-based production sequencing

non reactive capacity

• Demand forecast are most accurate

Early Write
reactive capacity

• market signals

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Accurate response

• Mathematical Model
• stockout and markdown cost 10.2? 1.8

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Accurate response

• Redesign
• reduced the variety of zippers used (color,
  length)
• use the same kinds of raw materials
• Tracking forecasting errors

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Mass Customization at HP
Edward Feitzenger a process-technology manager at
the HP Hau L.Lee Industerial engineering and
engineering management, Stanford
University Harvard Business Review (12 1997)
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Introduction

• orders be fulfilled ever more quickly
• highly customized products and services

Postponing the task of differentiating a product

• Organizational-design principles
• Product
• Process
• Supply network

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Modular Product Design

• Modular Design
• Flexibility, quickly, inexpensively
• Common components, differential components
• Benefits
• Maximize the number of standard components
• assemble those common components earlier stage
• postpone the differential components
• The modules of the product separately, possible
  at the same time
• shortens the total time required for production
• Easily diagnose production problems, isolate
  potential quality problems
• Considerations
• Cost of materials lt benefits of standardization(
  lead time, inventory, stockout)

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• Example Printer
• Universal power supply(Europe and North America
  LaserJet) 5
• Postpone the assembly(Europe and Asia DeskJet)
• customization at local D/C(Europe) rather than at
  factories(Singapore)
• country-specific power supply, packaging, manuals
  25

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• generic DeskJet printer for both Mac and Do

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Modular Process Design

• Modular process
• breaking down into independent sub processes
• flexibility
• Process postponement
• ex) paint store a broad range of different
  paints ? color pigments
• ex) retail apparel industry body-measurement
  processcut-and-sew process
• specific garment instead of stock in all sizes
  and colors, eliminating discounts
• relatively low-cost raw fabrics
• Process resequencing
• ex) Benetton dyeing, knitting ? knitting, dyeing
• ex) HP disk driver inserting printed circuit
  board, testing disk driver
• ? standard tests
  customized tests
• Process standardization

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Agile Supply Network

• Redesign network
• Optimum number and location of factories and D/C
• Multi-function warehouse
• perform light manufacturing

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The Power of Virtual Integration
Joan magretta Harvard Business Review (1998)
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The Evolution of a faster business model
The dominant model in the PC industry
A Value chain with arms-length transactions from
one layer to the next
suppliers
manufacturer
D/C
customer
Dells direct model
Eliminated the time and cost of third-party
distribution
customer
suppliers
manufacturer
Virtual integration
Blurring the traditional boundaries and roles in
the value chain
suppliers
suppliers
manufacturer
customer
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Fast-cycle segmentation

• Fast-cycle segmentation
• The finer the segmentation, the better forecast
  what customer needs and when

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Inventory Strategy
How fast its moving
How much inventory there is
80 days inventory
11 days inventory
vs.

• The cost of materials goes down 50 a year
• New computers gets to market 69 days sooner

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Conclusion