Supply Chain Management Introduction

1
Supply Chain Management Introduction
2
Outline

• What is supply chain management?
• A supply chain strategy framework
• Components of a SCM
• Major obstacles and common problems
• Seven Eleven Japan

3
Traditional View Supply Chains in the Economy
(1990, 1996)

• Freight Transportation 352, 455 B
• Transportation manager in charge
• Transportation software
• Inventory Expense 221, 311 B
• Inventory manager in charge
• Inventory software
• Administrative Expense 27, 31 B
• Logistics related activity 11, 10.5 of GNP

Transportation and inventory managers

• 898 B spent domestically for SC activities in
  1998.
• 1,160 B of inventory in the US economy in the
  early 2000s.

4
Traditional View Cost breakdown of a
manufactured good

• Profit 10
• Supply Chain Cost 20
• Marketing Cost 25
• Manufacturing Cost 45

Effort spent for supply chain activities are
invisible to the customers.
5
What can Supply Chain Management do?

• Estimated that the grocery industry could save
  30 billion (10 of operating cost) by using
  effective logistics and supply chain strategies
• A typical box of cereal spends 104 days from
  factory to sale
• A typical car spends 15 days from factory to
  dealership
• Faster turnaround of the goods is better?
• Laura Ashley (retailer of women and children
  clothes) turns its inventory 10 times a year five
  times faster than 3 years ago
• inventory is emptied 10 times a year, or an item
  spends about 12/10 months in the inventory.
• To be responsive, it relocated its main warehouse
  next to FedEx hub in Memphis, TE.
• National Semiconductor used air transportation
  and closed 6 warehouses, 34 increase in sales
  and 47 decrease in delivery lead time.

6
Magnitude of Supply Chain Management

• Compaq estimates it lost 0.5 B to 1 B in sales
  in 1995 because laptops were not available when
  and where needed
• PG (ProctorGamble) estimates it saved retail
  customers 65 M (in 18 months) by collaboration
  resulting in a better match of supply and demand
• When the 1 gig processor was introduced by AMD
  (Advanced Micro Devices), the price of the 800
  meg processor dropped by 30

7
Importance of SCM understood by some

• AMR Research
• "The biggest issue enterprises face today is
  intelligent visibility of their supply
  chains-both upstream and down"
• Forrester Research
• "Companies need to sense and proactively respond
  to unanticipated variations in supply and demand
  by adopting emerging technologies such as
  intelligent agents. To boost their operational
  agility, firms need to transform their static
  supply chains into adaptive supply networks
• Gartner Group
• By 2004, 90 of enterprises that fail to apply
  supply-chain management technology and processes
  to increase their agility will lose their status
  as preferred suppliers
• Open ended statement. Agility can be increased
  continuously.

8
Top 25 Supply Chains
AMR research http//www.amrresearch.com publishes
reports on supply chains and other issues. The
Top 25 supply chains report comes out in
Novembers. The table on the right-hand side is
from The Second Annual Supply Chain Top 25
prepared by Kevin Riley and Released in November
2005.
9
SCM Generated Value

• Minimizing supply chain costs
• while keeping a reasonable service level
• customer satisfaction/quality/on time
  delivery, etc.
• This is how SCM contributes to the bottom line
• SCM is not strictly a cost reduction paradigm!

10
A picture is better than 1000 words!How many
words would be better than 3 pictures?

• - A supply chain consists of

- aims to Match Supply and Demand, profitably
for products and services
- achieves
11
Detergent supply chain
Customer wants detergent
Albertsons Supermarket
Third party DC
PG or other manufacturer
Plastic cup Producer
Tenneco Packaging
Chemical manufacturer (e.g. Oil Company)
Chemical manufacturer (e.g. Oil Company)
Paper Manufacturer
Timber Industry
12
Flows in a Supply Chain
Material
Information
Customer
Supplier
Funds
The flows resemble a chain reaction.
13
SCM in a Supply Network

• Supply Chain Management (SCM) is concerned with
  the management and control of the flows of
  material, information, and finances in supply
  chains.

• The task of SCM is to design, plan, and execute
  the activities at the different stages so as to
  provide the desired levels of service to supply
  chain customers profitably

14
Importance of Supply Chain Management

• In 2000, the US companies spent 1 trillion (10
  of GNP) on supply-related activities (movement,
  storage, and control of products across supply
  chains). Source State of Logistics Report

• Eliminating inefficiencies in supply chains can
  save millions of .

15
A Generic Supply Chain
Sources plants vendors ports
Regional Warehouses stocking points
Field Warehouses stocking points
Customers, demand centers sinks
Supply
Inventory
Purchase
Inventory
Transportation
16
Cycle View of Supply Chains
17
Push vs Pull System

• What instigates the movement of the work in the
  system?
• In Push systems, work release is based on
  downstream demand forecasts
• Keeps inventory to meet actual demand
• Acts proactively
• e.g. Making generic job application resumes today
  (e.g. exempli gratia)
• In Pull systems, work release is based on actual
  demand or the actual status of the downstream
  customers
• May cause long delivery lead times
• Acts reactively
• e.g. Making a specific resume for a company after
  talking to the recruiter

18
Push/Pull View of Supply Chains
Procurement,
Customer Order
Manufacturing and
Cycle
Replenishment cycles
PUSH PROCESSES
PULL PROCESSES
Customer
Order Arrives Push-Pull boundary
19
Examples of Supply Chains

• Dell / Compaq
• Dell buys some components for a product from its
  suppliers after that product is purchased by a
  customer. Extreme case of a pull process
• Zara, Spains answer to Italys Benetton
• Sells apparel with a short design-to-sale cycle,
  avoids markdowns.
• Toyota / GM / Volkswagen, in the course notes
• McMaster Carr / W.W. Grainger, sell auto parts
• Amazon / Barnes and Noble
• Frozen food industry/Fast food industry/5 star
  restaurants
• Internet shopping Webvan / Peapod

20
SCM Strategy
21
Mission-Strategy-Tactics-Decisions

• Mission, Mission statement
• The reason for existence of an organization
• Strategy
• A plan for achieving organizational goals
• Tactics
• The actions taken to accomplish strategies
• Operational decisions
• Day to day decisions to support tactics

22
Life Strategy for Ted

• Ted is an undergrad. He would like to have a
  career in business, have a good job, and earn
  enough income to live comfortably
• Mission Live a good life
• Goal Successful career, good income
• Strategy Obtain a masters degree
• Tactics Select a college and a concentration
• Operations Register, buy books, take
  courses, study, graduate, get a job

23
Linking SC and Business Strategy
Competitive (Business) Strategy

• Product Development Strategy
• Portfolio of products
• Timing of product introductions

Marketing Strategy -Frequent discounts -Coupons
Supply Chain Strategy
Finance, Accounting, Information Technology,
Human Resources
24
Strategies Product Development

• It relates to Technologies for future operations
  (via patents) and Set of products/services
• Be the technology leader
• IBM workstations
• Offer many products
• Dell computers
• Offer products for locals
• Tatas Nano at 2500100000 rupees
• Production at Singur, West Bengal, India
• l x w x h3.1 x 1.5 x 1.6 meters
• Top speed 105km/hr
• Engine volume 623 cc
• Mileage 50 miles/gallon
• Annual sales target 200,000.

25
Strategies

• Marketing and sales strategy relates to
  positioning, pricing and promotion of
  products/services
• e.g. Never offer more than 40 discount
• e.g. EDLP every day low price
• At Wal-Mart
• e.g. Demand smoothing via coupons
• BestBuy
• Supply chain management strategy relates to
  procurement, transportation, storage and delivery
• e.g. Never use more than 1 supplier for every
  input
• e.g. Never expedite orders just because they are
  late
• e.g. Always use domestic suppliers within the
  sales season not in advance.

26
Fitting the SC to the customer or vice versa?

• Understand the customer Wishes
• Understand the Capabilities of your SC
• Match the Wishes with the Capabilities
• Challenge How to meet extensive Wishes
• with limited Capabilities?

27
Achieving Strategic Fit Consistent SCM and
Competitive strategies

• Fit SC to the customer
• Understanding the Customer
• Range of demand, pizza hut stable
• Production lot size, seasonal products
• Response time, organ transplantation
• Service level, product availability
• Product variety
• Innovation
• Accommodating
• poor quality

Implied (Demand) Uncertainty for SC Implied
trouble for SC
28
Contributors to Implied Demand Uncertainty
Commodities Detergent Long lead time steel
Customized products High Fashion
Clothing Emergency steel, for
maintenance/replacement
Price
Responsiveness
Customer Need
Low
High
Implied Demand Uncertainty
Short lead times, product variety, distribution
channel variety, high rate of innovation and
high customer service levels all increase the
Implied Demand Uncertainty
29
Understanding the Supply Chain
Cost-Responsiveness Tradeoff
Responsiveness (in time, high service level and
product variety)
High
Efficiency frontier
Inefficient
Impossible
Fix responsiveness
Inefficiency Region
Low
Cost in
High
Low
Why decreasing slope (concave) for the efficiency
frontier?
30
Achieving Strategic Fit Wishes vs. Capabilities
Responsive (high cost) supply chain
Gourmet dinner ltHigh margingt
Responsivenesspectrum
Zone of Strategic Fit
Lunch buffet ltLow margingt
Efficient (low cost) supply chain
Implied uncertainty spectrum
Certain demand
Uncertain demand
31
Loosing the strategic fit Webvan

• Webvan started a merger with HomeGrocer in Sept
  2000 and completed in May 2001.
• Declared bankruptcy in July 2001. Why?
• Webvan was so behemoth that could deliver
  anything to anyone anywhere that it lost sight of
  a more mundane task pleasing grocery customers
  day after day.
• Short to midterm cash mismanagement. Venture
  capital of 1.2 B run out.
• Merger costs duplicated work force, integration
  of technology, realignment of facilities.
• Peapod has the same business model but more
  focused in terms of service and locations. It
  actually survives with its parent company Royal
  Aholds (Dutch Retailer) cash.
• Delivers now at a fee of 6.95 within a day.

32
Top 10 Retailers Reported in 2008 First 4
Source www.deloitte.com/dtt/cda/doc/content/dtt_20
08globalpowersofretailing.pdf
33
Top 10 Retailers Reported in 2008 First 5-10
34
Big retailers Strategy

• Wal-Mart Efficiency
• Target More quality and service
• Carrefour International, ambiance
• K-Mart Confused.
• Squeezed between Target and Wal-Mart
• Reliance on coupon sales
• Do coupons stabilize or destabilize a Supply
  chain?
• K-Mart and Sears merged in November 2004. Now
  called Sears Holdings.
• K-Mart gets cash
• Sears gets presence outside malls

35
Other Factors

• Multiple products in a SC. Multiple customers for
  a given product
• Separate supply chains or Tailored supply chains
• e.g. Barnes and Noble Retailing and/or e-tailing
• Product and/or customer classes
• e.g. UTD library loans books for 6 months (2
  weeks) to faculty (students)
• Customer segmentation by pricing
• Competitors more, faster and global
• UTD online programs compete globally
• Product life cycle (shortening)
• SCM strategy moves toward efficiency and low
  implied uncertainty as products age
• e.g. Air travel is becoming more efficient
• e.g. Southwest airlines lead the drive for
  efficiency
• e.g. Airbus announced A380 accommodating 555-800
  people on Jan 17, 2005.
• e.g. Flat screen TV producer of AU Optronics of
  Taiwan was looking for ways to make its SC more
  efficient in June 2004.
• Replacement sales
• Selling to replace broken units.
• e.g. AC replacement is about 50 of the market.
• Macroeconomic factors for visibility
• Forecasting Home Depot sales from SP 500 price
  index.

36
Achieving Strategic Fit over a Lifecycle
Responsive (high cost) supply chain
Zone of Strategic Fit
Efficient (low cost) supply chain
Certain demand
Uncertain demand
37
Integration

• Integration is the central theme in SCM
• Building synergies by integrating business
  functions, departments and companies

38
Strategic Scope
Manufacturer
Distributor
Retailer
Customer
Suppliers
Competitive Strategy
Product Dev. Strategy
Supply Chain Strategy
Marketing Strategy
39
Supply Chain Drivers and Obstacles
40
Drivers of Supply Chain Performance
How to achieve
Efficiency
Responsiveness
Supply chain structure
Logistical Drivers
Inventory
Transportation
Facilities
Cross- Functional Drivers
Information
Sourcing
Pricing
41
1. Inventory

• Convenience Cycle inventory
• No customer buys eggs one by one
• Unstable demand Seasonal inventory
• Bathing suits
• Xmas toys and computer sales
• Randomness Safety inventory
• 20 more syllabi than the class size were
  available in the first class
• Compaqs loss in 95
• Pipeline inventory
• Work in process or transit

42
Littles law

• Long run averages Expected values
• I R . T
• IPipeline inventory
• Routput per timethroughput
• Tdelay timeflow time
• Flow time? Thruput? Pipeline (work in process)
  Inventory?

10/minute
Spend 1 minute
43
2. Transportation

• Air
• Truck
• Rail
• Ship
• Pipeline
• Electronic

44
3. Facilities

• Production
• Flexible vs. Dedicated
• Flexibility costs
• Production Remember BMW a sports car disguised
  as a sedan
• Service Can your instructor teach music as well
  as SCM?
• Sports A playmaker who shoots well is rare.
• Inventory-like operations Receiving,
  Prepackaging, Storing, Picking, Packaging,
  Sorting, Accumulating, Shipping
• Job Lot Storage Need more space. Reticle storage
  in fabs.
• Crossdocking Wal-Mart

45
4. Information

• Role in the supply chain
• The connection between the various stages in the
  supply chain
• Crucial to daily operation of each stage in a
  supply chain
• E.g., production scheduling, inventory levels
• Role in the competitive strategy
• Allows supply chain to become more efficient and
  more responsive at the same time (reduces the
  need for a trade-off)
• Information technology
• Andersen Windows
• Wood window manufacturer, whose customers can
  choose from a library of 50,000 designs or create
  their own. Customer orders automatically sent to
  the factory.

46
Characteristics of the Good Information
Strategy
Analytical Models

• Information
• Accurate?
• Accessible?
• Up-to-date?
• In the Correct form?
• If not, database restricted ability. How
  difficult is it to import data into SAP?

47
Quality of Information

• Information drives the decisions
• Good information means good decisions
• IT helps MRP, ERP, SAP, EDI
• Relevant information?
• How to use information?

48
Information Technology in a Supply Chain Legacy
Systems
49
Information Technology in a Supply Chain ERP
Systems
Strategic
Planning
ERP
Potential
Potential
Operational
ERP
ERP
Supplier
Distributor
Manufacturer
Customer
Retailer
50
Information Technology in a Supply Chain
Analytical Applications
Strategic
SCM
Transport Inventory
Planning
Dem Plan
APS
Planning
Supplier
Apps
CRM/SFA
Transport execution
MES
WMS
Operational
Supplier
Customer
Retailer
Distributor
Manufacturer
51
ERP Systems

• Wider focus
• Push (MRP) versus Pull (demand information
  transmitted quickly throughout the supply chain)
• Real-time information
• Coordination and Information sharing
• Transactional IT
• Expensive and difficult to implement
• About 25 of ERP installations are cancelled
  within a year
• About 70 of ERP installations go over the budget

52
IT Push
53
Supply Chain Software PushSee Top 100 under
/articles.html
Source Kanakamedala, Ramsdell, Srivatsan (2003).
McKinsey Quarterly, No 1.
54
5. Sourcing

• Role in the supply chain
• Set of processes required to purchase goods and
  services in a supply chain
• Supplier selection, single vs. multiple
  suppliers, contract negotiation
• Role in the competitive strategy
• Sourcing is crucial. It affects efficiency and
  responsiveness in a supply chain
• In-house vs. outsource decisions- improving
  efficiency and responsiveness
• TI More than half of the revenue spent for
  sourcing.
• Cisco sources Low-end products (e.g. home
  routers) from China.
• Components of sourcing decisions
• In-house versus outsource decisions
• Supplier evaluation and selection
• Procurement process
• Every department of a firm buy from suppliers
  independently, or all together.
• EDS to reduce the number of officers with
  purchasing authorization.

55
6. Pricing

• Role in the supply chain
• Pricing determines the amount to charge customers
  in a supply chain
• Pricing strategies can be used to match demand
  and supply
• Price elasticity Do you know yours?
• Role in the competitive strategy
• Use pricing strategies to improve efficiency and
  responsiveness
• Low price and low product availability vary
  prices by response times
• Amazon Faster delivery is more expensive
• Components of pricing decisions
• Pricing and economies of scale
• Everyday low pricing versus high-low pricing
• Fixed price versus menu pricing, depending on the
  product and services
• Packaging, delivery location, time, customer pick
  up
• Bundling products products and services

56
Considerations for Supply Chain Drivers
57
Major Obstacles to Achieving Fit

• SC is big
• Variety of products/services
• Spoiled customer
• Multiple owners (Procurement, Production,
  Inventory, Marketing) / multiple objectives
• Globalization

Local optimization and lack of global fit
58
Major Obstacles to Achieving Fit

• Dealing with Multiple Owners / Local Optimization
• Information Coordination
• Information sharing / Shyness / Legal and ethical
  issues
• Contractual Coordination
• Mechanisms to align local objectives with global
  ones
• Coordination with (real) options
• Rare in the practice
• Without coordination, misleading reliance on
  metrics
• Average safety inventory, Average incoming
  shipment size, Average purchase price of raw
  materials, Revenue

59
Major obstacles to achieving fit

• Instability and Randomness
• Increasing product variety
• Shrinking product life cycles
• Customer fragmentation Push for customization,
  segmentation
• Fragmentation of Supply Chain ownership
  Globalization

Increasing implied uncertainty
60
Common problems

• Lack of relevant SCM metrics How to measure
  responsiveness?
• How to measure efficiency, costs, worker
  performance, etc?
• Poor inventory status information
• Theft Major problem for furniture retailers.
• Transaction errors Retailers with inaccurate
  inventory records
• for 65 of SKUs
• Information delays, dated information,
  incompatible info. systems
• Misplaced inventory 16 of items cannot be found
  at a major retailer
• Spoilage active ingredients in the products are
  losing their properties
• Product quality and yield
• Lack of visibility in SCs
• Do you know the inventory your distribution
  centers hold?
• Do you know the inventory your fellow retailer
  holds?

61
Common problems

• Poor delivery status information
• Not knowing the order status
• Poor IT design
• Unreliable, duplicate data
• Security problems too much or too little
• Ignoring uncertainties
• The flight from uncertainty and ambiguity is so
  motivated that we often create pseudocertainty.
• Nitin Nohra, HBR February 2006 issue, p.40.
• Internal customer discrimination
• Giving lower priority to internal customers than
  external customers
• Poor integration
• Elusive inventory costs
• Accounting systems do not capture opportunity
  costs
• SC-insensitive product design

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Summary

• Supply Chain Introduction
• Competitiveness / Business strategy / SCM
  strategy
• Components
• Inventory, Transportation, Facilities,
  Information, Sourcing, Pricing
• Challenges

63
Seven Eleven Japan (SEJ)

• A Case Study

64
Factual Information on Seven Eleven Japan (SEJ)

• Largest convenience store in Japan with market
  value of 95 B. The third largest retail company
  in the world after Wal-Mart and Home Depot.
• Established in 1974.
• In 2000, total sales 18,000 M, profit 620 M.
• Average inventory turnover time 7-8.5 days.
• Stock value increased by 3000 times from 1974 to
  2000.
• In 1985, there were 2000 stores in Japan,
  increasing by 400-500 per year.
• Return on equity 14 over 2000-2004.
• A SEJ store is about the half the size of a US
  7-eleven store,
• that is about 110 m2.
• Sales
• Products
• 32.9 Processed food drinks, noodles, bread and
  snacks
• 31.6 Fast food rice ball, box lunch and
  hamburgers
• 12.0 Fresh food diary products
• 25.3 Non-food magazines, ladies stockings and
  batteries.
• Services Utility bill paying, installment
  payments for credit companies, ATMs, photocopying

65
More on SEJ

• More factual info
• Average sales about twice of an average US store
• SKUs offered in store Over 3,000 (change by
  time of day, day of week, season)
• Virtually no storage space
• No food cooking at the stores
• Japanese Images of Seven Eleven
• Convenient
• Cheerful and lively stores
• Many ready made dinner items I buy
• Famous for its great boxed lunch and dinner
• - On weekends, when I was single, I went to buy
  lunch and dinner
• SC strategy
• Micro matching of supply and demand (by location,
  time of day, day of week, season)

66
Seven Eleven - Number of Stores
1999 8,027 2004 10,356
67
Seven Eleven - Net Sales (B Yen)Sales 1,963 B
Yen in 2000
68
Seven Eleven - Pre tax Profit (B Yen)
69
Seven Eleven - Inventory turnover (days)
70
Information Strategy

• Quick access to up to date information (as
  opposed to data)
• In 1991, SEJ implemented Integrated Service
  Digital Network to link stores, headquarter, DCs
  and suppliers
• Customer checkout process
• Clerk records the customers gender, (estimated)
  age and purchased items. These Point of Sales
  (POS) data are transmitted to database at the
  headquarters.
• Store hardware Store computer, POS registers
  linked to store computer, Graphic Order
  Terminals, Scanner terminals for receiving
• Daily use of the data
• Headquarters aggregate the data by region,
  products and time and pass to suppliers and
  stores by next morning. Store managers deduce
  trend information.
• Weekly use of the data
• Monday morning, the CEO chairs a weekly strategy
  formulation meeting attended by 100 corporate
  managers.
• Tuesday morning, strategies are communicated to
  Operation Field Counselors who arrive in Tokyo on
  Monday night.
• Tuesday afternoon, regional elements (e.g.
  weather, sport events) are factored into the
  strategy. Tuesday nights, field counselors return
  back to their regions.

71
(No Transcript)
72
Information Analysis of POS Data

• Analysis of
• Sales for product categories over time
• SKU (stock keeping unit)
• Waste or disposal
• 10 day (or week) sales trend by SKU
• Sales trends for new product
• In the early 1990s, half-prepared fresh noodle
  sales were going up,
• new fresh noodle products were quickly developed
  
• Sales trend by time and day
• Different sales patterns for different sizes of
  milk at different times of the day results in
  rearrangement of the milks in the fridge.
  Extreme store micromanagement.
• Let us speculate Flavored milks are put in front
  of the pure milks in the evening (or the
  morning?).
• List of slow moving items
• About half of 3000 SKUs are replaced by new ones
  every year

73
Facilities Strategy

• Limited storage space at stores which have only
  125-150 m2 space
• Frequent and small deliveries to stores
• Deliveries arrive from over 200 plants.
• Products are grouped by the cooling needs
• Combined delivery system frozen foods, chilled
  foods, room temperature and hot foods.
• Such product groups are cross-docked at
  distribution centers (DC). Food DCs store no
  inventory.
• A single truck brings a group of products and
  visits several stores within a geographical
  region
• Aggregation No supplier (not even coke!)
  delivers direct
• The number of truck deliveries per day is reduced
  by a factor of 7 from 1974 to 2000. Still, at
  least 3 fresh food deliveries per day. Goods are
  received faster with the use of scanners.
• Have many outlets, at convenient locations, close
  to where customers can walk
• Focus on some territories, not all When they
  locate in a place they blanket (a.k.a.
  clustering) the area with stores stores open in
  clusters with corresponding DCs.
• 844 stores in the Tokyo region Seven Eleven had
  stores in 32 out of 47 prefectures in 2004. No
  stores in Kobe.
• Success rate of franchise application lt 1/100

74
The Present and the Future

• Is food preparation a good idea at 7-eleven
  locations?
• e.g. Compare microwave heating vs. salad
  preparation.
• Why SEJ does not allow direct delivery from
  suppliers to retailers?
• Point out which of the following strategies can
  also be used in US (or Taiwan)
• Information strategy
• Facilities strategy
• Discuss the differences between the Japanese and
  US (or Taiwanese) consumers with regard to
• Frequency and amount of grocery purchase
• Use of credit cards vs. cash for purchase
• 7-eleven inventory turnover rate is 50 in Japan
  and 19 in the USA.
• 7-eleven growing rapidly in the US so it aims to
  be a web depot in both the US and Japan. Does
  this make sense from a supply chain perspective?
• Cost vs. Responsiveness
• Business strategy
• What is the risk of micro-matching strategy?
• No direct deliveries to SEJ, what is the
  potential risk of this strategy if used in the
  USA?

75
Deloitte 2008 Global Retailers Survey

• Excerpts from www.deloitte.com/dtt/cda/doc/content
  /dtt_2008globalpowersofretailing.pdf
• Downloaded on Jan 30, 2008.