Supply Chain Management

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Supply Chain Management
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SUPPLY CHAIN MANAGEMENT

• Value Chain
• Supply side- raw materials, inbound logistics and
  production processes
• Demand side- outbound logistics, marketing and
  sales.

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WHAT IS SUPPLY CHAIN MANAGEMENT
Leads to Business Process Integration
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• Supply chain is the system by which organizations
  source, make and deliver their products or
  services according to market demand.
• Supply chain management operations and decisions
  are ultimately triggered by demand signals at the
  ultimate consumer level.
• Supply chain as defined by experienced
  practitioners extends from suppliers suppliers
  to customers customers.

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• SUPPLY CHAIN INCLUDES
• MATERIAL FLOWS
• INFORMATION FLOWS
• FINANCIAL FLOWS

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• SUPPLY CHAIN MANAGEMENT IS FACILITATED BY
• PROCESSES
• STRUCTURE
• TECHNOLOGY

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• Supply chain serves two functions
• Physical
• Market mediation

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• Supply chain objectives may differ from situation
  to situation.
• For functional products, cost efficiency is the
  critical factor.
• For innovative products, responsiveness is the
  important factor.
• Leanness Agility together make up Leagility

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Supply Chain Structure
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• Supply Chain and Demand Chain
• Demand chain is defined as the system by which
  organizations manage sales and distribution of
  products and services to end users.
• Conceptually incorrect to look at demand chain
  separately
• Look at the pipe as a whole.

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• But is there a pipe at all?
• More a network
• Not necessarily linear
• Value chain orchestration rather than controlling
  the flow through the pipe
• A network of independent and interdependent
  organizations mutually and cooperatively working
  together to control, manage and improve the flow
  of materials and information from suppliers to
  end users

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• SUPPLY CHAIN DRIVERS
• Not new. Value system of Michael Porter
• Why sudden interest?
• Demanding customers
• Shrinking product life cycles
• Proliferating product offerings
• Growing retailer power in some cases
• Doctrine of core competency
• Emergence of specialized logistics providers
• Globalization
• Information technology

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SUPPLY CHAIN ELEMENTS
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• Supply Chain Goals
• Efficient supply chain management must result in
  tangible business improvements. It is
  characterized by a sharp focus on
• Revenue growth
• Better asset utilization
• Cost reduction.

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Supply Chain Management Underlying Principles
C
Compression
(Planning/Manufacturing/Supply)
Conformance
(Forecasts/Plans/Distribution)
Co-operation
(Cross -Functional)
(Real Time Data)
Communication
Reduce Overall Cycle Time Improve Response
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• Changing Paradigm
• Functional vs Process
• Products vs Customers
• Revenues vs Performance
• Inventory vs Information
• Transactions vs Relationships

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• Critical Success Factors today
• Cross functional management and planning skills
• Ability to define, measure and manage service
  requirements by market segment
• Information systems
• Relationship management and win win orientation

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• PUTTING IN PLACE A WELL OILED SUPPLY CHAIN
• Supply chain as an efficient customer satisfying
  process
• Effectiveness of the whole supply chain is more
  important than the efficiency of each individual
  department.

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. The steps involved

• Step1- Designing the supply chain
• Determine the supply chain network
• Identify the levels of service required

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• Step 2 - Optimizing the supply chain
• Determine pathways from suppliers to the end
  customer
• Customer markets to Distribution centers
• Distribution centers to production plants
• Raw material sources to production plants
• Identify constraints at vendors, plants and
  distribution centers
• Get the big picture
• Plan the procurement, production and
  distribution of product groups rather than
  individual products in large time periods-
  quarters or years

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• Step 3- Material flow planning
• Determine the exact flow and timing of materials
• Arrive at decisions by working back from the
  projected demand through the supply chain to the
  raw material resources
• Techniques
• ERP

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• Step 4 - Transaction processing and
• short term scheduling
• Customer orders arrive at random
• This is a day to day accounting system which
  tracks and schedules every order to meet customer
  demand
• Order entry, order fulfillment and physical
  replenishment

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• Information flows in Supply Chain Management
• Information is overriding element
• Need for databases
• Master files Information about customers,
  products, materials, suppliers, transportation,
  production and distribution data- do not require
  frequent processing
• Status files- heart of transaction processing-
  track orders and infrastructure status- updated
  daily.
• Essentially using the same information to make
  all plans right from structuring the network to
  processing every day supply chain tasks.

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THE VIRTUAL VALUE CHAIN

• The value chain connects a companys supply side
  with its demand side.
• Traditionally information has been a supporting
  function.
• Information however can be managed far more
  creatively.
• There are various stages of using value added
  information processes.

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• Visibility See physical operations more
  effectively through information. Information can
  be used for effective coordination of value chain
  activities.
• Mirroring capability In this stage, virtual
  activities are substituted for physical ones. A
  parallel value chain is created.
• New customer relationships The company can draw
  on the flow of information in the virtual value
  chain to deliver value to customers in new ways.

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Dealer Management

• Conventional functions
• Inventory ownership and management
• Sales and technical support
• Order handling
• Credit

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• Contemporary Trends
• Channels being divided into two- Fulfillment and
  Franchised agent
• Fulfillment channel- responsible for getting the
  manufacturers product from the plant to the end
  user through a highly efficient logistics and
  inventory management system

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• Contemporary Trends
• Fulfillment channel may not take ownership of the
  product but may perform these functions on a per
  box fee structure
• Franchised agents responsible for sales and sales
  support but will not write the order or supply
  the product

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• Issues in customer management
• Penetration vs Spread
• Concentration is necessary to commit the
  necessary resources for true customer integration
• Depth of customer contact
• RD - sharing information vs developing new
  products together
• Logistics - Pros and cons of methods of
  transportation vs reengineering the logistics
  process

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• Implementation Points to keep in mind
• Recognize the difficulty of change.
• Prepare a blueprint for change that maps linkages
  among initiatives.
• Assess the entire supply chain from supplier
  relationships to internal operations to the
  market place, including customers, competitors
  and industry as a whole.

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IS THE SUPPLY CHAIN WORKING?

• Does our manufacturing strategy increase product
  line flexibility while continuing to drive down
  overall production costs?
• When was the last time we measured lost sales to
  end customers?
• Do we have an efficient system to get POS data
  from retailers?
• Are we testing our products with end customers?
  Do we use the resulting data to adjust our
  forecasting and supply positions?
• Is the ratio of returned orders to sales
  increasing?

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• The New Model of Relationships
• Hard bargaining vs shared destiny
• Exit vs Voice
• Arms length relations vs Involving dealers and
  suppliers in product development
• Piling up vs Replenishing dealer inventory more
  frequently
• In short working together as partners to cut
  costs, boost efficiencies, innovate and share
  value

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• Adversarial vs partnerships
• Short term vs long term contracts
• Large vs small order quantity
• Full truck load vs small parcels
• Inspection vs no inspection

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• Written order vs understanding
• Many vs few suppliers
• Design and then invite quote from vendor vs
  involving vendor in development
• Bargaining, holding cards close to chest vs
  Shared destiny, transparency

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• Summary
• Segmentation of customers based on service needs
• Customization of logistics network
• Listen to signals of market demand and plan
  accordingly.
• Differentiate product close to the customer
• Source strategically
• Develop a supply chain wide technology strategy
• Accept channel spanning performance measures

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• The Bullwhip Phenomenon
• Volatility amplification along the network
• Increase in demand variability as we move
  upstream away from the market
• Mainly because of lack of communication and
  coordination
• Delays in information and material flows

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• Bullwhip effect occurs because of various
  reasons
• Order Batching - Accumulate orders
• Shortage gaming- Ask for more than what is needed
• Demand forecast updating

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• Important points to keep in mind
• Segment customers based on service needs.
• Modify the supply chain to meet these service
  requirements profitably.
• Customize the logistics network.
• Develop forecasts collaboratively involving every
  link of the supply chain.
• Locate the leverage point where the product is
  unalterably configured to meet a single
  requirement
• Delay product differentiation till the last
  possible moment.

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• Assess options such as modularized design or
  modification of manufacturing processes that can
  increase flexibility.
• Cultivate warm relationships with suppliers.
• Efficient supply chain management has to be
  accompanied by a technology strategy.

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ITALIAN CLOTHING MANUFACTURE

• Warehousing and transportation 6
• Inventory 5
• Late delivery returns 2
• Obsolescence 20
• Lost sales 60
• Need to minimize obsolescence costs
• Minimize product range flexibility
• Reduce product development cycle

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Dells Direct Business Model of Virtual
Integration

• Advantages of a tightly coordinated supply chain
  traditionally facilitated by vertical
  integration.
• Combined with focus and specialization.
• Leveraging on investments others have made and
  focusing on delivering solutions and systems to
  customers
• Fewer things to manage - fewer things go wrong
• Suppliers engineers part of Dells Design team
• Have only a few partners

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Dells Direct Business Model of Virtual
Integration

• Share information with partners in Real time
  fashion.
• Stitch together a business with partners that are
  treated as if they are inside the company.
• Change focus from how much inventory there is to
  how fast it is moving
• Assets collect risks around them one way or the
  other.
• Limited or no testing - Eg. Sony Monitors

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Dells Direct Business Model of Virtual
Integration

• Only three Manufacturing centers - Austin,
  Ireland and Malaysia.
• Inventory levels and replenishment needs
  sometimes conveyed to vendors on hourly basis.
• Substitute information for inventory and ship
  only when we have real demand from real end
  customers
• Clever segmentation - Focus on institutional
  markets - 70 to very large customers with annual
  purchases exceeding 1 million.

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Dells Direct Business Model of Virtual
Integration

• Exit from retail business after wrong entry in
  1989.
• Segmentation - closeness to customers and access
  to valuable information.
• Demand forecasting as a critical sales skill
• Help global customers, manage their total
  purchase of PCs by selling them a standard
  product
• Dell server loads software on customers
  computers
• Meet customers needs faster and more efficiently
  than any other model.

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Li and Fung, Hong Kong

• Founded in 1906
• Today 35 offices in 20 countries
• 1997 revenues of 1.7 billion
• Largest export trading company in Hong Kong
• Customers- American and European retailers
• Sources clothing and other consumer goods ranging
  from toys to fashion accessories to luggage

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• Order from Europe
• Buy yarn from Korea
• Weave and dye in Taiwan
• Buy Japanese zippers made in China
• Make the garments in Thailand in five different
  factories
• Pulling apart the value chain and optimizing at
  each step

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• Victor Fung
• Today, assembly is the easy part. The hard
  part is managing your suppliers and the flow of
  parts. Good supply chain management strips away
  time and cost from product delivery cycles. Our
  customers have become more fashion driven,
  working with six or seven seasons a year instead
  of just two or three. Once you move to shorter
  life cycles, the problem of obsolete inventory
  increases dramatically. With customer tastes
  changing rapidly and markets segmenting into
  narrow niches, its not just fashion products
  that are becoming increasingly time sensitive.

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• Endorsement by Stan Shih, CEO, Acer
• Buying right things
• Reaching into suppliers to ensure that certain
  things happen on time and at the right quality
  level.

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• Buyer informs five weeks before delivery.
• Reserve undyed yarn from yarn supplier.
• Lock up capacity in weaving and dyeing mills.
• Outsourcing not same as leaving suppliers to do
  the worrying.
• Single factories are too small to have much
  buying power and to demand faster deliveries from
  suppliers.
• To shorten delivery cycle, need to go upstream to
  organize production.
• Li Fung able to delay commitment to a
  particular fashion trend.

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• Integrated logistics management
• Elimination of consolidators in container
  shipments
• Smokeless factory
• Design
• Procurement
• Inspection of raw materials
• Production planning
• Line balancing
• Inspection of finished goods
• No worker ownership
• No labour management

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• If we dont own factories, can we say we are in
  manufacturing? Absolutely, because of the 15
  steps in the manufacturing value chain, we
  probably do 10.
• Basic operating unit is the division.
• Divisions focused on serving single customers or
  groups of small customers.
• Less emphasis on geographic grouping
• Merchandising decisions decentralized
• Financial controls and operating procedures
  tightly centralized.
• Strong focus on inventory and working capital
  management.

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• As far as I am concerned, inventory is the root
  of all evil. At a minimum, it increases the
  complexity of managing any business. So its a
  word we dont tolerate around here.
• Need for sophisticated information systems. Li
  Fung working to create a database to
  systematically track all supplier relationships.
• Someone might steal our database but when they
  call up a supplier, they dont have the long
  relationship with the supplier that Li Fung
  has. It makes a difference to suppliers when they
  know that you are dedicated to the business, that
  you have been honoring your commitments for 90
  years.

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• Broadening the middle
• Better prices and better margins for customers
• Tackling the soft 3 in the cost structure. 3
  represents the inefficiency in the supply chain
  for a consumer product priced at 4. Look at
  costs throughout distribution channels than just
  in factory

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• Thank You