Supply Chain Management

Chapter 1 Understanding the Supply Chain

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Assist. Prof. F. Uney-Yuksektepe

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What is a Supply Chain?

Consists of all stages involved, directly or indirectly, in fulfilling a customer request SC includes manufacturers, suppliers, transporters, warehouses, retailers, and customers Example: Fig. 1.1 Detergent supply chain (WalMart)

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What is a Supply Chain?

P&G or other manufacturer Wal-Mart or third party DC Wal-Mart Supermarket Customer wants detergent and goes to Wal-Mart

Plastic Producer

Tenneco Packaging

Chemical manufacturer (e.g. Oil Company)

Chemical manufacturer (e.g. Oil Company)

Paper Manufacturer

Timber Industry

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Flows in a Supply Chain

Information Product

Customer
Funds

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What is a Supply Chain?

Customer is an integral part of the supply chain Includes movement of information, funds, and products in both directions Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers All stages may not present in all supply chains (e.g., no retailer or distributor for Dell)
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Supply Chain Stages

Supplier Manufacturer Wholesaler/ Distributer Retailer Customer

Supplier

Manufacturer

Wholesaler/ Distributer

Retailer

Customer

Supplier

Manufacturer

Wholesaler/ Distributer

Retailer

Customer

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Dell Computer
Customer Dells web site assembly plant Dells suppliers Dell

Web site provides the customer with information regarding pricing, product variety and product availability. Customer can enter the order, pay for the product and check the status of the order
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The Objective of a Supply Chain

Maximize overall value created Supply chain value: difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customers request Value is correlated to supply chain profitability (supply chain surplus): difference between revenue generated from the customer and the overall cost across the supply chain
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The Objective of a Supply Chain

Example: Dell receives $2000 from a customer for a computer (revenue) Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) Difference between $2000 and the sum of all of these costs is the supply chain profit Supply chain profitability is total profit to be shared across all stages of the supply chain Supply chain success should be measured by total supply chain profitability, not profits at an individual stage
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The Objective of a Supply Chain

Sources of supply chain revenue: the customer Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability
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Decision Phases of a Supply Chain

Supply chain design, planning and operation decisions play a significant role in the success or failure of a firm. SC decision phases may be categorized as (depending on the time frame during which the decisions made apply)
Supply chain strategy or design Supply chain planning Supply chain operation
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Supply Chain Strategy or Design

Decisions about the structure of the supply chain and what processes each stage will perform Strategic supply chain decisions
Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems

Supply chain design decisions are long-term and expensive to reverse must take into account market uncertainty
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Supply Chain Planning

Definition of a set of policies that govern short-term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year
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Supply Chain Planning

Planning decisions:
Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions

Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon
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Supply Chain Operation

Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating policies are determined Goal is to implement the operating policies as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon)
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Process View of a Supply Chain

Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push)
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Cycle View of Supply Chain Processes

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier
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Cycle View of a Supply Chain

Each cycle occurs at the interface between two successive stages
Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor) Manufacturing cycle (distributor-manufacturer) Procurement cycle (manufacturer-supplier)

Cycle view clearly defines processes involved and the owners of each process. Useful considering operational decisions because it specifies the roles and responsibilities of each member of the supply chain and the desired outcome of each process.
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Customer Order Cycle

Involves all processes directly involved in receiving and filling the customers order
Customer arrival Customer order entry Customer order fulfillment Customer order receiving

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Replenishment Cycle
All processes involved in replenishing retailer inventories (retailer is now the customer)
Retail order trigger Retail order entry Retail order fulfillment Retail order receiving

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Manufacturing Cycle
All processes involved in replenishing distributor (or retailer) inventory
Order arrival from the distributor, retailer, or customer Production scheduling Manufacturing and shipping Receiving at the distributor, retailer, or customer
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Procurement Cycle
All processes necessary to ensure that materials are available for manufacturing to occur according to schedule Manufacturer orders components from suppliers to replenish component inventories However, component orders can be determined precisely from production schedules (different from retailer / distributor orders that are based on uncertain customer demand)
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Push/Pull View of Supply Chain Processes

Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand Pull: execution is initiated in response to a customer order (reactive) Push: execution is initiated in anticipation of customer orders (speculative) Push/pull boundary separates push processes from pull processes
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Push/Pull View of Supply Chains (make-to-stock environment)

Procurement, Manufacturing and Replenishment cycles
Customer Order Cycle

PUSH PROCESSES

PULL PROCESSES

Customer Order Arrives

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Push/Pull View of Supply Chain Processes

Useful in considering strategic decisions relating to supply chain design more global view of how supply chain processes relate to customer orders The relative proportion of push and pull processes can have an impact on supply chain performance

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Supply Chain Macro Processes in a Firm

Supply chain processes discussed in the two views can be classified into:
Customer Relationship Management (CRM) Internal Supply Chain Management (ISCM) Supplier Relationship Management (SRM)

Integration among the above three macro processes is critical for effective and successful supply chain management
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Supply Chain Macro Processes

Supplier SRM Supplier Relationship Management Source Negotiate Buy Design Collaboration Supply Collaboration Firm ISCM Internal Supply Chain Management Strategic Planning Demand Planning Supply Planning Fulfillment Field Service Customer CRM Customer Relationship Management Market Sell Call Center Order Management

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Examples of Supply Chains

Gateway: a direct sales manufacturer Zara: apparel manufacturing and retail W. W. Grainger and McMAster-Carr: MRO suppliers Toyota: a global auto manufacturer Amazon.com: an e-business

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Gateway
Manufacturer of PCs, founded in 1985 Started as a direct sales manufacturer with no retail In 1996, it was one of the first PC manufacturers to start selling PCs online. In 1999, it had 3 plants in US, one in Ireland, one in Malaysia. In the late 1990s, it introduced an aggressive strategy of opening Gateway retail stores throughout the US. By 2002, it had ~280 retail stores in the US. Avoid carrying any finished-goods inventory in retail stores. Simply uses these stores for customers to try the PCs and help in deciding on the right configuration to purchase. When customers placed their order, PCs were manufactured IE 753 - Chp. 1 Assist. Prof. F. Uney-Yuksektepe 1-29 to order and shipped from one of the assembly plants.

Gateway
Initially, investors rewarded Gateway for this strategy and raised the stock price to more than $80 per share in late 1999s. By November 2002, Gateway shares had dropped to less than $4 and lose a significant amount of money. Plants in Salt Lake City, Ireland and Malaysia were shut. By 2004, it had closed all its retail outlets and reduced the number of configurations offered to customers. In August 2007, Taiwans Acer purchased Gateway for a price of $710 million. By 2008, Gateway computers were sold through over ten different retail outlets including Best Buy and Circuit City.

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Gateway
Why did Gateway have multiple production facilities in the US? What advantage or disadvantages does increasing the number of production facilities offer? How does Gateway decide which production facility will produce and ship a customer order? What factors did Gateway consider when deciding which plants to close? Why did Gateway choose not to carry any finishedproduct inventory at its retail stores?

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Gateway
Should a firm with an investment in retail stores carry any finished-goods inventory? What are the characteristics of products that are most suitable to be carried in finished-goods inventory? What characterizes products that are best manufactured to order? Is the Dell model of selling directly without retail stores always less expensive than a supply chain with retail stores? What are the supply chain implications of Gateways decision to offer fewer configurations?
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Zara
Chain of fashion stores owned by Inditex, Spains largest apparel manufacturer and retailer. In 2007 sales of about 9.5 million Euros from more than 3600 retail outlets in 68 countries. In 2007, company opened about two new stores for each day. With a volatile customer demand, Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices. Design-to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of four to six weeks.
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Zara
Thus, Zaras products on display match customer preferences much more closely than the competition. As a result, Zara sells most of its products at full price and has about half the markdowns in its stores compared to the competition. Zara manufactures its apparel using a combination of flexible and quick sources in Europe and low cost sources in Asia. This contrasts with most apparel manufacturers, who have moved most of their manufacturing in Asia. ~%40 of the manufacturing capacity is owned by Inditex and the rest is outsourced.
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Zara
More than 40% of its finished-goods purchases and most of its in-house production occur after the sales season starts. For a typical retailer this amount is less than %20. The responsiveness and the postponement of decisions until after trends are known allow Zara to reduce inventories and forecast error. Zara has also invested heavily in information technology to ensure that the latest sales data are available to derive replenishment and production decisions.

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Zara
In 2007 8 distribution centers located in Spain serve for all over the world Averaged delivery time 24 hours for European stores, up to a maximum of 40 hours for stores in America or Asia Shipments from the DCs to stores were made several times a week allows inventory to closely match customer demand In 2007 globally 627 million garments are distributed

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Zara
What advantage does Zara gain against the competition by having a very responsive supply chain? Why has Inditex chosen to have both in-house manufacturing and outsourced manufacturing? Why has Inditex maintained manufacturing capacity in Europe even though manufacturing in Asia is much cheaper? Why does Zara source products with uncertain demand from local manufacturers and products with predictable demand from Asian manufacturers? What advantage does Zara gain from replenishing its stores multiple times a week compared to a less frequent schedule? How does the frequency of replenishment affect the design of its distribution system? What information infrastructure does Zara need in order to operate its production, distribution, and retail network effectively?
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Amazon
Amazon. Com sells books, music and other items over the internet Based in Seattle, fills all orders using books purchased from a distributor in respond to customer orders Different than traditional bookstore, which usually purchases directly from publishers and stocks book in anticipation of customer orders. In 2008 8 warehouses in the U.S. and 15 warehouses in the rest of the world Uses U.S. postal service, UPS and FedEx to send books to customers Expand the set of products toys, apparel, electronics, jewelry and shoes.
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Amazon
Has been profitable since 2003. Several bricks-and-mortar players (such as Borders and Barnes & Noble) have also started selling using the internet channel. Borders used Amazon BarnesandNoble.com initially a separate company (Original strategy) Barnes & Noble the retail and online supply chains shares warehousing and transportation to some extent Departure from the companys original strategy

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Amazon
Why is Amazon building more warehouses as it grows? How many warehouses should it have and where should they be located? What advantages does selling books via the internet provide over a traditional bookstore? Are there any disadvantages to selling via the internet? Should Amazon stock every book it sells? What advantage can bricks-and-mortar players derive from setting up an online channel? How should they use the two channels to gain maximum advantage? For what products does the e-commerce channel offer the geratest advantage? What characterizes these products?
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