Introduction to Supply Chain Management (SCM)

Rev: Feb, 2012

Euiho (David) Suh, Ph.D. POSTECH Strategic Management of Information and Technology Laboratory (POSMIT: http://posmit.postech.ac.kr)

Dept. of Industrial & Management Engineering POSTECH

Contents
1 2 3 4 5 Discussion Questions Introduction Motivation in SCM Strategic approaches of SCM Roles of SCM Case Study

Discussion Questions
Why do you think implementing SCM is difficult? Find a successful case of SCM and explain it. EDI involves the electronic exchange business transaction documents over the Internet or other networks between supply chain trading partners. What is the concept explained in the below pharagraph?
A cross-functional interenterprise system that uses information technology to help support and manage the links between some of the organization's key business processes and those of its suppliers, customers, and partners. The intent is to create a fast, efficient, and low-cost network of business relationships to get an organization's products and services from concept to market.

What is a Supply Chain?

Definition

1. Introduction

The interrelationships with suppliers, customers, distributors, and other businesses that are needed to design, build, and sell a product make up the network of business entities, relationships, and processes
Suppliers Manufacturers Warehouses & Distribution Centers Customers

Material Costs

Transportation Costs

Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs 4

Supply Chain Management

Definition

1. Introduction

Applying a total systems approach to the entire flow of information, materials and service throughout the supply chain to provide the right quantities of right stuff, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements
Customer Relationship Management

Management customer services

Satisfaction of ordering

Management production

Management demand

Supply

Sales Strategy vs. Production Strategy

2. Motivation in SCM

What would sales & production costs have to be to double net income? Which is easier? Percentages are % of sales

Current Situation Sale

Production Marketing Net Income

Sales Strategy $?
$ (80%) $ (10%) $2

Production Strategy $ 10
$? $ (10%) $2

$10
$8 (80%) $1 (10%) $1

Reducing production costs is more feasible.

Solution Sale Production Marketing Net Income
Increase sales 100% Reduce production costs by 12%

Current Situation $10 $8 (80%) $1 (10%) $1

Sales Strategy $ 20 $ (80%) $ (10%) $2

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Production Strategy $ 10 $7 $ (10%) $2

The Importance of Supply Chain Management (1/2)

2. Motivation in SCM

Dealing with uncertain environments matching supply and demand

Boeing announced a $2.6 billion write-off in 1997 due to raw materials shortages, internal and supplier parts shortages and productivity inefficiencies U.S Surgical Corporation announced a $22 million loss in 1993 due to larger than anticipated inventories on the shelves of hospitals IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PCs from Taiwanese suppliers in 1999 due to a massive earthquake

U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998

The Importance of Supply Chain Management (2/2)

Shorter product life cycles of high-technology products
Less opportunity to accumulate historical data on customer demand Wide choice of competing products makes it difficult to predict demand

2. Motivation in SCM

The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners
If you dont do it, your competitor will Major buyers such as Wal-Mart demand a level of supply chain maturity of its suppliers

Availability of SCM technologies on the market

Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes

History of Supply Chain Management

2. Motivation in SCM

1960s Inventory Management Focus, Cost Control

1970s MRP & BOM Operations Planning

1980s MRPII, JIT - Materials Management, Logistics SCM - ERP - Integrated Purchasing, Financials, Manufacturing, Order Entry Optimized Value Network with Real-Time Decision Support; Synchronized & Collaborative Extended Network

1990s

2000s

Supply Chain Technology Market

2. Motivation in SCM

Grow 7% annually

$ 9.2B

$ 6.5B

The supply chain, and the technologies that support it, will play an important role in helping companies deal and thrive in an economy that is going to be quite unlike anything weve seen in the post-war era, - John Fontanella vice president of research at AMR Research

2008

2012

(source : AMR research, 2008)

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Why Is SCM Difficult?

Uncertainty is inherent to every supply chain
Travel times Breakdowns of machines and vehicles Weather, natural catastrophe, war Local politics, labor conditions, border issues

2. Motivation in SCM

The complexity of the problem to globally optimize a supply chain is significant

Minimize internal costs Minimize uncertainty Deal with remaining uncertainty

Plan

Source

Make

Deliver

Buy

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Electronic Data Interchange (EDI)

3. Strategic approaches of SCM

The electronic exchange of business transaction documents between supply chain trading partners One of the earliest uses of information technology for supply chain management The almost complete automation of an e-commerce supply chain process Many transactions occur over the Internet, using secure virtual private networks A communications standard for sharing business documents and settlement information among firms

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Todays Marketplace Requires:

3. Strategic approaches of SCM

Personalized content and services for their customers Collaborative planning with design partners, distributors, and suppliers Real-time commitments for design, production, inventory, and transportation capacity Flexible logistics options to ensure timely fulfillment Order tracking & reporting across multiple vendors and carriers

Shared visibility for trading partners

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Supply Chain Management Key Issues (1/3)

Forecasts are never right

3. Strategic approaches of SCM

Very unlikely that actual demand will exactly equal forecast demand

The longer the forecast horizon, the worse the forecast

A forecast for a year from now will never be as accurate as a forecast for 3 months from now

Aggregate forecasts are more accurate

A demand forecast for all CV therapeutics will be more accurate than a forecast for a specific CV-related product

Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty

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Supply Chain Management Key Issues (2/3)

Overcoming functional silos with conflicting goals

3. Strategic approaches of SCM

Purchasing

Manufacturing

Distribution

Customer Service/ Sales

Low purchase price Multiple vendors

Few changeovers Stable schedules Long run lengths

Low inventories Low transportation

High inventories High service levels Regional stocks

SOURCE

MAKE

DELIVER

SELL

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Supply Chain Management Key Issues (3/3)

ISSUE Network Planning Inventory Control

3. Strategic approaches of SCM

CONSIDERATIONS
Warehouse locations and capacities Plant locations and production levels Transportation flows between facilities to minimize cost and time How should inventory be managed? Why does inventory fluctuate and what strategies minimize this? Impact of volume discount and revenue sharing Pricing strategies to reduce order-shipment variability Selection of distribution strategies (e.g., direct ship vs. cross-docking) How many cross-dock points are needed? Cost/Benefits of different strategies How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?

Supply Contracts
Distribution Strategies

Integration and Strategic Partnering Outsourcing & Procurement Strategies

What are our core supply chain capabilities and which are not? Does our product design mandate different outsourcing approaches? Risk management How are inventory holding and transportation costs affected by product design? How does product design enable mass customization?

Product Design

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Supply Chain Management Operations Strategies

3. Strategic approaches of SCM

STRATEGY
Make to Stock

WHEN TO CHOOSE

BENEFITS

Low manufacturing costs; standardized products, meet customer demands relatively predictable demand quickly customized products, many variations many variations on finished product; infrequent demand Customization; reduced inventory; improved service levels Low inventory levels; wide range of product offerings; simplified planning Enables response to specific customer requirements

Make to Order

Configure to Order

Engineer to Order

complex products, unique customer specifications

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Role and Goals of SCM

Role of SCM

4. Roles of SCM

SCM management helps a company get the right products to the right place at the right time, in the proper quantity and at an acceptable cost.

Goals of SCM
To manage a process efficiently by forecasting demand Controlling inventory Enhancing the network of business relationships with customers, suppliers, distributors, and others Receiving feedback on the status of every link in the supply chain

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Supply Chain Management Benefits

4. Roles of SCM

A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain Delivery Performance Inventory Reduction Fulfillment Cycle Time Forecast Accuracy Overall Productivity Lower Supply-Chain Costs Fill Rates Improved Capacity Realization
Source: Cohen & Roussel

16%-28% Improvement 25%-60% Improvement 30%-50% Improvement 25%-80% Improvement 10%-16% Improvement 25%-50% Improvement 20%-30% Improvement 10%-20% Improvement

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Benefits and Challenges of SCM

Key Benefits
Faster, more accurate order processing Strategic relationships with supplier Lower transaction and materials cost Quicker times to market Reductions in inventory levels

4. Roles of SCM

Key Challenges
Lack of demand planning knowledge, tools, and guidelines Inaccurate data provided by other information systems

Lack of collaboration among marketing, production, and inventory management

SCM tools are immature, incomplete, and hard to implement

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Case Study
In the Text book
Real World Case 3 : Perdue Farms and Others: Supply Chain Management Meets the Holiday Season

Domestic Case

Click Here

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Reference
OBrien & Marakas, Introduction to Information Systems Fifteenth Edition, McGraw Hill, Chapter 7, pp. 276~281 Keebom Kang, Global Logistics and Information Technology(PPTSlide), Graduate School of Business Naval Postgraduate School Keebom Kang, B2B: Applications for Improving Supplier Selection(PPTSlide), Graduate School of Business Naval Postgraduate School Basics of Supply Chain Management(PPTSlide), Stevens Institute of Technology

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