DR.

SASWATI IIFT

CONTENT STRUCTURE
Definition, basic concepts and need of Supply Chain Evolution of Supply Chain

Importance of a Supply Chain

Decision Phases in a Supply Chain Process view of a Supply Chain-Cycle Process view of a Supply Chain-Push-Pull

Examples of Supply Chain

LEARNING OBJECTIVES
What is Supply Chain Management Why is the supply chain important?
What are the key supply chain decisions made by a firm?

How has the supply chain evolved over the last century? What are the cycle views of a supply chain? What are the push/ pull views of a supply chain

DEFINITION OF SUPPLY CHAIN

Supply chain is a network where products and services flow from:
Raw

materials manufacturers Intermediate products manufacturers End product manufacturers Wholesalers and distributors and Retailers

To Customers

- Connected by transportation and storage - Integrated through information and planning

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SUPPLY CHAIN CONCEPT

A customer enters a store to buy detergent Supply chain begins with need of customer Next stage is the store the customer visits
The store stocks its shelves using inventory supplied from a warehouse/distributor.

The distributor is stocked by manufacturer, say HUL HUL receives raw material from variety of suppliers
Ingredients for detergent manufacturing from chemical manufacturer 1, 2, 3. Packaging material from Tenneco packaging Paper from ITC Pulp from timber company Label from xyz Labels Cap from ABC Cap manufacturing

Customers need can be fulfilled when all the above entities work in synchronization.

A supply chain consists of

Supplier Manufacturer Distributor Retailer Customer

Upstream

Downstream

Aims to Match Supply, Demand and profitability

SUPPLY SIDE

PROFITABILITY

DEMAND SIDE

The right

+ + + +
The right right The The right right The

Product

Price Price

Store Store

The right The right Quantity Quantity

The right The right

Theright right The

Customer Customer

Time Time

Higher Higher Profits Profits

SUPPLY CHAIN CYCLE

Plan Suppliers Source Make Manufacturers Deliver Warehouses & Distribution Centers
Buy

Customers

Transportation Costs Material Costs

Transportation Costs Manufacturing Costs

Transportation Costs Inventory Costs

Demand in one end and meeting demand on other end

WHAT IS SUPPLY CHAIN MANAGEMENT ?

When HU L and P & G competes its not the competition only between the two giants its largely the competition between components of supply chain held by these companies.

Customer is interested only in price, quality and availability.

If customer is inconvenienced due to non-availability, damaged packaging etc., it attributes inefficiency to HUL not its chain partners.

HUL owns only a few components of its multi-component supply chain covering ingredient suppliers, transporters, manufacturing plants, C&F agents, wholesalers, distributors and retailers.

Deficiency in services by any of the component adversely affects brand name of HUL.

FOCAL FIRMS
A typical supply chain has a large number of firms.

However, the identity/ brand of a product is given by one focal firm. Being the main entity, the focal firm takes responsibility of designing the total chain.
Nike does not manufacture the product it sells, doesnt own retail outlets, but end customers identify the product with Nike. Nike coordinates / synchronizes activities of chain members to meet customers best interests.

Supply chain works in a complex multidirectional environment. Sourcing of raw materials can be from a no. of suppliers while one supplier may be supplying to a no. of producers this concept is applicable to other interfaces of supply chain too like wholesaler manufacturer, retailer wholesaler, and customer- retailer interfaces. Flow of information, product and finance keep the network active 24 hrs a day, seven days a week. Information and finance flows from point of sale (customer) to retailer to wholesaler to distributor to producer to raw material supplier and product flows in opposite direction except for flow of unsold / rejected products or used pack -aging materials like bottles in which coke is sold.

Material

Supplier

Information Funds

Customer

The flows resemble a multidirectional chain reaction.

Dell Computers managed a profitability of 8. 6% through efficient SCM compared to less than 1% earned by HP and I B M in PC business.
Wal-Mart emerged as largest American Corporation with profitability close to 5.8% much higher than its competitors. National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time. Compaq estimates it lost $0.5 B to $1 B in sales in 1995 because laptops were not available when and where needed P&G (Proctor& Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand In India, Asian Paints, Marico Industries etc. are pioneers in implementing SCM

EVOLUTION OF SUPPLY CHAIN FORD MOTOR COMPANY (19101920

Owned every part of chain from timber to rail

Tightly integrated chain

From ore mine to finished car in 81 hours Ford supply chain would offer any colour as long as it was black any model as long as it was model T

Ford SCM model was efficient but inflexible and could not handle wide variety of products

Suppliers located very close to Toyota assembly plant low setup time

Long term relationship with suppliers

Followed Keiretsu system set of companies with interlocking business relationship s and share holdings

Final assembly and manufactur ing of key component s only inhouse

World class suppliers instead of locals with low transportation cost

Suppliers are always on test

Medium term instead of long term relationship with suppliers

Allowed customers to customize their computers

Trigger for supplier order is orders by customers, not forecasts
meeting shipping deadlines

Accountable customer service which includes

fixing machines on the first try getting repair people to customers within 24 hours

Share information with partners in Real time fashion

Change focus from how much inventory to how fast it is moving

Inventory levels and replenishment needs sometimes conveyed to vendors on hourly basis.

JOURNEY YEARS Stock availability Delivery frequency Order to delivery lead time Timed delivery slot

Innocence 1985 90% weekly 72 hours

Maturity 1995 98% daily 48 hours 15 minutes 2 weeks

Excellence 2008 99.9% 3 times a day 6 hours

Industry Sector Food and Drink Automotiv e Food and Drink Retail

1 hour

on time

Supply Chain inventory

4 weeks

0.5 week

Electronics

... and product life cycles are measured in months not years

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

Frequent Supply shortages

Inefficient logistics Distributor Retailer

Low order fill rates Customer High stockouts

Tier 1 Supplier

Manufacturer

Glitch-Wrong Material, Machine is Down effect snowballs

High inventories through the chain

Ineffective promotions

High landed costs to the shelf

Eliminating inefficiencies in supply chains can save millions of $.

Proliferation of Product Lines

growing range of customer requirements abundant varieties to choose even a simple product like soap may have 20 odd varieties Same brand of soap may have varying colour and sizes Each variety identified as SKU (Stock Keeping Unit) HUL manages on an average 1200 SKUs Increasing variety makes forecast difficult Leads to maintenance of high inventories increased cost Key success - Optimization of inventory

 Product life cycles becoming shorter

PC/Cellphone industry works with a life cycle short as 6 months

Dell with just 11` days inventory, as compared to industry average 80 days, need not worry about product obsolescence High inflation may help gaining from raw material inventory, but with inflation under control low product cycles maintaining just inventory is need of hour With shorter product life cycles, not much data available for demand forecasting Most firms find majority of revenues come from products introduced in last three years

Shorter Product Life Cycles

 Multi-level activities often forces companies shift from their main focus Manhour cost of a reputed company very high Managing huge workforce difficult Firms increasingly focus on their core activities and outsource non-core activities Dell computers, Bharti Tele ventures outsource more than 50% of their activities

Higher Level of Outsourcing

 Variety of products increasing rapidly Retail shelf space not increasing at same pace Shelf space can accommodate limited stock

Shift in Balance of Power in Chain

Retailers demand instant replenishment of products Retailers, closest to customers, acts as power centre

IMPORTANCE OF SUPPLY CHAIN

Barbie doll manufacturing her statuesque figure made by workers in China moulds from United States machines from Japan and Europe nylon hair from Japan plastic in her body from Taiwan pigments from America Cotton clothing from China
Barbie, simple girl though she is, had developed her very own global supply chain.

Globalization of Manufacturing

Broadly classified as

Design Decisions (long term, 1-3 years)

Planning Decisions (Medium term, 1-312 months)

Operation Decisions (Short term, 1 minute 1 week)

Design or strategic decisions involve critical issues

What activities to be performed in-

DESIGN DECISION
Uncertainty in anticipated market conditions must be factored. Traditional supply chain concentrates on material, information and finance flows should look into risk flows.

house and what to be outsourced? How to select outsourced partners? What should be nature of relationship with outsourced partners? Transactional only or longterm?

What should be locations and capacities of various facilities?

Raw material suppliers Manufacturing unit / Contract manufacturers Warehouses Target market Transportation

Design decision should be put through sensitivity analysis by altering inputs/constraints.

New product development

PLANNING DECISION

Identification of constraints is most challenging Demand forecast

Aim is to maximize supply chain effectiveness at given constraints

Raw material availability Raw material cost Transportation cost Transportation availability Storage capacity

 Demand forecasting Procurement planning and control Production planning and control Distribution planning and control Inventory management Transportation management Customer order processing Incentive management amongst partners in chain Relationship management with partners in chain Relationship management with customers

At operational level, supply chain configuration is fixed.

Decision taken on individual customer order

Allocate inventory or production to individual orders Set date for order fulfillment Generate pick list at warehouse Allocate shipping mode Set scheduling of trucks Place replenishment orders

Operating decisions, being made in short term (minuteshours-days), are less uncertain about demands. Goal during operation phase is to reduce uncertainty and optimize performance.

PROCESS VIEWS OF SUPPLY CHAIN

Customer
Customer Order Cycle

Defines processes involved and owners of each process Any cycle 0. Customer arrival 1. Customer triggers an order 2. Supplier fulfills the order 3. Customer receives the order

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier
Very useful when considering operational decisions Clearly specifies roles and responsibilities of each member Correctly derives desired outcome for each process

CUSTOMER ARRIVAL

CUSTOMER ORDER RECEIVING

CUSTOMER ORDER ENTRY

CUSTOMER ORDER FULFILMENT

RETAIL ORDER TRIGGER

RETAIL ORDER RECEIVING

RETAIL ORDER ENTRY

RETAIL ORDER FULFILMENT

ORDER ARRIVAL

RECEIVING

PRODUCTION SCHEDULING

MANUFACTURING AND SHIPPING

ORDER BASIS MANUFACTURERS PRODUCTION SCHEDULE OR SUPPLIERS STOCKING NEEDS

RECEIVING

SUPPLIER PRODUCTION SCHEDULING

COMPONENT MANUFACTURING AND SHIPPING

Within each cycle When customers shop online at Amazon, customer is buyer and Amazon is supplier customer order cycle. When Amazon orders books from distributor, Amazon is buyer and distributor is supplier replenishme nt cycle. Buyer wants product availability and achieve economics of scale in ordering Supplier attempts to forecast customer order and reduce cost of receiving order.

In each cycle, buyer and supplier concept exists.

In traditional model, products are manufactured in anticipation of demand.

This concept got refined over years and response based model came into picture which says the moment one product is sold, replenishment order gets generated and raw material procurement action is initiated.

Todays supply chain initiates with a matured concept known as pull-push pull (customers actual order) combined with push (forecasted customer order).
However, proper care should be taken while considering forecasted numbers the less accurate it is less will be profitability in view of additional inventory carrying cost.

Hybrid of push and pull strategies to overcome disadvantages of each Early stages of product assembly are done in a push manner
Partial assembly of product based on aggregate demand forecasts (which are more accurate than individual product demand forecasts) Uncertainty is reduced so safety stock inventory is lower

Final product assembly is done based on customer demand for specific product configurations

Supply chain timeline determines push-pull boundary

Generic Product Push Strategy Raw Materials

PushPull Boundary

Customized Product Pull Strategy End Consumer

Supply Chain Timeline

Processes carried out before customer order point are managed through Push approach.

Processes carried out after customer order point are managed through Pull approach. The interface between Push and Pull strategy is known as Push-Pull Boundary. Processes managed by Pull approaches do not face any uncertainty.
Contrary to this, processes managed by Push approaches are executed based on forecast and thus uncertainty level is high.

Asian Pants, Dell Computers store base stocks at this boundary, assemble and deliver to customers customized products.

Pull High Demand Uncertainty

Industries where: Industries where: Customization is High Demand is uncertain Demand is uncertain Scale economies are High Scale economies are Low

Where do the following industries fit in this model: Automobile? Aircraft? Fashion? Petroleum refining? Pharmaceuticals? Biotechnology? Medical Devices?

Computer equipment (Pull Pull)

Industries where: Uncertainty is low Low economies of scale

Furniture (Pull Push)

Industries where: Standard processes are the norm Demand is stable Scale economies are High

Push

Low Low Pull

Books, CDs (Push-Pull)

Grocery, Beverages (Push Push) Economies of Scale High Push

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EXAMPLES OF SUPPLY CHAIN

35 million packages bought by 18 million households per month

1000 distributors store and deliver to 2500 stockists or 1.6 million retailers.

Less than 2% retailers represent organized sector.

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More than 95% are grocery retailers

Every Indian community is covered with a population of 20000 or more.

Penetrates rural market where 70% of Indians live

Its rural sales and distribution network ranks among top three in the industry.

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