Supply Chain Management:

Models and Challenges

September, 2002

Jae Kyu Lee

(jklee@kgsm.kaist.ac.kr)

Graduate School of Management

Korea Advanced Institute of Science and Technology
Seoul, Korea

Jae Kyu Lee

KAIST SCM 2002 Fall 1
 Fig.
Figure 15.2
  Order Fulfillment Process
15.2
Fig.
15.2

Jae Kyu Lee

KAIST SCM 2002 Fall 2
 Table of Contents
 SCM Definition, Goals, Process, Performance
Prospects
 Challenges in SCM: GE, Nike and SME
 Eight SCM Models with Cases
 SCM Solutions
 SCM Services Business Types
 Comprehensive Cases:
 Intel
 Listerine in Warner-Lambert and CVS
 Dell for production and aftermarket
 Case Discussion
Jae Kyu Lee
KAIST SCM 2002 Fall 3
 Definition of SCM
 Wider Definition
 Any types of SCM along the value chain of procurement,
sales, and collaborations
 Solutions with this definition will include exchanges, e-
procurement, e-marketing, and streamlined SCM.
 This definition encompasses the scope of intra- (ERP)
and inter-organizational (B2B) supply chain.
 Focused Definition
 Focused on the management of streamlined SCM
 Commonly accepted Definition and Classification
of Contingency important for SCM Planning
Jae Kyu Lee
KAIST SCM 2002 Fall 4
 What about SCM?
 Why SCM Complex?
 Architectural Options
 What is the scope of SCM in practice?
 What is the evolution of SCM focus?
 Cost effective SCM Planning

Jae Kyu Lee

KAIST SCM 2002 Fall 5
 The Bullwhip Effect

 Slight changes in actual demand create

problems
 Partners build “just in case” inventories
 Lack of trust among partners
 Stockpiling results in huge cost
 The manufacturers cannot plan production
 Cannot order material from suppliers

Jae Kyu Lee

KAIST SCM 2002 Fall 6
 Bullwhip Effect and
Information Sharing

 Flow of information to and from all

participating entities
 Information sharing between retailers and
their suppliers
 Bullwhip effect refers to erratic shifts in orders up and
down supply chain
 Distorted information leads to:
 Inefficiencies Ineffective shipments
 Excessive inventories Poor customer service
 Missed production schedules
Jae Kyu Lee
KAIST SCM 2002 Fall 7
 Avoiding the Sting
of the Bullwhip
 How to do it?
 Information sharing is a must and is facilitated by
EDI, extranets, and groupware technologies
 Trust and agreements in regard to:
 Ordering and inventory decisions
 Placing supply chain ahead of individual entities
within the corporation
 Sharing information could save $30
Billion/year just in the grocery industry
Jae Kyu Lee
KAIST SCM 2002 Fall 8
 Why SCM Complex?:
“Many-to-Many” Relationships
Consumer
Large Retail
Customer
Design Partner
VAR/
Manufacturer Reseller
Component Distributor
Supplier Small Retai
VAR/ Customer
Manufacturer
Reseller
Raw Material Distributor
Supplier

Manufacturer
Contract Distributor Corporate
Manufacturer Customer

Logistics Logistics Logistics

Jae Kyu Lee
KAIST SCM 2002 Fall 9
 Architectural Options
and Contingency
Streamlined Link GM Dealers
AC/Delco DANA

Bethlehem Cummins
Delphi
Consumers
Motorola Visteon
Ford Dealers
BF Goodrich

Dana
E-Hub GM BF Goodrich

Visteon Ford
Federal Mogul Dealer
Cummins
Jae Kyu Lee
KAIST SCM 2002 Fall 10
 Linkage Architecture
 Streamlined Point-to-Point Connection
 Focus on important items and partners
 Direct Connections
 Implementable only by big buyer or seller
 Tight integration will be possible
 Electronic Trading Hub (e-Hub)
 Open and flexible to connect
 Tends to be loosely coupled
 Ownership: Private or Public e-Hubs
 Integration with the role of exchange and ASP

Jae Kyu Lee

KAIST SCM 2002 Fall 11
 Scope of SCM Activities:
i2 Perspective

Jae Kyu Lee

KAIST SCM 2002 Fall 12
 Processes and Plannings
in SCM
 Order Entry
 Supply Planning
 Inventory Replenish
 Demand Forecasting
 Purchase Planning
 Warehousing and Inventory
 Delivery and Return
 Account payable
 Aftermarket
SCM is a combination of Processing and Planning
with Business Intelligence ((Mathematical Models
and Data Warehouse)
Jae Kyu Lee
KAIST SCM 2002 Fall 13
 Evolution of SCM Focus
Inter-Hubs
Intelligent
eBusiness
Hub

Value Chain
Scope

(End-to-End
Supply Chain)

Entire
Enterprise
Single
Factory

Jae Kyu Lee

Time
KAIST SCM 2002 Fall 14
 Supply Chain Performance
(CIO Magazine, Feb 1, 2000)

Jae Kyu Lee

KAIST SCM 2002 Fall 15
 SCM Spending

By Aberdeen Group

(March 21, 2001)
SCM software and
hardware: $20B by
2003
$2 Trillion of
transactions through
the SC
50% of them through
private or public net
markets
Jae Kyu Lee
KAIST SCM 2002 Fall 16
 Penetration of SCM
 Retail Industry Case (Feb 21, 2001)
 80% of suppliers:
 No electronic linkage;
 Cover 20% of procurements.
 80% of orders handled in traditional EDI platform
 E-Tailing Case (Jan 26, 2001)
 55% linked with vendors and suppliers
 20% will do so.
 10% expect to implement warehouse or inventory
management applications
 39%: Use third party software
 27%: Hybrid of in-house and third party S/W
 Penetration is slower than expected

Jae Kyu Lee

KAIST SCM 2002 Fall 17
 Contingency of SCM
 Items:
Items Contractual vs. Spot purchase
 Contractual Purchase:
 needs complex negotiation,
 collaborative SCM, and
 deeper connection between the ERP’s along the supply chain.
 Spot Purchase:
 Price is more important
 Exchanges and Auctions are options
 Partners:
Partners Big vs. Small company
 Big: SCM among big buyers and sellers
 Vertical SCM
 Small: How to handle with small suppliers?
 Exchanges and e-Hub service

Jae Kyu Lee

KAIST SCM 2002 Fall 18
 Challenges in SCM
 GE’s Progress of SCM
 Nike Fiasco
 The 21th Suppliers

Challenge is always an opportunity

Jae Kyu Lee

KAIST SCM 2002 Fall 19
 GE SCM Scales Back
 “GE Scales Back”,
InternetWeek, May 10,
2001,
http://www.internetweek.com/newslead01/lead051001.htm
 In June 2000,
announced plan
to cut the cost by
$10B by mid-
2002. But now
conceded to
$1.6B.

Jae Kyu Lee

KAIST SCM 2002 Fall 20
 Why GE Scales Back?
 Sales:
 $130B total revenue;
 Will sell $16B online in 2001 (50% of plan)
 Internet Auction:
 Will buy $16B material through 2,000 private auctions
(conducted each month)
 This is 35% of $40 B spent now on goods and services
 Trouble in connecting customers and suppliers
 7,500 on the Web; 7,500 on EDI; 15,000 manual
 Ultimate expectation: 60% of connection
 Because of too heavy price cut; cost and complexity of
integration with GE and other big manufacturers

Jae Kyu Lee

KAIST SCM 2002 Fall 21
 Nike Fiasco
 Report of March 7, 2001
http://www.internetweek.com/transtoday01/ttoday030701.htm
 Nike implemented i2 at the cost of $400M
 Sales in 3Q dropped more than $100M
 Nike’s View:
 Demand and supply planning module caused serious
inventory problem
 I2’s View:
 Nike failed to follow the vendor’s implementation
methodology
 Whose fault?

Jae Kyu Lee

KAIST SCM 2002 Fall 22
 Lessons from Nike Case
 Whose fault?
fault (Online polls on 350 responds)
 27%: Nike 15%: i2
 55%: Both 1%: Neither
 Possible Reasons
 Nike did not explained the manufacturing process clearly to i2
 Probably mismatched solution
 Nike did not monitor the system development process precisely
 Rush implementation without verification
 No pilot/parallel run stages
 Lesson:
Lesson
 Solution is “Stove”; Cooking should be done by “Chef”.

Jae Kyu Lee

KAIST SCM 2002 Fall 23
 Poor Readiness of SME
 SME Weak Link [Feb 21, 2001]
 44% of US businesses with fewer than 100
employees has no Internet connection;
37% no web site.
 SMEs need training
 SMEs need the support of inventory
management systems
 SMEs need intermediate e-Hub service:
Example: SPS Commerce
Jae Kyu Lee
KAIST SCM 2002 Fall 24
Sears through SPS Commerce
 Sears has 3,000 small and mid size
suppliers.
 80% of suppliers has no electronic linkage
 SPS Commerce provides the linkage
service between Sears and SME.

Jae Kyu Lee

KAIST SCM 2002 Fall 25
 SPS Commerce for SME
SME

Secure
Internet

EDI
SPS
Internet Commerce Fax

Phone
Sears

Internet
SCMSystem

Jae Kyu Lee

KAIST SCM 2002 Fall 26
 Eight SCM Models with Cases
1. Forecasting and Collaborative Forecasting
Solutions by Commerce One and SAP
1. Replenishing Inventory
Optimization Models; Vendor Managed Inventory (VMI)
Collaborative Planning, Forecasting, and Replenishment
WL and Wal-mart / CVS Cases
1. Factory Planning:
Planning Copperweld Case
2. Warehousing:
Warehousing WL-CVS Case
3. Trucking:
Trucking General Mills Case
4. Collaborative Design:
Design AviationX Case
5. Carrier’s Logistics:
Logistics
UPS Solutions; FedEx with Ariba; HP with FedEx.
1. Aftermarket Hub:
Hub Toyota Case

Jae Kyu Lee

KAIST SCM 2002 Fall 27
1. Forecasting and Collaboration
 Forecasting Models
 Statistical models
 Neural network models
 Time serious and causal models with uncertainty
 Collaborative Forecasting and Planning
 Reduce uncertainty by collaborating and sharing
information about the demand and inventory
 Solution by Commerce One and SAP
 MarketSet 2.0 and Enterprise Buyer 2.0
 Enable trading partners to swap product plans, streamline e-
procurement, content management, and related buying and
selling functions

Jae Kyu Lee

KAIST SCM 2002 Fall 28
 2. Replenishing Inventory
 Optimization Models under Uncertainties
 EOQ, Lot Sizing, Reordering points, etc
 Continuous Replenishment Policy
 Vendor Managed Inventory
 Collaborative Planning, Forecasting and
Replenishment (CPFR)
 Warner-Lambert and Wal-Mart: Retail Link
 Warner-Lambert and CVS
 www.cio.com/archive/enterprise/081598_jour_content.html

Jae Kyu Lee

KAIST SCM 2002 Fall 29
 Collaborative Planning, Forecasting
and Replenishment: Retail Link
Wal-Mart Supplier:Warner-Lambert

Operational
System

EDI

Data warehouse ERP

Internet
Manufacturing
RetailLink Plan

Sales data about

WWW
W-L Products

Review and
Inventory Forecast Comments
Plan
Planner
Planner

Jae Kyu Lee

KAIST SCM 2002 Fall 30
Retailer’s Perspective: Wal-Mart Case

 Wal-Mart: World’s largest discount retailer

(sales: $224 bil/year as of 1999)
 2,400 stores and 450 Sam’s Club in the U.S.A.
720 units internationally.
 7,000 suppliers
 Traditionally, retailers and suppliers forecasted separately
➔ Excessive inventory, out-of-stock, lost opportunity to suppliers
 RetailLink Data Warehouse
 Largest data warehouse in the world
 101 terabytes (stared with 10 terabytes in 1996, 44 terabytes till this August)
 NCR’s Teradata Relational Database
 NCR’s World Mark Parallel Computer

Jae Kyu Lee

KAIST SCM 2002 Fall 31
 Wal-Mart Case (Continued)
 Capacity of Data Warehouse
 Stores 2 years of sales history with 101 terabytes
1.25 years of sales history with 44 terabytes
 120,000 data mining questions per week
 Open the access to suppliers
 Collaborative Forecasting and Replenishment (CFAR) become possible
 Accurate sales and inventory data available to suppliers replacing inaccurate
forecasts
 Inventory management shifted to suppliers
 Real time monitoring of inventory and quick response to market fluctuation
 Long range trend analysis possible
 Right product in the right store at the right price
 Retail industry’s savings are projected to be $150-$250 billion per year

Jae Kyu Lee

KAIST SCM 2002 Fall 32
 Implication of CFAR and Data Warehouse

 Communication with many partners has become possible

 Large scale business planning and control possible
 Large scale model
 Realtime control to market fluctuation
 Long range analysis
 Longer period of data supported
 Eliminate uncertainty by collaboration, data sharing, and
inexpensive communication over the Internet.
 Make the suppliers happy, and get the price reduced.

Jae Kyu Lee

KAIST SCM 2002 Fall 33
 3. Factory Planning
 Sourcing:
Sourcing
 From whom to buy, what to buy
 Purchasing:
Purchasing
 What to buy, How much, When?
 Copperweld Case
 Copper tubing parts manufacturer
 Sell to Ford Motor, Catepillar, etc.
 On-time-delivery rate hovered at 62%
 Adopt i2’s Factory Planning Module
 Organize factory design, manage suppliers, set production
schedule
 95% of on-time-delivery

Jae Kyu Lee

KAIST SCM 2002 Fall 34
 4. Warehousing
 Check the shipping in
 Assign storage site
 Route to store and pick
 Assigning the gate
 Loading to the right trucks
 Example Solution:
 EXE: Exceed eFulfillment System
 Example Case:
 WL-CVS case

Jae Kyu Lee

KAIST SCM 2002 Fall 35
 5. Trucking
 General Mills (Jan 30, 2001)
 Cheerio cereal, Betty Crokers desserts
 40 Distribution centers and manufacturing plants across USA.
 Shipping alone takes $400M
 60% of cost of goods
 Empty truck 12-18% ($30B a year in the USA)
 Share shipping information over the web with 19 partners and 200
carriers.
 Development software: Nistevo Corp.
 Seek to fill thousand trucks, match with 4 M routes
 Eliminated empty backhauls
 Save $700K by sharing with Fort James Corp (cereal box paper)
 Load 97% full (from 85% full before)
 With 19 partners: expects 6% ($24M) annually
 Integration between ERP via XML

Jae Kyu Lee

KAIST SCM 2002 Fall 36
 6. Collaborative Design
 AviationX (Feb 17, 2000)
 Aftermarket for aircraft
 From ordering parts (trading hub) to
collaborating designs
 Collaboration for inventory ($40B) reduction
 For manufacturers, suppliers, and other participants
 Access information about parts, services, technical
manuals and other data needed to keep planes in the air

Jae Kyu Lee

KAIST SCM 2002 Fall 37
 7. Carrier’s Logistics Support
 UPS IT infra and e-Logistic Group
 PriceWaterhouseCoopers: Integration Consulting
 Oracle: ERP for order management; ASP service
 EXE: Exceed eFulfillment System
 Global fulfillment and distribution network
 Warehouse management system
 UPS serves SCM and Collaborative Planning
 Along with order management, warehouse, pick,
pack and ship, value added services (minor
assembly, configuration of products)
Jae Kyu Lee
KAIST SCM 2002 Fall 38
 HPShopping and FedEx
 The HPShopping retail site transmits order
directly via EDI from its site to FedEx’s
fulfillment operation in Memphis, every 5-
10 minutes
 FedEx manage clients inventory
 24 hours delivery possible
 Charge monthly fee based on space
required and how complicated the
products are.

Jae Kyu Lee

KAIST SCM 2002 Fall 39
 8. Aftermarket Hub
 Toyota (March 5, 2001) with 1,500 US dealers
 Spend $billions a year on service parts
 Required more accurate ordering and inventory
management
 Top 25-30 suppliers represents about 80% of
product flow
 Joint venture with i2: made e-Hub iStar-Xchange
 Expect to save $100M over three years.
 US Automakers: working for the similar projects

Jae Kyu Lee

KAIST SCM 2002 Fall 40
 SCM Solutions
 i2: SCM, SRM
 mySAP: SCM
 Oracle
 Manugistics
 Logility
 E3
 Escalate
 Optum
 Provia Software

Jae Kyu Lee

KAIST SCM 2002 Fall 41
 i2 Technology
 Solutions
 SCM
 SRM
 CRM
 Content
 SCM
 Strategic planning, demand management, supply
management, fulfillment, service
 SRM
 Strategic design, strategic sourcing, negotiation,
design/manufacturing collaboration

Jae Kyu Lee

KAIST SCM 2002 Fall 42
 i2 Solutions

Jae Kyu Lee

KAIST SCM 2002 Fall 43
 mySAP
 mySAP Workplace
 mySAP Supply Chain Mgmt.
 mySAP Customer Relationship Mgmt.
 mySAP E-Procurement
 mySAP Product Lifecycle Mgmt.
 mySAP Business Intelligence
 mySAP Financials
 mySAP Human Resources
 mySAP Mobile Business
 mySAP Marketplace
 Industry Solutions

Jae Kyu Lee

KAIST SCM 2002 Fall 44
 Manugistics
 Supply Chain Optimization
 Bstreamz
 Monitor upcoming product demand
 Check available parts inventory
 Web Works
 Tie hubs in different industries
 Jointly bid from a range of customers

Jae Kyu Lee

KAIST SCM 2002 Fall 45
 Logility
 July 25, 2000
 Statistical Models and Planning Tools
 Voyager Commerce Server:
 Empower the CPFR solution to e-MP
 Supply Chain planning
 Logistic Management
 Strategic Direct Procurement

Jae Kyu Lee

KAIST SCM 2002 Fall 46
 Logility

Jae Kyu Lee

KAIST SCM 2002 Fall 47
 Xelus.com

 Demand forecast, cost of needed inventory, and

days of supply of inventory
 Compare the actual with forecasts
 Count reusable parts for manufacturing;
component substitution
 Forecast multiple lead times (e.g., for old parts,
new parts)
 Chaining parts together
 Optimize service level and inventory levels

Jae Kyu Lee

KAIST SCM 2002 Fall 48
 Xelus.com (II)

 Control of computerized returns for repairs

 Assemble parts together in a kit format.
 Flag problem conditions such as parts out of
stock
 Flag order changes and cancellation in real time
 Flag discrepancies between forecast and actual
demand as they occur
 Evaluate trade-offs between service levels and
inventory cost

Jae Kyu Lee

KAIST SCM 2002 Fall 49
 Other Solutions
 Supply Solutions
 Support e-procurement and design collaboration
 E3
 Inventory tracking and forecasting
 Inventory level determination
 Escalate
 Enterprise EC application provider
 Acquired Managize (SCM technology provider)
 Manage orders and shipments for a large number of
warehouse and distribution center in real time
 SupplyWorks

Jae Kyu Lee

KAIST SCM 2002 Fall 50
 SCM Services
 Point-to-Point Connection
 Private Exchanges
 SCM in Public Exchanges
 SCEM Service
 Front-end Linkage Hub for SME
 Delivered initiated SCM service
 Auction merges SCM

Jae Kyu Lee

KAIST SCM 2002 Fall 51
 SCM in Exchanges
 Add the SCM function in the Exchange
Hubs
 Covisint’s SupplyConnect
 Scope: Auction, Catalogs, Quote Management
for Procurement, SupplyConnect.
 Used SupplySolution’s I-Supply
 Support e-procurement and design
collaboration
 Subscription basis

Jae Kyu Lee

KAIST SCM 2002 Fall 52
 SCEM Service
 Supply Chain Event Management
 Solutions for Web based on-demand service on
 ship notice, cycle times, and score cards of a supplier’s
performance
 Players: i2, Optum, Manugistic, Provia Software, SAP
Example Case: Trilion Inc.
 Customer: Peregrine Systems (e-Biz SW developer)
 SCEM service to Peregrine’s Get2Connect.net brokerage service
for 22,000 customers and 1.2 M transactions per day.
 Built using Java and XML
 Annual plat-rate subscription fee: $400K with 20-30
suppliers, $700K for 100 suppliers

Jae Kyu Lee

KAIST SCM 2002 Fall 53
 The 21st Supplier for SMEs
 Ingersoll-Rand Co.:
 $8B maker of industrial equipment
 $4B of direct material purchase
 Most manufacturers use electronic trading tools with only their top
20 suppliers
 Business unit: The 21st Supplier (April 9, 2001)
 Technology: SupplyWorks (Another: Primix Solution)
 Logistic Service Roberson Transportation
 Service to 9,300 suppliers
 SME suppliers use the web site to tap into the
manufacturer’s MRP
 Check the expected shipments from them
 Process orders, dispatch trucks and payment
 Market potential: predicted $140B by 2004
Jae Kyu Lee
KAIST SCM 2002 Fall 54
 Logistic Service Provider
Initiative on SCM
 See UPS Case
 Survey on more than 100 LSP (April 9, 2000)
 LSP offer shipping and warehouse services
 75% of shippers use planning and scheduling software of ERP
and warehouse management system
 80% of even low performing LSPs use tracking and tracing
systems
 80% (30%) of top (laggard) LSPs use:
 Prescheduled and dynamic dock scheduling
 Realtime routing of trucks and folklifts
 Assignment of gates in warehouse
 80% (20%) of too (low) LSPs use automatic picking.

Jae Kyu Lee

KAIST SCM 2002 Fall 55
 Intel Case
 Case written in August 15, 1998
 Demanded JIT delivery
 Customer in build-to-order manufacturing
[Zero inventory; Avoid obsolete inventory]
 Demanded JIT delivery
 Intel’s Internal system:
 ERP for inventory control, product delivery, and business
integration
 Intranet to speed up procurement cycle
 Network and Platform
 Link: Extranet
 Web: Share inventory levels and demand

Jae Kyu Lee

KAIST SCM 2002 Fall 56
 Intel (Conti.)
 For Suppliers
 Allow restricted suppliers to study product drawings and
specifications as Intel draft them
 Help to improve the inventory and demand forecasting
methods
 Material Suppliers continuously replenish the stock
 Order via Internet, EDI, and fax
 For Customers
 Customized Web page: report order processing, product
pricing, and availability
 A handful of large customer use EDI
 Support checking the status of order and shipping
 Confirm delivery date as orders are placed

Jae Kyu Lee

KAIST SCM 2002 Fall 57
 Conclusion
 Contingent Planning of SCM under the current
situation is essential for success.
 Consider the cost effectiveness in planning possibly
focusing on streamlined supply chains
 Understand the challenges of connecting SMEs and
a business opportunity.
 Apply right SCM models
 Get familiar with the capabilities of SCM solutions
and scrutinize the providers strategic moves
 Try with cases and plan for your own
Jae Kyu Lee
KAIST SCM 2002 Fall 58