MI 703 CIS Session #5

Digital Rights Management Apple Computer SCM Midterm exam info Note: this presentation on SCM is material deferred from Session #5
02/21/07 Robert G. Fichman MI 703 Computer Information Systems Slide 1

As know from Dell case, supply chain management is of great strategic importance In some industries like PCs, world class SCM has become a strategic necessity. In this lecture we will drill down on what SCM actually is and the role IT plays

Agenda
Introduction to Supply Chain Management
Definitions Software

SCM Challenges*
1. Information integration 2. Coordination and resource sharing 3. Organizational relationship linkage
[* See Hau Lee, Creating Value Through Supply Chain Integration, Supply Chain Management Review, 2000]
02/21/07 Robert G. Fichman MI 703 Computer Information Systems Slide 2

Well begin with a general introduction to broad topic of SCM Then we will examine three challenges associated with supply chain management Information integration Coordinating activities and resources Creating a strong organizational linkage. My thinking about SCM has been heavily influence by this paper by Hau Lee SCM really complex topic and Ive read many overviews, but this is best Ive seen. Maybe not surprising, since hes Mr. Supply Chain in the academic world

What is a Supply Chain?

The network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product.

Source: http://www.techexchange.com/ 02/21/07 Robert G. Fichman MI 703 Computer Information Systems Slide 3

Most students have a good intuitive idea what a supply chain is Here is a dictionary definition: A supply chain is a network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product. So, a supply chain is product specific, not company specific Dell has many supply chains to manage, not just one

http://www.techexchange.com/thelibrary/Dama/Map_Slacks.html http://www.techexchange.com/thelibrary/Dama/Map_Slacks.html

02/21/07

Robert G. Fichman MI 703 Computer Information Systems

Slide 4

Of course, supply chains can be really complicated. Here is a very detailed example of what the supply chain looks like for a pair of cotton slacks, stretching all the way from where cotton harvested, to purchase of pants

Supply Chain Management

Supply chain management involves the flows of material, information and finance in a network consisting of customers, suppliers, manufacturers, and distributors [Lee, 2000]
Information Capacity, promotion plans, delivery schedules Material Finance

Raw matls, intermediate prods, finished good Credits, consignment, payment terms, invoice

Suppliers

Manufacturers

Distributors

Retailers

Customers

Sales, orders, inventory, quality, promotions Returns, repairs, servicing, recycling, disposal Payments, consignment

Information Material Finance

02/21/07

Robert G. Fichman MI 703 Computer Information Systems

Slide 5

Now lets talk about supply chain management. Here is dictionary definition: Supply chain management involves the flows of material, information and finance in a network consisting of customers, suppliers, manufacturers, and distributors (Lee, 2000) More informally SCM is the science and art of making sure the right stuff is at the right place at right time --- to lower costs, AND to create value. Most of this stuff is physical stuff. But also, information and money have to be at right place at right time As diagram shows, supply chains are allow about flows. Most of flow comes from suppliers to customers (not surprisingly) But are reverse flow to suppliers from customers There are three types of flows: 1. Most obviously, is flow of actual materials, the middle bars From suppliers: flows of raw materials, intermediate products, finished goods Reverse material flows: returns, repairs, servicing, recycling, disposal 2. Beyond actual materials, there are information flows From suppliers: manufacturing capacity, delivery schedules, promotions they have going Reverse flows: sales, orders, inventory, quality, promotions 3. And finally, there are financial flows: From suppliers: Credits, consignment, payment terms, invoice Reverse Flows: payments, consignment Effective SCM means keeping all these flows humming, efficiently and accurately
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Why SCM importance keeps growing

Globalization Vertical disintegration Outsourcing/offshoring Shorter product lifecycles Faster order cycle times JIT inventory =>All of this results in massive complexity and low tolerance for error
02/21/07 Robert G. Fichman MI 703 Computer Information Systems Slide 6

SCM was never easy But number of current trends are making it harder. How does globalization make it harder? Geographic distance, regulations, cultures, time zones How does trend to vertical disintegration make harder? No longer tell power over captive units Dont have common systems (necessarily). Lack of knowledge of strategy and culture that subunit of your own firm would ordinarily have Outsourcing? Same issues as disintegration Shorter product lifecycles? Constantly setting up new supply chains Remember, each product has its own chain. Product, inventory = >get obsolete faster, increases inventory risk Faster order cycle time Less margin for error or delay anywhere in the chain JIT inventory? Same as faster Cant afford errors or supply chain disruption. Manufacturing comes to a halt.

Supply Chain Management Software

Leading vendors
Manugistics i2 Technologies SAP Oracle

Typical modules

Demand Planning and Pricing Supply Management Transportation and Logistics Collaboration Visibility and Performance Management Revenue Management
Robert G. Fichman MI 703 Computer Information Systems Slide 7

02/21/07

SCM is business discipline within operations management. Its not a not technology per se. But of course, technology plays a crucial role Some firms (like Dell) have custom develop their own SCM systems. But most firms buy a package of some sort Here are leading vendors: specialized, ERP Manugistics and i2 are the leading specialized vendors, but the leading ERP vendors also have SCM products These are kinds of modules find in these packages. Demand Planning and Pricing Supply Management Transportation and Logistics Collaboration Visibility and Performance Management Revenue Management Key thing here is: if you obtain a so-called SCM package, its all integrated Just like ERP and CRM

SCM Challenge 1: Information Integration

In an ideal supply chain, all information would be transparent across the supply chain. (Lee 2000)
Source: http://www.infotech.com 02/21/07 Robert G. Fichman MI 703 Computer Information Systems Slide 8

Now lets examine the three central challenges of supply chain management First challenge is information integration, which means getting to the point where supply chain partners share information in real time So, what information are we sharing? Production plans, designs, promotions and sales, orders, production schedules, inventory levels ... Everything required determine how much stuff to send, where, when What good does this do us? As one tangible example, it helps counter so-called bullwhip effect. This is problem of demand distortion in a supply chain, which increases as it moves back through the supply chain. It starts with a shift in consumer demand, which drives a response by retailers, then wholesalers, then manufacturers, the component suppliers, then raw materials suppliers Wikipedia: Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants will increase their orders. In periods of falling demand, orders will fall or stop in order to reduce inventory. The effect is that variations are amplified the farther you get from the end-consumer. Of course, if all information were transparent across the whole supply chain, there would be no bull whip effect.

SCM Challenge 2: Coordination and Resource Sharing

What is being exchanged?
Decision rights Actual work

Methods
Decision delegation, work realignment, outsourcing

02/21/07

Robert G. Fichman MI 703 Computer Information Systems

Slide 9

The first challenge we just discussed is about information integration This is not trivial to achieve. Managers are worried about sharing demand information, product plans, inventory levels, etc. Also, you need common IT systems, or at least systems that talk to each other in real time, like Dell has with its suppliers But this first challenge is still easier than the second challenge of SCM, which is Coordination and resource sharing Here it is not just information we are sharing, but rather we are shifting decision rights and actual work across firm boundaries Traditionally we located decisions and work with owner of resource However, its better to locate decisions and work with those people that the most knowledge and have incentives to make the right decisions. That might not be the owners.

Example: Vendor Managed Inventory at Wal-Mart

P&G

Wal-Mart

02/21/07

Robert G. Fichman MI 703 Computer Information Systems

Slide 10

Lets look at example of this sort of coordination and resource sharing at Wal-Mart Wal-Mart as you know, is King of supply chain management. As Friedman says, they manage their supply chain down to the last atom. For example, in 1980sa decade before the internet--Wal-Mart hooked up in store point-of-sale terminals with major suppliers in real time using a custom built satellite network. How it works: When a customer buys P&G diapers, a message is instantly sent to P&G So, this is information exchange Sort of nice. Might help P&D plan manufacturing. But is that worth a satellite network? Actually, yes, because the initiative goes way beyond information integration: Wal-Mart says to P&G, OK, you decide when to send more diapers to our stores based on these real-time information flows A DECISION right (when to reorder) is being moved from Wal-Mart Why is this good? P&G has information Wal-Mart doesnt: general consumer demand about diapers, future pricing policies, national promotions, new products, competitor actions See any problems? Yes, incentives: Why wouldnt P&G intentionally overstock? Because Wal-Mart says, heres another idea Well pay you on when sale happens. Why is this a big deal? More efficient and responsive, sure But it aligns incentives with suppliers to get right amount to right stores. And it pushes inventory risk onto them. Note: this was very advanced for its time technically. VSAT was new. But it was a management innovation as much as a technology innovation: Pioneered the idea of vendor managed inventory

SCM Challenge 3: Organizational Relationship Linkage

What is being exchanged?
Accountability Risks/costs/gains

Methods
Extended communication & performance measures Incentive realignment

Example: Virtual Integration at Dell

Supplier Manufacturer Customer

02/21/07

Robert G. Fichman MI 703 Computer Information Systems

Slide 11

The third and most difficult challenge of SCM is organizational relationship linkage Here you are really entwining two organizations together Exchanging accountability Exchanging risks, costs gains We see some of that in the Wal-Mart example just discussed: Inventory risk is being exchanged Earlier in the course had great case study on this: Dell and their virtual integration strategy Examples from the Dell case of: Information exchange? Sharing forecasts with suppliers Collaboration and resource sharing (decision rights, work)? Dells becomes your PC department Organizational relationship linkage? Suppliers co locate near Dell plants. Suppliers commit to fulfill 25% of Dell demand.

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SCM Challenges Summary

Challenge
1. Information Integration 2. Coordination and resource sharing 3. Organizational relationship linkage

Exchanges
Information, knowledge

How
Information sharing, collaborative planning, forecasting and replenishment Decision delegation, work realignment, outsourcing Extended communication and performance measures, incentive realignment
Source: Lee 2000

Decisions, work

Accountability, risks/costs/gain

02/21/07

Robert G. Fichman MI 703 Computer Information Systems

Slide 12

Conclusions: Supply chain management is about getting the right stuff to the right place at the right time, efficiently and effectively Some of this stuff is physical stuff, but just as important are information and financial flows. Most of the flow goes forward in the supply chain, but reverse flows are important too Technology plays a crucial role in modern SCM. Many organizations use purchased packages from companies like Manugistics, i2 and SAP But firms with the most advanced SCM tend to develop most of their own custom systems Effective supply chain management has information integration as its foundation. However to really maximize efficiency and responsiveness across the supply chain, firms have to move towards the kind of virtual integration strategy Dell employs, where decisions, work, accountability, risks, costs and gains are moved to the position in the supply chain where the the best knowledge and incentives reside, rather than the way traditional firms work (e.g., whoever owns the resource hoards the information, does the work, makes the decision).

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