Manag|ng the Supp|y Cha|n

lnLroducLlon
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Chapter 1
Introduct|on

11 what |s supp|y cha|n management?
llerce compeLlLlon ln Lodays global markeLs la lnLroducLlon of producLs wlLh shorLer y shorLer
llfe cycles and Lhe helghLened expecLaLlons of cusLomers have force busslnes enLerprlses Lo
lnvesL ln and focus aLLenLlon on Lher supply chalns 1hls LogeLher wlLh conLlnulng advances ln
comunlcaLlons and LransporLaLlon Lechnologles (eg moblle communlcaLlons Lhe lnLerneL and
overnlghL dellvery) has moLlvaLed Lhe conLlnuous evoluLlon of Lhe supply chaln and of Lhe
Lecnlques Lo manage lL
ln a Lyplcal supply chaln raw maLerlals are procured and lLems are produced aL one or more
facLorles shlpped Lo warehouses for lnLermedlaLe sLorage and Lhe shlpped Lo reLallers or
cusLomers ConsequenLly Lo reduce cosL and lmprove servlce levels effecLlve supply chaln
sLraLegles musL Lake lnLo accounL Lhe lnLeracLlons aL Lhe varlous levels ln Lhe supply chaln 1he
supply chaln whlch ls also referred Lo as Lhe loglsLlcs neLwork conslsLs Lo suppllers
manufacLurlng cenLers warehouses dlsLrlbuLlon cenLers and reLall ouLleLs as well as raw
maLerlals worklnprocess lnvenLory and flnlshed producLs LhaL flow beLween Lhe faclllLles
(flg11)
ln Lhls book we presenL and explaln concepLs lnslghLs pracLlcal Lools and declslon supporL
sysLems lmporLanL for Lhe effecLlve managemenL of Lhe supply chaln 8uL whaL exacLly ls
supply chaln managemenL? We deflne lL as follows
Supply chaln managemenL ls a seL of approaches used Lo efflclenLly lnLegraLe suppllers
manufacLurers warehouses and sLores so LhaL merchandlse ls produced and dlsLrlbuLed aL Lhe
rlghL Llme ln order Lo mlnlmlze sysLemwlde cosLs whlle saLlsfylng servlcelevel requlremenLs
1hls deflnlLlon leads Lo several observaLlons llrsL supply chaln managemenL Lakes lnLo
conslderaLlon every faclllLy LhaL has an lmpacL on cosL and plays a role ln maklng Lhe producL
conform Lo cusLomer requlremenLs from suppller and manufacLurlng faclllLles Lhrough
warehouses and dlsLrlbuLlon cenLers Lo reLallers and sLores lndeed ln some supply chaln
analysls lL ls necessary Lo accounL for Lhe suppllers suppllers and Lhe cusLomers cusLomers
because Lhey have an lmpacL on supply chaln performance Second Lhe ob[ecLlve of supply
chaln managemenL ls Lo be efflclenL and cosLeffecLlve across Lhe enLlre sysLem LoLal
sysLemwlde cosLs from LransporLaLlon and dlsLrlbuLlon Lo lnvenLorles of raw maLerlals work ln
process and flnlshed goods are Lo be mlnlmlzed 1hus Lhe emphasls ls noL on slmply
mlnlmlzlng LransporLaLlon cosL or reduclng lnvenLorles buL raLher on Laklng a sysLems
approach Lo supply chaln managemenL llnally because supply chaln managemenL revolves
around efflclenL lnLegraLlon of suppllers manufacLurers warehouses and sLores lL
Manag|ng the Supp|y Cha|n
lnLroducLlon
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encompasses Lhe flrms acLlvlLles aL many levels from Lhe sLraLeglc level Lhrough Lhe LacLlcal Lo
Lhe operaLlonal level
WhaL abouL loglsLlcs managemenL? whaL ls Lhe dlfference beLween supply chaln managemenL
and loglsLlcs managemenL? Whlle Lhe answer Lo Lhls quesLlons depends on who ls addresslng
Lhls lssue we wlll noL dlsLlngulsh beLween loglsLlcs and supply chaln managemenL ln Lhls LexL
lndeed our deflnlLlon of supply chaln managemenL ls slmllar Lo Lhe deflnlLlon of loglsLlcs
managemenL glven by Lhe Councll of loglsLlcs managemenL
1he process of plannlng lmplemenLlng and conLrolllng Lhe efflclenL cosLeffecLlve flow and
sLorage of raw maLerlals lnprocess lnvenLory flnlshed goods and relaLed lnformaLlon from
polnL of orlgln Lo polnL of consumpLlon for Lhe purpose of conformlng Lo cusLomer
requlremenLs

WhaL makes supply chaln managemenL dlfflculL? AlLhough we wlll dlscuss a varleLy of reasons
LhroughouL Lhls LexL Lhey can all be relaLed Lo one or boLh of Lhe followlng observaLlons
1 lL ls challenglng Lo deslgn and operaLe a supply chaln so LhaL LoLal sysLemwlde cosLs
are mlnlmlzed and sysLemwlde servlce levels are malnLalned lndeed lL ls frequenLly
dlfflculL Lo operaLe a slngle faclllLy so LhaL cosLs are mlnlmlzed and servlce level ls
malnLalned 1he dlfflculLy lncreases exponenLlally when an enLlre sysLem ls belng
consldered 1he process of flndlng Lhe besL sysLemwlde sLraLegy ls known as global
opLlmlzaLlon
2 uncerLalnLy ls lnherenL ln every supply chaln cusLomer demand can never be forecasL
exacLly Lravel Llmes wlll never be cerLaln and machlnes and vehlcles wlll break down
Supply chalns need Lo be deslgned Lo ellmlnaLe as much uncerLalnLy as posslble and Lo
deal effecLlvely wlLh Lhe uncerLalnLy LhaL remalns
ln Lhe nexL Lwo secLlons we dlscuss each of Lhese lssues ln deLall
12 GLC8AL C1IMI2A1ICN
whaL makes flndlng Lhe besL sysLemwlde or globally opLlmal lnLegraLed soluLlon so dlfflculL? A
number of facLors make Lhls a challenglng problem
1 1he supply chaln ls a complex neLwork of faclllLles dlspersed over a large geography
and ln many cases all over Lhe globe 1he followlng example lllusLraLes a neLwork LhaL
ls falrly Lyplcal of Lodays global companles
OAML 11
-aLlonal semlconducLor whose llsL of compeLlLors lncludes MoLorola l-C and Lhe
lnLel CorporaLlon ls one of Lhe worlds largesL chlpmakers whose producLs are used ln
fax machlnes cellular phones compuLers and cars CurrenLly Lhe company has four
Manag|ng the Supp|y Cha|n
lnLroducLlon
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wafer fabrlcaLlon faclllLles Lhree ln Lhe unlLed SLaLes and one ln CreaL 8rlLaln and has
LesL and assembly slLes ln Malaysla and Slngapore AfLer assembly flnlshed producLs
are shlpped Lo hundreds of manufacLurlng faclllLles all over Lhe world lncludlng Lhose
of Compaq lord l8M and Slemens Slnce Lhe semlconducLor lndusLry ls hlghly
compeLlLlve speclfylng shorL lead Llmes and belng able Lo dellver wlLhln Lhe
commlLLed due daLe are crlLlcal capablllLles ln 1994 93 percenL of -aLlonal
SemlconducLors cusLomers recelved Lhelr orders wlLhln 43 days from Lhe Llme Lhe
order was placed whereas Lhe remalnlng 3 percenL recelved Lhelr orders wlLhln 90
days 1hese LlghL lead Llmes requlred Lhe company Lo lnvolve 12 dlfferenL alrllne
carrlers uslng abouL 20000 dlfferenL rouLes 1he dlfflculLy of course was LhaL no
cusLomer knew ln advance lf Lhey were golng Lo be parL of Lhe 3 percenL of cusLomers
who recelved Lhelr order ln 90 days or Lhe 93 percenL who recelved Lhelr order wlLhln
43 days
2 ulfferenL faclllLles ln Lhe supply chaln frequenLly have dlfferenL confllcLlng ob[ecLlves
lor lnsLance suppllers Lyplcally wanL manufacLurers Lo commlL Lhemselves Lo
purchaslng large quanLlLles ln sLable volumes wlLh flexlble dellvery daLes
unforLunaLely alLhough mosL manufacLurers would llke Lo lmplemenL long producLlon
runs Lhey need Lo be flexlble Lo Lhelr cusLomers needs and changlng demands
1hus Lhe suppllers goals are ln dlrecL confllcL wlLh Lhe manufacLurers deslre for
flexlblllLy lndeed slnce producLlon declslons Lyplcally are made wlLhouL preclse
lnformaLlon abouL cusLomer demand Lhe ablllLy of manufacLurers Lo maLch supply
and demand depends largely on Lhelr ablllLy Lo change supply volume as lnformaLlon
abouL demand arrlves Slmllarly Lhe manufacLurers ob[ecLlve of maklng large
producLlon baLches Lyplcal confllcLs wlLh Lhe ob[ecLlve of boLh warehouses and
dlsLrlbuLlon cenLers Lo reduce lnvenLory 1o make maLLers worse Lhls laLLer ob[ecLlve
of reduclng lnvenLory levels Lyplcally lmplles an lncrease ln LransporLaLlon cosLs

3 1he supply chaln ls a dynamlc sysLem LhaL evolves over Llme lndeed noL only do
cusLomer demand and suppller capablllLles change over Llme buL supply chaln
relaLlonshlps also evolve over Llme lor example as cusLomers power lncreases Lhere
ls lncreased pressure placed on manufacLurers and suppllers Lo produce an enormous
varleLy of hlghquallLy producLs and ulLlmaLely Lo produce cusLomlzed producLs

SysLem varlaLlons over Llme are also an lmporLanL conslderaLlon Lven when demand
ls known preclsely (eg because of conLracLual agreemenLs) Lhe plannlng process
needs Lo accounL for demand and cosL parameLers varylng over Llme due Lo Lhe lmpacL
of seasonal flucLuaLlons Lrends adverLlslng and promoLlons compeLlLors prlclng
sLraLegles and so forLh 1hese Llmevarylng demand and cosL parameLers make lL
dlfflculL Lo deLermlne Lhe mosL effecLlve supply chaln sLraLegy le Lhe one LhaL
mlnlmlzes sysLemwlde cosLs and conforms Lo cusLomer requlremenLs

Manag|ng the Supp|y Cha|n

lnLroducLlon
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13 MANAGING UNC1AIN1
Clobal opLlmlzaLlon ls made even more dlfflculL because supply chalns need Lo be
deslgned for and operaLed ln uncerLaln envlronmenLs A number of facLors conLrlbuLe
Lo Lhls


1 MaLchlng supply and demand ls a ma[or challenge
a 8oelng AlrcrafL announced a wrlLedown of $26 bllllon ln ocLober 1997
due Lo raw maLerlal shorLages lnLernal and suppller parLs shorLages and
producLlvlLy lnefflclencles
b second quarLer sales aL uS Surglcal CorporaLlon decllned 23 percenL
resulLlng ln a loss $22 mllllon 1he sales and earnlngs shorLfall ls aLLrlbuLed Lo
larger Lhan anLlclpaLed lnvenLorles on Lhe shelves of hosplLals
c l8M sell ouL -ew ApLlva C shorLage may cosL mllllons ln poLenLlal
revenue
Cbvlously Lhls dlfflculLy sLems from Lhe facL LhaL monLhs before demand ls reallzed
manufacLurers have Lo commlL Lhemselves Lo speclflc producLlon levels 1hese
advance commlLmenLs lmply huge flnanclal and supply rlsks

2 lnvenLory and backorder levels flucLuaLe conslderably across Lhe supply chaln even
when cusLomer demand for speclflc producLs does noL vary greaLly 1o llusLraLe Lhls
lssue conslder llgure 12 wlch suggesLs LhaL ln a Lyplcal supply chaln dlsLrlbuLor
orders Lo Lhe facLory flucLuaLe far more Lhan Lhe underlylng reLaller demand

3 lorescasLlng does noL solve Lhe problem lndeed we argue ln Lhe flrsL prlnclple of all
forecasLs (see chap2) LhaL forecasLs are always wrong 1hus lL ls lmposslble Lo
predlcL Lhe preclse demand for a speclflc lLem even wlLh Lhe mosL advanced forecasLs
Lechnlques
4uemand ls noL Lhe only source of uncerLalnLy uellvery lead Llmes manufacLurlng
ylelds LransporLaLlon Llmes and componenL avallablllLy also can have slgnlflcanL
supply chaln lmpacL As supply chalns become larger and more geographlcally dlverse
naLural and humanmade dlsasLers can have Lremendous lmpacL
OAML 12
ln sepLember 1999 a masslve earLhquake devasLaLed 1alwan lnlLlally 80 percenL of Lhe
lslands power was losL Companles such as PewleLLackard and uell who source a varleLy of
componenLs from 1alwanese manufacLurers were affecLed by supply lnLerrupLlons Slmllarly
fabrlc shlpmenLs from lndla were delayed ln Lhe wake of Lhe !anuary 26 2001 earLhquake ln
Lhe lndlan sLaLe of Cu[araL affecLlng many uS apparel manufacLurers
Manag|ng the Supp|y Cha|n
lnLroducLlon
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AlLhough uncerLalnLy cannoL be ellmlnaLed we wlll explore varlous approaches LhaL
mlnlmlze Lhe effecL of uncerLalnLy ln Lhe supply chaln When Lhls ls noL posslble we wlll
ldenLlfy sLraLegles LhaL supply chaln parLners can apply so as Lo malnLaln or lncrease servlce
level
14 Wn SUL CnAIN MANAGMN1
ln Lhe 1980 companles dlscovered new manufacLurlng Lechnologles and sLraLegles LhaL
allowed Lhem Lo reduce cosLs and beLLer compeLe ln dlfferenL markeLs SLraLegles such as [usL
lnLlme manufacLurlng kanban lean manufacLurlng LoLal quallLy managemenL and oLhers
became very popular and vasL quanLlLles of resources were lnvesLed ln lmplemenLlng Lhese
sLraLegles ln Lhe lasL few years however lL has become clear LhaL many companles have
reduced manufacLurlng cosLs as much as ls pracLlcally posslble Many of Lhese companles are
dlscoverlng LhaL effecLlve supply chaln managemenL ls Lhe nexL sLep Lhey need Lo Lake Lo
lncrease proflL and markeL share
lndeed ln 1998 Amerlcan companles spenL $898 bllllon or abouL 10 percenL of Lhe uS
gross naLlonal producL (C-) on supplyrelaLed acLlvlLles uurlng 2000 Lhls cosL lncreased Lo
over $1 Lrllllon decreaslng Lo $937 bllllon ln 2001 and $901 bllllon ln 2002 1hls flgure lncludes
Lhe cosL of movemenL sLorage and conLrol of producLs across supply chaln boLh wlLhln
manufacLurlng planLs and warehouses and beLween dlfferenL componenLs of Lhe supply chaln
unforLunaLely Lhls huge lnvesLmenL Lyplcally lncludes many unnecessary cosL componenLs due
Lo dedundanL sLock lnefflclenL LransporLaLlon sLraLegles and oLher wasLeful pracLlces ln Lhe
supply chaln lor lnsLance experLs belleve LhaL Lhe grocery lndusLry can save abouL $30 bllllon
or 10 percenL of lLs annual operaLlng cosL by uslng more effecLlve supply chaln sLraLegles
1o lllusLraLe Lhls lssue conslder Lhe followlng Lwo examples
1 lL Lakes a Lyplcal box of cereal more Lhan 3 monLhs Lo geL from Lhe facLory Lo a
supermarkeL
2 lL Lakes a Lyplcal new car on average 13 days Lo Lravel from Lhe facLory Lo Lhe
dealershlp 1hls lead Llme should be compared wlLh Lhe acLual Lravel Llme whlch ls no more
Lhan 4 Lo 3 days
1hus many opporLunlLles exlsL Lo cuL cosLs ln Lhe supply chaln
-oL surprlslngly a number of companles have been able Lo subsLanLlally lncrease revenue or
decrease cosLs Lhrough effecLlve supply chaln managemenL
OAML 13
rocLer Camble esLlmaLes LhaL lL saved reLall cusLomers $63 mllllon ln recenL 18monLh
supply chaln lnlLlaLlve Accordlng Lo rocLer Camble Lhe essence of lLs approach lles ln
manufacLurers and suppllers worklng closely LogeLher [olnLly creaLlng buslness plans Lo
ellmlnaLe Lhe source of wasLeful pracLlces across Lhe enLlre supply chaln
Manag|ng the Supp|y Cha|n
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1hls example suggesLs LhaL sLraLeglc parLnershlps beLween suppllers and
manufacLurers may have a slgnlflcanL lmpacL on supply chaln performance WhaL are Lhe Lypes
of buslness plans and parLnershlps LhaL can besL reduce cosLs and lmprove servlce levels? Wlch
one ls approprlaLe for Lhe parLlcular slLuaLlon aL hand? WhaL lncenLlves and performance
measures should be used Lo make Lhe parLnershlp successful? llnally how should Lhe beneflLs
resulLlng from Lhe sLraLeglc parLnershlp be shared? Should Lhe cosL savlng be Lransferred Lo
Lhe cusLomer spllL beLween Lhe dlfferenL parLners or kepL by Lhe mosL powerful player?



amp|e 14
ln 2 years -aLlonal SemlconducLor reduced dlsLrlbuLlon cosLs by 23 percenL decreased
dellvery Llme by 47 percenL and lncreased sales by 34 percenL by closlng slx warehouses
around Lhe globe and alrfrelghLlng mlcrochlps Lo cusLomers from a new cenLrallzed
dlsLrlbuLlon cenLer ln slngapore?
Cf course by swlLchlng Lo alr carrlers -aLlonal SemlconducLor lncreased
LransporLaLlon cosLs slgnlflcanLly 1hls lncrease was offseL by a reducLlon ln lnvenLory cosLs
resulLlng from Lhe shlfL from a decenLrallzed sysLem wlLh a slngle warehouse 1hls example
moLlvaLes Lhe followlng quesLlon WhaL are Lhe correcL Lradeoffs beLween lnvenLory and
LransporLaLlon cosLs?
OAML 1S
-ablsco lnc dellvers 300 Lypes of cookles and more Lhan 10000 candles Lo over 80000
buyers and spends more Lhan $200 mllllon a year ln LransporLaLlon expenses unforLunaLely
Loo many Lrucks arrlve aL or deparL from Lhelr desLlnaLlons half empLy 1hls ls why -ablsco ls
ploneerlng a collaboraLlve loglsLlcs efforL so LhaL lL can share Lrucks and warehouse space wlLh
oLher companles ln order Lo lower loglsLlcs cosLs
ln a recenL plloL program -ablsco shared warehouses and Lrucks wlLh 23 oLher manufacLurers
lncludlng uole and Lea errlns ln one LesL lnvolvlng 8000 orders grocer Lucky SLores
reduced lnvenLory cosLs by $48 mllllon -ablsco lLself saved $78000 ln shlpplng cosLs and
comblned all Lhe manufacLurers lnvolved ln Lhe LesL saved nearly $900000
Cf course Lhls Lype of cooperaLlon wlLh oLher companles requlres advanced
lnformaLlon sysLems and enLalls a number of rlsks
WhaL sysLems are necessary for Lhls approach Lo be a success? When should a company
underLake Lhls Lype of compllcaLed parLnershlp?