Introduction to

Supply Chain
Management

Source: Designing and Managing the Supply

Chain,
By D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi

Sources:
plants
vendors
ports

Field
Regional
Warehouses:
Warehouses: stocking
stocking
points
points

Customers,
demand
centers
sinks

Supply

Inventory &
warehousing
costs
Production/
Transportati
Transportati
purchase
on
on
costs
costs
Inventory & costs
warehousing
costs

THE LOGISTICS SYSTEM

Component
Manufacturing

Final
Assembly

Distribution &
Warehousing

C
U
S
T
O
M
E
R
S

S
U
P
P
L
I
E
R
S

Physical Supply
Inbound Logistics

Physical Distribution
Outbound Logistics

Supply Chain
Management

Definition:
Supply Chain Management is primarily concerned with the
efficient integration of suppliers, factories, warehouses
and stores so that merchandise is produced and
distributed in the right quantities, to the right locations
and at the right time, and so as to minimize total system
cost subject to satisfying service requirements.
Notice:
Everyone is involved
Systems approach to reducing costs
Integration is the key

Conflicting Objectives
in the Supply Chain
1. Purchasing
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
2. Manufacturing
Long run production
High quality
High productivity
Low production cost

Conflicting Objectives
in
the Supply Chain
3. Warehousing

Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices

Order Size

The Dynamics of the

Supply Chain

Customer
Customer
Demand
Demand
Distributor
Distributor Orders
Orders

Retailer
RetailerOrders
Orders

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Order Size

What Management Gets...

Customer
Customer
Demand
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

Volumes

What Management
Wants
Production
ProductionPlan
Plan

Customer
Customer
Demand
Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

The Dynamic Supply Chain

Increasing customer power leads

to increased demands on retailers
Increased retailer power leads to
increased demands on suppliers

Supply Chain:
The Magnitude

In 1998, American companies spent

$898 billion in supply-related activities
(or 10.6% of Gross Domestic Product).

Transportation 58%

Inventory 38%

Management 4%

Third party logistics services grew in

1998 by 15% to nearly $40 billion

Dynamic Forces of the

Global Supply Chain

Information
Logistics

GLOBAL
SUPPLY
CHAIN

User Logistics

Resources
Logistics

Supply Chain:
The Magnitude

It is estimated that the grocery industry

could save $30 billion (10% of operating
cost) by using effective logistics
strategies.

A typical box of cereal spends more than three

months getting from factory to supermarket.

A typical new car spends 15 days traveling

from the factory to the dealership, although
actual travel time is 5 days.

Supply Chain:
The Magnitude

Compaq computer estimates it lost $500 million

to $1 billion in sales in 1995 because its laptops
and desktops were not available when and
where customers were ready to buy them.

In 1993, IBM lost a major fraction of its potential

sales of desktop computers because it could not
purchase enough chips that control the
computer displays.

Supply Chain:
The Magnitude

Boeing Aircraft, one of Americas leading capital

goods producers, was forced to announce
writedowns of $2.6 billion in October 1997.
The reason? Raw material shortages, internal
and supplier parts shortages. (Wall Street
Journal, Oct. 23, 1997)

Supply Chain:
The Potential

Procter & Gamble estimates that it saved retail

customers $65 million through logistics gains over the
past 18 months.
According to P&G, the essence of its approach lies in
manufacturers and suppliers working closely together
. jointly creating business plans to eliminate the
source of wasteful practices across the entire supply
chain. (Journal of Business Strategy, Oct./Nov. 1997)

Cost Structure in
the Supply Chain
100
Margin

100 = Average Retail Price

89.2

12.1

9.8

Stores
Operating Cost

18.1

Administration
Logistics
Sales/Purchases

5.0
8.1
4.1

Marketing

9.7

Production
Cost

42.7

16.4
4.8
6.2
3.0
8.2

40.8

ACTUAL

TARGET

Supply Chain:
The Potential

In two years, National Semiconductor reduced

distribution costs by 2.5%, delivery time by 47% and
increased sales by 34% by
- Shutting six warehouses around the globe.
- Air-freighting microchips to customers from a new
centralized distribution center.

Supply Chain:
The Potential

In 10 years, Wal-Mart transformed itself by

changing its logistics system. It has the highest
sales per square foot, inventory turnover and
operating profit of any discount retailer.

Laura Ashley turns its inventory 10 times a

year, five times faster than three years ago.
This is achieved by using
- New Information System
- Centralized Warehouse

Supply Chain:
The Potential
For a company with annual sales of $500 million and
a 60% cost of sales, the difference between being at
median in terms of supply chain performance and in
the top 20% is $44 million of additional working
capital.

-- PRTM Director Mike Aghajanian

Supply Chain:
The Complexity
National Semiconductors:

Production:
Produces chips in six different locations: four in
the US, one in Britain and one in Israel
Chips are shipped to seven assembly locations in
Southeast Asia.
Distribution
The final product is shipped to hundreds of
facilities all over the world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within 45 days
5% are delivered within 90 days.

Supply Chain:
The Complexity
1. Supply Chain Integration
Conflicting Objectives
The Dynamics of the Supply Chain
2. Matching Supply and Demand
3. System Variations over Time
4. Status of Logistics Knowledge
Many problems are new
Incomplete understanding of issues
Methodology is rather narrow

ISSUES:
Decision Classification

Strategic Planning:
Decisions that typically involve major capital
investments and have a long-term effect.
1. Determination of the number, size and location of
new plants, distribution centers and warehouses
2. Acquisition of new production equipment and the
design of working centers within each plant
3. Design of transportation facilities,
communications equipment, data processing
means, etc.

ISSUES:
Decision Classification

Tactical Planning:
Effective allocation of manufacturing and distribution
resources over a period of several months
1. Work-force size
2. Inventory policies
3. Definition of the distribution channels
4. Selection of transportation and trans-shipment
alternatives

ISSUES:
Decision Classification

Operational Control:
Includes day-to-day operational decisions
1. The assignment of customer orders to
individual machines
2. Dispatching, expediting and processing orders
3. Vehicle scheduling

ISSUES:
Why Keep Inventory?

Uncertainty in customer demands

Uncertainty in the supply

Uncertainty in quantity and quality
Uncertainty in delivery time
Uncertainty in costs

Economies of scale

ISSUES:
Demand Forecast

The three principles of all forecasting

techniques:

Forecasting is always wrong

The longer the forecast horizon the worse the
forecast
Aggregate forecasts are more accurate

ISSUES:
Inventory control

How much inventory to keep?

Can uncertainty be reduced?
What size should orders be?
How does forecasting tool effect
inventory level?

ISSUES: The Challenge of

Inventory Management

Matching supply and demand accurately is

a critical challenge

Dell Computers predicts a loss; stock plunges. Dell

acknowledged that the company was sharply off in its
forecast of demand, resulting in inventory writedowns.
(WSJ, August 1993)

IBM continues to struggle with shortages in the Think

Pad line. (WSJ, May 1994)

Liz Claiborne said its unexpected earnings decline is the

consequence of higher than anticipated excess
inventories.
(WSJ, August 1993)

ISSUES:
Purchasing

What to Purchase
- In-house production Vs. external suppliers
Where to purchase
- Domestic Vs. international
From whom to purchase
- Cost
- Reliability: quality and on time delivery
- Availability and flexibility

ISSUES:
Purchasing

Centralized Vs. Decentralized

Number of suppliers:
Single sourcing Vs. Multiple sourcing

Supply contracts

ISSUES:
Production

Location of manufacturing plants

Production cost

Taxes

Incentives (by government)

Proximity to markets and raw materials

Transportation infrastructure

Political stability and culture

ISSUES:
Production

Flexibility

The ability to produce different

products simultaneously and
efficiently

The ability to produce new products

efficiently

ISSUES:
Production

Efficiency

Low cost
Short lead time

Reliability

On-time delivery
Quality

ISSUES:
Distribution

The structure of the distribution

network

The distribution strategy

The Classical Strategy

Cross Docking

Direct Shipping

ISSUES:
Product Design

What role does product design play

in supply chain management?
When is redesigning products
worth the cost?
Can product design compensate
for uncertainty in customer
demand?

ISSUES:
Information Systems

The advantages of advanced

information systems
The challenge of unlimited data
The roll of e-commerce
Impact of the internet

ISSUES:
Whats New in
Logistics?

Global competition

Shorter product life cycle

Increasing product variety

New, low-cost distribution channels

More powerful well-informed

customers

ISSUES:
Whats New in
Logistics?

New communications and

information technologies POS and
EDI technology

Wireless technology

Decision Support Systems

Integrated systems

Multi-modal transportation

ISSUES:
Whats New in
Logistics?
New
concepts in logistics

Push Vs Pull strategies

Cross docking

Strategic alliances

Manufacturing postponement

Design for Logistics