CMTC - CA Member of US Manufacturing Extension Partnership

Supply Chain
Management
Strategies
CMTC - CA Member of US Manufacturing Extension Partnership

Supply-Chain
Management Strategies
• Supply-Chain Management Defined
• Understanding Your Industry Model
• Business Alignment
• Defining Supply Chain Excellence
• SCM Ground Rules
• A Multi-Disciplinary Approach
 Operations, Finance, IT & eOPS
CMTC - CA Member of US Manufacturing Extension Partnership

What is Supply-Chain
Management?
• Supply-chain is a term that describes
how organizations (suppliers,
manufacturers, distributors, and
customers) are linked together.
• Supply-chain management is a total
system approach to managing the entire
flow of information, materials, and
services from raw-material suppliers
through factories and warehouses to the
end customer.
CMTC - CA Member of US Manufacturing Extension Partnership

Supply Chain Management

Evolution

■ Historical operational stages:

– From disconnected.
■ Exclusively focus on growth/cost.
■ Separately managed functions.
■ Internal performance measurements.
– To integrated.
■ End-to-end process approach.
■ Customer focus, profitable growth, liquidity,
functional integration.
 CMTC - CA Member of US Manufacturing Extension Partnership Consumer

T3
Consumer
Web Site

T3 T2
Consumer

T3 OEM 1 Warehouse Retailer

T2 T1
Consumer

T3 T2 T1 Consumer
Retailer
Consumer
T3 T2 T1
Tier 1 Consumer
supplier OEM 2 Distributor/Retailer

Consumer
T3 T2
Distributor Retailer
Tier2 and 3
Suppliers
T3
Consumer
Direct Sales Force

Supply Chain of a Typical Original Equipment Manufacturer

CMTC - CA Member of US Manufacturing Extension Partnership

Overall Strategy
■ A Supply Chain is fully optimized when:
– Bundles of well-priced products/services create
unassailable levels of customer attachment
(acquisition and retention).
– Total supply chain costs are at the lowest level.
– The supply chain contributes to profitable sales
growth by creating cost/service advantages.
– Worldwide effective tax rates are at the lowest level.
– Capital efficiency is at the lowest level.
– The supply chain is made flexible to respond to
changes faster than competitors and to stratify
service levels by product, customer, and geography.
CMTC - CA Member of US Manufacturing Extension Partnership

Supply Chain Issues

■ The main purpose of the levels in

any supply chain is to add
processes to the product/service.
■ Another purpose is to absorb the
differences between the stable
supply on the upstream side and
the erratic demand on the
downstream(consumer) side.
■ The synchronization of the supply
chain will optimize efficiency along
the chain.
CMTC - CA Member of US Manufacturing Extension Partnership

Matching Supply-Chains
with Products
Functional Innovative
Products Products

Efficient
Match Mismatch
Supply-Chain

Responsive
Mismatch Match
Supply-Chain
CMTC - CA Member of US Manufacturing Extension Partnership

Few High
Low Multiple Major Volume,
Volume, Products, Products, High
One of a Low Higher Standard-
Kind Volume Volume ization
I. Commercial Flexibility (High)
Job Printer Unit Cost (High)
Shop French Restaurant

II. Heavy
Batch Equipment
Coffee Shop
III.
Automobile
Assembly
Assembly
Line Burger King
IV.
Sugar
Continuous Refinery Flexibility (Low)
Flow Unit Cost (Low)
CMTC - CA Member of US Manufacturing Extension Partnership

Supply Chain Excellence

■ New corporate state of being:

– Supply chain excellence requires
effective strategies, sustained
management commitment, and
changes in attitude, culture, and
organization. More importantly, it
requires superior execution.
CMTC - CA Member of US Manufacturing Extension Partnership

Principles For Supply Chain

Excellence

■ Formulate a differentiated supply

chain strategy by channel.
■ For product categories, product
channels, and target customers,
develop an operating strategy that,
when executed, makes your supply
chain different from the rest.
■ Focus on long- and short-term
profitability, liquidity, and growth.
CMTC - CA Member of US Manufacturing Extension Partnership

Principles For Supply Chain

Excellence
■ Organize your business unit around
major processes or channels, not
functions. Traditional “silos” separates
work and interrupts flows which leads to
inefficiency.
■ Work collaboratively with customers,
suppliers, partners, and third parties to
change the way operations perform,
viewed, and measured. Extended supply
chain.
CMTC - CA Member of US Manufacturing Extension Partnership

Principles For Supply Chain

Excellence
■ Invest/reinvest in supply chain
information technology to manage flows
end-to-end. IT should support both
planning, analysis, and execution.
■ Invest/reinvest in supply chain
knowledge, people, skills, and learning.
Supply chain practice is relatively new.
Change is a constant, with innovations
and problems always occurring.
Organizations must invest in ongoing
training, mentoring, education, and
feedback systems.
CMTC - CA Member of US Manufacturing Extension Partnership

Principles For Supply Chain

Excellence

■ Operate/manage by product/channel.
Think in terms of product/service bundles
that are sold through potentially different
channels. Supply chains should be set up
and driven by the characteristics of each
channel.
■ Outsource parts of the chain for flexibility
and better asset management. In many
cases, functions can be performed better
by third parties.
CMTC - CA Member of US Manufacturing Extension Partnership

Principles For Supply Chain

Excellence

■ Think globally…build regionally…operate

locally. The best performing supply
chains are managed with centralized
planning, regional approaches, and local
operations.
■ The most critical principle: Execution!!!
Focus on it, measure it daily or real time,
and give people the authority and
accountability to excel at it.
CMTC - CA Member of US Manufacturing Extension Partnership

Supply Chain Management

Approach
■ Three items that flow through the supply
chain:
– Information
– Money
– Materials
■ Three areas of decision-making:
– Materials
– Processes
– Logistics
■ Two types of tools:
– Information Technology
– Operational Analysis
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules

■ 1. Build in flexibility.
– Supply chain capacity(push things
off your books).
■ Move fixed to variable costs.
■ More flexible production methods.
■ Improved information flows.
■ Use subcontractors, co-packing,
outsourcing.
– Operations capability.
– Management’s will to change.
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules -

continued
■ 2. Plan and measure accurately.
– Total cost approach – true margins,
profitability by customer segment.
– Enterprise-wide planning – demand-
driven and supply-aware; reduce
cycle times; respond quickly(for high
material cost industries).
– Dashboard concept – 5 to 7 metrics in
operational cost, time and response,
margins, customer service.
– Benchmark 1st internally, then expand
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules -

continued
■ 3. Develop logistically separate operations
/supply chains where appropriate.
– Entities: suppliers, manufacturers, distributors,
freight forwarders, contract carriers, 3rd -party
warehousing, 3rd -party logistics partners, 3rd -
party maintenance, financing companies,
import/export/customs brokers.
– Fulfillment channels: direct-home, direct-
business, retailers, value-added resellers, mass
merchandisers, OEMs, service centers,
integrators.
– Order conduits that impact process: fax,
Internet, phone, sales force, POS orders, EDI, e-
mail.
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules -

continued
■ 4. Get lean by emphasizing
simplicity and speed. Value Stream
Map Current & Future States
– Reduce uniqueness (parts,
designs, suppliers, processes) and
variety(transportation resources,
parts suppliers).
– Reduce cycle times and maximize
inventory velocity. Key:
information.
– Understand where value is
captured and eliminate non-value
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules -

continued
■ 5. Optimize Information.
– Focus on Time to Benefit and Decision Support.
ERP? Multiple smaller systems?
– Take ownership of Customer Information. Most
untapped: not articulated needs.
– Replace assets with Information. E.g. inventory
are moved several times before reaching final
destination. Replace physical movement with
digital movement of customer and product
information.
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules -

continued
■ 6. Treat customers unequally: Segment
and Stratify. No unnecessary
excellence.
■ 7. Operate Globally.
– Economic, time, tax differences.
■ 8. Practice Virtuality (partnering) and
Collaborative
Manufacturing/Management.
– Virtuality – attempt to gain scale.
– Requires more management, not less.
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules -

continued
■ 9. Exploit Electronic Commerce.
– Collapsing supply chain levels. E.g.
distribution channel.
– New channel: many-to-many. Supply
Web – key customers can have
communities of suppliers;
collaboratively plan, forecast,
replenish on a real-time(or near real-
time) basis.
– Valued-based differentiation – add
value along product, information,
process. master channel managers.
CMTC - CA Member of US Manufacturing Extension Partnership

12 SCM Ground Rules -

continued
■ 10. Leverage People.
■ 11. Operationalize New Product
Introductions and Phaseouts.
■ 12. Mass Customize and Postpone.
– Commodities vs. highly
customizable products.
– Downstream flexibility.
– E.g. HP printers. Automobile.
Amazon.
CMTC - CA Member of US Manufacturing Extension Partnership

Performance Measurement:
Operational
■ 1. Throughput
– the rate at which money is generated by
the system through sales: O2C
■ 2. Inventory
– all the money that the system has
invested in purchasing things it intends to
sell
■ 3. Operating Expenses
– all the money that the system spends to
turn inventory into throughput
CMTC - CA Member of US Manufacturing Extension Partnership
OrdertoCashVSMAssessm ent
SampleData
CurrentState FutureState
General Data
Product Fam ily
Custom er D em andRate 100 per Day 100 per Day
Num ber of Shifts 1 per Day 1 per Day
Hoursper shift 8 8
Non-worktim e(breaks, meetings, cleanup) per shift

OrderEntry/OrderProcessing
T otal Order Entrytime 1.0 Days 0.5 Days
D oesthisincludethetim ew aitingfor someonetoact? Yes No
If yes, howlongdoesit takefor som eonetoact uponit? 0.5 Days 0.0 Days
Form /Form al Order Received No No

C redit CheckInfo
Averagelengthof C redit Checkprocess 0.0 Days 0.0 Days
IstheO rder helduntil theCredit Checkisapproved? No No
D escribethecredit checkprocessinyour notes Description Description

ManufacturingLeadTime
H owlongdoesplanningprocesstake? 5.0 Days 5.0 Days
H owlongdoesschedulingprocesstake? 1.0 Days 1.0 Days
H owlongdoespurchasingprocesstake? 3.0 Days 2.0 Days
H owlongdoestoolingdevelopm ent processtake? 0.0 Days 0.0 Days
Total Planning/Scheduling/B uying 9.0 Days 8.0 Days
D osom eof theseprocessesw orkinparallel? No No
If Yes, estim atethetotal duration 0.0 Days 0.0 Days
AverageT erm sonPayables 30.0 Days 30.0 Days

RawMaterial Inventory
Howm anydaysof inventoryisinstockbasedonthe
customer dem and?(includeoff-site, if any) 60.0 Days 40.0 Days
W ithnom aterial available, what isthedeliveryleadtime? 5.0 Days 5.0 Days

Percent built tostock 100% 100%

Percent built toorder 0% 0%
Total mus t equal 100% 100% 100%

ManufacturingCycleincludingWIPinventory
W hat istheO perational CycleTime? 23.0 Days 19.0 Days
Daysof W IPInventorybasedonC ustomer Demand? 7.0 Days 5.0 Days
W hat istheM fg./Prod. Time? 30.0 Days 24.0 Days
W hat istheC ustom er dem andrate? 100.0 per Day 100.0 per Day

FinishedGoodWarehouse/ Distribution
Howm anydaysof FinishG oodsbaseonCustomers
DailyD em andisinstock? 15.0 Days 10.0 Days
Doesthisincludeoff-sitestorage? No No
*Ow n Notethecosts Notethecosts
*Lease Notethecosts Notethecosts
 CMTC - CA Member of US Manufacturing Extension Partnership

Inventory: Bullwhip Effect

The magnification of variability in orders in the supply-chain.

Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

Quantity

Quantity

Quantity
Order

Order

Order
Time Time Time

A lot of retailers …can lead to …can lead to even

each with little greater variability for greater variability
variability in their a fewer number of for a single
orders…. wholesalers, and… manufacturer.
 CMTC - CA Member of US Manufacturing Extension Partnership

Minimizing Waste: Inventory

Hides Problems Example: By identifying
defective items from a
Machine
downtime vendor early in the
production process the
Scrap Vendor downstream work is
Work in delinquencies Change saved.
orders
process
queues Engineering design Design
(banks) redundancies backlogs

Example: By identifying
Paperwork Inspection Decision defective work by
backlog backlogs backlogs employees upstream,
the downstream work is
saved.
 CMTC - CA Member of US Manufacturing Extension Partnership

Cost Minimization Goal

By adding the item, holding, and ordering costs together,
we determine the total cost curve, which in turn is used to
find the Qopt inventory order point that minimizes total costs.
Total Cost
C
O
S
T Holding
Costs
Annual Cost of
Items (DC)

Ordering Costs

QOPT
Order Quantity (Q)
 CMTC - CA Member of US Manufacturing Extension Partnership

ABC Classification System

• Items kept in inventory are not of equal importance:
– dollars invested
– profit potential 60
% of
$ Value 30 A
– $ volume
0 B
– stock-out penalties % of 30 C
Use 60

So, identify inventory items based on percentage of total dollar

value, where “A” items are roughly top 15 %, “B” items as next
35 %, and the lower 65% are the “C” items.
 CMTC - CA Member of US Manufacturing Extension Partnership

Production Costs

Average
unit cost
of output

Under Utilization Over Utilization

Best Operating
Level

Volume
 CMTC - CA Member of US Manufacturing Extension Partnership

Economies & Diseconomies of Scale

Economies of Scale and the Experience Curve working

100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant

Diseconomies of Scale start working

Volume
 CMTC - CA Member of US Manufacturing Extension Partnership

Saving Time
What are the consequences of saving time at each process?

Bottleneck Nonbottleneck

• Rule: Bottlenecks govern both throughput

and inventory in the system.
• Rule: An hour lost at a bottleneck is an hour
lost for the entire system.
• Rule: An hour saved at a nonbottleneck is a
mirage.
CMTC - CA Member of US Manufacturing Extension Partnership

Waste in Operations
(1) Waste from overproduction
(2) Waste of waiting time
(3) Transportation waste
(4) Inventory waste
(5) Processing waste
(6) Waste of motion
(7) Waste from product defects
CMTC - CA Member of US Manufacturing Extension Partnership

Design for
Manufacturability
• Traditional Approach
– “We design it, you build it” or “Over
the wall”
• Concurrent Engineering
– “Let’s work together simultaneously”
CMTC - CA Member of US Manufacturing Extension Partnership

Designing for the Customer:

Quality Function Deployment
• Interfunctional teams from marketing,
design engineering, and
manufacturing

• Voice of the Customer

• House of Quality
CMTC - CA Member of US Manufacturing Extension Partnership

Measuring Product
Development Performance
• Time-to-market

• Productivity

• Quality
CMTC - CA Member of US Manufacturing Extension Partnership

Quality Specifications
• Design quality: Inherent value of the product in
the marketplace

– Dimensions include: Performance, Features,

Reliability, Durability, Serviceability,
Response, Aesthetics, and Reputation.

• Conformance quality: Degree to which the

product or service design specifications are met
CMTC - CA Member of US Manufacturing Extension Partnership

Costs of Quality
Appraisal Costs

Costs
External Failure Prevention Costs
Costs
of
Quality

Internal Failure
Costs
 CMTC - CA Member of US Manufacturing Extension Partnership

Example: Pareto Analysis

Can 80%
Can be be used
used
to
to find
find when
when
80%
80% of of the
the
problems
problems Frequency
may
may be be
attributed
attributed toto
20%
20% of of the
the
causes.
causes.
Design Assy. Purch. Training Other
Instruct.
CMTC - CA Member of US Manufacturing Extension Partnership

Performance Measurement:
Financial
■ Net profit
– an absolute measurement in
dollars

■ Return on investment
– a relative measure based on
investment

■ Cash flow
– a survival measurement
CMTC - CA Member of US Manufacturing Extension Partnership

Formulas for Measuring

Supply-Chain Performance
• Inventory Turnover =
Cost of goods sold
Average aggregate inventory value

• Weeks of Supply = 52 Weeks

Average aggregate inventory
Cost of goods sold
 CMTC - CA Member of US Manufacturing Extension Partnership

The Context of E-Ops

Business Model
“How we make our money?”

Operations
“How do we manage production of the product or service?”

Information System Architecture

“The set of tools used to support processes.”
 CMTC - CA Member of US Manufacturing Extension Partnership

Business Web Models

B-Web Marketplace

Model Aggregator
Alliance

Value Chain

Example Ebay Distributive Network

E-Trade
AOL

Dell Computers
UPS
 CMTC - CA Member of US Manufacturing Extension Partnership

Traditional vs. Electronic Commerce

Purchasing
Process Step Traditional Electronic Commerce
Acquire Magazines, flyers, Web pages
product online catalogues
information

Send order Fax, mail E-mail, Web pages

Check Printed form, phone Online database,
inventory at form Web pages
warehouse

Buyer sends Mail EDI

payment
CMTC - CA Member of US Manufacturing Extension Partnership

The Shape of Things to

Come

Old Model Plan – Execute - Plan

I2, Manugistics, Oracle, SAP

New Model Plan – Execute – Measure - Plan

I2, Manugistics, Oracle,

SAP, SeeCommerce