SESSION 1Basic terminology and concepts of supply chain management. Facilities, function, types Introduction to Introduction to Supply Chain Need, benefits elements challenges Some Estimates for India -------------------------------------------------------------------- LOGISTICS SPEND US $ 50 B SHARE OF GDP 12 - 13 % MAJOR ELEMENTS ARE ( % AGE OF TOTAL ) : TRANSPORTATION 35 INVENTORIES 25 PACKAGING 11 HANDLING & WAREHOUSING 9 OTHERS 6 LOSSES 14 -----------------------------------------------------------------------------------------------LOGISTICS COSTS CAN BE 6 - 7 % OF GROSS SALES CAN GO UP TO 14 - 15 %. FOR SECTORS LIKE CEMENT AND BULK MATERIALS. Global Logistics Industry Country’s spending on logistics management Country US Japan UK Canada Germany China Argentina Peru Logistics spend (% of GDP) 9.50 % 10.50 % 11.00 % 12.00 % 13.00 % 18.60 % 22.00 % 24.00 % 3rd Party Logistics Activities (% of total movement) 57 % 80 % < 10 % India 13.00 % < 10 % WHAT IS SUPPLY CHAIN MANAGEMENT What Is the Supply Chain? Also referred to as the logistics network Suppliers, manufacturers, warehouses, distribution centers and retail outlets – “facilities” Suppliers Manufacturers Warehouses & Customers Distribution Centers and the Raw materials Work-in-process (WIP) inventory Finished products that flow between the facilities Material Costs Transportation Costs Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs Supply chain management-defined Supply chain management is a set of approaches utilised to efficiently integrate suppliers, manufacturers, warehouses and stores , so that merchandise is produced and distributed at the right quantities , to the right location and at the right time, in order to minimise system wide costs while satisfying service level requirements. The Supply Chain Suppliers Manufacturers Warehouses & Distribution Centers Customers Transportation Costs Material Costs Transportation Costs 8 Manufacturing Costs Transportation Costs Inventory Costs What Is Supply Chain Management (SCM)? Plan Source Make Deliver Buy A set of approaches used to efficiently integrate Suppliers Manufacturers Warehouses Distribution centers In the right quantities To the right locations And at the right time So that the product is produced and distributed System-wide costs are minimized and Service level requirements are satisfied Facilities Warehouses Factories Processing centers Distribution centers Retail outlets Offices Functions and Activities Forecasting Purchasing Inventory management Information management Quality assurance Scheduling Production and delivery Customer service Typical Supply Chains Production Distribution Purchasing Receiving Storage Operations Storage ….No ideal supply chain model Functional Products v/s innovative products Toothpaste Cars Soups Furniture Mobile phones Need for Supply Chain Management 1.Improve operations 2.Increasing levels of outsourcing 3.Increasing transportation costs 4.Competitive pressures 5.Increasing globalization 6.Increasing importance of e-commerce 7.Complexity of supply chains 8.Manage inventories Benefits of Supply Chain Management Lower inventories Higher productivity Greater agility Shorter lead times Higher profits Greater customer loyalty Elements of Supply Chain Management History of Supply Chain Management 1960’s - Inventory Management Focus, Cost Control 1970’s - MRP & BOM - Operations Planning 1980’s - MRPII, JIT - Materials Management, Logistics 1990’s - SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order Entry 2000’s - Optimized “Value Network” with Real-Time Decision Support; Synchronized & Collaborative Extended Network Supply chain Management : Key Issues Issue Components Supply contracts Comprehensive relationshipprice,discounts,volummes, deliveries distribution Distribution network configuration multiple manufacturing, warehouses, retail Strategic alliances Distribution strategies Outsourcing and procurement strategies Product design IT Partnerships in SCM Cross-docking? Trade-off –make or buy. Risks of outsourcing, e-procurement Impact on inventory, transport,lead times Data analysis,e-commerce,RFID ….No ideal supply chain model Functional Products v/s innovative products Toothpaste Cars Soups Furniture Mobile phones Supply chain management Challenges SCM strategies can not be in isolation, have to align with another chain- the development chain (new product introduction) as well as overall org. objectives. Achieving the best solution with minimizing costs and maintaining service levels- Global optimisation Facing uncertainties and risk – customer demand, travel time, break downs, Supply chain management Challenges - Nike Supply chain configuration 120 countries, 20000 styles/season, 800 factories Challenge 1- Local factors- tariff resulting in consolidation, InfrastructureChallenge 2- Consumer – Choices –product proliferation- lean manufacturing Challenge 3- retail customers- Shorter lead times Challenge 4- Conflict- cost & flexibility – offshore v/s onshore –lead times Supply chain management Needs to be efficient and cost effective Across physical infrastructure Across entire system-Global optimisation Across levels from strategic to tactical Components of logistics management : Planning Inputs into logistics Natural resources (land, facilities, and equipments) Supplier s Human resources Management actions Implementation Control Outputs of logistics Logistics management Raw In-process materials inventory Finished goods Marketing Customer orientation (competitive s advantage) Time and place utility Efficient movement to customer Logistics Activities •Plant and warehouse site •Customer Service Financial resources •Demand forecasting selection •Procurement •Distribution •Packaging Information communications •Return goods handling resources •Inventory control •Salvage and scrap •Material handling disposal •Traffic and transportation •Order Processing •Warehousing and •Parts and service storage support Proprietary asset SESSION 2 Cycle view Push/Pull view Process views of Supply Chain Macro processes Customer Relationship Management (CRM) Internal supply chain management (ISCM) Supplier Relationship Management (SRM) Supply chain management-Process views Supply chain as a sequence of processes and flows that take place within and between diferent stages and combine to fill as customer need for a product. Cycle view Processes are divided into a series of cycles, each performed at the interface between two successive stages . Push/Pull view Pull processes- initiated by customer orders Push processes- initiated in anticipation of customer order Cycle View of Supply Chains Customer Customer Order Cycle to Retailer Replenishment Cycle to Distributor Manufacturing Cycle to Manufacturer Procurement Cycle to Supplier Supply chain management-Cycle view Each cycle occurs at the interface between two successive stages of the supply chain Not every supply chain will have all four cycles clearly separated Each cycle has sub-processes Customer Order Cycle Replenishment Cycle Manufacturing Cycle Procurement Cycle Supply chain managementPush/Pull views Processes in a supply chain fall into one of the two categories depending on the timing of execution relative to end customer demand. Pull processes- Reactive with certainty of demand Push processes- Speculative processes with demand estimates Supply chain management-Push/Pull views Push and Pull supply chain (Hybrid) Pushpull bound ary Push Raw Materials Pull Customer PC manufacturer Components ( Forecast based ) Final assembly (Order based) Cycles Pull Customer Order Customer arrival Customer order entry Customer order fulfilment Customer order receiving Replenishment Retail order trigger Retail order entry Retail order fulfilment Retail order receiving Push Manufacturing Order arrival from distributors Production scheduling Manufacturing and Shipping Receiving (distributors, retailers, customers Procurement Supply chain strategies Push (Forecast based) Pull (Demand based) Hybrid Supply chain strategies Push based supply chain (Forecast based) Based on long-term forecasts(retailers) Delays reactions Inability to meet demand pattern changes Obsolescence when demand disappers excess/short inveontories Lower service levels Supply chain strategies Pull based supply chain (demand based) Based on customer demand Firm responds only to order Lesser lead time lesser inventory levels Less variability Lower service levels Difficult when lead times are high Framework for matching products with strategies The right strategy Demand uncertainity Pull High Q1 Q2 Q2 Q4 Pull Push Low Furniture Books Grossary Computer Garments Pull centrifuges soaps Toys Watches High Economies of Scale Push Jewellery Water pumps Demand driven supply chain strategies Demand forecast – Historical demand data Demand shaping- Impact of promotions,discounts etc. Measuring accuracy of forecast Arrive at demand (SKU wise, location wise) Analyse supply chain to match support for demand Supply chain macro processes supplier Firm Customer CRM CRM aims to generate customer demand and facilitate placement and tracking of orders Market Price Sell Call center Order Management SRM ISCM Arranges and manages Planning of internal sources for various production and storage goods and services capacities, demand supply plans Source Negotiate Buy Design collaboration Supply collaboration Strategic planning Demand planning Supply planning Fulfillment Field service SESSION 3 Competitive and supply chain strategies Achieving Strategic Fit Achieving strategic fit and Scope: Supply Chain Drivers and Expanding strategic scope Obstacles Competitive and Supply Chain Strategies Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services Low cost, Rapid Response, Product Differentiation Ex: Pantaloons versus factory outlets HP versus Dell Supply chain strategy: determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important! Competitive Strategy Types Defender - operational efficiency Prospector - innovation - Wal-Mart, ExxonMobil? - Nike, Leitch Technology? Analyzer - minimize risk through proven opportunities - Hewlett-Packard, Toyota? Reactor - quick response to immediate market demands - ??? The Value Chain: Linking Supply Chain and Business Strategy Competitive Strategy New Product Marketing Strategy Strategy Supply Chain Strategy New Product Development Marketing and Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources Strategic planning Product development strategy: specifies the portfolio of new products that the company will try to develop Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted Supply Chain Strategy Traditionally, SC strategy includes -Suppliers Strategy -Operations Strategy -Logistics Strategy Involving inventory, transportation, operating facilities, information flows. Achieving Strategic Fit What is strategic fit? How is it achieved? Other issues affecting strategic fit Achieving Strategic Fit Strategic fit: Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies have the same goals A company may fail because of a lack of strategic fit Example of strategic fit – Dell, Designer garments How is Strategic Fit Achieved? Step 1: Understanding the customer and supply chain uncertainty Step 2: Understanding the supply chain capabilities Step 3: Achieving strategic fit Step 1: Understanding the Customer and Supply Chain Uncertainty Identify the needs of the customer segment being served by the following attributes: Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product Ex: 7-Neighbourhood store vs. Hypermart Step 1: Understanding the Customer and Supply Chain Uncertainty Understand the overall attributes of customer demand Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain due to the portion of the demand the supply chain is required to handle and attributes the customer desires Ex: A firm supplying only emergency orders for a product faces higher implied demand uncertainty then when there is long lead time. Ex: Implied demand uncertainty increases with service level, but demand uncertainty does not change. Step 1: Understanding the Customer and Supply Chain Uncertainty Implied demand uncertainty also related to customer needs and product attributes First step to strategic fit is to understand customers by mapping their demand on the implied uncertainty spectrum Step 1: Understanding the Customer and Supply Chain Uncertainty Understanding the Customer Lot size Response time Service level Product variety Price Innovation Implied Demand Uncertainty Impact of Customer Needs on Implied Demand Uncertainty Customer Need Causes implied demand uncertainty to increase because … Wider range of quantity implies greater variance in demand Less time to react to orders disaggregated Range of quantity increases Lead time decreases Variety of products required increases Demand per product becomes more Number of channels increases Rate of innovation increases Required service level increases Total customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand Levels of Implied Demand Uncertainty Detergent Long lead time steel Purely functional products High Fashion Palm Pilot Entirely new products Customer Need Price Responsiveness Low High Implied Demand Uncertainty Correlation Between Implied Demand Uncertainty and Other Attributes Attribute Product margin Avg. forecast error Avg. stockout rate Avg. forced seasonend markdown Examples Low Implied Uncertainty Low 10% 1%-2% 0% ?? High Implied Uncertainty High 40%-100% 10%-40% 10%-25% ?? Step 2: Understanding the Supply Chain How does the firm best meet demand? Dimension describing the supply chain is supply chain responsiveness Supply chain responsiveness -- ability to respond to wide ranges of quantities demanded meet short lead times handle a large variety of products build highly innovative products meet a very high service level Step 2: Understanding the Supply Chain There is a cost of achieving responsiveness Supply chain efficiency: cost of making and delivering the product to the customer Increasing responsiveness results in higher costs that lower efficiency Figure cost-responsiveness efficient frontier Figure supply chain responsiveness spectrum Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum Understanding the Supply Chain: CostResponsiveness Efficient Frontier Responsiveness High Low High Low Cost Responsiveness spectrum Highly efficient Somewhat efficient Somewhat responsive Highly responsive Integrated steel plant Apparelmake to stock Automobiles Retails stores stocks change during day Physically efficient V/s responsive supply chains Physically efficient Primary purpose Responsive supply chains Supply predictable demand Respond quickly to efficiently at lowest possible unpredictable demand to cost minimise stockouts, markdowns and obsolete inventory High utilisation Generate high turns and mimimize inventory Shorten lead time without increasing cost Deploy excess buffer capacity Deploy significant buffer stocks of parts or finished goods Invest aggressively in ways to reduce lead time Manufacturing focus Inventory strategy Lead time focus Supplier selection Primarily for cost and quality Primarily for speed, flexibility and quality Step 3: Achieving Strategic Fit Step is to ensure that what the supply chain does well is consistent with target customer’s needs Fig. : Zone of strategic fit Examples: Dell, maggie noodles Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map Responsive supply chain Responsive ness spectrum of it e F on gic Z te tra S Efficient supply chain Certain demand Implied uncertainty spectrum Uncertain demand Step 3: Achieving Strategic Fit All functions in the value chain must support the competitive strategy to achieve strategic fit Two extremes: Efficient supply chains (Cement) and responsive supply chains (Dell) – Two key points there is no right supply chain strategy independent of competitive strategy there is a right supply chain strategy for a given competitive strategy Other Issues Affecting Strategic Fit Multiple products and customer segments Product life cycle Competitive changes over time Multiple Products and Customer Segments Firms sell different products to different customer segments (with different implied demand uncertainty) The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments Two approaches: Different supply chains if the segments are large enough Tailor supply chain to best meet the needs of each product’s demand, i.e., share some links. Product Life Cycle The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle Supply chain strategy must evolve throughout the life cycle Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary Late: predictable demand, lower margins, price is important Product Life Cycle Examples: pharmaceutical firms, Intel As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency Competitive Changes Over Time Competitive pressures can change over time More competitors may result in an increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions Expanding Strategic Scope Scope of strategic fit The functions and stages within a supply chain that devise an integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope Five categories: Strategic Scope Suppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer Intracompany Intraoperational Scope One operation within a functional area in a company Each operation within each stage of the supply chain devises a strategy independently and attempts to optimize its own performance independently Usually results in different operations having conflicting objectives – does not maximize total supply chain profits Strategic Scope: Intracompany Intraoperation Scope Suppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer Intracompany Intrafunctional Scope Strategic fit is expanded to include all operations within a function Attempt to maximize performance for the entire function Strategic Scope: Intracompany Intrafunctional Scope Suppliers Manufacturer Distributor Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Retailer Customer Intracompany Interfunctional Scope All functional strategies within a company are developed to support each other and the company’s competitive strategy Strategic fit is expanded to include all functions in a firm Goal is to maximize company profit Strategic Scope: Intracompany Interfunctional Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy Intercompany Interfunctional Scope The only positive cash flow for the supply chain occurs when the customer pays for the product – all other cash flows are resettling of accounts within the chain and add to total supply chain cost Supply chain surplus Difference between what the customer pays and total supply chain cost Total profit to be shared among all members of the supply chain Intercompany Interfunctional Scope Increasing supply chain surplus increases the amount to be shared All stages coordinate strategy across all functions to ensure that they best meet the customer’s needs and maximize supply chain surplus Also provides more speed by managing the interfaces between supply chain stages Each company must evaluate its actions in the context of the entire supply chain