Supply Chain Management

Consists of all parties involved, directly or indirectly in fulfilling a customer request

In fact not a chain but a network

Includes:

• retailers
• wholesalers
• manufacturers
• customers

Objectives of Supply Chain Management:

• Effectively managing assets and products, inventories, information, and fund flows (in both directions)
  • SC(supply chain) costs include information, storage, transportation, components, assembly, etc.
• Maximize overall value created:
  • $SupplyChainSurplus=CustomerValue-SupplyChainCost$
  • Success should be measured by the total supply chain surplus, not by profits at an individual stage.

Examples of SCM (Supply Chain Management):

• Wall Mart: Supply chain win 📈
  • Invested heavily in transportation and information sharing
  • Cluster of stores around DCs (Distribution Centers) for frequent store replenishment
  • Match supply and demand more effectively
  • Information sharing and supplier collaboration to improve product availability and bring down costs
  • Sales increase between 1980 and 2010: $1 billion => $408 billion (22% growth per year)
• Borders: Supply chain fail 📉
  • Superstore for books sales
  • was offering greater variety far more titles than local book stores, dominating the market along with Barnes & Noble
  • Sales $4 bln. in 2004 dropped to $ 2.8 bln. in 2009 (Amazon: internet sales offer more titles at a lower cost through a few DCs (Distribution Centers)
• Dell: the original dropshipper. 💻
  • Earns its success based on its supply chain design
  • Between 1993-2006 made a decision to sell directly to customers bypassing distributors and retailers
  • Centralization of manufacturing and inventories in a few locations and final assembly is postponed until the customer order arrives
  • Large variety of PC configurations with low cost
  • By 2006 sales increased to $ 56 bln (still similar).
  • Faced a challenge: Market shifted to low level customization.
  • Given growing power of hardware customers were satisfied with few models
  • Adapts its supply chain by operating two supply chains for two markets
  • Make to order for customized and make to stock for low customized

Decision Phases of a Supply Chain:

1. Supply Chain strategy or design
   • how to structure the supply chain over several years.
2. Supply Chain tactical planning
   • Decisions over a quarter or year.
3. Supply Chain operation
   • Daily or weekly operational decisions

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Examples

• Stategic: long-term, expensive, must take into account market uncertainty
  • Whether to outsource or perform a supply chain function in-house
  • Example: Pepsi purchases two of its largest bottlers to react more quickly
  • Locations and capacities of facilities (manufacturing, warehousing)
  • Products to be manufactured (where to produce) and stored at various locations (where to store)
  • Type of information system to be utilized
• Planning: Must consider in planning decisions demand uncertainty, exchange rates, competition over mid-time horizon
  • Locations are fixed, which markets to supply from which locations Example: Arcelor Mittal’s decision regarding production quantities at each location From where to subcontract
  • Warehouse locations are fixed, inventory policies
  • Timing and size of market promotions
• Operations: less uncertainty, Focus on service (due date) / efficiency (cost)
  • Allocate an inventory or release a production order for customer orders
  • Set orders for the week
  • Generate pick lists at a warehouse,
  • Set delivery schedules and all sorts of scheduling

Customer Order Decoupling Point:

proactive	reactive
processes start before customer order	processes start after customer order
forecast driven	order driven
efficiency	flexibility

• ETO (engineer-to-order)
  • example: ship
• MTO (make-to-order)
  • example: furniture
• ATO (assemble-to-order)
  • example: car
• MTS (make-to-stock)
  • example: refrigerator
• DFS (deliver-from-local-stock)
  • example: food

Examples

• Delay product differentiation: United Colors of Benetton

postpone dying until the selling season gets closer so forecast uncertainty for individual products reduces.

Garment production:

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• Quick response: ZARA
• Zara: design-to-shelf lead time (display new designs every): 3-4 weeks
  • By working with local flexible producers
• Divide 3 month sales season in three 1-month periods
  • M1: Decide on quantities for first period only, no sales data;
  • M2: production decisions based on first week of sales data
  • M3: production decisions based on first month of sales data
• Zara responds to trends rather than having to predict them
  • Much smaller forecasting error; less discounts
• Issue: costs for manufacturer (smaller batches, costs of lead time reduction), but most revenues for retailer
  • But Zara is vertically integrated

Push / Pull System

Two approaches to control production/inventory

• push system
  • work release is scheduled based on forecasted (or even actual) demand (hence can be planned in advance).
  • "Make all we can just in case".
  • Large Lots.
  • High Inventories.
• pull system
  • work release is authorized based on the current inventory / production status (hence real time).
  • "Make what's needed when we need it".
  • Small Lots.
  • Low inventories.

see diagram

Drivers of Supply Chain Performance

• Logistical Drivers:
  • Facilities
  • Inventory
  • Transportation
• Cross-functional drivers:
  • Information
  • Sourcing
  • Pricing

Coordination in the supply chain

Inventories:

why do you need inventories ? each type of inventory has it's own name.

• Processing products in a supply chain takes time (e.g. production, distribution), and during inventories are kept work-in-process inventory
• Because typically production or supply is in larger quantities than demand cycle inventory
• Because of uncertainties in demand => need for buffer safety inventory
• Because of anticipated peaks in demand or supply seasonal inventory

Trade-offs for inventories:

• work-in-process inventory:
  • Proportional to flow time: $WIP=throughput\ast flowtime$
• cycle inventory
  • trade off between: order/setup costs and (inventory) holding costs
• safety inventory
  • trade off between: product availability and (inventory) holding costs
• seasonal inventory
  • trade off between inventory holding costs and costs of flexible demand / supply (overcapacity, working overtime in production)

Inventory holding cost

Inventory holding cost is a cost composed of costs associated with storing inventory.

Inventory holding cost has many components:

• Tangible costs
  • tax
  • insurance
  • material handling: financial sheets
• Intangible costs
  • opportunity: losses in productivity
  • customer goodwill
  • drops in employee morale
  • loss of brand value

How inventories are managed

Webshop Example

A webshop selling sweaters

Suppose: you sell 3 sweaters per week on average and it requires 1 week to receive an order (lead time)

• Order latest when you have 3 items on stock: reorder point
• Add buffer for uncertainty in demand: reorder point = 4, 5, 6?

Account for materials ordered before that have not arrived yet

Basic Inventory management

1. Observe demand and try to estimate future demand (forecasting)
2. Based on expected demand and variability in lead time demand, determine reorder point ROP
3. Based on a cost trade-off, find order quantity Q
4. Order Q when the effective inventory ($InventoryPosition=onhand+onorder-backorders$) reaches ROP
   • on hand: 📦 inventory you have.
   • on order: 🚚 inventory that is on it's way.
   • backorders: 🔙 orders that are pending for your clients.
5. Your supplier follows a similar procedure.

The Bullwhip effect

• Supply chain coordination is when all stages of the chain take actions that are aligned and increase total supply chain surplus

  • Requires a stage sharing information and taking into account the effects of its actions on the other stages
  • Lack of coordination results when:
    • Objectives of different stages conflict
    • Information moving between stages is delayed or distorted

• Bullwhip Effect: Increasing swings in inventory in response to shifts in consumer demand, it causes supply chain inefficiencies.

  • Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers
  • Results from: loss of supply chain coordination