SUPPLY CHAIN MANAGEMENT
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chapter1-iyerppts..pptxManaging Supply Chains: Concepts, Tools, Applications Chapter 1: Introduction
These powerpoints are a companion to the book: Managing Supply Chains: Concepts, Tools and Applications by Ananth. V . Iyer, Hercher Publishing Inc., ISBN 978-1-939297-01-3
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Outline
A supply chain – the CSCMP definition
The 4 C supply chain architecture
The book supply chain example
Zara’s supply chain
An example analysis: Industrial Chemicals case
Auditing a Supply Chain
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What is a supply chain ?
The Council of Supply Chain Management professionals (CSCMP) define the supply chain to be:
“Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across
companies”
(http://cscmp.org/aboutcscmp.org/definitions.asp)
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How significant are supply chain costs in the US Economy ?
The 23rd Annual State of the Logistics Report (June 2011) states that
US Supply Chain costs are 8.3% of US GDP
US Supply Chain Cost = $1.25 trillion
US Inventories = $2.1 trillion
In short, supply chain costs have a big impact.
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A “4 C” supply chain architecture
The 4 C’s are:
Chain Structure: the linkages between all entities from raw material to consumption and reuse and associated ownership
Capacity: long term capacity choices across the supply chain
Coordination: contracts, agreements between separate entities in the supply chain to manage risk, expectations, metrics.
Competitiveness: both the metrics of competition and the impact of competitors on choices
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An example book supply chain (section 1.2)
Printing industry is $210 billion in sales
Book printing is a $ 5 billion industry
Top 5 printers = 40 % of print volume
Bookstores and retail outlets – 6500 in 1991 to 10,600 in 2007
25,000 publishers, the largest released 11,000 titles in 2011
Return rate is 25% for the industry, but is under 3 % for Amazon.com – How ?
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The Book supply chain : A 4 C View
Chain: Author->Publisher->Printer->wholesaler->retailer->Customer with fragmented ownership
Capacity: retail store inventory, print runs and printer capacity, wholesaler inventory and capacity
Coordination: returns contracts for bookstores
Competitiveness: Number of titles, lead time for delivery, location of retailers
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Questions
How does Amazon manage to have return rates under 3 % ?
Given Amazon’s lower returns, what will be the impact on wholesaler pricing and consequent customer prices ?
What does it mean to “Amazon Your Supply Chain” ? (see reference [76] in the book)
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Zara and the apparel supply chain
Zara – vertically integrated apparel company
Market cap of $85 billion
Fast fashion – two week cycle time from design to retail
Fast feedback – from customers in stores to designers to manufacturing
Short life cycles incents customer purchase when available
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The 4 C view of Zara
Chain: Design->Manufacture->Ship to company store-> customer and feedback, Except some outsourced sewing, all steps owned by Zara
Capacity: Design staff, cutting, store inventory
Coordination: store staff to designer feedback
Competitiveness: Trendy products, Service level, retail location
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Questions
How does Zara manage the 10 day cycle time ?
What is the risk associated with Zara’s vertically integrated supply chain structure ?
Why has Zara’s success not been replicated by other apparel retailers ?
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Industrial Chemicals Case- Section 1.7
Outline of the case discussion
Do a 4 C outline of the case
Understand the logic for Figures 1.1 through 1.3
Understand the implication of Figure 1.4
Implement the coordination agreement described and explain Figure 1.8
Understand the consequent figure 1.5 to 1.7
Explain the result
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An Industrial Chemicals (IC) 4 C Analysis
Chain Structure: Suppliers -> Plant -> Plant Warehouse -> Distributors -> OEMs
Capacity: Warehouse capacity, Production batch size
Coordination: Backhaul discounts, Batch size
Competitiveness: Cost
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Figure 1.1
The figure shows orders received by the IC warehouse from distributors (IC’s customers)
In the absence of any causal information, the variance of orders i.e., demand and the coefficient of variation of demand are large
To maintain a high service level for distributors, one would expect high IC warehouse inventory levels
Why is the demand so variable ? Are the distributors demands variable or any other reason ?
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Figure 1.2
Given the demand in Figure 1.1, and production in batches (of size 300), orders to the plant are shown in Figure 1.2
Orders generated in Figure 1.2 based on a (Q,r) policy used with demands in Figure 1.1
Variability of orders in Figure 1.2 greater than that in Figure 1.1 (why ?)
What is the impact of the production order variability in Figure 1.2 ? Higher production capacity ? Longer queue time ? Extra staff ? Higher raw material inventories ? Higher costs ?
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Figure 1.3
The IC warehouse inventory serves as a buffer between demand variability (Fig 1.1) and production variability (Fig 1.2)
I(t) = I(t-1)+P(t)-D(t) where I(t) (I(t-1)) is the ending inventory in period t (t-1), P(t) is the production in period t, D(t) is the demand in period t
What is the link between warehouse inventory and service level ?
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Figure 1.4
Consider the separation of the 20% of distributors (termed large) accounting for 80% of the volume from the rest (small)
Fig 1.4 suggests that the large distributors account for most of the variability
It suggests that any approach to work with these large distributors to stabilize their orders could have a significant impact
It also suggests that only a few distributors will be impacted by these new agreements
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Figure 1.8
The case claims that the large distributors faced stable downstream demand, but their orders were motivated by backhaul credits
A standing order agreement with pooled delivery daily against demand faced the previous day makes orders match demand
Fig 1.8 shows how the demand from large distributors is stabilized as a result of the coordination agreement
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Figure 1.5
Given the new orders in Figure 1.8, the combined demand faced by the warehouse is shown in Figure 1.5
This demand is stable as compared to Fig 1.1
The associated inventory required to satisfy this demand and orders triggered for production will also stabilize
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Figure 1.6
Given stable orders, and a lower batch size because of committed capacity, production orders become stable
The lower batch size reflects lower setup costs as the capacity can be dedicated
Production lead times can decrease because of order stability
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Figure 1.7
With stable orders, and stable production, the inventory level decreases as the safety stock decreases
Figure 1.7 shows the low inventory level as the production and demand are more closely matched
Lower production lead times and batch sizes lower both safety stock and cycle stock
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Industrial Chemicals and SCM
The SCM manager worked “outside the box” of the chain of the firm’s influence and signed a coordination agreement
The impact is to lower capacity at the warehouse and lower batch sizes while lowering lead times
The resulting supply chain is more competitive and can expand to new markets without additional investments
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Auditing Supply Chains
Chain: Map the chain structure to understand entities involved, ownership and alternate choices.
The example in Fig 1.9 shows an example for a grocery supply chain
The possible upstream supply sources may be adjusted to product selling volumes and variability
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Capacity – product characteristics
An ABC classification by products type
A – 20% of product SKUs with 80% of volume
B – 30% of products SKUs with 15 % of volume
C – 50% of product SKUs with 5 % of volume
Question: Should supply chain structure vary with product characteristics i.e., will stable A products match with long lead time low cost supply chains ? Will volatile C products match higher cost faster response supply chains ?
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Capacity - standardization
Standardizing designs by preventing maverick buying consolidates and stabilizes demand
Stable orders may permit suppliers to offer vendor managed inventory services
Reduced inventories and costs with higher service levels possible
Ideal for MRO goods
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Capacity - consolidation
Consolidation is the accumulation of good into a single location
Permits efficient transportation and capacity use
Lowers safety stocks of supplies
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Coordination – Assembly Postponement
Keep product in its basic form and customize upon demand receipt
Consolidates demand across SKUs, thus lowers safety stock and forecast error for common product
Examples – HP Deskjet printer, paint in hardware stores
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Coordination – Geographic Postponement
Hold products in a central location and move to demand point after demand is realized
Ideal for expensive spare parts held centrally and moved with premium transport after demand occurs
Permits shipments to be coordinated with demand while lowering safety stock
Ecommerce companies gain this benefit
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Coordination – Speculative Capacity
If demands change or prices are volatile, speculative inventory can help
It time shifts supply and demand points and might enable cost reductions
Speculative capacity may also be a hedge against supply disruptions
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Competitiveness
Metrics of competition such as cost may demand supply chain structure adjustments – see Figures 1.11 and 1.12 for a medical supply chain
Competitors and their products and services may demand a response – see Section 1.8.5 for relevant questions
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Summary
A 4 C view of a supply chain focuses on chain structure, capacity, coordination and competitiveness
This approach provides characterization of a supply chain’s architecture and exploration of alternative choices through an audit
Measurements of supply chain components (See Industrial Chemicals case) may suggest significant changes through leveraging the 4Cs
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