Chapter 1 - SCM

SUPPLY CHAIN MANAGEMENT
( SIXTH EDITION)
Chapter 1
Understanding the Supply Chain
1-1
 Freight Transportation $352, $455 Billion
 Inventory Expense $221, $311 Billion
 Administrative Expense $27, $31 Billion
 Logistics Related Activity 11%, 10.5% of GNP
TRADITIONAL VIEW: LOGISTICS IN THE

ECONOMY (1990, 1996)
Source: Cass Logistics
1-2
 Profit 4%
 Logistics Cost 21% Profit

Logistics
 Marketing Cost 27% Cost
Marketing
 Manufacturing Cost48% Cost
TRADITIONAL VIEW: LOGISTICS INManufacturing

THE
MANUFACTURING FIRM Cost
1-3
 Estimated that the grocery industry could save $30 billion (10% of
operating cost) by using effective logistics and supply chain
strategies
 A typical box of cereal spends 104 days from factory to sale
 A typical car spends 15 days from factory to dealership
 Laura Ashley turns its inventory 10 times a year, five times faster
than 3 years ago
SUPPLY CHAIN MANAGEMENT: THE

MAGNITUDE IN THE TRADITIONAL VIEW
1-4
 Compaq estimates it lost $.5 billion to $1 billion in sales in 1995
because laptops were not available when and where needed
 When the 1 gig processor was introduced by AMD, the price of
the 800 mb processor dropped by 30%
 P&G estimates it saved retail customers $65 million by
collaboration resulting in a better match of supply and demand
SUPPLY CHAIN MANAGEMENT:

THE TRUE MAGNITUDE
1-5
 Discussthe goal of a supply chain and explain the
impact of supply chain decisions on the success of a
firm.
 Identify
the three key supply chain decision phases
and explain the significance of each one.
 Describe the cycle and push/pull views of a supply
chain.
 Classify the supply chain macro processes in a firm.
OUTLINE
1-6
 Allstages involved, directly or indirectly, in fulfilling a customer
request
 Includes manufacturers, suppliers, transporters, warehouses,
retailers, and customers
 Within each company, the supply chain includes all functions
involved in fulfilling a customer request (product development,
marketing, operations, distribution, finance, customer service)
WHAT IS A SUPPLY CHAIN?

1-7
P&G or other Walmart or third
Walmart Store Customers
manufacturer party DC
Plastic Pactiv
Producer Corporation
Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
STAGES OF A SUPPLY CHAIN 1-8

 Customer is an integral part of the supply chain
 The primary purpose of any supply chain is to satisfy customer needs and, in
the process, generate profit for itself.
 Supply chain: information, funds, and product flows along both directions
 Most supply chains are actually networks. Probably more accurate to use the
term “supply network” or “supply web”
 Typical supply chain stages: customers, retailers, wholesalers/distributors,
manufacturers, component/raw-material suppliers
 All stages may not be present in all supply chains (e.g., no retailer or distributor
for Dell)
WHAT IS A SUPPLY CHAIN?

1-9
customer is an integral part of the supply chain
SUPPLY CHAIN STAGES 1-10

Information
Product
Customer
Funds
FLOWS IN A SUPPLY CHAIN

1-11
THE OBJECTIVE OF A SUPPLY CHAIN
 Maximize overall value (supply chain surplus) generated
 Supplychain value: difference between what the final
product is worth to the customer and the effort the supply
chain expends in filling the customer’s request
Supply Chain Surplus = Customer Value - Supply Chain Cost
The difference between the value of the product and its price remains
with the customer as consumer surplus. The rest of the supply chain
surplus becomes supply chain profitability, the difference between the
revenue generated from the customer and the overall cost across the1-12
supply chain.
 customer purchasing a wireless router from Best Buy pays $60, which represents
the revenue the supply chain receives.
 Customers who purchase the router clearly value it at or above $60.
 Thus, part of the supply chain surplus is left with the customer as consumer
surplus.
 The rest stays with the supply chain as profit.
 Best Buy and other stages of the supply chain incur costs to convey information,
produce components, store them, transport them, transfer funds, and so on.
 The difference between the $60 that the customer paid and the sum of costs
incurred across all stages by the supply chain to produce and distribute the
router represents the supply chain profitability: the total profit to be shared
across all supply chain stages and intermediaries.
THE OBJECTIVE OF A SUPPLY CHAIN (EXAMPLE)

1-13
 Sources of supply chain revenue: the customer
 Sources
of supply chain cost: flows of information, products, or funds
between stages of the supply chain
 Effectivesupply chain management involves the management of supply
chain assets and product, information, and fund flows to grow the total
supply chain surplus.
A growth in supply chain surplus increases the size of the total pie,
allowing contributing members of the supply chain to benefit.
THE OBJECTIVE OF A SUPPLY CHAIN

1-14
DECISION PHASES OF A SUPPLY CHAIN
Supply chain strategy or design

Supply chain planning
Supply chain operation
1-15
 Decisions about the structure of the supply chain and what processes each stage will
perform Strategic supply chain decisions
 Locations and capacities of facilities
 Products to be made or stored at various locations
 Modes of transportation
 Information systems
 Supply chain design must support strategic objectives
 Supply chain design decisions are long-term and expensive to reverse – must take
into account market uncertainty
SUPPLY CHAIN STRATEGY OR DESIGN

1-16
 Definition
of a set of policies that govern short-term
operations
 Fixed by the supply configuration from previous phase
 Starts with a forecast of demand in the coming year
SUPPLY CHAIN PLANNING

1-17
 Planning decisions:
 Which markets will be supplied from which locations
 Planned buildup of inventories
 Subcontracting, backup locations
 Inventory policies
 Timing and size of market promotions
 Must consider in planning decisions demand uncertainty, exchange
rates, competition over the time horizon
SUPPLY CHAIN PLANNING

1-18
 Time horizon is weekly or daily
 Decisions regarding individual customer orders
 Supply chain configuration is fixed and operating policies are
determined
 Goal is to implement the operating policies as effectively as
possible
 Allocate orders to inventory or production, set order due
dates, generate pick lists at a warehouse, allocate an order
to a particular shipment, set delivery schedules, place
replenishment orders
 Much less uncertainty (short time horizon)
SUPPLY CHAIN OPERATION

1-19
 Cycle view: processes in a supply chain are divided into a
series of cycles, each performed at the interfaces between
two successive supply chain stages
 Push/pullview: processes in a supply chain are divided into
two categories depending on whether they are executed
in response to a customer order (pull) or in anticipation of a
customer order (push)
PROCESS VIEW OF A SUPPLY CHAIN

1-20
Customer
CYCLE VIEW
Customer Order Cycle OF SUPPLY
Retailer CHAINS
Replenishment Cycle
Each cycle occurs at the
Distributor
interface between two
Manufacturing Cycle successive stages
Manufacturer
Procurement Cycle
Supplier
Cycle view clearly defines processes involved and the owners
of each process, specifies the roles and responsibilities of each 1-21
member and the desired outcome of each process.
 Supply chain processes fall into one of two categories depending
on the timing of their execution relative to customer demand
 Pull:
execution is initiated in response to a customer order
(reactive)
 Push:execution is initiated in anticipation of customer orders
(speculative)
 Push/pull boundary separates push processes from pull processes
PUSH/PULL VIEW OF
SUPPLY CHAIN PROCESSES
1-22
PUSH/PULL
VIEW OF
SUPPLY
CHAINS
The relative proportion of push and pull processes can 1-23

have an impact on supply chain performance
1-24
1-25
 Supply chain processes can be classified into:
 Customer Relationship Management (CRM)
 Internal Supply Chain Management (ISCM)
 Supplier Relationship Management (SRM)
 Integration among the above three macro processes is critical for effective and
successful supply chain management
SUPPLY CHAIN MACRO PROCESSES 1-26

 Gateway
 Zara
 McMaster-Carr / W.W. Grainger
 Toyota
 Amazon
 Macy’s: Omni-Channel Retailing
What are some key issues in these supply chains?
EXAMPLES OF SUPPLY CHAINS

1-27

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SUPPLY CHAIN MANAGEMENT

TRADITIONAL VIEW: LOGISTICS IN THE

 Logistics Cost 21% Profit

TRADITIONAL VIEW: LOGISTICS INManufacturing

SUPPLY CHAIN MANAGEMENT: THE

SUPPLY CHAIN MANAGEMENT:

WHAT IS A SUPPLY CHAIN?

STAGES OF A SUPPLY CHAIN 1-8

WHAT IS A SUPPLY CHAIN?

SUPPLY CHAIN STAGES 1-10

FLOWS IN A SUPPLY CHAIN

Supply Chain Surplus = Customer Value - Supply Chain Cost

THE OBJECTIVE OF A SUPPLY CHAIN (EXAMPLE)

THE OBJECTIVE OF A SUPPLY CHAIN

Supply chain strategy or design

SUPPLY CHAIN STRATEGY OR DESIGN

SUPPLY CHAIN PLANNING

SUPPLY CHAIN PLANNING

SUPPLY CHAIN OPERATION

PROCESS VIEW OF A SUPPLY CHAIN

The relative proportion of push and pull processes can 1-23

SUPPLY CHAIN MACRO PROCESSES 1-26

What are some key issues in these supply chains?

EXAMPLES OF SUPPLY CHAINS

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