Supply Chain Managment

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

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

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.

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.

T3
T3
T3
T3
T3
T3
T2
T1T2
T2 T1
T2T3
T2
T1
OEM 1 Retailer
Web Site
Direct Sales Force
Distributor/Retailer
Distributor
Warehouse
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Consumer
Tier2 and 3
Suppliers
Retailer
Tier 1
supplier
Retailer
Supply Chain of a Typical Original Equipment Manufacturer
OEM 2

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.

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.

Matching Supply-Chains
with Products
Efficient
Supply-Chain
Responsive
Supply-Chain
Functional
Products
Innovative
Products
Match
MatchMismatch
Mismatch

IV.
Continuous
Flow
III.
Assembly
Line
II.
Batch
I.
Job
Shop
Low
Volume,
One of a
Kind
Multiple
Products,
Low
Volume
Few
Major
Products,
Higher
Volume
High
Volume,
High
Standard-
ization
Commercial
Printer
French Restaurant
Heavy
Equipment
Coffee Shop
Automobile
Assembly
Burger King
Sugar
Refinery
Flexibility (High)
Unit Cost (High)
Flexibility (Low)
Unit Cost (Low)

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.

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.

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.

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.

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.

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.

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

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.

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

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.

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

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.

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.

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.

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.

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

General Data
Product Family
Customer Demand Rate 100 per Day 100 per Day
Number of Shifts 1 per Day 1 per Day
Hours per shift 8 8
Non-work time (breaks, meetings, cleanup) per shift
Order Entry/Order Processing
Total Order Entry time 1.0 Days 0.5 Days
Does this include the time waiting for someone to act? Yes No
If yes, how long does it take for someone to act upon it? 0.5 Days 0.0 Days
Form/Formal Order Received No No
Credit Check Info
Average length of Credit Check process 0.0 Days 0.0 Days
Is the Order held until the Credit Check is approved? No No
Describe the credit check process in your notes Description Description
Manufacturing Lead Time
How long does planning process take? 5.0 Days 5.0 Days
How long does scheduling process take? 1.0 Days 1.0 Days
How long does purchasing process take? 3.0 Days 2.0 Days
How long does tooling development process take? 0.0 Days 0.0 Days
Total Planning/Scheduling/Buying 9.0 Days 8.0 Days
Do some of these processes work in parallel? No No
If Yes, estimate the total duration 0.0 Days 0.0 Days
Average Terms on Payables 30.0 Days 30.0 Days
Raw Material Inventory
How many days of inventory is in stock based on the
customer demand? (include off-site, if any) 60.0 Days 40.0 Days
With no material available, what is the delivery lead time? 5.0 Days 5.0 Days
Percent built to stock 100% 100%
Percent built to order 0% 0%
Total must equal 100% 100% 100%
Manufacturing Cycle including WIP inventory
What is the Operational Cycle Time? 23.0 Days 19.0 Days
Days of WIP Inventory based on Customer Demand? 7.0 Days 5.0 Days
What is the Mfg./Prod. Time? 30.0 Days 24.0 Days
What is the Customer demand rate? 100.0 per Day 100.0 per Day
Finished Good Warehouse / Distribution
How many days of Finish Goods base on Customers
Daily Demand is in stock? 15.0 Days 10.0 Days
Does this include off-site storage? No No
*Own Note the costs Note the costs
*Lease Note the costs Note the costs
Current State Future State
Order to Cash VSM Assessment
Sample Data

Inventory: Bullwhip Effect
Order
Quantity
Time
Retailer’s Orders
Order
Quantity
Time
Wholesaler’s Orders
Order
Quantity
Time
Manufacturer’s Orders
The magnification of variability in orders in the supply-chain.
A lot of retailers
each with little
variability in their
orders….
…can lead to
greater variability for
a fewer number of
wholesalers, and…
…can lead to even
greater variability
for a single
manufacturer.

Minimizing Waste: Inventory
Hides Problems
Work in
process
queues
(banks)
Change
orders
Engineering design
redundancies
Vendor
delinquencies
Scrap
Design
backlogs
Machine
downtime
Decision
backlogs
Inspection
backlogs
Paperwork
backlog
Example: By identifying
defective items from a
vendor early in the
production process the
downstream work is
saved.
Example: By identifying
defective work by
employees upstream,
the downstream work is
saved.

Cost Minimization Goal
Ordering Costs
Holding
Costs
QOPT
Order Quantity (Q)
C
O
S
T
Annual Cost of
Items (DC)
Total Cost
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.

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

Production Costs
Under Utilization
Best Operating
Level
Average
unit cost
of output
Volume
Over Utilization

Economies & Diseconomies of Scale
100-unit
plant
200-unit
plant 300-unit
plant
400-unit
plant
Volume
Average
unit cost
of output
Economies of Scale and the Experience Curve working
Diseconomies of Scale start working

Saving Time
Bottleneck Nonbottleneck
What are the consequences of saving time at each process?
• 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.

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

Design for
Manufacturability
• Traditional Approach
– “We design it, you build it” or “Over
the wall”
• Concurrent Engineering
– “Let’s work together simultaneously”

Designing for the Customer:
Quality Function Deployment
• Interfunctional teams from marketing,
design engineering, and
manufacturing
• Voice of the Customer
• House of Quality

Measuring Product
Development Performance
• Time-to-market
• Productivity
• Quality

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

Costs of Quality
External Failure
Costs
Appraisal Costs
Prevention Costs
Internal Failure
Costs
Costs
of
Quality

Example: Pareto Analysis
Can be used
to find when
80% of the
problems
may be
attributed to
20% of the
causes.
Can be used
to find when
80% of the
problems
may be
attributed to
20% of the
causes.
Assy.
Instruct.
Frequency
Design Purch. Training Other
80%

Performance Measurement:
Financial
Net profit
– an absolute measurement in
dollars
Return on investment
– a relative measure based on
investment
Cash flow
– a survival measurement

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

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.”

Business Web Models
B-Web
Model
Example
Marketplace
Ebay
Aggregator
E-Trade
Alliance
AOL
Value Chain
Dell Computers
Distributive Network
UPS

Traditional vs. Electronic Commerce
Purchasing
Process Step Traditional Electronic Commerce
Acquire
product
information
Magazines, flyers,
online catalogues
Web pages
Send order Fax, mail E-mail, Web pages
Check
inventory at
warehouse
Printed form, phone
form
Online database,
Web pages
Buyer sends
payment
Mail EDI

The Shape of Things to
Come
Old Model
New Model
Plan – Execute - Plan
Plan – Execute – Measure - Plan
I2, Manugistics, Oracle, SAP
I2, Manugistics, Oracle,
SAP, SeeCommerce

Supply Chain Managment

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Editor's Notes