Supply Chain

Management
(SCM)
Presented by : Amir Ahmed , CSCP
Supply Chain Management
 Definition:
Supply Chain Management is primarily concerned with the
efficient integration of suppliers, factories, warehouses and
stores so that merchandise is produced and distributed in the
right quantities, to the right locations and at the right time, and
so as to minimize total system cost subject to satisfying service
level requirements.
 Notice:
 Everyone is involved
 Systems approach to reducing costs
 Integration is the key
Supply Chain Management
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

Transportation Transportation
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory Costs Costs
Value vs. Supply Chain
 Value chain
 every step from raw materials to the eventual end user
 ultimate goal is delivery of maximum value to the end
user
 Supply chain
 activities that get raw materials and subassemblies into
manufacturing operation
 Terms are used interchangeably
Basic Supply Chain
Supplier Producer Customer

-Raw Materials -Products -Retailer

-Components -Power -Wholesaler
-Services -Distributor
-Energy -End user

Four flows
INFORMATION FLOW

PRIMARY CASH FLOW

PRIMARY PRODUCT FLOW

REVERSE PRODUCT FLOW

Supply Chain Management
 Managing flow of information through supply
chain in order to attain the level of
synchronization that will make it more responsive
to customer needs while lowering costs
 Keys to effective SCM
 information
 communication
 cooperation
 trust
Why Is SCM Difficult?
 Uncertainty is inherent to every supply chain
 Travel times
 Breakdowns of machines and vehicles
 Weather, natural catastrophe, war
 Local politics, labor conditions, border issues

 The complexity of the problem to globally optimize a supply

chain is significant
 Minimize internal costs
 Minimize uncertainty
 Deal with remaining uncertainty
Supply Chain Uncertainty
 One goal in SCM:  Factors that contribute to
 respond to uncertainty in uncertainty
customer demand without  inaccurate demand forecasting
creating costly excess  long variable lead times
inventory  late deliveries
 Negative effects of  incomplete shipments
uncertainty  product changes batch ordering
 lateness  price fluctuations and discounts
 incomplete orders  inflated orders
Bullwhip Effect
Occurs when slight demand variability is magnified as information moves
back upstream
Factors Contributing to the Bullwhip
 Demand forecasting practices
 Min-max inventory management (reorder points to bring
inventory up to predicted levels)
 Lead time
 Longer lead times lead to greater variability in estimates of
average demand, thus increasing variability and safety stock
costs
 Batch ordering
 Peaks and valleys in orders
 Fixed ordering costs
 Impact of transportation costs (e.g., fuel costs)
 Sales quotas
 Price fluctuations
 Promotion and discount policies
 Lack of centralized information
Today’s Marketplace Requires:
 Collaborative planning with design partners,
distributors, and suppliers
 Real-time commitments for design, production,
inventory, and transportation capacity
 Flexible logistics options to ensure timely fulfillment

Shared visibility for

trading partners
Supply Chain Management – Key Issues
 Forecasts are never right
 Very unlikely that actual demand will exactly equal forecast demand

 The longer the forecast horizon, the worse the forecast

 A forecast for a year from now will never be as accurate as a forecast
for 3 months from now

 Aggregate forecasts are more accurate

 A demand forecast for all CV therapeutics will be more accurate than
a forecast for a specific CV-related product
Supply Chain Management – Key Issues
 Overcoming functional silos with conflicting goals

Customer Service/
Purchasing Manufacturing Distribution
Sales

High
Low pur- Few change- inventories
chase price overs
Low High service
Multiple Stable invent- levels
schedules ories
vendors
Regional
Long run stocks
lengths Low trans-
portation

SOURCE MAKE DELIVER SELL

Information In The Supply Chain
Plan

Suppliers Manufacturers Warehouses & Retailer

Distribution Centers

Source Make Deliver Sell

Order Lead Time  Each facility further away from

actual customer demand must
It’s estimated that the
make forecasts of demand
Delivery Lead Time typical pharmaceutical
 Lacking actual customer buying company supply chain
data, each facility bases its carries over 100 days
Production Lead Time forecasts on ‘downstream’ of product to
orders, which are more variable accommodate
than actual demand uncertainty
 To accommodate variability,
inventory levels are overstocked
thus increasing inventory
carrying costs
Taming the Bullwhip
Four critical methods for reducing the Bullwhip effect:
 Reduce uncertainty in the supply chain
 Centralize demand information
 Keep each stage of the supply chain provided with up-to-date
customer demand information
 More frequent planning (continuous real-time planning the
goal)
 Reduce variability in the supply chain
 Every-day-low-price strategies for stable demand patterns
 Reduce lead times
 Use cross-docking to reduce order lead times
 Use EDI techniques to reduce information lead times
 Eliminate the bullwhip through strategic partnerships
 Vendor-managed inventory (VMI)
 Collaborative planning, forecasting and replenishment
(CPFR)
Supply Chain Integration – Push Strategies
 Classical manufacturing supply chain strategy
 Manufacturing forecasts are long-range
 Orders from retailers’ warehouses
 Longer response time to react to marketplace changes
 Unable to meet changing demand patterns
 Supply chain inventory becomes obsolete as demand for
certain products disappears
 Increased variability (Bullwhip effect) leading to:
 Large inventory safety stocks
 Larger and more variably sized production batches
 Unacceptable service levels
 Inventory obsolescence
 Inefficient use of production facilities (factories)
 How is demand determined? Peak? Average?
 How is transportation capacity determined?
 Examples: Auto industry, large appliances, others?
Supply Chain Integration – Pull Strategies

 Production and distribution are demand-driven

 Coordinated with true customer demand
 None or little inventory held
 Only in response to specific orders
 Fast information flow mechanisms
 POS data
 Decreased lead times
 Decreased retailer inventory
 Decreased variability in the supply chain and especially at
manufacturers
 Decreased manufacturer inventory
 More efficient use of resources
 More difficult to take advantage of scale opportunities
 Examples: Dell, Amazon
Supply Chain Integration – Push/Pull Strategies
 Hybrid of “push” and “pull” strategies to overcome disadvantages
of each
 Early stages of product assembly are done in a “push” manner
 Partial assembly of product based on aggregate demand forecasts
(which are more accurate than individual product demand
forecasts)
 Uncertainty is reduced so safety stock inventory is lower
 Final product assembly is done based on customer demand for
specific product configurations
 Supply chain timeline determines “push-pull boundary”

Push-
Pull
Boundary
“Generic” Product “Customized” Product

Push Strategy Pull Strategy

Raw End
Materials Consumer
Supply Chain Timeline
Choosing Between Push/Pull Strategies
Pull High Where do the following
Industries where: Industries where:
industries fit in this
• Customization is High • Demand is uncertain model:
• Demand is uncertain • Scale economies are High
• Scale economies are Low • Low economies of scale
 Automobile?
 Aircraft?
Demand Uncertainty

Computer Furniture
equipment  Fashion?
 Petroleum refining?
 Pharmaceuticals?
Industries where: Industries where:
 Biotechnology?
• Uncertainty is low • Standard processes are the  Medical Devices?
• Low economies of scale norm
• Push-pull supply chain • Demand is stable
• Scale economies are High

Books, CD’s Grocery,

Beverages
Push Low
Low Economies of Scale High

Pull Push
Conflicting Objectives
in the Supply Chain

1. Purchasing
• Stable volume requirements
• Flexible delivery time
• Little variation in mix
• Large quantities
2. Manufacturing
• Long run production
• High quality
• High productivity
• Low production cost
Conflicting Objectives
in the Supply Chain
3. Warehousing
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
4. Customers
• Short order lead time
• High in stock
• Enormous variety of products
• Low prices
Supply Chain Integration
 Information sharing among supply chain members
 Reduced bullwhip effect
 Early problem detection
 Faster response
 Builds trust and confidence
 Collaborative planning, forecasting, replenishment,
and design
 Reduced bullwhip effect
 Lower Costs (material, logistics, operating, etc.)
 Higher capacity utilization
 Improved customer service levels
Supply Chain Integration (cont.)
 Coordinated workflow, production and
operations, procurement
 Production efficiencies
 Fast response
 Improved service
 Quicker to market
 Adopt new business models and technologies
 Penetration of new markets
 Creation of new products
 Improved efficiency
 Mass customization
Collaborative Planning, Forecasting, and
Replenishment
 Process for two or more companies in a
supply chain to synchronize their demand
forecasts into a single plan to meet
customer demand
 Parties electronically exchange
 past sales trends
 point-of-sale data
 on-hand inventory
 scheduled promotions
 forecasts
Relationship between Facilities and Functions along the
Wal-Mart Supply Chain

Source: Adapted from Garrison Wieland for “Wal-Mart’s

Supply Chain,” Harvard Business Review 70(2; March–April
1992), pp. 60–71.
Vendor-Managed Inventory

▪ Manufacturers generate orders, not distributors or

retailers
▪ Stocking information is accessed using EDI
▪ A first step towards supply chain collaboration
▪ Increased speed, reduced errors, and improved
service
SCM Software
 Enterprise Resource Planning (ERP)
 software that integrates components of a company by
sharing and organizing information and data
 SAP was first ERP software
 mySAP.com
 web enabled modules that allow collaboration between
companies along the supply chain
Linking Supply Chain with SAP
Measuring Supply Chain Performance
 Key performance indicators
 inventory turnover
 cost of annual sales per inventory unit

 inventory days of supply

 total value of all items being held in inventory

 fill rate
 fraction of orders filled by a distribution center within a
specific time period
Key Performance Indicators
Cost of goods sold
Inventory turns =
Average aggregate value of inventory

Average aggregate value of inventory =

= (average inventory for item i) X (unit value item i)

Average aggregate value of inventory

Days of supply =
(Costs of goods sold)/(365 days)
Key Performance Indicators:
Example
1. Cost of goods sold: $425 million
2. Production materials and parts: $4,629,000
3. Work-in-process: $17,465,000
4. Finished goods: $12,322,000
5. Total average aggregate value of inventory (2+3+4): $34,416,000

$425, 000, 000

Inventory turns = = 12.3
$34,416,000

$34,416,000
Days of supply = = 29.6
($425,000,000)/(365)
Other Measures of Supply Chain
Performance
 Process Control
 used to monitor and control any process in supply chain
 Supply Chain Operations Reference (SCOR)
 establish targets to achieve “best in class” performance
SCOR Model Processes
Make Deliver
Plan Source
Transform Provide products
Develop a course Procure goods
of action that best product to a to meet demand,
and services to
meets sourcing, finished state to including order
meet planned
production and meet planned management,
delivery or actual
or actual transportation
requirements demand
demand and distribution
Return
Return
products,
post-delivery
customer
support
SCOR: Customer Facing
Performance Performance Definition
Attribute Metric
Supply Chain Delivery Percentage of orders delivered on time
Delivery performance and in full to the customer
Reliability Fill rate Percentage of orders shipped within24
hours of order receipt
Perfect order Percentage of orders delivered on time
fulfillment and in full, perfectly matched with order
with no errors
Supply Chain Order fulfillment Number of days from order receipt to
Responsivenes lead time customer delivery
s
Supply Chain Supply chain Number of days for supply chain to
Flexibility response time respond to an unplanned significant
change in demand without a cost penalty
Production Number of days to achieve an unplanned
flexibility 20% change in orders without a cost
penalty
SCOR: Internal Facing
Performance Performance Definition
Attribute Metric
Supply Chain Supply chain Direct and indirect cost to plan, source and deliver
management cost products and services
Cost
Cost of goods Direct cost of material and labor to produce a
sold product or service
Value-added Direct material cost subtracted from revenue and
productivity divided by the number of employees, similar to
sales per employee
Warranty/returns Direct and indirect costs associated with returns
processing cost including defective, planned maintenance and
excess inventory
Supply Chain Cash-to-cash Number of days that cash is tied up as working
cycle time capital
Asset
Management Inventory days of Number of days that cash is tied up as inventory
supply
Efficiency
Asset turns Revenue divided by total assets including working
capital and fixed assets
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