Supply/Demand Chain Introduction, Overview and Strategy These slides address chapters 1 through 3 of the textbook, with some information already found in the earlier Sustainable Demand Chain Management: an Introduction de-emphasized While the slide decks are based on the textbook, they have been customized for this class Additional materials are often included Professorial commentary that expresses a different viewpoint than in the text will be noted in a different color 1-1
Overview of Course 1. Chapters 1-3 + additional slide deck: Introduction, Overview and Strategy 2. Chapters 4-6: Network Planning and Distribution 3. Chapters 8-9: Aggregate Planning 4. Chapters 10-11, 13+ additional slide deck: Inventory and Transportation 5. Chapter 17: Supply Chain Coordination 1-2
Who Needs to Know About this Topic? Anyone involved in a manufacturing or service industry where capacities and raw materials cannot be obtained or expanded without a time or cost penalty Executives and Entrepreneurs must understand the strategic importance of the Supply Chain Managers, Consultants and Software Designers need to be able to analyze, design, and implement Supply Chain solutions 1-3
Supply Chain Management is not Learned just Through a Textbook The best solution to a Supply Chain problem may not win An elegant, mathematically complex LP presented such that only Ph.D.s understand may not be the best practical solution to the problem at hand. And even if it is, it is not the one that will be awarded the contract! Supply Chain Practitioners need soft skills Work effectively with clients and team members, including being responsive to questions and requests You must package and sell your proposed solution Supply Chain Practitioners need hard skills Lots of data, need to understand processes and interactions with IT Work usually involves creating or adapting large-scale computer models The class is designed for you to practice both hard and soft skills 1-4
Traditional View: Logistics in the US Economy (2006, 2007) Freight Transportation $809, $856 Billion Inventory Expense $446, $487 Billion Administrative Expense $50, $54 Billion Total Logistics Costs $1.31, $1.4 Trillion Logistics Related Activity 10%, 10.1% of GNP About 21% of total costs for a manufacturing firm Logistical costs percentages are higher in the EU But supply chain is more than logistics. Source: 18 th and 19 th Annual State of Logistics Report Logistics Magazine 1-5
Supply Chain Management: Mishaps and Opportunities 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 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 its previous version, the 800 megabyte processor, dropped by 30% What happened to firms who had stockpiled those? 1-6
Chapter 1 Outline What is a Supply Chain? (We covered this earlier) Decision Phases in a Supply Chain Process View of a Supply Chain The Importance of Supply Chain Flows 1-7
A Brief Review of Material to Date Typical stages: (from a demand chain perspective) customers<retailers<distributors<manufacturers<suppliers All stages may not be present- Can you think of some well known companies that are missing a stage? What stage is always present? The obvious flow is the movement of products from suppliers to the customer, but also includes movement of information, funds, and products in both directions Reverse logistics is an important facet of both sustainability and CRM initiatives, will be discussed later. 1-8
The Objective of a Supply Chain Sources of supply chain revenue: the customer Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain Supply chain management is. Book: the management of flows between and among supply chain stages to maximize total supply chain profitability Professor commentary: is the coordination of business functions within an organization and its channel partners in order to provide goods and services to fulfill customer demand responsively, efficiently and sustainably 1-9
Dell Computer: Illustration of Supply Chain Success Example: Dell receives $1000 from a customer for a computer (revenue) Supply chain incurs costs (information, storage, transportation, components, assembly, etc.) Difference between $1000 and the sum of all of these costs is the supply chain profit Time value of money often plays a role Supply chain profitability is the total profit to be shared across all stages of the supply chain Supply chain success should be measured by total supply chain profitability, not profits at an individual stage In practice this may be difficult when stages are separate firms 1-10
Decision Phases of a Supply Chain 1. Supply chain strategy (also called chain design) 2. Supply chain planning 3. Supply chain operation 1-11
Supply Chain Strategy (or Design) 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 Decisions often analyzed first through models and simulations 1-12
Supply Chain Planning Definition of a set of policies that govern short-term operations - typically a quarter to a couple years Fixed by the supply configuration from previous phase Typically starts with a forecast of demand in the coming year Planning decisions: Which markets will be supplied from which locations Planned buildup of inventories, inventory policies Subcontracting, backup locations Timing and size of market promotions Must consider demand uncertainty, exchange rates, competition over the time horizon 1-13
Supply Chain Operations 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 (due to short time horizon) 1-14
Process View of a Supply Chain 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 We will not be emphasizing the cycle view in class, as not all chains have all stages present Push/pull view: 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) 1-15
Push/Pull View of Supply Chains Actions initiated from Suppliers Retail/Customer Initiated Action PUSH PROCESSES PULL PROCESSES The barrier between push And pull may vary for different companies and industries 1-16
Push/Pull View of Supply Chain Processes 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 The relative proportion of push and pull processes can have an impact on supply chain performance 1-17
Outline: Chapter 2 - Chain Performance: Achieving Strategic Fit and Scope Competitive and supply chain strategies Achieving strategic fit Expanding strategic scope 2-18
Competitive and Supply Chain Strategies Competitive strategy: defines the set of customer needs a firm seeks to satisfy through its products and services Product development strategy: specifies the portfolio of new products that the company will try to develop Marketing and sales strategy: specifies how the market will be segmented and product positioned, priced, and promoted Supply chain strategy: determines the nature of material procurement, transportation of materials, manufacture of product or creation of service, distribution of product Consistency and support between supply chain strategy, competitive strategy, and other functional strategies is important 2-19
The Value Chain: Linking Supply Chain and Business Strategy Overall Competitive Strategy Product Dev. Strategy Marketing Strategy Supply Chain Strategy New Product Development Marketing and Sales Operations Distribution Service 2-20
Strategic fit: Achieving Strategic Fit Consistency between customer priorities of competitive strategy and supply chain capabilities specified by the supply chain strategy Competitive and supply chain strategies have the same goals A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy Example of strategic fit Dell s varied sales channels 2-21
How is Strategic Fit Achieved? Step 1: Understanding the customer and the supply chain uncertainty Step 2: Understanding the supply chain capabilities Step 3: Achieving strategic fit 2-22
Step 1: Understanding the Customer and Supply Chain Uncertainty Identify the needs of the customer segment being served Quantity of product needed in each lot Response time customers will tolerate Variety of products needed Service level required Price of the product Desired rate of innovation in the product Demand uncertainty: How much does customer demand for a product vary? Are there particular needs related to Sustainability? 2-23
Step 1: Understanding the Customer and Supply Chain Uncertainty Key Point: Implied Demand Uncertainty is more than just Demand Uncertainty Demand uncertainty: uncertainty of customer demand for a product Implied demand uncertainty: resulting uncertainty for the supply chain given the portion of the demand the supply chain must handle and the attributes the customer desires from the product and the experience of purchasing it: For example: if customers require very fast service or if they are many varieties of the product (and customers are picky about what they get) implied demand uncertainty is higher. 2-24
Impact of Customer Needs on Implied Demand Uncertainty Customer Need Range of quantity required increases Lead time required to decrease Causes implied demand uncertainty to increase because Wider range of quantity required implies greater variance in demand Less time to react to orders Variety of products required increases Demand per product becomes more disaggregated Number of channels through which product may be acquired increases Rate of innovation must increase Required service level must increase Total customer demand is now disaggregated over more channels New products tend to have more uncertain demand Firm now has to handle unusual surges in demand 2-25
Supply Uncertainty Now turn away from demand briefly to look at other side of the coin: Supply Supply Uncertainty variability associated with getting the right amount of the product at the right time Will increase with. Unpredictable/low yields problematic issue from high tech (semiconductor) to low tech- traditional agriculture) Limited/inflexible supply capacity Evolving production process First step to achieving strategic fit is to understand customers and their inherent implied demand uncertainty, and also consider effects from Supply Uncertainty, mapping both onto the implied uncertainty spectrum 1-26
Implied Uncertainty Spectrum Predictable supply and demand Predictable supply and uncertain demand or uncertain supply and predictable demand or somewhat uncertain supply and demand Highly uncertain supply and demand Salt at a supermarket An existing automobile model A new communication device Figure 2.2: The Implied Uncertainty (Demand and Supply) Spectrum There are exceptions- for example, with salt, think of Fleur de Sel or pink Himalayan salt! Many firms have attempted to move their products upstream, eg. Fresh Choice: bagged salads 2-27
Step 2: Understanding the Supply Chain Capabilities How does the firm best meet demand? One dimension describing the chain is supply chain responsiveness respond to wide ranges of quantities demanded meet short lead times handle a large variety of products build highly innovative products meet a very high service level There is a cost to achieving responsiveness Supply chain efficiency: cost of making and delivering the product to the customer Increasing responsiveness usually results in higher costs, lowing efficiency Second step to achieving strategic fit is to map the supply chain on the responsiveness spectrum 2-28
Understanding the Supply Chain: Cost- Responsiveness Efficient Frontier Responsiveness High Low High Low Cost 2-29
Responsiveness Spectrum Highly efficient Somewhat efficient Somewhat responsive Highly responsive Integrated steel mill- Production scheduled months in advance Hanes Apparel, Traditional Make-to-stock Manufacturer With lead-times of several weeks Most automotive Production, large Variety of products in a few weeks, Some customization 7-11 Japan, Changes merchandise Mix by location and time of day So now we have two spectrums (lines)- what do you think is next? 2-30
Step 3: Achieving Strategic Fit Third Step is to ensure that what the supply chain does well is consistent with target customer s needs All functions in the value chain must support the competitive strategy to achieve strategic fit Barilla Pasta and Apple Computer are examples of companies that are in the Zone Do you think their supply chain strategies are similar? Key points There is no one right supply chain for all companies there is a right supply chain strategy for a given competitive strategy In balancing efficiency and responsiveness, it is still critical to remember sustainability 2-31
Achieving Strategic Fit Shown on the Uncertainty/Responsiveness Map Responsive supply chain Responsiveness spectrum Efficient supply chain More Certain Implied uncertainty spectrum Highly Uncertain 2-32
Comparison of Efficient and Responsive Supply Chains Efficient Responsive Primary goal Lowest cost Quick response Product design strategy Min product cost Modularity to allow postponement Pricing strategy Lower margins Higher margins Mfg strategy High utilization Capacity flexibility Inventory strategy Minimize inventory Buffer inventory Lead time strategy Supplier selection strategy Transportation strategy Reduce but not at expense of greater cost Cost and, typically lower quality Greater reliance on low cost modes Aggressively reduce even if costs are significant Speed, flexibility, quality Greater reliance on responsive (fast) modes 2-33
Other Issues Affecting Strategic Fit 1. Multiple products and customer segments 2. Product life cycle 3. Competitive changes over time 4. Sustainability 2-34
Multiple Products and Customer Segments Firms sell different products to different customer segments (with different implied demand uncertainty) The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments Two approaches: 1. Different supply chains for different products/customers or 2. Tailor supply chain to best meet the needs of each product s demand. Example: W.W. Grainger, MRO 2-35
Product Life Cycle The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle Examples: pharmaceutical firms, Intel As the product goes through the life cycle, the supply chain changes from one emphasizing responsiveness to one emphasizing efficiency Supply chain strategy must evolve throughout life cycle Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary Late: predictable demand, lower margins, price is important 2-36
Competitive Changes Over Time Competitive pressures can change over time More competitors may result in an increased emphasis on variety at a reasonable price The Internet makes it easier to offer a wide variety of products The supply chain must change to meet these changing competitive conditions Example Dell used to sell PCs and laptops only via internet, but now also sells at Wal-Mart 2-37
Sustainability Consider both Ethical as well as Environmental issues Sustainability policies may be driven by either regulation or risk factors WEEE- EU regulation forced electronics providers to rethink SCs Supplier risk Demand risk, consumer expectations May be complex relationships between responsiveness, efficiency and sustainability issues Sometimes, but not always, involving tradeoffs 2-38
Expanding Strategic Scope Scope of strategic fit : The functions and stages within a supply chain that devise an integrated strategy with a shared objective One extreme: each function at each stage develops its own strategy Other extreme: all functions in all stages devise a strategy jointly From least to most evolved/expanded. 1. Intracompany intraoperation scope silos! 2. Intracompany intrafunctional scope 3. Intracompany interfunctional scope 4. Intercompany interfunctional scope - CPFR 5. Agile Intercompany, interfunctional scope - 3+ companies 2-39
Obstacles to Achieving Strategic Fit In short: today s business environment is more challenging for companies 1. Increasing variety of products 2. Shorter product life cycles (technology development, trend) 3. Increasingly picky customers 4. Fragmentation of chain ownership 5. Globalization, on supply-side and also the demand side* 6. Rapidly changing business environment 7. Difficulties with executing new strategies 8. Especially for 2007-2011 timeframe- economic cycle *see the P&G Swiffer in Italy story 2-40
Outline: Chapter 3- Supply Chain Drivers and Metrics Drivers of supply chain performance A framework for structuring drivers Detailed view for each driver and appropriate metrics 3-41
Drivers of Supply Chain Performance 1. Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites 2. Inventory raw materials, WIP, finished goods within a supply chain inventory policies 3. Transportation moving inventory from point to point in a supply chain combinations of transportation modes and routes 4. Information data & analysis regarding inventory, transportation, facilities throughout the chain potentially the biggest driver of chain performance 5. Sourcing functions a firm performs and functions that are outsourced 6. Pricing Price associated with goods and services provided by a firm to the supply chain 3-42
A Framework for Structuring Drivers Competitive Strategy Supply Chain Strategy Efficiency Supply chain structure** Logistical Drivers Responsiveness Facilities Inventory Transportation Information Sourcing Pricing Cross Functional Drivers ** also includes Sustainability 3-43
Facilities Role in the supply chain- the where manufacturing or storage (warehouses) Role in the competitive strategy economies of scale (efficiency priority) larger number of smaller facilities (responsiveness priority) Components of facilities decisions Location» centralization (efficiency) vs. decentralization (responsiveness)» other factors to consider (e.g., proximity to customers) Capacity (flexibility versus efficiency) Manufacturing methodology (product focused versus process focused) Warehousing methodology (SKU storage, job lot storage, cross-docking) Overall trade-off: Responsiveness versus efficiency 3-44
Role in the supply chain Inventory Exists because of a mismatch between supply and demand Source of cost and influence on responsiveness Given Little s Law, if throughput=demand, then inventory synonymous with material flow time Role in the competitive strategy If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers If cost is more important, inventory can be reduced (or consolidated further away) to make the firm more efficient Example: High-service department store: Nordstrom s We will spend 2 chapters in this class on inventory policies! 3-45
Components of Inventory Decisions Cycle inventory Average amount of inventory used to satisfy demand between shipments Depends on lot size Safety inventory inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales Seasonal inventory inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production Overall trade-off: Responsiveness versus efficiency more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness 3-46
Role in the supply chain Transportation Moves the product between stages in the supply chain Impact on responsiveness and efficiency Faster transportation allows greater responsiveness but lower efficiency Also affects inventory and facilities Role in the competitive strategy If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it Can also use slower transportation modes for customers whose priority is price (cost) Can also consider both inventory and transportation to find the right balance 3-47
Components of Transportation Decisions Mode of transportation: air, truck, rail, ship, pipeline, electronic transportation Utilization and backhaul rates should be considered vary in cost, speed, size of shipment, flexibility, carbon footprint Route and network selection route: path along which a product is shipped network: collection of locations and routes In-house or outsource (see driver #5) Overall trade-off: Responsiveness versus efficiency 3-48
Role in the supply chain Information The connection between the various stages in the supply chain allows coordination between stages Crucial to daily operation of each stage in a supply chain e.g., production scheduling, inventory levels Role in the competitive strategy Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Need to ask: what information is most valuable? 3-49
Components of Information Decisions Components of information decisions Push (MRP) versus pull (need demand information across all stages) Coordination and information sharing Forecasting and aggregate planning Enabling technologies include the following:» EDI» Internet» ERP systems» Supply Chain Management software» RFID Still some tradeoff exists: Responsiveness versus efficiency 3-50
Sourcing Role in the supply chain Set of business processes required to purchase goods and services in a chain» Examples: contract manufacturers, Transportation/Inventory services- 3PL Supplier selection, single vs. multiple suppliers, contract negotiation Role in the competitive strategy Sourcing decisions are crucial because they affect the level of efficiency and responsiveness in a supply chain In-house vs. outsource decisions- improving efficiency and responsiveness» Example: Expedited delivery usually requires Parcel Delivery Components of sourcing decisions Perform a task in-house versus outsource? Supplier evaluation and selection Procurement process Overall trade-off: balance profitability (Risk? Ethical issues?) 3-51
Role in the supply chain Pricing Pricing determines the amount to charge customers Pricing strategies can be used to match demand and supply Role in the competitive strategy Firms can utilize optimal pricing strategies to improve efficiency and responsiveness Low price and low product availability; vary prices by response times Components of pricing decisions Pricing and economies of scale Everyday low pricing versus high-low pricing Fixed price versus menu pricing Overall trade-off: Increase the firm profits We will explore effects from some of these pricing decisions later 3-52
Metrics The performance for these supply chain drivers can be quantified with metrics. Here s some examples we will work with during this term: 1. Facilities: Capacity, Utilization rate, per unit production cost 2. Inventory: Days-OnHand (Dollars-OnHand), Safety Stock, Stockout % 3. Transportation: Fraction transported by mode, inbound/outbound shipment size, inbound/outbound transportation cost per unit 4. Information: Forecast error, ratio of demand variability to order variability 5. Sourcing: supplier lead time, average purchase price, supplier reliability 6. Pricing: profit margin, fixed cost per order, variable cost per unit Certain metrics will be more important than others for different firms with different supply chain strategies Information Overload: SCOR has over 150+ KPIs 3-53
Summary of Learning Objectives- Chapter 1 What are supply chain stages? What are the three flows within a supply chain? What are the three key supply chain decision phases and what is the significance of each? What is the push/pull view of a supply chain? What is the goal of a supply chain and what is the impact of supply chain decisions on the success of the firm? 1-54
Summary of Learning Objectives for Chapter 2 Why is achieving strategic fit critical to a company s overall success? How does implied demand uncertainty differ from demand uncertainty? How does a company achieve strategic fit between its supply chain strategy and its competitive strategy? What are some complications to achieving this fit? 2-55
Summary of Learning Objectives for Chapter 3 What are the major drivers of supply chain performance? What is the role of each driver in creating strategic fit between supply chain strategy and competitive strategy (or between implied demand uncertainty and supply chain responsiveness)? What are some relevant metrics? In the remainder of the course, we will learn how to make decisions with respect to these drivers in order to achieve strategic fit and surmount these obstacles 3-56