Description
Basics of Supply Chain Management
Basics of Supply Chain Management
1
Definitions
2
What Is the Supply Chain?
• Also referred to as the logistics network • Suppliers, manufacturers, warehouses, distribution centers and retail outlets – “facilities”
Suppliers Manufacturers Warehouses & Customers Distribution Centers
and the • Raw materials • Work-in-process (WIP) inventory • Finished products that flow between the facilities
3
Material Costs
Transportation Costs
Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs
The Supply Chain
Suppliers Manufacturers Warehouses & Distribution Centers Customers
Transportation Costs Material Costs
Transportation Costs
Manufacturing Costs
Transportation Costs Inventory Costs
4
The Supply Chain – Another View
Plan
Source
Make
Deliver
Buy
Suppliers
Manufacturers
Warehouses & Distribution Centers
Customers
Material Costs
Transportation Transportation Costs Transportation Costs Manufacturing Costs Inventory Costs Costs 5
What Is Supply Chain Management (SCM)?
Plan Source Make Deliver Buy
• A set of approaches used to efficiently integrate
– – – – – – – Suppliers Manufacturers Warehouses Distribution centers In the right quantities To the right locations And at the right time
• So that the product is produced and distributed
• System-wide costs are minimized and • Service level requirements are satisfied
6
History of Supply Chain Management
• • • • 1960’s - Inventory Management Focus, Cost Control 1970’s - MRP & BOM - Operations Planning 1980’s - MRPII, JIT - Materials Management, Logistics 1990’s - SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order Entry • 2000’s - Optimized “Value Network” with Real-Time Decision Support; Synchronized & Collaborative Extended Network
7
Why Is SCM Difficult?
Plan Source Make Deliver Buy
• 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
8
The Importance of Supply Chain Management
• Dealing with uncertain environments – matching supply and demand
– Boeing announced a $2.6 billion write-off in 1997 due to “raw materials shortages, internal and supplier parts shortages and productivity inefficiencies” U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals” IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake
–
– –
• U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998
9
The Importance of Supply Chain Management
• Shorter product life cycles of high-technology products
– – Less opportunity to accumulate historical data on customer demand Wide choice of competing products makes it difficult to predict demand
• The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners
– – If you don’t do it, your competitor will Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its suppliers
• Availability of SCM technologies on the market
– Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes
10
Supply Chain Management and Uncertainty
• Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesn’t vary • The variability worsens as we travel “up” the supply chain • Forecasting doesn’t help!
Multi-tier Suppliers Manufacturer Wholesale Distributors Retailers Consumers
Sales
Sales
Time
Sales
Time
Time
Sales Time
Bullwhip Effect
11
Factors Contributing to the Bullwhip
• Demand forecasting practices
– Min-max inventory management (reorder points to bring inventory up to predicted levels) Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs Peaks and valleys in orders Fixed ordering costs Impact of transportation costs (e.g., fuel costs) Sales quotas Promotion and discount policies
• Lead time
–
• Batch ordering
– – – – –
• Price fluctuations • Lack of centralized information
12
Today’s Marketplace Requires:
• Personalized content and services for their
customers
• 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
• Order tracking & reporting across multiple vendors and carriers Shared visibility for
trading partners
13
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
Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty
14
Supply Chain Management – Key Issues
• Overcoming functional silos with conflicting goals
Purchasing Manufacturing Distribution Customer Service/ Sales
High inventories
Low purchase price Multiple vendors
Few changeovers Stable schedules Long run lengths
Low inventories
High service levels Regional stocks
Low transportation
SOURCE
MAKE
DELIVER
SELL
15
Supply Chain Management – Key Issues
ISSUE Network Planning CONSIDERATIONS
• Warehouse locations and capacities • Plant locations and production levels • Transportation flows between facilities to minimize cost and time • How should inventory be managed? • Why does inventory fluctuate and what strategies minimize this? • Impact of volume discount and revenue sharing • Pricing strategies to reduce order-shipment variability • Selection of distribution strategies (e.g., direct ship vs. cross-docking) • How many cross-dock points are needed? • Cost/Benefits of different strategies • • • • How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?
Inventory Control Supply Contracts Distribution Strategies
Integration and Strategic Partnering
Outsourcing & Procurement Strategies Product Design
• What are our core supply chain capabilities and which are not? • Does our product design mandate different outsourcing approaches? • Risk management • How are inventory holding and transportation costs affected by product design? • How does product design enable mass customization? 16
Source: Simchi-Levi
Supply Chain Management Operations Strategies
STRATEGY Make to Stock WHEN TO CHOOSE
standardized products, relatively predictable demand customized products, many variations many variations on finished product; infrequent demand
BENEFITS
Low manufacturing costs; meet customer demands quickly Customization; reduced inventory; improved service levels Low inventory levels; wide range of product offerings; simplified planning Enables response to specific customer requirements
Make to Order Configure to Order
Engineer to Order
complex products, unique customer specifications
Source: Simchi-Levi
17
Supply Chain Management – Benefits
• A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain Delivery Performance Inventory Reduction Fulfillment Cycle Time Forecast Accuracy Overall Productivity Lower Supply-Chain Costs Fill Rates Improved Capacity Realization
Source: Cohen & Roussel
16%-28% Improvement 25%-60% Improvement 30%-50% Improvement 25%-80% Improvement 10%-16% Improvement 25%-50% Improvement 20%-30% Improvement 10%-20% Improvement
18
Supply Chain Imperatives for Success
• View the supply chain as a strategic asset and a differentiator
– – Wal-Mart’s partnership with Proctor & Gamble to automatically replenish inventory Dell’s innovative direct-to-consumer sales and build-to-order manufacturing
• Create unique supply chain configurations that align with your company’s strategic objectives
– – – – –
– – –
Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network
Forecasting Collaboration Integration
Supply chain configuration components
• Reduce uncertainty
19
Value of Information and SCM
20
Information In The Supply Chain
Plan
Suppliers Manufacturers Warehouses & Distribution Centers Retailer
Source
Make
Deliver
Sell
Order Lead Time Delivery Lead Time
•
•
Production Lead Time
•
Each facility further away from actual customer demand must make forecasts of demand Lacking actual customer buying data, each facility bases its forecasts on ‘downstream’ orders, which are more variable than actual demand To accommodate variability, inventory levels are overstocked thus increasing inventory carrying costs
It’s estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertainty
21
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) Every-day-low-price strategies for stable demand patterns Use cross-docking to reduce order lead times Use EDI techniques to reduce information lead times Vendor-managed inventory (VMI) Collaborative planning, forecasting and replenishment (CPFR)
22
• Reduce variability in the supply chain
• Reduce lead times
• Eliminate the bullwhip through strategic partnerships
Methods for Improving Forecasts
Judgment Methods Market Research Analysis
Panels of Experts • • • • Internal experts External experts Domain experts Delphi technique Accurate Forecasts Causal Analysis
• Market testing • Market surveys • Focus groups
Time-Series Methods
• • • •
Moving average Exponential smoothing Trend analysis Seasonality analysis
• Relies on data other than that being predicted • Economic data, commodity 23 data, etc.
The Evolving Supply Chain
24
Supply Chain Integration – Push Strategies
• Classical manufacturing supply chain strategy • Manufacturing forecasts are long-range
–
– –
Orders from retailers’ warehouses
Unable to meet changing demand patterns Supply chain inventory becomes obsolete as demand for certain products disappears Large inventory safety stocks Larger and more variably sized production batches Unacceptable service levels Inventory obsolescence How is demand determined? Peak? Average? How is transportation capacity determined?
25
• Longer response time to react to marketplace changes
• Increased variability (Bullwhip effect) leading to:
– – – – – –
• Inefficient use of production facilities (factories)
• Examples: Auto industry, large appliances, others?
Supply Chain Integration – Pull Strategies
• Production and distribution are demand-driven
– – – Coordinated with true customer demand Only in response to specific orders POS data
• None or little inventory held
• Fast information flow mechanisms • 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
26
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”
“Generic” Product Push Strategy Raw Materials
PushPull Boundary
“Customized” Product Pull Strategy End Consumer 27
Supply Chain Timeline
Choosing Between Push/Pull Strategies
Pull High Industries where:
• Customization is High • Demand is uncertain • Scale economies are Low
Industries where:
• Demand is uncertain • Scale economies are High • Low economies of scale
Where do the following industries fit in this model: • Automobile? • Aircraft? • Fashion? • Petroleum refining? • Pharmaceuticals? • Biotechnology? • Medical Devices?
Demand Uncertainty
Computer equipment Industries where:
• Uncertainty is low • Low economies of scale • Push-pull supply chain
Furniture
Industries where:
• Standard processes are the norm • Demand is stable • Scale economies are High
Books, CD’s Push Low Low Pull
Grocery, Beverages
High Push
28 Source: Simchi-Levi
Economies of Scale
Characteristics of Push, Pull and Push/Pull Strategies
PUSH
PULL
Maximize Service Level
Objective
Complexity Focus Lead Time
Minimize Cost
High
Low
Resource Allocation
Responsiveness
Long
Short
Processes
Supply Chain Planning
Order Fulfillment
Source: Simchi-Levi
29
Supply Chain Collaboration – What Is It?
• Many different definitions depending on perspective • The means by which companies within the supply chain work together towards mutual goals by sharing
– – – – – – – – – Ideas Information Processes Knowledge Information Risks Rewards Accelerate entry into new markets Changes the relationship between cost/value/profit equation
• Why collaborate?
30
Supply Chain Collaboration
• Cornerstone of effective SCM • The focus of many of today’s SCM initiatives • The only method that has the potential to eliminate or minimize Retailers the Bullwhip effect
Suppliers
Synchronized Production Scheduling
Collaborative Product Development
Manufacturer
Collaborative Demand Planning
Distributors/ Wholesalers
Collaborative Logistics Planning •Transportation services •Distribution center services
Logistics Providers
31
Benefits of Supply Chain Collaboration
CUSTOMERS
• Reduced inventory • Increased revenue • Lower order management costs • Higher Gross Margin • Better forecast accuracy • Better allocation of promotional budgets
MATERIAL SUPPLIERS
• • • • Reduced inventory Lower warehousing costs Lower material acquisition costs Fewer stockout conditions • • • • •
SERVICE SUPPLIERS
Lower freight costs Faster and more reliable delivery Lower capital costs Reduced depreciation Lower fixed costs
• Improved customer service • More efficient use of human resources
Source: Cohen & Roussel
32
Supply Chain Collaboration Spectrum
Extensive Not Viable
Synchronized Collaboration
• The green arrow describes increasing complexity and sophistication of:
– – – – – – Information systems Systems infrastructure Decision support systems Planning mechanisms Information sharing Process understanding
Extent of Collaboration
Coordinated Collaboration
Cooperative Collaboration
Limited
Transactional Collaboration
Low Return
• Higher levels of collaboration imply the need for both trading partners to have equivalent (or close) levels of supply chain maturity • Synchronized collaboration demands joint planning, R&D and sharing of information and processing models
– Movement to real-time customer demand information throughout the supply chain 33
Many Number of Relationships
Few
Source: Cohen & Roussel
Successful Supply Chain Collaboration
• Try to collaborate internally before you try external collaboration • Help your partners to work with you • Share the savings • Start small (a limited number of selected partners) and stay focused on what you want to achieve in the collaboration • Advance your IT capabilities only to the level that you expect your partners to manage • Put a comprehensive metrics program in place that allows you to monitor your partners’ performance • Make sure people are kept part of the equation
– – Systems do not replace people Make sure your organization is populated with competent professionals who’ve done this before
34
Emerging Best Practices in SCM Strategy
35
The SCOR Model
36
Collaboration and the SCOR Model
• The Supply-Chain Council (SCC) is a global, not-for-profit trade association open to all types of organizations
– – 800 world-wide members Multi-industry
• SCC sponsors and supports educational programs including conferences, retreats, benchmarking studies, and development of the Supply-Chain Operations Reference-model (SCOR), the process reference model designed to improve users' efficiency and productivity • Promotes research and thought leadership in the supply chain management area • Adoption of common standards for reference to process, information and material goods flows is essential to enable trading partner collaboration
37
Process Reference Models
• Process reference models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework
Business Process Reengineering Capture the “as-is” state of a process and derive the desired “to-be” future state Best Practices Analysis Process Reference Model Capture the “as-is” state of a process and derive the desired “to-be” future state Quantify the operational performance of similar companies and establish internal targets based on “best-inclass” results Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results Characterize the management practices and software solutions that result in “best-inclass” performance
Benchmarking
Characterize the management practices and software solutions that result in “bestin-class” performance
38
SCOR Structure
Plan
Deliver Return
Source Return
Make
Deliver Return
Source Return
Make
Deliver Return
Source Return
Make
Deliver Return
Source
Return
Suppliers’ Supplier
Supplier
Internal or External
Your Company
Customer
Internal or External
Customer’s Customer
SCOR Model
Building Block Approach Processes Best Practice Metrics Technology
39
SCOR 7.0 Model Structure
Plan
P2 Plan Source P1 Plan Supply Chain P3 Plan Make P4 Plan Deliver P5 Plan Returns
Suppliers
Source
S1 Source Stocked Products S2 Source MTO Products
Make
M1 Make-to-Stock
Deliver
D1 Deliver Stocked Products
M2 Make-to-Order
D2 Deliver MTO Products
S3 Source ETO Products
M3 Engineer-to-Order
D3 Deliver ETO Products
D4 Deliver Retail Products
Return Source
Return Deliver
Enable
40
Customers
41
Examples of SCOR Adoptions
• Consumer Foods – Project Time (Start to Finish) – 3 months – Investment - $50,000 – 1st Year Return - $4,300,000 • Electronics – Project Time (Start to Finish) – 6 months – Investment - $3-5 Million – Projected Return on Investment - $ 230 Million • Software and Planning – SAP bases APO key performance indicators (KPIs) on SCOR Model • Aerospace and Defense – SCOR Benchmarking and use of SCOR metrics to specify performance criteria and provide basis for contracts / purchase orders
42
The SCOR Model As Context for This Course
• Pharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model
Plan
Segment Analysis, Marketing Planning
Patients
Pharmacies, Hospitals, Doctors
Deliver Source Make Deliver Return Return Return
Source Return
Make
Deliver
Source Make Deliver Source Return Return
Return
Return
Suppliers’ Supplier
Supplier
Your Company
Customer
Customer’s Customer
Internal or External
Internal or External
Marketing Data Suppliers
Doctors, Hospitals
Marketing and Sales Functions
43
The SCOR Model As Context for This Course
• Two interrelated “supply chains” work together to deliver drugs to market:
– – The Marketing and Sales “supply chain” which is principally information-based The Logistics supply chain which is principally product-based
Plan
Sales
Deliver Return
Source Return
Make
Deliver Return
Source
Make
Deliver
Source Make Deliver Return Source Return
Return
Return
Return
Suppliers’ Supplier
Supplier
Your Company
Customer
Customer’s Customer
Plan
Internal or External Internal or External
Manufacturing & Distribution
Deliver Return
Source Return
Make
Deliver Return
Source
Make
Deliver
Source Make Deliver Return Source Return
Return
Return
Return
Suppliers’ Supplier
Supplier
Your Company
Customer
Customer’s Customer
44
Internal or External Internal or External
doc_911399833.pptx
Basics of Supply Chain Management
Basics of Supply Chain Management
1
Definitions
2
What Is the Supply Chain?
• Also referred to as the logistics network • Suppliers, manufacturers, warehouses, distribution centers and retail outlets – “facilities”
Suppliers Manufacturers Warehouses & Customers Distribution Centers
and the • Raw materials • Work-in-process (WIP) inventory • Finished products that flow between the facilities
3
Material Costs
Transportation Costs
Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs
The Supply Chain
Suppliers Manufacturers Warehouses & Distribution Centers Customers
Transportation Costs Material Costs
Transportation Costs
Manufacturing Costs
Transportation Costs Inventory Costs
4
The Supply Chain – Another View
Plan
Source
Make
Deliver
Buy
Suppliers
Manufacturers
Warehouses & Distribution Centers
Customers
Material Costs
Transportation Transportation Costs Transportation Costs Manufacturing Costs Inventory Costs Costs 5
What Is Supply Chain Management (SCM)?
Plan Source Make Deliver Buy
• A set of approaches used to efficiently integrate
– – – – – – – Suppliers Manufacturers Warehouses Distribution centers In the right quantities To the right locations And at the right time
• So that the product is produced and distributed
• System-wide costs are minimized and • Service level requirements are satisfied
6
History of Supply Chain Management
• • • • 1960’s - Inventory Management Focus, Cost Control 1970’s - MRP & BOM - Operations Planning 1980’s - MRPII, JIT - Materials Management, Logistics 1990’s - SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order Entry • 2000’s - Optimized “Value Network” with Real-Time Decision Support; Synchronized & Collaborative Extended Network
7
Why Is SCM Difficult?
Plan Source Make Deliver Buy
• 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
8
The Importance of Supply Chain Management
• Dealing with uncertain environments – matching supply and demand
– Boeing announced a $2.6 billion write-off in 1997 due to “raw materials shortages, internal and supplier parts shortages and productivity inefficiencies” U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals” IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake
–
– –
• U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998
9
The Importance of Supply Chain Management
• Shorter product life cycles of high-technology products
– – Less opportunity to accumulate historical data on customer demand Wide choice of competing products makes it difficult to predict demand
• The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners
– – If you don’t do it, your competitor will Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its suppliers
• Availability of SCM technologies on the market
– Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes
10
Supply Chain Management and Uncertainty
• Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesn’t vary • The variability worsens as we travel “up” the supply chain • Forecasting doesn’t help!
Multi-tier Suppliers Manufacturer Wholesale Distributors Retailers Consumers
Sales
Sales
Time
Sales
Time
Time
Sales Time
Bullwhip Effect
11
Factors Contributing to the Bullwhip
• Demand forecasting practices
– Min-max inventory management (reorder points to bring inventory up to predicted levels) Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs Peaks and valleys in orders Fixed ordering costs Impact of transportation costs (e.g., fuel costs) Sales quotas Promotion and discount policies
• Lead time
–
• Batch ordering
– – – – –
• Price fluctuations • Lack of centralized information
12
Today’s Marketplace Requires:
• Personalized content and services for their
customers
• 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
• Order tracking & reporting across multiple vendors and carriers Shared visibility for
trading partners
13
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
Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty
14
Supply Chain Management – Key Issues
• Overcoming functional silos with conflicting goals
Purchasing Manufacturing Distribution Customer Service/ Sales
High inventories
Low purchase price Multiple vendors
Few changeovers Stable schedules Long run lengths
Low inventories
High service levels Regional stocks
Low transportation
SOURCE
MAKE
DELIVER
SELL
15
Supply Chain Management – Key Issues
ISSUE Network Planning CONSIDERATIONS
• Warehouse locations and capacities • Plant locations and production levels • Transportation flows between facilities to minimize cost and time • How should inventory be managed? • Why does inventory fluctuate and what strategies minimize this? • Impact of volume discount and revenue sharing • Pricing strategies to reduce order-shipment variability • Selection of distribution strategies (e.g., direct ship vs. cross-docking) • How many cross-dock points are needed? • Cost/Benefits of different strategies • • • • How can integration with partners be achieved? What level of integration is best? What information and processes can be shared? What partnerships should be implemented and in which situations?
Inventory Control Supply Contracts Distribution Strategies
Integration and Strategic Partnering
Outsourcing & Procurement Strategies Product Design
• What are our core supply chain capabilities and which are not? • Does our product design mandate different outsourcing approaches? • Risk management • How are inventory holding and transportation costs affected by product design? • How does product design enable mass customization? 16
Source: Simchi-Levi
Supply Chain Management Operations Strategies
STRATEGY Make to Stock WHEN TO CHOOSE
standardized products, relatively predictable demand customized products, many variations many variations on finished product; infrequent demand
BENEFITS
Low manufacturing costs; meet customer demands quickly Customization; reduced inventory; improved service levels Low inventory levels; wide range of product offerings; simplified planning Enables response to specific customer requirements
Make to Order Configure to Order
Engineer to Order
complex products, unique customer specifications
Source: Simchi-Levi
17
Supply Chain Management – Benefits
• A 1997 PRTM Integrated Supply Chain Benchmarking Survey of 331 firms found significant benefits to integrating the supply chain Delivery Performance Inventory Reduction Fulfillment Cycle Time Forecast Accuracy Overall Productivity Lower Supply-Chain Costs Fill Rates Improved Capacity Realization
Source: Cohen & Roussel
16%-28% Improvement 25%-60% Improvement 30%-50% Improvement 25%-80% Improvement 10%-16% Improvement 25%-50% Improvement 20%-30% Improvement 10%-20% Improvement
18
Supply Chain Imperatives for Success
• View the supply chain as a strategic asset and a differentiator
– – Wal-Mart’s partnership with Proctor & Gamble to automatically replenish inventory Dell’s innovative direct-to-consumer sales and build-to-order manufacturing
• Create unique supply chain configurations that align with your company’s strategic objectives
– – – – –
– – –
Operations strategy Outsourcing strategy Channel strategy Customer service strategy Asset network
Forecasting Collaboration Integration
Supply chain configuration components
• Reduce uncertainty
19
Value of Information and SCM
20
Information In The Supply Chain
Plan
Suppliers Manufacturers Warehouses & Distribution Centers Retailer
Source
Make
Deliver
Sell
Order Lead Time Delivery Lead Time
•
•
Production Lead Time
•
Each facility further away from actual customer demand must make forecasts of demand Lacking actual customer buying data, each facility bases its forecasts on ‘downstream’ orders, which are more variable than actual demand To accommodate variability, inventory levels are overstocked thus increasing inventory carrying costs
It’s estimated that the typical pharmaceutical company supply chain carries over 100 days of product to accommodate uncertainty
21
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) Every-day-low-price strategies for stable demand patterns Use cross-docking to reduce order lead times Use EDI techniques to reduce information lead times Vendor-managed inventory (VMI) Collaborative planning, forecasting and replenishment (CPFR)
22
• Reduce variability in the supply chain
• Reduce lead times
• Eliminate the bullwhip through strategic partnerships
Methods for Improving Forecasts
Judgment Methods Market Research Analysis
Panels of Experts • • • • Internal experts External experts Domain experts Delphi technique Accurate Forecasts Causal Analysis
• Market testing • Market surveys • Focus groups
Time-Series Methods
• • • •
Moving average Exponential smoothing Trend analysis Seasonality analysis
• Relies on data other than that being predicted • Economic data, commodity 23 data, etc.
The Evolving Supply Chain
24
Supply Chain Integration – Push Strategies
• Classical manufacturing supply chain strategy • Manufacturing forecasts are long-range
–
– –
Orders from retailers’ warehouses
Unable to meet changing demand patterns Supply chain inventory becomes obsolete as demand for certain products disappears Large inventory safety stocks Larger and more variably sized production batches Unacceptable service levels Inventory obsolescence How is demand determined? Peak? Average? How is transportation capacity determined?
25
• Longer response time to react to marketplace changes
• Increased variability (Bullwhip effect) leading to:
– – – – – –
• Inefficient use of production facilities (factories)
• Examples: Auto industry, large appliances, others?
Supply Chain Integration – Pull Strategies
• Production and distribution are demand-driven
– – – Coordinated with true customer demand Only in response to specific orders POS data
• None or little inventory held
• Fast information flow mechanisms • 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
26
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”
“Generic” Product Push Strategy Raw Materials
PushPull Boundary
“Customized” Product Pull Strategy End Consumer 27
Supply Chain Timeline
Choosing Between Push/Pull Strategies
Pull High Industries where:
• Customization is High • Demand is uncertain • Scale economies are Low
Industries where:
• Demand is uncertain • Scale economies are High • Low economies of scale
Where do the following industries fit in this model: • Automobile? • Aircraft? • Fashion? • Petroleum refining? • Pharmaceuticals? • Biotechnology? • Medical Devices?
Demand Uncertainty
Computer equipment Industries where:
• Uncertainty is low • Low economies of scale • Push-pull supply chain
Furniture
Industries where:
• Standard processes are the norm • Demand is stable • Scale economies are High
Books, CD’s Push Low Low Pull
Grocery, Beverages
High Push
28 Source: Simchi-Levi
Economies of Scale
Characteristics of Push, Pull and Push/Pull Strategies
PUSH
PULL
Maximize Service Level
Objective
Complexity Focus Lead Time
Minimize Cost
High
Low
Resource Allocation
Responsiveness
Long
Short
Processes
Supply Chain Planning
Order Fulfillment
Source: Simchi-Levi
29
Supply Chain Collaboration – What Is It?
• Many different definitions depending on perspective • The means by which companies within the supply chain work together towards mutual goals by sharing
– – – – – – – – – Ideas Information Processes Knowledge Information Risks Rewards Accelerate entry into new markets Changes the relationship between cost/value/profit equation
• Why collaborate?
30
Supply Chain Collaboration
• Cornerstone of effective SCM • The focus of many of today’s SCM initiatives • The only method that has the potential to eliminate or minimize Retailers the Bullwhip effect
Suppliers
Synchronized Production Scheduling
Collaborative Product Development
Manufacturer
Collaborative Demand Planning
Distributors/ Wholesalers
Collaborative Logistics Planning •Transportation services •Distribution center services
Logistics Providers
31
Benefits of Supply Chain Collaboration
CUSTOMERS
• Reduced inventory • Increased revenue • Lower order management costs • Higher Gross Margin • Better forecast accuracy • Better allocation of promotional budgets
MATERIAL SUPPLIERS
• • • • Reduced inventory Lower warehousing costs Lower material acquisition costs Fewer stockout conditions • • • • •
SERVICE SUPPLIERS
Lower freight costs Faster and more reliable delivery Lower capital costs Reduced depreciation Lower fixed costs
• Improved customer service • More efficient use of human resources
Source: Cohen & Roussel
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Supply Chain Collaboration Spectrum
Extensive Not Viable
Synchronized Collaboration
• The green arrow describes increasing complexity and sophistication of:
– – – – – – Information systems Systems infrastructure Decision support systems Planning mechanisms Information sharing Process understanding
Extent of Collaboration
Coordinated Collaboration
Cooperative Collaboration
Limited
Transactional Collaboration
Low Return
• Higher levels of collaboration imply the need for both trading partners to have equivalent (or close) levels of supply chain maturity • Synchronized collaboration demands joint planning, R&D and sharing of information and processing models
– Movement to real-time customer demand information throughout the supply chain 33
Many Number of Relationships
Few
Source: Cohen & Roussel
Successful Supply Chain Collaboration
• Try to collaborate internally before you try external collaboration • Help your partners to work with you • Share the savings • Start small (a limited number of selected partners) and stay focused on what you want to achieve in the collaboration • Advance your IT capabilities only to the level that you expect your partners to manage • Put a comprehensive metrics program in place that allows you to monitor your partners’ performance • Make sure people are kept part of the equation
– – Systems do not replace people Make sure your organization is populated with competent professionals who’ve done this before
34
Emerging Best Practices in SCM Strategy
35
The SCOR Model
36
Collaboration and the SCOR Model
• The Supply-Chain Council (SCC) is a global, not-for-profit trade association open to all types of organizations
– – 800 world-wide members Multi-industry
• SCC sponsors and supports educational programs including conferences, retreats, benchmarking studies, and development of the Supply-Chain Operations Reference-model (SCOR), the process reference model designed to improve users' efficiency and productivity • Promotes research and thought leadership in the supply chain management area • Adoption of common standards for reference to process, information and material goods flows is essential to enable trading partner collaboration
37
Process Reference Models
• Process reference models integrate the well-known concepts of business process reengineering, benchmarking, and process measurement into a cross-functional framework
Business Process Reengineering Capture the “as-is” state of a process and derive the desired “to-be” future state Best Practices Analysis Process Reference Model Capture the “as-is” state of a process and derive the desired “to-be” future state Quantify the operational performance of similar companies and establish internal targets based on “best-inclass” results Quantify the operational performance of similar companies and establish internal targets based on “best-in-class” results Characterize the management practices and software solutions that result in “best-inclass” performance
Benchmarking
Characterize the management practices and software solutions that result in “bestin-class” performance
38
SCOR Structure
Plan
Deliver Return
Source Return
Make
Deliver Return
Source Return
Make
Deliver Return
Source Return
Make
Deliver Return
Source
Return
Suppliers’ Supplier
Supplier
Internal or External
Your Company
Customer
Internal or External
Customer’s Customer
SCOR Model
Building Block Approach Processes Best Practice Metrics Technology
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SCOR 7.0 Model Structure
Plan
P2 Plan Source P1 Plan Supply Chain P3 Plan Make P4 Plan Deliver P5 Plan Returns
Suppliers
Source
S1 Source Stocked Products S2 Source MTO Products
Make
M1 Make-to-Stock
Deliver
D1 Deliver Stocked Products
M2 Make-to-Order
D2 Deliver MTO Products
S3 Source ETO Products
M3 Engineer-to-Order
D3 Deliver ETO Products
D4 Deliver Retail Products
Return Source
Return Deliver
Enable
40
Customers
41
Examples of SCOR Adoptions
• Consumer Foods – Project Time (Start to Finish) – 3 months – Investment - $50,000 – 1st Year Return - $4,300,000 • Electronics – Project Time (Start to Finish) – 6 months – Investment - $3-5 Million – Projected Return on Investment - $ 230 Million • Software and Planning – SAP bases APO key performance indicators (KPIs) on SCOR Model • Aerospace and Defense – SCOR Benchmarking and use of SCOR metrics to specify performance criteria and provide basis for contracts / purchase orders
42
The SCOR Model As Context for This Course
• Pharmaceutical sales and marketing activities have their own set of logistics related activities that can be fully described using the SCOR model
Plan
Segment Analysis, Marketing Planning
Patients
Pharmacies, Hospitals, Doctors
Deliver Source Make Deliver Return Return Return
Source Return
Make
Deliver
Source Make Deliver Source Return Return
Return
Return
Suppliers’ Supplier
Supplier
Your Company
Customer
Customer’s Customer
Internal or External
Internal or External
Marketing Data Suppliers
Doctors, Hospitals
Marketing and Sales Functions
43
The SCOR Model As Context for This Course
• Two interrelated “supply chains” work together to deliver drugs to market:
– – The Marketing and Sales “supply chain” which is principally information-based The Logistics supply chain which is principally product-based
Plan
Sales
Deliver Return
Source Return
Make
Deliver Return
Source
Make
Deliver
Source Make Deliver Return Source Return
Return
Return
Return
Suppliers’ Supplier
Supplier
Your Company
Customer
Customer’s Customer
Plan
Internal or External Internal or External
Manufacturing & Distribution
Deliver Return
Source Return
Make
Deliver Return
Source
Make
Deliver
Source Make Deliver Return Source Return
Return
Return
Return
Suppliers’ Supplier
Supplier
Your Company
Customer
Customer’s Customer
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Internal or External Internal or External
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