1 a Introduction to SCM BIA 674

1 a. Introduction to SCM BIA 674 – Supply Chain Analytics

Today’s learning objectives 1. Understand the importance of supply chains in a firm’s financial performance and for the economy as a whole. 2. Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm. 3. Identify the key supply chain decision phases and explain the significance of each one. 4. Describe the cycle and push/pull views of a supply chain. 5. Classify the supply chain macro processes in a firm.

% of Revenue Why is SCM important? Best-in-class Companies’ Outperform Their Median Competitors with a 50% Cost Advantage 3 Superior SCM has long been a source of competitive advantage Source: PRTM/The Performance Measurement Group

Especially in times of economic uncertainty • US business logistics amount to about 10% of US nominal Gross Domestic Product 3 • Supply-chain generally accounts for between 60% and 90% of all company costs 1 • A 2% improvement in process efficiency for supply-chain processes has 3000% 5000% the impact of a 2% improvement in efficiency for… IT… HR… Finance 1… Sales… 1 Exclusive of Financial Services companies 2 Source: Hoovers 2006 Financial Data, Supply-Chain Council 2006 SCM Benchmark data on SCM cost for discrete & process industries 3 CSCMP 19 th Annual State of the Logistics Industry Fortune-10 Company Supply-Chain Cost as % of Total Costs 2 GM 94% Ford 93% Conoco 90% Wal-Mart 90% Chevron 88% IBM 77% Exxon 75% GE 63% Citi 1 0% AIG 1 0% Focused initiatives in Supply Chain Management can result in 30 -35% cost Oil Gas Dec 2009 4 reductions, liberation of working capital, &and revenue increases of 3 -5%!

Definition of SCM Supply Chain Management (SCM) SCM is a set of approaches used to integrate suppliers, manufacturers, warehouses and customers so that merchandise is produced and distributed at the right quantities, to the right locations and at the right time, in order to minimize system wide costs while satisfying service-level requirements. Logistics Network Design Energy-aware Optimization + Supply-Chain Management + + +

Other definitions Supply Chains are the Totality of processes spanning operations from supplier to end-customer, focused on material, work and information flow (Supply Chain Council) A Supply Chain is the alignment of firms that brings products or services to the market (Lambert et. al. ) A Supply Chain is a set of three or more units (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances and/or information from a source to a customer

What is a Supply Chain? All stages involved, directly or indirectly, in fulfilling a customer request – the key driver of the SC Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers Includes multiple levels of suppliers, and multiple levels of retailers and customers Within each company, the supply chain includes all functions involved in fulfilling a customer request (e. g. product development, marketing, operations, distribution, finance, customer service) These functions need to be completely aligned!

Example: A detergent supply chain Remember: in addition to materials’ flows, there are flows of information and funds. You can draw a network for the transfer of funds across the above stages.

Key characteristics of a Supply Chain Customer is an integral part of the supply chain Includes movement of products from suppliers to manufacturers to distributors and information, funds, and products in both directions May be more accurate to use the term “supply network” or “supply web” Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers All stages may not be present in all supply chains (e. g. , no retailer or final distributor for Dell) In addition to materials’ flows, there also flows of information and funds Upstream vs. Downstream supply chain

Stages & Flows in a Supply Chain Each stage is connected through the flow of products, information & funds The appropriate design depends on customers’ needs and roles @ the various stages Remember: Dell maintains 2 supply chain structures Remember: difference between retail networks in USA vs India

Supply Chains can be global Heaney, B (2011), Supply Chain Visibility Excellence – Fostering Security, Resilience, and Efficiency, Aberdeen Group, March 2011

What is required to build a laptop? Morisson M. It’s a Global Economy: The supply chain for laptops & educational resources, 2012

The Objective of a Supply Chain Maximize overall value (supply chain surplus) created Supply Chain Surplus = Customer Value – Supply Chain Cost Maximum amount the customer is willing to pay for a product Cost to fulfill the customer request The difference between the value of the product and its price is the consumer surplus

The Objective of a Supply Chain Example: a customer purchases a wireless router from Best Buy for $60 (revenue) Supply chain incurs costs (information, storage, transportation, components, assembly, etc. ) Difference between $60 and the sum of all of these costs is the supply chain profit Supply chain profitability is total profit to be shared across all stages of the supply chain Success should be measured by total supply chain profitability, not profits at an individual stage

The Objective of a Supply Chain Customer the only source of revenue Actually, it is also the only reason for the SC to exist Sources of cost include flows of information, products, or funds between stages of the supply chain Effective supply chain management is the management of flows between and among supply chain stages to maximize total supply chain surplus Total profitability is the key criterion for performance measurement Difference in retailing between USA (largely consolidated around a few major chains) and India (with millions of small retail outlets)

Importance of Supply Chain Decisions Supply chain design, planning and operation decisions play a significant role in the success or failure of a firm. To stay competitive, supply chains must adapt to changing technology and customer expectations

Decision Phases of a SC 1. Supply chain strategy or design How to structure the supply chain over the next several years and how resources will be allocated 2. Supply chain planning Decisions over the next quarter or year 3. Anticipate market conditions over the next few years Incorporate any flexibility build in the supply chain during the design phase to optimize performance Supply chain operation Daily or weekly operational decisions Exploit the reduction of uncertainty and optimize performance

1. SC Design Decisions about the structure/configuration 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

2. SC Planning Definition of a set of policies that govern short -term operations Fixed by the supply configuration from previous phase Starts with a forecast of demand in the coming year

2. SC Planning decisions: Which markets will be supplied from which locations Planned buildup of inventories Subcontracting, backup locations Inventory policies Timing and size of market promotions Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

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

Process View of a SC Cycle View: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages Push/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)

Cycle View of SC Processes The supply chain is a concatenation of cycles with each cycle at the interface of two successive stages in the supply chain.

Sub-processes in each SC cycle Each cycle involves the customer placing an order and receiving it after it has been supplied by the supplier.

Differences among the cycles Each cycle has the same basic sub-processes, however: Predictability of orders - in the customer order cycle demand is external and thus uncertain, while orders in the procurement cycle are predictable once manufacturing planning has been done. Number and size of orders - the size increases as we move further from the end customer and the number of orders decline) The cycle view clearly defines the roles/owners and the processes involved – crucial for operational decisions This is the predominant view for ERP systems. It is a transaction level view and clearly defines each process and its owner.

Push/Pull View of Supply Chains Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand Pull: execution is initiated in response to a customer order (reactive) Push: execution is initiated in anticipation of customer orders (speculative) Push/pull boundary separates push processes from pull processes

Push/Pull View of Supply Chains

Push/Pull View of Supply Chains Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders Can combine the push/pull and cycle views L. L. Bean Dell The relative proportion of push and pull processes can have an impact on supply chain performance Uncertainty makes the difference!

Push/Pull View of – L. L. Bean

Push/Pull View – Dell (for customized orders)

SC Macro Processes Supply chain processes discussed in the two views can be classified into Customer Relationship Management (CRM) Internal Supply Chain Management (ISCM) Supplier Relationship Management (SRM) Integration among the above three macro processes is critical for effective and successful supply chain management

SC Macro Processes Suppler Relationship Internal SC Relationship Customer Relationship Importance of COORDINATION between Purchasing, Manufacturing and Marketing