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Introduction to Supply Chain Management. Designing & Managing the Supply Chain Chapter 1 Byung-Hyun Ha bhha@pusan.ac.kr. Outline. Introduction Global Optimization Uncertainty Case: Meditech Surgical. Introduction. Investment and interest in supply chain Economy issues

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introduction to supply chain management

Introduction to Supply Chain Management

Designing & Managing the Supply Chain

Chapter 1

Byung-Hyun Ha

bhha@pusan.ac.kr

outline
Outline
  • Introduction
  • Global Optimization
  • Uncertainty
  • Case: Meditech Surgical
introduction
Introduction
  • Investment and interest in supply chain
    • Economy issues
      • Fierce competition in today’s global market
      • Introduction of products with shorter and shorter life cycles
      • Heightened expectations of customers
    • Technology issues
      • Advances in communications and transportation technologies
introduction4
Introduction
  • Supply chain (logistics network)
    • The system of suppliers, manufacturers, transportation, distributors, and vendors that exists to transform raw materials to final products and supply those products to customers
    • That portion of the supply chain which comes after the manufacturing process is sometimes known as the distribution network
introduction5
Introduction
  • Goal of supply chain management
    • Supply chain management is 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
      • at the right time
    • In order to
      • Minimize total system cost
      • Satisfy customer service requirements
logistic network
Logistic Network

Customers,

demand

centers

sinks

Field

Warehouses:

stocking

points

Sources:

plants

vendors

ports

Regional

Warehouses:

stocking

points

Supply

Inventory &

warehousing

costs

Production/

purchase

costs

Transportation

costs

Transportation

costs

Inventory &

warehousing

costs

strategies for scm
Strategies for SCM
  • All of the advanced strategies, techniques, and approaches for supply chain management focus on:
    • Global optimization
    • Managing uncertainty
global optimization
Global Optimization
  • Issues
    • Why is it different/better than local optimization?
    • What are conflicting supply chain objectives?
  • Why is global optimization hard?
    • The supply chain is complex network
    • Different facilities in supply chain network have different and conflicting objectives
    • The supply chain is a dynamic system
      • The power structure changes
    • The system varies over time
      • e.g. Demand and cost variation due to seasonal factors, trend, advertising and promotion, competitors’ pricing strategies, …
global optimization9
Global Optimization
  • Tools and strategies
    • Decision support systems
    • Inventory control
    • Network design
    • Design for logistics
    • Cross docking
    • Strategic alliances / supplier partnerships
    • Supply contracts / incentive schemes
sequential vs global optimization

Procurement

Planning

Manufacturing

Planning

Distribution

Planning

Demand

Planning

Supply Contracts/Collaboration/Information Systems and DSS

Procurement

Planning

Manufacturing

Planning

Distribution

Planning

Demand

Planning

Sequential vs.Global Optimization
  • Sequential optimization
  • Global optimization
conflicting objectives in the supply chain
Conflicting Objectives in the Supply Chain
  • Purchasing
    • Stable volume requirements / flexible delivery time
    • Little variation in mix / large quantities
  • Manufacturing
    • Long run production / high quality
    • High productivity / low production cost
  • Warehousing
    • Low inventory / reduced transportation costs
    • Quick replenishment capability
  • Customers
    • Short order lead time / high in stock
    • Enormous variety of products / low prices
uncertainty
Uncertainty
  • Why is uncertainty hard to deal with?
    • Matching supply and demand is difficult
    • Forecasting doesn’t solve the problem
    • Inventory and back-order levels typically fluctuate widely across the supply chain
    • Demand is not the only source of uncertainty:
      • Lead times
      • Yields
      • Transportation times
      • Natural disasters
      • Component availability
  • Forecasting
    • Forecasting is always wrong
    • The longer the forecast horizon the worse the forecast
    • End item forecasts are even more wrong
uncertainty13

Manufacturer Forecast

of Sales

Retailer Warehouse

to Shop

Actual

Consumer

Demand

Retailer Orders

Production Plan

Uncertainty
  • Supply Chain Variability

Time

uncertainty14

Consumer

Demand

Production Plan

Uncertainty
  • What Management Gets...

Time

uncertainty15

Production Plan

Consumer

Demand

Uncertainty
  • What Management Wants…

Volumes

Time

uncertainty16
Uncertainty
  • Dealing with uncertainty
    • Pull systems
    • Risk pooling
    • Centralization
    • Postponement
    • Strategic alliances
    • Collaborative forecasting
key issues
Key Issues
  • Issues span
    • Strategic, tactical, operational
  • What are the tradeoffs and issues?
    • Distribution network configuration
    • Inventory control
    • Supply contracts
    • Distribution strategies
    • Integration and partnerships
    • Procurement strategies and outsourcing
    • Product design
    • Information technology
case meditech surgical
Case: Meditech Surgical
  • Case overview
    • Intent – diagnosis of supply chain
    • Business overview
    • Supply chain
    • Production planning
    • What’s wrong?
    • How to fix it?
meditech surgical
Meditech Surgical
  • Background
    • Endoscopic surgical instrument maker
      • Minimally invasive surgery
    • Parent company: Largo Healthcare Company
      • Spun off 3 years ago
    • Primary competitor: National Medical Corporation
      • Market created in early 80’s, rapidly growing
      • National sells to physicians
      • Meditech sells to material managers as well as physicians
      • Customer preferences change slowly
    • Old products continually updated
      • Replaced with new product introductions
    • Compete based on product innovations, customer service, cost
meditech surgical20
Meditech Surgical
  • Problems
    • New production introduction needs to be flawless
    • Consistently fail to keep up with demand during initial order
    • Customers wait over six weeks to have orders delivered
  • Dan Franklin, manager of Customer Service & Dist.
    • Recognizing growing customer dissatisfaction
distribution
Distribution
  • Central warehouse
  • Two primary channels to hospitals
    • Domestic dealers
      • Order and receive products from multiple manufacturers
      • Independent and autonomous entities
    • International affiliates
      • Subsidiaries of Largo Healthcare
      • Similar to domestic dealers from Meditech’s point of view
internal operations
Internal Operations
  • Assembly
    • Manually intensive
    • Using component parts in inventory
    • Assembly line with a team of cross-trained production workers
    • Cycle time for assembly of a batch of instruments
      • 2 weeks
    • Lead time for component parts
      • 2-16 weeks
  • Packaging
    • Using machine
  • Sterilization
    • Cobalt radiation sterilizer, about 1 hour
production planning scheduling
Production Planning & Scheduling
  • Broken down two parts
    • Assembly & component parts order based on monthly forecast
    • Packaging & sterilization based on finished goods inventory level
  • Forecast
    • Annual: during the fourth quarter of each fiscal year
    • Monthly: using annual forecast broken down proportionately
      • At the beginning of each month: adjustments of forecast
  • Planning of assembly
    • Using monthly demand forecasts
    • transfer req. =

month forecast – finished goods inventory + safety stock

    • Approved throughout the organization after 1 to 2 weeks
production planning scheduling25
Production Planning & Scheduling
  • MRP systems
    • Planning assembly schedules and parts order
    • Calculation may be run several times each week
      • Notification of change at least 1 weeks before
  • Packaging & sterilization process
    • Order point/order quantity (OP/OQ)

Packaging &

Sterilization

Assembly

Parts Inventory

Bulk Inventory

FG Inventory

2 – 16 weeks

2 weeks

1 week

push

pull

high inventory level of finished goods
High Inventory Level of Finished Goods
  • In case of representative stable product
var in production vs var in demand
Var. in Production vs. Var. in Demand
  • Variation in production schedules often exceeded variation in demand
new product introduction
New Product Introduction
  • Poor service level
    • Poor forecasting?
    • Panic ordering?
    • And high FG inventory
poor service level
Poor Service Level
  • What is going on?
    • Demand is quite predictable
    • Usage in hospitals is quite stable
    • Market share moves slowly over time
    • With each new product, dealer must build inventory to fill pipeline
  • Why did Meditech think demand was unpredictable?
    • Poor information systems
    • No one looked at demand
    • No one had responsibility for forecast errors
    • Tendency to shift the blame
    • Built-in delays and monthly buckets in planning system
    • Amplifier in planning system
poor service level31
Poor Service Level
  • What to do?
    • Recognize that demand is stable and predictable
    • Establish accountability for forecast
    • Eliminate planning delays and/or reduce time bucket
    • Alternatively, put assembly within pull system and eliminate bulk inventory
slide32
HW#1

 All homework should be prepared by handwriting and be submitted at the next class

  • Discussion questions 5, 7, 8, 9 (p. 13)
  • Case discussion question 3 (p. 21)