Introduction to Supply Chain Management

1. Introduction to Supply Chain Management Designing & Managing the Supply Chain Chapter 1 Byung-Hyun Ha bhha@pusan.ac.kr

2. Outline • Introduction • Global Optimization • Uncertainty • Case: Meditech Surgical

3. 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

4. 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

5. 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

6. 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

7. Strategies for SCM • All of the advanced strategies, techniques, and approaches for supply chain management focus on: • Global optimization • Managing uncertainty

8. 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, …

9. 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

10. 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

11. 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

12. 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

13. Manufacturer Forecast of Sales Retailer Warehouse to Shop Actual Consumer Demand Retailer Orders Production Plan Uncertainty • Supply Chain Variability Time

14. Consumer Demand Production Plan Uncertainty • What Management Gets... Time

15. Production Plan Consumer Demand Uncertainty • What Management Wants… Volumes Time

16. Uncertainty • Dealing with uncertainty • Pull systems • Risk pooling • Centralization • Postponement • Strategic alliances • Collaborative forecasting

17. 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

18. Case: Meditech Surgical • Case overview • Intent – diagnosis of supply chain • Business overview • Supply chain • Production planning • What’s wrong? • How to fix it?

19. 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

20. 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

21. 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

22. 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

23. Operation Organization

24. 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

25. 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

26. High Inventory Level of Finished Goods • In case of representative stable product

27. Var. in Production vs. Var. in Demand • Variation in production schedules often exceeded variation in demand

28. New Product Introduction • Poor service level • Poor forecasting? • Panic ordering? • And high FG inventory

30. 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

31. 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

32. 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)