SCM Overview

1. SCM Overview 2002.4.9 산업공학과 제조통합자동화 실험실 김해중

2. Contents • Evolution of the Integrated Logistics Concept • The Achilles’ Heel of SCM • What is the Right Supply Chain for Your Product? • Making Supply Meet Demand in an Uncertain World • Mass Customization at HP: The power of postponement • The Power of Virtual Integration: An interview with Dell Computer’s Michael Dell MAI Lab

3. Evolution of the Integrated Logistics Concepts Bernard J.La Londe Ohio State University “Integrated Distribution Management-The American Perspective” Long Range Planning No.1 (December 1969) 1993 revision

4. History • Begin • Rome, Napoleon(logistique), World War 1,2 • Industrial revolution: 생산과 소비 분리, specialized middleman • Three Questions • What is integrated Logistics management? • Why did the issue of integrated logistics become important? • How has integrated logistics evolved over the past 3 decades? MAI Lab

5. Materials Management Physical Distribution Management Business Logistics What? • Raw material • Subassemblies • Manufactured part • Racking materials Goods in Process Inventory Finished Goods Inventory Field Inventory Customer • Physical distribution • Post-World War 2 business management • “The movement and handling of goods from the point of production to the point on production to the point of consumption or user” • Materials Management • All materials employed in the production of the finished product • Inventory control, purchasing, traffic, materials handling, receiving • Business logistics • Emerged during 1980s~1990s as strategy • From raw material through finished goods inventory MAI Lab

6. Why? • Pressure on cost reduction • During the late 1950s~1960s • Increasing marketing costs, well advanced production technology • Relatively untouched areas  distribution(10%~30%) • Data processing technology • Computer technology became increasingly powerful, less costly • Automated inventory control • Customer focus • Right time in the right quantity • Particular importance for those companies selling relatively homogeneous products • Profit Leverage • 5% cost reduction  more than 5% revenue increase MAI Lab

7. Stage 1 Stage 2(Internal Linkage) Stage 3(External Linkages) How? Physical Distribution (40%) Procurement (30%) Vendor Operations (30%) Customer MAI Lab

8. Physical Distribution • 1950s~1960s • Focus: to meet customer expectation at lowest possible cost • Why the integration process started with finished goods • The Largest single segment on inventory(40%) • Directly impacts customer service • Without venturing into production processes • Low risk, high gain • Limitation • Internal Linkages • Around 1985 • 60%~100% of the firm's total inventory could be better managed • Elimination of buffer inventories between loops • External Linkages • Efficiencies in relationships with vendors, customers, third parties • EDI, JIT, DRP MAI Lab

9. Future-two trends • Cycles-time-to-market • Removal of time • Reducing the design-build-ship cycle • Process setup elimination • Supply Chain Management • Last half of the 1990s~2000s • Both internal and external units are forged together • Low-cost and high-value performance to the consumer • More responsive inventory systems MAI Lab

10. The Achilles’ Heel of SCM Ananth Raman Pro. at Harvard Business School in Boston Nicole DeHoratius, Zeynep Ton Doctoral candidates at HBS Harvard Business Review (July~August 2000)

11. New technology • Retailer Automatically track the flow of goods Electronically transmit replenishment orders Fewer stockouts • Bar code scanners • Electronic inventory • Supplier Synchronize production schedules to real- time demand data Fewer inventory MAI Lab

12. Data Inaccurate • Data error • 35 leading retailer - 2/3 of SKU • Reduced the company’s overall profits by 10% • Phantom stockouts • Employees routinely put products in the wrong places • 16% stockouts but the items available • Why? • Human nature • Retailers’ distribution centers • Wrong quantities for 29% of the SKUs, deviation from actual supplies of 25% • Items shipped in error that cost less than a certain amount • Most stores perform audits solely for financial reasons, to measure the “shrink” of goods that have been lost or pilfered. • Measure inventory by dollar value, not by item MAI Lab

13. What is the Right Supply Chain for Your Product? Marshall L.Fisher Wharton School University of Pennsylvania, Philadelphia, Pennsylvania Harvard Business Review (March~April 1997)

14. Why? Lack of framework for deciding Introduction Global competition Faster product development Variety of products New Technology New Concept • Point-of-sale scanners • Electronic data interchange • Flexible manufacturing • Automated warehousing • Rapid logistic • Quick response • Efficient consumer response • Accurate response • Mass customization • Lean manufacturing • Agile manufacturing But • Excess and shortage of products • Markdowns and stockouts • ex) U.S. food industry, poor coordination is wasting $30billion MAI Lab

15. First step-Product • Nature of the demand MAI Lab

16. Second step-Supply chain • Physical function • Function • Converting raw materials into parts, component, finished goods • Transporting all of them from one point in the supply chain to next • Cost • Production, transportation, inventory storage • Market mediation function • Function • matched what consumers want to buy • Cost • markdown, stockouts & dissatisfied customer MAI Lab

17. Supply Chain focus MAI Lab

18. Third step-Matching • Matching Supply Chains with Products MAI Lab

19. Case • Efficient supply of functional products • Campbell Soup • 5% of products are new • Highly predictable, • More than 98% service level • Responsive supply of innovative products • Obermeyer • 95% of products new • 200% forecast error MAI Lab

20. Functional  Innovative • Why? • customer needs • to avoid low margin • Automobile • Many options(color, interior,configuration,..)actually 20 million versions • Full option lead time=8 weeks 90% customer buy the car off the lot • needs responsive supply chain • Innovative  Functional • Computer • 20 years ago,IBM 360 mainframe 14-month lead time • Now lead time dropped to days by physical efficiency MAI Lab

21. Making Supply Meet Demand in an Uncertain World Marshall L.Fisher Wharton School University of Pennsylvania, Philadelphia, Pennsylvania Janice H. Hammond, Ananth Raman Harvard Business School Walter R.Obermeyer a principal of Sport Obermeyer Ltd. , in Aspen, Colorado, a graduate of the Harvard Harvard Business Review (May~June 1994)

22. Introduction global competition faster product development variety of products inaccurate forecast markdown, stockouts New concept fast direct response to demand: Quick response, JIT: MRP: rapidly change the schedules Limitation too large capacity in order to response to actual demand dependent on an unresponsive suppliers the supply chain has already been filled based on the old one MAI Lab

23. Markdowns MAI Lab

24. Why? • Problems • Most companies still treat the world as if it were predictable • Poor job of incorporating demand uncertainty into their production planning processes • Design their planning processes as if that initial forecast truly represented reality. why? • it’s complicated to factor multiple demand scenarios into planning • most companies simply don’t know how to do it • Frequent introductions of new products have two side effects • reduce the average lifetime of products • demand is divided over a growing number of SKUs • ex) GM Cadillac(Seville and Eldorado) vs. Buicks and Olds mobiles MAI Lab

25. Accurate response • Improve forecast • Redesign planning processes to minimize the impact of inaccurate forecasts costs per unit of stockouts and markdowns, missed opportunity cost predictable well make in advance unpredictable postpone decisions, early in the selling season MAI Lab

26. Sales volume grew Pressure to reduce More complex supply chain(global) Increased lead times, markdown, stockout Case - Sport Obermeyer • Obermeyer • leading suppliers in the US fashion sky apparel market • newly designed each year • difficult to predict –weather, fashion, trends, economy Until the mid-1980s • design and show samples to retailers in March • place production orders with suppliers in March ~ April • receive goods an D/C in September~October • ship to retail outlets MAI Lab

27. Limitations • First step: Shorten lead time - Quick response • Computerized systems – order process time, time to compute material requirements • Anticipate what materials it would require • pre-position in a warehouse • Air freight to expedite delivery • Early Write • persuaded some of important retailer customers to place orders sooner • 20% of total sales • Second step: Improving forecast • Buying committee • Group of company managers from a range of functional area • Sales exceed by 200%, less than 15% of the forecast MAI Lab

28. Accurate response • Changing Buying committee • Single consensus forecast for each style and color •  Each member makes an independent forecast for each style and color Accuracy Pandora > Entice forecasts A way to estimate which styles were accurately forecast MAI Lab

29. Accurate response • Update Early Write order • Overall buying patterns of retailers were remarkably similar • Updating the buying committee’s forecasts using Early Write sales sales Early Writer 20% Updating 80% Updating initial forecasts MAI Lab

30. Accurate response • Risk-based production sequencing non reactive capacity • Demand forecast are most accurate Early Write reactive capacity • market signals MAI Lab

31. Accurate response • Mathematical Model • stockout and markdown cost: 10.2% 1.8% MAI Lab

32. Accurate response • Redesign • reduced the variety of zippers used (color, length) • use the same kinds of raw materials • Tracking forecasting errors MAI Lab

33. Mass Customization at HP Edward Feitzenger a process-technology manager at the HP Hau L.Lee Industerial engineering and engineering management, Stanford University Harvard Business Review (1~2 1997)

34. Introduction orders be fulfilled ever more quickly highly customized products and services Postponing the task of differentiating a product • Organizational-design principles • Product • Process • Supply network MAI Lab

35. Modular Product Design • Modular Design • Flexibility, quickly, inexpensively • Common components, differential components • Benefits • Maximize the number of standard components • assemble those common components earlier stage • postpone the differential components • The modules of the product separately, possible at the same time • shortens the total time required for production • Easily diagnose production problems, isolate potential quality problems • Considerations • Cost of materials < benefits of standardization( lead time, inventory, stockout) MAI Lab

36. Example –Printer • Universal power supply(Europe and North America LaserJet) – 5% • Postpone the assembly(Europe and Asia DeskJet) • customization at local D/C(Europe) rather than at factories(Singapore) • country-specific power supply, packaging, manuals – 25% MAI Lab

37. generic DeskJet printer for both Mac and Do MAI Lab

38. Modular Process Design • Modular process • breaking down into independent sub processes • flexibility • Process postponement • ex) paint store: a broad range of different paints  color pigments • ex) retail apparel industry: body-measurement process+cut-and-sew process • specific garment instead of stock in all sizes and colors, eliminating discounts • relatively low-cost raw fabrics • Process resequencing • ex) Benetton: dyeing, knitting  knitting, dyeing • ex) HP disk driver: inserting printed circuit board, testing disk driver  standard tests + customized tests • Process standardization MAI Lab

39. Agile Supply Network • Redesign network • Optimum number and location of factories and D/C • Multi-function warehouse • perform light manufacturing MAI Lab

40. The Power of Virtual Integration Joan magretta Harvard Business Review (1998)

41. The Evolution of a faster business model The dominant model in the PC industry A Value chain with arms-length transactions from one layer to the next suppliers manufacturer D/C customer Dell’s direct model Eliminated the time and cost of third-party distribution customer suppliers manufacturer Virtual integration Blurring the traditional boundaries and roles in the value chain suppliers suppliers manufacturer customer MAI Lab

42. Fast-cycle segmentation • Fast-cycle segmentation • The finer the segmentation, the better forecast what customer needs and when MAI Lab

43. MAI Lab

44. Inventory Strategy How much inventory there is How fast it’s moving 80 days inventory 11 days inventory vs. • The cost of materials goes down 50% a year • New computers gets to market 69 days sooner MAI Lab

45. Conclusion MAI Lab