Supply Chain Management ( SCM)

1. Supply Chain Management (SCM)

2. SCM • Supply chain refers to those activities associated with the flow and transformation of goods from the raw materials stage (such as extraction), through to the end user, as well as the associated and necessary two-way information flows. • The supply chain includes: the management of information systems, sourcing and procurement, production scheduling, order processing, inventory management, warehousing, customer service, the after-market disposition of packaging and materials, and potentially recycling of products. • Supply chain management (SCM) is the integration of these activities through improved supply chain relationships. The goal is to achieve a competitive advantage.

3. SCM Importance • Advancement in technology and the information revolution • A global marketplace and global competition giving rise to customer demands regarding greater product variety, lower product and service costs, higher quality, shorter delivery times, and sustainability demands • Material and service inputs from suppliers have a major impact on an organizations’ ability to meet its customer needs

4. Components and Functions of a Supply Chain • External Suppliers: Tier 1, Tier 2, Tier 3, … • Internal Functions: sourcing and procurement, production scheduling, order processing, inventory management, warehousing, customer service, the after-market disposition of packaging and materials, and potentially recycling of products • External Functions: Traffic Management and physical Distribution Management

5. Key SCM Decisions • Inventory management: levels and positioning • Forecasting and demand management • Production planning and materials management • Transport mode(s) and policies • Reverse logistics • Supply chain structure: number of stages, locations of value added work, location of pull trigger • Distribution structure: number of distribution centers and warehouses, location sof facilities (regional or global), capacities • Distribution flow patterns: customer assignments, direct flows • Metrics: delivery time, fill rates, product line breadth, customization capability, etc. • Outsourcing and partnering • Supplier selection and coordination

6. 3 Key Dimensions of SCM Competition • Enriching the customer This entails a quick understanding of the unique requirements of each individual customer and rapidly providing it. • Cooperation in order to enhance competitiveness This cooperation includes better intraorganizational cooperation and quite likely will extend to interorganizational cooperation such as partnerships with suppliers and may possibly extend to newer, emerging virtual relationships with competing organizations. • Leverage the impact of people, information and technology This dimension recognizes the importance of employees as a company asset and therefore places greater emphasis on the development of this asset through education, training, and empowerment.

7. SCM Strategy Development • Firms are implementing numerous strategies in order to enhance competitive capabilities. • Strategies are being implemented which extend beyond the firm, serving to integrate companies and improve performance through a supply chain. • Many of these external supply-chain management initiatives integrate materials, organizations, and information, often through advances in technology. • Strategies entail many trade offs • The implementation of any SCM strategy is highly context dependent. The appropriate strategies followed differ for each company and each company must base its strategy upon an understanding of its customers and markets, products, strengths and weaknesses, competition, and resources.

8. Functional versus Innovative Products: Differences in Demand* Functional Innovative Aspects of Demand Predictable demand)(Unpredictable Demand) • Product Life Cycle: > 2 years 3 months to 1 year • Contribution Margin: 5% - 20% 20% - 60% • Product Variety Low (10-20 variants High (∞ potential of per category) variants per category) • AvgMargin of Forecast Error at Production Commitment: 10% 40% - 100% • Average StockoutRate: 1% - 2% 10% - 40% • AvgForced End-of-Season Markdown as % of Full Price: 0% 10% - 25% • Lead Time Required for Made-to-Order Products: 6 months - 1 year 1 day to 2 weeks • SCM Keys: Physical efficiency ($) Speed and Flexibility *Source: Fisher, Marshall l. "What is the Right Supply Chain for Your Product?" Harvard Business Review, March-April, 1997, pp. 105-116.

9. Bullwhip Effect Causes • Independent forecasting within each echelon (decentralized policy making) • Order batching which amplifies variability • Price fluctuations • Rationing and shortage gaming

10. Counteracting Bullwhip Effect • Technology provides visibility: CPFR (collaborative planning, forecasting, and replenishment), POS (point-of-sales), data mining • Trust: eliminates batching and gaming • Structural approaches: incentives, metric alignment, stable pricing eliminates forward buying)

11. SCM Strategies • Electronic Commerce Initiatives (various forms) • Internally, decentralized client and server computing of networked intranets (versus mainframe) reportedly afford greater access of real time data to more people. • Externally, e-commerce initiatives include: CPFR, POS data collection, VMI, RFID, shared databases, magnetic/optical data capture (such as bar coding), the internet, and world-wide web sites. • Partnerships • Partnering is a method of transforming contractual relationships into a cohesive, cooperative (collaborative) arrangement with a single set of goals and established procedures for resolving disputes in a timely and effective manner. • Partnering Purpose: to avoid the natural adversarial relationship that exists • Partnerships better enable firms to provide competitive advantages. • Partnerships spread the financial risk over a group of companies • Partnerships work to increase vendor participation in supply chain activities(e.g., early supplier involvement (ESI), vendor managed inventories (VMI), CPFR, JIT initiatives, etc.) • Many new forms of partnerships (contractual arrangements) have emerged: joint ventures, strategic alliances, virtual organizations, B2B, B2C, and C2C exchanges. • The technological advances in computer networks (internets and intranets) and telecommunications is making it possible for various forms of partnerships to coordinate geographically and institutionally dispersed capabilities.

12. SCM Strategies (continued) • Outsourcing • A strategy used to reduce uncertainty, cut lead times, increase supply chain flexibility • The internet is providing a great boost to this strategy • It is gaining popularity for reported benefits including: • Outsourcer’s expertise • Lower unit costs through higher and more stable volumes (economies of scale, specialization, improved capacity utilization) • Higher quality through greater investment justified by volumes • Lower financial risk to outsourcing firm through reductions in capital requirements with lower equipment, warehousing, and inventory costs • Greater opportunity for adding value through customization • Wide ranging set of functions (e.g., product design, materials management and transportation functions, inventory control and warehouse operations, etc.)

13. SCM Strategies (continued) • Postponement • Postponement in the distribution channel allows products to be designed for last minute customization • Forms: assembly, packaging, labeling, mixing

14. SCM Strategies (continued) • Transportation and Warehousing Innovation • Reusable containers and dunnage • Rapid load/unload • Point-of-use doors • In-line vehicle sequencing • Mixed mode transport • JIT process center (delivery postponement) • Direct Delivery (elimination of the traditional middleman) • Crossdocking • Consolidation (LTL into TL) and Break Bulk (TL into LTL) • Services (labeling, postponement, mixing, customization, others)

15. SCM Strategies (continued) • Purchasing Principles • Supplier speed (order response time) • Reliable delivery schedules (low variance) • An increased emphasis on supplier location (e.g., supplier locations in close proximity to OEM plants) • Continuous improvement initiatives (cost, products, processes, quality, flexibility, etc.) • Reduced purchase quantities (more frequent deliveries) through reduced order costs (same idea as lot size reductions) • Consistent quality levels for purchased goods and materials • Trust and increased information sharing (schedule sharing) • Maintaining a smaller number of suppliers • Longer-term supplier relations