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Managing Supply Chains:Concepts, Tools, Applications

Chapter 1: Introduction

These powerpoints are a companion to the book: Managing Supply Chains: Concepts, Tools and Applications by Ananth. V . Iyer, Hercher Publishing Inc., ISBN 978-1-939297-01-3

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Outline

• A supply chain – the CSCMP definition• The 4 C supply chain architecture• The book supply chain example • Zara’s supply chain• An example analysis: Industrial Chemicals case• Auditing a Supply Chain

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What is a supply chain ?The Council of Supply Chain Management professionals (CSCMP) define the supply chain to be:

“Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across

companies”

(http://cscmp.org/aboutcscmp.org/definitions.asp)

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How significant are supply chain costs in the US Economy ?

The 23rd Annual State of the Logistics Report (June 2011) states that• US Supply Chain costs are 8.3% of US GDP• US Supply Chain Cost = $1.25 trillion• US Inventories = $2.1 trillion

In short, supply chain costs have a big impact.

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A “4 C” supply chain architecture

The 4 C’s are:• Chain Structure: the linkages between all entities from raw

material to consumption and reuse and associated ownership

• Capacity: long term capacity choices across the supply chain

• Coordination: contracts, agreements between separate entities in the supply chain to manage risk, expectations, metrics.

• Competitiveness: both the metrics of competition and the impact of competitors on choices

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An example book supply chain (section 1.2)

• Printing industry is $210 billion in sales• Book printing is a $ 5 billion industry• Top 5 printers = 40 % of print volume• Bookstores and retail outlets – 6500 in 1991 to

10,600 in 2007• 25,000 publishers, the largest released 11,000 titles

in 2011• Return rate is 25% for the industry, but is under 3 %

for Amazon.com – How ?

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The Book supply chain : A 4 C View

• Chain: Author->Publisher->Printer->wholesaler->retailer->Customer with fragmented ownership

• Capacity: retail store inventory, print runs and printer capacity, wholesaler inventory and capacity

• Coordination: returns contracts for bookstores• Competitiveness: Number of titles, lead time for

delivery, location of retailers

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Questions

• How does Amazon manage to have return rates under 3 % ?

• Given Amazon’s lower returns, what will be the impact on wholesaler pricing and consequent customer prices ?

• What does it mean to “Amazon Your Supply Chain” ? (see reference [76] in the book)

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Zara and the apparel supply chain

• Zara – vertically integrated apparel company• Market cap of $85 billion• Fast fashion – two week cycle time from

design to retail• Fast feedback – from customers in stores to

designers to manufacturing• Short life cycles incents customer purchase

when available

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The 4 C view of Zara

• Chain: Design->Manufacture->Ship to company store-> customer and feedback, Except some outsourced sewing, all steps owned by Zara

• Capacity: Design staff, cutting, store inventory• Coordination: store staff to designer feedback• Competitiveness: Trendy products, Service

level, retail location

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Questions

• How does Zara manage the 10 day cycle time ?

• What is the risk associated with Zara’s vertically integrated supply chain structure ?

• Why has Zara’s success not been replicated by other apparel retailers ?

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Industrial Chemicals Case- Section 1.7

Outline of the case discussion • Do a 4 C outline of the case • Understand the logic for Figures 1.1 through 1.3• Understand the implication of Figure 1.4• Implement the coordination agreement

described and explain Figure 1.8• Understand the consequent figure 1.5 to 1.7• Explain the result

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An Industrial Chemicals (IC) 4 C Analysis

• Chain Structure: Suppliers -> Plant -> Plant Warehouse -> Distributors -> OEMs

• Capacity: Warehouse capacity, Production batch size

• Coordination: Backhaul discounts, Batch size• Competitiveness: Cost

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Figure 1.1

• The figure shows orders received by the IC warehouse from distributors (IC’s customers)

• In the absence of any causal information, the variance of orders i.e., demand and the coefficient of variation of demand are large

• To maintain a high service level for distributors, one would expect high IC warehouse inventory levels

• Why is the demand so variable ? Are the distributors demands variable or any other reason ?

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Figure 1.2• Given the demand in Figure 1.1, and production in batches

(of size 300), orders to the plant are shown in Figure 1.2• Orders generated in Figure 1.2 based on a (Q,r) policy

used with demands in Figure 1.1• Variability of orders in Figure 1.2 greater than that in

Figure 1.1 (why ?)• What is the impact of the production order variability in

Figure 1.2 ? Higher production capacity ? Longer queue time ? Extra staff ? Higher raw material inventories ? Higher costs ?

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Figure 1.3

• The IC warehouse inventory serves as a buffer between demand variability (Fig 1.1) and production variability (Fig 1.2)

• I(t) = I(t-1)+P(t)-D(t) where I(t) (I(t-1)) is the ending inventory in period t (t-1), P(t) is the production in period t, D(t) is the demand in period t

• What is the link between warehouse inventory and service level ?

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Figure 1.4

• Consider the separation of the 20% of distributors (termed large) accounting for 80% of the volume from the rest (small)

• Fig 1.4 suggests that the large distributors account for most of the variability

• It suggests that any approach to work with these large distributors to stabilize their orders could have a significant impact

• It also suggests that only a few distributors will be impacted by these new agreements

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Figure 1.8

• The case claims that the large distributors faced stable downstream demand, but their orders were motivated by backhaul credits

• A standing order agreement with pooled delivery daily against demand faced the previous day makes orders match demand

• Fig 1.8 shows how the demand from large distributors is stabilized as a result of the coordination agreement

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Figure 1.5

• Given the new orders in Figure 1.8, the combined demand faced by the warehouse is shown in Figure 1.5

• This demand is stable as compared to Fig 1.1• The associated inventory required to satisfy

this demand and orders triggered for production will also stabilize

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Figure 1.6

• Given stable orders, and a lower batch size because of committed capacity, production orders become stable

• The lower batch size reflects lower setup costs as the capacity can be dedicated

• Production lead times can decrease because of order stability

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Figure 1.7

• With stable orders, and stable production, the inventory level decreases as the safety stock decreases

• Figure 1.7 shows the low inventory level as the production and demand are more closely matched

• Lower production lead times and batch sizes lower both safety stock and cycle stock

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Industrial Chemicals and SCM

• The SCM manager worked “outside the box” of the chain of the firm’s influence and signed a coordination agreement

• The impact is to lower capacity at the warehouse and lower batch sizes while lowering lead times

• The resulting supply chain is more competitive and can expand to new markets without additional investments

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Auditing Supply Chains

Chain: Map the chain structure to understand entities involved, ownership and alternate choices. • The example in Fig 1.9 shows an example for a

grocery supply chain• The possible upstream supply sources may be

adjusted to product selling volumes and variability

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Capacity – product characteristics

• An ABC classification by products type A – 20% of product SKUs with 80% of volumeB – 30% of products SKUs with 15 % of volumeC – 50% of product SKUs with 5 % of volume• Question: Should supply chain structure vary with

product characteristics i.e., will stable A products match with long lead time low cost supply chains ? Will volatile C products match higher cost faster response supply chains ?

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Capacity - standardization

• Standardizing designs by preventing maverick buying consolidates and stabilizes demand

• Stable orders may permit suppliers to offer vendor managed inventory services

• Reduced inventories and costs with higher service levels possible

• Ideal for MRO goods

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Capacity - consolidation

• Consolidation is the accumulation of good into a single location

• Permits efficient transportation and capacity use

• Lowers safety stocks of supplies

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Coordination – Assembly Postponement

• Keep product in its basic form and customize upon demand receipt

• Consolidates demand across SKUs, thus lowers safety stock and forecast error for common product

• Examples – HP Deskjet printer, paint in hardware stores

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Coordination – Geographic Postponement

• Hold products in a central location and move to demand point after demand is realized

• Ideal for expensive spare parts held centrally and moved with premium transport after demand occurs

• Permits shipments to be coordinated with demand while lowering safety stock

• Ecommerce companies gain this benefit

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Coordination – Speculative Capacity

• If demands change or prices are volatile, speculative inventory can help

• It time shifts supply and demand points and might enable cost reductions

• Speculative capacity may also be a hedge against supply disruptions

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Competitiveness

• Metrics of competition such as cost may demand supply chain structure adjustments – see Figures 1.11 and 1.12 for a medical supply chain

• Competitors and their products and services may demand a response – see Section 1.8.5 for relevant questions

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Summary

• A 4 C view of a supply chain focuses on chain structure, capacity, coordination and competitiveness

• This approach provides characterization of a supply chain’s architecture and exploration of alternative choices through an audit

• Measurements of supply chain components (See Industrial Chemicals case) may suggest significant changes through leveraging the 4Cs