Supply Chain – Decision Phases

Section 4 part 2

The Magnitude

In 1998, American companies spent $898 billion in supply chain related activities (or 10.6% of Gross Domestic Product)

Third party logistics services grew in 1998 by 15% to nearly $40 billion

It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using more effective logistics strategies A typical box of cereal spends more than three

months getting from factory to supermarket

The Potential

In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer

Wal-Mart designed its supply chain with clusters of stores around distribution centers to facilitate frequent replenishment at its retail stores in a cost effective manner. Frequent replenishment allows stores to match supply and demand more efficiently than the competition. Wal-Mart has been a leader in sharing information and collaborating with suppliers to bring down costs and improve product availability. The results were impressive.

The Impact

In 1996, Dell held 31 days of inventory. It now holds only 4 days of inventory.

The Impact

The Turning Point (The Economist, 9/20/07)

“For such a tiny part of GDP, the contents of warehouses has

had a surprisingly big effect on its volatility. When industries cut

or add stocks according to demand, that adjustment magnifies

the effect of the initial change in sales. Stock levels were once

much larger relative to the size of the economy, so a small slip

in demand could easily blow up into a recession. But thanks to

improvements in technology, firms now have timelier and better

information about buyers. Speedier market intelligence and

production in smaller batches allows firms to match supply to

changing conditions. This makes huge stocks unnecessary and

minimizes the lurches in inventories that were once so

destabilizing.

Study of Supply Chain Management

Successful supply chain management requires decisions on the flow of information, product, and funds that fall into three decision phases Supply chain strategy or design Supply chain planning Supply chain operation

Decision Phases in a Supply Chain

TYPICAL DECISIONS

Strategic

Tactical

TYPETIME FRAME

•Supply chain network design (How many plants? Location and capacities of plants and warehouses?)•Supply chain strategies (Sell direct or through retailers? Outsource or in-house? Focus on cost or customer service?)•Product mix at each plant

years

•Workforce & Production planning •Inventory policies (safety stock level)•Which locations supply which markets•Transportation strategies

3 mo.- 1year

Operational•Production scheduling •Decisions regarding individual orders•Place replenishment orders

daily

Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm

Supply chain strategy or design Supply chain planning Supply chain operation

Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty

Supply chain planning decisions use a fixed supply chain configuration to come up with an overall production plan

Supply chain operation makes decisions about individual customer orders & daily operations.

Study of Supply Chain Management

A supply chain is a sequence of processes and flows that take place within and between different stages Cycle view

The processes in a supply chain are divided into a series of cycles, each performed at the interface between two successive stages of a supply chain

Push/pull view The processes in a supply chain are divided into

two categories depending on whether they are executed in response or in anticipation of a customer order

Cycle View of Supply Chain Processes

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Cycle view defines the processes involved and the owner of each process

Subprocesses in Each Cycle

Supplier markets the product

Buyer

Supplier

Buyer places an order

Supplier receivesthe order

Supplier suppliesthe order

Buyer receivesthe order

Buyer may return the product

Cycle View of Supply Chain Processes

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer Order Process1. Customer Arrival 2. Customer Order Entry3. Customer Order Fullfillment4. Customer Order Receiving

Procurement Process1. Component Order Arrival2. Production Scheduling3. Manufacturing/Shipping4. Receiving

Manufacturing Process1. Order Arrival2. Production Scheduling3. Manufacturing/Shipping4. Receiving

Replenishment Process1. Retail Order Trigger 2. Retail Order Entry3. Retail Order Fullfillment4. Retail Order Receiving

Differences1.In the Customer Order Cycle demand is external2.Scale (and frequency) of an order increases (decreases)

when moving further away from the customer

Each cycle occurs at the interface between two successive stages

Customer order cycle (customer-retailer) Replenishment cycle (retailer-distributor) Manufacturing cycle (distributor-manufacturer) Procurement cycle (manufacturer-supplier)

Push/Pull View of Supply Chain Processes

Customer order arrives

PULL PROCESSES

PUSH PROCESSES

Execution is initiated in response to customer orders (reactive)

Execution is initiated in anticipation of customer orders(speculative)

Processes are divided based on the timing of their execution relative to a customer order

Processes are divided based on their timing

relative to the timing of a customer order They key difference is the uncertainty during

the two phases At the time of execution of a pull process

customer demand is known At the time of execution of a push process

customer demand is not known (and must be forecasted)

Push/Pull Processes for the Supply chain of Dell

PUSH

PULL

Customer Order Cycle andManufacturing Cycle

Procurement Cycle

Customer

Manufacturer

Supplier

Push/Pull Processes for the Supply chain of Detergent

PULL

PUSH

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier