supply chain management - info...

Supply Chain ManagementPrashant Yadav, Professor of SCM, MIT-Zaragoza International Logistics Program

Tsukuba University, Jan 8-11, 2008

2

Yadav –Supply Chain Management-Tsukuba Univ.© 2007 Prashant Yadav

This session?

You can expect two key takeaways

Familiarity with the fundamental decision problems and issues you will face in your career as a supply chain manager/analyst

Some emerging concepts and insights

We will strive for simplicity

We will attempt to boil messy supply chain phenomena down to some basic logical principles with minimal math and models

3


Supply chain managers need hard facts, numbers and models. Un-proven theories and conjectures only work in marketing..

4


Introduction to MIT-Zaragoza International Logistics Program

5


MIT-Zaragoza International Logistics Program

A partnership between the Government of Aragón in Spain and the Massachusetts Institute of Technology to create in Zaragoza an international centre of excellence for education and research in logistics and supply chain management

Perform leading-edge research.

Deliver world class education.

Impact industry and society via outreach

http://ctl.mit.edu/zaragoza

http://www.zlc.edu.es

http://ctl.mit.edu/zaragoza

http://www.zlc.edu.es/

6


ZaragozaLogistics hub of high-speed railway, highway exchanges, and an airport accommodating the world's largest cargo planes60% of Spain’s GDP and 20 million consumers within 300 kilometers (200 miles)Host city for World Expo 2008

New high speed railway station

Ebro river flows past the Basilica

University of Zaragoza

7


The Zaragoza Logistics Park (PLAZA)

13-million square meter (3200 acre) complex of distribution centers, transportation, dry port, and intermodal services

8


Zaragoza Logistics Center (ZLC)

ZLC

Instead of putting a laboratory in a university, we put the university in the middle of a large-scale industrial laboratory.

9


What is a Supply Chain ?

10


Supply Chain Management: What does it include?

The Supply ChainThe Supply ChainThe Supply ChainManufacturing ControlManufacturing Control

Shipping ControlShipping Control

Factory SourcingFactory Sourcing

Raw Material SourcingRaw Material SourcingProduct DevelopmentProduct DevelopmentConsumer NeedsConsumer Needs

ConsumerConsumer Wholesaler/ Retailer

Product DesignProduct Design

LocalLocalForwarding ConsolidationForwarding Consolidation

Forwarder ConsolidationForwarder Consolidation

Customs ClearanceCustoms Clearance

11


Supply Chain ?

Supplier Customer Customer’sCustomerSuppliers’

SupplierInternal or External Internal or External

Your Company

Plan

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliverSource

Return Return Return Return Return Return Return Return

Supply Chain Operations Reference (SCOR) Model Source : Supply-Chain Council, Inc. www.supply-chain.org

12


What activities constitute Supply Chain Management ?

13


Supply Chain Management –Strategic

Plan production resourcesto meet inventoryreplenishment requirements

Design SCNetwork

SupplierSelection

Procurement

Choose a design that enables matching supply with demand at the least cost

Develop an overall procurement strategy and select suppliers

14


Supply Chain Management –Tactical and Operational

Plan demandbased on historical salesand business plans

Set inventory policiesand manage inventorylevels to balance supplyand demand requirements Plan production resources

to meet inventoryreplenishment requirements

Process customerrequirements andperform commercialactivities

Manage the movement ofinventory from production pointor storage point to market orthird party customer.

ForecastDemand

Plan &Manage

InventoryPlan

Production

MoveProduct

ProcessOrders

15


What makes a supply chain excellent?

16


What is an excellent supply chain?

Is part of a profitable company

Is comprised of supply chain “best practices”

These are all myths

××××

17


Excellent Supply Chain Characteristics

1. Supports, enhances, and is an integral part of a company’s competitive business strategy.

2. Leverages a distinctive (not necessarily unique) supply chain operating model to sustain competitiveness

3. Executes well against a balanced set of operational performance objectives/metrics

4. Focuses on a few business practices that reinforce each other to support the operating model and best achieve operational objectives.

Source: L. Lapide, “The Four Habits of Highly Effective Supply Chains”, Harvard Business Review Supply Chain Strategy 2006

18


Supply Chains: An evolutionary perspective

19


In the beginning

WH

Retailer

ConsumerConsumerManufacturing

LogisticsSales

Parts Manufacturing

Marketing

RetailerWH

4Fewer channel intermediaries4Sole suppliers4Limited interactions and transactions

20


WH

Retailer

ConsumerConsumerManufacturing

LogisticsSales

Parts Manufacturing

Marketing

RetailerWH

4Vertical Integration 4Firm boundary was drawn to cover as many activities as possible4Ford Rouge plant

Henry Ford and Fully Integrated Supply Chains

21


River Rouge Complex Dearborn, MI circa 1950

4Source: Detroit News/ Sent to me by Joseph Butler ZLOG Class of 2006

22


WH

Raw MaterialsSupplier

Retailer

ConsumerConsumer

ComponentSupplier

Manufacturing

Logistics Sales

Marketing

Retailer

DC

4Component and material suppliers are different firms4Located in the same geographical area4Toyota city

Disintegrated with Geographical ProximityEmergence of the Toyota City concept

23


Early supply chains4Geographical proximity

4Integrated ownership structures

24


Maybe because of slow and expensive transport..

25


Or maybe..slow and expensive communication systems

4Source: Presentation by G. Long, UPS

26


DCRaw Materials

Supplier

Retailer

LogisticsProviders

ConsumerConsumer

ComponentSupplier

Manufacturing

Logistics

Subcontractor

Sales

Manufacturing

Marketing

Retailer

DC

Today’s supply chains

27


SKU Proliferation and Fragmented SC


Cost in the Average New Vehicle?

30%Car Manufacturer

70%Suppliers

4Adapted from: John Kay - NSF Workshop on SCM, University of Florida

Supply chain cost as a fraction of overall cost

29


Food for thought

So why are supply chains becoming more disintegrated ?Is it a one size fits all situation ?

30


Need for channel intermediaries

Milk, bread, shampoo, soap

31


Need for intermediaries and Transaction Cost Economics

Wholesaleror Retailer

With Intermediaries

Milk P1 Bread P2 ShampooP3 Soap P4

C1 C2 C3

3 + 3 + 3 + 3 = 12 Transactions

P1 P2 P3 P4

C1 C2 C3

Without Intermediaries

Reducing Transaction Costs

32


Vertical Integration vs. Fragmented Supply Chains

Economies of scale in a specialized activity

“Core competency” argument of Prahalad

Return on Assets or Return on Capital Employed

Shared costs of design, development and tooling

Transaction cost economies

However,

there is no universal formula of success in SCM

For example

33


Examples from the Apparel Supply Chain

Dongguan, 30 minutes away from the Hong Kong border Second one coming up in Qing Yuan, 30 minutes away from GuangzhouEverybody including trend spotters, design executives , factory workers and engineers on one siteHotel rooms, workers dormitories, entertainment facilities everything on campusBigger US garment buyers adopting to LuenThai’s SC city concept rapidly

Luen Thai’ Supply Chain CitiesSupply Chain Integrator for large apparel firms Buys capacity in distinct units of the apparel SCPlays the role of coordinator on behalf of the apparel companies‘Channel maestro’

http://www.lifung.com/static.html

34


FunctionalSupply Chain

IntegratedSupply Chain

Loosely CoupledSupply Chain

“Incentive structures, contracts and information sharing”

“Integrate all members at information interfaces”

“Independent silos of optimization

Supply Chains : An evolutionary perspective

interfirm”

Supply Chain ?

“Independent silos of optimizationintra-firm”

Better Performance

??

??

35


Thought questions for Friday's class

1. Will supply chains become more fragmented ?

2. Will there be a role of a “channel maestro”/network orchestrator in all supply chains of tomorrow?

http://www.lifung.com/static.html

36


Supply Chain Management : Emerging Trends

Outsourcing in Logistics Activities

Transportation, Warehousing, Order Handling, Purchasing

Micro markets to replace segmented markets

Fully customized products are delivered at costs comparable to mass produced products : Postponement

Extended service offerings : Vendor Managed Inventory, Joint Design and Development

Retail powerhouses : The Wal-Mart effect

Creative trade terms and contracts to facilitate incentive alignment and gain-sharing

Death of TLAs

37


“The Wal-Mart effect” in Supply Chain ManagementResponsiveness, Agility and Leanness are the new differentiators

38


Postponement /Delayed Differentiation

Delay (in both time and geography) the point of differentiation as much as possible

Keep products as “standard vanilla boxes” as possible

Ideally until an order is received

If not at least as late as possible

Benetton, HP are excellent examples

39


Key take-away

“The future ain’t what it used to be”

Yogi Berra, The Yogi Book, Workman Publishing, New York, 1998

40


1. Aging of Developed Countries

2. Volatility of $100 to $200/ barrel of oil

3. Shift of economic power towards China, India, and Russia

4. Tightly aligned trading blocks (e.g., 3 or 4)

5. Pervasive Powerful Technologies

6. Green Laws, globally

Six Macro Factors That Would Reshape Supply Chains in 2020

41


Aging & Business: A Story of Markets & WorkforceU.S. Age Distribution Projections for 2010 by Five-Year Age Segment

-40%-20%

0%20%40%60%80%

100%

<5 10 to14

20 to24

30 to34

40 to44

50 to54

60 to64

70 to74

80 to84

90 to94

100+

% Growth in Segment 2000-2010

… Europe and Japan have similar trends

1) Aging of Developed Countries

Source: U.S. Census Bureau, J. Coughlin, MIT Age Lab

42


1) Aging of Developed Countries

1. What is the supply chain impact from changes in products & services purchased?

2. What is the impact of aging on:a. Plants and warehouses with elderly blue collar workers? b. Elderly drivers?c. Elderly white collar knowledge workers?

43


Capital Spending as Fraction of Sales (%)

0.0 2.0 4.0 6.0 8.0 10.0 12.0

North America

Latin America

EU

Central & Eastern Europe

Africa & Middle East

Asia-Pacific*

World

Not only is the population aging, our capital assets are aging too!

44


2) Volatility of $100 to $200/ barrel of oil

Twenty-five+ year trend of crude versus gasoline prices

-100%

-50%

0%

50%

100%

150%

200%Ja

n-47

Jan-

49

Jan-

51

Jan-

53

Jan-

55

Jan-

57

Jan-

59

Jan-

61

Jan-

63

Jan-

65

Jan-

67

Jan-

69

Jan-

71

Jan-

73

Jan-

75

Jan-

77

Jan-

79

Jan-

81

Jan-

83

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Ann

ual %

cha

nge

Average Crude Oil Prices (1947-2005)

OPEC OilEmbargo

Iranian Revolution

1st PersianGulf War

45


2) Volatility of $100 to $200/ barrel of oil

1. Freight costs

2. Material costs (i.e., oil-based materials)

3. Production operating costs

4. Packaging costs

Oil Costs Impact Supply Chains in 4 Major Cost Areas

46


Impacts of feedstock price volatilityForward integration by feedstock producers

Downstream production moves closer to feedstock or closer to growth markets

Better risk management

47


3) Shift of economic power towards China, India, and Russia

1. Consumer markets in U.S. , Europe and Japan may have peaked 2. Rise of middle class in these countries creates consuming nations

95% of consumers live outside of U.S.,60% in Asia

52 developing nations with population of 1.5 billion reaching middle class

3. Future global competition for scarce materials and resources4. China and India producing more and more engineers and college-

educated students: So will innovation move there too?5. New growth economies don’t have legal systems for IP and patent

protection like in U.S., Europe and Japan. Would IP become a critical factor in supply chain design decisions ?

48


4) Tightly aligned trading blocks (e.g., 3 or 4)

1. Powerful trading blocks centered around, for example, Europe, US,

Japan/Asia, and China

2. Heavy trade barriers into and out of blocks

3. Largely intra-trading among blocks

49


5) Pervasive Powerful Technologies

1. The World is Flat – distributed virtual workers and organization

2. Full supply chain visibility of goods, assets and inventories

3. Virtual but comprehensive view of total supply chains (i.e., melding

of the artificial and physical worlds)

4. Move to manufacturing at the point-of-sale (Postponement)

50


6) Green Laws, globally

1. Reverse logistics

2. Green product design

3. Supply network compliance

51


Inventory in the Supply Chain

52


Inventory Management!!

53


Why Inventory?Decouple two operationsMeet unexpected demandSmooth seasonal or cyclical demandMeet variations in customer demandTake advantage of price discountsHedge against price increasesQuantity discounts

54


Functions of Inventory

Cycle stockCongestion stockSafety stockSeasonal stockPipeline stockSpeculative stock

55


Inventory TypesCycle stock

Replenish inventory in batches

Time

Inventory

56


Safety stockHedge against some uncertainty

Supply, demand, etc.

Time

Inventory

SafetyStock

Inventory Types

57


Seasonal stockProduce or order in advance to smooth out workload

Time

Units

demand

inventory

production

Inventory Types

58


Inventory Types

Congestion stockMaterial waiting for a highly utilized process

Pipeline stockMaterial in transit between stocking locations

Speculative stockHedge against price variations

Buy more when price is low, so you can buy less when price is high

59


Traditional vs. Modern Inventory QuestionsWhat to order?How many to order?When to order?

Who manages the inventory?Who owns the inventory & when?When is the inventory paid for?Where to position safety stock ?

60


r = Reorder pointQ = Order quantityL = Lead time

L L

Q QQ

r

Time

You receive an order quantity Q.

Your consume them over time

When you reach down to a level of inventory of r, you place your next order of size Q.

The cycle then repeats

Simple dynamics at each stage

61


Some Inventory TermsOn-hand inventory (Physical inventory in stock)Net Inventory = On-hand inventory – Backorders Inventory Position = On-hand inventory – Backorders + Inventory on order

A fixed quantity, Q, is ordered whenever the inventory position drops to the reorder point, r, or lower.

Replenishment is made whenever the inventory position drops to the order point r or lower and order enough to the order-up-to level, S

(r,S) inventory policy or Min-Max system

(r,Q) inventory policy

62


Managers choose inventory level that minimizes

• Inventory holding cost

• Ordering cost

• Stock out cost

Fixed stock out costs

Proportional stock out costs

Proportional to time of delay

Deciding Inventory Levels

63


Often these costs are not explicitly known so managers work withmeasures that are easier to implement

α service level

Probability of not being out of stock in a specified time-interval

Long range vs. single replenishment cycle

Expected number of stock outs per unit time

β service level

Fraction of customer demand met from inventory or within the specified time. Also called fill-rate

γ service level

Time of stock out also plays a role.

Service Level Measures

cumulative unmet demand1demand per period

= −

supply chain management - info...

Documents