Introduction to

Supply Chain Management

(first lecture)
 MUHAMMAD HASHIM KHAN


• Event Management (Monash University

Australia)
• MBA -M.Phil (Supply Chain
Management)
• BBA-H (Marketing)
 Contact # 03218116006
•
©Copyright 2002 D. Simchi-Levi
 LEARNING OBJECTIVES
• Demonstrate your understanding
of the linkages between supply
chain management and the
various functional areas of
business
• Describe the historical
development of supply chain
management
• Describe supply chain
©Copyright 2002 D. Simchi-Levi
 LEARNING OBJECTIVES
• Describe supply chain
management configuration
strategies
• Describe supply chain
management coordination
strategies
• Describe supply chain
management improvement
strategies
©Copyright 2002 D. Simchi-Levi
 Introduction
• Materials - any commodities used
directly or indirectly in producing
a product or service.
– Raw materials, component parts,
assemblies, finished goods, and
supplies
• Supply chain - the way materials
flow through different
organizations from the raw
material supplier ©Copyright
to the 2002 D.finished
Simchi-Levi
Supply Chain Management ---A
River

©Copyright 2002 D. Simchi-Levi

 Customers,
demand
centers
sinks
Field
Warehouses:
Sources:
plants Regional
Warehouses: stocking
points
vendors
ports stocking
points

Supply

Inventory &
warehousing
costs

Production/
purchase
costs Transportation
costs Transportation
costs
Inventory &
warehousing
costs
 Supply Chain Management in a
Manufacturing Plant
Raw
Materials,
Finished Inspection,

Customers
Suppliers

Receiving Parts, and

Goods Packaging,
and In-process Production
Ware- And
Inspection Ware-
housing Shipping
Housing

Materials Management
Warehousing
Shipping
Purchasin Production and
and
g Control Inventory
Traffic
Control
Physical materials flow
Information flow

©Copyright 2002 D. Simchi-Levi

 Supply Chain management
• A supply chain consist of all parties
involved directly or in directly , in
fulfilling a customer requirement.
– Manufacturer
– Supplier
– Transporter
– Warehouse
– Retailer
– customer

©Copyright 2002 D. Simchi-Levi

 INTRODUCTION
• Supply chain management is the
configuration, coordination and
improvement of a sequentially
related set of operations
• With supply chain management,
the idea of satisfying an entire
chain of customers becomes
reality
©Copyright 2002 D. Simchi-Levi
 Sequential Optimization vs.
Global Optimization
Sequential Optimization

Procurem Manufact Distributi

ent uring on Demand
Planning Planning Planning Planning
Global Optimization

Supply Contracts/Collaboration/Information Systems and DSS

Procurem Manufactu Distributio

ent ring n Demand
Planning Planning Planning Planning

Source: Duncan McFarlane

©Copyright 2002 D. Simchi-Levi
 Supply Chain Management
• Definition:
 Supply Chain Management is primarily
concerned with the efficient integration of
suppliers, factories, warehouses and stores so
that merchandise is produced and distributed
in the right quantities, to the right locations
and at the right time, and so as to minimize
total system cost subject to satisfying service
requirements.
• Notice:
– Who is involved
– Cost and Service Level
– It is all about integration
©Copyright 2002 D. Simchi-Levi
 Supply Chain Management
• Refers to all the management functions
related to the flow of materials from the
company’s direct suppliers to its direct
customers.
• Includes purchasing, traffic, production
control, inventory control, warehousing, and
shipping.
• Two alternative names:
– Materials management
– Logistics management


©Copyright 2002 D. Simchi-Levi

 SCOR is structured around five distinct
management processes
Plan

Deliver Source Make Deliver Source Make Deliver Source Make Deliver Source

Return Return Return Return Return

Return Return Return

Your Company Customer’s

Suppliers’ Supplier Customer
Customer
Supplier
Internal or External Internal or External

SCOR Model

Building Block Approach

Processes Metrics
Best Practice Technology

©Copyright 2002 D. Simchi-Levi

 Supply-Chain Operations Reference-model
(SCOR) 5.0 - Processes
Plan P1 Plan Supply Chain

P2 Plan Source P3 Plan Make P4 Plan Deliver P5 Plan Returns

Source Make Deliver

Suppliers

S1 Source Stocked Products M1 Make-to-Stock D1 Deliver Stocked Products

Customers
D2 Deliver MTO Products
S2 Source MTO Products M2 Make-to-Order

S3 Source ETO Products M3 Engineer-to-Order D3 Deliver ETO Products

Return Return
Source Deliver

Enable
 Supply Chain Management
Requires Many Different Functions
Purchasing Logistics
Engineerin
Distributio Procure
Operation
g
n ment
Information s
Transporta
Systems tionMarketing
Materials
Warehousin
Production
g
Store
 Integrating Operations
Management with Other Functions

Functional Areas
of Business

gni t ekr a M

t ne me ga na M
gni t nuocc A

na mu H
ecr uose R

gni r ee ni gn E

met sy S
ec na ni F

noi t a mr of nI
Integrating Operations Management with
Other Functions

Supply Chain Management: From

Henry Ford to E-Commerce

Supply-Chain Management Decisions

Supply Chain Configuration Strategies

Supply-Chain Coordination Strategies

Improving Supply Chains: Seven

Principles
 Conflicting Objectives in the
Supply Chain
1. Purchasing
 • Stable volume requirements
 • Flexible delivery time
 • Little variation in mix
 • Large quantities
2. Manufacturing

 • Long run production

 • High quality
 • High productivity
 • Low production cost
 Conflicting Objectives in the
Supply Chain
3. Warehousing
 • Low inventory
 • Reduced transportation costs
 • Quick replenishment capability
4. Customers

 • Short order lead time

 • High in stock
 • Enormous variety of products
 • Low prices
•
 The Dynamics of the Supply Chain
Order Size

Customer
Demand

Retailer
Retailer Orders
Orders
Distributor
Distributor Orders
Orders

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 The Dynamics of the Supply Chain
Order Size

Customer
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Supply Chain: The
Magnitude
•In 1998, American companies spent
$898 billion in supply-related
activities (or 10.6% of Gross Domestic
Product).
– Transportation 58%
– Inventory 38%
– Management 4%
•Third party logistics services grew in
1998 by 15% to nearly $40 billion
•
•
 Supply Chain: The
Magnitude (continued)
•It is estimated that the grocery industry
could save $30 billion (10% of
operating cost) by using effective
logistics strategies.
– A typical box of cereal spends 104 days
getting from factory to supermarket.
– A typical new car spends 15 days
traveling from the factory to the
dealership.
–
 Supply Chain: The
Magnitude (continued)
• Compaq computer estimates it lost $500 million
to $1 billion in sales in 1995 because its
laptops and desktops were not available when
and where customers were ready to buy them.
• Boeing Aircraft, one of America’s leading capital
goods producers, was forced to announce
writedowns of $2.6 billion in October 1997.
The reason? “ Raw material shortages, internal
and supplier parts shortages…” . (Wall Street
Journal, Oct. 23, 1997)
•
•
 Supply Chain: The
Potential

• Procter & Gamble estimates that it saved retail

customers $65 million through logistics gains
over the past 18 months.

“ According to P&G, the essence of its

approach lies in manufacturers and suppliers
working closely together …. jointly creating
business plans to eliminate the source of
wasteful practices across the entire supply
chain” .
(Journal of Business Strategy, Oct./Nov.
1997)
 Supply Chain: The
Potential

• Dell Computer has outperformed the

competition in terms of shareholder value
growth over the eight years period, 1988-
1996, by over 3,000% (see Anderson and
Lee, 1999) using
 - Direct business model
 - Build-to-order strategy.
 Supply Chain: 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.
 Supply Chain: The
Complexity
National Semiconductors:


• Production:
– Produces chips in six different locations:
four in the US, one in Britain and one in
Israel
– Chips are shipped to seven assembly
locations in Southeast Asia.
• Distribution
– The final product is shipped to hundreds
of facilities all over the world
– 20,000 different routes
– 12 different airlines are involved
– 95% of the products are delivered within
45 days
 Supply Chain Challenges
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time
–
 Supply Chain Challenges
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time
• Managing Uncertainty
– Matching Supply and Demand
– Demand is not the only source of
uncertainty
–
Supply Management’s Impact on Net
Income and the Bottom Line
Increased Sales:


• Faster to Market
• Improved Quality
• Pricing Flexibility
• Innovation
Lower Total Cost:


• Acquisition Cost
• Processing Cost
• Quality Cost
• Downtime Cost
• Risk Cost
• Cycle Time Cost
• Conversion Cost
• Non-value Added Cost
• Supply Chain Cost
• Post Ownership Cost
 Supply Management and
Labor
$700,000 Return on Investment
Sales
$5,000,000 What if we
Net income
$400,000
Operating cost elements

Minus decrease
Profit
Materials
Cost of ($515,000)
margin materials cost
Goods Sold Divided by 8% by 5%?
$2,300,000
$3,800,000
Sales (10.3%) (or $115,000)
($2,185,000) ($3,685,000) $5,000,000
Plus
Overhead
$800,000 Other costs
$800,000
Return on
Investments
Multiply
10.0%

(13.0%)
Inventories
$500,000 Sales
$5,000,000
($475,000) Current Asset
turnover
Assets

Account assets Divided by

receivable $1,100,000 rate
$300,000 Total assets 1.25
($1,075,000) (1.26)
Plus $4,000,000

Cash Fixed assets ($3,975,000)

$300,000 $2,900,000 Figure 1-4
 The Impact on ROI of Reducing
Materials Costs vs. Increasing Sales
• If the same profit increase were to
be generated by increasing sales,
what sales increase would be
required?
• At the existing 8% profit margin,
the following calculation provides
the answer…
• Profit increase = new sales X .08
• $115,000 = new sales X .08
 The Impact on ROI of Reducing
Materials Costs vs. Increasing Sales
• therefore…..
• ($1,437,500 / $5,000,000) X 100 =
28.8%
• or a sales increase of 28.8% is
required to match the profit
increase generated by a 5%
reduction in materials cost
 What’s New in
Logistics?

•Global competition
•Shorter product life cycle
•New, low-cost distribution
channels
•More powerful well-informed
customers
•Internet and E-Business strategies
 New Concepts
•Push-Pull strategies
•Direct-to-Consumer
•Strategic alliances
•Manufacturing postponement
•Dynamic Pricing
•E-Procurement
 Management in the
Automobile Industry
Customer with Need
for a Vehicle

Retailers

Key:
Product Material Flow Distribution Centers
Information / Data Flow

Assembly /
Manufacturer

First-Tier Suppliers First-Tier Suppliers

Second-Tier Suppliers Second-Tier Suppliers Second-Tier Suppliers

Supply Chain for Steel in an Automobile Door
STEEL STEEL
MINING Iron Steel
MILL COMPANY
COMPANY
ore Forms steel ingots Forms sheet
Mines iron ore
ingot metal
Sheet
metal AUTOMOBILE CAR
AUTOMOTIVE MANUFACTUR
Car ER Car DEALERSHIP
SUPPLIER
door Does
Makes door Makes
preparation
automobile Prepared
car
FINAL
CONSUMER
Drives
automobile