Delivering a Burger to You

When you buy a burger from McDonald or a Zinger from
SUPPLY CHAIN
MANAGEMENT
Lecture 1-A
Introduction to SCM
Fighting a War is not easy
planning and carrying out the movement and
maintenance of forces....
those aspects of military operations that deal
with the design and development, acquisition,
storage, movement, distribution, maintenance,
evacuation and disposition of material;
movement, evacuation, and hospitalization of
personnel; acquisition of construction,
maintenance, operation and disposition of
facilities
a gigantic task indeed.
Definition of Logistics
Logistics - ...the process of planning,
implementing, and controlling the efficient, effective
flow and storage of goods, services, and related
information from point of origin to point of
consumption for the purpose of conforming to
customer requirements." (Reference: Council of
Logistics Management)
(Note that this definition includes inbound,
outbound, internal, and external movements, and
return of materials)
KFC, have you thought where all of the ingredients
came from that produced your sandwich?

Depending on the restaurant’s location, McDonald’s and
KFC source their ingredients from both local and global
suppliers.

The challenge is to ensure that all restaurants in their
network have enough ingredients to meet customer
demand.

This requires planning, implementing, and controlling the
efficient, effective flow and storage of goods and
services to deliver the burger to you
Logistics

The word logistics was first associated with the
military in 1905 as a branch of war that pertains
to the movement and the supply for armies.

Now, Logistics is not only used in military but
also by managers in almost all spheres of
activity to fine tune the process of delivery
through various supply lines with the primary
objective of being able to deliver not just 'in time'
but also at 'the desired place'.

It is a fallacy to assume that the best
logistics strategy is to get the product from
the supplier to the customer the fastest
and always be in stock for all
organizations.

If this were true, most organizations would
not be profitable today.
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THE PURPOSE OF A The Need for Logistics Improvements
LOGISTICS SYSTEM Earlier Today

RIGHT QUANTITIES of the • No two companies at the

same level of competition.
• Competition at all levels.

RIGHT GOODS to the • The main motive was to • Main motive is customer

Companies
increase production.

RIGHT PLACES at the • Production differentiation
very early and far from

RIGHT TIME in the customer.
• Reaction approach of

RIGHT CONDITION at the industries.

RIGHT COST. • Customer did not care
service.
• Product differentiated
nearer the customer.
• Action approach of
industries.
• Customers demand exact

Customer
about specifications. specifications.
Creating a logistics strategy is a balancing act • Less market moving
powers
• More power devolved to the
customer.
which takes many variables into account.

From Fragmentation to Integration-1 From Fragmentation to Integration-2

Total Integration
Era of Fragmentation Evolving Integration

Strategy

Strategy
Strategy
developing cross-organizational systems and
- design independent system for - design coordinated internal relationships
each logistics activity systems

Focus

Focus
Focus supply chain performance and value, total cost
- activity costs and productivity -internal logistics costs and analysis

Goal customer service levels
Goal
- minimize functional disruption

Goal maximize value and customer satisfaction
- internal costs and service
objectives

Supply Chain Integration

Material
purchasing production Sales Distribution
control

Material Flow Base Line Customer Service

Functional
Material Manufacturing Distribution
Management
Integration
Management

Material Flow Customer Service

Internal Integration External Integration

Material Manufacturing Internal

Management Management Distribution Suppliers Supply Chain Customer

Material Flow Customer Service Material Flow Customer Service

2
Supply Chain Management Some More Definitions
Supply Chain Management is primarily concerned with the efficient

The network of organizations that fulfill integration of suppliers, factories, warehouses and stores so that
customer needs merchandise is produced and distributed in the right quantities, to
the right locations and at the right time, and so as to minimize total
 Can either be product or service oriented system cost subject to satisfying service requirements.

Product: cars, computers, etc. Simchi-Levi

Service: MBA students, Hospitals

Call it distribution or logistics or supply chain management. By
 By definition, incorporates multiple firms or whatever name, it is the sinuous, gritty, and cumbersome process
organizations not under central control by which companies move, materials, parts, and products to
customers. Fortune (1994)

Philosophy of SCM

The entire supply chain is a single, integrated
entity.

The cost, quality and delivery requirements of
the customer are objectives shared by every
company in the chain.

Inventory is the last resort for resolving supply
and demand imbalances.
Efficiency: Basis of
Production Management

Efficiency leads to lower costs

Lower cost implies
Lower Price => Greater demand => Better
market growth => Higher profits => Product/
Process development => Better market share

1980s and 1990s: Era of achieving excellence at
the firm level (JIT, TQM, TPM, ERP, etc)

2000s: Era of achieving excellence at the value
chain level (SCM, E-Commerce, etc.)

More Realistic Supply Chain

Simplistic Supply Chain
Customer Base
Product
Retailer Retailer

Customer Retailer Retailer Flow

Retailer Wholesaler Wholesaler

Sell Side

Distributor The Firm

Manufacturer 1st Tier Supplier 1st Tier Supplier

Supplier 2nd Tier Supplier 2nd Tier Supplier

Buy Side
3rd Tier Supplier 3rd Tier Supplier

Information Resources Base

Flow

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Why is SCM Important? Why is SCM Important?
(continued)

Strategic Advantage – It Can Drive Strategy
* Manufacturing is becoming more efficient
At the company level, supply chain management
* SCM offers opportunity for differentiation (Dell) or cost impacts
reduction (Wal-Mart or Big Bazaar) * COST
– For many products, 20% to 40% of
total product costs are controllable

Globalization – It Covers The World logistics costs.
* Requires greater coordination of production and * SERVICE
distribution – For many products, performance
* Increased risk of supply chain interruption factors such as inventory availability
and speed of delivery are critical to
* Increases need for robust and flexible supply chains customer satisfaction.

Conflicting Objectives in the Supply Chain

Conflicting Objectives in the Supply Chain

1. Purchasing 3. Warehousing
• Stable volume requirements • Low inventory
• Flexible delivery time • Reduced transportation costs
• Little variation in mix • Quick replenishment capability
• Large quantities 4. Customers
2. Manufacturing • Short order lead time
• Long run production • High in stock
• High quality • Enormous variety of products
• High productivity • Low prices
• Low production cost

Traditional View of Suppliers &

More Advanced View of SCM
SCM

Porter’s Power Model
Minimize number of suppliers
 Very similar to Ford’s

Work on Just-in-time supplies

If a supplier makes a penny, that is a penny that Ford could
have made
Virtual Integration
 i.e., classic adversarial relationship
 Control not ownership
 Multiple suppliers to spread risk

Maintain internal manufacturing capability, just-in-case
Adaptive & Responsive supply chains

Vertical Integration
Risk management & mitigation

Optimization of a relatively static chain
 Long life products

4
Shift in focus in supply chains Shift in focus in supply chains
Kopczak & Johnson, 2003 Kopczak & Johnson, 2003

Shift 1: From Cross-Functional Integration to Cross-
Enterprise
 Old question: how do we get the various functional areas of our
company to work together to supply product to immediate
customers?
 New question: how to record and activities across companies, as
well as across internal functions, to supply product to the
market?

Shift 2: From Physical Efficiency to Market
Mediation.
 Old question: how do we minimize the costs our company incurs
in production and distribution of our products?
 New question: how do we minimize the cost of matching supply
and demand while continuing to reduce the costs of production
and distribution?

Shift 3: From Supply Focus to Demand Focus.
 Old question: how can we improve the way we supply product in
order to match supply and demand better, given the demand
pattern?
 New question: how can we get earlier demand information or
affect the demand pattern to match supply and demand?

Shift 4: From single company, product design to
collaborative, concurrent product, process and
supply chain design
 Old question: how can we improve the way we supply product in
order to match supply and demand better, given the demand
pattern?
 New question: how can we get earlier demand information or
affect the demand pattern to match supply and demand?

Shift in focus in supply chains Process view of a supply

Shift 5: From cost reduction to breakthrough
chain
business models.
 Old question: how can we reduce our company's production and
distribution costs?
Cycle view
 New question: what new supply chain and marketing approach
would lead to a breakthrough in customer value?

Shift 6: From mass-market supply to tailored
Push/pull

offerings. view
 Old question: how should we organize our company's operations
to serve the mass-market efficiently while offering customized
product?
 New question: how should we organize a supply chain to serve
each customer or segment uniquely and provide a tailored
customer experience?

Customer arrival
Cycle View of Supply Chains Customer
Customer order entry
order cycle
Customer order fulfillment
Customer
Customer order receiving

Customer Order Cycle
Retail order trigger

Retailer Replenishment
Retail order entry
Replenishment Cycle cycle
Retail order fulfillment
Distributor
Retail order receiving

Manufacturing Cycle

Order arrival from the distributor, retailer, or
Manufacturer customer
Manufacturin
Production scheduling
Procurement Cycle
g cycle
Manufacturing and shipping
Supplier
Receiving at the distributor, retailer, or
customer

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Push/Pull View of Push/Pull View of Supply
Supply Chains Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

Pull processes: execution
is initiated in response to a
customer order

Push processes: execution
is initiated in anticipation of PUSH PROCESSES PULL PROCESSES
customer orders

Customer
Order Arrives