Management II - Introduction to SCM (1).pdf

Management II Production, Logistics and Supply Chain Management Introduction to Supply Chain Management Understanding the Supply Chain Learning Objectives 1. Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm...

Management II Production, Logistics and Supply Chain Management Introduction to Supply Chain Management Understanding the Supply Chain Learning Objectives 1. Discuss the goal of a supply chain and explain the impact of supply chain decisions on the success of a firm. 2. Identify the three key supply chain decision phases and explain the significance of each one. 3. Describe the cycle and push/pull views of a supply chain. 3 What is a Supply Chain? All stages involved, directly or indirectly, in fulfilling a customer request Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers Within each company, the supply chain includes all functions involved in fulfilling a customer request (product development, marketing, operations, distribution, finance, customer service) 4 What is a Supply Chain? (cont.) Customer is an integral part of the supply chain Includes movement of products from suppliers to manufacturers to distributors and information, funds, and products in both directions May be more accurate to use the term “supply network” or “supply web” Typical supply chain stages: customers, retailers, wholesalers/distributors, manufacturers, component/raw material suppliers All stages may not be present in all supply chains (e.g., no retailer or distributor for Dell) 5 What is a Supply Chain? (cont.) 6 Flows in a Supply Chain 7 The Objective of a Supply Chain Maximize overall value generated Supply Chain Surplus = Customer Value – Supply Chain Cost 8 The Objective of a Supply Chain Example: a customer purchases a wireless router from Best Buy for $60 (revenue) Supply chain incurs costs (information, storage, transportation, produce components, assembly, etc.) Difference between $60 and the sum of all of these costs is the supply chain profit Supply chain profitability is total profit to be shared across all stages of the supply chain Success should be measured by total supply chain profitability, not profits at an individual stage 9 The Objective of a Supply Chain Customer is the only source of revenue Sources of cost include flows of information, products, or funds between stages of the supply chain Effective supply chain management is the management of supply chain assets and product, information, and fund flows to grow the total supply chain surplus 10 Importance of Supply Chain Decisions Wal-Mart, $1 billion sales in 1980 to $469 billion in 2013 Seven-Eleven Japan, ¥1 billion sales in 1974 to ¥1.9 trillion in 2013 Webvan folded in two years Borders, $4 billion in 2004 to $2.8 billion in 2009 Dell, $56 billion revenues in 2006, adopted new supply chain strategies 11 Key Point Supply chain design, planning, and operation decisions play a significant role in the success or failure of a firm. To stay competitive, supply chains must adapt to changing technology and customer expectations. 12 Decision Phases in a Supply Chain 1. Supply chain strategy or design How to structure the supply chain over the next several years 2. Supply chain planning Decisions over the next quarter or year 3. Supply chain operation Daily or weekly operational decisions 13 Supply Chain Strategy or Design Decisions about the configuration of the supply chain, allocation of resources, and what processes each stage will perform Strategic supply chain decisions » Outsource supply chain functions » Locations and capacities of facilities » Products to be made or stored at various locations » Modes of transportation » Information systems Supply chain design must support strategic objectives Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty 14 Supply Chain Planning Definition of a set of policies that govern short-term operations Fixed by the supply configuration from strategic phase Goal is to maximize supply chain surplus given established constraints Starts with a forecast of demand in the coming year 15 Supply Chain Planning Planning decisions: »Which markets will be supplied from which locations »Planned buildup of inventories »Subcontracting »Inventory policies »Timing and size of market promotions Must consider demand uncertainty, exchange rates, competition over the time horizon in planning decisions 16 Supply Chain Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and planning policies are defined Goal is to handle incoming customer orders as effectively as possible Allocate orders to inventory or production, set order due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders Much less uncertainty (short time horizon) 17  Supply Chain Planning Tasks Procurement Production Distribution Sales long-term Materials program Plant location Physical distribution Production program Supplier selection Production system structure Strategic sales Cooperations planning Personnel planning mid-term Master Prod. Scheduling (MPS) Mid-term sales Mat. Req. Planning (MRP) Distribution planning Capacity planning planning Contracts short-term Lot-sizing Personnel planning Warehouse operations Short-term sales Machine scheduling Ordering materials Transport planning planning Shop-floor control Supply Chain Planning Matrix (after Fleischmann et al., 2008) 18 Key Point Supply chain decision phases may be categorized as design, planning, or operational, depending on the time frame during which the decisions made apply. Design decisions constrain or enable good planning, which in turn constrains or enables effective operation. 19 Process Views of a Supply Chain 1. 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 the supply chain. 2. Push/Pull View: The processes in a supply chain are divided into two categories, depending on whether they are executed in response to a customer order or in anticipation of customer orders. Pull processes are initiated by a customer order, whereas push processes are initiated and performed in anticipation of customer orders. 20  Cycle View of Supply Chain Processes Customer Order Cycle Replenishment Customer Cycle Manufacturing Retailer Cycle Distributor Procurement Cycle Manufacturer Supplier 21 Cycle View of Supply Chain Processes 22 Key Point A cycle view of the supply chain clearly defines the processes involved and the owners of each process. This view is useful when considering operational decisions because it specifies the roles and responsibilities of each member of the supply chain and the desired outcome for each process. 23 Push/Pull View of Supply Chains 24 Push/Pull View of Supply Chain Processes Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand Pull: execution is initiated in response to a customer order (reactive) Push: execution is initiated in anticipation of customer orders (speculative) Push/pull boundary separates push processes from pull processes 25 Push/Pull View – L.L. Bean 26 Push/Pull View - Dell 27 Key Point A push/pull view of the supply chain categorizes processes based on whether they are initiated in response to a customer order (pull) or in anticipation of a customer order (push). This view is useful when considering strategic decisions relating to supply chain design. 28 Selected Examples of Supply Chains Gateway and Apple Zara Toyota Amazon 29 SC Examples – Gateway and Apple Gateway Founded 1985 as direct sales manufacturer of PCs No retail footprint until the late 1990s Then: aggressive strategy of opening retail stores But: no inventory in stores Apple Opened first retail store in 2001 Till 2010: 300 stores worldwide Concept: Stores always carry finished-goods inventory Possible because of relatively little variety in products 30 SC Examples – Gateway and Apple 1. Why did Gateway choose not to carry any finished-product inventory at its retail stores? Why did Apple choose to carry inventory at its stores? 2. Should a firm with an investment in retail stores carry any finished-goods inventory? What are the characteristics of products that are most suitable to be carried in finished-goods inventory? What characterizes products that are best manufactured to order? 3. How does product variety affect the level of inventory a retail store must carry? 4. Is a direct selling supply chain without retail stores always less expensive than a supply chain with retail stores? 5. What factors explain the success of Apple retail and the failure of Gateway country stores? 31 SC Examples – Zara (Inditex) Apparel manufacturing and retail Rapid growth – at year end 2016: 7292 stores in 93 markets Highly responsive to changing trends with affordable prices Avg. design-to-sales cycle time in peer group: 6 months Zara: 4 – 6 weeks (!) Zara’s SC uses combination of » Flexible and quick sources in Europe (Portugal, Spain) » Low-cost sources in Asia In 2009, global distribution was run via eight distribution centers in Spain (delivery times 24 hours Europe, 48 hours America & Asia) Shipments from the DCs to stores several times a week 32 SC Examples – Zara (Inditex) 1. What advantage does Zara gain against the competition by having a very responsive supply chain? 2. Why has Inditex chosen to have both in-house manufacturing and outsourced manufacturing? Why has Inditex maintained manufacturing capacity in Europe even though manufacturing in Asia is much cheaper? 3. Why does Zara source products with uncertain demand from local manufacturers and products with predictable demand from Asian manufacturers? 4. What advantage does Zara gain from replenishing its stores multiple times a week compared to a less frequent schedule? How does the frequency of replenishment affect the design of its distribution system? 5. Do you think Zara’s responsive replenishment infrastructure is better suited for online sales or retail sales? 33 SC Examples – Toyota Global strategy: open factories in every market it serves Key question: production capability – two extremes: »Equip plant only for local production/market (prior to 1996) »Enable plant to supply every market (after 1997) Parts production: global or local? »Toyota worked hard to increase commonality in parts »But: disastrous when parts have to be recalled (in 2009, 12 million cars had to be recalled in North America, Europe and Asia) 34 SC Examples – Toyota 1. Where should the plants be located, and what degree of flexibility should be built into each? What capacity should each plant have? 2. Should plants be able to produce for all markets or only for specific contingency markets? 3. How should markets be allocated to plants and how frequently should this allocation be revised? 4. How should the investment in flexibility be valued? 35 SC Examples – Amazon Striving to be the largest retailer online Amazon offers services to other, smaller businesses (Amazon Fulfillment Centers) »Picking and packing »Handles returns »Customer service Amazon consistently adopts innovative SC and warehouse management techniques Strong focus on IT infrastructure 36 SC Examples – Amazon 1. Why is Amazon building more warehouses as it grows? How many warehouses should it have and where should they be located? 2. Should Amazon stock every product it sells? 3. What advantage can bricks-and-mortar players derive from setting up an online channel? How should they use the two channels to gain maximum advantage? 4. What advantages and disadvantages does the online channel enjoy in the sale of shoes and diapers relative to a retail store? 5. For what products does the online channel offer the greater advantage relative to retail stores? What characterizes these products? 37 Reading Required: Chopra, S and Meindl, P.: Supply Chain Management – Strategy, Planning and Operation. Pearson, 2013. 5th Edition. » Chapter 1 Recommended: Fleischmann, H. Meyr, M. Wagner: Advanced Planning. In: Stadtler / Kilger: Supply Chain Management and Advanced Planning - Concepts, Models, Software and Case Studies. 4th Edition, Springer Verlag, 2008. 38 The Bullwhip Effect  Supply Chain Demand and Variability In the long run the average inflow to a firm must equal the average outflow Outflow Inflow Firm (sales) However, the volatility of the inflow can differ substantially from the volatility of the outflow Inflow Firm Outflow (sales) 40 What is the Bullwhip Effect Demand variability increases when moving in upstream direction of the supply chain (from customers to supply) Equipment Tier 1 Supplier Factory Distributor Retailer Customer 41 Bullwhip Effect in Autos to Machine Tools 80% 60% 40% 20% 0% -20% -40% -60% -80% 42 Source:Anderson, Fine and Parker (1996)  Bullwhip Effect in the US PC Supply Chain Changes in demand 80% 60% Semiconductor 40% Equipment 20% PC 0% -20% Semiconductor -40% 1995 1996 1997 1998 1999 2000 2001 Annual percentage changes in demand (in $s) at three levels of the semiconductor supply chain: personal computers, semiconductors and semiconductor manufacturing equipment. 43 Consequences of the Bullwhip Effect Inefficient production or excessive inventory. Low utilization of the distribution channel. Necessity to have capacity far exceeding average demand. High transportation costs. Poor customer service due to stockouts. 44 Causes of the Bullwhip Effect Order synchronization Order batching Trade promotions and forward buying Reactive and over-reactive ordering Shortage gaming 45 Order Synchronization 70 60 Customers order on the same order cycle, e.g., first of the 50 month, every Monday, etc. 40 Units The graph shows simulated daily 30 consumer demand (solid line) and supplier demand (squares) 20 when retailers order weekly: 9 10 retailers order on Monday, 5 on Tuesday, 1 on Wednesday, 2 or 0 Thursday and 3 on Friday. T im e (e a c h p e rio d e q u a ls o n e d a y ) 46 Strategies to Combat the Bullwhip Effect Information sharing: » Collaborative Planning, Forecasting and Replenishment (CPFR) Smooth the flow of products » Coordinate with retailers to spread deliveries evenly. » Reduce minimum batch sizes. » Smaller and more frequent replenishments (EDI). Eliminate pathological incentives » Every day low price » Restrict returns and order cancellations » Order allocation based on past sales in case of shortages Vendor Managed Inventory (VMI): delegation of stocking decisions » Used by Barilla, P&G/Wal-Mart and others. 47 A Remedy to the Bullwhip Effect Is there any force in a supply chain that counteracts the bullwhip effect? Yes: If demand is seasonal (i.e., there are anticipated peaks and valleys in demand), then use production smoothing: » If the firm’s orders are correlated with its production, the firm’s suppliers will see orders that are smoother than the firm’s demand. Quantity Demand Production Time 48 Production Smoothing at Walmart Quarterly sales and production 49 Reading (required) Cachon, G. and Terwiesch, C.: Matching Supply with Demand – An Introduction to Operations Management. McGraw Hill, 2012. 3rd Ed. »Chapter 17, Sections 17.1 & 17.2 50