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									        SUPPLY CHAIN

• Value Chain
• Supply side- raw materials, inbound
  logistics and production processes
• Demand side- outbound logistics,
  marketing and sales.

" Is the strategic management of activities involved in
the acquisition and conversion of materials to finished
products delivered to the customer"

 Supplier            Material Flow              Customer
Management                                      Management
                  Information Flow

 Schedule /                           Stock
                   Conversion                         Delivery
 Resources                         Deployment

              Leads to Business Process Integration
• Supply chain is the system by which
  organizations source, make and deliver
  their products or services according to
  market demand.
• Supply chain management operations and
  decisions are ultimately triggered by
  demand signals at the ultimate consumer
• Supply chain as defined by experienced
  practitioners extends from suppliers’
  suppliers to customers’ customers.





• Supply chain serves two functions:

  – Physical

  – Market mediation
• Supply chain objectives may differ from
  situation to situation.
• For functional products, cost efficiency is
  the critical factor.
• For innovative products, responsiveness
  is the important factor.
• Leanness + Agility together make up
                Supply Chain Structure

SUPPLIER        FACTORY   DC         RDC         RETAILER

Raw Materials
                               Finished Goods

                                     Information Flow
  Supply Chain and Demand Chain

• Demand chain is defined as the system by
  which organizations manage sales and
  distribution of products and services to end
• Conceptually incorrect to look at demand
  chain separately

• Look at the pipe as a whole.
• But is there a pipe at all?
  – More a network
  – Not necessarily linear

• Value chain orchestration rather        than
  controlling the flow through the pipe

• A network of independent and interdependent
  organizations mutually and cooperatively
  working together to control, manage and
  improve the flow of materials and information
  from suppliers to end users

Not new. Value system of Michael Porter
• Why sudden interest?
  – Demanding customers
  – Shrinking product life cycles
  – Proliferating product offerings
  – Growing retailer power in some cases
  – Doctrine of core competency
  – Emergence of specialized logistics providers
  – Globalization
  – Information technology
              • Supply Chain Design
Strategic     • Resource Acquisition
              • Long Term Planning (1 Year ++)

              • Production/ Distribution Planning
Tactical      • Resource Allocation
              • Medium Term Planning (Qtrly,Monthly)

              • Shipment Scheduling
Operational   • Resource Scheduling
              • Short Term Planning (Weekly,Daily)
        • Supply Chain Goals

Efficient supply chain management
must result in tangible business
improvements. It is characterized by a
sharp focus on
– Revenue growth
– Better asset utilization
– Cost reduction.
            Supply Chain
         Underlying Principles

      Compression (Planning/Manufacturing/Supply)
      Conformance (Forecasts/Plans/Distribution)
      Co-operation (Cross -Functional)
      Communication (Real Time Data)

Reduce Overall Cycle Time : Improve Response
           Changing Paradigm

•   Functional vs Process
•   Products vs Customers
•   Revenues vs Performance
•   Inventory vs Information
•   Transactions vs Relationships
 Critical Success Factors today

• Cross functional management and
  planning skills
• Ability to define, measure and manage
  service     requirements   by   market
• Information systems
• Relationship management and win win

• Supply chain as an efficient customer
  satisfying process
• Effectiveness of the whole supply chain is
  more important than the efficiency of each
  individual department.
         The steps involved

• Step1- Designing the supply chain
  – Determine the supply chain network
  – Identify the levels of service required
Step 2 - Optimizing the supply chain
• Determine pathways from suppliers to
  the end customer
  – Customer markets to Distribution centers
  – Distribution centers to production plants
  – Raw material sources to production plants
  – Identify constraints at vendors, plants and
    distribution centers
  – Get the big picture
  – Plan the procurement, production and
    distribution of product groups rather than
    individual products in large time periods-
    quarters or years
Step 3- Material flow planning

  • Determine the exact flow and timing of
  • Arrive at decisions by working back from the
    projected demand through the supply chain to
    the raw material resources
  • Techniques
     • ERP
Step 4 - Transaction processing and
  short term scheduling

  • Customer orders arrive at random
  • This is a day to day accounting system which
    tracks and schedules every order to meet
    customer demand
  • Order entry, order fulfillment and physical
Information flows in Supply Chain Management

• Information is overriding element
• Need for databases
• Master files: Information about customers, products,
  materials, suppliers, transportation, production and
  distribution data- do not require frequent processing
• Status files- heart of transaction processing- track
  orders and infrastructure status- updated daily.
• Essentially using the same information to make all
  plans right from structuring the network to
  processing every day supply chain tasks.

• The value chain connects a company’s
  supply side with its demand side.
• Traditionally information has been a
  supporting function.
• Information however can be managed
  far more creatively.
• There are various stages of using value
  added information processes.
• Visibility : See physical operations more
  effectively through information. Information
  can be used for effective coordination of
  value chain activities.
• Mirroring capability : In this stage, virtual
  activities are substituted for physical ones. A
  parallel value chain is created.
• New customer relationships : The company
  can draw on the flow of information in the
  virtual value chain to deliver value to
  customers in new ways.
         Dealer Management

Conventional functions

•   Inventory ownership and management
•    Sales and technical support
•    Order handling
•    Credit
           Contemporary Trends

• Channels being divided into two- Fulfillment
  and Franchised agent

• Fulfillment channel- responsible for getting
  the manufacturer’s product from the plant to
  the end user through a highly efficient
  logistics and inventory management system
           Contemporary Trends

• Fulfillment channel may not take ownership
  of the product but may perform these
  functions on a per box fee structure
• Franchised agents responsible for sales and
  sales support but will not write the order or
  supply the product
    Issues in customer management

• Penetration vs Spread
• Concentration is necessary to commit the
  necessary resources for true customer
• Depth of customer contact
  – R&D - sharing information vs developing new
    products together
  – Logistics - Pros and cons of methods of
    transportation vs reengineering the logistics
Implementation: Points to keep in mind

• Recognize the difficulty of change.
• Prepare a blueprint for change that maps linkages
  among initiatives.
• Assess the entire supply chain from supplier
  relationships to internal operations to the market
  place, including customers, competitors and
  industry as a whole.
• Does our manufacturing strategy increase product
  line flexibility while continuing to drive down
  overall production costs?
• When was the last time we measured lost sales to
  end customers?
• Do we have an efficient system to get POS data
  from retailers?
• Are we testing our products with end customers?
  Do we use the resulting data to adjust our
  forecasting and supply positions?
• Is the ratio of returned orders to sales
 The New Model of Relationships

• Hard bargaining vs shared destiny
• Exit vs Voice
• Arms length relations vs Involving dealers and
  suppliers in product development
• Piling up vs Replenishing dealer inventory more
• In short working together as partners to cut
  costs, boost efficiencies, innovate and share
•   Adversarial vs partnerships
•   Short term vs long term contracts
•   Large vs small order quantity
•   Full truck load vs small parcels
•   Inspection vs no inspection
• Written order vs understanding
• Many vs few suppliers
• Design and then invite quote from
  vendor vs involving vendor in
• Bargaining, holding cards close to chest
  vs Shared destiny, transparency
 • Segmentation of customers based on service
 • Customization of logistics network
 • Listen to signals of market demand and plan
 • Differentiate product close to the customer
 • Source strategically
 • Develop a supply chain wide technology
 • Accept channel spanning performance
• The Bullwhip Phenomenon

• Volatility amplification along the network
• Increase in demand variability as we move
  upstream away from the market
• Mainly because of lack of communication and
• Delays in information and material flows
• Bullwhip effect occurs because of various
• Order Batching- Accumulate orders
• Shortage gaming- Ask for more than what is
• Demand forecast updating
        Important points to keep in mind

• Segment customers based on service needs.
• Modify the supply chain to meet these service
  requirements profitably.
• Customize the logistics network.
• Develop forecasts collaboratively involving every
  link of the supply chain.
• Locate the leverage point where the product is
  unalterably configured to meet a single
• Delay product differentiation till the last possible
• Assess options such as modularized design
  or modification of manufacturing processes
  that can increase flexibility.
• Cultivate warm relationships with suppliers.
• Efficient supply chain management has to be
  accompanied by a technology strategy.
•   Warehousing and transportation      6
•   Inventory                           5
•   Late delivery returns               2
•   Obsolescence                        20
•   Lost sales                          60

• Need to minimize obsolescence costs
• Minimize product range flexibility
• Reduce product development cycle
    Dell’s Direct Business Model of
           Virtual Integration
• Advantages of a tightly coordinated supply chain
  traditionally facilitated by vertical integration.
• Combined with focus and specialization.
• Leveraging on investments others have made and
  focusing on delivering solutions and systems to
• Fewer things to manage - fewer things go wrong
• Suppliers’ engineers part of Dell’s Design team
• Have only a few partners
     Dell’s Direct Business Model of
            Virtual Integration
• Share information with partners in Real time
• Stitch together a business with partners that are
  treated as if they are inside the company.
• Change focus from how much inventory there is to
  how fast it is moving
• Assets collect risks around them one way or the
• Limited or no testing - Eg. Sony Monitors
    Dell’s Direct Business Model of
           Virtual Integration
• Only three Manufacturing centers - Austin, Ireland
  and Malaysia.
• Inventory levels and replenishment needs
  sometimes conveyed to vendors on hourly basis.
• Substitute information for inventory and ship only
  when we have real demand from real end
• Clever segmentation - Focus on institutional
  markets - 70% to very large customers with
  annual purchases exceeding $1 million.
     Dell’s Direct Business Model of
            Virtual Integration
• Exit from retail business after wrong entry in 1989.
• Segmentation - closeness to customers and
  access to valuable information.
• Demand forecasting as a critical sales skill
• Help global customers, manage their total
  purchase of PCs by selling them a standard
• Dell server loads software on customers’
• Meet customers’ needs faster and more efficiently
  than any other model.
      Li and Fung, Hong Kong

• Founded in 1906
• Today 35 offices in 20 countries
• 1997 revenues of $ 1.7 billion
• Largest export trading company in Hong
• Customers- American and European retailers
• Sources clothing and other consumer goods
  ranging from toys to fashion accessories to
• Order from Europe
• Buy yarn from Korea
• Weave and dye in Taiwan
• Buy Japanese zippers made in China
• Make the garments in Thailand in five different
• Pulling apart the value chain and optimizing at
  each step
• Victor Fung
 “ Today, assembly is the easy part. The hard part is
  managing your suppliers and the flow of parts.“
  Good supply chain management strips away time
  and cost from product delivery cycles. Our
  customers have become more fashion driven,
  working with six or seven seasons a year instead
  of just two or three. Once you move to shorter life
  cycles, the problem of obsolete inventory
  increases dramatically. With customer tastes
  changing rapidly and markets segmenting into
  narrow niches, it’s not just fashion products that
  are becoming increasingly time sensitive.”
• Endorsement by Stan Shih, CEO, Acer
• Buying right things
• Reaching into suppliers to ensure that certain
  things happen on time and at the right quality
• Buyer informs five weeks before delivery.
• Reserve undyed yarn from yarn supplier.
• Lock up capacity in weaving and dyeing mills.
• Outsourcing not same as leaving suppliers to do the
• Single factories are too small to have much buying
  power and to demand faster deliveries from
• To shorten delivery cycle, need to go upstream to
  organize production.
• Li & Fung able to delay commitment to a particular
  fashion trend.
• Integrated logistics management
• Elimination of consolidators in container
• Smokeless factory
  –   Design
  –   Procurement
  –   Inspection of raw materials
  –   Production planning
  –   Line balancing
  –   Inspection of finished goods
  –   No worker ownership
  –   No labour management
“ If we don’t own factories, can we say we are in
   manufacturing? Absolutely, because of the 15
   steps in the manufacturing value chain, we
   probably do 10.”
• Basic operating unit is the division.
• Divisions focused on serving single customers or
   groups of small customers.
• Less emphasis on geographic grouping
• Merchandising decisions decentralized
• Financial controls and operating procedures tightly
• Strong focus on inventory and working capital
• “As far as I am concerned, inventory is the root of
  all evil. At a minimum, it increases the complexity
  of managing any business. So it’s a word we don’t
  tolerate around here.”
• Need for sophisticated information systems. Li &
  Fung working         to create a database to
  systematically track all supplier relationships.
• “ Someone might steal our database but when
  they call up a supplier, they don’t have the long
  relationship with the supplier that Li & Fung has. It
  makes a difference to suppliers when they know
  that you are dedicated to the business, that you
  have been honoring your commitments for 90
• Broadening the middle
• Better prices and better margins for customers
• Tackling the soft $3 in the cost structure. $3
  represents the inefficiency in the supply chain for
  a consumer product priced at $4. Look at costs
  throughout distribution channels than just in
Thank You

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