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Introduction to Supply Chain Design by togar

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Introducing what supply chain design is and tools for supply chain design

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									Introduction to Supply
     Chain Design

         Togar M. Simatupang
    School of Business and Management
      Bandung Institute of Technology
               26 August 2011
   What is a supply chain?
   What is Supply Chain Management?
   Managing supply chain is not easy
    • Issue # 1: Conflicting objectives
    • Issue # 2: Uncertainties
   Supply chain design
   Tools for supply chain design

What is a Supply Chain?
   A logistics network (interdependent – decentralized
    system) of facilities performing various functions that
    flow goods and services and related information
    between the facilities including
    •   procurement of materials from suppliers
    •   transformation of materials to semi-finished and finished
    •   distribution of finished products to customers
                                          A Typical Supply Chain



                                Manufacturing    Regional          Field        Retail   Customers
                                   Plants       Warehouses
Characteristics of supply chains
   Dynamic - constant flow of information, products, funds and even the
    parts involved.
   Runs across several stages - e.g. raw materials supplier -
    manufacturer - distributor - retailer - customer; in some supply chains
    some stages have been left out, leading to the simplification and the
    performance of the whole supply chain.
   Flows in both directions.
   Has a cost and a capacity.
   Has as objective the maximization of its value - the difference between
    the revenue generated from the customer and the overall cost of the
    supply chain (and not just a part of it, which might lead to the loss of
    value for the entire chain and subsequently to the respective stages).
   Its success or failure is determined by its design and management.

Logistics, Value chain, and
Supply Chain
   Logistics
    •   Flow of materials and information between the facilities
    •   Warehousing, transportation, inventory, and information
   Value chain
    •   Every step from raw materials to the eventual end user
    •   Ultimate goal is delivery of maximum value to the end user
   Supply chain
    •   Activities that get raw materials, subassemblies into
        manufacturing operation, and deliver to end customers
   Terms are used interchangeably

Wal-Mart Supply Chain

   Source: Adapted from Garrison Wieland for “Wal-Mart’s Supply Chain,”   6
      Harvard Business Review 70(2; March–April 1992), pp. 60–71.

What is supply chain
   A set of approaches used to efficiently integrate
     •   Suppliers
     •   Manufacturers
     •   Warehouses
     •   Distribution centers
   So that the product is produced and distributed
     •   In the right quantities
     •   To the right locations
     •   And at the right time
   System-wide costs are minimized and
   Service level requirements are satisfied

The goal in SCM?
   The efficient integration of suppliers, factories, warehouses and
    stores so that merchandise is produced and distributed:
     •   In the right quantities
     •   To the right locations
     •   At the right time
   4R’s:
     •   the right product,
     •   to the right place,
     •   at the right time,
     •   with the right quantity
   by sustaining the minimum cost and achieving the best
    customer satisfaction as much as possible

History of supply chain
   1960’s - Inventory Management Focus, Cost Control
   1970’s - MRP & BOM - Operations Planning
   1980’s - MRPII, JIT - Materials Management,
   1990’s - SCM - ERP - “Integrated” Purchasing,
    Financials, Manufacturing, Order Entry
   2000’s - Optimized “Value Network” with Real-Time
    Decision Support; Synchronized & Collaborative
    Extended Network

Why SC Catches Attention?

   Information technology revolution

   Global competition in cost, quality,
    delivery, and cycle time.

   Emergence of inter-organizational

     Managing a SC is Not Easy
        Conflicting objectives of the entities in the chain
        Uncertainty in demand/production/transportation/
         product availability is inherent to every supply chain

    Manufacturers          Distributors         Retailers        Consumers

Large production batches   Low inventory       Few stores       Convenience
                           Few DCs             Low inventory    Short lead time
                                               Little variety   Large variety of
                                               Close to DCs     products

                                   Large shipments

Issue 1: Conflicting Objectives
   Overcoming functional silos with conflicting
                                                   Customer Service/
      Purchasing   Manufacturing   Distribution

       Low                                            High
       purchase     changeovers                       inventories
       price                         Low
                    Stable           inventories      High
       Multiple     schedules                         service
       vendors                       Low              levels
                    Long run
                    lengths          transpor-
                                     tation           Regional

      SOURCE          MAKE           DELIVER            SELL

Do conflicting goals get in the
way of collaboration?

The drive to push Costs, Risks,
and Assets up the Supply Chain


Issue 2: Uncertainty and
   Inventory and back-order levels fluctuate considerably across
    the supply chain even when customer demand doesn’t vary
   The variability worsens as we travel “up” the supply chain
   Forecasting does not help
      Multitier           Manufacturer        Wholesale               Retailers              Consumers
      Suppliers                              Distributors




                          Time                                 Time                   Time

                                            Bullwhip Effect

Uncertainty framework

       Source: Hau Lee, “Aligning supply chain strategies with product
       uncertainties”, California Management Review, 44(3), 2002.

Mitigation strategies

        Source: Hau Lee, “Aligning supply chain strategies with product
        uncertainties”, California Management Review, 44(3), 2002.

So what?
How to design, manage, and improve?
Focus on “how to design”:
 Global optimization

 Managing risk and uncertainty

Supply Chain Design
   How to choose what capabilities along the supply
    chain to invest and develop for competitive
   SCD incorporates a wide range of decisions:
    •   Network design decision
    •   Product and process design decisions
    •   Responsiveness to uncertainty and variability
   SCD initiatives are necessary for two key reasons:
    •   Changes in the business
    •   The need to adjust the balance of cost and service

Supply chain design
   Who are the different stakeholders
    involved in the supply chain process?
   What role do they serve?
   What are different flows, both material
    and informational taking place in the
    supply chain?
   Asking key questions about the current
    supply chain?
       Levels in SCM design
           Strategy                                   Planning                            Operation
Duration   several years                              one quarter to a full year          weekly or daily
Starter    Marketing and pricing plan for a           Forecast for the coming year        Fixed supply chain configuration
           product(or set of products)                (or the time frame in question)
                                                      of the demand for the product
                                                      on different markets
Goal       Increase the supply chain surplus          Incorporate flexibility, optimize   Handle incoming customer orders in
                                                      performance                         the best possible manner

Decisions • very expensive to alter and thus must     • must include uncertainty in       • made under less uncertainty
          take into consideration uncertainty         demand, exchange rates,             allocate inventory or production to
          whether to outsource or perform a           competition which markets will      individual orders
          supply chain function in-house              be supplied from which              • set a date that an order is to be
          • location and capacity of production and   locations                           filled
          warehousing facilities                      • subcontracting of                 • generate pick lists at a warehouse
          • the products to be manufactured or        manufacturing                       • allocate an order to a particular
          stored at various locations                 • inventory policies to be          shipping mode and shipment
          • the modes of transportation to be made    followed                            • set delivery schedules of trucks
          available along different shipping legs     • timing and size of marketing      •place replenishment orders
          • type of information system to be used     and price promotions
          • choice and contract of supply sources

Supply Chain Management
Operations Strategies
     STRATEGY            WHEN TO CHOOSE                      BENEFITS
Make to Stock (MTS)    standardized products,          Low manufacturing costs;
                       relatively predictable demand   meet customer demands

Make to Order (MTO) customized products, many          Customization; reduced
                       variations                      inventory; improved
                                                       service levels
Configure to Order     many variations on finished     Low inventory levels; wide
(CTO)                  product; infrequent demand      range of product
                                                       offerings; simplified

Engineer to Order      complex products, unique        Enables response to
(ETO)                  customer specifications         specific customer

    Supply Chain Decisions
             KEY ISSUES                                             CONSIDERATIONS

Network Planning                       • Warehouse locations and capacities
                                       • Plant locations and production levels
                                       • Transportation flows between facilities to minimize cost and time
Inventory Control                      • How should inventory be managed?
                                       • Why does inventory fluctuate and what strategies minimize this?
Supply Contracts                       • Impact of volume discount and revenue sharing
                                       • Pricing strategies to reduce order-shipment variability
Distribution Strategies                • Selection of distribution strategies (e.g., direct ship vs. cross-docking)
                                       • How many cross-dock points are needed?
                                       • Cost/Benefits of different strategies
Integration and Strategic Partnering   •   How can integration with partners be achieved?
                                       •   What level of integration is best?
                                       •   What information and processes can be shared?
                                       •   What partnerships should be implemented and in which situations?
Outsourcing & Procurement              • What are our core supply chain capabilities and which are not?
Strategies                             • Does our product design mandate different outsourcing approaches?
                                       • Risk management
Product Design                         • How are inventory holding and transportation costs affected by product
                                       • How does product design enable mass customization? 24
Booz-Allen’s supply chain
management approach


A Set of 7 Tools
1.   Thinking and
     Improvement Cycle
2.   Gap Analysis
3.   Process Analysis
4.   Cause and Effect
5.   Tradeoff Analysis
6.   Conflict Analysis
7.   Lifecycle Analysis
Tools: thinking

Tools: design thinking
   Design thinking: a discipline that uses the designer's sensibility and methods to
    match people's needs with what is technologically feasible and what a viable
    business strategy can convert into customer value and market opportunity.
   A person or organization instilled with that discipline is constantly seeking a
    fruitful balance between reliability and validity, between art and science,
    between intuition and analytics, and between exploration and exploitation.

     Tools: analytical thinking
         The concept of the "Knowledge Funnel" describing how
          knowledge advances from mystery to heuristic, to algorithm for
          businesses to gain efficiency and lower costs, and the activities
          of moving across the knowledge stages (exploration) and
          operating within each knowledge stage (exploitation).

Source:                           30
Tools: improvement cycle
   A Plan-Do-Check-Act Deming wheel approach to continuous
    improvement. It involves seven iterative steps to sustainability.
   Prepare (Plan)
     •   1. Map your impact, set priorities and build the team.
     •   2. Select useful performance indicators and associated data.
   Measure (Do)
     •   3. Measure the inputs used in production (primarily materials and
     •   4. Assess the impact and efficiency of your facility.
     •   5. Evaluate your products. Determine how they perform in terms of energy
         (resource) consumption.
   Improve (Check/Act)
     •   6 .Understand measured results.
     •   7. Take action to improve performance.

   4D Process

Source:   32
Tools: gap analysis
   Gap analysis

Performance measurement and

Tools: process analysis
   Cycle view of supply chain = the supply chain as a series of
    cycles of communication occurring between each two
    consecutive stages

Tools: process analysis
   SCM - pull/push view: the reactive processes are called pull
    processes, and the speculative - push processes.

Pull-Push View

Tools: cause and effect analysis
   Cause-effect analysis: Pursue and specify the root cause by
    repeatedly asking “Why?” and building a chain of Cause/Effect
    Relationships to the root cause.
   Stop when you believe you have reached the root cause and
    check to see if it this cause is effectively counter measured will
    it address all the causes up the chain?

3 ways of thinking rationally
                               Cause           Effect
Disjointed Viewpoint           Cause           Effect
                               Cause           Effect

Linear Control                      Effect/        Effect/
                       Cause                                      Effect
Viewpoint                           cause          cause

Causal-loop, non-
linear feedback
Viewpoint                      Effect/                       Effect/
                               cause                         cause

Root Cause Analysis
                Reality Tree

                 Reality Tree


    A problem tree

  A problem tree is a systematic
  analysis of the interrelations
  between problems,
  represented in a drawing or
  As each problem gives rise to
  other problems, the drawing
  branches out, so that the result
  looks like a tree.

    Cause and effect analysis
        This analysis involves five steps:
          1.      Identify the problem
          2.      Construct a problem chain that shows causes and effects
          3.      Translate the problem chain into an objective chain by reformulating all the elements into
                  positive, desirable conditions
          4.      Review the chain to ensure the connections are logical and complete
          5.      If required, revise the statements, delete objectives that are unrealistic or unnecessary, and add
                  new objectives where required

                            Example of
                            Cause and
                            Effect Analysis

Tools: tradeoff analysis
   Tradeoff analysis:

Source:   43
IBM Unveils New Carbon
Management Analysis Tool

Source:   44
Tradeoff analysis
   Trade-off between Transport Cost and Inventory Cost

   Cost tradeoff

Source: https://www-                                                                        46
Tools: conflict analysis
   Conflict analysis: One department realizes that they can save
    costs by changing to a cheaper and slower production process.
    However, this has a significant, negative impact on the rest of
    the organization. The attempt at saving costs in one department
    has increased the overall expenses of the organization.
   Supply chain activities often span many different organizations.
    These organizations all follow different policies and procedures,
    working towards a range of objectives and operating based on
    various reward and incentives schemes.
   By aligning each business and department's strategies,
    objectives and goals, you can improve the efficiency and
    productivity of the entire supply chain, leading to cost savings
    and opportunities to generate more profit.

Tools: lifecycle analysis
   Lifecycle analysis: using the 3 dimensions of volume, profit, and
    variability on a single graph in illustrating that in fact the policies
    used to operate the supply chain need to vary over the life cycle
    of a product.

Thank You


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