Overview of Supply Chain Management

Supply Chain Management

What Is the 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

 
History of Supply Chain Management

•       1960’s - Inventory Management Focus, Cost Control

•       1970’s - MRP & BOM  - Operations Planning

•       1980’s - MRPII, JIT - Materials Management, Logistics

•       1990’s - SCM - ERP - “Integrated” Purchasing, Financials, Manufacturing, Order Entry

•       2000’s - Optimized “Value Network” with Real-Time Decision Support; Synchronized & Collaborative Extended Network

The Importance of Supply Chain Management

•       Dealing with uncertain environments – matching supply and demand

–      Boeing announced a $2.6 billion write-off in 1997 due to “raw materials shortages, internal and supplier parts shortages and productivity inefficiencies”

–      U.S Surgical Corporation announced a $22 million loss in 1993 due to “larger than anticipated inventories on the shelves of hospitals”

–      IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue

–      Hewlett-Packard and Dell found it difficult to obtain important components for its PC’s from Taiwanese suppliers in 1999 due to a massive earthquake

•       U.S. firms spent $898 billion (10% of GDP) on supply-chain related activities in 1998

•       Shorter product life cycles of high-technology products

–      Less opportunity to accumulate historical data on customer demand

–      Wide choice of competing products makes it difficult to predict demand

•       The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners

–      If you don’t do it, your competitor will

–      Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its suppliers

•       Availability of SCM technologies on the market

–      Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes

Supply Chain Management – Key Issues

•       Forecasts are never right

–      Very unlikely that actual demand will exactly equal forecast demand

–      The longer the forecast horizon, the worse the forecast

–      A forecast for a year from now will never be as accurate as a forecast for 3 months from now

–      Aggregate forecasts are more accurate

–      A demand forecast for all CV therapeutics will be more accurate than a forecast for a specific CV-related product

The Bullwhip Effect:

The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain. The concept first appeared in Jay Forrester's Industrial Dynamics (1961) and thus it is also known as the Forrester effect. The bullwhip effect was named for the way the amplitude of a whip increases down its length. The further from the originating signal, the greater the distortion of the wave pattern. In a similar manner, forecast accuracy decreases as one moves upstream along the supply chain. For example, many consumer goods have fairly consistent consumption at retail but this signal becomes more chaotic and unpredictable as the focus moves away from consumer purchasing behavior.

Factors Contributing to the Bullwhip

•       Demand forecasting practices

–      Min-max inventory management (reorder points to bring inventory up to predicted levels)

•       Lead time

–      Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs

•       Batch ordering

–      Peaks and valleys in orders

–      Fixed ordering costs

–      Impact of transportation costs (e.g., fuel costs)

–      Sales quotas

•       Price fluctuations

–      Promotion and discount policies

•       Lack of centralized information