ESD.273J, Introduction to supply chain management

1 Introduction to supply chain management supply chain management David Simchi-Levi Professor of Engineering Systems Massachusetts Institute of Technology 1 Sources:Plants vendorsportsRegional warehouses:Stocking pointsField warehouses:Stocking pointsCustomers demandcenters sinksTransportation costsTransportation costsInventory & warehousingcostsInventory & warehousingcostsProduction/purchasecosts SupplyImage by MIT chain management Definition: supply chain management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements service requirements.

2 Notice: Who is involved Cost and Service Level It is all about integration Copyright 2003 D. Simchi-Levi Conflicting Objectives in the supply chain 1 Purchasing1. Purchasing Stable volume requirements Flexible delivery time Little variation in mix Large quantities 2. Manufacturing2. Manufacturing Long run production High quality High productivity Low production cost Copyright 2003 D. Simchi-Levi 2 Order SizeConflicting Objectives in the supply chain 3 Warehousing3. Warehousing Low inventory Reduced transportation costs Quick replenishment capability 4. Customers Short order lead time Shortorderleadtime High in stock Enormous variety of products Low prices Copyright 2003 D.

3 Simchi-LeviThe Dynamics of the supply chain Customer Demand Retailer Orders Distributor Orders Production Plan Time Source: Tom Mc Guffry, Electronic Commerce and Value chain management , 1998 Copyright 2003 D. Simchi-Levi 3 Order SizeThe Dynamics of the supply chain Customer Demand Production Plan Time Source: Tom Mc Guffry, Electronic Commerce and Value chain management , 1998 Copyright 2003 D. Simchi-Levi Today s supply chain Challenges Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countriesIncrease in labor costs in developing countries Increase in logistics costs 8 4 Increase in Logistics Costs 13 14 US Logistics Costs as Percent of GDP 8 9 10 11 12 15% increase 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Rising energy prices Rail capacity pressure Truck driver shortage Security requirements 9 Total US Logistics Costs 1984 to 2007 ($ Billions)

4 1400 1600 Total US Logistics Costs in $MMs 52% Total Cost 600 800 1000 1200 Transportation 47% 62%Inventory 0 200 400 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Inv Carrying Transportation Admin Total Source: 19th Annual Logistics Report 10 Admin 5 Today s supply chain Challenges Global supply chain with long lead times Rising and shifting customer expectations Increase in labor costs in developing countriesIncrease in labor costs in developing countries Increase in logistics costs Importance of sustainability Unprecedented Volatility 11 Unprecedented Volatility Number of days the price of oil changed 5% or more 1990: 38 days of oil changed 5% or more 2008: 39 days Year In 2008 the price of oil changed 5% or more from its previous close on 39 days making it the most volatile year since 1990.

5 Source: NYT 12 6 tttttSupply chain : The Magnitude It i It is estiimatedd thhat ththe grocery iinddustry could ld save $30 billion (10% of operating cost) by using effective logistics strategies. A typical box of cereal spends 104 days getting from factory to supermarket. Ati l d15d t li f A typical new car spends 15 days traveling from the factory to the dealership. Copyright 2003 D. Simchi-Levi supply chain : The Magnitude (continued) Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them. Boeing Aircraft, one of America s leading capital goods producers, was forced to announce writedowns of $ billi i Ot b 1997billion in October 1997.

6 The reason? Raw material shortages, internal and supplier parts . (Wall Street Journal, Oct. 23, 1997) Copyright 2003 D. Simchi-Levi 7 supply chain : The Potential Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months. According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together manufacturers and suppliers working closely together .. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain . (Journal of Business Strategy, 1997) Copyright 2003 D. Simchi-Levi supply chain : The Potential Dell Computer has outperformed the competition in terms of shareholder value growth over the eight years period, 1988-1996, by over 3,000% (see Anderson and Lee, 1999) using -Direct business model -Build-to-order strategy.

7 Copyright 2003 D. Simchi-Levi 8 supply chain : The Potential In 10 yyears,, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Copyright 2003 D. Simchi-Levi supply chain : The Complexity National Semiconductors:National Semiconductors: Production: Produces chips in six different locations: four in the US, one in Britain and one in Israel Chips are shipped to seven assembly locations in Southeast Asia. Distribution The final product is shipped to hundreds of facilities all The final product is shipped to hundreds of facilities all over the world 20,000 different routes 12 different airlines are involved 95% of the products are delivered within 45 days 5% are delivered within 90 days.

8 Copyright 2003 D. Simchi-Levi 9 10 Copyright 2003 D. Simchi-Levi supply chain Challenges Achieving Global Optimization Achieving Global Optimization Conflicting Objectives Complex network of facilities System Variations over time Image by MIT PlanningManufacturing PlanningDistribution PlanningDemand PlanningProcurement PlanningManufacturing PlanningDistribution PlanningDemand PlanningSequential OptimizationGlobal OptimizationSupply Contracts / Collaboration / Information Systems and DSSS upply chain Challenges Achieving Global Optimization Achieving Global Optimization Conflicting Objectives Complex network of facilities System Variations over time Managing Uncertainty Matching supply and Demand Demand is not the only source of

9 Uncertainty Copyright 2003 D. Simchi-Levi The EnterpriseFulfillment and Development supply Chains Plan/Design Product Architecture Make/BuyDevelop Plan/Design Source Make/Buy Early Supplier Involvement Strategic Partnerships Suppliers Selection supply Contracts pment Suppply ChainSupply Produce Distribute Sell Fulfillment supply chain 11 Fulfillment and Development supply chain Industry clock speed Innovative vs. functional products Core competencies Make vs. buy Make vs. buy Product design Modular vs. integral Development SSupply ChainSupply Plan/Design Product architecture Make/buy Early supplier involvement Strategic partnerships Produce Distribute Source Strategic partnerships Supplier selection supply contracts Fulfillment supply chain Sell Uncertainty and variability Demand and supply Lead time Offshoring vs.

10 Onshoring Economies of scale Production and transportation What s New in Logistics? Global competition Shorter product life cycle New, low-cost distribution channels More powerful well-informed customers Internet and E-Business strategies Copyright 2003 D. Simchi-Levi 12 Significant Increase in Outsourcing Purchasing as % of SalesPurchasing as % of Sales 54% 28% 60% 57% 34% 30% 40% 50% 60% 70% % 0% 10% 20% 22%24% 16% Machinary Computer and telecom Food manufacturing Telecom services 1993 1996 Copyright 2003 D. Simchi-Levi New Concepts Push Pull strategies Push-Pull strategies Direct-to-Consumer Strategic alliances Manufacturing postpponementgp Dynamic Pricing E-Procurement Copyright 2003 D.