Introduction to [609652]

Introduction to
Supply Chain Management
Supply Chain Management
David Simchi-Levi
Professor of En gineerin g Systems
Massachusetts Institute of Technology
1 Sources:
Plants vendors
portsRegional warehouses:
Stocking pointsField warehouses:
Stocking pointsCustomers demand
centers sinks
Transportation costs Transportation costs
Inventory & warehousing
costsInventory & warehousing
costs
Production/purchase
costsSupply
Image by MIT OpenCourseWare .

Supply Chain Management
• Definition:
Supply Chain Mana gement is primarily concerned
with the efficient integratio n of suppliers, factories,
warehouses and stores so that merchandise is
produced and distributed in the right quantities, to
the right locations and at th e right time, and so as to
minimize total system cost subject to satisfying
service requirements
service requirements .
• Notice:
– Who is involved
– Cost and Service Level
– It is all about integration
©Copy right 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
©Copy right 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 Short order leadtime
• High in stock
• Enormous variety of products
• Low prices
©Copy right 2003 D. Simchi-Levi
The Dynamics of the Supply Chain
Customer
Demand
Retailer O rders
Distributor Orders
Production Plan
Time
Source: Tom Mc Guffr y, Electronic Commerce and V alue Chain Management, 1998
©Copy right 2003 D. Simchi-Levi
3

Order SizeThe Dynamics of the Supply Chain
Customer
Demand
Production Plan
Time
Source: Tom Mc Guffr y, Electronic Commerce and V alue Chain Management, 1998
©Copy right 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)
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 Adm in
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 day s 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 o f oil changed 5% or more fro m its p revious close
on 39 days makin g it the most volatile year since 1990.
Source: NYT 12
6

tttt tSupply Chain: The Magnitude
• It i It is estiimatedd thhat ththe grocery iinddustry cou ld 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.
Atil d15d t li f – A typical new car spen ds 15 days traveling from
the factory to the dealership.
©Copy right 2003 D. Simchi-Levi
Supply Chain: The Magnitude
(continued)
• Compaq computer estimates it lost $500 million to $1
billion in sales in 1995 becaus e 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 $2.6
billi i Ot b 1997 billion in October 1997.
The reason? “Raw material shortages, internal and
supplier parts shortages…”. (Wall Street Journal, Oct.
23, 1997)
©Copy right 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 essen ce of its approach lies in
manufacturers and suppliers working closely together manufacturers and suppliers working closely together
…. jointly creating busine ss plans to eliminate the
source of wasteful practices across the entire supply
chain”.
(Journal of Business Strategy, Oct./Nov. 1997)
©Copy right 2003 D. Simchi-Levi
Supply Chain: The Potential
• Dell Computer has outperformed the competition
in terms of shareholde r 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.
©Copy right 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.
©Copy right 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.
• Distrib ution
– 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.
©Copy right 2003 D. Simchi-Levi
9

10 ©Copy right 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 OpenCourseWare.Procurement Planning Manufacturing PlanningDistribution Planning Demand Planning
Procurement Planning Manufacturing PlanningDistribution Planning Demand PlanningSequential Optimization
Global Optimization
Supply Contracts / Collaboration / Information Systems and DSS

Supply Chain Challenges
•• Achieving Global Optimization Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time
• Managing Uncertainty
– Matchin g Supply and Demand
– Demand is not the only source of
uncertainty
©Copy right 2003 D. Simchi-Levi
The Enterprise
Fulfillment and Development Supply Chains
Plan/Design •Product Architecture
•Make/Buy
Develo p Plan/Design
Source Make/Buy
•Early Supplier Involvem ent
•Strategic Partnerships
•Suppliers Selection
•Supply Contracts
pment Sup pply Chain
Supply Produce Distribute Sell
Fulfillment Supply Chain
11

Fulfillment and Development Supply Chain
• Indust ry clock speed
ΠInnovative vs. functional
produc ts
• Core competenci es
ΠMake vs. buy Make vs. buy
• Product desi gn
ΠModula r vs. integral Development SSupply Chain
Supply Plan /Desig n • Product architecture
• Make/ buy
• Early suppl ier involvement
• Strategic par tnerships
Produc e Distribute Sourc e Strategic par tnerships
• Suppl ier selection
• Suppl y cont racts
Fulfillment Supply Chain Sell
• Uncertainty and variability
ΠDemand and supply
• Lead ti me
ΠOffshoring v s. onshoring
• Economi es of scale
ΠProduc tion a nd 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
©Copy right 2003 D. Simchi-Levi
12

Significant Increase in Outsourcing
Purchasing as % of Sales Purchasing as % of Sales
54%
28% 60%
57%
34%
30% 40% 50% 60% 70%
%
0% 10% 20% 22%24%
16% Machinary
Computer and t elecom
Food m anufacturing
Telecom services
1993 1996
©Copy right 2003 D. Simchi-Levi
New Concepts
•• Push Pull strategies Push-Pull strategies
• Direct-to-Consumer
• Strategic alliances
• Manufacturin g postpponement gp
• Dynamic Pricing
• E-Procurement
©Copy right 2003 D. Simchi-Levi
13

©Copy right 2003 D. Simchi-Levi
14

MIT OpenCourseWare
http://ocw.mit.edu
ESD.273J / 1.270J Logistics and Supply Chain Management
Fall 2009
For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms .