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OPER3208-001 Supply Chain Management

OPER3208-001 Supply Chain Management. Fall 2006 Instructor: Prof. Setzler. Simchi-Levi, Chapter 1. Ch1: Introduction to SCM (Simchi-Levi). Why focus on SC? Products with shorter life cycles Heightened expectations of customers Advances in communications and transportation technologies

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OPER3208-001 Supply Chain Management

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  1. OPER3208-001Supply Chain Management Fall 2006 Instructor: Prof. Setzler

  2. Simchi-Levi, Chapter 1

  3. Ch1: Introduction to SCM (Simchi-Levi) • Why focus on SC? • Products with shorter life cycles • Heightened expectations of customers • Advances in communications and transportation technologies • Mobile communications, Internet, and overnight delivery

  4. Ch1: Introduction to SCM (Simchi-Levi) • What is supply chain management? • Definition: Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize systemwide costs while satisfying service level requirements

  5. Ch1: Introduction to SCM (Simchi-Levi)

  6. Ch1: Introduction to SCM (Simchi-Levi) • Observation #1: SC management takes into consideration every facility that has an impact on cost and plays a role in making the product conform to customer requirements • From supplier and manufacturing facilities through warehouses and distribution centers to retailers and stores

  7. Ch1: Introduction to SCM (Simchi-Levi) • Observation #2: The objective of SCM is to be efficient and cost-effective across the entire system • Minimizing total systemwide costs • From transportation and distribution to inventories of raw materials (RM), work in process (WIP), and finished goods

  8. Ch1: Introduction to SCM (Simchi-Levi) • Observation #3: It includes the firm’s activities at many levels, from the strategic level through the tactical to the operational level • In this text, there is no distinction between logistics and supply chain management

  9. Ch1: Introduction to SCM (Simchi-Levi) • What makes SCM so difficult? • Reason #1: It is challenging to design and operate a SC so that total systemwide costs are minimized, and systemwide service levels are maintained • Hard to meet these objectives within a single facility • Difficulty increases exponentially with more companies • The solution that gives the best systemwide strategy is called global optimization

  10. Ch1: Introduction to SCM (Simchi-Levi)

  11. Ch1: Introduction to SCM (Simchi-Levi) • What makes SCM so difficult? • Reason #2: Uncertainty is inherent in every SC • Customer demand can never be predicted exactly • Travel times vary • Machines and vehicles break down • SCs need to be designed to eliminate as much uncertainty as possible and to deal effectively with the uncertainty that remains

  12. Ch1: Introduction to SCM (Simchi-Levi) • What makes finding the globally optimal integrated solution so difficult? • Reason #1: The SC is a complex network • Reason #2: Different facilities in the SC frequently have different, conflicting, objectives • Reason #3: The supply chain is a dynamic system • Reason #4: System variations over time

  13. Ch1: Introduction to SCM (Simchi-Levi) • Conflicting Objectives in the Supply Chain • Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. Manufacturing • Long run production • High quality • High productivity • Low production cost

  14. Ch1: Introduction to SCM (Simchi-Levi) • Conflicting Objectives in the Supply Chain • Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4. Customers • Short order lead time • High in stock • Enormous variety of products • Low prices

  15. Ch1: Introduction to SCM (Simchi-Levi) • Managing uncertainty • Factor #1: Matching supply and demand • Months before demand is realized, manufacturers have to commit to specific production levels • Factor #2: Inventory and back-order levels fluctuate considerably across the SC • Even when customer demand does not very greatly

  16. Ch1: Introduction to SCM (Simchi-Levi) • Managing uncertainty (continued) • Factor #3: Forecasting doesn’t solve the problem • Forecasting is always wrong • Factor #4: Demand is not the only source of uncertainty • Delivery lead times, manufacturing yields, transportation times, and component availability • As SCs become larger and more geographically diverse, disasters can have tremendous impact

  17. Ch1: Introduction to SCM (Simchi-Levi) • Managing uncertainty (continued) • Although uncertainty cannot be eliminated, we will discuss approaches to minimize the effect of uncertainty

  18. Ch1: Introduction to SCM (Simchi-Levi) Supply Chain Variability

  19. Ch1: Introduction to SCM (Simchi-Levi) What Management Gets...

  20. Ch1: Introduction to SCM (Simchi-Levi) What Management Wants…

  21. Ch1: Introduction to SCM (Simchi-Levi) • Dealing with Uncertainty • Pull Systems • Risk Pooling • Centralization • Postponement • Strategic Alliances • Collaborative Forecasting

  22. Ch1: Introduction to SCM (Simchi-Levi) • Why SCM? • Companies have reduced manufacturing costs as much as is practically possible • Many companies are using SCM to increase profit and market share • In 1998 U.S. companies spend $898 billion on supply related activities (~10% of U.S. GNP) • During 2000, costs increased to $1 trillion, $6 billion • Costs include • Movement, storage, and control of products across the SC • Often includes unnecessary costs such as redundant stock, inefficient transportation strategies, and other wasteful practices

  23. Ch1: Introduction to SCM (Simchi-Levi) • It is believed that by implementing more effective SC strategies the grocery industry can save about $30 billion, or 10% of its annual operating cost • For example, • It takes a typical box of cereal more than 3 months to get from factory to supermarket • It takes a typical car 15 days to travel from factory to dealership • Actual travel time = 4-5 days

  24. Ch1: Introduction to SCM (Simchi-Levi) • Many opportunities exist to cut cost in the SC • Many companies have been able to substantially increase revenue or decrease costs through effective SCM • Strategic partnerships between suppliers and manufacturers can significantly impact SC performance

  25. Ch1: Introduction to SCM (Simchi-Levi) • Transportation costs and inventory costs need to be examined carefully • Changing to a more expensive transportation method, which would increase transportation costs, might be less expensive than inventory hold costs which would be required if a less expensive transportation method is used • Shifting from a decentralized distribution system with a number of warehouses to a centralized system with a single warehouse might also result in lower overall costs

  26. Ch1: Introduction to SCM (Simchi-Levi) • In order to fully integrate companies within a SC requires advanced information systems and entails many risks • SC also need to be very flexible • With increased flexibility comes increased complexity

  27. Ch1: Introduction to SCM (Simchi-Levi) • In some industries, SCM is perhaps the single most important factor determining the success of the firm • In highly competitive industries, where most manufacturers use the same suppliers and identical technologies, companies compete on cost and service levels

  28. Ch1: Introduction to SCM (Simchi-Levi) • A few years ago most would have said that these 2 objectives, improving service and inventory levels, could not be achieved at the same time • Traditional inventory theory says that to increase service levels, the firm must increase inventory and therefore cost

  29. Ch1: Introduction to SCM (Simchi-Levi) • Developments in information and communications technologies have led to innovative approaches that allow the firm to improve both objectives • Improve service level • Improve inventory levels

  30. Ch1: Introduction to SCM (Simchi-Levi) • Key Issues in SCM • Issues span from strategic through tactical to the operational level • The strategic level deals with long-term decisions • Number, location, and capacity of warehouses and manufacturing plants and the flow of materials • The tactical level deals with mid-range decisions • Purchasing and production decisions, inventory policies, and transportation strategies, frequency with which customers are visited • The operational level refers to day-to-day decisions • Scheduling, lead time quotations, routing, and truck loading

  31. Ch1: Introduction to SCM (Simchi-Levi) • Key Issues • Distribution Network Configuration • Inventory Control • Supply Contracts • Distribution Strategies • Supply Chain Integration and Strategic Partnering • Outsourcing and Procurement Strategies • Product Design • Information Technology and Decision-Support Systems • Customer Value

  32. Ch1: Introduction to SCM (Simchi-Levi) • Key SCM Issues

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