Download Chapter 1: Introduction

Introduction
Chapter 1
Operations and
Supply Chain
Management
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Questions
1. What is operations management?
2. What is a supply chain?
3. What is supply chain management?
4. Why is supply chain management
important?
1-2
Road Map
•
What
• Why
• Summary
1-3
Core activities of any organization
What
• 3 overlapping disciplines
supporting 3 core activities
Make the stuff
(operations)
SUPPLY CHAIN MANAGEMENT
Sell the stuff
(marketing)
Collect the
money
(finance)
• Stuff = services and/or
products
 IBM: consulting services,
technology products
 University: education,
research
 Temple: religious service
• We’ll examine SCM from
primarily an operations
perspective
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What
Operations function in an organization
• Responsible for creation & delivery of
goods/services
• “Making the stuff”
• Wide range of “operations” positions, e.g.,
 factory worker
 truck driver
 operations manager
 vice president of operations
 chief operations officer
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What
What is a supply chain
• Two or more parties linked by a flow of material,
information, & money, often global in scope
• A “party” could be a company, or department within a
company
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What
What is supply chain management?
• Supply chain management - all about managing flows of
resources
• Closely related to logistics management
 We will not make a distinction between SCM & LM
• Expanded definitions (Council of Supply Chain Management
Professionals):
 Logistics management is that part of the supply chain
management that plans, implements, and controls the efficient,
effective forward and reverse flow and storage of goods, services,
and related information between the point of origin and the point
of consumption in order to meet customers' requirements
 Supply Chain Management encompasses the planning and
management of all activities involved in sourcing and
procurement, conversion, and all Logistics Management activities.
Importantly, it also includes coordination and collaboration with
channel partners, which can be suppliers, intermediaries, thirdparty service providers, and customers. In essence, Supply Chain
Management integrates supply and demand management within
and across companies.
1-7
What
Logistics management is not new
Gran Mareshal de Logis
 First “official” logistician
 French army of 1671
 Charged with providing lodging & support
for the French troops in the field
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What
OM versus SCM
Much overlap, though neither a subset, e.g.,
 Important for OM, but less so for SCM
• Overarching management initiatives such as TQM
 Important for SCM, but less so for OM
• Adjustments in pricing to balance supply & demand –
more of a marketing issue outside the scope of OM
• Design of contracts to balance risks & rewards
between companies in a supply chain
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Road map
• What
• Why is SCM important?
 Big $
 High leverage
 Increasing challenges
 Increasing opportunities
 Industry examples
• Summary
1-10
Why
Why is SCM Important ?
Big dollars
 U.S. inventory investment:  15% - 20% of GDP
• U.S. grocery pipeline  $75 - $100 billion
 U.S. transportation & warehousing expense:  9% of
2004 GDP (about 16% in 1981)
 U.S. companies: 25% of corporate budgets on SCM
• Inventory carrying, transportation,
warehousing, order management, supply
chain financing, related IT expenses
- Benchmarking Partners
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Why
Why is SCM important ?
High leverage
 Impact on profit
• increase sales by $12 = $1 savings in the supply
chain
 Impact on sales
• competition often focused on the service
surrounding the product (high quality, low cost
assumed)
- high availability
- delivery speed & consistency
- order status (e.g., Internet order tracking)
 Impact on stock price
• profit + assets  ROA
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Why
Why is SCM important ?
Stock price & SCM
A firm announces a supply chain problem (e.g., shipment
delays), & stock price drops by about 9% . . .
. . . and as much as 20% over 6 months
- Hendricks and Singhal (2003)
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Why
Why is SCM important ?
Increasing challenges
 Shrinking product life-cycles
 Increasing product variety
• Food product introductions:
-
1980: 2,000
1991: 18,000
1997: 25,000
2000: 31,000
• Books
- 1947: 85,000 published titles
- 2001: 1.5 million published titles
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Why
Why is SCM important ?
Increasing Challenges
Apparel & PCs are notorious for short, unpredictable life-cycles
“We have this hungry baby which is the
apparel market, and it’s constantly screaming
for the next new thing,” says Davies-Keller, . .
. “All this baby says is, We want the next best
thing! We want innovation!”
• Wired
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Why
Why is SCM important ?
Opportunities
• Best-in-class SCM expense about 12% of corporate budget
(versus overall average of 25%)
 World Research Advisory Fax Newsletter
• Idle time in supply chain – rough & quick analysis...
 inventory at 15% of GDP, & say 30% to 70% of GDP due to product 
 value of inventory between 20% (15/70) & 50% (15/30) of sales 
 flowtime between 10 (52/5) & 26 (52/2) weeks, & say average
production/transport time is 2 weeks 
 material idle 80% to 90% of the flowtime time
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Why
Quick industry examples
• Information sharing
 Wal-Mart
• Trimming the chain
 Dell Computer
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Why
Information sharing
Wal-Mart
• Largest & highest profit retailer in the world
 Only 229 stores in 1979 versus 1,891 for Kmart
 #1 or #2 on Fortune 500 list in recent years
• Focus on efficient logistics
 Walton influenced by military logistics; now U.S. Marines
are studying Wal-Mart logistics
• Invested $700 million in 1985 to connect stores to key
vendors via satellite – sales transmitted daily
• The view of an economist - Wal-Mart’s approach is a
more significant innovation than the transistor
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Why
Information sharing
Wal-Mart & VF Corporation
• The apparel company VF receives daily sales
data from Wal-Mart stores
 Today: a VF product is sold at a Wal-Mart store
 Tomorrow: a replacement product leaves a VF
warehouse for the store
 Two days after the sale: the replacement product
arrives at the store & is put on the shelf
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Why
Trimming the chain
Dell computers
• Ship direct to customers (built to order)
 More than $50 million/day over Internet
• Customers customize PCs & order over the Internet
• Many parts are delivered only hours before needed from
distributors within a few miles of Dell’s factories
• Maintain about 4 days of inventory compared to 24 days
for Compaq – a significant edge considering prices for
components typically drop by about 1% per week
 Fortune
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Why
Dell’s performance
• Flows are fast – Dell gets paid about 12 days
before paying for the parts
• Split-adjusted stock price: $0.0575 in 1990,
$51 on 12/31/1999 » a 88,600% increase
 $1,200  $1+ million
 Top gain in the decade among publicly traded
companies
1-21
Road map
• What
• Why
• Summary
1-22
Summary
• What?
 A supply chain is 2 or more parties linked by a flow of
resources
 SCM: managing flows of material, information, money,
people, …
 Cuts across core activities of sell, make, collect money
• Marketing, operations, finance
 Our view – SCM from mostly an operations perspective
• Why?
 It’s the money
1-23
Back to key questions
1. What is operations management?
2. What is a supply chain?
3. What is supply chain management?
4. Why is supply chain management
important?
1-24