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MANAGING THE SUPPLY CHAIN
The Definitive Guide for the Business Professional
By David Simchi-Levi, Philip Kaminsky, Edith Simchi-Levi
The McGraw-Hill Companies, Inc.Copyright © 2004The McGraw-Hill Companies, Inc.
All rights reserved.
1.1 WHAT IS SUPPLY CHAIN MANAGEMENT?
Fierce competition in today's global markets, the introduction of products with shorter and shorter life cycles, and the heightened expectations of customers have forced business enterprises to invest in and focus attention on their supply chains. This, together with continuing advances in communications and transportation technologies (e.g., mobile communication, the Internet, and overnight delivery), has motivated the continuous evolution of the supply chain and of the techniques to manage it.
In a typical supply chain, raw materials are procured, and items are produced at one or more factories, shipped to warehouses for intermediate storage, and then shipped to retailers or customers. Consequently, to reduce cost and improve service levels, effective supply chain strategies must take into account the interactions at the various levels in the supply chain. The supply chain, which is also referred to as the logistics network, consists of suppliers, manufacturing centers, warehouses, distribution centers, and retail outlets, as well as raw materials, work-in-process inventory, and finished products that flow between the facilities (Fig. 1-1).
In this book we present and explain concepts, insights, practical tools, and decision support systems important for the effective management of the supply chain. But what exactly is supply chain management? We define it as follows:
Supply chain management is a set of approaches used 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.
This definition leads to several observations. First, supply chain 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. Indeed, in some supply chain analysis, it is necessary to account for the suppliers' suppliers and the customers' customers because they have an impact on supply chain performance. Second, the objective of supply chain management is to be efficient and cost-effective across the entire system; total systemwide costs, from transportation and distribution to inventories of raw materials, work in process, and finished goods, are to be minimized. Thus the emphasis is not on simply minimizing transportation cost or reducing inventories but rather on taking a systems approach to supply chain management. Finally, because supply chain management revolves around efficient integration of suppliers, manufacturers, warehouses, and stores, it encompasses the firm's activities at many levels, from the strategic level through the tactical to the operational level.
What about logistics management? What is the difference between supply chain management and logistics management? While the answer to this question depends on who is addressing this issue, we will not distinguish between logistics and supply chain management in this text. Indeed, our definition of supply chain management is similar to the definition of logistics management given by the Council of Logistics Management:
The process of planning, implementing, and controlling the efficient, cost- effective flow and storage of raw materials, in-process inventory, finished goods, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.
What makes supply chain management difficult? Although we will discuss a variety of reasons throughout this text, they can all be related to one or both of the following observations:
1. It is challenging to design and operate a supply chain so that total systemwide costs are minimized and systemwide service levels are maintained. Indeed, it is frequently difficult to operate a single facility so that costs are minimized and service level is maintained. The difficulty increases exponentially when an entire system is being considered. The process of finding the best systemwide strategy is known as global optimization.
2. Uncertainty is inherent in every supply chain; customer demand can never be forecast exactly, travel times will never be certain, and machines and vehicles will break down. Supply chains need to be designed to eliminate as much uncertainty as possible and to deal effectively with the uncertainty that remains.
In the next two sections we discuss each of these issues in detail.
1.2 GLOBAL OPTIMIZATION
What makes finding the best systemwide, or globally optimal, integrated solution so difficult? A number of factors make this a challenging problem:
1. The supply chain is a complex network of facilities dispersed over a large geography and, in many cases, all over the globe. The following example illustrates a network that is fairly typical of today's global companies.
2. Different facilities in the supply chain frequently have different, conflicting objectives. For instance, suppliers typically want manufacturers to commit themselves to purchasing large quantities in stable volumes with flexible delivery dates. Unfortunately, although most manufacturers would like to implement long production runs, they need to be flexible to their customers' needs and changing demands. Thus the suppliers' goals are in direct conflict with the manufacturers' desire for flexibility. Indeed, since production decisions typically are made without precise information about customer demand, the ability of manufacturers to match supply and demand depends largely on their ability to change supply volume as information about demand arrives. Similarly, the manufacturers' objective of making large production batches typically conflicts with the objective of both warehouses and distribution centers to reduce inventory. To make matters worse, this latter objective of reducing inventory levels typically implies an increase in transportation costs.
3. The supply chain is a dynamic system that evolves over time. Indeed, not only do customer demand and supplier capabilities change over time, but supply chain relationships also evolve over time. For example, as customers' power increases, there is increased pressure placed on manufacturers and suppliers to produce an enormous variety of high-quality products and, ultimately, to produce customized products.
4. System variations over time are also an important consideration. Even when demand is known precisely (e.g., because of contractual agreements), the planning process needs to account for demand and cost parameters varying over time due to the impact of seasonal fluctuations, trends, advertising and promotions, competitors' pricing strategies, and so forth. These time-varying demand and cost parameters make it difficult to determine the most effective supply chain strategy, i.e., the one that minimizes systemwide costs and conforms to customer requirements.
1.3 MANAGING UNCERTAINTY
Global optimization is made even more difficult because supply chains need to be designed for and operated in uncertain environments. A number of factors contribute to this:
1. Matching supply and demand is a major challenge:
a. Boeing Aircraft announced a write-down of $2.6 billion in October 1997 due to "raw material shortages, internal and
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