introduction to supply chain management
TRANSCRIPT
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Introduction to Supply Chain Management
Professor Guojun JiUniversity of Washington, GTTL
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Motivation of Supply Chain Evolution
Short life cycle heightened expectations of customers advances in communication and
transportation technologies mobile communication overnight delivery
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Supply Chain Components
Suppliers Manufacturing centers Warehouses Distribution centers Retail outlets Raw material Work-in-Process inventory Finished products
Supply
Sources:plantsvendorsports
RegionalWarehouses:stocking points
Field Warehouses:stockingpoints
Customers,demandcenterssinks
Production/purchase costs
Inventory &warehousing costs
Transportation costs Inventory &
warehousing costs
Transportation costs
Logistics Network
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Network Design
The Key Issues:
1. Number of warehouses
2. Location of each warehouse
3. Size of each warehouse
4. Allocation of products to the different warehouses
5. Allocation space for products in each warehouses
6. Allocation of customers to each warehouse
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Network Design
The objective is to balance service level subject to:
Production/ purchasing costs
Inventory holding costs
Facility costs (storage, handling and fixed costs)
Transportation costs (different transportation mode)
That is, we would like to find a minimal-annual-cost configuration of the distribution network that satisfies product demands at specified customer service levels.
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The More Warehouse, the more ...
Improvement in service level inventory costs due to increased safety stock overhead and setup costs reduction in outbound transportation costs
(from warehouses to customers) inbound transportation costs (from plants to
warehouses)
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Inventory (1/2)
Where do we hold inventory? Suppliers and manufacturers warehouses and distribution centers retailers
Types of Inventory WIP raw materials finished goods
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Inventory (2/2)
Why do we hold inventory? Uncertainty in customer demand
short life cycle implies that historical data may not be available
many competing products in the marketplace
Uncertainty in quantity and quality of the supply, supplier costs, and delivery times
Economies of scale offered by transportation companies
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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 level requirements.
Notice: Everyone is involved Systems approach to reducing costs Integration is the key
Supply Chain Management
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Conflicting Objectives in the Supply Chain
1. 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
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Conflicting Objectives in the Supply Chain
3. Warehousing• Low inventory • Reduced transportation costs• Quick replenishment capability
4. Customers• Short order lead time• High in stock• Enormous variety of products• Low prices
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The Effect of Demand Uncertainty (1/2)
Most companies treat the world as if it were predictable: Production and inventory planning are based on
forecasts of demand made far in advance of the selling season
Companies are aware of demand uncertainty when they create a forecast, but they design their planning process as if the forecast truly represents reality
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The Effect of Demand Uncertainty (1/2)
Recent technological advances have increased the level of demand uncertainty: Short product life cycles Increasing product variety
The three principles of all forecasting techniques:
Forecasting is always wrong The longer the forecast horizon the worst is the forecast Aggregate forecasts are more accurate
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Market Two
Risk Pooling
Consider these two systems:
Supplier
Warehouse One
Warehouse Two
Market One
Market Two
Supplier Warehouse
Market OneLT = 1 week
1500 products, 10000 accounts
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Risk Pooling
For the same service level, which system will require more inventory? Why?
For the same total inventory level, which system will have better service? Why?
What are the factors that affect these answers?
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The Dynamics of the Supply Chain
Ord
er
Siz
e
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
CustomerDemand
Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders
Production PlanProduction Plan
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What Management Gets...
Ord
er
Siz
e
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
CustomerDemand
Production PlanProduction Plan
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What Management Wants…
Vo
lum
es
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Production PlanProduction PlanCustomerDemand
CustomerDemand
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The Bullwhip Effect
2
2221
)(
)(
P
L
P
L
DVar
QVar
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The bullwhip effect is an extreme change in the supply position upstream generated by a small change or no change in customer demand. Inventory can shift quickly from being highly backordered to being excess.
Observations show that the variation of inventory and order quantities increases up the supply chain from customer to supplier. In addition, the longer the lead times of goods, date, and control flow are, the stronger the bullwhip effect is. Figure 2.3.4.2 shows this effect.
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A famous example, analyzed and published by Procter&Gamble, is demand for Pampers disposal diapers. The bullwhip effect is caused mainly by information processing obstacles in the logistics network; the obstacles are information time lag and distortion (by the actual orders). An appropriate countermeasure is adapting manufacturing lead times (see here [Solo03]), based on rapid information exchange on consumption, or demand, by point-of-sale scanning.
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Var(q)/Var(D):For Various Lead Times
L=5
L=3
L=1
0
2
4
6
8
10
12
14
0 5 10 15 20 25 30
L=5
L=3
L=1
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The Dynamic Supply Chain
Increasing customer power leads to increased demands on retailers
Increased retailer power leads to increased demands on suppliers
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Example 1
A Korean manufacturer of electrical products is facing: 70% service level 4 turnover rate
Leading electronic companies: 9 turnover rate
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Supply Chain: The Magnitude
In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product). Transportation 58% Inventory 38% Management 4%
Third party logistics services grew in 1998 by 15% to nearly $40 billion
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Supply Chain: The Magnitude
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.
In 1993, IBM lost a major fraction of its potential sales of desktop computers because it could not purchase enough chips that control the computer displays.
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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 …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct./Nov. 1997)
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Supply Chain: The Complexity
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
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.
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Supply Chain: The Complexity
1. Supply Chain Integration (network)• Conflicting Objectives• The Dynamics of the Supply Chain
2. Matching Supply and Demand3. System Variations over Time (parameters)4. Status of Logistics Knowledge
• Many problems are new• Incomplete understanding of issues• Methodology is rather narrow• No historical data available
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Example 2
National semiconductor: one of the world’s largest chipmakers short lead time In 1994, 95% demands received within 45
days, the remaining 5% received within 90 days
12 different airline carriers 20,000 different routes Who will be in the lucky 5%?
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ISSUES:Decision Classification
Strategic Planning:Decisions that typically involve major capital investments and have a long-term effect.
1. Determination of the number, size and location of new plants, distribution centers and warehouses
2. Acquisition of new production equipment and the design of working centers within each plant
3. Design of transportation facilities, communications equipment, data processing means, etc.
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ISSUES:Decision Classification
Tactical Planning:Effective allocation of manufacturing and distribution resources over a period of several months
1. Purchasing and production decisions
2. Work-force size
3. Inventory policies
4. Definition of the distribution channels
5. Selection of transportation and trans-shipment alternatives
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ISSUES:Decision Classification
Operational Control:Includes day-to-day operational decisions
1. The assignment of customer orders to individual
machines
2. Dispatching, expediting and processing orders
3. Vehicle scheduling, routing
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ISSUES: Distribution Strategies
The structure of the distribution network
The distribution strategy
The Classical Strategy
Cross Docking (Wal-Mart)
Direct Shipping
merge-in-transit
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Integration and Strategic Partnering
Successful Keys: Information sharing Operational planning
What information should be shared? How should it be used?
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Advantages of Alliance (1/2)
Adding value to product Improve time to market, distribution times, repair times, complementary product lines
Improving market access better advertising new market channels
Strengthening operations complementary seasonal products
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Advantages of Alliance (2/2)
Adding technological strength Enhancing strategic growth: overcome barriers Enhancing organizational skills: organization
learning Building financial strength
shared administrative costs reduced owing to the expertise risk sharing
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Disadvantages of Alliance
IBM entered the PC market in 1981. Outsourcing:
CPU: Intel OS: Microsoft
Market share: 1985: 40% 1995: 8%; Compaq: 10%
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Types of Strategic Alliances
Third-Party Logistics (3PL) Retailer-Supplier Partnerships (RSP) Distributor Integration (DI)
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Types of Retailer-Supplier Partnerships (RSP)
Quick Response: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.
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Types of Retailer-Supplier Partnerships (RSP)
Continuous Replenishment (rapid replenishment): Vendors receive POS data and use it prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory.
Wal-Mart, Kmart
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Types of Retailer-Supplier Partnerships (RSP)
Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.
Kmart
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Types of Retailer-Supplier Partnerships (RSP)
Vendor Managed Inventory (VMI) (Vendor Managed Replenishment, VMR) : The supplier decide on the appropriate
inventory levels of each products and the appropriate inventory policies.
The goal of VME is to eliminate retailers’ orders. VMI Projects at Dillard Department Stores, J.C.
Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements.
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Increasing Globalization
1/5 of output of US firms produced abroad US Companies hold $500 Billion in foreign
asset stocks (7% annual growth) 1/4 of US imports between foreign affiliates
and US parent companies Over half of US companies increased the
number of countries in which they operate (late 80’s to early 90’s)
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Taxonomy of International Supply Chains (1/2)
International distribution: domestic: manufacturing overseas: marketing
International suppliers: domestic: final assembly overseas: raw materials, components,
marketing
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Taxonomy of International Supply Chains (2/2)
Off-shore manufacturing domestic: warehouses, marketing overseas: manufacturing
Fully integrated global supply chain product are produced, manufactured, and distributed
from various facilities located throughout the world supply chain was designed without regard to
national boundaries
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Forces Driving Globalization
Global Market Forces Technological Forces Global Cost Forces Political and Economic Forces
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Global Market Forces
Foreign competition in local markets pressures by foreign competitors opportunities by foreign customers
Growth in foreign demand Global presence as a defensive tool
Nestle’s and Kellogg’s Global proliferation of information:
overnight mail, internet Presence in state-of-the-art markets
Japan -- consumer electronics Germany -- machine tools US: software
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Technological Forces
Diffusion of knowledge Many high tech components developed overseas Need close relationships with foreign suppliers
Gain access to technology or markets: joint location collaborations
Global location of R&D facilities Close to production (as cycles get shorter) Close to expertise (Indian programmers?)
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Global Cost Forces Low unskilled labor cost
Diminishing importance (offset by operating facilities costs in remote locationas)
Other cost priorities Integrated supplier infrastructure Skilled labor
Capital intensive facilities government actions: tax breaks, cost sharing joint ventures price breaks
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Political and Economic Forces (1/2)
Exchange rate fluctuations and operating flexibility Regional trade agreements (Europe, North
America, Pacific Rim) Value of being in a country in one of these regions Implications for supply network design Reevaluation of foreign facilities (Production processes
designed to avoid tariffs)
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Political and Economic Forces (2/2)
Trade protection mechanisms Tariffs (finished goods) Quotas Voluntary export restrictions: Lexus, Infiniti Local content requirements
TI/Intel factories in EuropeJapanese automakers in the EU
Health/environmental regulationsJapanese refused to import US skis (different snow)
Government procurement policiesUp to 50% advantage for American companies on US
Defense contracts
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Issues In Global SCM Regional vs. International Products
regional-specific products: cars true global products: Coca-cola, McDonald
Local Autonomy vs. Central Control Short term expectations
Miscellaneous dangers harder to administer offshore facilities cheap labor masks the low productivity collaborators become competitors
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Regional Differences in Logistics (1/2)
Culture differences: beliefs and values customs languages
Infrastructure highway systems, ports, communication and
information systems road widths, bridge heights, communication protocols geography distances
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Regional Differences in Logistics (2/2)
Performance expectation and evaluation: formal partnership contract operating standards
Information system availability: POS, automation tools, PC, EDI
Human resources: managerial personnel technical personnel unskilled labors
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Design For Logistics
Design for Logistics uses product design to address logistics costs
Key Concepts of Design for Logistics Economic packaging and transportation Concurrent/Parallel Processing Postponement
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Economic Transportation, Storage, and Transportation
Design products so that they can be efficiently packed and stored
Packed more compactly Design products to efficiently utilize retail
space Design packaging so that products can be
consolidated at cross docking points
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Examples
Ikea World’s largest furniture retailer 131 stores in 21 countries Large stores, centralized manufacturing,
compactly and efficiently packed products Rubbermaid
Clear Classic food containers - designed to fit 14x14” Wal-Mart shelves
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Concurrent / Parallel Processing
Objective is to minimize manufacturing lead times
Achieved by redesigning products so that several manufacturing steps can take place in parallel
Modularity/Decoupling is key to implementation Enables different inventory levels for different
parts
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The Network Printer Example
Stage 1(Europe) Stage 2
Integration (Far East)
Customer(Europe)
Board Printer
Stage 1(Europe)
Integration (Europe)
Customer(Europe)
Board
Printer
Plastics, motors, etc.
Stage 2(Far East)
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Traditional Manufacturing
Set schedules as early as possible Use large lot sizes to make efficient use of
equipment and minimize costs Large centralized facilities take advantage of
economies of scale
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It is hard to be flexible when... Lead times are long Retailers are committed to purchasing early
orders Purchasing plans for raw materials are
based upon extrapolating from 10% of the orders
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Postponement
Manufacturing process starts by making a generic or family product which is later differentiated into a specific end product.
Concepts of implementing delayed differentiation: resequencing commonality modularity standardization
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Resequencing: BenettonOld Manufacturing Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
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Resequencing: BenettonNew Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment
Finish Garment
This step is postponed
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Benetton Postponement Why the change?
The change enables Benetton to start manufacturing before color choices are made
What does the change result in? Delayed forecasts of specific colors Still use aggregate forecasts to start manufacturing early React to customer demand and suggestions
Issues with postponement Costs are 10% higher for manufacturing New processes had to be developed New equipment had to be purchased
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Postponement: Key Concepts
Delay differentiation of products in the same family as late as possible
Enables the use of aggregate forecasts Enables the delay of detailed forecasts Reduces scrapped or obsolete inventory,
increases customer service May require new processes or product design
with associated costs
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Information Technology
Competitive advantage through advanced IT Banking Retail (Wal-Mart - satellite connected IT) Airlines (American Airlines Reservation System,
Sabre) Trucking and Shipping (FedEx - tracking)
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Goals of IT in SCM (1/3)
Collect and store information on each product from production to delivery/purchase point Provide complete visibility Tracking Alerting
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Goals of IT in SCM (2/3)
Access any data in the system from a single point of contact. This is complicated by the fact that one may need information which resides in various locations within one company in different companies
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Goals of IT in SCM (3/3)
Analyze and plan activities based on total supply chain information.
Decision Support Systems Advanced Planning Systems
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How are these Goals Achieved?
1. Standardization
2. Infrastructure
3. Electronic Commerce
4. Supply Chain System Components
5. Integration-related issues
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1. Standardization various forces are making this happen
market forces interconnectivity reduced costs in software Internet-based standards economies of scale
Examples: email, EDI
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ERP System Providers
SAP Oracle J.D. Edwards PeopleSoft Baan
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2. Infrastructure
The software and hardware around which the IT system is built
Components include hardware interface/presentation devices: PC, voice
mail, terminals, Internet devices, PDAsanywhere, anytimegraphical displayWintel standards vs. Java standards
communicatons: email, EDI, groupware, location tracking
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3. Electronic Commerce
The replacement of physical processes with electronic ones
The creation of new models for collaboration between customers and suppliers
Examples include:
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Taxonomy: level 1: one-way communication: email, FTP,
browser level 2: database access: inquireies, forms,
purchasing, tracking level 3: data exchange: EDI, clearinghouse level 4: sharing processes: CRPT, business
communities, VCI
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4. Supply Chain Component
DSS for Supply Chain Processes: Demand planning tools Supply Chain Design Production planning Distribution planning Transportation planning
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5. Integrating Supply Chain IT
Manugistics’s Supply Chain Compass Model: Stage I: Fundamentals - focus on quality Stage II: Cross-functional teams - serve customers Stage III: Integrated Enterprise - drive business
efficiency Stage IV: Extended supply chain - create market
value Stage V: Supply chain communities: be a market
leader
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ISSUES: What’s New in Logistics?
Global competition
Shorter product life cycle
Increasing product variety
New, low-cost distribution channels
More powerful well-informed customers
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ISSUES: What’s New in Logistics?
New communications and information technologies POS and EDI technology Wireless technology
Decision Support Systems Integrated systems Multi-modal transportation
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ISSUES: What’s New in Logistics?
New concepts in logistics
Push Vs Pull strategies
Cross docking
Strategic alliances
Manufacturing postponement
Design for Logistics