End-to-End Supply Chain

Transformation through Digitization

David Simchi-Levi

Professor of Engineering Systems

Massachusetts Institute of Technology
Tel: 617-253-6160
E-mail: [email protected]
 Lecture 1
• Context Setting

• Today’s Supply Chain Challenges

• Key Supply Chain Concepts

©Copyright 2021 D. Simchi-Levi

 Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points

Supply

Inventory &
warehousing
costs
Production/
purchase Transportation Transportation
costs costs costs
Inventory &
warehousing
costs
 The Enterprise
Fulfillment and Development Supply Chains
Development Supply Chain

•Product Architecture
Plan/Design •Make/Buy
•Early Supplier Involvement

•Strategic Partnerships
Source •Suppliers Selection
•Supply Contracts

Supply Produce Distribute Sell

Fulfillment Supply Chain

 Our Focus
• Laws of Physics
– Relationships between variability, inventory, capacity, service levels,
information…
• Recent Business Trends
– Market Volatility: Increase in demand and supply uncertainty
– Role of Emerging Markets: In many industries, growth is coming
from emerging markets not developed countries
– Product Localization: Pressure to localize product design and delivery
strategies
– Product lifecycles: Shortened product lifecycle and fast
commoditization of innovation
– Supply Chain Risks: Increase in the level of risk
– Rising Costs: Increase in commodity costs, logistics costs and labor
costs in developing countries
– …..
Three Recent Technology Trends

Prescriptive
How to make it happen?
Optimization

Predictive What will happen?

Forecasts, Machine Learning

Value
Why did it happen?
Diagnostic
Queries, Data mining, Statistical Analysis

Descriptive What happened?

Reports, Alerts, Mapping

Difficulty

6
Course Agenda

• Week 1: Supply Chain Fundamentals

• Week 2: Supply Chain Digitization

• Week 3: Supply Chain Resiliency

• Week 4: Supply Chain Sustainability

• Foundations, Integration, Strategy, Technology

7
 Optional Text Books
 Designing and Managing the Supply Chain: Concepts,
Strategies and Case Studies by D. Simchi-Levi, P.
Kaminsky and E. Simchi-Levi, 4th Edition, 2021, McGraw-Hill.
 Operations Rules: Delivering Customer Value
Through Flexible Operations, by D. Simchi-Levi,
published in October 2010 by MIT Press.

©Copyright 2021 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 countries

The Average Annual Wage Increase between 2003 and 2008

Country Brazil China Malaysia Mexico US
Average Annual Wage Increase 21% 19% 8% 5% 3%

Between 2011 and 2012, labor cost in China increase 13-21% nationwide
…and, at the same time the Yuan is appreciating against the Dollar

The Average Annual Wage Increase between 2012 and 2020

Country China Mexico US India

Average Annual Wage Increase 9.4% 6.60% 2.50% 9.60%
9
Today’s Supply Chain Challenges

• Global supply chain with long lead times

• Rising and shifting customer expectations
• Increase in labor costs in developing countries
• Increase in logistics costs

10
 Changes in Logistics Costs between 1984 and 2018

US Logistics Costs as Percent of GDP

15% increase

India=14%

• Rising energy prices • Truck driver shortage

• Rail capacity pressure • Security requirements
©Copyright 2021 D. Simchi-Levi
11
Total US Logistics Costs 1984 to 2018 ($ Billions)

Total US Logistics Costs in $MMs

Total Cost
52%

Transportation
47%

62%
Inventory

Admin

©Copyright 2021 D. Simchi-Levi

Source: 2018 Annual Logistics Report
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Today’s Supply Chain Challenges

• Global supply chain with long lead times

• Rising and shifting customer expectations
• Increase in labor costs in developing countries
• Increase in logistics costs
• Increase in risks

©Copyright 2021 D. Simchi-Levi

 Pre-Pandemic: Increase in Supply Chain Risk

• Consolidation, Outsourcing and Offshoring

 Supply chain is geographically more concentrated
• Lean Manufacturing
 Just-in-time (JIT) manufacturing and low inventory levels

Ash in the Supply Chain

Intel Sales are down
General Motors truck
The tentacles of the crisis plant was shutting down
have already stretched into Giant blames Thai flood
the global supply chain. for $1B drop in sales
goals. Toyota, Honda, General Motors truck plant
Auto factories in China in Louisiana announced
that use electronic parts Goodyear, Canon, Nikon,
Sony… have cut that it was shutting down
flown in from Germany temporarily for lack of
faced a sudden halt in production and lowered
financial forecasts Japanese-made parts
shipments. because of the earthquake
because of the flooding
in Thailand. and tsunami had struck
The Washington Post, 2010 Japan.
The Wall Street Journal,
2011 New York Times, 2011
 Last Year: Supply Disruption

• HBR on February 28, 2020:

 “…the peak of the impact of Covid-19 on global supply
chains will occur in mid-March, forcing thousands of
companies to throttle down or temporarily shut
assembly and manufacturing plants in the U.S. and
Europe.” by Pierre Haren and David Simchi-Levi
• FORTUNE on March 17, 2020: Between 2/28 and 3/4 the article
was viewed 170,786 by
 “The European automotive industry is shutting down…” 146,426 unique visitors
 This includes Volkswagen, Renault, PGA Group, Fiat, etc
• MIT News on March 25, 2020:
 “In the U.S., most major automakers announced last week
(week of March 17) they were temporarily closing
plants”
 This Year: Global Supply Chain Problems Escalate

A few companies have been more effective

in managing their supply chain during the pandemic
• Dramatic increase in demand;
• Many countries are still under lockdown
 Creating significant supply problems;
• Global labor shortages
 New outbreaks are putting workers off the job
 People departing the workforce; North America Supply Chain Executive Summit
September 2021
• Limited transportation capacity
 Clogged ports from Asia to Europe and NA
 Shipping cost from China to Europe increased by a factor > 5 relative to last year
• The Impact: price increase, low product availability, long lead times…
• It is projected that the problems will extend well into next year
Worldwide Natural Disasters 1980-2019 Source: Munich Re

Number of Events by Year

Insurance Level

17
Supply Chain Disruption and Stock Performance

• Mattel, the world’s largest toy maker;

• Recalled 18 million toys made in China on August 2007;
• The reason: hazards such as lead paint
$2.50
Stock Performance
($1 invested in 2003)
$2.00

$1.50

Hasbro

$1.00 Mattel

$0.50
Product Recall

$-
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
Today’s Supply Chain Challenges

• Global supply chain with long lead times

• Rising and shifting customer expectations
• Increase in labor costs in developing countries
• Increase in logistics costs
• Increase in risks
• Importance of sustainability
• Unprecedented Volatility

©Copyright 2021 D. Simchi-Levi

 Unprecedented Volatility --- Oil Price

Oil Price In the Last 24 Months

+ 125%

Jan 09 Jan 11

In 2008 the price of oil changed 5% or more from its previous close
on 39 days making it the most volatile year since 1990.
20
 Today’s Supply Chain Challenges

• Global supply chain with long lead times

• Rising and shifting customer expectations

• Increase in labor costs in developing countries

• Increase in logistics costs

• Increase in risks

• Importance of sustainability

• Unprecedented
Rule: Volatility
The New Normal--Executives face
competition in an environment that is complex,
uncertain, dynamic and chaotic.

©Copyright 2021 D. Simchi-Levi

21
The Need to Focus
Customer Value
Example Operations Strategy
Proposition

Walmart

Zara

Dell Direct

Amazon

Apple

©Copyright 2021 D. Simchi-Levi

The Need to Focus
Customer Value
Example Operations Strategy
Proposition

Everyday Low
Walmart Cost Efficiency
Pricing

Zara

Dell Direct

Amazon

Apple

©Copyright 2021 D. Simchi-Levi

The Need to Focus
Customer Value
Example Operations Strategy
Proposition

Everyday Low
Walmart Cost Efficiency
Pricing

High Fashion
content at a Zara Speed to Market
reasonable Price

Dell Direct

Amazon

Apple

©Copyright 2021 D. Simchi-Levi

The Need to Focus
Customer Value
Example Operations Strategy
Proposition

Everyday Low
Walmart Cost Efficiency
Pricing

High Fashion
content at a Zara Speed to Market
reasonable Price

Customer Responsiveness through

Dell Direct
Experience Configure-to-Order

Amazon

Apple

©Copyright 2021 D. Simchi-Levi

The Need to Focus
Customer Value
Example Operations Strategy
Proposition

Everyday Low
Walmart Cost Efficiency
Pricing

High Fashion
content at a Zara Speed to Market
reasonable Price

Customer Responsiveness through

Dell Direct
Experience Configure-to-Order

Product Selection Efficient and reliable Order

Amazon
and Availability Fulfillment

Apple

©Copyright 2021 D. Simchi-Levi

The Need to Focus
Customer Value
Example Operations Strategy
Proposition

Everyday Low
Walmart Cost Efficiency
Pricing

High Fashion
content at a Zara Speed to Market
reasonable Price

Customer Responsiveness through

Dell Direct
Experience Configure-to-Order

Product Selection Efficient and reliable Order

Amazon
and Availability Fulfillment

Product Efficiency through outsourced

Apple
Innovation manufacturing and logistics

©Copyright 2021 D. Simchi-Levi

The Challenges

• Mismatch between the strategies suggested by different

customer value proposition & product characteristics
 Push vs Pull
• Different products, channels and customer types require
different supply chain strategies
 Innovative vs. Functional Products; Stores vs. Online
• Different conflicting objectives
 Cost, time and service

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Trade-Offs between Responsiveness vs. Efficiency

Efficiency
High
Cost Current
Strategy
A
B

Low
Cost
Responsiveness
Short Long
Response Response

©Copyright 2021 D. Simchi-Levi

 Two Important Objectives
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time

©Copyright 2021 D. Simchi-Levi

 Sequential Optimization vs.
Global Optimization
Sequential Optimization

Procurement Manufacturing Distribution Demand

Planning Planning Planning Planning
Global Optimization

Supply Contracts/Collaboration/Digitization & Information Technologies

Procurement Manufacturing Distribution

Demand
Planning Planning Planning
Planning

©Copyright 2021 D. Simchi-Levi

 Two Important Objectives
• Achieving Global Optimization
– Conflicting Objectives
– Complex network of facilities
– System Variations over time
• Managing Uncertainty
– Matching Supply and Demand
– Demand is not the only source of
uncertainty

©Copyright 2021 D. Simchi-Levi

 New Concepts
• Push-Pull strategies
• Customer value proposition and Op strategy
• Supply Chain Digitization
• Supply Chain Visibility
• Manufacturing postponement
• Flexibility
• Lean Supply Chain
• Risk Management/ Robust Supply Chain/Resilient SC

©Copyright 2021 D. Simchi-Levi

©Copyright 2021 D. Simchi-Levi