Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Supply Chain Management - What it is and How it works

Its not what you know, but what you can remember when you need it

SCM is a way of delivering products to customers across one or different markets through one or many routes in a way that reduces costs while not compromising quality. SCM, theoretically speaking, comes under the heading of Operations Research. So most of the people involved in this trade basically find ways to make operational processes efficient and effective. SCM starts from the moment a new idea is conceived. Why? Because now you have to plan everything from raw material extraction, inbound logistics, manufacturing, fabricating, distributing, selling and finally providing additional services-(that may or may not generate profit for the company). Also traditional logistics focuses its attention on activities such as procurement, distribution, maintenance, and inventory management. Supply chain management, on the other hand, acknowledges all of traditional logistics and also includes activities such as marketing, new product development, finance, and customer service. So the SC manager is like the conductor of an orchestra who perhaps should have as many skills as the arms of an octopus to meet or exceed expectations. This is an important exercise in creating balance between different, often competing, activities. So what should he do? He should find ways to make his life easier! So we have discussed how it all starts at the design stage. That means it is perhaps one of the most important stages in the whole supply chain. Here you are planting a small tree or taking that small step that will lead you towards bigger outcomes. So you can think how you can design a product Whose raw materials can be easily procured That is easy to manufacture That is easy to assemble Which has low inventory lead time That is easy to deliver And finally convenient from the point of view of providing after-sales services

(Tough task, eh?)

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Anyway thats more of a science than an art and often it involves a lot of mathematics. In reality most of the process is reactionary i.e. first a product is modeled and tested by the marketing department and then the OR people are told to take care of the dirty work. How do they respond? Well their life is miserable and they use lots and lots of statistical data to conceive the ideal supply chain. There is also some trial and error. Finally with the aid of software and experience a way is sought whereby you deliver the product to the customer through different processes along many alternative routes (online, brick and mortar shop, etc) while trying to minimize cost and maintaining quality (read standards). And this is exactly where we started from. Now lets do some boring stuff and try to discover SCM as it is explained across different contemporary texts.

1. The Definition
The management of upstream and downstream relationships with suppliers and customers in order to deliver superior customer value at less cost to the supply chain as a whole.

Wellthere are many definitions available and the above quoted example is just one of many. So one can easily find different examples across different textbooks and try to compare them and blah, blah, blah, yak, yak, yak. Whats important here is to understand the concept of SCM as a whole. To specialize in of the domains of SCM is the province of nerdy PhD scholars or researchers. In simple words the goal or mission of supply chain management can be defined as to Increase throughput while simultaneously reducing both inventory and operating expense.

2. A Little History
The concept of SCM is very old; perhaps as old as life itself. It goes back to the great wars of ages gone by, the building of great cities, even earlier when man started hunting and make fire, or even earlier when different species were evolving. I know, I know, too abstruse! Ok, so the term was coined in a paper published in 1975. Banbury (1975) used supply chain as a term of passing on electricity towards the ultimate consumer. It was not until the 1980s, however, that the term supply chain management came into context. Oliver and Webber (1982) discussed the potential benefits of integrating internal business functions of purchasing, manufacturing, sales and distribution into one cohesive framework. In the early 1990s, supply chain management evolved dramatically with the increasing importance of the relationship with other suppliers (Harland, 1996). Then came TQM, lean and JIT. Nowadays there is a strong emphasis on Green Supply Chain Management and more specifically on Reverse Logistics and Waste Management.

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

3. How It Works
Over the years researchers (yes those nerdy rascals!) have found that the whole can be greater than the sum of its parts. The concept is similar to the one used in Atomic Physics (:p) Anyway, they like to believe (and they would very much like us to believe) that its true. In simple words it means that if we integrate all the functions of SCM effectively, we can achieve greater productivity than it would have been possible otherwise. Its like cooking a good meal. If we adjust everything according to the right proportion, the final dish might taste great! So its like a puzzle where we find the best fit that helps us achieve success (reap profit i.e.). In a way we are differentiating /positioning ourselves on the basis of service. We are different because our SC is efficient and effective. That means we can deliver a product to our customer quickly and according to specifications. Here we are striving to reduce cost and increase value. How do we do that? Well we should first realize that, the chain in SCM can act as a network. Its something like the diagram given below

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

As can be seen, there are multiple players involved across different ladders. So the first step would be to identify all the processes in the SC. The next step is to realize the functions/ BUs in which we have core competencies. Logically the next step is to outsource the non core functions (e.g. Transportation, Warehousing, Finance, Market research, New product design, Information, Communication and Technology) and concentrate our attention and energy on the ones left. So instead of focusing on vertical integration, we are focusing on virtual integration. Phew! That makes life much easier. The next step is to find a way to improve the core systems. Usually there are different management systems that can be used for that e.g. TQM, JIT, ISO, etc, etcBut these are only general guidelines. Every solution needs to be customized. For example a company might be selling different products across different markets to different customers. Then there is globalization, downwards pressures on price, customer choices, legislation, CSR, etc, etc. So the order of the day is to customize, customize and (you guessed it right!) customize. In the end there should be a strategic fit between the companys supply chain and its business strategy For example, lets consider two companies and the needs that their supply chains must respond to. The two companies are 7-Eleven and Sams Club, which is a part of Wal-Mart. The customers who shop at convenience stores like 7-Eleven have a different set of needs and preferences from those who shop at a discount warehouse like Sams Club. The 7-Eleven customer is looking for convenience and not the lowest price. That customer is often in a hurry and prefers that the store be close by and have enough variety of products so that they can pick up small amounts of common household or food items that they need immediately. Sams Club customers are looking for the lowest price. They are not in a hurry and are willing to drive some distance and buy large quantities of limited numbers of items in order to get the lowest price possible. Clearly the supply chain for 7-Eleven needs to emphasize responsiveness. That group of customers expects convenience and will pay for it. On the other hand, the Sams Club supply chain needs to focus tightly on efficiency. The Sams Club customer is very price conscious and the supply chain needs to find every opportunity to reduce costs so that these savings can be passed on to the customers. Both of these companies supply chains are well aligned with their business strategies and because of this they are each successful in their markets.

4. SCOR Model-General
There used to be (and still are) many different ways of describing SCM. So the Supply Chain Council (yepthis is an organization for the Knights of OR) came up with an easy way of describing the whole process. Its called SCOR-Supply Chain Operations Reference Model (yawn.!). The model was actually developed by PWC but it has been endorsed by the council. It is a complex model with many subdivisions across a hierarchical platform. Suffice to say businesses can change the way of managing OR using this model. Again, its just a friggin tool.!

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Different Stages of SCM in SCOR Model

Following are the drivers of SCM ProductionWhat products does the market want? How much of which products should be produced and by when? InventoryWhat inventory should be stocked at each stage in a supply chain? How much inventory should be held as raw materials, semifinished, or finished goods? LocationWhere should facilities for production and inventory storage be located? Where are the most cost efficient locations for production and for storage of inventory? TransportationHow should inventory be moved from one supply chain location to another? InformationHow much data should be collected and how much information should be shared?

An optimum supply chain is usually the sum of these decisions. 4.1 PLAN A company can either take a product focus (a particular kind of product) or a functional focus (core competency).

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

The inventory of the company is said to be composed of raw materials or WIP or finished goods. It is held for a variety of reasons the main of which is to pre-empt uncertainty. The finished goods inventory then consists of many further sub-classifications. These are used to describe different mathematical models used under different situations. All of them have specific assumptions. Cycle or replenishment stock: This stock keeps the supply chain moving; to meet normal demand. Safety stock: This stock buffers against forecast error and the suppliers unreliability. In-transit stock: This stock is in the process of being transported to a stocking or delivery point. Seasonal stock: This stock is built up in advance to meet increased sales volumes during a particular time of the year. Promotional stock: This stock feeds into marketing campaigns and advertising. Speculative stock: This stock is held to protect against price increases or periods of limited availability. Dead or obsolete stock: This stock is no longer usable or saleable in the market.

Also the items can be classified as SKU (all of a given type of product is stored together) Job Lot (all the different products related to the needs of a certain type of customer or related to the needs of a particular job are stored together) Cross Docked (Smaller lots of different products are recombined according to the needs of the day and quickly loaded onto outbound trucks) 4.1.1 Supply & Demand Planning Some markets are supply driven e.g. those for commodities. However many markets are also demand driven. So supply driven markets are examples of monopolistic or perfect competition markets. On the other hand demand driven markets are the ones where SCM matters as a strategy and/or a competency. Its here that we can customize a product (services/ goods). It is like controlling the gates of a dam where you manage water flow and depth levels in accordance with the demand downstream. The demand might show upward, downward, seasonal or stable trends. Again different models are used to describe demand e.g. Product Life Cycle (Launch, Maturity, Decline, and Withdrawal) or the 80-20/ Paretos rule But these are very simple models. So its useful to remember that Supply chain forecasts must cover a time period that encompasses the combined lead times of all the components that go into the creation of a final product.

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Demand is usually estimated by experts (for which they get paid handsomely!). They might use quantitative techniques (e.g. some rule of thumb or their gut feeling or whatever) or quantitative techniques (LP, game theory, heuristics, fuzzy logic, time series analysis, etc, etc). Then there is Supply Forecasting. There might be continuous reviews for fast moving products and periodic reviews for slow moving items. Then there is an important model called economic order quantity (EOQ). It is illustrated below

It is important to note that EOQ for different products changes over time. Few companies use only one of these methods to do forecasts. Most companies do several forecasts using several methods and then combine the results of these different forecasts into the actual forecast that they use to plan their business.

4.1.2 Sales and Operations Planning aka Aggregate Planning

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

One of the most important parts, here, is pricing and it is also a hot subject as far as research is concerned.

4.2SOURCE
Sourcing is concerned with two issues namely, finding the best supplier(s) available and managing them. The first part (up till the signing of a contract between the buyer and the supplier) is called pre-order sourcing while the later is known as post order sourcing. The sourcing items are divided between direct and indirect items. Indirect items are those that do not go directly into the manufacturing process (e.g. Maintenance, Repair and Operating costs) and vice versa. Managers also use the concept of tactical sourcing. Here they use tools such as market research, forecasting, benchmarking, cost analysis, etc, etc to have some background information in hand before they go into the buying process. This information helps them to find the best solution/ fit to their sourcing needs. Since most of the things in management sciences and humanities are relatively in-concrete researchers love to build models and come up with different jargons. They try to repeat the same thing using different nomenclature. I think its mainly because every situation is different from the other and they want to suggest a solution for almost every contingency. Anyway there is another fancy name/ concept called strategic sourcing. It consists of category sourcing (finding ways to minimize misc items). It also consists of supplier relationship management (SRM)-where different departments from both (buyer and supplier) interact with each other. This way they can minimize confusion and streamline things. The tools used for sourcing are negotiation (duh!) and cost management. Cost management classifies the buying cost into three elements i.e. fixed, variable and semi-variable costs. Here the independent variable is volume. Again there is some sub-classification of tools within cost management. It goes like Commodity purchasing-involves negotiation, global sourcing, volume leveraging. Value engineering and analysis-working in tandem with suppliers for improvement or new product development. Non-value added improvement-work with supplier to reduce waste, remove excess inventory, production down time, long order cycle time. Total cost of ownership-finds all costs (hidden or otherwise, long or short term, tc, etc) associated with buying and then compare the proposals. Price analysis-try to reduce the profit of the buyer and save money by estimating different price components.

Sourcing can also be said to include credit and collections!

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

4.3MAKE
The production costs can become 50 percent or more of the end products cost. So the goal should be to design products with fewer parts, simple designs, and modular construction from generic sub-assemblies. There are different ways anything can be made. These can be classified as project (dam, stadium), job shop (plant, yacht), batch/ flow (dyeing then printing then packaging), line (conveyors e.g. U line or Rabbit chase), continuous flow (refinery, chemicals). The variables in all the situations consist of man, machine, method and material. The manufacturing planning process is illustrated below

The production schedule can be driven by either demand forecast or customer orders. Once an estimate is in hand the materials required are matched against the inventory in hand. Finally the capacity and distribution required are planned. The plans are always flexible and can be modified as new information emerges. Cross functional teams can also be used to have inputs from procurement, design and manufacturing people and come up with the best plan. A common technique is to schedule production runs based on the concept of a products run out time. The run out time is the number of days or weeks it would take to deplete the product inventory on hand given its expected demand. The run out time calculation for a product is expressed as R=P/D where R = run out time P = number of units of product on hand D = product demand in units for a day or week

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

4.3.1 Just in Time JIT Its a very famous concept. It was devised by the people at M/s Toyota, Japan. Instead of having a safety stock the materials are requisitioned right at the moment they are needed. Issues such as supplier delays, poor forecasts or quality issues are faced head on. Moreover instead of pushing everything through the chain, a pull is followed across the workstations towards the completion of the job. Eventually, this reduces the inventory carrying cost but it also increases potential risk. This is because everything and everyone has to act like a robot! Usually it is achieved by VMI (vendor managed inventory). There is another related buzz word called lean manufacturing. Its aim is to reduce wastes wherever they occur across the system. Thus it estimates just the right mix of man, machine and material required. Some of the tools to achieve this are described below

4.3.2 TQM and continuous improvement TQM involves being proactive in performing the right activity, the right way, the first time and continuing to perform it to the required level. The focus is towards moving from q (quality assurance) to Q (total quality).

4.3.3 Waste management There is hardly any production process that doesnt produce waste. Well that might be because the thing we call waste might be useful. Its just that we dont know how to use it. But thats just a thought. Again, the Toyota people tried to classify the waste occurring across the chain. Heres what they came up with

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

1. Over manufacturing: production ahead of demand 2. Waiting: waiting for the next manufacturing step 3. Defects: The effort involved in inspecting for and fixing defects 4. Inventory: all components, work-in-progress and finished products not being processed 5. Motion: people or equipment moving or walking more than is required to perform the processing 6. Transport: moving products that is not actually required to perform the processing 7. Inappropriate processing: due to poor tool or product design creating activity It should be remembered that all of this stuff is only indicative. There might be many other kinds of waste. Each case is peculiar. 4.3.4 Tools for Improvement There can be many tools for improvement. Some of these include the 5 Whys-asking why 5 times till you reach the core of a problem; the loss tree analysis-you make a tree of all the issues occurring and then prioritize accordingly; fish-bone diagram-takes a problem and divides it on the dimensions of man, machine, method and material.

4.4 DELIVER Delivery is sort of glue that holds the operations intact. It is influenced by factors such as globalization, political conditions, environmental regulation, technological advancement, etc, etc. The delivery can be direct or in the form of milk run if the order is LTL (less than truck load). The main costs involved include facility cost, transportation cost and inventory cost. All of them increase in the long run. Although transportation cost decreases initially but increases as facilities/ warehouses increase in number. The location of the facilities is incumbent upon the center of gravity (COG) i.e. the area with the largest number of customers. However many other factors such as cost, availability of skilled labor, etc are considered before a facility is selected. The transportation takes place through air (cargo, courier, niche-military, etc), water (tanker, container, inland waterways), road (FTL, LTL, primary-large, usually upstream i.e. from sea to warehouse, secondary-warehouse to customer), rail (Trailer on Flat Car-TOFC, Container on Flat Car- COFC, Rolling Road Train-RRT) and pipeline (for liquid, powder and gas) depending upon requirements such as speed, cost, reliability, security, environment, quality, etc.

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Many times intermodal logistics are required such as in international trade. It has its own criteria such as concerns for liability, information, etc. Apart from types of transportation, there also exists a classification of warehouses. Thus warehouses can be bonded (govt.), contracted, refrigerated, cross docked (stuff enters and leaves within a short time frame), etc. When planning warehouse operations, it is important to be aware of the expected development of products, volumes, suppliers and customers. Warehousing normally represents about one-third of the total distribution cost of a business with labor and space. It is always ideal to maximize the store space and minimize the handling operation. The layout of the facility/ warehouse can be in U form or through form. Again it depends upon the situation. The planning process in constructing a warehouse is illustrated below

The strategic fit thing shown above is the alignment between the business plan and the warehouse layout.

4.5 RETURN Returns follow the reverse supply chain. They take place for many reasons such as: customer is not satisfied, installation or usage problem, warranty claim, faulty order processing, retail overstock, manufacture recall program, etc.

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

There are some trends that serve to promote returns. Today the concern for environment has taken a steeper trajectory. This is because the consumers have become more environmentally conscious, there has been a lot of legislation/ regulation to protect the environment e.g. the Kyoto Protocol. Then there is the case of diminishing natural resources. Therefore companies are trying to find new ways to minimize waste at the design stage. They are also trying to brand themselves as responsible organizations. Often such CSR activities are mentioned in the Annual reports of many companies. Most importantly it makes good economic sense to use returns in assembly or sub-assembly and sell them through primary/ secondary markets. The main players in the returns process include companies that take on producers responsibility towards the disposal of the product after obsolescence, specialized 3PL companies and government bodies. Vendors, developers and consultants of technology, infrastructure and software for managing reverse flows are also interested in the growing area of RL practices. This part of the industry is growing and there is a need for specialized services and technology. The product recovery process takes place in the shape of resale, repair, reuse, remanufacture/refurbish, recycle and/ or scrap. Following are the stages in the recovery process

Receive Sort and stage- according to the format of return, the type of return or size of item being returned. Process-paper work and customer credits Analyze- individuals working here must be aware of the financial impact and benefits associated with each option Support-distribution for refurbishment, sale, etc

There are three ways/ models of returns as shown below

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

The advantage of keeping RL in-house is to protect IP rights. On the other hand, 3PL acts as a specialized option which is used by a company to concentrate on its core competencies. Independent operators are usually junk dealers. The main issues in the returns process include uncertainty and low margins. However such problems can be mitigated by improving product life cycle, designing a product for re-assembly (e.g. automotive industry) and recycling. Again, it is still a growing field and a subject of ongoing research. Some important rulesFirst, returns must be treated as perishables: Every delay in transporting, sorting, processing and repacking of returned printers, for example, reduces the value remaining in the product. Second, value chain partnerships in reverse logistics are crucial. Specialized 3PL providers can often handle tasks such as credit issuance and product disposition much more efficiently than manufacturers. Thirdly, returns can provide valuable customer feedback. A well-managed reverse supply chain allows the manufacturer to retain contact with the customer and gather valuable feedback from them. This customer feedback can be used to adapt the product mix and to correct any failings in product design and distribution infrastructure.

5. Collaboration in Supply Chain

Since any and all production systems have constraints, it is better to choose some of them and work with them rather than trying (vain fully) to eliminate them. Researchers have come up with a theory of constraint to manage the constraints. It says that the throughput of the whole system is set by the capacity of the bottlenecks. A 5 step model has been described Identify the systems bottlenecks or constraints Decide how to exploit these bottlenecks-maximize them Subordinate everything else to the above decisionDo not try to maximize the operation of a non-bottleneck operation. Additional productivity achieved by non-bottleneck operations that exceeds the capacity of the bottlenecks to process will be neutralized anyway by the slowdowns and backups caused at the bottlenecks. Elevate the systems bottlenecksAdd additional processing capacity to the bottleneck activities If, in a previous step, a bottleneck has been broken, go backto step 1As the capacity of one system bottleneck is elevated, it may cease to be a bottleneck. So the whole system needs to be re-evaluated now

The above described process is for internal improvement. However many times there are problems resulting from external factors. An example of such factors is the bullwhip effect. As a

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

result the SC partners collaborate to minimize bullwhip effect. The process of the effect is illustrated in the figure given below.

The solution of the problem is collaboration in planning, forecasting and replenishment of the product.

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

6. Technology
All information systems are composed of technology that performs three main functions: data capture and communication; data storage and retrieval; and data manipulation and reporting. Different supply chain information systems have different combinations of capabilities in these functional areas. ERP systems like SAP and Oracle have simplified many of the SC processes. They have many modules to cover different aspects of the whole chain e.g. MM, Accounting, Sales, etc. For SCM the use of data bases is very important. Hence most of the people in this industry (having good jobs) are well acquainted with SQL. The use of technology also involves e-commerce.

7. Measures of Performance
Some of the tools used to measure the internal efficiency of the SC are as follows

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Here Inventory Value-Its very important (as measured in the oil sector). Inventory Turnover= Annual COGS/Avg Annual Inventory value Return on Sales=E before T&I/Sales Cash-to-Cash Cycle Time=Inventory Days of Supply + Days Sales Outstanding Average Payment Period on purchases and Activity Cycle Time= the amount of time it takes to perform a supply chain activity such as order fulfillment, product design, product assembly, or any other activity that supports the supply chain Upside Flexibility= ability of a company or supply chain to respond quickly to additional order volume for the products they carry Outside Flexibility=ability to quickly provide the customer with additional products outside the bundle of products normally provided The SCOR Model can also assist in measuring performance at the strategic (level 1), tactical (level 2) and operational (level 3) levels.

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Mustafa Ali

[SUPPLY CHAIN MANAGEMENT-WHAT IT IS & HOW IT WORKS]

Bibliography
Guide to Supply Chain Management by Colin Scott, Henriette Lundgren and Paul Thompson Essentials of Supply Chain Management by Michael Hugos