Supply Chain Management

The way materials flow through different

organizations from the raw material supplier to
the finished goods consumer.

Flow of products and services from:

Raw materials manufacturers
Intermediate products manufacturers
End product manufacturers
Wholesalers and distributors and
Retailers
Connected by transportation and storage
activities
Integrated through information, planning, and
integration activities

Supply
Chain for
Milk
Products

Supply Chain
A Supply Chain consists of all the parties
involved, directly or indirectly in fulfilling a
customer request for goods or services.
Each party is involved in various functions
involved in receiving and fulfilling a
customers request

The Value Chain: Linkage

between Supply Chain and
Other Functions
Finance, Accounting, Information Technology, Human Resources
New
Product
Development

2-8

Marketing
and
Operations
Sales

Distribution

Service

Production: refers to the capacity of a supply chain

to make and store products.
Key Production Decision Responsiveness VS
Efficiency
Factories and Facilities with Excess Or Limited
capacities?
Focuses on:
Customer & market demand
Resource Management
Internal sourcing (what and which plants)
Outsourcing to capable suppliers
Capacity Management

Inventory is spread throughout the supply chain and

includes everything from raw material to work in process to
finished goods that are held by the manufacturers,
distributors, and retailers in a supply chain.
How Much Inventory and Where to Store It?
Reasons for holding inventory:
Cycle InventoryThis is the amount of inventory needed to
satisfy demand for the product in the period between
purchases of the product.

Safety Inventorythat is held as a buffer

against uncertainty.
Seasonal InventoryThis is inventory that is
built up in anticipation of predictable increases
in demand that occur at certain times of the
year
Analysis of fluctuations in demand
Identification of optimal storage locations in
support of customer demand
Identification of optimal storage locations in
support of customer demand

Location: refers to Strategic placement of

production plants, distribution and stocking
facilities
It is the geographical positioning /siting of
supply chain facilities
Factors that relate to a given location including
the cost of facilities, the cost of labor, skills
available in the workforce, infrastructure
conditions, taxes and tariffs, and proximity to
suppliers and customers.

Transportation: refers to movement of everything from

raw material to finished goods between different
facilities in a supply chain
In transportation the trade-off between responsiveness
and efficiency is manifested in the choice of transport
mode.
Ship which is very cost efficient but also the slowest
mode of transport
Rail which is also very cost efficient but can be slow.
This mode is also restricted to use between locations
that are served by rail lines
Airplanes are a very fast mode of transport and are
very responsive.

Pipelines can be very efficient but are restricted to

commodities that are liquids or gases such as
water, oil, and natural gas
Trucks/Road are a relatively quick and very flexible
mode of transport. Trucks can go almost anywhere.
Electronic Transport is the fastest mode of
transport and it is very flexible and cost efficient.
However, it can only be used for movement of
certain types of products such as data, and
products composed of data such as music,
pictures, and text.

Timely and accurate information holds the promise

of better coordination and better decision making.
Information is used for two purposes in any supply
chain:
1. Coordinating daily activities related to the
functioning of the other four supply chain drivers:
production; inventory; location; and transportation.
2. Forecasting and planning/Decision Making to
anticipate and meet future demands.
Obtaining, linking and leveraging information
across the Supply Chain

1. Producers
Raw materials, Intermediary Products, Finished
goods
2. Distributors: are companies that take
inventory in bulk from producers and deliver a
bundle of related product lines to customers
A distributor is typically an organization that
takes ownership of significant inventories of
products that they buy from producers and
sell to consumers

A distributor can also be an organization that only

brokers a product between the producer and the
customer and never takes ownership of that
product
Distributors buffer the producers from fluctuations
in product demand by stocking inventory.
Perform Sales work and at times
Marketing/promotion / After Sales Services

3. Wholesalers: stock a range of products from

several producers. The role of the wholesaler is
to sell onto retailers. Wholesalers usually
specialize in particular products.
4.Franchises: are independent businesses that
operate a branded product (usually a service) in
exchange for a license fee and a share of sales.
5. Agents: sell the products and services of
producers in return for a commission (a
percentage of the sales revenues)

6. Retailers operate outlets that trade directly

with household customers. Retailers can be
classified in several ways:
Type of goods being sold( e.g. clothes, grocery,
furniture)
Type of service (e.g. self-service, counter-service)
Size (e.g. corner shop; superstore)
Location (e.g. rural, city-centre, out-of-town)
Brand (e.g. nationwide retail brands; local oneshop name)

7. Customers or consumers are any organization

that purchases and uses a product
A customer organization may purchase a product
in order to incorporate it into another product
that they in turn sell to other customers
A customer may be the final end user of a
product who buys the product in order to
consume it.

8. Service Providers are the organizations that

provide services to other participants which may
include:
Logistic Providers which provide transportation
and warehousing services
Financial Service providers such as Banks,
collection agents, credit companies
Other service providers such as Marketing
Research companies, Advertising agencies,
engineers , legal consultants, HR consultants etc

The design and management of seamless,

value-added process across organizational
boundaries to in order to minimize total system
cost and satisfy end customers

Reliability
Responsiveness
Flexibility
Cost
Asset Management
Quality

Increased Sales:

Faster to Market
Improved Quality
Pricing Flexibility
Innovation

Lower Total Cost:

Acquisition Cost
Processing Cost
Quality Cost
Downtime Cost
Risk Cost
Cycle Time Cost
Conversion Cost
Non-value Added Cost
Supply Chain Cost
Post Ownership Cost

Operating cost elements

Labor
$700,000

Materials
$2,300,000
($2,185,000)
Overhead
$800,000

Sales
$5,000,000
Minus
Cost of
Goods Sold
$3,800,000
($3,685,000)
Plus

Net income
$400,000
($515,000)
Divided by

Profit
margin
8%

Sales
$5,000,000

(10.3%)

Other costs
$800,000
Multiply

Return on
Investments
10.0%
(13.0%)

Inventories
$500,000
Assets

What if we
decrease
materials cost
by 5%?
(or $115,000)

Sales
$5,000,000

($475,000)
Account
receivable
$300,000

Current assets
$1,100,000

Divided by

($1,075,000)
Plus

Total assets
$4,000,000

Cash
$300,000

Fixed assets
$2,900,000

($3,975,000)

Asset turnover
rate
1.25
(1.26)

If the same profit increase were to be generated

by increasing sales, what sales increase would
be required?
At the existing 8% profit margin, the following
calculation provides the answer
Profit increase = new sales X .08
$115,000 = new sales X .08
new sales = $1,437,500
therefore..
($1,437,500 / $5,000,000) X 100 = 28.8%
or a sales increase of 28.8% is required to
match the profit increase generated by a 5%
reduction in materials cost

Decision Phases of a Supply

Chain
Supply chain strategy or design
Supply chain planning
Supply chain operation

Push/Pull View of Supply

Chains

Processes are divided into two categories,

pull or push
Procurement,
Manufacturing and
Replenishment cycles

PUSH PROCESSES:
executed in anticipation
of a customer order

Customer Order
Cycle

PULL PROCESSES:
executed in response to a
customer order

Customer
Order Arrives

Push/Pull View of
Supply Chain Processes
Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
Pull: execution is initiated in response to a
customer order (reactive)
Push: execution is initiated in anticipation of
customer orders (speculative)
Push/pull boundary separates push
processes from pull processes

Push/Pull View of
Supply Chain Processes
Useful in considering strategic decisions
relating to supply chain design more global
view of how supply chain processes relate to
customer orders
Can combine the push/pull and cycle views
L.L. Bean (Figure 1.6)
Dell (Figures 1.7)
The relative proportion of push and pull
processes can have an impact on supply
chain performance

Examples of Supply Chains

Gateway
Zara
WW Grainger and McMaster-Carr: MRO suppliers*
Toyota
Amazon.com
How do these supply chains differ in terms of their
design? Where are the push/pull interfaces? How
does the location of these interfaces affect their
design?