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Supply Chain Management

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales conflict with manufacturing and distribution goals. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such integration can be achieved. Many a times I wonder how the Tide detergent that I pick from Big Bazaar reaches there. There might be a long path covering various stages that would help the company making the products and services available to the customers. Lets see how it happens with the help of a diagram. Timber Company Paper Manufacturer Tanneco Packaging

P&G/ WS Chemical Manufac turer Plastic Producer

Big Bazaar


When as a customer you walk into big bazaar and asks for Tide detergent, the Retailer provides you with the product, information and services. You as a customer in-turn provide him with the funds. The retailer provides to the company or the wholesaler the point of sales data and the replenishment schedule. The company or the wholesaler in turn provides the replenishment and the future schedule of replenishment. After receiving the retailer provides the payment to the company or the wholesaler. P&G procures the packaging from Tenneco Packaging which in turn receives paper from paper manufacturer which in turn makes paper after receiving the timber from the timber company. P&G may also procure plastic for its products from the plastic producer who procures chemical from the chemical manufacturer; chemical manufacturer however may directly supply to the company. In this chain customer is the only source of revenue. All others are the part of exchange system. For example retailer making payment to the wholesaler or the retailer in return of goods received. The model illustrated is an example of Supply Chain Management.

A supply chain consists of all the parties involved directly or indirectly making the products and services available to the customers for their use. The supply chain includes not only the manufacturers and suppliers, but also transporters, warehouses, retailers, and even customers themselves It spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.

Supply Chain Supply Chain Management encompasses every effort involved in producing and delivering a final product or service, from the suppliers supplier to the customers customer. Supply Chain Management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer. (The Supply chain council, USA) Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). SCM as the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally." SCM is a set of approaches used to efficiently integrate suppliers, manufacturers, warehouses and distribution centres so that the product is produced and distributed in right quantities, to the right locations and at the right time in such a way that system-wide costs are minimized and service level requirements are satisfied

Objectives of SCM:
The main objective of the SCM is maximization of the value of the supply chain. Value refers to the difference between revenue generated from the customer and the cost of the supply chain. The objectives of SCM include the minimization of the system cost. i.e. the over all cost of supply chain rather than the cost reduction at a single level. It also aims to integrate all the parties involved in supply chain so that the right product can be delivered to the right customer at a right time. SCM also aims to fulfill the services requirements of the customers so that they may feel value/ worth of what they have purchased. SCM also deals with the demand supply mismatch and ensures the availability of the product whenever required.

Flows in SCM
There are basically four types of flows in a supply chain management system which are: Information flow (orders, status, contracts) Payment flow (payment, credits, etc.) Product flow (finished goods, raw material, w.i.p.) Title flow

Features of SCM
The most prominent feature of SCM is that it is an integrated activity. It calls for integrating various functions like logistics, manufacturing, distribution, design/engineering, marketing, finance etc. It also calls for management of conflicts and having the single objective of customer satisfaction. It is responsible for the multiple flows in the system which are information, payment and product flows. Each interface or the stage in the SCM represent flow of product, title, payment and the information. Most of the analysis in a SCM involve the trade offs between different channels, time, risk and costs associated with the distribution. The growth of technologies such as the Internet enables greater collaboration between supply chain trading partners. Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which they can integrate internal processes.

Philosophy of SCM
The entire supply chain is a single, integrated entity rather than he individual units working in the system.

The cost, quality and delivery requirements of the customer are objectives shared by every company in the chain rather than the profit and sales motive held by individual partner. Inventory is the last remedy for resolving supply and demand imbalances.

Decision Variables in SCM

SCM takes into account four major decisions which are as follows: LOCATION PRODUCTION INVENTORY TRANSPORTATION Location Decisions Location decision is the first step in creating the supply chain. It takes decisions like geographic placement of production facilities, stocking points, and sourcing points. Once the size, number, and location of these are determined it becomes possible to find the paths by which the product flows through to the final customer. While taking these decisions one should consider production costs, taxes, duties and duty drawback, tariffs, local content, distribution costs, production limitations, etc. Production Decisions Here the producer takes the decisions like what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to distribution centres, and distribution centres to customer markets. Obviously these decisions will have a big impact on the revenues, costs and customer service levels of the firm. Another critical issue that is considered here is the capacity of the manufacturing facilities. Operational decisions focus on detailed production scheduling. These decisions include the construction of the master production schedules, scheduling production on machines, and equipment maintenance. Other considerations include workload balancing, and quality control measures at a production facility. Inventory Decisions These refer to means by which inventories are managed. Inventories exist at every stage of the supply chain as either raw material, semi-finished or finished goods. They can also be in-process between locations. These are primarily used to buffer any uncertainty that might exist in the supply chain. Since holding of inventories can cost anywhere between 20 to 40 percent of their value, their efficient management is critical in supply chain operations. Inventory strategies include push versus pull, control policies, the determination of the optimal levels of order quantities and reorder points, and setting safety stock levels, at each stocking location. These levels are critical, since they are primary determinants of customer service levels.

Transportation Decisions Here the mode of transportation is chosen by the firm. The best choice of mode is often found by trading-off the cost of using the particular mode of transport with the indirect cost of inventory associated with that mode. While air shipments may be fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may be much cheaper, but they necessitate holding relatively large amounts of inventory to buffer against the inherent uncertainty associated with them. Since transportation is more than 30 percent of the logistics costs, operating efficiently makes good economic sense.

Importance of SCM
SCM can give strategic advantage to the firms. SCM now a days has become so important that it is becoming the back bone of the strategy. SCM can provide a firm the strategic edge over others in the business. SCM offers opportunity for differentiation via the channel adopted or the cost reduction. Take the example of Dell computers and Wal Mart or Big Bazaar. Wal-Mart has partnership with Proctor & Gamble to automatically replenish inventory and Dells innovative direct-to-consumer sales and build-to-order manufacturing is an excellent example of SCM. It helps in global functions of the firm. As the boundaries among various countries have disappeared and world has become a village in which any company can market its products. It requires greater coordination of production and distribution. In global market there is increased risk of supply chain interruption so need is more for robust and flexible supply chains. SCM helps the company in cost reduction. For many products, 20% to 40% of total product costs are controllable logistics costs. SCM a philosophy provides the same cost reduction for the company. Moreover in some cases, performance factors such as inventory availability and speed of delivery are critical to customer satisfaction. SCM deals with the uncertain environment.

Uncertainty is inherent to every supply chain due to factors like travel times, breakdowns of machines and vehicles, weather, natural catastrophe, war, local politics, labor conditions, border issues etc. SCM helps in minimizing the risks associated with uncertain environment by matching demand and supply. Following are the few examples which illustrate the problem faced by businesses due to uncertain environment.

Boeing announced a $2.6 billion write-off in 1997 due to raw materials shortages, internal and supplier parts shortages and productivity inefficiencies U.S Surgical Corporation announced a $22 million loss in 1993 due to larger than anticipated inventories on the shelves of hospitals IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue. Hewlett-Packard and Dell found it difficult to obtain important components for its PCs from Taiwanese suppliers in 1999 due to a massive earthquake.

Conflicting Objectives in the SCM:

Sr. No. 1

Particular Purchasing

Objectives Stable volume requirements, Flexible delivery time, Little variation in mix, Large quantities Long run production, High quality, High productivity, Low production cost Low inventory, Reduced transportation costs,Quick replenishment capability Short order lead time, High in stock, Enormous variety of products, Low prices

2 3 4

Manufacturing Warehousing Customers

Process view of a supply chain

There are two main views regarding the supply chain management: a) Cycle view b) Push vs. pull strategy. Cycle view:SCM can be defined as series of communication occurring between two consecutive stages of the supply chain. The cycle shares the same communication as between buyers and the sellers.

Customer order cycle: This cycle represents the communication between the buyer and the retailer level. It introduces uncertain risk in the supply chain and includes phases like customer arrival, customer order entry, customer order fulfillment and customer order receiving. Replenishment Cycle: This is the communication that occurs between the retailer and the wholesaler level. It includes taking decision regarding retail order trigger, retail order entry, retail order fulfillment and retail order receiving. Manufacturing Cycle: This is the communication that occurs between the wholesaler and the manufacturer level. It takes into consideration the order arrival from the distributor, retailer, or customer, production scheduling, manufacturing and shipping and receiving orders at the distributor, retailer, or customer level. Procurement Cycle: This is the communication that occurs between the manufacturer and the suppliers and takes into consideration activities like assessing the core supply chain capabilities, designing of the product, risk management, order placing with the supplier, receiving raw material, and making payment to the suppliers. Push/Pull View of Supply Chains

There is a great deal of time involved in making a product effectively packaged and ready to serve stage from the raw material stage. During this time period, all the members of the channel anticipate the changes in the demand due to customer order cycle. The reactive process to a demand is known as Pull strategy and reactive process to a speculation or anticipation is known as Push Strategy. Procurement, Manufacturing and Replenishment cycles Customer Order Cycle



Customer Order arrives

Supply Chain Design:

Designing a supply chain takes into consideration the three important decisions which are as follows: Insourcing/OutSourcing: It involves taking decisions regarding which processes to be outsourced or which are to be produced inhouse. In other words, here you need to take the make/buy or vertical integration decision. Partner Selection: This includes the selection of partners and suppliers for the chain. Obviously the decision is made on the number of factors discussed in the distribution channel. The Contractual Relationship: This decision is to do with the contractual relationship with the channel partners via joint ventures, strategic alliances, equity participation, long term contracts etc.