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SCM) Supply Chain Management Terms & Definitions

Activity-Based Cost Accounting (ABC)
A cost accounting system that accumulates costs based on activities performed and then
uses cost drivers to allocate these costs to products or other bases, such as customers,
markets, or projects. It is an attempt to allocate overhead costs on a more realistic basis
than direct labor or machine hours. Source: (10th ed.)
Activity-Based Management (ABM)
The use of activity-based costing information about cost pools and drivers, activity
analysis, and business processes to identify business strategies; improve product design,
manufacturing, and distribution; and remove waste from operations. Source: (10th ed.)
An agreement should clearly state what you are buying and its cost. Delivery terms and
responsibility, Installation related issues, if applicable, an acceptance provision detailing
how and when the buyer
Business-to-Business Commerce (B2B)
Business being conducted over the Internet between businesses. The implication is that
this connectivity will cause businesses to transform themselves via supply chain
management to become virtual organizations, reducing costs, improving quality, reducing
delivery lead time, and improving due-date performance.

Capacity Management
The function of establishing, measuring, monitoring, and adjusting limits or levels of
capacity in order to execute all manufacturing schedules; i.e., the production plan, master
production schedule, material requirements plan, and dispatch list. Capacity management
is executed at four levels: resource requirements planning, rough-cut capacity planning,
capacity requirements planning, and input/output control.

Capacity Planning
The process of determining the amount of capacity required to produce in the future. This
process may be performed at an aggregate or product-line level (resource requirements
planning), at the master-scheduling level (rough-cut capacity planning), and at the
material requirements planning level (capacity requirements planning).

Capacity Requirements Planning
The function of establishing, measuring, and adjusting limits or evels of capacity. The
term capacity requirements planning in this context refers to the process of determining
in detail the amount

Capacity Strategy
One of the strategic choices that a firm must make as part of its manufacturing strategy.
There are three commonly recognized capacity strategies: lead, lag, and tracking. A lead
Capacity Utilization
A measure (usually expressed as a percentage) of how intensively a resource is being
used to produce a good or service. Utilization compares actual time used to available
time. Traditionally,
Capacity Information Flows
Capacity is the capability of a worker, machine, work center, plant, or organization to
produce output per time period. Information aids us in addressing capacity availability,
unused capacity and performance issues that impact a businesss revenue and
productivity as well as its image and reputation Source: (10th ed.)

Capacity Physical Flows
1) The capability of a system to perform its expected function. 2) The capability of a
worker, machine, work center, plant, or organization to produce output per time period.

Channel management
The management of firms or individuals that participate in the flow of goods and services
from the raw material supplier and producer to the final user or customer.

Collaboration is defined as the process by which partners adopt a high level of purposeful
cooperation to maintain a trading relationship over time. The relationship is bilateral;
both parties have

Commodity Strategy Development
The purchasing plan for a family of items. This would include the plan to manage the
supplier base and solve problems. Source:

Continuous Improvement
A never-ending effort to expose and eliminate root causes of problems; small step
improvement as opposed to big step improvement. Source:

An agreement between two or more competent persons or companies to perform or not to
perform specific acts or services or to deliver merchandise. A contract may be oral or
written. A purchase agreement when accepted by a supplier, becomes a contract.
Acceptance may be in writing or by performance, unless the purchase order requires
acceptance in writing. Source:

Contract Management
Contract management is a strategic management discipline employed by both buyers and
sellers whose objectives are to manage customer and supplier expectations and
relationships, control risk and cost, and contribute
See: Activity-based Cost Accounting, Activity-based Management, Cost System Design,
Target Costing, Total Costs, Total Cost of Ownership
Cost Management
In terms of activity-based cost accounting, cost management involves control of activities
to eliminate waste, improve cost drivers, and plan operations. This process should
influence the organizations strategy setting process. Factors such as product pricing,
introduction of new products, and distribution of existing products are examples of
strategic decisions that are affected by cost management.
Cost System Design
An intelligent cost system design is one that is simple while still providing managers with
information they need to make decisions. As most manufacturing processes were labor
intensive at the
Currency Conversions
Issues with currency conversion add complexity to the global sourcing process. The
absence of fixed exchange rates can be a problem. Fluctuations in exchange rates can
have a significant impact
Customer Relationship Management (CRM)
A marketing philosophy based on putting the customer first. It involves the collection and
analysis of information designed for sales and marketing decision support to understand
and support existing and potential customer needs. It includes account management,
catalog and order entry, payment processing, credits and adjustments, and other
Customer Value
The customer value approach focuses on how people choose among competing suppliers,
customer attraction and retention, and market-share gains. Answering three customer
value questions is important in order to determine

Customer/Order Fulfillment Process
A series of customers interactions with an organization through the order filling process,
including product/service design, production and delivery, and order status reporting.
Demand Management
The function of recognizing all demands for goods and services to support the market
place. It involves prioritizing demand when supply is lacking. Proper demand
management facilitates the planning and use of resources for profitable business results.
Source: (10th ed.)
Distribution Channel
The distribution route, from raw materials through consumption, along which products
Distribution Channel Design
The planned channels of inventory disbursement from one or more sources to field
warehouses and ultimately to the customer. There are several levels in the distribution
network structure. Source: APICS (8th edition)

Facility Location
Location decisions are a basic determinant of profitability in international logistics.
Decisions on where to manufacture, to assemble, to store, to transship and to consolidate
can make the difference between

Forecast Error
The difference between actual demand and forecast demand, stated as an absolute value
or as a percentage. E.g., average forecast error, forecast accuracy, mean absolute
deviation, tracking signal. There are

Forecast Sharing
A supply partnership between a buyer and supplier is based on mutual interdependency
and respect and calls for information sharing between the involved parties. By sharing its
demand forecast with
The business function that attempts to predict sales and use of products so they can be
purchased or manufactured in appropriate quantities in advance. Source: (10th ed.)

Forecasting Methods
Qualitative forecasting techniques An approach to forecasting that is based on intuitive or
judgmental evaluation. It is used generally when data are scarce, not available, or no
longer relevant. Common

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Inbound Logistics
Following the receipt of materials, parts or resale products from external suppliers, the
subsequent storage, handling, and transportation requirements to facilitate either
manufacturing or market distribution constitute inbound logistics. Source: Bowersox,
D.J., Closs, D.J., & Cooper, B.M. (2002). Supply Chain Logistics Management. Burr
Ridge, Boston: McGraw Hill. See: Interplant Transfer, Outbound Logistics

Industry Standards
An industrial standard is a uniform identification that is agreed on. Industrial
standardization can be defined as the process of establishing agreement on uniform
identifications for definite characteristics of quality, design, performance, quantity,
service, etc. Source: Dobler, D.W., & Burt, D.N. (1996). Purchasing and Supply
Management. (6th ed.). New York: McGraw Hill.
Information Sharing
A strategic partnering relationship between suppliers and buyers is characterized by a
willingness to be open, and to share forecasted demand and cost data as well as the
benefits resulting
Information Technology
The technology of computers, telecommunications, and other devices that integrate data,
equipment, personnel, and problem-solving methods in planning and controlling business
activities. Information technology provides the means for collecting, storing,

Insource vs Outsource
The act of deciding whether to produce an item internally or buy it from an outside
supplier. Factors to consider in the decision include costs, capacity availability,
proprietary and/or specialized knowledge, quality considerations, skill requirements,
volume, and timing. Source: (10th ed.)

Interplant Transfer
The shipment of a part or product by one plant to another plant or division within the
corporation. Source: (10th ed.)

1) Those stocks or items used to support production (raw materials and work-in-process
items), supporting activities (maintenance, repair, and operating supplies), and customer
service (finished goods and spare parts). Demand

Inventory Management Systems
Software applications that permit monitoring events across a supply chain. These systems
track and trace inventory globally on a line-item level and notify the user of significant
deviations from plans.

Inventory Positioning
Inventory positioning refers to the selective location of various items in the product line
in plant, regional, or field warehouses. Inventory positioning has a bearing on facility
location decision, and therefore, must be considered in the logistics strategy. Source:
Ballou, R.H. (1999). Business Logistics Management. (4th ed.). Upper Saddle River,
New Jersey: Prentice Hall.

Joint Venture
An agreement between two or more firms to risk equity capital to attempt a specific
business objective. Source:

Differences in culture, language, dialects or terminology may result in miscommunication
and cause problems. While both parties may think that they understand what the other
party has said, a true

Lead Times/Cycle Times
1) A span of time required to perform a process (or series of operations). 2) In a logistics
context, the time between recognition of the need for an order and

Lean Manufacturing
A philosophy of production that emphasizes the minimization of the amount of all the
resources (including time) used in the various activities of the enterprise. It involves
identifying and eliminating

Legal Issues
Purchasing law has been primarily developed from laws regarding contracts. In order for
a contract to be valid, four conditions must be present: 1) Parties with full contractual
capacity should

Logistics Information Systems
Converting data to information, portraying it in a manner useful for decision making, and
interfacing the information with decision-assisting methods are considered to be at the
heart of an information

Logistics Management
Logistics management is the process of strategically managing the procurement,
movement and storage of materials, parts and finished inventory (and the related
information flows) through the organization and its marketing

See: Preventative Maintenance, Total Product Maintenance (TPM)

See: Lean Manufacturing, Manufacturing Layout Strategy, Reverse Logistics, Order
Management, Scheduling

Manufacturing Layout Strategy
An element of manufacturing strategy. It is the analysis of physical capacity, geography,
functional needs, corporate philosophy, and product-market/process focus to
systematically respond to required facility changes driven by organizational, strategic,
and environmental considerations. Source: (10th ed.)

Market Analysis
See: Business-to-Business, Channel Management, Customer Relationship Management
(CRM), Customer Value, Promotions
Negotiation is a process of formal communication where two or more people come
together to seek mutual agreement over an issue or issues. Negotiation is particularly
appropriate when issues besides

New Product Development
See: Lead Times/Cycle Times, Supplier Integration in New Product Development

Operating Policies and Procedures
Definitive statements of what should be done in the business, and a formal organization
and indexing of a firms procedures. They are usually outlined in manuals which are
printed and distributed to the appropriate functional areas. Source: APICS (8th ed.)

Order management
Order management involves the seamless integration of orders from multiple channels
with inventory databases, data collection, order processing including credit card
verification, fulfillment systems and returns across the entire fulfillment

Outbound Logistics
The process related to the storage and movement of the final product and related
information flows from the end of the production line to the end user. Sources:
Christopher, M. (1998). Logistics and Supply Chain Management: Strategies for reducing
cost and improving service, (2nd Ed.). New York: Prentice Hall.

Packaging has a significant impact on the cost and productivity of logistics. Inventory
control depends upon the accuracy of manual or automatic identification systems keyed
by product packaging. Order selection

Performance Measurement
Supplier performance measurement and evaluation includes the methods and techniques
used to collect information that can be used to measure, rate or rank supplier performance
on a continuous basis. The
Preventative Maintenance
The activities, including adjustments, replacements, and basic cleanliness, that forestall
machine breakdowns. The purpose is to ensure that production quality is maintained and
that delivery schedules are met. In addition, a machine that is well cared for will last
longer and cause fewer problems. Source: (10th ed.)
Program Management
The coordinated management of a portfolio of projects to achieve a set of business
objectives is called program management. Or, a program might refer to an ongoing set of
activities internal to the organization, for example, a Total Quality Management program,
workplace safety program, supplier development program, etc. Source:

Project Management
Project management is the application of knowledge, skills, tools and techniques to a
broad range of activities in order to meet the requirements of the particular project. A
project is
One of the four Ps (product, price, place, and promotion) that constitute the set of tools
used to direct the business offering to the customer. Promotion is the mechanism
Purchase Requirements
See: Specifications, Industry Standards, Statement of Work, Service Level Agreement

Conformance to requirements or fitness for use. Quality can be defined through five
principal approaches: (1) Transcendent quality is an ideal, a condition of excellence. (2)
Product-based quality is based

Quality Programs
Some of quality programs that are currently used include: Total Quality Management
(TQM): TQM is a management approach to long-term success through customer
satisfaction. TQM is based on the participation

Relationship Management
See: Agreements, Collaboration, Contract, Joint Venture, Strategic Alliance, Supplier-
Customer Partnership

Reverse Logistics
A supply chain that is dedicated to the reverse flow of products and materials for returns,
repair, remanufacture, and/or recycling. Source: (10th ed.)

Scheduling involves taking decisions regarding the allocation of available capacity or
resources (equipment, labor and space) to jobs, activities, tasks or customers over time.
Scheduling thus results in a time-phased

Service Level Agreement
Service-level agreements (SLAs) are contracts between service providers and customers
that define the services provided, the metrics associated with these services, acceptable
and unacceptable service levels, liabilities on the part

Six Sigma
See: Quality Programs

Sourcing Strategy
A successful sourcing strategy requires a thorough understanding of a companys
business strategy, the resources required to deliver that strategy, the market forces and the
unique risks within the company

Specifications are the most detailed method of describing requirements. Various types of
design specifications are the detailed descriptions of the materials, parts, and components
to be used in making a

1) An established norm against which measurements are compared. (APICS 10th ed.) 2)
The Internet has transformed supply chain management into something closer to an exact
science. However for information

Statement of Work (S.O.W)
The most critical ingredient of a successful procurement of services is the development
and documentation of the requirements the statement of work. The S.O.W. identifies
what the contractor is

Statistic Quality Control
See: Quality Programs

Strategic Alliance
A relationship formed by two or more organizations that share (proprietary), participate
in joint investments, and develop linked and common processes to increase the
performance of both companies. Many organizations form strategic alliances to increase
the performance of their common supply chain. Source:

Supplier Development Training
Education and training is the most common approach to supplier development and
improvement. A purchaser may provide training in statistical process control, quality
improvement techniques, just-in-time delivery or any other

Supplier Integration in New Product Development
Supplier integration into new product/process/service development suggests that
suppliers are providing information and directly participating in decision making for
purchases used in the new product/process/service. This integration can occur during

Supplier Intelligence
Supplier Intelligence is the purposeful, coordinated and ethical monitoring of strategic
suppliers, within a specific marketplace.

Supplier Performance Evaluation
The main objective of the supplier evaluation process is to reduce purchase risk and
maximize the overall value of the purchaser. It typically involves evaluating, at a
minimum, supplier quality,

Supplier-Customer Partnership
A long-term relationship between a buyer and a supplier characterized by teamwork and
mutual confidence. The supplier is considered an extension of the buyers organization.
The partnership is based on

Supply Chain Design
Supply chain design involves the determination of how to structure a supply chain.
Design decisions include the selection of partners, the location and capacity of warehouse
and production facilities, the products, the modes of transportation, and supporting
information systems. Source: (10th ed.)

Supply Chain Inventory Visibility
Software applications that permit monitoring events across a supply chain. These systems
track and trace inventory globally on a line-item level and notify the user of significant
deviations from plans. Companies are provided with realistic estimates of when material
will arrive. Source: (10th ed.) See: Inventory Management Systems

Target Costing
It is the process of designing a product to meet a specific cost objective. Target costing
involves setting the planned selling price, subtracting the desired profit as well as
marketing and distribution costs, thus leaving the required manufacturing or target cost.
Source for above definitions: (10th ed.)
Total Cost of Ownership (TCO)
In supply chain management, the total cost of ownership of the supply delivery system is
the sum of all the costs associated with every activity of the supply stream. The
Total Costs
The sum of the variable, fixed and semivariable costs (costs that cannot be classified as
variable or fixed ) comprises total costs. As the volume of production increases, total

Total Productive Maintenance (TPM)
Preventive maintenance plus continuing efforts to adapt, modify, and refine equipment to
increase flexibility, reduce material handling, and promote continuous flows. It is
operator-oriented maintenance with the involvement of all qualified employees in all
maintenance activities. Source: (10th ed.)
Managers must ensure that appropriate personnel receive periodic training with respect to
the organizations ethical and professional standards. Supply managers should ensure that
their personnel receive training on current thinking

Warehouse Management Layouts
This refers to the configuration of the warehouse site with lines, storage areas, aisles, etc.
Layout or storage plan of a warehouse should be planned to facilitate product flow.

What is Supply Chain Management?
By: Robert Handfield, Ph.D. Posted 01-11-2011
What is Supply Chain Management? The concept of Supply Chain Management is based
on two core ideas. The first is that practically every product that reaches an end user