Supply Chain Management

Graeme Warren
Copyright Graeme Warren 1
A supply chain is a network of firms that produce
and deliver goods and services. The different firms
in a supply chain:
• successively convert raw materials, labor,
knowledge, capital, and other resources into
finished goods and services, and
• collectively repair, re-use, refurbishment, and
recycling of materials in the goods produced.
These activities produce “reverse flows” in the
supply chain.

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Supply Chain Example
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“Supply Chain of Indian Automobile Industry.” Source: via Wikimedia
Major Activities in SCM
Supply chain management (SCM) is the planning
and coordination of supply chain partners and
activities with the purpose of matching supply with
customer demand. SCM activities include:
• Sourcing. Deals with the identification of
suppliers of goods and services.
• Procurement. Deals with the purchasing of goods
and services.
• Logistics. Deals with the transportation, handling,
warehousing, order fulfillment, and distribution
of goods and services.

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Supply Chain Flows
There are four types of flows in supply chains:
• Product and service flows (the physical flow of
goods and services from raw material suppliers to
• Information flows (the sharing of data, forecasts,
placing of orders, tracking of shipping, etc.)
• Financial flows (payments, letters of credit, credit
terms, contractual terms, etc.)
• Reverse flows of goods and components for
repair, re-use (resale as pre-owned goods),
refurbishment, or recycling.

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SCM Trends
• Measuring supply chain ROI.
• “Greening” the supply chain. This trend focuses on reduction of energy
usage, pollution, carbon footprints, and an increase in sustainable
practices such as end-of-life recycling (and other) programs, use of
alternative energy, and use of organic materials by the supply chain.
• Reevaluating outsourcing. The cost benefits of offshoring are being
weighed against strategic considerations such as job loss, protection of
intellectual property, agility of the supply chain, etc.
• Integrating IT.
• Managing risks. Risk avoidance and mitigation strategies have to be
exploited. Supply chain flexibility can be used to offset disruptions due
to political and regulatory risk, terrorism, weather risk, natural
disasters, etc.
• Adopting lean principles. The drive to fewer suppliers, more
collaborative vendor relationships, pull systems, and waste elimination
will continue.
• See
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Global Supply Chains
• The attraction of low wage rates in offshore locations like India and
China has to be weighed against strategic factors like increased
transportation costs, piracy, transportation risks such as lost
shipments, delivery lead times, agility of the supply chain, political
and regulatory risk, coordination requirements due to cultural and
language differences, quality issues, domestic job loss, exchange
rate risk, management of intellectual property, and trust of supply
chain partners.
• Some of the risks of the global supply chain can mitigated by the
use of tracking technologies, increasing inventory levels through the
supply chain, and the use of letters of credit, contractual
guarantees, hedging, and insurance.
• Many examples of unethical behavior in the global supply chain can
be found.
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Management Responsibilities
• Legal responsibilities (conformance with the law)
• Ethical responsibilities (operation the supply chain according to acceptable
social norms).
• Strategic managerial considerations related to the supply chain are:
– Ensure that the supply chain is designed in a manner that fits corporate
strategy. There are three types of supply chain strategies:
• Responsive/agile supply chains are able to quickly adapt to design changes, volume
changes, and disruptions. A large downtown hospital is an example.
• Lean supply chains have small capacity cushions, low profit margins, and offer very little
customization or other flexibility. Any of the large box retailers are examples.
• Near-sourcing chains rely on location to reduce access/transportation time. Convenience
stores and city hospitals are examples.
– Configure the physical supply chain network: decide how the number and
location of suppliers, the number and location of warehouses, show rooms,
retail outlets, and distribution centers.
– Decide the supply chain IT system functionality and overall data flow model.
– Decide which products and services will be offered.
– Decide whether to use centralized or decentralized procurement and

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• Procurement deals with purchasing.
• Responsibilities here include identification of suppliers (including vendor
analysis), negotiation of supply contracts, quality assurance of goods and
services received, and managing supplier relationships.
• Purchasing has interactions with many other business functions, including
operations, legal, accounting, IT, design/engineering, and receiving.
• The steps in a typical purchasing cycle are as follows: purchasing receives a
requisition (request to purchase), selects a supplier (normally the supplier
will have been pre-selected), places an order, and monitors and received
• The purchasing function can be centralized to take advantage of quantity
discounts, closely manage supplier relationships, and develop specialized
knowledge about the procured goods and services. Decentralized
purchasing allows for fast response, tailoring of purchases to local needs,
the use of local suppliers, and possibly reduced transportation costs.
• See Table 15.2 for guidelines for ethical behavior in purchasing established
by the National Association of Purchasing Management.

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E-Business is the use of the web to facilitate business. The features of
an e-business include:
• A website for order placement. A variety of business models can be
pursued: websites can be catalog hubs, simple e-tail (e-stores),
auction-based, exchange-based, advertising-based, etc.
• An order fulfillment function. This can be expensive, depending
upon the variety and volumes concerned. Specialized distribution
centers may have to be built. An alternative is the use of third-party
order fulfillment
• Supply chain partners that produce the goods that are ordered.

The advantages of an e-business over a brick-and-mortar equivalent
include: global 24X7 presence, use of IT to monitor customer
preferences and purchasing habits, lower infrastructure costs, and
access to global markets for small companies.

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Supplier Management
The issues/activities of supplier management are as follows:
• Selection of suppliers. Vendor analysis is necessary. Various factors need to be
considered, including price, capacity of the supplier, quality capability of the supplier,
engineering or design capabilities, delivery lead times, proximity, flexibility,
willingness of the supplier to collaborate, the reputation of the supplier, etc.
• Supplier Audits. Vendors will be audited on a number of criteria, including their
quality and delivery records, agility and flexibility, capacity, continuous improvement
processes, design performance, etc.
• Supplier Certification. Some (typically large) companies will certify vendors
themselves. An alternative is to pursue International Standards Certification (ISO),
e.g., ISO-9000 certification. We talked about this in our discussion of Chapter 9.
• Supplier Relationship Management. Relationships and short-term contracts for non-
strategic items can be pursued on a competitive/tender basis. The lessons from lean
thinking are driving many companies to develop long-term collaborative relationships
with relatively few suppliers with the aim of exploiting design and technology
• Strategic Partnering. Strategic partners are partnerships where each partner
contributes something of strategic significance that the other partners lack (e.g.,
access to raw materials, access to a harbor, a distribution network, intellectual
property, etc.)

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Inventory Management
Key inventory management concerns for the supply chain include:
• Positioning of inventory in the chain. Keeping inventory in a central
location (e.g., national warehouse) may allow one to keep less
inventory overall than at decentralized locations (e.g., regional
warehouses) because the aggregation of demand at a central
location cancels out over- and under-stocking scenarios that may
occur in decentralized locations. The use of IT and inter-store or
warehouse transfers reduces the benefit of centralizing (see, e.g.,
this). Decentralized inventories also have the benefit of forward
placement (placement close to the customer in retail outlets and
even on the customer’s driveway (inside delivery vans which double
as mobile mini warehouses)).
• The speed at which inventory moves through the chain (the
inventory velocity).
• Demand variability. The bullwhip effect. See the discussion of VMI.
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Bullwhip Effect
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Visualization of the Bullwhip Effect. “Zeit” means “time.” Image by Grap via Wikimedia Commons. This file is licensed under the
Creative Commons Attribution-Share Alike 3.0 Unported license.

Order Fulfillment
• Order fulfillment is the process of receiving and
responding to customer orders.
• Common strategies include engineering to order
(used in custom projects), making to order
(manufacturing a standard product from scratch),
assembling to order (using standard modular
components), and making to stock (common in
• An order fulfillment technology that is worth
knowing about is picking-to-light.

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• Logistics refers to the movement of goods,
services, and intangibles in a supply chain,
including movement within a manufacturing
• The use of multimodal transport (container-
based shipping that relies on ships, rail, and
trucks) is common in the movement of goods
from/to offshore locations. The use of conveyors,
forklifts, and monorail systems for in-facility
movements is common.

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Image: PSA Singapore Terminals is the world's busiest transhipment hub, handling about one-fifth of the world's total
container transhipment throughput, and 6% of global container throughput. Image by hydriz via WikiMedia Commons,
licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license
Logistics contin.
• Shipping tracking (using radio-frequency identification (RFID),
cellular, and satellite technologies) and management has
become the norm to reduce risk of loss and delay. Efficient
processing of shipments through customs and is vital. RFID is
now used in many applications. See the reading “Active RFID
vs. Passive RFID” on p.687 of the class text.
• Shipping alternatives need to be weighed. Factor costs,
reliability, environmental concerns, risks (e.g., piracy,
weather), and availability.
• Outsourcing the logistics to third-party logistics (3PL) providers
is often a cost-effective alternative. It is frequently hard to
compete with the dedicated fleets of planes, trucks, ships, and
processing facilities of 3PLs and their specialized knowledge of
customs and delivery requirements in international locations
as markets have globalized.

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Image: RFID tag and barcode. This image (via Wikimedia Commons) is in the public domain.
Creating an Effective Supply Chain
• Strategic sourcing is a systematic process of analyzing purchasing. It
factors waste elimination, risk reduction, and targets superior supply
chain performance. Lean techniques of fewer suppliers, with
collaborative relationships are favored. Total costs of the supply
chain, including reverse flows (repair, refurbishment, etc.) are
factored in making supply chain design choices.
• Creating an effective supply chain will depend upon a host of factors,
including effective communication (often using IT) and trust among
supply chain participants, the ability to handle supply chain
disruptions (event management capability), and ongoing
performance measurement strategies to detect if the supply chain is
“in control” (see Table 15.7 for some supply chain performance
metrics). Effective communication requires that new information be
quickly disseminated to relevant parties to allow them to modify
their schedules, mixes and volumes. Visibility in the supply chain can
be improved by using forecasts, possibly with varying levels of
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Effective Supply Chain contin.
• An effective supply chain will be designed to handle reverse flows (repairs,
returns, re-use (e.g., pre-owned products such as autos), recalls, unsold
merchandise, product for refurbishing/reconditioning, product for recycling,
and waste). Substantial value is locked up in the reverse flows of a supply chain.
Manufacturers and service providers are increasingly realizing that the original
sale can represent a small fraction of the total cash flow from the customer
when repair (service), re-use, and other reverse flows are taken into account.
• Reverse logistics is the transportation used in reverse supply chain flows. The
class text mentions two techniques for managing returns:
– Gatekeeping screens returns to prevent acceptance of product that should not be
returned or is returned to the wrong location.
– Avoidance strategies seek to minimize returns by superior design, quality assurance,
improved instructions and assembly/operating manuals, and the use of toll-free
numbers to allow customers to call for replacement parts instead of simply
returning the merchandise.
• Reverse flows in the supply chain need to be carefully monitored to see why
customers are returning product and why they are dissatisfied. This information
should feed the design process. The reverse flows in a supply chain are
increasingly important as manufacturers seek to entice customers to replace
their existing electronics, autos, etc. with updated technologies.
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Effective Supply Chain contin.
Some of the challenges of supply chain management include:
• Barriers to integration of separate organizations.
• Getting the board, management, and employees “on board.”
• Evaluating trade-offs. A variety of tradeoffs have to be considered:
– The lot size-inventory tradeoff.
– The lot-size transportation cost tradeoff.
– The lead-time-transportation cost tradeoff.
– Product variety-inventory tradeoffs.
– Cost-customer service tradeoffs.
• Small businesses reluctance.
• Variability and uncertainty.
• Response times.
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Gray map image from User:Theshibboleth via Wikimedia Commons. Modifications in red by Graeme Warren. Permission was granted to copy, distribute and/or modify this
document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, no
Front-Cover Texts, and no Back-Cover Texts.
Potential Improvements
• Smaller, more-frequent cross-docked
• Delayed differentiation.
• Modularized designs.
• Disintermediation (eliminating “middlemen”).
• Outsourcing, and
• Shortening lead times, reducing variety, better

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Supply chain projects are a primary concern in continuous
improvement programs because so much cost/value is
tied up in supply chain interactions. The most important
considerations in creating an effective supply chain are:
• Developing close, collaborative relationships with a few
key suppliers.
• Implementing coordination and monitoring processes
to allow for continuous improvement of all elements of
the supply chain. Waste elimination and the use of lean
and similar techniques are vital.

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