Pankaj Yadav

Ramneet Singh

INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

UNIVERSITY BUSINESS SCHOOL

PANJAB UNIVERSITY, CHANDIGARH

Submitted To:
Prof. Gunmala Suri

Table of Contents
1.0 Aim and Objectives........................................................................................................................... 3
1.1 Introduction ....................................................................................................................................... 3
1.2 Supply Chain Modeling Approaches ................................................................................................ 4
1.3 Activities of Supply Chain Management .......................................................................................... 5
1.4 Development in Supply Chain Management .................................................................................... 6
1.5 Supply Chain Management Problems ............................................................................................... 7
1.6 Supply Chain Business Process Integration ...................................................................................... 8
1.6.1 Customer Service Management Process .................................................................................. 10
1.6.2 Procurement Process ................................................................................................................ 10
1.6.3 Product Development and Commercialization ........................................................................ 10
1.6.4 Manufacturing Flow Management Process.............................................................................. 11
1.6.5 Physical Distribution ................................................................................................................ 11
1.6.6 Outsourcing/partnerships ......................................................................................................... 11
1.6.7 Performance Measurement ...................................................................................................... 12
1.7 Conclusion .................................................................................................................................. 12
1.8 Key Terms ................................................................................................................................... 13
1.9 Test Questions............................................................................................................................. 13

1.0 Aim and Objectives

After studying this, you will be able to understand:
1.
2.
3.
4.

Supply Chain Modeling Approaches

Activities/functions of Supply Chain Management
Developments in Supply Chain Management
Supply Chain Business Process Integration

1.1 Introduction
A supply chain is a network of facilities and distribution options that performs functions of
procurement of materials, transformation of these materials into intermediate and finished
products, and the distribution of these finished products to customers. Supply chains exist in
both service and manufacturing organizations, although the complexity of the chain may vary
greatly from industry and firm to firm.
Supply-chain management is basically 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." Typically, SCM attempts to centrally control
or link the production, shipment and distribution of a product. By managing the supply chain,
companies are able to cut excess costs and deliver products to the consumer faster. This is
done by keeping tighter control of internal inventories, internal production, distribution, sales
and the inventories of company vendors.
The concept of Supply Chain Management is based on two core ideas. The first is that
practically every product that reaches an end user represents the cumulative effort of multiple
organizations. These organizations are referred to collectively as the supply chain.
The second idea is that while supply chains have existed for a long time, most organizations
have only paid attention to what was happening within their four walls. Few businesses
understood, much less managed, the entire chain of activities that ultimately delivered
products to the final customer. The result was disjointed and often ineffective supply chains.
Supply chain management, then, is the active management of supply chain activities to
maximize customer value and achieve a sustainable competitive advantage. It represents a
conscious effort by the supply chain firms to develop and run supply chains in the most
effective & efficient ways possible. Supply chain activities cover everything from product
3

development, sourcing, production, and logistics, as well as the information systems needed
to coordinate these activities.
The organizations that make up the supply chain are linked together through physical flows
and information flows. Physical flows involve the transformation, movement, and storage of
goods and materials. They are the most visible piece of the supply chain. But just as
important are information flows. Information flows allow the various supply chain partners to
coordinate their long-term plans, and to control the day-to-day flow of goods and material up
and down the supply chain.

1.2 Supply Chain Modeling Approaches

MIP Optimisation Modeling: Many important supply chain models fall into the
MIP (Mixed Integer Programming) class. This includes most models for vehicle
routing and scheduling, facility location and sizing, shipment routing and scheduling,
freight consolidation and transportation mode selection. Mixed-integer models are
often difficult to optimize, as there can be an exponential number of possible decision
alternatives. Some problems are nonlinear MIP.

Stochastic Programming and Robust Optimisation Methods: Stochastic

programming deals with a class of optimisation models and algorithms in which some
of the data may be subject to significant uncertainty. Uncertainty is usually
characterized by a probability distribution on the parameters. Such models are
appropriate when data evolve over time and decisions need to be made prior to
observing the entire data stream.

Heuristic Methods: Heuristic is another important class of methods for generating

supply chain alternatives and decisions. A heuristic is simply any intelligent approach
that attempts to find good or plausible solutions. Generally, mathematical
programming methods are used to solve strategic and higher levels of tactical supply
chain planning. This method generally works only for solving linear- and some
integer-based models, commonly used in strategic levels of planning. Heuristic
methods used in supply chain planning and scheduling include the general random
search approaches such as simulated annealing, genetic algorithms and tabu

algorithms. Recently, the theory of constraints has also been used in supply chain
operational planning.

Supply Chain Network Design Method: This method determines the location of
production, stocking, and sourcing facilities, and channels the products take through
them.

Simulation based Methods: This is a method by which a comprehensive supply

chain model can be analyzed by considering both its strategic and operational
elements. This method can evaluate the effectiveness of a pre-specified policy before
developing new ones.

1.3 Activities of Supply Chain Management

The various activities/functions/processes of supply chain management are:

1. Inventory Management: With a supply chain management, companies can

significantly improve the way they track and manage their supplies of raw materials
and components needed for production, finished goods to satisfy open sales orders,
and spare parts required for field service and support. This eliminates excess and
waste, frees up valuable real estate for other important purposes, and minimizes
related storage costs.

2. Order Management: Supply chain management can dramatically accelerate the

execution of the entire order-to-delivery cycle by helping companies to more
productively generate and track sales orders. Supply chain also enables the dynamic
scheduling of supplier deliveries to more effectively meet demand, and more rapid
creation of pricing and product configurations.

3. Procurement: Procurement means obtaining some things or services with

optimization of cost, time, space, other factors depends upon requirement. In supply
chain it's one the of very important things. As supply chain consist of numerous
chains at various points procurement needs are different and different specialist may
require at different point. For e.g. In supply chain of chemical industry for
procurement of raw materials can be performed by some chemical engineer but for
decision of it's logistics, transporter/shipping vendor will be performed by other
person having knowledge of shipping. The procurement at warehouse activities
(repacking, labelling, storing, safety etc.) might be done by some other specialist.

4. Logistics: Logistics refers to all the processes involved in storing, moving,

transporting or in any other way handling material. Role of logistics in activities
before start of material and after completion of manufacture up to transportation to the
immediate customer has been well recognized in the past also. But the logistics cost
and effectiveness is also affected by, and in turn affect all other activities along the
supply chain.

5. Manufacturing System Interface: Manufacturing represents the core of internal

operations of a company. No SCM policies, can operate in isolation from the
manufacturing activities. Manufacturing supports SCM in many ways like, reducing
manufacturing lead times and supplying material closely matched to customer lot size
and time requirements.

6. Product Design Interface: Product design has significant impact on efficiency and
effectiveness of both supply and demand side of supply chain. In addition the basic
quality of the finished product sold to the end user can be improved substantially by
better collaboration among channel partners.

1.4 Development in Supply Chain Management

Six major movements can be observed in the evolution of supply chain management studies:
creation, integration, and globalization, specialization phases one and two, and SCM 2.0.
1. Creation Era: The term "supply chain management" was first coined by Keith
Oliver in 1982. However, the concept of a supply chain in management was of great
importance long before, in the early 20th century, especially with the creation of
the assembly line. The characteristics of this era of supply chain management include
the need for large-scale changes, re-engineering, downsizing driven by cost
reduction programs, and widespread attention to Japanese management practices.
2. Integration Era: This era of supply chain management studies was highlighted with
the development of electronic data interchange (EDI) systems in the 1960s, and
developed through the 1990s by the introduction of enterprise resource planning
(ERP) systems. This era has continued to develop into the 21st century with the
expansion of Internet-based collaborative systems. This era of supply chain evolution
is characterized by both increasing value added and cost reductions through
integration.

3. Specialization Phase 1: In the 1990s, companies began to focus on "core

competencies" and specialization. They abandoned vertical integration, sold off noncore operations, and outsourced those functions to other companies. This changed
management requirements, by extending the supply chain beyond the company walls
and distributing management across specialized supply chain partnerships.

4. Specialization Phase 2: Specialization within the supply chain began in the 1980s
with the inception of transportation brokerages, warehouse management (storage and
inventory), and non-asset-based carriers, and has matured beyond transportation and
logistics into aspects of supply planning, collaboration, execution, and performance
management.
5. Supply Chain Management 2.0: Building on globalization and specialization, the
term "SCM 2.0" has been coined to describe both changes within supply chains
themselves as well as the evolution of processes, methods, and tools to manage them
in this new "era". The growing popularity of collaborative platforms is highlighted by
the rise of Trade Cards supply chain collaboration platform, which connects multiple
buyers and suppliers with financial institutions, enabling them to conduct automated
supply-chain finance transactions.

1.5 Supply Chain Management Problems

A kink in the supply chain cycle can cause a list of problems with inventory, customer
service and cost efficiency. With such a fragile structure, it is important for a business to be
aware of these main issues, and know how to avoid running into such problems.
1. Lack of Visibility: How can you be sure of what you have? Many companies lose
sight of their inventory because they do not have a Supply Chain Management system
that provides end-to-end visibility. In many cases, companies are sitting on too much
inventory, or have misplaced their inventory, resulting in the next issue of maintaining
costs. Obtaining a 360-degree view of inventory levels is a must-have.
2. Reducing Costs: One of the main causes of cost containment issues in a supply chain
cycle is excess or expired inventory. With a technologically advanced automated
system, you will be able to monitor stock quantity, location, shelf-life and expiration
information.

In addition, real-time business intelligence through reporting is

available, allowing you to also keep track of trends and better manage your financial
risk.
7

3. Customer Service: Today, customers have much higher demands, if you dont have
the inventory they are looking for, theyll find another who does have what they
want. This requires an extremely organized Supply Chain system that allows for
more reliable and faster delivery. It also requires a business to have accurate
information on their available inventory. Often times, supply chain management
issues stem from the challenge of balancing customer demands with cost
containment. With accurate real-time reporting on the trends of your business and
what you have in stock, you can easily meet your clients needs while eliminating
excess costs.
4. Planning & risk management: In order to stay as efficient and effective as possible,
periodic assessments and redesigns are needed. These adjustments are in response to
changes in the market - changes such as new product launches, global sourcing, credit
availability and the need to protect intellectual property. These risks must be
identified and quantified in order to control and mitigate.
5. Supplier/partner relationship management: It is important to create, understand
and follow mutually agreed upon standards to better understand current performance
and opportunities for improvement. Having two different methods for measuring and
communicating performance and results wastes time and effort. Trust the system that
was put in place for consistent results and better supplier/partner relationships.
6. Talent: This was touched on in a previous post. It is becoming increasingly more
difficult to find qualified and interested talent. Supply chain leaders need an extensive
understanding of the key competencies and duties needed for supply chain
management roles and the ability to efficiently source specific skill sets and methods
for developing future leaders.

1.6 Supply Chain Business Process Integration

Successful SCM requires a change from managing individual functions to integrating
activities into key supply chain processes. An example scenario: the purchasing department
places orders as requirements become appropriate. Marketing, responding to customer
demand, communicates with several distributors and retailers, and attempts to satisfy this
demand. Shared information between supply chain partners can only be fully leveraged
through process integration.

Supply chain business process integration involves collaborative work between buyers and
suppliers, joint product development, common systems and shared information. According to
Lambert and Cooper (2000) operating an integrated supply chain requires continuous
information flows, which in turn assist to achieve the best product flows. However, in many
companies, management has reached the conclusion that optimizing the product flows cannot
be accomplished without implementing a process approach to the business. The key supply
chain processes stated by Lambert (2004) are:
Customer relationship management
Customer service management
Demand management
Order Fulfilment
Manufacturing flow management
Supplier relationship management
Product development and commercialization
Returns management
One could suggest other key critical supply business processes combining these processes
stated by Lambert such as:
a. Customer service management
b. Procurement
c. Product development and commercialization
d. Manufacturing flow management/support
e. Physical distribution
f. Outsourcing/partnerships
g. Performance measurement

1.6.1 Customer Service Management Process

Customer Relationship Management concerns the relationship between the organization and
its customers. Customer service provides the source of customer information. It also provides
the customer with real-time information on promising dates and product availability through
interfaces with the company's production and distribution operations. Successful
organizations use following steps to build customer relationships:
Determine mutually satisfying goals between organization and customers
Establish and maintain customer rapport
Produce positive feelings in the organization and the customers

1.6.2 Procurement Process

Strategic plans are developed with suppliers to support the manufacturing flow management
process and development of new products. In firms where operations extend globally,
sourcing should be managed on a global basis. The desired outcome is a win-win
relationship, where both parties benefit, and reduction times in the design cycle and product
development is achieved. Also, the purchasing function develops rapid communication
systems, such as electronic data interchange (EDI) and Internet linkages to transfer possible
requirements more rapidly. Activities related to obtaining products and materials from
outside suppliers. This requires performing resource planning, supply sourcing, negotiation,
order placement, inbound transportation, storage and handling and quality assurance. Also,
includes the responsibility to coordinate with suppliers in scheduling, supply continuity,
hedging, and research to new sources or programmes.

1.6.3 Product Development and Commercialization

Here, customers and suppliers must be united into the product development process, thus to
reduce time to market. As product life cycles shorten, the appropriate products must be
developed and successfully launched in ever shorter time-schedules to remain competitive.
According to Lambert and Cooper (2000), managers of the product development and
commercialization process must:
1. Coordinate with customer relationship management to identify customer-articulated needs;
2. Select materials and suppliers in conjunction with procurement, and

10

3. Develop production technology in manufacturing flow to manufacture and integrate into

the best supply chain flow for the product/market combination.

1.6.4 Manufacturing Flow Management Process

The manufacturing process is produced and supplies products to the distribution channels
based on past forecasts. Manufacturing processes must be flexible to respond to market
changes, and must accommodate mass customization. Orders are processes operating on a
just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow
process lead to shorter cycle times, meaning improved responsiveness and efficiency of
demand to customers. Activities related to planning, scheduling and supporting
manufacturing operations, such as work-in-process storage, handling, transportation, and time
phasing of components, inventory at manufacturing sites and maximum flexibility in the
coordination of geographic and final assemblies postponement of physical distribution
operations.

1.6.5 Physical Distribution

This concerns movement of a finished product/service to customers. In physical distribution,
the customer is the final destination of a marketing channel, and the availability of the
product/service is a vital part of each channel participant's marketing effort. It is also through
the physical distribution process that the time and space of customer service become an
integral part of marketing, thus it links a marketing channel with its customers (e.g. links
manufacturers, wholesalers, retailers).

1.6.6 Outsourcing/partnerships
This is not just outsourcing the procurement of materials and components, but also
outsourcing of services that traditionally have been provided in-house. The logic of this trend
is that the company will increasingly focus on those activities in the value chain where it has
a distinctive advantage and everything else it will outsource. This movement has been
particularly evident in logistics where the provision of transport, warehousing and inventory
control is increasingly subcontracted to specialists or logistics partners. Also, to manage and
control this network of partners and suppliers requires a blend of both central and local
involvement. Hence, strategic decisions need to be taken centrally with the monitoring and
control of supplier performance and day-to-day liaison with logistics partners being best
managed at a local level.

11

1.6.7 Performance Measurement

Experts found a strong relationship from the largest arcs of supplier and customer integration
to market share and profitability. By taking advantage of supplier capabilities and
emphasizing a long-term supply chain perspective in customer relationships can be both
correlated with firm performance. As logistics competency becomes a more critical factor in
creating and maintaining competitive advantage, logistics measurement becomes increasingly
important because the difference between profitable and unprofitable operations becomes
narrower. A.T. Kearney Consultants (1985) noted that firms engaging in comprehensive
performance measurement realized improvements in overall productivity. According to
experts internal measures are generally collected and analyzed by the firm including
1. Cost
2. Customer Service
3. Productivity measures
4. Asset measurement, and
5. Quality.
External performance measurement is examined through customer perception measures and
"best practice" benchmarking, and includes
1) Customer perception measurement
2) Best practice benchmarking.

1.7 Conclusion
Efficient material & supply chain management is crucial for the success of any organization
and can be the deciding factor between a successful organization and an organization full of
delays and claims. An effective supply management system is essential for managing
efficient material management to avoid material shortages, misplacements, loss, and theft
which might result in increases in crew idle times, loss of productivity and delay of activities.
The primary goal of supply chain management is to have the material needed, in the amounts
needed, with the quality required, and the time that they are needed. A fully integrated
approach like that of supply chain management will better improve communication and
minimize gaps in information flow among all the parties and departments of the organization
involved. SCM involves the integration of various activities and aims to improve
relationships between the various parties, while achieving a sustainable competitive
12

advantage through high quality and lower cost products. SCM is closely linked with
enterprise resource planning (ERP) and electronic commerce systems. Future supply chains
are likely to be more dynamic in nature, and consist of collaborative value networks in which
productivity and efficiency are constantly maximised.

1.8 Key Terms

Supply chain management, Inventory Management, Order management, Procurement,
Logistics, Product design Interface, Manufacturing system interface, Heuristic methods,
Business process integration, Enterprise Resource Planning.

1.9 Test Questions

What is supply chain management?
What are the various developments in supply chain management?
What are the various activities/functions of supply chain management?
What are the various supply chain modelling approaches?
What is supply chain business process integration?

13