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Supply chain

A supply chain consists of all stages involed directly, or indirectly, in fulfilling a customer request for
a product in an economy. Thus it includes customers who give the requests, transporters, retailers,
wholesalers, warehoues, manufacturers, and component, service as well as raw material suppliers.

Within an organization there is a supply chain that includes all functions involved a filling a customer
request as well as the order. The functions carried out within an organization include marketing,
new product development, operations, distribution, finance and customer service.

In a supply chain there is constant flow of information, product and funds between stages. Usually
supply chain is imagined as product moving from suppliers to manufacturers and from there to
wholesalers and retailers and then further to customers. But supply chains have two way
movements and also involve movement of information and fund apart from the product.

Customer is an integral part of the supply chain and the primary purpose of a supply chain is
satisfying customer needs and generating profit for itself in the process.

The routine supply chain activities begin with a customer order and end when a satisfied customer
has paid for his purchase.

In a supply chain, number of customers are there, number of retailers are there, number of
transporters are there and number of manufacturing plants can be there. Hence a supply chain is
actually a network or a web. Hence supply network and supply web also describe a supply chain.

The objective of every supply chain is to maximize the overall value generated. Supply chain
management involves the management of flows between and among stages in a supply chain to
maximize total profitability.

Decision Phases in a Supply Chain

Supply Chain Design, Plan and Operation are identified as three significant decision phases by
Chopra and Meindl.

Supply Chain Design: Supply chain strategy is another word used for this phase. Supply chain design
decisions or strategy decisions include products to be manufactured, location and capacities of
manufacturing plants and warehouses, modes of trasport to be utilized and information system to
be utilized.

Supply Chain Planning: Planning, typically done for an year, establishes parameters within which a
supply chain will function over a specified period of time.

Supply Chain Operation: In this phase the time horizons are small, monthly, weekly and daily. The
decisions driven by customer order and are related to invidual customer orders. There are also
decision related to individual production facilities, warehouses and transporters.

Process Views of a Supply Chain

There are two views.

1. Cycle view

In cycle view, the supply chain processes are divided into cycles that are performed at the interface
between two successive stages of a supply chain and one describes the following cycles.

Customer order cycle

Replenishment cycle

Manufacturing cycle

Procurement cycle

A. Customer order cycle

Normally occurs at the retailer place between the customer and the retailer.

Activities involved
Customer arrival, Customer order entry, Customer order fulfilment, Customer order receiving,
Customer funds payment

B. Replenishment cycles

Normally thought to occur at the retailer/wholesaler or distributor interface.

Activities involved
Retai order trigger, Retail order entry, Retail order fulfilment, Retail order receiving, Funds payment

C. Manufacturing cycle

Normally thought to occur at the wholer/manufacturer interface. Depending on the number of

channels in the distribution channel it can occur at customer - manufacturer, or retailer -
manufacturer also.

Activities involved

Order arrival, Production scheduling, Manufacturign and shipping, Receiving by the person ordered,
Funds payment

D. Procurement cycle

Occurs at the manufacturer/supplier interface

2. Push/Pull View
In this view, pull processes and push processes are categorized and identified in the supply chain.
Each supply chain will have some pull processes and push processes. The activities initiated
by customers' orders form pull process activities. The activities initiated and carried out in
anticipation of customer demand are push process activities.

Importance of Supply Chain Flows

Flow of information, material and product and cash are important for supply chain functioning and
fulfilment of its objectives.

Information is key to produce as per customers' order and also to forecast in case of made-to-stock
supply chains.

Supply Design, Planning and Operation Related Questions. One will find answers to these questions
in various chapters of the Supply Chain Management Book which we are summarising chapter-wise.

1. Why a company outsources some assembly activities and does some within its assembly plant?
What characteristics of the product or order characterize outsourced activities?
2. When does a company have only one manufacturing location for the entire country or world?
When does it have multiple plants?
3. Why certain orders are despatched via couriers for overnight delivery or one day delivery and why
certain other orders are sent via trucks on full load or part load basis?
4. How inventories are determined for components and finished goods?

Supply Chain Performance: Achieving Strategic

Fit and Scope - Review Notes

Competitive Strategy and Supply Chain Strategy

A company's competitive strategy clearly spells out the set of customer needs that it seeks to satisfy
through its products and services having a defined set of attributes.

The supply chain design or supply chain strategy must be in alignment with competitive strategy. A
supply chain design can be taken up only after the competitive strategy is finalised and a supply
chain needs to be redesigned or modified whenever there is a change in competitive strategy.

Chopra and Meindl use the concept of strategy to refer to what each function will try to do
particularly well. They indicate that product strategy specifies the portfolio of products that will be
offered for sale by the company and product development strategy specifies the portfolio of new
products that the company will develop. A marketing and sales strategy specifies how the market
will be segmented and the products of the company are positioned, priced and promoted. The
supply chain strategy determines the procurement process of the raw materials, transportation of
materials, manufacture of the product, distribution channels, warehousing and transportation of
the products, and the follow-up services.
The supply chain strategy includes supplier strategy, operations strategy, and logistics strategy.
Design decisions regarding inventory, transportation, operating facilities, and information flows in
the supply chain of a company are all part of supply chain strategy.

The Process of Achieving Strategic Fit

Strategic fit between competitive strategy and supply chain strategy refers to the consistency
between the customer needs that the competitive strategy aims to satisfy and the supply chain
capabilities that the supply chain strategy aims to build. Chopra and Meindl stated an important
point: no one function can ensure the chain's success. However, failure at one function may lead to
failure of the overall chain.

Three steps are involved.

1. Understanding the customer needs regarding attributes of supply.

2. Understanding the supply chain attributes (alternatives available).
3. Achieving strategic fit. Making decision on the supply chain to best serve the needs of the target
segment customers.

Understanding the Needs of the Customer Regarding Supply Attributes

Some of the attributes or dimensions of the supply are as follows:

The quantity of the product needed in each lot purchased. Preferred purchase quanity of the
The response time from customer's enquiry.
The variety of products needed (applicable in case of a retail store, restaurant etc.).
The service level required (shortage of items)
The price of the product or service.
The desired rate of innovation.

Chopra and Meindl argued that while there are many attributes of the supply system which are to be
understood from customer point of view and built into the supply chain, one key measure captures
the variation for many of these attributes. That measure according to them is implied demand
uncertainty. It is different from demand uncertainty. Demand uncertainty reflects the uncertainty of
customer demand for a product. Implied demand uncertainty is uncertainty for a specific supply
chain for the portion of the demand (target market) it caters to.

Implied demand uncertainty is defined in the context of multiple supply chains supplying the same
product. Multiple supply chains come due to different attributes that they satisfy. An example is a
firm supplying a product, say medicines, 24 hours versus a firm that supplies during normal day
hours. The implied demand uncertainty for the 24 hour firm can be high as on some days there is
heavy demand and some days very less demand and also the demand for specific medicines can be
high on some days and can be even zero on some days.

A spectrum can be visualized in terms of implied demand uncertainty from low uncertainty to high
uncertainty and a firm can be placed on this line or spectrum at some point.

Understanding the Supply Chain (Characteristics)

A supply chain can be described initially by two characteristics responsiveness and efficiency.

Various supply chain characteristics contribute to responsiveness and efficiency.

Supply chain responsiveness is measured by the abilities of the chain to do the following:

Ability to respond to fluctuations in demand

Ability to provide short lead times
Ability to handle large variety of products
Ability to come out with innovations and highly innovative products
Ability to provide a very high service level

Supply chain efficiency is the cost of making and delivering a product to the customer. Increase in
costs lower efficiency.

Cost-Responsiveness Efficient Frontier

It is a chart or graph with cost on the X-axis (origin is high cost) and Responsiveness on the Y axis
(origin is low responsiveness). See Example

The frontier shows the minimum cost for a given responsiveness. If a company is operating within
the frontier, at a higher cost, it can decrease the cost by appropriate actions but keep the
responsiveness same. When it is operating on the efficient frontier, any increase in responsiveness
can only come by incurring extra cost.

The frontier curve is a short-run phenomena and companies continually try to improve their supply
chain by reducing cost further and increasing responsiveness and thus change the frontier over each

Achieving strategic fit

The greater the implied demand uncertainty, the more responsive a supply chain has to be. More
responsive supply chains are more costly supply chains. When compared directly with less
responsive but more efficient supply chains, their costs may look excessive. But the fit demands that
for target markets with greater implied demand uncertainty, more responsive supply chain is to be

Therefore it is to be emphasized that there is no right supply chain strategy independent of the
competitive strategy. For a given competitive, a right supply chain can be specified.

Other Issues affecting the Strategic Fit Decision

Multiple Target Markets: Most companies may serve two or more target markets and the supply
chain has to serve them both. In this case some tailoring has to be done by having common facilities
and in some supply chain activities and dedicated facilities in some supply chain activities so that
economies of scale where exist can be utitlized without deterioration in service for either target

Product Life Cycle: As the product is new, implied demand uncertainty is high and as it matures,
implied demand uncertainty is low. Hence supply chain design has to change over the life cycle of
the product.

Competitive situation: As the product matures, more competitors emerge and implied demand
uncertainty keeps chaging.

Expanding the Supply Chain Optimization and Strategic Fit Scope

Intracompany Intraoperation scope: The most limited scope over which strategic fit and optimization
can be attempted is one with one operation within a functional area in a company. For example
each warehouse of the company has its own goal.

Intracompany Intrafunctional scope: If the competitive strategy and supply chain strategy are
aligned across all the supply chain activities (supplier strategy, operations strategy, and logistics
strategy ) or functions of the company and optimization is attempted in an integral manner
including the raw material inventory, manufacturing operations, finished goods inventory and
warehouse, and transportation, the scope is extended to intracompany intrafuctional level.

Intracompany Interfunctional scope: At this level of scope, the entire company's activities are
viewed and modeled as one single system, and optimization is done and company profit is

Intercompany Interfunctional scope: The Maximum Supply Chain Surplus view: At this level of
optimization and fit making, the entire supply chain (including various different organizations) is
modeled as a system and optimization and fit is designed so that supply chain surplus is maximized.

Flexible Intercompany interfunctional scope: The flexibility refers to dynamic situation. Physically,
the participants in the supply chain keep changing, products keep changing, technologies keep
changing, facilities keep changing. Mathematically, there are changes in number of variables and
variable values. A supply chain capable of optimizing and fit making dynamically over time is a
flexible intercompany interfuctional scope supply chain.

Supply Chain Drivers and Obstacles - Review Notes

The supply chain strategic fit concept requires that a company achieve the desired responsiveness
and efficiency in its supply chain that best meets the needs of the company's competitive strategy.

The performance of a supply chain (responsiveness and efficiency) is determined by decisions in the
areas of inventory, transportation, facilities and information. Hence these four areas are identified
as drivers of supply chain performance.

A Framework for Structuring Supply Chain Drivers

Supply chain managers have to take research and development efforts to improve both
responsiveness and efficiency of their supply chains on a continuous basis. In the past there were
technological and managerial breakthroughs which improve one of them without any deterioration
in the other and also improvement in both dimensions simulataneously. Actual economic theory
tells, new technologies (capital investments) are adopted for capital productivity. Capital
productivity in the context of supply chains comes through improvement in responsiveness and

But at a certain point in time, there can be tradeoffs between responsiveness and efficiency. Hence
supply chain designers come with supply chains that give various combinations of responsiveness
and efficiency (responsiveness - efficiency frontier) and the optimal combination is chosen based on
the competitive strategy considerations.

Definition/Explanation of Four Drivers

Inventory: It consists of all raw material, work in process, and finished goods within a supply chain.

Transportation: It involves moving inventory from one point in the supply chain to another point.

Facilities: A facility is a place where inventory is stored, manufactured or assembled. Hence facilities
can be categorised into production facilities and storage facilities.

Information: It consists of data and results of analysis regarding inventory, transportation, facilities,
customer orders, customers, and funds.


Inventory is maintained in the supply chain because of mismatches between supply and demand.

Types of inventory based on reasons for keeping them:

Cycle inventory: This results due to producing or buying larger lots to minimize acquisition costs
related to processing each purchase order or production order.

Safety Inventory: It is held to counter against uncertainty or variability of demand.

Seasonal Inventory: It is inventory maintained to satisfy higher demands in a period compared to

production capacity. It arises due to the decision to service predicted variability in demand through
extra production during slack period or low demand periods.

Increasing inventory gives higher responsiveness but results in higher inventory carrying cost.


Number of decisions have to be taken in designing a supply chain regarding transportation.


Mode of Transportation

Six basic modes exist

Truck (Road)
Electronic transportation (the newest mode for music, documents etc)

Route and Network Selection

Network is a set of facilities or destinations which can be used for transportation of goods. Route is a
specific selection of facilities or destinations through which goods move.

Own Transport or Outsourced Transport


Within a facility, inventory is either transformed into another state or stored.

Facilities Related Decisions

Manufacturing Methodology or Technology
Warehousing methodology

Information does not have a physical presence. It is likely to be overlooked. But it deeply affects
every part of supply chain. Information is the connection between various stages in a supply chain
and allows them to coordinate actions and increase the maximum supply chain profitability. It is also
essential in daily operations. The stocks available in warehouses must have visibility so that when a
customer wants an item, it can be delivered to him.

Decisions related to Information

Push Process Information and Pull Process Information

Coordination and information sharing across various facilities in the supply chain.
Aggregate Planning
Enabling technologies

Obstacles to Achieving Strategic Fit

Increasing Variety of Products:In the era of mass customization production variety is increasing.

The customers becoming increasingly demanding. Today's customers are demanding faster
fulfillment, better quality, and better performing products for the same price that they are paying

The supply chain is getting fragmented. At one time vertical integration was the order of the day. But
the present trend is to concentrate on core competence and outsource more activities. Thus the
supply chain is more fragmented now.

Globalization is creating global supply chains and hence physical distance is increasing between a
company and its suppliers and a company and its customers.

While creating a strategy is difficult, executing it is much more difficult. Many companies understand
Toyota Production System now, but still find it difficult to implement and operate