Fundamentals of

Supply Chain Management

Dr. Dawei Lu

Key Learning Points

• Brief historical development of SCM
• Working definitions of SC and SCM
• Relevance to real-world supply chains
• Development trends
• The basic SC model – SCOR model
• The key scope and emphasis of SCM
• Mini case studies

1
Brief Historical Background
Academic study of logistics management could be dated back to the
1850s, when Henry Adams, an economist who was president of Yale
University, Offered a course in the Economics of Transportation
In 1962, Peter Drucker argues that logistics was unexplored and left
behind as a “dark continent”.
In the 1970s and 1980s the importance of logistics was brought to the
surface.
Over the early 1980s, logistics has penetrated into a broader
management philosophy known as Supply Chain Management
The term “supply chain management” first appeared in a Financial
Times article written by Oliver and Webber in 1982 (Laseter, T, & Oliver, K., (2003). “When
will Supply Chain Management Grow Up.” Strategy and Business, 32, pp.1 – 5.) describing the range of activities

performed by the organization in procuring and managing supplies.

Brief Historical Background

The distinction between supply chain management and logistics is

blurry in the literature and the terms often used interchangeably.
Early 1990s companies start to identify their business environment
from the supply chain perspective. The study was focused on the
efficiency of material flow at the operational level.
Key SCM issues in the mid 1990s were cost competitiveness and
inventory management.
Today it focuses more on dynamic buyer-supplier relationships
towards the entire supply chain integration, of which the
implementation of e-business is the new dimension.

2
 Evolutionary Nature of SCM

‘Functional’ to ‘process’ perspective

‘Operational’ to ‘strategic’ viewpoint
‘Single enterprise’ to ‘extended enterprise’
IT as the major enabler, both internally and externally
Towards ‘portfolio relationship’ approach
Relates to other alternative management topics (e.g. TQM, JIT,
BPR, Learning organisation, and knowledge management)
From local, to regional, and toward global supply chain
perspective

Supply Chain Evolution Model

1980 1985 1990 1995 2000

Operational Business Supply Integrated

cost Process Chain Value Chain
Realignment Reengineering management Management

3
Four Basic Flows
Supply chain
Material flow Supply network
Information flow Supplier/vendor
Buyer/Customer
Finance flow Value chain/stream
Commercial flow Demand chain
Revenue chain

Value delivery

Supplier’s
Supplier OEM Distributor Retailer Consumer
Supplier

Demands from customer

Supply Chain Definition

Du Pont’s director of logistics, Clifford Sayer, defines

supply chain management as a loop:

“It starts with customer and it ends with

customer”
“It requires looking at your business as one
continuous process”

4
Supply Chain Definition
The Terminology Committee of the European Standards
Authority has recommended the following definition of a
Supply Chain:

“A sequence of events which creates the value of

a specific good. This sequence may include
conversion, assembling and/or disassembling,
movement and placement.”

Supply Chain Definition

“ Supply chain management by definition is

about the management of relationships across
complex networks of companies that whilst
legally independent are in reality inter-
dependent” Martin Christopher (1998)

5
Supply Chain Definition

Donald J. Bowersox and David J. Closs (1996,

Logistical Management -- The Integrated Supply Chain
Process) defined supply chain management as:
Firms must expand their integrated behaviour to
incorporate customers and suppliers. This extension,
through external integration, is referred to as supply
chain management

Supply Chain Model

— Source: Bowersox 1996

Inventory Flow

Manufacturing Physical
Suppliers Procurement
support distribution Customers

Information Flow

Supply Chain Management

6
Supply Chain Network
—Source: Nigel Slack, 2002
Second Tier First Tier First Tier Second Tier
Supplier Supplier customer customer

OEM

Supply side Demand side

Purchasing and supply Physical distribution

In bound Logistics Out bound Logistics
Material management
Supply Chain Management

Supply Chain Management

A definition: “Maximising added value and

reducing total cost across the entire trading
process through focusing on speed and
certainty of response to the market.”
– Tom McGuffog

7
 My Definition
Supply chain is defined as a group of inter-connected
participating companies that add value to a stream of
transformed inputs from their source of origin to the
end products or services that are demanded by the
designated end-consumers.
Supply chain management is simply and ultimately
the business management, whatever it may be in its
specific context, which is perceived and enacted from
the relevant supply chain perspective.

Lu, D. (2011), Fundamentals of Supply Chain Management, ISBN 978-87-7681-798-5, Ventus Publishing Aps,
Frederikesberg, Denmark.

Discussion
Watch the video
Write down the issues
mentioned in the video
Discuss which ones are
supply chain management,
and which are not.
How do you make the
distinction?

8
 Relevance to real-world supply chains
--- Ancient “Silk-Road” Supply Chains

The driver for the supply chain to take

place is the trade.
The driver for trade to take place is the
economic gains

Global Agricultural Supply Chains

9
 Global Energy Supply Chains

Manufacturing Supply Chains

10
 Economic Gains from import and export

Economic Gains from Trade

Here is the production possibilities frontier for a fictional country, "Country A“ and
"Country B“. The fact that the two countries have different relative rates of trade-off is
important. This difference gives rise to a comparative advantage, a key concept in
economics. If free trade is possible, the green line is the production possibilities
frontier (or "PPF") for the entire world.

11
Economic theory suggests that, if countries apply the principle of
comparative advantage, combined output will be increased in comparison
with the output that would be produced if the two countries tried to
become self-sufficient and allocate resources towards production of both
goods.

Only when the gradients are different will a country have a

comparative advantage, and only then will trade be beneficial.

Winning Characteristics
-- Evolutionary business dynamism

OUTPUT PRICE QUALITY SERVICE CHOICE

1960’s
1970’s
1980’s
1990’s
2000
PRODUCTIVITY
FLEXIBILITY
AGILITY

12
Trends in Business Environment

Globalisation, convergence, deregulation, and hence

severer competition
Channel structures continues to evolve with
technological advances.
Increasing customer demands for greater variety and
choice in product configuration
Organisations are outsourcing their manufacturing
capability to focus on their core competences.
Product and components life cycle are shortening
rapidly

Intrinsic Characteristics of SC

Voluntarily formed “organisation”

No structure, no leaders, no reward/penalty system
Loosely associated with fickle loyalty
Relationship tends to be adversarial, and distrustful
Poor communication flow and visibility
Reactive rather responsive

13
 Key Activities of SCO

Plan: Product introduction and business

development
Source: Materials and components procurement
Make: Manufacturing, assembly
Deliver: Distribution and logistics sales and after
sales services

Supply Chain Operations Reference Model

(SCOR)
Plan

Deliver Source Make Deliver

Source Make Deliver Source Make Deliver Source

Return Return Return Return Return

Return
Return Return

Suppliers’ Supplier Your Company Customer Customer’s

Supplier Customer
Internal or External Internal or External

SCOR Model
Building Block Approach
Processes Metrics
Best Practice Technology

14
The Scope of SCM (by C. Harland, 1996)
The internal supply chain that integrates business functions
involved in the flow of materials and information from inbound to
outbound ends of the business.

The management of dyadic or two party

relationships with immediate suppliers.
The management of a chain of businesses including a
supplier, a supplier’s suppliers, a customer and a customer’s customer, and
so on.

The management of a network of interconnected

businesses involved in the ultimate provision of product and service
packages required by end customers.

The Emphasis of SCM

Supply chain configuration

Supply chain relationships
Supply chain coordination

Fundamentally It Is About
System Thinking

15
 Some Key Issues of SCM

1. Supply Chain Integration

2. Supply Relationships
3. Outsourcing and vertical integration
4. Supply base design and configuration
5. Value adding and total cost reduction (Lean)
6. Responsiveness and customer service (Agile)
7. Complexity and dynamics

Chrysler’s New Value

Chrysler’s new model

reflects important value
adding in the process for Chrysler’s new model

selecting, work with and Cross functional team

evaluating suppliers
Pre-sourcing

Target costing

SCORE

Coordination

Long-term com’t
DaimlerChrysler Delivers the First Fuel Cell Cars to Customers in Berlin

16
Seven Effects of SCM

More frequent product up-dating

Much lowered stocks and inventory
Compressed manufacturing lead-time
Reduced cost throughout the chain
Improved cash flow
Reduced commercial risks
Added customer value (make bigger cake)

Cases of Supply Chain Operations

Case 1: Marks & Spencer

Case 2: Dell Computers
Case 3: Benetton Group

– Identify and draw out supply chain diagram

– What are the major management issues
– How those issues are dealt with

17
CASE STUDY

DELL Reconfigures Its Supply Chain

As the personal computer industry matured, and competition increasingly focused on
the cost of its products, some companies decided to cut out a tier of their network and
sell directly to customers rather than through retail outlets. This move into mail-order
selling was prompted originally by the need to trim costs. With most manufacturers
buying their components from the same group of suppliers, the potential for cost
cutting on the supply side of the network was limited. Furthermore, the nature of
customers was changing. The growing number of sophisticated second- or third-time
customers no longer needed quite the same degree of technical support from dealers.
Cutting them out seemed a good move to Dell Computers, who initially became the
most successful of the computer companies to bypass its demand side supply chain
and deal directly with its ultimate customers.

Yet Dell also found that reshaping its supply chain yielded benefits other than lower
costs. Its (now direct) contact with customers meant that it could learn more about
their needs and preferences ahead of rival manufacturers. Realizing that this new-
found potential needed to be exploited, Dell built computer-based information
systems which could track every contact with customers, from their first inquiry
through to details of every service and repair, thus building a service history for every
machine. As well as helping to sell and service computers more effectively in the
short term, this information base also let sales and support staff pass better
information back to product development teams.
 CASE STUDY
The Benetton Supply Chain

One of the best known examples of how an organization can use its supply chain to achieve a
competitive advantage is the Benetton Group. Founded by the Benetton family in the 1960s,
the company is now one of the largest garment retailers, with stores which bear its name
located in almost all parts of the world. Part of the reason for its success has been the way it
has organized both the supply side and the demand side of its supply chain.
Although Benetton does manufacture much of its production itself, on its supply side the
company relies heavily on 'contractors'. Contractors are companies (many of which are
owned, or part-owned, by Benetton employees) who provide service to the Benetton factories
by knitting and assembling Benetton's garments. These contractors, in turn, use the services
of sub-contractors to perform some of the manufacturing tasks. Benetton's manufacturing
operations gain two advantages from this. First, its production costs for woollen items are sig-
nificantly below some of its competitors because the small supply companies have lower
costs themselves. Second, the arrangement allows Benetton to absorb fluctuation in demand
by adjusting its supply arrangements, without itself feeling the full effect of demand
fluctuations.
On the demand side of the chain Benetton operates through a number of agents, each of
whom are responsible for their own geographical area. These agents are responsible for
developing the stores in their area. Indeed many of the agents actually own some stores in
their area. Products are shipped from Italy to the individual stores where they are often put
directly on to the shelves. Benetton stores have always been designed with relatively limited
storage space so that the garments (which, typically, are brightly coloured) can be stored in
the shop itself, adding colour and ambience to the appearance of the store. Because there is
such limited space for inventory in the stores, store owners require that deliveries of garments
are fast and dependable. Benetton factories achieve this partly through their famous policy of
manufacturing garments, where possible, in greggio, or in grey, and then dying them only
when demand for particular colours is evident. This is a slightly more expensive process than
knitting directly from coloured yarn, but their supply-side economies allow them to absorb
the cost of this extra flexibility, which in turn allows them to achieve relatively fast deliveries
to the stores.
 Case Study
Oil Supply Chain Dynamics
Consider the gasoline shortages of the 1970s. In 1979 the United States (and some other industrialized
nations) experienced a severe gasoline shortage. Iran's exports of oil dropped in the wake of the
revolution there, and petroleum prices on the world market increased sharply. Within weeks, a shortage
of gasoline began. Some service stations found their tanks emptied before the next delivery. Drivers,
remembering the first oil embargo in 1973 and worried that they wouldn't be able to get gas, began to
top off their tanks, instead of filling up only when the gas gauge fell toward empty. Soon, long lines of
cars were seen idling in front of gas stations, and "Sorry-No Gas" signs sprouted along the highways of
America as station after station found its underground tanks pumped dry. The shortage was the top
story on the evening news-aerial footage of cars lined up around the block, close-ups of "No Gas"
signs, and interviews with anxious drivers dominated the news. In some states, mandatory rationing
was imposed, including limiting purchases to, for example, no more than $10 worth of gas. California
imposed odd/even purchase rules: Drivers were allowed to buy gas only every other day, based on
whether their license plate number was odd or even. It seemed that the supply of gasoline had been
slashed.
Curiously, the impact of the Iranian revolution on the flow of oil to the US was small. True, US oil
imports from the Persian Gulf (including Iran) fell by 500,000 barrels per day between 1978 and 1979,
about 3% of US consumption, but imports from other nations increased by 640,000 barrels per day, so
imports in 1979 actually increased by 140,000 barrels per day. Domestic production fell by 150,000
barrels per day, so total supply was essentially constant, while consumption fell by about 330,000
barrels per day, a drop of 2% from 1978. Plainly, for the year as a whole, there was no shortage. But if
the flow of oil into the US was essentially constant, what caused the shortage? Where did the gas go?