Supply Chain Management

Chapter 1
Understanding the Supply Chain
Lecturer:
Wilmer Jorge
 OBJECTIVES

By the end of this unit you will be able to:

 Appreciate what a supply chain is and what it does.

 Understand what the basic components of the supply
chain are and what kind of decisions at each stage of the
SCM are made.
 Identify the key three supply chain decision phases and
explain the significance of each one.
 Describe the cycle and push/pull views of a supply chain.
 Classify the supply chain macro processes in a firm.
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Nothing entirely new... Just a significant
evolution
“An army marches on its
stomach”

Unless the soldiers are fed, the army

cannot move.

Grand strategies and dashing maneuvers will not

be possible without first figuring out how to meet
the day-to-day demands of providing an army with
fuel, spare parts, food, shelter and ammunition.
The term “supply chain management”
arises in the late 1980’s and came into
widespread use in the 1990’s.

Before that time: “Logistics” and

“Operations management”

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 What is Supply Chain?
“A supply chain consist of all stages
involved, directly or indirectly, in
fulfilling a customer request.”
Chopra, Sunil, and Peter Meindl, 2003, Supply Chain, Second Edition.

Manufacturers Transporters
Retailers

Suppliers Warehouses Final Consumers 5

 … And what is Supply
Chain Management then?
We can say that SCM is the things
that we do to influence the
behaviour of the supply chain.

“Supply chain management is the coordination of

production, inventory, location and transportation
among the participants in order to achieve the best
responsiveness and efficiency for the market being
served”.
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 Diference between SCM and traditional LOGISTICS

Logistics refers to the activities that occur within the

boundaries of a single organization and Supply Chain
refers to networks of companies that work together and
coordinate their actions to deliver a product to market.

LOGISTICS: Procurement, distribution, maintenance and

inventory management.
SCM also includes: marketing, new product
development, finance and customer service.

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The SCM views the supply chain and the organizations in
it as a single entity.

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 What is a Supply Chain?
 All stages involved, directly or indirectly, in
fulfilling a customer request.
 Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers.
 Within each company, the supply chain includes
all functions involved in fulfilling a customer
request (product development, marketing,
operations, distribution, finance, customer
service).
 Examples: Fig. 1.1 Detergent supply chain (Wal-
Mart), Dell.
 What is a Supply Chain?
Customer wants
P&G or other Jewel or third Jewel
detergent and goes
manufacturer party DC Supermarket
to Jewel

Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
 What is a Supply Chain?
 Customer is an integral part of the supply chain.
 Includes movement of products from suppliers
to manufacturers to distributors, but also
includes movement of information, funds, and
products in both directions.
 Probably more accurate to use the term “supply
network” or “supply web”.
 Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers (Fig. 1.2).
 All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell).
Flows in a Supply Chain

Information

Product
Customer
Funds
 The Objective of a 1-13

Supply Chain:
Maximize overall value created.
Supply chain value: difference between what
the final product is worth to the customer
and the effort the supply chain expends in
filling the customer’s request.
Value is correlated to supply chain
profitability (difference between revenue
generated from the customer and the overall
cost across the supply chain).
 The Objective of a
Supply Chain
 Example: Dell receives $2000 from a customer
for a computer (revenue).
 Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.).
 Difference between $2000 and the sum of all of
these costs is the supply chain profit.
 Supply chain profitability is total profit to be
shared across all stages of the supply chain.
 Supply chain success should be measured by
total supply chain profitability, not profits at an
individual stage.
 The Objective of a
Supply Chain
 Sources of supply chain revenue: the customer.
 Sources of supply chain cost: flows of
information, products, or funds between stages
of the supply chain.
 Supply chain management is the management
of flows between and among supply chain
stages to maximize total supply chain
profitability.
https://www.youtube.com/watch?v=nmO-y0q8sdI
 Decision Phases of a Supply
Chain

Supply chain strategy or design

Supply chain planning
Supply chain operation
 Supply Chain Strategy
or Design
 Decisions about the structure of the supply chain
and what processes each stage will perform.
 Strategic supply chain decisions:
› Locations and capacities of facilities.
› Products to be made or stored at various locations.
› Modes of transportation.
› Information systems.
 Supply chain design must support strategic
objectives.
 Supply chain design decisions are long-term and
expensive to reverse – must take into account
market uncertainty.
 Supply Chain
Planning
Definition of a set of policies that govern
short-term operations.
Fixed by the supply configuration from
previous phase.
Starts with a forecast of demand in the
coming year.
 Supply Chain Planning
Planning decisions:
› Which markets will be supplied from which
locations.
› Planned buildup of inventories.
› Subcontracting, backup locations.
› Inventory policies.
› Timing and size of market promotions.
Must consider in planning decisions demand
uncertainty, exchange rates, competition over
the time horizon.
 Supply Chain Operation
 Time horizon is weekly or daily.
 Decisions regarding individual customer orders.
 Supply chain configuration is fixed and operating
policies are determined.
 Goal is to implement the operating policies as
effectively as possible.
 Allocate orders to inventory or production, set
order due dates, generate pick lists at a
warehouse, allocate an order to a particular
shipment, set delivery schedules, place
replenishment orders.
 Much less uncertainty (short time horizon).
 Hierarchical Planning
Framework
Procurement Production Distribution Sales

-Material programs - Plant location - Physical distribution - Product program

Long term
- Supplier selection - Production systems structure - Strategic sales
- Cooperation - Subcontractors - Transportation strategy planning

-- Personnel training -- Master production

-- Contracts -Scheduling -- Distribution -- Mid-term sales
Mid term -- Material Requirements -- Capacity planning planning planning
Planning

-- Personnel scheduling -- lot-sizing - Warehouse

- material ordering - operations replenishment -- Mid-term sales
Short term scheduling - Transportation planning planning
- shop floor control

EXECUTION

Flow of goods Information Feedback

 Differentiating Factors by Planning Levels
Factor- Level Strategic Tactical Operational
Purpose Supply chain design, Planning resource Operation scheduling
resource acquisition utilization and execution

Implementation Policies, objectives, Budgets Schedules, procedures

instruments capital investment and reports

Planning horizon Long: 3-5 years Medium: 6-18 months Short: daily, weekly,
monthly
Scope Broad Medium Short
corporate level plant level floor level
Level of Management Top Middle Low

Frequency of Low: every few years Medium: monthly or High: weekly, daily or as
re-planning quarterly required
Source of information Largely external External and internal Largely internal

Level of aggregation High Medium Low

- product data Product families Product groups individual products
- time years Month continuous
Degree of uncertainty High Medium Low

Degree of risk High Medium Low

 Process View of a Supply Chain
Cycle view: processes in a supply chain are
divided into a series of cycles, each
performed at the interfaces between two
successive supply chain stages.
Push/pull view: processes in a supply chain
are divided into two categories depending on
whether they are executed in response to a
customer order (pull) or in anticipation of a
customer order (push).
Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
 Cycle View of a Supply Chain
 Each cycle occurs at the interface between two
successive stages.
 Customer order cycle (customer-retailer).
 Replenishment cycle (retailer-distributor).
 Manufacturing cycle (distributor-manufacturer).
 Procurement cycle (manufacturer-supplier).
 Figure 1.3
 Cycle view clearly defines processes involved and the
owners of each process. Specifies the roles and
responsibilities of each member and the desired
outcome of each process.
 Push/Pull View of
Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
 Push/Pull View of
Supply Chain Processes
Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand.
Pull: execution is initiated in response to a
customer order (reactive).
Push: execution is initiated in anticipation of
customer orders (speculative).
Push/pull boundary separates push processes
from pull processes.
 Push/Pull View of
Supply Chain Processes
 Useful in considering strategic decisions relating
to supply chain design – more global view of
how supply chain processes relate to customer
orders.
 Can combine the push/pull and cycle views
› L.L. Bean (Figure 1.6)
› Dell (Figure 1.7)
 The relative proportion of push and pull
processes can have an impact on supply chain
performance.
 Example of a
Supply Chain Network
Distribution
Supplier Manufacturer Center Customer

Products

Information / Cash

Decoupling
point PULL
PUSH
 Production Strategies

• Make to Stock
– Production is based on forecasted amounts for
stocked items
• Make to Order
– Production of a product is made for a customer
order in the quantity specified by the order
 Process View of a Supply Chain: Push – Pull View
LL Bean DELL

PULL PULL

Process Process

Customer Order
Cycle
Cust Order & Mfrg
Customer order arrives Cycle

Repl & Mfrg

Cycle
Customer order arrives

Procurement Procurement
Cycle Cycle

PUSH PUSH
Process Process
 Pull Push

Execution initiated in response to a Execution initiated in anticipation of

customer order customer order

At time execution of pull, customer At time execution of pull, customer

demand is known with certainty demand is not known and must be
forecasted

Its also called as reactive process It is called as speculative process

The importance of the push/pull view

 The manufature of paint requires

production of the base, mixing of
suitable colors and packing.
 Until the 80’s all was performed
in large factories and paint cans
were shipped to stores.
 This qualified as push processes
as they were performed to a
forecast in anticipation to
customer demand
The importance of the push/pull view

So it was very difficult to match

supply with demand.
In the 90’s, paint supply chains
were restructured such that
mixing of colors was done at
retail stores after customers
place their orders.
Color mixing was shifted from
the push to the pull phase of
the supply chain.
Total paint inventories across the supply
chain have declined!!
 Supply Chain Macro Processes in a
Firm
 Supply chain processes discussed in the two
views can be classified into (Figure 1.8):
› Customer Relationship Management (CRM)
› Internal Supply Chain Management (ISCM)
› Supplier Relationship Management (SRM)
 Integration among the above three macro
processes is critical for effective and successful
supply chain management.
 Supply Chain Macro Processes
• All SC processes can be classified into three categories.

Supplier Firm Customer

SRM ISCM CRM

Supplier Relationship Internal Supply Chain Customer Relationship
Management Management Management

Source StrategicPlanning Market

Negotiate Demand Planning Sell

Buy Supply Planning CallCenter

Design Fulfillment Order Management
Collaboration Field Service
Supply
1-38
Collaboration
 Analysis
• Retailing in the United States is largely consolidated, with
large chains buying comsumer goods from manufacturers.
This consolidation give retailers sufficient scale that the
introductions of an intermediary such as a distributor does
little to reduce costs.
• India has millions of small retail outlets. The small size of
Indian retail outlets limits the amount of inventory they can
hold, thus requiring frequent replenishment . The only way
for a manufacturer to keep transportation costs low is to bring
full truckloads of product close to the market and then
distribute locally using “milk runs” with smaller vehicles.
 Analysis
• The pressence of an intermediary that can receive a full
truckload shipment , break bulk , and then make smaller
deliveries to the retailers is crucial if transportations costs are
to be kept low.
• India has millions of small retail outlets. The small size of
Indian retail outlets limits the amount of inventory they can
hold, thus requiring frequent replenishment . The only way
for a manufacturer to keep transportation costs low is to bring
full truckloads of product close to the market and then
distribute locally using “milk runs” with smaller vehicles.
 Concept Question?
• How is the importance of an
intermediary here in Lima?
 Discussion Questions
1. Consider the supply chain involved when a
customer purchases a book at a bookstore.
Identify cycles in this supply chain and the
location of the push/pull boundary.
2. In what way do supply chain flows affect the
success or failure of a firm like Amazon? List two
supply chain decisions that have a significant
impact on supply chain profitability.
3. What are some strategic, planning and
operational decisions that must be made by a
retailer like Plaza Vea?