MGT-629/422 Operations and Supply Chain Management

Lesson 9-10-11

Supply Chain Management

Logistics and supply chain management are not new ideas. From the building of the pyramids to the
relief of hunger in Africa, the effective flow of materials and information is the main concern.
Throughout the history of mankind wars have been won and lost through logistics strengths and
capabilities. It is only in the recent past that business organizations have come to recognize the vital
impact that logistics management can have in the achievement of competitive advantage.

Mission of Supply Chain and Logistics Management

Getting the right goods or services to the right place, at the right time, and in the desired condition at
the lowest cost and highest return on investment.

Logistics Management (Definition)

Logistics is the process of strategically managing the procurement, movement and storage of materials,
parts and finished inventory (and the related information flows) through the organization and its
marketing channels in such a way that current and future profitability are maximized through the cost-
effective fulfillment of orders.

Supply chain management builds upon the logistics management framework and seeks to achieve
linkage and co-ordination between the processes of other entities in the pipeline, i.e. suppliers, and
customers, and the organization itself.

1. For example, elimination of buffers of inventory that exist between organizations in a chain
through the sharing of information on demand and current stock levels.

Supply Chain Management (Definitions)

The management of a network of relationships within a firm and between interdependent organizations
and business units consisting of material suppliers, purchasing, production facilities, logistics, marketing,
and related systems that facilitate the forward and reverse flow of materials, services, finances and
information from the original producer to final customer with the benefits of adding value, maximizing
profitability through efficiencies, and achieving customer satisfaction.

The design and management of seamless, value-added processes across organizational boundaries to
meet the real needs of the end customer (Institute for Supply Management)

Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry and order management, distribution across all
channels, and delivery to the customer (The Supply Chain Council)

The planning and management of all activities involved in sourcing and procurement, conversion, and all
logistics management activities … also includes coordination with channel partners, which can be

Umer Mukhtar (Assistant Professor, GIFT Business School)

Notes prepared using prescribed textbook sources of this course
MGT-629/422 Operations and Supply Chain Management

suppliers, intermediaries, third party service providers, and customers. (Council of Supply Chain
Management Professionals)

Approach of Supply Chain management

 Cross function approach
 Integrated approach
 Overall objective is more important
 Conflict resolution
 Planning uncertainty i.e. contingency plans
 Decision making at corporate level
 Eliminate redundant activities
 Ultimate objective is customer astonishment

Creating Value through Supply Chain

Companies seek to develop a distinctive advantage and differentiate themselves in the mind of
consumer. Customers seek value in terms of:

 Quality
 Cost
 Flexibility
 Delivery
 Innovation

The underlying philosophy of SC is to link the marketplace, the distribution network, the manufacturing
process and the procurement activity in such a way that customers are serviced at higher levels and yet
at lower cost.

What is the Right Supply Chain?

Food Industry of U.S. was losing 300 Billion annually due to poor coordination of Supply Chain
Partners. The excess of some products and shortage of others owing to an inability to predict
demand.

Consideration of Demand Nature

 Primarily Functional

Satisfy basic needs, stable, and predictable demand and long life cycles – Rice, Pulses, Milk, Chicken,
Vegetables (Grocery Items)

 Primarily Innovative

Satisfy luxury needs, unstable, and unpredictable demand and short life cycles – Apparels, Fashion
products, Personal Computers, Smart phones.

Umer Mukhtar (Assistant Professor, GIFT Business School)

Notes prepared using prescribed textbook sources of this course
MGT-629/422 Operations and Supply Chain Management

Functional Innovative

Aspects of Demand Predictable Unpredictable

Product Life Cycle More than 2 years 3 months to 1 year

Contribution Margin 5% to 20% 20% to 60%

Product Variety Low (10 to 20 variants per High (Often no. of variants per
category) category)

Average Margin of error in the 10% 40% to 100%

demand forecast

Average Stock out Rate 1% to 2 % 10% to 40%

Lead time required for made-to- 6 months to 1 year 1 day to 2 weeks

order products

Physically efficient and Market-Responsive Supply Chains

Physically Efficient Process Market Responsive Process

Primary purpose Supply predictable demand Respond quickly to

efficiently at the lowest unpredictable demand in order
possible cost to minimize stakeouts and
obsolete inventory

Manufacturing focus Maintain high average Deploy excess buffer capacity

utilization rate

Inventory Strategy Generate high turns and Deploy significant buffer stocks
minimize inventory throughout of parts or finished goods
the chain

Lead Time focus Shorten lead time as long as it Invest aggressively in ways to
does not increase cost reduce lead time

Lead Time Focus Shorten lead time as long as it Invest aggressively in ways to

Umer Mukhtar (Assistant Professor, GIFT Business School)

Notes prepared using prescribed textbook sources of this course
MGT-629/422 Operations and Supply Chain Management

does not increase cost reduce lead time

Approach to choosing Supplies Select primarily for cost and Select primarily for speed,
quality flexibility and quality

Product Design Strategy Maximize performance and Use modular design in order to
minimize cost postpone product
differentiation for as long as
possible

Key Activities/Processes in Supply Chain Management

The Bullwhip Effect

Variation in demand is exaggerated as information moves upstream away from the point of use.
Variation in demand is exaggerated due to infrequent demand and/or inventory level information
exchange and order batching.

Umer Mukhtar (Assistant Professor, GIFT Business School)

Notes prepared using prescribed textbook sources of this course
MGT-629/422 Operations and Supply Chain Management

Supply Chain Performance: Achieving Strategic Fit and Scope

A company's competitive strategy defines, relative to its competitors, the set of customer needs that it seeks to
satisfy through its products and services. For example, Wal-Mart aims to provide high availability of a variety
of products of reasonable quality at low prices. Most products sold at Wal-Mart are commonplace (everything
from home appliances to clothing) and can be purchased elsewhere. What Wal-Mart provides is a low price
and product availability.
We can also contrast Dell, with its build-to-order model, with a firm like Gateway selling eMachines PCs
through retailers. Dell has stressed customization and variety at a reasonable cost, with customers having to
wait approximately one week to get their product. In contrast, a customer can walk into a computer retailer, be
helped by a salesperson, and leave the same day with an eMachines computer.
To see the relationship between competitive and supply chain strategies, we start with the value chain for a
typical organization.
The value chain begins with new product development, which creates specifications for the product. Marketing
and sales generate demand by publicizing the customer priorities that the products and services will satisfy.
Marketing also brings customer input back to new product development. Using new product specifications,
operations transforms inputs to outputs to create the product. Distribution either takes the product to the
customer or brings the customer to the product. Service responds to customer requests during or after the sale.
These are core processes or functions that must be performed for a successful sale. Finance, accounting,
information technology, and human resources support and facilitate the functioning of the value chain.

ACHIEVING STRATEGIC FIT

This chapter is built on the idea that for any company to be successful, its supply chain strategy and
competitive strategy must fit together. Strategic fit means that both the competitive and supply chain strategies
have aligned goals. It refers to consistency between the customer priorities that the competitive strategy hopes
to satisfy and the supply chain capabilities that the supply chain strategy aims to build.

HOW IS STRATEGIC FIT ACHIEVED?

What does a company need to do to achieve that all-important strategic fit between the supply chain and
competitive strategies? A competitive strategy will specify, either explicitly or implicitly, one or more
customer segments that a company hopes to satisfy.
Step 01: Understanding the Customer and Supply Chain Uncertainty:
 Quantity of product needed in each lot
 Response time customers are willing to tolerate
 Variety of products needed
 Service level required
 Price of the product
 Desired rate of innovation in the product

Customer Need Causes Implied Demand Uncertainty to …

Range of quantity required increases Increase because a wider range of the quantity required
implies greater variance in demand

Lead time decreases Increase because there is less time in which to react to
orders

Umer Mukhtar (Assistant Professor, GIFT Business School)

Notes prepared using prescribed textbook sources of this course
MGT-629/422 Operations and Supply Chain Management

Variety of products required Increase because demand per product becomes more
increases disaggregate

Number of channels through which Increase because the total customer demand is now
product may be acquired increases disaggregated over more channels

Rate of innovation increases Increase because new products tend to have more
uncertain demand

Required service level increases Increase because the firm now has to handle unusual
surges in demand

Implied demand uncertainty is demand uncertainty due to the portion of demand that the supply chain is
targeting, not the entire demand. We make a distinction between demand uncertainty and implied demand
uncertainty.
Demand uncertainty reflects the uncertainty of customer demand for a product. Implied demand uncertainty,
in contrast, is the resulting uncertainty for only the portion of the demand that the supply chain plans to satisfy
and the attributes the customer desires. For example, a firm supplying only emergency orders for a product will
face a higher implied demand uncertainty than a firm that supplies the same product with a long lead time, as
the second firm has an opportunity to fulfill the orders evenly over the long lead time.
Another illustration of the need for this distinction is the impact of service level.
As a supply chain raises its level of service, it must be able to meet a higher and higher percentage of actual
demand, forcing it to prepare for rare surges in demand. Thus, raising the service level increases the implied
demand uncertainty even though the product's underlying demand uncertainty does not change.
Both the product demand uncertainty and various customer needs that the supply chain tries to fill affect
implied demand uncertainty. Table 2-1 illustrates how various customer needs affect implied demand
uncertainty. As each individual customer need contributes to the implied demand uncertainty, we can use
implied demand uncertainty as a common metric with which to distinguish different types of demand.
Step 2: Understanding Supply Chain Capabilities
After understanding the uncertainty that the company faces, the next question is: How does the firm best meet
demand in that uncertain environment? Creating strategic fit is all about creating a supply chain strategy that
best meets the demand a company has targeted given the uncertainty it faces.
We now consider the characteristics of supply chains and categorize them. Similar to the way we placed
demand on a one-dimensional spectrum (the implied uncertainty spectrum), we will also place each supply
chain on a spectrum. Like customer needs, supply chains have many different characteristics that influence
their responsiveness and efficiency. Supply chain responsiveness is the ability to
 Respond to wide ranges of quantities demanded
 Meet short lead times
 Handle a large variety of products
 Build highly innovative products
 Meet a very high service level
 Handle supply uncertainty

Step 3: Achieving Strategic Fit

After mapping the level of implied uncertainty and understanding the supply chain position on the
responsiveness spectrum, the third and final step is to ensure that the degree of supply chain responsiveness is

Umer Mukhtar (Assistant Professor, GIFT Business School)

Notes prepared using prescribed textbook sources of this course
MGT-629/422 Operations and Supply Chain Management

consistent with the implied uncertainty. The goal is to target high responsiveness for a supply chain facing high
implied uncertainty, and efficiency for a supply chain facing low implied uncertainty.

Drivers of supply chain performance for achieving strategic fit

Umer Mukhtar (Assistant Professor, GIFT Business School)

Notes prepared using prescribed textbook sources of this course