Textual Learning Material - Module 2

Supply Chain Management 39
Unit 2: Supply Chain Management

Notes
Structure
2.1 Introduction
2.2 Supply Chain Management (SCM)
2.2.1 Origin of the Term and Definitions
2.2.2 Supply Chain Management 2.0 (SCM 2.0)
2.2.3 Business Process Integration
2.3 The Drivers of Supply Chain Management
2.3.1 A Framework for Structuring Supply Chain Drivers
2.4 Planning in Supply and Demand in Supply Chain
2.4.1 Supply Chain Planning
2.4.2 Capabilities in Supply Chain Planning
2.4.3 Demand Planning
2.5 Planning and Managing Inventories in a Supply Chain
2.6 Transportation
2.7 ERP on SCM
2.8 Network Design and IT in Supply Chain
2.9 E-Business and Supply Chain
2.10 Business Intelligence
2.10.1 Components
2.10.2 Characteristics of Best-In-Class Business Intelligence
2.10.3 Benefits of Business Intelligence
2.11 Summary
2.12 Check Your Progress
2.13 Questions and Exercises
2.14 Key Terms
2.15 Further Readings
Objectives
After studying this unit, you should be able to:
 Describe the supply chain management
 Describe the drivers of supply chain management
 Explain the planning in supply and demand in supply chain
 Understand the capabilities in supply chain planning
 Understand the planning and managing inventories in a supply chain
 Explain the business intelligence
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40 Enterprise Management
2.1 Introduction
Notes Supply chain management (SCM) is the oversight of materials, information, and
finances as they move in a process from supplier to manufacturer to wholesaler to
retailer to consumer. Supply chain management involves coordinating and integrating
these flows both within and among companies. It is said that the ultimate goal of any
effective supply chain management system is to reduce inventory (with the assumption
that products are available when needed). As a solution for successful supply chain
management, sophisticated software systems with Web interfaces are competing with
Web-based Application Service Providers (ASP) who promises to provide part or all of
the SCM service for companies who rent their service.
A supply chain is a set of facilities, supplies, customers, products and methods of
controlling inventory, purchasing, and distribution. The chain links suppliers and
customers, beginning with the production of raw material by a supplier, and ending with
the consumption of a product by the customer. In a supply chain, the flow of goods
between a supplier and a customer passes through several echelons, and each echelon
may consist of many facilities. The problems of supply-production, production-
distribution, and inventory-distribution systems have been studied for many years. Most
of these studies focus only on a single component of the overall supply-production-
distribution system, such as procurement, production, transportation, or scheduling,
although limited progress has been made towards integrating these components in a
single supply chain.
Supply chain management (SCM) is a subject of increasing interest to academics,
and practitioners. SCM can be divided into two levels: strategic and operational. Models
have been developed for optimizing supply chain operations at these two levels. The
primary objective of strategic optimization models is to determine the most cost-
effective location of facilities (plants and distribution centers), flow of goods throughout
the supply chain (SC), and assignment of customers to distribution centers (DCs).
These types of models do not seek to determine required inventory levels, and
customer service levels. The main purpose of the optimization at the operational level is
to determine the safety stock for each product at each location, the size and frequency
of the product batches that are replenished or assembled, the replenishment transport
and production lead times, and the customer service levels. Uncertainty is one of the
most challenging but important problems in SC management. Indeed, it is a primary
difficulty in the practical analysis of SC performance.
In the absence of randomness, the problems of material and product supply are
eliminated; all demands, production, and transportation behaviour would be completely
fixed, and therefore, exactly predictable. This work seeks to integrate strategic and
operational analysis of a SC subject to uncertainty, using a performance vector
designed to describe the efficiency and effectiveness of the chain. SCM draws heavily
from the areas of operations management, logistics, procurement, and information
technology, and strives for an integrated approach.
2.2 Supply Chain Management (SCM)

Supply Chain Management (SCM) is another 21st century business development that
involves the collaboration of members of a supply chain to deliver the best value
solution to the end customer. Built on software applications, SCM relies on close
partnerships between manufacturers, wholesalers and retailers. SCM software is used
for close monitoring and precise automation of inventory replenishment and
management. Supply Chain Management (SCM) is the management of the flow of
goods and services. It includes the movement and storage of raw materials, work-in-
process inventory, and finished goods from point of origin to point of consumption.
Interconnected or interlinked networks, channels and node businesses are involved in
the provision of products and services required by end customers in a supply chain.
Supply chain management has been defined as 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.
Notes
Supply chain management is a cross-functional approach that includes managing
the movement of raw materials into an organization, certain aspects of the internal
processing of materials into finished goods, and the movement of finished goods out of
the organization and toward the end consumer. As organizations strive to focus on core
competencies and become more flexible, they reduce their ownership of raw materials
sources and distribution channels. These functions are increasingly being outsourced to
other firms that can perform the activities better or more cost effectively. The effect is to
increase the number of organizations involved in satisfying customer demand, while
reducing managerial control of daily logistics operations. Less control and more supply
chain partners lead to the creation of the concept of supply chain management. The
purpose of supply chain management is to improve trust and collaboration among
supply chain partners, thus improving inventory visibility and the velocity of inventory
movement.
There are five key SCM steps, including planning, sourcing, making solutions,
delivering them and coordinating returns. Each supply chain has a unique potential
based on the trade-offs of these factors. As a result, companies cannot make
improvements in operating margin without affecting inventories unless they improve the
supply chain potential. One of the most effective ways to increase the potential of the
supply chain is to improve the demand signal.
The challenge of getting past this plateau is as important as it is formidable. Supply
chains are becoming more complex. As products proliferate, channels become more
specialized and as companies span global geographies, demand planning principles
grow in importance.
Organizational design, process design, and how the data is used in demand
processes all play a major role in defining the differences between leaders and
laggards. An important factor in making demand planning progress is the design of
reporting relationships. Based on our work with more than 300 companies, we have
concluded that a reporting relationship to a central group or a supply chain center of
excellence gives companies an advantage in getting past the plateau.
By contrast, companies with reporting relationships to the sales organization tend to
post the worst results in demand planning. These organizations are plagued by high,
and often uncontrolled, bias.
Reporting relationships to marketing and manufacturing are similarly problematic.
The bias in these relationships is not as high as it is with sales reporting, but it is higher
than in organizations with reporting relationships to a neutral, cross-functional analytics
group.
Our research shows that 64 present of companies today have a supply chain center
of excellence. SCM draws heavily from the areas of operations management, logistics,
procurement, and information technology, and strives for an integrated approach
2.2.1 Origin of the Term and Definitions

The term "supply chain management" entered the public domain when Keith Oliver, a
consultant at Booz Allen Hamilton used it in an interview for the Financial Times in
1982. The term was slow to take hold. It gained currency in the mid-1990s, when a
flurry of articles and books came out on the subject. In the late 1990s it rose to
prominence as a management buzzword, and operations managers began to use it in
their titles with increasing regularity.
Commonly accepted definitions of supply chain management include:
The management of upstream and downstream value-added flows of materials,
final goods, and related information among suppliers, company, resellers, and final
consumers.
The systematic, strategic coordination of traditional business functions and tactics

across all business functions within a particular company and across businesses within
Notes the supply chain, for the purposes of improving the long-term performance of the
individual companies and the supply chain as a whole.
A customer-focused definition is given by Hines (2004:p76): "Supply chain
strategies require a total systems view of the links in the chain that work together
efficiently to create customer satisfaction at the end point of delivery to the consumer.
As a consequence, costs must be lowered throughout the chain by driving out
unnecessary expenses, movements, and handling. The main focus is turned to
efficiency and added value, or the end-user's perception of value. Efficiency must be
increased, and bottlenecks removed. The measurement of performance focuses on
total system efficiency and the equitable monetary reward distribution to those within
the supply chain. The supply chain system must be responsive to customer
requirements."
The integration of key business processes across the supply chain for the purpose
of creating value for customers and stakeholders (Lambert, 2008).
According to the Council of Supply Chain Management Professionals (CSCMP),
supply chain management encompasses the planning and management of all activities
involved in sourcing, procurement, conversion, and logistics management. It also
includes coordination and collaboration with channel partners, which may be suppliers,
intermediaries, third-party service providers, or customers. Supply chain management
integrates supply and demand management within and across companies. More
recently, the loosely coupled, self-organizing network of businesses that cooperate to
provide product and service offerings has been called the Extended Enterprise.
A supply chain, as opposed to supply chain management, is a set of organizations
directly linked by one or more upstream and downstream flows of products, services,
finances, or information from a source to a customer. Supply chain management is the
management of such a chain.
Supply chain management software includes tools or modules used to execute
supply chain transactions, manage supplier relationships, and control associated
business processes.
Supply Chain Event Management (SCEM) considers all possible events and factors
that can disrupt a supply chain. With SCEM, possible scenarios can be created and
solutions devised.
In many cases the supply chain includes the collection of goods after consumer use
for recycling. Including third-party logistics or other gathering agencies as part of the
RM re-partition process is a way of illustrating the new endgame strategy.
Functions
Supply chain management is a cross-functional approach that includes managing the
movement of raw materials into an organization, certain aspects of the internal
processing of materials into finished goods, and the movement of finished goods out of
the organization and toward the end consumer. As organizations strive to focus on core
competencies and become more flexible, they reduce their ownership of raw materials
sources and distribution channels. These functions are increasingly being outsourced to
other firms that can perform the activities better or more cost effectively. The effect is to
increase the number of organizations involved in satisfying customer demand, while
reducing managerial control of daily logistics operations. Less control and more supply
chain partners lead to the creation of the concept of supply chain management. The
purpose of supply chain management is to improve trust and collaboration among
supply chain partners, thus improving inventory visibility and the velocity of inventory
movement.

The Basic Supply Chain Functions
 Transportation
Notes
 Warehousing
 Sourcing and Procurement
 Returns Management
 Post-sales Service
 Partnerships and Collaboration
Importance
Organizations increasingly find that they must rely on effective supply chains, or
networks, to compete in the global market and networked economy. In Peter Drucker's
(1998) new management paradigms, this concept of business relationships extends
beyond traditional enterprise boundaries and seeks to organize entire business
processes throughout a value chain of multiple companies.
In recent decades, globalization, outsourcing, and information technology have
enabled many organizations, such as Dell and Hewlett Packard, to successfully operate
collaborative supply networks in which each specialized business partner focuses on
only a few key strategic activities (Scott, 1993). This inter-organizational supply network
can be acknowledged as a new form of organization. However, with the complicated
interactions among the players, the network structure fits neither "market" nor
"hierarchy" categories (Powell, 1990). It is not clear what kind of performance impacts
different supply network structures could have on firms, and little is known about the
coordination conditions and trade-offs that may exist among the players. From a
systems perspective, a complex network structure can be decomposed into individual
component firms (Zhang and Dilts, 2004). Traditionally, companies in a supply network
concentrate on the inputs and outputs of the processes, with little concern for the
internal management working of other individual players. Therefore, the choice of an
internal management control structure is known to impact local firm performance
(Mintzberg, 1979).
In the 21st century, changes in the business environment have contributed to the
development of supply chain networks. First, as an outcome of globalization and the
proliferation of multinational companies, joint ventures, strategic alliances, and business
partnerships, significant success factors were identified, complementing the earlier
"just-in-time", lean manufacturing, and agile manufacturing practices. Second,
technological changes, particularly the dramatic fall in communication costs (a
significant component of transaction costs), have led to changes in coordination among
the members of the supply chain network (Coase, 1998).
Many researchers have recognized supply network structures as a new
organizational form, using terms such as "Keiretsu", "Extended Enterprise", "Virtual
Corporation", "Global Production Network", and "Next Generation Manufacturing
System". In general, such a structure can be defined as "a group of semi-independent
organizations, each with their capabilities, which collaborate in ever-changing
constellations to serve one or more markets in order to achieve some business goal
specific to that collaboration" (Akkermans, 2001).
The security management system for supply chains is described in ISO/IEC 28000
and ISO/IEC 28001 and related standards published jointly by the ISO and the IEC.
Supply Chain Management draws heavily from the areas of operations management,
logistics, procurement, and information technology, and strive for an integrated
approach.
2.2.2 Supply Chain Management 2.0 (SCM 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 Card’s supply
Notes chain collaboration platform, which connects multiple buyers and suppliers with financial
institutions, enabling them to conduct automated supply-chain finance transactions.
Web 2.0 is a trend in the use of the World Wide Web that is meant to increase
creativity, information sharing, and collaboration among users. At its core, the common
attribute of Web 2.0 is to help navigate the vast information available on the Web in
order to find what is being bought. It is the notion of a usable pathway. SCM 2.0
replicates this notion in supply chain operations. It is the pathway to SCM results, a
combination of processes, methodologies, tools, and delivery options to guide
companies to their results quickly as the complexity and speed of the supply chain
increase due to global competition; rapid price fluctuations; changing oil prices; short
product life cycles; expanded specialization; near-, far-, and off-shoring; and talent
scarcity.
SCM 2.0 leverages solutions designed to rapidly deliver results with the agility to
quickly manage future change for continuous flexibility, value, and success. This is
delivered through competency networks composed of best-of-breed supply chain
expertise to understand which elements, both operationally and organizationally, deliver
results, as well as through intimate understanding of how to manage these elements to
achieve the desired results. The solutions are delivered in a variety of options, such as
no-touch via business process outsourcing, mid-touch via managed services and
software as a service (SaaS), or high-touch in the traditional software deployment
model.
2.2.3 Business Process Integration

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by adding citations to reliable sources. Insourced material may be challenged and
removed. (June 2013)
Successful SCM requires a change from managing individual functions to
integrating activities into key supply chain processes. In an example scenario, a
purchasing department places orders as its requirements become known. The
marketing department, responding to customer demand, communicates with several
distributors and retailers as it attempts to determine ways to satisfy this demand.
Information shared between supply chains 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 a continuous information flow. However, in many companies,
management has concluded that optimizing product flows cannot be accomplished
without implementing a process approach. The key supply chain processes stated by
Lambert (2004) are:
 Customer relationship management
 Customer service management
 Demand management style
 Order fulfillment
 Manufacturing flow management
 Supplier relationship management
 Product development and commercialization
 Returns management
Much has been written about demand management. Best-in-class companies have
similar characteristics, which include the following:

 Internal and external collaboration
 Initiatives to reduce lead time
Notes
 Tighter feedback from customer and market demand
 Customer-level forecasting
One could suggest other critical supply business processes that combine these
processes stated by Lambert, such as:
Customer service management process
Customer relationship management concerns the relationship between an organization
and its customers. Customer service is the source of customer information. It also
provides the customer with real-time information on scheduling and product availability
through interfaces with the company's production and distribution operations.
Successful organizations use the following steps to build customer relationships:
 Determine mutually satisfying goals for organization and customers
 Establish and maintain customer rapport
 Induce positive feelings in the organization and the customers
Procurement process
Strategic plans are drawn up with suppliers to support the manufacturing flow
management process and the development of new products. In firms whose operations
extend globally, sourcing may be managed on a global basis. The desired outcome is a
relationship where both parties benefit and a reduction in the time required for the
product's design and development. The purchasing function may also develop rapid
communication systems, such as electronic data interchange (EDI) and Internet linkage,
to convey possible requirements more rapidly. Activities related to obtaining products
and materials from outside suppliers involve resource planning, supply sourcing,
negotiation, order placement, inbound transportation, storage, handling, and quality
assurance, many of which include the responsibility to coordinate with suppliers on
matters of scheduling, supply continuity, hedging, and research into new sources or
programs.
Product development and commercialization
Here, customers and suppliers must be integrated into the product development
process in order to reduce the time to market. As product life cycles shorten, the
appropriate products must be developed and successfully launched with ever-shorter
time schedules in order for firms to remain competitive. According to Lambert and
Cooper (2000), managers of the product development and commercialization process
must:
 Coordinate with customer relationship management to identify customer-articulated
needs;
 Select materials and suppliers in conjunction with procurement; and
 Develop production technology in manufacturing flow to manufacture and integrate
into the best supply chain flow for the given combination of product and markets.
Manufacturing flow management process
The manufacturing process produces and supplies products to the distribution channels
based on past forecasts. Manufacturing processes must be flexible in order 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. Changes in the
manufacturing flow process lead to shorter cycle times, meaning improved
responsiveness and efficiency in meeting customer demand. This process manages
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 geographical and final assemblies postponement of physical distribution

operations.
Notes
Physical distribution
This concerns the movement of a finished product or service to customers. In physical
distribution, the customer is the final destination of a marketing channel, and the
availability of the product or 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 (i.e., it links manufacturers, wholesalers, and
retailers).
Outsourcing/partnerships
This includes not just the outsourcing of the procurement of materials and components,
but also the 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 in which it has a distinctive advantage and outsource everything else. 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, managing and controlling this network of partners and suppliers
requires a blend of central and local involvement: strategic decisions are taken
centrally, while the monitoring and control of supplier performance and day-to-day
liaison with logistics partners are best managed locally.
Performance measurement
Experts found a strong relationship from the largest arcs of supplier and customer
integration to market share and profitability. Taking advantage of supplier capabilities
and emphasizing a long-term supply chain perspective in customer relationships can
both be correlated with a firm's performance. As logistics competency becomes a
critical factor in creating and maintaining competitive advantage, measuring logistics
performance 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[according to whom?], internal
measures are generally collected and analysed by the firm, including cost, customer
service, productivity, asset measurement, and quality. External performance is
measured through customer perception measures and "best practice" benchmarking.
Warehousing management
To reduce a company's cost and expenses, warehousing management is concerned
with storage, reducing manpower cost, dispatching authority with on time delivery,
loading & unloading facilities with proper area, stock management system etc.
Workflow management
Integrating suppliers and customers tightly into a workflow (or business process) and
thereby achieving an efficient and effective supply chain is a key goal of workflow
management.
2.3 The Drivers of Supply Chain Management

Performance of the supply chain can be determined with the help of the drivers. The
drivers of the supply chain consist of three logistical drivers and three cross functional
drivers. 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. Notes
2.3.1 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
simultaneously. 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 efficiency.
But at a certain point in time, there can be trade-offs between responsiveness and
efficiency. Hence supply chain designers come with supply chains with 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 materials; 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 categorized into production facilities and storage
facilities.
 Information: It consists of data and results of analysis regarding inventory,
transportation, facilities, customer orders, customers, and funds.
(A) Logistical Drivers
(i) Inventory: 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: These 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
Inventory consists of the raw materials, work in progress and the finished goods.
Changing inventory policies can largely affect the efficiency and the responsiveness
of the supply chain. Basic decisions to be taken by the business regarding inventory
are cycle, safety and the seasonal inventory decisions.
(ii) Transportation: Transportation refers to the modes and routes for moving
inventory throughout the supply chain. Faster transportation ensures more
responsiveness but less efficiency of supply chain. Transportation supports a
firm's competitive strategy. The different ways of transportation includes rail,
road, sea water, pope lines and the air ways. Electronic transport is the fastest

and the efficient mode of transportation. Transportation decisions includes

mode, routes and in house or outsourcing the transportation.
Notes Number of decisions has to take in designing a supply chain regarding
transportation.
Mode of Transportation: Six basic modes exist
 Air
 Truck (Road)
 Rail
 Ship
 Pipeline
 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
(iii) Facilities: Facilities are the physical locations where the products stored or
assembled. The major types of facilities are production sites and the storage
sites. Economies of scales are used in centralization of facilities to increase
supply chain efficiency.
Within a facility, inventory is either transformed into another state or stored.
Facilities Related Decisions
 Location
 Capacity
 Manufacturing Methodology or Technology
 Warehousing methodology
(B) Cross functional
(i) Information: Information connects various supply chain partners and allows
them to coordinate activities. Information is crucial to the daily operations at
each stage of the supply chain. An information system can enable a firm to get
a high variety of customized products to customers rapidly and to understand
the changing customers tastes and preferences.
 Issues related to Information
 Push Process Information and Pull Process Information
 Coordination and information sharing across various facilities in the supply
chain
 Forecasting
 Aggregate Planning
 Enabling technologies
Sourcing: Sourcing is the process of purchasing the materials required for the
production of the final products. Components of the sourcing decisions are the
evaluation and the selection of the suppliers, in house or outsourcing.
Pricing: Pricing involves determining the charges for the goods or services offered
by the manufacturers. The price of the product affects the buying patterns of the
customers thus affecting the supply chain performance.
All the above stated drivers are very crucial in determining the success of the
supply chain management process.

2.4 Planning in Supply and Demand in Supply Chain
2.4.1 Supply Chain Planning Notes
Supply Chain Planning (SCP) is the component of Supply Chain Management (SCM)
involved with predicting future requirements to balance supply and demand.
SCM is sometimes broken down into the stages of planning, execution and
shipping. Supply chain planning and Supply Chain Execution (SCE) is the two main
categories of SCM software. SCP products may include supply chain modelling, and
design, distribution and supply network planning. SCE software applications track the
physical status of goods, the management of materials, and financial information
involving all parties.
SCM is sometimes broken down into the stages of planning, execution and
shipping. Supply chain planning and Supply Chain Execution (SCE) is the two main
categories of SCM software. SCP products may include supply chain modelling, and
design, distribution and supply network planning. SCE software applications track the
physical status of goods, the management of materials, and financial information
involving all parties
Manufacturers, suppliers, distributors, and retailers face not only price competition,
but also fluctuating customer demands. To handle these challenges, enterprises need
real-time visibility into the customer demand pattern enabling them to make the desired
changes in their supply chain planning faster than ever before.
Supply Chain Planning is an amalgamation of all the planning processes across
various business planning functions such as Materials Requirement Planning, Sourcing
and Distribution Network Planning, Inventory Planning, Financial Planning, and so on.
Manufacturers need to collaborate with suppliers, distributors and retailers to
manage a balance between supply and demand. To achieve this, Collaborative
Planning, Forecasting, and Replenishment (CPFR) model has been adopted by many
manufacturers.
Cybage helps its customers in developing solutions for suppliers' network and
collaboration platforms to accurately report demand, plan procurement, schedule
manufacturing activities, thus enabling enterprises to optimize their supply chain.
Supply chain plans are often not fully implemented or executed as expected.
Whether it is a periodic plan for Operations Strategy—or an ongoing planning process,
such as that for S&OP—there is usually dissatisfaction with benefits. Whether it is a
complete Supply Chain Assessment or for one of its processes such as transportation,
the work often tends to be incomplete.
Effective Supply Chain Planning requires broad, deep knowledge and experience
backed by Benchmarking and leading practices and strengthened by skills in both
planning and execution. Tompkins International’s Supply Chain Planning services and
solutions work because we consider planning from an end-to-end perspective and
monitor results at every stage.
 Operations Strategy Development: While a company’s business strategy is often
well-defined and communicated, we take it a step further to help you build an
Operations Strategy that fully realizes necessary business goals and objectives.
 Supply Chain Assessment (SCA): We provide an evaluation that focuses on
identifying strengths, weaknesses and opportunities within your supply chain. This
assessment is determined by your own internal values and expectations and
measured against best-in-class and core competitor performance.
 Logistics Outsourcing: We help you decide which processes or functions can be
outsourced and what these business cases look like. This includes qualification and
selection of service providers, implementation support, and promotion of ongoing
relationship management practices.

 Sales & Operation Planning (S&OP): Are your demand, supply and inventory
priorities out of balance? Tompkins develops a structured process to reconcile this
Notes imbalance while achieving improvements in customer service, cost, and reliability of
short- and long-term supply.
 Benchmarking & Best Practices: Tompkins boasts a confidential, 300-plus
member supported database process and proprietary survey capabilities. This
service allows you to compare your company’s performance against that of others –
both within industries or across industries, as well as identify the processes and
technologies that deliver best-in-class performance.
 Organizational Design and Change Management (ODCM): Every
transformational project requires that you adapt to new processes and/or
technologies. We help your company identify, design and manage desired changes
and ensure that they occur at the earliest possible time in order for maximum,
continuous benefits to be achieved in the shortest possible time.
 Implementation Services: Our team is experienced at providing the effective
leadership, and/or coaching, to achieve successful implementation and adoption of
new processes and technologies. We also ensure that changes are accomplished
in a timely manner.
Supply Chain Modelling
There are a variety of supply chain models, which address both the upstream and
downstream sides. The SCOR (Supply-Chain Operations Reference) model, developed
by the management consulting firm PRTM, now part of PricewaterhouseCoopers LLP
(PwC) has been endorsed by the Supply-Chain Council (SCC) and has become the
cross-industry de facto standard diagnostic tool for supply chain management. SCOR
measures total supply chain performance. It is a process reference model for supply-
chain management, spanning from the supplier's supplier to the customer's customer.
Figure 2.1: Supply Chain Model
The black arrow represents the flow of materials and information, and the gravy
arrow represents the flow of information and backhauls. The elements are (a) the initial
supplier (vendor or plant), (b) a supplier, (c) a manufacturer (production), (d) a
customer, and (e) the final customer.
It includes delivery and order fulfillment performance, production flexibility, warranty
and returns processing costs, inventory and asset turns, and other factors in evaluating
the overall effective performance of a supply chain.
The Global Supply Chain Forum has introduced another supply chain model. This
framework is built on eight key business processes that are both cross-functional and
cross-firm in nature. Each process is managed by a cross-functional team including
representatives from logistics, production, purchasing, finance, marketing, and research
and development. While each process interfaces with key customers and suppliers, the
processes of customer relationship management and supplier relationship management
form the critical linkages in the supply chain.
The American Productivity and Quality Center (APQC) Process Classification
Framework (PCF) SM is a high-level, industry-neutral enterprise process model that
allows organizations to see their business processes from a cross-industry viewpoint.
The PCF was developed by APQC and its member organizations as an open standard
to facilitate improvement through process management and benchmarking, regardless

of industry, size, or geography. The PCF organizes operating and management
processes into 12 enterprise-level categories, including process groups, and over 1,000
processes and associated activities. Notes
In the developing country public health setting, John Snow, Inc. has developed the
JSI Framework for Integrated Supply Chain Management in Public Health, which draws
from commercial sector best practices to solve problems in public health supply chains.
In 2013, the Supply Chain Roadmap has been presented. It is a method where an
organization’s supply chain strategy can be reviewed in an organized and systematic
approach in order to assure alignment of the supply chain with the business strategy.
The method is supported in the most important and recognized theories and practices
about supply chain strategy and business strategy. The method allows the
characterization of the supply chain under analysis by 42 factors in a single page view
called "The Map", and allows the comparison of this supply chain with 6-supply chain
archetypes (fast, efficient, continuous flow, agile, custom configured, flexible), in order
to find gaps between supply chain under analysis and the most proper supply chain
archetype. Method is applied in four steps (scope, understanding, evaluation, and,
redesign and deployment). The method was developed by Hernan David Perez, an
experienced supply chain manager in several industrial sectors, and, professor and
international speaker in supply chain strategy.
Supply chain management
A German paper factory receives its daily supply of 75 tons of recyclable paper as its
raw material
In the 1980s, the term supply chain management (SCM) was developed to express
the need to integrate the key business processes, from end user through original
suppliers. Original suppliers are those that provide products, services, and information
that add value for customers and other stakeholders. The basic idea behind SCM is that
companies and corporations involve themselves in a supply chain by exchanging
information about market fluctuations and production capabilities. Keith Oliver, a
consultant at Booz Allen Hamilton, is credited with the term's invention after using it in
an interview for the Financial Times in 1982.
If all relevant information is accessible to any relevant company, every company in
the supply chain has the ability to help optimize the entire supply chain rather than to
sub-optimize based on a local interest. This will lead to better-planned overall
production and distribution, which can cut costs and give a more attractive final product,
leading to better sales and better overall results for the companies involved. This is one
form of Vertical integration.
Incorporating SCM successfully leads to a new kind of competition on the global
market, where competition is no longer of the company-versus-company form but rather
takes on a supply-chain-versus-supply-chain form.
Many electronics manufacturers of Guangdong rely on the supply of parts from
numerous component shops in Guangzhou.
The primary objective of SCM is to fulfill customer demands through the most
efficient use of resources, including distribution capacity, inventory, and labour. In
theory, a supply chain seeks to match demand with supply and do so with the minimal
inventory. Various aspects of optimizing the supply chain include liaising with suppliers
to eliminate bottlenecks; sourcing strategically to strike a balance between lowest
material cost and transportation, implementing just-in-time techniques to optimize
manufacturing flow; maintaining the right mix and location of factories and warehouses
to serve customer markets; and using location allocation, vehicle routing analysis,
dynamic programming, and traditional logistics optimization to maximize the efficiency
of distribution.
The term "logistics" applies to activities within one company or organization
involving product distribution, whereas "supply chain" additionally encompasses
manufacturing and procurement, and therefore has a much broader focus as it involves
multiple enterprises (including suppliers, manufacturers, and retailers) working together
Notes to meet a customer need for a product or service.
Starting in the 1990s, several companies chose to outsource the logistics aspect of
supply chain management by partnering with a third-party logistics provider (3PL).
Companies also outsource production to contract manufacturers. Technology
companies have risen to meet the demand to help manage these complex systems.
There are four common supply chain models. Besides the three mentioned above,
there is the Supply Chain Best Practices Framework.
2.4.2 Capabilities in Supply Chain Planning

 Demand Planning and Forecasting
 Supply Planning
 Inventory Planning
 Sales and Operational Planning
 Materials Requirement Planning (MRP)
 Master Data Management
Figure 2.2: Supply Chain Planning
2.4.3 Demand Planning

Demand planning is a multi-step operational supply chain management (SCM) process
used to create reliable forecasts. Effective demand planning can guide users to
improve the accuracy of revenue forecasts, align inventory levels with peaks and
troughs in demand, and enhance profitability for a given channel or product.
The approach begins with a statistical forecast. Data sources for the forecast
include planned sales orders, customer contracts and intercompany standing orders.
The final forecast is shared with key stakeholders, such as suppliers.

Notes
Figure 2.3: Planning in Supply and Demand in Supply Chain

Key steps in demand planning include:
 Importing historical sales data
 Creating statistical forecasts
 Importing customer forecasts
 Collaborating with customers
 Managing forecasts
 Building consensus forecasts
 Supply and demand collaboration
 Securing constrained forecasts
 Confirmation with customers
 Re-examining data and adjusting planning accordingly.
Demand Planning – The Key to a Profit-Driven Supply Chain Cycle

Several times in the past I came across these questions. Why the forecast accuracy
should be improved? What is the necessity in spending money towards improvement
and implementation of some expensive demand planning software?
To know the significance of demand planning in supply chain management you
need to know what a demand planning means. The most crucial aspect of any
organization, be it the services or the manufacturing sector, is demand planning or
sales forecasting. It is a business process that entails futuristic predictions of demand
for products and services and calibrates production and distribution capabilities
accordingly. If you are a part of manufacturing company then you will be responsible for
estimating demands for the manufactured goods and work towards activities like supply
of raw materials, production capacity, and distribution, etc. Being a part of service
organization makes no difference, still you will be accountable for estimating the
demand for its services and thereby gear up to service demand.
For any organization, demand planning plays a strategic role in planning for various
products involving different business functions and requires timely data, precise
processing of this data and agreement on joint business plans along the supply chain.
Several software is available currently which helps in conducting effective demand
planning. The most widely used is Microsoft Excel and several ERP products like
Oracle, SAP and SCM products have demand planning functionality incorporated in
their suite. So let’s figure out some of the important functionalities and features which
may be useful for companies in demand planning.

1. Generation of statistical baselines: The base requirement to initiate the process

is to have an accurate forecast on the products your company sells. Any profit-
Notes driven supply chain depends on precise forecasts to maintain customer satisfaction
high and inventory low.
There are various models to choose from, each reflects different operational
patterns shown by products and markets. These include linear models, seasonal
models, multivariate linear and nonlinear models, Croston’s model, etc. It is a never
ending list. This may look simple but to select the correct model for each of the
product can be an intricate task without any shortcuts to take. Statistical forecasting
models need to be repeatedly tested and refined. Based on the storage of data in
the demand planning tool, statistical forecasting can be performed at various levels.
In some industries like semiconductor or high-tech, the product lifecycle is too short
and fast changing trends impede the statistical forecast from being a direct input to
the operational forecast. However, even in these industries statistical forecast do
provide values by acting as a control measure in identifying exceptions in other
forecast sources. It provides a scientific approach to understand how external
factors impact demand. It also caters a way to forecast new products based on
lifecycle profiles and characteristics, to identify prior products which are similar to
the new ones
2. Driving Consensus Forecast: It is important that your demand planning tool
support consensus planning features. In demand planning it is required to merge all
the projections from different departments and experts, into one forecast that
represents the prime revenue in the market place. The tool should be capable
enough to intelligently blend the inputs from all the sources on top of statistically
forecasted numbers.
Consensus forecast involves intervention by the planner based on facts and data
and not bias or personality. Depending on past measures of accuracy collected
from various sources and time horizons, the final judgment is done. Organizations
should determine if they are on target to meet the revenue plan by focusing on the
analytical views which can be broken down by any attributes. If not on target, then
the divisions that are not meeting their share of the financial plan should be notified.
The main advantage of the analytics is that it provides a virtual view to the
management from several angels to determine trends and problems.
3. Inventory Goals: For an organization, expected customer demands are not the
only source of demands. Having backup inventories ensures efficient running of
supply chain operations and protection against uncertainty. A company with larger
number of inventory has lesser risk to their revenue plan and can be more efficient
in operations. However, higher inventory can result in the extension to Return-on-
Assets and can reduce profit drastically on becoming discontinued or obsolete.
So, for a company apart from the value to inventory, considerable measure should
be taken to predict demand and supply uncertainty in order to identify how much
inventory should be in buffer. For a profit-driven company, it is necessary to
understand that each market segment is different and hence the buffer stock
policies vary with each situation. It is very important to have a proper inventory
strategy which involves effective distribution of products, like some products may be
held as components and assembled to order, later.
In the end, the consensus forecast and the project revenue plan are blended to the
inventory plan to get a complete picture of the demand and inventory targets. The
operation planning team is then responsible for identifying which demands and
inventory targets can be met, and the cost related in doing it. Adapting to this
process helps in estimating the profitability accurately.
4. An effective Demand Planning tool: An effective demand planning tool should
have the ability to filter and cut down bulk data within a short interval of time, and
archive old data for referral without affecting the product functionality. It should be
able to translate demand of various market segments on the basis of business
sales and revenue plan through the use of attributes. The selected tool should be

able to determine the average selling price of the mix products in market and
predict expected revenue out of it. A tool built on data warehousing platform can
project data from different dimensions and makes it possible to have statistical Notes
forecasting at various levels.
To manage the front-end of a supply chain with a profit oriented mind frame
requires a business process and system, diverse from the traditional demand
planning systems. The first step to any profit-driven supply chain planning cycle is
demand planning and forecasting. Any error during this phase can have an adverse
effect which only keeps expanding. This is popularly known as the Bullwhip effect in
supply chain.
Uncertainty in the planning decisions
The need to account for uncertainty in the planning decisions can essentially be traced
back to the core functionality of planning models, which is to allocate resources for the
future based on current information and future projections. The foremost consideration
in incorporating uncertainties into the planning decisions is the determination of the
appropriate representation of the uncertain parameters. Two distinct methodologies for
representing uncertainty can be identified. These are the scenario-based approach and
the distribution-based approach. In the former approach, the uncertainty is described by
a set of discrete scenarios capturing how the uncertainty might play out in the future.
Each scenario is associated with a probability level representing the decision maker’s
expectation of the occurrence of a particular scenario. For instance, suppose a
company is waiting for the result of a pending legislation in Congress that would give it
access to new markets in Asia.
Clearly, the resolution of this source of uncertainty results in two discrete scenarios
with their respective probabilities. However, the applicability of the scenario based
approach is limited by the fact that it requires forecasting all possible outcomes of the
uncertain parameter. In cases where a natural set of discrete scenarios cannot be
identified and only a continuous range of potential futures can be predicted, the
distribution-based approach is used. By assigning a probability distribution to the
continuous range of potential outcomes, the need to forecast exact scenarios is
obviated. The distribution-based approach is adopted in this work by modelling the
demand as normally distributed with a specified mean and standard deviation. The
normality assumption is widely invoked in literature (Wellons & Reklaitis, 1989;
Nahmias, 1989) as it captures the essential features of demand uncertainty and is
convenient to use. An enterprise can adopt two strategic ‘postures’ when faced with
demand uncertainty. It can either position itself as a shaper or as an adapter to combat
uncertainty.
In the former strategy, the company aims to restructure the demand distribution so
that the associated downside risk is limited while the upside potential is retained. This is
typically achieved through contracting agreements with the customer. For example, the
company may offer a supply contract with a minimum/maximum quantity commitment to
its customer in return for a price discount (Anupindi & Bassok, 1999). By contrast, in the
adapter strategy, the enterprise does not attempt to influence the uncertainty level in the
market. It controls the risk exposure of its assets, such as inventory levels and profit
margins, by constantly adapting its operations to unfolding demand realizations.
An adapter view to the planning process is taken in this work. One of the most
popular frameworks for planning under uncertainty is two-stage stochastic programming
(Birge & Louveaux, 1997; Dantzig, 1955). In this approach, the decisions and
constraints of the system are classified into two sets. The first-stage variables, also
known as design variables, are determined prior to the resolution of the underlying
uncertainty. Contingent on these ‘here-and-now decisions and the realizations of the
uncertain parameter, the second-stage or control variables are determined to optimize
in the face of uncertainty. These ‘wait-and-see’ recourse decisions model how the
decision maker adapts to the unfolding uncertain events. The presence of uncertainty is
reflected by the fact that both the second-stage decisions as well as the second stage

costs are probabilistic in nature. The objective is, therefore, to minimize the sum of the
first stage costs, which are deterministic, and the expected value of the second-stage
Notes costs. The classification of the decisions of the midterm planning model into
manufacturing and logistics naturally fits into the two-stage stochastic programming
framework as described next.
2.5 Planning and Managing Inventories in a Supply Chain

Managing customer and vendor relationships is a critical aspect of managing supply
chains. In many cases, the collaborative relationship concept has been considered the
essence of supply chain management. However, a closer examination of supply chain
relationships, particularly those involving product flows, reveals that the heart of these
relationships is inventory movement and storage. Much of the activity involved in
managing relationships is based on the purchase, transfer, or management of
inventory. As such, inventory plays a critical role in supply chains because it is a salient
focus of supply chains.
Perhaps the most fundamental role that inventory plays in supply chains is that of
facilitating the balancing of demand and supply. To effectively manage the forward and
reverse flows in the supply chain, firms have to deal with upstream supplier exchanges
and downstream customer demands. This puts an organization in the position of trying
to strike a balance between fulfilling the demands of customers, which is often difficult
to forecast with precision or accuracy, and maintaining adequate supply of materials
and goods. This balance is often achieved through inventory.
For example, a growing trend is the implementation of sales and operations
planning (S&OP) processes. The fundamental purpose of S&OP is to bring the demand
management functions of the firm (for example, sales forecasting, marketing) together
with the operations functions of the firm (for example, manufacturing, supply chain,
logistics, procurement) and level strategic plans. This often involves extensive
discussions about the firm’s on-hand inventory, in-transit inventory, and work-in-
process. Such discussions allow the sales and marketing group to adequately plan for
the forthcoming time horizon by gaining a realistic picture of the inventory levels
available for sale. Additionally, the operations groups are able to get updated and direct
sales forecasting information, which can assist in planning for future inventory needs.
Such information may very well result in shifts in manufacturing plans or alterations to
procurement needs because of the strategic decision to focus on specific units of
inventory instead of others in the near future.
Another example of balancing through inventory is the use of point-of-sale (POS)
data for perpetual inventory management in the retail industry. For many retailers, every
“beep” of a cash register upon scanning of an item’s bar code during checkout triggers
a series of messages that another unit of inventory has been sold. This information is
not only tracked by the retailer but is also shared with upstream vendors. As items are
depleted from inventory, in some cases, both the retailer and vendor work
collaboratively to determine when reordering is necessary to replenish the depleted
inventory, especially at the distribution center level. This is a balancing of supply and
demand because demand information is tracked to determine when to best place
replenishment orders based on the time required to get the inventory to the store
location. In essence, inventory decisions are used to effectively time when supply
inflows are needed to handle demand outflows.

Notes
Figure 2.4: A conceptual model of Supply Chain Performance
2.6 Transportation
Supply Chain Management (SCM) can be divided into three main areas: purchasing,
manufacturing, and transport. From end to end, this includes decisions about which
input materials to use, production quantities, inventory levels, distribution network
configuration, and transportation for both the input materials as well as for the finished
products. Logistics Management is the component of SCM that focuses on how and
when to get raw materials, intermediate products, and finished goods from their
respective origins to their destinations. Today, international trade is commonplace and
increasing market share in emerging markets is highly desirable. It is therefore safe to
say goods are rarely consumed where they are produced, and transportation services
are the essential trait union between all of the elements of the Supply Chain. Effective,
cost efficient Logistics Management can be a real point of competitive differentiation.
But how does a company achieve this?
To practice effective, cost efficient Logistics Management, an organization must lay
the foundation for a responsive, economical transportation network. With a responsive,
economical transportation network, an organization is able to implement major strategic
changes to reduce costs and increase customer service levels with very little disruption
to the overall supply chain flow.
A responsive transportation network begins with end-to-end network visibility.
Visibility allows the business to centralize production operations to lower-cost areas
without impacting customer service levels, because any uncertainty within the network
can be monitored and appropriately managed to keep inventory levels as low as
possible.
Figure 2.5: Role of Transportation in Supply Chain

An economical transportation network actually begins with a shift in attitude.

Businesses are often trapped in the traditional view that transportation is a necessary
Notes evil – an inevitable source of cost and risk. And who can blame them? Transport is by
far the largest component of the cost structure of a business’ logistics. According to
sector research (Chang, 1998), transport accounts for as much as 30% of the total cost
of logistics operations – almost as much as Ware housing and Inventory together!
Now consider the impact of transportation activities on the overall economy of a
country. The numbers are impressive. In the United States in 2005, freight transport
activities accounted for 10% of the GDP. In Germany alone, the Freight Logistics Sector
(the largest in Europe) came in third in total revenue (after retail trade and the
automotive industry) with a whopping 170 billion Euros, or 7% of the German GDP.
While the data certainly lends itself to the mindset that transportation is a “cost
albatross,” if you will, around one’s neck, this attitude is rapidly changing. In fact, Supply
Chain Managers who are outpacing their competition have done so largely by
acknowledging transportation as a ready vehicle through which to drive cost savings
and create value within the Supply Chain. How? Technology, for one. More and more
sophisticated tools allowing Managers to monitor, control, and optimize transportation
networks are available, and in the wake of the Cloud – are available with increasingly
easy implementations.
That said, while a Bloomberg survey reports that 73% of Supply Chain Managers
are undergoing this shift in attitude toward transportation and identifying transportation
as their key focus in 2014, the same survey also reported that the current adoption rate
of transportation solutions is somehow lagging – with 46% of participants reporting
current use of a solution, and another 22% reporting plans to adopt one in 2014.
The road ahead is therefore still long, but the systemic impact of transportation-
related figures clearly demonstrates that transportation is much more than just the
financial drain associated with trucks, pallets, and warehouses. When the appropriate
tools to manage complexity and guarantee visibility are in place, transportation provides
an organization with the opportunity to continuously create operational efficiency and
improve the bottom line – ultimately unlocking previously untapped value for
shareholders.
Transportation and the Supply Chain
Another system that calls for recognizing tradeoffs and interrelationships among actions
and costs is the supply chain. A supply chain is the network of companies that work
together to provide a good or service for end users and consumers. Most companies
operate within supply chains, relying on outside parties such as suppliers and
customers to help them reach the end-user market. In other words, most companies do
not entirely own their supply chains.
Supply chain management encompasses the planning and management of all
activities involved in sourcing, procurement, conversion, and logistics management. It
also includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers, or customers. Supply chain
management integrates supply-and-demand management within and across
companies. Managing a supply chain, then, means managing the business
relationships among the focal company and its outside supply chain partners, including
customers and suppliers.
This supply chain management conference considered two issues always at the
forefront of operations: minimizing cost and reducing risk. For effective supply chain
operations, managers should tackle both simultaneously.
 Communication – Real time information from all actors in the supply chain at each
touch point is critical.
 Value and benefits versus effort and complexity – Determining which supply
chain projects get priority is challenging.

 Understanding the cost to serve – Receiving early warnings if a shipment will not
be arriving on time is key to achieving desired results.
 Varying degrees of collaboration – From visibility of information to co-shipping
Notes
with suppliers, taking advantage of opportunities to collaborate can drive success.
Communication
The idea of disparate silos of information was common to many companies, with many
different actors both inside and outside the organization needing to access key
information – information that is often sent and received through email in the form of
documents and spreadsheets. Exacerbating this already painstaking communication
process is a lack of integration. Legacy IT systems, processes, and procedures that
may have been right for the business in the past have not evolved at the rapid pace of
the marketplace and changing customer needs.
Varying Degrees of Collaboration
Visibility
System integration with 3rd parties
Enable pro-active decisions
Accurate logistics data supporting customer service
Support strategic decisions with granular reports on logistics KPIs and LSP
performance
Optimization
Enable optimal central planning
Leverage state-of-art academic research in transport science
Create synergies between outbound and reverse logistics
Collaboration
Collaboration between different actors of the supply chain
Co-shipping
Value versus Effort
To answer the question: “Which applications are best suited for the cloud?” Transport
Management Systems were identified as one of the best. The discussions revealed the
following: a really productive Transport Management System will have all of the
transport vendors connected, which is in line with most companies’ preference to avoid
hundreds of outside parties connecting into their internal systems. Many participants
agreed a system accessible by as many key actors (both inside and outside the
company) as possible enables a company to increase communication, better
understand the true cost of serving customers, and ultimately facilitate collaboration.
Transportation represents the physical connection among the companies in the
supply chain. The locations in a supply chain network are called nodes, and the
connections are referred to as links. When one entity sells product to another,
transportation provides the delivery. An outbound delivery for a supplying company is
the inbound delivery for its customer. When one level in the supply chain experiences
delays and problems, it impacts the abilities of downstream members of the supply
chain to serve their customers. For this reason, the larger economy is affected when
transportation disruptions occur. Potential sources for disruptions include equipment
failures, natural disasters and inclement weather, work stoppages, and government
intervention. The next section reviews the role of transportation in the larger economy.

Economic uncertainty, fluctuating fuel prices, increased safety and social regulation,
escalating customer expectations, globalization, improved technologies, labour and
Notes equipment shortages, a changing transportation service industry…today’s managers
are faced with an array of challenges and opportunities that contrast dramatically with
those of a decade ago.
It is not surprising, then, that many managers have failed to fully adapt to the
changing environment, resulting in performance shortcomings and lost opportunities.
Prominent among the list of lost opportunities is fully leveraging the transportation
function as a critical strategic element within the supply chain.
Transportation plays a central role in seamless supply chain operations, moving
inbound materials from supply sites to manufacturing facilities, repositioning inventory
among different plants and distribution centers, and delivering finished products to
customers. Benefits that should result from world-class operations at the points of
supply, production, and customer locations will never be realized without the
accompaniment of excellent transportation planning and execution. Having inventoried
positioned and available for delivery is not enough if it cannot be cost effectively
delivered when and where needed.
Long-Term Decisions
At the highest strategic decision level, transportation managers must fully understand
total supply chain freight flows and have input into network design. At this level, long-
term decisions related to the appropriateness and availability of transportation modes
for freight movement is made. Managers need to decide, for example, which primary
mode of transportation is appropriate for each general flow (i.e., inbound, outbound) by
product and/or location, paying careful attention to consolidation opportunities where
feasible.
Plans should indicate the general nature of product flows, including volume,
frequency, seasonality, physical characteristics, and special handling requirements.
Strategic mode and carrier-sourcing decisions should be considered part of a long-term
network design, identifying core carriers in each relevant mode to enhance service
quality commitments and increase bargaining power. Additionally, managers need to
make decisions regarding the level of outsourcing desired for each major product flow—
ranging from providing the transportation through the company’s own assets (e.g.,
private fleets) to latch-key turnover of transportation operations to third-party providers.
Network and lane design decisions at the strategic level should examine tradeoffs
with other operational cost areas such as inventory and distribution center costs. In
conducting this analysis, companies should keep in mind that networks need not be
fixed or constant. Rather, substantial service improvements and cost reductions can be
achieved by critically examining existing networks and associated flows. For instance, it
may become apparent that stock locations can be centralized by using contract
transportation providers to move volume freight to regional cross-dock facilities for
sorting, packaging, and brokering small loads to individual customers.
Lane Operation Decisions
The second level of decision-making regards lane operation decisions. Where network
design decisions are concerned with long-term planning, these decisions focus on daily
operational freight transactions. At this level, transportation managers armed with real-
time information on product needs at various system nodes must coordinate product
movements along inbound and outbound shipping lanes to meet service requirements
at lowest total costs. Decision-makers who are adept at managing information can take
advantage of consolidation opportunities, while ensuring that products arrive where they
are needed in the quantities they are needed just in time to facilitate other value-added
activities. At the same time, they are realizing transportation cost savings.
The primary opportunities associated with lane operation decisions include
inbound/outbound consolidation, temporal consolidation, vehicle consolidation, and

carrier consolidation. If managers have access to inbound and outbound freight
movement plans, they can identify opportunities to combine freight to build volume
shipments. An inbound shipment may arrive from a supplier located in Philadelphia, for Notes
example, on the same day that a production order destined for a customer in
Wilmington, Del., becomes available for movement. If this information is known to
transportation planner’s far enough in advance, arrangements could be made for the
inbound carrier to haul the outbound load back to Wilmington.
In many cases the inbound carrier would be willing to negotiate lower roundtrip
rates to avoid deadhead miles on the backhaul. This is particularly true if the carrier
and/or driver are headquartered in the Philadelphia area. If this happens to be a heavy
traffic lane, the firm may consider strategically sourcing a core carrier in this geographic
region to capitalize on this opportunity.
Similarly, less-than-volume-load (LVL) shipments moving to the same geographic
region on consecutive days may be detained until sufficient volumes exists to justify a
full load on one carrier with multiple stops (temporal consolidation). By avoiding the LVL
terminal system, the detained freight often arrives at the same time or earlier than the
original LVL shipment—and at a lower cost. Multiple, small shipments inbound from
suppliers or outbound to customers in the same geographic region scheduled for
delivery on the same day may also be combined on one vehicle at full-volume rates,
paying stop-off charges but saving on multiple LVL rates (vehicle consolidation).
Another consolidation opportunity springs from the core carrier concept. Assigning
greater shipping volumes to fewer carriers should result in lower per-unit transportation
costs and higher priority assigned to the shipper’s increased freight. In addition to
consolidating the carrier base, the shipper can identify reliable carriers in need of
backhaul miles.
For instance, a plastics distributor identifies carriers that operate a high percentage
of deadhead miles in lanes over which the firm regularly moves freight. The firm
negotiates advantageous rates with these carriers in exchange for guaranteed backhaul
revenue miles. If the plastics firm plans to move significant amounts of product from
Texas to Florida, the transportation manager will find a Florida carrier that moves a
large volume of product from Florida to Texas. Given sufficient planning information, the
transportation manager can use guaranteed volumes on the backhaul to negotiate
attractive rates.
Choice of Mode and Carrier
A third level of transportation decision-making involves the choice of mode and carrier
for a particular freight transaction. Due to the blurring of service capabilities among
traditional transportation modes, options that in the past would not be considered
feasible may now emerge as the preferred choice. For example, rail container service
may offer a cost-effective alternative to long haul motor transport while yielding
equivalent service. Similarly, package delivery carriers are competing with traditional
LTL operators. Truckload carriers, on the other hand, are increasingly bidding for low-
volume shipments as well as for overnight freight movements. For the shipper seeking
24-hour delivery, truckload carriers may offer an alternative to air carriers at significantly
lower rates—and, quite possibly, higher reliability.
In an integrated mode/carrier decision-making scenario, each shipment would be
evaluated based upon the service criteria that must be met, (for example, delivery
date/time or special handling requirements) as well as the movement’s cost constraints.
All core carriers, regardless of mode, that could possibly meet the service and cost
criteria would be pulled from the database. Managers would then choose the carrier
from this multi-modal set based on availability and existing rates.
Dock Level Operations
The final set of transportation decisions involves dock level operations, such as load
planning, routing, and scheduling. These activities encompass the operational

execution of the higher-level planning decisions. While the fundamental purpose of

shipping docks may not have changed much over the years, the manner in which work
Notes is done certainly has. One obvious change is the common usage of advanced IT and
decision support systems. These tools help the dock personnel to make better use of
the transportation vehicle space; to identify the most efficient routes; and to better
schedule equipment, facilities and drivers on a given day.
Transportation departments that avail themselves of better and more timely
information can derive significant benefits from more efficient and effective load
planning, routing, and scheduling. For example, if a vehicle is being loaded with multiple
customer orders, dock-level managers must ensure that the driver is informed of the
most efficient route and that loads are placed in the order of the planned stops.
Transportation managers, even at the dock level, must develop expertise in using the
information tools available to aid in these decisions.
Successful managers today require a broad view of transportation management’s
role and responsibilities in an integrated supply chain. Managers will continue to
encounter significant challenges as their firms proceed down the road toward supply
chain integration, particularly as external environmental characteristics such as fuel
costs and the overall economy wax and wane.
Regardless of external conditions, however, managers must encourage their firms
to avoid the temptation of making transportation decisions with an eye toward short-
term gain. Rather, they need to view the total cost and total value provided by the
function not only in relation to operating expenses but also in terms of the impact on
customer service and inventory reduction. The influence on total economic value added
is significant.
2.7 ERP on SCM

Effective Business Control
ERP is an effective and powerful tool for management and controlling business
processes. ERP vendors talk about the tangible and intangible benefits that can be
achieved by using ERP, but fall short to emphasize on the key advantages i.e., effective
monitoring and control by adapting to the changing environment rapidly using ERP.
When we talk about effective monitoring and control, it refers not to the employee
but to the process. If you review our history, it is evident that early businesses used to
survive primarily due to effective monitoring and control of key parameters of business
i.e., sales, cost of production, inventory and profitability.
Due to diversification, complexity in business and inability to control and coordinate
various cost functions manually, the focus was lost somewhere down the line.
Now that we are facing intense competition, the same philosophy is being
endorsed. But this time the difference is that technology is being used as an enabler to
focus on these parameters and various tools and philosophies are being adapted to
focus on the basic requirements of a profitable organization.
Early business organizations were fundamentally family business units. The small
amount of manufacturing carried on was primarily done by artisans working alone. Key
management positions were held by family members. The business used to work well
and the key to success was daily control on:
 Sale of what was produced
 Procurement of what was required
 Payable and receivables
 Daily profits

Notes
Figure 2.6: ERP on Supply-Chain Management

In today’s business parlance, it could be termed as daily sales target, minimum
inventory of finished goods and raw material, daily cash flow management and daily
profits.
As the demand of goods started increasing, these organizations started to expand
and diversify to meet the customer needs. It became more and more difficult to manage
and control. Then the concept of scientific management spread throughout industry
which resulted in a modified and enlarged bureaucracy form. Businesses were still
owned by family members and the focus was still the same, i.e., daily control on sales,
cost of production, inventory and profitability.
Example: PARTA system was the controlling factor for any Birla organization in
India.
The parta system was developed with the concept of setting the yearly and monthly
budgets and the performance of the company was measured daily, based on the
standards established in the parta system. It was an effective and powerful tool for
controlling and managing the business as all the vital information regarding costs of
production, sales and inventory was available to make strategic decisions.
Then businesses started diversifying and processes and products started getting
more and more complex. Organizations started setting annual and monthly targets and
performance was being measured on a monthly basis. This resulted in hockey-stick
phenomena where the focus was to meet the targets at the end of the month. As a
result, companies ended with maximum sales, maximum production, maximum
overtimes and maximum collections during the last week of the month. The effect of this
phenomenon was increased work in process inventory, lower machine and resource
utilization, poor on-time deliveries, premium freights, erratic cash flow and so on.
Demand-Supply Gap Filling

The definition and usage of the term, supply chain, depends on the practical scope of
the parties using it.

Notes
Figure 2.7: Supply-Chain Flows

 Supply Chain: For automotive suppliers, the supply chain horizon reaches the end
customer, but in practice this is limited to the point of prime customer – the
assembler. For suppliers, the chain between factory and dealer/customer cannot be
a real supply chain issue because, when the assembly parts are delivered,
suppliers can be influenced by the following steps in the chain.
 Demand Chain: For importers and dealers, it is essential to fulfill customer
requirements regarding reliable and short delivery dates, while the head-office role
is to control and optimize the vehicle stock in the chain (i.e., keep it as low as
possible). Tier one and two suppliers are not part of this area of the demand chain.
For these reasons, it becomes necessary to make a distinction between demand
chain and supply chain.
 Scope: The focus areas for the two chains are different. The supply chain focuses
on tier one and lower suppliers up to the assembler. The demand chain focuses on
all parties between the assembler and customer/dealer.
Basic Principles: Delivery Date and Order Volume

The basic principles between both the chains are different. While the supply chain is
very much focused on lean production (efficiency) and flexibility up to the assembler,
based on fixed, large amount schedules, the demand chain is focused on lean
distribution and flexibility to the end customer, based on variable individual schedules.
In the supply chain, the delivery date demanded by the assembler is fixed and
based on just-in-time principles. Via backward calculation the delivery dates can be
calculated for the suppliers in the chain, assuming that suppliers in most cases do not
have restrictions on flexibility. This calculation will be done in general for large volume
orders, based on determined production volumes for a month, week or day.
In the demand chain, the delivery data to the end customer is not defined by the
end customer, but based on constraints in the production plan and distribution network
by the head office organization. Via a forward calculation the delivery date for an end
customer can be calculated. Achieving delivery dates of few days for a new vehicle
customer order will be very difficult to achieve. Therefore, it is common that the car
seller will calculate for him what a possible delivery date could be and give that
information to the end customer.
Decoupling Demand and Supply

In the automotive industry, supply chain and demand chain will be de-coupled. This is
because a mechanism is needed to balance the volumes required in the demand chain
and the volumes planned and available in the supply chain. When volumes have been
allocated, an order slotting process will take place at the individual car level. Based on

the position of the customer order in this slotting process, (in factory stock, on ship at
importer or at dealer), a delivery date can be given.
Notes
Of course, it would be for the benefit of the industry to work on fluent mechanisms
between demand chain and supply chain, but as long as factories have capacity
restrictions and end customer demand is unpredictable, the mentioned allocation
mechanism should be in place.
In practice, the supply chain view is limited in area so only a very few people can
really oversee the total chain head quarter function. This means that discussions in
general can only be held for parts of the chain. To ensure that one of the areas is not
forgotten or under emphasized, it becomes useful to split the two. At certain moments in
time, it will be necessary to discuss the mechanism of how to link supply chain and
demand chain as effectively as possible for the volume allocation — the basic principle
for the assembler.
In this process, it will also be necessary to set up a mechanism to support the end
customer orders, so that every party, especially in the demand chain, knows about the
given commitment to the customer and will operate in line with this commitment.
What is Demand Chain?
In the demand chain, the parties playing a role between factory and consumer
dealers are assemblers, distribution centers, headquarters, importer, dealer and
consumer. Targets in the demand chain can be described as follows:
 Reduce vehicle stock
 Provide reliable lead times
 Provide short lead times.
Some characteristics of the automotive demand chain are as follows.
 The Internet provides customer influence transparently on the chain
 Balance between flexibility, responsiveness and low inventory is a major challenge
 OEM headquarter takes the lead
 Country/continental specific logistics are needed to take advantages of local
factories
 IT solution for transparency over the chain is challenging operation.
Demand and Supply Chain Coordination

To be competitive in lead times and accurate about delivery dates of vehicles to the end
customer, it is important to have the mechanisms in place to balance demand and
supply. The following functions must be created in the headquarter organisation to
balance these two chains:
 A mechanism is needed to allocate forecast sales volumes within the defined
production capacities.
 A capacity check for volumes and critical components should take place on line for
a dealer to provide a reliable delivery date to the customer when he visits the
showroom.
 Based on the confirmed delivery dates promised to the end customer, all parties in
the logistic pipeline (from assembler to dealer) must be informed about which
orders need to reach the next stage at which moment.
 All parties in the logistic pipeline must have transparency regarding the status and
the number of vehicles available in different statuses.
 All parties must be able to inform the central pipeline when vehicles come into a
delayed condition due to damage, hold or delayed shipments.

 All parties must have the chance to recognize delayed vehicles and must have a
mechanism in place to take action to give priority to these vehicles.
Notes  Headquarters must have a function to inform dealers/customers about customer
orders which will be delivered later than promised.
 All logistics parties must have a performance indicator program in place so that
continuous improvement can be made.
Transparency: The Starting Point

As a first step in getting control over the chains, it is essential to achieve transparency
over the chain. Which goods and how many are where and at which moment? Does
everyone measure the same way? Do the right measuring points exist to follow the
goods? Are hands over points in operations and systems in line?
All of these questions need to be answered internally before this information can be
shown to external parties, such as customers.
At present, there are often inconsistencies in the required data and providing
reliable lead times/delivery dates is impossible.
It is essential that one party in the chain is responsible for the chain organization. A
critical success factor is to set up a strategy to convince other parties in the chain that a
win-win scenario becomes likely if all parties become involved in getting the supply and
demand chain up and running.
In the automotive industry, the supply chain is mainly in the hands of the assembler
who decides the production volumes for the supply chain. Whereas in the automotive
demand chain, the headquarters organization is responsible for the coordination
between sales and production, becomes the best party to take this initiative. However,
in industries where there is less integration between parties in the demand and supply
chain, it will be even harder to implement the chains.
2.8 Network Design and IT in Supply Chain

Network Design determines the physical configuration and infrastructure of the supply
chain. Key decisions are made on the number, locations, and size of manufacturing
plants and warehouses, the assignment of retail outlets to warehouses, etc. At this
stage, major sourcing decisions are also made. The typical planning horizon is a few
years.
Long-term location, capacity, technology, and supplier selection decisions have to
be made under considerable uncertainty with respect to market development and
changing economic and legal conditions. Our research in supply chain design focuses
on the development of multi-stage stochastic optimization methods for decision support
under demand, freight rate, and exchange rate uncertainty. We further investigate
different approaches to uncertainty and scenario modelling.
Warehouse location
If companies expand and want to build new factories or storage places, the Warehouse
Location Problem calculates among a set of possible locations the ones that minimize
fixed costs and operational costs by fulfilling the required demand.
Traffic network design:
Facing increasing demand on transportation in cities, the traffic networks have to be
extended. As the budget is usually limited, the question is: Which projects should be
built to improve the flow inside a traffic network.
Reshoring:
For many years, OEM’s constantly achieved significant cost savings through
outsourcing to low cost countries. However, due to rising cost and other circumstances,

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Supply Chain Management 39

Unit 2: Supply Chain Management

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2.2 Supply Chain Management (SCM)

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2.2.1 Origin of the Term and Definitions

The systematic, strategic coordination of traditional business functions and tactics

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2.2.2 Supply Chain Management 2.0 (SCM 2.0)

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2.2.3 Business Process Integration

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coordination of geographical and final assemblies postponement of physical distribution

2.3 The Drivers of Supply Chain Management

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Definition/Explanation of Four Drivers

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and the efficient mode of transportation. Transportation decisions includes

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Figure 2.1: Supply Chain Model

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2.4.2 Capabilities in Supply Chain Planning

Figure 2.2: Supply Chain Planning

2.4.3 Demand Planning

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Figure 2.3: Planning in Supply and Demand in Supply Chain

Demand Planning – The Key to a Profit-Driven Supply Chain Cycle

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1. Generation of statistical baselines: The base requirement to initiate the process

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2.5 Planning and Managing Inventories in a Supply Chain

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Figure 2.4: A conceptual model of Supply Chain Performance

Figure 2.5: Role of Transportation in Supply Chain

An economical transportation network actually begins with a shift in attitude.

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execution of the higher-level planning decisions. While the fundamental purpose of

2.7 ERP on SCM

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Figure 2.6: ERP on Supply-Chain Management

Demand-Supply Gap Filling

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Figure 2.7: Supply-Chain Flows

Basic Principles: Delivery Date and Order Volume

Decoupling Demand and Supply

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Demand and Supply Chain Coordination

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Transparency: The Starting Point

2.8 Network Design and IT in Supply Chain

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