Supply Chain Management

Chapter 1
Umar Farooq
Management Sciences Department
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GIK Institute
 Denotation
• What is Supply Chain Management?
• Supply Chain:
 Network of integrated activities and/or processes
used to deliver products and services, from raw
material to final product, to the final consumer.
• Management: (What should we manage?)
Effectively manage back and forth flows;
 Material flow
 Information flow
 Cash flow
• For one common purpose reduce cost and increase
profit
2
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 General Composition of Supply Chain
Three Main Channel entities/Actors
• Supplier
 A provider of raw goods or services.
 e.g. Raw material, Energy, Services, Components. Farmers, Ore
mines, Spare parts manufacturers etc.
• Manufacturer
 Receives raw materials and components to convert it into
finished products
 e.g. Finished Goods manufacturer, Denim industry, Aerospace
Industry, Automobile Industry, Cement Industry, Sugar Industry etc.
• Distributor
 Receives and distribute finished products to final consumers
 e.g. Macy’s, Wall Mart, Nestle, Nike, Cash & Carry etc.
• Customer
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Consume to utilize the final product or services. 3
 General Composition of Supply
Chain…Cont.
• Supply Chain includes four main Flows

o Material and services flow

 From suppliers toward customer
o Information Flow
 Information flows both ways
o Cash Flow
 Payment flows from customers toward suppliers

o Reverse Flow????
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 General Composition of Supply
Chain…Cont.

Information Flow

Reverse Flow
Rejected or Defected
products

Supplier Manufacturer Distributor Customer

Downstream flow

Upstream flow

Product Flow
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Cash Flow
 Origin of Supply Chain Management
• 1930-1950s (Early years of SCM)
 Mass Production age
 Women induction into industries
 Pallet, Pallet Lift and Unit Load Concepts
 Set the stage for supply chain globalization
Fredrik Taylor
• 1950s & 1960s (Quality Era)
 More focus on cost reduction
 Improve productivity
 Less focus on quality
 Systems innovation
• 1960s-1970s (Integration Era)
 Introduction of computer technology
 Development of software like MRP-I & MRP-II 7
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Origin of Supply Chain Management
1980s & 1990s (Globalization Era)
 Personal Computers
 Intense global competition led manufacturers to adopt
 Just-In-Time (JIT),
 Total Quality Management (TQM), and
 Business Process Reengineering (BPR) practices
2000s and Beyond (SCM 2.0)
 Industrial buyers will rely more on third-party service providers to
improve purchasing and supply management.
 Wholesalers/retailers will focus on transportation and logistics more
as quick response service

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 Main Supply Chain Structures
Question: Can we apply same supply chain management concepts to
all types of industries?
• They can improve operating efficiency by employing the right
supply chain structure.

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 Journey of Main Supply Chain Strategies
• Stable Supply Chain:
 Less variability and innovation in product’s demand and design.
Produced in bulk quantities.
 A heavy focus on execution, efficiencies, and cost performance.
 Slight focus on communication technologies.
 Strong relationship with business partners.
 Examples: ????? Cement Industry, Pharmaceuticals, Fertilizers
• Reactive supply chain:
• Seasonal or on-demand manufacturing.
• Required good communication technologies in order to react quickly.
• Example: ?????? Ice cream, Clothing industry, Sugar industry, Agriculture industry
• Efficient reactive supply chain:
• Acts as an efficient, low-cost provider of goods and services.
• Operate in highly competitive environment.
• Required highly efficient communication systems to reduce lead time and
operational costs.
 Supply Chain Models

• Vertical integration

• Horizontal Integration

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 Supply Chain Models
• Vertical integration

• It is a strategy to gain control

over its suppliers or
distributors, retailers in order
to increase the firm’s power
in the marketplace, reduce
transaction costs and secure
supplies or distribution
channels.
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 Supply Chain Models
• Examples(Vertical
Integration):
 Ford, Hyundai, Apple,
Google, Microsoft

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 AMAZON Case

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 Supply Chain Models
• Examples: Apple
• They are completely vertically
integrated. They own the OS, the
hardware and the ecosystem. The
result of this vertical integration is that
they have complete control of their
future.
• Samsung
• They do their own design, their own
chips, and in their case they even do
their own screens and manufacture
their own products.
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 Supply Chain Models
• Horizontal integration
is a strategy where a
company acquires, or
mergers or takes over
another company in the
same industry value
chain.

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 Supply Chain Models
• Examples (Horizontal
Integration):
• Marriott's 2016 acquisition of
Sheraton (hotels)
• AstraZeneca's 2015
acquisition of ZS Pharma
(biotech)
• Volkswagen’s 2012
acquisition of Porsche
(automobiles),
• Facebook's 2012 acquisition
of Instagram (social media),
• Disney's 2006 acquisition of
Pixar (entertainment media)
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 Supply Chain Models

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 Importance of Supply Chain
Management

• Globalization and Global Competition in business

• Shorter Product Life Cycle
• Low Cost Distribution Channels
• More Concerned and well informed customers

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 Importance of Supply Chain
Management Profit
Supply Chain
• Supply Chain Cost 20% Cost

• Marketing Cost 25% Marketing

Cost

• Manufacturing Cost 45%

Manufacturing
• Other Costs 10% Cost

Effort spent for supply chain activities are invisible to the

customers.

• $3 trillion spent domestically for SC activities.

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 What can Supply Chain
Management do?
• If you cannot bring big change, Start doing small changes.
• The need for Cost savings and better coordination of resources are
reasons to employ Supply Chain Management.
• Some Examples:
• The grocery industry could save $30 billion (10% of operating cost)
by using effective logistics and supply chain strategies.

 A typical box of cereal spends 104 days from factory to sale

 A typical car spends 15 days from factory to dealership
o Faster turnaround of the goods is better???

• National Semiconductor used air transportation and closed 6

warehouses, 34% increase in sales and 47% decrease in delivery lead
time.
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 Benefits For Effective Supply Chain
Management
o "The biggest issue enterprises face today is intelligent visibility
of their supply chains both upstream and downstream" (AMR
Research)

• Compaq lost $0.5 B to $1 B in sales because laptops were not

available when and where needed.

• P&G (Proctor&Gamble) estimates it saved $65 M (in 18 months)

by collaboration with retailers resulting in a better match of supply
and demand

• When the 1 gig processor was introduced by AMD (Advanced

Micro Devices), the price of the 800 meg processor dropped by
30%
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 Benefits For Effective Supply Chain
Management
• When a firm, its customers and suppliers all know
each other future plans and are willing to
coordinate,
 They can reduce cost significantly
 Much easier planning and scheduling
 Quality improvement
 More Productivity
• All leads to more profit and customer satisfaction

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 Bullwhip Effect
• Lack of communication, coordination and
disorganization within supply chain can result one of
the most common problem of supply chain.
• This common problem is known as the bullwhip
effect or whiplash effect.
o Increasing fluctuations in inventory in response to shifts in
customer demand as one moves further up the supply
chain.
• Bullwhip effect is a phenomenon in Forecast driven
distribution channels

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 Bullwhip Effect
• The bullwhip effect in the supply chain occurs when
changes in consumer demand causes the companies
in a supply chain to order more/less goods to meet
the new demand.
• The bullwhip effect usually flows up the supply
chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials
supplier.
• It occurs because the demand for goods is based on
the poor demand forecasts from companies, rather
than actual consumer demand.
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 Causes of Bullwhip Effect
• The main causes of bullwhip effect are;
 Disorganization
 Lack of communication
 Wrong Demand Forecasting
 Longer Lead-Time
 Price Fluctuation (Discounts)

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 Example: Bullwhip Effect
• Lets say;
• Actual demand from a customer = 8 units
• The retailer order from distributer = 10 units
– (Extra 2 units are to ensure they don’t run out of stock)
• Distributer orders to manufacturer = 20 units
– (To ensure that they should have enough stock to
guarantee timely shipment of goods to the retailer)
• Manufacturer order raw material for = 40 units
– (In order to balance the economy of scale in production)

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Foundation Elements of Supply Chain
Management
• Supply/Purchasing Elements
• Operations Elements
• Logistics/Transportation Element
• Integration Elements

Supplier Manufacturer Distributor Customer

Important Elements of Supply Chain
Management Cont….
 Important Elements of Supply Chain
Management Cont….

Supply Supplier alliances, supplier management,

Strategic sourcing, Supply base

Operations Demand management, MRP, ERP, JIT, TQM

Distribution Transportation management, Customer

relationship management, Network design

Integration Coordination/Integration activities, global

integration problems, performance
measurement
 Important Elements of Supply Chain
Management Cont….
Supply/Purchasing Element

 Traditional Purchasing Approach:

o Many Suppliers (Supply-Base)
o Short-term contracts
o Purchase-price based seller-buyer relationship

• Over the past two decades shift towards more

strategic approach to purchasing known as supply
management/procurement.
 Important Elements of Supply Chain
Management Cont….
• Supply/Purchasing Elements
 Raw material quality, delivery timing,
reliability and purchase price are important
factors….
 Supplier Management
 Supplier evaluation: Determining the capabilities “If we truly want to be
of suppliers world-class, we have to
 Supplier certification: Third party or internal be in tune with our
certification to assure product quality requirements. suppliers. If we cannot
respond because we
 i.e. ISO certifications: ISO 9000, ISO 14001 don’t have the right
 Long-term Relationship materials at the right
 To get a reliable supplier time, we will fail,”
Harvey Kaylie
 Better quality of material president of Mini-
 Better payment terms and discounts Circuits.
 Priority manufacturing status
Important Elements of Supply Chain
Management Cont….

Islamabad—Qatar recently signed 15 years long term agreement

 Important Elements of Supply Chain
Management Cont….
 What does supplier get from long term contracts???
 The Supplier can benefits from the closer relationship
by getting bulk and consistent orders from customers.
 Such kind of long-term trading partnership is called
Strategic Partnership.
• Suppliers can have a significant impact on a firm’s
reputation.
• Ethical and Sustainable sourcing:
o Purchasing from those suppliers that
are governed by environmental
sustainability and social and ethical
practices.
The Dark Side of Chocolate
 Important Elements of Supply Chain
Management Cont….
• After Delivery…….
• Once raw material has delivered to buyer, the
internal operations begin, to convert raw
material into final product.
• Operation Element
 Demand Management
 During a calendar year, seasonal demand If forecast is wrong
variations commonly occur. then firm is left with
• Firms can predict these variations, using too much inventory or
historic demand patterns, and forecasting. too little inventory.
• Over-Stock and Out-of-Stock situations are
costly and can result in lose of business.
 Important Elements of Supply Chain
Management Cont….
• Using Demand Forecasting to minimize these costs (Out of stock &
Over stock).
 Linking buyers & suppliers via MRP-Material Requirement
Planning (for managing inventory) and ERP-Enterprise
Resource Planning.
 Provide sales data, inventory and production information related
to all business units to supplier.
 Quality of the incoming purchased items and sub-assemblies
• Firms and supply chains employing concepts of lean
 Use Lean/JIT to improve the “pull” of materials to reduce
inventory levels.
 Employ TQM or Six Sigma to improve quality compliance
among suppliers
 Important Elements of Supply Chain
Management Cont….
• How the Large Super-Store keep track of
their inventory?
• Wal-Mart MRP System: Wal-Mart retail
stores, scan the barcodes of the products
purchased by customers, causing the local
store’s MRP system to deduct units from the
inventory until a preset reorder point is
reached.
• When this occurs, the local computer system
automatically contacts Wal-Mart’s regional
distribution center’s MRP system and generates
an order.
• At the distribution center, the order is filled and
sent along with other orders to the particular
Wal-Mart store. Eventually, the distribution
center’s MRP system automatically generates
an order to the manufacturer who produces the
product for Wal-Mart, reducing the likelihood
of stock outs or excess inventories.
 Important Elements of Supply Chain
Management Cont….
Distribution Trends:
– Transportation management-
tradeoff decisions between cost &
timing of delivery/customer
service via trucks, rail, water &
air
– Customer relationship
management (CRM)- strategies
to ensure deliveries, resolve
complaints, improve
communications, & determine
after sales service requirements
Deliver at Right Time, Right
Quality and Right Amount
Motor carriers (trucks), are
more expensive than rail but
provide more flexibility for
short routes.
Air carriers are most expensive
but fastest mode.
Water carriers are least
expensive
But also slowest.
National Semiconductor
used air transportation and
closed 6 warehouses, 34%
increase in sales and 47%
decrease in delivery lead
time.
California-based clothing company
Anchor Blue, was having many problems
few years ago with its distribution centre
and inventory management system,
leading to problems stocking its retail
stores. Consequently, they outsourced
their logistics function to UPS Supply
Chain Solutions, resulting in a 40 percent
decrease in unit processing costs and a 37
percent increase in merchandise pieces
moved per year.
According to Richard Space, senior vice president for logistics at Anchor Blue,
“We have increased delivery to stores and seen better fill rates. What used to
take ten days from DC to stores now takes two. And that means improved cash
flow.” In the end, Space says the keys to a successful outsourcing arrangement
are communication and trust with partners.
 Important Elements of Supply Chain
Management Cont….
• Network design- creating distribution networks based on
tradeoff decisions between cost & sophistication of
distribution system
• Large number of warehouses: The transportation cost
from factory to warehouse, the inventory holding cost
and the cost to build and operate warehouses would be
quite high, but the payoff would be better customer
service.
• Few Warehouses: Low transportation cost from factory
to warehouse, low construction and operating cost but
limited customer services.
 Important Elements of Supply Chain
Management Cont….
Integration Trends:
If one key activity fails or is
– Supply Chain Process Integration- performed poorly, then the
when supply chain participants work flow of goods moving along the
for common goals. Requires intra-firm supply chain is disrupted,
functional integration. Based on efforts jeopardizing the effectiveness
of the entire supply chain
to change attitudes & adversarial
relationships
– Firms act together to maximize total
supply chain profits.
– Supply Chain Performance
Measurement- Crucial for firms to
know if procedures are working as
expected—or not before they become
financial drains.
 Future Trends in Supply Chain
Management
Expanding (and Contracting) the Supply Chain

Today, firms are increasing their partnerships with

foreign firms and building foreign production facilities
to accommodate their market expansion plans.

The expansion involves:

• breadth- foreign manufacturing, office & retail
sites, foreign suppliers & customers
• depth- second and third tier suppliers & customers
 Future Trends in Supply Chain
Management
 Increasing Supply Chain Responsiveness

 Firms will increasingly need to be more flexible and

responsive to customer needs
 Supply chains will need to benchmark industry
performance and, meet and improve on a continuous
basis
 Responsiveness improvement will come from more
effective and faster product & service delivery systems
 Future Trends in Supply Chain
Management- Cont.

 The Greening of Supply Chains

 Sustainability: Based on three pillars
 Social, Economical, Environmental
 Supply chains will work harder to reduce
environmental degradation
 Large majority (75%) of U.S. consumers
influenced by a firm’s environmental
friendliness reputation
 Recycling and conservation are a growing
alternative in response to high cost of
natural resources.
Future Trends in Supply Chain Management-
 Reducing Supply Chain Costs
• Cost reduction can be achieved throughout the supply chain by
reducing waste by reducing purchasing and product distribution
costs.
• By reducing excess inventories and non-value-adding activities
among the supply chain participants.

 Cost reduction achieved in the supply chain through:

• Reduced purchasing costs
• Reducing waste
• Reducing excess inventory
• And reducing non-value added activities
 Continuous Improvement through
• Benchmarking- improve over competitors’ performance
• Trial & error
• Increased knowledge of supply chain processes