Chapter 1

Understanding the Supply Chain

1-1
 What is a Supply Chain?

•Flow of products and services from

• Suppliers
• Raw materials manufacturers
• Intermediate goods manufacturers
• Finished goods manufacturers
• Distributors and wholesalers
• Retailers
• Customers
•Connected through transportation, information, and
exchanges of funds

Supplier Manufacturer Distributor Retailer Customer

 What is a Supply Chain?

•All stages involved, directly or indirectly, in fulfilling a

customer request

•Includes manufacturers, suppliers, transporters,

warehouses, retailers, and customers

•Within each company, the supply chain includes all

functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)
•Customer is an integral part of the supply chain
1-3
What is a Supply Chain?
•Includes movement of products from suppliers to
manufacturers to distributors, but also includes movement
of information, funds, and products in both directions

•The supply chain includes not only the manufacturer and

suppliers, but also transporters, warehouses, retailers, and
even customers themselves.

• Within each organization, such as a manufacturer, the

supply chain includes all functions involved in receiving and
filling a customer request.

1-4
What is Supply Chain Management?

The management of the

chain of supplies.
What is Supply Chain Management?

Supply Chain Management (SCM) spans all

management and storage of row materials,
work-in-process inventory, and finished goods from
point to origin to point to consumption. – Lowdon &
Lowdon
What is Supply Chain Management?

Supply chain management involves the

management of supply chain assets
and products, information, and fund
flows to maximize total supply chain
surplus
What is Supply Chain Management?

•“Managing supply and demand, sourcing raw materials and

parts, manufacturing and assembly, warehousing and
inventory tracking, order entry and order management,
distribution across all channels, and delivery to the
customer”
• The Supply Chain Council
•“The design and management of seamless, value-added
process across organizational boundaries to meet the real
needs of the end customer”
• Institute for Supply Management
What is Supply Chain Management?

Getting the right things

to the right places
at the right times
for profit
•Examples: Fig. Detergent Supply Chain (Wal-Mart)
Consider a customer walking into a Walmart store to purchase detergent. The
supply chain begins with the customer and his or her need for detergent.

For normal customer it is very difficult to realize the actual supply chain
originated from timber industry or plastic producer.
1-10
Most Supply Chain are Actually Networks

• Typical supply chain stages: customers, retailers, distributors,

manufacturers, suppliers All stages may not be present in all supply
chains (e.g., no retailer or distributor for Dell)
• The term supply chain may also imply that only one player is involved
at each stage.
• In reality, a manufacturer may receive material from several
suppliers and then supply several distributors.
• Probably more accurate to use the term “supply network” or “supply
web”
• to describe the structure of most supply chains, as shown in Figure.
•Consider a customer walking into a Walmart store to
purchase detergent. The supply chain begins with the
customer and his or her need for detergent.
1-11
1-12
Flows in a Supply Chain

Information

Product
Customer
Funds

1-13
Flows in a Supply Chain

•Each stage in a supply chain is connected through the flow

of products, information, and funds.

•These flows often occur in both directions and may be

managed by one of the stages or an intermediary.

•Information flows in both direction upward and downward.

•Product Flows: Example: Gas cylinder ,Coca-Cola bottle
•Fund flows also in both direction upwards and downwards

1-14
 Managing a Supply Chain is Not Easy

• Conflicting objectives across the supply chain

Manufacturer Distributor Retailer Customer

• Large production • Low inventory • Few stores • Convenience

batches • Few DCs • Low inventory • Short lead time
• Little variety • Large variety of
• Close to DCs products

• Large shipments
Managing a Supply Chain is Not Easy

•Uncertainty and risk factors

•2005 Hurricane Katrina
• P&G coffee supplies from sites around New Orleans
• Six month impact
•2002 West Coast port strike
• Losses of $1B/day
• Store stock-outs, factory shutdowns
•2001 India earthquake
• Supply interruptions for apparel manufacturers
•1999 Taiwan earthquake
• Supply interruptions for HP and Dell
• 2020 ‘Corona Virus’ situation
 Managing a Supply Chain is Not Easy

• Information distortion

Supplier Manufacturer Distributor Retailer Customer

Bullwhip effect
Managing a Supply Chain is Not Easy

• What is Information Distortion. The tendency of information

communicated within and between individuals and
organizations to be altered, omitted, or re-organized as it is
communicated. It includes a range of alterations from error
in transmission to deliberate prevarication.

•The bullwhip effect is a distribution channel phenomenon in

which forecasts yield supply chain inefficiencies. It refers to
increasing swings in inventory in response to shifts in
customer demand as one moves further up the supply chain.

1-18
The Objective of a Supply Chain

•Maximize overall value created

•Supply chain value: difference between what the final
product is worth to the customer and the effort the supply
chain expends in filling the customer’s request
•Value is correlated to supply chain profitability (difference
between revenue generated from the customer and the
overall cost across the supply chain)
•Example: Dell receives $2000 from a customer for a
computer (revenue)
•Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
•Difference between $2000 and the sum of all of these costs
is the supply chain profit 1-19
 The Objective of a Supply Chain

•Supply chain profitability is total profit to be shared

across all stages of the supply chain
•Supply chain success should be measured by total
supply chain profitability, not profits at an
individual stage
•Sources of supply chain revenue: the customer
•Sources of supply chain cost: flows of information,
products, or funds between stages of the supply
chain
•Supply chain management is the management of
flows between and among supply chain stages to
maximize total supply chain profitability 1-20
Supply Chain Management–Advantages

Develops better customer relationship and service.

Creates better delivery mechanisms for products and services in

demand with minimum delay.
Improvises productivity and business functions.
Minimizes warehouse and transportation costs.

Assists in achieving shipping of right products to the right place at

the right time.

Enhances inventory management, supporting the successful

execution of just-in-time stock models.

Assists companies in adapting to the challenges of globalization,

economic upheaval, expanding consumer expectations, and related
differences.

Assists companies in minimizing waste, driving out costs, and

achieving efficiencies throughout the supply chain process.
1-21
 Decision Phases

Three categories - Depending on the frequency of

each decision and the time frame over which a
decision has an impact,

▪Supply chain strategy or design

▪Supply chain planning
▪Supply chain operation

1-22
 Supply Chain Strategy or Design
•Decides how to structure the supply chain over the next several
years
• chain configuration,
• resource allocated and
• process at each stage should perform
•Strategic supply chain decisions
• Locations and capacities of facilities
• Products to be made or stored at various locations
• Modes of transportation
• Information systems
•Supply chain design must support strategic objectives
•Supply chain design decisions are long-term and expensive to
reverse – must take into account market uncertainty
1-23
 Supply Chain Planning
• Under the given configuration decisions are made which has
impact on a time frame of quarter to a year
• Starts with a forecast the coming year or a comparable time
frame
• Planning decisions include
– which market will be supplied from which locations,
– the subcontracting for manufacturing,
– the inventory policies to be followed, and
– the timing and size of marketing promotions
• Companies in the planning phase try to incorporate any flexibility
built into the supply chain in the design phase and exploit it to
optimize performance
• Companies define a set of operating policies that govern
short-term operations
1-24
 Supply Chain Operation
• Decisions are taken regarding individual customer order and the time
frame is week or days
• Configuration is fixed and policies are defined
• Objective is to handle incoming customer orders in the best possible
manner
• · Decisions related with
– allocation of inventory or production to individual orders,
– set a date that an order is to be filled,
– generate pick lists at a warehouse,
– allocate an order to a particular shipping mode and shipment,
– set delivery schedules of trucks, and
– place replenishment order
• Exploit the reduction in uncertainty and optimize performance
1-25
Process View of Supply Chain

•A supply chain is a sequence of processes and flows that

take place within and between different stages and combine
to fill a customer need for a product
•· Two ways to view the processes performed in a supply
chain
Cycles view and
Push/pull view
•Cycle view: processes in a supply chain are divided into a
series of cycles, each performed at the interfaces between
two successive supply chain stages
•Push/pull view: processes in a supply chain are divided into
two categories depending on whether they are executed in
response to a customer order (pull) or in anticipation of a
customer order (push)
1-26
 Cycle view
• Defines the processes involved and the owners of each process
• Process in a supply chain are divided into a series of cycles
• Cycles are performed at the interface between two successive stages of a
supply chain
• Supply chain process can be broken down into four process cycles such as
– Customer order cycle
– Replenishment cycle
– Manufacturing cycle
– Procurement cycle
• Each cycles occurs at the interface between two successive stages of the
supply chain
• A cycle view of the supply chain is very useful when considering operational
decisions
• It clearly specifies the roles and responsibilities of each member of the supply
chain
• It helps the designer to consider the infrastructure required to support the
processes 1-27
Cycle View of Supply Chains

Custome
Customer Order
r
Cycle
Retaile
Replenishment r
Cycle
Distributor

Manufacturing
Cycle
Manufacturer
Procurement Cycle
Supplie
r 1-28
 Cycle View of Supply Chain Processes

Customer Order Process

1. Customer Arrival
2. Customer Order Entry Customer Order
3. Customer Order Fullfillment Cycle
4. Customer Order Receiving Replenishment Process
1. Retail Order Trigger
Replenishment 2. Retail Order Entry
Cycle 3. Retail Order Fullfillment
Manufacturing Process 4. Retail Order Receiving
1. Order Arrival
2. Production Scheduling Manufacturing
3. Manufacturing/Shipping Cycle
4. Receiving Procurement Process
1. Component Order Arrival
Procurement Cycle 2. Production Scheduling
3. Manufacturing/Shipping
4. Receiving
 Push/Pull View
∙Categorizes processes in a supply chain based on whether they are initiated in
response to a customer order (pull) or in anticipation of a customer order (push)
∙ With pull processes, execution is initiated in response to a customer order. With
push processes, execution is initiated in anticipation of customer orders based on a
forecast.
∙ Categorisation is based on the timing of process execution relative to end customer
demand
∙ At the time of execution of a pull process customer demand is known with certainty
∙ In case of push process at the time of execution of a process demand is not known
and must be forecasted
∙ Pull process – reactive process
∙ Push process – speculative process
∙ Push/pull boundary in a supply chain separates push process from pull process
∙ Very useful when considering strategic decisions relating to supply chain
∙ Forces more global consideration of supply chain processes as they relate to a
customer order
∙ More the pull process better the supply chain

1-30
1-31
Push/Pull View of Supply Chain Processes

PULL Execution is initiated in

PROCESSES response to customer orders
(reactive)
Customer order arrives

PUSH Execution is initiated in

PROCESSES anticipation of customer orders
(speculative)

Processes are divided based on the timing of

their execution relative to a customer order
Push/Pull View of Supply Chains
Procurement Customer
M
, anufacturing Cycle
Order
Replenishment
and
cycles

PUSH PULL
PROCESSES PROCESSES

Customer
Order
Arrives 1-33
Push/Pull Processes for the Supply chain of Dell

PULL

Custome
Customer Order Cycle r
and
Manufacturing
Cycle Manufacturer
Procurement Cycle
PUS
Supplie
H
Push/Pull Processes for the Supply chain of
Detergent

Custome
PULL Customer Order
r
Cycle
Retaile
Replenishment r
Cycle
Distributor

Manufacturing
PUSH Cycle
Manufacturer
Procurement Cycle
Supplie
 Examples of Supply Chains: gateway and
apple: two Different journeys into retailing
• Gateway was founded in 1985 as a direct sales manufacturer of PCs with no
retail footprint. In 1996, Gateway was one of the first PC manufacturers to
start selling PCs online. After many years of selling its PCs without a retail
infrastructure, however, Gateway introduced an aggressive strategy of
opening Gateway retail stores throughout the United States in the late
1990s. Its stores carried no finished-goods inventory and were primarily
focused on helping customers select the right configuration to purchase. All
PCs were manufactured to order and shipped to the customer from one of
the assembly plants. Initially, investors rewarded Gateway for this strategy
and raised the stock price to more than $80 per share in late 1999. However,
this success did not last. By November 2002, Gateway shares had dropped
to less than $4, and Gateway was losing a significant amount of money. By
April 2004, Gateway had closed all its retail outlets and reduced the number
of configurations offered to customers. In August 2007, Gateway was
purchased by Taiwan’s Acer for $710 million. By 2010, Gateway computers
were sold through more than 20 different retail outlets, including Best Buy
and Costco. As one can imagine, this was quite a transition for the company
to experience. In contrast, Apple has enjoyed tremendous success since it
opened its first retail store in 2001.

1-36
 By 2013, Apple had more than 415 stores worldwide, with sales of over $20
billion. Unlike Gateway, Apple has always carried product inventory at its
stores. Given its product designs, Apple carries relatively little variety in its
stores. In 2012, average revenue per Apple retail store was $51.5 million, a 19
percent increase over 2011.

• The following questions highlight supply chain decisions that have a bearing
on the difference between Apple’s and Gateway’s performance:

• 1. Why did Gateway choose not to carry any finished-product inventory at its
retail stores? Why did Apple choose to carry inventory at its stores?
• 2. What factors explain the success of Apple retail and the failure of Gateway
country stores?

1-37
 Amazon.com
• Amazon sells books, music, and many other items over the Internet and is one
of the pioneers of online consumer sales. Amazon, based in Seattle, started by
filling all orders using books pur- chased from a distributor in response to
customer orders. As it grew, the company added ware- houses, allowing it to
react more quickly to customer orders. In 2013, Amazon had about 40
warehouses in the United States and another 40 in the rest of the world. It
uses the U.S. Postal Service and other package carriers, such as UPS and FedEx,
to send products to customers. Out- bound shipping-related costs at Amazon
in 2012 were over $5 billion. Following the introduction of the Kindle, Amazon
has worked hard to increase sales of digital books. The company has also
added a significant amount of audio and video content for sale in digital form.
Amazon has continued to expand the set of products that it sells online.
Besides books and music, Amazon has added many product categories such as
toys, apparel, electronics, jewelry, and shoes. In 2009, one of its largest
acquisitions was Zappos, a leader in online shoe sales. This acquisition added a
great deal of product variety: According to the Amazon annual report, this
required creating 121,000 product descriptions and uploading more than 2.2
million images to the website. In 2010, another interesting acquisition by
Amazon was diapers.com. Unlike Zap- pos, this acquisition added little variety
but considerable shipping volumes.
•. Several questions arise concerning how Amazon is
structured and the product categories it continues
to add:
• 1. Why is Amazon building more warehouses as it
grows? How many warehouses should it have, and
where should they be located?
•2. Should Amazon stock every product it sells?
•3. What advantage can bricks-and-mortar players
derive from setting up an online channel? How
should they use the two channels to gain maximum
advantage?
•4. For what products does the online channel offer
the greater advantage relative to retail stores?
What characterizes these products?
1-39