Supply Chain Management [SCM] 1

Understanding the Supply Chain Management • Concept of Supply Chain Management
– Define Supply – Define Supply Chain – Define Supply Chain Management This can best be done by discussing the general Operating process of organizations with examples from day to day activities.


Operation of an Organization
Random Fluctuations Inputs [Transformed Resources] 1. Materials 2. Information 3. Customers The Transformation Process Outputs Customers Late Deliveries Staff Turnover Power / Equipment failure Products External

1. Facilities 2. Energy & Utilities

Services Government Regulations etc. Environment A general Input – Transformation Process– Output Operations model


3. Technology 4. Staff
Inputs [Transforming Resources]

Supply Chain Management [SCM] 2

Process of buying / purchasing Products
Raw material Supplier Component Supplier Computer Manufacturer Distributor Show Room [Retailer] Customer

Toilet Soap
Raw material Supplier Soap Manufacturer Supermarket [Retailer]



Crude Oil Supplier Refinery [Manufacturer] Petrol/Diesel Pump [Retailer]


Supply Chain Management [SCM] 3 Process of buying / purchasing Services Vehicle Repair Raw material Supplier Component Supplier Vehicle Manufacturer Spares Distributor Service Centre [Retailer] Customer Pest Control Maintenance Company [Retailer] Raw material Supplier Pest control products Manufacturer Pest control products Distributor Customer Electricity Water [Nature] Generating Station [Producer] Home Customer Distribution Company [Retailer] Commercial Customer Industrial Customer Fuel Supplier .

Supply Chain Management [SCM] 4 Supply The Customer expects that there will be supply of Products / Services whenever the need arises. The replenishment quantities are created in response to demand for the product or component or in anticipation of such a demand. -Definition of Supply [APICS Dictionary 11th edition] 1] The quantity of goods available for use 2] The actual or planned replenishment of product or component. .

Oil Company) Paper Manufacturer Timber Industry .What is a Supply Chain? P&G or other manufacturer Jewel or third party DC Jewel Supermarket Customer wants detergent and goes to Jewel Plastic Producer Tenneco Packaging Chemical manufacturer (e. Oil Company) Chemical manufacturer (e.g.g.

. It has the following typical entities / stages: •Customers •Retailers •Wholesalers / Distributors •Transporters •Manufacturers / Producers •Component / Raw material Suppliers These entities are connected to each other along a chain.Supply Chain Management [SCM] 5 Supply Chain The buying process begins with customer order and ends when the satisfied customer pays for the product / service. Hence the name Supply Chain system.

and supplies from other organizations and or individuals. equipment. To be successful. Value = Revenue from customer – Overall cost across the supply chain. Organizations have to acquire many of the materials. Supply chain success should be measured in terms of supply chain profitability and not in terms of profit at an individual stage. . facilities. Value is correlated with supply chain profitability. To maximize the overall value generated. organizations have to be interdependent. Thus the performance of an organization depends not only on its own performance but on the performance of other organizations which supply the resources. Value generated = Worthiness of product – Effort the supply chain expends.Objectives of Organizations To meet the needs of various customers and stakeholders. This makes it clear that an organization cannot exist in isolation. Cooperation among firms is a must.

Supply Chain Management [SCM] 6 Supply Chain Supply Chain Model Information Flow Return of Product Return of Product Basic Supplier Primary Product Flow Producer Customer Primary Product Flow Primary Cash Flow Supplier – Producer – Customer are connected by Product. repairs. Reverse flow of products returned for replacement. Flow of Cash from customer through intermediate entities to supplier 3. or disposal . Flow of Information back and forth along the chain 4. recycling. Information & Payment Flows 1. Flow of physical materials and services from suppliers through intermediate entities to customers 2.

Supply Chain Management [SCM] 7 Supply Chain Organizations: •Supplier – materials / energy / services / components •Producer – finished products / services •Retailer – receives finished products and delivers to customers Flows that connect the entities: •Physical materials / services •Cash from customer •Information – back and forth •Reverse flow of products – repair / recycling / disposal / replacement .

[APICS Dictionary 11th edition] •SC involves directly or indirectly. Component / Raw material Suppliers •SC can be viewed as processes – marketing data analysis. Manufacturers / Producers. order processing cutting across entities •Outside stakeholders – government. competitors etc. trade associations. Wholesalers / Distributors. Retailers. everyone and everything required to deliver products and services from raw materials to end customers •SC includes Customers. Physical Distribution and Cash. shipping. public at large. universities.Supply Chain Management [SCM] 8 Definition of Supply Chain The global network used to deliver products and services from raw materials to end customers through an engineered flow of Information. Transporters. invoicing. .

[APICS dictionary 11th edition] . planning. leveraging world wide logistics. building a competitive infrastructure. synchronizing supply with demand and measuring performance globally. execution. control and monitoring of supply chain activities with the objective of creating net value.Supply Chain Management [SCM] 9 Supply Chain Management The design.

.Some more definitions of SCM Oliver and Webber (1982) – SCM covers the flow of goods from supplier through manufacturing and distribution channels to end user. through upstream and downstream linkages. Christopher (1992) – SCM is the management of a network of organizations that are involved. in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer. maintenance and operation of supply chain processes for satisfaction of end users. Sunil Chopra and Peter Meindl (2001) – SCM involves the management of flows between and among stages in a supply chain to maximize total profitability. Ellram (1991) – An integrative approach to dealing with the planning and control of the materials flow from suppliers to end users. Jones and Riley (1987) – SCM techniques deal with the planning and control of total materials flow from suppliers to through end users. Ayers (2000) – SCM is the design.

Supply Chain Management [SCM] 10 A generalized SC Model Distribution Tier 2 Distribution Tier 1 Raw Materials Retailer Distributor Retailer Customer Customer Supplier Tier 2 Supplier Tier 1 Manufacturer Supplier Tier 2 Supplier Tier 1 Distributor Retailer Customer Components Retailer Customer .

car. Show Room Distribution Plant Ford Customer Now horizontal integration Component Production Raw material Extraction is the favoured approach. 2 – Vertical Integration Bringing the SC inside one organization Ford motor company pursued this strategy for their famous model T .Supply Chain Management [SCM] 10A Types of Supply Chain 1 – Horizontal (lateral) integration The stages of SC [Physical Supply. Manufacturing & Physical] are carried out by different organizations – discussed earlier. Later divested. Ownership Management Marketing / Sales Finance What Ford practised. .

Supply Chain Management [SCM] 11 Evolution of Supply Chain Management Stage 1 – Multiple Dysfunction Supplier Supplier Purchasing Marketing / Sales Customer Production Control Customer Distribution Customer Supplier Logistics Materials / Service Payments Lacks clear internal definitions and goals – No external links other than transactional ones .

Supply Chain Management [SCM] 12

Evolution of Supply Chain Management

Stage 2 – Semi functional Enterprise Information
Supplier Purchasing Supplier Logistics Production Control Marketing / Sales Distribution Customer Customer

Materials / Service


Improving efficiency, effectiveness, quality etc within functional areas – No overlap / consulting in decision making from one department to another – Department wise Maximising

Supply Chain Management [SCM] 13

Evolution of Supply Chain Management

Stage 3 – Integrated Enterprise ERP
Supplier Purchasing Supplier Logistics Production Control Marketing / Sales Distribution Customer Customer

Materials / Service


Breaks down silo walls and brings functional areas together in processes such as Sales & Operations Planning (S&OP), CPFR – Company wide processes rather than individual functions – late 1980s to early 1990s. MRP(1950s) – MRPII(1960s) – ERP(1990s).

Supply Chain Management [SCM] 13A
Why Process Integration is needed? To make maximum profit a company must have the following objectives: - Provide best customer service - Provide lowest inventory investment - Provide lowest production costs - Provide lowest distribution costs

These objectives create conflict among marketing, production & finance departments:

Function Marketing

Objective - High revenue - High Product Availability - Low Production Cost - High Level Production - Long Production Run - Low Investment and Cost - Fewer Fixed Costs - Low Inventories High

Implication Customer Service Low Many Production Disruption Few High Inventories Low



. quality of products / services.Supply Chain Management [SCM] 14 Evolution of Supply Chain Management Stage 4 – Extended Enterprise Networked Information Flow Suppliers’ Suppliers Suppliers Internal Chain Customers Customers’ Customers Materials / Service Payments Integration of internal network with selected SCM partners’ internal network to improve efficiency.

5.2. The Objectives 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) .

components. storage. etc. not profits at an individual stage .The Objective of a Supply Chain • Example: Dell receives $2000 from a customer for a computer (revenue) • Supply chain incurs costs (information. transportation.) • Difference between $2000 and the sum of all of these costs is the supply chain profit • Supply chain profitability is total profit to be shared across all stages of the supply chain • Supply chain success should be measured by total supply chain profitability. assembly.

Employee.Logistics •Possession Utility .Supply Chain Management [SCM] 17 Creating Value through Supply Chain Management The primary purpose for the existence of any SCM is to satisfy customer needs. Types of utility: •Form Utility •Place Utility •Time Utility . . Investor.Operation . Government etc.Logistics . Maximise the overall value generated.Sales During value generation SC has to satisfy all the stakeholders – Customer. Correlated with SC Profitability (SCP). in the process generating profits for itself. Public at large. Value generated = what the product/service worth to the customer – the effort SC expends in fulfilling the customer needs. SCP = Revenue generated – Overall cost across SC Value depends on the product’s utility to the customer.

Supply Chain Management [SCM] 18 Creating Value through Supply Chain Management Financial Value • Cost Reduction may be self defeating • Gains must be equitably distributed Customer Value • Quality •Affordability •Availability •Service Social value •Socially Desired and useful product / service •Avoiding or reducing negative environmental side effects of activities such as extraction. processing and construction .

products.The Objective of a Supply Chain • Sources of supply chain revenue: the customer • Sources of supply chain cost: flows of information. 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 .

Supply Chain Management [SCM] 19 Importance / Benefits of SCM •To achieve economies of scale and scope – Costs are significant •To improve business focus and expertise •Customer Expectations are increasing •Supply and Distribution Lines are lengthening with complexity •Adds Significant Customer value •Customers Increasingly Want Quick & Customised Response .

An independent company that focuses entirely on a particular business can develop more expertise than an in-house department Ford divested their Iron Ore company. Eg: Computer Monitor / Chip / Hard drive Attractive pricing – volume leverage. Steel Mill etc Higher Quality. Attractive Pricing or both .Supply Chain Management [SCM] 20 Importance / Benefits of SCM •To achieve economies of scale and scope – Costs are significant Internal SC functions lack economies of scale when compared with the potential capacity of an independent provider of the same product / service. •To improve business focus and expertise Vertical integration multiplies the complexities of managing disparate businesses.

Designing products for world market & producing them wherever raw material.Political arrangements : European Union. components. labour.Trend towards an integrated world market . overhead etc are lower .Cut costs and expand markets .Supply Chain Management [SCM] 22 Importance / Benefits of SCM •Customer Expectations are increasing .High degree of Product Availability .Lower Prices •Supply and Distribution lines are lengthening with greater complexity .Rapid processing of Customer Request . SAARC etc . ASEAN.Globalization of industries depends on logistic performance and cvosts .Quick delivery (shorter Order Cycle Time) .

Technical Support Responsibility Engineering & Manufacturing Time Place Possession Manufacturing & Logistics Engineering & Logistics Marketing.A product or service is of no value to the customer. Fit & Function Production scheduling & moving Moving & making transportable Advertising. Finance & Engineering . if not available when required Goods customers want are not produced where they want to consume OR goods are not accessible when customers want to consume Value Form Through Converting raw materials and components to the required Form.Supply Chain Management [SCM] 23 Importance / Benefits of SCM •Adds significant Customer Value . Pricing.

.Manufacturers / Suppliers are offering products that meet individual needs .One Size Fit all philosophy is not appreciated always . E-Mail etc.Supply Chain Management [SCM] 24 Importance / Benefits of SCM •Customers Increasingly want Quick Customised Response .Customers expect that products / services can be made available in shorter times.Improved IS and flexible manufacturing processes have led to mass customisation . Guided by Fast Food. ATM.

Decision Phases of a Supply Chain • Supply chain strategy or design • Supply chain planning • Supply chain operation .

Supply Chain Strategy or Design • Decisions about the structure of the supply chain and what processes each stage will perform • Strategic supply chain decisions – Locations and capacities of facilities – Products to be made or stored at various locations – Modes of transportation – Information systems • Supply chain design must support strategic objectives • Supply chain design decisions are long-term and expensive to reverse – must take into account market uncertainty .

Supply Chain Planning • Definition of a set of policies that govern short-term operations • Fixed by the supply configuration from previous phase • Starts with a forecast of demand in the coming year .

Supply Chain Planning • Planning decisions: – Which markets will be supplied from which locations – Planned buildup of inventories – Subcontracting. exchange rates. competition over the time horizon . backup locations – Inventory policies – Timing and size of market promotions • Must consider in planning decisions demand uncertainty.

generate pick lists at a warehouse. set order due dates.Supply Chain Operation • Time horizon is weekly or daily • Decisions regarding individual customer orders • Supply chain configuration is fixed and operating policies are determined • Goal is to implement the operating policies as effectively as possible • Allocate orders to inventory or production. allocate an order to a particular shipment. place replenishment orders • Much less uncertainty (short time horizon) . set delivery schedules.

each performed at the interface between two successive stages / entities of SC. Cycles Customer Order Cycle Stage/Entity Customer Customer Arrival Customer Order Receiving Customer Order Entry Customer Order Fulfilment Retailer Replenishment Cycle Retail Order Entry Retail Order Fulfilment Retail Order Trigger Retail Order Receiving Distributor Manufacturing Cycle Order Arrival from D/R/C Receiving by D/R/C Manufacturer Procurement Cycle Production Scheduling Manufacturing & Shipping Order from Manufacturer Receiving at Manufacturer Supplier Supplier Prodn Scheduling RM / Comp. Mfg & Shipping . These processes are divided into a series of cycles (cyclic view).5.3. Process View of Supply Chain Cyclic View Management: SC is a sequence of processes and flows that take place within and between different SC stages and combine to fulfil a customer need for a product / service.

Push/Pull View of Supply Chains Procurement. Manufacturing and Replenishment cycles Customer Order Cycle PUSH PROCESSES PULL PROCESSES Customer Order Arrives .

Supply Chain Management [SCM] 24A Process View of a Supply Chain: Push – Pull View LL Bean PULL Process Customer Order Cycle Cust Order & Mfrg Cycle DELL PULL Process Customer order arrives Repl & Mfrg Cycle Customer order arrives Procurement Cycle Procurement Cycle PUSH Process PUSH Process .

Supply Chain Macro Processes in a Firm SRM •Source •Negotiate •Buy •Design Collaboration •Supply Collaboration Purchasing Supplier selection Supplier evaluation New orders ISCM •Strategic planning •Demand planning •Supply planning •Fulfilment •Field service Manufacturing Production planning Storage planning Demand-Supply planning CRM •Market •Sell •Call centre •Order management Marketing Generate demand Facilitate placement Track orders .

4. Supply Chain Drivers • • • • • • • Drivers of supply chain performance A framework for structuring drivers Facilities Inventory Transportation Information Obstacles to achieving fit .5.

assembled.Drivers of Supply Chain Performance • Facilities – places where inventory is stored. facilities throughout the supply chain – potentially the biggest driver of supply chain performance . WIP. or fabricated – production sites and storage sites • Inventory – raw materials. transportation. finished goods within a supply chain – inventory policies • Transportation – moving inventory from point to point in a supply chain – combinations of transportation modes and routes • Information – data and analysis regarding inventory.

A Framework for Structuring Drivers Efficiency Responsiveness Supply chain structure Facilities Transportation Inventory Information Drivers .

Supply Chain Decisions: Structuring Drivers Strategy (Design) Planning Operation .

Facilities • Role in the supply chain – the “where” of the supply chain – manufacturing or storage (warehouses) • Role in the competitive strategy – economies of scale (efficiency priority) – larger number of smaller facilities (responsiveness priority) • Example 3.1: Toyota and Honda • Components of facilities decisions .

proximity to customers) • Capacity (flexibility versus efficiency) • Manufacturing methodology (product focused versus process focused) • Warehousing methodology (SKU storage. decentralization (responsiveness) – other factors to consider (e.g.Components of Facilities Decisions • Location – centralization (efficiency) vs.. job lot storage. cross-docking) • Overall trade-off: Responsiveness versus efficiency .

Inventory • Role in the supply chain • Role in the competitive strategy • Components of inventory decisions .

T = flow time • Example • Inventory and throughput are “synonymous” in a supply chain . R = throughput.Inventory: Role in the Supply Chain • Inventory exists because of a mismatch between supply and demand • Source of cost and influence on responsiveness • Impact on – material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain – throughput • rate at which sales to end consumers occur • I = RT (Little’s Law) • I = inventory.

a firm can locate larger amounts of inventory closer to customers • If cost is more important. inventory can be reduced to make the firm more efficient • Trade-off • Example 3.2 – Nordstrom .Inventory: Role in Competitive Strategy • If responsiveness is a strategic competitive priority.

Components of Inventory Decisions • Cycle inventory – Average amount of inventory used to satisfy demand between shipments – Depends on lot size • Safety inventory – inventory held in case demand exceeds expectations – costs of carrying too much inventory versus cost of losing sales • Seasonal inventory – inventory built up to counter predictable variability in demand – cost of carrying additional inventory versus cost of flexible production • Overall trade-off: Responsiveness versus efficiency – more inventory: greater responsiveness but greater cost – less inventory: lower cost but lower responsiveness .

Transportation • Role in the supply chain • Role in the competitive strategy • Components of transportation decisions .

Transportation: Role in the Supply Chain • Moves the product between stages in the supply chain • Impact on responsiveness and efficiency • Faster transportation allows greater responsiveness but lower efficiency • Also affects inventory and facilities .

Transportation: Role in the Competitive Strategy • If responsiveness is a strategic competitive priority. then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it • Can also use slower transportation modes for customers whose priority is price (cost) • Can also consider both inventory and transportation to find the right balance • Example 3.3: Laura Ashley .

Components of Transportation Decisions • Mode of transportation: – air. flexibility • Route and network selection – route: path along which a product is shipped – network: collection of locations and routes • In-house or outsource • Overall trade-off: Responsiveness versus efficiency . ship. electronic transportation – vary in cost. rail. truck. size of shipment. speed. pipeline.

Information • Role in the supply chain • Role in the competitive strategy • Components of information decisions .

Information: Role in the Supply Chain • The connection between the various stages in the supply chain – allows coordination between stages • Crucial to daily operation of each stage in a supply chain – e. production scheduling.g. inventory levels ..

Information: Role in the Competitive Strategy • Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) • Information technology • What information is most valuable? • Example 3.4: Andersen Windows • Example 3.5: Dell .

Components of Information Decisions • Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain) • Coordination and information sharing • Forecasting and aggregate planning • Enabling technologies – – – – EDI Internet ERP systems Supply Chain Management software • Overall trade-off: Responsiveness versus efficiency .

Considerations for Supply Chain Drivers Driver Inventory Transportation Facilities Information Efficiency Cost of holding Consolidation Responsiveness Availability Speed Consolidation / Proximity / Dedicated Flexibility What information is best suited for each objective .

Obstacles to Achieving Strategic Fit • • • • • • Increasing variety of products Decreasing product life cycles Increasingly demanding customers Fragmentation of supply chain ownership Globalization Difficulty executing new strategies .

Major Obstacles to Achieving Fit • Multiple owners / incentives in a supply chain Local optimization and lack of global fit • Increasing product variety / shrinking life cycles / customer fragmentation Increasing implied uncertainty .