LESSON ONE

INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

1.1 Definition of Terms
1.1.1 Procurement
Purchasing refers to the process/activity of acquiring goods or services to meet the organizations
requirements or accomplish the goals of an organization the requirements may involve
production (manufacturing or processing) of other goods, sale/ trading purposes, consumption or
provision of services.The terms purchasing and procurement are used interchangeably, but there
is slight difference between procurement and purchasing. Whereas may simply mean buying or
acquiring, Procurement is a wider term that involves activities before and after purchasing. This
may include planning, specification, supplier selection, the negotiation of contracts, actual
purchasing of goods, asset and inventory management as well as disposal. Procurement is,
essentially, the overarching or umbrella term within which purchasing can be found.
1.1.2 Logistics Management
Logistics is the management of the flow of goods and services between the point of origin and
the point of consumption in order to meet the requirements of customers. Logistics involves the
integration of information, transportation, inventory, warehousing, material handling, and
packaging, and often security. Logistics is a channel of the supply chain which adds the value of
time and place utility. Today the complexity of production logistics can be modeled, analyzed,
visualized and optimized by plant simulation software.
It refers to the process of strategically managing the acquisition, movement and storage of
material, parts and finished inventory through an organization and its marketing channels to
fulfill orders most cost-effectively. Logistics does add value and can play a vital role in the
organization‘s profitability. However, only by linking all logistics activities directly to the
organizations strategic plan can it be useful in supporting the organization‘s strategy for
achieving competitive advantage. Procurement is thus a supporting activity in logistics which
should be properly handled to enable firm‘s improve cash flow, open new territories, introduce
new products etc.
1.1.3 Supply Chain Management

This is an integrative philosophy to manage the flow of a distribution channel from the
supplier to the ultimate user. A supply chain management can be likened to a well-balanced
and practiced relay team in which the entire team is co-coordinated to win the race.
From this definition, supply chain is therefore a cross-functional process for strategy
definition and implementation with total cost focus and a strong continuous
improvement drive aimed at serving the organization’s customer.

The Kenya Institute of Supply Management (KISM) defines supply chain

management as managing a series of activities and processes ranging from the
source of raw material, performing a series of value adding activities, procurement,
production or conversion of the finished product or service purchased by ultimate
consumer to satisfaction.
Supply Chain Management includes, planning, design, control and implementation of all
business processes related to procurement, manufacturing, distribution and sales order fulfilment
functions of a business. Thus Supply Chain Management includes 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. Thus Supply chain management is the integration of businesses from end user through
original suppliers that provides products, services, and information that add value for customers.

Supply chain is that network of organizations that are involved through upstream
and downstream linkages in the different processes and activities that produce value in the
form of products and services in the hands of the ultimate customers.
1.2 Functions of Supply Chain
A supply chain involves the following functions:
 Customer relationship management
 Customer service management
 Demand management
 Order fulfillment
 Manufacturing flow management
 Procurement
 Information management
Most supply chains are actually networks. Although the word chain is commonly used,

the term ‘supply network’ or ‘supply web’ is technically more accurate. A network has

been described as a set of supply chain activities, which together describes the flow of

goods and services from original Source to their uses. The term network is intended to

imply a more strategic concept with the idea that networks compete.

There are nine different types of activities that companies perform in coordinating and managing
supply networks: Partnering, Risk and benefit sharing, Resource integration, Information
processing, Knowledge capture, Social coordination, Decision making, Conflict resolution,
Motivation. Successful supply chain management requires a change from managing individual
functions to integrating activities into key supply chain processes. Operating an integrated supply
chain requires continuous information flow, which in turn helps create the best product flows. The
customer remains the primary focus of the process.

1.3 Concept of Supply-Chain Management

The development of supply-chain management concept is attributable to two major paradigm
shifts:
 change from managing individual functions to integrating activities into key supply
chain processes
 Change in focus on internal processes to value adding benefits.
 Change in focus from tactical to strategic.

Supply chain management represents a relatively new way of approaching business and
different views exists regarding the process involved, the key process typically would include
customer relationship management, customer service management, demand
management, order fulfilment, manufacturing flow management, procurement and
product development and commercialization. Supply chains are essentially a series of linked
suppliers and customers. Every customer is in turn a supplier to the next downstream
organization until a finished product reaches the ultimate end user. It is important to note that
the supply chain includes: a firm’s internal function, upstream suppliers and downstream
customers.
 Internal functions: Different processes used in transforming the inputs provided by the
supplier network. This involves order- processing, managers translating customer’s
requirements into actual orders, which are inputs in the system. Proper co-ordination and
scheduling of these internal flows is challenging. Examples of internal functions include:
Purchasing, warehousing, engineering, production and operation departments.

Upstream external suppliers:

In order to manage the flow of materials between all the upstream organization in the supply
chain, firms employ an array of managers who ensure that right materials arrive at the right
location at the right time. Purchasing managers are responsible for ensuring that:
 Right suppliers are selected.
 The suppliers are meeting performance expectation
 Appropriate contractual mechanisms are employed.
 Good relationships maintained with these suppliers
 They may also be responsible for driving improvement in the supply base and acting
as a liaison between suppliers and other internal members.
1.4 Logistics and Supply Chain Management (SCM)
There are four distinct differences claimed for supply chain management over the more
classic view of Logistics although some of these elements have also been recognized as key
to successful planning of logistics operations. These four are:
 The supply chain is viewed, as a single entity rather than a series of fragmented elements
such as procurement, manufacturing, distribution etc. This is also how logistics is viewed in
most forward – looking companies. The real change is that both the supplier and the end
user are included in the planning process thus going outside the boundaries of a single
organization in an attempt to plan for the supply chain as a whole
 Supply chain management is very much a strategic planning process with a particular
emphasis on strategic decision-making rather than on operational systems.

 Supply chain management provides for a very different approach to dealing with
inventory throughout the pipeline process. Traditionally, inventory has been used as safety –
 leading to large and expensive stocks of production. SCM aims to alter this perspective so
that inventory is used as a last resort to balance the integrated flow of products through the
pipeline.

 Central to the success of effective SCM is the use of integrated information system that is
a part of the whole supply chain rather than merely acting in isolation for each of the
separate components. These enable visibility of products demand and stock levels through
the full length of the pipeline. This has only become a possibility with the recent advances
in information system technology.
Supply Chain Management is consists of all business partners or parties involved in the
fulfilment of a customer. This includes Manufacturers, Marketers, Suppliers, Transporters,
Warehouses, Retailers and even customers. Their involvement may be direct or indirect.

1.4 Key Elements of Supply Chain Management

Procurement: The first element of SCM is procurement. During manufacturing process, raw
materials are needed. It is essential that these materials are procured and delivered on time. Then
only the production can begin. In order to make this happen, coordination with suppliers and
delivery companies is needed to avoid delays. Supply source selection, purchase-timing,
negotiation etc.

Demand/ Inventory Management: Forecasting and demand planning is needed before

materials are procured as the demand market shall dictate how many units are to be produced and
how much material is needed for production.  This function in SCM is vital as organizations
accurately forecast demand to avoid having too little or too much inventory that would lead to
revenue losses. Therefore, forecasting and demand planning should be tied in with inventory
management, production and shipping. Raw materials and finished goods stocking policies,
short-term sales forecasting, determining product mix at stocking points, evaluating number,
size, and location of stocking points, just-in-time, push, and pull strategies, information flows
and order processing etc.
Logistics: Logistics is a part of SCM that co-ordinates all planning aspects, purchasing,
production, and transportation aspects to ensure that products reach the end consumer without
hindrances. It is essential to have co-ordination with multiple departments so that products are
quickly shipped to customers. It involves Determining customer needs and wants related to
logistics, recording of the response to the service and finally benchmarking the service levels;
Warehousing – Assistance in space determination, stock layout and dock design, warehouse
configuration, storage methods, materials handling equipment selection, etc. and; Transportation
– Assistance is provided in selection of mode and transport, service selection, freight
consolidation, carrier routing, vehicle scheduling etc.

Production Management: It ensures that optimized production schedule is created to maximize

operations efficiency. Co-operate with production/operations: Specify aggregate quantities,
sequencing and timing production.

Information Workflow: Sharing information and distribution is that what keeps all other
functions of supply chain management on track, Information collection, storage, data analysis
and control procedures. If this information workflow and communication is poor, it can hurt the
entire chain.

1.5 Principles of Supply Chain Management

These principles guide the individual strategies and decision making processes on associated
activities adopted by organizations for successful supply chain management and include: (i)
efficiency (ii) reliability (iii) flexibility (iv) optimization and (v) innovation.
(i) Efficiency:
The principle of efficiency requires that any supply chain should be conscious of cost reduction
in all the activities and programmes. Efficiency leads to reduction in the wastage of resources,
including wastage of time. The principle of efficiency is reflected in initiatives such as just-in-
time (JIT) inventory management. The principle of efficiency also drives firms to achieve better
planning and coordination of activities.
(ii) Reliability:
Reliability is associated with consistency. To a customer, the supply chain should ensure
consistency of service. Consistency should be measured mainly in terms of the consistent
delivery time achievement, accuracy in order fulfilment, consistency and accuracy in payment
processing time, installation support, and after-sales service.
To achieve consistency, the processes have to be perfectly synchronized to the maximum extent
possible across every link in the supply chain. Reliability is very important since the globalized
nature of supply chain relationships and criticality of the network linkages lead to a high level of
dependency. Disruption in the availability of even some small components could bring an entire
assembly line to a complete halt, leading to huge losses across the entire supply chain.
(iii) Flexibility:
Flexibility is associated with the ability of the entire supply chain to adapt to changes in the
demand or supply pattern. Sometimes flexibility is also termed as the ‘agility’ of the supply
chain. Flexibility involves such capabilities such as ramping up production at the minimum of
time intervals if required, responding to changing patterns of demand, customized transactional
processes, as well as streamlined and rapid data flow.

(iv) Optimization
It refers to the tools and processes by which manufacturing and distribution supply chain
performance and efficiency are improved, taking into account all constraints. Supply chain
optimization techniques allow the organization to build quality management into the end-to-end
production process, from raw materials to customer delivery. A focus on quality will help drive
efficiency while reducing waste. It involves:
 Cost optimization takes each cost area in the supply chain–such as orders and payments,
storage and transportation, stock and wastage–to identify potential cost reductions.
 Supply chain inventory optimization helps determine the ideal amount of inventory
needed to satisfy customer demand and where it should reside in the supply chain.
 Network optimization looks to improve every part within the supply chain. It enables
organizations to develop strategies and plans to maximize productivity and profitability
and identify which suppliers are best suited to help achieve these goals. In addition,
supply chain planning optimization relies on a clear understanding of exactly how your
supply chain network operates

(v)Innovation:
It is not just sufficient for the supply chain to be efficient, reliable, and flexible, but a supply
chain also has to constantly innovate so as to constancy utilize the learning generated through its
operations. Innovation is important, as it could generate a sustainable competitive advantage for
the firm. Supply chains that do not innovate will slowly erode their comparative advantage with
regard to their competitors.

1.6 Objectives of Supply Chain Management

Supply chain management seeks to ensure minimum cost and maximum efficiency in every
aspect of handling of raw material, component parts and finished goods as they move from
production centre to the final consumer.
Effective supply chain aims to bridge the gaps that exist between the producer and the consumer
including:
(a) Space Gap:
This is the gap caused by the manufacturers and consumers being situated physically away from
each other. The supply chain moves the goods physically from the point of production to the
point of distribution and fills the space gap. It is a supply chain management system that ensures
that goods produced in one particular place are available for consumption to consumers at their
right place.
(b) Time Gaps:
This is the gap that results because the manufacture of a product takes place at one point in time
however it is required by the consumer at another point in time. Example – sugar is
manufactured just after the harvest of sugarcane and beetroot. However sugar is demanded
throughout the year. Thus the supply chain ensures that excess manufactured product is properly
stored when not required and makes it available when required. It thus fulfills the time gap.
(c) Quantity Gap:
Quantity gap is the difference between the quantities produced and demanded. Certain products,
in order to be profitable have to be manufactured in large quantities. However the demand is
limited and spread over a period of time. For example a producer of consumer products cannot
produce a small quantity of the products. For the cost of production to be feasible, a particular
number of units of a particular product need to be published. However the sale is only of a unit
per consumer. Thus this quantity gap too is taken care of by an effective supply chain
management system.
(d) Variety Gap:
Customers usually want a variety of products. The more the customer for a product the more
variety is demanded. It is an effective supply chain management system that fills this variety gap
and ensures a wide variety of goods for the customers. For example a stockiest of consumer
products or a retailer will keep soaps of various brands and manufacturers, thus ensuring a wide
range of soaps for the consumer to choose from.
(e) Information Gap:
It is the supply chain that bridges this gap. An information gap exists when either the supplier or
the consumer does not have information about the other. That is the supplier lacks information
about who or where is his consumer and the consumer lacks information about the various
available options that are available to fulfil his product need. Here supply chain supplies the
information and bridges this gap.

The Objectives of Supply Chain Management include:

 To reduce waste/non value-added activities- the goal is to reduce amount of handling and
excess inventory of both materials and finished goods
 To maximise levels of customer service/responsiveness
 To improve supply-chain communication- the aim is to increase speed-timeliness of
information flows, increase accuracy of information flows and increase level of
information sharing
 To reduce cycle time- the aim is to reduce time spent in new product development and
order lead-time
 To promote Flexibility; the aim is to Improve co-ordination of effort, planning and better
control mechanism in the fulfillment of customer demand through efficient resources.
 To Maximize supply chain profitability- The higher the supply chain profitability or
surplus, the more successful is the supply chain. It is the difference between the amount
paid by the consumer to purchase the product and the cost incurred by the organization to
produce and supply the product to the customer at right time.
 To ensure Cost Quality Improvement
  Another important objective of supply chain management is to achieve cost quality
balance and optimization. The goal is to meet consumer demand for guaranteed delivery
of high quality and low cost with minimal lead time
 To ensure Delivery Optimization: the aim is to Shorten the Time to Order and fulfilling
the same with faster speed and reduce or minimal the transportation cost.
 To achieve world-class performance: the aim is to enhance efficiency and efficacy as a
strategic management tool for competitive advantage.
 To promote Inventory Optimization-It also beneficial to optimize pre-production and
post-production inventory levels and Replenishment of the Material or Product Whenever
Required. Inventory means stock: inflow and outflow of the stock for production purpose.
Replenishment means the restoration of a stock or supply to a former level or condition.
 Cost Reduction: The aim is to reduce the system-wide cost of the organization to satisfy
service level requirement. Company costs: Manufacturing, Fixed assets, inventories,
transportation

If company or manager understands the importance and benefits of supply chain management, it
can be used to improve overall business performance and to gain competitive advantage. And
most importantly, all these achievements can be done without sacrificing the desired level of
customer service. SCM seeks to improve the total performance of an enterprise by enhancing its
responsiveness to the market place and by reducing the overall cost of supply. Fundamental to its
success are effective performance measures, relevant to each key link in the chain and also
relevant to the overall objective. Without agreed measures, it is difficult to focus effort on those
actions which are likely to bring the greatest improvements and the most cost benefits.

The major focus areas are enhancing visibility, optimization, having the lowest cost possible,
timeliness, Managing Demand, Improving Flexibility, Improving Process Quality, Variety
reduction/standardization, Minimising Uncertainty, continuous improvement and consistency.

1.7 Supply Chain Management Strategies

Supply chain management is a general orientation for managing the operations and a firm may
select which strategy to focus on including:
  Rationalization Strategy
 Synchronization Strategy
 Customization Strategy
 Innovation Strategy.
In practice, a firm may adopt a combination of these strategies, placing varying levels of
emphasis on each.
(i) Rationalization Strategy:
Rationalization strategy focuses on process rationalization which results in improved
profitability. Such a strategy involves closely analysing the processes and identifying ways of
reducing wastage wherever possible. It emphasizes on operating costs management, without
compromising customer service. Examples of execution of rationalization strategy would involve
reducing the number of suppliers, warehouses or less than full truck load transportation. Typical
elements of the rationalization strategy would involve devices such as transportation
optimization, lean manufacturing, and electronic data interchange (EDI). This strategy is more
traditional than other supply chain strategies such as synchronization and innovation.
(ii) Synchronization Strategy:
Synchronization strategy involves streamlining the supply chain process so that there is a flaw-
less, reliable execution of the supply chain process. Synchronization also places emphasis on
cost reduction, not just through process rationalization but by efficiency managing the assets.
Synchronization strategy involves elements such as collaborative inventory management, perfect
order fulfilment, anchor players, and optimal inventory placement. One of the most popular
supply chain practices that follow from synchronization strategy is JIT inventory management.
Both rationalization and synchronization strategies have the same goal—cost reduction.
However, the two seek to achieve it through different means.
(iii) Customization Strategy:
Customization strategy involves developing specific strategies for profitable customers and
executing it with a view to establishing a long-term relationship with them. Customization stra-
tegy is associated with responsiveness and flexibility. Responsiveness is measured in terms of
the ‘Velocity’ with which the supplier provides products to the customer, and flexibility is
measured in terms of the ‘agility’ with which the supplier responds to the changing needs of the
customer. The elements of customization strategy involve mass customization, lifetime
relationships, customer profitability management, customer knowledge management, and value
analysis.

(iv) Innovation Strategy:

Innovation strategy is different from the principle of innovation—considered as a basic principle
of SCM. The supply chain innovation strategy involves exploiting the competitive advantage
generated by a strong supply chain to introduce successful new products in the market at a much
higher rate than competitors. Implementing a supply chain strategy essentially boils down to
involving the supply chain partners in developing new products and integrating the supply chain
processes among all partners to such an extent that it becomes possible to constancy innovate
and produce new products with collaboration from tier 1 as well as tier 2 suppliers.
For a company like Apple, developing a constant stream of new products involves working
closely with their partners in research and development (R&D) and other associated activities.
The elements of the innovation strategy involve concurrent product development, rapid and early
prototyping, early supplier involvement, and designing for the supply chain.
All firms may not choose to focus on all these strategies with the same level of emphasis at all
times. According to Jacoby (2010), the degree to which a firm places emphasis on each of these
four supply chain strategies depends on the generic organizational strategy followed by the firm.
Though the supply chain strategies flow from the fundamental supply chain principles, they are
basically correlated with the overall strategy followed by the firm.
Some of the supply chain strategies are implemented only in combination with (or as part of)
certain generic strategies followed by the firm. For instance, a firm following a focus or niche
strategy will be focusing more on a customization supply chain strategy, with emphasis on
streamlining the supply chain-related processes to give each customer what he or she wants.
Following such a strategy would lead to less emphasis on elements of rationalization,
synchronization, and innovation.

1.8 Measures to Ensure Effective Implementation of Supply Chain Management Strategies

Any supply chain strategy can be implemented only through strong supply chain techniques.
Supply chain techniques are a set of activities that the SCM process should incorporate, in order
to achieve the objectives set in the SCM strategy. Whichever supply chain strategy is
emphasized, supply chain techniques require adequate attention and application.

1.8.1 Supply Chain Network Design

Network design is probably the most critical part of the supply chain management. To achieve
the optimum supply chain performance, it is necessary to establish a purposeful network
design characterized by an optimum division of activities and responsibilities.
Further, the network design should be based on fairness and transparency. This implies that no
element in the network should get an unfair profit for the contribution made to the processes,
and every element should know what the others are doing and what the other element is
receiving as remuneration. Fairness and transparency contribute to the sustainability of the
network design.
1.8.2 Capacity Planning
Capacity planning is associated with the ability of the network to respond to changing demand
patterns and market conditions. Ideally, the supply chain strategies should lead to an optimum
utilization of the infrastructure and other facilities. This would involve the most appropriate
utilization of transportation facilities with very few less-than-truckload transportation and
maximum capacity utilization of the warehouse space. In order to achieve the optimum level
of capacity utilization, proper planning is required.
Capacity planning requires both long-term, as well as short-term orientation. For instance,
capacity planning should address issues such as—if the demand increases gradually, how
would the requirements for additional inventory storage be met after two years? In the short
term, how would the short-term dip in demand affect storage space productivity? Supply
chain managers use sophisticated modelling- based analysis to address some of these issues.
1.8.3Risk Management
Supply chain management requires a seamless, delicate integration of hundreds of supply and
processing points. Often, these processing points are separated by thousands of kilometers. It
is only with perfect and accurate coupling, that cost and time advantage in a supply chain can
be realized. However, such a coupling also leads to potential risks. Disruption in any one of
these points could translate into a system-wide disruption.
 Environmental factors, such as the sudden increase in cost of certain components, or
disruptions to the physical flow of goods due to natural disasters could create tremendous
disruption in the whole system. Similarly, fluctuating demand at any point in the system could
lead to tremendous disruption in the overall supply.
Risk management is therefore very critical in SCM strategies. Risk management involves
qualifying, measuring and managing risks, developing broad objectives while handling risk
(e.g. the quantum of compensation), as well as hedging for risks such as building buffer
stocks.
1.8.4 Organizational Change Management
Ultimately, SCM is also an organizational process involving organizational players including
departments, teams, and informal groups. Embracing SCM involves profound changes within
the organization, including the way activities are organized and personnel interact.
Further, as SCM involves a continuous adaption to market changes, the organization will also
need to change constancy. All this requires an ability to change whenever required. An
organization that refuses to change will find it difficult to adopt SCM. Expertise in managing
change in an organization is therefore a critical factor in managing a supply chain.
1.8.4 Performance Measurement and Monitoring
Developing and implementing performance monitoring processes is also very crucial to the
success of a SCM strategy. Erroneous performance metrics or faulty measurement
methodology could completely derail a well thought out SCM strategy. Performance metrics
and measurement provides the crucial feedback that guides the SCM strategy.
The lack of proper feedback or faulty feedback leads to faulty implementation of the strategy.
For instance, if the main focus is on inventory turnover and faulty methodology is
implemented in calculating average inventory, the feedback going to the supply chain will be
fundamentally wrong, and any action which is initiated, based on such a feedback will be
ineffective or worse—counterproductive.
Supply chain management as a philosophy or a set of practices dominates the practice of
logistics management. With the impending arrival of large multinational firms in the Indian
retail arena, SCM will gain much more prominence than at present in India. It is much wider
in scope than the logistics management of a firm. Supply chain management directly embraces
activities such as procurement, research, design, manufacturing, distribution, and marketing.