UNIT 2
The Three Levels of Supply Chain
Management
Supply chain management (SCM) is the
management of operations that are involved in the
procurement of raw materials, its processing into
finished goods, and distribution to the end
consumer. SCM also involves the active
streamlining of the supply-side activities of a
business to maximize customer value and gain an
overall competitive advantage in the marketplace.
Supply chain management can be taken for
granted within the world of business. However, it
is important to realize that the supply chain forms
the foundation of any operation or company. It
includes every decision made about the products
or services that a company offers its customers.
The best way to understand the various stages of
supply chain management and their influence on
one another is to take a look at the three levels of
supply chain management: the strategic level, the
tactical level, and the operational level. Together,
these levels work together to manage all decisions
that are required to deliver quality products to your
customers on time for the cheapest cost and
greatest revenue.
Understanding the Three Levels of Supply Chain
Management
1. Strategic Level
The top-level of supply chain management is
responsible for the long-term decisions of the
company. The decisions made at this level lay the
groundwork for the entire supply chain process.
Examples of decisions made at this level include
things such as deciding which products or services
will be offered by the company. This task involves
keeping track of current market trends and
customer feedback to improve existing products or
introduce new items to the product mix.
Along with product development comes decisions
surrounding which suppliers to purchase materials
from and where the manufacturing operations
should take place. Choosing the right suppliers
should involve decisions that consider the
company’s overall objectives and values. For
example, choosing a supplier for their sustainable
practices may incur higher costs for certain
materials but will better reflect the values and
goals of the company that is looking to reduce
their environmental impact and build a sustainable
supply chain.
This level of supply chain management is crucial
to develop an advantageous process that will tie in
all levels of the company to ensure that every
decision being made accurately reflects the overall
goals of the company. This will ensure that all
parts of the supply chain are working together to
deliver your goods to your customers and allow
you to make profits.
2. Tactical Level
The second level of supply chain management is
involved with all of the short- and medium-term
decisions of the supply chain. While the strategic
level takes care of the general and ‘big-picture’
decisions, this level is usually where the more
specific processes are defined. This is where
manufacturing processes will be defined to ensure
that a high-quality product can be made for the
lowest cost possible.
Tactical-level decisions play a substantial role in
controlling costs and minimizing risks. The focus
here is on customer demand and achieving the
overall best end value.
Other decisions made at this level can include
transportation, warehousing, and inventory
logistics, notably whether these should be handled
internally or outsourced. These decisions can be
different based on factors such as location, costs of
transportation, costs or land ownership, etc.
3. Operational Level
This level of supply chain management is the most
commonly encountered. It is where the day-to-day
processes, decision-making, and planning occurs
to keep the supply chain running. Often times,
companies and manufacturing facilities forget to
take into account the tactical and strategic level
when making operational-level decisions.
It is critical for the operational level to carefully
consider the options they are faced with and make
decisions that are aligned with the overall strategic
and tactical decisions that have been made. Even
though the higher-level decisions are made with
the intention of creating advantageous processes
throughout the supply chain, operations managers
must make hundreds of decisions every day to
handle every unexpected thing that comes their
 way. The best decisions are made within the
strategic and tactical frameworks.
Some of the aspects of operational-level
management include daily and weekly forecasting
for resource and capacity planning, monitoring
logistics to ensure that enough inventory is
available and that materials are available on-time
for production. Other decisions include settling
damages or losses with suppliers in the event that
the manufacturing facility receives material
deemed to be of poor quality, which would affect
the overall quality of products being made.
It is essential for any manufacturing organization
to understand the three levels of supply chain
Supply Chain Management building blocks:
management. Advanced Planning and Scheduling
(APS) can easily help align the three levels of
supply chain management. These softwares
provide a thorough insight into your
manufacturing operations through visual
production scheduling and is a must for companies
trying to take their operations to the next level.
APS systems like PlanetTogether are being
implemented into manufacturing operations
around the globe and is helping companies
improve the overall efficiency of their operations
to ensure that they maintain a competitive
advantage.
Supply chain drivers and obstacles:
 International Logistics:
 Logistics refers to the services or activities
required for the management of physical
movement of goods from the source of origin
to the source of destination. It involves
transaction channel, distribution channel and
communication channel for faster and efficient
provision of logistics services.
 International Logistics, therefore, refers to the
integration and management of activities
including inventory databases and shipping
schedules, material handling, production,
packaging, inventory, transportation,
distribution, storage, and security for the
resources of organizational supply chains
beyond the political boundaries of the nations
involved in the global trade.
 With the advent of liberalization and
globalization of world trade, international
logistics is becoming more and more important
to maintain the efficient, effectiveness and
value addition in the international trading
activities.
 In addition, international logistics are
extremely important to achieve the marketing
and overall broader objectives of a firm.
Objectives of International Logistics
The basic objective which a company tries to
achieve through using the logistics at global
level or even at national level is to maintain
the ensured flow of goods & services from
seller to the buyer with the following:
· Right product
· Right quantities and assortments
· Right places
· Right time
· Right cost/price
· Right condition
However, there are some definite objectives to
be achieved through a proper logistics system
which are as follows:
1. Improving Customer Service
The effective management of international
logistics system can help in improving the
level of customer service by developing an
effective system of warehousing, quick and
economic transportation, along with
maintenance of optimum level of inventory
because the level of service directly affects the
cost of physical distribution.
2. Increased Customer Response
Now-a-days, the information &
communication technology has increased the
capability to postpone logistical operations to
the latest possible time and then achieve the
faster delivery of required inventory, thereby,
resulting in the elimination of excessive
inventories traditionally stocked in anticipation
of customer requirements.
3. Reduction in Distribution Costs
The distribution cost is comprised of various
elements, like, transportation, warehousing
and inventory maintenance, and any reduction
in the cost of one the elements are likely to
increase the cost of the other elements. Thus,
the objective of the firm should be the
reduction of the total cost of distribution and
not just the cost incurred on any one of the
elements. To serve this purpose, the total cost
of alternative distribution systems should be
analyzed and the one with the minimum total
distribution cost should be selected.
4. Increasing Sales
The physical distribution/logistics system in a
firm also aims to generate more sales. A firm
can attract more customers by offering better
services at lower prices. For instance, by
introducing decentralization in its warehousing
operations or by using economic and efficient
modes of transportation, a firm can achieve
larger market share. Further, by avoiding the
out-of-stock situation, the loss of loyal
customers can be curtailed.
5. Creating Time & Place Utilities
The logistical system also focuses on creating
time and place utilities to the products &
services. Till the products are physically
moved from the place of their origin to the
place of destination, they do not serve any
purpose to the users. In the same manner, the
products & services have to be made available
at the time when they are needed for
consumption. Moreover, a rapid mode of
transportation should be selected to move the
products from one place to another in the
shortest possible time. Therefore, time and
place utilities can be created in the products &
services by adopting an efficient system of
physical distribution.
6. Stabilizing Product Prices
The international logistics system also aims at
stabilizing the prices of the products. It can be
achieved by controlling & maintaining the
flow of the products to the market through a
judicious use of available transport facilities
and compatible warehouse operations. To say,
maintaining the stock of the raw material
during the periods of excess supply and
making it available during the periods of short
supply, the prices can be stabilized.
7. Quality Management
The international logistics system is a
significant part & parcel of developing and
maintaining continuous improvement in total
quality management. The long-term objective
of the international logistics system is to seek
continuous quality improvement. Overall
commitment to total quality management is
one of the major forces responsible for the
logistical renaissance because the logistical
costs cannot be reversed, if they are increased
once. In fact, when the quality fails to match
the set standards, the logistical performance
typically needs to be reversed and then
repeated. Moreover, logistics itself must
perform to demanding quality standards.
8. Supporting Product Life-Cycle
A good logistical system helps to support the
life cycle. Product recall is a vital competency
resulting from increasingly rigid quality
standards, product expiration dating and
liability for unfavorable consequences as well.
The return logistics requirements are also a
product of the increasing number of regulatory
norms & laws prohibiting disposal and
encouraging recycling of beverage containers
as well as packaging materials. Further, the
operational requirements of reverse logistics
have stretched their scope from lowest total
cost, to say, returning bottles for recycling, to
maximum performance solutions for critical
recalls. The critical point is that the sound
logistical strategy can’t be formed without
careful review of reverse logistical
requirements.
9. Consolidating Transportation Costs
Transportation cost is directly linked to the
type of product, size of shipment, and distance
which the concerned shipment is supposed to
travel. Many Logistical systems which are
equipped with the premium services depend on
high-speed, small shipment transportation
because the larger the overall shipment and the
longer the distance it is to be transported, the
lower the transportation cost per unit. This
needs innovative initiatives aimed at clustering
the small shipments for consolidated
movement which are required to be facilitated
by the working arrangements that transcend
the entire supply chain.
Elements of International Logistics
1. Processing Customer Orders
The first element of the international logistics
system is the processing of orders of the
customers. With an aim to provide faster
customer service, the orders received from
customers need to be processed within least
possible time. This element comprises of the
activities like, receiving the order, recording
the order, filling the order, and assembling all
such orders for transportation, etc. Further, the
high speed data processing techniques are
presently available leading for the rapid
processing of the orders.
2. Storage and Warehousing
This is the second element which involves
assorting products in order to create time
utility. The major objective of the storage &
warehousing activities is to make proper
arrangements for the placement of goods,
providing storage facility to store them,
consolidating them with other similar
products, splitting up them into smaller
quantities and building up assortment of
products. Generally, more the number of
warehouses firm has, the lesser would be the
time taken in serving customers at different
locations. However, this would result in
increased storage & warehousing cost.
Therefore, the firm has to maintain a balance
between the cost of warehousing and the level
of customer service.
3. Managing & Controlling Inventories
The next element involves decision-making
process regarding managing and controlling
inventories which is important for the success
of physical distribution. This element becomes
more important in case the cost of inventories
is higher. Moreover, the new concept of Just-
inTime-Inventory decision is increasingly
becoming popular with a number of
companies, now-adays. The decision regarding
level of inventory involves estimated demand
for the product. A correct estimate of the
demand helps to maintain requisite inventory
level and control the inventory costs as well. It
helps the firm in terms of the cost of inventory
and supply to customers in time and also to
maintain production at a consistent level.
4. Transportation
The element of transportation consists of
moving goods from points of production and
sale to points of consumption in the quantities
required at times needed and at a reasonable
cost. The transportation system increases time
and place utilities to the goods handled and
therefore, increases their economic value.
With an aim to achieve these goals,
transportation facilities must be adequate,
regular, dependable and equitable in terms of
costs and benefits of the facilities and service
provided.
5. Information Monitoring
The information monitoring element of
international logistics system requires the
logistics’ handling personnel continuously
updated information about inventory,
transportation and warehousing. For instance,
with respect to inventory, the information
about the present stock position at each
location, future commitment and
replenishment capabilities are required on an
ongoing basis. In the same manner, before
choosing a carrier, the information about the
availability of relevant modes of
transportation, their costs, services and
suitability for a particular product is needed. In
case of warehousing activities, the information
with respect to space utilization, work
schedules, unit load performance, etc., is
required. For receiving all this information, an
efficient management information system
would be of immense use in controlling costs,
improving services and determining the
overall effectiveness of distribution.
6. Support Facilities
The support facilities element of international
logistics system is comprised of a number of
planning activities which are, usually, directed
toward ensuring that all required permanent or
transitory operating and support facilities,
including training, field and depot
maintenance, storage, operational, and testing
are available concurrently with system
fielding. Planning must be comprehensive and
include the need for expansion, diversification
and modification of the existing facilities as
well as creating new facilities. It also takes
research & developmental activities under its
purview with an aim to define and establish
impacts on life cycle cost, funding
requirements, facility locations and
improvements, space requirements,
environmental
impacts, duration or frequency of use, safety &
security requirements and health standards,
and security restrictions.
Total cost concept in Logistics:
Total cost approach to logistics is the key to
managing the logistics function. Management
should strive to reduce the total cost of
logistics rather than the cost of each activity.
So logistics must be viewed as an integrated
system rather than the individual system,
because reduction in one cost invariably lead
to increase the cost of other components.
Effective management and real cost savings
can be accomplished only by viewing logistics
as an integrated system and minimizing its
total cost given the firms customer service
objectives. So the main costs which are
involved in logistics function are:
1. Customer Service Level Costs
Most business people find it difficult, if not
impossible to measure this cost. The cost
associated with alternative customer service
levels is the cost of lost sales (not only the
margin lost by not meeting current sales
demand, but the present value of all future
contributions to profit forfeited when a
 customer is lost due to poor availability, long
lead times, or other service failures). By
comparing total logistics system costs,
management can make knowledgeable
judgment about the likelihood of recovering,
through increased sales, the increase in total
system costs brought about by an increase in
customer service levels.
2. Transportation Costs
Costs associated with the transportation
function can be identified in total and be
segments (i.e. inbound, outbound, by vendor,
by customer, by mode, by carrier, by product,
or by channel). This detail is necessary to
determine the incremental costs associated
with changes in the logistics system. If
transportation costs are no currently available
in any other form, management can determine
them at a relatively low cost by sampling
product flows and auditing freight bills (for
common carriers) or corporate accounting
records (for private fleets).
3. Warehousing Costs
Warehousing costs are all the expenses that
can be eliminated or that must be increased as
a result of a change in the number of
warehousing facilities. Warehousing costs
should be separated into two distinct
categories:
Throughput Costs: These costs are associated
with selling product in a given market by
moving it into and out of a warehouse in that
market, and the fixed costs associated with the
facility. Example is charges that public
warehouses assess for moving product into and
out of their facilities, and the costs of leased
and owned facilities for the movement of the
goods.
Storage Costs: Warehousing costs related to
inventory storage should be included in
Supply Chain Management Trade Offs:
inventory carrying costs. These warehousing
costs change with the level of inventory held
in a specific warehouse and tend to be
negligible in a company- owned or leased
warehouse.
Throughput costs should be included instead in
warehousing costs so that the increments can
be easily added or subtracted when the
logistics system configuration system changes.
4. Order Processing and Information Costs
Order processing and information costs
include the cost of order transmittal, order
entry, order processing, related handling costs,
and associated internal and external
communication costs. When establishing these
costs management should remember to include
in the analysis only those costs that will
change with decision being made.
5. Lot Quantity Costs
Lot quantity costs are those production related
or purchasing/acquisition costs that will
change as a result of a change in the logistics
system. Generally, it consists of production
preparation costs, capacity lost due to
changeover, materials handling, scheduling
and expediting. The lot quantity costs
associated with purchasing are the costs of
buying in various quantities.
6. Inventory Carrying Costs
Conceptually inventory carrying costs are the
most difficult costs to determine next to the
costs of lost sale. Inventory carrying costs
should include only those costs that vary with
the level of inventory stored and that can be
categorized into 4 costs.
 Capital costs
 Inventory service costs
 Storage space costs
 Inventory risk costs