SUPPLY CHAIN MANAGEMENT

Important Topics

Supply Chain Process of Any Company:

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a
customer request. 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. These
functions include, but are not limited to, new product development, marketing,
operations, distribution, finance, and customer service.
A typical supply chain may involve a variety of stages, including the following:
• Customers
• Retailers
• Wholesalers/distributors
• Manufacturers
• Component/raw material supplier

Example: Walmart provides the product, as well as pricing and availability

information, to the customer. The customer transfers funds to Walmart. Walmart
conveys point-of-sales data and replenishment orders to the warehouse or
distributor, which transfers the replenishment order via trucks back to the store.
Walmart transfers funds to the distributor after the replenishment. The
distributor also provides pricing information and sends delivery schedules to
Walmart. Walmart may send back packaging material to be recycled. Similar
information, material, and fund flows take place across the entire supply chain.
Process of Supply Chain Surplus
The objective of every supply chain should be to maximize the overall value
generated. The value (also known as supply chain surplus) a supply chain
generates is the difference between what the value of the final product is to the
customer and the costs the entire supply chain incurs in filling the customer’s
request.
Supply Chain Surplus = Customer Value - Supply Chain Cost
The value of the final product may vary for each customer and can be estimated
by the maximum amount the customer is willing to pay for it. The difference
between the value of the product and its price remains with the customer as
consumer surplus. For example, a customer purchasing a wireless router from
Best Buy pays $60, which represents the revenue the supply chain receives.
Customers who purchase the router clearly value it at or above $60. Thus, part of
the supply chain surplus is left with the customer as consumer surplus.
Importance of Supply Chain Surplus
Effective supply chain management involves the management of supply chain
assets and product, information, and fund flows to grow the total supply chain
surplus. A growth in supply chain surplus increases the size of the total pie,
allowing contributing members of the supply chain to benefit. The higher the
supply chain surplus, the more competitive the supply chain is.
Process Views of a 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. There
are two ways to view the processes performed in a supply chain.

1. Cycle View
The processes in a supply chain are divided into a series of cycles, each performed
at the interface between two successive stages of the supply chain. All supply
chain processes can be broken down into the following four process cycles:

A customer order cycle takes place when orders are processed, prepared, and
shipped. For retail, the customer is often picking orders from the store inventory
(shelves), which represents the point of final demand.
The replenishment cycle concerns the steps involved to re-supply outlets from
distribution centers and wholesalers. Each outlet places orders to distributors
based on its own fluctuation of demand. It involves inventory that has already
been manufactured and stored in different locations and parts of the supply
chain.
The manufacturing cycle concerns the scheduling of production in light of the
demand from distributors. The procurement cycle involves the scheduling of the
components required in the manufacturing of a good.
The procurement cycle is the process of selecting a vendor, buying goods or
services from them, and managing their ongoing performance.

2. Push/Pull View
The processes in a supply chain are divided into two categories, depending on
whether they are executed in response to a customer order or in anticipation of
customer orders. Pull processes are initiated by a customer order, whereas push
processes are initiated and performed in anticipation of customer orders.
Following are the push/pull processes in a supply chain:
A push/pull view of the supply chain is very useful when considering strategic
decisions relating to supply chain design. The goal is to identify an appropriate
push/pull boundary such that the supply chain can match supply and demand
effectively.
Example: The paint industry provides another excellent example of the gains from
suitably adjusting the push/pull boundary. The manufacture of paint requires
production of the base, mixing of suitable colors, and packing. Until the 1980s, all
these processes were performed in large factories, and paint cans were shipped
to stores. These qualified as push processes, as they were performed to a forecast
in anticipation of customer demand. Given the uncertainty of demand, though,
the paint supply chain had great difficulty matching supply and demand. In the
1990s, paint supply chains were restructured so mixing of colors was done at
retail stores after customers placed their orders. In other words, color mixing was
shifted from the push to the pull phase of the supply chain even though base
preparation and packing of cans were still performed in the push phase. The
result is that customers are always able to get the color of their choice, whereas
total paint inventories across the supply chain have declined.

Supply Chain Macro Processes in a Firm:

1. Customer Relationship Management (CRM):
The CRM macro process consists of processes that take place between an
enterprise and its customers downstream in the supply chain. The goal of the
CRM macro process is to generate customer demand and facilitate transmission
and tracking of orders. Weakness in this process results in demand being lost and
a poor customer experience because orders are not processed and executed
effectively. The key processes under CRM are as follows:

 Marketing - Marketing processes involve decisions regarding which

customers to target, how to target customers, what products to offer, how
to price products, and how to manage the actual campaigns that target
customers. Good IT systems in the marketing area within CRM provide
analytics that improve the marketing decisions on pricing, product
profitability, and customer profitability, among other functions.
  Sell - The sell process focuses on making an actual sale to a customer. It
includes providing the sales force with the information it needs to make a
sale and then execute the actual sale. Executing the sale may require the
salesperson (or the customer) to build and configure orders by choosing
among a variety of options and features.
 Order Management - The process of managing customer orders as they
flow through an enterprise is important for the customer to track an order
and for the enterprise to plan and execute order fulfillment. This process
ties together demand from the customer with supply from the enterprise.
 Call/Service Center - A call/service center is often the primary point of
contact between a company and its customers. A call/service center helps
customers place orders, suggests products, solves problems, and provides
information on order status. Good IT systems have helped improve
call/service center operations by facilitating and reducing work done by
customer service representatives and by routing customers to
representatives who are best suited to service their request.

2. Internal Supply Chain Management (ISCM):

ISCM, as we discussed earlier, is focused on operations internal to the enterprise.
ISCM includes all processes involved in planning for and fulfilling a customer
order. The various processes included in ISCM are as follows:
 Strategic planning - This process focuses on the network design of the
supply chain. Key decisions include location and capacity planning of
facilities.
 Demand planning - This process consists of forecasting demand and
analyzing the impact on demand of demand management tools such as
pricing and promotions.
 Supply planning - The supply planning process takes as an input the
demand forecasts produced by demand planning and the resources made
available by strategic planning, and then produces an optimal plan to meet
this demand. Factory planning and inventory planning capabilities are
typically provided by supply planning software.
  Fulfillment - Once a plan is in place to supply the demand, it must be
executed. The fulfillment process links each order to a specific supply
source and means of transportation. The software applications that
typically fall into the fulfillment segment are transportation and
warehousing management applications.
 Field service - Finally, after the product has been delivered to the
customer, it eventually must be serviced. Service processes focus on setting
inventory levels for spare parts as well as scheduling service calls. Some of
the scheduling issues here are handled in a similar manner to aggregate
planning, and the inventory issues are the typical inventory management
problems.

3. Supplier Relationship Management (SRM):

SRM includes those processes focused on the interaction between the enterprise
and suppliers that are upstream in the supply chain. There is a natural fit between
SRM processes and the ISCM processes, as integrating supplier constraints is
crucial when creating internal plans. The major SRM processes are as follows:
Design collaboration - This software aims to improve the design of products
through collaboration between manufacturers and suppliers. The software
facilitates the joint selection (with suppliers) of components that have positive
supply chain characteristics such as ease of manufacturability or commonality
across several end products.
 Source - Sourcing software assists in the qualification of suppliers and helps
in supplier selection, contract management, and supplier evaluation. An
important objective is to analyze the amount that an enterprise spends
with each supplier, often revealing valuable trends or areas for
improvement. Suppliers are evaluated along several key criteria, including
lead time, reliability, quality, and price. This evaluation helps improve
supplier performance and aids in supplier selection.
 Negotiate - Negotiations with suppliers involve many steps, starting with a
request for quote (RFQ). The negotiation process may also include the
design and execution of auctions. The goal of this process is to negotiate an
 effective contract that specifies price and delivery parameters for a supplier
in a way that best matches the enterprise’s needs. Successful software
automates the RFQ process and the execution of auctions.
 Buy - “Buy” software executes the actual procurement of material from
suppliers. This includes the creation, management, and approval of
purchase orders. Successful software in this area automates the
procurement process and helps decrease processing cost and time.
 Supply collaboration - Once an agreement for supply is established
between the enterprise and a supplier, supply chain performance can be
improved by collaborating on forecasts, production plans, and inventory
levels. The goal of collaboration is to ensure a common plan across the
supply chain. Good software in this area should be able to facilitate
collaborative forecasting and planning in a supply chain.
Components of Information Decisions:
Many technologies exist to share and analyze information in the supply chain.
Managers must decide which technologies to use and how to integrate them into
their supply chain. Some of the most important technologies are as follows:

1. Electronic Data Interchange (EDI):

Electronic data interchange (EDI) was developed in the 1970s to facilitate the
placement of instantaneous, paperless purchase orders with suppliers. Its
proprietary nature, however, required significant upfront investment and often
some translation between the communicating parties. It did, however, make
transactions faster and more accurate than when they were paper based.

2. Enterprise Resource Planning (ERP):

Enterprise resource planning (ERP) systems provide the transactional tracking and
global visibility of information from within a company and across its supply chain.
This realtime information helps a supply chain improve the quality of its
operational decisions. ERP systems keep track of the information, whereas the
Internet provides one method with which to view this information.

3. Supply Chain Management (SCM) Software:

Supply chain management (SCM) software uses the information in ERP systems to
provide analytical decision support in addition to the visibility of information. ERP
systems show a company what is going on, whereas SCM systems help a company
decide what it should do.

4. Radio Frequency Identification (RFID):

Radio frequency identification (RFID) consists of an active or passive radio
frequency (RF) tag, applied to the item being tracked, and an RF reader/emitter. A
passive tag draws energy from the reader, whereas an active tag has its own
battery and draws power from it. RFID has many potential uses. It can be used in
manufacturing to check availability of the entire bill of materials. The technology
can make the receiving of a truck much faster and cheaper. Full implementation
of RFID could eliminate the need for manual counting and bar-code scanning at
the receiving dock. It can also be used to get an exact count of incoming items
and items in storage.

Important Incoterms:
1. EXW (Ex Works)
EXW, short for “Ex Works,” places most responsibility with the buyer. The seller is
expected to have the goods ready for collection at the agreed place of delivery
(commonly the seller’s factory, mill, plant, or warehouse). The buyer is
accountable for all subsequent costs and risk, including all export procedures,
starting with loading the goods onto a transport vehicle at the seller’s premises.

Benefits:
The two main benefits of using Incoterms Ex Works for buyers are:
 Control: When using Ex Works logistics, all the costs and responsibilities lie
with the buyer. This means you’ll have perfect insight and full control over
the transportation chain.
 Transparency: Except when the goods are in the customs, the buyer has full
control over the transportation chain. It allows for a fully transparent
transportation process where you can avoid having carriers raise local costs
or add additional charges.

2. DDP (Delivery Duty Paid)

Delivered duty paid (DDP) is a delivery agreement whereby the seller assumes all
of the responsibility, risk, and costs associated with transporting goods until the
buyer receives or transfers them at the destination port.
This agreement includes paying for shipping costs, export and import
duties, insurance, and any other expenses incurred during shipping to an agreed-
upon location in the buyer's country.

Seller’s Responsibilities:
The seller arranges for transportation through a carrier of any kind and is
responsible for the cost of that carrier as well as acquiring customs clearance in
the buyer's country, including obtaining the appropriate approvals from the
authorities in that country. Also, the seller may need to acquire a license for
importation. However, the seller is not responsible for unloading the goods.

3. DAP (Delivered at Place)

Under the Delivered at Place (DAP) Incoterms rules, the seller is responsible for
delivery of the goods, ready for unloading, at the named place of destination. The
seller assumes all risks involved up to unloading. Unloading is at the buyer’s risk
and cost.
DAP can apply to any—and more than one—mode of transport. The buyer and
seller should specify and agree upon the precise unloading spot at the named
place of destination.

Key Takeaways:
 Under DAP, a seller agrees to pay all costs and suffer any potential losses of
moving goods sold to a specific location.
 In simpler terms, the seller takes on all the risks and costs of delivering
goods to an agreed-upon location under DAP rules.
 The buyer assumes all the risk and responsibility once the shipment arrives
at the destination.

4. FAS (Free Alongside Ship)

Free alongside ship (FAS) is a contractual term used in the international export
business that stipulates that the seller must arrange for goods to be delivered to a
designated port and next to a specific vessel for easier transfer.
In a contract for international trade, free alongside ship means the goods will be
delivered right next to the buyer's ship, ready for reloading.

Understanding FAS:
 Free: This means that the seller is obligated to deliver the goods purchased
at a particular port where the goods can be easily transferred to a carrier.
 Alongside: This word also means the seller is obligated to deliver the goods
near a particular vessel designated by the buyer. This means if the goods
 are not delivered to (near) the vessel, they might not be within the reach of
the carrier.
Both the seller and the buyer have obligations, while the seller is responsible for
export clearance, the buyer is liable for the cost of insurance, transportation, and
loading of the goods into the designated vessel.

5. FOB (Free on Board)

FOB means “Free on Board” and this incoterm indicates that the seller is
responsible for transportation of the goods to the port of shipment and the cost
of loading. The buyer pays the costs of ocean freight, insurance, unloading, and
transportation from the arrival port to the final destination. The seller passes the
risk to the buyer when the goods are loaded at the originating port.

Understanding FOB:
“FOB Destination” refers to the legal fact that the seller retains title and control of
the goods until they are delivered. The seller selects the carrier and is responsible
for the risk of transportation and filing claims in case of loss or damage.
“Freight collect” refers to the legal fact that the buyer is responsible for the
freight charges.

Long Term vs Short Term

Under long-term contracts, the supplier and buyer cannot breach or renegotiate
the first period offer. Thus, the supplier offers the same contract in period 2 as
that in period 1. The short-term contracts apply to only one period. Thus, the
supplier and buyer sign a new contract in every period.
Supply Chain Planning - For decisions made during this phase, the time frame
considered is a quarter to a year. Therefore, the supply chain’s configuration
determined in the strategic phase is fixed. This configuration establishes
constraints within which planning must be done. The goal of planning is to
maximize the supply chain surplus that can be generated over the planning
horizon given the constraints established during the strategic or design phase.
Companies start the planning phase with a forecast for the coming year (or a
comparable time frame) of demand and other factors, such as costs and prices in
different markets. Planning includes making decisions regarding which markets
will be supplied from which locations, the subcontracting of manufacturing, the
inventory policies to be followed, and the timing and size of marketing and price
promotions.
Supply Chain Operation - The time horizon here is weekly or daily. During this
phase, companies make decisions regarding individual customer orders. At the
operational level, supply chain configuration is considered fixed and planning
policies are already defined. The goal of supply chain operations is to handle
incoming customer orders in the best possible manner. Because operational
decisions are being made in the short term (minutes, hours, or days), there is less
uncertainty about demand information. Given the constraints established by the
configuration and planning policies, the goal during the operation phase is to
exploit the reduction of uncertainty and optimize performance.

Strategic Fit
Strategic fit requires that both the competitive and supply chain strategies of a
company have aligned goals. It refers to consistency between the customer
priorities that the competitive strategy hopes to satisfy and the supply chain
capabilities that the supply chain strategy aims to build. For a company to achieve
strategic fit, it must accomplish the following:
1. The competitive strategy and all functional strategies must fit together to form
a coordinated overall strategy. Each functional strategy must support other
functional strategies and help a firm reach its competitive strategy goal.
2. The different functions in a company must appropriately structure their
processes and resources to be able to execute these strategies successfully.
3. The design of the overall supply chain and the role of each stage must be
aligned to support the supply chain strategy.
Steps for Achieving Strategic Fit
To achieve strategic fit, a company must ensure that its supply chain capabilities
support its ability to satisfy the needs of the targeted customer segments. There
are three basic steps to achieving this strategic fit:
1. Understanding the customer and supply chain uncertainty: First, a
company must understand the customer needs for each targeted segment and
the uncertainty these needs impose on the supply chain. These needs help the
company define the desired cost and service requirements.
In general, customer demand from different segments varies along several
attributes, as follows:
• Quantity of the product needed in each lot: An emergency order for material
needed to repair a production line is likely to be small. An order for material to
construct a new production line is likely to be large.
• Response time that customers are willing to tolerate: The tolerable response
time for the emergency order is likely to be short, whereas the allowable
response time for the construction order is apt to be long.
• Variety of products needed: A customer may place a high premium on the
availability of all parts of an emergency repair order from a single supplier. This
may not be the case for the construction order.
• Service level required: A customer placing an emergency order expects a high
level of product availability. This customer may go elsewhere if all parts of the
order are not immediately available. This is not apt to happen in the case of the
construction order, for which a long lead time is likely.
• Price of the product: The customer placing the emergency order is apt to be
much less sensitive to price than the customer placing the construction order.
• Desired rate of innovation in the product: Customers at a high-end department
store expect a lot of innovation and new designs in the store’s apparel. Customers
at Walmart may be less sensitive to new product innovation.
2. Understanding the supply chain capabilities: Each of the many types of
supply chains is designed to perform different tasks well. A company must
understand what its supply chain is designed to do well.

Supply chain responsiveness includes a supply chain’s ability to do the following:

• Respond to wide ranges of quantities demanded
• Meet short lead times
• Handle a large variety of products
• Build highly innovative products
• Meet a high service level
• Handle supply uncertainty
3. Achieving strategic fit: If a mismatch exists between what the supply chain
does particularly well and the desired customer needs, the company will either
need to restructure the supply chain to support the competitive strategy or alter
its competitive strategy.
For example: Consider a pasta manufacturer such as Barilla. Pasta is a product
with relatively stable customer demand, giving it a low implied demand
uncertainty. Supply is also quite predictable. Barilla could design a highly
responsive supply chain in which pasta is custom made in small batches in
response to customer orders and shipped via a rapid transportation mode such as
FedEx. This choice would obviously make the pasta prohibitively expensive,
resulting in a loss of customers. Barilla, therefore, is in a much better position if it
designs a more efficient supply chain with a focus on cost reduction.
The next step in achieving strategic fit is to assign roles to different stages of the
supply chain that ensure the appropriate level of responsiveness. It is important
to understand that the desired level of responsiveness required across the supply
chain may be attained by assigning different levels of responsiveness and
efficiency to each stage of the supply chain.

Drivers of Supply Chain Performance

A supply chain’s performance in terms of responsiveness and efficiency is based
on the interaction between the following logistical and cross-functional drivers of
supply chain performance:
1. Facilities – These are the actual physical locations in the supply chain
network where product is stored, assembled, or fabricated. The two major
types of facilities are production sites and storage sites. Decisions regarding
the role, location, capacity, and flexibility of facilities have a significant
impact on the supply chain’s performance. For example, in 2013, Amazon
increased the number of warehousing facilities (and, as a result,
experienced an increase in PP&E) located close to customers to improve its
responsiveness.
2. Inventory - Encompasses all raw materials, work in process, and finished
goods within a supply chain. The inventory belonging to a firm is reported
under assets. Changing inventory policies can dramatically alter the supply
chain’s efficiency and responsiveness. For example, W.W. Grainger makes
itself responsive by stocking large amounts of inventory and satisfying
customer demand from stock even though the high inventory levels reduce
efficiency. Such a practice makes sense for Grainger because its products
hold their value for a long time.
3. Transportation - Entails moving inventory from point to point in the
supply chain. Transportation can take the form of many combinations of
modes and routes, each with its own performance characteristics.
Transportation choices have a large impact on supply chain responsiveness
and efficiency. For example, a mail-order catalog company can use a faster
mode of transportation such as FedEx to ship products, thus making its
supply chain more responsive— but also less efficient, given the high costs
associated with using FedEx.
4. Information - Consists of data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers throughout the supply chain.
Information is potentially the biggest driver of performance in the supply
chain because it directly affects each of the other drivers. Information
presents management with the opportunity to make supply chains more
responsive and more efficient.

5. Sourcing - is the choice of who will perform a particular supply chain

activity, such as production, storage, transportation, or the management of
information. At the strategic level, these decisions determine what
functions a firm performs and what functions the firm outsources. Sourcing
decisions affect both the responsiveness and efficiency of a supply chain.
After Motorola outsourced much of its production to contract
manufacturers in China, for instance, it saw its efficiency improve but its
responsiveness suffers because of the long lead times. To make up for the
drop in responsiveness, Motorola started flying in some of its cell phones
from China even though this choice increased transportation cost.

6. Pricing - determines how much a firm will charge for the goods and
services that it makes available in the supply chain. Pricing affects the
behavior of the buyer of the good or service, thus affecting demand and
supply chain performance. For example, if a transportation company varies
its charges based on the lead time provided by the customers, it is likely
that customers who value efficiency will order early and customers who
value responsiveness will be willing to wait and order just before they need
a product transported.
Backward vs Forward Integration
Forward Integration
Forward integration is a business strategy that involves a form of
downstream vertical integration whereby the company owns and controls
business activities that are ahead in the value chain of its industry, this might
include among others direct distribution or supply of the company's products.
This type of vertical integration is conducted by a company advancing along
the supply chain.
Example: A good example of forward integration is a clothing label that opens up
its own boutiques, selling its designs directly to customers instead of or in
addition to selling them through department stores.
How Forward Integration Works
Often referred to as "cutting out the middleman," forward integration is an
operational strategy implemented by a company that wants to increase control
over its suppliers, manufacturers, or distributors, so it can increase its market
power. For a forward integration to be successful, a company needs to gain
ownership over other companies that were once customers. This strategy differs
from backward integration in which a company tries to increase ownership over
companies that were once its suppliers.
Backward Integration
Backward integration is a form of vertical integration in which a company expands
its role to fulfill tasks formerly completed by businesses up the supply chain. In
other words, backward integration is when a company buys another company
that supplies the products or services needed for production. In short, backward
integration occurs when a company initiates a vertical integration by moving
backward in its industry's supply chain.
Example: An example of backward integration might be a bakery that purchases a
wheat processor or a wheat farm. In this scenario, a retail supplier is purchasing
one of its manufacturers, therefore cutting out the intermediary, and hindering
competition. 
How Backward Integration Works
Companies often complete backward integration by acquiring or merging with
these other businesses, but they can also establish their own subsidiary to
accomplish the task. Complete vertical integration occurs when a company owns
every stage of the production process, from raw materials to finished
goods/services.

Inbound/Outbound Logistics
Inbound transportation costs are the costs incurred in bringing material into a
facility. Outbound transportation costs are the costs of sending material out of a
facility. Outbound transportation costs per unit tend to be higher than inbound
costs because inbound lot sizes are typically larger.
For example, an Amazon warehouse receives full truckload shipments of books on
the inbound side but ships out small packages with only a few books per customer
on the outbound side. Increasing the number of warehouse locations decreases
the average outbound distance to the customer and makes outbound
transportation distance a smaller fraction of the total distance traveled by the
product.

Estimated Time of Arrival (ETA)

An ETA, or estimated time of arrival, is a term used widely in transportation
predicting when a means of transport, or freight shipment, will arrive at its
destination. In the world of logistics and supply chain management, obtaining an
ETA for a shipment in transit has a wide range of benefits. Sharing ETAs with end-
customers helps manage their expectations while operational teams can use this
information to help ensure deliveries are on-time, helping manufacturers avoid
production line halts or retailers avoid stocks outs.
Importance
Knowing accurate ETAs can reduce administration costs for organizations by
automating processes and allowing teams to focus on exceptions. This allows
shippers to better utilize teams who used to perform time-consuming tasks
like sending delivery notifications, calling carriers to follow up on the
whereabouts of deliveries, scheduling of docks and processing of payments
through workflows.

What are Payment Terms?

Payment terms provide clear details about the expected payment on a sale.
Often, payment terms are included on an invoice and specify how much time the
buyer has to make payment on the purchase.
There are four basic models:
Payment in advance: payment must be made before the supplier performs its
obligations.
Letter of Credit: payment formally guaranteed by a bank.
Documentary Collection: Payment executed through a bank on production on
documents; and
Open Accounts: Payment made following performance.