INRODUCTION TO SUPPLY CHAIN MANAGEMENT

Organizational Fundamentals
In any manufacturing company, material flow can be basically classified into three

phases.

 Flow of raw material from suppliers into the manufacturing facility.

 Flow of material within the manufacturing facility as they are processed.

 Flow of finished goods from the manufacturing facility to the end customers.

To be responsive to the global competition, Organizations must be able to manage the

complete flow of material from the suppliers, through manufacturing, till the end product

reaches the customers.

Hence organizations must be involved in the management of suppliers who provide direct

and indirect material inputs, must increase the manufacturing competitiveness and must

effectively manage the network of distribution systems responsible for delivery of the end

product to end customers.

From this realization emerged the concept of supply Chain.

Definition of Supply Chain

Supply Chain : The supply chain encompasses all activities associated with the flow and

transformation of goods from the raw materials stage (extraction), through to end users,

as well as the associated information flows. Material and information flows both up and

down the supply chain. The supply chain includes new product development, systems

management, operations and assembly, purchasing, production scheduling, order

processing, inventory management, transportation, warehousing, and customer service.

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.

What is Supply Chain Management?

Supply Chain Management (SCM) : SCM is the integration of all the activities in the

supply chain to achieve a sustainable competitive advantage. Supply Chain can be

broadly classified of comprising of three networks – Supplier, Firm and Distribution.

The supplier network consists of all organizations that provide inputs, either directly or

indirectly, to the focal firm (i.e., the purchaser). Focal firms network is involved in the

conversion of input material to the output material. The distributive network consists of
 all downstream organizations from the focal (Main) firm that ensure that the right

quantity of goods is delivered to the appropriate customer location in a timely manner.

SCM Vs Logistics

Logistics : Logistics, also called as Physical distribution, focuses on the physical

movement and storage of goods and materials. Logistics is that part of the supply chain

process that plans, implements, and controls the efficient, effective forward and reverse

flow and storage of goods, services, and related information between the point of origin

and the point of consumption.

Typical issues in logistics are evaluation of various transportation options, packaging

options, inventory management for different channels, develop and manage networks of

warehouses when needed, and manage the physical flow of materials into and out of the

organization.

Therefore, logistics is a subset in the broader scope of SCM.

ELEMENTS OF SCM

Suppliers, Producers, Distributors, Customers etc.,

Following are the key elements in Supply Chain Management:

 Customers (A customer is an individual or business that purchases another company's

 goods or services. Customers are important because they drive revenues; without them,

businesses cannot continue to exist.)

 Producers (includes Retailer, Distributor, Manufacturer)

 Suppliers

Customers, Producers and Suppliers can be interconnected in the Supply chain as

follows:

Manufacturing
Supplier Customer Facility
-------------
Supplier
Supplier
SupplierCustomer
Manufacturing Facility
Customer
Supplier SupplierFacility Customer
Manufacturing Supplier
Facility ------------- Customer
Supplier Customer
Customer
Interrelationship of the elements

 A number of companies can be linked in the supply chain network.

 A supplier to one manufacturing facility can be a customer to another

manufacturing facility and so on. Hence a number of supplier / customer

relationships exist in the supply chain network.

 A number of intermediaries (distributors, wholesalers, retailers etc.,) form part of

the supply chain network.

In defining the supply chain network and the integrations between the elements, the

following decisions must be made.

 Identifying the key supply chain elements in the network to link the processes.

 Identifying the processes that are to be linked with the key elements.

 Identifying the level of integration and management control to be applied for each

of the processes.

Organizational Dynamics
Three phases in the evolution of SCM

Organizational structure from the fifties to the late eighties was marked by the functional

silos (stores) where the decisions were made keeping in mind the narrow view of the

business functions and the repercussions of the decisions on the other functions were

ignored. These often-created conflicting objectives within the various functions of a

company. The late eighties saw the advent of Business Process Reengineering and ERP

concepts. The corporate houses started analyzing the importance of aligning their

business with the developments in the information technology capabilities to collaborate

effectively with its stakeholders, integrate its functions and decision making and to

remain competitive in the market.

There are three distinct phases in evolution of SCM:

Pre-1970 era :

 Supply Chain was not considered as a competitive unit. Companies seek more

profit by maneuvering (manipulating) their suppliers and customers.

 Scientific methods like EOQ was applied.

 Companies attempted at Vertical integration – themselves.

1970 – 1980 era :

 Holding inventory becomes key due to Oil shock

 TQM and JIT practice becomes popular in Japan

 Distribution is not yet the focus area

 MRP systems gain popularity in US and Europe

Post 1980 era :

 Inventory profits dry up as inflation reigns ( controls) in

 US manufacturers embrace JIT philosophy. JIT pushes inventory upstream.

 Lower setup times, lower batch quantities result in reduction in lead times and

drastic improvement in customer responsiveness.

 Suppliers and customers considered as part of the organization network. We

against them philosophy fades away.

 MRP systems give way to MRP II systems, ERP and then to advanced supply

chain systems involving optimization.

Operating Environments
Business Process that connect various elements in SCM

Following are the typical business that connect various elements in the SCM:

 Product Development

 Order Fulfillment

 Demand Management

 Customer Relationship Management

Product Development Process :

As customer demands are ever increasing with respect to quality, delivery and options,

organizations are increasingly finding it difficult to meet the customer’s expectations. It

is often noted that customers want:

 Faster delivery

 Least price

 0 % rejection rate
 And as customer’s preference keeps changing, organizations are forced to reduce the

product development lead-time as well as costs. Organizations are increasingly

employing the following strategies in the Product Development Process:

 Integrate customers and suppliers early in the development process

 Reduce time to market

 Incorporate supply chain considerations into product design

 Employ Concurrent Product Development Practices

Order Fulfillment Process :

Organizations need to deploy appropriate production systems depending on the Product

and demand environment in which they operate. Main objectives, which need to be

considered, are:

 Production must shift from a supply/ push method of operation to a demand / pull

method based on customer needs.

With a push-based supply chain, products are pushed through the channel, from the production side up to the

retailer. The manufacturer sets production at a level in accord with historical ordering patterns from retailers. It

takes longer for a push-based supply chain to respond to changes in demand, which can result in overstocking or

bottlenecks and delays (the bullwhip effect), unacceptable service levels and product obsolescence.

In a pull-based supply chain, procurement, production and distribution are demand-driven rather than to forecast.

However, a pull strategy does not always require make to order production. Toyota Motors Manufacturing is

frequently used as an example of pull production, yet do not typically produce to order. They follow the

"supermarket model" where limited inventory is kept on hand and is replenished as it is consumed. In Toyota's

case, Kanban cards are used to signal the need to replenish inventory.

Kanban is a workflow management method for defining, managing and improving services that deliver

knowledge work. It aims to help you visualize your work.

The Six Rules of Kanban

 Never Pass Defective Products. ...

 Take Only What's Needed. ...

 Produce the Exact Quantity Required. ...

 Level the Production. ...

 Fine-tune the Production or Process Optimization. ...

 Stabilize and Rationalize the Process.

A supply chain is almost always a combination of both push and pull, where the interface between the push-

based stages and the pull-based stages is sometimes known as the push–pull boundary.[6] However, because of

the subtle difference between pull production and make-to-order production, a more accurate name for this may

be the customer order decoupling point. An example of this is Dell's build to order supply chain. Inventory levels

of individual components are determined by forecasting general demand, but final assembly is in response to a

specific customer request. The decoupling point would then be at the beginning of the assembly line.

 Applied to that portion of the supply chain where demand uncertainty is relatively small

 Production and distribution decisions are based on long term forecasts

 Based on past orders received from retailer's warehouse (may lead to bullwhip effect)

 Inability to meet changing demand patterns

  Large and variable production batches

 Unacceptable service levels

 Excessive inventories due to the need for large safety stocks

 Less expenditure on advertising than pull strategy.

In a marketing pull system, the consumer requests the product and "pulls" it through the delivery channel. An

example of this is the car manufacturing company Ford Australia. Ford Australia only produces cars when they

have been ordered by customers.

 Applied to that portion of the supply chain where demand uncertainty is high

 Production and distribution are demand driven

 No inventory, response to specific orders

 Point of sale (POS) data comes is helpful when shared with supply chain partners

 Decrease in lead time

 Difficult to implement.

 Manufacturing process must flexibly respond to market changes with rapid

changeover possibilities for mass customizations.

 Minimum lot sizes are planned to move toward a make to order environment.

 Required delivery dates rather than EOQ drive production priorities.

 Specific supply strategies are developed for each customer segment.

 Customer needs dates and requirements drive the process.

 Manufacturing, distribution and transportation plans are integrated.

Organizations can employ following Production Typologies to accomplish the above
objectives:
Manufacturing process Choices :

Considering the demand for the items, range of products, product design, equipment,

material movement, etc., manufacturing process choices can be categorized as follows :

 Lot/Batch/Intermittent

 Flow Line / Repetitive / Continuous

 Project

Lot/Batch/Intermittent : In the batch / intermittent process, goods are produced in

batches / lots. Work centres are generally organized into groups / departments having the

similar equipment an skills. Ex., all milling machines in one group, all Lathe machines in

one group etc.

These work centers can perform a variety of operations due to the different machine’s

and skills present and hence are capable of producing different products.

The products move along the various machines in the work centers based on the required

operations to be performed on them. These work centers hence comprise of general

purpose machinery with the flexibility of making a variety of products.

Control of work is managed through the individual work centers for each lot.

A 1 2 3

4 5 6
B
 9
C

Flow Line / Repetitive / Continuous : In a flow line / repetitive / continuous

manufacturing process, workstations are organized in the sequence needed to make the
product. The product moves from one work station to the next along the defined sequence
at an almost constant rate.

Work Station 1 Work Station 2 Work Station 3

In Out
If the products are discrete ex., automobiles, Refrigerators etc., the process is called

repetitive manufacturing process. If the products are not discrete ex., gasoline, oils etc.,

the process is called continuous manufacturing process.

The repetitive / continuous manufacturing process has the following characteristics:

 Setting up of a flow line is justified only if the demand of the product is large

enough.

 Only a limited range of products can be produced in each flow line

 The work stations comprise of specialized machinery and tooling required for the

product

 Since the flow of products between the work stations is balanced and is nearly

constant, there is a minimal build up of work in process inventory.

Project : The Project manufacturing process choice is applicable to huge complex

projects. In most cases, the product is developed at a particular location with all the

necessary resources and equipment moving to the product development location.

Large aircrafts, ship building and construction are examples.

Production Environments :

On-Time Delivery is one of the key attributes in meeting customer expectations. To cater

to the varying needs of different customers, operations must device the required

production environment / strategy which will help in minimizing the lead times.
Production environment can be classified into

 Design / Engineer to Order

 Make to Order

 Assemble / Package to Order

 Make to Stock

Design / Engineer - to - Order : ETO environment caters to specific customers’

requirements. The process starts with the preparation of unique / highly customized

engineering designs of the product, with the close involvement of the customer.

After the designs are finalized, required material is purchased and the components and

subassemblies are manufactured. Its during this process that inventories, mostly work in

process are maintained. The goods are then assembled and shipped to the customer.

Hence the total delivery lead time that has to be optimized in this environment to provide

a faster customer service include

Delivery Lead Time

Designing Purchasing Manufacturing Assembling Shipping

Make - To - Order : In this environment, the final product is made after the receipt of

the customer order. Standard components are purchased / manufactured and are usually

stocked as raw material inventory.

On receipt of customer orders, the product is made from these standard components and

the process may include minor customizations of the design.

The main activities contributing to the delivery lead time in this environment include the

manufacturing time, assembling time and shipping.

Raw material Inventory

Delivery Lead Time

Manufacturing Assembling Shipping

Assemble / Package - To - Order : In this environment, the standard components and

sub-assemblies are manufactured and stocked in the form of component / sub-assembly
inventories.

On the receipt of the customer orders, these standard components / sub-assemblies are
assembled according to the configurable options specified by the customer. There is no
design and product manufacturing activity involved and hence the delivery lead time
includes the time to assemble and ship.

Delivery Lead Time

Standard
Components / Sub-
Assembling Shipping
assemblies Inventory

Make - To - Stock : In this environment, the products are completely manufactured and
the finished goods are stocked as end item / finished goods inventory. On the receipt of

Delivery
 Inventory

customer orders, the goods are packed and shipped to the customers and hence the
delivery lead time in this environment comprises of only the shipping time.

To sum it up

SUPPLY CHAIN:

A supply chain is a sequence of suppliers, warehouses operations and retail outlets.

The sequence may be

SUPPLIER STORE MFG STORE DISTRIBUTION RETAILERS CUSTOMERS

SUPPLY CHAIN MANAGEMENT(SCM)

SCM is the combination of art and science that goes into improving the way the

organisation finds the Raw Material/components to make a product or service and

deliver it to customers.

SCM consists of a total system approach to managing the entire flow of information,

material and services from raw material suppliers through manufacturing and

warehouses to the end custorms.

BASIC COMPONENTS OF SCM:

PLAN: it should be efficient, costs less and delivers high qlty and value to

custormers

SOURCE: Choose supplier. Develop a set of pricing, delivery, payment process,

manage inventory.

MAKE: Manufacturing steps, produce, test, pack and deliver. Compare production

output vs. worker productivity

DELIVER: Implement loigistic management. Receive order, develop network of

warehouse, deliver goods and receive payment

RETURN: Receiving defective and excess products back from customers thru

distributors / retailers.

RELEVANCE OF SCM TO TQM:

SCM includes determining:

Transportation vendors, Credit and Cash tranfers, Distributors and banks, Accounts

payable and receivable

Warehousing and inventory levels, Order fulfillment, Forecasting, production

information.

BASIC PURPOSE OF SCM IS TO CONTROL INVENTORY:

Materials Management and Supply Chains: The primary purpose of the

existence of any Supply Chain is to satisfy customer needs in the process of

generating profits for it-self. SC activity begins with customer order and ends when a

satisfied customer paid for his purchase.

SUPPLY CHAIN – STAGES: CUTOMERS, RETAILERS, WAREHOUSE /

DISTRUBOTRS, MANUFACTUERS / RAW MATERIAL SUPPLIERS.

OBJECTIVE OF SUPPLY CHAIN:

To achieve maximum supply chain profitability

To reduce supply chain costs

Evaluate difference between what final product is worth to the customer.

SUPPLY CHAIN ACTIVITIES:

PURCHASING (Purchasing and relation to other depts.)purchase cycle, value

analysis, outsourcing, JIT purchasing, choosing suppliers – Lead-time, quality,

flexibility, location, price, service etc.

WAREHOUSING
EXPEDITING

LOGISTIC MANAGEMENT:

It refers to the movement of materials, within a production facility, the shipment of

incoming materials from suppliers and the shipment of outgoing products to

customers. Materials include all the physical items used in the production process

such as Raw Materials, parts, components, consumable supplies, fuel, equipments,

tools, office supplies and so on.

PROCESS TOOLS FOR SCM:

Make or buy decisions – Assess the firms competencies, product characteristics for

outsourcing, reasons for outsourcing, quantitative costs, qualitative costs, capability

of supplier, implement decision, monitor the decision, value analysis etc.

Supplier scheduling:

After the make/buy decision – develop a system for controlling outside production of

outsourced products.

Value analysis:

Reduction in average purchasing cost, improved rate of return, enhances

performance reduce costs and higher employee morale.

Supplier certification and evaluation:

Reliable inputs without inspection, evaluate the output quality levels.

Coordination of Supply chain can be increased through cross-

functional teams, partnership with customer and supplier, better

information system.

Supply chain performance can be measured through factors such as delivery time (on time delivery),

quality (customer satisfaction) replenishment time and cost.