SCM Module 3 notes

SCM Module 5
Current Trends: Supply Chain Integration
Supply Chain Integration:
A typical firm is functionally organized, and material and information have to go through
multiple departments across the internal supply chain. As each function is myopic in nature
and is focusing on a narrowly defined local performance, there are many inefficiencies and
buffers at departmental boundaries. This is illustrated using two examples.
1. An electric machinery firm, which has a manufacturing plant in Mumbai, serves the
southern market through a stock point in Chennai. The Mumbai plant ships goods to
the Chennai stock point once a month because monthly demand amounts to
approximately a full truckload. Obviously by shipping goods using full truckloads, the
plant is able to minimize transportation costs. As it receives goods only once a month,
the Chennai stock point has to keep high safety stocks to ensure a reasonable level of
service to its customers. Thus, both the Mumbai plant and the Chennai regional stock
point have made so-called locally optimal decisions A detailed analysis shows that it
will be optimal (total transportation and inventory cost will be lowest) for the firm to
ship goods to Chennai from Mumbai once a week. There is a trade-off between
transportation and inventory costs, individual departments chose to ignore this trade-
off to make locally optimal decisions, resulting in a substantial increase in the overall
cost in the system.
2. A split pump manufacturer used to offer about 30-odd varieties of pumps in the
marketplace. As per the product design, the pump housing consisted of a top housing
and a bottom housing and the exact size of the pump housing varied with each model.
The machining of housings was one of the most critical tasks, involving expensive
equipment and a significant amount of time. One of the critical operations in the
machining of housing involved joint machining of both the housing castings (top and
bottom of same model) in one setup. However, the firm found that though it had a huge
inventory of housing castings, it rarely had matching pairs of top and bottom housing
castings, resulting in serious difficulties in scheduling machining operations, upsetting
promised customer delivery schedules. The purchase department had placed orders for
top housings with one vendor and bottom housings with another. Since one vendor had
quoted lowest for top housing castings and another had quoted lowest for bottom

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housing castings, the purchase department had placed orders accordingly. While the
purchase department had substantially minimized the buying cost at the purchase stage,
this kind of ordering resulted in uncoordinated supply by each vendor leading to
constant problems for manufacturing. The manufacturing team faces serious problems
in scheduling its operations. Even with a huge inventory of individual top and bottom
housing castings, operations find it difficult to match pairs for manufacturing. Hence,
the company had a typical problem of high inventory and low customer service. A
simple solution therefore will be an order of top and bottom housing casting with the
same vendor with clear instructions to supply both castings of the same model in one
shipment. The purchase department had tried to similarly cut costs by splitting “C”
category hardware items’ orders to several suppliers and found eventually that many
times crucial shipments could not be made because of non-availability of some of these
items

Building partnership and trust in Supply chain Value of

Information:
Bullwhip Effect: Demand Volatility and Information Distortions
Across Supply Chains:

 Supply chain coordination improves if all stages of the chain take actions that
together increase total supply chain profits. Supply chain coordination requires
each stage of the supply chain to take into account the impact its actions have
on other stages.
 A lack of coordination occurs either because different stages of the supply chain
have objectives that conflict or because information moving between stages is
delayed and distorted. Different stages of a supply chain may have conflicting
objectives if each stage has a different owner. As a result, each stage tries to
maximize its own profits, resulting in actions that often diminish total supply
chain profits.
 Today, supply chains consist of stages with many different owners. For
example, Ford Motor Company has thousands of suppliers from Goodyear to
Motorola, and each of these suppliers has many suppliers in turn.
 Information is distorted as it moves across the supply chain because complete
information is not shared between stages.

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 This distortion is exaggerated by the fact that supply chains today produce a
large amount of product variety. For example, Ford produces many different
models with several options for each model. The increased variety makes it
difficult for Ford to coordinate information exchange with thousands of
suppliers and dealers.
 The fundamental challenge today is for supply chains to achieve coordination
in spite of multiple ownership and increased product variety.
 Many firms have observed the bullwhip effect, in which fluctuations in orders
increase as they move up the supply chain from retailers to wholesalers to
manufacturers to suppliers, as shown in Figure 1.
 The bullwhip effect distorts demand information within the supply chain, with
each stage having a different estimate of what demand looks like. The result in
a loss of supply chain coordination.
 Proctor & Gamble (P&G) has observed the bullwhip effect in the supply chain
for Pampers diapers. The company found that raw material orders from P&G to
its suppliers fluctuated significantly over time. Farther down the chain, when
sales at retail stores were studied, it was found that the fluctuations, while
present, were small. It is reasonable to assume that the consumers of diapers
(babies) at the last stage of the supply chain used them at a steady rate. Although
consumption of the end product was stable, orders for raw material were highly
variable, increasing costs and making it difficult for supply to match demand.

Figure 1: Demand fluctuations at different stages of a supply chain

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Effective Forecasting
The following basic, six-step approach helps an organization perform effective forecasting.
1. Understand the objective of forecasting.
2. Integrate demand planning and forecasting throughout the supply chain.
3. Understand and identify customer segments.
4. Identify the major factors that influence the demand forecast.
5. Determine the appropriate forecasting technique.
6. Establish performance and error measures for the forecast.
UNDERSTAND THE OBJECTIVE OF FORECASTING
Every forecast supports decisions that are based on the forecast, so an important first step is to
identify these decisions clearly. Examples of such decisions include how much of a particular
product to make, how much to inventory, and how much to order. All parties affected by a
supply chain decision should be aware of the link between the decision and the forecast. For
example, Wal-Mart's plans to discount detergent during the month of July must be shared with
the manufacturer, the transporter, and others involved in filling demand, as they all must make
decisions that are affected by the forecast of demand. All parties should come up with a
common forecast for the promotion and a shared plan of action based on the forecast. Failure
to make these decisions jointly may result in either too much or too little product in various
stages of the supply chain.
INTEGRATE DEMAND PLANNING AND FORECASTING THROUGHOUT THE
SUPPLY CHAIN
A company should link its forecast to all planning activities throughout the supply chain.
These include capacity planning, production planning, promotion planning, and purchasing,
among others. This link should exist at both the information system and the human resources
management level. As a variety of functions are affected by the outcomes of the planning
process, it is important that all of them are integrated into the forecasting process. In one
unfortunately common scenario, a retailer develops forecasts based on promotional activities,
whereas a manufacturer, unaware of these promotions, develops a different forecast for its
production planning based on historical orders. This leads to a mismatch between supply and
demand, resulting in poor customer service.
To accomplish this integration, it is a good idea for a firm to have a cross-functional team, with
members from each affected function responsible for forecasting demand and an even better

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idea is to have members of different companies in the supply chain working together to create
a forecast.

Coordination in supply chain

 Effectively managed supply chain relationships foster cooperation and trust, thus
increasing supply chain coordination. In contrast, poorly managed relationships lead to
each party being opportunistic, resulting in a loss of total supply chain profits. The
management of a relationship is often seen as a tedious and routine task. Top
management, in particular, is often very involved in the design of a new partnership but
rarely involved in its management. This has led to a mixed record in running successful
supply chain alliances and partnerships.
 Figure 2 shows the basic process by which any supply chain partnership or alliance
evolves. Once the partnership has been designed and established, both partners learn
about the environment in which the partnership will operate, the tasks and processes to
be performed by each partner, the skills required and available on each side, and the
emerging goals of each side. The performance of each side is evaluated based on the
improvement in profitability and on equity or fairness. At this stage, a better evaluation
of the value of the partnership becomes available, which provides both parties in the
supply chain partnership an opportunity to revise the conditions of the partnership to
improve profitability and fairness. It is important that the initial contracts be designed
with sufficient flexibility to facilitate such alterations.
 Formal contracts may be restructured to reflect the changes. As the business
environment and company goals change, the cycle repeats itself and the relationship
evolves. Any successful supply chain partnership will go through many such cycles. A
supply chain partnership falters if the perceived benefit from the relationship diminishes
or one party is seen as being opportunistic. Problems arise when communication
between the two parties is weak and the mutual benefit of the relationship is not
reiterated regularly. When managing a supply chain relationship, managers should
focus on the following factors to improve the chances of success of a supply chain
partnership:
1. The presence of flexibility, trust, and commitment in both parties helps a supply chain
relationship succeed. In particular, commitment of top management on both sides is
crucial for success.

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2. Good organizational arrangements, especially for information sharing and conflict

resolution, improve chances of success. Lack of information sharing and the inability
to resolve conflicts are the two major factors that lead to the breakdown of supply chain
partnerships.
3. Mechanisms that make the actions of each party and resulting outcomes visible help
avoid conflicts and resolve disputes. Such mechanisms make it harder for either party to be
opportunistic and help identify defective processes, increasing the value of the relationship
for both parties.
4. The more fairly the stronger partner treats the weaker, vulnerable partner, the stronger
the supply chain relationship tends to be.

Figure 2: Process of alliance and partnership Evolution

 The issue of fairness is extremely important in the supply chain context because
most relationships involve parties with unequal power. Unanticipated situations that
hurt one party more than the other often arise.
 The more powerful party often has greater control over how the resolution occurs.
The fairness of the resolution influences the strength of the relationship in the
future.
 The relationship between Marks & Spencer and a manufacturer of a kitchen product
provides an excellent example of a fair sharing of benefits. A few months after the
product's introduction, the manufacturer realized that costs had been miscalculated
and exceeded the price at which the product was being sold to Marks & Spencer.

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Meanwhile, given its low retail price, customers found the product an outstanding
value and made it a big hit.
 When the manufacturer brought the problem to the attention of Marks & Spencer,
its managers helped the manufacturer reengineer both the product and the process
to lower cost. Marks & Spencer also lowered its margin to provide a sufficient profit
for the manufacturer. The outcome was one in which the relationship was
strengthened between the two partners because Marks & Spencer's fairness allowed
a resolution that recognized the manufacturer's needs. In the long run, both partners
benefited and a higher level of trust developed.

Supply chain Restructuring:

Introduction:
 In the era of globalization, firms are under relentless pressure to continuously
improve their supply chain performance so as to minimize cost and maintain high
levels of customer service.
 In the last decade, several leading firms have reaped substantial benefits by working
on initiatives involving supply chain integration and supply chain optimization.
These initiatives have helped these firms in ensuring above-average business
performance in their respective industry sectors.
 But in the last few years, leading firms have realized that initiatives involving
supply chain integration and supply chain optimization are not enough for ensuring
above-average business performance. These initiatives are necessary for the very
survival of a firm. These do not ensure an above-average performance.
 Supply chain integration and related best practices have received adequate attention
in the industry. These practices have percolated down from the best firms to emerge
as necessary but insufficient conditions for firms to establish themselves as market
leaders.
 Industries have realized that if they want to retain their leadership, they will have to
go beyond these initiatives and look at ways in which they can restructure supply
chain architecture and processes. Supply chain restructuring focuses on these
innovative practices that separate leaders from the “also-ran” companies.
 Unlike supply chain integration and supply chain optimization, supply chain
restructuring goes beyond supply chain function and requires integrating product

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and process engineering with supply chain function. Similarly, it may also involve
closer integration between marketing and supply chain function.
Supply Chain Mapping:
 Before a firm sets out to restructure its supply chain, it has to find a method to
successfully capture and evaluate the existing supply chain processes. The method
used to capture current supply chain processes is termed supply chain mapping.
 As can be seen in Figure 3, existing supply chain processes can be characterized on
the basis of the following dimensions:
• Shape of the value-addition curve
• Point of differentiation
• Customer entry point in the supply chain

Figure 3: Supply chain mapping:

existing position.
Restructuring of the supply chain process involves altering the supply chain on at least one the
three dimensions. It may also involve altering more than one dimension of the supply chain
process. We initially take one dimension at a time and later on discuss a specific innovation,
which involves altering two dimensions in the process.
Value-addition Curve:
 The supply chain encompasses all the activities/processes associated with the
transformation of goods from the raw material stage to the final stage when the goods
and services reach the end customer.
 A typical supply chain starts with some input material and information, which are
transformed into the end product and delivered to the customer. This transformation
involves a number of activities, with each activity taking time, incurring cost and adding
value.

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 One can debate on whether all activities add value or if there some activities that are
non-value-added activities. At this stage, we assume that the firm has removed all non-
value added activities from the supply chain processes.
 On the x-axis we have the total time in a chain or the average flow time in the chain
and on the y-axis we have the total cost (cumulative) in the chain.
Customer Entry Point in the Supply Chain:
 The point at which a customer places an order is shown as a dotted line in Figure 3. In
several industries customers expect material off the shelf in the neighbourhood retail
store.
 In such a case, the customer entry point is at the end of chain and is the same as the
delivery time. But in several industries it is not uncommon for customers to give some
amount of delivery lead time and in such a case obviously the customer entry point will
be ahead of the delivery time. This is similar to build-to-order or configure-to-order
supply chain situations.
 Essentially, the customer entry point captures the order to delivery lead time. This
dimension is important because all the operations before the customer order has to be
done based on forecast, whereas after the customer order one will be working with
actual orders.
 In other words, before the customer entry point all the activities are carried out based
on forecast while subsequent activities are done based on order. As discussed in the
chapter on demand forecasting, however good the forecasting process, as per the first
law of forecasting, a forecast is always wrong.
 So if bulk of the activities can be carried out based on order rather than forecast one
does not have to worry about the likely forecast error that is inherent in any forecasting
exercise.
Point of Differentiation:
 The concept of the point of differentiation is valid for any organization that is offering
a variety of end products to customers. Products are made in a supply chain consisting
of multiple stages. As the product moves in the chain, progressively, the product
assumes an identity that is closer to the end product.
 The point of differentiation is a stage where the product gets identified as a specific
variant of the end product. We will illustrate the concept using a toothpaste
manufacturing firm. Let us assume that the firm offers variety only in pack sizes.

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 In such a firm, the packing stage is a point of differentiation. At a packing station the
same basic material, that is, toothpaste, is packed in sizes of varying dimensions. So till
the packing station one has been working with the generic material, but at the packing
station the firm has to make an irreversible decision in terms of committing the generic
material to a specific product variant. Similarly, at a garment manufacturing firm, at the
stitching stage the firm is committing the fabric to different sizes and styles of garment.
 In automobile manufacturing firms like Tata, where usually large variety is offered in
terms of colours, the painting stage becomes the point of differentiation because at that
stage the firm makes an irreversible decision about the colour of the car.

Supply Chain Process Restructuring:

Supply chain process restructuring involves playing around with at least one of the three
dimensions of the supply chain in the direction as shown below:
• Postpone the point of differentiation. By moving the point of differentiation as much
as possible, a bulk of the activities can be carried out using the aggregate-level forecast
rather than the variant-level forecast.
• Alter the shape of the value-addition curve. Shift the bulk of the cost addition as
late as possible. This will reduce the inventory in the chain and also help the firm in
having some flexibility. If the bulk of the cost addition takes place at a later point in
time in the chain, one will be in a position to respond to unforeseen changes with the
least cost.
• Advance the customer ordering point. Move from an MTS to a CTO supply chain.
By moving the customer ordering point as early as possible, one can carry out the bulk
of the activities against an order, which reduces the importance of forecasting. If one
were also able to postpone the point of differentiation, one will be able to move from
an MTS to a CTO supply chain.
In a CTO supply chain, since the point of differentiation takes place after customer
order, one does not have to prepare a variant-level forecast.
Before we get into a detailed discussion about supply chain restructuring, it will be
important to compare it against supply chain integration and supply chain optimization.
As can be seen in Figure 4, supply chain integration and supply chain optimization
focus on lowering the value-addition curve. This results in overall reduction in cost and
time and will result in an absolute shift in the point of differentiation but the relative
position of the point of differentiation does not change. Unlike these two approaches,

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supply chain restructuring affects the shape of the value-addition curve, shifts customer
ordering, or shifts the point of differentiation.
This will essentially require supply chain process restructuring and may also involve a
change in product design or a change in the product service bundle offered to customers.
Supply chain restructuring is likely to bring in substantial business benefits in general
and in special cases it fundamentally changes the way in which the supply chain is
managed by moving from the MTS to the CTO business model.

Figure 4: Impact of supply chain

Integration /optimization.

Postpone the Point of Differentiation:

Delaying an operational process that results in variety explosion or customization to a
later point in the supply chain postpones the point of product differentiation. Delaying
the differentiating operations, apart from reducing inventories, also reduces the time
period for which one has to carry out forecasting at the variant level and thereby reduces
inventory and improves customer service and reduces product obsolescence.
Postponement for Reducing Transportation Cost
Usually, postponing of the assembly process is carried out for shifting the point of
differentiation to a later stage. But there have also been cases where firms have used
the postponement strategy for delaying an operational process to a later point in the
supply chain in order to reduce transportation costs. Transportation cost is reduced in
the case of bulky finished products by shifting the assembly operations to the customer
end as transporting parts as kits is cheaper than transporting a finished product.
Postponement in Bicycle Industry
The bicycle industry in India belongs to a category of industries that traditionally
practices the postponement strategy. The reasons for this practice are as follows:

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• To reduce transport complexities and costs. The bicycle manufacturers limit their
activities to production of frames, handle bars and transmission parts. Other suppliers
produce the tyres, tubes, seats and many extra fittings. A large number of bicycle
dealer’s stock products of all bicycle manufacturers. The bicycle purchasing process is
as follows: when the customer arrives at the bicycle shop, she/he opts for a particular
frame size offered by a particular bicycle manufacturer. Similarly, she/he will opt for a
particular tyre size, offered by a particular tyre manufacturer and so on. Given this
situation, it is imperative that the assembly of the final product is carried out at the
dealer point. Additionally, the entire assembly takes just 15–30 minutes.
• Less exposure to damage than when transported as fully assembled bicycles.
• Less need for shop space when material is stocked as components instead of as fully
assembled bicycles.
• Low-technology nature of the assembly operation, which ensures there are no
inconsistencies in product quality.
Though the bicycle industry has worked on the idea of postponement of assembly so as
to primarily reduce transportation cost, they can also take advantage of this strategy and
offer higher variety. The bicycle industry can design a modular-level variety and allow
customers to choose a combination of modules and the retailer can assemble the
bicycle, which is essentially configured to customer requirements. This facilitates the
bicycle industry’s transition to a mass-customization environment.
Problems with Implementing the Postponement Strategy
The examples cited above help in understanding the industrial and technological
characteristics that make the postponement strategy viable. In general, postponement
strategy is likely to be advantageous in the following situations:
• High level of product customization
• Existence of modularity in product design
• High uncertainty in demand
• Long transport lead time
• Short lead time of postponed operation
• Low value addition in transportation
• High value addition in postponed operation
• Difference in tariff rates for components and finished goods in different markets.

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THE ROLE OF IT IN NETWORK DESIGN:

Even though it may seem at first glance that the strategic nature of the network design
problem makes information technology systems less valuable, good IT systems can
significantly improve the capability of a network designer. In this chapter, we discuss
a variety of methodologies in Excel that can be used to solve network design problems.
Even though the core models are the same, problems in practice tend to be much larger
than the problems considered in the chapter. For much larger problems, there are four
ways that an IT system can help with network design relative to the use of a general-
purpose tool such as Excel.
1. A good network design IT system makes the modeling of the network design
problems much easier than in a general-purpose tool such as Excel. These applications
have many built-in tools that facilitate an accurate description of a large supply chain
network and incorporate realistic features that would be time consuming and difficult
to build in Excel.
2. An IT system contains high-performance optimization technologies, which deliver a
high-quality solution for large problems in a reasonable amount of time. Although
Excel's solver can be upgraded, there are many cases in which the size and complexity
of the optimization require a more sophisticated system that a network design
application can provide.
3. A good network design application also allows for an analysis of various "what if"
scenarios. Given the uncertainty associated with forecasts, the ability to evaluate
network designs in a variety of scenarios is a very powerful tool for a designer. A
network designer may find it much more appropriate to select a design that gives very
good costs in many likely scenarios rather than a design that is optimal in one scenario
but very poor in another. The ease of modeling and speed of solution allows a good
network design application to facilitate what-if analysis to a far greater extent than a
general-purpose tool such as Excel.
4. Finally, network design applications are structured to interface easily with the
planning and operational software used by firms, which contain much of the actual data
required for network design. The ease of interfacing with the data source speeds up the
creation and solution of a network design model.
Network design applications are often quite inexpensive relative to the other uses of IT
we discuss. Network design applications, sometimes called supply chain strategy
modules, are often thrown in for free on top of the much more expensive planning and

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execution modules. In fact, many companies have rights to these products without even
realizing it, as a result of past software purchases.
There are some caveats, however, to the use of IT systems in network design.
Network design decisions are strategic and involve many factors that are hard to
quantify.
When using a network design tool, it is easy to fall into the trap of allowing the
application to make the decision based only on aspects that are quantifiable. Important
factors such as culture, quality-of-life issues, and cost of coordination that are hard for
IT to handle can be significant in making a network design decision. Thus, relevant non
quantifiable factors should be included with the output of IT systems when making
network design decisions.

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