Module 1

INTRODUCTION

1. What is Supply Chain Management?

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. The supply chain encompasses all
activities involved in the transformation of goods from the raw material stage to the final stage,
when the goods and services reach the end customer. Supply chain management involves
planning, design and control of flow of material, information and finance along the supply chain
to deliver superior value to the end customer in an effective and efficient manner.

Definition:

“ Supply Chain management can be defined as the management of flow of products and services,
which begins from the origin of products and ends with the product’s consumption at the end-
user”

Figure 1: General Supply Management System

1.2 Objective

i. Success should be measured by total supply chain profitability, not by profits at

an individual stage and customer is the only source of revenue.
ii. A source of cost includes flows of information, products, or fund between stages
of the supply chain.
iii. Supply chain profitability is total profit to be shared across all stages of the supply
chain.
iv. Effective supply chain management is the management of flows between and
among supply chain stages to maximize total supply chain surplus.

1.3 Supply Chain Management–Advantages

i. Develops better customer relationship and service.

ii. Creates better delivery mechanisms for products and services in demand with
minimum delay.
iii. Improvises productivity and business functions.
iv. Minimizes warehouse and transportation costs.
v. Minimizes direct and indirect costs.
vi. Assists in achieving shipping of right products to the right place at the right time.
vii. Enhances inventory management, supporting the successful execution of just-in-
time stock models.
viii. Assists companies in adapting to the challenges of globalization, economic
upheaval, expanding consumer expectations, and related differences.
ix. Assists companies in minimizing waste, driving out costs, and achieving
efficiencies throughout the supply chain process.

1.4 Supply Chain Management –Goals

i. Supply chain partners work collaboratively at different levels to maximize
resource productivity, construct standardized processes, remove duplicate efforts
and minimize inventory levels.
ii. Minimization of supply chain expenses is very essential, especially when there
are economic uncertainties in companies regarding their wish to conserve capital.
iii. Cost efficient and cheap products are necessary, but supply chain managers need
to concentrate on value creation for their customers.
iv. Exceeding the customers’ expectations on a regular basis is the best way to
satisfy them.
v. Increased expectations of clients for higher product variety, customized goods,
off-season availability of inventory and rapid fulfillment at a cost comparable to
in-store offerings should be matched.
 vi. To meet consumer expectations, merchants need to leverage inventory as a
shared resource and utilize the distributed order management technology to
complete orders from the optimal node in the supply chain.

1.5 Supply Chain Fundamentals

Figure 1.2: Fundamentals of Supply chain management

A supply chain consists of the flow of products and services from:

 Raw materials manufacturers

 Component and intermediate manufacturers
 Final product manufacturers
 Wholesalers and distributors and
 Retailers

Connected by transportation and storage activities, and Integrated through information, planning,
and integration activities.

Explanation with example

Supply chain management, as we understand it today, represents the confluence of at least three
main streams of knowledge and practical experience of the business world, spanning almost 60
years. The fusion of these streams into one powerful movement is supply chain management,
which is sweeping across the present-day industrial world has been brought about by intense
competition characteristic of contemporary markets. The supply chain is how a company turns
raw materials into finished goods and services for the customer. It starts with the harvesting of
the raw material. The commodity could be crops, animals, timber, gold, or other natural
resources. The commodity then goes to the manufacturer. That's when it becomes a finished
product. There can be several steps in this process and they can involve locations in several
different countries. The finished product goes to one of three places: a wholesaler, a retailer, or
directly to the consumer.

Figure 1.3: A Generic supply chain.

Case study Example

 1.6 Evolution
The evolution of supply chain management has been a gradual process. Over the last century,
there have been three major revolutions in the field of supply chain management and examine
each of them in the context of the broader evolution in the economic and technological
environment.

Consider the following statement made by the chief executive of an automobile firm:

“Our aim is always to arrange the material and machinery and to simplify the operations
so that practically no orders are necessary. Our finished inventory is in transit. So is most
of our raw material inventory. Our production cycle is about eighty-one hours from the
mine to the finished machine (automobile) in the freight car.”

It is clear from this statement that this firm had a well-integrated supply chain in place that
allowed it to minimize cost and maximize asset productivity.

Indeed, this statement came not in the 1960s or 1970s. Rather, Henry Ford achieved this fine
balance in the 1910s with the Ford Motor Company. Clearly, this achievement set the standard
for all managers the world over.

i. The First Revolution (1910–1920): Vertical Integrated Firms Offering Low

Variety of Products.

- The - First major revolution was staged by the Ford Motor Company where they had managed
to build a tightly integrated chain. The Ford Motor Company owned every part of the chain -
right from the timber to the rails. Through its tightly integrated chain, it could manage the
journey from the iron ore mine to the finished automobile in 81 hours.

- However, as the famous saying goes, the Ford supply chain would offer any colour, as
long as it was black; and any model, as long as it was Model T.

- Ford innovated and managed to build a highly efficient, but inflexible supply chain that
could not handle a wide product variety and was not sustainable in the long run.

- General Motors, on the other hand, understood the demands of the market place and
offered a wider variety in terms of automobile models and colours.

- Ford’s supply chain required a long time for set-up changes and, consequently, it had to
work with a very high inventory in the chain.

- Till the second supply chain revolution, all the automobile firms in Detroit were
integrated firms. Even traditional firms in India, like Hindustan Motors, were highly
integrated firms where the bulk of the manufacturing was done in house.
 ii. The Second Revolution (1960–1970): Tightly Integrated Supply Chains Offering
Wide Variety of Products.

• Towards the end of the first revolution, the manufacturing industry saw many changes,
including a trend towards a wide product variety.

• To deal with these changes, firms had to restructure their supply chains to be flexible and
efficient.

• The supply chains were required to deal with a wider product variety without holding too
much inventory.

• The Toyota Motor Company successfully addressed all these concerns in the second
revolution.

• The Toyota Motor Company came up with ideas that allowed the final assembly and
manufacturing of key components to be done in-house.

• The bulk of the components were sourced from a large number of suppliers who were
part of the keiretsu system.

• Keiretsu refers to a set of companies with interlocking business relationships and

shareholdings.

• The Toyota Motor Company had long-term relationships with all the suppliers.

• These suppliers were located very close to the Toyota assembly plants.

• Consequently, set-up times, which traditionally used to take a couple of hours, were
reduced to a couple of minutes.

• This combination of low set-up times and long-term relationships with suppliers was the
key feature that propelled the second revolution - and it was a long journey from the
rigidly integrated Ford supply chain.

• The principles followed by Toyota are more popularly known as lean production systems.

iii. The Third Revolution (1995–2020): Virtually Integrated Global Supply Networks
Offering Customized Products and Services.

• Technology, especially information technology, which is evolving faster than enterprises

can find applications for some of the innovations, is the fuel for the third revolution in
supply chain.
• It will probably take at least couple of years before we can fully understand the IT-
enabled model that has emerged and begin to apply it to all industries.

• However, we have enough information to get a reasonably good understanding of the

contours of the third revolution.

• We can understand the key characteristics of the third revolution using the example of
Dell computers (Customized product), Apple Inc.(Revolutionized used experience) and
Bharti Airtel(strategic outsourcing and partnerships with global partners for these core
activities).

• The first is a product company, the second combines product and service, and third is a
pure service organization. In each of these organisations, we can see different aspects of
the third revolution.

1.7 Role in Economy

• The growth of global supply chains has changed the distribution of incomes across
countries.

• Participation in supply chains, initiated by the successful completion of low value-added

manufacturing tasks, contributed to industrialization and high rates of economic growth
in several Asian developing economies.

• Manufacturing managers decide where to locate the company based on the costs of
production.

• That's led to a lot of jobs outsourcing in technology to India and China.

• Many call - centers have outsourced to India and the Philippines.

 • Natural disasters are becoming an increasing threat that can disrupt any part of the
supply chain.

• The United Nations Refugee Agency reported their frequency has doubled in the last 20
years due to global warming.

• The impact on local productivity can last decades after an event. If a disaster is bad
enough, it can slow global growth.

• In 2011, Japan's earthquake and the resultant to sunami created the most damage to the
world's supply of automobiles, electronics, and semiconductor equipment.

– Eg. The wings, landing gears, and other major airline parts are also made in
Japan, so the quake disrupted the production of Boeing's 787 Dreamliner. U.S.
gross domestic product slowed in 2011 as 22 Japanese auto part plants suspended
production.

Efficient management of the supply chain can reduce costs, maximize customer value, and
maximize competitive advantage. It entails effective coordination and control of linked sectors,
departments, systems, and organizations.

1.8 IMPORTANCE
• There is a close connection between the design and management of supply chain flows
(product, information, and funds) and the success of a supply chain.
Eg. Walmart, Amazon, and Seven - Eleven Japan are examples of
companies that have built their success on superior design, planning, and operation of
their supply chain.
In contrast, the failure of many online businesses, such as Webvan, can be attributed to
weaknesses in their supply chain design and planning.
• In the past, customers were not very demanding and competition was not really intense.
As a result, firms could afford to ignore issues pertaining to the supply chain.
• Today, firms that do not manage their supply chain will incur huge inventory costs and
eventually end up losing a lot of customers because the right products are not available at
the right place and time.
• The following are the five major trends that have emerged to make supply chain
management a critical success factor in most industries.
a) Proliferation in product lines:
- Companies have realized that more and more product variety is needed to satisfy the
growing range of customer tastes and requirements.
 - This is evident from the fact that every time a customer walks into a neighborhood store,
he or she is bound to discover a couple of items on the shelf that he or she had not seen
during last visit and that he or she has more varieties to choose from now.

b) Shorter product life cycles:

With increased competition, product life cycles across all industries are becoming shorter. For
example, technology leaders like Apple works with a life cycle as short as 6 months.

c) Higher level of outsourcing:

Firms increasingly focus on their core activities and outsource non-core activities to other
competent players. Michael Dell, the CEO of Dell Computers, had mentioned that if his
company was vertically integrated, it would need five times as many employees and would
suffer from a drag effect.

d) Shift in power structure in the chain:

In every industry, the entities closer to customers are becoming more powerful. With increasing
competition, a steadily rising number of products are chasing the same retail shelf space. Retail
shelf space has not increased at the pace at which product variety has increased. So there have
been cases of retailers asking for slotting allowance when manufacturers introduce new products
in the market place.

e) Globalization of manufacturing:
Over the past decade, tariff levels have come down significantly. Many companies are
restructuring their production facilities to be at par with global standards. Unlike in the past,
when firms use to source components, produce goods and sell them locally, now firms are
integrating their supply chain for the entire world market.

Example 1
• Walmart has been a leader at using supply chain design, planning, and operation to
achieve success.
• From its beginning, the company invested heavily in transportation and information
infrastructure to facilitate the effective flow of goods and information.
• Walmart designed its supply chain with clusters of stores around distribution centers to
facilitate frequent replenishment at its retail stores in a cost-effective manner.
• Frequent replenishment allows stores to match supply and demand more effectively than
the competition.
 • Walmart has been a leader in sharing information and collaborating with suppliers to
bring down costs and improve product availability.
• The results are impressive. In its 2013 annual report, the company reported a net income
of about $17 billion on revenues of about $469 billion.
• These are dramatic results for a company that reached annual sales of only $1 billion in
1980.
• The growth in sales represents an annual compounded growth rate of more than 20
percent.

Example 2
• Seven-Eleven Japan is another example of a company that has used excellent supply
chain design, planning, and operation to drive growth and profitability.
• It has used a very responsive replenishment system along with an outstanding
information system to ensure that products are available when and where customers need
them.
• Its responsiveness allows it to change the marketing at each store by time of day to
precisely match customer demand.
• As a result, the company has grown from sales of 1 billion yen in 1974 to almost 1.9
trillion yen in 2013, with profits in 2013 totaling 222 billion yen.

1.9 Decision phases of supply chain

Decision phases can be defined as the different stages involved in supply chain
management for taking an action or decision related to some product or services.

Successful supply chain management requires decisions on the

i. Flow of information,
ii. product, and
iii. Funds
• The decision fall into three phases.
• The three main decision phases involved in the entire process of supply
chain.
 Figure 1.4: Decision Phase

i. Supply chain strategy or design:

How to structure the supply chain over the next several years?
Decision is taken by the management mostly by the higher authority or the senior
management. The decision to be made considers the sections like long term prediction
and involves price of goods that are very expensive if it goes wrong.
It is very important to study the market conditions and decisions consider the future
conditions of the market. These decisions include deciding manufacturing the material,
factory location, which should be easy for transporters to load material and to dispatch at
their mentioned location, location of warehouses for storage of completed product or
goods and many more.

ii. Supply chain planning:

Decisions over the next quarter or year
Supply chain planning should be done according to the demand and supply view.
In order to understand customers’ demands, a market research should be done.
The second thing to consider is awareness and updated information about the
competitors and strategies used by them to satisfy their customer demands and
requirements.
This phase includes it all, starting from predicting the market demand to which market
will be provided the finished goods to which plant is planned in this stage.
All the participants or employees involved with the company should make efforts to
make the entire process as flexible as they can. A supply chain design phase is
considered successful if it performs well in short-term planning.
 For example, steel giant Arcelor-Mittal’s decisions regarding markets supplied by a
production facility and target production quantities at each location are classified as
planning decisions. In the planning phase, companies must include uncertainty in
demand, exchange rates, and competition over this time horizon in their decisions.
As a result of the planning phase, companies define a set of operating policies
that govern short-term operations.

iii. Supply chain operation:

Daily or weekly operational decisions
• Last decision phase consists of the various functional decisions that are to be made
instantly within minutes, hours or days.
• The objective behind this decisional phase is minimizing uncertainty and performance
optimization. Starting from handling the customer order to supplying the customer with
that product, everything is included in this phase.
• For example, imagine a customer demanding an item manufactured by
company. Initially, the marketing department is responsible for taking the
order and forwarding it to production department and inventory
department. The production department then responds to the customer
demand by sending the demanded item to the warehouse through a proper
medium and the distributor sends it to the customer within a time frame.
All the departments engaged in this process need to work with an aim of
improving the performance and minimizing uncertainty.

1.10 Supplier - Manufacturer - Customer chain.

• In its simplest form, a supply chain is composed of a company and the suppliers and
customers of that company.

• This is the basic group of participants that creates a simple supply chain. Extended
supply chains contain three additional types of participants.

– First there is the supplier’s supplier or the ultimate supplier at the beginning of an
extended supply chain. Then there is the customer’s customer or ultimate
customer at the end of an extended supply chain.

– Finally, there is a whole category of companies who are service providers to other
companies in the supply chain. These are companies who supply services in
logistics, finance, marketing, and information technology.
The four main participants in every supply chain.

1. Producers:

2. Distributors:

3. Retailers:

4. Customers:
Producers:

Producers or manufacturers are organizations that make a product. This includes companies that
are producers of raw materials and companies that are producers of finished goods. Producers of
raw materials are organizations that mine for minerals, drill for oil and gas, and cut timber. It
also includes organizations that farm the land, raise animals, or catch seafood. Producers of
finished goods use the raw materials and sub-assemblies made by other producers to create their
products.

 Distributors:

Distributors are companies that take inventory in bulk from producers and deliver a bundle of
related product lines to customers. Distributors are also known as wholesalers. They typically
sell to other businesses and they sell products in larger quantities that an individual consumer
would usually buy. Distributors buffer the producers from fluctuations in product demand by
stocking inventory and doing much of the sales work to find and service customers. For the
customer, distributors fulfill the “Time and Place” function – they deliver products when and
where the customer wants them.

 Retailers:

Retailers stock inventory and sell in smaller quantities to the general public. This organization
also closely tracks the preferences and demands of the customers that it sells to. It advertises to
its customers and often uses some combination of price, product selection, service, and
convenience as the primary draw to attract customers for the products it sells. Discount
department stores attract customers using price and wide product selection. Upscale specialty
stores offer a unique line of products and high levels of service. Fast food restaurants use
convenience and low prices as their draw.

 Customers:

Customers or consumers are any organization that purchase and use a product. A customer
organization may be an organization that purchases a product in order to incorporate it into
another product that they in turn sell to other customers. Or a customer may be the final end user
of a product who buys the product in order to consume it.
1.11 Enablers/ Drivers of Supply Chain Performance.

• The drivers of Supply chain performance are as follows:

i. Facilities

ii. Inventory

iii. Transportation

iv. Information

v. Sourcing

vi. Pricing

i. Facilities
Facilities 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 2009, Amazon increased the number of warehousing facilities located close to
customers to improve its responsiveness.

ii. Inventory
• Inventory encompasses all raw materials, work in process, and finished goods with in 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.
 A strategy using high inventory levels can be dangerous in the fashion apparel business where
inventory loses value relatively quickly with changing seasons and trends.

iii. Transportation
• 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.

– McMaster-Carr andW.W. Grainger, however, have structured their supply chain

to provide next-day service to most of their customers using ground
transportation. They are providing a high level of responsivenes lower cost.

– Outbound transportation costs of shipping to the customer are typically included

in selling, general, and administrative expense, while inbound transportation costs
are typically included in the cost of goods sold.

iv. Information
• 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.

– For example, Seven-Eleven Japan has used information to better match supply
and demand while achieving production and distribution economies. The result is
a high level of responsiveness to customer demand while production and
replenishment costs are lowered.
 – Information technology–related expenses are typically included under either
operating.

V. Sourcing
• 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, it saw its efficiency improve but its responsiveness suffer because of the
long distances.

– 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.

– Flextronics, an electronics contract manufacturer, is hoping to offer both

responsive and efficient sourcing options to its customers. It is trying to make its
production facilities in high-cost locations very responsive while keeping its
facilities in low-cost countries efficient.

Flextronics hopes to become an effective source for all customers using this combination of
facilities. Sourcing costs show up in the cost of goods sold, and to suppliers are recorded under
accounts payable.

VI. Pricing
• 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 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.

– Differential pricing provides responsiveness to customers that value it and low

cost to customers that do not value responsiveness as much. Any change in
 pricing impacts revenues directly but could also affect costs based on the impact
of this change on the other drivers

1.12 Supply chain strategy

Supply chain strategy will have a major impact on creating value for a company and its supply
chain partners. An effective supply chain strategy may be formulated to meet the needs of the
market and integrate them with technology to generate the highest level of customer satisfaction
while delivering the highest value to the share-holders.

Supply chain strategy is based on:

a) Collaboration strategy

b) Demand flow strategy

c) Customer service strategy

d) Technology integration strategy

a) Collaboration Strategy:

Opportunities for collaboration among business partners will vary depending

upon the organization’s perspective role in the supply chain. The three main types of
collaboration are as follows:
 i. Manufacturer - Supplier Collaboration: By collaborating with suppliers, manufacturers
will derive benefits in activities such as product development, order fulfillment and
capacity planning.

ii. Manufacturer - Customer Collaboration: The opportunities of collaboration between

manufacturers and customers are focused on demand planning and inventory
replenishment. This approach ensures that the customer requirements are met efficiently.

iii. Collaboration with Third Party and Fourth Party Logistics Providers: The collaboration
of companies with 3rd party logistics providers focuses on jointly planning logistics
activities. It also gives the company the added advantage of better packaging. The 4th
party logistics organisation is one of the intermediate stages along the logistics spectrum
that combine the benefits of outsourcing and insourcing.

b) Demand Flow Strategy:

-Traditionally, in supply chain management, the key focus and scope has been in managing flow
of goods from suppliers through the manufacturing and distribution chain to the customer.

- The key in demand management is the continuous flow of demand information from
customer and end users through distribution and manufacturing to suppliers.

- Customers can never be totally predictable but then a good demand flow strategy enables
the company to simplify their supply chain operations.

c) Customer Service Strategy:

- Customer satisfaction level is directly proportional to the service provided by the company.

Formulating a customer service strategy involves addressing 3 steps, namely:

i. Customer Segmentation: A company has to decide on the segment it wants to target for a
particular commodity.

ii. Cost to Serve: It is important to obtain an impartial assessment of whether the things that the
customers want are feasible for the company. It is also important to determine the kind of
support needed from the suppliers or other parties in the supply chain. Finally, it is required to
project the cost of the support system and its feasibility of execution.

iii. Revenue Management: Determination of the appropriate response to the identified needs and
expectations of each customer segment must be completed. In short, the response which
maximizes the firm's profitability and growth should be determined.
d) Technology Integration Strategy:

- Developments in IT enabled the integration of business information systems, both

horizontally and vertically.

- A number of IT-based supply chain information management tools are now available to
provide intelligent decision support and execution management.

- The main SCM approach today deals with the integration of all the elements of a
customer service focused organisation, as shown in Figure.