UNIT I

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Chapter 1 INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

A supply chain may be considered as network of organizations, connected by a series of trading

relationships. This network covers the logistics and manufacturing activities from raw materials
to the final consumer. Each organization in the chain procures and transforms materials and
information into intermediate / final products, and distributes them to customers and consumers.
As such every organization has a supply chain and represents one step in the total ‘value adding’
process. There are three aspects to the supply chain. Upstream–those activities linking
organizations to their suppliers. Internal – or primary activities and Down stream those activities
linking organizations to their customer. SCM is the management of the flow of goods. It
includes the movement and storage of raw materials, work-in-process inventory, and finished
goods from point of origin to point of consumption. Interconnected or interlinked networks,
channels and node businesses are involved in the provision of products and services required by
end customers in a supply chain.[2] Supply chain management has been defined as the "design,
planning, execution, control, and monitoring of supply chain activities with the objective of
creating net value, building a competitive infrastructure, leveraging worldwide logistics,
synchronizing supply with demand and measuring performance globally. A supply chain, as
opposed to supply chain management, is a set of organizations directly linked by one or more
upstream and downstream flows of products, services, finances, or information from a source to
a customer. Supply chain management is the management of such a chain. Supply chain
management software includes tools or modules used to execute supply chain transactions,
manage supplier relationships, and control associated business processes.Supply chain event
management (SCEM) considers all possible events and factors that can disrupt a supply chain.
With SCEM, possible scenarios can be created and solutions devised.In many cases the supply
chain includes the collection of goods after consumer use for recycling. Including third-party
logistics or other gathering agencies as part of the RM re-patriation process is a way of
illustrating the new endgame strategy. Supply chain management is a business process which
although still evolving has been in existence for many years. It affects every business

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irrespective of size, age, sector or location. CIPS acknowledges that supply chain management
has undergone many changes in recent years; in particular in the 1980s there was a
recognition that holding inventory was an inefficient use of resources and that supply chain
management was one area where buyers, suppliers and internal. customers could work closely
together to ensure goods and services were delivered as required, of the appropriate quality and
at the agreed cost. The best companies around the world are discovering a powerful new source
of competitive advantage. It's called supply-chain management and it encompasses all of those
integrated activities that bring product to market and create satisfied customers. The Supply
Chain Management Program integrates topics from manufacturing operations, purchasing,
transportation, and physical distribution into a unified program. Successful supplychain
management, then, coordinates and integrates all of these activities into a seamless process. It
embraces and links all of the partners in the chain. In addition to the departments within
the organization, these partners include vendors, carriers, third party companies, and information
systems providers.

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FUNDAMENTALS OF SUPPLY CHAIN

The term supply chain refers to the “processes from the initial raw materials to the end user of
the finished product linking across supplier-user”, or as the “functions within and outside an
industry that enable the value chain to make products and render services to the customer”. Let
us try to understand the meaning of the word ‘value chain’ and distinguish it with ‘supply chain’.
The supply chain is linking the companies from raw material stage to the ultimate consumption.
In the process more than one entity is involved. Where as the value chain’ refers to the internal
operations of a particular company. Operations include purchasing, marketing and operations
management. So, value chain is an internal concept and the supply chain consists of both internal
and external.
A supply chain may be considered as network of organizations, connected by a series of trading
relationships. This network covers the logistics and manufacturing activities from raw materials
to the final consumer. Each organization in the chain procures and transforms materials and
information into intermediate / final products, and distributes them to customers and consumers.
As such every organization has a supply chain and represents one step in the total ‘value adding’
process. There are three aspects to the supply chain. Upstream– those activities linking
organizations to their suppliers. Internal – or primary activities and Down stream those activities
linking organizations to their customer. Supply chain management (SCM) is the management of
the flow of goods. It includes the movement and storage of raw materials, work-in-process
inventory, and finished goods from point of origin to point of consumption. SCM is the active
management of supply chain activities to maximize customer value and achieve a sustainable
competitive advantage. It represents a conscious effort by the supply chain firms to develop and
run supply chains in the most effective & efficient ways possible.

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Meaning of SCM

Supply chain management(SCM) is the control of the supply chain as a process from supplier to
manufacturer to wholesaler to retailer to consumer. Supply chain management does not involve
only the movement of a physical product (such as a microchip) through the chain but also any
data that goes along with the product (such as order status information, payment schedules, and
ownership titles) and the actual entities that handle the product from stage to stage of the supply
chain.
There are essentially three goals of SCM: to reduce inventory, to increase the speed of
transactions with real-timedata exchange, and to increase revenue by satisfying customer
demands more efficiently.
Supply chain management (SCM) is the oversight of materials, information, and finances as they
move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply
chain management involves coordinating and integrating these flows both within and among
companies. It is said that the ultimate goal of any effective supply chain management system is
to reduce inventory (with the assumption that products are available when needed). As a solution
for successful supply chain management, sophisticated software systems with Web interfaces are
competing with Web-based application service providers (ASP) who promise to provide part or
all of the SCM service for companies who rent their service.

SCM is the management of the flow of goods. It includes the movement and storage of raw
materials, work-in-process inventory, and finished goods from point of origin to point of
consumption. Interconnected or interlinked networks, channels and nodebusinesses are involved
in the provision of products and services required by end customers in asupply chain. Supply
chain management has been defined as the "design, planning, execution, control, and monitoring
of supply chain activities with the objective of creating net value, building a competitive
infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring
performance globally.

SCM draws heavily from the areas of operations management, logistics, procurement, and
information technology, and strives for an integrated approach
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Definitions of a supply chain

• “A supply chain is the alignment of firms that bring products or services to market.”
(Lam bart, et al, 1998).
• “A supply chain consists of all stages involved, directly or indirectly, in fulfilling a
customer request. The supply chain not only includes the manufacturer and suppliers,
but also transporters, were houses, retailers, and customer themselves…” (Chopra
sunil, et.al, 2003).
• “A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products
to customers”. (Ganeshan, et.al,1995).
• A definition is given by Hines (2004:p76): "Supply chain strategies require a total
systems view of the links in the chain that work together efficiently to create customer
satisfaction at the end point of delivery to the consumer. As a consequence, costs must
be lowered throughout the chain by driving out unnecessary expenses, movements, and
handling. The main focus is turned to efficiency and added value, or the end-user's
perception of value. Efficiency must be increased, and bottlenecks removed. The
measurement of performance focuses on total system efficiency and the equitable
monetary reward distribution to those within the supply chain. The supply chain system
must be responsive to customer requirements.

Hope you have understood the concept of supply chain. Now, let us consider an
example for supply chain to make you understand the concept further. Consider a customer
walking into a departmental store to purchase a toilet soap. The supply chain begins with the
customer and his need for a toilet soap. The next stage of this supply chain is the departmental
store that the customer visits. The departmental store stocks its shelves using inventory that may
have been supplied from a distributor using trucks supplied by a third party. The distributor in
turn is stocked by the manufacturer. The manufacturer plant receives raw material from a variety

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of suppliers who may themselves have been supplied by lower tier suppliers. This supply is
illustrated in fig 1.1.

Figure 1.1 An example of supply chain

This example illustrate that the customer is an integral part of the supply chain. We
can conclude that the primary purpose for the existence of any supply chain is to ensure the
satisfaction of the customer need. So, supply chain activities begin with a customer order
and end with a satisfied customer. It may appear that in the process, there is only one
player is involved at each stage. But it is not so. In fact, most supply chains are actually
networks, as shown in fig 1.2.

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This example illustrate that the customer is an integral part of the supply chain. We
can conclude that the primary purpose for the existence of any supply chain is to ensure the
satisfaction of the customer need. So, supply chain activities begin with a customer order
and end with a satisfied customer. It may appear that in the process, there is only one
player is involved at each stage. But it is not so. In fact, most supply chains are actually
networks, as shown in fig 1.2.

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From fig 1.2 you can notice the different stages in supply chain. It consists of Customers,
Retailers, Distributors, Manufacturers and raw material suppliers. Each stage in fig 1.2
need not be present in a supply chain. The actual design of the supply chain will depend on
both the customers’ requirements and the roles of the stages involved. In some cases, a
manufacturer may fill customer order directly. Similarly some firms may not use the
distributors or retailers.

Components of SCM

Supply chain activities cover everything from product development, sourcing, production, and
logistics, as well as the information systems needed to coordinate these activities.Supply chain
management (SCM) is the combination of art and science that goes into improving the way your
company finds the raw components it needs to make a product or service and deliver it to
customers. The following are five basic components of SCM:-

1. Plan—This is the strategic portion of SCM. Companies need a strategy for managing all the
resources that go toward meeting customer demand for their product or service. A big piece of
SCM planning is developing a set of metrics to monitor the supply chain so that it is efficient,
costs less and delivers high quality and value to customers.

2. Source—Next, companies must choose suppliers to deliver the goods and services they need
to create their product. Therefore, supply chain managers must develop a set of pricing, delivery
and payment processes with suppliers and create metrics for monitoring and improving the
relationships. And then, SCM managers can put together processes for managing their goods and
services inventory, including receiving and verifying shipments, transferring them to the
manufacturing facilities and authorizing supplier payments.

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3. Make—This is the manufacturing step. Supply chain managers schedule the activities
necessary for production, testing, packaging and preparation for delivery. This is the most
metric-intensive portion of the supply chain—one where companies are able to measure quality
levels, production output and worker productivity.

4. Deliver—This is the part that many SCM insiders refer to as logistics, where companies
coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers
to get products to customers and set up an invoicing system to receive payments.

5. Return—This can be a problematic part of the supply chain for many companies. Supply
chain planners have to create a responsive and flexible network for receiving defective and
excess products back from their customers and supporting customers who have problems with
delivered products..

Objectives of Supply Chain

The traditional objective of supply chain management is to minimize total supply

chain cost to meet fixed and given demand. This total cost may be comprised of a number
of terms including
raw material and other acquisition costs
in-bound transportation costs
facility investment costs
direct and indirect manufacturing costs
direct and indirect distribution center costs
inventory holding costs
inter-facility transportation costs
out-bound transportation costs

In building a model for specific planning problems, we might decide to examine only a
portion of the company’s entire supply chain and associated costs.
One can argue that total cost minimization is an inappropriate and timid objective
for the firm to pursue when it analyzes its strategic and tactical supply chain plans.
Instead, the firm should seek to maximize net revenues where

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net revenues = gross revenues – total cost
If demand is fixed and given, the implication is that gross revenues from meeting it are
also fixed and given, and therefore, that the firm will maximize net revenues by
minimizing total cost.Our objection to focusing only on cost control when using an optimization
modelfor strategic or tactical planning is that the model provides insights into product costs that
should be exploited to increase net revenues by suitable adjustments in sales. For
example, when planning for next year, information provided by a model about the
marginal costs of products delivered to various markets could be used to change the
projected sales plan. The company’s salesforce would be instructed to push products in
markets with the highest margins, possibly at the expense of products in markets with
low margins if total manufacturing capacity is limited.

IMPORTANCE OF SUPPLY CHAIN

Supply chain is about creating value-value for customers and suppliers of the firm,
and value for the firm’s stakeholders. Value in supply chain is primarily in terms of time and
place. Productions and services have no value unless they are supplied to customers when
(time) and where (place) they wish to consume them. Good supply chain management
views each activity in the supply chain as contributing to the process of adding value. To
many firms throughout world, supply chain has become an increasingly important valueadding
process for a number of reasons. They are discussed below.

1. Costs are Significant: Statistics show that average about 12% of worlds GDP
accounts supply chain costs. About 7-9% sales accounts physical distribution costs.
Supply chain cost, substantial for most firms, rank second only to the cost of goods
sold. Value is added by minimizing these costs and by passing the benefits on to
customers and to the firm’s shareholders.

2. Increased expectations of the customers: Awareness of customers has gone up.

Customers expect rapid processing of their requests, quick delivery and also expect a

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high degree of product availability. Supply chain assures less error rates, lower order
processing costs, reduced inventory, minimum cycle time and lowest transportation
costs. To meet the increased exceptions of the present day customer, it is essential that
every firm should implement supply chain management.

3. Supply and distributions lines are lengthening with greater complexity. Today’s
trend is towards an integrated world economy. Firms are seeking, or have developed,
global strategies by designing their products for a world market and producing them
wherever the low-cost raw materials, components, and labour can be found, or they
simply produce locally and sell internationally. In either case, supply and distribution
lines are stretched, as compared with the producer who wishes to manufacture and
sell only locally. As this happens, supply chain takes on increased importance with in
the firm and can considerably reduce the other costs.

4. Supply chain is important to strategy: Firms spend a great deal of time finding
ways to differentiate their product offerings from those of their competitors. When
management recognizes that supply chain affects a significant portion of a firm’s costs
and that the result of decisions made about the supply chain processes yields different
levels of customer service, it is in a position to use this effectively to penetrate new
markets, to increase market share, and to increase profits. That is, good supply chain
management can generate sales, not just reduce costs.

5. Supply Chain adds Significant Customer Value: Customers become unsatisfied,

if the product/service is not delivered to him/her at the time and place he/she wish to
consume it. When a firm incurs the cost of moving the product toward the customer or
making inventory available in a timely manner, customer value has been created. It is
value as surely as that created through the production of a quality product or through
a low price. Supply chain controls two (time and place) out of four values creating
variables.

6. Customers increasingly want QUICK customized Response: Today’s customers

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expect that products and services be delivered at very short time. In addition, improved
internet service, quick information systems, and flexible manufacturing systems have
led the market place toward customization. Rather than consumers having to accept
the ‘One size fits all” philosophy in their purchase, suppliers are increasingly offering
products that meet individual customer needs.

7. Supply Chain in Service Industry: Service sector of industrialized countries is large

and growing. The size of this sector alone forces us to use the supply chain concepts to
untap the potentials so far not tapped.

Functions

Supply chain management is a cross-functional approach that includes managing the movement
of raw materials into an organization, certain aspects of the internal processing of materials into
finished goods, and the movement of finished goods out of the organization and toward the end
consumer. As organizations strive to focus on core competencies and becoming more flexible,
they reduce their ownership of raw materials sources and distribution channels. These functions
are increasingly being outsourced to other firms that can perform the activities better or more
cost effectively. The effect is to increase the number of organizations involved in satisfying
customer demand, while reducing managerial control of daily logistics operations. Less control
and more supply chain partners led to the creation of the concept of supply chain management.
The purpose of supply chain management is to improve trust and collaboration among supply
chain partners, thus improving inventory visibility and the velocity of inventory movement.

Main function of Supply Chain Management are as follows:

–Inventory Management
–Distribution Management
–Channel Management
–Payment Management
–Financial Management
–Supplier Management

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–Transportation Management
–Customer Service Management

Decision Phases in a Supply Chain

A Supply chain needs three phases to build. These phases are strategy or design phase,
planning phase, and operation phase.

1) Supply chain strategy or design.

In this phase, we must consider how to structure the supply chain. Location, capacities of
production and warehousing facilities will be considered in this phase too.

2) Supply chain planning

In this phase, companies define a set of operating policies that govern short-term
operations. They collect data and produce market and inventory level forecast. And they
decide whether they need subcontract some of manufacturing or not in this phase.

3) Supply chain operation

In this phase companies make decisions regarding individual customer orders. Then,
allocate individual orders to inventory or production. And they also manage shipments, delivery
and schedules of trucks.

Strategies for Improving Supply Chain Performance

⚫ Determine the cost drivers and supply chain performance

⚫ Focus on the needs of the end users

⚫ Understand trade partners’ priorities

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 ⚫ Develop a clear and focused strategy

⚫ Assemble a high-performance project team

⚫ Commit to long-term improvement

CHAPTER 2- issUTION

Six major movements can be observed in the evolution of supply chain management studies:
creation, integration, and globalization

1)Creation era

The term "supply chain management" was first coined by Keith Oliver in 1982. However, the
concept of a supply chain in management was of great importance long before, in the early 20th
century, especially with the creation of the assembly line. The characteristics of this era of
supply chain management include the need for large-scale changes, re-engineering, downsizing
driven by cost reduction programs, and widespread attention to Japanese management practices.

2) Integration era

This era of supply chain management studies was highlighted with the development of electronic
data interchange (EDI) systems in the 1960s, and developed through the 1990s by the
introduction of enterprise resource planning (ERP) systems. This era has continued to develop
into the 21st century with the expansion of Internet-based collaborative systems. This era of
supply chain evolution is characterized by both increasing value added and cost reductions
through integration.

A supply chain can be classified as a stage 1, 2 or 3 network. In a stage 1–type supply chain,
systems such as production, storage, distribution, and material control are not linked and are
independent of each other. In a stage 2 supply chain, these are integrated under one plan and is
ERP enabled. In a stage 3 supply chain is one that achieves vertical integration with upstream
suppliers and downstream customers. An example of this kind of supply chain is Tesco.

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3) Globalization era

The third movement of supply chain management development, the globalization era, can be
characterized by the attention given to global systems of supplier relationships and the expansion
of supply chains over national boundaries and into other continents. Although the use of global
sources in organisations' supply chains can be traced back several decades (e.g., in the oil
industry), it was not until the late 1980s that a considerable number of organizations started to
integrate global sources into their core business. This era is characterized by the globalization of
supply chain management in organizations with the goal of increasing their competitive
advantage, adding value, and reducing costs through global sourcing.

4)Globalization era

The third movement of supply chain management development, the globalization era, can be
characterized by the attention given to global systems of supplier relationships and the expansion
of supply chains over national boundaries and into other continents. Although the use of global
sources in organisations' supply chains can be traced back several decades (e.g., in the oil
industry), it was not until the late 1980s that a considerable number of organizations started to
integrate global sources into their core business. This era is characterized by the globalization of
supply chain management in organizations with the goal of increasing their competitive
advantage, adding value, and reducing costs through global sourcing.

5)Specialization era (phase I): outsourced manufacturing and distribution

In the 1990s, companies began to focus on "core competencies" and specialization. They
abandoned vertical integration, sold off non-core operations, and outsourced those functions to
other companies. This changed management requirements, by extending the supply chain beyond
the company walls and distributing management across specialized supply chain partnerships.

This transition also refocused the fundamental perspectives of each organization. Original
equipment manufacturers (OEMs) became brand owners that required visibility deep into their
supply base. They had to control the entire supply chain from above, instead of from within.
Contract manufacturers had to manage bills of material with different part-numbering schemes

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from multiple OEMs and support customer requests for work-in-process visibility and vendor-
managed inventory (VMI).

The specialization model creates manufacturing and distribution networks composed of several
individual supply chains specific to producers, suppliers, and customers that work together to
design, manufacture, distribute, market, sell, and service a product. This set of partners may
change according to a given market, region, or channel, resulting in a proliferation of trading
partner environments, each with its own unique characteristics and demands.

6)Specialization era (phase II): supply chain management as a service

Specialization within the supply chain began in the 1980s with the inception of transportation
brokerages, warehouse management, and non-asset-based carriers, and has matured beyond
transportation and logistics into aspects of supply planning, collaboration, execution, and
performance management.

Market forces sometimes demand rapid changes from suppliers, logistics providers, locations, or
customers in their role as components of supply chain networks. This variability has significant
effects on supply chain infrastructure, from the foundation layers of establishing and managing
electronic communication between trading partners, to more complex requirements such as the
configuration of processes and work flows that are essential to the management of the network
itself.

Supply chain specialization enables companies to improve their overall competencies in the same
way that outsourced manufacturing and distribution has done; it allows them to focus on their
core competencies and assemble networks of specific, best-in-class partners to contribute to the
overall value chain itself, thereby increasing overall performance and efficiency. The ability to
quickly obtain and deploy this domain-specific supply chain expertise without developing and

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maintaining an entirely unique and complex competency in house is a leading reason why supply
chain specialization is gaining popularity.

Outsourced technology hosting for supply chain solutions debuted in the late 1990s and has
taken root primarily in transportation and collaboration categories. This has progressed from the
application service provider (ASP) model from roughly 1998 through 2003, to the on-demand
model from approximately 2003 through 2006, to the software as a service (SaaS) model
currently in focus today.

7)Supply chain management 2.0 (SCM 2.0)

Building on globalization and specialization, the term "SCM 2.0" has been coined to describe
both changes within supply chains themselves as well as the evolution of processes, methods,
and tools to manage them in this new "era". The growing popularity of collaborative platforms is
highlighted by the rise of TradeCard’ssupply chain collaboration platform, which connects
multiple buyers and suppliers with financial institutions, enabling them to conduct automated
supply-chain finance transactions.

Web 2.0 is a trend in the use of the World Wide Web that is meant to increase creativity,
information sharing, and collaboration among users. At its core, the common attribute of Web
2.0 is to help navigate the vast information available on the Web in order to find what is being
bought. It is the notion of a usable pathway. SCM 2.0 replicates this notion in supply chain
operations. It is the pathway to SCM results, a combination of processes, methodologies, tools,
and delivery options to guide companies to their results quickly as the complexity and speed of
the supply chain increase due to global competition; rapid price fluctuations; surging oil prices;
short product life cycles; expanded specialization; near-, far-, and off-shoring; and talent
scarcity.

SCM 2.0 leverages solutions designed to rapidly deliver results with the agility to quickly
manage future change for continuous flexibility, value, and success. This is delivered through
competency networks composed of best-of-breed supply chain expertise to understand which
elements, both operationally and organizationally, deliver results, as well as through intimate
understanding of how to manage these elements to achieve the desired results. The solutions are

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delivered in a variety of options, such as no-touch via business process outsourcing, mid-touch
via managed services and software as a service (SaaS), or high-touch in the traditional software
deployment model

CHAPTER 3 - ISSUES INVOLVED IN DEVELOPING THE SUPPLY

CHAIN FRAMEWORK

According to Cooke matching demand characteristics to supply chain capabilities in order to

capture sales opportunities and to satisfy customer needs in terms of speed, location and product
variability is the purpose of supply chain planning.

In the year 1997, Fisher presented a framework for selecting the appropriate supply chain for a
product. This framework was further developed and refined by Li an O’Brien in 2001, and De
Treville et al in 2004. Fisher recommends that the features of product demand define whether the
product is functional or innovative. The assets of demand to be considered are:

1) demand predictability
2) life cycle
3) product variety and lead time and
4) service requirements

The author states that the above mentioned factors determine the availability and inventory
needs, which in turn determine demand. On the basis of the above mentioned factors, products
can be categorized as either primarily functional such as those bought in supermarkets or
primarily innovative like many products in the fashion or technology sector.

The type of supply chain expertise required would be dependent on the type of product. For
functional products, an efficient supply chain that focuses on delivering products at the lowest

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possible cost to customers should be developed. Selection of, suppliers, capacity usage and
product design all need to aim gaining effective low cost solutions.

The second type is a market responsive process, where speed and flexibility are required from
suppliers, manufacturers and from product design solutions. For innovative products, the demand
for which is difficult to predict, market responsive processes ought to be developed.

A useful framework for analyzing the issues involved in developing a supply can be represented
as a pyramid. At the strategic level the retailer can focus on service levels required to support the
unique value proposition that the retailer has developed. The retailer can then evolve appropriate
channels and networks to achieve the uniqueness desired.

The framework is depicted below:

A framework for analyzing issues in SCM

IMPLEMENTATION

Customer Service

Strategic
1) Channel Design
2) Network Strategy

Structural
1) Warehouse design and operations
2) Transportation Management
3) Materials management

Functional

1) Information systems
2) Policies and Procedures
3) Facilities and Equipment
4) Organizational and Change Management

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The next level the structural level, allows the retailer to identify suppliers, stock points and to
develop an appropriate transportation model. The extent of outsourcing is also determined at this
level.

At the functional level, the operational details are worked out. This includes developing policies
and procedures around the facilities and equipment to be deployed implementing information
systems to support the operations and ensuring that the right organizational and training inputs
are provided.

The consumers developed using any framework must be successfully implemented. Successful
implementation usually requires a programming approach to ensure that the implementation is
effective and helps the retailer achieve its goals.

Fast emerging concept is that of an Agile supply chain, which according to Christopher and Von
Hoek, is driven by being responsive to the market. Market sensitivity and responsiveness to the
market conditions and requirements of the consumers is a key driver of developing an agile
supply chain. The agile supply chain is network based, which can also be of a virtual nature. This
will require a great deal of integration between all the elements of the supply chain. Complete
process integration is also a prerequisite for developing such an agile chain. The various
components are illustrated below:

Agile Supply

1) Market Sensitive
2) Virtual
3) Process integration
4) Network Based.

2 Types of Supply Chain Management (SCM) Systems

Depending on the functions the supply chain management systems perform, they are classified
into two categories, namely supply chain planning systems and supply chain execution systems.

1)Supply Chain Planning Systems

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These systems provide information that help businesses in the planning of their supply chain.
Some of the important supply chain planning functions are as follows:

• Forecasting demand for specific products and preparing sourcing and manufacturing plan
for those products.

• Estimating the quantity of the product to be manufactured in a given time period

• Deciding the location where the finished goods are to be stored

• Identifying the transportation mode to be used for delivering the products

• Setting the inventory levels for raw materials, intermediate products, and finished goods

• Determining the product quantity a business should make in order to meet all its
customers’ demands

2)Supply Chain Execution Systems

These systems provide information that help businesses in the execution of their supply chain
steps. Some of the major supply chain execution functions are as follows:

• Managing the flow of products from the manufacturers to distributors to retailers and
finally to customers in order to ensure the accurate delivery of products

• Providing information about the status of orders being processed so that the vendors
could provide the exact delivery dates to customers

• Tracking the shipment and accounting for the products that have been returned or are to
be repaired and serviced

Constituents of SCM

• Supply chain management (SCM) is a network of facilities and distribution options that
goes into improving your company. Making a product or service and delivering to
customers by finding raw components. For example; transformation of materials into
intermediate and finished products and the distribution of finished products to consumers.
• Plan

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• Every company needs a strategy on how to manage the resources in order to achieve their
customers demand for their products and services. The supply chain management is
developing a set of metric to monitor the supply chain so that it can deliver high qualities
and values to customers.
• Source
• To create their products, companies need to be very careful when choosing suppliers to
deliver their goods and services needed. The managers need to develop a set pricing and
delivery system in the supply chain.They can also put processes for managing their goods
and goods inventory, for example; receiving shipments.
• Make
• In manufacturing the supply chain manager should always schedule the activities that are
needed for the production, packaging, testing and preparation for delivery.The most
metric-intensive portion of the supply chain, production output and measure levels.
• Deliver
• This part is mainly referred to as logistics by the supply chain management. In this case
companies coordinate receipts of orders, pick carriers to get products to customers and
develop a network of warehouses.
• Return
• In many companies this is usually where the problem is – in the supply chain.The
planners should create a flexible and responsible network for receiving a flaw and excess
products sent back to them (from customers).

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CHAPTER 4 SUPPLY CHAIN ACTIVITIES
There are five key activities in the supply chain process; purchasing, producing, storing,
distributing and selling. The way you manage these activities will influence the efficiency and
overall success of your small business.

• Purchasing
Purchasing activities occur throughout all of the supply chain. The ability to effectively manage
purchasing activities can help reduce expenses and maximise efficiency. When making
purchasing decisions, it is important to factor in more than just the list price. You should
consider:

➢ The listed purchase price

➢ The total cost of acquiring the product
➢ Other relevant lifecycle costs
➢ Disposal costs

• Producing
The production stage of the supply chain includes activities such as manufacturing products
or providing services. Some businesses have very little to do with any production activities,
whereas for others it is their main focus. Significant efficiency gains and cost reduction can
be achieved if the producing stage of the supply chain is managed effectively.

• Distribution and storage

24
 The distribution and storage activities in the supply chain are often grouped together as they
are closely linked. Distribution and storage activities are often referred to as logistics and
involve the transporting, warehousing and distribution of products and services to other parts
of the supply chain. Significant cost and efficiency savings can be made by optimising the
distribution and storage activities in the supply chain.

• Selling
Selling is often the focus of many businesses as it is the step in the supply chain where
products and services can be turned into monetary value. It is important to remember that
selling isn't necessarily the final step in a supply chain as it occurs as each business
transfers its products and services to the next.

Supply chain management aims to reduce and eliminate inefficiencies to save time and money
and streamline the process involved in the supply chain. The following information outlines
some of the common supply chain system inefficiencies.

• System slack - the level of idle, underutilised or non-value adding resources in the supply
chain. This includes excess inventory, poorly deployed human resources, underutilised funds
delays and unused space.

• Time lag - the lengths of time that pass between the ordering of materials, making payments,
producing, distributing and selling. Time lags increase exponentially with increases in the
number of supply chain participants.

• Conflicting objectives - supply chain activities often span many different organisations and
departments. These different departments sometimes have conflicting objectives and targets, so
communication is required to reduce inefficiencies.

• Variable supply and demand - Market supply and demand rarely move as one, which can
make it difficult to forecast and plan future requirements. This generally results in either
underutilised resources or an inability to meet demand.

25
The competitive market places significant expectations on the efficiency of the supply chain and
on the ability of businesses to operate effectively within their supply chain. Market participants
generally have many options when it comes to buying and selling, so if you can't meet the
expectations of the market, you will struggle to be competitive.

CHAPTER-5 How can Supply Chain Management (SCM) be applied to an organisation?

Domino Effect
The most important thing is to first understand the customer's true needs.
Companies that want to improve their competitive position by reducing their order-to-delivery
cycle are looking to supply-chain management to help them achieve that goal.Because SCM
encompasses all processes involved in producing and delivering a productto the customer, it
offers the opportunity to identify bottlenecks that can slow downactivities along the entire supply
chain.Youngberg gives the exampleof an automaker that wants to build individual cars to
orderfor delivery within one week. A supply-chain analysis might discover that the seatsupplier
doesn't have the capability to produce and deliver seats in a variable coloursequence--
jeopardising the car manufacturer's ability to offer its customers the kind of
service it envisions. Inevitably, such problems will affect delivery to the final customer,much as
a domino falling at the front of a line eventually causes the one at the end totopple, too.To obtain
the greatest possible improvement in the total product cycle, it may be helpfulto think of the
supply-chain dominoes falling backward. In other words, under a supply-
chain management philosophy, customer demand is what drives the activities required tofulfil
that customer's demand, all the way back to raw materials suppliers at the beginningof the
production process. That is why it is important to first understand the customer'strue needs, then
work back from that, Morehouse says: Once the correct information isin hand, companies can

26
design their supply-chain processes to provide what thecustomer really needs. Without that
information, says Youngberg, companies risk fallinginto the "wasted excellence" trap, providing
a higher service level or faster cycle timethan is necessary. "It doesn't provide you with a
competitive advantage, but it saddles youwith costs that may not [yield] you anything," he
explains.Here is an exampleof a company that uses chemicals stored in tanks to manufacture
itsproducts. The chemical supplier discovered--to its surprise--that the most important thing
to the manufacturer was not how quickly it delivered the raw material, but rather howwell the
vendor monitored the supply of the chemical to ensure that it never ran out. Forthe customer,
reliability outweighed all other considerations.How can it be accomplished? Ideally, product is
received and put away to a location fromwhere you will pick it. While picking the product it
should be placed directly in theshipping carton. A weigh scale checks each picked orderline. As
errors are found they are
corrected immediately. The last step in the process would be to insert the invoice, seal thecarton
and apply a shipping label. During this process product has been handled only forput away (only
cross-docking can eliminate that) and for picking. No other producthandling. Handling steps are
reduced to the most basic needs. Such processes are possible
and they don't require a lot of automation. They need a WMS, RF terminals for put awayand
picking and well maintained product information. The process delivers an error freeshipment,
completed in one handling step, provides a direct quality feedback to theoperator and allows you
to manage each worker based on his or her individualperformance = quality + output.
Requirements for A Successful Supply Chain

⚫ Share goals and interests

⚫ Trust

⚫ Information sharing

⚫ Long-term commitment

⚫ Strong individual members

27
UNIT-2

28
CHAPTER 1 SUPPLY CHAIN INTEGRATION

The nature of a supply chain is that it is usually a network which consists of a number of
participating firms as its member. For a global supply chain the network stretches many parts of
the world, and the participating member firms of the network can be an independent company in
any country around the world. Supply chains are therefore voluntarily formed ‘organisations’
with fickle loyalties and often antagonistic relations in between the member firms.
Communication and visibility along the supply chain are usually poor. In other words, supply
chains are not born integrated.

Supply chain integration therefore can be defined as the close internal and external coordination
across the supply chain operations and processes under the shared vision and value amongst the
participating members. Usually, a well integrated supply chain will exhibit high visibility, lower
inventory, high capacity utilization, short lead-time, and high product quality (low defect rate).
Therefore, managing supply chain integration has become one of the most common supply chain
management approaches that can stand up to the global challenges. However, there is no supply
chain that is strictly 100% integrated, nor any one that is strictly 0% integrated. It is about how
much the supply chain is integrated from a focal company’s point of view. To illustrate this
degree of difference in supply chain integration, Frohlich and Westbrook (2001) suggested a
concept of ‘Arc of Integration’ . ( fig 2.1)A wider arc represents a higher degree of integration
which covers larger extent of the supply chain, and a narrow one for a smaller extent. The issue

29
about supply integration is particularly important when the supply chain is formed by the
members around the globe.

The eight key processes involved in supply chain management—customer relationship

management, customer service management, demand management, order fulfillment,
manufacturing flow management, supplier relationship management, product development and
commercialization, and returns management. Successfully managing supply chains requires the
firm to first become internally integrated in the relevant key business process areas, and then
look to integrate these processes with important trading partners. This requires breaking down
barriers to integration inside the firm, followed by establishing a high level of trust and working
experience with the firm’s trading partners, and involves the use of appropriate technologies and
performance measures to improve internal and external integration capabilities. Process
integration is thus something that evolves over time within a firm’s workforce and its supply
chains.
Successful process integration is also something that can be difficult for firms to
benchmark; rather, each firm must develop its own unique set of integration capabilities.
Different firms have different employees, cultures, processes, products, suppliers, customers, and
technical capabilities; therefore their means to successful integration and supply chain
management may vary from their competitors, or other firms like Texas-based computer
manufacturer Dell and mega-retailer Wal-Mart who have created reputations for possessing
superior supply chain management capabilities. In short, there is no “silver bullet” set of detailed
practices that will guarantee process integration or supply chain management success. Managers
must define and uncover the appropriate supply chain strategies for their firms, align their own
business strategies to those of their supply chains, and then design operations practices that
support the strategies. In a multi-year study first launched in 2005 by MIT’s Center for
Transportation and Logistics, a number of successful companies are being studied with the
intention of identifying general attributes critical to successful supply chain management. So far,
they have found that companies need to adopt a “competitively principled” strategic supply chain
management framework, or in other words, develop a set of tailored practices for their company
that lead to success, based on their unique resources and the required supply chain strategies.

30
Because successful internal and external process integration also requires the passage of time,
most firms and their supply chain trading partners are still heavily involved in their process
integration efforts. This is exacerbated by the seemingly continuous entry of new competitors,
new suppliers, new customers and customer requirements, and new information and
communication technologies to the marketplace. Consequently, there are many new trends in
process management and process integration impacting supply chain management.

The Benefits of Supply Chain Integration

Understanding the Benefits of Supply Chain Integration Organizations need to manage the integration of
business, technology and processes across extended enterprises to be successful. It is no different with
supply chain management. Inter-enterprise cooperation and collaboration with suppliers, customers, and
business partners is facilitated with supply chain management. This system brings tremendous benefits

31
and competitive advantages to the organizations and major supply chain participants like the suppliers,
manufacturers, distributors and customers. Any supply chain cannot be integrated overnight. The levels of
integration evolve and grow deeper overtime. Integrated supply chain improves customer satisfaction and
loyalty as the end customers experience improved on-time delivery. There is also a surge in the loyalty
among partners, diminished inventory and an increase in flexibility to deal with disruptions. The other
benefits include: Partnership formation The primary benefit of integrating a supply chain is the formation
of partnerships. Sourcing and customer relationships are transformed into partnerships thereby increasing
the trust levels. There is a steady performance and predictable sourcing due to this added trust, paving the
way for even former rivals to become partners. Facilitates prediction With the sharing of information, the
supply chain achieves better integration. Companies along the supply chain begin to swap planning data
in addition to real-time tracking. Keeping in mind the goal of increasing efficiency, companies can plan
and execute inventory management, shipping, and production schedules with the deeper and more
valuable information. For instance, a construction company can share information with a with a supply
chain partner that produces doors to ensure there is adequate resources for a new housing development.
Decrease in inventory requirement The most important benefits of supply chain system integration are
increased on-time delivery and lower inventory requirements. A recent study of supply chain management
indicated that companies that moved to an integrated supply chain reported doubled inventory turns, had
50 percent improvements in on-time delivery and experienced a50 percent increase in sales supported by
35 percent lower inventory. This in turn improved customer service which in turn increased customer
loyalty due to better on-time delivery. Flexibility An integrated supply chain offers flexibility and a great
amount of resilience in facing chaotic circumstances. A company can quickly acclimatize to the varying
circumstances without delayed production by having true partners along the supply chain. As an
integrated supply chain achieves resilience by increasing flexibility, companies can cross train employees
along the supply chain to respond quickly to a shutdown at one point along the chain. The main driver
behind any collaboration and integration is the desire to extend the control and co-ordination of
operations across the entire supply process, replacing both the market and vertical integration as the
means of managing the supply chain solutions .Learn more about :- fulfillment solutions & supply chain
outsourcing

2.3 Stages in integration

The term integration means coordinating and sharing information and resources to
jointly manage a process. Integration can occur both internally or externally with respect to the

32
firm, and reflects how harmoniously employees or businesses work together to accomplish tasks.
Developing communication, information sharing, and collaboration capabilities among
employees in different units within an organization can be quite difficult, particularly when
departments are busy protecting turf and fighting for their share of tight budgets and other firm
resources. But this type of behavior, along with other internal barriers, must change in
organizations serious about process integration.

In some industries, process integration is the norm and has become necessary for survival—take
the automobile industry, for example Japanese auto manufacturer Toyota had become quite
proficient at lean principles by the 1980s, in part by creating opportunities for its employees to
integrate their efforts when designing and building new automobiles, and when solving
manufacturing and quality problems. As a result, Toyota has been able to provide higher quality
automobiles with shorter new model cycle times when compared to most of their competitors.
Consequently, Ford, GM, DaimlerChrysler, and other auto manufacturers have been forced to
follow suit to stay competitive. As of mid-2006, Toyota was trailing only GM as the world’s
largest automaker and was easily the world’s biggest in terms of profitability (approximately $20
billion per year).i In fact by 2001, most North American automakers reported that they were
practicing internal integration of key processes, and working hard at forming fully-integrated
supply chains
To achieve internal process integration, firms must first lay the groundwork necessary to
begin process integration efforts. This includes breaking down internal barriers to collaboration,
connecting departmental and unit information systems, and developing performance measures
that encourage teamwork and collaboration. When the firm’s employees are comfortable
working together and sharing ideas and information, then supply chain management efforts and
external process integration with trading partners can begin to take place. . Figure 2.1 depicts this
integration model, and a discussion of each of these topics follows.

33
Fig 2.1 The Supply Chain Process Integration Model

Breaking down barriers Forming intraorganizational teams Identifying supply chain

to collaboration business strategies

Connecting all information Communicating and sharing Identifying key business

systems information enterprise-wide process requirements,

integration elements, and

Developing collaboration Achieving collaboration objectives partnership opportunities

performance
Preparationmeasures
Phase Active Internal Integration Active External Integration

Developing new collaboration Identifying supply chain

Supply chain Process Example
opportunities information system

requirements

Developing external integration

performance measures

34
CHAPTER-2 BREAKING DOWN INTERNAL BARRIERS TO
COLLABORATION OR INTEGRATION

Internal barriers to collaboration can be classified as technological (information

system software/hardware) barriers, structural (management hierarchy, goals, procedures)
barriers, and cultural (employee values, norms, behavior) barriers. Chapter 9 discussed a number
of information system problems, including the purchasing of software applications at different
times or purchasing best-of-breed software solutions from different vendors, both of which
require integration middleware to tie the systems together, or the use of web services and web
portals to create information sharing capabilities for the disparate applications. These could be
considered technological barriers to collaboration. A few years ago Washington-based fashion
retailer Nordstrom’s online site, nordstrom.com, found itself unable to accept gift cards
purchased by customers at Nordstrom stores (it lacked a linkage process to the Nordstrom bank’s

35
mainframe required to validate and execute the transaction). The company adapted quickly by
using XML web services to integrate its systems and create a standard data format that all of the
company’s systems could understand.ii XML web services are becoming the basic platform for
application integration. Applications are constructed using multiple XML web services from
various sources that work together regardless of where they reside or how they were
implemented.
Structural barriers to collaboration include the often slow, bureaucratic decision-
making hierarchy in firms; poorly designed pay systems and incentives; and ineffective
administrative procedures and policies. An incentive pay system that encourages groups of
employees to work against one another is a structural problem, for example. Steve Banker, senior
supply chain analyst at the ARC Advisory Group in Massachusetts advises companies to
establish compensation methods that reward teamwork. “If you tell people to work as a team, to
make it work, you need metrics that measure supply chain performance. Then you have to tie
punishments and rewards to those metrics.” Structural change involves a top-down
management approach, because the expertise and resources needed for administrative
improvements requires the involvement of middle and upper management. When problems such
as a lack of communication and teamwork are acting as barriers to internal process integration,
structural changes are needed, and this requires upper and middle management to take the
initiative to propose and implement structural solutions. Structural change implementation tactics
can include employee education, instituting cross-training and process teams, and
manager/worker negotiations to achieve acceptance of the changes.
During the early days of U.S. professional baseball, hiring a hearing-impaired player on one
team initially caused a severe communication problem among the team’s players. The coach’s
solution was to implement a structural change—he taught the entire team a version of sign
language to improve communication. This creative solution ultimately led to the widespread use
of hand-signaling among baseball team coaches and players.iii More recently, when the U.S.
Congress mandated the restructuring of the Internal Revenue Service (IRS), a number of
structural changes were implemented to improve customer service and protect taxpayer rights.
For example the IRS Large and Mid-Size Business Division was created to administer taxes for
businesses with over $10 million in assets. Lately, the IRS has adjusted managerial span of
control to better balance the number of employees reporting to managers, eliminated

36
management redundancy in some field offices, and adjusted the number of its core industry
groups from seven to five.
The third set of barriers to internal process collaboration or integration can be much more
difficult to overcome, namely the often deeply-rooted cultural barriers to collaboration within
the firm, which can encourage employees to hoard information, hide operating problems, and shy
away from working together as a team to develop optimal solutions for the organization. This is
sometimes also referred to as the silo mentality, where workers act only in their own best
interests, and managers act only in their departments’ best interests. An overall lack of trust can
permeate this type of organization. Cultural changes in the organization are required to reduce
the silo mentality and improve trust, or how employees think about their coworkers and the
organization. In these types of cases, the organization as a whole must undergo change.

Achieving excellence in SCM

To weather the global challenges and to achieve long lasting business success often calls for one
fundamental feat and that feat is world class excellence. Almost all known world leading supply
chains in all industrial sectors have somehow demonstrated that they have just been excellent in
a multitude of performance measures. The world class excellence defines the highest business
performance at a global level that stand the test of time. Only the very few leading edge
organisations around the world truly deserve this title. But the title is not just a title. It is the
fitness status that ultimately separates the business winners from losers.
Competing in the market place is like fighting a war, with several enemies well equipped with
the best weapons fighting each other to win over the customer. Customer behavior is like a
pendulum that wings from product to product without getting stationed at or being loyal to any
product.
Any war needs a game plan or strategy, brief soldiers and a dependable logistics system.
Similarly, to win the market war, companies need a sound market driven strategy, good quality
product that can brave the other products, a sound and flawless supply chain management, to
ensure that the right product is made at the right time and reaches at the right time and in the
right quantity.

37
Supply chain is a means to achieve an end, which obviously is winning in the market. SCM
indicates the kind of preparedness with which the manufacturers goes to the market.SCE is one
of the most vital ingredients for success in the market.

CHAPTER-3 THE 10 DIMENSIONS OF SUPPLY CHAIN EXCELLENCE

1. Alignment: It is clear to me that the "best" supply chains are characterized by having the
tightest alignment between the overall business strategies and supply chain strategy and
execution. Of course, achieving this alignment is the objective of Sales & Operations planning,
but it can go much further, such as the service-level agreements Nick LaHowchic used to use
when he ran the Limited Brands logistics services group with each of the company's different
business units. It is clear: the supply chain supports the business. Those supply chains that best
synchronize that support with the strategies and objectives of the business are at the top of the
performance heap - recognizing that the business itself may not execute well, or have the wrong
strategy.

38
2. Strategic Depth: Great supply chains are characterized by detailed and "living" strategies that
are directly connected to the support of the business(es). What is a supply chain strategy? More
on that soon, but at its core, a strategy is a multi-year plan that details the what, why, how of the
supply chain and more. Many companies have no real supply chain strategy. The strength of the
strategy, and how well that strategy turns into what the supply chain actually does, are critical
elements of supply chain excellence. This also includes such core decisions around what to do
internally and what to outsource.

3. Customer Satisfaction with Supply Chain Performance: I could argue this should be
number one, but think in the end it has to follow alignment and the resulting supply chain
strategy. But where the rubber hits the road, the supply chain has to deliver in the eyes of the
customer - this is the real lens through which supply chain performance should first be measured.
The nice aspect of this dimesnsion is that it takes into account the company's overall value
proposition or unique value props to different markets - the supply chain expectations from
customers should be different depending on that (e.g., efficiency versus service).

4. Supply Chain Network Design: Hardly anyone mentions this as a core aspect of supply chain
excellence, but it is at the heart of it. Network design is tied at the hip with supply chain strategy.
It is the crucible in which the trade-offs between cost, service, flexibility and more must be
managed, either explicitly or implicitly. Additionally, experts say network design determines
some 80% of total supply chain costs. Supply chain excellence is clearly driven in large part by
the quality of the network it operates in.

5. Macro Agility: One of the few true sources of overall corporate competitive advantage is the
ability to respond consistently faster to opportunities and changing strategies than the other guys
do. There are two components to this agility, as I have written about before - a more strategic,
longer term view, and a more real-time, right now view. This is the strategic component. CEO
after CEO says they want their companies to respond more quickly to market changes and
opportunities. For product companies, this largely means how fast the supply chain can respond.
I will admit this dimension is not easy to measure, however. But you know it when you see it.

39
6. Micro Agility: The other side of the flexibility dimension is the ability to react more quickly
and intelligently to near-term changes in the supply-demand equation and other issues related to
execution. Many current supply chain "buzz" concepts relate to this micro flexibility: demand
sensing, real-time planning, response management and more. This area is a bit easier to measure
than macro flexibility. Impacts both cost and revenue.

7. Talent Management: It seems hard to argue against the idea that how well a company
manages and develops its internal talent is a key component of how good the company's supply
chain is. Clearly, many companies thought of as supply chain leaders (e.g., Procter & Gamble,
PepsiCo, The Limited Brands) focus on this dimension continuously, even if that leads them to
play the role of farm system for others that will not invest in that talent development. Talent
management has a lot to do with how "sustainable" a company's supply chain really is, and is
seeing growing recognition throughout the industry.

8. Technology Management: This is another area that is often overlooked, but clearly there is a
wide, wide range of approaches and results between companies, often in the same industry. This
has to do not only how much is invested in technology (in general, should be more steady in
nature rather than big peaks and valleys), but even more important than spend levels are such
areas as how well new technologies are implemented, how often the returns are at or above what
was projected, how well the full relevant capabilities are utilized, and more. Huge deltas between
companies in all these areas.

9. Collaboration Intensity: Finally (more soon) companies are realizing that the next natural
path to improve supply chain performance versus the competition is in improving integration and
collaboration with trading partners. This is a major topic that we can just touch on here, but it is
clear to me (with some adjustments for differences across industries and perhaps overall business
models) that companies that are better at collaboration have better supply chains. But for many,
the focus is still not really there.

10. Supply Chain Culture: This is probably the fuzziest of the 10 attributes, but one for which
differences between companies are often large and easily identified. Again, there is much more
to discuss in this area than room here allows, but it is simply amazing the differences that can be

40
seen (and "felt") in supply chain cultures across companies. Of course, that culture is set from the
top, so leadership is the most important factor. But other elements include the approach to risk
taking, the extent to which there is a "learning culture" in the supply chain, how well supply
chain staff is truly valued, how well innovation is fostered, and more.

Competing in the market place is like fighting a war, with several enemies well equipped
with the best weapons fighting each other to win over the customer. Customer behavior is like a
pendulum that wings from product to product without getting stationed at or being loyal to any
product. Any war needs a game plan or strategy, brief soldiers and a dependable logistics system.
Similarly, to win the market war, companies need a sound market driven strategy, good quality
product that can brave the other products, a sound and flawless supply chain management, to
ensure that the right product is made at the right time and reaches at the right time and in the
right quantity.Supply chain is a means to achieve an end, which obviously is winning in the
market. SCM indicates the kind of preparedness with which the manufacturers goes to the
market.SCE is one of the most vital ingredients for success in the market.

CHAPTER-4- PHYSICAL AND FINANCIAL SUPPLY CHAINS

Physical supply chain

Physical supply chain is equal to any sequence of processes involved in the production
and distribution of a commodity ,the network of retailers,distributotrs,transportes,storage
facilities and suppliers that participate in the sale,delivery and production of a particular
product.

41
The Financial Supply Chain

The financial supply chain is comprised of the sequence of financial events and processes
that take place as commercial transactions are executed. These events and processes
include flows of financial information (e.g. sending a customer an invoice) and money
between GVC members.

42
The major financial supply chain events and processes that occur when a company
purchases goods from another value chain participant are depicted below (Figure 1).

43
From the perspective of a company that sells goods to another value chain member, key
financial supply chain events and processes mirror the ones presented above (e.g. in the
third step, the purchase order is received as opposed to sent). Although seemingly
simplistic, Figure 1 depicts supply chain events and processes in respect of which
financial flows are regularly inefficient within domestic, regional and global value
chains.

For banks, FSCM as a concept was initially a marketing umbrella to repackage

such traditional products as trade, insurance, payments and cash management. More
recently, banks have reviewed traditional trade and cash management services and
identified those elements of the value proposition that could be developed to better serve

44
 their customers’physical and financial supply chain. In this context, banks tend to define
FSCM services in terms of five interrelated groups:

1. Payments and cash management

2. Working capital management (WCM) and supply chain finance
3. Risk mitigation
4. Process improvement
5. Shared Services (BPO)
6. Visibility control.

The financial supply chain is an important concept for CFOs and treasurers to understand.
However, it is one that they might be unfamiliar with, and certainly it is unlikely to be at the top
of their agenda. Corporates have fixed resources and although they obviously pay attention to
elements of financial supply-chain management, such as working capital or risk management, the
holistic idea of financial supply chain management has yet to be fully embraced.
Instead, CFOs are more concerned with problems associated with the physical supply chain and,
in many cases, have made significant improvements to its operation by investing in supply-chain
management teams that work with different parts of the organization, and third-party supply
partners. The financial supply-chain requires a similar collaborative effort to bring finance,
treasury and accounts payable into cross-functional teams, which work with a company’s
external partners.This will not necessarily be easy. Many of the structural changes that have
taken place in the global market have accentuated the confrontational aspects of business: cutting
costs has been about buyers and sellers fighting over every last cent. However, although that
combative culture of cost-cutting is not in any danger of dying out, strategic sourcing and
supplier relationship management techniques mean that the emphasis has moved from pushing
costs down the chain towards taking costs out of the overall supply chain.

45
Essential Indicators of FSCM

• Days Inventory Outstanding: Inventory/(total revenue/365) - DIO: Year-end

46
 inventory plus LIFO reserve, divided by one day of average revenue. A
decreaseis animprovement, an increase a deterioration.
• Days Payables Outstanding: AP/(total revenue/365) - DPO: Year-end trade
payables divided by one day of average revenue. An increase in DPO is an
improvement, a decrease DWC: Year-endnet working capital (trade receivables
plus inventory, minus AP) divided by one day of average revenue. The lower the
number of days is, the better. The percentage change is marked N/M (not
meaningful) if DWC moved from a positive to a negative number or vice versa
(Pearson Addison-Wesley, 2004).
• A new financial solution: Factoring and Reverse Factoring vs. Commercial
CreditNormal financial collaboration (figure no. 4) and between supplier-
manufacturer-retailer is made by commercial credit. Factoring is a new
comprehensive finance business including a deterioration. For purposes of the
survey, payables exclude accrued expenses.
• .Days Sales Outstanding: AR/(total revenue/365) - DSO: Year-end trade
receivables net of allowance for doubtful accounts, plus financial receivables,
divided byone day of average revenue. A decrease in DSO represents an
improvement, an increase adeterioration.Days Working Capital: (AR + inventory
- AP)/(total revenue/365)

CHAPTER-5 CHECKLIST FOR EXCELLENCE

47
 Concerted efforts and focus can help in achieving SCE. But more important is continuing to
function and perform in the market in the manner that please the customer and hence the bottom-
line.

1.Achieving internal excellence

Any company that cannot achieve excellence can never hope to compete in the external
market. Internal excellence can be achieved by breaking the internal walls that exist in the
company. A cross functioned team that is knowledgeable about and is capable of taking
decisions regarding all accepts of SCM but should also take charge of the operational
requirements.

2.Ensuring Visibility and Openness

Supply chain spans all the organization that contributes to making a customer desired
product. Therefore, it is very important that all of these organizations participating in the supply
chain have proper information sharing protocols between them. It should be understood that
information that is being shared will be used to achieve excellence in the supply chain. But
before embarking on the process of information sharing, it is essential to identify that exact
nature of relationship to be shared, kind of information that will support this relationship.

3.Ensuring partnerships and collaboration

Collaboration means working together to achieve the same goal. And here the goal is winning
the end user. Collaboration is function of how tuned all the business partnership in the supply
chain, how much information is available about criticality of their role in the supply chain, what
technological infrastructure is available to support this role. “Walk with your supplier and let
your supplier walk with you” should be the ultimate motto.

4.Ensuring amalgamation
This is one step further to the concept of collaboration. Supply chain amalgamation means
showing one single face to the customer. Blending or synthesizing so much that it immediately
instills confidence in the customer. Collaborating not only to produce product but understanding
what the customers want and designing the product accordingly.

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5.Momentum and ascent

This stage signifies that the ground is set to take off. In this stage it is important to ensure that the
movement of material, information and money is fast and smooth. This stage should make the
company concentrate on TAT, i.e. turn around time. The faster the movement through the supply
chain, the better the bottom-line gets as it reflects conversion of material into money.

To sum up, supply chain excellence is consistently doing the right thing well. It requires
new solution that focuses on key business issues, continuously improvement. Most importantly it
is essential to recognize towards continuous improvement. Most importantly it is essential to
recognize that operational excellence is a journey and not a destination. As situations, problems
and issues change so will the definition of supply chain excellence.

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 UNIT-3

CHAPTER 1 PURCHASING AND SUPPLY CHAIN MANAGEMENT

50
Purchasing and Supply Chain Management focuses on the fundamental aspects of the supply chain,
including methods to improve how organizations find and manage materials and services needed to
make a product or service and deliver it to customers. The Purchasing and Supply Chain
Management program provides an in-depth focus of the field, including sourcing, price theory,
procurement, production, quality assurance, inventory, warehousing, logistics and customer
relations. Students learn related business and accounting practices such as standard policies and
operating procedures, negotiation techniques, planning, organization and the legal aspects of
purchasing.
As companies struggle to increase customer value by improving performance, many companies
are turning their attention to purchasing and supply management. Consider, for example, CSX,
the company featured at the beginning of this chapter. Almost 45 percent of the total sales of
CSX is expended with suppliers for the purchase of materials and services. It does not take a
financial genius to realize the impact that suppliers can have on a firm’s total cost. Furthermore,
many features that make their way into final products originate with suppliers. The supply base is
an important part of the supply chain. Supplier capabilities can help differentiate a producer’s
final good or service, increasing their value to the final customer. In the manufacturing sector,
the percentage of purchases to sales averages 55 percent. This means that for every dollar of
revenue collected on goods and services sales, more than half goes back to suppliers. It is not
difficult to see why purchasing is clearly a major area for cost savings. Cost savings also
encompasses avoiding costs through early involvement with design and proactively responding
to supplier requests for price increases.

We need to recognize the differences between purchasing and supply management. Purchasing is
a functional group (i.e., a formal entity on the organizational chart) as well as a functional
activity (i.e., buying goods and services). The purchasing group performs many activities to
ensure it delivers maximum value to the organization. Examples include supplier identification
and selection, buying, negotiation and contracting, supply market research, supplier
measurement and improvement, and purchasing systems development. Purchasing has been
referred to as doing “the five rights”: getting the right quality, in the right quantity, at the right
time, for the right price, from the right source.

51
After millennia of unchallenged success, businesses and governments aroundthe world are
entering a new era of unprecedented openness. The movement tohold corporate officers and
politicians accountable is spurred by three powerfulforces: economics, technology, and zeitgeist.
The entire world is experiencing adeep recession. The Internet, meanwhile, has revolutionized
the speed andpower of data analysis and dissemination. And financial institutions are beingheld
responsible.

Purchasing and supply management involves the procurement, storage, and monitoring of goods
sold in a retail store, machinery, supplies, or other raw goods. The purchasing and
supply manager is the person in charge of this division of this job, as well as in managing the
other employees working in this section. For most businesses, specifically retailers, purchasing
and supply management is one of the most important job descriptions in monitoring buyer
behaviors and making sure top selling items are well-stocked.

In many cases, purchasing and supply management may involve negotiating with manufacturers
or wholesalers in the process of buying goods or materials, as well as in working closely with
cost analysts and marketing professionals in deciding which products to buy and which ones are
not selling well enough for the costs. This process ensures that the company keeps better selling
items in stock while passing on products that sit on store shelves collecting dust.

Inventory is also a big part of managing purchasing and supplies. At set intervals, inventory is
taken at every warehouse or store, and those numbers are compared with how many of each unit
was originally purchased. This gives managers and owners a way of gauging which items
topurchase more of and which ones to scale back on.The people in charge of purchasing and
supply management must constantly research and learn consumer behaviors, as well as stay up-
to-date on new and emerging products on the market. In order for a business to survive, it must
offer the things consumers want to buy.

In many cases purchasing and supply management teams are made up of several key players.
This team can include pricing analysts, market researchers and marketing personnel, managers
over each of these departments, as well as store owners and supervisors. It is vitally important for
each team member to compare notes and discuss buying and marketing strategies. In the case of

52
retailers, they must also compare notes with the manufacturers or wholesalers purchasing team to
get an idea of which items are being made and sold, and to whom.

The purchasing the supply management team must also come to buying agreements
withsuppliers of their products, about the prospect of returning merchandise should an item fail
to sell. For example, many publishing companies allow book sellers to return any unsold copies
within six months. This acts as some level of protection on a company’s investment. The
purchasing and supply department must negotiate these terms before any inventory is paid for, as
well as keep accurate records and inventory to comply with all agreement terms and conditions.

Since there are various job descriptions and responsibilities involved in purchasing and
supplymanagement, getting a job in this field may require one of several potential degrees,
certificates, or experiences depending on which section one wishes to pursue.Purchasing and
Supply Management (PSM) is an approach to supplychain management that is meeting with
great success at a number ofleading commercial companies. Quite simply, PSM is a
strategic,enterprise-wide approach to selecting the suppliers of goods andservices and managing
them and the whole value network, from rawmaterials to final customer use and disposal. It
seeks to continuallyreduce total ownership costs, manage risks, and improve
performance(quality, responsiveness, reliability, and flexibility).

Purchasing process

53
PSM is often described by its attributes, which are listed below:

• PSM is strategic;

• PSM is enterprise-wide;

• PSM is multifunctional;

• PSM is adaptive;

• PSM is proactive;

• PSM is process focused;

• PSM is both short- and long-term;

Purchasing Objectives

1. Procure the necessary quality and quantity of goods and/or services in an efficient, timely
and cost effective manner, while maintaining the controls necessary for a corporation.

2. Encourage an open competitive bidding process practicable for the acquisition of goods and/or
services and equitable treatment of all vendors.

3. Ensure the maximum value of an acquisition is obtained by determining the total cost of
performing the intended function over the lifetime of the task. This may include, but not be
limited to, acquisition cost, installation, disposal value, disposal cost, training cost, maintenance
cost, quality of performance and environmental impact.

4. Procure goods and/or services with due regard to the preservation of the natural
environment and to encourage the use of “environmentally friendly” products and services

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Achieving Purchasing and Supply Chain Benefits

When the pieces come together, can the assumption of a supply chain orientation with the right
kinds of activities really produce the results envisioned by proponents? Consider the rebirth of
Apple Computer, which had BusinessWeek asking in 1997, “Is Apple mincemeat?” Apple made
a great comeback through an impressive, steady stream of new and innovative products such as
the iPod, iPod Nano, iPhone, iPad and the new iPhone4. Apple has reengineered itself from
being considered “mincemeat” to now once again being the “darling of Wall Street.”10
Facilitating this turnaround was Apple’s pursuit of an impressive array of purchasing and supply
chain activities to manage product demand, inventory investment, channel distribution, and
supply chain relationships. The company reduced its product line by almost half, forecasted sales
weekly instead of monthly with daily adjustments to production, and relied on suppliers to
manage inventory for standard parts and components. Apple also formalized a partnership with a
supplier to build components close to Apple facilities with just-in-time (JIT) delivery, created a
direct ship distribution network through the Web, and simplified its finished goods distribution
channel. Because of these activities, Apple now rivals, and sometimes exceeds, Dell Computer in
terms of supply chain performance.

THE EVOLUTION OF THE PURCHASING AND SUPPLY MANAGEMENT

FUNCTION

To become a competitive organization in today’s global economy, the purchasing and supply
management function must become world class. The supply managementfunction is the key to
unlocking the value within the organization. Organizationsmust optimize sourcing assets. As can
be seen in Figure 1.1, there are threephases in the optimization of an organization’s sourcing
assets. Stage 1 involvesleveraging through volume discounts. It can easily lead to significant
reductions inthe total purchasing costs. Stage 2 involves focusing on the value
propositionthroughout the supply chain among customers and suppliers.Finally, stage 3
isnecessary for sustaining the successes in the previous two phases. Practice andhigh-quality
feedback allow the purchasing professional the ability to make adjustmentsto stages 1 and 2. The
organizations that produce excellence are thosethat continuously improve. In general the

55
purchasing and supply managementfunction has evolved from a pure cost management function
to a competitive advantage.

56
10 STEPS TO MANAGE YOUR SUPPLY CHAIN AND YOUR PURCHASING
RESPONSIBLY

57
CHAPTER—2 INTEGRATED PURCHASING AND SUPPLY
MANAGEMENT PROCESS

Definition: Just in Time or JIT method creates the movement of material into a specific
location at the required time, i.e. just before the material is needed in the manufacturing process.
The technique works when each operation is closely synchronized with the subsequent ones to
make that operation possible. JIT is a method of inventory control that brings material into the
production process, warehouse or to the customer just in time to be used, which reduces the need
to store excessive levels of material in the warehouse.

58
 To gain and maintain a competitive advantage, firms are using the just-in-time (JIT)
philosophy, which is to eliminate waste by cutting unnecessary inventory and removing delays in
operations. The goals are to produce goods and services as needed and to continuously improve
the value-added benefits of operations. A JIT system is the organization of resources,
information flows, and decision rules that can enable an organization to realize the benefits of the
JIT philosophy. Often a crisis (such as being faced with going out of business or closing a plant)
galvanizes management and labor to work together to change traditional operating practices.
Converting from traditional manufacturing to a just-in-time system brings up not only inventory
control issues, but also process management and scheduling issues. In this chapter we identify
the characteristics of JIT systems, discuss how they can be used for continuous improvement of
operations, and indicate how manufacturing and service operations utilize such systems. We also
address the strategic implications of JIT systems and some of the implementation issues that
companies face. Finally, we discuss the choice of an appropriate production and inventory
management system for a particular environment.

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CHAPTER-3 PURCHASING PARTNERSHIPS

What if you could keep the same amenities, food and beverage and supplies during this
recession, but do so at a lower cost? Well, it’s not a foolproof plan, but partnering with a
purchaser could provide your hotels this opportunity while streamlining your operations. Those
who most benefit from a purchasing partnership, often, are management companies or
organizations with larger portfolios. It’s like the old saying about having strength in numbers—
the more properties, the more leverage in reducing prices from a vendor. Recently, the Asian
American Hotel Owners Assn. signed a contract with Source1 Purchasing to benefit from its
Buyer’s Advantage program. “We really want to help our members during this downturn, and
one way is through this centralized buying format versus a decentralized format,” says Fred
Schwartz, president of AAHOA. AAHOA members can now use their numbers as leverage
when purchasing items through Source1’s network of suppliers and receive discounts and
rebates.“Centralized purchasing is the most advantageous way to start streamlining overall cost,”
says Scott Hoffmire, president of Source1.Although there are no concrete numbers to show
exactly how much money can be saved, several procurement companies said a hotel could save
anywhere from 5 percent to 10 percent on their food-and-beverage costs.

ON THE ROLE OF PURCHASING WITHIN SUPPLY CHAIN

MANAGEMENT

Introduction
Over the last decades many new management ideas were launched. Some of
these turned into hypes but disappeared almost as quickly as they came. However,
there is little doubt that Supply Chain Management (SCM) is here to stay. Although
not everyone always realizes this, once implemented, SCM will a major impact on
all functions within the organization. All too often SCM is seen as a logistics activity
only. This however is dead wrong. In Figure 1 the supply chain from the perspective
of a single company is given. As can be seen from this graph, the coordination of
activities requires the efforts of basically anyone in the organization: Operations &

60
logistics, Marketing & Sales, Administration, Finance and Purchasing.

The question addressed in this article is: “how are the activities and organization of
Purchasing affected once the company decides to implement SCM?” In order to
answer this question, first SCM will be defined in more detail. It will be argued that
in fact there are three levels of SCM. Subsequently, the impact of SCM on each of
the three levels on Purchasing will be discussed. In order to focus the article, only
primary purchasing is considered, i.e. we will concentrate on getting in those
products and services that are required for creating the endproducts of the
company.

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Three levels of Supply Chain Management

In the literature, numerous definitions of SCM are given. In this article a definition that
generalizes many others is used, namely: The coordination of activities and goals between
different entities in the supply chain with the goal of reducing waste and creating value. As can
be seen from the definition, the tool that SCM is using to lower waste and increase value is the
coordination between several entities. Dependent on whether the entities are departments in a
company, business-units within a corporation or separate organizations, we can distinguish three
levels of SCM.
The first level of SCM refers to the alignmentof activities and goals of the different
functions (or departments) within a company such as Research and development (R&D),
Marketing and sales (M&S), Operations and logistics (O&L) and Purchasing. The basic idea of
SCM on this level is that, in order to get the optimal result for the entire company, all functions
need to be coordinated. For instance, in the product development process it is desired (or even
required) that, next to the R&D department, also O&L, M&S and Purchasing will be a part of the
product development team. M&S is needed to make sure that the product is designed with the

62
customer in mind, O&L can give details on what can and what can not be manufactured and
Purchasing can be used to find out what type of components and technologies are available on
the market. It is important to realize that on this first (internal) level, coordination can be forced
upon by making use of hierarchical structures. That is, the organizational structure of the
company can be used to force specific behavior from different departments.
The second level of SCM refers to the coordination of different business-units (BU’s) within one
corporation. Typical examples of companies that feel the need for SCM on this level are Philips
and Hewlett-Packard. These companies have several operating units that produce and distribute
components (such as computer chips and disk drives) for several products made by internal
suppliers and shipped to internal customers. SCM on this level is aimed at optimizing the flow of
goods and information as well as the activities and goals between the different business units.
SCM usually also aims to present one face to the suppliers, one face to the customer (account
management) and optimization of the activities between the different BU’s. Note that SCM on
the second level is still about internal optimization only. So again, like at SCM on the lowest
level, hierarchical structures can be used to force collaboration and joint optimization.

On the third level of SCM the different entities are autonomous organizations. SCM on this level
implies that the several organizations work together to improve the results of all of them. This
feature is usually referred to as “win-win”. Note that, in contrast to the first two levels of SCM,
at this highest level hierarchical control is not possible, simply because a supply chain does not
have an owner. So, the companies are autonomous and working together only because they
choose to do so. It can be observed that, because of the necessary condition that win-win is
achieved and the lack of hierarchy, SCM on the third level is the most difficult one to implement.

Note that the three levels of SCM discussed above are indeed to be considered as “levels”. That
is, usually companies consist of several BU’s and BU’s consist of several departments, see
Figure 2. The implication is that in order to get into SCM on a higher level, usually a company
has to implement SCM on the lower levels first. Generally, SCM on the third level is considered
as the only “real” SCM. However, frequently also the first two levels are considered as SCM.
With this in mind and since the three levels are in fact implementation steps, in the remainder of
this article we will also discuss the first two levels of SCM and their impact on Purchasing.

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The impact of SCM at the first level on purchasing

Traditionally, in many companies the perceived function of Purchasing is quite narrow. The key
responsibility for Purchasing usually is buying the parts that Operations is needing at the lowest
possible price. As a result, frequently Purchasing is concentrating on negotiation and market
price. As such, Purchasing is most often a sub-department of Manufacturing or Operations. In an
SCM-environment this will drastically change. In fact, when SCM on the first level is
implemented, it becomes necessary that Purchasing is a primary function next to other primary
functions such as O&L and M&S. Below, this statement and its consequences will be discussed
in some detail.

Recall that SCM is all about creating value for the final customer. It is to be realized that an
important source of value lies outside the company, namely with the suppliers. Take the example
of Dell who are in the business of assembling and selling computers. Needless to say that the
performance of a computer heavily depends on its key components such as the hard disk, DVD
drive, keyboard, CPU and memory. Rather than developing new components by themselves, Dell
is always scanning the market to see what the customer’s whishes are and keeping in touch with
all the hardware developers. This allows Dell to always incorporate those technologies that are

64
available and in demand, rather than being enforced to sell the homemade technology to recoup
their investments. Other classroom examples of value-creation by Purchasing are department
stores and similar retailers. Such companies are basically only re-selling what is bought by
Purchasing

When SCM on the first level is implemented, Purchasing gets responsible for delivering
value rather than being considered a cost driver. In order to capture the value, it is necessary that
Purchasing is on the same level with for instance O&L and M&S. Instead of O&L and M&S
telling Purchasing what to buy, Purchasing now will be on equal foot. They should inform O&L
and M&S about what is available on the market, what innovations might be expected and how
this might affect the competitive position of the company. In order words, the activities of M&S,
O&L are coordinated.

As a consequence of the situation described above, clearly the emphasis of decision making
within Purchasing is shifted from the usual short-term and opportunistic (focussed at low price)
to integrated, holistic and long-term (creating up-stream value). Furthermore, the Purchasing
strategy is no longer a derivative from the Operations strategy but is aligned to the Business
strategy very similar to how Operations strategy and Marketing strategy are aligned to the
Business strategy.

When SCM on the first level is implemented also the Purchasing activities will be
redistributed. In general there are three types of Purchasing activities, namely:
Strategic purchasing activities, i.e. activities focused on delivering strategic value to an
organization;
Tactical purchasing activities such as determining the specification (in terms of required
quality and quantities) of the goods and services that need to be bought and selecting the most
suitable supplier, and
Operational activities including placing the order with the selected supplier and
monitoring and control of the order (expediting).
Clearly, in an SCM-environment, the Strategic purchasing activities will be performed by
the Purchasing department and will in fact get much more important. One example is

65
Magnetti Marelli, a manufacturer of fuel injection systems, that is involved in the product
development of the Fiat Bravo. The strategic purchasing activity of Fiat here is “scanning the
market for new fuel injection technologies and motivating the specific supplier who offers the
state-of-the-art technologies to cooperate”. After Fiat’s purchasing function had tracked Magnetti
Marelli, this supplier had to be managed so that it was willing to commit to Fiat

Also the tactical purchasing activities remain to be carried out by the Purchasing
department. In an SCM-environment, however, the contents of these activities will shift. For
example, selecting a supplier will lead to searching for a “partner” rather than merely a supplier.
The evaluation of the different possible suppliers has to be done on different features than in the
case of the selection of an “ordinary” supplier. Soft variables, like culture within the supplier’s
organization and congruence in goals, are important.

The operational purchasing activities, however, usually will be decentralized and not per se
executed by Purchasing. For example, traditionally, if a warehouse manager notices that the level
of the inventory is too low, he writes an order coupon and sends it to the Purchasing department.
The purchaser will check the order coupon and order the product. Clearly, in the new situation it
is much more logical if the warehouse manager is empowered to order the product directly with a
supplier as long as the product is listed in the “catalog” and a window contract with the supplier
is available. Nowadays, frequently e-purchasing software tools are used to allow decentralizing
the operational purchasing activities.
Summarizing, if SCM on the first level is implemented, the position of Purchasing will be
upgraded and Purchasing will be on par with functions such as O&L and M&S.
Furthermore, the activities of Purchasing will be enriched while operational activities will
be decentralized. The result of the coordinated activities within the firm is an increase in
value and a decrease in operational cost, exactly what SCM is all about.

The impact of SCM at the second level on purchasing

In this section, SCM at the second level, i.e. coordination of Business units within an
organization, is considered. Here it is assumed that various BU’s purchase similar goods.

66
Usually, it is felt that SCM at the second level favors the centralized purchasing structure in
order to optimize the coordination, i.e. the emphasis is on “providing one face to the supplier”.
This means that in order to exploit the joint buying power, there will be one single purchasing
organization that usually is located in the head office. However, this will not necessarily provide
the company with an optimal situation. In fact there might be various coordination mechanisms
besides centralizing decisions. In other words, centralizing Purchasing is only one way of
capturing the benefits of SCM on the second level. In practice there are various combinations of
centralized and decentralized Purchasing organizations. One alternative possibility is to
centralize the strategic and tactic purchasing activities and decentralize the operational
purchasing activities. Also here the aforementioned e-purchasing software is instrumental. IBM
adopted a similar structure with their so-called Cross-functional commodity teams. This structure
provided a consolidation of needs on components for the whole organizations with one single
contact point for the supplier. The needs of the different BU’s were bundled and managed by this
team.

Contracting was done centrally on corporate level. However, in all cases the operational
purchasing activities were decentralized.

The impact of SCM at the third level on purchasing

In this section, the impact of SCM at the third level, i.e. coordination of independent
organizations within a supply chain, on Purchasing is considered. Compared to the previous two
sections, the scope will be widened across the company borders. The emphasis here will be on
how to coordination the activities of a company with its suppliers. More specifically the
following three issues will be reviewed: “Which type of products will require which type of
coordination?”, “Which types of supply chain relations are relevant?” and “How should SCM-
relations be managed?”

For each purchased product it has to be decided what type of coordination activities are
desired. For this purpose the well-known Kraljic purchasing portfolio matrix is a helpful

67
tool. The matrix differentiates products by two variables: impact on financial result and
supplier risk, see Figure 3. Routine products are low-valued and carry little risk because
there are various suppliers that are more-or-less exchangeable. One example is office
supplies. Leverage products are high-value products that can be delivered by many
suppliers. Bottleneck products are low-value products of which the supplier base is small.
Strategic products are high-value products of which the supply is dependent on a specific
supplier. An example is the engine supplied by Bosch to DAF. In cooperation with Bosch, DAF
developed a new engine type. Bosch has brought in the fuel injection knowledge. This product is
of high value and it is virtually impossible to replace Bosch since the engine is completely
adapted to the specific Bosch fuel injection system.

The optimal level of supply chain integration can be deducted from the Kraljic matrix as
follows. Only in case of strategic products a true supply chain partnership makes sense. For these
products, the primary role of Purchasing is to secure the timely delivery. Because of the impact
on the financial result, the necessary investments in time, effort, IT-systems and so on become
feasible. In the case of routine products, extensive integration will not provide many gains and
the coordination costs will rise. Consequently, it is not worthwhile to invest in heavily in supply
chain relations with suppliers of routine products. In the case of leverage products, the gains of
integration will be higher when compared to routine products. However, since there are many
alternative suppliers, it is probably more profitable to use the buying power to “squeeze” the

68
supplier. This is in fact what Lopez did when he was in charge of Volkswagen: “I want 12 quotes
for any component to goes into a car”. In the case of a bottleneck product the sensible strategy is
twofold. On the short-term continuity in supply is to be established. However, on the long-term
Purchasing has to internally urge for a redesign of the manufactured product in order to make
sure that in the future the bottleneck product is no longer needed.

Frequently, SCM on the third level is associated with so-called supply chain partnerships. Like
in a good marriage, partners are supposed to share everything and take each other’s whishes and
needs into account always. Unfortunately, but not surprisingly, such partnerships are rare in the
business environment. However, this does not imply that SCM does not exist in practice. In fact,
in reality, besides a full partnership, there is a wide variety of ways to coordinate the supply
chain. In Figure 4 a continuum between a simple suppliercustomer and a full supply chain
partnership is given.

On the left-hand side in Figure 4, there is a traditional supplier-customer relation with no

coordination. On the right hand side there is a full partnership with central optimization, i.e. the
companies forming the partnership are considered as operating like a single entity. Inbetween
these two extremes several other coordinating mechanisms are given. The farther on the right
side, the more intense, involving and complex the relationship is. It can be observed that a first
step towards coordination is to share information between the involved supply chain parties.
Moreover, this is also a necessary condition for all other coordination mechanisms. The
information might for instance consist of production plans, actual demand or promotion
campaigns. A next step would be to add parameters to the contracts such as pay-backs, revenue
sharing, quantity discounts or license fees. The rationale behind such contracts is that it allows
the decision-makers in the two autonomous companies to strive for their own optimal situation
without making the situation worse for their supply chain partners. One step further would lead

69
to situations in which, for example, a supplier would be responsible for managing the inventory
of its customer. This is known as Vendor Managed Inventory (VMI) or Consignment
inventories.

As a closing remark it is to be mentioned that, obviously, it is Purchasing that is responsible for

establishing and maintaining the “right level” of partnership with autonomous suppliers for the
“right product”. Quite obviously these purchasing activities are of strategic nature and go way
beyond the operational activities performed by Purchasing in the traditional non-SCM company.
Such initiatives are known in the automotive industry under the name Co-makership because the
suppliers perform an ever-increasing percentage of the primary manufacturing activities. In other
industries similar initiatives are known as “the Extended Supply Chain”: the suppliers are
considered as an integrated part of the organization.

THE ROLE OF LOGISTICS

Logistics is a wide-spanning term, which is constantly evolving, covering more and more issues
in the business environment (Skjött-Larsen, 2000). Some cornerstones of logistics can however
be traced from its roles and activities. In general, the role of logistics has grown considerably
during the last years and depending on whom you ask, the function might include activities such
as transportation, warehousing, inventories, order processing, packaging, materials handling,
forecasting and planning and purchasing.

Quayle and Jones (1999, p.85-86) define logistics as a strategic and holistic view of thinking,
which embraces all links in the flow of materials and its related information in order to make the
activities perform in accordance with overall business objectives. The obligations of logistics
point towards its value-added role in assuring the four basic utilities place, time, form and
possession.

However, Coyle et al. (1996, p.34-35) argue that two of the most important roles of logistics are
to add value in terms of time and place utility. Place and time utility are ensured mainly through
transportation and accurate inventory management. Ballou (1999, p.7) argues that there are many

70
activities that have to be performed in order to provide mainly time and place utility. These
activities vary between companies depending on issues such as organisational structure,
management perception about logistics, and the company’s role in the supply chain.

Lambert et al. (1998, p. 564-565) state that the role of logistics can be seen from three different
hierarchical levels, which figure 3.3 illustrates below. The highest level is the strategic level,
which considers issues such as business objectives and customer service. The second level is
named tactical and handles decisions such as location of warehouses and types of inventory
control systems. The operating level focuses on day-to-day decisions, such as quality control,
vehicle routing and scheduling.

LOGISTICS ACTIVITIES
The Council of Supply Chain Management Professionals (CSCMP, 2006) states that typical
logistics activities that should be handled by the logistics function are materials handling,
inventory management, transportation management and warehousing.

The predecessor of CSCMP is Council of Logistics Management, CLM, and the major logistics
activities according to them are transport management, inventory management, warehousing and
storage, packaging, materials handling, order processing, demand/sales forecasting, customer
service, purchasing, warehouse site location and return goods handling. (Ballou, 1999, p.8)
Quality control can also be seen as a logistics activity according to Langevin and Riopel (2005,
p.4-9).
71
Langevin and Riopel (2005, p. 4-9) have categorised logistics activities based on definitions
gathered from 66 different sources and have divided the major activities into strategic, network
and operational level. The strategic level incorporates strategic decisions spanning over
crossfunctional areas in a company. One example of a strategic decision, in which the logistics
function is involved, is the customer service and the related metrics for measuring customer
service. The network level concerns long-range structural decisions, which include issues such as
communication and information networks. The activities on the operational level are divided
into nine different decision areas: demand forecasting, inventory management, purchasing,
production, warehousing, transportation, materials handling, packaging and order processing.

Coyle et al. (1996, p.43) state that the logistics function cooperates mainly with two other
functions inside a company, the marketing and sales functions. However CSCMP (2006) has a
broader view of the integrating role of logistics that incorporates integration with the marketing-,
IT- and finance functions. Coyle et al. (1996, p.43) highlight that the logistics function has a
close corporation with other functional areas in almost every company since the logistics
activities works cross-functionally in many aspects. According to CSCMP (2006) the reason for
this is because logistics is involved in all levels of planning, implementation and control of the

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material flow. Nevertheless, the logistics function does not necessarily include purchasing which
can be a separate function. Coyle et al. (1996, p.44) also state that purchasing sometimes is
excluded from the logistics function in many companies, although it is regarded as a logistics
activity by many authors. To exclude purchasing from the logistics function, and perceive it as a
separate function, is especially evident within companies that have a focus on physical
distribution such as wholesalers.

Van Weele (2005), as well as Fawcett and Fawcett (1995), separate the logistics function from
the purchasing function. In their view, the logistics function should work more with activities
such as distribution and warehousing than purchasing. Bowersox and Closs (1996, p.25) state
that the logistics competency covers transportation, inventory, warehousing, material handling
and packaging. Purchasing is excluded from their definition.

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CHAPTER-4 SOURCE OF PURCHARSING:

Different Types of Purchases

Type of Purchase Description Examples

Raw materials Items with a lack of processing by the Petroleum, coal, lumber, copper,
supplier into a newly formed product. zinc, gold, and silver
Often these raw materials are not of equal
quality and are purchased by “grade.”

Semi-finished All items purchased from a supplier Components, subassemblies,

products and required to support an organization’s final assemblies, subsystems, and
components that are production. systems (seat assembly, steering
assembly, doors, and posts)

Finished products Products for internal use or products that Furniture, computers, cars, and
require no major processing before resale carts
to the end customer.

Maintenance, repair, Items that do not go directly into an Spare parts, office and cleaning
and operating items organization’s product but are required to supplies
(MRO) run the business.

Production support Materials required for packaging and Tape, bags, inserts, and shrink-wrap
items shipping.

Services Services required to support the facility or Customer support, temporary labor,
the business. facilities, and legal

Capital equipment Assets intended to be used for more than Machinery, computer systems, and

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Type of Purchase Description Examples

one year. material-handling equipment

Transportation and A specialized type of service buying to Rail, truck, ocean, 3PL, and
third-party manage inbound and outbound material multimodal
purchasing flows.

FACTORS FOR INTEGRATION

Each function within a company contains different activities that all contribute to the creation of
added value. It is not unusual that functions work after own goals, which easily can lead to
suboptimisation and thereby making integration efforts hard to achieve. A big challenge for the
top management is hence to ensure that the overall goal is achieved, which requires that the
functions within the company to some extent work together. The functions of purchasing and
logistics each have a large impact on the success of a company, but their greatest potential
depends on if they are integrated or not. (Fawcett and Fawcett, 1995)

HISTORICAL FACTORS

Hayes and Wheelwright (1984, cited in Pagell, 2004*) suggests that the key factors for
integration are structure, measurement and rewards, job rotation, communication, information
technology and top management support. Figure 3.4 visualise these factors.

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STRUCTURE

According to Stank et al. (1994) the structure of an organisation is a critical factor that to a great
extent influences the internal relationships between the functions of the organisation.
Organisational structure also affects the information flow and the human relations. Some other
areas where structure has a great impact are for instance internal collaboration and allocation of
power and responsibilities within the organisation.

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MEASUREMENT AND REWARD SYSTEMS

Beretta (2004) claims that performance measures enable effective integration within a company.
This is clarified by Pagell (2004) who argues that not only measurements but also reward
systems are great ways of integrating the purchasing and logistics functions. Performance
measurement is also essential for every company because it creates comprehension, and brings
understanding to the different work of each function. Performance measurement is the factor on
which integration between functions is built. Many authors argue that logistics has a direct
connection to the purchasing and marketing function within a company. By measuring logistics
and purchasing performance, the integration between the functions becomes easier to achieve.
(Fawcett and Cooper, 1998)

Nevertheless, it is essential that the performance measurement systems must be adaptable with
the information systems of the company to be able to construct an integration-oriented
company culture. (Fawcett and Fawcett, 1995) Another hinder towards functional integration is
the tendency towards counterproductive performance measurement. Without consistent
measures it is very hard to get the whole organisation to strive towards overall strategic
objectives. (Fawcett and Cooper, 2001)

Lei et al. (1990) argue that a reward system constitutes the relationship between a company and
its employees. Furthermore the reward system defines the values and norms of the company.
Allen and Kilmann (2001) claim that reward systems should be used by companies with the
purpose to increase the motivation of the employees. If they are able to do so, this would lead to
that the company overall strategy can be obtained and hence create a culture and structure where
different function support each other’s work. Historically, the characteristics of reward systems
have been to compensate the employees within a certain function of a company for their
individual achievement. For instance, Pagell’s (2004) research demonstrates that the purchasing
function was mainly rewarded on how well the purchasers were able to reduce the prices. In the
research it emerged that one purchasing manager claimed that when a trade-off was to be made
between price and quality, he/she would choose a lower price of a product even if this would
lead to lower quality.

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Job rotation

The area of job rotation can gain major advantages concerning integration within a company. By
using job rotation, the employees can get more insight and knowledge about other functions
work and issues they need to deal with and thereby add value through their extended experience.
(Song et al., 2006) Furthermore Adomi (2006) claim that job rotation increases “the life of the
organization” as it also enhances the employees understanding and possibility to adapt to
changes within the organisation. Lenders and Wierenga (2002) argue that moving employees
across functions reduces isolated thoughts and can help people within different functions to
interact, which enables integration.

Communication

Pagell (2004) argue that one of the major enablers, and also hinders, of integration is
communication. Fawcett and Fawcett (1995) claim that communication is needed to be able to
overcome gaps between functional areas. To overcome the gaps it is critical that all
functionswithin a company are well aware about their respective roles. Narasimhan and Soo
Wook (2001) talk about something called functional integration, which focus on minimising the
trade-offs between purchase discount and the level of inventory. In order to minimise these
trade-offs, communication is vital between the functions. Large (2005) claims, for instance, that
interpersonal communications is the skill that is required by purchasers to perform efficiently.
Furthermore, Gammelgaard and Larson (2001) argue that logistics people need to be able to
communicate across functional borders in order to be successful.

Information technology

The introduction of Information Technology (IT), which has helped companies to communicate
both internally and externally, has helped many companies to integrate different functional areas.
(Narasimhan and Soo Wook, 2002, Beretta, 2004) The discussion whether to name a company
system for enterprise resource planning system (ERP) or enterprise systems is divided among

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authors. However, they all share the same purpose, which is to integrate different business
processes and functions. Another aim with ERP-systems is to provide the company with a
holistic view. (Jarrar et al., 2000)

Davenport and Brooks (2004) claim that ERP-systems in the past have helped companies to
manage their inventory in an effective way. One of the first functions that were supported by
this type of system inside a company was the purchasing function (Sherer, 2005). ERP-systems
can help companies to overcome traditional functional barriers and is a condition to whether a
process-based approach can be successful or not (Davenport and Brooks, 2004). A company’s
ERP-system is a factor that affects logistics costs and service levels at the same time (Bardi and
Raghunathan, 1994).

Nevertheless, the major problem with ERP-systems has been to integrate them with other type
of systems within the company. For instance, there are systems that have solely been designed to
handle the information within a specific function, which has caused communication problems
with other functions (Davenport and Brooks, 2004). In order to become successful, Jarrar et al.
(2006) claims that ERP-systems require top management support

Top management support

According to Pagell (2004) top management support is required to create integration between
the functions of purchasing and logistics. If there is a lack of support from top management, this
will be a factor that hinders integration. Fawcett et al. (2006) also argue that top management
must facilitate the work of the manager within each function of a company in order to create
integration. Many managers also find it more difficult to create an adequate collaboration
between the internal functions of the company compared to external actors of the supply chain.
However, a successful functional integration has to start with top management support. This is,
indeed, the stepping-stone for functional integration because a change needs to be accepted
among the workforce as well. In this changing process, top management has a critical role in
winning commitment from the workforce. (Fawcett and Cooper, 2001)

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CONCEPTUAL MODEL

The conceptual model has at this point grown from its original appearance in chapter 1.7. The
theoretical findings regarding purchasing and logistics activities as well as factors for integration
have been added and are presented in the theory box. A reference to where further information
can be found regarding the activities and factors are marked out by parenthesis.

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CHAPTER-5 JUST-IN-TIME PURCHASING

CHARACTERISTICS OF JUST-IN-TIME SYSTEMS

Just-in-time systems focus on reducing inefficiency and unproductive time in the production
process to improve continuously the process and the quality of the product or service. Employee
involvement and inventory reduction are essential to JIT operations. Just-in-time systems are
known by many different names, including zero inventory, synchronous manufacturing, lean
production, stockless production (Hewlett-Packard), material as needed (Harley-Davidson), and
continuous flow manufacturing (IBM). In this section we discuss the following characteristics of
JIT systems: pull method of material mow, consistently high quality, small lot sizes, uniform
workstation loads, standardized components and work methods, close supplier ties, flexible work
force, line flow strategy, automated production, and preventive maintenance.

Pull Method of Materials Flow

Just-in-time systems utilize the pull method of materials flow. However, another popular method
is the push method. To differentiate between these two systems, let's first consider the production
system for a Quarter Pounder at a McDonald's restaurant. There are two workstations. The
burger maker is the person responsible for producing this burger: Burger patties must be fried;
buns must be toasted and then dressed with ketchup, pickles, mayonnaise lettuce, and cheese;
and the patties must be inserted into buns and put on a tray. The final assembler takes the tray,
wraps the burgers in paper, and restocks the inventory. Inventories must be kept low because any
burgers left unsold after seven minutes must be destroyed.
The flow of materials is from the burger maker to the final assembler to the customer. One
way to manage this flow is by using the push method, in which the production of the item begins
in advance of customer needs. With this method, management schedules the receipt of all raw
materials (e.g., meat, buns, and condiments) and authorizes the start of production, all in advance
of Quarter Pounder needs. The burger maker starts production of 24 burgers (the capacity of the
griddle) and, when they are completed, pushes them along to the final assembler's station, where
they might have to wait until she is ready for them. The packaged burgers then wait on a
warming tray until a customer purchases one.

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 The other way to manage the flow among the burger maker, the final assembler, and the
customer is to use the pull method, in which customer demand activates production of the item.
With the pull method, as customers purchase burgers, the final assembler checks the inventory
level of burgers and, when they are almost depleted, orders six more. The burger maker produces
the six burgers and gives the tray to the final assembler, who completes the assembly and places
the burgers in the inventory for sale. The pull method is better for the production of burgers: The
two workers can coordinate the two workstations to keep inventory low, important because of
the seven-minute time limit. The production of burgers is a highly repetitive process, setup times
and process times are low, and the flow of materials is well defined. There is no need to produce
to anticipated needs more than a few minutes ahead.
Firms that tend to have highly repetitive manufacturing processes and well-defined material
flows use just-in-time systems because the pull method allows closer control of inventory and
production at the workstations. Other firms, such as those producing a large variety of products
in low volumes with low repeatability in the production process, tend to use a push method such
as MRP. In this case a customer order is promised for delivery on some future date. Production is
started at the first workstation and pushed ahead to the next one. Inventory can accumulate at
each workstation because workstations are responsible for producing many other orders and may
be busy at any particular time.

Consistently High Quality

Just-in-time systems seek to eliminate scrap and rework in order to achieve a uniform flow of
materials. Efficient JIT operations require conformance to product or service specifications and
implementation of the behavioral and statistical methods of total quality management (TQM).
JIT systems control quality at the source, with workers acting as their own quality inspectors. For
example, a soldering operation at the Texas Instruments antenna department had a defect rate
that varied from zero to 50 percent on a daily basis, averaging about 20 percent. To compensate,
production planners increased the lot sizes, which only increased inventory levels and did
nothing to reduce the number of defective items. Engineers discovered through experimentation
that gas temperature was a critical variable in producing defect-free items. They devised

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statistical control charts for the operators to use to monitor gas temperature and adjust it
themselves. Process yields immediately improved and stabilized at 95 percent, eventually
enabling management to implement a JIT system.
Management must realize the enormous responsibility this method places on the workers and
must prepare them properly, as one GM division quickly learned. When Buick City began using
JIT in 1985, management authorized its workers to stop the production line by pulling a cord if
quality problems arose at their stations-a practice the Japanese call andon. GM also eliminated
production-line inspectors and cut the number of supervisors by half. Stopping the line, however,
is a costly action that brings a problem to everyone's attention. The workers weren't prepared for
that responsibility; productivity and quality took a nose-dive. The paint on Le Sabres wasn't
shiny enough. The seams weren't straight. The top of the dashboard had an unintended wave.
Management, labor, and engineering formed a team to correct the problems. Work methods were
changed, and the andon system was modified to include a yellow warning cord so that workers
could call for help without stopping the line.

Small Lot Sizes

Rather than building up a cushion of inventory, users of JIT systems maintain inventory with lot
sizes that are as small as possible. Small lot sizes have three benefits. First, small lot sizes reduce
cycle inventory, the inventory in excess of the safety stock carried between orders (see the
Inventory Management chapter). The average cycle inventory equals one-half the lot size: As the
lot size gets smaller, so does cycle inventory. Reducing cycle inventory reduces the time and
space involved in manufacturing and holding inventory
Second, small lot sizes help cut lead times. A decline in lead-time in turn cuts pipeline (WIP)
inventory because the total processing time at each workstation is greater for large lots than for
small lots. Also, a large lot often has to wait longer to be processed at the next workstation while
that workstation finishes working on another large lot. In addition, if any defective items are
discovered, large lots cause longer delays because the entire lot must be inspected to find all the
items that need rework.
Finally, small lots help achieve a uniform operating system workload. Large lots consume
large chunks of processing time on workstations and therefore complicate scheduling. Small lots
can be juggled more effectively, enabling schedulers to utilize capacities more efficiently. In

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addition, small lots allow workstations to accommodate mixed-model production (more than one
item) by reducing waiting line times for production. We return to this point when we discuss
uniform workstation loads.
Although small lot sizes are beneficial to operations, they have the disadvantage of increased
setup frequency. In operations where the setup times are normally low, as in the McDonald's
example, small lots are feasible. However, in fabrication operations with sizable setup times,
increasing the frequency of setups may result in wasting employee and equipment time. These
operations must reduce setup times to realize the benefits of small-lot production.
Achieving low setup times often requires close cooperation among engineering, management,
and labor. For example, changing dies on large presses to form automobile parts from sheet
metal can take three to four hours. At Honda's Marysville, Ohio, plant--where four stamping
lines stamp all the exterior and major interior body panels for Accord production--teams worked
on ways to reduce the changeover time for the massive dies. As a result, a complete change of
dies for a giant 2400-ton press now takes less than eight minutes. The goal of single-digit setup
means having setup times of less than 10 minutes. Some techniques to reduce setup times include
using conveyors for die storage, moving large dies with cranes, simplifying dies, enacting
machine controls, using microcomputers to automatically feed and position work, and preparing
for changeovers while the current job is being processed.

Uniform Workstation Loads

The JIT system works best if the daily load on individual workstations is relatively uniform.
Uniform loads can be achieved by assembling the same type and number of units each day, thus
creating a uniform daily demand at all workstations. Capacity planning, which recognizes
capacity constraints at critical workstations, and line balancing are used to develop the monthly
master production schedule. For example, at Toyota the aggregate production plan may call for
4500 minivans per week for the next month. That requires two full shifts, five days per week,
producing 900 minivans each day, or 450 per shift. Three models of minivans are produced:
Camry (C), Avalon (A), and Sienna (S). Suppose that Toyota needs 200 Camrys, 150 Avalons,
and 100 Siennas per shift to satisfy market demand. To produce 450 units in one shift of 480
minutes, the line must roll out a minivan every 480/450 = 1.067 minutes.

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 Three ways of devising a master production schedule for the minivans are of interest here.
First, with big-lot production, all daily requirements of a model are produced in one batch before
another model is started. The sequence of 200 C's, 150 As, and 100 S's would be repeated once
per shift. Not only would these big lots increase the average cycle inventory level, but they also
would cause lumpy requirements on all the workstations feeding the assembly line.
The second option uses mixed-model assembly, producing a mix of models in smaller lots.
Note that the production requirements are in the ratio of 4 C's to 3 A's to 2 S's, found by dividing
the model's production requirements by the greatest common divisor, or 50. Thus the Toyota
planner could develop a production cycle consisting of 9 units: 4 C's, 3 As, and 2 S's. The cycle
would repeat in 9(1.067)= 9.60 minutes, for a total of 50 times per shift (480 min/9.60 min = 50).
A sequence of C-S-C-A-C-A-C-S-A, repeated 50 times per shift, would achieve the same total
output as the other options. This third option is feasible only if the setup times are very short.
The sequence generates a steady rate of component requirements for the various models and
allows the use of small lot sizes at the feeder workstations. Consequently, the capacity
requirements at those stations are greatly smoothed. These requirements can be compared to
actual capacities during the planning phase, and modifications to the production cycle,
production requirements, or capacities can be made as necessary.

Standardized Components and Work Methods

The standardization of components, called part commonality or modularity, increases

repeatability. For example, a firm producing 10 products from 1000 different components could
redesign its products so that they consist of only 100 different components with larger daily
requirements. Because the requirements per component increase, so does repeatability; that is,
each worker performs a standardized task or work method more often each day. Productivity
tends to increase because, with increased repetition, workers learn to do the task more efficiently
Standardization of components and work methods aids in achieving the high-productivity, low-
inventory objectives of JIT systems.

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Close Supplier Ties

Because JIT systems operate with very low levels of inventory, close relationships with suppliers
are necessary. Stock shipments must be frequent, have short lead times, arrive on schedule, and
be of high quality. A contract might require a supplier to deliver goods to a factory as often as
several times per day. Purchasing managers focus on three areas: reducing the number of
suppliers, using local suppliers, and improving supplier relations.
Typically, one of the first actions undertaken when a JIT system is implemented is to pare the
number of suppliers. Xerox, for example, reduced the number of its suppliers from 5000 to just
300. This approach puts a lot of pressure on these suppliers to deliver high-quality components
on time. To compensate, JIT users extend their contracts with these suppliers and give them firm
advance-order information. In addition, they include their suppliers in the early phases of product
design to avoid problems after production has begun. They also work with their suppliers'
vendors, trying to achieve JIT inventory flows throughout the entire supply chain.
Manufacturers using JIT systems generally utilize local suppliers. For instance, when GM
located its Saturn complex in Tennessee, many suppliers clustered nearby. Harley-Davidson
reduced the number of its suppliers and gave preference to those close to its plants--for example,
three-fourths of the suppliers for the Milwaukee engine plant are located within a 175-mile
radius. Geographic proximity means that the company can reduce the need for safety stocks.
Companies that have no suppliers close by must rely on a finely tuned supplier delivery system.
For example, New United Motor Manufacturing, Incorporated (NUMMI), the joint venture
between GM and Toyota in California, has suppliers in Indiana, Ohio, and Michigan. Through a
carefully coordinated system involving trains and piggyback truck trailers, suppliers deliver
enough parts for exactly one day's production each day.
Users of JIT systems also find that a cooperative orientation with suppliers is essential. The
JIT philosophy is to look for ways to improve efficiency and reduce inventories throughout the
supply chain. Close cooperation between companies and their suppliers can be a win-win
situation for everyone. Better communication of component requirements, for example, enables
more efficient inventory planning and delivery scheduling by suppliers, thereby improving
supplier profit margins. Customers can then negotiate lower component prices. Suppliers also

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should be included in the design of new products so that inefficient component designs can be
avoided before production begins. Close supplier relations can't be established and maintained if
companies view their suppliers as adversaries whenever contracts are negotiated. Rather, they
should consider suppliers to be partners in a venture wherein both parties have an interest in
maintaining a long-term, profitable relationship.

Flexible Work Force

Workers in flexible work forces can be trained to perform more than one job. When the skill
levels required to perform most tasks are low--at a McDonald's restaurant, for instance--a high
degree of flexibility in the work force can be achieved with little training. In situations requiring
higher skill levels, such as at the Texas Instruments antenna department, shifting workers to
other jobs may require extensive, costly training. Flexibility can be very beneficial: Workers can
be shifted among workstations to help relieve bottlenecks as they arise without resorting to
inventory buffers--an important aspect of the uniform flow of JIT systems. Or they can step in
and do the job for those on vacation or out sick. Although assigning workers to tasks they don't
usually perform may reduce efficiency, some rotation relieves boredom and refreshes workers.

Line Flow Strategy

A line flow strategy can reduce the frequency of setups. If volumes of specific products are large
enough, groups of machines and workers can be organized into a product layout to eliminate
setups entirely. If volume is insufficient to keep a line of similar products busy, group
technology can be used to design small production lines that manufacture, in volume, families of
components with common attributes. Changeovers from a component in one product family to
the next component in the same family are minimal.
Another tactic used to reduce or eliminate setups is the one-worker, multiple machines
(OWMM) approach, which essentially is a one-person line. One worker operates several
machines, with each machine advancing the process a step at a time. Because the same product is
made repeatedly, setups are eliminated. For example, in a McDonald's restaurant the person
preparing fish sandwiches uses the OWMM approach. When the signal is given to produce more
fish sandwiches, the employee puts the fish patties into the fish fryer and sets the timer. Then
while the fish are frying, he puts the buns into the steamer. When the buns are finished, he puts

87
them on a tray and dresses them with condiments. When the fish patties are ready, he inserts
them into the buns. He then places the completed sandwiches on the shelf for the final assembler
to package for the customer. The cycle is repeated throughout the day.

Automated Production

Automation plays a big role in JIT systems and is a key to low-cost production. Sakichi Toyoda,
the founder of Toyota, once said, "Whenever there is money, invest it into machinery. " Money
freed up because of JIT inventory reductions can be invested in automation to reduce costs. The
benefits, of course, are greater profits, greater market share (because prices can be cut), or both.
Automation should be planned carefully, however. Many managers believe that if some
automation is good, more is better. That isn't always the case. When GM initiated Buick City, for
example, it installed 250 robots, some with vision systems for mounting windshields.
Unfortunately, the robots skipped black cars because they couldn't "see" them. New software
eventually solved the problem; however, GM management found that humans could do some
jobs better than robots and replaced 30 robots with humans. That lesson carried over to GM's
Opel plant in Eisenach, Germany, where radiators and windshields are now installed by hand.

Preventive Maintenance

Because JIT emphasizes finely tuned mows of materials and little buffer inventory between
workstations, unplanned machine downtime can be disruptive. Preventive maintenance can
reduce the frequency and duration of machine downtime. After performing routine maintenance
activities, the technician can test other parts that might need to be replaced. Replacement during
regularly scheduled maintenance periods is easier and quicker than dealing with machine failures
during production. Maintenance is done on a schedule that balances the cost of the preventive
maintenance program against the risks and costs of machine failure.
Another tactic is to make workers responsible for routinely maintaining their own equipment
and develop employee pride in keeping their machines in top condition. This tactic, however,
typically is limited to general housekeeping chores, minor lubrication, and adjustments.
Maintenance of high-tech machines needs trained specialists. Doing even simple maintenance
tasks goes a long way toward improving machine performance, though.

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89
UNIT-4

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CHAPTER – 1 OUTSOURCING IN SCM

Outsourcing is subcontracting a process, such as product design or manufacturing, toa third-party

company. The decision to outsource is often made in the interest of loweringfirm costs,
redirecting or conserving energy directed at the competencies of a particularbusiness, or to make
more efficient use of labour, capital, technology and resources.Outsourcing became part of the
business lexicon during the 1980’s.

The strategic use of outside service provides to perform non-revenue generatingactivities so that
an organization may focus on its core competencies. Outsourcingis a business model for
leveraging the capability and capacity externally. Outsourcingis a long-term result oriented
business in an external service provider for servicestraditionally performed with in a company.
Outsourcing means taking out a specificarea of the business and giving it to some one who is an
expert and having assumedend-to-end deliveries.

Outsourcing involves the transfer of the management and / or day-to-day executionof an entire
business function to an external service provider. The client organizationand the supplier enter
into a contractual agreement that defines the transferredservices. Under the agreement the
supplier acquires the means of production inthe form of a transfer of people, assets and other
resources from the client. Theclient agrees to procure the services from the supplier for the term
of the contract.Business segments typically outsourced include information technology, human
resources, facilities and real estate management, and accounting. Many companiesalso outsource
customer support and call center functions like telemarketing,customer services, market research,
manufacturing and engineering.Outsourcing and offshoring are used interchangeably in public
discourse despiteimportant technical differences. Outsourcing involves contracting with a
supplier, whichmay or may not involve some degree of offshoring. Offshoring is the transfer of
anorganizational function to another country, regardless of whether the work is outsourcedor
stays within the same corporation.With increasing globalization of outsourcing companies, the
distinction betweenoutsourcing and offshoring will become less clear over time. This is evident
in the increasingpresence of Indian outsourcing companies in the US and UK. The globalization
ofoutsourcing operating models has resulted in new terms such as near shoring and right shoring

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that reflect the changing mix of locations. This is seen in the opening of offices and
operationscenters by Indian companies in the US and UK. Multi sourcing refers to large
(predominantly IT) outsourcing agreements. Multi sourcing= is a framework to enable different
parts of the client business to be sourced from different suppliers. This requires a governance
model that communicates strategy, clearly definesresponsibility and has end-to-end integration.
Outsourcing is defined as the contracting of one or more of a company’s business processes to an
outside service provider to help increase shareholder value,.
CIO defines outsourcing as an arrangement in which one company provides services for another
company that could also be or usually have been provided in- house.
Automatic data processing Inc. (ADP) defines .outsourcing as the contracting out of a company’s
non- core, non-revenue-producing activities to specialists. It differs from contracting in that
outsourcing is a strategic management tool that involves the restructuring of an organization
around what it does best — its core competencies.

Need for outsourcing

Organization that outsource are seeking to realize benefits or address the following issues:

• Cost savings: The lowering of the overall cost of the service to the business. This will involve
reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access
to lower cost economies through off shoring called “labor arbitrage” generated by the wage gap
between industrialized and developing nations.

• Cost restructuring: Operating leverage is a measure that compares fixed costs to variable
costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable
cost and also by making variable costs more predictable.

• Improve quality: Achieve a step change in quality through contracting out the service with a
new service level agreement.

• Knowledge: Access to intellectual property and wider experience and knowledge.

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• Contract: Services will be provided to a legally binding contract with financial penalties and
legal redress. This is not the case with internal services.

• Operational expertise: Access to operational best practice that would be too difficult or time
consuming to develop in-house.

• Staffing issues: Access to a larger talent pool and a sustainable source of skills.

• Capacity management: an improved method of capacity management of services and

technology where the risk in providing the excess capacity is borne by the supplier

• Catalyst for change: An organization can use an outsourcing agreement as a catalyst for major
step change that cannot be achieved alone. The outsourcer becomes a change agent in the
process.

• Reduce time to market: The acceleration of the development or production of a product

through the additional capability brought by the supplier.

• Commoditization: The trend of standardizing business processes, IT services

and application services enabling businesses to intelligently buy at the right price.
Allows a wide range of businesses access to services previously only available to
large corporations.
• Risk Management: An approach to risk management for some types of risks is
to partner with an outsourcer who is better able to provide the mitigation.
• Time zone: A sequential task can be done during normal day shift in different time
zones – to make it seamlessly available 24X7. Same/similar can be done on a
longer term between earth’s hemispheres of summer/winter.
• Customer Pressure: Customer may see benefits in dealing with your company,
but are not happy with the performance of certain elements of the business, which
they may not see a solution to except through outsourcing.

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WHY DO COMPANIES OUTSOURCE?

There are several reasons why outsourcing is becoming a habit. The simplest reason to
outsource is to alleviate administrative burdens and focus on strategic areas.
As the companies move from non-outsourcing environment to an outsourcing environment the
profile of the time spent by the executives on various activities change dramatically. According
to Figure 1 in a non outsourcing environment, executives spend 60 per cent of their time on
administration matters, while 30 per cent on tactical issues and this leaves only 10 per cent of
their time to focus on strategic matters. On the contrary when they switch to an outsourcing
environment and outsource some of the activities they need to spend only 10 per cent of their
time on handling administration issues, 30 per cent time they focus on tactical matters while 60
per cent of their time they can devote to thinking, strategizing and planning.

Power of Outsourcing in Supply Chain Management

Outsourcing, once a mere option, has today become a competitive imperative. The growth of the
Internet, customer revolution, rise of mass customization, severe competition etc. has forced the
companies to focus on core competencies instead of vertical integration. This means that original
equipment manufacturers (OEMs) must ideally contract out part or all of manufacturing,
assembly, distribution, and support operations. What to outsource has historically been decided
by the question, “Is it strategic to my business?” If the answer is yes, you would keep it. If no,
farm it out. Today, companies are asking a different question : Is it my core competency? If no,
then it is ripe for outsourcing, whether it is ‘strategic’ or not.
The ‘trendsetter barometer’ conducted by Coopers and Lybrand LLP, contraction shows that 83
per cent of America’s fastest growing companies have turned to out-sourcing for one or more
functions

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CHAPTER-2 OUTSOURCING PROCESS

Deciding to outsource
The decision to outsource is taken at a strategic level and normally requires board
approval. Outsourcing is the divestiture of a business function involving the transfer of
people and the sale of assets to the supplier. The process begins with the client identifying
what is to be outsourced and building a business case to justify the decision. Only once a
high-level business case has been established for the scope of services will a search begin
to choose an outsourcing partner. A request for proposal (RFP) is issued to the shortlist
suppliers requesting a proposal and a price. A competition is held where the client marks
and scores the supplier proposals. This may involve a number of face-to-face meetings to
clarify the client requirements and the supplier response. The supplier will be qualified out
until only a few remain. This is known as down select in the industry. It is normal to go into
the due diligence stage with two suppliers to maintain the competition. Following due
diligence the supplier submit a “best and final offer” (BAFO) for the client to make the final
down select decision to one suppliers to go into competitive negotiations.

Negotiations and Finalization

The negotiation takes the original RFP, the supplier proposals, BAFO submissions
and convert these into the contractual agreement between the client and the supplier. This
stage finalizes the documentation and the final pricing structure. At the heart of every
outsourcing deal is a contractual agreement that defines how the client and the supplier will
work together. This is a legally binding document and is core to the governance of the
relationship. There are three terms become active and a service commencement date when the
supplier will take over the services.

Execution
The transition will begin from the effective date and normally run until four months
after service commencement date. This is the process for the staff transfer and take –on of
services. The transformation is the execution of a set of projects to implement the Service

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Level Agreement (SLA), to reduce the Total Cost of Ownership (TCO) or to implement
new services. Emphasis is on ‘standardization’ and ‘centralization’. This is the execution of
the agreement and lasts for the term of the contract. Near the end of the contract term a
decision will be made to terminate or renew the contract. Termination may involve taking
back services (insourcing) or the transfer of services to another supplier.

Outsourcing objectives
• Focus core activity
• Reduced costs
• Improved operational quality
• Achieve high productivity
• De-risk the business

Overseeing supply chain management (SCM) can be a demanding task and a serious time
drainer. That’s why some companies choose to outsource their SCM and leave it to a third-party
organization. While this isn’t for everyone, it can be suitable for many businesses. Here are some
of the inherent risks and benefits of outsourcing SCM

RISKS in Out sourcing

Unanticipated Costs
At first glance, the improved efficiency and financial savings may look appealing. The problem
is that there is always the potential for hidden fees along the way when leaving this process in the
hands of a third party. Issues like increased shipping costs for hauling freight and associated
taxes can put a damper on cost projections that initially appeared promising.

Potential for Setbacks

Although outsourcing SCM will often look great on paper, it can be a complex process with
plenty of opportunities for complications. If the third party you choose creates unrealistic
timelines throughout distribution, it can lead to a host of problems. One scenario could be

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inventory not being received on time, which means consumer demand wouldn’t be met. In turn,
this could lead to revenue loss and further glitches within the supply chain.

Integration Difficulties
Once your business has been fully integrated with a third party, operations should run relatively
smoothly. The problem lies in the transition process, which requires plenty of financial backing
and a considerable time investment from both parties. Even a minor lack of communication can
result in mishaps and delays.

Quality Suffers
When the organization you hire for supply chain management lacks experience in your industry,
the quality of your products may diminish. If the organization cuts corners, uses cheaper
materials, and doesn’t fully assess risks, it can be detrimental to your company. Sales can
decrease along with your brand equity, and competitors are more likely to get ahead.

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CHAPTER-3 THE BENEFITS OF OUTSOURCING

While there are a considerable amount of risks with outsourcing, there are just as many
advantages. Assuming you perform enough research and join forces with a professional
organization, your business can prosper.

Focus on Other Business Aspects

Because other individuals will be handling supply and distribution, you can spend more time on
further building your business. SCM can easily eat away at precious hours, so you can use those
saved hours for marketing, establishing customer relationships, and developing new ideas. This
should make your company more productive and help your long-term success.

Minimize Overall Costs

By hiring a professional organization, you can use their expertise, knowledge, and connections to
reduce your overall expenses. They will work on logistics and with other resource providers to
develop the most cost-effective plan possible. This might include making changes like obtaining
less expensive materials, transportation optimization, and better inventory management. If the
organization decides to go offshore, this can boost your savings even more.

Meet Customer Demand

If your business has plateaued due to lack of resources, you may only be able to supply your
customers with a finite number of products. When this is the case, it can be nearly impossible to
grow and build your brand equity. Outsourcing can help you in this department because an
organization will take the necessary steps to obtain the quantity of products your customers want.
This can be the catalyst for major growth and propel your business into the future.

More Flexibility
By working with a third-party organization, you have access to their resources, which means
you’ll have help in creating a more extensive infrastructure. This way, you can pick and choose
who your company does business with and make adjustments along the way.

Like in most other areas of business, with risk comes reward. If you’re unprepared and haven’t
covered all the bases, outsourcing supply chain management can throw a wrench in your plans

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and hurt your overall efficiency. On the other hand, doing your research and hiring the right
organization can do wonders for your company. It can make your life easier, reduce stress, and
allow you to get more things done. It can also raise customer satisfaction, drive higher profit
margins, and fuel growth

NEW OPPORTUNITIES IN SCM OUTSOURCING

In today’s global economy, companies are making their best attempt at shedding their flab and
becoming lean and trim. This new avatar can ensure a faster response, agility and better ability to
handle pressure. These companies often find it much more cost effective to outsource rather than
build a proprietary infrastructure. They believe in having no production facility, no warehouse,
no loading dock, no boardroom—just office space, a handful of employees, and a great idea for a
product or service and marketing strength.
In this case, outsourcing SCM can ensure that the entire necessary infrastructure is in place,
without actually having to spend on any infrastructure. This can save a lot of working capital
from getting locked. Moreover, companies can then focus on core activity of getting the
customers and servicing them efficiently.
Through the use of outsourced services, enterprises can avoid all or some of the costs associated
with physical plant, specialized IT systems and equipment, telephone lines and bodies—and best
of all—no distractions from the carrying out of their core competencies. Especially young
companies or new companies should not waste t time focusing on
building these operational infrastructures when their primary business is to create and sell
products and services—and not managing supply chain activities.

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DETERMINING WHEN TO OUTSOURCE SUPPLY CHAIN
MANAGEMENT SERVICES

In today's highly competitive and dynamic global business environment with vastly extended
supply chains, companies can often be confused by the many logistics options and sources
available to them when seeking to implement a highly visible supply chain management (SCM)
solution.

Before making a decision on how to best integrate advancing technologies into your company's
supply chain, however, it is more important than ever to evaluate the many existing options
today.

Companies should closely examine their internal cultural alignment, core competencies and
business capabilities before making a decision. A company's cultural alignment, cross-
departmental capabilities and corporate commitment to funding IT initiatives provide the seminal
factors in determining whether it should keep supply chain management services in-house or
outsource them to a qualified third party logistics provider.

First and foremost, shippers must determine the state of their existing WMS system. If it is
consistently out-of-stock with finished products for customers, an in-house logistics system is
not providing the IT capabilities necessary to avoid poor lead times and missed shipments.

Outsourcing logistics to a 3PL can prevent losing customers and revenues. If, however, a proper
in-house IT infrastructure is in place, cost-savings and efficiencies may be realized - at least in
the short-term. (Typically, if companies try to add-on newer technologies to existing legacy
platforms, these costs will outweigh the cost of outsourcing.)

If a shipper finds that its production facilities are down for long periods of time and logistics
operations are not flexible enough to meet the requirements of after-hours deliveries and

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expedited service, there may be no choice but to pay the extra costs and outsource the logistics
process on top of paying for large overhead for an inflexible logistics operation.

If the in-house logistics operation is already funded as a core competency, you may already have
a competitive edge. Flexibility is the key here.

Evaluate delivery date success. If the targeted dates for time-sensitive product launches are not
consistently being met, it is a good indication that internal staffing and facility capacity cannot
keep up with customer demand. This indicates a company probably requires the assistance of a
3PL along with the financial commitment to the third party has already made to integrated IT
development.

Shippers should also assess overhead and fixed logistics costs before making a decision. If these
expenses are squeezing the bottom line, customers may realize virtually instant savings by
consolidating warehouse operations with a "shared" facility operated by a 3PL. This can move
fixed costs to a variable expense, which provides flexibility in responding to market dynamics.

If in examining IT capabilities, if a company determines that it cannot adapt to growing supply

chain needs, it should consider outsourcing its logistics data and integrating it with that of a 3PL
that specializes in customized supply chain solutions.

Rather than waiting years for a new system to be developed internally, companies often find that
outsourcing both the technology and logistics process to a suitable 3PL will realize long-term
cost savings, while expediting the supply chain process.

Companies should evaluate their customs compliance readiness. With the implementation of the
Customs Modernization Act, compliance assessments and audits became widely used as a tool to
maximize compliance and provide uniformity.

Regular assessment of import compliance processes and procedures require an evaluation of the
overall effectiveness of the Customs Compliance Program, employee education and training
programs, and operating procedures.

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If a company is unable to develop compliance and cost goals, formal policies, training programs,
internal revenues and supplier compliance programs, the selection of a suitable 3PL to provide
the required skill sets to establish a process-based compliance function is critical.

Ultimately, following an in-depth evaluation of the entire supply chain process, many companies
find that including a mix of in-house and outsourced logistics functions may provide the best
solution for them.

In a global economy, where there is no set criterion for supply chain success, companies have to
carefully analyze their unique requirements and determine what logistics solutions are best suited
to meeting their specific distribution needs.

Cost is always important, but ultimately the success of any global supply chain management
process relates back to client satisfaction as a means of achieving customer focus and growth in
market share.

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CHAPTER-4 MYTHS OF SCM OUTSOURCING

SEVEN MYTHS OF SUPPLY CHAIN OUTSOURCING

These seven myths can help manufacturers realize the original vision of this option.

Myth 1 : My outsourced partners are all supply chain experts.

The reality is that they know very little about your (or anyone else’s) supply chain. What they are
experts in is producing the maximum volume of product at the minimum cost. Doing this does
not require much visibility into their supply chains; it requires focusing on their internal business
processes. The old saying of ‘garbage in, garbage out’ applies here. The best partner in the world
will do a great job. of building perfectly to specifications and delivering on time a product that
never has and never will work. It’s your responsibility to ensure that your outsourcing partner
knows your current specifications (not those planned three to six months ago, which may now be
obsolete), and that you have real time, web-based access to their work in progress and bills of
materials. Only through such oversight, can you enable your outsourced partners to produce as
though they actually were supply chain experts.

Myth 2 : My partners have state-of-the-art information technology (IT) infrastructures.

You may assume that your outsourcing provider has a fully automated system and end-to-end
electronic data interchange or web-based links with its suppliers. Unfortunately, this assumption
is not grounded in reality. The reason is that most outsourcers have net profit margins in the 2
per cent to 4 per cent range, and any cost centre that does not directly relate to product quality
becomes a candidate for the ‘budget axe’. Consequently, new investments in IT infrastructures
are about as common as ice storms in the Sahara. Instead, legacy systems that predate the
Internet and that lack supply chain-specific functionality are common. When you choose an
outsourcing provider, your challenge is to provide him with a way to access integratable state-of-
the-art supply chain systems without his having to invest a penny in the procurement of those
systems.

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Myth 3 : By outsourcing production and fulfilment, I will not have to worry about
execution.

The issue here is that you, and you alone, are responsible for the ultimate execution of your
project and delivery of your products. Outsourcing is a means to an end, and your ends are
necessarily different from those to whom you outsource. Consider that multiple subsets of
unfinished goods generally comprise finished goods. Each unfinished good has a particular
process, timetable, set of inefficiencies and potential obstacles. The result is that the acceptance
of an order can be followed by missteps and missed deadlines by a variety of third parties, and
any of these problems can cause serious problems with manufacturing and fulfilment. It has been
said that when everyone is in charge, no one is in charge, and the proliferation of these third
parties makes that aphorism a reality. Therefore, you must take direct responsibility for end- to-
end execution or suffer the consequences.

Myth 4 : My outsourced partners will provide expert project management.

It is better to view these partners as renegade divisions of your company. They may get the job
done, but they will do it their way, with their own processes and without an interest in integrating
their data with yours. How can you reconcile these apparent conflicts of interest ? First, you must
recognize that your outsourcing partners would not be in business unless they had many other
customers’ demands to satisfy, many other deadlines to meet, and a high attention to cost
containment.
Second, you should understand that your partners will be, by the nature of their businesses,
paying attention only to that small portion of the manufacturing! fulfilment process with which
they are concerned— not to the entire supply chain, which must be your concern. Ultimately,
you must accept that outsourcing and retaining control of your supply chain network are
complementary, not antagonistic, activities.

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Myth 5 : Outsourcing automatically gives me a time-to-market advantage..

In many cases, this myth is the most compelling driver of an outsourcing policy. But unless you
carefully select your partners, provide them with integrated access to your supply chain systems,
and enable your company to supervise the relevant projects, it will be your more nimble
competitors who will realize the advantage. Why? Because contract manufacturers’ processes
and systems have been designed for mass production, not for mass customization and weekly
new product introductions. It is easy to s that you should select your outsourced partners based
on their demonstrated commitment to fast-paced manufacturing environments. It is easy to
suggest that your partners should implement strict management oversight and control
mechanisms to ensure that their subcontractors respond rapidly to fast-changing deadlines.
The reality is that these bromides should not and cannot substitute for your enabling your
partners by providing them with cost-free access to a real-time, web-enabled, collaborative
software platform that instantaneously shares and distributes management, scheduling and other
data to all relevant parties. This is how to gain a real time-to-market advantage over your
competitors, who will still be relying on their partners to shoulder such unwanted burdens.

Myth 6 : Outsourcing is the key to making my operations highly scalable.

Vertically integrated companies have to scale linearly, not exponentially. Real estate and labour
pools inherently grow in a linear fashion. Exponential growth, on the other hand, arises only
from leveraging the efforts of multiple contractors, who in turn leverage other contractors.
Outsourcing is then, in principle, a direct application of then work effect.But if you lose control
of your supply chain network, outsourcing may introduce interminable delays instead of
exponential growth. Specifically, at each step along your supply chain, you need to make
decisions. Some of these decisions can be automated, while others require the intervention of
individuals with domain-specific knowledge. If you lack information about your outsourcing
partners’ activities and visibility into their supply chain networks, these will together prevent
decisions from being made quickly and often prevent them from being made at all.
Again, only by offering and requiring your partners to collaborate in real time with you (at no IT
cost to them), can you achieve the scalability that outsourcing promises.

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Myth 7: Fulfillment is easier to outsource than manufacturing.
Fulfillment companies, like manufacturers, have to optimize their cost structures. These firms
are, therefore, also reluctant to invest in IT systems that would optimize the management of
inventory and accelerate their own supply chains. Moreover, because fulfillment firms are,
therefore, also reluctant to invest in IT systems that would optimize the management of
inventory and accelerate their own supply chains. Moreover, because fulfillment firms typically
pass on their costs to their customers, there is, in the short term, no market imperative for such
firms to become more efficient .But there are strategies that you can employ that will deliver
meaningful benefits to your fulfillment partners and that will enable you to capture the business
of the best of these partners. Specifically, you can deploy a system that automates the
replenishment of stock prior to the occurrence of a product shortage. The benefit to your partner
will be direct and compelling: lower inventory carrying costs. The benefit to you will be that you
can now gain from the outsourcing of fulfillment the same advantages as you would from the
outsourcing of manufacturing

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UNIT-5

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CHAPTER-1 PERFORMANCE MEASUREMENT IN SCM
Meaning

The Council of Logistics Management defines Supply Chain Management as “the process of
planning, implementing and controlling efficient and cost effective flow of materials, in-process
inventory, finished goods and related information from point-of-orderto point-of-consumption,
for the purpose of conforming to customer requirements”. The fundamental objective of a high
performance of supply chain is to produce products to match customers’ demand cycle, while
producing the greatest value possible to the customers. A number of technologies and managerial
attention has gone into improving supply chain performance. The increasingly competitive
environment calls for speedy, cost efficient, accurate and reliable supply chains. Supply chain
management is no longer a matter of operational and functional areas of the firm. Today, it is a
strategic issue demanding top-level management attention. The supply chain can have huge
leverage on the creation of customer value. Supply chains will fight the new battle for market
dominance; as such measurements around the supply chain are critical. If we look at competition
today, it is supply chain versus supply chain. This brings out a situation that competitors might
focus on developing superior supply chain Performance. Accordingly, companies will have to
find or develop metrics to measure performance of supply chain.

Companies must always be concerned with their competition. Today's marketplace is shifting
from individual company performance to supply chain performance: the entire chain's ability to
meet end-customer needs through product availability and responsive, on-time delivery. Supply
chain performance crosses both functional lines and company boundaries. Functional groups
(engineering/R&D, manufacturing, and sales/marketing) are all instrumental in designing,
building, and selling products most efficiently for the supply chain, and traditional company
boundaries are changing as companies discover new ways of working together to achieve the
ultimate supply chain goal: the ability to fill customer orders faster and more efficiently than the
competition.

Supply chains are growing increasingly complex, from linear arrangements tosynchronized,
multi-echelon, outward-facing networks of distributed servers.There is much more information

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that needs to be monitored than there wasjust a few years ago. Most companies lack the tools that
can quickly shiftthrough and present data coming from supply chain partners and systems.
The overall performance of the supply chain significantly affects thefinancial health of all
member companies. Therefore, an effective supply chainperformance measurement process
should be able to directly addressperformance areas that create sustainable profitability and
financial strength.In order to accomplish this requirement, the performance measurement
process will need to provide a reliable indication of the contribution of supplychain operations to
the areas like growth, cost minimization, working capitalefficiency and fixed asset utilization. A
robust and scalable performance management system is the platform forimprovement. It must be
exception-based and allow users to prevent problems, resolve issues, capture knowledge, and
sustain improvements. Thesystem must be able to handle an increasing number of users and
amounts ofinformation (due to expanded products, members of the supply chain,geography, and
time). While it must be personalized and easy to use, it mustalso ensure high levels of security
and privacy.Supply chain PM cycle is not just for the supply chain, but for all aspects ofthe
enterprise as well as for the extended supply chain. Ultimately, by
managing the performance of myriad processes across enterpriseboundaries, companies will
have achieved the vision of EnterprisePerformance Management (EPM) In supply chain, large
volumes of raw transactional data are generated byeach process and stored. The challenge for
many companies lies indetermining what information is necessary to drive improvements and
efficiencies at each process in the supply chain, and designing an informationmanagement
environment to turn the raw data into meaningful metrics andkey performance indicators (KPI).
Key performance indicators aremeasurements that directly relate to key business requirements.
KPI come invarious forms from simple reporting measurements to very complex, cross
correlated analytic results.Information from supply chain management (SCM) processes must be
collected, measured, analyzed and continuously monitored. This requiresintegration of data
coming out of ERP (Enterprise Resource Planning), SCMand all other systems supporting these
business processes. Data fromtransactional systems should be summarized into the Data
Warehouse (DW),which should be ableto scale to large sizes and be continually updated.A well
designed and integrated PM framework increases the capability ofbusiness intelligence (BI)
systems to provide accurate insights for effectivesupply chain decision making. BI is evolving
from traditional BI to pervasive BI(PBI), which empowers everyone in the organization, at all

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levels, withanalytics, alerts and feedback mechanisms.The importance of performance
measurement in the context of SCM cannot be overstated. Timely and accurate assessment of
overall system and individual system component performance is paramount. An effective
performance measurement system provides the basis to understand thesystem, influences
behavior throughout the system, and provides informationregarding the results of system efforts
to supply chain members and outsidestakeholders. In effect, performance measurement is the
glue that holds thecomplex value-creating system together, directing strategic formulation aswell
as playing a major role in monitoring the implementation of that strategy.In addition, research
findings suggest that measuring supply chainperformance in and of itself leads to improvements
in overall performance.

Despite its importance, supply chain performance often was measured in over implified and
sometimes counterproductive (cost-reduction-based) terms Lack of an appropriate performance
measurement system has been citedas a major obstacle to effective supply chain management
Traditionally, companies have tracked performance based largely on financial accounting
principles. Financial accounting measures are certainly important in assessing whether or not
operational changes are improving thefinancial health of an enterprise, but insufficient to
measure supply chainperformance for the following reasons
• The measures tend to be historically oriented and not focused on providing
a forward-looking perspective.
• The measures do not relate to important strategic, non-financial
performance.
• The measures do not directly tie to operational effectiveness and efficiency.
Most performance measurement systems are functionally focused.
Learn performance measures, or "metrics", for global supply chain performance
improvements; understand the importance of aligning metrics with your business strategy
through insightful examples. Explore service, asset, speed, and financial metrics, along with a
special Bullwhip Metric to help you and your supply chain partners mitigate the Bullwhip Effect.
Discover "bad" metrics, typically misunderstood or misused to the detriment of supply chain
performance.Companies must always be concerned with their competition. Today's marketplace
is shifting from individual company performance to supply chain performance: the entire chain's

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ability to meet end-customer needs through product availability and responsive, on-time
delivery. Supply chain performance crosses both functional lines and company boundaries.
Functional groups (engineering/R&D, manufacturing, and sales/marketing) are all instrumental
in designing, building, and selling products most efficiently for the supply chain, and traditional
company boundaries are changing as companies discover new ways of working together to
achieve the ultimate supply chain goal: the ability to fill customer orders faster and more
efficiently than the competition.
To achieve that goal, you need performance measures, or "metrics", for global supply chain
performance improvements. Your performance measures must show not only how well you are
providing for your customers (service metrics) but also how you are handling your business
(speed, asset/inventory, and financial metrics). Given the cross-functional nature of many supply
chain improvements, your metrics must prevent "organizational silo" behavior which can hinder
supply chain performance.

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CHAPTER-2 ADVANTAGES OF PERFORMANCE MEASURES
Definition and Objectives of SCPMS
Neely et al. (2002) defined Performance Measurement System (PMS) as a balanced and dynamic
system that enables support of decision-making processes by gathering, elaborating and
analyzing information. Taticchi et al. (2010) further elaborated this definition by commenting on
the concept of ‘balance’ and ‘dynamicity'. ‘Balance’ refers to the need of using different
measures and perspectives that tied together give a holistic view of the organization. The concept
of ‘dynamicity’ refers instead to the need of developing a system that continuously monitors the
internal and external context and reviews objectives and priorities. Bititci et al. (1997) defined
SCPMS as the reporting process that gives feedback to employees on the outcome of actions.
Stefan Tangen (2004) proposed that performance be defined as the efficiency and effectiveness
of action, which leads to the following definitions: (i). Performance measurement is defined as
the process of quantifying the efficiency and effectiveness of action; (ii). A performance
measure is defined as a metric used to quantify the efficiency and/or effectiveness of an action;
and (iii). Performance Management System is defined as the set of metrics used to quantify the
efficiency and effectiveness of an action. Effective supply chain management (SCM) has been
associated with a variety of advantages including increased customer value ,increased
profitability, reduced cycle times and average inventory levels and even better product design
(William et al., 2007).
The objective of SCPM therefore has to facilitate and enhance the efficiency and effectiveness of
SCM. The main goal of SCPM models and frameworks is to support management by helping
them to measure business performance, analyze and improve business operational efficiency
through better decision-making processes (Tangen, 2005). An effective, integrated and balanced
SCPMS can engage the organisation’s performance measurement system as a vehicle for
organisational change. SCPM can facilitate inter-understanding and integration among the SC
members. It makes an indispensable contribution to decision making in SCM, particularly in re-
designing business goals and strategies, and re-engineering processes (Charan et al., 2008).

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Why Is Performance Measurement Important?
Measurement is important, as it affects behavior that impacts supply chain performance. As such,
performance measurement provides the means by which a company can assess whether its
supply chain has improved or degraded.
There are several lessons on the importance of measuring supply chain performance:
• Measurements are important to directly controlling behavior and indirectly to
performance
• Seemingly relevant, but cumbersome, measurements are of little use, and are
possibly a hindrance, in helping to improve supply chain performance
• Driving a supply chain based only on after the-fact measures, like losing an
important customer or having poor financial performance is not very effective

Benefits of performance measurement

1. To identify whether we are meeting customer requirements: How do we know that we are
providing the services/products that our customers require?
2. To help us understand our processes: To confirm what we know or reveal what we don't
know: Do we know where the problems are?
3. To ensure decisions are based on fact, not on emotion: Are our decisions based upon
well-documented facts and figures or on intuition and gut feelings?
4. To show where improvement needs to be made: Where can we do better? How can we
improve?
5. To show if improvements actually happened: Do we have a clear picture?
6. To reveal problems that bias, emotion, and longevity cover up: If we have been doing our
job for a long time without measurements, we might assume incorrectly that things are
going well. (They may or may not be, but, without measurements, there is no way to tell.)
7. To identify whether suppliers are meeting our requirements: Do our suppliers know if our
requirements are being met?

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CHAPTER-3 SUPPLIER PERFORMANCE MEASUREMENT

Measuring Supplier Performance

Every organization knows it should be assessing supplier performance. Most are deploying some
sort of supplier performance measurement, whether it is a couple of rudimentary key
performance indicators (KPIs) or more sophisticated data gathering and on-site assessment
programs. But few purchasing and quality professionals are likely to answer “yes” when asked
whether they are satisfied with their supplier assessment capabilities and results. With increased
reliance on suppliers for one’s own ability to meet customer requirements and expectations, and
even, in some cases, to comply with legal and regulatory requirements, organizations are under
increasing pressure to avoid supplier problems and to attract and retain the high performers,
particularly among their strategic suppliers or long-term partners. How can an organization turn
thought into action and effectively use internal resources to improve the performance of these
key suppliers and, at the same time, produce results and a return on investment? The following
seven steps comprise a process for developing and deploying supplier assessment:

1. Align supplier performance goals with organizational

goals and objectives.
2. Determine an evaluation approach.
3. Develop a method to collect information
about suppliers.
4. Design and develop a robust assessment system.
5. Deploy a supplier performance assessment
system.
6. Give feedback to suppliers on their performance.
7. Produce results from measuring supplier performance.

Supplier Information Outputs

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Supply Chain Performance:The Supplier’s Role

Companies of all sizes are realizing that they no longer have complete control over their market
success. This is because they rely heavily on the performance of their supply chain trading
partners. Market-leading retailers and OEMs know this, and they are looking for partners that
work to ensure their success. Many large companies are now insisting that their small and
medium industrial suppliers help them improve supply chain cost, responsiveness and reliability.
These market heavy weights are measuring suppliers’ performance against key indicators and
giving preferred status to those who perform well. This puts pressure on many small and medium
manufacturers. Those that have not invested heavily in supply chain (SCM) practices or
solutions beyond ERP to date are now driven to seriously consider making the investment. The
business justification will rest on traditional cost savings and on revenue and customer
compliance issues. Supply chain improvements will not only improve internal performance, but
will also create benefits that will ripple through to customers and partners as well. Cost savings
through reduced inventory levels, expediting, fulfillment and premium freight costs could allow
a company to provider more favorable prices or terms to customers. Likewise, effective planning
and execution can help companies and their customers adapt to the market’s demand shifts.
When the company can purchase, produce and distribute the right products to the right channels
in the right quantities at the right time, both supplier and customer will increase revenue capture
by channel and region. Larger companies often issue mandates that simply force compliance,
without offering smaller partners an active role in improving performance. This type of
relationship fosters frustration and deep distrust. Further, it can put smaller firms in the
precarious position of being manipulated into the red or being replaced by another supplier.To

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change the dynamics and give themselves a more powerful role, smaller suppliers need to
differentiate themselves. This differentiator may be consistent zero defects, a patented or hard-to-
find process critical to the customer’s success, value added services, vendor managed inventory
(VMI) contracts, or the highest delivery performance of any competitor. As those last two
illustrate, active participant supply chain performance improvements can give even a small
company more clout. Moving from being squeezedto acting as an extension of the large
company allows the smaller player to be much more effective. (Figure 1.) Sometimes, all it takes
is opening up the discussion. One of the keys to successful supply chain performance
improvement is cooperation and mutual decision making between trading partners. Companies
that collaborate with customers in demand and replenishment planning have a better chance of
meeting demand. Those who give accurate information may also gain visibility of customer
requirements and inventory levels. This starts the improvement cycle, as the supplier can then
reduce their own inventory stocks. By synchronizing operations with customers, the supply chain
is more responsive to the marketplace with less waste.

1 Identifying Performance Opportunities

2 Improving Supplier Performance
3 Critical Supply Chain Applications
4 Becoming the Strong Link in the Chain

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CHAPTER-5 PARAMETERS CHOOSING SUPPLIERS

Parameters for choosing suppliers

Nowadays, competitive in market is extremely increasing. Firms need to maintain their

competitive edge and make a decent profit. More specifically, require reorganizing their supply
chain management strategy (SCMS) to harmonize with the external environments by integrating
the organizational resources, information, and activities . If you asked a food manufacturer 20
years ago how they selected an ingredient supplier, they would have likely said it was based on
price, flavour .

Selecting the right supplier may seem like an onerous process for your supply chain. While
having a more simplistic supplier selection process may be helpful for some smaller supply
chains, a more involved process of selecting the right suppliers can help many food and nutrition
companies meet or exceed regulatory standards, drive customer demand and build a strong brand
reputation of quality products.

Selecting the suppliers who can meet your consumers’ demand for higher-quality ingredients
may bring some initial costs, but it will pay off over time through consistent, high-grade
materials. However, the process to find the ideal supplier is often not easy and requires discipline
and hard work.

1. Identifying a Supplier

Before selecting your supplier, it is important to gather the opinions of stakeholders and define
the criteria for the selection process. This list of stakeholders may include members from
research and development, purchasing, marketing, quality assurance and any other area of your
organization that touches the supplier selection process.

During this time, it is important to identify a few suppliers to assess their capabilities and
compare pricing. The supplier selection team should work with the potential suppliers to
establish specifications. For example, they should explain how the supplier’s materials would be
used in your products and within the manufacturing process. Keep in mind that the ultimate goal

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is a win-win situation for the supplier and manufacturer; therefore, open and transparent
communication is extremely important.

A key criterion in selecting the right supplier is value. Cost should not be the lone driver; you
should instead look at the total cost of ownership, which looks at the supplier’s:
• Customer service

• Delivery commitments

• Reliability and responsiveness

• Resource savings (hard and soft)

2. Measuring Supply Performance

Another important step of the supplier management process is developing an audit and
assessment program. Best-in-class supplier programs conduct audits throughout multiple stages
of the manufacturer/supplier relationship. You should always conduct an audit before the
contract is signed to confirm that the supplier relationship. You should always conduct an audit
before the contract is signed to confirm that the supplier does not have any significant
compliance or quality system failures that could affect your ability to produce top-quality
products. Another reason to conduct the audit beforehand is to understand the supplier’s
strengths and weaknesses before the relationship becomes official.

Even after the contract is signed, you should continue auditing, basing the frequency of the
audits on the criticality of the supplier. To determine the frequency, all suppliers should be
categorized into a level of risk or importance. This prioritization will help you be smarter and
more effective with your resources and place a higher focus on your important, high-risk
suppliers, while continuing to monitor second-tier suppliers.

Beyond an established audit program, you should continuously monitor and assess each
supplier’s performance. You can track positive or sustained strong performances, as well as

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negative trends.

3. Gaining Supplier Feedback

Another tool you can utilize with suppliers is a self-assessment questionnaire. The supplier self-
assessment can be used to identify performance gaps, as well as discover how the supplier
understands their own operation.

In addition to audits and assessments, it also is beneficial to monitor informative metrics that
direct value to the business. You should discuss and select the appropriate metrics with suppliers
to receive their input and understanding of purposeful measurements. Examples of these metrics
include rejected lots, perfect shipments and documentation errors. The metrics selected should
measure the total cost of ownership, as well as improve performance toward the maximum
finished product performance.

4. Achieving Certification
As your supplier relationship grows stronger, and both parties feel they are receiving positive
performances, the supplier may be able to achieve a certified status. This occurs when you
establish a set of selected criteria to be met by your suppliers. Certification must be obtained
with sustained successful performance and can be lost with poor performance or a negative
compliance outcome from an audit.

5.Developing Partnerships
Ultimately, the manufacturer/supplier relationship is at its best when a strategic partnership is
formed, allowing full knowledge of the source of materials and ensuring high quality.
With a stronger business partnership, a supplier is more likely to:
• Anticipate what is needed from the manufacturer and begin to take the leadership role in
communication.
• Notify the manufacturer if problems occur that limit production availability, or a quality issue
is identified.

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• Communicate production delays when downtime or maintenance is required.

6. Ensuring Quality for Consumers

Depending on the number of materials and ingredients needed, developing a supplier quality
management program can be a complex and upfront investment. However, once you choose to
build strong relationships with reliable suppliers, you will have peace of mind, knowing you’re
delivering high quality to your consumer.

The benefits are realized when your supplier quality team is focused on issues other than
material quality, and your satisfied end-users have confidence in the products you provide.

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