CHAPTER ONE: CONCEPT OF SUPPLY CHAIN MANAGEMENT

1.1 Definition of Supply Chain Management

As per definition SCM is the management of a network of all business processes and activities
involving procurement of raw materials, manufacturing and distribution management of Finished
Goods.
1.1.1 Why SCM Strategy is Important for an Organization
Supply Chain Strategies are the critical backbone to Business Organizations today.
The sub areas comprising a supply chain include:
 Forecasting / Planning
 Purchasing / Procurement
 Logistics
 Operations
 Inventory Management
 Transport
 Warehousing
 Distribution
 Customer Service
Forecasting / Planning
All business needs to forecast and plan. To look forward and predict what will be required in
terms of resources and materials in order to deliver their product or service to their customer in a
timely manner.
Purchasing / Procurement
The commercial part of the supply chain is purchasing. Otherwise known as Buying or
Procurement.
Logistics
In its strictest definition logistics refers to the movement of goods or materials, whether inbound,
through, or outbound.
Operations
Operations is a general management type activity ensuring that a business uses its resources
effectively to meet its customer commitments.
Inventory Management
Sometimes found within Logistics Management, or Demand Planning or Operations, Inventory
Management typically takes responsibility for both the replenishment of physical stock, the
levels of physical stock, and of course storage and issue of physical stock.
Transport
Transport management can involve the control of a company owned fleet of vehicles, collecting,
moving, or delivering materials and goods, or managing transport services sourced from a 3rd
party transport provider.
Warehousing
Like transport management, warehousing can involve the control of company warehouse space,
or managing warehouse space sourced from 3rd party providers.
Distribution
Distribution involves the physical distribution of the company’s products to the sub-distributor or
directly to the customer base.

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 CHAPTER TWO: EVOLUTION OF SUPPLY CHAIN MANAGEMENT

The term "supply chain management" entered the public domain when Keith Oliver as already
mentioned. a consultant at Booz Allen Hamilton (now Booz & Company), used it in an interview
for the Financial Times in 1982.
Commonly accepted definitions of supply chain management include:
 The management of upstream and downstream value-added flows of materials, final
goods, and related information among suppliers, company, resellers, and final consumers
 The systematic, strategic coordination of traditional business functions and tactics across
all business functions within a particular company and across businesses within the
supply chain, for the purposes of improving the long-term performance of the individual
companies and the supply chain as a whole
 A customer-focused definition is given by Hines (2004): "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.
Problems Addressed
Supply chain management addresses the following problems:
Distribution network configuration: the number, location, and network missions of suppliers,
production facilities, distribution centers, warehouses, cross-docks, and customers.
Distribution strategy: questions of operating control (e.g., centralized, decentralized, or shared);
delivery scheme (e.g., direct shipment, pool point shipping, cross docking, direct store delivery,
or closed loop shipping); mode of transportation (e.g., motor carrier, including truckload, less
than truckload (LTL)
Trade-offs in logistical activities: The above activities must be coordinated in order to achieve
the lowest total logistics cost. Trade-offs may increase the total cost if only one of the activities
is optimized.
Information: The integration of processes through the supply chain in order to share valuable
information, including demand signals, forecasts, inventory, transportation, and potential
collaboration.
Inventory management: Management of the quantity and location of inventory, including raw
materials, work in process (WIP), and finished goods.
Cash flow: Arranging the payment terms and methodologies for exchanging funds across entities
within the supply chain.
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.
Importance
Organizations increasingly find that they must rely on effective supply chains, or networks, to
compete in the global market and networked economy.
2.1 Historical Developments
Six major movements can be observed in the evolution of supply chain management studies:
creation, integration, and globalization, specialization phases one and two, and SCM 2.0.

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Creation Era
The term "supply chain management" was first coined by Keith Oliver in 1982 as mentioned
from above.
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.
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.
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.
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.
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 key supply chain processes stated by Lambert (2004) are:
 Demand management style
 Order fulfillment
 Manufacturing flow management
 Supplier relationship management
 Product development and commercialization
 Returns management
Much has been written about demand management. Best-in-class companies have similar
characteristics, which include the following:
 Internal and external collaboration
 Initiatives to reduce lead time
 Tighter feedback from customer and market demand
 Customer-level forecasting
One could suggest other critical supply business processes that combine these processes stated
by Lambert, such as:
 Customer service management
 Procurement
 Product development and commercialization
 Manufacturing flow management/support
 Physical distribution
 Outsourcing/partnerships
a) Customer service management process
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Customer relationship management concerns the relationship between an organization and its
customers. Customer service is the source of customer information. Successful organizations use
the following steps to build customer relationships:
 Determine mutually satisfying goals for organization and customers
 Establish and maintain customer rapport
 Induce positive feelings in the organization and the customers

b) Procurement process
Strategic plans are drawn up with suppliers to support the manufacturing flow management
process and the development of new products.
c) Product development and commercialization
Here, customers and suppliers must be integrated into the product development process in order
to reduce the time to market. According to Lambert and Cooper (2000), managers of the product
development and commercialization process must:
1. Coordinate with customer relationship management to identify customer-articulated
needs;
2. Select materials and suppliers in conjunction with procurement; and
3. Develop production technology in manufacturing flow to manufacture and integrate into
the best supply chain flow for the given combination of product and markets.

d) Manufacturing flow management process

The manufacturing process produces and supplies products to the distribution channels based on
past forecasts.
e) Physical distribution
This concerns the movement of a finished product or service to customers.
f) Outsourcing/partnerships
This includes not just the outsourcing of the procurement of materials and components, but also
the outsourcing of services that traditionally have been provided in house.

g) Performance measurement
Experts found a strong relationship from the largest arcs of supplier and customer integration to
market share and profitability.

h) Warehousing management
To reduce a company's cost and expenses, warehousing management is carrying the valuable role
against operations.
Theories
Currently there's a gap in the literature on supply chain management studies present: there is no
theoretical support for explaining the existence or the boundaries of supply chain management.
These theories include:
 Resource-based view (RBV)
 Transaction cost analysis (TCA)
 Knowledge-based view (KBV)
 Strategic choice theory (SCT)
 Agency theory (AT)
 Channel coordination
 Institutional theory (InT)
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Supply Chain Centroids
In the study of supply chain management, the concept of centroids has become an important
economic consideration.

2.2 Tax Efficient Supply Chain Management

Tax efficient supply chain management is a business model that considers the effect of tax in the
design and implementation of supply chain management.

2.2.1 Sustainability and Social Responsibility in Supply Chains

Supply chain sustainability is a business issue affecting an organization's supply chain or
logistics network, and is frequently quantified by comparison with SECH ratings, which uses a
triple bottom line incorporating economic, social, and environmental aspects.

2.3 Management Components

SCM components are the third element of the four-square circulation framework. The level of
integration and management of a business process link is a function of the number and level of
components added to the link (Ellram and Cooper, 1990; Houlihan, 1985
Lambert and Cooper (2000) identified the following components:
 Planning and control
 Work structure
 Organization structure
 Product flow facility structure
 Information flow facility structure
 Management methods
2.3.1 Reverse Supply Chain
Reverse logistics is the process of managing the return of goods. It is also referred to as
"aftermarket customer services".

2.3.2 Systems and Value

Supply chain systems configure value for those that organize the networks. Value is the
additional revenue over and above the costs of building the network.

Global Applications
Global supply chains pose challenges regarding both quantity and value. Supply and value chain
trends include:
 Globalization
 Increased cross-border sourcing
 Collaboration for parts of value chain with low-cost providers
 Shared service centers for logistical and administrative functions
 Increasingly global operations, which require increasingly global coordination and
planning to achieve global optimums
Certification
There are several certification programs for SCM staff development, including the Association
for Operations Management (APICS), the International Supply Chain Education Alliance
(ISCEA), and the Institute of Supply Chain Management (IOSCM). others progressing toward it.
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The new integration has a variety of activities that include:
 Integrated Purchasing Strategy
 Supplier Integration
 Supply Base Management
 Supply Chain Management
Logistics activities exist since the early 1900s. Logistics is being used by the military even today.
The evolution led to an Internet-based application for Supply Chain Management.

Academic Definition of Supply Chain and Logistics Management

According to the APICS Dictionary, supply chain management (SCM) is 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. How would YOU
define it and does the APICS define this well enough?
Logistics Management Definition
According to Council of Supply Chain Management Professionals (CSCMP), logistics
management is the part of supply chain management that plans, implements, and controls the
efficient, effective forward and reverse flow and storage of goods, services, and related
information between the point of origin and the point of consumption in order to meet
customers’ requirements.

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 CHAPTER THREE: ORGANIZATION DESIGN AND MANAGEMENT OF THE
SUPPLY CHAIN

3.1 Organizational Design

The importance of organizational design and core competencies are often underestimated when
assessing the performance of current supply chain processes or evaluating designs for supply
chain process transformation.
Effective organization design can be structured answering the following issues:
 Decision relating to identifying the core competencies of the firm and thus
completing those activities internally
 When can an activity be outsourced and the associated risks with it?
 Decentralization of any activity/ process for e.g. having centralized warehouse system
or having distributed network and the resulting trade off which needs to be balanced
between time, money and quality
 Are all the functions needed to perform an activity/ process in place?
 What are the various non value adding functions that can be done way with resulting
in a lean organization hence better managed?
Supply chain management flows can be divided into three main flows:
 The product flow
 The information flow
 The finances flow
The product flow includes the movement of goods from a supplier to a customer, as well as any
customer returns or service needs.
There are two main types of SCM software: planning applications and execution applications.

3.2 Strategic Supply Chain Management

Strategic supply chain management is more than just innovation for the sake of being innovative.
It’s creating a unique supply chain configuration that drives your strategic objectives forward. To
get the most from your supply chain, you need to consider five critical configuration
components:
 Operations strategy
 Outsourcing strategy
 Channel strategy
 Customer service strategy
 Asset network
Operations Strategy
Your operations strategy determines how you staff and run your factories, warehouses, and order
desks—as well as how you design your processes and information systems.
◆ Make to stock is the best strategy for standardized products that sell in high volume. Larger
production batches keep manufacturing costs down, and having these products in inventory
means that customer demand can be met quickly.
◆ Make to order is the preferred strategy for customized products or products with infrequent
demand.
Companies following this strategy produce a shippable product only with a customer order in
hand.
This keeps inventory levels low while allowing for a wide range of product options.
◆ Configure to order is a hybrid strategy in which a product is partially completed to a generic
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level and then finished when an order is received.
◆ Engineer to order, which shares many of the characteristics of make to order, is used in
industries where complex products and services are created to unique customer specifications.

Channel Strategy
Your channel strategy has to do with how you’ll get your products and services to buyers or end
users. These decisions address such issues as whether you’ll sell indirectly through distributors
or retailers or directly to customers via the Internet or a direct sales force.

Outsourcing Strategy
Outsourcing decisions begin with an analysis of your company’s existing supply chain skills and
expertise.

Customer Service Strategy

Customer service strategy is another key configuration component. Your customer service
strategy should be based on two things: the overall volume and profitability of your customer
accounts and an understanding of what your customers really want.
Asset Network
The final component of your supply chain configuration includes the decisions you make
regarding your company’s asset network—the factories, warehouses, production equipment,
order desks, and service centers that make up your business.
◆ Global model—Manufacturing of a given product line is done in one location for the global
market.
◆ Regional model—Manufacturing is done primarily in the region where the products are sold,
although some cross-regional flows may exist based on production-center specialization.
◆ Country model—Manufacturing is done primarily in the country where the market is..

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 CHAPTER FOUR: CUSTOMER FOCUS IN SUPPLY CHAIN

4.1 Demand-Chains
A Focus on End Users: Instead of building and operating a supply chain from manufacturer to
market, demand-chain leaders focus on developing alliances with those channel partners who can
meet customer requirements.
Broad Trends and Misconceptions:
While developing a demand chain, channel partners should be aware of the broad demand trends
in consumer markets based on demographics, lifestyle, and other social factors.
Misconception # 1 - Customers will always buy from retailers. Consumers are actively looking
for new sources from which to obtain products and services.
Misconception # 2 - Business-to-business companies or industrial organizations need to monitor
only their customers.

4.2 Creating the Demand Chains of the Future

Demand chains are intended to bring together channel members to delight customers and solve
their problems by.
 Gathering and analyzing information about consumers, their problems, and their needs.
 Identifying and choosing the right channel partners.
 Developing a system for information sharing among channel partners.
 Developing products and services, which are capable of solving customers' problems.
 Choosing the most optimal transportation and distribution methods.
Demand chains aim to bring together channel members to delight customers and solve their
problems by:
 Gathering and analyzing information about consumers, their problems, and their
unmet needs.
 Identifying and choosing the right channel partners who can effectively perform
functions needed in the demand chain.
 Developing a system for information sharing among channel partners about
consumers and customers, available technology, and logistic challenges and
opportunities.
 Developing products and services which are able to solve customers' problems.
 Choosing the most optimal transportation and distribution methods to deliver
products and services to consumers in the expected format.


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 CHAPTER FIVE: VALUE CHAIN AND VALUE DELIVERY SYSTEMS

5.1 Value Chain

A value chain is a chain of activities that a firm operating in a specific industry performs
in order to deliver a valuable product or service for the market.

5.2 Global Value Chains (GVCs)

Often multinational enterprises (MNEs) developed global value chains, investing abroad and
establishing affiliates that provided critical support to remaining activities at home.
Firm-Level
The appropriate level for constructing a value chain is the business unit (not division or corporate
level). Products pass through activities of a chain in order, and at each activity the product gains
some value.
Activities
The value chain categorizes the generic value-adding activities of an organization. The activities
considered under this product/service enhancement process can be broadly categorized under
two major activity-sets.
1. Physical/traditional value chain: a physical-world activity performed in order to enhance
a product or a service. Such activities evolved over time by the experience people gained
from their business conduct.
2. Virtual value chain: The advent of computer-based business-aided systems in the modern
world has led to a completely new horizon of market space in modern business-jargon -
the cyber-market space.
Industry-Level
An industry value-chain is a physical representation of the various processes involved in
producing goods (and services), starting with raw materials and ending with the delivered
product (also known as the supply chain).
Significance
1. The value chain framework quickly made its way to the forefront of management thought
as a powerful analysis tool for strategic planning.
2. The value-chain concept has been extended beyond individual firms. It can apply to
whole supply chains and distribution networks.
3. Capturing the value generated along the chain is the new approach taken by many
management strategists.
4. Value chain analysis has also been successfully used in large petrochemical plant

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 maintenance organizations to show how work selection, work planning, work scheduling
and finally work execution can (when considered as elements of chains) help drive lean
approaches to maintenance.
5. A value chain approach could also offer a meaningful alternative to evaluate private or
public companies when there is a lack of publicly known data from direct competition,
where the subject company is compared with, for example, a known downstream industry
to have a good feel of its value by building useful correlations with its downstream
companies.
6. Value chain analysis has also been employed in the development sector as a means of
identifying poverty reduction strategies by upgrading along the value chain.

5.3 Supply-Chain Operations Reference (SCOR)

The Supply-Chain Council, a global trade consortium in operation with over 700 member
companies, governmental, academic, and consulting groups participating in the last 10 years,
manages the Supply-Chain Operations Reference (SCOR), the de facto universal reference
model for Supply Chain including Planning, Procurement, Manufacturing, Order Management,
Logistics, Returns, and Retail; Product and Service Design including Design Planning, Research,
Prototyping, Integration, Launch and Revision, and Sales including CRM, Service Support,
Sales, and Contract Management which are congruent to the Porter framework. The SCOR
framework has been adopted by hundreds of companies as well as national entities as a standard
for business excellence, and the U.S. Department of Defense has adopted the newly launched.

5.4 Design-Chain Operations Reference (DCOR)

This framework for product design as a standard to use for managing their development
processes.

5.5 Value Reference Model

A Value Reference Model (VRM) developed by the trade consortium Value Chain Group offers
an open source semantic dictionary for value chain management encompassing one unified
reference framework representing the process domains of product development, customer
relations and supply networks.
Six business functions of the value chain:
 Research and development
 Design of products, services, or processes
 Production
 Marketing and sales
 Distribution
 Customer service

5.6 Facilities Decision

We classify the decisions for supply chain management into two broad categories -- strategic and
operational. There are four major decision areas in supply chain management:
1) Location,
2) Production,
3) Inventory, and
4) Transportation (distribution), and there are both strategic and operational elements in each of
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these decision areas.

5.6.1 Location Decisions

The geographic placement of production facilities, stocking points, and sourcing points is the
natural first step in creating a supply chain.

5.6.2 Production Decisions

The strategic decisions include what products to produce, and which plants to produce them in,
allocation of suppliers to plants, plants to DC's, and DC's to customer markets.

5.6.3 Inventory Decisions

These refer to means by which inventories are managed. Inventories exist at every stage of the
supply chain as either raw materials, semi-finished or finished goods.
5.6.4 Transportation Decisions
The mode choice aspect of these decisions are the more strategic ones. These are closely linked
to the inventory decisions, since the best choice of mode is often found by trading-off the cost of
using the particular mode of transport with the indirect cost of inventory associated with that
mode. strategy.

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 CHAPTER SIX: SUPPLY CHAIN COMMUNICATION
Communication Assets
Communication assets can be defined as materials that are either hardcopy or electronic, created
and produced by an organization designed to communicate some form of important message to a
particular audience.

6.1 Importance of Supply Chain Communication

While every organization has a communication supply chain, in many cases the processes and
procedures that enable it are not looked at in a strategic manner, or worse, not looked at across
the enterprise at all.
1. Network
Providing a single integrated source of information creates a supply chain that can respond
rapidly to change or new opportunities, a concept discussed in the book "Supply Chain
Management on Demand."

2. Developments
An important aspect of supply chain communication is keeping members informed on market
developments that affect their business.

3. Teamwork
A strong supply network has teamwork at its core, and communication is key to its success.

4. Marketing
At the distribution end of a supply chain, companies can drive more business by communicating
marketing information and support material that helps distribution partners increase sales.

5. Growth
A structured communication program can encourage growth and development at different levels
in the supply chain.

6.2 Transportation Choices in the Supply Chain

Transportation refers to the movement of product from one location to another as it makes its
way from the beginning of a supply chain to the customer’s handle.
Any supply Chain’s success is closely linked to the appropriate use of transportation. Wal- Mart has
effectively used a responsive transportation system to lower its overall costs.
Meanwhile, the booming growth in shipments to & from China is creating both bottlenecks
opportunities. Many major corporations have invested in significant buying offices in China,
India, & elsewhere.
There are two keys players in any transportation that takes place within a supply chain. The
shipper is that party that requires the movement of the product between two points in the supply
chain.
There are numbers of factors affecting carrier decisions:
The vehicle- related is incurred whether the vehicle is operating or not & is considered fixed for
short-term operational decisions by the carrier.
Fixed operating cost is generally proportional to the size of operating facilities. This includes any
cost associated with terminals, airport gates & labor that are incurred whether vehicles are
operating or not.
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Trip-related cost includes the price of labor & fuel incurred for each trip independent of the
quantity transported. Quantity-related cost are loading / unloading costs & a portion of the fuel
cost that varies with the quantity being transported.
A carrier’s decisions are also affected by the responsiveness it seeks to provide its target segment
& the prices that the market will bear. The various modes of transportation include water, rail,
intermodal, truck, air, and pipeline & package carriers.
Long-Term Decisions
At the highest strategic decision level, transportation managers must fully understand total
supply chain freight flows and have input into network design. At this level, long-term decisions
related to the appropriateness and availability of transportation modes for freight movement are
be made. Managers need to decide, for example, which primary mode of transportation is
appropriate for each general flow (i.e., inbound, interfacility, outbound) by product and/or
location, paying careful attention to consolidation opportunities where feasible.
Network and lane design decisions at the strategic level should examine tradeoffs with other
operational cost areas such as inventory and distribution center costs.
Lane Operation Decisions
The second level of decision-making regards lane operation decisions. Where network design
decisions are concerned with long-term planning, these decisions focus on daily operational
freight transactions.
The primary opportunities associated with lane operation decisions include inbound/outbound
consolidation, temporal consolidation, vehicle consolidation, and carrier consolidation.
In many cases the inbound carrier would be willing to negotiate lower roundtrip rates to avoid
deadhead miles on the backhaul.

6.3 Choice of Mode and Carrier

A third level of transportation decision-making involves the choice of mode and carrier for a
particular freight transaction.
Dock Level Operations
The final set of transportation decisions involves dock level operations, such as load planning,
routing, and scheduling.
6.4 Factors Affecting the Choice of Mode of Transport
If business firm can deliver goods and satisfactory services to customers, it ca earn goodwill.
1. Cost
Water transport is the cheapest means for transporting raw materials or finished goods. Road
transport is relatively costly and airway transport is the costliest.

2. Speed
The time taken by the means of transport in transporting goods is called speed.

3. Accessibility Or Availability
All means of transport have no same accessibility. There is neither accessibility nor availability
of pipeline and water ways/sea route in some countries.

4. Capacity
Railways and water ways are the best means in carrying capacity. They can transport huge and
heavy loads.

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5. Reliability
The task of carrying goods to destination at right time regularly is called reliability.

6.5 Different Modes Means of Transport

There are various means to carry products from one place to another.

1. Land Transport System

Land transport is the oldest and more practiced system. The means, which are used to carry
people and goods through land transport are called land transportation.

i. Road Transport
Road transport is being used from ancient time and it is very useful and important. The means of
road transport are: a). men and labors, b). animals such as mule, horse, sheep, goat, camel etc. c).
cart, lorry etc. d). the modern automobile such as motor, bus, truck, tractor, tempo, trolley bus,
jeep etc are also used to transport people and goods.

ii. Railway Transport

The other important means of land transport is railway. It is used to transport goods and people
from one place to another.

2. Water Transport System

Water transport is taken as an ancient means of transport, It was developed and used to transport
goods and people from one country to another before the development of air transport. I
3. Air Transport System
Air transport is the fastest modern means of transport. Air transport was started after First World
War, especially after 1918.

4. Pipeline Transport System

Pipeline is another important means of transport. Raw oil, Petroleum products, processed coal,
drinking water, natural gas etc. are transported from one place to another place.
5. Rope-way Transport System
Rope-way is the another means of transport. It can transport people and goods.

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 CHAPTER SEVEN: INVENTORY MANAGEMENT

7.1 Defining Inventory

Inventory is an idle stock of physical goods that contain economic value, and are held in various
forms by an organization in its custody awaiting packing, processing, transformation, use or sale
in a future point of time.
From the above definition the following points stand out with reference to inventory:
 All organizations engaged in production or sale of products hold inventory in one form or
other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further processing/value
addition.
 All inventoried resources have economic value and can be considered as assets of the
organization.
7.2 Different Types of Inventory
Inventory of materials occurs at various stages and departments of an organization. A
manufacturing organization holds inventory of raw materials and consumables required for
production.
Types of Inventory by Function

7.3 Inventory Management Concepts

Inventory management and supply chain management are the backbone of any business
operations.

Let us look at the benefits of this model for both Dell as well as Its Suppliers:
1. With VMI model, Dell has reduced its inbound supply chain and thereby gets to reduce
its logistics and inventory management costs considerably.
2. DELL gets to postpone owning inventory until at the time of actual consumption.
Thereby with no inventories DELL has no need for working capital to be invested into
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 holding inventories.
3. DELL does not have to set up inventory operations and employ teams for operations as
well as management of inventory functions.

Supplier Benefits
1. Supplier gets to establish better relationship and collaboration with DELL with long-term
business prospect.
2. By agreeing to hold inventories and effect JIT supplies at the door to DELL, supplier will
be in a better position to bargain and get more business from DELL.
3. With VMI model, supplier gets an opportunity to engage in better value proposition with
his customer DELL.
4. Supplier gets confirmed forecast for the entire year with commitments from DELL for
the quantity off take.
5. VMI managed is managed by 3PL and supplier does not have to engage himself in
having to set up and manage inventory operations at DELL’s premise.
6. 3PL Managed VMI holds inventories of all suppliers thereby charges each supplier on
per pallet basis or per sq.ft basis.
Need for Inventory Management - Why do Companies hold Inventories?
Inventory is a necessary evil that every organization would have to maintain for various
purposes. Optimum inventory management is the goal of every inventory planner.

1. Meet variation in Production Demand

Production plan changes in response to the sales, estimates, orders and stocking patterns.
2. Cater to Cyclical and Seasonal Demand
Market demand and supplies are seasonal depending upon various factors like seasons;
festivals etc and past sales data help companies to anticipate a huge surge of demand in
the market well in advance.

3. Economies of Scale in Procurement

Buying raw materials in larger lot and holding inventory is found to be cheaper for the
company than buying frequent small lots.

4. Take advantage of Price Increase and Quantity Discounts

If there is a price increase expected few months down the line due to changes in demand
and supply in the national or international market, impact of taxes and budgets etc, the
company’s tend to buy raw materials in advance and hold stocks as a hedge against
increased costs.
5. Reduce Transit Cost and Transit Times
In case of raw materials being imported from a foreign country or from a far away vendor
within the country, one can save a lot in terms of transportation cost buy buying in bulk
and transporting as a container load or a full truck load.
Finished Goods Inventory
All Manufacturing and Marketing Companies hold Finished Goods inventories in various
locations and all through FG Supply Chain.

1. Markets and Supply Chain Design

Organizations carry out detailed analysis of the markets both at national as well as international /
17
global levels and work out the Supply Chain strategy with the help of SCM strategists as to the
ideal location for setting up production facilities,
2. Production Strategy necessitates Inventory holding
The blue print of the entire Production strategy is dependant upon the marketing strategy.
3. Market penetration
Marketing departments of companies frequently run branding and sales promotion campaigns to
increase brand awareness and demand generation.

4. Market Size, location and supply design

Supply chain design takes into account the location of market, market size, demand pattern and
the transit lead time required to reach stocks to the market and determine optimum inventory
holding locations and network to be able to hold inventories at national, regional and local levels
and achieve two major objectives.
5. Transportation and Physical Barriers
Market location and the physical terrain of the market coupled with the local trucking and
transportation network often demand inventory holding at nearest locations.
6. Local tax and other Govt. Rules
In many countries where GST is not implemented, regional state tax rules apply and vary from
state to state.
7. Production lead times
FG inventory holding becomes necessary in cases where the lead-time for production is long.
8. Speculative gain
Companies always keep a watch on the economy, annual state budget, financial environment and
international environment and are able to foresee and estimate situations, which can have an
impact on their business and sales.
9. Avoid Certain Costs
Finally organizations hold FG inventories to satisfy customer demand, to reduce sales
management and ordering costs, stock out costs and reduce transportation costs and lead times.
Why and When to avoid Holding Inventories
Every business organization that is engaged in manufacturing, trading or dealing with salable
products holds inventories in one form another.

7.4 Inventory Buildup can be a Sign of Hidden Problems

It has been noticed that inventory build up in process and manufacturing industries is often a sign
of hidden problems, which lie underneath and are not visible at the surface level.
7.5 Types of Inventories - Independent and Dependant Demand Inventories
Inventory Management deals essentially with balancing the inventory levels. Inventory is
categorized into two types based on the demand pattern, which creates the need for inventory.
The two types of demand are Independent Demand and Dependant Demand for inventories.
 Independent Demand
An inventory of an item is said to be falling into the category of independent demand
when the demand for such an item is not dependant upon the demand for another item.
 Dependant Demand
If the demand for inventory of an item is dependant upon another item, such demands are
categorized as dependant demand.

7.6 Inventory Costs

18
Inventory procurement, storage and management is associated with huge costs associated with
each these functions. Inventory costs are basically categorized into three headings:
1. Ordering Cost
2. Carrying Cost
3. Shortage or stock out Cost & Cost of Replenishment
a. Cost of Loss, pilferage, shrinkage and obsolescence etc.
b. Cost of Logistics
Sales Discounts, Volume discounts and other related costs.

1. Ordering Cost
Cost of procurement and inbound logistics costs form a part of Ordering Cost. Ordering Cost is
dependant and varies based on two factors - The cost of ordering excess and the Cost of ordering
too less.
Both these factors move in opposite directions to each other. Ordering excess quantity will result
in carrying cost of inventory.
How much to order is determined by arriving at the Economic Order Quantity or EOQ.

2. Carrying Cost
Inventory storage and maintenance involves various types of costs namely:
 Inventory Storage Cost
 Cost of Capital

c. Inventory Storage Cost

Inventory storage costs typically include Cost of Building Rental and facility maintenance and
related costs.

d. Cost of Capital
Includes the costs of investments, interest on working capital, taxes on inventory paid, insurance
costs and other costs associate with legal liabilities.

7.7 Inventory Classification - ABC Classification, Advantages & Disadvantages

Inventory is a necessary evil in any organization engaged in production, sale or trading of
products.
ABC Classification
Inventory in any organization can run in thousands of part numbers or classifications and
millions of part numbers in quantity. Therefore inventory is required to be classified with some
logic to be able to manage the same.
In most of the organizations inventory is categorized according to ABC Classification Method,
which is based on pareto principle. Here the inventory is classified based on the value of the
units. The principle applied here is based on 80/20 principles. Accordingly the classification can
be as under:
A Category Items Comprise 20% of SKU & Contribute to 80% of $ spend.
B Category Items Comprise 30% of SKU & Contribute to 15% of $ spend.
C Category Items Comprise 50% of SKU & Contribute to 5% of $ spend.
The above is only an illustration and the actual numbers as well as percentages can vary.

19
Advantages of ABC Classification
 This kind of categorization of inventory helps one manage the entire volume and assign
relative priority to the right category. For Example A Class items are the high value
items.
 A Category Items: Helps one identify these stocks as high value items and ensure tight
control in terms of process control, physical security as well as audit frequency.
 It helps the managers and inventory planners to maintain accurate records and draw
management’s attention to the issue on hand to facilitate instant decision-making.
 B Category Items: These can be given second priority with lesser frequency of review
and less tightly controls with adequate documentation, audit controls in place.
 C Category Items: Can be managed with basic and simple records. Inventory quantities
can be larger with very few periodic reviews.
Example: Take the case of a Computer Manufacturing Plant; the various items of inventory can
be broadly classified as under.

Disadvantages
 Inventory Classification does not reflect the frequency of movement of SKU and hence
can mislead controllers.
 B & C Categories can often get neglected and pile in huge stocks or susceptible to loss,
pilferage, slackness in record control etc.

7.8 Operational Challenges in Inventory Management

The latest trend in all industries has been to outsource inventory management functions to Third
Party Service providers. Establish and outline Operations Process for Service Providers: Draw up
SOP - Standard Operating procedure detailing warehouse operations process, warehouse
inventory system process as well as documentation process.
1. Establish inventory visibility at each of the location through MIS Reports: Draw up list of
20
 reports and MIS data for all locations and ensure they are mailed to a central desk in the
inventory team for daily review.
2. Initiate Daily Stock count procedure to be carried out at all of the locations and reported
back to the inventory desk.
Daily stock count should be able to reflect location accuracy, stock accuracy as well as
transaction summary for the day.
3. Monthly audits and inventory count should be implemented at all locations without fail
and insist on one hundred percent adherence.
4. Quarterly inventory - wall-to-wall count or half yearly and annual wall-to-wall count
should be implemented depending upon the volume of transactions as well as value of
transactions at each location.

7.9 Good Inventory Management Practices

Good inventory Management practices in the company help by adding value in terms of having
control over and maintaining lean inventory.

1. Review Inventory periodically and revise stocking patterns and norms

Inventory is dependant upon the demand as well as the supply chain delivery time. Often
companies follow one stocking policy for all items.

2. Get into detailed inventory planning - One size does not fit all
Understand the inventory types and the specific characteristics of the items you are
carrying.

3. Study demand pattern, movement patterns and cycles to build suitable inventory norms
for different categories of inventory
Companies which are into retail segments and dealing with huge inventories in terms of
number of parts as well as value will necessarily need to ensure they practice review of
inventory list and clean up operations on ongoing basis.
7.9.1 Inventory Management Systems
Modern day inventory is managed by sophisticated system applications that are designed to
manage complex inventory plans and to a large extent contain processes that initiate and
streamline the operations and inventory management.
Inventory in the earlier days used to be managed by a system known as cardex system. Bin cards
were printed and kept in every bin location. Whenever inventory was put into the bin or
removed, the card had to be updated.
In the next phase come the basic inventory management systems, which were a replica of the
accounting books containing debit and credit entries along with the balance and the Cardex
System continued to be used to manage the shop floor operations.
With the ERP System introduction, MM modules are deployed which work in tandem with
procurement and other modules. Inventory modules contain intelligent applications that manage
the inventory, help in analysis, categorization and to a large extent initiate actions and processes
based on auto inputs derived from other sources.

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 CHAPTER EIGHT: FORMULATING SUPPLY CHAIN STRATEGY

1. Setting Organizations’ objectives

The key component of any strategy statement is to set the long-term objectives of the
organization.
2. Evaluating the Organizational Environment
The next step is to evaluate the general economic and industrial environment in which the
organization operates.

3. Setting Quantitative Targets

In this step, an organization must practically fix the quantitative target values for some of
the organizational objectives.
4. Aiming in context with the divisional plans
In this step, the contributions made by each department or division or product category
within the organization is identified and accordingly strategic planning is done for each
sub-unit.
5. Performance Analysis
Performance analysis includes discovering and analyzing the gap between the planned or
desired performance.
6. Choice of Strategy
This is the ultimate step in Strategy Formulation. The best course of action is actually
chosen after considering organizational goals, organizational strengths, potential and
limitations as well as the external opportunities.

8.1 Distribution Channel Design and Management

Product distribution (or place) is one of the four elements of the marketing mix.
Channels and intermediaries
Distribution of products takes place by means of channels. Channels are sets of interdependent
organizations (called intermediaries) involved in making the product available for consumption.
Channel design
A firm can design any number of channels. Channels are classified by the number of
intermediaries between producer and consumer.

Category Definition
Intensive The producer's products are stocked in the majority of outlets. This strategy
distribution is common for basic supplies, snack foods, magazines and soft drink
beverages.
Selective Means that the producer relies on a few intermediaries to carry their product.
distribution This strategy is commonly observed for more specialised goods that are
carried through specialist dealers, for example, brands of craft tools, or large
appliances.

22
 Exclusive Means that the producer selects only very few intermediaries. Exclusive
distribution distribution is often characterised by exclusive dealing where the reseller
carries only that producer's products to the exclusion of all others. This
strategy is typical of luxury goods retailers such as Gucci.

Channel mix
In practice, many organizations use a mix of different channels; in particular, they may
complement a direct sales-force who typically call on larger customers with agents who cover
the smaller customers and prospects.

Managing channels
The firm's marketing department needs to design the most suitable channels for the firm's
products, then select appropriate channel members or intermediaries.
Channel motivation
To motivate intermediaries the firm can use positive actions, such as offering higher margins to
the intermediary, special deals, premiums and allowances for advertising or display.
Channel conflict
Channel conflict can arise when one intermediary's actions prevent another intermediary from
achieving their objectives. Vertical channel conflict occurs between the levels within a channel
and horizontal channel conflict occurs between intermediaries at the same level within a channel.

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 CHAPTER NINE: FORMING STRATEGIC ALLIANCES AND PARTNERSHIPS
Terminology
Various terms have been used to describe forms of strategic partnering. These include
‘international coalitions’, ‘strategic networks’ and, most commonly, ‘strategic alliances’.
Definitions are equally varied.

Typology
One typology of strategic alliances conceptualizes them as horizontal, vertical or inter-sectoral:
 Horizontal strategic alliance: Strategic alliance characterized by the collaboration
between two or more firms in the same industry, e.g. the partnership between Sina Corp
and Yahoo in order to offer online auction services in China;
 Vertical strategic alliances: Strategic alliance characterized by the collaboration between
two or more firms along the vertical chain, e.g. Caterpillar's provision of manufacturing
services to Land Rover;
 Intersectoral strategic alliances: Strategic alliance characterized by the collaboration
between two or more firms neither in the same industry nor related through the vertical
chain, e.g. the cooperation of Toys "R" Us with McDonald's in Japan resulting in Toys
"R" Us stores with built-in McDonald's restaurants.
 Joint venture is a strategic alliance in which two or more firms create a legally
independent company to share some of their resources and capabilities to develop a
competitive advantage.
 Equity strategic alliance is an alliance in which two or more firms own different
percentages of the company they have formed by combining some of their resources and
capabilities to create a competitive advantage.
 Non-equity strategic alliance is an alliance in which two or more firms develop a
contractual-relationship to share some of their unique resources and capabilities to create
a competitive advantage.
 Global Strategic Alliances working partnerships between companies (often more than
two) across national boundaries and increasingly across industries, sometimes formed
between company and a foreign government, or among companies and governments.

Advantages
The advantages of forming a strategic alliance include:
 Allowing each partner to concentrate on their competitive advantage.
 Learning from partners and developing competencies that may be more widely exploited
elsewhere.
 Adequate suitability of the resources and competencies of an organization for it to
survive.
 To reduce political risk while entering into a new market.

Disadvantages
 Risk of losing control over proprietary information, especially regarding complex
transactions requiring extensive coordination and intensive information sharing.
 Coordination difficulties due to informal cooperation settings and highly costly dispute
resolution.

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  Agency costs: As the benefit of monitoring the alliance's activities effectively is not fully
captured by any firm, a free rider problem arises (the free rider problem seems to be less
pronounced in settings with multiple strategic alliances due to reputational effects).
 Influence costs because of the absence of a formal hierarchy and administration within
the strategic alliance.

9.1 Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:
 Strategy Development: Strategy development involves studying the alliance’s
feasibility, objectives and rationale, focusing on the major issues and challenges and
development of resource strategies for production, technology, and people. It requires
aligning alliance objectives with the overall corporate strategy.
 Partner Assessment: Partner assessment involves analyzing a potential partner’s
strengths and weaknesses, creating strategies for accommodating all partners’
management styles, preparing appropriate partner selection criteria, understanding a
partner’s motives for joining the alliance and addressing resource capability gaps that
may exist for a partner.
 Contract Negotiation: Contract negotiations involves determining whether all parties
have realistic objectives, forming high calibre negotiating teams, defining each partner’s
contributions and rewards as well as protect any proprietary information, addressing
termination clauses, penalties for poor performance, and highlighting the degree to which
arbitration procedures are clearly stated and understood.
 Alliance Operation: Alliance operations involves addressing senior management’s
commitment, finding the calibre of resources devoted to the alliance, linking of budgets
and resources with strategic priorities, measuring and rewarding alliance performance,
and assessing the performance and results of the alliance.
 Alliance Termination: Alliance termination involves winding down the alliance, for
instance when its objectives have been met or cannot be met, or when a partner adjusts
priorities or re-allocates resources elsewhere.

9.2 Strategy Development

Features common to transactions that are natural candidates for strategic alliances are:
 High impediments to comprehensive contracting resulting in a major degree of contract
incompleteness
 High complexity minimizing the auxiliary potential of the body of law for resolving
issues not specified in the contract
 Both allies have to invest in relationship-specific assets resulting in potential for mutual
hold-ups
 Excessive cost for one party to develop the expertise to carry the transaction itself (e.g.
due to experience curve)
 Transitory or uncertain character of market opportunity making a merger or vertical
integration unattractive

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 CHAPTER TEN: SUPPLY CHAIN STRUCTURE
Height
 A company's organizational management structure can be flat or tall. Smaller companies
usually have very few managers.
Types
 There are three common types of vertical organizational management structures: product,
functional and customer.
Advantages
 The advantage of a product organizational structure is that companies can better focus on
their product lines, according to the Reference for Business website.
Disadvantages
 The major disadvantage of a product organizational management structure is duplication
of resources.

10.1 How to Design an Organization Structure

One important element of ensuring the efficient operation of a business is determining the
functions of its workers. Once that has been accomplished, the emphasis should be on designing
an efficient organizational structure for a company or business.
1. Develop a clear mission statement for the organization. Focus the organization
structure around the mission statement.
2. Decide whether the organization structure will be centralized and formal or
decentralized and informal.
3. Determine the nature of the organization structure based on the mission statement
and the formality of the organization structure.
4. Design the overall chain of command for the organization. If there is a single
overall director or leader, determine the title for that role.
5. Determine the authority and responsibility to be assigned to each position in the
organization structure.
6. Add subordinate roles to the chain of command. Determine the process of
reporting from subordinate to supervisor and make allowances for special
circumstances (such as grievance resolution).
10.2 Types of Organizational Structures
An organizational structure is an institution with strategies, policies, commonly shared values
and a specific set of activities working together toward a single objective.

The Horizontal Organization Structure

Organizational structures define a company's internal setup, the manner in which authority and
information flow and the hierarchical structure. Vertical organizational structures are most
common in large companies; small companies are more likely to use horizontal organizational
structures.
Function
 Horizontal organizational structures give employees power to make decisions.
Features
 Employees may report directly to the owners of businesses with horizontal structures.
The chain of command has minimal levels in such organizations.
Significance
26
  Bureaucracy is minimal in horizontal organizational structures.
Benefits
 Work often proceeds quickly in companies with horizontal structuresfaster as employees
make decisions on their own.
Application
 Horizontal organization structures are common in organizations such as hotels, hospitals,
spas, salons and restaurants.
Line Organizational Structure
o Line organizational structures are informal environments where decision-makers
interact directly with their staff, and decisions are implemented quickly.
Functional Organizational Structures
o Functional organizational structures are concerned with matching a propensity for
a skill set with a functional department; for example, placing employees
displaying excellent interpersonal skills in a customer service department.
Bureaucratic Organizational Structures
o Bureaucratic organizational structures are mature and formal structures where
decision-making is implemented from the top-down.
Network Organizational Structures
o Network structures are concerned with outsourcing jobs, tasks and/or activities to
outside entities to better achieve their goals; reduce operating costs; take
advantages of price discrepancies in the marketplace; export liability; and harness
volunteer-based talent.
Matrix Organizational Structures
o Matrix organizational structures are a combination of functional and line organizational structures.
Matrix structures are the most complex of all the structures, and are resilient to change.
10.3 Advantage & Disadvantage of Organizational Structures
Firms have organizational structures that show the relationship between the company's
employees and the responsibilities of said employees.

Vertical Organizational Structure

o A vertical organizational structure is based on the reporting chain from the head
of the company down.

Horizontal Organizational Structure

oA horizontal structure is a flatter organizational structure that groups together

people based on their skills or functions. Matrix Organizational Structure
o Businesses working on a specific project could also have a matrix organizational
structure that sets up the relationship among the people working on the project.
Informal Organizational Structure
o Whatever an organization's formal organizational structure, there is an informal
organizational structure that develops. This informal structure, also known as the
"company grapevine," influences how information flows within the company.

10.4 Hybrid Structure Advantages & Disadvantages

27
Organizational structure defines the way in which the people and resources are organized and
coordinated by the authority to achieve the organizational goals.

Increased Efficiency
o The major advantage of hybrid structure is the increased efficiency. This structure
makes sure that the right quantity of work is assigned at the right time to the right
professionals, thus making the optimum use of resources and prevention of waste.

Development of Cross-Functional Skills

o In hybrid structures groups are formed considering the specializations as well as
services.
Conflicts
o The major disadvantage of hybrid structure is the chance of having conflicts
between corporate departments and divisions.
Too Much Administration Overhead
o Waste of time and effort come into picture in case of hybrid organizations.

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 CHAPTER ELEVEN: INTER - ORGANIZATIONAL RELATIONSHIPS

11.1 Types of Inter-organizational Relationships

Interorganizational relationships between businesses or nonprofits are also known as strategic
relationships.

Alliance
 Frequently identified as a means to improve customer service and reduce costs, business
alliances are created with an agreement between the two organizations.

Consortium
 A consortium is a group of businesses or organizations that are united by a common goal
and choose to work together to reach that goal, often by pooling resources.

Sponsorship
 Sponsorship is a type of interorganizational relationship where one entity gives financial
or other support to another for a set amount of time.

Subsidiary
 A subsidiary interorganizational relationship is frequently found in the nonprofit world.
Large nonprofit organizations, such as United Way, have hundreds of local chapters and
smaller organizations that fall under the national organization's umbrella of funding and
centralized administration.
11.2 Interorganizational Strategies
Firms are facing a growing need to be more competitive. Organizations are facing unprecedented
challenges brought on by increased technological needs and a growing focus on international
business.
Communication
o Interorganizational management emerges from one basic need: communication.
Executive management must develop consistent methods to communicate quality
and delivery goals to all levels of employees.

Common Language
o Measurable goals related to market share and profits are primarily driven by
competition and pressure from stakeholders, both internal and external.

Convergence
o By creating a new approach to decision making and thinking top managers can
create a new paradigm for employees to foster collaborative networks instead of
functional silos.
11.3 Interorganizational Conflict
With organizations expanding their boundaries into wider areas, encountering interorganizational
conflict is a possibility.

29
Types
 The three types of interorganizational conflict are substantive conflict, emotional conflict
and cultural conflict. Each is dealt with differently.
Substantive
 Substantive conflict occurs when a basic disagreement arises between the two
organizations at a fundamental level.
Emotional
 Emotional conflicts takes place when individuals between the organizations find
themselves reacting on an emotional level–out of fear, jealousy, envy or stubbornness.

Cultural
 Interorganizational conflict also can occur based on cultural needs and desires. These
conflicts are often the result of basic misinterpretation.

Resolution
 Interorganizational conflict sometimes can be resolved through mediation, open dialogue
or cultural understanding.

11.3.1 Advantages & Disadvantages of Conflict in Organizations

Over time, conflict within organizations may be inevitable.

1. What is Conflict?
o Conflict can crop up in organizations whenever people have contact. People might
disagree about facts or about the soundness of opinions expressed by those in
authority.
2. Can Conflict be an Advantage?
o The word "conflict" has negative connotations in common use, so we tend to
think that conflict can only be a disadvantage in an organization.

Managing Conflict
o Some conflict within an organization may be inevitable, but it is important to
acknowledge that it exists in order to resolve the issues.
11.4 Negative Effects of Conflict within an Organization
An organization is made up of groups of people, and within groups of people conflicts are
inevitable.

Insubordination
 A company with weak management develops problems with conflict that continue for the
long term.

Drop in Productivity
 Allowing a conflict to continue means that employee attention becomes more focused on
the conflict and not on productivity. As a problem is allowed to linger, employees will

30
 attach more importance to resolving the issue in their favor rather than attending to
worker productivity.

Lack of Direction
 Conflict can sometimes arise when management is unable to communicate the direction of the
company to employees.
Fragmentation
 Conflict creates rival factions. Sometimes those factions are individuals, sometimes they
are groups.

Lack of New Ideas

 Groups in conflict tend not to collaborate on new ideas. When conflict goes unresolved it
can be difficult to create new ideas the company needs to solve problems it is facing.

Quality of Work
 If a conflict is allowed to go on long enough, the parties involved may begin to show
more interest in the conflict than in doing their jobs properly.

Deadlines
 In some companies, deadlines are very important. Groups in conflict may start to push
deadline limits as the conflict becomes more important than reaching their deadlines.

31
 CHAPTER TWELVE: DISTRIBUTION
Who uses a distribution warehouse?
 The Manufacturing Company. They use the warehouse in order to store the goods and the
items that they have manufactured and are to be delivered to the distributors.
 Third party distributors. These are the entities that the manufacturing company delivers
their products to.
 Retail stores. This refers to the stores that sell products in retail. The items they usually
place inside the distribution warehouse are those items that they sell.
12.1 The Benefits of Having a Distribution Warehouse
Distribution centers or companies need to have a distribution warehouse if they want to avail of
these benefits:
 Time-savings. A distribution warehouse can really save distributors a lot of time when it
comes to distributing all the items.
 Money-savings. A distribution warehouse is the best solution to protect the goods or the
products that distributors are trying to distribute to retail outlets.
 from the technical benefits you are likely to get with a distribution warehouse, you can
also benefit a lot from the peace of mind that it’s going to give you.

12.2 Production Issues for Supply Chain

For efficient, effective and economical operation in a manufacturing unit of an organization, it is
essential to integrate the production planning and control system.
Planning and control are an essential ingredient for success of an operation unit. The benefits of
production planning and control are as follows:
 It ensures that optimum utilization of production capacity is achieved, by proper
scheduling of the machine items which reduces the idle time as well as over use.
 It ensures that inventory level are maintained at optimum levels at all time, i.e. there is no
over-stocking or under-stocking.
 It also ensures that production time is kept at optimum level and thereby increasing the
turnover time.
 Since it overlooks all aspects of production, quality of final product is always maintained

Retail & Consumer Product Goods

Consumer products companies are working towards eliminating waste and inefficiencies from
the consumer goods supply chain to reduce costs and increase customer satisfaction.

Inventory
The best performing companies are able to forecast their demand accurately and tackle variations
through proper risk mitigation strategies.

Sourcing and Procurement

When consumer packaged goods companies work with multiple suppliers, it is easy to overlook
communication and the relationship between buyer and supplier, leading to substandard product,
increased operations costs and loss of productivity.

Manufacturing
Manufacturing of consumer products has evolved with changes in technology. The focus has
been to increase through put rate, quality and flexibility of production.
32
Transportation
Top companies are able to isolate demand to the point where they are able to make direct
shipments to customers from their plants or goods warehouses.

12.3 Distribution Operations

Companies that do not have the internal capabilities or wish to quickly expand their distribution
networks are relying on consumer products Logistic Service Providers (LSPs).
The combination of supply chain agility and efficient SCM practices is the key to long term
competitiveness and prosperity of retail firms in a global supply chain context and are not limited
to:
 Strategic decisions such as Integrated Organization Design, Delivery Mechanism
Analysis, Restocking and Shelf Management, Warehousing and Staffing solutions,
Replenishment decisions etc.
 Network structure optimization on number of platforms, location etc., Delivery mode
optimization on warehouses, DCs, cross docking etc., Inbound and Outbound transport
optimization on routing and scheduling , Consolidation etc.
 Inventory management & replenishment planning based on Pull Vs Push Analysis,
Integration of Vendors, DC’s in replenishment planning etc.
 Operational Management such as Effective Labour Utilization with standardizing
ordering and sorting procedures, Shrink Management with proper department and lane
layouts, Inventory Management with linkages to demand
 Information Technology Integration with emphasis on In-store operations and Customer
support, Supply chain management via advanced planning scheduling, procurement
management etc.

12.4 Production Planning

Production planning is one part of production planning and control dealing with basic concepts
of what to produce, when to produce, how much to produce, etc. It involves taking a long-term
view at overall production planning. Therefore, objectives of production planning are as follows:
 To ensure right quantity and quality of raw material, equipment, etc. are available during
times of production.
 To ensure capacity utilization is in tune with forecast demand at all the time.
A well thought production planning ensures that overall production process is streamlined
providing following benefits:
 Organization can deliver a product in a timely and regular manner.
 Supplier are informed will in advance for the requirement of raw materials.
 It reduces investment in inventory.
 It reduces overall production cost by driving in efficiency.
12.5 Production Control
Production control looks to utilize different type of control techniques to achieve optimum
performance out of the production system as to achieve overall production planning targets.
Therefore, objectives of production control are as follows:
 Regulate inventory management
 Organize the production schedules
 Optimum utilization of resources and production process
The advantages of robust production control are as follows:
33
  Ensure a smooth flow of all production processes
 Ensure production cost savings thereby improving the bottom line
 Control wastage of resources
 It maintains standard of quality through the production life cycle.
Production control cannot be same across all the organization. Production control is dependent
upon the following factors:
 Nature of production( job oriented, service oriented, etc.)
 Nature of operation
 Size of operation
Production planning and control are essential for customer delight and overall success of an
organization.

12.6 Procurement
This is the acquisition of goods, services or works from an external source. It is favorable that
the goods, services or works are appropriate and that they are procured at the best possible cost
to meet the needs of the purchaser in terms of quality and quantity, time, and location.

12.6.1 Procurement Steps

Procurement life cycle in modern businesses usually consists of seven steps:
 Identification of need: This is an internal step for a company that involves
understanding of the company needs by establishing a short term strategy ( three to five
years) followed by defining the technical direction and requirements.
 Supplier Identification: Once the company has answered important questions like:
Make-buy, multiple vs. single suppliers, then it needs to identify who can provide the
required product/service.
 Supplier Communication: When one or more suitable suppliers have been identified,
requests for quotation, requests for proposals, requests for information or requests for
tender may be advertised, or direct contact may be made with the suppliers.
 Negotiation: Negotiations are undertaken, and price, availability, and customization
possibilities are established.
 Supplier Liaison: During this phase, the company evaluates the performance of the P/S
and any accompanying service support, as they are consumed.
 Logistics Management: Supplier preparation, expediting, shipment, delivery, and
payment for the P/S are completed, based on contract terms.
 Additional Step - Tender Notification: Some institutions choose to use a notification
service in order to raise the competition for the chosen opportunity.

34
12.7 Transportation and Logistics
This refers to the effective management of the whole network of flow (of material, services and
information) across the supply chain including the storage facilities and 3PLs.

Benefits of an effective logistics and distribution network

An efficient logistics and distribution system affects the whole supply chain.
Benefits of an effective logistics and distribution system:
 Lower costs due to better utilization of resources
35
  Faster cash-to-cash cycle
 Lesser inventory levels
 Increased reliability of delivery to customers
 Decreased response time

Questions/Issues
 How to minimize the total landed cost (production, inventory handling and transportation
cost) within acceptable service levels?
 In-case of global sourcing, how to manage the complex logistic network?
 Where to locate your new warehouse to reach your changing customer base?
 Does consolidation of DCs make sense for my firm?
 Which mode (air, water, road (LTL or FTL)) to use in which lane?

36
A well organized, transparent and effective logistics and distribution network greatly enhances
customer satisfaction levels and cost reduction opportunities. Aqua MCG provides a complete
end-to-end solution to all your logistics and distribution needs to achieve best-in-class supply
chain performance.

12.8 Managing Supply Chain

The diagram below illustrates how supply chain is evolving into a more integrated end-to-end,
customer-driven supply chain – which is well integrated across the business and all its
stakeholders and service providers.

37
 The On-demand supply chain would focus on elements such as:
 Excellent synchronization between supply & demand through efficient planning &
forecasting
 Integrating & co-ordinating business functions horizontally across the supply chain
 Developing outcomes that have been mutually decided & beneficial, to strengthen
relationships
 Managing the supply chain cycles for planning to order-to-delivery
12.8.1 Synchronizing Supply & Demand
Understanding demand patterns and efficient planning of supply is the constant endeavor of all
supply chain planners.
12.8.2 New Product Introduction
Innovation is the key to future success. It is also critical for a company to maintain profitable
growth especially in view of the increasingly competitive Indian marketplace.
12.8.3 Efficient Customer Order Fulfillment
Customer orders start with the order entry process and involve efficient maintenance of customer
database, opportunity evaluation for cross- sell, up-sell, back-order processing and post order
fulfillment transactions.
12.8.4 Logistics Services
 Today's market demands:
 More stocking locations
 Frequent ordering
 Smaller order sizes
 More sophisticated modes of transportation
 Multi-channel distribution
 Configure-to-order capabilities, among others
.

38
 CHAPTER THIRTEEN: INFORMATION SYSTEMS FOR SUPPLY CHAIN
INFORMATION SYSTEMS

13.1 Types of Information Management Systems

The management of Information is facilitated by the use of Information Technology and
Information Sciences.

i) Document Management System (DMS)

Electronic data resources in the document form. Generally, the DMS is designed to help the
organizations to manage the creation and flow of documents through the provision of a
centralized repository.

ii) Content Management System (CMS)

The CMS assist in the creation, distribution, publishing, and management of the enterprise
information.

iii) Library Management System (LMS)

Library management systems facilitate the library technical functions and services that include
tracking of the library assets, managing CDs and books inventory and lending, supporting the
daily supply Chain administrative activities of the library and the record keeping in Logistics.

iv) Records Management System (RMS)

The RMS are the recordkeeping systems which capture, maintain and provide access to the
records including paper as well as electronic documents, efficiently and timely so as to
effectively facilitate the Supply Chain function.

v) Digital Imaging System (DIS)

The DIS assists in automation of the creation of electronic versions of the paper documents such
as PDFs or Tiffs.
vi) Learning Management System (LMS)
Learning management systems are generally used to automate the e-learning process which
includes the administrative process like registering trainees in logistics, managing training
resources, creating courseware, recording results hence providing an online information to
educational supply chains.

vi) Geographic Information System (GIS)

The GIS are special purpose, computer-based systems that facilitate the capture, storage,
retrieval, display and analysis of the spatial data in the Supply Chain function.

Information Systems within Supply Chain

13.2 Materials Requirement Planning (MRP) 1

MRP emerged in the early 1970's as a software application to address inventory and scheduling
issues in manufacturing to support logistics.
From the inputs, the system determines
(1) Quantities the company should order and when,
(2) The need to expedite or reschedule arrival dates or needed products
39
 (3) The canceled need for products.
Thus, changes in customer requirements are easily dealt with such a system as production and
logistics plans are automatically revised when the MPS changes.
13.3 MRP (Material Requirements Planing)II.
MRP II includes all the functionalities of an MRP and have the following added capabilities as
discussed by Coyle et al. (2003):
i) Feedback: MRP II is sometimes referred to as a "Closed Loop MRP" as it incorporates the
feedback from previous run, which is the work already, progressed on the shop floor.
ii) Resource Scheduling: During scheduling, the system also takes into account the plant and
equipment required to convert raw materials into finished goods.
iii) Batching: Also batching needs to be incorporated into the system if resources need to be
scheduled.
• Part Period Cover: Here, batches are made to cover a fixed period of demand such as a week.
iv) Software Extension Programs: A number of software extensions are designed and are
available for MRP II to help the scheduling procedure.
13.4 Electronic Data Interchange (EDI)
EDI is the organization-to-organization, computer-to-computer exchange of business data in a
structured, machine-processable format (Coyle et al. 2003, 464).
13.5 Web Services
“Web services are software programs that use XML to exchange information with other software
via common Internet protocols” (Deitel, DuWaldt & Trees 2003, 23). These softwares can send
requests and possibly respond to other computers' requests.

13.6 Electronic Business XML (ebXML)

ebXML is an open infrastructure that has similar objectives to those of web services.
The project delivered five layers of substantive data specifications in logistics, including XML
standards for:
• Business processes
• Core data components
• Collaboration protocol agreements
• Messaging
• Registries and repositories (ebXML 2003)

13.7 Information Systems and Decision Making

Facility- determining the location, capacity and schedules of a facility requires information on
the trade-offs arrange efficiency fleets, and flexibility demand exchange rates and so on.
i) Inventory –Setting optimal inventory policies requires information that includes
demand pattern, cost of carrying inventory, cost of stocking out and cost of ordering
ii) Transportation
iii) Deciding on transportation networks, routings, modes, shipments and vendors,
requires information including cost, customer locations, and shipment sizes to make
good decisions. Use the information to integrate operations with those of suppliers
iv) Sourcing- Information on product margins , prices, quality, delivery lead times and so
on, are all important in making sourcing decisions .
v) Pricing and revenue management-To et pricing policies, one needs information on
demand both its volume and various customer segment willingness to pay as well as
many supply issues such as the product margin, lead-time and availability.
40
 13.7.1 Importance of Information Systems and an Integrated Supply Chain Environment
Prior to 1980s the information flow between functional areas within an organization and
between the logistics member organizations were paper based.
 First, satisfying in fact pleasing customer has become something of a corporate
obsession. Serving the customer in the best, most efficient and effective manner has
become critical.
 Second information is a crucial factor in the managers' abilities to reduce inventory.
 Human resource requirement to a competitive level. Information flows plays a crucial
role in strategic planning.

 Logistic organizational dynamics in information

All enterprises participating in logistics management initiatives accept a specific role to perform.
They also share the joint belief that they and all other logistical participants will be better off
because of this collaborative effort.
1. Remote Input/Output node: In this case the member participates from a remote location within
the application system supported by one or more higher-level participants.
2. Application processing node: In this case a member develops and shares a single application
such as an inventory query or order processing system.
3. Multi participant exchange node: In this case the member develops and shares a network
interlinking itself and any number of lower level participants with whom it has an established
business relationship.
4. Network control node: In this case the member develops and shares a network with diverse
application that may be used by many different types of lower level participants.
5. Integrating network node: In this case the member literally becomes a data
communications/data processing utility that integrates any number of lower level participants
and applications in real times.
Four fundamental mistakes made when determining information technology requirements in the
logistical function are as follows:
1. Viewing system as functional instead of cross-functional.
2. Interviewing managers individually instead of jointly.
3. Not allowing for trial and error in detail design process.
4. Asking the wrong question during the interview.

 Information and Technology: Application of Supply Chain

In the development and maintenance of logistics information systems both software and
hardware must be addressed. Hardware includes computer's input/output devices and storage
media. Software includes the entire system and application programme used for processing
transactions management control, decision-making and strategic planning. Recent development
in logistical software is:
1. Base Rate, Carrier select & match pay (version 2.0) developed by Distribution
Sciences Inc. which is useful for computing freight costs, compares transportation mode
rates, analyze cost and service effectiveness of carrier.
2. A new software programme developed by Ross systems Inc. called Supply Chain
planning which is used for demand forecasting, replenishment & manufacturing tools for
accurate planning and scheduling of activities.
3. P&G distributing company and Saber decision Technologies resulted in a software
41
 system called Transportation Network optimization for streamlining the bidding and
award process.
4. Logitility planning solution was recently introduced to provide a programme capable
managing the entire supply chain.

 Electronic Commerce:
It is the term used to describe the wide range of tools and techniques utilized to conduct
business in a paperless environment within the logistics.
 Electronic Data Interchange(Refined)
Electronic Data Interchange (EDI) refers to computer-to-computer exchange of business
documents in a standard format. EDI describe both the capability and practice of
communicating information between two organizations electronically instead of
traditional form of mail, courier, & fax. The benefits of EDI (refined) are
1. Quick process to information.
2. Better customer service.
3. Reduced paper work.
4. Increased productivity.
5. Improved tracing and expediting.
6. Cost efficiency.
 Bar coding and Scanner:
Bar code scanners are most visible in the check-out counter of super market. This code specifies
name of product and its manufacturer.

 Data warehouse:
Data warehouse is a consolidated database maintained separately from an organization's
production system database..

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 CHAPTER FOURTEEN: MARKET RELATIONSHIPS

14.1 Market Relationship with Stakeholders

Using marketing techniques to strengthen stakeholder relationships makes an important
contribution to organizational success.
Audience
 Market research helps to identify the organization's stakeholders and prioritize its
communication requirements.
Communication
 As organizations face increasing scrutiny from stakeholders, they need to communicate
with greater clarity using marketing techniques. Communication must become proactive
rather than reactive.
Engagement
 Organizations should use the techniques of customer relationship management (CRM) to
strengthen relationships with their stakeholders, according to Stamp Consulting.
Social Media
 Marketing can help strengthen stakeholder relationships by using social media
techniques.
Press Relations
 Organizations can issue press releases and articles, as well as personalized
communication, to build understanding and awareness among stakeholders.

14.2 Global Issues

Political, Economic, Social and Technological analysis describes a framework of macro-
environmental factors used in the environmental scanning component of strategic management.
Some analysts added Legal and rearranged the mnemonic to SLEPT; inserting Environmental
factors expanded it to PESTEL or PESTLE, which is popular in the United Kingdom. Political
factors are basically to what degree the government intervenes in the economy.
 Economic factors include economic growth, interest rates, exchange rates and the
inflation rate..
 Social factors include the cultural aspects and include health consciousness, population
growth rate, age distribution, career attitudes and emphasis on safety.
 Technological factors include technological aspects such as R&D activity, automation,
technology incentives and the rate of technological change.
 Legal factors include discrimination law, consumer law, antitrust law, employment law,
and health and safety law.
 Environmental factors include ecological and environmental aspects such as weather,
climate, and climate change, which may especially affect industries such as tourism,
farming, and insurance.
Other factors for the various offshoots include:
 Demographic factors include gender, age, ethnicity, knowledge of languages, disabilities,
mobility, home ownership, employment status, religious belief or practice, and income
level.
 Regulatory factors include acts of parliament and associated regulations, international
and national standards, local government by-laws, and mechanisms to monitor and ensure
compliance with these.
43
Applicability of the Factors
The model's factors will vary in importance to a given company based on its industry and the
goods it produces.

Use of Pest Analysis with Other Models

The PEST factors, combined with external micro-environmental factors and internal drivers, can
be classified as opportunities and threats in a SWOT analysis for the planet’s supply chains.

14.2.1 Strategic Modeling and Location

Writing a strategic planning model may seem difficult, but it's actually fairly easy to do when
setting up your business.
Instructions
1. Draft a mission statement. A mission statement is a general statement about the
purpose of your company, why it exists, and what services you provide.
2. Break your mission statement down into goals. Goals are things that your
company needs to accomplish, either to succeed in your general mission
statement, or to stay afloat as a company.
3. Develop strategies to help you reach each of your goals. For example, your
strategy for profitability might be "Spend heavily to increase market penetration
for three years, then push a profitable product on our wide customer base."
4. Develop action plans for each strategy. This involves writing down all the specific
steps necessary to achieve each part of the strategy.
5. Apply the above four steps to your daily business operations. This is the hardest
part of a strategic planning model, but it is essential.

44
 CHAPTER FIFTEEN: STRATEGY OF SUPPLY CHAIN

15.1 Supply Chain Strategy

A company’s supply chain is the execution vehicle its business strategy. It must be efficient, but
it must also be responsive to today's constantly changing environment with shorter product
lifecycles, fluctuating inventory levels and changing costs.
Here is a four step process for doing that through Supply Chain agility.

Step 1—Build a definition

There is no industry-standard definition for agility. For top performers, agility is well defined for
each organization.
Agility is most frequently defined as manufacturing cycle time, according to our recent study.
Step 2—Leadership the missing link
The need for agility is felt across the organization, but it can’t be solved by any one function.

Step 3—Alignment
Cracking the nut requires a focus in three areas: culture, right-sizing complexity, and rethinking
financial reward systems.
Reduced product complexity—To accomplish this, there’s an active focus on product and
customer complexity.
Invested in available-to-promise (ATP) capabilities— To improve visibility, ATP processes
are extended to manufacturing capabilities.
Reduced demand forecast error—Over 60% of companies are experiencing an increase in
demand variability, with new product launch forecast being the largest contributor to this error.
A focus in this area can yield big dividends.
Improved order effectiveness—Successful companies have a significantly higher percentage of
orders that move through their order management systems without manual intervention.
Designed for supply—The focus is on common formulations, platforms, and reuse strategies for
source, make, and deliver.

Step 4—Supporting cycles

Reactive supply chains are unable to play catch-up. On average, the time to sense demand is
three times the time to process an order. Companies that focus on reacting to demand are always
on their back feet.
15.2 Supply Chain and Corporate Strategy
Some managers believe that there are universal definitions of good or bad supply chains. We
often see companies attempt to build the most efficient supply chain, regardless of whether their
market strategy is to compete on price.

1. Define and communicate a clear corporate strategy.

One of the biggest failure points in aligning strategy is when the supply chain organization
doesnt know what to align with. Strategies cannot be too limited and fail to consider and

45
prioritize all the market requirements and factors on which participants compete (features, price,
delivery, etc).

2. Identify the areas of your corporate strategy that are enabled by the supply chain.
You need to connect the dots between your strategic goals and how those get delivered by the
company.

3. Align supply chain performance metrics with the corporate strategy.

One of the most common issues we see is the belief that there are standard supply chain
performance measures, and the company should strive to maximize them all.
4. supply chain to optimize the strategic goals.
This step is where you address the elements of supply chain design: Supply chain network,
locations, supplier selection and business terms, inventory and planning policy, organizational
structure.
5. Align incentives end to end.
Internal performance evaluations and bonus structures need to match the aligned metrics that
have been set.

15.3 Best Practices and Benchmarking

Benchmarking is the process of comparing one's business processes and performance metrics to
industry bests or best practices from other industries.
15.4 Benefits Benchmarking
In 2008, a comprehensive survey on benchmarking was commissioned by The Global
Benchmarking Network, a network of benchmarking centers representing 22 countries. Over 450
organizations responded from over 40 countries. The results showed that:
1. Mission and Vision Statements and Customer (Client) Surveys are the most used (by
77% of organizations) of 20 improvement tools, followed by SWOT analysis (72%), and
Informal Benchmarking (68%).
2. The tools that are likely to increase in popularity the most over the next three years are
Performance

15.4.1 Collaborative Benchmarking

Benchmarking, originally described Rank Xerox, is usually carried out by individual companies.
Sometimes it may be carried out collaboratively by groups of companies (e.g. subsidiaries of a
multinational in different countries). Procedure Benchmarking
The 12 stage methodology consists of:
1. Select subject
2. Define the process
3. Identify potential partners
4. Identify data sources
5. Collect data and select partners
6. Determine the gap
7. Establish process differences
8. Target future performance
9. Communicate
10. Adjust goal

46
 11. Implement
12. Review and recalibrate
The following is an example of a typical benchmarking methodology:

 Identify problem areas: Because benchmarking can be applied to any business process
or function, a range of research techniques may be required.
 Identify other industries that have similar processes: For instance, if one were
interested in improving hand-offs in addiction treatment one would identify other fields
that also have hand-off challenges.
 Identify organizations that are leaders in these areas: Look for the very best in any
industry and in any country.
 Survey companies for measures and practices: Companies target specific business
processes using detailed surveys of measures and practices used to identify business
process alternatives and leading companies.
 Visit the "best practice" companies to identify leading edge practices: Companies
typically agree to mutually exchange information beneficial to all parties in a
benchmarking group and share the results within the group.

 Implement new and improved business practices: Take the leading edge practices and
develop implementation plans which include identification of specific opportunities,
funding the project and selling the ideas to the organization for the purpose of gaining
demonstrated value from the process.
Costs
The three main types of costs in benchmarking are:
 Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor
time.
 Time Costs - Members of the benchmarking team will be investing time in researching
problems, finding exceptional companies to study, visits, and implementation.
 Benchmarking Database Costs - Organizations that institutionalize benchmarking into
their daily procedures find it is useful to create and maintain a database of best practices
and the companies associated with each best practice now.
Technical/Product Benchmarking
The technique initially used to compare existing corporate strategies with a view to achieving the
best possible performance in new situations (see above), has recently been extended to the
comparison of technical products.
Types
Benchmarking can be internal (comparing performance between different groups or teams within
an organization) or external (comparing performance with companies in a specific industry or
across industries). Within these broader categories, there are three specific types of
benchmarking: 1) Process benchmarking, 2) Performance benchmarking and 3) strategic
benchmarking. These can be further detailed as follows:
 Process benchmarking - the initiating firm focuses its observation and investigation of
business processes with a goal of identifying and observing the best practices from one or
more benchmark firms.
 Financial benchmarking - performing a financial analysis and comparing the results in
an effort to assess your overall competitiveness and productivity.
47
  Benchmarking from an investor perspective- extending the benchmarking universe to
also compare to peer companies that can be considered alternative investment
opportunities from the perspective of an investor.
 Benchmarking in the public sector - functions as a tool for improvement and
innovation in public administration, where state organizations invest efforts and resources
to achieve quality, efficiency and effectiveness of the services they provide.
 Performance benchmarking - allows the initiator firm to assess their competitive
position by comparing products and services with those of target firms.
 Product benchmarking - the process of designing new products or upgrades to current
ones. This process can sometimes involve reverse engineering which is taking apart
competitors products to find strengths and weaknesses.
 Strategic benchmarking - involves observing how others compete. This type is usually
not industry specific, meaning it is best to look at other industries.
 Functional benchmarking - a company will focus its benchmarking on a single function
to improve the operation of that particular function.
 Best-in-class benchmarking - involves studying the leading competitor or the company
that best carries out a specific function.
 Operational benchmarking - embraces everything from staffing and productivity to
office flow and analysis of procedures performed.
 Energy benchmarking - process of collecting, analysing and relating energy
performance data of comparable activities with the purpose of evaluating and comparing
performance between or within entities.

Tools
Benchmarking software can be used to organize large and complex amounts of information.
Software packages can extend the concept of benchmarking and competitive analysis by
allowing individuals to handle such large and complex amounts or strategies.

Metric Benchmarking
Another approach to making comparisons involves using more aggregative cost or production
information to identify strong and weak performing units. The two most common forms of
quantitative analysis used in metric benchmarking are data envelope analysis (DEA) and
regression analysis.

15.5 Optimization of Supply Chain

Supply chain optimization is the application of processes and tools to ensure the optimal
operation of a manufacturing and distribution supply chain.

Applications
Typically, supply chain managers are trying to maximize the profitable operation of their
manufacturing and distribution supply chain. This could include measures like maximizing gross
margin return on inventory invested (GMROII) (balancing the cost of inventory at all points in
the supply chain with availability to the customer), minimizing total operating expenses
(transportation, inventory and manufacturing), or maximize

Approaches and Solutions

48
The classic supply chain approach has been to try to forecast future inventory demand as
accurately as possible, by applying statistical trending and "best fit" techniques based on historic
demand and predicted future events.
Claimed Advantages
Firstly, the techniques being applied to supply chain optimization are claimed to be academically
credible.

Recent Developments
The trend to provide software as a service is a new business model that is now being applied to
building and designing optimization solutions.

49
 CHAPTER SIXTEEN: ETHICAL CONSIDERATIONS

The best and most successful organizations recognise that they will only prosper in the long term
if they satisfy the aspirations of their stakeholders; including customers, suppliers, employees,
local communities, investors, governments, public interest and environment groups. Professional
Bodies in Supply Chain like The Chartered Institute of Purchasing & Supply (CIPS) has a
Personal Ethical Code with which members undertake to comply. Their Code sets out principles
of:
 Integrity
 Professionalism
 High standards
 Optimal use of resources and
 Compliance with legal and other obligations and offers guidance in relation to:
 Declaration of interest
'Ethics' in purchasing and supply management can relate to a wide range of issues from doubts
about suppliers' business procedures and practices to corruption. The vocabulary associated with
this field can, in itself, be confusing, and includes such terms as:
 Fair-trade
 Ethical trading
 Ethical sourcing
 Social accountability
 Social auditing
 Corporate social responsibility
16.1 Audience, Objective and Scope
The CIPS and other Professional bodies like KISM’s position on Ethical Business Practices in
Purchasing and Supply Management is intended primarily for purchasing and supply
management professionals but it applies equally to anyone who has responsibility for managing
the supply of goods or services from an external source.
16.2 Business to Business Ethics
The CIPS Personal Ethical Code is the starting point for business to business ethics in Supply
chains.
16.3 Transparency, Confidentiality and Fairness
The purchasing and supply management process should be as transparent as possible, within
commercial and legal constraints.
Use of Power
Power is a key element in supply relationships. Purchasing and supply management
professionals should understand how to use the purchasing power of their organisation
appropriately.
Corruption
Purchasing and supply management professionals should seek to encourage the application of
both the word and the intention of the CIPS Personal Ethical Code.
Declaring Interest
Purchasing and supply management professionals should encourage colleagues to declare any
material personal interest which may affect, or be seen to affect, their impartiality or judgement
in respect of their duties.

50
Business Gifts, Hospitality and Undue Influence
Organizations should have a clear policy on accepting business gifts. Purchasing and supply
management professionals should encourage colleagues to comply with any such policy. CIPS
believes that normally the only acceptable gifts are items of small intrinsic value, such as desk
diaries.
Payment ot be an Approved Supplier
Purchasing and supply management professionals should not request payment from suppliers as
a condition of being placed on an approved or preferred supplier list.

Payment towards Joint Projects

Purchasing and supply management professionals may invite suppliers to contribute towards the
costs of joint projects or initiatives such as sector-wide supplier databases, marketing a new
product range or investing in a new IT system, provided there are clear and tangible business
benefits to the supplier.
Payment to Agreed Terms
Purchasing and supply management professionals should ensure that their suppliers understand
and agree to the negotiated payment terms. Payment terms are the subject of EU legislation Late
Barter
Barter is trade by exchange of goods or services for other goods or services. There is no
exchange of money and, as barter is not usually a condition of contract between two parties,
coercion is not an issue.

Reciprocal Trading
Reciprocal trading (countertrade) which makes being a customer of an organisation a condition
for being a supplier is generally unacceptable business practice. In essence CIPS believes
reciprocal trading to be only acceptable when:
 There is no coercion
 Both parties are in agreement and
 There is mutual benefit and transparency

16.4 Supplier Relationships and Competition

Most organisations purchase some commodities and services tactically, using short-term
contracts, and others, for reasons of strategy, security or leverage, by means of longer-term
arrangements.
From time to time, longer-term agreements with suppliers should be subject to open and
transparent competition:
 To provide new or alternative suppliers with an opportunity to win the business.
 To enable the buying organisation to access and obtain the best current market offering.

Supplier Mistakes
A mistake is a non deliberate error. CIPS has a separate detailed position on practice on this
subject, the essence of which is as follows:
Mistakes identified post-contract award should be investigated impartially and ethically with a
view to generating options for resolution.

16.5 Size, Maturity and Location

It is good practice to balance the risk of awarding contracts to new or small suppliers with the
51
opportunity of encouraging new business to flourish. Capability and experience are examples of
relevant supplier selection criteria.
16.6 Social Responsibility
The CIPS position on Ethical Business Practices in Purchasing and Supply Management distils
aspects of current developments in the area, including:
 The Ethical Trading Initiative (ETI) Base Code
 The Core Conventions of the International
 Labour Organisation (ILO)
Employment is Chosen (No Forced Labour)
Employees should be free to choose to work for the supplier, i.e. their employer
Employees should be free to leave the supplier after reasonable notice is served Suppliers should
not use forced, bonded or non-voluntary prison labour.

Employment Relationships
Suppliers should establish recognised employment relationships with their employees that are in
accordance with their national law and good practice

Freedom of Association
Suppliers should not prevent or discourage employees from joining trade unions Suppliers'
employees should be able to carry out reasonable representative functions in the workplace.

Living Wages Are Paid

Wages and benefits should at least meet industry benchmarks or national legal standards. As a
minimum, the wages paid to suppliers' employees should meet their basic needs.

Suppliers’ Employees’ Working Hours

Working hours should comply with national laws or industry standards Suppliers' employees
should not be expected to work more than 48 hours per week on a regular basis.

Suppliers’ Treatment of Employees

Under no circumstances should suppliers abuse or intimidate, in any fashion, employees. Any
disciplinary measures should be recorded.
Law
Suppliers should always work within the laws of their country

Health and Safety

Suppliers should assign responsibility for health and safety to a senior management
representative.
Child Labour
In principle, CIPS is against the use of child labour and believes its long-term elimination is
ultimately in the best interests of children.
Discrimination
Suppliers should have a policy of equality for all in the workplace with no discrimination on the
basis of race, caste, religion, nationality, age, gender, marital status, sexual orientation, disability,
union membership or political.

52
DEPARTMENT OF MANAGEMENT
MBM5110
End of Semester Examinations
Time: 2 Hrs
Instructions to Candidates: Answer question 1 (Compulsory) and any other TWO questions.
QUESTION 1 (30 mks)
i) What is a logistics and distribution network and what are the benefits of such? (10mks)
ii) What is a horizontally structured organization and what are its merits and demerits
(10mks)
QUESTION 2
i) Explain PESTEL analysis and how it is used in supply chain management (15mks)
ii) What is a Global Supply Chain? (5mks)
QUESTION 3 (10mks each)
i) Explain the concept of market relationships in supply chain management.
ii) What is electronic data interchange (EDI) and how is it applicable to supply chain
management.
QUESTION 4 (20mks)
What is benchmarking and how is it helpful in supply chain management. How does it
promote best practices within a business environment?
QUESTION 5 (20 mks)
Organizations especially those within the public sector have challenges in the
management of their supply chain ethics. Discuss ethical considerations in supply chain
management as it is expected of a modern day professional.
QUESTION 6 (20 mks)
i) Why and when do companies avoid holding inventories? (8mks)
ii) Explain the meaning of and the application of the following concepts in supply chain
management. (12mks)
a). Production Decisions
b). Inventory Decisions
c). Transportation Decisions

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DEPARTMENT OF MANAGEMENT
MBM5110
End of Semester Examinations
Time: 2 Hrs
Instructions to Candidates: Answer question 1 (Compulsory) and any other TWO questions.
QUESTION 1 (20 mks)
i) Explain the factors that determine the location of facilities decision within the supply
chain environment. (10mks)
ii) The evolution of the concept of supply chain management has been in existence for a
period of almost 30 years now; highlight chronologically the historical developments and
its expected future simulations. (10mks)
QUESTION 2 (20mks)
In order for organizations to remain competitive and relevant in present day world trade
environment, organizations must have good inventory management practices so that they
can have good liquidity to maintain effective supply chains. Give a very detailed
explanation to this statement.
QUESTION 3 (20 mks)
i) Describe the factors affecting the choice of the mode of transport (12mks)
ii) Describe the different modes of transport (8mks)
QUESTION 4 (20 mks)
Modern day supply chain management proposes the use of different supply chain
information management systems for effective and efficient supply chains. By use of this
statement, Discuss.
QUESTION 5 (20 mks)
i) Describe the Process of Developing Corporate Strategy within a supply chain
environment (12mks)
ii) What does it mean by global issues within Chain Management? (8mks)
QUESTION 6 (20 mks)
i) What is the meaning of the term procurement? (3mks)
ii) How can SWOT analysis be used to determine the performance of a global supply chain
environment? (7mks)
iii) What are the benefits of having a distribution warehouse (10mks)

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