Supply Chain Management

Dr. Francis Ssennoga

 Course Objectives

• After this course, students will be able to:

• Describe the basic terminology used in SCM and be able to more
effectively communicate with SCM teams.
• Explain the basic elements of SCM and how improvements in
processes and communication can lead to increased overall
customer satisfaction and profitability.
• Appreciate the role of SCM within the organisation
• Understand how a supply network should be organised and
effectively managed
 Course Objectives..
• Benefits of SCM, Tradeoffs in SCM
• SCM tools and techniques: Total Quality Management in SCM,
Vendor managed inventory, Supplier relationship, Supplier
development, Supplier evaluation
• Performance management in the SC: Performance indicators of
Supply chain management
 Course content
• Introduction to SCM: The changed business environment / role of
purchasing and supply, The supply chain context and definitions, Role of
supply chain management
• Development of the SCM: Historical perspective of Supply chain
management, Traditional versus Integrated supply chain management
• Classification of the SC: Members of supply chain: 1st, 2nd and 3rd tier
suppliers in a supply chain, Synergetic relationships between the firm,
customers and suppliers, Primary and secondary supply chains, internal
and external chains; Components of the supply chain process;
 Course content ..
• SCM tools and techniques: Total Quality Management in SCM,
Vendor managed inventory, Supplier relationship, Supplier
development, Supplier evaluation
• Performance management in Supply Chain: Performance indicators
of Supply chain management
 The Supply Chain
The supply chain encompasses all organizations and activities associated
with the flow and transformation of goods from the raw materials stage,
through to the end user, as well as the associated information flows.
A supply chain involves, directly or indirectly, everyone and everything
required to extract materials, transform them into a product, and sell the
product to a user.
Supply chains include various entities, such as raw material extractors,
service and component suppliers, a material product manufacturer or a
producer of services, distributors, and end customers
 The Supply Chain….
• ‘The supply chain is made up of both internal and external business
groups. These groups, eg. suppliers, purchasing, operations, logistics, etc,
are sometimes referred to as enterprises, while distributors and retailers
may be referred to as channel members.
• Together these groups form an extension of the company and are linked
together for the purpose of moving product and/or services in a cost-
effective and efficient manner.
• This linkage forms an integration that allows these groups to share
information while aiming to reduce overall risks and costs in doing business
together. The by-product of this alignment results in improved profitability
and increased value to the end user’.
Decisions to be made in supply chains

• What products to make and what their designs should be

• How much, when, where and from whom to buy product;
• How much, when and where to produce product;
• How much and when to ship from one facility to another;
• How much, when and where to store product;
• How much, when and where to charge for products; and
• How much, when and where to provide facility capacity
What is a Supply Chain?
 Classification of Supply Chain
 The supply chain can be classified into three levels: internal supply chain,
immediate (direct) supply chain, and total supply chain (Slack, 1992):
 Internal supply chain: The internal supply chain consists of departments, cells
or operation sectors that are internal to a firm or a business unit. This means a
single organization.
 Immediate supply chain: The immediate supply chain consists of suppliers and
customers who are in direct contact with the operation of a single organization.
 Total supply chain: The total supply chain consists of all the organizations that
are involved with the production and distribution of a specific product, including
the upstream suppliers and the downstream customers of the immediate
supply chains.
 Key requirements of a supply chain

• Connectivity – the capability to exchange information with external supply

chain partners in a suitable format for facilitating inter-organisational
collaboration
• Integration – the process of combining or coordinating separate functions
to enable them to interact in a seamless fashion
• Visibility – the ability to access relevant data in terms of its relevance and
importance to the supply chain
• Responsiveness - the ability to react quickly and effectively to customer
needs by delivering the right product at the right time and at the right cost.
 Supply Chain Management
 Most supply chains consist of many separate companies, each linked
by virtue of their part in satisfying the specific need of the end
consumer
 It is quite possible for each of the links in the chain to have their own
objectives, each of which can easily be in conflict with those of another.
For example, manufacturing operations are aimed at achieving
maximum output without taking optimum inventory levels or distribution
capacity into account
 Supply chain management has emerged as a technique for reconciling
and accommodating these differences, thereby maximising the
efficiency level of the supply chain as a whole.
 Supply Chain Management

• Supply chain management (SCM) is the integration and

management of supply chain organizations and activities through
cooperative organizational relationships, effective business
processes, and high levels of information sharing to create high-
performing value systems that provide member organizations a
sustainable competitive advantage.
• In supply chain Management, we include both its upstream supplier
network and its downstream distribution channel
 Supply Chain Management
• An integrative philosophy to manage the total flow of a distribution
channel from the supplier to the ultimate user
• This definition embraces viewing the supply chain as a single entity
dedicated to the efficient flow of goods and services with the target
of eliminating waste, in particular eliminating inventory defects and
delay.
• For this to happen there needs to be co-ordinating management of
all the links in the supply chain. The objective is to eliminate the
barriers between the links of the chain
 Supply Chain Management
• Supply chain includes managing information systems, sourcing and
procurement, production scheduling, order processing, inventory
management, warehousing, customer service, and after-market
disposition of packaging and materials. The supplier network consists of
all organizations that provide inputs, either directly or indirectly, to the
focal firm.
• A firm's external downstream supply chain encompasses all of the
downstream organizations, processes, and functions that the product
passes through on its way to the end customer. In the case of an
automotive company's distribution network, for example, this includes its
finished goods and pipeline inventory, warehouses, dealer network, and
sales operation
 Supply Chain Management…
• SCM involves identifying where the value lies within the whole supply
chain, ie identifying the value chain and then segmenting it so that each
segment can be addressed individually.
• It is also concerned with analysing and identifying all the non-value
adding activities across the entire supply chain and removing them. This
process is sometimes referred to as “diagnostics”.
• The purpose of this is to firstly diagnose each value segment to determine
whether the organisation could improve it; then find out whether the value
segment could be enhanced; and finally whether cost could be taken out
or whether knowledge about it could be bettered.
Supply Chain Management
Supply Chain Network Structure (Lambert 2008)
 SCM in a Supply Network
 Supply Chain Management (SCM) is concerned with the management and
control of the flows of material, information, and finances in supply chains.

Cash
Products and Services
Information
THAILAND INDIA Kenya Kampala Uganda
N-Tier Suppliers Suppliers Logistics Distributors Retailers

Supply Side OEM Demand Side

Demand

Supply

 The task of SCM is to design, plan, and execute the activities at the different
stages so as to provide the desired levels of service to supply chain customers
profitably
 The Evolution of Supply Chain Management

 Over the years, most firms have focused their attention on the
effectiveness and efficiency of separate business functions such as
purchasing, production, marketing, financing, and logistics.
 The lack of connectivity among these functions, however, can lead to
sub-optimal organizational goals and create inefficiency by duplicating
organizational efforts and resources.
 To capture the synergy of interfunctional and interorganizational
integration and coordination across the supply chain and to
subsequently make better strategic decisions, a growing number of
firms have begun to realize the strategic importance of planning,
controlling, and designing a supply chain as a whole.
 The Evolution of Supply Chain Management..

 In today’s global marketplace, individual firms no longer compete as

independent entities with unique brand names, but rather as integral
parts of supply chain links. As such, the ultimate success of a firm will
depend on its managerial ability to integrate and coordinate the
intricate network of business relationships among supply chain
partners
 The evolution of supply chain management has been characterized by
an increasing degree of integration of separate tasks, a trend that was
underlined in the 1960s but not until today with the implementation of
modern information and communication technologies did a more
complete integration became possible
The Evolution of Supply Chain Management
 From Traditional towards Integrated SCM

• Tomorrow’s competition and competitive advantage will be determined by

value chains rather than single business units.
• The current, traditional way of synchronizing activities between distinct
business entities in a value chain is realized through the creation of inter-
/intra-entity buffers of any kind, like inventory, capacity and lead-time.
• This way of operating(fragamentation) leaves a lot of room for
performance improvement and companies will need to work hard to get
rid of any non-added value activities and associated costs.
•
Traditional supply chain management
Traditional supply chain management ...

• A traditional supply chain suffers from a number of problems, which SCM

can prevent. As a consequence of the structure, the traditional supply
chain suffers from long lead-times, multiple decision points, unclear
information and minimal synchronization (Childerhouse and Towill, 2000).
• In generating orders, each echelon looks to manage their own situation,
with orders based on incoming orders, inventory levels, goods shipped
and received and, to some extent, orders placed but not yet
received(Senge,1990). Consequently, orders include not only actual
incoming demand, but also components covering the echelon's own
inventory, customer service levels and cost requirements (Disney, 2001).
 The Integrated supply Chain
• To arrive at world-class performance, value chain entities will have to
establish an integrated and fully coordinated framework of cross-entity
processes, encompassing both value creation and value delivery
processes.
• A supply chain should not merely represent a linear chain of one-on-
one business relationships, but a web of multiple business networks
and relationships. Along a supply chain, there may be multiple
stakeholders, composed of various suppliers, manufacturers,
distributors, third-party logistics providers, retailers, and customers.
Integrated Supply Chain Management
The supply chain network for automobile seats
 Benefits of an integrated supply Chain
• Reduce waste/non value-added activities
• reduce amount of handling
• reduce excess inventory, both materials and finished goods
• Increase customer service/responsiveness
• Improve supply-chain communication
• increase speed-timeliness of information flows
• increase accuracy of information flows
• increase information sharing
Benefits of an integrated supply Chain

• Reduce cycle time

• new product development
• order lead-time
• Improve co-ordination of efforts
• continuous channel improvement
• understanding of goals
 Component Parts of SCM
• It has been suggested that SCM comprises five key elements: strategy;
process; organisation; information; and performance.
Strategy
• This drives a supply chain design based on business goals and objectives
and on market needs and expectations. It includes the development and
management of business processes, performance targets, organisation
structures, and information systems.
Process
• This describes the activities required to operate and manage the supply
chain, including links between processes and relevant best practices.
 Component Parts of SCM
Model
• An appropriate model defines management structures, department
missions, and roles and responsibilities.
Information
• IT systems are tools that support supply chain planning, execution,
infrastructure maintenance, and the decision-making process.
Performance
• A balanced set of process-level performance indicators that can be used to
evaluate and manage supply chain performance against targets. Most
supply chains are actually networks
 Supply Chain Vulnerability

• Supply Chain Networks can comprise hundreds if not thousands of

companies which may stretch globally and which can be subject to
numerous risks. These risks can be largely classified into two
types:
• Weaknesses and potential risks within the SCN that impact on the ability to
meet customer needs. Instability arises when demand and supply are not in
balance. Not only can price be affected, but also the total cost, time and
performance.
• Fragility of the SCN’s to external events/threats both now and in the future.
 Supply Chain Vulnerability..

• There will always be an inherent tolerance built into any network

(which results from the assumptions/design parameters made when
they are set up) but if any effect causes an impact outside of the
natural tolerance a point of vulnerability will occur.
• In complex networks there may be multiple points of vulnerability
occurring at any one time in different parts of the SCN, and
potentially a compounding effect may begin to happen
 Causes of Supply Chain Vulnerability

• Susceptibility arising out of modern techniques leading to lean supply networks

• External corruption of the SC, eg fraud via counterfeit products.
• Quality failure
• Lack of visibility along the full length of the SC
• The global economic and political situation
• “Silos” in both the customer and supplier organisations, ie disjointedness in the
SC
• Market régulation (quotas, taxes etc)
 Causes of Supply chain Vulnerability …

• Disconnection between an organisation’s strategy and the practical

application of SCM
• The difficulties in planning and forecasting demand
• Designing the SC system to be more flexible and reactive and responsive
(e.g. to seasonality, fashion etc)
• The dependency of organisation on IT systems to manage complex
SCN’s, can lead to increased vulnerability.
• The volumes of demand in the supply chain/network,
• The capacities in the supply chain/network, and
• Outsourcing
 Steps to Improving SCV

• Discuss the practical steps of improving supply chain

vulnerability
 Supply Chain Management Effectiveness

• The goals of corporate supply chains are to provide customers with the
products they want in a timely way and as efficiently and profitably as
possible.
• Fueled in part by the information revolution and the rise of e-commerce,
the development of models of supply chains and their optimization has
emerged as an important way of coping with this complexity
• This reflects the realization that the success of a company generally
depends on the efficiency with which it can design, manufacture and
distribute its products in an increasingly competitive global economy.
 Supply Chain Management Effectiveness

• Elimination of waste or unnecessary costs across the supply chain

such us invoices, expediting and inspection.
• After appraisal, many organisations tend to undertake outsourcing
of activities originally produced internally. However, this usually
comes with increase in the number of suppliers a firm deals with.
To manage this issue, the organisations undertake tiering
Tiering
 Lean Supply Chains

• Lean supply chain (LSC) can be defined as a "set of organisations

directly linked by upstream and downstream flows of products,
services, finances and information that collaboratively work to
reduce costs and waste
• Management of an LSC is a process aimed at eliminating waste
and nonvalue-adding activities from the overall value stream in the
supply chain
• To build a lean supply chain it is important to identify the wastes
associated with these flows and eliminate them.
 Waste in supply chains
• Transport between processes or organisations
• • Defects - called ‘scrap and rework’ in assembly industries and ‘waste and write-offs’ in
continuous process industries
• • Over-processing - doing work that does not provide value to the customer
• • Waiting (or inactivity) - people or parts that are waiting for other activities to complete
• • Motion of people or parts within a process without adding value
• • Inventory, raw material, work-in-progress or finished goods that are not being worked upon
• • Overproducing - making product sooner or in greater quantities than customers require in
order to reduce unit costs of production
• • Excess production and distribution capacities
• • Under-utilisation of the skills of the workforce
 Application of Lean Supply Chain

• Select critical supply chain members (by importance of products and the
impact on overall production cost and time) to gradually implement lean
supply chain.
• Assess the current state of the supply chain and develop value stream
maps of critical products.
• Develop an overall value stream map and establish a cross-organisation
assessment team to identify improvement opportunities.
• Develop a detailed time-line chart.
 Application of Lean Supply Chain

• Develop potential value stream maps of company level and supply

chain level in order to guide the project.
• Implement improvement project.
• Introduce cross-enterprise collaboration to achieve consistency:
collaborative practices and processes across departments allow a
company as a whole to maximise the value stream to the customer
 Advantages
• LSC facilitates permeation across the vendor base and logistics
operation
• LSC can enable member companies to align themselves with each
other and to coordinate their continuous improvement efforts
• Lean logistics and IT can help achieve decrease in inventory levels,
shorten lead times, lower costs, deliver quality and customer
satisfaction
 Disadvantages

• There is a general problem around the lack of awareness about

LSC and its implementation. Lean techniques are often limited to
manufacturing operations and the shop floor
• Cost and profit allocations between companies can be problematic
due to increased levels of integration and cooperation
• Over-utilisation may turn lean supply into a 'tool' for profit-making
rather than a managerial technique
 Agile Supply Chain
• The agile supply chain is a fast-moving, adaptable and robust system
capable of rapid adaptation in response to turbulent and volatile markets,
uncertainty created by economic and competitive forces, market
opportunities, and customer requirements
• Agility is defined as a strategy that is more responsive in a volatile market
place, where this strategy is totally demand driven. As consumers buying
patterns are changing on a very rapid pace, so does the whole supply
chain management changes. The fundamental drivers of agile supply
chain are Speed, Cost and Efficiency.
Major constituents of Agile Supply
 Virtual Integration
• Virtual Integration: Information is shared among concerned
departments for the real demand from market or end consumers.
Information is shared collaboratively and each player will respond
according to his capability to fulfill the demand
• Virtually being integrated would result in end to end visibility, this is
how this would be easy to identify the bottlenecks in the network
and any other problem that creates hindrance in the network.
 Process Alignment
• In process alignment, three things are mainly of concerned: Co-
managed inventory, in present time mostly chains are managed
through the VMI (vendor managed inventory) this is one of the best
solution, as a co-managed inventory, Collaborative product design
by the concerned departments, this is how the team works to shape
the consumer needs or wants and the third and the ultimate result
is synchronous supply chain.
 Network Based
• Every individual actor in the chain has to put their efforts to make it
the success of the chain. This will reduce the burden on individual
actors and the task is divided among the actors as per their core
competencies where they are best at.
• All actors in the chain are orchestrators of the chain, therefore, they
equally own the chain and their performance level matters from
each end.
 Market Sensitive
• Today’s chains are market sensitive where demand is sensed from the market.
The demand forecasting is based on the daily Point of Sale (P.O.S), sensing
demand from past trends is an obsolete way to predict the demand in such a
volatile markets.
• Therefore, daily feedback from market or sales terminal feedback is taken to
meet the future demand. In present time companies are focusing on future,
therefore, their efforts are to make it from today, by executing best practices to
capture the emerging trends.
• One of the best practice would be to listen your customer. It is said that success
of supply chain is based on the end consumer’s feedback. therefore, voice of
consumer is the actual demand that drives the supply chain.
 Successful Application
• The agile supply chain model requires that:
• The stock is held at the fewest echelons (if at all) with finished goods
sometimes being delivered directly from factory to customer
• Replenishment of all echelons is driven from actual sales/usage data
collected at the customer inter-face
• Production is planned across functional boundaries from vendor to
customer, through highly integrated systems and with minimum lead
times
• The majority of stock is held as 'work in progress' awaiting
build/configuration instructions Systems and process flexibility are the key
components of agility
 Steps to Successful Application

• Use a wide network of suppliers that are flexible and responsive to changes in
demand and also serve as design partners.
• Install processes and systems that are adaptable, flexible and reconfigurable.
• Postpone decisions in manufacturing until final customer demand is received.
• Provide data on changes in supply and demand.
• Invest in a cross-functional and highly skilled workforce and sophisticated
information systems and technologies.
• Reduce echelons in the supply chain
 Advantages
• Agile supply chains are capable of fulfilling variable and
unpredictable customer demand in a rapidly changing and volatile
business environment Agile supply chains can deliver a broad
variety of products in a relatively short time
• Agile supply chains can substantially increase profit margins by
reducing costs and rationalising inventory
 Disadvantages
• Agile supply chains are over-reliant on people and systems. Agility is lost
when information does not flow due to technical or human error. Similarly,
if users are unwilling and reluctant to accept agile practices and enabling
technologies, agile manufacturing may fail from the inability to overcome
the inertia of traditional and deeply ingrained practices
• Building an agile and resilient supply chain can be expensive
• Agile supply is not recommended where the 'order winners', cost,
efficiency and profit margins are low. In such a scenario, having spare
capacity or investing in inventory as advocated by agility can lead to
higher production costs
 Total quality Management in the Supply chain
• The majority of enterprises are increasingly relying on their suppliers more and
more heavily. The product quality and manufacturing process of suppliers has great
effect on the quality of final product of the core enterprise. It means that the
emphasis on TQM has transferred from enterprise focus to supply chain focus.
• Quality control of the whole supply chain system ensures that each organisation
within the system becomes competitive . The essence of the competition
advantage is not pursuing product quality and process quality only, but the
performance of the whole supply chain system. Therefore, the establishment of
quality management system of supply chain will promote the involvement of all the
members and facilitate the implementation of quality control of the whole supply
chain system.
 Total quality Management
• TQM is an integrated approach, consisting of principles and practices, whose
goal is to improve the quality of an organization’s goods and services through
continuously meeting and exceeding customer’s needs in most competitive
ways. TQM focuses on enhancing customer satisfaction
• TQM and SCM act as important tools to achieve competitive advantage
together with strengthening organizational competitiveness
• QM is a total system approach which works horizontally across functions and
departments, involving all employees, top to bottom, and extends backwards
and forwards to include the supply chain and customer chain
 Total quality Management in the Supply
chain
• Both TQM and SCM aim to achieve customer satisfaction. There
are many strategies to accomplish this ultimate goal. Basically,
customers require better product quality, faster delivery and
cheaper costs, or quality-delivery-cost(QDC). Organizations must
meet these requirements to achieve customer satisfaction.
• Quality control (QC) focuses on specification-based performance. It
emphasizes inspection to prevent delivering defect products to
customers. TQM focuses more on quality conformance by aiming to
deliver error-free products and services.
 Supply Chain Quality management

• SCQM refers to the participation of all members of a supply channel

network in the continuous and synchronized improvement of all processes,
products, services, and work cultures focused on generating sources of
productivity and competitive differentiation through the active promotion of
market winning product(s) and service solutions that provide total customer
value and satisfaction
• The quality policy of individual supply chain members should be aligned for
consistency together to ensure a common quality policy of the entire supply
chain.
 Why TQM?

• TQM applications help reduce process variance, which has a direct impact on supply
chain performance measures, such as cycle time and delivery dependability
• TQM practices result in set-up time reduction, allowing improved schedule attainment and
correspondingly faster response to market demands. This helps in synchronizing, to a
greater extent, the whole supply chain
• TQM practices ensure that processes are followed and customers are satisfied. SCM
includes a set of approaches and practices to effectively integrate suppliers,
manufacturers, distributors and customers for improving the long-term performance of the
individual organizations and the supply chain as a whole in a cohesive and high-
performing business model
• Thus, it is important to have a customer-focused corporate vision in place while striving to
implement TQM and SCM practices effectively both upstream and downstream and doing
so can produce a number of competitive advantages for the supply chain
Integration (Participation and Partnership)

• Both TQM and SCM offer unique frameworks to integrate participation

and partnership, since they require participation from all internal functions
and continuous collaboration with all external partners
• Although TQM requires involvement from customers and suppliers, it
places more emphasis on employee participation. The focus is on both
internal primary and supportive functions in an organization’s value chain.
In the TQM environment, all employees are treated as internal customers.
If the internal customers are not satisfied, external customer satisfaction
is difficult.
• Therefore, TQM emphasizes employee involvement and ownership
 Integration (Participation and Partnership)

• SCM requires internal and external business process integration across

the whole supply chain. SCM effectiveness and efficiency depend
significantly on the degree of integration. Therefore, SCM aims to improve
not only the performance of the individual organization but also that of the
whole supply chain
• When TQM and SCM are integrated, both business processes and the
organizational structure will become more complex.
 Bullwhip Effect
• Bullwhip effect can be defined as the amplification of demand
variability from a downstream site to an upstream site. Information
transferred in the form of orders tends to be distorted and can
misguide upstream members in their inventory and production
decisions.….
• The variance of (replenishment) orders may be larger than that of
sales (to end customers), and the distortion tends to increase as
one moves upstream. Bullwhip costs money, wastes resources,
and loses customers.
Bullwhip Effect …
 What contributes to the bullwhip effect?

• Disorganization between each supply chain link; with ordering larger or smaller
amounts of a product than is needed due to an over or under reaction to the
supply chain beforehand.
• Lack of communication between each link in the supply chain makes it difficult
for processes to run smoothly. Managers can perceive a product demand quite
differently within different links of the supply chain and therefore order different
quantities.
• Free return policies; customers may intentionally overstate demands due to
shortages and then cancel when the supply becomes adequate again, without
return forfeit retailers will continue to exaggerate their needs and cancel orders;
resulting in excess material.
 What contributes to the bullwhip effect?...
• Order batching; companies may not immediately place an order with their
supplier; often accumulating the demand first. Companies may order weekly or
even monthly. This creates variability in the demand as there may for instance be
a surge in demand at some stage followed by no demand after.
• Price variations – special discounts and other cost changes can upset regular
buying patterns; buyers want to take advantage on discounts offered during a
short time period, this can cause uneven production and distorted demand
information.
• Demand information – relying on past demand information to estimate current
demand information of a product does not take into account any fluctuations that
may occur in demand over a period of time.
 Mitigation of the Bullwhip Effect
• The bullwhip effect can be mitigated by:
• Reduced lead times
• Revision of reordering procedures
• limitations of price fluctuations
• Integration of planning and performance measurement.
The bullwhip effect in the supply chain can be eliminated through shared
knowledge with suppliers and customers to better gauge demand, cooperation
with supply chain partners to determine what information is causing an
overreaction, and use of internet-enabled technology to speed
communications and improve response time
 Steps to Successful Application
• Improve communication and information flow along the supply chain.
• Improve data forecasting (eg. determining product demand from actual
data entered into point of sale (POS) computer systems and electronic
data interchange (EDI) systems will improve sales forecast accuracy).
• Work with firms upstream and downstream in the supply chain.
• Order products up and down the supply chain in smaller increments, thus
reducing the time between orders and allowing for timely information to
be available
 Disadvantages of Bullwhip effect
• The bullwhip effect can lead to excessive inventory investments throughout
the supply chain when the parties involved attempt to protect themselves
against demand variations.
• The bullwhip effect can be very costly in terms of "capacity on costs and
stock-out costs on the upswing and stockholding and obsolescence costs on
the downswing"
• The bullwhip effect can lead to accumulation of inventory at the
manufacturer's end. This further increases supply chain costs to the company
 Vendor Managed Inventory
• Vendor managed inventory (VMI) is a supply chain agreement where an upstream
agent (e.g. supplier or manufacturer) takes control of the inventory management
decisions for one or more downstream agents (e.g. retailers). This type of
agreement is also known as supplier managed inventory, continuous
replenishment programme, or supplier-assisted inventory replenishment.
• In VMI arrangements the supplier decides the timing and quantity of materials
delivered to the retailer using advanced online messaging and data-retrieval
systems
• Vendor Managed Inventory (VMI) involves another party, other than customer,
taking responsibility for elements of inventory management, including setting and
managing inventory levels, re-ordering, and replenishing.
 Benefits of VMI
• The benefits of VMI are mainly found in two areas. The first lies in
the ability of VMI systems to mitigate the ‘bullwhip effect’. VMI
systems can minimise demand information distortion transferred
from the downstream supply-chain entity to the upstream entities
resulting in less stockouts, reduced inventory carrying costs and
more accurate demand forecasts.
• This is made possible by greater information transparency and by
reducing the number of agents making inventory-related decisions
in the supply chain
 Benefits of VMI
• The second set of benefits derives from improvements in transportation and
production efficiencies and from changes in the incentives offered to supply
chain agents under VMI
• Because vendors do not need to wait for retailer delivery requests, they can
more appropriately handle upcoming orders and schedule multiple
deliveries on a single route
• This improves vehicle cube utilisation and reduces the number of vehicles
needed. It also permits more regular deliveries, thus reducing lead times
and safety stock levels
 VMI Application
• The VMI process requires the customer to send information on items sold to the
distributor. This information is usually captured by barcoding and scanning
technologies and is passed to the distributor via EDI or the Internet on a daily
bases.
• The distributor then processes it and provides acknowledgement to the
customer with details of the quantities and product descriptions, delivery dates
and destinations and the release of goods. After the manufacturer replenishes
the distributor’s stock, the distributor invoices the customer.
• For very large customers, requirements may be transmitted directly to the
manufacturer from whom they receive direct deliveries
 Steps to Successful Application
• Hold customer-supplier negotiations, establish project teams and
roles and collaborative planning, forecasting and replenishment
(CPFR) during the preparation stage.
• Focus on quantity forecasting, safety stocks, lead time, service
level and ownership issues as preimplementation activities.
• Implement the VMI system.
• Refine the VMI system by identifying any improvements as a result
of experience with the technique (including technical problems).
 Advantages of VMI
• VMI promotes ‘demand soothing’: VMI information enhances
customer requirement fore-casting which facilitates production
planning to meet demand
• A VMI supplier has the flexibility to control downstream resupply
decisions and offers a means to synchronise inventory and
transportation decisions
• Customers would incur costs by switching from VMI suppliers,
therefore VMI promotes long-term customer relationships
 Disadvantages of VMI
• The enhanced inventory and administrative costs associated with VMI for
suppliers can lead to reduced working capital
• Much of the academic research on VMI has ignored many implementation
and recurring cost issues such as technological compatibilities and
verification and enforcement factors).
• Retailers can become dependent upon the manufacturer or distributor. This
can increase risks if supplier performance degrades
 Supplier Relationship Management
• Supply Chain Management (SCM) has had to move away from a purely
process role towards a much more strategic network co-ordination process
approach. This trend has been a movement towards supply base
rationalisation resulting in fewer, but more strategically powerful suppliers.
These suppliers need to be managed strategically.
• This means developing a clear understanding of how to manage inter
(between) and intra (within) firm relationships
• A closer collaborative approach is required with long term goals, often with
mutual benefits for buyer and supplier
What is Supplier Relation Management(SRM)?

• SRM is the overarching strategic approach to determine and implement

different supplier based “interventions”;
• Applied as appropriate across the supply base to maximise value to
the organisation
• Reduce supply chain risk
• Prioritised against available resources
• Enhance value to the end customer
• Enabling the organisation to achieve its goals
 SRM Justification
• Many firms have directed significant attention toward working more
closely with supply chain partners, including not only customers
and suppliers but also various types of logistics suppliers.
• Considering that one of the fundamental objectives of effective
supply chain management is to achieve coordination and
integration among participating organizations, the development of
more meaningful “relationships” through the supply chain has
become a high priority.
 Nature of Supplier relationships
• The range of supply chain relationships types extends from that of a vendor to
that of a strategic alliance
• A strategic alliance is one in which two or more business organizations
cooperate and willingly modify their business objectives and practices to help
achieve long-term goals and objectives.
• The strategic alliance is highly relational in terms of the firms involved. This form
of supplier relationship management typically benefits the involved parties by
reducing uncertainty and improving communication, increasing loyalty and
establishing a common vision, and helping to enhance global performance.
• Alternatively, the challenges with this form of relationship include the fact that it
implies heavy resource commitments by the participating organizations,
significant opportunity costs, and high switching costs.
 Differences in SRM
Supply chain relationships may differ in numerous ways. A partial list of these differences follows:
• Duration.
• Obligations.
• Expectations.
• Interaction/Communication.
• Cooperation.
• Planning.
• Goals.
• Performance analysis.
• Benefits and burdens.
Model for Developing and Implementing
Successful Supply Chain Relationships
 Step 1: Perform Strategic Assessment

• The firm should assess the supply chain needs and the overall strategies that guide its
operations. Attention should be paid:
• Overall business goals and objectives, including those from a corporate, divisional, or
logistics perspective.
• Needs assessment to include requirements of customers, suppliers, and key suppiers
• Identification and analysis of strategic environmental factors and industry trends.
• Profile of current network and the firm’s positioning in respective supply chains.
• Identification of “gaps” between current and desired measures of performance
(qualitative and quantitative).
 Step 2: Decision to Form Relationship

• Once assessment is done then a decision is made to undertake a strategic

relationship. For a supplier relationship management to be successful, the
theory of the model is that all parties “must believe that they will receive
significant benefits in one or more areas and that these benefits would not
be possible without a partnership.
• The primary drivers include the following:
• Asset/Cost efficiency.
• Customer service.
• Marketing advantage.
• Profit stability/Growth.
 Decision to Form Relationship…
• Supportive corporate environmental factors that enhance
partnership growth and development include:
• Corporate compatibility.
• Management philosophy and techniques.
• Mutuality of commitment to relationship formation.
• Symmetry on key factors such as relative size, financial strength
 Step 3: Evaluate Alternatives

• The apparent levels of drivers and facilitators may suggest the most
appropriate type of relationship to consider i.e. whether arms length
of Strategic
• it is also important to conduct a thorough assessment of the supply
chain members’ needs and priorities in comparison with the
capabilities of each potential partners. This task should be
supported with not only the availability of critical measurements and
so on, but also the results of personal interviews and discussions
with the most likely potential partners.
 Step 4: Select Partners

• The selection of supply chain partner should be made only following very
close consideration of the credentials of the most likely candidates.
• It is highly advisable to interact with and get to know the final candidates
on a professionally intimate basis.
• It is important to achieve consensus on the final selection decision to
create a significant degree of “buy-in” and agreement among those
involved. Due to the strategic significance of the decision to form a
logistics or supply chain relationships, it is essential to ensure that
everyone has a consistent understanding of the decision that has been
made and a consistent expectation of what to expect from the firm that
has been selected.
 Step 5: Structure Operating Model

• The structure of the relationship refers to the activities, processes, and

priorities that will be used to build and sustain the relationship. Components of
the operating model may include the following.
• Planning.
• Joint operating controls.
• Communication.
• Risk/Reward sharing.
• Trust and commitment.
• Contract style.
• Scope of the relationship.
• Financial investment
 Step 6: Implementation and Continuous
Improvement
• Once the decision to form a supplier relationship management has been made
and the structural elements of the relationship identified, it is important to
recognize that the most challenging step in the relationship process has just
begun.
• Depending on the complexity of the new relationship, the overall
implementation process may be relatively short, or it may be extended over a
longer period of time. If the situation involves significant change to and
restructuring of the manufacturing firm’s logistics or supply chain network, for
example, full implementation may take longer to accomplish. In a situation
where the degree of change is more modest, the time needed for successful
implementation may be abbreviated.
 Step 6: Implementation and Continuous
Improvement…
• Finally, the future success of the supplier relationship management
will be a direct function of the ability of the involved organizations to
achieve both continuous and breakthrough improvement. A number
of steps should be considered in the continuous improvement
process. In addition, efforts should be directed to creating the
breakthrough, or “paradigm-shifting,” type of improvement that is
essential to enhance the functioning of the relationship and the
market positioning of the organizations involved.
 Supplier Development
• Supplier development is the process of working with certain suppliers on a one-to-
one basis to improve their performance for the benefit of the buying organisation.
Reasons for embarking on supplier development process include:
• Improving supplier performance
• Reducing costs of Production
• Resolving serious quality issues
• Developing new routes to supply
• Improving business alignment between the supplier and the buying organisation
• Developing a product or service not currently available in the marketplace
 Performance management in the SC
• A performance measure, or a set of performance measures, is used to
determine the efficiency and/or effectiveness of an existing system, or
to compare competing alternative systems.
• Performance measures are also used to design proposed systems, by
determining the values of the decision variables that yield the most
desirable level(s) of performance.
• A number of performance measures are important in the evaluation of
supply chain effectiveness and efficiency. These measures, may be
categorized as either qualitative or quantitative.
 Qualitative Performance Measures

• Qualitative performance measures are those measures for which there is no single direct
numerical measurement, although some aspects of them may be quantified. These
include:
• Customer Satisfaction: The degree to which customers are satisfied with the product
and/or service received, and may apply to internal customers or external customers.
Customer satisfaction is comprised of three elements :
• Pre-Transaction Satisfaction: satisfaction associated with service elements occurring
prior to product purchase.
• Transaction Satisfaction: satisfaction associated with service elements directly
involved in the physical distribution of products.
• Post-Transaction Satisfaction: satisfaction associated with support provided for
products while in use.
 Qualitative Performance Measures
• Flexibility: The degree to which the supply chain can respond to random
fluctuations in the demand pattern.
• Information and Material Flow Integration : The extent to which all
functions within the supply chain communicate information and transport
materials.
• Effective Risk Management : All of the relationships within the supply
chain contain inherent risk. Effective risk management describes the
degree to which the effects of these risks is minimized.
• Supplier Performance : With what consistency suppliers deliver raw
materials to production facilities on time and in good condition.
 Quantitative Performance Measures
• Quantitative supply chain performance measures may be categorized by:
• Objectives that are based directly on cost or profit
• Objectives that are based on some measure of customer responsiveness.
• Measures Based on Cost
• Cost Minimization: The most widely used objective. Cost is typically minimized for an entire supply chain
(total cost), or is minimized for particular business units or stages.
• Sales Maximization : Maximize the amount of sales dollars or units sold.
• Profit Maximization : Maximize revenues less costs.
• Inventory Investment Minimization : Minimize the amount of inventory costs (including product costs and
holding costs)
• Return on Investment Maximization : Maximize the ratio of net profit to capital that was employed to produce
that profit.
 Measures Based on Customer Responsiveness

• Fill Rate Maximization : Maximize the fraction of customer orders filled on time.
• Product Lateness Minimization : Minimize the amount of time between the
promised product delivery date and the actual product delivery date.
• Customer Response Time Minimization : Minimize the amount of time required
from the time an order is placed until the time the order is received by the
customer.
• Lead Time Minimization : Minimize the amount of time required from the time a
product has begun its manufacture until the time it is completely processed.
• Function Duplication Minimization :Minimize the number of business functions
that are provided by more than one business entity.
 Performance Measures Used in Supply Chain
Modeling
Basis Performance Measure

Cost • Minimize cost

Customer Responsiveness
Cost and Customer Responsiveness
• Minimize average inventory levels
• Maximize profit
• Minimize amount of obsolete inventory
• Achieve target service level (fill rate)
• Minimize stockout probability
• Minimize product demand variance or demand
amplification
• Maximize buyer-supplier benefit
• Minimize the number of activity days and total cost