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PART I

An Overview of Supply Chain Management

By

Dr. Syed Zulfiqar Ali Shah

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Advances in Supply Chain
Management
Chapter 1: Advances in Supply Chain
Management: An Overview

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Road Map of the Course Material
 Part 1
 An Overview of Supply Chain Management
 Part 2
 Concepts of Advanced Planning Systems
 Part 3
 Implementing Advanced Planning Systems
 Part 4
 Actual APS and Case Studies

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Lec 1 : Learning Objectives
 Brief introduction of supply chain management.
 To discuss the In-House Vertically Integrated structures to
more advanced concept of Outsourcing in Supply Chain
Management
Describe the importance and reasons to employ supply chain
management.
 Describe a brief history and some of the trends of supply
chain management.
Advances in SCM

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 LAYOUT
 Definitions
 In-House Vertically Integrated structures to more
advanced concept of Outsourcing in Supply Chain
Management
 Importance of Supply Chain Management (SCM)
 Reasons to Employ SCM
 Origin of SCM
 Important Elements of SCM
 Advances in SCM

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What is a Supply Chain?
A supply chain consists of the flow of products and services from:
 Raw materials manufacturers
 Component and intermediate manufacturers
 Final product manufacturers
 Wholesalers and distributors
 Retailers and
 End customers
The whole process of supply chain is connected by transportation and storage
activities, and integrated through information, planning, and integration
activities.
Many large firms are moving away from In-House Vertically Integrated
structures to Supply Chain Management. In-house location of resource
simplifies coordination, fosters synergy, but increases fixed cost. A good
example of in house vertical integration is Big Pharma which tended to
execute all stages in-house. As fixed cost becomes a burden to Big
Pharma outsourcing becomes attractive.  They are moving towards
Vertical Disintegration, following the trend in the automotive, IT and
aerospace industries. 
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What is a Supply Chain?

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 In-House Vertically Integrated structures to more advanced
concept of Outsourcing in Supply Chain Management
 Old paradigm - Firm gained synergy as a vertically integrated firm
encompassing the ownership and coordination of several supply chain
activities. Organizational cultures emphasized short-term, company
focused performance.
 New paradigm - Firm in a supply chain focuses activities in its area of
specialization and enters into voluntary and trust-based relationships with
supplier and customer firms (outsourcing). Firms can outsource functions
such as payroll, information technology, research and development and
customer care services.
 Outsourcing spares the firms the burden of acquiring costly
equipment, machinery or license rights to expensive software
products. This allows them to concentrate on the core aspects of their
business, enhance efficiency and cut operational costs.
 All participants in the supply chain benefit. Outsourcing entails
giving out noncore, process-intensive or capital-demanding
operations to companies that specialize in providing these services.
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Cont’d….
 Boundaries are dynamic and extend from “the firm’s suppliers’
suppliers to its customers’ customers (i.e., second tier suppliers and
customers).”
 Supply chains now deal with reverse logistics to handle returned
products, warranty repairs, and recycling.
 Example of Outsourcing Industry
You cannot tie down outsourcing to any particular industry because it is
applicable across different sectors. However, it mostly applied in
industries that incur huge costs of labor and capital resources. For
example, it may be more appropriate to outsource the storage and
warehousing functions of your cargo haulage business than to maintain a
network of your own stores and warehouses. When it comes to labor
costs, outsourcing helps you streamline your work force, as contracting
firms remain responsible for the welfare of their own employees.
Outsourcing is ideal for industries, such as manufacturing, that require
huge work force and capital resources.
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Importance of SCM
Firms using supply chain management have discovered value-enhancing and
long term benefits. Their Supply Chain Management:
1. Start with key suppliers
2. Move on to other suppliers, customers, and shippers
3. Integrate second tier suppliers and customers (second tier refers to
the customer’s customers and the supplier’s suppliers)
Who benefits most? Firms with:
 Large inventories: Many argue that the focus point (and perhaps the
linchpin) of successful supply chain management is inventories and
inventory control. So how do companies manage their large
inventories? What factors drive inventory costs? When might it make
sense to keep larger inventories? For example, food companies are
quicker to pursue inventory reduction strategies.
A common perception and experience is that supply chain
management leads to cost savings, largely through reductions in
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Cont’d….
inventory. Inventory costs have fallen by about 60% since 1982,
while transportation costs have fallen by 20% (Wilson, 2004). Such
cost savings have led many to pursue inventory-reduction strategies
in the supply chain. To develop the most effective logistical strategy,
a firm must understand the nature of product demand, inventory
costs, and supply chain capabilities.
 Large number of suppliers: supply chain management helps
companies to efficiently manage the number of suppliers. A firm can
reduce large number of suppliers and can focus more on the
operational level integration so that apart from purchasing costs
inventory, administrative efforts can also be reduced.
 Complex products: In recent years, effective supply-chain
management has emerged as a significant competitive advantage for
companies in very different industries (e.g., Chopra and Meindl, 2000
). For large multinational companies that manufacture complex
products, such as automobiles, machines, or personal computers,
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Cont’d….
supply chains are highly complex socioeconomic systems. Similar to
the supply chains in manufacturing and other industries, the health
care delivery system is so large and complex that it has become
impossible for any individual, or even any single organization, to
understand all of the details of its operations. Like industrial supply
chains, the health care “supply chain” consists of multiple
independent agents, such as insurance companies, hospitals, doctors,
employers, and regulatory agencies, whose economic structures, and
hence objectives, differ and in many cases conflict with each other.
 Intense Competition: Managers these days recognize that getting
products to customers faster than the competition will improve a
company's competitive position. To remain competitive, companies
must seek new solutions to important Supply Chain Management
issues such as modal analysis, supply chain management, load
planning, route planning and distribution network design.
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Cont’d…
Why is it so important for companies to get products to their customers
quickly? Faster product availability is key to increasing sales, says R.
Michael Donovan of Natick, Mass., a management consultant specialising
in manufacturing and information systems. "There's a substantial profit
advantage for the extra time that you are in the market and your
competitor is not," he says. "If you can be there first, you are likely to get
more orders and more market share." The ability to deliver a product
faster also can make or break a sale. "If two alternative [products] appear
to be equal and one is immediately available and the other will be
available in a week, which would you choose? Clearly, "Supply Chain
Management has an important role to play in moving goods more quickly
to their destination.

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Reasons to Employ Supply Chain Management
Cost savings and better coordination of resources are reasons to employ
Supply Chain Management
 Reduced Bullwhip Effect- the magnified reduction of safety stock
costs based on coordinated planning and sharing of information.
forecasting, and replenishment activities reduce the Bullwhip Effect
and lead to better customer service, lower inventory costs, improved
quality, reduced cycle time, better production methods, and other
benefits.
 Collaborative planning- One of the greatest benefits from long-term
supply chain collaboration (and one that consistently delights
operationally oriented managers) are the cost savings that result from
routinized procedures over the life of the relationship. When buyers
and suppliers begin a relationship, there interactions often are fraught
with inefficiencies and expensive organizational idiosyncrasies,
adding to the cost of doing business in year one. In year two,
however, procedures typically become more streamlined.
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Cont’d….
The longer the relationship, the more indirect costs—operational and
otherwise— are reduced. These cost savings are shared by both buyers
and sellers, increasing the benefits to both. They can also be passed on
to customers in the form of lower prices, thereby increasing the supply
chain’s position in the competitive landscape.
 Boosts Customer Service- SCM impacts customer service by making
sure the right product assortment and quantity are delivered in a timely
fashion. Additionally, those products must be available in the location
that customers expect. Customers should also receive quality after-sale
customer support.
 Improves Bottom Line- SCM has a tremendous impact on the bottom
line. Firms value supply chain managers because they decrease the use
of large fixed assets such as plants, warehouses and transportation
vehicles in the supply chain. Also, cash flow is increased because if
delivery of the product can be expedited, profits will also be received
quickly.
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Origin of SCM
 Before the 1950s,
logistics was thought of in military terms. It had to do with procurement,
maintenance, and transportation of military facilities, materiel, and personnel.
Although a few authors before this time began talking about trading one cost
for another, such as transportation costs with inventory costs, and discussed
the benefits to the firm of getting the right goods to the right place at the right
time, the organization within the typical firm around the activities currently
associated with logistics was fragmented. This fragmentation led to conflicts
among those responsible for logistics activities with the result that, from the
firm's perspective, costs and customer service were sub-optimized. The
reasons for this fragmentation were said to be:
 A lack of understanding of key cost tradeoffs
 The inertia of traditions and conventions
 Areas other than logistics were thought to be more important
 The organization may have been in an evolutionary state
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 1950s & 1960s
U.S. manufacturers focused on mass production techniques as their
principal cost reduction and productivity improvement strategies. Paul
Converse (Converse, 1954), a noted marketing professor, said in 1954
that businesses had been paying a great deal more attention to buying and
selling than to physical distribution. In retrospect, research that would
play a pivotal role in laying the foundations for physical distribution was
a study by Lewis et al. (Lewis et al., 1956). This study for the airline
industry asked how it might better compete in hauling freight when its
costs were significantly higher than other forms of transportation. The
study pointed out that it is necessary to view shipping from a total cost
perspective and not from just a transportation cost one. That is, although
air freight cost may be high, air freights faster and more reliable service
can lead to lower inventory carrying costs on both ends of the shipment.
This was an expression of the total cost concept that was to underpin
much of writing and teaching to follow in the 1960s.
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 1960s-1970s
Introduction of new computer technology lead to development of
Materials Requirements Planning (MRP) and Manufacturing Resource
Planning (MRPII) to coordinate inventory management and improve
internal communication.
The study and practice of physical distribution and logistics also emerged in
the 1960s and 1970s. Logistics costs were high. On a national level, it
was estimated that logistics cost in the U.S. accounted for 15 percent of
the gross national product (Heskett et al., 1973). Similarly, physical
distribution costs of other nations were found to be high as well. Physical
distribution with its outbound orientation was first to emerge, since it
represents about two thirds of logistics costs and it was considered a
component of the marketing mix (product, place or physical distribution,
promotion, and price) of essential elements.

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Cont….
 1980s & 1990s
Intense global competition led U.S. manufacturers to adopt Supply Chain
Management along with Just-In-Time (JIT), Total Quality Management
(TQM), and Business Process Reengineering (BPR) practices
In the 1980s, companies discovered new manufacturing technologies and
strategies that allowed them to reduce costs and better compete in
different markets. Strategies such as just-in-time manufacturing,
kanban, lean manufacturing, total quality management, and others
became very popular, and vast amounts of resources were invested in
implementing these strategies. In the last few years, however, it has
become clear that many companies have reduced manufacturing costs
as much as is practically possible. Many of these companies are
discovering that effective supply chain management is the next step
they need to take in order to increase profit and market share.

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Cont….

 2000s and Beyond

Given 40 years of background with a broad concept for logistics, what
exactly is supply chain management to its proponents? There has been an
attempt to distinguish logistics from supply chain management, declaring
logistics to be a subset of supply chain management. Recently, the
Council of Supply Chain Management Professionals (CSCMP), which is
the premier organization of supply chain practitioners, researchers, and
academics, has defined supply chain management as:
Supply Chain Management encompasses the planning and management
of all activities involved in sourcing and procurement, conversion, and all
Logistics Management activities. Importantly, it also includes
coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers, and customers. In
essence, Supply Chain Management integrates supply and demand
management within and across companies.
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Today Supply Chain Management includes services such as:
• Operational Analysis and Design Materials Handling
• Distribution Strategy
• Operational Improvements, Distribution Management
• Computer Systems
• Warehouse Design Project Management
• Operational Commissioning
• Computer Simulation
• Technical seminars
 In future, Industrial buyers will rely more on third-party service
providers (3PLs) to improve purchasing and supply management.
Wholesalers/retailers will focus on transportation and logistics more &
refer to these as quick response, service response logistics, and
integrated logistics. The trend toward increased globalization, free trade,
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outsourcing all contribute to a continued and growing interest in
logistics/SCM. According to a McKinsey & Company study,
"…by the year 2020, 80% of the goods in the world will be
manufactured in a country different from where they
are consumed compared with 20% now."
There will be a tremendous shift in the movement and consumption of
goods, all of which will require ever better management of the associated
supply chain processes. There will be a shift in strategy. In the past, the
focus of logistics/SCM has been on efficiency. As Peter Drucker
(Drucker, 1962) put it, physical distribution is:
"The last frontier of cost economies."
The contemporary view is that SCM is a new frontier for demand
generation – a competitive weapon. Both views will be important, but the
new emphasis will be on designing and operating the supply chain to
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 enhance the revenues of the firm in such a way as to maximize
contribution to profit. This view replaces the often-used strategic
objective of minimizing supply chain costs, subject to meeting given
customer service requirements, and it will elevate SCM in the eyes of top
management. A new objective will emerge to capture revenue
enhancement effects.
Collaboration and coordination will be the keys to achieving the benefits
of supply chain management. When both parties in a supply chain
relationship win equally due to their cooperative actions in the supply
channel, the benefits are likely to be realized and the relationship remains
intact. In too many cases, this does not occur and there is a dilemma that
must be resolved.

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Cont….

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Summary of the Lecture
The lecture has proceeded from the very basic
definition and origin of supply chain management to
the developments in the field over the period of time.
Further how advanced trends in the field has added
value and made the supply chain more effective.
Advances in SCM focus on creating value chain
network. The focus of which is to create value for
partners on each level of supply chain.

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