Supply Chain Management

The way materials flow through different

organizations from the raw material supplier to
the finished goods consumer.
Flow of products and services from:
– Raw materials manufacturers
– Intermediate products manufacturers
– End product manufacturers
– Wholesalers and distributors and
– Retailers
Connected by transportation and storage
activities
Integrated through information, planning, and
integration activities
 Supply
Chain for
Milk
Products
 Supply Chain
• A Supply Chain consists of all the parties
involved, directly or indirectly in fulfilling a
customer request for goods or services.

• Each party is involved in various functions

involved in receiving and fulfilling a
customers request
 The Value Chain: Linkage
between Supply Chain and
Other Functions
Finance, Accounting, Information Technology, Human Resources

New Marketing
Product and Operations Distribution Service
Development Sales

2-8
 Responsiveness Vs Efficiency
• Responsiveness can be defined as the ability of
the supply chain to respond purposefully and
within an appropriate timeframe to customer
requests or changes in the marketplace.
• Efficiency is to achieve the maximum out of the
FOP with minimum wastage.
•Production: refers to the capacity of a supply
chain to make and store products.
•Key Production Decision “Responsiveness VS
Efficiency
•Factories and Facilities with “Excess” Or
“Limited” capacities?
Focuses on:
•Customer & market demand
•Resource Management
•Internal sourcing (what and which plants)
•Outsourcing to capable suppliers
•Capacity Management
Inventory is spread throughout the supply chain and
includes everything from raw material to work in process
to finished goods that are held by the manufacturers,
distributors, and retailers in a supply chain.

How Much Inventory and Where to Store It?

Reasons for holding inventory:

Cycle Inventory—This is the amount of inventory needed
to satisfy demand for the product in the period between
purchases of the product.
Safety Inventory—that is held as a buffer
against uncertainty.

Seasonal Inventory—This is inventory that is

built up in anticipation of predictable increases
in demand that occur at certain times of the
year

•Analysis of fluctuations in demand

•Identification of optimal storage locations in
support of customer demand
•Identification of optimal storage locations in
support of customer demand
•Location: refers to Strategic placement of
production plants, distribution and stocking
facilities

•It is the geographical positioning /siting of

supply chain facilities
•Factors that relate to a given location
including the cost of facilities, the cost of labor,
skills available in the workforce, infrastructure
conditions, taxes and tariffs, and proximity to
suppliers and customers.
Transportation: refers to movement of everything
from raw material to finished goods between
different facilities in a supply chain
In transportation the trade-off between
responsiveness and efficiency is manifested in
the choice of transport mode.
Ship which is very cost efficient but also the
slowest mode of transport
Rail which is also very cost efficient but can be
slow. This mode is also restricted to use between
locations that are served by rail lines
Airplanes are a very fast mode of transport and
are very responsive.
Pipelines can be very efficient but are restricted
to commodities that are liquids or gases such
as water, oil, and natural gas
Trucks are a relatively quick and very flexible
mode of transport. Trucks can go almost
anywhere.
Electronic Transport is the fastest mode of
transport and it is very flexible and cost
efficient. However, it can only be used for
movement of certain types of products such as
data, and products composed of data such as
music, pictures, and text.
Timely and accurate information holds the
promise of better coordination and better
decision making.
Information is used for two purposes in any
supply chain:
1. Coordinating daily activities related to the
functioning of the other four supply chain
drivers: production; inventory; location; and
transportation.
2. Forecasting and planning/Decision Making
to anticipate and meet future demands.
Obtaining, linking and leveraging information
across the Supply Chain
1. Producers
Raw materials, Intermediary Products, Finished
goods
2. Distributors: are companies that take
inventory in bulk from producers and deliver
a bundle of related product lines to
customers
A distributor is typically an organization that
takes ownership of significant inventories of
products that they buy from producers and
sell to consumers
A distributor can also be an organization that
only brokers a product between the producer
and the customer and never takes ownership of
that product

Distributors buffer the producers from

fluctuations in product demand by stocking
inventory.

Perform Sales work and at times

Marketing/promotion / After Sales Services
3. Wholesalers: stock a range of products from
several producers. The role of the wholesaler
is to sell onto retailers. Wholesalers usually
specialize in particular products.
4.Franchises: are independent businesses that
operate a branded product (usually a service)
in exchange for a license fee and a share of
sales.
5. Agents: sell the products and services of
producers in return for a commission (a
percentage of the sales revenues)
6. Retailers operate outlets that trade directly
with household customers. Retailers can be
classified in several ways:
• Type of goods being sold( e.g. clothes, grocery,
furniture)
• Type of service (e.g. self-service, counter-
service)
• Size (e.g. corner shop; superstore)
• Location (e.g. rural, city-centre, out-of-town)
• Brand (e.g. nationwide retail brands; local
one-shop name)
7. Customers or consumers are any
organization that purchases and uses a
product

A customer organization may purchase a

product in order to incorporate it into another
product that they in turn sell to other
customers
A customer may be the final end user of a
product who buys the product in order to
consume it.
8. Service Providers are the organizations that
provide services to other participants which
may include:

Logistic Providers which provide transportation

and warehousing services
Financial Service providers such as Banks,
collection agents, credit companies
Other service providers such as Marketing
Research companies, Advertising agencies,
engineers , legal consultants, HR consultants
etc…
The design and management of seamless,
value-added process across organizational
boundaries to in order to minimize total system
cost and satisfy end customers
Reliability

Responsiveness

Flexibility

Cost

Asset Management

Quality
Increased Sales:
• Faster to Market
• Improved Quality
• Pricing Flexibility
• Innovation
Lower Total Cost:
• Acquisition Cost
• Processing Cost
• Quality Cost
• Downtime Cost
• Risk Cost
• Cycle Time Cost
• Conversion Cost
• Non-value Added Cost
• Supply Chain Cost
• Post Ownership Cost
 Labor Sales
$700,000 $5,000,000 Net income
$400,000
What if we
Operating cost elements

Minus Profit decrease

Cost of ($515,000)
Materials
Goods Sold Divided by
margin
8%
materials cost
$2,300,000
$3,800,000
Sales (10.3%) by 5%?
($2,185,000) ($3,685,000) $5,000,000
Plus
(or $115,000)
Overhead
$800,000 Other costs
$800,000
Return on
Investments
Multiply
10.0%

(13.0%)
Inventories
$500,000 Sales
$5,000,000
($475,000) Current assets Asset turnover
Assets

Account $1,100,000 Divided by rate

receivable 1.25
$300,000 Total assets
($1,075,000) (1.26)
Plus $4,000,000

Cash Fixed assets ($3,975,000)

$300,000 $2,900,000
If the same profit increase were to be generated
by increasing sales, what sales increase would
be required?
At the existing 8% profit margin, the following
calculation provides the answer…
Profit increase = new sales X .08
$115,000 = new sales X .08
new sales = $1,437,500
therefore…..
($1,437,500 / $5,000,000) X 100 = 28.8%
or a sales increase of 28.8% is required to
match the profit increase generated by a 5%
reduction in materials cost
 Decision Phases of a Supply
Chain

• Supply chain strategy or design

• Supply chain planning
• Supply chain operation
 Push/Pull View of Supply
Chains
Processes are divided into two categories,
pull or push
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES: PULL PROCESSES:

executed in anticipation executed in response to a
of a customer order customer order

Customer
Order Arrives
 Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two
categories depending on the timing of their
execution relative to customer demand
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push
processes from pull processes
 Push/Pull View of
Supply Chain Processes
• Useful in considering strategic decisions
relating to supply chain design – more global
view of how supply chain processes relate to
customer orders
• Can combine the push/pull and cycle views
– L.L. Bean (Figure 1.6)
– Dell (Figures 1.7)
• The relative proportion of push and pull
processes can have an impact on supply
chain performance
• SRM
Supplier Relationship Management

• ISCM
Integrated Supply Chain Management

• CRM
Customer Relationship Management
 Examples of Supply Chains
• Gateway
• Zara
• WW Grainger and McMaster-Carr: MRO suppliers*
• Toyota
• Amazon.com

How do these supply chains differ in terms of their

design? Where are the push/pull interfaces? How
does the location of these interfaces affect their
design?