Chapter One

Basic Concepts of Supply Chain Management

Supplier Manufacturer Customer

By Mr. Belachew Y. (Asst.prof.)

Date : 18/05/2014
 Introduction
 Traditionally marketing, distribution, planning,
manufacturing, and the purchasing departments of
various organizations operated independently.
 These functional departments have their own
objectives which are often conflicting one another.
For example, marketing department's objective of
high customer service levels and maximum
revenue conflict with manufacturing and
distribution goals like reduction of finished goods
inventories.
 Introduction…cont’d

o Many manufacturing operations are designed to maximize

throughput and lower costs with little consideration for
the impact on inventory levels and distribution capabilities.
o There is a critical need for a mechanism through which
different functions can be integrated.
o Consider this situations: non-integrated manufacturing
processes, non-integrated distribution processes and poor
relationships with suppliers and customers.
 Is these situation guarantee today’s industry
success?
 Introduction …Cont’d
 SCM enabling effective integration of the various
functional entities is in place to optimize the overall
activities of business process.
 Integration is a broad concept which includes:
 Integration of internal system
 Integration of external systems
Integration of suppliers
Integration of customers
Integration with companies
 Introduction …Cont’d
 The bases of integration can be characterized by:
 Cooperation
 Collaboration
 Information sharing
 Trust
 Partnerships
 Shared technology.
All these bases need a fundamental shift away from managing
individual functional processes to managing integrated chains of
process.
 The integration could take many forms:
 Vertical integration – control by the firm itself up & down
stream SC activities
 Horizontal integration - Hotels & Tour operators –
technologically unrelated but similar in business
 Supply Chain (SC), and
Supply Chain Management (SCM)
 What is Supply Chain and SCM?

o Supply chain is defined as a group of entities

directly or indirectly involved in the flows of
products, services, finances and information from
a source to a customer
• SC could be defined as a net work of connected
and interdependent organizations mutually and
cooperatively working together to control, manage
and improve the flow of information, materials
and funds from suppliers to end users.

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 Con’d

 Supply chain performs the functions of

procurement of materials, transformation of
these materials into intermediate and
finished products, and the distribution of
these finished products to customers.

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 con’d
- A supply chain consists of
Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream
- aims to Match Supply and Demand,
profitably for products and services

so as to
achieves SUPPLY SIDE DEMAND SIDE

+ + + + + =
The right The right The right The right The right The right Higher
Product Price Store Quantity Customer Time Profits

9
 What is Supply Chain Management (SCM)?

 SCM is the integration of key business processes

from the end user through original suppliers that
provide products, services, and information that add
value for customer and other stakeholder- Global
Supply Chain Forum
 Supply chain management deals with the
management of materials, information and
financial flows in a network consisting of suppliers,
manufacturers, distributors, and customers (Stanford
Supply Chain Forum, 1999)
 cont’d
• The art of managing the flow of materials and

products from source to user

• A set of approaches utilized to efficiently integrate

suppliers, manufacturers, warehouses, and stores, so

that merchandise is produced and distributed at the
right quantities, to the right locations, and at the right
time, in order to minimize system-wide costs while
satisfying service level requirements
 Con’d

Supply Chain Management is the design and

management of processes across organizational boundaries
with the goal of matching supply and demand in the most cost
effective way.

Supply Demand

Mission impossible: If You Fail to Match Supply and Demand

12
 Links and Flows
General material flow/ service flow

Information flow

Information flow

Customer’s Supplier’s
Customer Lead Firm Supplier
customer supplier

General cash flow

Outbound / Downstream logistics Inbound / Upstream logistics

Fig. 1: Flows of materials, information and funds in a SCM

 SCM…Cont’d
 SCM involves the management of flows between and
among stages in a supply chain to maximize total
profitability (Chopra and Meindl, 2004)
 SCM is concerned with the Efficient Integration of
suppliers, factories, warehouses and stores so as to the
product is produced and distributed:
• in the right quantities
• to the right locations
• at the right time
in order to
– Minimize Total System Cost
– Maximize Customer Satisfaction
 SCM…Cont’d
 SCM involves in integrating three key flows across
the boundaries of the companies Supply chain
 Product/material flows
 Information flows, and
 Financial-cash flows.
 Successful integration of the above three flows has
produced improved efficiency and effectiveness.
 SCM…cont’d

 SCM is a dynamic entity that constantly

changing and evolving in response to

changes in technology, competitiveness,
and customer needs- (Steven,2006)
Why is supply chain management so important?

– To gain efficiencies from procurement, distribution and

logistics
– To make outsourcing more efficient
– To reduce transportation costs of inventories
– To meet competitive pressures from shorter development
times, more new products, and demand for more
customization
– To meet the challenge of globalization and longer supply
chains
– To meet the new challenges from e-commerce
– To manage the complexities of supply chains
– To manage the inventories needed across the supply chain
Why so Difficult to Match Supply and Demand?

– Different organizations in the supply chain may have

different, conflicting objectives
• Manufacturers: long run production, high quality,
high productivity, low production cost
• Distributors: low inventory, reduced transportation
costs, quick replenishment capability
• Customers: shorter order lead time, high in-stock
inventory, large variety of products, low prices
 con’d

 Purchasing
• Stable volume requirements ,flexible delivery
time, little variation b/n products, large quantities
 Warehouse
• Low inventory ,reduced transportation costs, quick
replenishment capability
 Marketing/sales wants: fast delivery, many package
types, special wishes/promotions

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 con’d

o Uncertainty in demand and supply

– Breakdowns of machines and vehicles
– Weather, natural catastrophe, war
– Local politics, labor conditions, border issues
o Changing customer requirements
o Decreasing product life cycles
o Fragmentation of supply chain ownership
o Barriers to integration of organizations
o Getting low commitment from top management
o Long lead times
20
 SCM as a Management Philosophy

• Systems approach
• Manage the total flow of goods, inventory
from the supplier to the ultimate customer
• Strategic orientation toward cooperative
efforts
• Customer focus, leading to customer
satisfaction

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 Con’d
o SCM set of activities to implement a management
philosophy
• Integrated behavior
• Mutually sharing information
• Mutually sharing risks and rewards
• Cooperation
• The same goal and the same focus on serving customers
• Integration of processes
• Partners to build and maintain long - term relationship

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 Evolution of Supply Chain Management

Further
Refinement of
SCM Capabilities

SCM
Formation/
Extensions

JIT, TQM, BPR,

ERP, Alliances

Inventory Management/Cost
Optimization

Traditional Mass Manufacturing

1950s 1960s 1970s 1980s 1990s 2000s Beyond

 Objectives of supply chain mgt

 To maximize the overall value generated.

• The value is the d/ce between what the final product is
worth to the customer and the costs the supply chain
incurs in filling the customer’s request.
• Supply chain profitability or surplus is the total profit
to be shared across all supply chain stages and
intermediaries.
• Supply chain success should be measured in terms of
supply chain profitability and not in terms of the profit
at an individual stage.

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 con’d

• To improve the performance of an individual

organization thereby
• To improve the performance of the whole supply
chain
 The higher the supply chain profitability, the more
successful is the supply chain
• Thus, the appropriate management of these flows
is a key to supply chain success.

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 Drivers of Supply Chain Performance

How to achieve
Efficiency Responsiveness

Supply chain structure

Logistical
Inventory Transportation Facilities
Drivers

Cross-
Information Sourcing Pricing Functional
Drivers
 con’d

 To understand how a company can improve supply chain

performance in terms of responsiveness and efficiency, we
must examine the logistical and cross functional drivers of
supply chain performance.
 The drivers interact with each other to determine the
supply chain’s performance in terms of responsiveness and
efficiency.
 As a result the structure of these drivers determines if and
how strategic fit is achieved across the supply chain.
 Therefore, the better management of all these activities
leads to increase a firm’s performance

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 Logistics Drivers

1. Inventory Driver
 Changing inventory policies can dramatically alter the
supply chain's efficiency and responsiveness / effectiveness.
 For example, a clothing retailer can make itself more
responsive by stocking large amounts of inventory and
satisfying customer demand from stock.
 A large inventory, however, increases the retailer's cost,
thereby making it less efficient.
 Reducing inventory makes the retailer more efficient but
hurts its responsiveness.

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 con’d

 Inventory – offsets discrepancies between supply and

demand
 Two primary inventory components
1. Cycle inventory
2. Safety inventory
 Cycle inventory – the average amount of inventory
held to satisfy customer demands between inventory
deliveries
 Safety inventory – extra inventory held in the event
demand exceeds supply
Con’d
 con’d

 2. Transportation Driver
 Transportation – moves inventories
between the different stages in the supply
chain
 Two primary transportation components
1. Method of transportation
2. Transportation route
 con’d

 Method of transportation
• Air
• Truck
• Rail
• Ship
• Pipeline
• Electronic
con’d
 con’d

3. Facilities
 The actual physical locations in the SC network
where product is stored, assembled or fabricated. The
major types of facilities are production site and
storage site
 Decisions regarding the role, location , capacity and
flexibility of facilities have significant impact on the
SC’s performance
con’d
 Cross Functional Drivers

4. Information
 Role in the supply chain
– The connection between the various stages in the supply
chain
– Crucial to daily operation of each stage in a supply chain
• E.g., production scheduling, inventory levels
 Role in the competitive strategy
– Allows supply chain to become more efficient and more
responsive at the same time
 con’d

o Two primary information components

1. Information sharing
2. Push verses pull strategy

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 con’d

o Information sharing efficiency – freely share

lots of information to increase the speed and
decrease the costs of supply chain processing
o Information sharing effectiveness – share only
selected information with certain individuals,
which will decrease the speed and increase the
costs of supply chain processing
 con’d

 Pull information strategy (efficiency) – supply

chain partners are responsible for pulling all
relevant information
– Pull technology – pulls / receives information

 Push information strategy (effectiveness) –

organization takes on the responsibility to push
information out to its supply chain partners
– Push technology – sends information
con’d
 Characteristics of the Good Information

Information Global Coordinated Supply Chain

Scope Decisions Success

Strategy Analytical $$$

Models
Information
 Accurate?
 Accessible?
 Up-to-date?
 In the correct form?
» If not, database restricted ability. How difficult is it to
import data into System Application & Product (SAP)?
 Quality of Information

 Information drives the decisions:

– Good information means good decisions
 IT helps: MRP, ERP, SAP, EDI
 Relevant information?
 How to use information?
 5. Sourcing
 Role in the supply chain
– Decisions determine what functions a firm performs and
what functions the firm out- sources.
– Sourcing decisions affect both the responsiveness and
efficiency of a SC.
– Set of processes required to purchase goods and services
in a supply chain
– Supplier selection, single vs. multiple suppliers, contract
negotiation
 Role in the competitive strategy
– Sourcing is crucial. It affects efficiency and
responsiveness in a supply chain
– In-house vs. outsource decisions- improving efficiency
and responsiveness
 con’d

 Components of sourcing decisions

– In-house versus outsource decisions
– Supplier evaluation and selection
– Procurement process:
• Every department of a firm buy from suppliers
independently, or all together.
– Eelectronic Data System (EDS)- to reduce
the number of officers with purchasing
authorization.

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6. Pricing

 Role in the supply chain

– Pricing determines how much the firm will charge for goods
or services that it makes available in a supply chain
– Pricing affects the behavior of the buyers of the good thus
affects SC performance.
– Pricing strategies can be used to match demand and supply
 Role in the competitive strategy
– Use pricing strategies to improve efficiency and
responsiveness
– Low price and low product availability; vary prices by
response times
• Amazon: Faster delivery is more expensive
Considerations for Supply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information Low cost/slow/no High cost/
duplication streamlined/reliable
Sourcing Low cost sources Responsive sources

Pricing Constant price Low-high price

Supply Chain Decisions Making Areas
 Con’d

 Production is the method of turning raw

materials or inputs in to finished goods / products
 What products does the market want?
 When products should be produced?
 How much of which products should be
produced?
 Determine plant capacities, workload balancing,
quality control and equipment maintenance etc

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 con’d

 Inventory is any stored resource used to satisfy a

current or future need (raw materials, work-in-
process, finished goods, etc.)
 what inventory should be stocked at each stage in a
supply chain?
 How much inventory should be held in the form of
raw materials, semi finished, or finished goods?
• why we held inventories?

١٤٤٣/٠٧/٢٩ 49
 con’d

o The primary purpose of inventory is to act as a

buffer against uncertainty in the supply chain.
o Level of inventory held - not be over / under
but should be better to held optimal level of
inventory.
o However, holding inventory can be expensive,
so determine the amount of inventory held

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 con’t

 Location - where should facilities for

production and inventory storage be located?
Where are the most cost efficient locations for
production and for storage of inventory?
Should existing facilities be used or new ones
built?
Finally, determine the possible paths available
for product to flow through for delivery to the
final consumer
١٤٤٣/٠٧/٢٩ 51
 con’t

 Transportation
o How / when should inventory be moved
from one supply chain location to another?
o Which mode of transport the company
used?
o Air freight and truck delivery are generally
fast and reliable but they are expensive.

١٤٤٣/٠٧/٢٩ 52
 con’t
• Shipping by sea or rail is much less
expensive but usually involves longer
transit times and more uncertainty.
• So, what is your decision regarding this
controversy?
• What circumstances to be considered to
select mode of transport?
• This uncertainty must be compensated for
by stocking higher levels of inventory
١٤٤٣/٠٧/٢٩ 53
 con’t

 Information - how much data should be

collected and how much information should be
shared?
 The basis for making these decisions
 Timely and accurate information holds the
promise of-
• better coordination and
• better decision making

١٤٤٣/٠٧/٢٩ 54
 con’t

 With good information, people can make

effective decisions about what to produce
and how much, about where to locate
inventory and how best to transport it
 The sum of these decisions will define the
capabilities and effectiveness of a
company’s supply chain.

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Participants in the Supply Chain
SUPPLIERS
Source of raw materials, component parts, semi-manufactured products and
unfinished or non-consumable products that occurs early in the supply chain.

MANUFACTURERS / PRODUCERS
Makers of final products. Manufacturers perform the task of final assembly or
product integration.

DISTRIBUTORS / WHOLE SALERS

Responsible for managing, storing and handling of products for organizations that
don’t want to carry entire variety of products in their own facilities.

LOGISTICS SERVICE PROVIDERS

Commercial provider of individual or multiple integrated service for other entities in
the supply chain e.g. transportation management, value-added warehousing and
distribution and information technology based services

RETAILERS
The entity that buys from the manufacturer and sell to the final customer.

CONSUMERS
People who go into the stores and buy and consume the product
Process View of a Supply Chain

57
 A cycle-based process view for supply chain
operations.
Stages
Cycles: A sequence of steps characterizing
the transactions that take places among two
successive stages of the supply chain Customer
Customer Order Cycle

Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Customer order cycle - The agreed upon time
between the purchase of a product and the delivery
of the product
Replenishment cycle - it is the movement of
inventory from upstream - to downstream locations.
The process helps prevent costly inventory
overstocking

١٤٤٣/٠٧/٢٩ 59
 con’d

Manufacturing cycle refers to the time required or spent

to convert raw materials into finished goods. It is also
known as throughput time. Technically, it is the length
of time from the start of production to the delivery of the
final products
Procurement cycle can be defined as the cyclical
process of key steps when procuring goods or services
for the organization / the series of actions required to
obtain goods or services from an outside source.

١٤٤٣/٠٧/٢٩ 60
 con’d

N.B
• The goal of the replenishment cycle is to ensure
product availability when a customer order
arrives.
• All processes in the replenishment cycle are
performed in anticipation of demand and which
are similar with push processes.
• The same holds true for processes in the
manufacturing and procurement cycle.

١٤٤٣/٠٧/٢٩ 61
Push/Pull View of Supply Chain Processes

• Under a pull supply chain, actual customer

demand drives the process – reactive process
• While push strategies are driven by long-term
projections of customer demand – proactive
process

١٤٤٣/٠٧/٢٩ 62
con’d

63
con’d

64
con’d

65
con’d

66
 Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

Push processes Pull processes

Customer
Order Arrives
 Differences between Push and Pull Strategy

Dimensions Traditional Focus Customer Focus

Push / Pull
Push Pull
Strategy

Start of Inventory- Customer-Order

Production Based Based

Manufacturing Mass Production Mass Customization

١٤٤٣/٠٧/٢٩ 68
 con’d
NB.
A cycle view of the supply chain is very useful when
considering operational decisions because it clearly
specifies the roles of each member of the supply
chain and the desired outcome for each process.
A pull/push view of the supply chain is very useful
when considering strategic decisions relating to
supply chain design.
The goal is to identify an appropriate pull/push
boundary such that the supply chain can match
supply and demand effectively.

١٤٤٣/٠٧/٢٩ 69
Aligning the Supply Chain with Business Strategy

o There are three steps to use in aligning your supply

chain with your business strategy.
• Step1 - understand the markets that your company
serves.
• Step2 - is to define the strengths or core
competencies of your company and the role the
company can or could play in serving its markets.
• Step3 - develop the needed supply chain
capabilities to support the roles your company has
chosen.

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Aligning the Supply Chain with Business Strategy

1. Understand the markets your company serves

o The quantity of the product - do your customer
want small amounts of products or will they buy large
quantities?
o The response time that customers are willing to
tolerate - Do your customers buy on short notice and
expect quick service or is a longer lead time acceptable?
o The variety of products needed - Are customers
looking for a narrow and well-defined bundle of
products or are they looking for a wide selection of
different kinds of products?

١٤٤٣/٠٧/٢٩ 71
 Con’d

o The service level required -do customers expect

all products to be available for immediate delivery
or will they accept partial deliveries of products
and longer lead times?
o The price of the product - how much are
customers willing to pay?
o The desired rate of innovation in the product -
how fast are new products introduced and how
long before existing products become obsolete?

١٤٤٣/٠٧/٢٩ 72
 Con’d
2. Core competencies of your company
 What kind of supply chain participant is your
company?
 Is your company a producer, a distributor, a retailer,
or a service provider?
 What does your company do to enable the supply
chains that it is part of?
 What are the core competencies of your company?
 How does your company make money?
 The answers to these questions tell you what roles in a
supply chain will be the best fit for your company

١٤٤٣/٠٧/٢٩ 73
 Con’d

3. Develop needed supply chain capabilities

• This development is guided by the decisions made
about the five supply chain drivers (production,
inventory, location, transportation and
information)
• Each of these drivers can be developed and
managed to emphasize responsiveness or
efficiency depending on the business
requirements.

١٤٤٣/٠٧/٢٩ 74
 Linking Supply Chain and Business Strategy
Business Strategy

New Marketing
Product Strategy Supply Chain Strategy
Strategy

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, HR

 The Value Chain:
Linking Supply Chain and Business Strategy
o To execute a company’s competitive strategy, all
functions play a role, and each must develop its own
strategy.
o Here, strategy refers to what each process or function
will try to do particularly well.
o A product development strategy - specifies the portfolio
of new products that a company will try to develop. It
also dictates whether the development effort will be made
internally or outsourced.
o A marketing and sales strategy - specifies how the
market will be segmented and how the product will be
positioned, priced, and promoted.

76
 con’d
o A supply chain strategy - determines the nature of
procurement of raw materials, transportation of materials
to and from the company, manufacture of the product or
operation to provide the service, and distribution of the
product to the customer, along with any follow-up service
and a specification of whether these processes will be
performed in-house or outsourced.
o Defines not only what processes within the firm should do
well but also what the role played by each supply chain
entity is.
o Specifies what the operations, distribution, and service
functions, whether performed in-house or outsourced,
should do particularly well.

77
 con’d
*Includes a specification of the broad structure of the
supply chain and what many traditionally call “supplier
strategy”, “operations strategy”, and “logistics strategy”.
*Includes design decisions regarding inventory,
transportation, operating facilities, and information
flows.
*The value chain emphasizes the close relationship
between the functional strategies and success can be
related to the excellent fit among the functional
strategies.

78
 con’d
 A company’s failure or success is closely linked to the
following keys:
1. The competitive strategy and all functional strategies
must fit together to form a coordinated overall strategy.
Each functional strategy must support other functional
strategies and help a firm reach its competitive strategy
goal.
2. The different functions in a company must
appropriately structure their processes and resources to
be able to execute these strategies successfully.
3. The design of the overall supply chain and the role of
each stage must be aligned to support the supply chain
strategy.

79
“Competition is No Longer Between
Companies; It is Between Supply Chains”

The End of Chapter One!!!

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