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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

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 InventoryThis is the amount of inventory needed to satisfy demand for the product in the period between purchases of the product.

Safety Inventorythat is held as a buffer against uncertainty. Seasonal InventoryThis 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, counterservice) 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

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 $700,000

Sales $5,000,000 Minus Cost of Goods Sold $3,800,000 ($3,685,000) Plus Other costs $800,000

Operating cost elements

Net income $400,000 ($515,000) Divided by Sales $5,000,000 Profit margin 8% (10.3%)

Materials $2,300,000 ($2,185,000) Overhead $800,000

What if we decrease materials cost by 5%? (or $115,000)

Return on Investments 10.0% (13.0%)


Inventories $500,000 ($475,000) Account receivable $300,000 Cash $300,000

Sales $5,000,000 Current assets $1,100,000 ($1,075,000) Plus Fixed assets $2,900,000 Divided by Total assets $4,000,000 ($3,975,000) Asset turnover rate 1.25 (1.26)


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

Cycle View of Supply Chains

Processes are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages
Customer Order Cycle

Customer Retailer

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle


Push/Pull View of Supply Chains

Processes are divided into two categories, pull or push
Procurement, Manufacturing and Replenishment cycles
Customer Order Cycle

executed in anticipation of a customer order

executed in response to a 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

Supply Chain Macro Processes

Customer Relationship Management (CRM) focuses on the interface between the firm and its customers Internal Supply Chain Management (ISCM) focuses on all processes internal to the firm Supplier Relationship Management (SRM) focuses on the interface between the firm and its suppliers See Figure 1.8, p. 15.

Examples of Supply Chains

Gateway Zara WW Grainger and McMaster-Carr: MRO suppliers* Toyota 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?