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Understanding the Supply Chain

Chapter 1

Chopra/Meindl & Kapoor

Learning Objectives
Describe the Cycle and push /pull views of a supply chain. Classify the supply chain macro process in a firm. Identify the three key supply chain decision phases and explain the significance of each one. Discuss the goal of a supply chain and explain the impact of supply chain decision on the success of a firm.

1.1 What is a Supply Chain

A supply chain consists of all parties involved , directly or indirectly, in fulfilling a customer request. The supply chain not only includes the manufacturer and suppliers, but also transporters, wholesalers, retailers, and customers themselves. Supply chain includes all functions involved in receiving and fulfilling customer request. These functions include, but are not limited to, new product development, marketing, operations, distribution, finance, and customer service. A supply chain is a dynamic and involves the constant flow of information, product, and funds between different stages. 3 Stages of supply chain is illustrated in Fig- 1.1 & Fig- 1.2 (Chopra)

Evolution of Supply Chain Management

Activity fragmentation to 1960 Demand forecasting Purchasing Requirements planning Production planning Manufacturing inventory Warehousing Material handling Packaging Finished goods inventory Distribution planning Order processing Transportation Customer service Strategic planning Information services Marketing/sales Finance Physical Distribution Supply Chain Supply Chain Management Management Logistics Purchasing/ Materials Management Activity Integration 1960 to 2000 2000+

Supply Chain Schematic

Materials Management Manufacturing and supply service Physical Distribution Management Customer Service

Suppliers Raw Materials Sub-assemblies Manufactured parts Packaging material

Out bound Work in progress Finished goods In bound Materials flow Production

Inventory in the field

Finished goods

Transit depot


Fig: Components of Logistics.

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Customer Other equipment manufacturers End users Government

The Immediate Supply Chain for an Individual Firm






Information flows


Vendors/plants/ports Warehousing Transportation


Scope of the Supply Chain for Most Firms

Business logistics

Physical supply (Materials management) Sources of supply Plants/ operations Transportation Inventory maintenance Order processing Acquisition Protective packaging Warehousing Materials handling Information maintenance

Physical distribution

Customers Transportation Inventory maintenance Order processing Product scheduling Protective packaging Warehousing Materials handling Information maintenance

Focus firms internal supply chain

Difference between Supply Chain Management and Logistics



Not only seeks to create single plan for flow of goods and information through business, but also aims to achieve linkages and co-ordination between process of other entities in the chain, like suppliers, customers an so forth. Defined as management of downstream and upstream relationships to ensure superior customer satisfaction to the organization.

Seeks to create a single plan for flow of product and information through business. But it is planning oriented. It is defined as process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw material, in process inventory, finished goods and related information from point of origin to the point of consumption to fulfill customer requirement.

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Supply Chain Management (SCM)

Objective of a well-planned supply chain system helps an organization to achieve:

Lower cost More sales Prompt delivery Increased goodwill Improved customer confidence Competitive edge & supply chain profitability

SCM Entails:

Management of flow of goods from supplier to final user; System-wide co-ordination of product and information flows; and Development of relationships and information of all activities that provide customer value through distribution channel.

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1.2 Decision Phases in a Supply Chain

1. Supply chain strategy or design
Company decides how to structure the supply chain over the next several years. Which includes:
Chain configuration Resource allocation & location analysis and capacities Process each stage will perform

1. Supply chain planning

Planning phase starts with a forecast for a time frame (quarter to a year) of demand in different market. Also include:
Which market will be supplied from which location. The subcontracting Inventory policies Timing and size of marketing promotion

1. Supply chain operation

Companies make decision and carry out activities regarding ]individual customer orders on weekly or daily basis. Includes:
Allocate inventory, set a date to fill order, order for shipment, pick 11 at list a warehouse, delivery schedule of transports, etc.

1.3 Process View of a Supply Chain

A supply chain is a sequence of processes and flows that take place within and between different stages. 1. Cycle view Fig 1.3 a) Customer order cycle
Occurs at the customer/retailer interface and includes all processes directly involved in receiving and filling the customers order.

a) Replenishment cycle
Occurs at the retailer/distributors interface and includes all processes involved in replenishing retailer inventory.

c) Manufacturing cycle
Occurs at the distributors/manufacturer interface and includes all processes involved in replenishing distributor inventory.

d) Procurement cycle
Occurs at the manufacturer/supplier interface and includes all processes to ensure that materials are available for manufacturing 12 to occur according to schedule.

1.3 Process View of a Supply Chain

2. Push/Pull view

Fig 1.8 & 1.10

With pull processes, execution is initiated in response to the customer order. Also referred to as reactive process because they react to customers demand. With push processes, execution is initiated in anticipation of the customer order. Also referred to as speculation processes because they respond to speculated( or forecasted) rather than actual demand.

2. Supply Chain Macro Processes in a firm


Fig 1.11

Customer relationship management (CRM) All processes that focus on the interface between the firm and its Customers. Internal supply chain management (ISCM) All processes that are internal to the firm. Supplier relationship management (SRM) All processes that focus on the interface between the firm and its Suppliers.

a. a.

Marketing Force Affecting SCM & Physical Distribution

Demand Characteristics 1.Population(spread fixed costs as large market) 2.Income(more dis.income, more demand) 3.Demand variation(more demand, more PD.) Product characteristics 1.Value of the product(high value, high inventory and trans.cost) 2.Seasonality of the product(high seasonality, high trans.cost) 3.Product line (related vs. unrelated) Dynamic environment

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The SCM & Physical Distribution Concept: A total system perspective

Total cost perspective Understanding of relevant trade-offs The notion of zero sub-optimization Total system perspective

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Total cost perspective TDC= Transport cost + Facilities cost + Communication cost + Inventory cost + Protective packaging cost + Distribution management cost. Understanding of relevant trade-offs Intra-activity trade-off Inter-activity trade-off Inter-functional trade-off Inter-organizational trade-off 15

Relevant trade-offs
Intra-activity trade-off Decision to use ones own trucks or of a transportation company is an intra-activity trade-off. Decisions between choosing public and private warehousing can be a good example of this trade-off. Inter-activity trade off Use of air freight might increase the transportation cost but would help reduce the inventory and warehousing cost. Af=TC IC or WC Xerox- emergency shipment Inter-functional trade-off Packaging of a product is used for protecting the product and transporting and promoting the product. Packaging= Protecting + Transporting + Promoting A classic example is Pringles Chips. Here the company changed the packaging structure from conventional vacuum packs to temper-proof packs, to increase customer satisfaction and decrease damage during transportation. Inter-organizational trade-off Manufacturer and other organization involved in the creation of place, possession and time utilities for the manufacturer, i.e. intermediaries, transport contractors, shipping and warehouse agents. Thus, management should ensure co-ordination to all the external organizations and capitalize on trade-off opportunities.

The SCM & Physical Distribution Concept: A total system perspective

M+P = 5000---(5) P=2000---(2)

M+2P = 4000---(3) M = 2500---(1)

M+P = 3000---(4)

Possible PD programs and restrictions


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The SCM & Physical Distribution Concept: A total system perspective



M = 2500---(1)

50 $7

50 $6

50 $5

Lines of equal profit 5P+3M = profit

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Possible PD programs and restrictions