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Supply Chain Management [SCM] 1

SCM-LN-060213

Understanding the Supply Chain Management

Concept of Supply Chain Management Define Supply Define Supply Chain

Define Supply Chain Management

This can best be done by discussing the generalOperating process of organizations with examples

from day to day activities.


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Operation of an Organization

TheTransformation

Process

Outputs

Inputs

[TransformedResources]

1. Materials

2. Information

3. Customers

1. Facilities

2. Energy &

Utilities3. Technology4. Staff

Inputs

[TransformingResources ] A general Input

Transformation Process Output Operations model

Products

Services

Customers

Government

Regulations etc.

Environment

External

Internal

Random Fluctuations

Late DeliveriesStaff Turnover

Power / Equipment failure


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Process of buying / purchasing Products

Raw materialSupplier

ComponentSupplier

ComputerManufacturer Distributor

Show Room[Retailer] Customer

Computer


SoapManufacturer Distributor

Supermarket[Retailer] Customer

Toilet Soap

Crude OilSupplier

Refinery[Manufacturer]

Petrol/Diesel Pump[Retailer] Customer

Fuel


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Process of buying / purchasing Services


ComponentSupplier

VehicleManufacturer

SparesDistributor

Service Centre[Retailer] Customer

Vehicle Repair


Pest control products Manufacturer

Pest control productsDistributor

MaintenanceCompany[Retailer]

Customer

Pest Control

Water[Nature]

Generating Station[Producer ]

Distribution Company[Retailer]

HomeCustomerElectricity

FuelSupplier

CommercialCustomer

IndustrialCustomer


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Supply

The Customer expects that there will be supply ofProducts / Services whenever the need arises .

-Definition of Supply [APICS Dictionary 11 th edition]

1] The quantity of goods available for use

2] The actual or planned replenishment of productor component. The replenishment quantities are createdin response to demand for the product or component or inanticipation of such a demand.


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Supply Chain

The buying process begins with customer order and ends when thesatisfied customer pays for the product / service. It has the following typicalentities / stages:

Customers

Retailers

Wholesalers / Distributors

Transporters

Manufacturers / Producers

Component / Raw material SuppliersThese entities are connected to each other along a chain. Hence the nameSupply Chain system.


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Objectives of Organizations

To meet the needs of various customers and stakeholders.To maximize the overall value generated.Value generated = Worthiness of product Effort the supply chain expends.Value is correlated with supply chain profitability.Value = Revenue from customer Overall cost across the supply chain.

Organizations have to acquire many of the materials, equipment, facilities,and supplies from other organizations and or individuals. Thus theperformance of an organization depends not only on its own performancebut on the performance of other organizations which supply the resources.This makes it clear that an organization cannot exist in isolation .

To be successful, organizations have to be interdependent. Cooperationamong firms is a must.

Supply chain success should be measured in terms of supply chainprofitability and not in terms of profit at an individual stage.


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Supply Chain BasicSupply Chain Model

1. Flow of physical materials and services from suppliers through

intermediate entities to customers2. Flow of Cash from customer through intermediate entities to supplier

3. Flow of Information back and forth along the chain

4. Reverse flow of products returned for replacement, repairs, recycling, or

disposal

Supplier Producer Customer

Primary Product Flow Primary Product Flow

Primary Cash Flow

Information Flow

Return of Product

Supplier Producer Customer are connected by Product, Information & Payment Flows

Return of Product


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Supply Chain

Organizations:Supplier materials / energy / services / components

Producer finished products / services

Retailer receives finished products and delivers to

customersFlows that connect the entities:

Physical materials / services

Cash from customer

Information back and forth

Reverse flow of products repair / recycling / disposal / replacement


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Definition of Supply Chain

The global network used to deliver products andservices from raw materials to end customers throughan engineered flow of Information, Physical Distributionand Cash. [APICS Dictionary 11th edition]

SC involves directly or indirectly, everyone and everythingrequired to deliver products and services from raw materials to endcustomers SC includes Customers, Retailers, Wholesalers / Distributors,Transporters , Manufacturers / Producers, Component / Raw materialSuppliersSC can be viewed as processes marketing data analysis, invoicing,shipping, order processing cutting across entitiesOutside stakeholders government, public at large, trade associations,universities, competitors etc.


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Supply Chain Management

The design, planning, execution, controland monitoring of supply chain activities

with the objective of creating net value ,building a competitive infrastructure,leveraging world wide logistics,synchronizing supply with demand andmeasuring performance globally.

[APICS dictionary 11 th edition]


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Some more definitions of SCMOliver and Webber (1982) SCM covers the flow of goods from supplier throughmanufacturing and distribution channels to end user.

Jones and Riley (1987) SCM techniques deal with the planning and control of total materialsflow from suppliers to through end users.

Ellram (1991) An integrative approach to dealing with the planning and control of thematerials flow from suppliers to end users.

Christopher (1992) SCM is the management of a network of organizations that are involved,through upstream and downstream linkages, in the different processes and activities thatproduce value in the form of products and services in the hands of the ultimate customer.

Ayers (2000) SCM is the design, maintenance and operation of supply chain processes forsatisfaction of end users.

Sunil Chopra and Peter Meindl (2001) SCM involves the management of flows between and

among stages in a supply chain to maximize total profitability.


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A generalized SC Model

Manufacturer

Distributor Retailer Customer

Distributor Retailer Customer

Retailer Customer

Retailer Customer

SupplierTier 1

SupplierTier 2

SupplierTier 1

SupplierTier 2

Raw Materials

Components

Distribution Tier 1Distribution Tier 2


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Supply Chain Management [SCM] 10A

Types of Supply Chain

1 Horizontal (lateral) integration

The stages of SC [Physical Supply, Manufacturing & Physical] arecarried out by different organizations discussed earlier.

2 Vertical Integration

Bringing the SC inside one organization

Ford motor company pursued this strategy for their famous model

T - car.What Ford practised. Later divested.

Now horizontal integration

is the favoured approach .

OwnershipManagement

Marketing / SalesFinance

Show Room

Distribution

Plant

Component Production

Raw material Extraction

Ford Customer


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Evolution of Supply Chain Management

Stage 1 Multiple Dysfunction

Purchasing Marketing / Sales

Production Control

Logistics Distribution

Supplier

Supplier

Supplier

Customer

Customer

Customer

Materials / Service Payments

Lacks clear internal definitions and goals No external links other than transactional ones


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Stage 2 Semi functional Enterprise


Improving efficiency, effectiveness, quality etc within functional areas No overlap / consulting indecision making from one department to another Department wise Maximising

Purchasing Logistics ProductionControlMarketing /

Sales Distribution

Supplier

Supplier

Customer

Customer

Information

l h [ ]


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Stage 3 Integrated Enterprise


Breaks down silo walls and brings functional areas together in processes such as Sales &Operations Planning (S&OP), CPFR Company wide processes rather than individual functions

late 1980s to early 1990s. MRP(1950s) MRPII(1960s) ERP(1990s).

Purchasing Logistics ProductionControlMarketing /

Sales Distribution

Supplier

Supplier

Customer

Customer

ERP

S l Ch i M [SCM] 13A


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Why Process Integration is needed?

To make maximum profit a company must have the following objectives:

- Provide best customer service - Provide lowest production costs

- Provide lowest inventory investment - Provide lowest distribution costs

These objectives create conflict among marketing, production & finance departments:

Function Objective ImplicationMarketing - High revenue

- High Product AvailabilityHigh

Customer ServiceLow

Production - Low Production Cost- High Level Production- Long Production Run

ManyProduction Disruption

Few

Finance - Low Investment and Cost- Fewer Fixed Costs- Low Inventories

HighInventories

Low


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5.2. The Objectives of a Supply Chain

Maximize overall value created Supply chain value: difference between what the

final product is worth to the customer and the

effort the supply chain expends in filling thecustomers request

Value is correlated to supply chain profitability(difference between revenue generated from thecustomer and the overall cost across the supplychain)


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The Objective of a Supply Chain Example: Dell receives $2000 from a customer

for a computer (revenue) Supply chain incurs costs (information, storage,

transportation, components, assembly, etc.) Difference between $2000 and the sum of all ofthese costs is the supply chain profit

Supply chain profitability is total profit to be

shared across all stages of the supply chain Supply chain success should be measured by

total supply chain profitability, not profits at anindividual stage

S l Ch i M g t [SCM] 17


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Creating Value through Supply Chain Management

The primary purpose for the existence of any SCM is to satisfy customer needs, in

the process generating profits for itself. Maximise the overall value generated.Value generated = what the product/service worth to the customer the effort SCexpends in fulfilling the customer needs. Correlated with SC Profitability (SCP).

SCP = Revenue generated Overall cost across SC

Value depends on the products utility to the customer. Types of utility:

Form Utility - Operation

Place Utility - Logistics

Time Utility - Logistics

Possession Utility - Sales

During value generation SC has to satisfy all the stakeholders Customer, Investor,Employee, Public at large, Government etc.



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Creating Value through Supply Chain Management

Financial Value

Cost Reduction may be self defeating

Gains must be equitably distributed

Customer Value

Quality

AffordabilityAvailability

Service

Social value

Socially Desired and useful product / service

Avoiding or reducing negative environmental side effects of activities suchas extraction, processing and construction


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The Objective of a Supply Chain

Sources of supply chain revenue: the customer

Sources of supply chain cost: flows ofinformation, products, or funds between stagesof the supply chain

Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability



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Importance / Benefits of SCMTo achieve economies of scale and scope Costsare significant

To improve business focus and expertise

Customer Expectations are increasingSupply and Distribution Lines are lengthening withcomplexity

Adds Significant Customer value

Customers Increasingly Want Quick & CustomisedResponse



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Importance / Benefits of SCMTo achieve economies of scale and scope Costs aresignificant

Internal SC functions lack economies of scale when compared withthe potential capacity of an independent provider of the same product / service.

Eg: Computer Monitor / Chip / Hard driveAttractive pricing volume leverage.

To improve business focus and expertise

Vertical integration multiplies the complexities of managing

disparate businesses. An independent company that focuses entirely ona particular business can develop more expertise than an in-housedepartment

Ford divested their Iron Ore company, Steel Mill etc

Higher Quality, Attractive Pricing or both



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Importance / Benefits of SCMCustomer Expectations are increasing

- Rapid processing of Customer Request

- Quick delivery (shorter Order Cycle Time)

- High degree of Product Availability

- Lower Prices

Supply and Distribution lines are lengthening with greatercomplexity

- Cut costs and expand markets

- Trend towards an integrated world market- Designing products for world market & producing them wherever

raw material, labour, components, overhead etc are lower

- Political arrangements : European Union, ASEAN, SAARC etc

- Globalization of industries depends on logistic performance andcvosts


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Importance / Benefits of SCM

Customers Increasingly want Quick Customised Response

- Customers expect that products / services can be made availablein shorter times. Guided by Fast Food, ATM, E-Mail etc.

- Improved IS and flexible manufacturing processes have led tomass customisation

- One Size Fit all philosophy is not appreciated always

- Manufacturers / Suppliers are offering products that meetindividual needs


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Decision Phases of a Supply Chain

Supply chain strategy or design

Supply chain planning Supply chain operation


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Supply Chain Strategy or Design

Decisions about the structure of the supply chain andwhat processes each stage will perform

Strategic supply chain decisions Locations and capacities of facilities Products to be made or stored at various locations Modes of transportation Information systems

Supply chain design must support strategic objectives Supply chain design decisions are long-term and

expensive to reverse must take into account marketuncertainty


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Supply Chain Planning

Definition of a set of policies that governshort-term operations

Fixed by the supply configuration fromprevious phase

Starts with a forecast of demand in thecoming year


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Supply Chain Planning

Planning decisions: Which markets will be supplied from which

locations

Planned buildup of inventories Subcontracting, backup locations Inventory policies

Timing and size of market promotions Must consider in planning decisions demand

uncertainty, exchange rates, competition over thetime horizon


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Supply Chain Operation Time horizon is weekly or daily Decisions regarding individual customer orders Supply chain configuration is fixed and operating

policies are determined Goal is to implement the operating policies as

effectively as possible Allocate orders to inventory or production, set order

due dates, generate pick lists at a warehouse,allocate an order to a particular shipment, set deliveryschedules, place replenishment orders

Much less uncertainty (short time horizon)


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5.3. Process View of Supply Chain Management :Cyclic View

SC is a sequence of processes and flows that take place within and between different SCstages and combine to fulfil a customer need for a product / service. These processes aredivided into a series of cycles (cyclic view), each performed at the interface between twosuccessive stages / entities of SC.

Customer Order

Cycle

Replenishment

Cycle

ManufacturingCycle

Procurement

Cycle

Customer Arrival Customer Order Receiving

Customer Order FulfilmentCustomer Order Entry

Retail Order Trigger Retail Order Receiving

Retail Order FulfilmentRetail Order Entry

Order Arrival from D/R/C Receiving by D/R/C

Manufacturing & ShippingProduction Scheduling

Order from Manufacturer Receiving at Manufacturer

RM / Comp. Mfg & ShippingSupplier Prodn Scheduling

Cycles Stage/EntityCustomer

Retailer

Distributor

Manufacturer

Supplier


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Push/Pull View of Supply ChainsProcurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES



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pp y g [ ]

Customer Order

Cycle

Repl & Mfrg

Cycle

ProcurementCycle

PUSHProcess

PULLProcess

LL Bean

Cust Order & Mfrg

Cycle

Procurement

Cycle

PUSHProcess

PULLProcess

DELL

Customer order arrives

Customer order arrives

Process View of a Supply Chain : Push Pull View


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Supply Chain Macro Processes in a Firm

SRM ISCM CRM

Source

Negotiate

BuyDesign Collaboration

Supply Collaboration

Strategic planning

Demand planning

Supply planningFulfilment

Field service

Market

Sell

Call centreOrdermanagement

Generate demandFacilitate placementTrack orders

Production planningStorage planningDemand-Supply

planning

Supplier selectionSupplier evaluationNew orders

MarketingManufacturingPurchasing


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5.4. Supply Chain Drivers

Drivers of supply chain performance A framework for structuring drivers

Facilities Inventory Transportation

Information Obstacles to achieving fit


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Drivers of Supply Chain Performance

Facilities places where inventory is stored, assembled, or fabricated production sites and storage sites

Inventory

raw materials, WIP, finished goods within a supply chain inventory policies Transportation

moving inventory from point to point in a supply chain combinations of transportation modes and routes

Information data and analysis regarding inventory, transportation, facilities

throughout the supply chain potentially the biggest driver of supply chain performance


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A Framework for Structuring Drivers

Efficiency Responsiveness

Facilities Transportation Inventory Information

Supply chain structure

Drivers


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Supply Chain Decisions: StructuringDrivers

Strategy

(Design)

Planning

Operation


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Inventory

Role in the supply chain

Role in the competitive strategy

Components of inventory decisions


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Inventory: Role in the Supply Chain

Inventory exists because of a mismatch betweensupply and demand

Source of cost and influence on responsiveness

Impact on material flow time: time elapsed between when material entersthe supply chain to when it exits the supply chain

throughput rate at which sales to end consumers occur I = RT (Littles Law) I = inventory; R = throughput; T = flow time Example Inventory and throughput are synonymous in a supply chain

I R l i C i i


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Inventory: Role in CompetitiveStrategy

If responsiveness is a strategiccompetitive priority, a firm can locatelarger amounts of inventory closer tocustomers

If cost is more important, inventory can bereduced to make the firm more efficient

Trade-off Example 3.2 Nordstrom


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Components of Inventory Decisions Cycle inventory

Average amount of inventory used to satisfy demand betweenshipments

Depends on lot size

Safety inventory

inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales

Seasonal inventory inventory built up to counter predictable variability in demand

cost of carrying additional inventory versus cost of flexibleproduction

Overall trade-off: Responsiveness versus efficiency more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness


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Transportation



Components of transportation decisions


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Transportation: Role inthe Supply Chain

Moves the product between stages in thesupply chain

Impact on responsiveness and efficiency Faster transportation allows greater

responsiveness but lower efficiency Also affects inventory and facilities


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Transportation:Role in the Competitive Strategy

If responsiveness is a strategic competitivepriority, then faster transportation modes canprovide greater responsiveness to customers

who are willing to pay for it Can also use slower transportation modes forcustomers whose priority is price (cost)

Can also consider both inventory andtransportation to find the right balance

Example 3.3: Laura Ashley


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Components ofTransportation Decisions

Mode of transportation : air, truck, rail, ship, pipeline, electronic transportation vary in cost, speed, size of shipment, flexibility

Route and network selection route: path along which a product is shipped network: collection of locations and routes

In-house or outsource Overall trade-off: Responsiveness versus

efficiency


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Information



Components of information decisions


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Information: Role in

the Supply Chain The connection between the various

stages in the supply chain allowscoordination between stages

Crucial to daily operation of each stage ina supply chain e.g., productionscheduling, inventory levels


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Information:Role in the Competitive Strategy Allows supply chain to become more

efficient and more responsive at the sametime (reduces the need for a trade-off)

Information technology What information is most valuable? Example 3.4: Andersen Windows Example 3.5: Dell


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Components of Information Decisions

Push (MRP) versus pull (demand informationtransmitted quickly throughout the supply chain)

Coordination and information sharing

Forecasting and aggregate planning Enabling technologies

EDI Internet ERP systems Supply Chain Management software

Overall trade-off: Responsiveness versus efficiency


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Considerations forSupply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Dedicated Proximity / FlexibilityInformation What information is best suited for

each objective


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Obstacles to AchievingStrategic Fit

Increasing variety of products

Decreasing product life cycles Increasingly demanding customers Fragmentation of supply chain ownership

Globalization Difficulty executing new strategies


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Major Obstacles to Achieving Fit

Multiple owners / incentives in a supplychain

Increasing product variety / shrinking lifecycles / customer fragmentation Increasing implied uncertainty

Local optimization and lack of global fit

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