SCMPE Chapter 2

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Chapter 2

MODERN BUSINESS ENVIRONMENT

SUPPLY CHAIN MANAGEMENT

Introduction

Management of relationship in the network of organisations

✓ Supply Chain Management can be defined as the management of flow of products & services,

which begins from the origin of products and ends at the product’s consumption at consumer’s

end.

✓ It comprises of vendors that supply raw material, producers who convert the material into

products, warehouses that store, distribution centres that deliver to the retailers and retailers

who sell the product to the ultimate user.

✓ Supply chains encourage value-chains because, without them, no producer has the ability to

give customers what they want, when and where they want, at the price they want.

Deficiencies in supply chain reduces the ability of the producers to compete with each other.

The following activities which are termed as primary activities under value chain model

forms part of SCM.

▪ Inbound Logistics covering procurement and related activities.

▪ Operations covering conversion of raw material into finished products.

▪ Outbound Logistics covering movement of products from plants to end users.

▪ Marketing and Sales

▪ Service

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Supply Chain Management looks each of the above activities as integrated and interrelated to

each other. So, the comment that unless value chains are encouraged customers’ demands

cannot be met holds good.

✓ The term supply chain can be referred to as the entire network of organisations working

together to design, produce, deliver and service products.

Difference between SCM & VCM:

Supply Chain Value Chain

A tool of business transformation, which

minimizes costs and maximizes customer

satisfaction by providing the right product at

the right time at the right place and the

right price.

A way of getting a Competitive Advantage,

through which a company can beat its

competitors along with fulfilling customer

requirements.

The major objective of the supply chain is to

gain complete customer satisfaction.

Its gaining competitive advantage.

Difference between Logistics & SCM:

1] Logistics Mgt. is only a part of SCM.

2] Logistics is movements of goods from point of origin to point of consumption.

3] While SCM is combination of purchasing, operations and logistics.

Definition

✓ The Global Supply Chain Forum (GSCF) defines Supply chain management as the

“Integration of key business processes from end user through original suppliers that provides

products, services, and information that add value for customers and other stakeholders”.

Key Processes:

The following eight supply chain management processes are included in the GSCF framework:

[1] Customer Relationship Management, to manage and analyse customer’s interaction and

data throughout the life cycle with the main motive of improving business relations.

[2] Supplier Relationship Management, provides the structure for how relationships with

suppliers are developed and maintained.



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[3] Customer Service Management, provides the key points of contact for administering

product and service agreements.

[4] Demand Management, provides the structure for optimising the customer's requirements

with supply chain capabilities.

[5] Order Fulfilment, includes all activities necessary to define customer requirements,

design the logistics network, and fill customer orders.

[6] Manufacturing Flow Management, includes all activities necessary to move products

through the plants and to obtain, implement and manage manufacturing flexibility in the

supply chain.

[7] Product Development and Commercialization, provides the structure for developing and

bringing to market new products jointly with customers and suppliers.

[8] Returns Management, includes all activities related to returns, reverse logistics, gate keeping,

and avoidance.

Service Sector:

[1] Information Flow

Information flow is critical at various stages:

• To understand expectations of customers

• To share this information with the suppliers of service with whom company has partnership

• To establish clear service level agreements with these suppliers and to clearly define the

scope of work

• To be able to monitor the performance of these suppliers. Performance has to be monitored

because it will impact payment settlements with these suppliers

• To collect constructive feedback from customers about the performance of these suppliers

[2] Capacity and Skills Management

• Develop assets and skilled staff who can attract customers and help them to customize

their services.

• The company has to invest in its processes to ensure that information flow is smooth and

accurate.



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• Similarly, it has to invest in assets like IT infrastructure, offices and also develop a skilled

staff who can provide quality service.

• However, since building capacity and developing skills comes with a cost, that has to be

balanced out with the revenue it generates.

[3] Demand Management

• Company will have to focus on how to generate demand for its products.

• The company should be able to manage variation in customers’ expectations in a cost-

effective way.

[4] Customer Relationship Management

Identifying key customers segments, tailoring product and service agreements to meet their

needs, measuring customer profitability.

[5] Supplier Relationship Management

Managing service level agreements with suppliers, developing close working relationships

with key suppliers

[6] Service Delivery Management

• Agreements with suppliers will help to ensure that expectations of customers are being

met.

• Service performance must be monitored, checked continuously for compliance.

• Any deviation from scope may have an impact on the payment settlement to be made with

the supplier.

[7] Cash Flow

• Service delivery should be monitored to ensure that payment is made only to the extent

the agreed quality of service is delivered

• Periodic payments to suppliers should be made based on service level agreements.

• Similarly, cash inflow from customers should be monitored to avoid any bad debts.



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Benefits of supply chain are enormous on any business. Highly controlled supply chain fetches

tangible benefits such as

• Inventory reduction,

• Personnel reduction,

• Productivity improvement;

• Order management improvement,

• Financial cycle improvement etc.

• Information visibility,

• New/ improved processes,

• Customer responsiveness,

• Standardization- flexibility & globalization of business performance

Types of Supply Chain- Push and Pull

Push Model

Under Push model, stocks are produced on the basis of anticipated demand. Demand forecasting

can be done via a variety of sophisticated techniques may be from operations research area or

data mining.

Pull Model

Under Pull model stocks are produced in response to the actual demand. This new business

model is less products centric and more directly focused on the individual consumer – a more

marketing - oriented approach.



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SCM & E-Commerce:

Electronic connections are used in the pull model to bring out the needs of customers.

✓ Electronic supply chain connectivity gives end customers the opportunity to give direction to

suppliers, for example about the precise specifications of the products they want.

✓ Ultimately, customers have a direct voice in the functioning of the supply chain.

Supply chain created through E-Commerce brings benefit to both customer and manufacturer.

Thus, facilitating the companies to fulfil the customer needs, carry fewer inventories, and send

products to market more quickly

The SCM is the backbone of E-commerce industry. Customers buying products online want

deliveries to be faster. Another distinct feature of e-commerce is that buyers could be located

in any corner of the country. This definitely means that the company must have an effective

Supply Chain Management in place which could meet the customer’s requirement.

Customer Orders

The company must have an effective mechanism to capture customer orders and feed it into

the production planning on a real time basis. An integrated ERP system would be required for

this purpose. Any delay in intimating the production team would mean delay in production and

delivery which would not be taken positively by the customers. A real time flow of information

would mean lower inventory holding.



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Procurement

The material requirements must be communicated to suppliers seamlessly. The company must

identify those vendors who can delivery quality materials in the required time frame. A delay in

supplies would delay the production process. A company cannot afford this in e-commerce

business. Automatic exchange of information using EDI (Electronic Data Interchange) or

Integrated ERP systems would ensure that the vendors receive material requirements in a

timely manner.

Production

As discussed earlier, the production must be in accordance with the customer order. This

requires a shift in approach of the production team. Business environments have shifted from

“Customer will buy what we produce” to “We have to produce what the customers require”.

The company would ideally not produce products to store them and sell later.

Logistics

Logistics would be the backbone of entire e-commerce set up. Right from sourcing of materials

to delivery of products at the customer’s door step, logistics would play an important role. If

the company has an in-house logistics facility, the logistics team must be trained with the

requirement of the new business. If the company has outsourced the logistics, vendors must be

briefed about the requirements of the e-commerce. The company might have to tie up with

new logistic vendors to avoid any delay in deliveries.

Upstream and Downstream Flow

A supply chain begins right from the supplier and finally ends on end customer or consumer. In

the total chain there are flows of material, information and capital or finance. When the flow

relates to supplier it is termed as upstream flow. If the flow is with consumers or customers it

is named as downstream flow.

For instance, upstream and downstream include flows as demonstrated in the below:

Upstream Downstream

Material Returns, Repairs, After-Sales

Service

Products, Parts

Information Orders, Point of Sale Data Capacity, Delivery Schedules

Capital/Finance Payments Invoices, Pricing, Credit Terms



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Management of Upstream Supplier Chain

Management of transactions with suppliers are termed as upstream supply chain management.

[1] Relationship with Suppliers

In today’s global economy there are so many factors to consider when choosing and managing a

supplier. Supplier capabilities of innovation, quality, reliability and costs/price reductions and

agility to reduce risk factors all have witnessed significant changes when aligned with key

suppliers.

Supplier Strategy:

To possess a commendable influence on the whole upstream flow, organization has to build up a

set of strategies which in turn results in control over suppliers. This strategy is likely to take

account of matters such as the following:

Sources

In the era of globalization, companies choose suppliers from different parts

of world.

Number of Suppliers

In the event the buying company wants to avail huge discount bulk purchase

from single supplier is advisable. However, if requirement is to avoid the risk

of failed deliveries organization may prefer several or multiple suppliers.



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[2] Use of Information Technology

The main activities of upstream supply chain are procurement and logistics. In modern business

environment upstream supply chain management use E-Procurement process.

E-Procurement is the electronic methods beginning from identification of the organization’s

requirements and end on payment.

E-Procurement includes E-Sourcing, E-Purchasing and E-Payment.

Cost, Quality, and Speed of Delivery

These factors are closely interrelated and the strategy will probably need to

make compromises to achieve the right balance.

Make or Buy and Outsourcing

Depending upon the application of various strategic cost management

techniques, decision on toproduce or to outsource.

E-Sourcing : Covers electronic methods for finding new suppliers and

establishing contracts.

Not only can e-sourcing save administrative time and money, it can

enable companies to discover new suppliers and to source more

easily from other countries.

E-Purchasing: Covers product selection and ordering.

Buying and selling online streamlines procurement and reduces

overheads through spending less on administration time and

cutting down on bureaucracy. E-purchasing transfers effort from a

central ordering department to those who need the products.

E-Payment : Includes tools such as electronic invoicing and

electronic funds transfers.

Again, e-payment can make the payment processes more efficient

for both the purchaser and supplier, reducing costs and errors

that can occur as a result of information being transferred

manually from and into their respective accounting systems.



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Information Technology– A Source of Competitive Advantage

If it is identified which generic strategy an organisation is presently following to promote their

products and/or services, it should be possible to define a role for IS to improve that strategy.

▪ Overall cost leadership:

✓ The basic objective of this strategy is to outperform competitors industry-wide in terms of

product cost. Therefore, the managerial attention is on cost reduction for this strategy.

✓ For example, driving down inventory levels, with the assistance of IT, can reduce costs.

▪ Differentiation-.

✓ This strategy needs an exclusive position in an industry through providing value to customers

that cannot be offered by any competitor.

✓ The possible areas of differentiation range from technology to brand image and distribution

networks. A way of differentiating may be to make the ordering process smooth as far as

possible. This can be done by providing on-line information services followed up by a simple

on-line ordering process.

▪ Focus:

✓ A particular buyer group can be targeted specifically by market segmentation. Superior

competitive position can be attained through both lower cost and/or differentiation.

✓ The opportunities for IS/IT include providing access to customer information, trends, and

competitors to gain competitive thrust and exclude competitors.

Downstream Supply Chain Management

Management of transactions with consumers or customers are termed as downstream supply

chain management.

Contents

1] Relationship Marketing - Six Markets Model

2] Customer's Relationship Management

• Analysis of Customers and their Behaviour

• Customers Account Profitability (CAP)

• Customers Lifetime Value (CLV)

• Customer’s Selection,

• Acquisition, Retention and Extension

3] Use of Information Technology

4] Brand Strategy



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[1] Relationship Marketing

✓ Marketing plays a vital role to successfully handle the downstream supply chain management.

✓ The Relationship marketing helps the organization to keep existing customer and to attract

new customers through helpful staff, quality service / product, appropriate prices and proper

customer care etc.

✓ Six Markets Model identifies the six key “market domain” where organizations may consider

directing their marketing activities.

1. Customer Market:

✓ This market contains buyer, intermediates, final customers and retailers.

✓ Some companies serve the consumer of the product directly - but for others, there is a

supply chain between them and the consumer that includes wholesalers and retailers, whose

needs and interests must be served, and whose cooperation is necessary in reaching consumers

(more on this in "the alliance market'). It's also noted that a customer of a brand will not use

a single channel, but may use multiple channels to purchase the brand.

✓ For each channel, the customer has different expectations, the participants have different

needs, and the competitors in the channel may be different.

2. Influence Market:

✓ Influence market includes stakeholders as well as third parties.

✓ Customers who have bought our product must give feedback to their friends, relatives and

neighbours, for any organization these customers are their influencers

✓ When third party like supply partners and retailers influence our customer to buy our

product, they are called value added influencers. They may be TV reporters, Shopkeeper, Article

writers, analysts etc.



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3. Referral Market:

✓ Referral marketing is when we buy something after being referred by our friends and

relatives.

✓ In general we can understand this term as “Word of Mouth”.

✓ In case of Service Marketing, Referral marketing is very common. We can also find this in

our daily life. We can get hundreds of advises when we look for a doctor. Everyone in our family

would suggest a different Physician. So this is what Referral Marketing is.

4. Supplier Market:

✓ Suppliers are like partners to an organization. They do supply the crucial raw materials and

parts. We need to develop an strategic alliance with them.

5. Employee/Recruitment Market:

✓ Firms have to manage its relationships with recruitment markets such as commercial

recruitment agencies, universities and institutes in order to have access to potential employees

who possess the required skills for the job position.

6. Internal Market:

Internal markets include internal departments and staff.

The six markets model suggests that a firm must regulate its actions towards developing

appropriate relationships with each of the market areas as the management of relationships in

each of the six markets is critical for the attainment of customer retention objective.

[2] Customers Relationship Management

✓ Relation includes relations with customers, assisting in customer retention and driving sales

growth.

✓ Remember one satisfied customer brings five new customers with him where as one

dissatisfied customer takes away ten customers along with him.

✓ CRM is knowing the needs of the customers and providing them with best possible solution.



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Analysis of Customers and their Behaviour

✓ Analysis of customers is necessary based on geographical location or purchasing characteristics.

✓ For industrial customer expectation of benefits - quality, discount, serviceability, size of the

should be taken into consideration.

✓ During such analysing process, management should keep in mind the physiological need, safety

need, social need, status/ ego need and self-fulfillment need of existing and future customers.

Customers Account Profitability (CAP)

✓ Most firms today understand the source of their revenues but unfortunately, do not

understand the source of profits.

✓ What firms fail to do is measure profit at the most meaningful and controllable level, the

customer level.

✓ Customer Profitability Analysis is best conducted with a technique known as Activity Based

Costing or ABC analysis. The net profit coming from each customer which can be calculated by

revenue less costs done by this tool. These costs are not only manufacturing and distribution

costs but also sales costs, marketing costs, services cost and any other related costs which have

to be undertaken to service the customer.

Customers Lifetime Value (CLV)

✓ Customer Life time value is the present value of net profit that we derive from a customer

over the entire lifetime of relationship with that particular customer. It is an essential tool

used in marketing to focus on more profitable customers and stop servicing non-profitable

customers.

✓ First of all, we need to ascertain the profits generated from each customer. ABC model

helps in associating direct costs and revenues to a particular customer over a period of time to

ascertain the profit margins from that particular customer.

✓ To ascertain the lifetime value, judgments with regards to the duration of relationships have

to be made. These require detailed analysis of the strength of relationships, the likelihood,

frequency and amount of repeated or additional purchases, competitive products, customer

loyalty etc.

✓ Thus, profit margins are then discounted at the firm’s cost of capital or any other rate

that may be determined by the organisation to arrive at the CLV.



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[3] The use of Information Technology in Downstream Supply Chain Management

✓ In managing downstream supply chain, organizations link their sales system to the purchasing

system of its customer through Electronic Data Change.

✓ Using E-Business, they sale products.

✓ Intelligence gathering is used to monitor the online customer transactions. E-mail is the way

through which organization keeps touch with customers.

✓ Use of IT results in quick action, reduction in associated cost and saving in time.

[4] Brand Strategy

Specially branding of product makes a huge difference in its appeal to customers. Branding can

be usage of logo or specific colour or any other means which makes the product or service

distinctively visible among others.


SCMPE Chapter 2

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