Supply Chain Management Chapter 1: Introduction Supply Chain Management is the integration of business processes from end user through original suppliers.

Supply Chain Management

Chapter 1: Introduction

• Supply Chain Management is the integration of business processes from end user through original suppliers that provides products, services and information that add value for customers

• Channels develop when many exchanges take place between producers and consumers

• Supply chain the alignment of firms that bring products or services to market

Chapter 2: What is Channel Distribution?

• A channel of distribution can be defined as the collection of organizational units which perform the function that support product marketing

• Include buying, selling, transporting, storing, grading, financing, bearing market risk and provide marketing information

Chapter 2: Why Do Channels of Distribution Develop?

1. The Evolution of Marketing Channels

• Marketing channels develop because intermediaries (e.g., wholesalers and retailers) make the marketing process more efficient by reducing the number of market contact

• Intermediaries provide possession, time and place utility

1 2 3 4 5 6 7 8 9 10

14 market contracts

1 2 3 4 5 6 7 8 9 10

1 2 3 4Supplier

Customer

40 market contracts

A. Direct selling

1 2 3 4Supplier

Customer

B. Selling through one intermediaries

Intermediaries

2. The Discrepancy of Assortment and Sorting

• The assortment of goods and services held by a producer and the assortment demanded by the customer often differ

• The primary function of channel intermediaries is to adjust this discrepancy by performing the “sorting” process

• Sorting out grouping a heterogeneous supply into relatively homogeneous stocks

• Accumulating Bringing similar stocks together into a larger homogeneous supply

• Allocation Breaking down a homogeneous supply into smaller lots.

• Assorting Building up the assortment of products for use or sale in association with each other

3. Routinization of Transactions

• Marketing agencies form channel arrangements to make transactions routine

• The cost of distribution can be minimized if transactions are routine

• Logistics operations can be made more efficient by using the same processes

4. Searching Through Marketing Channels

• Channels facilitate the searching process by consumers

• Buyer and seller engage in a process in which consumers try to satisfy their consumption needs and producers attempts to predict those needs

• If the searching process is successful, allocation and assorting will take place, resulting in benefits to both the consumer and producer

• Marketing channels facilitate the process of searching when institutions organize by provide information to their markets

Chapter 3: Channel Structure

The purpose of the channel is to provide consumers with the desired combination of its outputs at minimal cost

1. Outsourcing

• Outsourcing represent an opportunity that a firm should consider in its supply chain design and evaluation of existing channels

• In addition, the role and utility of the distributor is changing

Example of available outsourcing services;

A large pharmaceutical company will outsource its worldwide distribution, providing on-site pharmacist at some centers to dispense high-value products.

A third party handles the entire finished goods inventory for a large women’s clothing company. When garments are purchased by a retailer, the distributor attaches the store’s private label, refreshes the garment, packs it in the store’s packaging, and ship it to the retailer.

A mail-order retailer is having federal express handle not only its shipments, but storage and management of the inventory in all aspects of distribution.

Chapter 3: Channel Structure

2. Postponement and Speculation

a) Postponement – results in savings because it moves differentiation nearer to the time of purchase, when demand is more easily forecast.Costs can be reduced by;

• Postponing changes in the form and identity of a product to the last possible point in the marketing process

Chapter 3: Channel Structure

Example of Postponement

• An excellent example of postponement is the mixing of paint colors at the retail store. Instead of having to forecast the exact colors that consumers will want to buy, the retailer mixes paint in any color the consumer wisher at the time of purchase.

• Other example include the color panels in the front or built-in kitchens; the centralization of slow-selling products in one warehouse location; and the assembly of slow-moving items only after orders have been received.

Chapter 3: Channel Structure

2. Postponement and Speculation

b) Speculation – is the opposite of postponement; that is a channel institution assumes risk rather than shifting it.Speculation can reduce marketing costs through;

• Economies of large-scale production• Placement of large orders that reduce the

costs of order processing and transportation.• Reduction of stock outs and their associated

costs.• Reduction of uncertainty.

Chapter 3: Channel Structure

3. Time to Market Pressures

• “Speed” can be used as a source of competitive advantage

• Retailers relying heavily on advanced computer systems involving bar coding and EDI to support quick response

• Benefits of effective time-based management include;i. Improved customer service through better

responsivenessii. Reduced inventory requirements due to shorter

lead timesiii. Improved quality through reduced handling and

lower inventoriesiv. Faster throughputv. Reduced supply chain cost

Chapter 4: Considerations of Channel Design

1. Market Coverage Objectives

i. Customer Buying Behavior • The buying motives of potential customer segments

must be determined in order to select intermediaries who can perform the selling function most efficiently and effectively

• Industrial marketers also must identify potential user and determine how these consumers will make the purchase decision

Chapter 4: Considerations of Channel Design

ii. Type of Distribution

• Intensive distribution the product is sold to as many appropriate retailers

or wholesalers as possible

• Selective distribution the number of outlets that may carry a product is

limited, but not to extent of exclusive dealing

• Exclusive distribution When a single outlet is given an exclusive franchise

to sell the product in a geographic area

Chapter 4: Considerations of Channel Design

iii. Channel Structure

• With customer requirements and the type of distribution determined, managements must select channel institutions.

• The increased use of scrambled merchandising has made this task somewhat more difficult

• For example, grocery stores have added non-grocery products like pots and pans, children’s toys, hardware items, and in some cases television sets to improve margins and profitability.

Chapter 4: Considerations of Channel Design

2. Product Characteristics

Nine product characteristics should be analyzed by the channel designer:

i. Product valueii. Technicality of the product.iii. Degree of market acceptance iv. Degree of substitutability v. Product bulk vi. Product perish ability vii. Degree of market concentration viii. Seasonality ix. Width and depth of the product line

Chapter 4: Considerations of Channel Design

3. Customer Service Objectives

CS usually measured in terms of;

i. Level of product availability

ii. Speed and consistency of the customer’s order cycle

iii. Communication that takes place between seller and customer

• Order status• Order confirmation• Product shortages• Product information request

Chapter 4: Considerations of Channel Design

4. Profitability

i. Management must estimate variable manufacturing costs for different levels of activity and variable marketing and logistics costs (e.g., sales commissions, transportation, warehousing and order processing) along with accounts receivable

ii. Management should add to each channel alternative the assignable non-variable costs incurred for each segment, including bad debts, sales promotion, salaries and inventory carrying costs

Chapter 5: Channel Performance Measurement

1. Potential Qualitative Measures

i. Qualitative measures that managers may use when reevaluating the channel of distribution and specific channel members include degree of channel coordination, degree of channel conflict, and availability of information as needed

ii. the best measure of channel performance is profitability.

2. Cost Trade-Off Analysis

i. A manufacturer with poor product availability and inconsistent order cycle times may force wholesalers to carry more inventory as safety stock in order to offer an acceptable level of service to the retailers

ii. In order processing, for example, by replacing an outdated order processing and information system with advanced technology, a firm may be able to achieve some or all of the following;

• Increased customer service levels • Lower inventories• Speedier collections• Decreased transportation costs• Lower warehousing costs• Improvement in cash flow• High return on assets

14 Key Pitfalls of SCM

No supply chain strategy

Inadequate definition of customer service

Inaccurate delivery status data

Inefficient information systems

Ignoring the impact of uncertainties

Simplistic inventory stocking policies

Discrimination against internal customers

Poor coordination

Incomplete analysis of shipment methods

Incorrect assessment of inventory costs

Organizational barriers

Product-process design without supply chain consideration

Separation of supply chain design from operational decisions

Incomplete supply chain strategy

Ways to Overcome SCM

Pitfalls

The design of the product or service should

give consideration

to the cost and

implications for the

existing or proposed

supply chain

Database should be integrated throughout the supply chain to ensure

operational control

The integration of control and

planning support system

Supply Chain members

should embrace the

system approach with the realization

that each member’s

activity have an impact on

the others

Redesign the incentives, so

that individuals,

divisions and sites are

rewarded for taking a

system wide

Key Supply Chain Processes Identified at

3MDelivering Order on time, in full and

correctly

Demand management.

Order fulfillment.

Manufacturing flow management.

Procurement.

Customer Relationship Management

Product development and commercialization.

Customer service management

Chapter 6: Processes of Integrated Supply Chain Management

Requirements for Successful Supply Chain Management

Executive support, leadership, and commitment to

change.

An understanding of the degree of change

necessary.

Agreement on the SCM vision and key

processes.

The necessary commitment of resources and empowerment to achieve the stated goals.