SCM- Basics

Supply Chain Management [SCM] 1

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 general
Operating process of organizations with examples
from day to day activities.

SCM-LN-060213

Operation of an Organization

Rando m Fluc tuatio ns
Inputs
Late Deliveries
[Trans fo rme d
Re s o urc e s ] Staff Turnover

3. Mate rials Pow / Equipm failure
er ent Exte rnal
Pro duc ts
4. Info rmation
5. Cus to me rs
The
Trans fo rmatio n Outputs Cus to me rs
Pro c e s s
1. Fac ilitie s
2. Ene rg y &
Utilitie s S e rvic e s Inte rnal
3. Technology Government
4. Staff
Regulations etc.
Inputs
Enviro nme nt
[Trans fo rming
A g e ne ral Input – Transformation Process–
Re s o urc e s ]
Output Ope ratio ns mo de l


Process of buying / purchasing Products

Computer
Raw material
Supplier
Computer Show Room
Distributor Customer
Manufacturer [Retailer]
Component
Supplier

Toilet Soap

Raw material Soap Supermarket
Distributor Customer
Supplier Manufacturer [Retailer]

Fuel

Crude Oil Refinery Petrol/Diesel Pump
Customer
Supplier [Manufacturer] [Retailer]


Process of buying / purchasing Services

Vehicle Repair
Raw material
Supplier
Vehicle Spares Service Centre
Customer
Manufacturer Distributor [Retailer]
Component
Supplier
Pest Control

Maintenance
Raw material Pest control products Pest control products
Supplier Distributor
Company Customer
Manufacturer [Retailer]

Electricity Home
Water Customer
[Nature]
Generating Station Distribution Company Commercial
[Producer] [Retailer] Customer
Fuel
Supplier Industrial
Customer


Supply
The Customer expects that there will be supply of
Products / Services whenever the need arises.

-Definition of Supply [APICS Dictionary 11th edition]
1] The quantity of goods available for use

2] The actual or planned replenishment of product
or component. The replenishment quantities are created
in response to demand for the product or component or in
anticipation of such a demand.

What is a Supply Chain?
Customer wants
P&G or other Jewel or third Jewel
detergent and goes
manufacturer party DC Supermarket
to Jewel

Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)


Supply Chain
The buying process begins with customer order and ends when the
satisfied customer pays for the product / service. It has the following typical
entities / stages:

•Customers
•Retailers
•Wholesalers / Distributors
•Transporters
•Manufacturers / Producers
•Component / Raw material Suppliers
These entities are connected to each other along a chain. Hence the name
Supply Chain system.

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 the
performance of an organization depends not only on its own performance
but 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. Cooperation
among firms is a must.
Supply chain success should be measured in terms of supply chain
profitability and not in terms of profit at an individual stage.

Supply Chain Basic
Supply Chain Model
Information Flow

Return of Product Return of Product

Supplier Producer Customer

Primary Product Flow Primary Product Flow

Primary Cash Flow

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

• Flow of physical materials and services from suppliers through
intermediate entities to customers
• Flow of Cash from customer through intermediate entities to supplier
• Flow of Information back and forth along the chain
• Reverse flow of products returned for replacement, repairs, recycling, or
disposal


Supply Chain
Organizations:
•Supplier – materials / energy / services / components
•Producer – finished products / services
•Retailer – receives finished products and delivers to
customers

Flows that connect the entities:
•Physical materials / services
•Cash from customer
•Information – back and forth
•Reverse flow of products – repair / recycling / disposal /
replacement


Definition of Supply Chain
The global network used to deliver products and
services from raw materials to end customers through
an engineered flow of Information, Physical Distribution
and Cash. [APICS Dictionary 11th edition]
•SC involves directly or indirectly, everyone and everything
required to deliver products and services from raw materials to end
customers
•SC includes Customers, Retailers, Wholesalers / Distributors,
Transporters, Manufacturers / Producers, Component / Raw material
Suppliers
•SC can be viewed as processes – marketing data analysis, invoicing,
shipping, order processing cutting across entities
•Outside stakeholders – government, public at large, trade associations,
universities, competitors etc.


Supply Chain Management
The design, planning, execution, control
and monitoring of supply chain activities
with the objective of creating net value,
building a competitive infrastructure,
leveraging world wide logistics,
synchronizing supply with demand and
measuring performance globally.
[APICS dictionary 11th edition]

Some more definitions of SCM
Oliver and Webber (1982) – SCM covers the flow of goods from supplier through
manufacturing and distribution channels to end user.

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

Ellram (1991) – An integrative approach to dealing with the planning and control of the
materials 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 that
produce 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 for
satisfaction 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.


A generalized SC Model
Distribution Tier 2
Distribution Tier 1
Retailer Customer
Raw Materials

Supplier Supplier
Distributor Retailer Customer
Tier 2 Tier 1

Manufacturer

Supplier Supplier
Tier 2 Tier 1 Distributor Retailer Customer

Components
Retailer Customer

Supply Chain Management [SCM] 10A
Types of Supply Chain
1 – Horizontal (lateral) integration
The stages of SC [Physical Supply, Manufacturing & Physical] are
carried 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.
Ownership
Management What Ford practised. Later divested.
Marketing / Sales
Finance

Show Room Ford Customer

Distribution

Plant
Now horizontal integration
Component Production
is the favoured approach.
Raw material Extraction


Evolution of Supply Chain Management

Stage 1 – Multiple Dysfunction

Purchasing Marketing / Sales Customer
Supplier

Supplier Production Control Customer

Supplier Logistics Distribution Customer

Materials / Service Payments

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



Stage 2 – Semi functional Enterprise

Information

Supplier Customer
Production Marketing /
Purchasing Logistics Distribution
Control Sales
Supplier Customer


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



Stage 3 – Integrated Enterprise

ERP

Supplier Customer
Production Marketing /
Purchasing Logistics Distribution
Control Sales
Supplier Customer


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).


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 Implication
Marketing - High revenue High
- High Product Availability Customer Service
Low
Production - Low Production Cost Many
- High Level Production Production Disruption
- Long Production Run Few
Finance - Low Investment and Cost High
- Fewer Fixed Costs Inventories
- Low Inventories Low



Stage 4 – Extended Enterprise

Networked Information Flow

Suppliers’ Internal Customers’
Suppliers Customers
Suppliers Chain Customers


Integration of internal network with selected SCM partners’ internal network to improve
efficiency, quality of products / services.

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 the
customer’s request
• Value is correlated to supply chain profitability
(difference between revenue generated from the
customer and the overall cost across the supply
chain)

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 of
these 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 an
individual stage


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 SC
expends in fulfilling the customer needs. Correlated with SC Profitability (SCP).
SCP = Revenue generated – Overall cost across SC
Value depends on the product’s 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.


Creating Value through Supply Chain Management
Financial Value
• Cost Reduction may be self defeating
• Gains must be equitably distributed
Customer Value
• Quality
•Affordability
•Availability
•Service
Social value
•Socially Desired and useful product / service
•Avoiding or reducing negative environmental side effects of activities such
as extraction, processing and construction

The Objective of a Supply Chain
• Sources of supply chain revenue: the customer

• Sources of supply chain cost: flows of
information, products, or funds between stages
of the supply chain

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


Importance / Benefits of SCM
•To achieve economies of scale and scope – Costs
are significant
•To improve business focus and expertise
•Customer Expectations are increasing
•Supply and Distribution Lines are lengthening with
complexity
•Adds Significant Customer value
•Customers Increasingly Want Quick & Customised
Response


•To achieve economies of scale and scope – Costs are
significant
Internal SC functions lack economies of scale when compared with
the potential capacity of an independent provider of the same product /
service.
Eg: Computer Monitor / Chip / Hard drive
Attractive pricing – volume leverage.
•To improve business focus and expertise
Vertical integration multiplies the complexities of managing
disparate businesses. An independent company that focuses entirely on
a particular business can develop more expertise than an in-house
department
Ford divested their Iron Ore company, Steel Mill etc
Higher Quality, Attractive Pricing or both


•Customer 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 greater
complexity
- 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 and
cvosts


•Adds significant Customer Value
- A product or service is of no value to the customer, if not available
when required
Goods customers want are not produced where they want to consume
OR goods are not accessible when customers want to consume

Value Through Responsibility
Form Converting raw materials Engineering &
and components to the Manufacturing
required Form, Fit &
Function
Time Production scheduling & Manufacturing & Logistics
moving
Place Moving & making Engineering & Logistics
transportable
Possession Advertising, Pricing, Marketing, Finance &
Technical Support Engineering



•Customers Increasingly want Quick Customised Response
- Customers expect that products / services can be made available
in shorter times. Guided by Fast Food, ATM, E-Mail etc.
- Improved IS and flexible manufacturing processes have led to
mass customisation

- One Size Fit all philosophy is not appreciated always
- Manufacturers / Suppliers are offering products that meet
individual needs

Decision Phases of a Supply Chain

• Supply chain strategy or design
• Supply chain planning
• Supply chain operation

Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and
what 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 market
uncertainty

Supply Chain Planning
• Definition of a set of policies that govern
short-term operations
• Fixed by the supply configuration from
previous phase
• Starts with a forecast of demand in the
coming year

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
the time horizon

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 delivery
schedules, place replenishment orders
• Much less uncertainty (short time horizon)

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 SC
stages and combine to fulfil a customer need for a product / service. These processes are
divided into a series of cycles (cyclic view), each performed at the interface between two
successive stages / entities of SC.
Cycles Stage/Entity
Customer Customer Arrival Customer Order Receiving
Customer Order
Cycle Customer Order Entry Customer Order Fulfilment

Retailer
Replenishment Retail Order Trigger Retail Order Receiving

Cycle
Retail Order Entry Retail Order Fulfilment

Distributor
Order Arrival from D/R/C Receiving by D/R/C
Manufacturing
Cycle
Production Scheduling Manufacturing & Shipping
Manufacturer
Procurement Order from Manufacturer Receiving at Manufacturer

Cycle
Supplier Supplier Prodn Scheduling RM / Comp. Mfg & Shipping

Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives


Process View of a Supply Chain: Push – Pull View
LL Bean DELL

PULL PULL

Process Process

Customer Order
Cycle
Cust Order & Mfrg
Customer order arrives Cycle

Repl & Mfrg
Cycle
Customer order arrives

Procurement Procurement
Cycle Cycle

PUSH PUSH
Process Process

Supply Chain Macro Processes in a Firm

SRM ISCM CRM

•Source •Strategic planning •Market
•Negotiate •Demand planning •Sell
•Buy •Supply planning •Call centre
•Design Collaboration •Fulfilment •Order
management
•Supply Collaboration •Field service

Purchasing Manufacturing Marketing

Supplier selection Production planning Generate demand
Supplier evaluation Storage planning Facilitate
New orders Demand-Supply placement
planning Track orders

5.4. Supply Chain Drivers

• Drivers of supply chain performance
• A framework for structuring drivers
• Facilities
• Inventory
• Transportation
• Information
• Obstacles to achieving fit

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

A Framework for Structuring Drivers

Efficiency Responsiveness

Supply chain structure

Facilities Transportation Inventory Information

Drivers

Supply Chain Decisions: Structuring
Drivers

Strategy
(Design)

Planning

Operation

Facilities
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities
(responsiveness priority)
• Example 3.1: Toyota and Honda
• Components of facilities decisions

Components of Facilities Decisions
• Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other factors to consider (e.g., proximity to customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused
versus process focused)
• Warehousing methodology (SKU storage, job lot
storage, cross-docking)
• Overall trade-off: Responsiveness versus
efficiency

Inventory


• Components of inventory decisions

Inventory: Role in the Supply Chain
• Inventory exists because of a mismatch between
supply and demand
• Source of cost and influence on responsiveness
• Impact on
– material flow time: time elapsed between when material enters
the supply chain to when it exits the supply chain
– throughput
• rate at which sales to end consumers occur
• I = RT (Little’s Law)
• I = inventory; R = throughput; T = flow time
• Example
• Inventory and throughput are “synonymous” in a supply chain

Inventory: Role in Competitive
Strategy
• If responsiveness is a strategic
competitive priority, a firm can locate
larger amounts of inventory closer to
customers
• If cost is more important, inventory can be
reduced to make the firm more efficient
• Trade-off
• Example 3.2 – Nordstrom

Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments
– 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 flexible
production
• Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness

Transportation


• Components of transportation decisions

Transportation: Role in
the Supply Chain

• Moves the product between stages in the
supply chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities

Transportation:
Role in the Competitive Strategy
• If responsiveness is a strategic competitive
priority, then faster transportation modes can
provide greater responsiveness to customers
who are willing to pay for it
• Can also use slower transportation modes for
customers whose priority is price (cost)
• Can also consider both inventory and
transportation to find the right balance
• Example 3.3: Laura Ashley

Components of
Transportation 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

Information


• Components of information decisions

Information: Role in
the Supply Chain
• The connection between the various
stages in the supply chain – allows
coordination between stages
• Crucial to daily operation of each stage in
a supply chain – e.g., production
scheduling, inventory levels

Information:
Role in the Competitive Strategy
• Allows supply chain to become more
efficient and more responsive at the same
time (reduces the need for a trade-off)
• Information technology
• What information is most valuable?
• Example 3.4: Andersen Windows
• Example 3.5: Dell

Components of Information Decisions

• Push (MRP) versus pull (demand information
transmitted 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

Considerations for
Supply Chain Drivers
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /
Dedicated Flexibility
Information What information is best suited for
each objective

Obstacles to Achieving
Strategic Fit

• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies

Major Obstacles to Achieving Fit
• Multiple owners / incentives in a supply
chain

Local optimization and lack of global fit

• Increasing product variety / shrinking life
cycles / customer fragmentation
Increasing implied uncertainty

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