National Conference on Recent Trends in ManagementOn 29th May, 2014

K. S. School of Engineering & Management

Title: A Study on Application of Supply Chain Management in PresentBusiness Organizations.

AuthorDepesh Banik

Student of MBA 1st Year, 2nd Semesterdepeshbanik@gmail,com

AIMS Institutes, Peenya, Bangalore.

Abstract

A supply chain is dynamic process and involves the constant flow of information, product, and

funds between different stages. The supply chain, which is also referred to as the logistics

network, consists of suppliers, manufacturing centers, warehouses, distribution centers, and retail

outlets, as well as raw materials, work-in-process inventory, and finished products that flow

between the facilities. We study supply chain because of three things, they are pervasiveness,

interdependence and profitability & survival. Pervasiveness means every organization must

make a product or provide a service that someone values. They follow value chain process.

Interdependence means most organizations functions as a part of larger chain. They are all

interrelated dependent on each other. Profitability and survival means organization must

carefully manage their operations and supply chain to prosper and to make profit indeed survive.

A properly functioning supply chain is a critical part of ensuring commodity security—

financing, policies, and commitment are also necessary. Effective supply chains not only help

ensure commodity security, they also help determine the success or failure of any business. Both

in business and in the public sector, decision makers increasingly direct their attention to

improving supply chains, because logistics improvements bring important, quantifiable benefits.

Well-functioning supply chains benefit business organizations s in important ways by increasing

program impact, enhancing quality of system, improving cost effectiveness and efficiency.

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Objective of the paper:

1. To understand the application of supply chain concepts in present organizations

2. To have an in depth understanding of how supply chain works in an organization.

3. To conduct a comparative analysis of the effects of supply chain process adaptations in an

organization.

However, the overall objective of this paper is to study and have an understanding as to how

supply chain management processes have adapted new ways to bring about desired changes to

contest with the ever changing competitive world. It is also to understand how these processes

helped an organization to increases their customer satisfaction and achieve overall profitability.

Research methodology:

It is a conceptual research study which is carried by through in depth understanding of various

literature reviews. The research has been carried out across various different renowned

companies those are following very sophisticated supply chain management processes where

supply chain professionals are interviewed through online questionnaire.

Key Words: Supply chain management, value chain process, logistics, efficiency and effectiveness.

Introduction

The practice of supply chain management is guided by some basic underlying concepts that have

not changed much over the centuries. Several hundred years ago, Napoleon made the remark,

“An army marches on its stomach.” Napoleon was a master strategist and a skillful general and

this remark shows that he clearly understood the importance of what we would now call an

efficient supply chain. Unless the soldiers are fed, the army cannot move. Along these same

lines, there is another saying that goes, “Amateurs talk strategy and professionals talk logistics.”

People can discuss all sorts of grand strategies and dashing maneuvers but none of that will be

possible without first figuring out how to meet the day-to-day demands of providing an army

with fuel, spare parts, food, shelter, and ammunition. It is the seemingly mundane activities of

the quartermaster and the supply sergeants that often determine an army’s success. This has

many analogies in business. The term “supply chain management” arose in the late 1980s and

came into widespread use in the 1990s.Prior to that time, businesses used terms such as

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“logistics” and “operations management” instead. 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, warehouses, retailers, and customers

themselves. Within each organization, such as manufacturer, the supply chain includes all

functions involved in receiving and filling a customer request.

What is Supply Chain?

Generally, a supply chain is the alignment of firms that bring products or services to market.

Broadly, a supply chain consists of all stages involved, directly or indirectly, in fulfilling a

customer request. The supply chain not only includes the manufacturer and suppliers, but also

transporters, warehouses, retailers, and customers themselves. A supply chain is a network of

facilities and distribution options that performs the functions of procurement of materials,

transformation of these materials into intermediate and finished products, and the distribution of

these finished products to customers.

Flows of Supply Chain

A supply chain is dynamic and involves the constant flow of information, product, and funds

between different stages. In our example, Wal-Mart provides the product, as well as pricing and

availability information, to the customer. The customer transfers funds to Wal-Mart. Wal-Mart

conveys point-of-sales data as well as replenishment order via trucks back to the store. Wal-

Mart transfers funds to the distributor after the replenishment. The distributor also provides

pricing information and sends delivery schedules to Wal-Mart. Similar information, material, and

fund flows take place across the entire supply chain. In another example, when a customer

purchases online from Dell Computer, the supply chain includes, among others, the customer,

Dell’s Web site that takes the customer’s order, the Dell assembly plant, and all of Dell’s

suppliers and their suppliers. The Web site provides the customer with information regarding

pricing, product variety, and product availability. Having made a product choice, the customer

enters the site to check the status of the order. Stages further up the supply chain use customer

order information to fill the order. That process involves an additional flow of information,

product, and funds between various stages of the supply chain.

Stages of Supply Chain

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A typical supply chain may involve a variety of stages. These supply chain stages include:

Customers

Retailers

Wholesalers/Distributors

Manufacturers

Component/Raw material suppliers

Importance of Supply Chain Management

1. Start with key suppliers and move on to other suppliers

2. Similar protocol for customers and shippers as well

3 .Integrate second tier suppliers and customers. (Second tier refers to the customer’s (customers

and the supplier’s suppliers)

The Objective of a Supply Chain

Maximize overall value created

Supply chain value: difference between what the final products 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)

Sources of supply chain revenue: the customer

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

the supply chain.

Example:

Dell receives 30000/- from a customer for a computer (revenue)

Supply chain incurs costs (information, storage, transportation, components, assembly,

etc.)

Difference between 30000/- 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.

Benefits of Supply Chain Management

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Inventory, cost and personnel reduction

Productivity Improvement

High customer satisfaction

On time delivery fulfillment

Revenue/profit increase

Better cash and order management

Supply Chain Competitiveness

• Competitor

•Competition

•Competitiveness

Difficulty in Supply Chain Management:

1. Supply chain strategies cannot be determined in isolation. They are directly affected by

another chain that most organizations have, the development chain that includes the set of

activities associated with new product introduction.

2. It is challenging to design and operate a supply chain so that total system wide costs are

minimized, and system wide service levels are maintained. Indeed, it is frequently difficult to

operate a single facility so that costs are minimized and service level is maintained.

3. Uncertainty and risk are inherent in every supply chain; customer demand can never be

forecast exactly, travel times will never be certain, and machines and vehicles will break down.

Example

Supply Chain Competitiveness Toyota Way

“When Toyota developed Prius hybrid car, a core part of computer system, Insulated Gate

Bipolar Transistor had to be developed. Toyota was not good at semiconductors. But they decided

to develop and put up a new plant for Manufacture. Why? Toyota wanted ‘Self-reliance’ as this

Technology would lead to future and give them competitive advantage.

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Global optimization is made even more difficult because supply chains need to be designed for,

and operated in, uncertain environments, thus creating sometimes enormous risks to the

organization. A variety of factors contribute to this:

1. Matching supply and demand is a major challenge:

a. Boeing Aircraft announced a write-down of $2.6 billion in October 1997 due to “raw

material shortages, internal and supplier parts shortages and productivity inefficiencies . . .”

b. “Second quarter sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss

of $22 million.

c. “There are so many different ways inventory can enter our system it’s a constant challenge

to keep it under control” [Johnnie Dobbs, Wal-Mart Supply Chain and Logistics Executive].

d. “Intel, the world’s largest chip maker, reported a 38 percent decline in quarterly profit

Wednesday in the face of stiff competition from Advanced Micro Devices and a general

slowdown in the personal computer market that caused inventories to swell”.

2. Inventory and back-order levels fluctuate considerably across the supply chain, even

when customer demand for specific products does not vary greatly.

3. Forecasting doesn’t solve the problem. Indeed, we will argue that the first principle of

forecasting is that “forecasts are always wrong.”

4. Demand is not the only source of uncertainty. Delivery lead times, manufacturing yields,

transportation times, and component availability also can have significant supply chain impact.

5. Recent trends such as lean manufacturing, outsourcing, and offshoring that focus on cost

reduction increase risks significantly. With little uncertainty in transportation and a stable

supply schedule, parts can be delivered to assembly plants “just-in-time” based on fixed

production schedules.

Key Issues in Supply Chain Management

In this section, we introduce some of the supply chain management issues that these issues span

a large spectrum of a firm’s activities, from the strategic through the tactical to the operational

level:

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• The strategic level deals with decisions that have a long-lasting effect on the firm. This includes

decisions regarding product design, what to make internally and what to outsource, supplier

selection, and strategic partnering as well as decisions on the number, location, and capacity of

warehouses and manufacturing plants.

• The tactical level includes decisions that are typically updated anywhere between once every

quarter and once every year.

• The operational level refers to day-to-day decisions such as scheduling, lead time quotations,

routing, and truck loading.

Supply Chain Management: The Magnitude in the Traditional View

Estimated that the grocery industry could save $30 billion (10% of operating cost) by

using effective logistics and supply chain strategies.

A typical box of cereal spends 104 days from factory to sale.

A typical car spends 15 days from factory to dealership.

Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago

Supply Chain Management: The True Magnitude

Compaq estimates it lost $.5 billion to $1 billion in sales in 1995 because laptops were

not available when and where needed.

EXAMPLE

A Korean manufacturer of electrical products such as industrial relays is facing a service level of

about 70 percent; that is, only about 70 percent of all orders are delivered on time. On the other

hand, inventory keeps piling up, mostly of products that are not in demand. The manufacturer’s

inventory turnover ratio, defined as the ratio of the annual flow to average inventory at the

manufacturer’s main warehouse, is about four. However, in the electronics industry, leading

companies turn inventory over about nine times a year. If the Korean manufacturer can increase

its inventory turns to this level, it will be able to significantly reduce inventory levels. The

manufacturer is thus searching for new strategies that will increase service levels over the next

three years to about 99 percent and, at the same time, significantly decrease inventory levels and

cost.

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P&G estimates that it saved $65 million retail customers by collaboration resulting in a

better match of supply and demand.

Boeing Aircraft, one of America’s leading capital goods producers, was forced to

announce write- downs of $2.6 billion in October 1997.

Some Estimates for India

Logistics Spend … IN Rs. 2,40,000 crores (approx. US $ 50 Billion)

Share of GDP …….…… 12-13 %

Major Elements are ( Percentage of Total)

Transportation ……… 35%

Inventories ……… 25 %

Packaging ……… 11 %

Handling & Warehousing ….. 9 %

Others & Losses ……… 14 %

Supply Chain: The Potential

In 25 years, NDDB has enabled India to become the largest producer of milk by

implementing a logistics and supply chain system that has eliminated several

intermediaries, thereby leading to a much higher remunerative price (yield) for producers

and lower price for consumers.

As described in the FORBES magazine, the Dabbawalas of Mumbai has achieved an

extremely high level of reliability and precision (SIX SIGMA level in QA) in delivering

to their customers the products earmarked for them.

Dell Computer has outperformed the competition in terms of shareholder value growth

over the eight years period, 1988-1996, by over 3,000% using - Direct business model -

BTO (Build-to-Order) strategy.

In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the

highest sales per square foot, inventory turnover and operating profit of any discount

retailer.

Process View of a Supply Chain

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Cycle view: processes in a supply chain are divided into a series of cycles, each

performed at the interfaces between two successive supply chain stages

Push/pull view: processes in a supply chain are divided into two categories depending on

whether they are executed in response to a customer order (pull) or in anticipation of a

customer order (push) Each cycle occurs at the interface between two successive stages

Customer order cycle (customer-retailer)

Replenishment cycle (retailer-distributor)

Manufacturing cycle (distributor-manufacturer)

Procurement cycle (manufacturer-supplier)

Cycle view clearly defines processes involved and the owners of each process. Specifies

the roles and responsibilities of each member and the desired outcome of each process.

Push/Pull View of Supply Chain Processes

Supply chain processes fall into one of two categories depending on the timing of their

execution relative to customer demand

Pull: execution is initiated in response to a customer order (reactive)

Push: execution is initiated in anticipation of customer orders (speculative)

Push/pull boundary separates push processes from pull processes

The relative proportion of push and pull processes can have an impact on supply chain

performance.

Supply Chain Integration – Push Strategies

Classical manufacturing supply chain strategy

Manufacturing forecasts are long-range

Orders from retailers’ warehouses

Longer response time to react to marketplace changes

Unable to meet changing demand patterns

Supply chain inventory becomes obsolete as demand for certain products disappears

Supply Chain Integration – Pull Strategies

Production and distribution are demand-driven

Coordinated with true customer demand

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None or little inventory held

Only in response to specific orders

Fast information flow mechanisms

POS data

Decreased lead times, decreased variability in the supply chain and especially at

manufacturers and decreased manufacturer inventory

More efficient use of resources

More difficult to take advantage of scale opportunities

Supply Chain Macro Processes in a Firm

Supply chain processes discussed in the two views can be classified into

o Customer Relationship Management (CRM)- interface between the firm and its

customers

o Internal Supply Chain Management (ISCM) – internal to the firm

o Supplier Relationship Management (SRM) - interface between the firm and its suppliers

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 and locations and capacities of facilities

Products to be made or stored at various locations, modes of transportation and

information systems

Supply chain design must support strategic objectives and supply chain design decisions

are long-term and expensive to reverse – must take into account market uncertainty

Supply Chain Planning

Planning decisions which markets will be supplied from which locations

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Planned buildup of inventories and subcontracting, backup locations

Inventory policies and timing and size of market promotions

Must consider in planning decisions demand uncertainty, exchange rates, competition

over the Supply Chain Operation.

Time horizon is weekly or daily and 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

Areas of action in Supply Chain

Companies in any supply chain must make decisions individually and collectively regarding their

actions in five areas:

1. Production: What products does the market want? How much of which products should be

produced and by when?

2. Inventory: What inventory should be stocked at each stage in a supply chain? How much

inventory should be held as raw materials, semi-finished, or finished goods?

3. Location: Where should facilities for production and inventory storage be located? Where are

the most cost efficient locations for production and for storage of inventory?

4. Transportation: How should inventory be moved from one supply chain location to another?

Air freight and truck delivery are generally fast and reliable but they are expensive.

5. Information: How much data should be collected and how much information should be

shared? Timely and accurate information holds the promise of better coordination and better

decision making.

Drivers of Supply Chain

Each driver has the ability to directly affect the supply chain and enable certain capabilities. The

next step is to develop an appreciation for the results that can be obtained by mixing different

combinations of these drivers. Let’s start by looking at the drivers individually.

Production: Production refers to the capacity of a supply chain to make and store products. The

facilities of production are factories and warehouses. So the more excess capacity that exists, the

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less efficient the operation becomes. Factories can be built to accommodate one of two

approaches to manufacturing:

1. Product focus—A factory that takes a product focus performs the range of different operations

required to make a given product line from fabrication of different product parts to assembly of

these parts.

2. Functional focus— A functional approach concentrates on per- forming just a few operations

such as only making a select group of parts or only doing assembly.

A product approach tends to result in developing expertise about a given set of products at the

expense of expertise about any particular function. A functional approach results in expertise

about particular functions instead of expertise in a given product. As with factories, warehouses

too can be built to accommodate different approaches. There are three main approaches to use in

ware- housing:

1. Stock keeping unit (SKU) storage— in this traditional approach, all of a given type of product

is stored together. This is an efficient and easy to understand way to store products.

2. Job lot storage— in this approach, all the different products related to the needs of a certain

type of customer or related to the needs of a particular job are stored together.

3. Cross docking— an approach that was pioneered by Wal-Mart in its drive to increase

efficiencies in its supply chain. In this approach, product is not actually warehoused in the

facility.

Inventory: Inventory is spread throughout the supply chain and includes every- thing from raw

material to work in process to finished goods that are held by the manufacturers, distributors, and

retailers in a supply chain. There are three basic decisions to make regarding the creation and

holding of inventory:

1. Cycle Inventory—this is the amount of inventory needed to satisfy demand for the product in

the period between purchases of the product

2. Safety Inventory—Inventory that is held as a buffer against uncertainty. If demand forecasting

could be done with perfect accuracy, production of different products to respond to increases in

demand.

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Location: Location refers to the geographical siting of supply chain facilities. It also includes the

decisions related to which activities should be per- formed in each facility. When making

location decisions, managers need to consider a range of factors that relate to a given location

including the cost of facilities, the cost of labor, skills available in the workforce, infrastructure

conditions, taxes and tariffs, and proximity to suppliers and customers.

Pricing: Pricing is a cross functional drivers. It considers the cost of good, raw materials cost,

cost work in process or semi-finished goods, and cost of final goods etc.

Transportation: This refers to the movement of everything from raw material to finished goods

between different facilities in a supply chain. In transportation the trade-off between

responsiveness and efficiency is manifested in the choice of transport mode. There are six basic

modes of transport that a company can choose from:

1. Ship which is very cost efficient but also the slowest mode of transport.

2. Rail which is also very cost efficient but can be slow.

3. Pipelines can be very efficient but are restricted to commodities that are liquids or gases such

as water, oil, and natural gas.

4. Trucks are a relatively quick and very flexible mode of transport. Trucks can go almost

anywhere.

5. Airplanes are a very fast mode of transport and are very responsive.

6. Electronic Transport is the fastest mode of transport and it is very flexible and cost efficient.

Information: Information is the basis upon which to make decisions regarding the other four

supply chain drivers. It is the connection between all of the activities and operations in a supply

chain. Information is used for two purposes in any supply chain:

1. Coordinating daily activities related to the functioning of the other four supply chain drivers:

production; inventory; location; and transportation.

2. Forecasting and planning to anticipate and meet future demands. Available information is used

to make tactical forecasts to guide the setting of monthly and quarterly production schedules and

timetables.

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Example: Wal-Mart is a company shaped by its supply chain and the efficiency of its supply chain has

made it a leader in the markets it serves. Sam Walton decided to build a company that would serve a

mass market and compete on the basis of price. He did this by creating one of the world’s most efficient

supply chains. The structure and operations of this company have been defined by the need to lower its

costs and increase its productivity so that it could pass these savings on to its customers in the form of

lower prices. The techniques that Wal-Mart pioneered are now being widely adopted by its competitors

and by other companies serving entirely different markets. Wal-Mart introduced concepts that are now

industry standards. Many of these concepts come directly from the way the company builds and operates

its supply chain. Let’s look at four such concepts:

The strategy of expanding around distribution centers (DCs)

Using electronic data interchange (EDI) with suppliers

The “big box” store format

“Everyday low prices”

Understand the Markets Your Company Serves

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Conclusion:

A supply chain is composed of all the companies involved in the design, production, and

delivery of a product to market. Supply chain management is the coordination of production,

inventory, location, and transportation among the participants in a supply chain to achieve the

best mix of responsiveness and efficiency for the market being served. The goal of supply chain

management is to increase sales of goods and services to the final, end use customer while at the

same time reducing both inventory and operating expenses. The business model of vertical

integration that came out of the industrial economy has given way to “virtual integration “of

companies in a supply chain. Each company now focuses on its core competencies and partners

with other companies that have complementary capabilities for the design and delivery of

products to market. Companies must focus on improvements in their core competencies in order

Example:

Sunil Chopra is the IBM Distinguished Professor of Operations Management at Northwestern

University’s Kellogg School of Management and a director of the Masters of Management in

manufacturing program. He is also co-author of Supply Chain Management: Strategy, Planning, and

Operation, a definitive and widely recognized source book in the field. Wal-Mart and Dell Computers

are two companies that have risen to prominence using a business strategy that offers low prices as a key

selling point to their customers. This strategy requires that their sup- ply chains be highly efficient in

order to generate the cost savings needed to make a profit at the low prices they offer. Professor Chopra

has followed these two companies and offers an analysis of how they have aligned their supply chains to

support their business strategies. To begin with, he points out that Wal-Mart’s competitors opened stores

in ones and twos and used demographic data to select store sites. Wal-Mart took a supply chain

approach and would not even open a store in an area unless they determined that the area could support

a distribution center (DC) and a sufficient number of stores to gain scale economies at the DC. Then

they targeted specific business operations from which to get efficiencies. “Wal-Mart said 15 years ago

we are going to replenish our stores much more efficiently. They began to replenish stores two times a

week where their competition was replenishing two times a month. What this meant was that a Wal-Mart

manager only had to forecast for half a week and an equally capable store man- ager elsewhere had to

forecast sales and inventory needs for half a month—they couldn’t do as well.

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to keep up with the fast pace of market and technological change in today’s economy.

Competitors all use many of the same components to build their machines. If the market no

longer values customization and simply wants the best price on a standard machine, then the Dell

model doesn’t work as well. Build to stock and position inventory close to the customers via

retail stores becomes a better model.”There is no one right model for a supply chain. Markets

change and as they do, businesses need to reevaluate their business model and their strategy.

“Since a company’s supply chain has a great impact on its ability to execute its business model

successfully, that supply chain must always be adjusted as the business strategy changes.” To

succeed in the competitive markets that make up today’s economy, companies must learn to

align their supply chains with the demands of the markets they serve. Supply chain performance

is now a distinct competitive advantage for companies who excel in this area. One of the largest

companies in North America is a testament to the power of effective supply chain management.

Wal-Mart has grown steadily over the last 20 years and much, if not most, of its success is

directly related to its evolving capabilities to continually improve its supply chain.

References:

1. Chopra, Sunil and Peter Meindl. Supply Chain Management. 2 ed. Upper Saddle River:

Pearson Prentice Hall, 2004.

2. Lambert, Stock, and Ellram in their book Fundamentals of Logistics Management

(Lambert, Douglas M., James R. Stock, and Lisa M. Ellram, 1998, Fundamentals of

Logistics Management, Boston, MA: Irwin/McGraw-Hill, Chapter 14)

3. Supply Chain Management: Strategy, Planning, and Operations (Chopra, Sunil, and Peter

Meindl, 2001, Supply Chain Management: Strategy, Planning, and Operations, Upper

Saddle River, NJ: Prentice-Hall, Inc. Chapter 1).

4. Ganeshan and Harrison at Penn State University in their article An Introduction to Supply

Chain Management published at http://silmaril.smeal.psu.edu/supply_chain_intro.html

(Ganeshan, Ram, and Terry P. Harrison, 1995,“An Introduction to Supply Chain

Management,” Department of Management Sciences and Information Systems, 303

Beam Business Building, Penn State University, University Park, PA).

5. The reason? “Raw material shortages, internal and supplier parts shortages…” (Wall

Street Journal, Oct. 23, 1997)

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6. Cavinato, Joseph L. 2002. “What’s your supply chain type?” Supply Chain Management

Review (May-June); 60-66.

7. Fisher, Marshall L. 1997. “What is the right supply chain for your product?” Harvard

Business Review (March-April) : 83-93.

8. Magretta, Joan. 1998a “Fast, Global, and Entrepreneurial: Supply Chain Management,

Hong Kong Style”. Harvard Business Review (September-October): 102-114.

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