scm- basics

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

Operation of an Organization

The Transformation

Process

Outputs

Inputs

[Transformed Resources]

1. Materials

2. Information

3. Customers

1. Facilities

2. Energy & Utilities

3. Technology4. Staff

Inputs

[Transforming Resources] A general Input – Transformation

Process– Output Operations model

Products

Services

Customers

Government

Regulations etc.

Environment

External

Internal

Random Fluctuations

Late Deliveries

Staff Turnover

Power / Equipment failure


Process of buying / purchasing Products

Raw material Supplier

Component Supplier

Computer Manufacturer

DistributorShow Room

[Retailer]Customer

Computer


Soap Manufacturer

DistributorSupermarket

[Retailer]Customer

Toilet Soap

Crude Oil Supplier

Refinery [Manufacturer]

Petrol/Diesel Pump[Retailer]

Customer

Fuel


Process of buying / purchasing Services


Component Supplier

Vehicle Manufacturer

SparesDistributor

Service Centre[Retailer]

Customer

Vehicle Repair


Pest control products Manufacturer

Pest control productsDistributor

Maintenance Company[Retailer]

Customer

Pest Control

Water [Nature]

Generating Station[Producer]

Distribution Company[Retailer]

HomeCustomer

Electricity

Fuel Supplier

CommercialCustomer

IndustrialCustomer


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 wantsdetergent and goes

to Jewel

Customer wantsdetergent and goes

to Jewel

JewelSupermarket

JewelSupermarket

Jewel or thirdparty DC

Jewel or thirdparty DC

P&G or othermanufacturerP&G or othermanufacturer

PlasticProducer

PlasticProducer

Chemicalmanufacturer

(e.g. Oil Company)


(e.g. Oil Company)

TennecoPackagingTenneco

Packaging

Paper Manufacturer

Paper Manufacturer

TimberIndustryTimber

Industry


(e.g. Oil Company)


(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

1. Flow of physical materials and services from suppliers through intermediate entities to customers

2. 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


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

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

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.

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


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



Stage 2 – Semi functional Enterprise


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

Purchasing LogisticsProduction

ControlMarketing /

SalesDistribution

Supplier

Supplier

Customer

Customer

Information



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 LogisticsProduction

ControlMarketing /

SalesDistribution

Supplier

Supplier

Customer

Customer

ERP


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 Product Availability

High

Customer Service

Low

Production - Low Production Cost

- High Level Production

- Long Production Run

Many

Production Disruption

Few

Finance - Low Investment and Cost

- Fewer Fixed Costs

- Low Inventories

High

Inventories

Low



Stage 4 – Extended Enterprise


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

Suppliers’Suppliers

SuppliersInternalChain

CustomersCustomers’Customers

Networked Information Flow

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


Importance / Benefits of SCM•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


Importance / Benefits of SCM•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


Importance / Benefits of SCM•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 and components to the required Form, Fit & Function

Engineering & Manufacturing

Time Production scheduling & moving

Manufacturing & Logistics

Place Moving & making transportable

Engineering & Logistics

Possession Advertising, Pricing, Technical Support

Marketing, Finance & Engineering


Importance / Benefits of SCM

•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.

Customer Order

Cycle

Replenishment

Cycle

Manufacturing

Cycle

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

Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES


Customer Order

Cycle

Repl & Mfrg

Cycle

Procurement

Cycle

PUSH Process

PULL

Process

LL Bean

Cust Order & Mfrg

Cycle

Procurement

Cycle

PUSH Process

PULL

Process

DELL

Customer order arrives

Customer order arrives

Process View of a Supply Chain: Push – Pull View

Supply Chain Macro Processes in a Firm

SRM ISCM CRM

•Source

•Negotiate

•Buy

•Design Collaboration

•Supply Collaboration

•Strategic planning

•Demand planning

•Supply planning

•Fulfilment

•Field service

•Market

•Sell

•Call centre

•Order management

Generate demandFacilitate placementTrack orders

Production planningStorage planningDemand-Supply planning

Supplier selectionSupplier evaluationNew orders

MarketingManufacturingPurchasing

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

Facilities Transportation Inventory Information

Supply chain structure

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

• Role in the supply chain

• Role in the competitive strategy

• 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 inthe 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 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

Information



• Components of information decisions

Information: Role inthe 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 forSupply Chain Drivers

Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation /Dedicated

Proximity /Flexibility

Information What information is best suited foreach 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

• Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty

Local optimization and lack of global fit

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