Supply Chain Management

Understanding the Supply

Chain

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 Outline
• What is a Supply Chain?
• Decision Phases in a Supply Chain
• Process View of a Supply Chain
• The Importance of Supply Chain Flows
• Examples of Supply Chains

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 What is supply chain?
- A supply chain consists of
Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream

Aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

Achieves

The right
Product
+ + + + +
The right
Price
The right
Store
The right
Quantity
The right
Customer
=
The right
Time
Higher
Profits

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 What is supply chain? (Continued)
• Customer is an integral part of the supply chain.
• Includes movement of products from suppliers to
manufacturers to distributors, but also includes
movement of information, funds and products in
both directions.
• Probably more accurate to use the term “supply
network” or “supply web”.
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell).
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 P &G Product (Detergent)
Manufacturer Wholesaler Retailer Customer
Detergent P&G or third P&G Customer wants
manufacturer party DC Supermarket detergent and goes
To Supermarket

Supplier Supplier Supplier

Plastics Packaging Chemical
Producer Firm Manufacturer
(e.g. Oil Company)

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

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 Dell Supply Chain

Direct Shipment
Master Board

Dell Assembly Website

Hard disk Customer wants
Plant or Phone To buy computer

Customer’s Order
SRAM

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Supply Chain Management: A Pictorial Representation

C1

C2

C3

C4

C5

C6

DISTRIBUTION OUTBOUND
VENDOR INBOUND PLANTS INTERFACILITY
CUSTOMERS
TRANSPORTATION CENTERS TRANSPORTATION
TRANSPORTATION

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 Historical Evolution of the Supply Chain
• First Revolution: (Ford Motor Co. 1910–1920)
 Single product, that is, no product variety
 Vertical integration

• Second Revolution: (Toyota Motor Co. 1960–1970)

 Wide Variety
 Long-term relationship with suppliers

• Third Revolution: (Dell Computers 1995–Current)

 Customized products
 Medium-term relationship with suppliers
 Suppliers have to maintain technology and cost leadership

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 The Objective 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).

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 What is SCM?
David, Kaminsky& Edith (2000) defined
SCM is a set of approaches to efficiently integrate
suppliers, manufacturers, warehouses, and stores,
so that merchandise is produced and distributed at
right quantities, to the right locations, and at the
right time, in order to minimize system-wide
costs while satisfying service level requirements.
Coming together is the beginning
Keeping together is the progress

Working together is the success

Henry Ford
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 Supply Chain Management: Success
Stories
• Dell: Inventory turn-over ratio of 58.7 compared to
industry average of 12 (Net Profitability of 5.3.%) (
Drop from 7.8% in 2006).

• Wal-Mart: Inventory turn-over ratio of 9.9 compared

to industry average of 5.5 ( Net profitability of 3.5%)

• Zara Corporation: Lead-time from new product to

stores is 15 to 20 days compared to industry average
of six months ( Net profitability of 11.3%)

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 Supply chain initiative in India
• Maruti Udyog has located 70% of its vendors
within 100 kms of radius of their Guragaon factory
for achieving lean supply chain.
• Sundram Fasteners, a Chennai based high tensile
fastener and radiator cap manufacturer, appointed a
consolidation agent in UK to collect all its supplies
of steel coils and components from Europe.
– This move will help in streamlining their supply chain
and reducing their vendor base.

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 Supply chain initiative in India
• TELCO has inducted Dynamic logistics, a 3PL service
supplier in their supply chain for spare parts management
of commercial vehicles and passenger cars.
– The benefits are 50 percent reduction in logistics cost and on
time delivery to customers.

• MODI XEROX LIMITED leveraged on its supply chain

strategy to improve customer satisfaction- by reducing
cycle time, enhancing productivity and keeping on-time
delivery- and the market.

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 Examples of SC in India
Industry Type Name
Automotive Telco, Mahindra, Maruti
Chemicals Asian Paints, Apollo tyres, Reliance
Apparel Madura Coats, Reliance
Food Cadbury, Parle, Amul Products, HLL
Consumer durables HLL, P & G
Forest Products Papermills
Construction L&T
Pharmaceutical Ranbaxy, Glaxo
Electromechanical Kirloskar, L & T
Tooling HMT, Mico
PC/ Computer IBM, WIPRO, HCL, Intel

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 The Complexity of SCM

• Supply Chain Integration

– Conflicting objectives
– Sharing supply chain profitability
– The dynamics involved

• Role of Information Systems

• The Human Elements

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 Logistics vs. SCM
• Council of Logistics Management (CLM) (1998),
revised its definition, clearly subordinating
logistics under the banner of SCM.
• It is defined as “Logistics is that part of the supply
chain process that plans, implements and controls
the efficient, effective flow and storage of goods,
services and related information from the point of
origin to point of consumption in order to meet
customer’s requirements”.

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Decision Phases of a Supply Chain

• Supply chain strategy or design

• Supply chain planning

• Supply chain operation

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 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.

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 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.

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 Supply Chain Planning (Continued)
• 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.
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 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).

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 Process View of a Supply Chain
• 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).

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 Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
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 Cycle View of a Supply Chain (Continued)
• 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.
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 Customer Order Cycle
• Involves all processes directly involved in receiving
and filling the customer’s order
• Customer arrival
• Customer order entry
• Customer order fulfillment
• Customer order receiving

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 Replenishment Cycle
• All processes involved in replenishing retailer
inventories (retailer is now the customer):
• Retail order trigger
• Retail order entry
• Retail order fulfillment
• Retail order receiving

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 Manufacturing Cycle
• All processes involved in replenishing distributor (or
retailer) inventory.
• Order arrival from the distributor, retailer, or customer.
• Production scheduling.
• Manufacturing and shipping.
• Receiving at the distributor, retailer, or customer.

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 Procurement Cycle
• All processes necessary to ensure that materials are available for
manufacturing to occur according to schedule.
• Manufacturer orders components from suppliers to replenish
component inventories.
• However, component orders can be determined precisely from
production schedules (different from retailer/distributor orders
that are based on uncertain customer demand).
• Important that suppliers be linked to the manufacturer’s
production schedule.

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

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
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Push/Pull View of Supply Chain Processes (Continued)

• 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.
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 Push/Pull View of Supply Chain Processes
(Continued)

• Useful in considering strategic decisions relating

to supply chain design – more global view of how
supply chain processes relate to customer orders.

• Can combine the push/pull and cycle views:

• Dell

• The relative proportion of push and pull processes

can have an impact on supply chain performance

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The Importance of Supply Chain
Flows
• Close connection between design and management
of supply chain flows (product, information, and
cash) and supply chain success

• Dell: success

• Supply chain decisions can play a significant role

in the success or failure of a firm

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 Macro Processes in a Supply
Chain

Supplier Internal Customer

Relationship Supply Chain Relationship
Management Management Management
(SRM) (ISCM) (CRM)

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 Customer Relationship Management

• The processes that take place between an

enterprise and its customers downstream in the
supply chain.

• Key processes:
– Marketing
– Selling
– Order management
– Call/Service center
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 Internal Supply Chain Management
• Includes all processes involved in planning for
and fulfilling a customer order
• ISCM processes:
– Strategic Planning
– Demand Planning
– Supply Planning
– Fulfillment
• There must be strong integration between the
ISCM and CRM macro processes
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 Supplier Relationship Management
• Those processes focused on the interaction between
the enterprise and suppliers that are upstream in the
supply chain.

• Key processes:
– Design Collaboration
– Source
– Negotiate
– Buy
– Supply Collaboration
• There is a natural fit between ISCM and SRM
processes
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 Examples of Supply Chains
• Dell / Compaq/ Gateway
• Toyota / GM / Ford
• McMaster Carr / W.W. Grainger
• Amazon / Borders / Barnes and Noble
• Webvan / Peapod / Jewel
What are some key issues in these supply
chains?
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