SUPPLY CHAIN MANAGEMENT

UNIT I

Definition:

Supply chain management is defined as a flow of material and information in a supply chain to provide
the highest degree of customer satisfaction at the lowest possible cost.

Meaning:

Supply chain management is the handling of the entire production flow of a good or service — starting
from the raw components all the way to delivering the final product to the consumer. To accomplish this
task, a company will create a network of suppliers that move the product along from the suppliers of
raw materials to the organizations who deal directly with users.
Supply chain Flows:

Supply chain management is the management of these three flows:

 Material (Product) Flow

 Information Flow
 Financial Flow

Material (Product) Flow

This is the flow of the physical product from supplier all the way down to the customer. This flow is
usually uni-directional, that is, it only flows one direction from supplier to customer; however, in certain
instances, when the customer returns the product, the flow occasionally goes in the other direction. A
typical flow of materials usually begins with the raw materials suppliers to manufacturers to warehouses
and distribution to the final customer.

Information Flow

Information flow is the flow of information from supplier to customer and from customer back to
supplier. This flow is bi-directional, that is, it goes both direction in the supply chain. The type of
information that flows between customers and suppliers include quotations, purchase orders, delivery
status, invoices, customer complaints and so on. For supply chain to be successful there has to be
constant interaction between supplier and Customer. In many cases, other partners like distributors,
dealers, retailers, logistic service providers are involved in the information network.
Financial Flow

Financial flow involves the movement of money from the customer to the supplier. Usually, when the
customer receives the product and verifies it, the customer pays and the money travels back to the
supplier. Sometimes the finances flow the other direction (from supplier to customer) in form of debit.

For an efficient and effective supply chain, it is important that all three flows are managed properly with
minimal effort. By understanding your supply chain and how products, information and money flows
through it, you will be in a good position to find several inefficiencies and figure out how to significantly
improve your business.

Inventory Management:

Inventory management refers to the process of ordering, storing, and using a company's inventory.
These include the management of raw materials, components, and finished products, as well as
warehousing and processing such items.

A company's inventory is one of its most valuable assets. In retail, manufacturing, food service, and
other inventory-intensive sectors, a company's inputs and finished products are the core of its business.
A shortage of inventory when and where it's needed can be extremely detrimental.

At the same time, inventory can be thought of as a liability (if not in an accounting sense). A large
inventory carries the risk of spoilage, theft, damage, or shifts in demand. Inventory must be insured, and
if it is not sold in time it may have to be disposed of at clearance prices—or simply destroyed.

Inventory Management Methods

Depending on the type of business or product being analyzed, a company will use various inventory
management methods. Some of these management methods include just-in-time (JIT) manufacturing,
materials requirement planning (MRP), economic order quantity (EOQ), and days sales of inventory
(DSI).

Just-in-Time Management

Just-in-time (JIT) manufacturing originated in Japan in the 1960s and 1970s; Toyota Motor Corp. (TM)
contributed the most to its development. The method allows companies to save significant amounts of
money and reduce waste by keeping only the inventory they need to produce and sell products. This
approach reduces storage and insurance costs, as well as the cost of liquidating or discarding excess
inventory.
Materials Requirement Planning

The materials requirement planning (MRP) inventory management method is sales-forecast dependent,
meaning that manufacturers must have accurate sales records to enable accurate planning of inventory
needs and to communicate those needs with materials suppliers in a timely manner. For example, a ski
manufacturer using an MRP inventory system might ensure that materials such as plastic, fiberglass,
wood, and aluminum are in stock based on forecasted orders. Inability to accurately forecast sales and
plan inventory acquisitions results in a manufacturer's inability to fulfill orders.

Economic Order Quantity

The economic order quantity (EOQ) model is used in inventory management by calculating the number
of units a company should add to its inventory with each batch order to reduce the total costs of its
inventory while assuming constant consumer demand. The costs of inventory in the model include
holding and setup costs.

Days Sales of Inventory

Days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a company
takes to turn its inventory, including goods that are a work in progress, into sales.

Global Optimisation:

The supply chain seeks is to find a balance between desired responsiveness and efficiency at the lowest
total cost.This might mean that costs may increase for some , but for the overall supply chain the costs
are decreased . All the functions collaborate with each other , share information and data among supply
chain partners and work together to find that balance at the lowest cost. Nowadays there are tools to
help companies do simulations and modeling with different scenarios to find the optimal solution for
supply chain at the lowest cost.

Companies should be able to use solutions to optimize across their sourcing and procurement,
production and distribution processes all at the same time. Instead, supply chain solutions tend to break
those functions out into separate modules, each of which runs separately from the others.

Strategic Issues In Global:

Internal issues

External issues

Internal issues:

Planning

Inventory

Product variable

Flexibility
Planning:

Planning is crucial for companies with global operations in order to gain competitivess.Formulating a
strategy also depends on factors such as unit value of the product,markets and competition.

Inventory:

It is make to order or make to stocks or delivery products to customer result in inventory planning,
working process and finished goods etc., a modular approach the product design, where the product can
be configured to its final shape at the distribution center.

Product variable:

In a global environment firms with low unit value products resort to the local manufacturing system for
extending good customer services.

Flexibility:

Global players focus on economics of scale for achieving cost advantage.The firm is considering more
flexible to the process held in supply chain management through globally.

External issues:

Shorter lead time

Trade barriers

Cultural issues

Shorter lead time:

Global markets emphasize on responsiveness with the lean supply chain.The supplier has to maintain
some buffer stock to reach the desired level of customer service.

Trade barriers:

Trade barriers of the hurdles are happens in transporting of products from one end to another.Trade
barrier are increase particularly in developed countries.

Cultural issues:

These can be the problem in global source due to a wide variety of approaches for conducting business
in different regions in the world.

Key issues in Supply Chain Management:

These issues span a large spectrum of a firm’s activities, from the strategic to the tactical to the
operational level.

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, strategic
partnering as well as decisions on the number, location and capacity of warehouses and manufacturing
plants and the flow of material through the logistics network.
Tactical level includes decisions that are typically updated anywhere between once every quarter and
once every year.These include purchasing and production decisions, inventory policies and
transportation strategies,including the frequency with which customers are visited.

Operational level refers to day-to-day decisions such as scheduling,lead time quotations, routing and
truck loading.

Economic Lot Size:

Economic Lot Size (ELS) was first developed about 1913. It balances the costs of inventory against the
costs of setup over a range of batch quantities. In this model, the Economic Lot Size (ELS) is where Total
Cost is minimum.

They contend that every operation should manufacture what the downstream customer needs
immediately in "batches" of one unit. (One Piece Flow)

Most factories are less than ideal. Where significant setup costs exist, batch quantity is still an issue and
Economic Lot Size provides important insights for rational decisions.

The figure depicts a typical ELS model. This model calculates the total production cost per unit over a
range of batches. The batch quantity having the lowest unit cost is the ideal or Economic Lot Size. This
Total Cost typically forms a "U" as shown in the figure

The model classifies total cost into three components: Setup Cost, Direct Cost and Carrying Cost (Storage
Cost).

Direct Cost

Direct costs are directly proportional to the amount produced. Materials and direct labor are the most
common. Accounting systems usually capture these costs accurately and make them readily available.

Setup Cost
Setup costs include the labor and material to ready a machine for production. They may include the
processing of work orders or a first-article inspection. We amortize these costs over the entire batch to
derive the Setup Cost per piece. This cost is high when batches are small and rapidly decreases with
increasing batch quantity.

Carrying Cost

Carrying or Storage cost is the average cost associated with storing an average production unit for the
average time it will be in inventory. These costs are more difficult to calculate and we will not take up
that procedure here. Storage costs are significant and often represent 20%-60% of inventory value on an
annual basis.

Supply contract:

An agreement by which a seller promises to supply all of the specified goods or services that a buyer
needs over a certain time and at a fixed price, and the buyer agrees to purchase such goods or services
exclusively from the seller during that time. In international markets a supply contract is often necessary
in order to lock in discounted pricing and other benefits that the supplier is agreeing to provide to the
client for a specific period of time. The terms of a supply contract often define everything from the
means whereby the products are delivered, terms of payment, and any other aspect of the relationship
that the two parties have determined to be necessary.

Supply contracts allocate this profit among supply chain members.

Effective supply contracts allocate profit to each partner in a way that no partner can improve his profit
by deciding to deviate from the optimal set of decisions.

The supply contract protects the rights of both parties. The client knows what to expect in terms of the
goods received and how they will be delivered. In turn, the supplier knows what the client is likely to
need and how payment will be submitted.

 Significant level of outsourcing

 Many leading brand OEMs outsource complete manufacturing and design of their products
 More outsourcing has meant
o Search for lower cost manufacturers
o Development of design and manufacturing expertise by suppliers
 Procurement function in OEMs becomes very important
 OEMs have to get into contracts with suppliers
o For both strategic and non-strategic components

2-Stage Sequential Supply Chain:

A buyer and a supplier.

Buyer’s activities:
  generating a forecast
 determining how many units to order from the supplier
 placing an order to the supplier so as to optimize his own profit
 Purchase based on forecast of customer demand

Supplier’s activities:

 reacting to the order placed by the buyer.

 Make-To-Order (MTO) policy

Raincoat Example

2 Stages:

 a retailer who faces customer demand

 a manufacturer who produces and sells raincoat to the retailer.

Retailer Information:

 Rainy season sale price of a raincoat is $125 per unit.

 Wholesale price paid by retailer to manufacturer is $80 per unit.
 Salvage value after the rainy season is $20 per unit

Manufacturer information:

 Fixed production cost is $100,000

 Variable production cost is $35 per unit

Risk Sharing

 In the sequential supply chain:

 Buyer assumes all of the risk of having more inventory than sales
 Buyer limits his order quantity because of the huge financial risk.
 Supplier takes no risk.
 Supplier would like the buyer to order as much as possible
 Since the buyer limits his order quantity, there is a significant increase in the likelihood of out of
stock.
 If the supplier shares some of the risk with the buyer
 it may be profitable for buyer to order more
 reducing out of stock probability
 increasing profit for both the supplier and the buyer.
 Supply contracts enable this risk sharing
Buy-Back Contract

 Seller agrees to buy back unsold goods from the buyer for some agreed-upon price.
 Buyer has incentive to order more
 Supplier’s risk clearly increases.
 Increase in buyer’s order quantity
 Decreases the likelihood of out of stock
 Compensates the supplier for the higher risk

Revenue Sharing Contract

 Buyer shares some of its revenue with the supplier

 in return for a discount on the wholesale price.
 Buyer transfers a portion of the revenue from each unit sold back to the supplier

Cost-Sharing Contract

 Buyer shares some of the production cost with the manufacturer, in return for a discount on the
wholesale price.
 Reduces effective production cost for the manufacturer
 Incentive to produce more units

Centralisation versus Decentralization:

Centralization:

Centralization of authority means the power of planning and decision making are exclusively in the
hands of top management. Centralization refers to the process in which activities involving planning and
decision-making within an organization are concentrated to a specific leader or location. In a centralized
organization, the decision-making powers are retained in the head office, and all other offices receive
commands from the main office. The executives and specialists who make critical decisions are based in
the head office.

Advantages

• Uniform Policy can be evolved.

• Decreases complexity of co-ordination that is observed in decentralises structure.

• Top authority gain control over the affairs of the organisation and adequate control techniques can be
adapted.

• Action plans can be smoothly implemented.

• Organisation is relieved of the burden of looking for more qualified middle manager and reduce
training cost on these personnel.

• May be benefitted by economics of scale by some operations.

Disadvantages
• Top management is over burdened with many functions and problems associated with them.

• Since authority and responsibility are concentrated, decision-making being absolute and independent,
may prove detrimental to growth of the enterprise.

• Comparative performance appraisal may become difficult as the span of control is too large.

• Top management cannot identify profit centres and weak centres.

• Supporting staff are overburdened with tasks.

• Adaptability to fast charging environment becomes difficult

Decentralization

The assignment of authorities and responsibilities by the top level management to the middle or low-
level management is known as Decentralization. It is the perfect opposite of centralization, in which the
decision-making powers are delegated to the departmental, divisional, unit or center level managers,
organization-wide.

At present, due to the increase in competition, managers take the decision regarding for the delegation
of authority to the subordinates. Due to which the functional level managers get a chance to perform
better, as well as freedom of work, is also there. Moreover, they share the responsibility of the high-
level managers which results in quick decision making and saving of time. It is a very effective process
for the expansion of the business organization, like for mergers and acquisitions.

Advantages

Decentralisation reduces the workload of top executives.

 It improves job satisfaction by satisfying their needs for independence, participation and status.
 Decision making is quicker.
 It gives opportunity to subordinates to exercise their own judgment.
 Decentralisation requires wider span of control and fewer levels of organisation. It speeds up
communication.
 Decentralisation increases the administrative expenses and each division or department has to
be sufficient in terms of physical facilities and trained personnel.

Disadvantages

 Decentralisation increases the administrative expenses and each division or department has to
be sufficient in terms of physical facilities and trained personnel.
 As each department or division enjoys substantial autonomy it might lead to co-ordination
problems.
 There might be lack of uniformity and inconsistent procedures as each department might have
the authority to formulate its own policies and procedures.
UNIT IV

PROCUREMENT & OUTSOURCING

Procurement:

Process of identifying right needs by working with various internal departments,conducting efficient
purchasing and managing suppliers.

Contribute to competitive advantage of organization.

Make use of hiring / leasing / outsourcing.

Procurement includes:

Few activities prior to actual purchasing:

Identification of right need.

Surviving in the market.

Few activities after actual purchasing: