Supply Chain

UNIT 13 SUPPLY CHAIN MANAGEMENT Management

Structure
13.1 Introduction
Objectives

13.2 Definition
13.3 Stevens Model of Supply Chain Integration
13.4 Aims of SCM
13.5 Benefits of Supply Chain Improvement
13.6 Distortion of Demand : Bullwhip Effect
13.7 Performance of Supply Chain
13.8 Summary
13.9 Key Words

13.1 INTRODUCTION
Enterprise Resource Planning (ERP), Business Process Re-engineering (BPR) and
Supply Chain Management (SCM) are the three commonly heard buzzwords in recent
years. All the three are related in some ways. In this unit, we will examine supply chain
management. You have already studied ERP in Unit 8.
Objectives
After studying this unit, you will be able to
• define supply chain processes,
• understand what is supply chain,
• learn the components of a supply chain,
• know the various benefits from supply chain improvement,
• define the scope of supply chain improvement,
• understand the aims of supply chain management,
• understand Bullwhip effect, and
• understand metrices of supply chain performance.

13.2 DEFINITION
Supply Chain (SC) and Supply Chain Management (SCM) are defined at many places in
literature. However, all reveal the common theme of material, information and financial
flows coordinating among supplier, manufacturers, distributors and customers of product
and services.

The supply chain is the network of autonomous and semi-autonomous business

entities, which are involved through upstream and downstream linkages in the
different processes and activities that produce value in the form of physical products
and services in the hands of the ultimate customers.

Supply chain consists of the network of organisations that connects supplier and
end-users. It provides the route through which raw material is converted into finished
good/services into the hand of consumers. Supply chain management, in turn, covers the
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Operational Aspects of “flow of goods from suppliers through manufacturing and distribution chains to the end
Production Management users” (Figure 13.1).

Suppliers Procurement Manufacturing Factory Distribution Customer Customers

Orders Orders Orders Orders Orders

Figure 13.1 : Flow of Order in a Supply Chain

The concept of supply chain management is important as it provides a framework for the
integration of information, material and finance of the enterprise, right from the suppliers
to the customers. The coordination elements of the supply chain include :
• Procurement also known as Source
• Manufacturing also known as Make
• Logistics also known as Move
• Warehousing, also known as Store
• Market also known as Sell
Key Points
(a) A supply chain produces value in the form of physical products and services
in the hand of ultimate customers.
(b) A supply chain is a network of facilities and distribution options that
● procures materials from suppliers,
● transforms these materials into products, and
● distributes these finished products to customers.
(c) SCM is the integrated process of managing these value-chain activities
(Figure 13.2).
(d) SCM systems perform the transactions and manage the data required to
complete these activities.

Vendors Purchasing
Orders

Receiving
Manufacturing
Goods

Payments Inventory Payroll

to
Vendors
Accounts Shipping
Payable
Taxes
Billing

Customers Customer
Orders
General Fixed
Ledger Assets
Payments
from
Customers Periodic
Account
Statements
Receivable

Figure 13.2 : The Processes in a Supply Chain

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Supply Chain Management encompasses management of all the elements and activities Supply Chain
of the supply-chain. This includes material suppliers, production facility, distribution, Management
services and customers; linked together via the feed-forward flow of information and the
feedback flow of materials. The “Supply Chain” term is being extended to
International/Global-supply chain. This is common in industries, which have global
customer/supplier base; for example, textile, pharmaceuticals, automobile, electronic etc.
The inclusion of distribution as a key link of the supply-chain makes its scope quite wide
and extended. Distribution may incorporate many stages such as warehouse, Carry and
Forwarding (C & F)) agents or third party freight-forwarders, wholesalers, retailers and
servicing units. Figures 13.3 and 13.4 represent a generic structure and internal
complexity of the supply chain. The multiplayer abstraction is evident in Figure 13.5
since a supplier may still have its own chain as depicted by dotted circles.

Upstream of Supply Chain (Procurement)

Distributor
Tier 2 Customer
Supplier

Tier 1
Supplier

Tier 1 Customer
M
Supplier
A Hybrid
Manufacturing /
Distribution Retailer
Facility
Foreign Customer
Supplier

Port of Distributor
Entry
Customer
Foreign
Supplier

Downstream of the Supply Chain (Distribution)

Figure 13.3 : The Supply Chain Network Diagram of a Global Unit

Supplier Subcontractor Retailer

Distributor

Supplier Manufacturer Assembler Retailer

C & F Agent

Supplier Supplier Retailer

Legend : Business Entry Inventory Stockpile → Material Flow

Figure 13.4 : A Genetic Structure of a Supply Chain

Supplier Subcontractor Retailer 43

Distributor

Supplier Manufacturer Assembler Retailer

Operational Aspects of
Production Management

Figure 13.5 : The Multiple Layer Abstraction of a Supply Chain

SAQ 1
What are the various components of a supply chain?

13.3 STEVENS MODEL OF SUPPLY CHAIN

INTEGRATION
Stevens (1986) has provided a simple model to understand supply-chain integration. It
involves transforming enterprise from an inward looking (i.e. producing whatever the
market wants it to sell) in an overall efficient manner. The transformation can be
performed in an effective manner through a series of phased steps. These steps involve
the recognition of technological, organizational and attitudinal attributes (Figure 13.6).
Integration of the Supply Chain is a four-stage process.
Stage 1 Base line Understanding of material flow from purchasing to
distribution.
Stage 2 Functional Understanding the functionality of material
Integration management, manufacturing management and
distribution.
Stage 3 Internal Integration Internal integration of material management,
manufacturing management and distribution.
Stage 4 External Integration Integration of suppliers, internal supply chain and
customers.

There are two common approaches for evolving a supply-chain-management

environment
Internal Integration
(a) Integrated system (e.g., ERP solutions such as SAP R/3).
(b) Link functions such as, purchasing, manufacturing, inventory, finance,
marketing, etc.
(c) Shared data and integrated processes.
Intra-firm Integration
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 (a) Interorganizational information system, such as, extranet. Supply Chain
Management
(b) Link firm’s systems with external entities-suppliers, distributors, retailers,
etc.
(c) Shared data and integrated processes.

Stage One : Base Line

Material Flow Customer Service

Purchasing Material Production Sales Distribution

Control

Elevation
Principally
Stage Two : Functional Integration
Technology-
based
Customer Service
Material Flow

Materials Manufacturing
Management Management Distribution

Elevation
Stage Three : Internal Integration Principally
Organization-
based
Material Flow
Customer Service

Materials Manufacturing
Management Management Distribution

Elevation
Stage Four : External Integration Principally
Attitude-
based
Customer Service
Material Flow

Suppliers Internal Supply Customers

Chain

Figure 13.6 : Steven’s Model for Integration of Supply Chain

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Operational Aspects of
Production Management 13.4 AIMS OF SCM
Main aim of SCM is to optimize the overall performance of the entire network of the
supply-chain. The word “entire” is very important here. With experience in
enterprise-research, we have realized that despite each factory, distribution centre and
other elements of supply-chain operating at the best levels, the supply-chain as a whole
may operate sub-optimally. Let us examine this issue.
All the constituents of supply-chain have their own short-term and long-term objectives.
Their operating decisions are based on these objectives. It is very common that the
decisions of the constituents may not be aligned to the overall strategic goal of the entire
supply chain. For example, the optimal strategy for the logistics may be bulk shipments,
one-time order, selection of nearest vendor/supplier, etc. In many situations, when entire
chain performance is considered, these individual strategies fail to deliver the best. It is,
therefore, an integrated-holistic view of supply-chain, which is essential. Many situations
force management to go for incurring more than the double cost in order to build up
inventories to support some increase in customer’s service.
SCM Benefits
(a) Integrated view of enterprise resources and constraints.
(b) Improved channel efficiency by sharing information between suppliers and
customers.
(c) Reduced inventory level and production costs.
(d) Extension of organizational control beyond firm boundaries.
(e) ROI (Return on Investment) : typically 10 times the cost of developing and
implementing the system
SCM Risks
(a) Poor implementation due to enlargement of scope.
(b) Information access and security.
(c) Supply-chain interruptions.
(d) Unidirectional loss of bargaining power.
(e) Training and change management.
(f) System maintenance.
(g) Challenge of developing trust and managing interorganisational
dependencies
Through our studies of firms in a variety of firms in US, Japan and Western
Europe, we have found that the traditional approach of seeking trade-off among
the various conflicting key functional objectives (purchasing, production,
distribution and sales) along the supply chain no longer worked very well. We
needed a new perspective and following from that a new approach supply chain
management.
- Houlihan J. B. (1986)
According to Yankee Group site, “leading companies operate with supply chain costs
36% lower than the average company – resulting in a nearly 4% savings to the bottom
line”. The IBM site (Jan. 1999) says, “according to a recent study, companies that
practice best-in-class supply-chain-management techniques achieve a 40 to 65%
advantage in cash-to-cash cycle time, and a 7% cost advantage over average companies.
They all typically hold 50 to 80% less inventory than their competitors.
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 • SC is an integrated system. It is not like an interfaced system as commonly Supply Chain
Management
seen in conventional enterprise.
• SCM is a focused at and directed towards the end-supply to the customer. It
is a domain of strategic decision making rather than operational decision in
conventional enterprise. All elements of the chain share a common platform
and have common objective of overall reduction in cost, Increase in market
share, customer satisfaction, etc.
• SC negates the fragmented responsibility of each functional units such as
suppliers, manufacturing, purchasing, distribution, and sales. It has been
observed that the effectiveness of any element of the supply-chain is greatly
affected by the performance of the total chain.
• Inventory is closely linked with information or data-flow in the chain.
Integration of enterprise through networking and common information-
access, facilitates prudent decision regarding inventory management,
logistics, purchasing, supply and customer service.
• Enterprise, these days, gets more involved in the operation and policies of
its suppliers. Vendor audit, open costing, vendor development/training,
on-line monitoring of scheduling and delivery of vendors, sharing
technological capabilities, providing services of quality team to
vendors/suppliers, etc., are few measures which may not be cost-effective in
short run. But, in long run, this union is bound to prove beneficial,
cost-effective and reliable.
• Several suppliers to a common unit (say, manufacturing) may collaborate in
the logistic arrangements for deriving the benefits of economy of scale.
Subcontracting among themselves may also be beneficial in many instances.
However, all is effectively well with mutual trust, only when there exists a
common enterprise-wide integration of information along the supply-chains.
• Supplier is linked with the inputs from the end-user regarding specifications,
timing and quality. Integration facilitates quick response time. Secondly,
their interaction improves cost reduction effort through value engineering
technique. Supplier input is upgraded through better manufacturability of
supplied items, quick response time and better preparedness.
• The era of multi-supplier-enterprise network is gradually phasing out. The
new paradigm is “dependable, mutually-developed, partner-type, single
sourcing”. The potential benefits in single sourcing are more evident when
integration, data-sharing, technology transfer and vendor development effort
are accounted.
• Visibility of full supply-chain provides executives the ability to see
problems before they arise.
The market is competitive. Therefore, the supply chain is expected to operate faster. The
operative distance between each link (which is different from physical distance) is
shortening in most of cases. This is due to increasing influence of communication and
simulation technologies.
SAQ 2
Describe the aims of supply chain.

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Operational Aspects of
Production Management 13.5 BENEFITS OF SUPPLY CHAIN IMPROVEMENT
Improvement in supply-chain management is very significant in providing competitive
advantages to the companies. A survey was conducted in US with sixty-five closely-
associated engineers, project manager, director, and executives of firms dealing in
supply-chain area (Savoie, 1998). Their ranked-response regarding most important
benefit of supply-chain improvement included :
(a) reduce operating costs,
(b) improve responsiveness and reduce cycle time,
(c) improve customer service,
(d) simplify operations,
(e) improve quality,
(f) support significant volume growth,
(g) reduce capital basis/improved return on capital,
(h) effectively support a growing or diverse customer base,
(i) effectively offer a greater variety of products, and
(j) focus on core competencies.
The benefits of supply-chain improvement can be harnessed by better integration of
supply-chain in terms of information, material and money flows. Better coordination of
different functions is possible through ERP implementation/SCM solution.
SAQ 3
What are the benefits achieved from an integrated supply chain?

13.6 DISTORTION OF DEMAND : BULLWHIP

EFFECT
“Distortion of demand” along the supply-chain is a common problem. Many researchers
have explained this problem (Lee et al. 1997). While explaining the law of industrial
dynamics, Burbridge (1984) postulated that the variation in demand for product increases
as it passes through a series of transfers in a supply-chain, and stock-control ordering is
used.
Many authors have explained “bullwhip effect” or “flywheel effect” in the supply-chain.
Uncertainly in economy, market being in-and-out of recession, tendency of management
to over-react to periodic economic swings, which are very common, and creating a
safety-net in material planning are few reasons for “amplification of demand” in a
supply-chain (Figure 13.7). The effect of amplified demand-distortion is evident in a
factory (factory E), which is a down-stream link of the chain. This effect in modern
supply chain literature is termed as Bullwhip Effect. It represents the increase in the
variability of demand, as we move up the supply chain from the retailer to the distributor
to the manufacturer to the suppliers. The effects of “Bullwhip effect” are as follows :
• More stock-outs
• Increased inventory
• Overtime production and idle production scheduling
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 • Excessive or insufficient capacity Supply Chain
Management
• Poor customer service due to unavailable products
• Expedited shipments, etc.
Different causes of bullwhip effect are listed as follows.
(a) Error in demand forecasting causes bullwhip effect. Due to forecasting
error, supply chain partners go into speculation game related to actual
demand. As the number of supply chain partner increase, the demand
variability gets amplified as we move away from the cutomers’ end in the
supply chain. To counter this effect, a possible measure is to share
consumption data with upstream members. This requires :
• Point of sale data given to distributors and manufacturers
• Use EDI and internet to share data
• Vendor managed inventory or continuous replenishment
programs
• Direct sale techniques to get downstream demand information,
• Share sales, capacity and inventory data to reduce gaming.
(b) Order batching is another cause of Bullwhip effect. It is driven by the
following factors :
• Economies of scale in order costs
• Economies of scale in transportation, i.e. one truck load (TL)
vs. less than a truck load (LTL)
• MRP systems, which is based on monthly or periodically
updating approach,
• Push ordering (e.g., to meet a quarterly sales quota) drive order
batching
To counter this effect, following measures are helpful.
• Reduce order costs
• Use Electronic Data Interchange (EDI) technology and
standardize ordering processes
• Innovative transportation (like third party logistics providers,
3PL)
(c) Price fluctuation is a major reason for Bullwhip effect. It is driven by price
discounts, quantity or volume discounts, coupons, and rebates given by
supply chain partners. These cause swings in demand, resulting into high
during low price periods and low during normal price periods. The problems
include overtime and idle production time, premium freight charges, and
inventory accumulations. To counter this reason, the possible approaches are
:
• avoid price discounting and volume discounting, and
• following a same day low prices.
(d) Rationing and shortage gaming is the fourth reason for Bullwhip effect.
This is characterized by large swings in perceived demand at upstream
components of supply chain. To counter this reason following measures are
useful.
• Allocate product based on past sales not on current orders
• Share information about capacity 49
Operational Aspects of • Long term contracting to allow vendors to adjust capacity
Production Management
• Eliminate generous return and order cancellation policies
In general, Bullwhip effect is a major cause of worry in a supply chain as this results in
inventory pile-up when there is no demand and huge shortages when there is demand.
Both result in loss of profitability. Moreover, this phenomenon is more serious when one
go away from the customer end of a supply chain. The possible approaches to counter
this effect have been mentioned above. This is more effectively countered with
information sharing among supply chain partners, channel alignment, and better
operational efficiencies.
Internally also, this behavior is seriously present throughout the chain. The classic case is
the “marketing-manufacturing conflict”. The demand forecast is inflated by marketing so
as to obtain longer allocation from the manufacturing units. This saves them from being
caught in short-supply situation under an upward market swing. Manufacturing and
distribution people make a second guess apparently to nullify it, which creates further
distortion in demand. Similar way, other elements of the chain contribute to the inventory
building measures. Decisions regarding required-capacity of the enterprise lag behind the
changes in demand. This causes further building-up of a safety net for inventories or lost
sales due to under-production.
Flow of Demand Information

Retailer Distributor Manufacturer Tier 1 Supplier Tier 2 Supplier

C
O
N
S
U
M
E
R

Flow of Material

Actual Demand Received

by Retailer :
(Stable Demand)
Demand

Tier 2 Supplier
(Huge Fluctuations)

! ! ! ! ! !
1 2 3 4 5 6 7

Time in Weeks →

Figure 13.7 : Amplification of Demand as Transmitted Along a Supply Chain (Houlihan, 1987)

SAQ 4
What are the different causes of bullwhip effect?

50
 Supply Chain
Management

13.7 PERFORMANCE OF SUPPLY CHAIN

It is important to judge the performance of supply-chain so as to judge how well it is
performing. This is important for two purposes. One, it gives idea regarding the current
position. Secondly, it is helpful in identifying gaps for improvements. Beamon (1999)
has identified three types of measures of performance : resources, output and flexibility.
In this context, it is important to investigate the ways to improve the performance of
supply-chain (Table 13.1).
Table 13.1 : Type of Performance Measures (Beamon, 1999)
Performance of Goal Purpose Example List
Measure Type
Resources High level of Efficient Total cost
efficiency resource
Distribution cost
management
is critical to Manufacturing cost
profitability
Inventory cost
Return on investment (ROI)
Output High level of Without Number of items produced
customer acceptable
Time required to produce a particular item or a set of items
service output,
customers Number of on-time deliveries
will turn to
other Customer satisfaction
supply- Product quality
chains.
Total revenue (sales)
Profit (total revenue less expenses)
Fill rate (proportion of order filled immediately)
On-time deliveries
Back order (stock out)
Customer response time
Manufactured read time (total time required to produce a
particular item or batch
Shipment error
Customer complaints
Flexibility Ability to In an Volume flexibility (ability to change the output level of
respond to a uncertain products)
changing environment,
Delivery flexibility (ability to change planned delivery dates)
environment supply-
chains must Mix flexibility (ability to change variety of products
be able to produced)
respond to
change New product flexibility (ability to introduce and produce new
products and ability to introduce modification in existing
product)

A popular approach to measure the supply chain performance is called as SCOR Model
(Supply Chain Operations Reference Model), which was originally developed by PRTM
Consulting. It is now managed and maintained by the Supply Chain Council
(supply-chain.org). Few matrices of performance are given in Table 13.2.
Table 13.2 : Matrices of Performance
Type of Performance Performance Attribute Definition Level 1 Metric
Performance Attribute
Supply Chain The performance of the supply chain in Delivery Performance 51
Operational Aspects of Type of Performance Performance Attribute Definition Level 1 Metric
Production Management Performance Attribute
E Delivery delivering: the correct product, to the Fill Rates
Reliability correct place, at the correct time, in the
X correct condition and packaging, in the Perfect Order Fulfillment
T correct quantity, with the correct
documentation, to the correct customer.
E
Supply Chain The velocity at which a supply chain Order Fulfillment Lead
R Responsiveness provides products to the customer. Times
N Supply Chain The agility of a supply chain in Supply Chain Response
Flexibility responding to marketplace changes to gain Time
A
or maintain competitive advantage.
L Production Flexibility

Supply Chain The costs associated with operating the Cost of Goods Sold
Costs supply chain.
I Total Supply Chain
Management Costs
N
Value-Added Productivity
T
Warranty/Returns
E
Processing Costs
R
Supply Chain The effectiveness of an organization in Cash-to-Cash Cycle Time
N Asset managing assets to support demand
Management satisfaction. This includes the Inventory Days of Supply
A
Efficiency management of all assets: fixed and Asset Turns
L working capital.

This model provides a set of performance metrics (Table 13.2) and supply chain practices
where the supply chain performance is related with the maturity of supply chain
practices.
SAQ 5
Explain the performance attributes of a supply chain.

13.8 SUMMARY
In this unit, you have studied that the supply chain is the network of autonomous and
semi-autonomous business entities, which are involved through upstream and
downstream linkages in the different processes and activities that produce value in the
form of physical products and services in the hands of the ultimate customers. Its concept
is important as it provides a framework for the integration of information, material and
finance of the enterprise, right from the suppliers to the customers. The benefits of
supply-chain improvement can be harnessed by better integration of
supply-chain in terms of information, material and money flows.

13.9 KEY WORDS

Standard Time : Used in work study for time to complete job and
an ‘allowance’ as the operator cannot work at
exactly same pace throughout the working day.
Warehousing : Warehousing can be defined as the segment of an
enterprise logistics function for storage and
52
 handling of inventories beginning with supplier Supply Chain
receipt and ending at the point of consumption. Management

Transportation : Transportation is the movement of products from

one node in the distribution channel to another.
Original Equipment : A manufacturer that buys and incorporates another
Manufacturer (OEM) supplier’s products into its own products.

53
Operational Aspects of
Production Management FURTHER READINGS
Krishnaveni Muthai, (2003), Logistics Management and World Sea-borne Trade,
Himalaya Publishing House, Mubmai (for Basics of Logistics and Marketing Interface).
Deshmukh and Mohanty, (2004), Essentials of SCM, Jaico Publishing House, Mumbai
(should be included in compulsory reading, since the text pertains to Indian context,
simple and easy to comprehend).
Simchi-Levi, David Kaminsky, Philipsimchi-Levi, Edith, (2004), Designing and
Managing the Supply Chain, Tata McGraw-Hill.
D. Whitney, (1988), Manufacturing by Design, Harvard Business Review, pp. 83-91.
Bauer, Bowden and Browne J, (1991), Shop Floor Control Systems, Chapman and Hall.
Browne, J, Harhen, 1. and Shivnan, 1., (1988), Production Management Systems : A CIM
perspective, Addisen-Wesley Publishing Company.
Chase R.B., Aquilano, NJ and Jacob FR, (1998), Production and Operations
Management, Irwin McGraw Hill, Boston.
Childe S. 1., (1977), An Introduction to Computer-aided Production Management,
Chapman and Hall, London.
Goldratt, E., (1980), Optimized Production Time Tables : A Revolutionary Program for
Industry, In the proceedings of the 23rd ARICS Conference, Los Angeles, Oct. 1980, pp
172-176.
Goldratt; E., (1990) (a) Theory of Constraints, North River Press, NY.
Goldratt E., (1990) (b) The Haystack Syndrome, North River Press, NY.
Goldratt, E., (1994), It's Not Luck, Gower, Aldershot.
Goldratt, E. and Cox, J., (1993), The Goal, Gower, Alder Shot.
Shucavage D., (1995), Crazy About Constraints,
(http://www.lm.com/_dshu/toc/cac.htm!).
Beaman, B. M., (1999), Measuring Supply Chain Performance, International Journal of
Operations and Production Management, 19(3), 275-298.
Burbidge, J. L., (1984), Automated Production Control with Simulation Capability,
Proceedings of IFIP Conference WG5-7, Copenhagen, 1-14.
Evans, G. N., Naim, M. M., and Towill, D. R., (1993), Assessing the Impact of
Information Systems on the Dynamics of Supply Chain Performance, Logistics
Information Management, 6, 15-25.
Houlihan, J. B., (1987), International Supply Chain Management, International Journal
of Physical Distribution and Logistics Management, 17(2), 51-66.
Lee, H. L., V. Padmanabhan, and S. Whang, (1997), The Bullwhip Effect in Supply
Chains, Sloan Management Review, Spring, pp. 93-102.
Stevens, G., (1986), Integrating the Supply Chain, International Journal of Physical
Distribution and Logistics Management, 19(8), 3-8.
Savoie, B. J., (1998), The Last Word in Supply Chain Improvement, IIE Solutions,
29-32.

54
 Supply Chain
OPERATIONAL ASPECTS OF PRODUCTION Management

MANAGEMENT
This block consists of units on Inbound Logistics, Outbound Logistics, Theory of
Constraints and Basics of Supply Chain Management.
In Unit 11, you will be introduced with logistics. Logistics is a very intricate yet a very
simple subject to learn about, but a very complicate subject in case the channels of
logistics are not in place and not integrated. Logistics require a lot of coordination and
integration at the highest and the lowest of levels. Rightly said, a logistics phone never
stops ringing, he moves from crisis to crisis, and from one critically to another.
Goldratt’s theory of constraint has attracted the attention of many practitioners in the
industry. This has been explained in Unit 12. The concept of goal, constraint, throughput,
thinking process, critical chain and scheduling through OPT have helped many industries
to improve their performance. Nine rules of OPT are helpful in developing the
framework for TOC.
Unit 13 deals with basics of supply chain management. The supply chain is the network
of autonomous and semi-autonomous business entities, which are involved through
upstream and downstream linkages in the different processes and activities that produce
value in the form of physical products and services in the hands of the ultimate
customers. The concept of supply chain management is important as it provides a
framework for the integration of information, material and finance of the enterprise, right
from the suppliers to the customers.

55