Introduction

Supply Chain Management

Introduction
Supply Chain Management

People think we got big by putting big

stores in small towns. Really, we got big
by replacing inventory with information
Sam Walton, Founder of Wal-Mart

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What is a Supply Chain?

All facilities, functions, and activities involved in producing

and delivering a product or service from suppliers (and
their suppliers) to customers (and their customers).

All stages involved, directly or indirectly, in fulfilling a

customer request.

Includes

manufacturers,

suppliers,

transporters,

warehouses, retailers, and customers.

Contd

What is a Supply Chain?

Flow of products and services from:
Raw materials manufacturers
Intermediate products manufacturers
End product manufacturers
Wholesalers and distributors and
Retailers to end consumers

Within

each

company,

the

supply

chain

includes all functions involved in fulfilling a

customer

request

(product

development,

marketing, operations, distribution, finance,

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What is Supply Chain?

Customer is an integral part of the supply chain

Supply Chain encompasses flow of products, funds and

information.

Includes movement of products from suppliers to

manufacturers to distributors, and information, funds, and
products in both directions.
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What is a Supply Chain?

Transportation

Factory

Warehousing

Transportation

Customers

Information
flows

Transportation

Warehousing

Transportation

Vendors/plants/ports

Supply Chain Illustration

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Supply
Chain
for
Denim
Jeans

Supply
Chain
for
Denim
Jeans

What is a Supply Chain?

All stages may not be present in all supply chains.

Supply chain structure used primarily depends on

customer segment and their needs it aims to
satisfy. (e.g., two supply chain structures for Dell).

May be more accurate to use the term supply

network or supply web.

Supply Chain Flows

Source: Principles of Supply Chain Management: A Balanced

Approach by Wisner, Leong, and Tan
2005 Thomson Business and Professional Publishing

Supply Chain

What is Supply Chain Management?

Supply

Chain Management is a set of

approaches utilized to efficiently integrate
suppliers, manufacturers, warehouses, and
stores, so that merchandize is produced and
distributed at the right quantities, to the right
locations, and at the right time, in order to
minimize system-wide costs while satisfying
service-level requirements.
- Levi et. al.

What is Supply Chain Management?

Managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry
and order management, distribution across all
channels, and delivery to the customer.
-Supply Chain Council

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The Objective of a Supply Chain

Objective of supply chain is to maximize overall value (i.e.

Supply chain surplus) created

Supply chain surplus = Customer value Supply chain

cost
The value of a product is estimated by the maximum

amount the customer is willing to pay for it.

The difference between the value of product and its price is

consumer surplus.

The Objective of a Supply Chain

Sources of supply chain revenue: the customer
Sources of supply chain cost: production , distribution, flows of information,

transportation etc.

Supply chain Profitability: Difference between the revenue generated

from customer and overall costs across supply chain.

Supply chain
Profitability

surplus

Customer

Surplus

Supply

chain

Contd

The Objective of a Supply Chain

Example: Dell receives $2000 from a customer for a computer

(revenue).

Supply chain incurs costs (production, 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.

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The Objective of a Supply Chain

Thus, Effective Supply chain management is:
The management of flows between and among
supply chain stages to maximize total supply
chain surplus and supply chain profitability.
As objective of SCM is to be efficient and cost-

effectiveness across entire system i.e. reduce total

system wide costs, It is a System level approach.
Why distributors have a important role in Indian retail

sector and not in US?

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Why SCM is difficult?

Three Major Reasons are:
1. Challenging to minimize system wide costs and

maximize system service levels i.e. The process of

finding best system-wide strategy is Global
Optimisation.
2. Inherent presence of Uncertainty and Risk in

every supply chain.

3. Supply

chain strategy cannot be determined in

isolation. Invariably linked to Development Chain.

Why SCM is difficult?

1 Global Optimization
Global Optimisation is difficult to achieve:
1.1 Supply chain today is geographically dispersed
complex network of facilities.

Why SCM is difficult?

1 Global Optimization

National Semiconductors (Acquired by Texas Instruments

in 2011):
Production:
Produces chips in six different locations: four in the US,
one in Britain and one in Israel
Chips are shipped to seven assembly locations in
Southeast Asia.
Distribution
The final product is shipped to hundreds of facilities all
over the world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within 45 days
5% are delivered within 90 days.

Why SCM is difficult?

1 Global Optimization
McDonald in India
Opened 1st restaurant in New Delhi, India in 1996
Started its operations in India with two Partners
Since 2011, it is a master franchisee operation-

HardCastle Restaurants Pvt. Ltd.

Currently has more than 300 restaurant across India.
Focus

on Quality, Service, Cleanliness & Value

( QSCV).
Achieve best value by offering best quality at

reasonable prices Jatia

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McDonald in India

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Why SCM is difficult?

1 Global Optimization
McDonald in India
Storage at 4 distribution centers
Two primary (company owned) in Noida and Mumbai
Two leased at Bengaluru and Kolkata
There are two types of food ingredients suppliers Tier1 and

Tier2 suppliers
Radha Krishna Foodland Pvt. Ltd. is the sole distributor
partner of the fast food chain.
RKFL handles thousand tonnes per month of around 250 items
from 50 suppliers at varying temperatures.

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Why SCM is difficult?

1 Global Optimization
Sources raw material / ingredients from all part of India

Why SCM is difficult?

1 Global Optimization
1.2 Conflicting objectives of different facilities: e.g.
Suppliers typically want manufacturers themselves to

commit to large quantities in stable volumes with

flexible delivery dates, however, manufacturers need to
be flexible to customer needs and changing demands.

Also, manufacturers want to make large production

batches which is in conflict with objectives of both

warehouses and distribution centres to reduce inventory.
Objective of reducing inventory levels typically implies

an increase in transportation costs.

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Why SCM is difficult?

2. Uncertainty and Risk
Supply Chain need to be designed and operated

in uncertain environment.
Inherent presence of uncertainty and risk in every

supply chain.

Demand is not the only sources of uncertainty:

Other potential sources are delivery lead times,

transportation times, components availability etc.
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Why SCM is difficult?

2.
Uncertainty
and
Risk
Matching Supply and Demand a Major
Challenge
REASONS

EXAMPLES

Raw material shortages

Internal and supplier parts shortages
Productivity inefficiencies

Boeing Aircrafts inventory write-down of

$2.6 billion in 1997

Customers refused on orders due to

market meltdown

Ciscos multi-billion ($2.2b) dollar write-off of

inventories in 2001-2002

Higher than expected orders for new

EMC Corp. missed its revenue targets in

2006

products over existing products

Laptops and desktops were not

available when and where customers
were ready to buy them

Sales and earnings shortfall

Larger than anticipated inventories
Stiff competition
General slowdown in the PC market

Compaq computers loss of $500 million to

$1 billion in sales in one year
Sales at U.S. Surgical Corporation declined
25 percent, resulting in a loss of $22 million
Intel reported a 38 percent decline in
quarterly profit

Why SCM is difficult?

2. Uncertainty and Risk
Fluctuations of Inventory & Backorders
throughout the Supply Chain

Order variations in the supply chain

Why SCM is difficult?

3. Uncertainty and Risk
Fluctuations of Inventory and Backorders
throughout the Supply Chain

In Supply Chain, the flow of materials from suppliers, to

production, to warehousing, to distribution, to the customertakes among separate and often very independent
organisations.
Bullwhip Effect: The increasing fluctuation in orders as

orders move through supply chain Or

Magnification of slight demand variability is magnified as
information moves back upstream
It can lead to significant and serious inefficiencies &

decrease in profits.
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Why SCM is difficult?

2. Uncertainty and Risk
Bullwhip Effect:

Order are relayed from retailers to wholesalers to

manufacturers with fluctuations increasing with each
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step of the chain.

Why SCM is difficult?

2. Uncertainty and Risk
Bullwhip Effect occurs due to
Local Optimisation
Incentives (sales incentives, promotion, quantity

discounts etc)
Large Lots
Bullwhip Effect increase the costs associated with

inventory, transportation, shipping and receiving

while decreasing customer service and profitability.

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It is set of activities and processes associated

with new product introduction.

It includes:
Why
SCM is difficult?
product
design phase
3. The
Development
Chain
associated capabilities and knowledge that need to
be developed internally
sourcing decisions
production plans
Includes decisions such as product design, make-

buy, outsourcing, supplier selection,

partnership, early supplier involvement

strategic

Why
SCM
is and
difficult?
Supply
Chain
development chain
point.
3.production
The Development
Chain

intersect at

Characteristics and decisions made in development

chain shall impact supply chain and vice versa.

Different managers are responsible for different parts of

these chains.
Others chains also intersect these chains i.e. reverse

logistics chain (returns of products / components),

spare parts chain

Evolution of Supply Chain

Management

Evolution of Supply Chain

Management
Evolved from Three principal areas:
Sourcing, procurement and supply management
Classic function: efficient and economic purchasing
SCM areas: Sourcing, supply side management, inbound
logistics, supplier relationship management
Materials management
Early: Forecasting, inventory management, stores
management, warehousing, stock-keeping
Extended Materials Management: include production
planning and control
Integrated Materials Management : order processing.
Subsequent merger of purchasing and Materials Management
Logistics and distribution
Early avatar of SCM as it includes all processes related to
transportation and inventory management

Logistics Management

Tradeoff between transportation and inventory lead to

emergence of logistics as a cross-functional discipline.

Logistics Management is that part of SCM that

plans, implements and controls the efficient and

effective forward and reverse flows and storage
of goods, services and related information between
the point of origin and the point of consumption in
order to meet the customers requirements
By Council of Supply Chain Management Professionals (CSCMP)

SCM vs Logistics Management identical or

different?
Logistics Mgmt is a part of SCM
Integrated Logistics Management is operationally

same as SCM

SCM = Logistics Management + Management of

conversion process + Coordination of functions and

processes (both intra- and inter-company)

Logistics Management = Management of materials /

information on movement and on rest = Inbound +

outbound + inventory management

Logistics - India
The Indian logistics industry was valued at an

estimated US$ 130 billion in 2012-13.

The industry comprises the following main

segments:
Transportation via road, rail, air and water
Warehousing and cold-storage
Indias logistics sector is expected to grow to USD

200 billion by 2020 - CII

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Logistics - India
India's logistic cost

as a percentage of the GDP is 13%-

14% .
It is double that of developed countries (7%-8%)

and

substantially higher than even BRIC nations (9%-10%) .

By 2018, the country will lose $65 billion every year

due to inefficient supply chain systems in retail

sector. Global competitiveness of retail supply chain Challenges- Strategies and Recommendations, 2010,
Confederation of Indian Industry (CII) and Amarthi Consulting.

India is ranked 47th on logistics globally.

Improving supply chain infrastructure and adopting best

supply chain practices are key recommendations of the

above report.
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Logistics costs share of the U.S. economy

US Logistics Cost:
$898 billion in
1998,$ 1.18
Trillion in 2005

India GDP : $
1.877 Trillion
(nominal);
2012

Total U.S. logistics costs between 1984 and 2005

Supply Chain: The Potential

Wal-Mart, $1 billion sales in 1980 to $408 billion in 2010

Seven-Eleven Japan, 1 billion sales in 1974 to 3 trillion

in 2009

Webvan folded in two years

Borders, $4 billion in 2004 to $2.8 billion in 2009

Dell, $56 billion in 2006, adopted new supply chain

strategies

Supply Chain: The Potential

For Illustration Only : Cost Elements of a Typical
Trade Book

Supply Chain: The Potential

For Illustration Only : The Apparel Industry

Manufacturer

Distributor

Retailer

Customer

Manufacturer

Distributor

Retailer

Customer

Manufacturer

Distributor

Retailer

Customer

Cost per

Percent

Shirt

Saving

$52.72

0%

$41.34

28%

$20.45

62%

Decision Phases of a Supply Chain

SCM encompasses firms activities at multiple levels
Supply chain strategy or design
How to structure the supply chain over the next

several years
Supply chain planning
Decisions over the next quarter or year

Supply chain operation

Daily or weekly operational decisions

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 / Tactical

Decisions
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

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 a Supply Chain

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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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 Supply Chain Processes

Figure 1-4

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 / proactive)
Push/pull boundary separates push processes
from pull processes

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Push/Pull View of Supply Chains

Procurement,
Manufacturing and
Replenishment cycles

PUSH PROCESSES

Customer Order
Cycle

PULL PROCESSES

Customer
Order Arrives
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Push/Pull View of Supply Chains

Figure 1-5

Push/Pull ViewL.L. Bean,

a US Based mail order,

online company Clothing and outdoor equipment

Push/Pull ViewDell

Push/Pull View of Supply Chain

Processes
Useful in considering strategic decisions relating

to supply chain design more global view of how

supply chain processes relate to customer orders
The relative proportion of push and pull processes

can have an impact on supply chain performance

e.g. Paint industry

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Characteristics of push and pull

portions of supply chain
Objective
Complexity
Focus
Lead time
Processes

Push

Pull

Minimize cost

Maximize
service level

High

Low

Resource
allocation

Responsiveness

Long

Short

Tactical Planning Order Fulfillment

Supply Chain Macro Processes

Supply chain processes discussed in the two

views can be classified into:
Customer Relationship Management (CRM)
Internal Supply Chain Management (ISCM)
Supplier Relationship Management (SRM)

These three macro processes manage the flow of

information, product and funds required to
generate, receive and fulfill a customer request.

Supply Chain Macro Processes

Customer Relationship Management (CRM):
All processes that focus on the interface between

the firms and its customers.

CRM processes aims to generate the customer

demand, facilitate the placement and tracking of

orders.
E.g. marketing, pricing, sales, order management,

call center management etc

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Supply Chain Macro Processes

Internal Supply Chain Management (ISCM):
All processes that are internal to the firm.
ISCM processes aims to fulfill demand generated by

the CRM processes in a timely manner and lowest

possible cost.
These

include planning of internal production,

storage , preparation of demand and supply plans
etc.
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Supply Chain Macro Processes

Supplier Relationship Management (SRM):
All processes that focus on the interface between

the firms and its suppliers.

SRM processes aims to arrange for and manage
supply sources for various goods and services.
Integration among the above three macro
processes is critical for effective and
successful supply chain management.

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Supply Chain Macro Processes

Examples of Supply Chains

Zara

Gateway and Apple

W.W. Grainger and McMaster-Carr

Toyota

Amazon

Zara
Chain of fashion stores owned by Inditex; World largest

apparel retailer
2014: 6500 retail outlets in 88 countries.
Highly responsive to changing trends with affordable prices
Design to sales time: 4 to 6 weeks (6 months)
New designs every week and change 75% of display every 3-4
weeks
Flexible and quick sources in Europe/low cost sources in Asia.
More than 40% of production starts after sales season (20%) Postponement.
High investment in IT: after sales data to drive replenishments
and production decisions.
8 DCs in Spain supplying all over the world
Lead time: 24 hour within Europe and 48 hours for
American and Asian stores.
Replenishments from DCs to stores several times a week

Toyota
Open factories in every market it serves
Till 1996 Local plants equipped for local

markets
After 1996 Global complementation to
export to markets that remain strong when
local demand weakens
Increased commonality of parts used around
the globe: lower costs and increase
availability.
Risk?