Understanding the Supply Chain Management

• Concept of Supply Chain Management

– Define Supply
– Define Supply Chain
– Define Supply Chain Management
.
 Operation of an Organization

Random Fluctuations
Inputs
Late Deliveries
[Transformed
Resources] Staff Turnover

1. Materials Power / Equipment failure External

Products
2. Information
3. Customers

The
Transformation Outputs Customers
Process
1. Facilities
2. Energy &
Utilities Services Internal
3. Technology Government
4. Staff
Regulations etc.
Inputs
Environment
[Transforming
Resources] A general Input – Transformation Process–
Output Operations model
 Process of buying / purchasing Products

Computer
Raw material
Supplier
Computer Show Room
Distributor Customer
Manufacturer [Retailer]
Component
Supplier

Toilet Soap

Raw material Soap Supermarket

Distributor Customer
Supplier Manufacturer [Retailer]

Fuel

Crude Oil Refinery Petrol/Diesel Pump

Customer
Supplier [Manufacturer] [Retailer]
 Process of buying / purchasing Services

Vehicle Repair
Raw material
Supplier
Vehicle Spares Service Centre
Customer
Manufacturer Distributor [Retailer]
Component
Supplier
Pest Control

Maintenance
Raw material Pest control products Pest control products
Supplier Distributor
Company Customer
Manufacturer [Retailer]

Electricity Home
Water Customer
[Nature]
Generating Station Distribution Company Commercial
[Producer] [Retailer] Customer
Fuel
Supplier Industrial
Customer
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 wants
P&G or other Jewel or third Jewel
detergent and goes
manufacturer party DC Supermarket
to Jewel

Chemical
Plastic Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

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

Return of Product Return of Product

Supplier Producer Customer

Primary Product Flow Primary Product Flow

Primary Cash Flow

Supplier – Producer – Customer are connected by Product, Information & Payment Flows

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
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
The SCM Network
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.
•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.
 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
Distribution Tier 2
Distribution Tier 1
Retailer Customer
Raw Materials

Supplier Supplier
Distributor Retailer Customer
Tier 2 Tier 1

Manufacturer

Supplier Supplier
Tier 2 Tier 1 Distributor Retailer Customer

Components
Retailer Customer
 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.
Ownership
Management
What Ford practised. Later divested.
Marketing / Sales
Finance

Show Room Ford Customer

Distribution

Plant
Now horizontal integration
Component Production
is the favoured approach.
Raw material Extraction
 Evolution of Supply Chain Management

Stage 1 – Multiple Dysfunction

Purchasing Marketing / Sales Customer

Supplier

Supplier Production Control Customer

Supplier Logistics Distribution Customer

Materials / Service Payments

Lacks clear internal definitions and goals – No external links other than transactional ones
 Evolution of Supply Chain Management

Stage 2 – Semi functional Enterprise

Information

Supplier Customer
Production Marketing /
Purchasing Logistics Distribution
Control Sales
Supplier Customer

Materials / Service Payments

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

Stage 3 – Integrated Enterprise

ERP

Supplier Customer
Production Marketing /
Purchasing Logistics Distribution
Control Sales
Supplier Customer

Materials / Service Payments

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).
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
- High Product Availability Customer Service
Low
Production - Low Production Cost Many
- High Level Production Production Disruption
- Long Production Run Few
Finance - Low Investment and Cost High
- Fewer Fixed Costs Inventories
- Low Inventories Low
 Evolution of Supply Chain Management

Stage 4 – Extended Enterprise

Networked Information Flow

Suppliers’ Internal Customers’

Suppliers Customers
Suppliers Chain Customers

Materials / Service Payments

Integration of internal network with selected SCM partners’ internal network to improve efficiency,
quality of products / services.
 1.5 Evolution of Supply Chain
Management
Further
Refinement of
SCM Capabilities

SCM
Formation/
Extensions

JIT, TQM, BPR,

Alliances

Inventory Management/Cost
Optimization

Traditional Mass Manufacturing

1950s 1960s 1970s 1980s 1990s 2000s Beyond

 SCM Definition
Material Flow

Converter
Supplier Retailer
Distributor

Source
Converter Consumers
Distributor End-User
Supplier

Value-Added Services

Funds/Demand Flow

Information Flow

Reuse/Maintenance/After Sales Service 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
Cisco’s Value Network
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