Supply Chain Management [SCM] 1

Understanding the Supply Chain Management

Concept of Supply Chain Management
Define Supply Define Supply Chain Define Supply Chain Management This can best be done by discussing the general Operating process of organizations with examples from day to day activities.

SCM-LN-060213

Operation of an Organization
Random Fluctuations Late Deliveries Staff Turnover Power / Equipment failure

Inputs [Transformed Resources]

1. Materials
2. Information 3. Customers

Products

External

1. Facilities

The Transformation Process

Outputs

Customers

2. Energy & Utilities

Services Government Regulations etc.

3. Technology 4. Staff
Inputs [Transforming Resources]

Internal

Environment
A general Input Transformation Process Output Operations model

Supply Chain Management [SCM] 2

Process of buying / purchasing Products

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

Toilet Soap

Raw material Supplier

Soap Manufacturer

Distributor

Supermarket [Retailer]

Customer

Fuel

Crude Oil Supplier

Refinery [Manufacturer]

Petrol/Diesel Pump [Retailer]

Customer

Supply Chain Management [SCM] 3

Process of buying / purchasing Services

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

Pest Control
Maintenance Company [Retailer]

Raw material Supplier

Pest control products Manufacturer

Pest control products Distributor

Customer

Electricity
Water [Nature]
Generating Station [Producer]

Home Customer Distribution Company [Retailer] Commercial Customer

Fuel Supplier

Industrial Customer

Supply Chain Management [SCM] 4

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?

P&G or other manufacturer Jewel or third party DC Jewel Supermarket Customer wants detergent and goes to Jewel

Plastic Producer

Tenneco Packaging

Chemical manufacturer (e.g. Oil Company)

Chemical manufacturer (e.g. Oil Company)

Paper Manufacturer

Timber Industry

Supply Chain Management [SCM] 5

Supply Chain
The buying process begins with customer order and ends when the satisfied customer pays for the product / service. It has the following typical entities / stages:

Customers
Retailers Wholesalers / Distributors

Transporters
Manufacturers / Producers Component / Raw material Suppliers
These entities are connected to each other along a chain. Hence the name
Supply Chain system.

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 Management [SCM] 6

Supply Chain
Supply Chain Model
Information Flow Return of Product Return of Product

Basic

Supplier
Primary Product Flow

Producer

Customer
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 Management [SCM] 7

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

Supply Chain Management [SCM] 8

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. [APICS Dictionary 11th edition]
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 [SCM] 9

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.
[APICS dictionary 11th edition]

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.

Supply Chain Management [SCM] 10

A generalized SC Model
Distribution Tier 2 Distribution Tier 1

Raw Materials

Retailer Distributor

Customer Customer

Supplier Tier 2

Supplier Tier 1

Retailer

Manufacturer Supplier Tier 2 Supplier Tier 1

Distributor

Retailer

Customer

Components

Retailer

Customer

Supply Chain Management [SCM] 10A

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 Marketing / Sales Finance

What Ford practised. Later divested.

Show Room Distribution Plant

Ford Customer

Now horizontal integration

Component Production

is the favoured approach.

Raw material Extraction

Supply Chain Management [SCM] 11

Evolution of Supply Chain Management

Stage 1 Multiple Dysfunction

Supplier Supplier

Purchasing

Marketing / Sales

Customer

Production Control

Customer Distribution Customer

Supplier

Logistics

Materials / Service

Payments

Lacks clear internal definitions and goals No external links other than transactional ones

Supply Chain Management [SCM] 12

Evolution of Supply Chain Management

Stage 2 Semi functional Enterprise Information
Supplier Purchasing Supplier Logistics Customer

Production Control

Marketing / Sales

Distribution 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

Supply Chain Management [SCM] 13

Evolution of Supply Chain Management

Stage 3 Integrated Enterprise ERP
Supplier Purchasing Supplier Logistics Customer

Production Control

Marketing / Sales

Distribution 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).

Supply Chain Management [SCM] 13A

Why Process Integration is needed? To make maximum profit a company must have the following objectives: - Provide best customer service - Provide lowest inventory investment - Provide lowest production costs - Provide lowest distribution costs

These objectives create conflict among marketing, production & finance departments:

Function Marketing

Objective - High revenue - High Product Availability - Low Production Cost - High Level Production - Long Production Run - Low Investment and Cost - Fewer Fixed Costs - Low Inventories High

Implication Customer Service

Low
Production Many Production Disruption

Few
High Inventories Low

Finance

Supply Chain Management [SCM] 14

Evolution of Supply Chain Management

Stage 4 Extended Enterprise Networked Information Flow

Suppliers Suppliers

Suppliers

Internal Chain

Customers

Customers Customers

Materials / Service

Payments

Integration of internal network with selected SCM partners internal network to improve efficiency, quality of products / services.

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 customers 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

Supply Chain Management [SCM] 17

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 products utility to the customer. Types of utility: Form Utility Place Utility - Operation - 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.

Supply Chain Management [SCM] 18

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

Supply Chain Management [SCM] 19

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

Supply Chain Management [SCM] 20

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

Supply Chain Management [SCM] 22

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

Supply Chain Management [SCM] 23

Importance / Benefits of SCM

Adds significant Customer Value - A product or service is of no value to the customer, if not available
when required
Goods customers want are not produced where they want to consume OR goods are not accessible when customers want to consume Value Form Through Converting raw materials and components to the required Form, Fit & Function Production scheduling & moving Moving & making transportable Responsibility Engineering & Manufacturing

Time Place

Manufacturing & Logistics Engineering & Logistics

Possession

Advertising, Pricing, Technical Support

Marketing, Finance & Engineering

Supply Chain Management [SCM] 24

Importance / Benefits of SCM

Customers Increasingly want Quick Customised Response
- Customers expect that products / services can be made available in shorter times. Guided by Fast Food, ATM, E-Mail etc. - Improved IS and flexible manufacturing processes have led to mass customisation

- One Size Fit all philosophy is not appreciated always - Manufacturers / Suppliers are offering products that meet individual needs

Decision Phases of a Supply Chain

Supply chain strategy or design Supply chain planning Supply chain operation

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

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

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

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)

5.3. Process View of Supply Chain

Cyclic View

Management:

SC is a sequence of processes and flows that take place within and between different SC stages and combine to fulfil a customer need for a product / service. These processes are divided into a series of cycles (cyclic view), each performed at the interface between two successive stages / entities of SC.

Cycles
Customer Order Cycle

Stage/Entity
Customer
Customer Arrival Customer Order Receiving

Customer Order Entry

Customer Order Fulfilment

Retailer
Replenishment Cycle
Retail Order Entry Retail Order Fulfilment Retail Order Trigger Retail Order Receiving

Distributor
Manufacturing
Order Arrival from D/R/C Receiving by D/R/C

Cycle

Manufacturer
Procurement Cycle

Production Scheduling

Manufacturing & Shipping

Order from Manufacturer

Receiving at Manufacturer

Supplier

Supplier Prodn Scheduling

RM / Comp. Mfg & Shipping

Push/Pull View of Supply Chains

Procurement, Manufacturing and Replenishment cycles
Customer Order Cycle

PUSH PROCESSES

PULL PROCESSES

Customer Order Arrives

Supply Chain Management [SCM] 24A Process View of a Supply Chain: Push Pull View

LL Bean
PULL Process
Customer Order Cycle

DELL

PULL
Process

Cust Order & Mfrg

Customer order arrives

Cycle

Repl & Mfrg Cycle

Customer order arrives

Procurement

Procurement Cycle

Cycle

PUSH Process

PUSH Process

Supply Chain Macro Processes in a Firm

SRM
Source Negotiate Buy Design Collaboration Supply Collaboration

ISCM
Strategic planning Demand planning Supply planning Fulfilment Field service

CRM
Market Sell Call centre Order management

Purchasing
Supplier selection Supplier evaluation New orders

Manufacturing
Production planning Storage planning Demand-Supply planning

Marketing Generate demand Facilitate placement Track orders

5.4. Supply Chain Drivers

Drivers of supply chain performance A framework for structuring drivers Facilities Inventory Transportation Information Obstacles to achieving fit

Drivers of Supply Chain Performance

Facilities
places where inventory is stored, assembled, or fabricated production sites and storage sites

Inventory
raw materials, WIP, finished goods within a supply chain inventory policies

Transportation
moving inventory from point to point in a supply chain combinations of transportation modes and routes

Information
data and analysis regarding inventory, transportation, facilities throughout the supply chain potentially the biggest driver of supply chain performance

A Framework for Structuring Drivers

Efficiency

Responsiveness

Supply chain structure

Facilities

Transportation

Inventory

Information

Drivers

Supply Chain Decisions: Structuring Drivers

Strategy (Design) Planning Operation

Facilities
Role in the supply chain
the where of the supply chain manufacturing or storage (warehouses)

Role in the competitive strategy

economies of scale (efficiency priority) larger number of smaller facilities (responsiveness priority)

Example 3.1: Toyota and Honda Components of facilities decisions

Components of Facilities Decisions

Location
centralization (efficiency) vs. decentralization (responsiveness) other factors to consider (e.g., proximity to customers)

Capacity (flexibility versus efficiency) Manufacturing methodology (product focused versus process focused) Warehousing methodology (SKU storage, job lot storage, cross-docking) Overall trade-off: Responsiveness versus efficiency

Inventory
Role in the supply chain Role in the competitive strategy Components of inventory decisions

Inventory: Role in the Supply Chain

Inventory exists because of a mismatch between supply and demand Source of cost and influence on responsiveness Impact on
material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain throughput rate at which sales to end consumers occur I = RT (Littles Law) I = inventory; R = throughput; T = flow time Example Inventory and throughput are synonymous in a supply chain

Inventory: Role in Competitive Strategy

If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers If cost is more important, inventory can be reduced to make the firm more efficient Trade-off Example 3.2 Nordstrom

Components of Inventory Decisions

Cycle inventory
Average amount of inventory used to satisfy demand between shipments Depends on lot size

Safety inventory
inventory held in case demand exceeds expectations costs of carrying too much inventory versus cost of losing sales

Seasonal inventory
inventory built up to counter predictable variability in demand cost of carrying additional inventory versus cost of flexible production

Overall trade-off: Responsiveness versus efficiency

more inventory: greater responsiveness but greater cost less inventory: lower cost but lower responsiveness

Transportation
Role in the supply chain Role in the competitive strategy Components of transportation decisions

Transportation: Role in the Supply Chain

Moves the product between stages in the supply chain Impact on responsiveness and efficiency Faster transportation allows greater responsiveness but lower efficiency Also affects inventory and facilities

Transportation: Role in the Competitive Strategy

If responsiveness is a strategic competitive priority, then faster transportation modes can provide greater responsiveness to customers who are willing to pay for it Can also use slower transportation modes for customers whose priority is price (cost) Can also consider both inventory and transportation to find the right balance Example 3.3: Laura Ashley

Components of Transportation Decisions

Mode of transportation:
air, truck, rail, ship, pipeline, electronic transportation vary in cost, speed, size of shipment, flexibility

Route and network selection

route: path along which a product is shipped network: collection of locations and routes

In-house or outsource Overall trade-off: Responsiveness versus efficiency

Information
Role in the supply chain Role in the competitive strategy Components of information decisions

Information: Role in the Supply Chain

The connection between the various stages in the supply chain allows coordination between stages Crucial to daily operation of each stage in a supply chain e.g., production scheduling, inventory levels

Information: Role in the Competitive Strategy

Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) Information technology What information is most valuable? Example 3.4: Andersen Windows Example 3.5: Dell

Components of Information Decisions

Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain) Coordination and information sharing Forecasting and aggregate planning Enabling technologies
EDI Internet ERP systems Supply Chain Management software

Overall trade-off: Responsiveness versus efficiency

Considerations for Supply Chain Drivers

Driver Inventory Transportation Facilities Information Efficiency Cost of holding Consolidation Responsiveness Availability Speed

Consolidation / Proximity / Dedicated Flexibility What information is best suited for each objective

Obstacles to Achieving Strategic Fit

Increasing variety of products Decreasing product life cycles Increasingly demanding customers Fragmentation of supply chain ownership Globalization Difficulty executing new strategies

Major Obstacles to Achieving Fit

Multiple owners / incentives in a supply chain
Local optimization and lack of global fit

Increasing product variety / shrinking life cycles / customer fragmentation

Increasing implied uncertainty