SUPPLY CHAIN MANAGEMENT

Objective

Maximise the overall value generated is the difference between what the final product is
worth to the customer and the effort the supply chains expends in filling the request of the
customer

Supply chain profitability is the difference between the revenue generated from the
customer and the overall cost across the supply chain

It is the total profit to be shared across all supply chain stages

Supply chain success is measured in terms of supply chain profitability and not in terms
of the profits at an individual stage

Revenue is from customer positive cash flow

All other cash flows are simply fund exchanges that occur within the supply chain given
that different stages have different owners

All flows of information, product or funds generates costs within the supply chain

Supply chain management involves the management of flows between and among stages
in a supply chain to maximise total supply chain profitability

Decision Phases
Three categories - Depending on the frequency of each decision and the time frame over
which a decision has an impact,
Supply chain strategy or design
Supply chain planning
Supply chain operation
Supply chain strategy

Decides how to structure the supply chain over the next several years
-

chain configuration,

resource allocated and

process at each stage should perform

Decisions include
-

location and capacities of production and warehousing facilities,

the products to be manufactured or stored at various locations,

the method of transportation to be made available along different shipping legs,

and

the type of information system to be utilised

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National Institute of Technology Calicut

Department of Mechanical Engineering

Supply chain planning

Under the given configuration decisions are made which has impact on a time frame of
quarter to a year

Starts with a forecast the coming year or a comparable time frame

Planning decisions include

which market will be supplied from which locations,

the subcontracting for manufacturing,

the inventory policies to be followed, and

the timing and size of marketing promotions

Companies in the planning phase try to incorporate any flexibility built into the supply
chain in the design phase and exploit it to optimise performance

Companies define a set of operating policies that govern short-term operations

Supply chain operation

Decisions are taken regarding individual customer order and the time frame is week or
days

Configuration is fixed and policies are defined

Objective is to handle incoming customer orders in the best possible manner

Decisions related with

allocation of inventory or production to individual orders,

set a date that an order is to be filled,

generate pick lists at a warehouse,

allocate an order to a particular shipping mode and shipment,

set delivery schedules of trucks, and

place replenishment order

Exploit the reduction in uncertainty and optimise performance

Process View of Supply Chain

A supply chain is a sequence of processes and flows that take place within and between
different stages and combine to fill a customer need for a product

Two ways to view the processes performed in a supply chain

Cycles view and
Push/pull view

Cycle view

Defines the processes involved and the owners of each process

Process in a supply chain are divided into a series of cycles

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National Institute of Technology Calicut

Department of Mechanical Engineering

Cycles are performed at the interface between two successive stages of a supply chain

Supply chain process can be broken down into four process cycles such as

Customer order cycle

Replenishment cycle

Manufacturing cycle

Procurement cycle

Each cycles occurs at the interface between two successive stages of the supply chain

A cycle view of the supply chain is very useful when considering operational decisions

It clearly specifies the roles and responsibilities of each member of the supply chain

It helps the designer to consider the infrastructure required to support the processes
Customer

Customer Order Cycle

Retailer
Replenishment Cycle
Distributor
Manufacturing Cycle
Manufacturer
Procurement Cycle
Supplier
Fig 1: Supply Chain Process Cycles

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Department of Mechanical Engineering

Customer
Arrival

Customer
Order Receiving

Customer
Order Entry

Customer
Order Fulfillment

Fig. Customer Order Cycle

Retailer Order
Trigger

Retailer
Order Receiving

Retailer
Order Entry

Retailer
Order Fulfillment

Fig 2: Replenishment Cycle

Order
Arrival

Receiving

Production
Scheduling

Manufacturing and
Shipping

Fig 3: Manufacturing Cycle

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National Institute of Technology Calicut

Department of Mechanical Engineering

Order Based on
Manufacturers
Production Schedule
Arrival

Receiving at
Manufacturer

Supplier Production
Scheduling

Component
Manufacturing and
Shipping

Fig 4: Procurement Cycle

Push/Pull View

Categorises processes in a supply chain based on whether they are initiated in response to
a customer order (pull) or in anticipation of a customer order (push)

Categorisation is based on the timing of process execution relative to end customer

demand

At the time of execution of a pull process customer demand is known with certainty

In case of push process at the time of execution of a process demand is not known and
must be forecasted

Pull process reactive process

Push process speculative process

Push/pull boundary in a supply chain separates push process from pull process

Very useful when considering strategic decisions relating to supply chain

Forces more global consideration of supply chain processes as they relate to a customer
order

More the pull process better the supply chain

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National Institute of Technology Calicut

Department of Mechanical Engineering

Customer

Customer Order and

Manufacturing Cycle

Manufacturer (Dell)

Procurement Cycle

Supplier

Fig 5: Dell Supply Chain

Customer
Order and
Manufacturing
Cycle

PULL
PROCESS
Customer Order and
Manufacturing Cycle
Customer
Order Arrives

Procurement
Cycle

Procurement Cycle

PUSH
PROCESS

Fig 6: Push/Pull Processes of Dell Supply Chain

COMPETITIVENESS AND SUPPLY CHAIN

STRATEGIES

Competitive strategy of a company defines the set of customer needs that it seeks to
satisfy through its products and services

Defined based on how customer prioritises product cost, delivery time, variety and quality

Targets one or more customer segments and aims to provide products and services that
satisfy these customers needs

Some companys competitive strategies are defined around the following

High availability of a variety of reasonable quality products at low prices eg:

Wal-Mart

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National Institute of Technology Calicut

Department of Mechanical Engineering

Better customer convenience, availability and responsiveness eg: McMaster

Carr MRO items - over 200,000 items through catalog and web site

Better customisation, and variety at reasonable cost eg: Dell

To execute a competitive strategy of a company, all the functions play a role and each
must develop its own strategy

Supply chain strategy determines

the nature of procurement of raw materials,

transportation of materials to and from the company,

manufacture of the product or operations to provide the service, and

distribution of the product to the customer, along with any follow-up service

This strategy includes what many traditionally include

Supplier strategy

Operations strategy, and

Logistics strategy

Decisions regarding inventory, operating facilities, transportation, and information flows

in the supply chain are all part of supply chain strategy

Achieving Strategic Fit

Strategic fit means that both the competitive and supply chain strategies have the same
goal

It refers to consistency between

The customer priorities that the competitive strategy hopes to satisfy and

The supply chain capabilities that the supply chain strategy aims to build

Major task of chief executive officer (CEO) is aligning all of the core strategies with the
overall competitive strategy to achieve strategic fit

During the supply chain design a key consideration is the strategic fit

A companys success or failure closely linked to the following

1. The competitive strategy and all functional strategies must fit together to form a
coordinated overall strategy
2. Different functions in a company must appropriately structure their process and
resources to be able to execute these strategies successfully

Basic steps to achieve strategic fit

1. Understanding the customer, and supply chain uncertainty
2. Understanding the supply chain capabilities
3. Achieving strategic fit

Understanding the Customer and Supply Chain Uncertainty

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Department of Mechanical Engineering

To understand the customer, a company must identify the needs of the customer segment
being served

Customer demand from different segments may vary along several attributes:
1. The quantity of the product needed in each lot
2. The response time that customers are willing to tolerate
3. The variety of products needed
4. The service level required
5. The price of the product
6. The desired rate of innovation in the product

Implied Demand Uncertainty

Demand uncertainty reflects the uncertainty of customer demand for product

Implied demand uncertainty is the uncertainty in meeting a portion of customer demand

and it is the uncertainty the supply chain faces.

It is mainly due to the attributes the customer desires

Illustration
As a supply chain raises its service level, it must be able to meet a higher and higher
percentage of actual demand, forcing it to prepare for rare surges in demand.
Thus raising the service level increases the implied demand uncertainty even though
the products underlying demand uncertainty does not change.

Product demand uncertainty and various customer needs that the supply chain tries to fill
affect implied demand uncertainty

The following customer needs increases implied demand uncertainty

Range quantity required increases

Lead time decreases
Variety of products required increases
Number of channels through which product may be acquired increases
Rate of innovation increases
Required service level increases
Correlation between implied demand uncertainty and other attributes
Low Implied
High Implied
Uncertainty
Uncertainty
Product margin
Average forecast error
Average stockout rate
Average forced season
end markdown

Low
10%
1% to 2%

High
40% to 100%
10% to 40%

0%

10% to 25%

Following supply source capabilities increase the supply uncertainty and hence high
implied demand uncertainty
Frequent breakdown
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Department of Mechanical Engineering

Unpredictable and low yields

Poor quality
Limited supply capacity
Inflexible supply capacity
Evolving production process

Implied uncertainty spectrum shows in one end predictable supply and demand, and in the
other end highly uncertain supply and demand

Understanding the supply chain

Important supply chain characteristics are responsiveness and efficiency

Supply chain responsiveness includes a supply chains ability to do the following

Respond to wide range of quantities demanded

Meet short lead time
Handle a large variety of products
Build highly innovative products
Meet a very high service level
Handle supply uncertainty

Supply chain efficiency is the cost of making and delivering a product to the customer

Cost-responsiveness efficient frontier is the curve showing the lowest possible cost for a
given level of responsiveness

Shows the cost-responsiveness performance of the best supply chain

Firms on the efficient frontier are also continuously improving their processes and
changing technology to shift the efficient frontier itself

Responsiveness

Low
High

Low

Cost

Fig 7: Cost Responsiveness efficient frontier

Responsiveness spectrum - Supply chains range from those that focus solely on being
responsive to those that focus on a goal of producing and supplying at the lowest possible
cost
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Department of Mechanical Engineering

Achieving Strategic Fit

Strategic fit is achieved if what the supply chain does particularly well is consistent with
the targeted customers needs and the uncertainty of the supply chain

Responsive
Supply Chain

Responsiveness
Spectrum
Zone of strategic fit

Efficient
Supply Chain

Certain
Demand

Implied
Uncertainty
Spectrum

Uncertain
Demand

Fig 8: Finding the zone of strategic fit

For high level of performance, companies should move their competitive strategy (and
resulting implied uncertainty) and supply chain strategy (and resulting responsiveness)
towards the zone of strategic fit

To achieve complete strategic fit, a firm must consider all functional strategic within the
value chain

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Department of Mechanical Engineering

Comparison of efficient and responsive supply chains

Primary goal

lowest cost

Respond quickly

Product design
strategy

Max. performance
at a min. cost

Modularitypostponement

Pricing strategy

Lowe margin

High margin

Mfg. Strategy

Lower cost

Capacity flexibility

Inventory Strategy

Minimise

Buffer inventory

Lead time strategy

Reduce- not at the

expense of cost

Aggressively
reduce

Supplier strategy

Cost and quality

Speed, flexibility,
reliability, quality

Other Issues Affecting Strategic Fit

Multiple products and customer segments

Product life cycle

Competitive change over time

Multiple Products and Customer Segments

Firms often sells multiple products and serves customer segments with very different
needs

Different products and segments have different implied demand uncertainty

Key issue for company is to create a supply chain that balances efficiency and
responsiveness given its portfolio of products, customer segments and supply sources

Several possible routes a company can take

 One route set up independent supply chains for each different product or
customer segment

Feasible if each segment is large enough to support a dedicated supply

chain

 Preferable strategy is to tailor the supply chain to best meet the needs of each
products demand

Tailoring the supply chain requires some links in the supply chain with
some products, while having separate operations for other links
considering efficiency and responsiveness

Product Life Cycle

As product go through their life cycle, the demand characteristics and the needs of the
customer segments being served change

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National Institute of Technology Calicut

Department of Mechanical Engineering

As product mature, the corresponding supply chain strategy should, in general, move
from being responsive to being efficient

Responsive

Responsiveness
Spectrum
Zone of strategic fit

Efficient
Product
Maturity

Implied
Uncertainty
Spectrum

Product
Introduction

Fig 9: Changes in supply chain strategy over a product life

cycle

Competitive Change Over Time

Competitor can change the landscape of the market

 Growth of mass customisation competitors flood the marketplace with
product variety, customers are becoming accustomed to having their
individual needs satisfied
 Competitive focus today is on producing sufficient variety at a reasonable
price

As competitive landscape changes, a firm is forced to alter its competitive strategy result
in change in supply chain strategy

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Department of Mechanical Engineering

EXPANDING STRATEGIC SCOPE

Scope of strategic fit refers to the function and stages that devices an integrated strategy
with a shared objective

One extreme - operation within a function devices independent strategy

Other extreme - all functional areas within all stages of the supply chain device strategy
jointly with a common objective

Intracompany intraoperation scope: minimises local cost view

Strategic fit is considered in one operation within a functional area within a company

Resulting collection of strategies will most likely not come close to maximising supply
chain profit conflicting local objectives

Practices during 1950s and 1960s

Intracompany intrafunctional scope: minimise functional cost view

Given that many operations together form each function within a firm, managers
recognised the weakness of the intracompany intraoperation scope

With the intracompany intrafunction scope, the strategic fit is expanded to include all
operations within a function

The scope of strategic fit expands to an entire function within a stage of the supply chain

Suppliers

Manufacturer

Distributor

Retailer

Customer

Competitive
Strategy
Product
Development
Strategy
Supply Chain
Strategy
Marketing
Strategy
An example of intracompany intraoperation scope of supply chain strategy at a
distributor

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National Institute of Technology Calicut

Department of Mechanical Engineering

Suppliers

Manufacturer

Distributor

Retailer

Customer

Competitive
Strategy
Product
Development
Strategy
Supply Chain
Strategy
Marketing
Strategy
An example of intracompany intrafunctional scope of supply chain strategy at a
distributor
Intracompany interfunctional scope: maximise company profit view

Different functions may have conflicting objectives

Functional strategies are developed to support both each other and the competitive
strategy

Intercompany interfunctional scope: maximise supply chain surplus view

Intracompany interfunctional scope leads to each stage of the supply chain trying to
maximise its own profits, which does not necessarily result in the maximisation of supply
chain surplus

When company uses speed as their primary competitive advantage to succeed in the
marketplace, intracompany interfunctional strategy performs badly
 The impediment to create level of speed that customers are demanding lies to a
degree within their own boundaries
 Managing these interfaces becomes a key to providing speed to customers

Intercompany scope forces every stage of the supply chain to look across the supply chain
and evaluate the impact of its action on other stages as well as on the interfaces

This means treating stages in the supply chain that a company does not own as belonging
to the company

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National Institute of Technology Calicut

Department of Mechanical Engineering

Suppliers

Manufacture
r

Distributor

Retailer

Customer

Competitive
Strategy
Product
Development
Strategy
Supply
Strategy

Chain

Marketing
Strategy
An example of intracompany interfunctional scope of supply chain strategic fit at a
distributor
Suppliers

Manufacturer

Distributor

Retailer

Customer

Competitive
Strategy
Product
Development
Strategy
Supply Chain
Strategy
Marketing
Strategy
The intercompany interfunctional scope of strategic fit
Agile intercompany interfunctional scope

Till now the discussion was on strategic fit under static context players in supply chain
and customers do not change over time

Dynamics exits product life cycle get shorter and companies try to satisfy the changing
needs of individual customers

In such situations, a company may have to partner with many different firms depending
on the product being produced and the customer being served strategic fit should have
agile intercompany scope
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National Institute of Technology Calicut

Department of Mechanical Engineering