Supply Chain Concepts: Objectives of a Supply Chain

Supply Chain

A supply chain is a network between a company and its suppliers to produce and distribute a
specific product to the final buyer. This network includes different activities, people, entities,
information, and resources. The supply chain also represents the steps it takes to get the product
or service from its original state to the customer.

Supply chains are developed by companies so they can reduce their costs and remain competitive
in the business landscape.

A supply chain involves a series of steps involved to get a product or service to the customer.
The steps include moving and transforming raw materials into finished products, transporting
those products, and distributing them to the end user. The entities involved in the supply chain
include producers, vendors, warehouses, transportation companies, distribution centers, and
retailers.

The elements of a supply chain include all the functions that start with receiving an order to
meeting the customer’s request. These functions include product development, marketing,
operations, distribution, finance, and customer service.

A supply chain is a network between a company and its suppliers to produce and distribute a
specific product or service.

The entities in the supply chain include producers, vendors, warehouses, transportation
companies, distribution centers, and retailers.

The functions in a supply chain include product development, marketing, operations,

distribution, finance, and customer service.

Supply chain management results in lower costs and a faster production cycle.

The objective of a supply chain

The objective of every supply chain is to maximize the overall value generated. The value of a
supply chain generates is the difference between what the final product is worth to the customer
and the effort of the supply chain expands in filling the customer’s request. For most commercial
supply chains, the value will be strongly correlated with supply chain profitability, the difference
between the revenue generated from the customer and the overall cost across the supply chain.
For most commercial supply chains, the value will be strongly correlated with supply chain
profitability, the difference between the revenue generated from the customer and the overall
cost across the supply chain.

For example, a customer purchasing a computer from Dell pays $2,000, which represents the
revenue the supply china receives. Dell and other stages of the supply chain incur costs to
convey information, produce components, store them, transport them, transfer funds, and so on.

The difference between the $2,000 that the customer paid and the sum of all costs incurred by the
supply chain to produce and distribute the computer represents the supply chain profitability.
Supply chain profitability is the total profit to be shared across all supply chain. Supply chain
success should be measured in terms of supply chain profitability and not in terms of the profits
at an individual stage.

Max.the overall
value of the
product

Effective SCM--
Management of Max. Supply Chain
Supply chain Objective Profitability/ supply
assets,product,infor chain surplus.
mation and fund of SCM
flow.

Flow of
information
and Funds
 Stages of Supply Chain
Supply chain management encompasses such a wide range of functions that it can seem
daunting, even to the most experienced international businessperson. However, the process can
be effectively modeled by breaking it down into several main strategic areas. One common and
very effective model is the Supply Chain Operations Reference (SCOR) model, developed by the
Supply Chain Council to enable managers to address, improve and communicate supply chain
management practices effectively. The SCOR model runs through five supply chain stages: Plan,
Source, Make, Deliver, and Return.

Stage 1: Plan

Planning involves a wide range of activities. Companies must first decide on their operations
strategy. Whether to manufacture a product or component or buy it from a supplier is a major
decision.

Companies must weigh the benefits and disadvantages of different options presented by
international supply chains.

Options include:

 Manufacturing a product component domestically

 Manufacturing a component in a foreign market by setting up international production
facilities
 Buying a component from a foreign supplier
 Buying a component from a domestic supplier

If companies are manufacturing products, they must decide how they will be produced.

Goods can be:

 Make to stock (produced and stored, awaiting customer orders);

 Make to order (constructed in response to a customer order);
 Configure to order (partially manufactured the product and completed it after a firm
customer order is received); or
 Engineer to order (manufactured a product to unique specifications provided by a
customer).

Sometimes, goods can be produced by a combination of these methods. Companies must also
decide whether they will outsource manufacturing. This operations planning is essential because
these decisions influence the supply chain.
Planning also involves mapping out the network of manufacturing facilities and warehouses,
determining the levels of production and specifying transportation flows between sites. It also
involves assessing how to improve the global supply chain and its management processes.

When planning, companies should ensure that their supply chain management strategies align to
business strategies, that communication plans for the entire supply chain are decided and that
methods of measuring performance and gathering data are established before planning begins.

Stage 2: Source

This aspect of supply chain management involves organizing the procurement of raw materials
and components.

Procurement is the acquisition of goods and services at the best possible price, in the right
quantity and at the right time.

When sources have been selected and vetted, companies must negotiate contracts and schedule
deliveries. Supplier performance must be assessed and payments to the suppliers made when
appropriate. In some cases, companies will be working with a network of suppliers. This will
involve working with this network, managing inventory and company assets and ensuring that
export and import requirements are met.

Stage 3: Make

This stage is concerned with scheduling of production activities, testing of products, packing and
release. Companies must also manage rules for performance, data that must be stored, facilities
and regulatory compliance.

Stage 4: Deliver

The delivery stage encompasses all the steps from processing customer inquiries to selecting
distribution strategies and transportation options. Companies must also manage warehousing and
inventory or pay for a service provider to manage these tasks for them.

The delivery stage includes any trial period or warranty period, customers or retail sites must be
invoiced and payments received, and companies must manage import and export requirements
for the finished product.

Stage 5: Return

Return is associated with managing all returns of defective products, including identifying the
product condition, authorizing returns, scheduling product shipments, replacing defective
products and providing refunds.
Returns also include ―end-of-life‖ products (those that are in the end of their product lifetime and
a vendor will no longer be marketing, selling, or promoting a particular product and may also be
limiting or ending support for the product).

Companies must establish rules for the following:

 Product returns

 Monitoring performance and costs

 Managing inventory of returned product

Value Chain Process

A value chain is a business model that describes the full range of activities needed to create a
product or service. For companies that produce goods, a value chain comprises the steps that
involve bringing a product from conception to distribution, and everything in between—such as
procuring raw materials, manufacturing functions, and marketing activities.

A company conducts a value-chain analysis by evaluating the detailed procedures involved in

each step of its business. The purpose of value-chain analyses is to increase production
efficiency so that a company may deliver maximum value for the least possible cost.

Components of a Value Chain

In his concept of a value chain, Porter splits a business’s activities into two categories, ―primary‖
and ―support,‖ whose sample activities we list below. Specific activities in each category will
vary according to the industry.

Primary activities consist of five components, and all are essential for adding value and creating
a competitive advantage:

(i) Inbound logistics

Functions like receiving, warehousing, and managing inventory.

(ii) Operations

Procedures for converting raw materials into finished product.

(iii) Outbound logistics

Activities to distribute a final product to a consumer.

(iv) Marketing and sales

Strategies to enhance visibility and target appropriate customers—such as advertising,

promotion, and pricing.

(v) Service

Programs to maintain products and enhance consumer experience—customer service,

maintenance, repair, refund, and exchange.

Support Activities

The role of support activities is to help make the primary activities more efficient. When you
increase the efficiency of any of the four support activities, it benefits at least one of the five
primary activities. These support activities are generally denoted as overhead costs on a
company’s income statement:

(i) Procurement

How a company obtains raw materials.

(ii) Technological development

Used at a firm’s research and development (R&D) stage—designing and developing

manufacturing techniques; and automating processes.

(iii) Human resources (HR) management

Hiring and retaining employees who will fulfill business strategy; and help design, market, and
sell the product.

(iv) Infrastructure

Company systems and composition of its management team—planning, accounting, finance, and
quality control.

VALUE CHAIN PROCESS

Step 1 – Identify sub activities for each primary activity

For each primary activity, determine which specific sub activities create value. There are three
different types of sub activities:-
(i) Direct activities: Create value by themselves. For example, in a book publisher’s marketing
and sales activity, direct sub activities include making sales calls to bookstores, advertising, and
selling online.

(ii) Indirect activities: Allow direct activities to run smoothly. For the book publisher’s sales and
marketing activity, indirect sub activities include managing the sales force and keeping customer
records.

(iii) Quality assurance: Activities ensure that direct and indirect activities meet the necessary
standards. For the book publisher’s sales and marketing activity, this might include proofreading
and editing advertisements.

Step 2 – Identify sub activities for each support activity.

For each of the Human Resource Management, Technology Development and Procurement
support activities, determine the sub activities that create value within each primary activity. For
example, consider how human resource management adds value to inbound logistics, operations,
outbound logistics, and so on. As in Step 1, look for direct, indirect, and quality assurance sub
activities.

Then identify the various value-creating sub activities in your company’s infrastructure. These
will generally be cross-functional in nature, rather than specific to each primary activity. Again,
look for direct, indirect, and quality assurance activities.

Step 3 – Identify links

Find the connections between all of the value activities you’ve identified. This will take time, but
the links are key to increasing competitive advantage from the value chain framework. For
example, there’s a link between developing the sales force (an HR investment) and sales
volumes. There’s another link between order turnaround times, and service phone calls from
frustrated customers waiting for deliveries.

Step 4 – Look for opportunities to increase value

Review each of the sub activities and links that you’ve identified, and think about how you can
change or enhance it to maximize the value you offer to customers (customers of support
activities can be internal as well as external).

Cycle view of Supply Chain Process

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. The processes in a Supply Chain are
divided into series of cycles, each performed at the interface between two successive stages of a
Supply Chain. Cycle view of Supply Chain is useful in making operational decisions as role of
each member of Supply Chain is clearly defined.
 Key Issues in SCM

Key Issue #1: Globalization

Globalization presents several critical supply chain management challenges to enterprises and
organizations:

First, to reduce costs across the supply chain, enterprises are moving manufacturing operations to
countries which offer lower labor costs, lower taxes, and/or lower costs of transport for raw
materials. For some companies, outsourcing production involves not only a single country, but
several countries for different parts of their products.

However, outsourcing not only extends the production process globally, but also the company’s
procurement network. Having suppliers in different geographic locations complicates the supply
chain. Companies will have to deal with, coordinate, and collaborate with parties across borders
regarding manufacturing, storage, and logistics. Furthermore, they have to extend or maintain
fast delivery lead times to customers who want to receive their products on schedule despite the
increased complexity in the manufacturer’s supply chains. Finally, they also have to maintain
real-time visibility into their production cycle — from raw materials to finished goods — to
ensure the efficiency of their manufacturing processes.
Second, as companies expand sales into global markets, localization of existing products requires
a significant change in the supply chain as companies adapt their products to different cultures
and preferences. There is an inherent risk of losing control, visibility, and proper management
over inventory, especially if enterprise applications are not integrated. This requires managing
diverse structures of data across geographies effectively.

For example: many manufacturers in Asia still handle trading partner communications via fax
and email while suppliers in North America and Europe have utilized EDI for decades. As
technology matures, suppliers in emerging markets may skip EDI altogether and move to a more
modern API driven approach to communication just as developing countries have skipped land
lines in favor cell phones.

Supply chain practitioners need to ask if their enterprise technology is prepared to handle these
diverse forms of communication that arise from Globalization, and build a business case to stay
prepared.

Key Issue #2: Fast-changing Markets

According to Edu CBA, consumer behavior is affected by cultural, social, personal, and
psychological factors that are quickly being changed by technology and globalization. Social
media is creating new pressures for consumers to conform while putting pressure on enterprises
to utilize these sources of information to respond to changing preferences in order to stay
interesting and relevant.

Like globalization, the fast-changing consumer market also brings with it supply chain
management challenges:

First, products have shorter life cycles due to rapidly changing market demands. Enterprises are
under pressure to keep up with the latest trends and innovate by introducing new products, while
keeping their total manufacturing costs low because they understand that trends will not last for a
long time. This also demands a flexible supply chain that can be utilized for manufacturing other
products and for future projects.

Second, aside from new products, companies also need to constantly update product features.
Enhancing product features requires enterprises to redesign their supply chain to accommodate
product changes.

Finally, innovation presents a challenge in forecasting demand for new products. The constant
innovation necessitated by fast-changing markets also means enterprises will constantly have to
anticipate demand for new products. Enterprises need to create and maintain an agile supply
chain that can respond well to spikes and dips in demand and production needs.
Companies should be asking if they have all the data needed to make planning decisions to
address challenges created by fast-changing markets. For example, if stated lead times from
suppliers are longer than actual times, this will lead to higher inventory levels than are actually
required and affect costly decisions around network planning and optimization. Omni channel
retail has reated silos of sales data that have to be blended and harmonized to detect demand
signals earlier in the planning process as well.

Key Issue #3: Quality and Compliance

Aside from influencing consumer behavior, social media highlights the importance of having
high-quality products. According to research conducted by e Marketer, reading reviews,
comments, and feedback is the top social media activity that influences online shopping
behavior. Furthermore, social media has not only raised consumers’ expectations of product
quality, but has also amplified the damages caused by product recalls. Thus, enterprises are
under increasing pressure to create high-quality products and to create them consistently. They
can do so by addressing quality at every level of the supply chain, such as raw materials
procurement, manufacturing, packaging, logistics, and product handling.

Product quality often goes hand-in-hand with compliance. Enterprises need to ensure that they
meet local and international regulatory standards in manufacturing, packaging, handling, and
shipping of their products. Aside from passing quality control and safety tests, enterprises are
also required to prepare compliance documents such as permits, licenses, and certification which
can overwhelm them and their supply chain management systems.

Emerging capabilities like IoT, Smart Packaging, and Block chain are changing how compliance
is enforced and measured. However, these innovations will produce streams of data that can’t be
handled with the enterprise technology of the past 20 years. Managers should carefully consider
where these investments make sense and asking IT if the business is utilizing platforms based on
micro-services and big data to support these heavy data lifting requirements.

Logistics
Logistics is generally the detailed organization and implementation of a complex operation. In a
general business sense, logistics manages the flow of goods between the point of origin and the
point of consumption to meet the requirements of customers or corporations. The resources
managed in logistics may include tangible goods such as materials, equipment, and supplies, as
well as food and other consumable items.

In military science, logistics is concerned with maintaining army supply lines while disrupting
those of the enemy, since an armed force without resources and transportation is defenseless.
Military logistics was already practiced in the ancient world and as the modern military has a
significant need for logistics solutions, advanced implementations have been developed. In
military logistics, logistics officers manage how and when to move resources to the places they
are needed.

Logistics management is the part of supply chain management and supply chain engineering that
plans, implements, and controls the efficient, effective forward, and reverse flow and storage of
goods, services, and related information between the point of origin and point of consumption to
meet customers’ requirements. The complexity of logistics can be modeled, analyzed, visualized,
and optimized by dedicated simulation software. The minimization of the use of resources is a
common motivation in all logistics fields. A professional working in the field of logistics
management is called a logistician.

Types:

Procurement logistics consists of activities such as market research, requirements planning,

make-or-buy decisions, supplier management, ordering, and order controlling. The targets in
procurement logistics might be contradictory: maximizing efficiency by concentrating on core
competences, outsourcing while maintaining the autonomy of the company, or minimizing
procurement costs while maximizing security within the supply process.

Advance Logistics consists of the activities required to set up or establish a plan for logistics
activities to occur.

Global Logistics is technically the process of managing the ―flow‖ of goods through what is
called a supply chain, from its place of production to other parts of the world. This often requires
an intermodal transport system, transport via ocean, air, rail, and truck. The effectiveness of
global logistics is measured in the Logistics Performance Index.

Distribution logistics has, as main tasks, the delivery of the finished products to the customer. It
consists of order processing, warehousing, and transportation. Distribution logistics is necessary
because the time, place, and quantity of production differ with the time, place, and quantity of
consumption.

Disposal logistics has as its main function to reduce logistics cost(s) and enhance services related
to the disposal of waste produced during the operation of a business.
Reverse logistics denotes all those operations related to the reuse of products and materials. The
reverse logistics process includes the management and the sale of surpluses, as well as products
being returned to vendors from buyers. Reverse logistics stands for all operations related to the
reuse of products and materials. It is ―the process of planning, implementing, and controlling the
efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related
information from the point of consumption to the point of origin for the purpose of recapturing
value or proper disposal. More precisely, reverse logistics is the process of moving goods from
their typical final destination for the purpose of capturing value, or proper disposal. The opposite
of reverse logistics is forward logistics.‖

Green Logistics describes all attempts to measure and minimize the ecological impact of
logistics activities. This includes all activities of the forward and reverse flows. This can be
achieved through intermodal freight transport, path optimization, vehicle saturation and city
logistics.

RAM Logistics: Combines both business logistics and military logistics since it is concerned
with highly complicated technological systems for which Reliability, Availability and
Maintainability are essential, ex: weapon systems and military supercomputers.

Asset Control Logistics: Companies in the retail channels, both organized retailers and suppliers,
often deploy assets required for the display, preservation, promotion of their products. Some
examples are refrigerators, stands, display monitors, seasonal equipment, poster stands & frames.

Logistics outsourcing

Logistics outsourcing involves a relationship between a company and an LSP (logistic service
provider), which, compared with basic logistics services, has more customized offerings,
encompasses a broad number of service activities, is characterized by a long-term orientation,
and thus has a strategic nature.

Outsourcing does not have to be complete externalization to an LSP, but can also be partial:

A single contract for supplying a specific service on occasion

Creation of a spin-off

Creation of a joint venture

Third-party logistics (3PL) involves using external organizations to execute logistics activities
that have traditionally been performed within an organization itself. According to this definition,
third-party logistics includes any form of outsourcing of logistics activities previously performed
in house. For example, if a company with its own warehousing facilities decides to employ
external transportation, this would be an example of third-party logistics. Logistics is an
emerging business area in many countries. External 3PL providers have evolved from merely
providing logistics capabilities to becoming real orchestrators of supply chains that create and
sustain a competitive advantage, thus bringing about new levels of logistics outsourcing.

The concept of a fourth-party logistics (4PL) provider was first defined by Andersen Consulting
(now Accenture) as an integrator that assembles the resources, planning capabilities, and
technology of its own organization and other organizations to design, build, and run
comprehensive supply chain solutions. Whereas a third-party logistics (3PL) service provider
targets a single function, a 4PL targets management of the entire process. Some have described a
4PL as a general contractor that manages other 3PLs, truckers, forwarders, custom house agents,
and others, essentially taking responsibility of a complete process for the customer.

Supply Chain Management

In commerce, supply chain management (SCM) is the management of the flow of goods and
services includes all processes that transform raw materials into final product between businesses
and locations. This can include the movement and storage of raw materials, work-in-process
inventory, finished goods, and end to end order fulfilment from the point of origin to the point of
consumption. Interconnected, interrelated or interlinked networks, channels and node businesses
combine in the provision of products and services required by end customers in a supply chain.

Supply-chain management has been defined as the ―design, planning, execution, control, and
monitoring of supply chain activities with the objective of creating net value, building a
competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand
and measuring performance globally‖. SCM practice draws heavily on industrial engineering,
systems engineering, operations management, logistics, procurement, information technology
and marketing, and strives for an integrated, multidisciplinary, multi method approach.
Marketing channels play an important role in supply-chain management. Current research in
supply-chain management is concerned with topics related to sustainability and risk
management, among others. An important concept discussed in SCM is supply chain resilience.
Some suggest that the ―people dimension‖ of SCM, ethical issues, internal integration,
transparency/visibility, and human capital/talent management are topics that have, so far, been
underrepresented on the research agenda. SCM is the broad range of activities required to plan,
control and execute a product’s flow from materials to production to distribution in the most
economical way possible. SCM encompasses the integrated planning and execution of processes
required to optimize the flow of materials, information and capital in functions that broadly
include demand planning, sourcing, production, inventory management and logistics or storage
and transportation.
Although it has the same goals as supply chain engineering, supply chain management is focused
on a more traditional management and business based approach, whereas supply chain
engineering is focused on a mathematical model based one.

Functions

Purchasing:

The activity of acquiring goods or services to accomplish the goals of an organization.

Inventory Management:

Activities employed in maintaining the optimum number or amount of each inventory item.

The objective of inventory management is to provide uninterrupted production, sales, and/or

customer-service levels at the minimum cost. Since for many companies inventory is the largest
item in the current assets category, inventory problems can and do contribute to losses or even
business failures.

The management of inventory is a key function of any manufacturing company, whether

domestic or foreign. Physical inventory is often one of the most signification assets of a
company, and without it, a company would have no sales. It’s important to have the right
product, at the right place at the right price, and inventory allows this to occur. In today’s global
economy the inventory function has become more important and challenging as product can be
produced and available anywhere in the world.

Manufacturing:

The production of merchandise for use or sale using labour and machines, tools, chemical and
biological processing, or formulation

The term may refer to a range of human activity, from handicraft to high tech, but is most
commonly applied to industrial production, in which raw materials are transformed into finished
goods on a large scale. Such finished goods may be used for manufacturing other, more complex
products, such as aircraft, household appliances or automobiles, or sold to wholesalers, who in
turn sell them to retailers, who then sell them to end users and consumers.

The manufacturing function has received a lot of notice in the press as companies move various
production operations overseers. Despite this, there are still many job opportunities available.
These include: production planner, production manager, corporate manager of production
planning, plant manager, line operator, machine operator, QA analyst, or engineer.Manufacturing
will always play a key role in the US economy as many products will always be produced here.

Warehousing:

Performance of administrative and physical functions associated with storage of goods and
materials. These functions include receipt, identification, inspection, verification, putting away,
retrieval for issue, etc.

While many people view the function of warehousing as the simple process of storing products,
it has evolved into a function that does more than that. In today’s world of mass customization,
the warehouse has evolved into a distribution centre, and even a facility to customize the final
product via repacking, labelling or other physical conversion. The importance of these facilities
has grown as it’s the final ―stop‖ before moving to the customer. Proper handling, storage and
management of the products within these facilities must occur so that customer orders can be
fulfilled with the right product at the right time.

Demand Planning:

The process of forecasting customer demand to drive execution of such demand by corporate
supply chain and business management

Demand forecasting involves techniques including both informal methods, such as educated
guesses, and quantitative methods, such as the use of historical sales data and statistical
techniques or current data from test markets. Demand forecasting may be used in production
planning, inventory management, and at times in assessing future capacity requirements, or in
making decisions on whether to enter a new market

Demand forecasting is predicting future demand for the product. In other words it refers to the
prediction of probable demand for a product or a service on the basis of the past events and
prevailing trends in the present.

Customer Service:

The process of ensuring customer satisfaction with a product or service, Often, customer service
takes place while performing a transaction for the customer, such as making a sale or returning
an item. Customer service can take the form of an in-person interaction, a phone call, self-service
systems, or by other means.

While the customer service function appears to be at the end of the supply chain, it is definitely
not the end of the process. This function is critical in that its works to meet the needs of the
customer and ensure the customer receives what they want, when they want it. This function is
sometimes the only point of contact a customer has with a customer so it’s imperative that they
have the skills and knowledge to understand a customer’s needs and to meet those needs when
possible.

Transportation:

Is the movement of people, animals and goods from one location to another. Modes of transport
include air, rail, road, water, cable, pipeline and space. The field can be divided into
infrastructure, vehicles and operations. Transport is important because it enables trade between
persons, which is essential for the development of civilizations.

Logistics Supply Chain

Supply chain management covers a wide range
of activities, including planning, sourcing
Logistics is one activity in supply chain
materials, labor and facilities management,
management.
producing and delivering those goods and
services.
Supply chain management targets higher
Logistics focuses on the efficient and cost-
operational performance that will give the
effective delivery of goods to the customer.
business a competitive advantage.
The modern practice of supply chain
management started in the 20th century. The
Logistics started with the military. Many say
Ford Motor Company production lines
Alexander the Great, born 356 B.C., as a
perfected the concept. Many credit logistician
logistics master.
Keith Oliver as the person who coined the term
in the early 1980s.
SCM oversees the development of raw
materials into finished goods that move from
Logistics are centered on the movement and
the producer to the manufacturer. Those goods
transport of goods within a company
get distributed to retailers or directly to
consumers.
Supply chain management targets higher
Logistics focuses on the efficient and cost-
operational performance that will give the
effective delivery of goods to the customer.
business a competitive advantage.

Supply Chain Drivers

Supply chain capabilities are guided by the decisions you make regarding the five supply chain
drivers. Each of these drivers can be developed and managed to emphasize responsiveness or
efficiency depending on changing business requirements.

The five drivers provide a useful framework for thinking about supply chain capabilities.
Decisions made about how each driver operates will determine the blend of responsiveness and
efficiency a supply chain is capable of achieving. The five drivers are illustrated in the diagram
below:
PRODUCTION

This driver can be made very responsive by building factories that have a lot of excess capacity
and use flexible manufacturing techniques to produce a wide range of items. To be even more
responsive, a company could do their production in many smaller plants that are close to major
groups of customers so delivery times would be shorter. If efficiency is desirable, then a
company can build factories with very little excess capacity and have those factories optimized
for producing a limited range of items. Further efficiency can also be gained by centralizing
production in large central plants to get better economies of scale, even though delivery times
might be longer.

INVENTORY

Responsiveness can be had by stocking high levels of inventory for a wide range of products.
Additional responsiveness can be gained by stocking products at many locations so as to have
the inventory close to customers and available to them immediately. Efficiency in inventory
management would call for reducing inventory levels of all items and especially of items that do
not sell as frequently. Also, economies of scale and cost savings can be gotten by stocking
inventory in only a few central locations such as regional distribution centers (DCs).
LOCATION

A location decision that emphasizes responsiveness would be one where a company establishes
many locations that are close to its customer base. For example, fast-food chains use location to
be very responsive to their customers by opening up lots of stores in high volume markets.
Efficiency can be achieved by operating from only a few locations and centralizing activities in
common locations. An example of this is the way e-commerce retailers serve large geographical
markets from only a few central locations that perform a wide range of activities.

TRANSPORTATION

Responsiveness can be achieved by a transportation mode that is fast and flexible such as trucks
and airplanes. Many companies that sell products through catalogs or on the Internet are able to
provide high levels of responsiveness by using transportation to deliver their products often
within 48 hours or less. FedEx and UPS are two companies that can provide very responsive
transportation services. And now Amazon is expanding and operating its own transportation
services in high volume markets to be more responsive to customer desires. Efficiency can be
emphasized by transporting products in larger batches and doing it less often. The use of
transportation modes such as ship, railroad, and pipelines can be very efficient. Transportation
can also be made more efficient if it is originated out of a central hub facility or distribution
center (DC) instead of from many separate branch locations.

INFORMATION

The power of this driver grows stronger every year as the technology for collecting and sharing
information becomes more wide spread, easier to use, and less expensive. Information, much
like money, is a very useful commodity because it can be applied directly to enhance the
performance of the other four supply chain drivers. High levels of responsiveness can be
achieved when companies collect and share accurate and timely data generated by the operations
of the other four drivers. An example of this is the supply chains that serve the electronics
market; they are some of the most responsive in the world. Companies in these supply chains,
the manufacturers, distributors, and the big retailers all collect and share data about customer
demand, production schedules, and inventory levels. This enables companies in these supply
chains to respond quickly to situations and new market demands in the high-change and
unpredictable world of electronic devices (smartphones, sensors, home entertainment and video
game equipment, etc.).

Obstacles to Achieving Strategic Fit

Increasing Variety of Products: In the era of mass customization production variety is increasing.
The customers becoming increasingly demanding. Today’s customers are demanding faster
fulfillment, better quality, and better performing products for the same price that they are paying
today.

The supply chain is getting fragmented. At one time vertical integration was the order of the day.
But the present trend is to concentrate on core competence and outsource more activities. Thus
the supply chain is more fragmented now.

Globalization is creating global supply chains and hence physical distance is increasing between
a company and its suppliers and a company and its customers.

While creating a strategy is difficult, executing it is much more difficult. Many companies
understand Toyota Production System now, but still find it difficult to implement and operate.

Supply Chain Strategies

Supply chain and logistics improvements are neither easy nor inexpensive. Better strategic and
operational investments and decisions in supply chain and logistics can help to reduce cost by
10% to 40%, and also to grow overall corporate revenues through enhanced customer service
and demand management.
A supply chain strategy is a plan for managing the flow of goods, services, and information from
the point of origin to the point of consumption. The purpose of a supply chain strategy is to align
the supply chain with the business strategy, enabling the organization to create value for
customers and gain a competitive advantage in the marketplace. In this article, we will discuss
the components of a supply chain strategy and how organizations can develop and implement an
effective supply chain strategy.

Components of a Supply Chain Strategy

Alignment with Business Strategy

The first component of a supply chain strategy is alignment with the business strategy. A supply
chain strategy should be developed in conjunction with the overall business strategy, ensuring
that the supply chain supports the organization’s goals and objectives. This includes identifying
the key drivers of supply chain performance, such as cost, quality, delivery, and responsiveness,
and developing strategies to optimize each of these areas.

Network Design
The second component of a supply chain strategy is network design. This involves determining
the optimal structure of the supply chain, including the number and location of facilities, the
mode of transportation, and the allocation of inventory. The goal of network design is to create a
supply chain that is efficient, flexible, and responsive to customer needs.

Supplier Management
The third component of a supply chain strategy is supplier management. This involves selecting
and managing suppliers to ensure that they meet the organization’s requirements for quality,
cost, and delivery. Effective supplier management includes developing strong relationships with
suppliers, monitoring supplier performance, and collaborating with suppliers to improve supply
chain performance.
Demand Management
The fourth component of a supply chain strategy is demand management. This involves
understanding customer needs and developing strategies to meet those needs. Effective demand
management includes developing accurate demand forecasts, managing demand variability, and
collaborating with customers to improve supply chain performance.

Inventory Management
The fifth component of a supply chain strategy is inventory management. This involves
managing inventory levels to ensure that the right products are available at the right time and in
the right quantity. Effective inventory management includes developing accurate inventory
forecasts, managing inventory variability, and optimizing inventory levels to minimize costs and
maximize service levels.

Logistics Management
The sixth component of a supply chain strategy is logistics management. This involves managing
the movement of goods and information through the supply chain. Effective logistics
management includes selecting the optimal mode of transportation, managing transportation
costs, and optimizing the flow of goods through the supply chain.

Performance Measurement and Improvement

The final component of a supply chain strategy is performance measurement and improvement.
This involves measuring and monitoring supply chain performance and using that information to
identify areas for improvement. Effective performance measurement includes developing key
performance indicators (KPIs), monitoring KPIs, and using the results to improve supply chain
performance.

Developing a Supply Chain Strategy

Define the Business Strategy

The first step in developing a supply chain strategy is to define the business strategy. This
involves identifying the organization’s goals and objectives, as well as the key drivers of supply
chain performance. For example, if the organization’s goal is to provide high-quality products at
a low cost, the supply chain strategy should focus on reducing costs while maintaining quality.
Conduct a Supply Chain Analysis

The second step in developing a supply chain strategy is to conduct a supply chain analysis. This
involves analyzing the organization’s current supply chain to identify strengths, weaknesses,
opportunities, and threats. The analysis should include a review of the organization’s supply
chain structure, supplier performance, demand patterns, inventory levels, logistics performance,
and overall supply chain costs.

Define the Supply Chain Strategy

The third step in developing a supply chain strategy is to define the supply chain strategy. This
involves identifying the key components of the supply chain strategy, including network design,
supplier management, demand management, inventory management, logistics management, and
performance measurement and improvement. The supply chain strategy should be aligned with
the business strategy and should address the key drivers of supply chain performance.

Develop an Implementation Plan

The fourth step in developing a supply chain strategy is to develop an implementation plan. This
involves identifying the resources required to implement the supply chain strategy, including
people, technology, and infrastructure. The implementation plan should include timelines,
milestones, and performance metrics to measure progress and ensure that the supply chain
strategy is being implemented effectively.

Implement the Supply Chain Strategy

The fifth and final step in developing a supply chain strategy is to implement the supply chain
strategy. This involves executing the implementation plan and monitoring progress to ensure that
the supply chain strategy is achieving its goals and objectives. Continuous improvement should
be built into the implementation process to ensure that the supply chain strategy remains
effective over time.

Best Practices for Supply Chain Strategy

Collaborate with Suppliers and Customers

One of the best practices for supply chain strategy is to collaborate with suppliers and customers.
By working together with suppliers and customers, organizations can improve supply chain
performance and create value for all stakeholders. Collaboration can include sharing information,
developing joint forecasts, and working together to improve processes.
Use Technology to Improve Visibility

Another best practice for supply chain strategy is to use technology to improve visibility. This
includes using tools such as RFID, GPS, and real-time data analytics to track inventory levels,
monitor transportation routes, and optimize supply chain performance. Technology can also be
used to improve communication between suppliers and customers, enabling faster and more
accurate decision-making.

Build Resilience into the Supply Chain

A third best practice for supply chain strategy is to build resilience into the supply chain. This
involves developing contingency plans for potential disruptions, such as natural disasters,
geopolitical events, or supplier bankruptcies. Resilience can be built into the supply chain by
diversifying suppliers, developing redundant transportation routes, and maintaining adequate
inventory levels.

Develop a Culture of Continuous Improvement

Finally, a best practice for supply chain strategy is to develop a culture of continuous
improvement. This involves encouraging employees to identify opportunities for improvement
and to implement changes that will improve supply chain performance. Continuous improvement
can be facilitated by developing performance metrics, establishing cross-functional teams, and
providing training and development opportunities for employees.

Developing Supply Chain Strategy

Supply chain management is a critical component of modern business operations. A well-
designed and managed supply chain can provide organizations with a competitive advantage by
enabling them to reduce costs, improve quality, and enhance customer satisfaction. However,
developing an effective supply chain strategy requires a deep understanding of the organization’s
business strategy, industry dynamics, and the needs and preferences of customers. In this article,
we will explore the key steps involved in developing a supply chain strategy.

Step 1: Understand the Business Strategy

The first step in developing a supply chain strategy is to understand the organization’s business
strategy. This involves identifying the organization’s mission, goals, and objectives, as well as its
competitive environment and market position. By understanding the business strategy, supply
chain managers can align the supply chain strategy with the organization’s broader goals and
objectives.
For example, if the organization’s business strategy is focused on differentiation, the supply
chain strategy should be designed to support the development and delivery of unique and high-
quality products or services. On the other hand, if the organization’s business strategy is focused
on cost leadership, the supply chain strategy should be designed to achieve operational efficiency
and cost savings.

Step 2: Assess the Supply Chain

The next step in developing a supply chain strategy is to assess the current state of the supply
chain. This involves identifying the strengths and weaknesses of the existing supply chain,
including the performance of suppliers, manufacturers, distributors, and logistics providers. The
assessment should also consider the costs and risks associated with the supply chain.

One useful tool for assessing the supply chain is the supply chain maturity model. This model
categorizes supply chains into four levels of maturity based on their level of integration and
sophistication:

Level 1: Fragmented supply chain with little integration or coordination between stakeholders.

Level 2: Coordinated supply chain with some integration and coordination between stakeholders.

Level 3: Integrated supply chain with a high level of integration and coordination between
stakeholders.

Level 4: Agile supply chain with real-time integration and coordination between stakeholders

By assessing the current state of the supply chain, supply chain managers can identify areas for
improvement and develop strategies to enhance the performance and efficiency of the supply
chain.

Step 3: Define Supply Chain Objectives

Once the business strategy and the current state of the supply chain have been assessed, the next
step is to define the supply chain objectives. These objectives should be aligned with the
organization’s business strategy and should reflect the desired outcomes of the supply chain.

Some common supply chain objectives include:

Cost reduction: The supply chain should be designed to minimize costs while maintaining
quality and service levels.

Customer satisfaction: The supply chain should be designed to meet the needs and preferences of
customers, including timely delivery, quality products, and responsive customer service.
Operational efficiency: The supply chain should be designed to achieve operational efficiency by
reducing lead times, inventory levels, and other inefficiencies.

Risk management: The supply chain should be designed to mitigate risks, including disruptions,
delays, and quality issues.

By defining clear and specific supply chain objectives, supply chain managers can develop
strategies and tactics to achieve these objectives.

Step 4: Develop Supply Chain Strategies

The next step in developing a supply chain strategy is to develop strategies to achieve the defined
objectives. These strategies should be aligned with the organization’s business strategy and
should reflect the strengths and weaknesses of the existing supply chain.

Some common supply chain strategies include:

Procurement strategy: The procurement strategy should focus on identifying and selecting
suppliers that provide high-quality materials and components at a competitive price. The
procurement strategy should also consider factors such as supplier diversity, sustainability, and
risk management.

Production strategy: The production strategy should focus on optimizing the production process
to minimize lead times, reduce costs, and improve quality. This may involve the use of lean
manufacturing principles, automation, or other process improvements.
Inventory strategy: The inventory strategy should focus on minimizing inventory levels while
ensuring that sufficient inventory is available to meet customer demand. This may involve the
use of just-in-time (JIT) inventory systems or other inventory optimization techniques.

Logistics strategy: The logistics strategy should focus on optimizing the transportation and
distribution of products to minimize lead times, reduce costs, and improve service levels. This
may involve the use of third-party logistics (3PL) providers, intermodal transportation, or other
logistics optimization techniques.

Collaboration strategy: The collaboration strategy should focus on building strong relationships
with suppliers, customers, and other stakeholders in the supply chain. This may involve the use
of collaborative planning, forecasting, and replenishment (CPFR) or other collaborative
initiatives.

By developing clear and specific supply chain strategies, supply chain managers can ensure that
the supply chain is aligned with the organization’s broader goals and objectives.
Step 5: Implement and Monitor the Supply Chain Strategy

The final step in developing a supply chain strategy is to implement and monitor the strategy.
This involves implementing the strategies and tactics developed in the previous step and
monitoring their performance to ensure that the objectives are being met.

To implement the supply chain strategy, supply chain managers may need to make changes to
the organization’s processes, systems, or infrastructure. For example, implementing a new
procurement strategy may require changes to the procurement process or the adoption of new
procurement systems. Similarly, implementing a new logistics strategy may require changes to
the transportation and distribution systems.

Once the supply chain strategy has been implemented, it is important to monitor its performance
to ensure that the objectives are being met. This may involve the use of key performance
indicators (KPIs) such as:

 Cost per unit

 Order lead time
 On-time delivery
 Inventory turnover

Customer satisfaction

By monitoring the performance of the supply chain and adjusting the strategy as needed, supply
chain managers can ensure that the supply chain remains aligned with the organization’s
business strategy and continues to deliver value to the organization.

Best Practices in SCM

―The major trends in business right now — low-cost country sourcing, outsourcing,
customization, globalization — all create tremendous complexities in a supply chain,‖ said Steve
Matthesen, vice president and global leader for supply chain at Boston Consulting Group, in a
special business operations report. ―In most cases, however, companies have not changed how
they manage this critical part of the business.‖

According to the Indian Institute of Materials Management, ―Business today is in a global

environment [and] companies are going truly global with Supply Chain Management (SCM)…
Companies have changed the ways in which they manage their operations and logistics activities.
Changes in trade, the spread and modernization of transport infrastructures and the
intensification of competition have elevated the importance of flow management to new levels.‖
The following best practices in supply chain management offer a critical look at best-in-class
manufacturers and what they are doing to implement the most effective supply chains.

Set up your supply chain council

Without an internal council of leaders in place, your supply chain may lack a clear strategy for
efficiency and functionality. There’s also a good chance an existing supply chain strategy will
not align with the company’s overall strategy if your organization doesn’t have a governing body
to synchronize the two. For example, if a company goal is to improve inventory turns, your
supply chain probably shouldn’t take in a container of raw material requiring about 12 months to
consume. By supporting your supply chain with a council of executive leadership and lower
level management, your council can improve cross-functional communication and demonstrate
the value of an organized supply chain — two barriers to success that often hinder operations
without a supply chain council.

Establish an appropriate and thoughtfully staffed supply chain structure.

Ideally, your supply chain will be staffed and structured in a way that maximizes effectiveness as
well as efficiency in order to bring the most benefit to your organization. Most organizations
these days find that a centralized strategy, implemented by specialized managers in their various
business units is the most optimal approach. Reportedly, this combination leads to more harmony
between strategy and implementation, while also resulting in the best service. In staffing your
supply chain, you should be more focused on strategy than simply transactional ability with your
top leadership. These leaders should extend this strategic thinking toward creating value using
strong interpersonal skills (such as communication and relationship management) internally as
well as externally.

Identify areas where technology can help improve and streamline processes.

Approximately 79 percent of supply chain enterprises surveyed worldwide fault manually driven
processes as the cause for continued lack of supply chain visibility. Lack of visibility and another
global concern, the uncoordinated nature of supply chain processes can be solved with the
automation provided by technology: ―On average, large companies report that their international
supply chains are only 50 percent as automated as their domestic supply chains. Overall, only 6
percent of companies report that they have highly automated end-to-end and cross-functional
processes.‖ Although improving efficiency in your supply chain is a key concern when selecting
software and technology, it’s backwards to structure your processes around technology. Instead,
review processes that are producing below standard to determine areas where technology can
help improve, and then select your software solutions to fit those needs. With appropriate
technology in place, detailed reporting data will be more accessible and accurate to better inform
the supply chain council for performance measures as well as strategic planning.
Maintain healthy supplier relationships

An important indicator of success in this industry is the health of your supplier relationships.
These connections should be maintained and cultivated on an ongoing basis, beyond the
finalization of your deal. The best supplier relationships are the ones with two-way
communication between the buyer and seller. Your objectives should include mechanism(s) to
maintain the health of your relationship, goals for continuing improvement and value,
performance measurement and a platform for conflict resolution.

In procurement, look at total cost of ownership over price

Follow the example of best-in-class companies, and move away from the procurement practice
of selecting a supplier based completely on price. Instead, strategic sourcing involves
understanding the total cost of ownership/consumption (TCO) of a product or service. This
makes more business sense when you remember that the cost of acquisition for most products
and services is only 25 to 40 percent of the TCO, while the rest is comprised of operating,
warehousing, and transportation costs, to name a few. Not surprisingly, your procurement teams
will need more collaboration with your suppliers in order to determine an accurate TCO.

Source suppliers strategically and with collaboration

Strategic selection of suppliers is at the heart of successful supply chain management, and adding
a collaborative element to strategic sourcing produces even better results. In a 2009 Industry
Week article, J. Paul Dittmann of the University of Tennessee noted that successful supply
chains are proficient in five key pillars of excellence: Talent, technology, internal collaboration,
external collaboration, and change management. Collaboration is at the heart. Take your
sourcing beyond the purchasing department to engage your suppliers in the decision-making
process. Solicit their feedback on all areas of internal business or function that may affect the
success of your initiatives or processes. With collaborative strategic sourcing, you’ll enjoy
streamlined operations, reduced costs, and improved responsiveness.

Move contract management responsibility to the supply chain

Although potential savings are often negotiated during the procurement process, they are rarely
fully realized. This is most commonly because of a lapse in communication or lack of follow-
through on contract compliance. To combat this and actually realize those cost savings, best-in-
class companies move contract management under the supply chain. This allows the supply
chain leader to leverage spend where there is greater opportunity for reducing costs and
mitigating risk, usually with services.

Optimize inventory for reduced cost

In any business, there’s a desire to reduce costs and improve the bottom line. This is especially
true in times of global economic downturn, like the one we’re currently subject to. In light of and
in support of these efforts, supply chain management should include a consistent look at
optimizing inventory quantities. There’s a very real cost of holding and storing inventory, and
it’s almost always higher than the generally assumed 20 to 25 percent. In fact, ―Research reveals
that inventory holding costs could represent up to 60 percent of the cost of an item that is held in
inventory for 12 months,‖ as reported by Supply Chain Quarterly. To optimize your supply chain
inventory, include forecasting and demand planning.

Establish regular reviews to ensure efficiency and mitigate risk

Your supply chain council and leadership team members should be constantly reviewing
procedures and policies to ensure compliance, efficiency, and currency. This will help avoid
process bottlenecks and help streamline operations while mitigating the risk of theft, fraud, and
the like. Risk mitigation in the supply chain must adhere to some important steps: identifying all
elements of risk, evaluating their probability of occurrence, estimating the financial impact in the
event of an incident, and prioritizing risks for appropriate monitoring and prevention measures.

Be socially responsible and establish “green” initiatives

It’s no longer optional for your supply chain company to actively reduce its carbon footprint,
instead, supply chain organizations must become sustainable and socially responsible if they
hope to thrive or even survive. While the U.S. doesn’t yet have a carbon-trading regime, buyers
are now considering environmental impact when they choose suppliers. On a more general scale,
social responsibility is also becoming more and more significant in buyers’ estimation when
making purchase decisions. A best-in-class supply chain organization should have a measureable
framework of policies and procedures designed to improve the workplace for the greater good of
employees, the organization itself, and also its community.

Obstacles of Streamlined SCM

Juggling multiple systems to complete the same task

When information is fragmented across different applications and tools, operational delays
become inevitable. For example, a team might end up checking several carrier systems for
updates while sharing error-laden spreadsheets via email.

Reconciling all of this data saps valuable time. It also complicates tasks such as procurement and
supply planning, producing considerable inefficiencies that drive up costs for workflows such as
freight invoicing.

Ideally, such islands of information can be consolidated without having to resort to onerous
manual processes. Integrated supply chain solutions implemented by a trusted partner such as
Inspirage will put you on the track to a more cost-effective, scalable and transparent supply chain
management solution.
Outsourcing logistics visibility to third parties

Outsourcing to third party logistics providers is unavoidable in some industries, not to mention a
practical necessity among large organizations with national or even global footprints. At the
same time, ineffective third-party partnerships can become a major drag on overall supply chain
visibility, with cascading effects across the whole enterprise.

Relying on outside help for logistics visibility creates issues similar to those we raised in the first
item above: Namely, time-consuming and expensive fragmentation. In contrast, having data
points such as carrier commonly available in a platform such as Oracle Transportation
Management greatly simplifies transportation management.

The results often speak for themselves. A more streamlined supply chain is both economical and
easy to manage, thanks to features such as centralized data repositories.

Working with outdated technology

Have you ever researched a product on a retailer’s website, checked to verify that it’s available at
a specific location, visited that store and discovered instead that the item is out of stock? There
are many reasons for such discrepancies, with lack of an up-to-date data near the top of the list.

While consumers regularly engage with organizations across multiple devices and platforms,
companies do not always possess the right tools to keep pace. Accordingly, they might have to
lean on decades-old ERP systems and complex customizations, which together contribute to
difficulties in meeting product demand, allocating costs for parts and ensuring that publicly
viewable indicators of store stock (e.g., on an e-commerce site or in a mobile app) are accurate.

Paying too much for essential services

As a result of these flaws and many others, many organizations end up with a supply chain
burdened by costs and incapable of adapting to evolving requirements. Overpaying for freight
invoices is a prime example of a pitfall opened up by inefficient supply chain management:
much of the cost of paying for these items can be eliminated with the right pairing of processes
and tools.

The good news is that you have worthwhile options for modernizing your approach to supply
chain management. Inspirage is an end-to-end Oracle partner with a long track record of
ensuring industry-appropriate implementations that finish on time and on budget.