Supply Chain Management

Prof.G.Purandaran
M.Tech (I.I.T-Madras)
PGDM (I.I.M-Bangalore)

SUPPLY CHAIN MANAGEMENT

.

Module : 1
INTRODUCTION TO
SUPPLY CHAIN
MANAGEMENT

SCM
What is Supply Chain Management?
Supply Chain Managementis the
process of strategically managing the
flow of goods, services and information
and the relationships within and among
organizations, in order to deliver greater
economic value and enhanced customer
service.

SCM
It includes the interaction of logistics
and transport, operations,
purchasing, and some elements of
marketing and information
technology. Itfocuses on serving
relevant stakeholders, including
customers, suppliers, shareholders,
employees, communities, and policy
makers.

SCM
Several major forces have driven the
development of supply chain
management, including:
the increased complexity of
organizations
the globalization of commerce
the evolution of information
technology

What Is a Supply Chain?

Flow of products and services from:

Raw materials manufacturers

Intermediate products manufacturers
End product manufacturers
Wholesalers and distributors and
Retailers

Connected by transportation and

storage activities
Integrated through information,
planning, and integration activities
Cost and service levels

1.1 What Is Supply Chain

Management?
Supply chain management is a set of
approaches utilized to efficiently
integrate suppliers, manufacturers,
warehouses, and stores, so that
merchandise is produced and
distributed at the right quantities, to
the right locations, and at the right
time, in order to minimize system
wide costs while satisfying service
level requirements.

The Objective 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)
1-11

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
1-12

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
1-13

PC Industry Supply Chain

Globally Dispersed Manufacturing

An Illustration: How Li & Fung Limited Might Make a Dress
Product
ProductDesign
Design
[Hong
[HongKong]
Kong]

Yarn
YarnSpinning
Spinning
[Korea]
[Korea]

QC
QC&
&Shipping
Shipping
[Hong
[HongKong]
Kong]

Weaving
Weaving
[Taiwan]
[Taiwan]
Zippers+
Zippers+
[Japan+]
[Japan+]

Stitching
Stitching
[Indonesia]
[Indonesia]

SCM Definition
Material Flow

Supplier

Converter
Distributor

Retailer

Source
Converter
Supplier

Distributor

Consumers
End-User

Value-Added Services
Funds/Demand Flow
Information Flow
Reuse/Maintenance/After Sales Service Flow

Key Issues
Key issues in supply chain management include
Distribution network configuration
How many warehouses do we need?
Where should these warehouses be located?
What should the production levels be at
each of our plants?
What should the transportation flows be
between plants and warehouses?
Inventory control
Why are we holding inventory? Uncertainty
in customer demand? Uncertainty in the
supply process? Some other reason?
If the problem is uncertainty, how can we
reduce it?

Key Issues
Distribution strategies
Direct shipping to customers?
Classical distribution in which inventory is
held in warehouses and then shipped as
needed?
Cross-docking in which transshipment points
are used to take stock from suppliers
deliveries and immediately distribute to
point of usage?
Supply chain integration and strategic
partnering
Should information be shared with supply
chain partners?
What information should be shared?
With what partners should information be

Key Issues
Product design
Should products be redesigned to reduce logistics
costs?
Should products be redesigned to reduce lead times?
Would delayed differentiation be helpful?
Information technology and decision-support systems
What data should be shared (transferred)
How should the data be analyzed and used?
What infrastructure is needed between supply chain
members?
Should e-commerce play a role?
Customer value
How is customer value created by the supply chain?
What determines customer value? How do we
measure it?
How is information technology used to enhance
customer value in the supply chain?

Process View
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. There are two different ways to view the
processes performed in a supply chain.
Cycle View The processes in a supply chain are
divided into a series of cycles, each performed at
the interface between two successive stages of a
supply chain.
Push/Pull View Pull processes are initiated in
response to a customer order, whereas push
processes are initiated and performed in
anticipation of customer orders.
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All supply chain processes can be

broken down into four process
cycles:
Customer order cycle
Replenishment cycle
Manufacturing cycle
Procurement cycle
Each cycle occurs at the interface
between two successive stages of
the supply chain.
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Supply Chain Process Cycles

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Top 25
Supply Chain
Company
In the year
2005

A picture is better than 1000 words!

How many words would be better than 3
pictures?
- A supply chain consists of
Supplier

Manufacturer

Distributor

Upstream

The right

Product

Customer

Downstream

- aims to Match Supply and

Demand, profitably for products
and services
achieve
s

Retailer

SUPPLY SIDE

+ + + + +

DEMAND SIDE

The right

The right

The right

The right

The right

Price

Store

Quantity

Customer

Time

Higher

Profits

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
Sourcing
functions a firm performs and functions that are
outsourced
3-28
Pricing

A Framework for Structuring Drivers

Competitive Strategy
Supply Chain
Strategy
Efficiency

Responsiveness

Supply chain structure

Logistical Drivers

Facilities

Inventory

Transportation

Information

Sourcing

Pricing

Cross Functional Drivers

3-29

SC-Bridge
Supply chain is a bridgebetween:
sales and customers,
suppliers and production,
production and customers,
facilities and other facilities.
Its also a bridge between revenue and
profitability,
promises and responses,
commitments and satisfaction.
It isthe thread through a businessthat
must fill :
the cracks and inconsistencies between supplier
capabilities,
inconsistent demands, resource volatility, location
variations,

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)

Components of facilities decisions

3-32

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
3-33

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

3-34

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

3-35

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
3-36

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
3-37

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

3-38

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

3-41

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
3-42

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
3-43

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

3-44

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

3-45

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?

3-46

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
3-47

Sourcing
Role in the supply chain
Role in the competitive strategy
Components of sourcing decisions

3-48

Sourcing: Role in
the Supply Chain
Set of business processes required to
purchase goods and services in a
supply chain
Supplier selection, single vs. multiple
suppliers, contract negotiation

3-49

Sourcing:
Role in the Competitive Strategy
Sourcing decisions are crucial
because they affect the level of
efficiency and responsiveness in a
supply chain
In-house vs. outsource decisionsimproving efficiency and
responsiveness

3-50

Components of Sourcing
Decisions

In-house versus outsource decisions

Supplier evaluation and selection
Procurement process
Overall trade-off: Increase the supply
chain profits

3-51

Pricing
Role in the supply chain
Role in the competitive strategy
Components of pricing decisions

3-52

Pricing: Role in
the Supply Chain
Pricing determines the amount to
charge customers in a supply chain
Pricing strategies can be used to
match demand and supply

3-53

Sourcing:
Role in the Competitive Strategy
Firms can utilize optimal pricing
strategies to improve efficiency and
responsiveness
Low price and low product
availability; vary prices by response
times

3-54

Components of Pricing
Decisions
Pricing and economies of scale
Everyday low pricing versus high-low
pricing
Fixed price versus menu pricing
Overall trade-off: Increase the firm
profits

3-55

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
3-56

Understanding the Supply Chain:

.
Cost-Responsiveness
Tradeoff
.

Responsiveness (in time, high service level and

product variety)
High

Efficiency frontier

Fix responsiveness

Ineffici
ent

Impossible

Inefficiency Region
Low

Hig
h

Low

Cost in $

Why decreasing slope (concave) for the

Achieving Strategic Fit: Wishes vs.

.
Capabilities
.

Responsive
(high cost)
supply
chain

Gourmet dinner
<High margin>
of c
e gi
n
Zo ate
r
t
St Fi

Responsive
nesspectru
m
Lunch buffet
<Low margin>

Efficient
(low cost)
supply
Certain
chain
demand

Implied
uncertaint
y spectrum

Uncertain
demand

Considerations for Supply Chain

.
Drivers
.

Customer Relationship Management

Customer relationship
management (CRM) involves
managing all aspects of a customers
relationship with an organization to
increase customer loyalty and
retention and an organization's
profitability
Many organizations, such as Charles
Schwab and Kaiser Permanente, have
obtained great success through the
implementation of CRM systems
3-60

Customer Relationship
Management
CRM is not just technology, but a
strategy, process, and business goal
that an organization must embrace on
an enterprisewide level
CRM can enable an organization to:
Identify types of customers
Design individual customer marketing
campaigns
Treat each customer as an individual
Understand customer buying behaviors

3-61

Customer Relationship
Management

3-62

Charles Schwabs CRM Case

Charles Schwab recouped the cost of a multimilliondollar CRM system in less than two years
The system allowed Schwab to segment its customers
in terms of serious and non-serious investors
The CRM system looked for customers that had
automatic withdrawal from a bank account as a sign of
a serious investor
The CRM system looked for stagnant balances as a
sign of a non-serious investor
Charles Schwab could then focus efforts on selling to
serious investors, and spend less time attempting to
sell to non-serious investors