HANDOUT

MBA FT 202
UNIT 1

By Varun Keshari
What is the Supply Chain Management (SCM)
The best companies around the world are discovering a powerful new source of competitive
advantage. It's called supply-chain management and it encompasses all of those integrated activities
that bring product to market and create satisfied customers. The Supply Chain Management Program
integrates topics from manufacturing operations, purchasing, transportation, and physical distribution
into a unified program. Successful supply- chain management, then, coordinates and integrates all of
these activities into a seamless process. It embraces and links all of the partners in the chain. In
addition to the departments within the organization, these partners include vendors, carriers, thirdparty companies, and information systems providers.
Within the organisation, the supply chain refers to a wide range of functional areas. These include
Supply Chain Management-related activities such as inbound and outbound transportation,
warehousing, and inventory control. Sourcing, procurement, and supply management fall under the
supply-chain umbrella, too. Forecasting, production planning and scheduling, order processing, and
customer service all are part of the process as well. Importantly, it also embodies the information
systems so necessary to monitor all of these activities. Simply stated, "the supply chain encompasses
all of those activities associated with moving goods from the raw-materials stage through to the end
user." Advocates for this business process realised that significant productivity increases could only
come from managing relationships, information, and material flow across enterprise borders.
One of the best definitions of supply-chain management offered to date comes from Bernard J. (Bud)
LaLonde, professor emeritus of Supply Chain Management at Ohio State University. LaLonde defines
supply-chain management as follows:
"The delivery of enhanced customer and economic value through synchronised management of
the flow of physical goods and associated information from sourcing to consumption."
As the "from sourcing to consumption" part of our last definition suggests, though, achieving the real
potential of supply-chain management requires integration not only of these entities within the
organisation, but also of the external partners. The latter include the suppliers, distributors, carriers,
customers, and even the ultimate consumers. "The goal of the extended enterprise is to do a better job
of serving the ultimate consumer, Superior service, and leads to increased market share. Increased
share, in turn, brings with it competitive advantages such as lower warehousing and transportation
costs, reduced inventory levels, less waste, and lower transaction costs. The customer is the key to
both quantifying and communicating the supply chain's value, confirms Shrawan Singh, vice
president of integrated supply-chain management at Xerox.
"If you can start measuring customer satisfaction associated with what a supply chain can do for a
customer and also link customer satisfaction in terms of profit or revenue growth," Singh explains,
"then you can attach customer values to profit & loss and to the balance sheet."

Notes by Prof Varun Keshari

# What is the importance of Supply Chain Management?

In the ancient Greek fable about the tortoise and the hare, the speedy and overconfident rabbit fell
asleep on the job, while the "slow and steady" turtle won the race. That may have been true in Aesop's
time, but in today's demanding business environment, "slow and steady" won't get you out of the
starting gate, let alone win any races. Managers these days recognise that getting products to
customers faster than the competition will improve a company's competitive position. To remain
competitive, companies must seek new solutions to important Supply Chain Management issues such
as modal analysis, supply chain management, load planning, route planning and distribution network
design. Companies must face corporate challenges that impact Supply Chain Management such as
reengineering globalisation and outsourcing.

Why is it so important for companies to get products to their customers quickly?

Faster product availability is key to increasing sales. "There's a substantial profit advantage for the
extra time that you are in the market and your competitor is not," he says. "If you can be there first,
you are likely to get more orders and more market share." The ability to deliver a product faster also
can make or break a sale. "If two alternatives [products] appear to be equal and one is immediately
available and the other will be available in a week, which would you choose?
An example of a Supply Chain Management application:
One of the chief causes of excessive order-to-delivery cycle times is the existence of long standing
"bad habits" that result when companies fail to revise internal processes to reflect market changes.
The existence of separate, independent departments tends to perpetuate these inefficient practices.
Taking the supply-chain management view, on the other hand, helps companies identify the
cumulative effects of those individual procedures. Eliminating such bottlenecks improves product
availability and speeds delivery to customers--both of which can increase sales and profits. The case
Consultant R. Michael Donovan illustrates the point with the tale of a client that manufactures a
made-to-order machine part. Average order-to-delivery time varied between six and nine weeks. As a
result, the manufacturer was losing business to "replicators" that could produce low-quality
"knockoff" versions in just three weeks. Donovan and his colleagues analyzed the manufacturer's
entire supply chain, from order entry and raw-materials supply all the way to final delivery.
They found problems at every step of the way: Handwritten orders were being rekeyed into the
Materials planning system on weekends, which meant that some orders were sitting around
unprocessed for an entire week. On Monday mornings, production control would be overwhelmed
with a week's worth of orders. It often took them several days to plow through the backlog and
issue manufacturing orders. Once those orders had been cut, the engineering department required one
week to produce technical drawings. They needed several more days to match up drawings with
orders and other documentation. Those information packets then would go to the manufacturing line,
where the scheduling system allowed three weeks' time for production. "Orders could be sitting there
for almost three weeks before going into production, even though the actual time required to produce
an item ranged from a few hours to one full day," Donovan recalls. The solution Supply Chain experts
were able to slash order-processing time, including the generation of engineering drawings, from
about two and a half weeks to one day. They made some alterations to the manufacturing process to
speed up production. While they were cutting waste out of physical processes, the consultants also
were finding ways to speed up the flow of information and to improve the accuracy of production

Notes by Prof Varun Keshari

orders. Today, materials flow is closely correlated with information flow, and lead times have been
cut from an average of six to nine weeks down to fewer than three weeks. The payoff! The payoff has
been enormous. Instead of steadily losing market share to the order-to-delivery process," he
concludes. "It should enable you to achieve your objectives."
Supply Chain Management Today
If we take the view that Supply Chain Management is what Supply Chain Management people do,
then in 1997 Supply Chain Management has a firm hand on all aspects of physical distribution and
materials management. Seventy-five percent or more of respondents included the following activities
as part of their company's Supply Chain Management department functions:
Inventory management
Transportation service procurement
Materials handling
Inbound transportation
Transportation operations management
Warehousing management
Moreover, the Supply Chain Management department is expected to increase its range of
responsibilities, most often in line with the thinking that sees the order fulfilment process as one coordinated set of activities. Thus the functions most often cited as planning to formally include in the
Supply Chain Management department are:

Customer service performance monitoring

Order processing/customer service
Supply Chain Management budget forecasting

On the other hand, there are certain functions which some of us might feel logically belong to Supply
Chain Management which companies feel are the proper domain of other departments. Most difficult
to bring under the umbrella of Supply Chain Management are:

Third party invoice payment/audit

Sales forecasting
Master production planning

Today Supply Chain Management includes services such as:

Operational Analysis and Design Materials Handling

Distribution Strategy
Operational Improvements, Distribution Management
Computer Systems
Warehouse Design Project Management
Operational Commissioning
Computer Simulation
Technical seminars

Supply Chain Management Tomorrow

The future for Supply Chain Management looks very bright. This year, as well as last year, two major
trends are benefiting Supply Chain Management operations. These are

Notes by Prof Varun Keshari

 Customer service focus

Information technology
Successful organisations must be excellent in both of these areas, so the importance of Supply Chain
Management and the tools available to do the job right will continue to expand.
Objectives of Supply Chain Management
The fundamental objective is to "add value".
That brings us to the example of the fish fingers. During the Supply Chain Management '98
conference in the United Kingdom this fall, a participant in a supply chain management seminar said
that total time from fishing dock through manufacturing, distribution, and final sale of frozen fish
fingers for his European grocery-products company was 150 days. Manufacturing took a mere 43
minutes. That suggests an enormous target for supply chain managers. During all that time, company
capital is almost literally in this case--frozen. What is true for fish fingers is true of most products.
Examine any extended supply chain, and it is likely to be a long one. James Morehouse, a vice
president of consulting firm A.T. Kearney, reports that the total cycle time for corn flakes, for
example, is close to a year and that the cycle times in the pharmaceutical industry average 465 days.
In fact, Morehouse argues that if the supply chain, of what he calls an "extended enterprise," is
encompassing everything from initial supplier to final customer fulfilment, could be cut to 30 days,
that would provide not only more inventory turns, but fresher product, an ability to customise better,
and improved customer responsiveness. "All that add value," he says. And it provides a clear
competitive advantage.
Supply Chain Management becomes a tool to help accomplish corporate strategic objectives:

reducing working capital,

taking assets off the balance sheet,
accelerating cash-to-cash cycles,
Increasing inventory turns, and so on.

Decision Phases in a Supply Chain

Supply Chain Strategy or Design
Decisions about the structure of the supply chain and what processes each stage will perform

Strategic supply chain decisions

Locations and capacities of facilities

Products to be made or stored at various locations

Modes of transportation

Information systems
Supply chain design must support strategic objectives

Notes by Prof Varun Keshari

Supply chain design decisions are long-term and expensive to reverse must take into
account market uncertainty

Planning decisions:

Which markets will be supplied from which locations

Planned build up of inventories

Subcontracting, backup locations

Inventory policies

Timing and size of market promotions

Must consider in planning decisions demand uncertainty, exchange rates, competition over
the time horizon

Operational decisions:

Time horizon is weekly or daily

Decisions regarding individual customer orders

Supply chain configuration is fixed and operating policies are determined

Goal is to implement the operating policies as effectively as possible

Allocate orders to inventory or production, set order due dates, generate pick lists at a
warehouse, allocate an order to a particular shipment, set delivery schedules, place
replenishment orders

Much less uncertainty (short time horizon)

Performance of the supply chain can be determined with the help of the drivers. The driver of supply
chain consists of three logistical drivers and three cross functional drivers.
(A)Logistical Drivers
Facilities:
Facilities are the physical locations where the products stored or assembled. The major types of
facilities are production sites and the storage sites. Economies of scales are used in centralization of
facilities to increase supply chain efficiency.
Inventory:
Inventory consists of the raw materials, work in progress and the finished goods. Changing inventory
policies can largely effects the efficiency and the responsiveness of the supply chain. 3 basic decisions
to be taken by the business regarding inventory are, cycle, safety and the seasonal inventory decisions.
Transportation:
Transportation refers to the modes and routes for moving inventory throughout the supply chain.
Faster transportation ensures more responsiveness but less efficiency of supply chain. Transportation
supports a firm's competitive strategy. The different ways of transportation includes rail, road, sea

Notes by Prof Varun Keshari

water, pope lines and the air ways. Electronic transport is the fastest and the efficient mode of
transportation. Transportation decisions includes mode, routes and in house or outsourcing the
transportation.
(B) Cross functional:
Information:
Information connects various supply chain partners and allows them to coordinate activities.
Information is crucial to the daily operations at each stage of the supply chain. An information system
can enable a firm to get a high variety of customized products to customers rapidly and to understand
the changing customer tastes and preferences.
Sourcing:
Sourcing is the process of purchasing the materials required for the production of the final products.
Components of the sourcing decisions are the evaluation and the selection of the suppliers, in house or
outsourcing.
Pricing:
Pricing involves determining the charges for the goods or services offered by the manufacturers. The
price of the product affects the buying patterns of the customers thus affecting the supply chain
performance.

Notes by Prof Varun Keshari

Drivers of Supply Chain

The major drivers of Supply chain performance consist of three logistical drivers & three crossfunctional drivers.
Logistical drivers:

Cross-functional drivers:

Facilities

Information

Inventory

Sourcing

Transportation

Pricing

Companys supply chain achieves the balance between responsiveness & efficiency that best meets
the needs of the company competitive strategy.
FACILITY
Facilities are the actual physical locations in the supply chain network where product are stored,
assembled or fabricated. The two major types of facilities are:

Production sites(factories)

Storage sites(warehouses)

Factories can be built to accommodate one of two approaches to manufacturing:

1. Product Focus: A factory that takes a product focus performs the range of different
operations required to make a given product line from fabrication of different product parts to
assembly of these parts.
2. Functional focus: A functional focus approach concentrates on performing just a few
operations such as only making a select group of parts or doing only assembly
Warehousing: There are three main approaches to use in warehousing:
1. Stock keeping unit (SKU) storage: In this approach all of a given type of product is stored
together.
2. Job lot storage: In this approach all the different products related to the needs of a certain
type of customer or related to the needs of a particular job are stored together.
3. Cross docking: In this approach, product is not actually warehoused in the facility, instead the
facility is used to house a process where trucks from suppliers arrive and unload large
quantities of different products. These large lots are then broken down into smaller lots.
Smaller lots of different products are recombined according to the needs of the day and
quickly loaded onto outbound trucks that deliver the product to their final destination.
So the fundamental trade-off that managers face when making facilities decision between the cost of
the number, location & type of facilities (efficiency) & the level of responsiveness that these facilities
provide the companys customer.

Notes by Prof Varun Keshari

INVENTORY
Inventory encompasses all the raw materials, work in process, and finished goods within a supply
chain. Changing inventory policies can dramatically alter the supply chains efficiency &
responsiveness.
There are three basic decisions to make regarding the creation and holding of inventory:
1. Cycle Inventory: This is the amount of inventory needed to satisfy demand for the product in
the period between purchases of the product.
2. Safety Inventory: inventory that is held as a buffer against uncertainty. If demand forecasting
could be done with perfect accuracy, then the only inventory that would be needed would be
cycle inventory.
3. Seasonal Inventory: This is inventory that is built up in anticipation of predictable increases in
demand that occur at certain times of the year.
TRANSPORTATION
Transportation entails moving inventory from point to point in the supply chain. Transportation can
take the form of many combinations of modes & routes, each with its own performance
characteristics. There are six basic modes of transport that a company can choose from:

Ship which is very cost efficient but also the slowest mode of transport. It is limited to use
between locations that are situated nest to navigable waterways & facilities such as harbor &
canals.

Rails which is also very cost efficient but can be slow. This mode is also restricted to use
between locations that are served by rail lines.

Pipelines can be very efficient but are restricted to commodities that are liquid or gases such
as water, oil & natural gas.

Trucks are a relatively quick & very flexible mode of transport. Trucks can go almost
anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel fluctuates
and the condition of road varies.

Airplanes are a very fast mode of transport and are very responsive. This mode is also very
expensive mode & is somewhat limited by the availability of appropriate airport facilities.

Electronic transport is the fastest mode of transport and it is very flexible & cost efficient.
However , it can be only be used for movement of certain types of products such as electric
energy, data, & products composed of data such as music, pictures & text.

INFORMATION
Information serves as the connection between various stages of a supply chain, allowing them to
coordinate & maximize total supply chain profitability. It is also crucial to the daily operations of each
stage in a supply chain for e.g. a production scheduling system.
Information is used for the following purpose in a supply chain:
1. Coordinating daily activities related to the functioning of other supply chain drivers: facility,
inventory & transportation.

Notes by Prof Varun Keshari

2. Forecasting & planning to anticipate& meet future demands. Available information is used to
make tactical forecasts to guide the setting of monthly & quarterly production schedules &
time table
3. Enabling technologies: many technologies exist to share & analyze information in the supply
chain. Managers must decide which technologies to use & how to integrate these technologies
into their companies like internet, ERP, RFID.
SOURCING
Sourcing is the set of business processes required to purchase goods & services. Managers must first
decide which tasks will be outsourced & those that will be performed within the firm.
Components of sourcing decisions

In-House or outsource: The most significant sourcing decision for a firm is whether to
perform a task in-house or outsource it to a third party. This decision should be driven in part
by its impact on the total supply chain profitability.

Supplier selection: It must be decided on the number of suppliers they will have for a
particular activity. The must then identify the criteria along which suppliers will be evaluated
& how they will be selected like through direct negotiations or resort to an auction.

PRICING
Pricing determines how much a firm will charge for goods & services that it makes available in the
supply chain. Pricing affects the behavior of the buyer of the good or services, thus affecting supply
chain performance, for example, if a transportation company varies its charges based on the lead time
provided by the customers, it s very likely that customers who value efficiency will order early &
customers who value responsiveness will be willing to wait & order just before they need a product
transported. This directly affects the supply chain in terms of the level of responsiveness required as
well as the demand profile that the supply chain attempts to serve. Pricing is also a lever that can be
used to match supply & demand.
Components of Pricing Decisions:

Fixed Price versus Menu pricing: A firm must decide whether it will charge a fixed price for
its supply chain activities or have a menu with prices that vary with some other attribute, such
as response time or location of delivery.

Everyday low pricing versus High-Low pricing

Obstacles to Achieving Strategic fit

Increasing variety of products

Decreasing product life cycles

Increasingly demanding customers

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Notes by Prof Varun Keshari

Fragmentation of supply chain

ownership

Globalization