Understanding the Supply Chain

What is supply chain Management? Supply Chain Management is the process of Planning, Implementing & Controlling the operation of Supply Chain as Efficiently As possible.SCM spans all movement & Storage of Raw materials, work-in-progress inventory, & finished goods from point of origin to point of consumption. The definition of one American professional Association Put Forward is that SCM encompasses the planning & Management of all activities involved in Sourcing, procurement, conversion, & logistics management Activities. Importantly, it also includes coordination & collaboration with channels partners, which can be suppliers, intermediaries, third party service providers, & customers. In essence, SCM integrates supply 7 demand management within the across companies. Some experts distinguish SCM & logistics, while other considers the terms to be interchangeable. Supply chain event Management (abbreviated as SCEM) is a consideration of all possible occurring events & factors that can cause disruption in a supply chain with SCEM possible scenarios can be created & solution can be planned.

Importance of Supply chain Decisions

There is a close connection between the design & management of supply chain flows (product, information & funds) & a success of the supply chain. Wal-Mart, dell computers & seven-Eleven Japan are examples of companies that have built their success on superior design, planning & operation of their supply chain. In contrast the failure of many e-businesses such as Web van can be attributed to weakness in their supply chain design & planning. Wal-Mart has been a leader at using supply chain design, planning & operation to achieve success. The company invested heavily in transportation & information infrastructure to facilitate the effective flow of goods & information Wal-mart design its supply chain with clusters of stores around distribution centers to facilitate frequent replenishment at its retail stores in a cost-effective manner. Frequent replenishment allows stores to match supply & demand more effectively than the competition. Wal-Mart has been leader in sharing information & collaborating with suppliers in brings down cost & improves product availability. In their 2004 Annual report, the company reported the net income of more than $9 billion on revenues of about $250 billion. These are the dramatic results for a company that reached annual sales of only $1 billion in 1980.The growth in sales represent as annual compounded growth rate of 26%.

Decision Phases in a Supply Chain

Following there are three phases: 1. Supply Chain Strategy or Design

2. Supply Chain Planning 3. Supply Chain Operation 1. Supply Chain Strategy or Design The marketing & pricing plans for a product, a company decides how to structure the supply be, how resources will be allocated, & what the chains configuration will strategic decision made by companies include whatever to outsource or perform a supply chain function in house, the location & capacities of product & warehousing facilities the product to be manufactured or stored at various location & capacities of production & the modes of transportation to be made available along different shipping legs, & the type of information system to be utilized. 2. Supply Chain Planning The supply chain configuration determined in the strategic phase is fixed. This configuration is established constrains with in which planning must be done. The goal of planning is to maximize the supply chain surplus that can be generated over the planning horizon given the constrains established during the strategic or design phase. Planning includes making decisions regarding which markets will be supplied from which locations, the sub-contracting of manufacturing, the inventory policies to be followed, & the timing & the size of marketing & price promotions. Dell decision markets supplied by a production facility & target production quantities at each location are classified as planning decisions. 3. Supply Chain Operation The time horizon here is weekly or daily & during this phase companies make decision regarding individual customer orders. At the operational level, supply chain configuration is considered fixed & planning policies are already defined. The goal of supply chain operations is to handle incoming customers order the best possible manner. During, this phase firms allocate inventory or production to individual orders, sat a date that an order to a particular shipping mode & shipment, set delivery schedule of trucks, & place replenishment orders. The design, planning, & operation of supply chain have a strong impact on overall profitability & success. It is fare to state that a large part of success of firms like Wal-Mart & Dell can be attributed to their effective supply chain design, planning & operation.

Process Views of a Supply Chain

A supply chain is a sequence of process & flows that take place within & between different stages & combine to fill a customer need for a product. There are two different views the processes performed in a supply chain.

1. 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. 2. Push/Pull View: The processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order or in anticipation of customer orders. Pull processes are initiated by a customer order, whereas push processes are initiated & performed in anticipation of customer orders. Cycle view of supply chain processes All the supply chain processes can be broken down into following four processes cycle. Customer order cycle Replenishment cycle Manufacturing Cycle Procurement cycle - Customer - Retailer - Distributor - Manufacturer Supplier

Supply Chain Process Each cycle occurs at the interface between two successive stages of the supply chain. The five stages thus result in four supply chain process cycles. Not every supply chain will have all four cycles clearly separated. For example, a grocery supply chain in which retailer stocks finishedgoods inventories & places replenishment orders with a distributor is likely to have all four cycles separated .Dell, in contrast, sells directly to customers, thus bypassing the retailer & distributor. Each cycle starts with the supplier marketing the product to customers. A buyer then places an order that is received by the supplier supplies the order, which is received by the buyer. The buyer may return some of the product or other recycled material to the supplier or a third party. The cycle of activities then begins all over again.
Supplier Stage markets Product Buyer returns Reverse Flows to supplier or third Party

Buyer Stages Places Order

Buyer stage Receives supply

Supplier stage Receives order

Supplier Stage Supplies Order

Push/Pull View Of supply Chain Processes

All processes in a supply chain fall into one of two categories depending on the timing of their execution relative to end customer demand. With pull processes, execution is initiated in response to a customer order. With push processes, execution is initiated in anticipation of customer orders. Therefore, at the time of execution of a pull process, customer demand is known with certainty, whereas the time of execution of a push processes, demand is known & must be forecast. Pull processes may also be referred to as speculative processes because they respond to speculated rather than actual demand. The push/pull in a supply chain separates push process from pull process. Push process operate in an uncertain environment because customer demand is not yet known. They are, however, often constrained by inventory & capacity decisions that were made in the push phase.

Supply Chain Management Problems

SCM must address the following problems: Distribution Strategy: Including questions of operating control (centralized, decentralized or shared); delivery scheme (eg.,direct shipment, pool print shipping , cross docking, DSD(direct store delivery), closed loop shipping); mode of transportation (e.g., motor carrier, including truckload, LTL, Parcel, Rail, Road . Information: Integration of & processes through the supply chain to share valuable information, including demand signals, forecasts, inventory & transportation etc. Inventory Management: Quantity & location of inventory including raw materials, work-in-process & finished goods. Cash-Flow: Arranging the payment terms & the methodologies foe exchanging funds across entities within the chain supply.

Activities/Function
SCM is a cross functional approach to managing the movement of raw material into an organization, certain aspects of internal processing of materials into finished goods, & then the movement of finished goods out of the organization towards the end-customer. An organization strives to focus on core competencies & becoming more flexible, they have reduced their ownership of raw material sources & distribution channels. These functions are increasingly being outsourced to other entities that can perform the activities better or more cost effectively. The effect is to increase the number of organizations are involved in satisfying customer demand, while reducing management control of daily logistics operations. Less control or more supply chain partner led to the creation of SCM concepts. The purpose of SCM is to improve trust & collaboration among supply chain partners, thus improving inventory visibility & improving inventory velocity.

Strategic level

Strategic network optimization, including the number, location, and size of warehousing, distribution centers, and facilities. Strategic partnerships with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third. Product life cycle management, so that new and existing products can be optimally integrated into the supply chain and capacity management activities. Information technology chain operations. Where-to-make and make-buy decisions. Aligning overall organizational strategy with supply strategy. It is for long term and needs resource commitment.

Tactical level

Sourcing contracts and other purchasing decisions. Production decisions, including contracting, scheduling, and planning process definition. Inventory decisions, including quantity, location, and quality of inventory. Transportation strategy, including frequency, routes, and contracting. Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise. Milestone payments. Focus on customer demand and Habits.

Operational level
Daily production and distribution planning, including all nodes in the supply chain. Production scheduling for each manufacturing facility in the supply chain (minute by minute). Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers. Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers. Inbound operations, including transportation from suppliers and receiving inventory. Production operations, including the consumption of materials and flow of finished goods. Outbound operations, including all fulfillment activities, warehousing and transportation to customers. Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities, distribution centers, and other customers. From production level to supply level accounting all transit damage cases & arrange to settlement at customer level by maintaining company loss through insurance company.

Role of distribution in Supply Chain

Distribution refers to the steps taken to move & store a product from the supplier stage to a customer stage in the supply chain. Raw material & components are moved from suppliers to manufacturers, whereas finished products are moved from the manufacturers to the end customers. Distribution is the key driver of the all profitability of a firm because it affects both the supply chain cost & the customer experience directly. Distribution-related costs make up about 10.5 percent of the U.S economy & about 20% of the cost of manufacturing. For commodity products, distribution forms an even higher fraction of the product cost. In India, the outbound distribution cost of cement is about 30percent of the cost of producing & selling cement. P&G has to chosen directly to large supermarket chains while obligating smaller players to buy P&G products from distributors. Products directly move from P&G to the large chains, move through an additional stage when going to smaller supermarkets. Texas instrument, which once used only direct sales, now, sells about 30percent of its volume to 98percent of its customers through distributors, while serving the remaining with 70 percent of the volume directly. What value do these distributors provide? When should a distribution network include an additional stage such as a distributor? Proponents of e-business have predicted to the death of intermediaries such as distributors why were they proved wrong in many industries? Distributors play a much more significant role for consumer goods distribution in a country such as India compared to the U.S. Why might this be the case?

Factors Influencing Distribution Network Design

At the highest level, performance of a distribution network should be evaluated along two dimensions: 1. Customers needs they are met 2. Cost of meeting customers need Thus, a firm must evaluate the impact on customer service & cost as it compares different distribution network options. The customer needs they are met influence the company revenues, which along with the cost decide the profitability of the delivery network. Although customer service consists of many components, we focus on those measures that are influenced by the structure of the distribution network. These include: Response Time Product Variety Product Availability Customer Experience Time to Market Order Visibility Return ability

Inventory Management
Introductory Concept & Definition Inventory control cannot be treated in isolation. Inventories grow because of large lead times, long setup times, erratic output, etc.Inventories managers have unenviable task on their hands. They are blamed at drop of a hat. However the nature of the problem in such that, they on their own can do very little about the inventory on the hand. Inventory management is but a part of the greater system that we may well call as the production materials management systems. Traditionally, inventory control system have been reactive in nature .The rule has been for extra inventory as a mean to tackle the wide range of variability that confronts any organization. Inventories must flow .this become more all the important when cost is consider, for cist is like dust-it has a tendency to settle on anything sitting around. Rapid flow of materials allows little time for cost to accumulate. Conflicting pressures on inventory levels Pressures for small inventories 1.Intrest or Opportunity Cost 2.Storage & Handling Cost 3.Property taxes 4.Insurance premiums 5.Shrinkage Cost: Pilferage, Obsolesce & Deterioration Pressures for Large inventories 1.Customer Service 2.Ordereing or Setup Cost 3.Labour & Facility utilization 4.transportation Cost 5.Cost of Purchased Items

Four Reasons For Its Importance Are: Inventories can be a major commitment of monetary resources. Inventories affect virtually every aspect of daily operations. Inventories can be a major competitive weapon. Inventories are the major control problems in many companies.

 Function & types of inventories: Inventory serves various functions in a firm. Firms hold inventories to buffer against uncertainties in supply, in the production process, & in demand. Irrespective of whether a certain inventory is planner or not, it always serves the basic function of de-coupling supply from demand. Inventories can be classified in various ways depending on the specific purpose .Manufacturing companies have broadly two categories of inventories. They are: 1. Manufacturing inventory 2. Distribution inventory 1. Manufacturing Inventories a) Raw Materials (e.g. steel) b) Semi finished components( e.g. Tata Junction Control) c) Finished components (e.g. Tyres) d) Sub-Assemblies (e.g. gear box) e) Work in progress (WIP)(e.g. steel body) f) Finished goods (e.g. Tata Indica V2) g) Supplies/Consumables (e.g. cotton, oil) h) Spares (e.g. M/C spares parts) 2. Distribution Inventory a) Finished products in ware house b) Finished product in transit

Functions Of Inventory Control 1. To de-couple demand & supply. 2. To take care of physical impractically of getting right amount of stock at exact time of requirement. 3. To economize production level or smoother manufacturing. 4. To de-link various successive stages in a production process. 5. To reduce material handling cost. 6. To take advantage of quantity discount bulk purchases 7. To earn favorable return on investment. 8. To take care of variable, seasonal, immediate customer demands. 9. To take advantage of lower bulk transportation cost. 10. To disclose slow moving & non- moving items. Elements of inventory cost The type of cost that usually affect the inventory decisions are: 1. The cost to place replenishment order. They are also referred to as replenishment costs or procurement or indenting cost. Cost of paperwork, typing & dispatching & order

Cost incurred in following up timely deliverers, travelling costs, purchase follow up costs, telephone, telegrams, telex postal, e-mail & other correspondence costs. Cost involved in receiving the order, incoming inspection, checking, physical handling over to stores. Any setup machine cost, if any, directly charge by the supplier to the batch size. Salaries & wages of the purchase department. 2. The cost to hold inventory: These cost include all expenses incurred because of the volume of inventory carried. These are also called as inventory carrying cost. This may be fixed sum per unit per time period, or it may be fixed percent of value per time period. In more complex models it may consists of more than one element i.e. holding cost may consists of both physical storage & capital costs. Among the relevant cost are warehouse rental clerical cost of counting inventory, obsolesce, damage, pilferage, theft, reduce item life, spoilage & value associated with funds tie-up in the inventory. The challenges of inventory management: Maximize the level of customer service Minimizing the cost of providing an adequate level of customer service, promoting efficiency in production or purchasing. The OIM system must carry out objectives set by upper management. It must perform in such a way to enhance the organizations profit or performance. The objectives set by management will frequently fall into either of two categories: 1. Customer service objectives 2. Inventory investment objective Thus, we see the basic conflict of inventory management: some objectives call for economizing on inventory levels, while other objectives call for increasing inventories. These objectives may create conflict along departmental lines: finance wants smaller sums tied up in a inventory, while marketing wants larger amounts so that customer orders can be more promptly satisfied. Various types of inventory management techniques. ABC analysis VED analysis HML analysis GOLF analysis SOS analysis LIFO FIFO techniques MNG analysis FSN analysis XYZ analysis

Purchasing Cycle

A. Establishing The Need For Procurement

Recognizing the need for procurement Determining the requirements Spelling out specifications Communicating requirements to purchase:

1. Purchase indents/Bills of Materials 2. Purchase indents (other items)

B. Scrutiny of Purchase Indent

Completeness of description Appropriateness of request Routing of indent through stores Logging indents into indent registrar

D.Order Preparation
Scrutiny Of Quotations Negotiation Placing orders on suppliers Obtaining suppliers acceptance of purchase order

E. Follow Up Pre-Delivery follow up Shortage chasing reminders 1. Personals Visits 2. Telephone/Telegrams F.3. Faxes/Telex Receiving & Inspection 4.Posting of dispatch detailssuppliers works Receiving personnel at (RR/LR/CAN) & logging them into the consignment
register collection of materials from transporter godown. Inspection for physical damages to the packages & no. of packages. Entering consignment details in GRN register. Uncrating of goods quantity certification raising of GRN. Intimating receipt of materials to the indenter. Inspection of goods.

H. Invoicing & Payment

Receiving GRN in a/c department Receiving suppliers bills Posting of purchase register Passing of bills Effecting payments

A) Supplier & Vendor/Ancillary Supplier Caters to a number of manufacturers May or May not be on contract Relationship is that of buyer & seller are superficial Breach may not affect both intensely Vendor/Ancillary Caters to up to 50% for the manufacturer Supply based on a longer period of time contract Partners in progress & relationship is deep rooted Any one backing out can cause intense harm to

other or breach of relationship can harm both Relationship doesnt involve joint decision making B) Centralized & Decentralized Purchases Centralized Purchase carried out for various units at head office at a central location Heavy discount offered due to economics of scale Standardization is the key reason Logistics cost is the high Supplier is big, national player CSD canteen purchases centrally Involved in decision making within the manufacturer

Decentralized Each manufacturing units buys locally Discounts are less as compared to centralized

Standardization is not the key factor Logistics cost is low Supplier is local TELCO pune, Jamshedpur & Lucknow purchases welding materials from different suppliers TAJ GROUP has stationary material supplied by McDonalds in pune is supplied chicken by central re-cycle paper manufacturer in Delhi venkys & in Delhi by sunrise hatcheries C. Make & Buy Decisions Make Manufacturers produce in house Cost of acquisition>cost of manufacture Company has the capacity to invest Co. has no plans to divest or focus to core competencies L & T forges ahead into LTITL

Buy Manufacturers outsource Cost of manufacture>cost of acquisition Company cannot afford to block huge capital Co. plans to divest & focus on core competencies SBI outsources its 17 functions

Distribution Cost Analysis Foe achieving the objectives of physical distribution, the co. must have such a system which will minimize the costs. Any proposed system will have to include the following costs in the total distribution costs. 1. The Freight Costs 2. Fixed warehouse costs 3. Variable warehouse (inventory) costs For reducing the costs of various levels, it is necessary to analyze the costs.After examining the analysis, the distribution manager can identify the areas where costs can be reduced. The steps for distribution cost analysis are:

1. 2. 3. 4. 5. 6.

Getting the detail of cost data Finding out the effects of handling Calculating the cost per unit Using quantitative techniques Analyzing the information Setting the priority areas

a) Getting the detail of cost data: These can be obtained mostly internally; some information may be required externally. b) Finding out the effects of handling: In some products like cement or fertilizers or glassware, it will be imperative to have minimum handling. Each handling will increase the probability of damage, breakage, pilferage. c) Calculating the cost per unit: After knowing the fixed costs & variable costs, unit costs can be worked out for different numbers of units distributed. d) Using quantitative techniques: It will be meaningful to know whether some quantitative techniques could be used to advantage. e) Analyzing the information: After getting all the information, its analysis will indicate the areas where action is required. f) Setting the priority Areas: the distribution manager can think of the strengths & weakness of the co. & then set the priorities for cost reduction. The entire exercise of the collection of cost data & its analysis will be of tremendous help is arriving at a decision as to how to reduce the costs. It is not an easy task due to various reasons. The interdepartmental nature of the work creates many mental barriers also. 1. Cost at the production point 2. Cost related to material movements 3. Cost of warehousing 4. Cost of holding the inventories 5. Cost incurred by the dealer 6. Cost incurred by the consumer 7. Costs of storages, Damages, Pilferages 8. Distribution administrative costs

Further the cost could be of: 7. Shortage of goods, damaged good costs 8. Distribution administration costs 9. Packaging costs The details of the above can now be discussed 1. Cost at the production point: These would increase raw material, direct labor, machine time, power & fuel cost. a) Cost of storage handling: These would consist cost of labor as well as space. b) Financial cost which would involve costs of working capital for finished goods inventory. Costs of deteriorating of goods can also be there at the production point. c) Packaging costs would include the cost of material for packaging as well as the cost of labor needed for that 2. Cost related to movements of materials a) Freight cost would be incurred for the goods to be carried from the plant/factory to warehouse & then to distributor/dealer b) The company may possess its own transportation equipment in which case it will have capital costs as well as operating costs. Alternatively it may be contracting the transport carriers with hiring charges. c) Insurance charges will be paid for transport insurance. 3. Cost of warehousing a) Here also cost of storage is incurred. If it is companys own warehouse, capital costs & also operating costs are incurred. If it is a hired warehouse, then rentals are to be provided for. b) Financial costs & administrative costs are incurred. c) Sometimes, location of the warehouse is not ideal. More costs are incurred due to a wrong location. In such a case, the costs are called improper location costs. 4. Cost of handling inventories a) The inventories are most likely to be at three places: (i)At the production point, (ii) at the warehouse, (iii) at stock paints, at all the above places, capital would be employed & interest will be paid. That cost is to be calculated.

b) The servicing cost of inventory would include, (i) handling costs, (ii) insurance (iii) pilferage, (iv) deterioration, (v) obsolescence, (vi) Taxes. c) There is one more aspect to carrying the inventories. A minimum level of inventories will have to be maintained. In addition to this, the stock level would have to increase during a particular time-specially when the demand of that product is likely to increase. 5. Cost incurred by the dealers a) From the warehouse, the material will be going to the distributor/dealer. As per the terms of contractual arrangements, the material will be delivered at the warehouse & thereafter, all the charges like transportation will be borne by the dealer b) The dealer will be incurring cost for storing of inventories & handling as well as the financial costs involved in these. c) Sometimes, the containers are returnable, like in soft drink glass bottles. The costs of returning would also be an element of costs at this level. 6. Costs incurred by the consumers It can be debated whether some of the costs incurred by the consumer spatiality for transportation should form part of the distribution costs analysis. In rural markets in India, when fertilizers are purchased in bulk quantities by the cultivators, they have to think of the delivery point & the cost incurred by them after. In competitive markets, consumers would expect some discounts/rebate towards these costs. 7. Costs of storages, Damages, Pilferages For bulk quantities there is insurance during transit & storage. But at some point, the goods would be uninsured. There may be damages due to handlings or storage due to theft. There may be difference between the value of insurance & the claims settlement. Provision has to be made for taking care of these costs. 8. Distribution administrative costs At the distribution mangers office, would be costs incurred for office maintenance as well as administrative & managerial staff. These also need to be analyzed.

Transportation
In this we discuss the role that transportation plays in the supply chain as well as key transportation related decisions that supply chain managers must make. Role in the supply chain Transportation moves product between different stages in a supply chain. Like the others supply chain drivers, transportation has large impact on both responsiveness & efficiency. The type of transportation a company uses also effect the inventory & facility locations in the supply chain. Dell, for e.g., files some components from Asia because doing so allows the company to lower the level of inventory it holds. Clearly such a practice also increases responsiveness but decreased transportation efficiency because it more costly than transporting parts by ship. Role in competitive strategy The role of transportation in a companys competitive strategy figures prominently in the co. consideration to the target customer needs. If a firm competitive strategy targets a customer whose demand a very high level of responsiveness, & that customer is willing to pay for this responsiveness, then a firm can use transportation as one driver for making the supply chain more responsive. The opposite holds true as well. If a co. competitive strategy targets customers whose, main decision criterion is price, then the co. responsiveness. Because a co. may use both inventory & transportation to increase responsiveness & efficiency, the optimal decisions for the co. often means findings the right balance b/w the two. EXAMPLE: Laura Ashley They sells clothing & household items through a mail order catalogue & uses transport as part of its competitive strategy. Their customers are willing to pay a premium price for a high level of responsiveness. To meet this level of responsiveness, the co. has located its main warehouse near the Fed-Ex hub in Memphis, Tennessee, to better utilize the responsive transportation that FedEx offers .When an order is placed, the goods are easily & quickly sent from the Laura Ashley warehouse to the FedEx hub, where they are sent overnight to the customer. This transportation policy enables Laura Ashleys customers to order their goods later than they can at other co. & still receive them next day.

Components of Transportation Decisions

We now identify key components of transportation that companies must analyze when designing & operating a supply chain. Design of transportation Network It is the collection of transportation modes, locations, & routes along which product can be shipped. A co. must decide whether transportation from a supply source will be a direct to the demand point or will go through intermediate consolidations points. Design decision also include whether multiple supply or

demand points will be included in a single run or not. Finally, companies must also decide on the set of transportation modes that will be used. Choice of Transportation Mode The mode of transportation is the manner in which a product is move from one location in the supply chain network to another. Companies can choose between air, truck, rail, sea & pipelines as modes of transportation for products. Today, information goods can also be sent via the internet. Each mode has different characterization with respect to the speed, size of shipments, and cost of shipping & flexibility that leads companies to choose one particular mode over the others.

Information
In this section we discuss the role that information plays in the supply chain, as well as key information related decisions that supply chain mangers must take. Role in the supply Chain Information deeply affects every part of the supply chain. Its, impact easy to underestimate, as information affects a supply chain in many different ways. Consider the following: 1. Information serves as the connection b/w the various stages of a supply chain, allowing them to coordinate & maximize total supply chain profitability. 2. Information is also crucial to the daily operation of the each stage in a supply chain. For instance, a production scheduling systems uses information on demand to create a schedule that allows a factory to produce the right product is an efficient manner. Warehouse management systems use information to create visibility of the warehouses inventory. The co. can use this information to determine whether new orders can be filled. Role in the competitive strategy Information is an important driver that companies have use to become both more efficient & more responsiveness. The tremendous growth of the importance of information technology is a testimony to the impact that information can have on improving a co. Like all the others drivers, however, even with information, companies reach a point when they must make the trade-off between efficient & responsiveness. Another key decision involves what information is most valuable in reducing cost & improving responsiveness within a supply chain. This decision will vary depending on the supply chain structure & the markets segments served. Some companies, for e.g. target customer who required customized products that carry a premium price tag. These companies might find that investments in information that allows them to respond more quickly to their customer. The following example illustrates this type of investment. EXAMPLE: Anderson Windows

Anderson windows, a major manufacturer of residential wood windows located in Bayport, Minnesota, have invested in an information system that enables the company to bring customized products to the market rapidly. This system called Windows of Knowledge allows distributors & customers to design windows to custom fit their needs. Users can select from a library of over 50,000 components that can be combined in any no. of ways. The system immediately gives the customer price quotes & automatically sends the order to the factory. If the customers decide to buy. This information investment not only gives the customer a much wider variety of products, it allows Andersen to be much more responsive to the customer, as it gets the customers order to the factory as soon as the order is placed.

Sourcing
In this section we discuss the role that sourcing plays in the supply chain & key sourcing related decisions that mangers need to make. Role in the Supply Chain Sourcing is the set of business processes require to purchase goods & services. Managers must first decide which task will be outsourced & those that will be performed with in the firm. For each outsourced task, the manager must decide whether to source from a single supplier or a portfolio of suppliers .If a portfolio of multiple suppliers is to be carried, then the role of each supplier in the portfolio must be clarified. The next step is to identify the set of criteria that will be used to select suppliers & & measure their performance. Managers then select suppliers & negotiate contracts with them. Contracts define the role of each supply source & should be structured to improve supply chain performance & minimize information distortion from one stage from the next .Once suppliers & contracts are in place procurement processes that facilitate the placement & delivery of orders plays a major role. Role in competitive strategy Sourcing decisions are crucial because they affect the level of efficiency & responsiveness that supply chain can achieve. In some instance firms outsource to responsive third parties if it is too expensive for them to develop this responsiveness on their own. An example is the outsourcing of next-day delivery by all firms to a few package carriers because it is too expensive for a firm to develop next-day delivery capability on its own. In other instances firms have kept the responsive process in house, to maintain control. An example of this is Benetton, which keeps the dyeing of knit garments in house so it can respond quickly to order as they arrive. Firms also outsource for efficiency if the third party can achieve significant economies of scale or has a lower underlying cost structure for other reasons. Outsourcing decisions should be driven by the desire for growth in total supply chain profitability. EXAMPLE: Cisco It has outsourced almost all of its manufacturing. It does, however, have a sourcing strategy that varies by product type. For low end productions such as routers for home networks, Cisco aims for efficiency. These routers are produced & packed in the china & shipped in bulk for sale in U.S.Cisco aims for the lower costs

manufacturing locations & economies of scale in transportation because the targeted market segment value low cost. For high end products, in contrast, Cisco outsource to contract manufacturers in the U.S.These manufacturers are not cheap but they are responsive & can serve the rapidly evolving needs of the high end market.

Components of sourcing Decisions We now consider key sourcing decisions that are made within firm a firm. In-House or Outsource The most significant 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 profit. It is best to outsource if the growth in the total supply chain profit is a significant with little additional risk. Within a task such as transportation, managers must decide whether to outsource only the responsive components, or outsource only the efficient component. Once again, the decision should be based in part in the growth in total supply chain profitability. Suppliers selection Managers must decide on the no. of suppliers they will have for a particular activity. They must then identify the criteria along which suppliers will be evaluated & how they will be selected. For the selection process, managers must decide whether they will use direct negotiations or resort to an auction. If an auction is used, it must be structured to insure the desired outcome.

Pricing
In the section we discuss the role that pricing plays in the supply chain Role in the supply chain It is the process by which firms decide how much to charge customers for its goods & services. It affects the customers segment that choose to buy the product, as well as the customer expectations 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. It is also a lever that can be use to match the supply & demand. Shortterm discount can be used to eliminate supply surplus or decrease seasonal demand spikes by moving some of the demand forward. In short, pricing is one of the most significant factors that affect the level& type of demand that the supply chain will face. Role in the competitive strategy Pricing is a significant attribute through which a firm executes its competitive strategy. For Example, Costco, a membership based wholesaler in the U.S., has a policy that price are kept steady but low.

Customers expect low prices but are comfortable with their lower level of product availability the steady prices also ensure that demand stays relatively stable. Costco serves a well defined segment, & it can thus design an appropriate supply chain. The Costco supply chain aims to be very efficient, at the expense of some responsiveness .In contrast, some manufacturing & transportation firms use pricing that varies with the response time desired by the customer. Through their pricing, these firms are targeting a broader set of customers, some of whom need responsiveness while other need efficiency. In this case its become important for these firms to structure a supply chain that can meet the two divergent needs. Example: Amazon Amazon offers its customer a large menu of prices for products that are purchased from the company. For E.g., in November 2005, a person purchasing two books worth $30 could use standard shipping at a cost of $4.98, two days shipping at a cost of $11.47, one day shipping at cost of $20.47 or use free shipping. The pricing menus allow Amazon to attract customer with varying levels of desire responsiveness. Whereas customer paying for one-day shipping imposes a high degree of uncertainty on Amazon, customer opting for free shipping can be use level out the workload at the warehouse over the time. It can thus use its pricing to provide responsiveness to those who value it while using those who want a low price to help it improve its efficiency. It also uses prices effectively to some shift of the Christmas peak to November, when it usually offer a discount on shipping. The discounts moves some of the December demand forward, allowing it to reduce its December peak & improve its efficiency without giving upon responsiveness for those customers who do not want to order earlier.

Components its pricing decision We noe describe key components of pricing decision that affect supply chain performance. A) Pricing & economies of scale Most supply chain activities display economies of scale. Changeover makes small productions runs more expensive per unit than large production runs. Loading & unloading cost makes it cheaper a truckload to one location than four. in each case, the provider of supply chain activity must decide how to price it appropriately to reflect these economies of scale. A commonly used approach is to offer quantity discounts. Care must be taken to ensure that quantity discount offered is consisting with the economies of scale in the underlying process. Otherwise there is a danger of customers orders being delivered by the primarily by the quantity discount even though the underlying process does not have significant economies of scale. B) Everyday Low pricing versus High-Low pricing A firm such as Costco practices everyday low pricing as its, warehouse stores, keeping prices over steady time. Costco will go to the extent of not offering any discount on damaged books to ensure its everyday low

pricing strategy. In contrast, most supermarkets practice high-low pricing & offers steep discount on a subset of their product every week. The Costco pricing strategy results in relative stable demand. The highlow pricing strategy results in a peak during the discount week; often follow by a steep drop in demand during the following weeks. The two pricing strategy lead to very different demand profiles that the supply chain must serves.

Facilities
In this section we will discuss the role that facilitates plays in the supply chain as well as critical; facility related decisions that supply chain managers need to make. Role in the supply chain If we think of inventory as what is being passed along the supply chain & transportation as how it is passed along, the facilities are the where of the supply chain. They are the locations to or from which the inventory is transported. Within a facility, inventory is either transformed into another state or it is stored. Role in the competitive strategy Facilities are a key driver of supply chain performance in terms of responsiveness & efficiency. For example, companies can gain economies of scale when a product is manufactured for stored in the only one location; this centralization is increases efficiency. The cost reduction, however, comes at expense of responsiveness, as many of a co. customer may be located far from the production facility. The opposite is also true. Locating facility close to customer increases the number of facilities needed & consequently reduces efficiency. If the customer demand & is willing to pay for the responsiveness that having numerous facilities adds, however, then this facility decision helps meets the companys competitive Strategy goals. Example: Toyota & Honda Both Toyota & Honda use facilities decision to be more responsive to their customer. These companies has end goal of opening manufacturing facilities in every major market that they enter. While there are other benefits to opening local facilities, such as protection from the currency fluctuation & trade barriers, in increase in responsiveness plays a large role in Toyota & Honda decisions to place facilities in their local markets. Components of facility decision Decision regarding facilities is a crucial part of supply chain design. We now identify components of facilities decision that companies must analyze. Role For production facilities, firms must decide whether they will be flexible, delicate, or a combination of the two. Flexible capacity can be used for many types of products but it is more efficient. Firms must also

decide to design a facility with the product focus or a functional focus. A product focused facility performs many different functions (e.g., Fabrication & assembly) in producing a single type of product. A functional focused facility performs few functions (e.g., only fabrication or only assembly) on many types of product. A product focus tends to result in more expertise that comes from a functional methodology. For warehouses & DCs, firms must decide whether they will be primarily cross docking facilities, inbound trucks from the suppliers are unloaded; the product is broken into smaller lots, & is quickly loaded onto store bound truck. For storage facilities, firms must decide on the products to be stored at each facility. Location Deciding a co. where will locate its facilities constitute a large part of the design of a supply chain. A basic trade off here is whether too centralized in order to gain economies of scale or to decentralize to become more responsive by being close to the customer. Companies must also consider a host of issues related to the various characterization of the local area in which the facility is situated. These include macroeconomics factors; quality of workers, cost of workers, cost of facility, availability of infrastructure, proximity to the customer, and the locations of that firms other facilities, tax effect & other strategic factors.

Supply Chain Management at McDonald (India)

Every year, Rs.50, 000 cr. worth of food produced is wasted in India. This is mainly because of the lack of proper infrastructure for storage & transportation under controlled conditions. McDonald is committed to providing quality products while supporting other Indian businesses. So, they spent few years setting up a unique supply chain, even before they opened our first restaurant in India. A supply chain is a network of facilities including material flows from suppliers & their upstream suppliers at all levels, transformation of materials into semi-finished & finished product , & distribution of products to customer & their downstream customers at all levels. So raw material follows as follows:

Supplier-Manufacturer-Distributor-Retailer-Consumer
Information & the money flows in the reverse direction .The balance between these 3 flows in what a supply chain is all about. When there is balanced in the finish product ordering, the supply chain operates as its best. Any major fluctuation in the product ordering patterns cause excess/fluctuating inventories, shortages/Stock outs, longer lead times, higher transportation & manufacturing costs, & mistrust between supply chain partners. This is called the Bullwhip Effect. Depending on the situation, the supply chain may include major products elements, various suppliers, geographically dispersed activities, & both upstream & downstream activities. It is critical to go beyond ones immediate supplier & customer to encompass the entire chain, since hidden value often emerges one the entire chain is valorized. For e.g., a diesel engine manufacturer may be able to integrate a GPS locator

system into its engine control system. Its imitate customer, a heavy truck manufacturer, may see no need for this functionally. However, the downstream customer, a trucking co. with a large fleet, may be very interested in a locator system. Understanding the value to the downstream customer is the part of supply chain management process.

Big Macs Supply Chain success

The seed of McDonald's success was sown in 1990 - six years before it started its actual operations. Sanjeev Bhar traces its supply chain management that played a vital role in its growth. About two decades ago, the QSR wouldn't have meant much to the Indian F&B segment. Today, the acronym has been seamlessly absorbed in the industry lingo. McDonald's, arguably, one of the first brands that left a strong imprint on the Indian QSR history, has much to do with this. And its success is credited to its well-established supply management chain. According to Vikram Bakshi, managing director and joint venture partner of McDonald's India (North & East), the company invested about Rs 400 crore even before its first restaurant commenced operations in October 1996. "We had to ensure that we had the back-end linked up to the farm level for delivery commitment." The company also deployed the latest state-of-the-art food processing technology for having a sound supply chain. The transition towards the latest technology, which has been subsequently noticed in other QSRs as well, changed the Indian fast food scenario to match international standards.

Tracing its success path

McDonald's had been working critically on its supply chain part. Considering, an international brand trying to make inroads into the Indian consciousness, its Indian supplier partners were developed in such a manner that made them stay with the company from the beginning. Bakshi explains, "The success of McDonald's India is a result of its commitment to sourcing almost all its products from within the country. For this purpose, it has developed local Indian businesses, which can supply them the highest quality products required for their Indian operations." As per today's standings, McDonald's India works with as many as 38 Indian suppliers on a long-term basis, besides several others standalone restaurants working with it, for various requirements. In the supply chain management for a QSR, the distribution centres hold special place for bringing food right to the outlet counters. For McDonald's India, the distribution centres came in the following order: Noida and Kalamboli (Mumbai) in 1996, Bangalore in 2004, and the latest one in Kolkata (2007). McDonald's entered its first distribution partnership agreement with Radha Krishna Foodland, a part of the Radha Krishna Group engaged in food-related service businesses. The association goes back to July 1993, when it studied the nuances of McDonald's operations and requirements for the Indian market. Recalling the association, Bakshi remarks, "Better facilities and infrastructures were created along with new

systems by them to satisfy McDonald's high demands, which finally culminated into an agreement with McDonald's India, for Radha Krishna Foodland to serve as distribution centres for our restaurants in Delhi and Mumbai." As distribution centres, the company was responsible for procurement, the quality inspection programme, storage, inventory management, deliveries to the restaurants and data collection, recording and reporting. Value-added services like shredding of lettuce, re-packing of promotional items continued since then at the centres playing a vital role in maintaining the integrity of the products throughout the entire 'cold chain'. The operations and accounting is totally transparent and is subject to regular audits. "McDonald's had worked aggressively to attain the right suppliers and systems that ensured that 90 per cent of yield was indigenous before the doors were opened to consumers. The only products that we used to import were oil and fries, for which we have had made arrangements to manufacture the oil in India. We ensured that the products developed locally abide by global McDonald's standards," informs Bakshi. Over the last 10 years, the company has gained experience and adopted procedures that helped in maintaining a continuous supply of food products irrespective of the climatic conditions. Bakshi proclaims, "Our logistics and warehousing system is robust that prepares us to deliver products at the same temperature throughout, without a single break in the cold chain."

McDonalds suppliers in india

Amrit Foods: Amrit Foods, a division of Amrit Banaspati, has been associated with McDonald's India as a supplier of Dairy Mixes, Soft Serve Mix and Milk Shake Mix for over a decade now. Cremica Industries: Cremica Industries was started in 1980 as small ice-cream unit run by Mrs Bector out of her backyard in Ludhiana. However after its initial success Cremica added buns and biscuits to its product line and in 1996 McDonald's selected Cremica to be its supplier for buns, liquid condiments, batter and breading in collaboration with its international partners Dynamix Dairies: McDonald's India has approved Dynamix Dairies, Baramati (Maharashtra) for supply of cheese to its restaurants. Dynamix has a modern automated plant that is fully computer controlled Trikaya Agriculture: Trikaya Agriculture is McDonald's supplier of fresh iceberg lettuce. The farms at Talegaon, Maharashtra produce the crop throughout the year

Strengthening the backbone

Suppliers are proclaimed to be the backbone of any good business as they are the individual units that build supply chain. On them depends the health of the overall business cycle. Highlighting McDonald's role in developing its supply chain network, Bakshi says, "Cremica Industries (which provide liquid condiments, batter and breading), for example, worked with another McDonald's supplier from Europe to develop technology and expertise that allowed the company to expand it business from baking to providing breading and batters to McDonald's India and other companies as well." Another benefit in the company's favour was its expertise in the areas of agriculture, which allowed it, along with its suppliers, to work with farmers in Ooty, Pune, Dehradun and other regions to cultivate high quality iceberg lettuce. Bakshi says, "There has been a substantial effort on sharing advanced agricultural

technology and expertise with farmers/suppliers like utilisation of drip irrigation systems (for less water consumption), better seeds and agricultural management practices for greater yields." Another area of concern is the sensitive price indexes of the food materials that McDonald's uses and to tackle price fluctuations, the company goes with yearly rate agreements with suppliers. McDonald's took special care in identifying the positives of their suppliers and added their expertise to improve on their existing standard. Trikaya Agriculture, a major supplier of iceberg lettuce to McDonald's India, is one such enterprise that is an intrinsic part of the cold chain. "Initially, lettuce could only be grown during the winter months but with McDonald's intervention, it is now able to grow the crop throughout the year," says Bakshi. Also, some of its suppliers with concerns over cultural sensitivities, segregated with a separate work force for the vegetarian and non-vegetarian processing lines.
Refrigerated vans for McDonald's
National inbound - Supplier to DC: 20 vehicles + 2 for Kolkata Outbound north - DC to restaurant: 13 vehicles Outbound west - DC to restaurant: 11 vehicles Outbound south - DC to restaurant: 1 vehicle Proposed Kolkata - DC to restaurant: 1 vehicle

Incorporating chill zones

Setting up extensive cold chain distribution system forms the lifeline of any fast food business. In this regard, McDonald's incorporated state-of-the-art food processing technology along with its international suppliers to pioneering Indian entrepreneurs, who are today an integral part of the cold chain, avers Bakshi. He says, "We have imparted technical training to all our suppliers on how to operate the imported machineries, educated them on the McDonald's philosophy of Quality, Service, Cleanliness and Value (QSCV) in order to provide standardised food to our customers." The 'cold chain', on which the QSR major has spent more than six years for setting up the same in India, has brought about a veritable revolution, immensely benefiting the farmers at one end and enabling customers at retail counters. McDonald's finding the factor of cold room being vital ensured that even before vegetable from farms enters the refrigerated zones, they are locked in a pre-cooling room to remove field heat. Vegetables are placed in the pre-cooling room within half an hour of harvesting where rapid cooling decreases the field temperature of vegetables to 2C within 90 minutes. Then a large cold room (a refrigerated van) is used for transportation to the distribution centers. In the van, the temperature and relative humidity of crop is maintained at 1-4C and 95 per cent, respectively and the flavours and freshness are locked at -35C. Even in this field, McDonald's takes the big pie of credit for developing the concept of cold chain. Bakshi claims, "Prior to McDonald's arrival in India, the concept of a cold chain for the distribution of food and dairy products from the farm to the end supplier, in predetermined and stringently enforced climactic and hygienic conditions, was at a very nascent stage of development. For five years prior to opening our first restaurant, McDonald's pioneered the effort to develop this aforementioned cold chain so that our high standards would be assured. Various Indian and international players later adopted this system to deliver quality fresh produce to consumers."

McDonald's also kept a tab on quality control. McDonald's, as a rule, throws away burger puffs kept for more than 30 minutes after the final preparation during service. To avoid any wastage, Bakshi says, "The crew is trained and equipped to forecast the requirements at various stages of the day. At the suppliers' level, care is taken to guard against any possible contamination or interruption in the cold chain that can break the link and have a detrimental effect on the quality of our product."

Dynamix Dairy Industries (Supplier of Cheese): Dynamix has brought immense benefits to farmers in Baramati, Maharashtra by setting up a network of milk collection centres equipped with bulk coolers. Easy accessibility has enabled farmers augment their income by finding a new market for surplus milk. The factory has: Fully automatic international standard processing facility. Capability to convert milk into cheese, butter/ghee, skimmed milk powder, lactose, casein & whey protein and humanized baby food. Stringent quality control measures and continuous Research & Development

Trikaya Agriculture (Supplier of Iceberg Lettuce): Implementation of advanced agricultural practices has enabled Trikaya to successfully grow specialty crops like iceberg lettuce, special herbs and many oriental vegetables. Farm infrastructure features: A specialized nursery with a team of agricultural experts. Drip and sprinkler irrigation in raised farm beds with fertilizer mixing plant. Pre-cooling room and a large cold room for post harvest handling. Refrigerated truck for transportation.

Radhakrishna Foodland (Distribution Centres for Delhi and Mumbai) An integral part of the Radhakrishna Group, Foodland specializes in handling large volumes, providing the entire range of services including procurement, quality inspection, storage, inventory management, deliveries, data collection, recording and reporting. Salient strengths are :

A one-stop shop for all distribution management services. Dry and cold storage facility to store and transport perishable products at temperatures upto -22 Degree Cell. Effective process control for minimum distribution cost.

Amrit Food (Supplier of long life UHT Milk and Milk Products for Frozen Desserts) Amrit Food, an ISO 9000 company, manufactures widely popular brands Gagan Milk and Nandan Ghee at its factory at Ghaziabad, Uttar Pradesh. The factory has:

State-of-the-art fully automatic machinery requiring no human contact with product, for total hygiene. Installed capacity of 6000 ltrs/hr for producing homogenized UHT (Ultra High Temperature) processed milk and milk products. Strict quality control supported by a fully equipped quality control laboratory.