INTRODUCTION TO

SUPPLY CHAIN MANAGEMENT

Challenges : New Competition & New Economy

• Competition- the corporate business Olympic

• Value innovation - high product diversification for

heightened expectations of customers

• Short Product Life Cycle

• Use of IT
Implications of WTO Regulations

•Open Market & Integrated Economies

•More Global Competition

•Time as the Crucial Element of Competition

•Customer at the Center-stage

•Quality as a qualifying criteria

Traditional Material Flow System

Procurement Operations Distribution

•Manufacturing firms had three separate units

•Strategy: Buffered each system with inventory

 Material Flow Integration - Stage I

Procurement Operations Distribution

STAGE I

• STAGE I Integration - Physical Distribution Management-

integration within The Distribution Loop
• Integration of finished goods transportation, warehousing,
inventory and customer service function
 Material Flow Integration -
Stage II= Logistics

Procurement Operations Distribution

STAGE II = LOGISTICS
• Integration of materials across procurement/ operations/
distribution sub-systems of the firm
• Requires elimination of inventory buffers through better
information interfaces
• Does not require change in organizational structure of firm
 Material Flow Integration –
Stage III = Supply Chain Management

Vendor Procurement Operations Distribution Retailer

STAGE III = SUPPLY CHAIN MANAGEMENT

• Manage inventory flow from vendor through firm all the way
to retailer
• Primary Resource Transformation is trading information for
inventory as in EDI, JIT etc.
• Focus on BOTH level and velocity of inventory
 Views on Supply Chain

• View 1: an integrated process where raw materials are

transformed into final products then delivered to customers.

• View 2: a system whose constituent parts include material

supplies, production facilities, distribution services and customer

linked together by feed forward flow of materials and feed back

flow of information.
 Views on Supply Chain

• View 3: a complex, dynamic network or system of

interconnected and interdependent individuals, groups,
companies, organizations, and relationships whose goal is to
satisfy and add value to their particular customer.
• View 4: a process of strategically managing the movement
and storage of materials, parts, and finished inventory from
suppliers through the firm and on to the customers or an
integrating process based on flawless delivery of basic and
customized services.
 Views on Supply Chain

• View 5: an integrating process, used to build

competitive position, based on the delivery to
customers of basic and unexpected services.
 Changing Basis of Competition

Basis of Competition

Yesterday Manufacturing company

versus
Manufacturing company

Today Manufacturing company and it’s supply chain

versus
Manufacturing company and it’s supply chain
 A picture is better than 1000 words!

- Important Players in a supply chain

Supplier Manufacturer Distributor Retailer Customer

Upstream
Downstream
 Why SCM Complex?:
“Many-to-Many” Relationships
Consumer

Large Retail
Customer
Design Partner
VAR/
Manufacturer Reseller
Distributor
Component
Supplier Small Retai
VAR/ Customer
Manufacturer Reseller
Raw Material Distributor
Supplier

Manufacturer
Contract Distributor Corporate
Manufacturer Customer

Logistics Logistics Logistics

 A picture is better than 1000 words!

Aims to Match Supply and Demand,

profitably for products and services

SUPPLY SIDE DEMAND SIDE

Achieves

+ + + + + =
The right The right The right The right The right The right Higher
Product Price Store Quantity Customer Time Profits
 Supply Chain Defined

Supply Chain is defined, as a network of facilities and

distribution options that:
 perform the functions of procurement of materials

 transformation of these materials into intermediate and

finished goods and
 finally supply to its customer the right product at right price,
time and quality.

Material and information flows in opposite direction to each

other in the supply chain.
 Flows in a Supply Chain

Material

Information
Supplier Customer
Funds
Wal-Mart and Procter & Gamble (P&G)
 Detergent supply chain:

P&G or other Third Customer wants

Super Bazar
manufacturer party DC detergent

Chemical
Plastic cup Tenneco
manufacturer
Producer Packaging
(e.g. Oil Company)

Chemical
Paper Timber
manufacturer
Manufacturer Industry
(e.g. Oil Company)
 Cereal Supply Chain

Custom
ers

Upstream Internal Downstrea

Grain Processi m
Packagi Distribut Stores
Produce ng ors
ng
r Facility
Lumber Corrugat Boxes
Compan Custom
ed Paper Paperboard
y ers
Co.
Grain Cereal Custom Custom
ers ers
Package
Label Labels d
Manufactur Cereal
ing
 Supply
Chain for
Milk
Products
 Supply Chain Management

 Supply Chain Management (SCM) is concerned with the

management and control of the flows of material,
information, and finances in supply chains.

 The task of SCM is to design, plan, and execute the activities

at the different stages so as to provide the desired levels of
service to supply chain customers profitably
Importance of Supply Chain Management

 In 2000, the US companies spent $1 trillion (10% of GNP) on

supply-related activities (movement, storage, and control of
products across supply chains). Source: State of Logistics Report
Frequent Supply Low order
shortages Inefficient fill rates
logistics
High
Tier 1 Manufacturer Distributor Retailer Customer
stockouts
Supplier

Glitch-Wrong Ineffective
High inventories High landed
Material, Machine promotion
through the chain costs to the
is Down – effect s shelf
snowballs

 Eliminating inefficiencies in supply chains can save millions of $.

 What do customers want ?: Some
Empirical Observations
 Dissatisfied customer

 15 to 40 percent of customers who say they are

“satisfied” defect from a company each year
 It costs five to seven times more to find new
customers than to retain current customers.
 98 percent of dissatisfied customers never complain
– they just switch to other competitors.
 What do customers want ?: Some
Empirical Observations
 Satisfied Customer

 “Totally satisfied” customers are six times more likely to

repurchase a company’s products over a span of one to
two years than merely satisfied customers.
 A 5 percent reduction in customer defection can result in
profit increases from 30 to 85 percent.
 If companies increase their customer retention by 2
percent, it is the equivalent of cutting their operating
expenses by 10 percent.
 Important points for Supply Chain Success

 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 customer’s request

 Value is correlated to supply chain profitability

(difference between revenue generated from the
customer and the overall cost across the supply chain)
 Important points for Supply Chain Success

• Minimizing supply chain costs while keeping a

reasonable service level customer satisfaction/ quality/
on time delivery, etc.

 Supply chain success should be measured by total

supply chain profitability, not profits at an individual

stage i.e. global optimization
 Important points for Supply Chain Success

 Supply chain profitability is total profit to be shared

across all stages of the supply chain

 Customer is the Sources of supply chain revenue:

Concentrate on satisfaction

 Efficient flow of information

What can Supply Chain Management do?
 Estimated that the grocery industry could save $30 billion (10% of
operating cost) by using effective logistics and supply chain
strategies
 A typical box of cereal spends 104 days from factory to sale
 A typical car spends 15 days from factory to dealership
 Faster turnaround of the goods is better?

 Laura Ashley (retailer of women and children clothes) turns its

inventory 10 times a year five times faster than 3 years ago
 inventory is emptied 10 times a year, or an item spends about 12/10 months
in the inventory.
 To be responsive, it relocated its main warehouse next to FedEx hub in
Memphis, TE.
Magnitude of Supply Chain Management

 National Semiconductor used air transportation and

closed 6 warehouses, 34% increase in sales and 47%
decrease in delivery lead time
 Compaq estimates it lost $0.5 B to $1 B in sales in
1995 because laptops were not available when and
where needed
 P&G (Proctor & Gamble) estimates it saved retail
customers $65 M (in 18 months) by collaboration
resulting in a better match of supply and demand
 Top 25
Supply Chains

AMR research publishes

reports on supply chains
and other issues. November
2005.
 Top 25
Supply Chains
 Top 25
Supply Chains
 Conflicting Objectives
in the Supply Chain
1. Purchasing
 Stable volume requirements
 Flexible delivery time
 Little variation in mix
 Large quantities

2. Manufacturing
 Long run production
 High quality
 High productivity
 Low production cost
 Conflicting Objectives
in the Supply Chain
3. Warehousing
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
4. Customers
• Short order lead time
• High in stock
• Enormous variety of products
• Low prices
 Process View of a Supply Chain

 Cycle view: processes in a supply chain are divided into a

series of cycles, each performed at the interfaces between two
successive supply chain stages

 Push/pull view: processes in a supply chain are divided

into two categories depending on whether they are executed
in response to a customer order (pull) or in anticipation of a
customer order (push)
 Cycle View of Supply Chains
Customer

Customer Order Cycle Customer

Retailer
Customer Order Cycle
Replenishment Cycle Any cycle
Retailer 0. Customer arrival
Distributor
1. Customer triggers an order
Replenishment Cycle
2. Supplier fulfils the order
Manufacturing Cycle Distributor 3. Customer receives the order
Manufacturer
Manufacturing Cycle
Procurement Cycle
Manufacturer
Supplier

Procurement Cycle
Supplier
 Push vs Pull System
What instigates the movement of the work in the system?
 In Push systems, work release is based on downstream
demand forecasts
 Keeps inventory to meet actual demand
 Acts proactively
 In Pull systems, work release is based on actual demand or
the actual status of the downstream customers
 May cause long delivery lead times
 Acts reactively
Push/Pull View of Supply Chains
Procurement, Customer
Manufacturing and Order Cycle
replenishment cycle

PUSH PROCESSES PULL PROCESSES

Customer
POSTPONEMENT STRATEGY Order Arrives
 Contributors to Implied Demand
Uncertainty

Customized products
Commodities High Fashion Clothing
Detergent Emergency steel,
Long lead time for maintenance/replacement
steelPrice Responsiveness
Customer Need
Low High
Implied Demand Uncertainty

Short lead times, product variety,

distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
 Achieving Strategic Fit:
Understanding the Supply Chain through
Cost-Responsiveness Efficient Frontier

High

Efficiency frontier (for best SC)

Responsiveness

Impossible

Inefficiency Region
Low

High Low Cost in $

 Product Life Cycle Vs Strategic Fit

As the product matures the supply chain

strategy should , in general, move from
being responsive to being efficient
 Strategies for SCM

All of the advanced strategies, techniques, and

approaches for Supply Chain Management focus
on:
 Global Optimisation – Best system wide strategy

 Managing Uncertainty – customer demand, lead

time, m/c & vehicle breakdown etc.
 Factors making Global
Optimization challenging

 Complex network: dispersed over large

geographical area

 Entities/facilities having different conflicting

objectives

 SC is a dynamic system i.e. system parameters

and relationship changes with time
 Why Is Uncertainty Hard
to Deal With?
 Matching supply and demand is difficult.
 Forecasting doesn’t solve the problem.
 Inventory and back-order levels typically fluctuate widely
across the supply chain.
 Demand is not the only source of uncertainty. Other
sources are may be:
 Delivery Lead times
 Manufacturing Yields
 Transportation times
 Natural Disasters
 Component Availability
 Key Issues in
Supply Chain Management
Key Issues in Supply Chain Management

Issues are according to the time horizon:

 Strategic – Long-time effect on firm
 Number, location and capacity of warehouses and
manufacturing units.

 Tactical - Medium range i.e. 4-12 months.

 Purchasing and production decision, inventory policies,
transportation strategies etc.

 Operational – Day-to-day decisions.

 Scheduling, routing etc.
Key Issues in Supply Chain Management
 Distribution Network Configuration:
 Changing demand patterns, termination of leasing contract
 Selection of new suppliers, new flow pattern of goods/ information
 Inventory control: when and how much to stock & order
 Distribution Strategies: centralized vs decentralized, impact of service level, mode of dist.
 Production sourcing & Supply Contracts:
 Production vs sourcing decision (production vs transportation cost)
 Pricing and volume discounts, delivery lead time, quality etc.
 Revenue sharing contracts etc.
 Integration and Strategic Partnerships: how to integrate & what information to share
 Procurement Strategies and Outsourcing
 Product Design
 Information Technology
 Customer value
 Key SCM issues
Global Optimization Managing Uncertainty
Distribution Network XX
Configuration
Inventory control XX
Supply Contracts XX
Distribution Strategies XX XX
Strategic Partnerships XX
Procurement Strategies XX
and Outsourcing
Product Design XX
Information Technology XX XX
Customer Value XX XX
 SEVEN PRINCIPLES OF
SUPPLY CHAIN MANAGEMENT
Industry View on SCM

By
Anderson Consulting
 Seven Principles of SCM
1. Group Customers by needs:
– What is needed
– When it is needed

– How much of it is needed.

Effective supply chain management groups customers

by distinct service needs--regardless of industry--and
then tailors services to those particular segments.
 Seven Principles of SCM
2. Customize the logistics network :
– Product distribution is as important as product
creation.

In designing their logistics network, companies need to focus

on the service requirements and profit potential of the
customer segments identified.
 Seven Principles of SCM
3. Listen to signals of market demand and plan
accordingly.
Sales and operations planners must monitor the entire
supply chain to detect early warning signals of changing
customer demand and needs. This demand-driven
approach leads to more consistent forecasts and optimal
resource allocation.

-- Aggregate demand
-- Streamline the information pipeline
-- Streamline the distribution pipeline
 Seven Principles of SCM

4. Differentiate the product closer to the customer.

– Postponement
– Assemble-to-order

Companies today no longer can afford to stockpile inventory to

compensate for possible forecasting errors. Instead, they need to
postpone product differentiation in the manufacturing process
closer to actual consumer demand. This strategy allows the
supply chain to respond quickly and cost-effectively to changes in
customer needs.
 Seven Principles of SCM

5. Strategically manage the sources of supply

By working closely with their key suppliers to reduce the

overall costs of owning materials and services, supply chain

managers maximize profit margins both for themselves and

their suppliers..
 Seven Principles of SCM

6. Develop a supply chain-wide technology strategy

As one of the cornerstones of successful supply chain

management, information technology must be able to

support multiple levels of decision making. It also should

afford a clear view and ability to measure the flow of

products, services, and information

 Seven Principles of SCM

7. Adopt channel-spanning performance measures

Excellent supply chain performance measurement systems

do more than just monitor internal functions. They apply
performance criteria to every link in the supply chain -
criteria that embrace both service and financial metrics,
including as each account's true profitability
 Relationship between Supply chain
Principles and Financial outcomes

7 Principles Revenue Asset Cost

Growth Utilization Reduction

Segment customers based on needs HIGH Medium

Customize logistics network

Listen to market signal and plan accordingly

Differentiate product closer to customer

Source Strategically

Develop SC technology strategy

Adopt channel spanning measures

 Organizational Paradigms

Paradigm Shift Leading to Skills Required

From functions to Integral management of Cross-functional management
process material and information flow and planning skills

From products to Focus on markets and the Customer segmentation

customers creation of customer value

From revenue to Focus on the key performance Understanding of the time

performance drivers of profit based performance indicators

From inventory to Demand based replenishment Information management

performance and quick response systems

From transactions to Supply chain partnerships Relationship management

relationships
The Development Chain

The enterprise development and supply chain

Study on India’s SCM Practices
Participation by management level
Classification of
respondents by
industry
Importance of overall business objective
Importance of supply chain objective to top management
 Quality of Product

Availability of Product

Productivity improvement of
each production function

Mapping supply chain objectives with business objectives

Mapping management focus with supply chain issues
Operations covered by Current & proposed IT Applications
THANK YOU