Introduction

Supply Chain Management

Introduction
Supply Chain Management

People think we got big by putting big stores in small

towns. Really, we got big by replacing inventory with
information
Sam Walton, Founder of Wal-Mart

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What is a Supply Chain?

All stages involved, directly or indirectly, in fulfilling a

customer request.

Includes manufacturers, suppliers, transporters, warehouses,

wholesalers, distributors, retailers, and customers.

All facilities, functions, and activities involved in producing

and delivering a product or service from suppliers (and their
suppliers) to customers (and their customers).

Contd

What is a Supply Chain?

Within each company, the supply chain includes all functions
involved in fulfilling a customer request (product development,
marketing, operations, distribution, finance, customer service).
Customer is an integral part of the supply chain

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What is a Supply Chain?

Transportation
Warehousing

Factory

Transportation

Customers

Information
flows

Transportation

Vendors/plants/ports
Warehousing

Transportation

Supply Chain Illustration

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Supply
Chain for
Denim
Jeans

Supply
Chain for
Denim
Jeans

What is a Supply Chain?

Most supply chains are actually networks.

Multiple players involved at each stage

More accurate to use the term supply network or

supply web.

Supply or logistics network

Supply or logistics network

McDonald in India
Opened 1st restaurant in New Delhi, India in 1996
Started its operations in India with two Partners
Currently has more than 300 restaurant across India.
Philosophy of QSCV (Quality, Service, Cleanliness and Value)

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McDonald in India

Storage at 4 distribution centers

Two primary (company owned) in Noida and Mumbai
Two leased at Bengaluru and Kolkata
There are two types of food ingredients suppliers Tier1 and

Tier2 suppliers
Radha Krishna Foodland Pvt. Ltd. is the sole distributor
partner of the fast food chain.
RKFL handles thousand tonnes per month; around 250 items
from about 54 suppliers at varying temperatures.

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McDonald in India

Copyright 2009 John Wiley & Sons, Inc.

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McDonald in India

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McDonald in India
Sources raw material / ingredients from all part of India

Three Flows in a Supply Chain

Supply Chain encompasses flow of products, funds and

information.
Each stage in supply chain is connected through these
three flows.
Includes movement of products from suppliers to
manufacturers to distributors, and information, funds, and
products in both directions.

The flows can be managed by one of the stages or by an

intermediary
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Supply Chain Flows

Source: Principles of Supply Chain Management: A Balanced

Approach by Wisner, Leong, and Tan
2005 Thomson Business and Professional Publishing

Supply Chain

Supply Chain

All stages may not be present in all supply chains.

Design of supply chain depends on the customer needs and

requirements it aims to satisfy.

E.g. Two supply chain structures of Dell- Build to order;

through retailer

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What is Supply Chain Management?

Supply chain management encompasses the planning and

management of all activities involved in sourcing and

procurement, conversion, and all logistics management
activities.
Importantly, it also includes coordination and collaboration

with channel partners, which can be suppliers, intermediaries,

third party service providers, and customers.
In essence, supply chain management integrates supply and

demand management within and across companies.

-Council of Supply Chain Management Professionals (CSCMP)

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What is Supply Chain Management?

Managing supply and demand, sourcing raw materials and
parts, manufacturing and assembly, warehousing and
inventory tracking, order entry and order management,
distribution across all channels, and delivery to the customer.
-APICS SCC

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What is Supply Chain Management?

Supply Chain Management is a set of approaches utilized

to efficiently integrate suppliers, manufacturers,

warehouses, and stores, so that merchandize is
produced and distributed at the right quantities, to the
right locations, and at the right time, in order to
minimize system-wide costs while satisfying service-level
requirements.
- Levi et. al.

The Objective of a Supply Chain

Objective of supply chain management is to

maximize Supply chain surplus

Supply chain surplus = Customer value Supply

chain cost

The value of a product is estimated by the maximum

amount the customer is willing to pay for it.

The difference between the value of product and its

price is consumer surplus.

The Objective of a Supply Chain

Supply chain Profitability: Difference between the

revenue generated from customer and overall costs across
supply chain.
Sources of supply chain revenue: the customer
Sources of supply chain cost: production , distribution,

flows of information, transportation etc.

Supply chain surplus = Customer Surplus + Supply

chain Profitability

The Objective of a Supply Chain

Supply chain surplus is strongly correlated with supply chain

profitability
Supply chain profitability is total profit to be shared across all

stages of the supply chain.

Supply chain success should be measured by total supply

chain profitability, not profits at an individual stage.

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The Objective of a Supply Chain

Thus, Effective Supply chain management is:
The management of flows between and among supply chain
stages to maximize total supply chain surplus i.e. consumer
surplus and supply chain profitability.
As objective of SCM is to be efficient and cost-effectiveness

across entire system i.e. reduce total system wide costs, It is a

System level approach.
Why distributors have a important role in Indian retail sector

and not in US?

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Why SCM is difficult?

Three Major Reasons are:
1.

Difficult to minimize system wide costs and maximize system

service levels i.e. The process of finding best system-wide
strategy is Global Optimisation.

2.

Inherent presence of Uncertainty and Risk in every supply

chain.

3.

Supply chain strategy cannot be determined in isolation.

Invariably linked to Development Chain.

Why SCM is difficult?

1 Global Optimization
Global Optimisation is difficult to achieve:
1.1 Supply chain today is geographically dispersed complex
network of facilities.

Why SCM is difficult?

1 Global Optimization
National Semiconductors (Acquired by Texas Instruments in

2011): worlds largest manufacturers of analog devices and subsystems

that are used in fax, machines, cellular phones, computers, and cars
Production:

Produces chips in six different locations: four in the US, one in

Britain and one in Israel
Chips are shipped to seven assembly locations in Southeast Asia
(Malaysia, China, and Singapore).

Distribution

The final product is shipped to hundreds of facilities all over the

world including those of Apple, Canon, Delphi, Ford, IBM,
Hewlett-Packard, and Siemens.
20,000 different routes; 12 different airlines are involved
95% of the products are delivered within 45 days; 5% are
delivered within 90 days.

Why SCM is difficult?

1 Global Optimization
1.2 Conflicting objectives of different facilities:
Suppliers typically want manufacturers themselves to commit

to large quantities in stable volumes with flexible delivery

dates, however, manufacturers need to be flexible to customer
needs and changing demands.
Also, manufacturers want to make large production batches

which is in conflict with objectives of both warehouses and

distribution centres to reduce inventory.
Objective of reducing inventory levels typically implies an

increase in transportation costs.

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Why SCM is difficult?

2. Uncertainty and Risk
Supply Chain need to be designed and operated in uncertain

environment.
Inherent presence of uncertainty and risk in every supply

chain.

Demand is not the only sources of uncertainty: Other potential

sources are delivery lead times, transportation times,

components availability etc.
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Why SCM is difficult?

3. Uncertainty and Risk
Bullwhip Effect: The increasing fluctuation in orders as orders

move through supply chain.

Demand

information is distorted (demand variability is

increased) within the supply chain with each stage having a different
estimate of what demand looks like.

Fluctuations in orders increase as they move up the supply chain

from retailers to wholesalers to manufacturers to suppliers.

Bullwhip effect leads to increased costs and also make matching

demand and supply difficult, poor product availability

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Why SCM is difficult?

2. Uncertainty and Risk
Bullwhip Effect: Occurs when slight demand variability is
magnified as information moves back upstream

Order are relayed from retailers to wholesalers to manufacturers

with fluctuations increasing with each step of the chain.
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Demand at Different Stages

Bullwhip Effect: Impact on Performance

Performance Measure
Manufacturing cost

Impact of the Lack of Coordination/ Bullwhip effect

Increases (as stream of orders more variable than customer
demand, surplus or varying capacity may have to be maintained)

Inventory cost

Increases (higher inventory levels to be carried as demand

variability is more)

Replenishment lead
time

Increases (Production scheduling at plants more difficult when

Transportation cost

Increases (Transportation requirements fluctuate because of

demand variability is more)

higher demand variability, surplus or varying transportation
capacity may have to be maintained to cover high demand periods)

Shipping and receiving

cost
Level of product
availability
Relationships across
supply chain

Increases (surplus or varying labor capacity may have to be

maintained)

Decreases (Increased demand variability or fluctuations in orders

makes it difficult for manufacturers to fullfil all orders on time)

Decreases (trust among stages decreases)

Why SCM is difficult?

2. Uncertainty and Risk
Bull whip effect: Occurs due to lack of Supply Chain
Coordination
Different stages of supply chain have objectives that are in

conflict
Local Optimisation : Each stage tries to optimize its local

objective without considering its impact on entire chain,

hurting performance of other stages
e.g. when different stages have different owners
Incentives (sales incentives, promotion, quantity discounts

etc)
Information flow between stages is distorted or delayed
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Why SCM is difficult?

3. The Development Chain
It is set of activities and processes associated with new

product introduction.
It includes:
product design phase
associated capabilities and knowledge that need to be
developed internally
sourcing decisions
production plans
Includes

decisions such as product design, make-buy,

outsourcing, supplier selection, strategic partnership, early
supplier involvement

Why SCM is difficult?

3. The Development Chain

Why SCM is difficult?

3. The Development Chain
Supply Chain and development chain intersect at production

point.
Characteristics and decisions made in development chain shall

impact supply chain and vice versa.

Different managers are responsible for different parts of these

chains.
Others chains also intersect these chains i.e. reverse logistics

chain (returns of products / components), spare parts chain

Decision Phases of a Supply Chain

Supply Chain decisions falls into three major categories or
phases:

Supply chain strategy or design decisions

Supply chain planning decisions

Supply chain operation decisions

Supply Chain Strategy or Design Decisions

Decisions about the structure of the supply chain and what

processes each stage will perform

Time horizon of the next several years
Strategic supply chain decisions
Locations and capacities of facilities
Products to be made or stored at various locations
Modes of transportation
Information systems
Make vs Buy

Supply chain design must support strategic objectives

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

Supply Chain Planning / Tactical Decisions

Fixed by the supply configuration from previous phase
Time horizon is quarter to a year
Starts with a forecast of demand in the coming year or

comparable time frame

Planning decisions:
Which markets will be supplied from which locations
Target production quantities
Inventory policies
Subcontracting
Timing and size of market promotions
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Supply Chain Operation 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 fulfill incoming customer order in best possible manner
Allocate orders to inventory or production, set order due dates,

allocate an order to a particular shipment, set delivery schedules,

place replenishment orders
Much less uncertainty (short time horizon)
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Process View of a Supply Chain

A supply chain is sequence of processes and flows taking

place within and between different stages in order to fulfill a

customer request
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)
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Cycle View of a Supply Chain Processes

Each cycle occurs at the interface between two successive

stages
Customer order cycle (customer-retailer)
Replenishment cycle (retailer-distributor)
Manufacturing cycle (distributor-manufacturer)
Procurement cycle (manufacturer-supplier)
Cycle view clearly defines processes involved and the owners

of each process.
Helps in:
Specifying the roles and responsibilities of each member
Identifying infrastructure requirements to support the processes
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Cycle View of Supply Chains

Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier
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Cycle View of Supply Chain Processes

Figure 1-4

Push/Pull View of Supply Chain Processes

Supply chain processes fall into one of two categories

depending on the timing of their execution relative to

customer demand
Pull: execution is initiated in response to a customer order

(reactive)
Push: execution is initiated in anticipation of customer orders

(speculative / proactive) based on forecast

Push/pull boundary separates push processes from pull

processes
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Push/Pull View of Supply Chains

Procurement,
Manufacturing and
Replenishment cycles

PUSH PROCESSES

Customer Order
Cycle

PULL PROCESSES

Customer
Order Arrives
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Push/Pull View of Supply Chains

Figure 1-5

Push/Pull ViewL.L. Bean, a US Based mail order, online

company Clothing and outdoor equipment

Push/Pull ViewDell

Push/Pull View of Supply Chain Processes

Push process operate in uncertain environment as customer

demand is not yet known

Pull process operate in an environment in which demand is

known
The relative proportion of push and pull processes can have

an impact on supply chain performance e.g. Paint industry

Helps in taking supply chain design decisions
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Characteristics of push and pull portions of

supply chain
Push

Pull

Minimize cost

High

Maximize service
level
Low

Resource allocation

Responsiveness

Lead time

Long

Short

Processes

Tactical Planning

Order Fulfillment

Objective

Complexity
Focus

Supply Chain Macro Processes

Supply chain processes discussed in the two views can be

classified into:
Customer Relationship Management (CRM)
Internal Supply Chain Management (ISCM)
Supplier Relationship Management (SRM)

These three macro processes manage the flow of information,

product and funds required to generate, receive and fulfill a
customer request.

Supply Chain Macro Processes

Customer Relationship Management (CRM):
All processes that focus on the interface between the firms

and its customers.

CRM processes aims to generate the customer demand,

facilitate the placement and tracking of orders.

E.g. marketing, pricing, sales, order management, call center

management etc

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Supply Chain Macro Processes

Internal Supply Chain Management (ISCM):
All processes that are internal to the firm.
ISCM processes aims to fulfill demand generated by the

CRM processes in a timely manner and lowest possible

cost.
These include planning of internal production, storage ,

preparation of demand and supply plans, fulfillment of

orders etc.
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Supply Chain Macro Processes

Supplier Relationship Management (SRM):
All processes that focus on the interface between the firms

and its suppliers.

SRM processes aims to arrange for and manage supply

sources for various goods and services.

Integration among the above three macro processes is

critical for effective and successful supply chain
management.
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Supply Chain Macro Processes

Evolution of Supply Chain Management

Activity fragmentation to 1960

2000+

Activity Integration 1960 to 2000

Demand forecasting
Purchasing
Requirements planning
Production planning
Manufacturing inventory

Purchasing/
Materials
Management

Warehousing
Logistics

Material handling
Packaging
Finished goods inventory
Distribution planning
Order processing
Transportation
Customer service
Strategic planning
Information services
Marketing/sales
Finance

Physical
Distribution

Supply Chain
Supply Chain
Management
Management

Evolution of Supply Chain Management

Evolved from Three principal areas:
Sourcing, procurement and supply management

Economic procurement and inflow of inputs into the enterprise and

efficient control over flow of funds out of the company
SCM areas: Sourcing, supply side management, inbound logistics,
supplier relationship management

Materials management

Early: Forecasting, inventory management, stores management,

warehousing, stock-keeping
Extended Materials Management: included production planning and
control also
Integrated Materials Management : included order processing also
Subsequent merger of purchasing and Materials Management

Logistics and distribution

Early avatar of SCM as it includes all processes related to

transportation and inventory management

Logistics Management
Logistics Management is that part of SCM that plans,

implements and controls the efficient and effective forward

and reverse flows and storage of goods, services and related
information between the point of origin and the point of
consumption in order to meet the customers requirements
By Council of Supply Chain Management Professionals (CSCMP)

Tradeoff between transportation and inventory lead to

emergence of logistics as a cross-functional discipline

integrating various other disciplines like purchasing, inventory
management, production control etc.

SCM vs Logistics Management identical or different?

Logistics Mgmt is a part of SCM
Integrated Logistics Management is operationally same as SCM

Logistics Management = Management of materials /

information on movement and on rest = Inbound + outbound

+ inventory management
SCM = Logistics Management + Management of conversion

process + Coordination of functions and processes (both intraand inter-company)

Logistics - India
The Indian logistics industry is valued at an estimated US$ 130

billion.
Growing @ 1.5 - 2 times the GDP growth
The industry comprises the following main segments:
Transportation via road, rail, air and water
Warehousing and cold-storage
Indias logistics sector is expected to grow to USD 200 billion

by 2020 - CII
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Logistics - India
India's logistic cost as a percentage of the GDP is 13%-14% .
It is double that of developed countries (7%-8%)

and

substantially higher than even BRIC nations (9%-10%) .

By 2018, the country will lose $65 billion every year due to

inefficient supply chain systems in retail sector. Global competitiveness of retail

supply chain Challenges- Strategies and Recommendations, 2010, Confederation of Indian Industry (CII) and Amarthi Consulting.

Improving supply chain infrastructure and adopting best supply

chain practices are key recommendations of the above report.

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Progression of Logistics Costs

Logistics costs share of the U.S. economy

Supply Chain: The Potential

Webvan folded in two years

Borders, started in 2011, $4 billion in 2004 to $2.8 billion in

2009

Gateway, started 1985, acquitted by Acer in 2007 vs. Apple

Subhiksha Retail, started 1997, closed down in 2009

Supply Chain: The Potential

Wal-Mart, $1 billion sales in 1980 to $482 billion in 2015

Seven-Eleven Japan, 1 billion sales in 1974 to 3 trillion in 2009

Dell, $56 billion in 2006, adopted new supply chain strategies

Zara

W.W. Grainger and McMaster-Carr

Toyota

Amazon

Zara
Chain of fashion stores owned by Inditex; World largest apparel

retailer
About 6500 retail outlets in 88 countries.
Highly responsive to changing trends with affordable prices
Design to sales time: 4 to 6 weeks (6 months)
New designs every week and change 75% of display every 3-4 weeks
Flexible and quick sources in Europe/low cost sources in Asia.
40% manufacturing capacity owned by Inditex
More than 40% of production starts after sales season (20%) Postponement.
High investment in IT: after sales data to drive replenishments and
production decisions.

8 DCs in Spain supplying all over the world

Lead time: 24 hour within Europe and 48 hours for American and Asian
stores.
Replenishments from DCs to stores several times a week

Toyota
Open factories in every market it serves
Till 1996 Local plants equipped for local markets

After 1996 Global complementation to export to

markets that remain strong when local demand

weakens
Increased commonality of parts used around the
globe: lower costs and increase availability.
Risk?

Supply Chain: The Potential

For Illustration Only : Cost Elements of a Typical Trade Book

Supply Chain: The Potential

For Illustration Only : The Apparel Industry

Manufacturer

Distributor

Retailer

Customer

Manufacturer

Distributor

Retailer

Customer

Manufacturer

Distributor

Retailer

Customer

Cost per

Percent

Shirt

Saving

$52.72

0%

$41.34

28%

$20.45

62%