Delivering a Burger to You

When you buy a burger from McDonald or a Zinger from
SUPPLY CHAIN
MANAGEMENT
Introduction to SCM
Lecture 1
Fighting a war is a little more difficult!

design and development, acquisition, storage,
movement, distribution, maintenance,

planning and carrying out the movement and
maintenance of forces

evacuation and disposition of material;

movement, evacuation, and hospitalization of
personnel;

acquisition of construction, maintenance,
operation and disposition of facilities
a gigantic task indeed.
KFC, have you thought where all of the ingredients
came from that produced your sandwich?

Depending on the restaurant’s location, McDonald’s and
KFC source their ingredients from both local and global
suppliers.

The challenge is to ensure that all restaurants in their
network have enough ingredients to meet customer
demand.

This requires planning, implementing, and controlling the
efficient, effective flow and storage of goods and
services to deliver the burger to you
Logistics

The word logistics was first associated with the
military in 1905 as a branch of war that pertains
to the movement and the supply for armies.

Now, Logistics is not only used in military but
also by managers in almost all spheres of
activity to fine tune the process of delivery
through various supply lines with the primary
objective of being able to deliver not just 'in time'
but also at 'the desired place'.
Definition of Logistics
Logistics - ...the process of planning,
It is a fallacy to assume that the best
implementing, and controlling the efficient, effective logistics strategy is to get the product from
flow and storage of goods, services, and related the supplier to the customer the fastest
information from point of origin to point of and always be in stock for all
consumption for the purpose of conforming to
organizations.
customer requirements." (Reference: Council of
Logistics Management)
If this were true, most organizations would
not be profitable today.
(Note that this definition includes inbound,
outbound, internal, and external movements, and
return of materials)

THE PURPOSE OF A The Need for Logistics Improvements

LOGISTICS SYSTEM Earlier Today

RIGHT QUANTITIES of the • No two companies at the • Competition at all levels.

same level of competition.

RIGHT GOODS to the • The main motive was to • Main motive is customer
Companies

increase production.

RIGHT PLACES at the • Production differentiation
very early and far from

RIGHT TIME in the customer.
• Reaction approach of

RIGHT CONDITION at the industries.

RIGHT COST. • Customer did not care
Customer
service.
• Product differentiated
nearer the customer.
• Action approach of
industries.
• Customers demand exact

about specifications. specifications.

Creating a logistics strategy is a balancing act • Less market moving
powers
• More power devolved to the
customer.
which takes many variables into account.
 From Fragmentation to Integration-1

Era of Fragmentation Evolving Integration

Strategy
Strategy
- design independent system for - design coordinated internal
each logistics activity systems

Focus
Focus
- activity costs and productivity -internal logistics costs and

Goal customer service levels

- minimize functional disruption

Goal
- internal costs and service
objectives

From Fragmentation to Integration-2

Supply Chain- One Definition
Total Integration

Strategy Supply Chain is a sequence of firms that
developing cross-organizational systems and
relationships
perform activities required to create and

Focus deliver a good or service to consumers or
supply chain performance and value, total cost industrial users.
analysis

Goal
maximize value and customer satisfaction
Logistics Management….

Logistics Management is that part of
Supply Chain Management that plans,
implements, and controls the efficient,
effective forward and reverse flow and
storage of goods, services and related
information between the point of origin and
the point of consumption in order to meet
customer’s requirements.
Logistics vs. Supply Chain
…while 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
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.
Supply Chain Management

The network of organizations that fulfill
customer needs
 Can either be product or service oriented

Product: cars, computers, etc.

Service: MBA students, Hospitals
 By definition, incorporates multiple firms or
organizations not under central control
 Philosophy of SCM Simplistic Supply Chain

The entire supply chain is a single, integrated Wholesaler/
entity. Supplier Manufacturer
Distributer
Retailer Customer

The cost, quality and delivery requirements of

the customer are objectives shared by every Information
company in the chain.
Product

Inventory is the last resort for resolving supply Funds

and demand imbalances.

More Realistic Supply Chain Why is SCM Important?

Downstream of the firm

Customer Base
Product

Strategic Advantage – It Can Drive Strategy
Retailer Retailer Retailer Retailer Flow * Manufacturing is becoming more efficient
Wholesaler Wholesaler * SCM offers opportunity for differentiation (Dell) or cost
Sell Side reduction (Wal-Mart or Big Bazaar)
The Firm

Globalization – It Covers The World

Upstream of the firm

1st Tier Supplier 1st Tier Supplier

* Requires greater coordination of production and

2nd Tier Supplier 2nd Tier Supplier
Buy Side distribution
3rd Tier Supplier 3rd Tier Supplier * Increased risk of supply chain interruption
* Increases need for robust and flexible supply chains
Information Resources Base
Flow
Why is SCM Important?
(continued)

At the company level, supply chain management
impacts
* COST
– For many products, 20% to 40% of
total product costs are controllable
logistics costs.
* SERVICE
– For many products, performance
factors such as inventory availability
and speed of delivery are critical to
customer satisfaction.
Traditional View of Suppliers &
Businesses

Porter’s Power Model
 Very similar to Ford’s

If a supplier makes a penny, that is a penny that Ford could
have made
 i.e., classic adversarial relationship
 Multiple suppliers to spread risk

Maintain internal manufacturing capability, just-in-case

Vertical Integration

Optimization of a relatively static chain
 Long life products

More Advanced View of SCM

Minimize number of suppliers

Work on Just-in-time supplies

Virtual Integration
 Control not ownership

Adaptive & Responsive supply chains Creating a Strategic Advantage

Risk management & mitigation
Creating a Strategic Advantage Competing for the customer

What are the strategic objectives of the Customer:
organization?
Seeking benefit at an acceptable cost
- Strategic Analysis of the Competition
Value Value
- Evaluate Channel Structure
The answers to the above question will give an Company Competitor
organization a road map to set its customer service policy. Cost differential
Asset utilization Asset utilization
This policy is then translated to the channel structure to
best meet the organization’s goals in the most efficient and
effective manner for a competitive advantage
Competitive Advantage  Commercial Success

Competitive Advantage  Commercial Success Productivity Advantage

Comes from experience in efficient production,
Commercial Success greater sales volume, economy of scale and
declining of all costs with increase in volume.
Cost Advantage Value Advantage

Cost Advantage helps in productivity advantage and Real

cost
successful companies have: per
• PRODUCTIVITY ADVANTAGE: lower cost profile unit

• VALUE ADVANTAGE: product offering

• IDEALLY, A COMBINATION OF BOTH Cumulative volume
 Value Advantage Productivity & Value Advantage Matrix
“CUSTOMERS DON’T BUY PRODUCT,
Service Leader
THEY BUY BENEFITS” Cost & Service Leader
• Mainly value • Excel in value chain

Value Advantage
advantage activities and also have

Strategy based upon differentiated value productivity advantage

Product image & reputation Commodity Market Cost Leader

• Little or no product • Mainly Productivity

Service: Delivery service, after sales or value advantage advantage
service, technical support, financial
package Productivity
Advantage

Customer/company relationship

Factors Affecting Productivity & Value Advantage Logistics and Marketing

The goal:
Value (3) Superior Customer
Due to increased competition and product
Advantage Value improvements power of brand value is
• Customized
(4) declining.
services
Technological difference between
• Reliability (1) (2) company product is also declining
• Responsiveness
Availability at the point of sales is
important to retain even an old satisfied
Productivity Advantage customer, otherwise the sale will be lost to
• Capacity Utilization competitor
• Asset Utilization

Customer service is a major ‘value
• Inventory Reduction advantage’.
• Integration with
suppliers
Impact of Logistics & Customer Service
Barriers to SC Integration
on Marketing

For the consumer the customer service, brand value,
corporate image and availability are important
Barriers to Logistics/SC Integration arise
considerations. from inappropriate

Marketing is improved with strong ties with intermediary
 Organization Structure
such as large retail outlets creating customer franchises
as well as what the consumer is looking for.  Measurement Systems

The consumer and customer franchises need an  Inventory Ownership
effective supply chain to result in market effectiveness.
 Information Technology
Consumer Customer Supply Chain Market
X X =  Knowledge Transfer Capability
Franchise Franchise Efficiency Effectiveness

Brand Value Customer Flexibility Market Share

Service
Corporate Reduced Inventory Customer
Image Partnership Retention
Low Cost
Availability Quick Response Suppliers Superior ROI

Barriers to Logistics Integration- Barriers to Logistics Integration-

Organization Structure Measurement Systems

Traditional organization structure prevents
Traditional measurement systems have also
any cross-functional process from being made cross-functional coordination difficult.
implemented.
Managers must learn to view their specific

Each functional area concerns itself with functions as part of a process rather than as
achieving its own functional excellence stand-alone activities

And accept increased costs within their

Reason: Most managers are rewarded for
functional area for the sake of lower costs
achieving functional excellence throughout the process
Significant modification of how an organization Measurement system must not penalize
deals with cross-functional matters is essential functional managers, otherwise logistical
for successful process integration integration will be more theory than practice.
Barriers to Logistics Integration-
Inventory Ownership

adequate supply has always been a
comfort against demand and operational
uncertainty

Forward commitment of inventory to local
markets can serve to facilitate sales
The cost-benefit relationship and the risks
related to incorrectly located or obsolete
inventory must be considered.
Barriers to Logistics Integration-
Information Technology

performance measurement, information
system applications tend to be designed
along organization lines

Many databases limited to specific
functions and not easily accessed on a
cross-functional basis
Logistical integration requires sharing of
critical data across functional areas.

Barriers to Logistics Integration-

Knowledge Transfer Capability

knowledge containment tends to foster
the functional orientation by developing a
workforce composed of specialists Elements of Supply Chain

The failure to transfer knowledge can also
create a barrier to continued integration Competency
when an experienced employee leaves
Failure of many firms to develop procedures
and systems for transferring cross functional
knowledge is a barrier to logistics integration .
Planning & Coordination Flows Superior Network Design

SC facilities typically include manufacturing
plant, warehouses, cross-dock operations,
outsourced facilities and retail stores

All logistical facilities must be managed as a
part of company’s logistical/SC network.

The design network including information and
transportation, also handles customer orders,
maintains inventory and materials.

Network design needs to be modified to
accommodate changes in demand and supply,
product mix, supplier’s supplies and
manufacturing requirements.

Drivers of Supply Chain Performance Integrated Logistics/SC

It is the competency that links the company with

Network Design its customers and suppliers. The entire

Information operation can be divided into two main
categories:

Inventory - Information Flow

Sourcing Information from and about customers flows in the

Pricing form of sales activity, orders and forecasts.

Transportation - Inventory Flow

Warehousing, material handling, and The information flow is used for purchasing and
Packaging manufacturing plans. The products and materials
procured are used to move the value added inventory,
flow takes place to ultimately result in transfer of product
to the consumer.
 Inventory Flow Information Flow

The logistics/SC operation starts with
Information flow integrates the three
initial shipment of materials from a supplier operating areas of inventory flow and
and ends with the manufactured or parallel the actual work performed in the
processed product to a customer. three operating areas of inventory flow.
The main component are:
Inventory Flow Information Flow

Physical Manufacturing Planning &

Procurement Operational Flows
Distribution Support Coordination Flows

Inventory Management Policy
Customer Segmentation

More weightage to highly profitable and customers with

Customer Segmentation growth potential. Inventory needs to be focused on

Product Requirement highly profitable customers (part of segmented logistics)

Transportation Integration
Product Requirements

Time Based Requirement In most cases, there is substantial difference in volume

Competitive Performance and profitability across product lines. Selective inventory
policy demands more importance to be given to product
line profitability. An enterprise takes more care of its
Inventory Management Policy highly profitable items.
Selective Deployment

Transport Integration
Regional warehousing saves transportations which may
Customer Product Transportation Time-based Competitive offset the cost of holding inventory
Segmentation Requirement Integration requirements performance

Time based requirements
Produce and supply products when required to save on
inventory costs. In cases when the raw materials and
products can be delivered quickly, safety stock can be
reduced for lower inventory costs

Competitive Performance
Inventories need to be analyzed with competitors in
mind. Unnecessarily higher inventories make a company
uncompetitive. Analyze!
1. What is supply chain management?
2. What are the sources of competitive advantage
in supply chain?
3. What are the implications of supply chain
management in logistics?
4. Explain the concept of value advantage. How
value advantage can be achieved through
customer service and production activities?
5. How logistics and customer service affect
marketing?
Reference: Logistics Management by Satish C.
Ailwadi and R. Singh, Prentice Hall of India,
2005
Question
Customer segmentation in inventory
management policy gives all customer
equal weightage
A. True
B. False
Suggested Texts
1. Wisner, J. D., Leong, G. K. and Tan, KC., Principles of
Supply Chain Management, Thomson, 2005
2. Chopra, S., and Meindl, P., Supply Chain
Management: Strategy, Planning, & Operation, 2nd
edition, Upper Saddle River, NJ: Prentice-Hall, Inc.,
2004.
3. Bowersox, D.J., Closs, D.J., & Cooper, M.B., Supply
Chain Logistics Management, Boston: McGraw-Hill,
2002.
4. Coyle, J. J. Bardi, E.J. and Langley Jr., C. J., ‘The
Management of Business Logistics’, 7th edition,
Published by Thomson Learning, Canada
5. Ailwadi S.C, and Singh, R., Logistics Management,
Prentice Hall of India, 2005
6. Designing & Managing the Supply Chain by Simchi-
Levi, D; Keminsky,P. and Simchi-Levi, E., 2nd Edition,
Tata McGraw-Hill
The end

Thank You