1. Supply Chain Management
The Introduction

2. Outline
• What is Supply Chain
• Definitions of Terminologies
• Process view of SCM
• Importance of SCM
• Objectives of SCM
• Focus of SCM
• SCM organization
• Supply Chain Decisions
• Competitive advantage through SCM
• Expanding strategic scope of SCM
2

3. A Supply Chain for Bread
3

4. What is Supply Chain
Upstream Downstream
Information
End-
product
Producer
Distributor/
Wholesaler
RetailerSupplier’s
supplier
Suppliers
End
Customer
Product & Service Flow
Fund
Third Party Companies
• Information Systems Firms
•Transportation Firms
• Warehousing Firms
• Clearing Agents etc.
4

5. 5
What is a Supply Chain?
• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to
manufacturers to distributors, but also includes movement
of information, funds, and products in both directions
• Probably more accurate to use the term “supply network”
or “supply web”
• Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
• All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)

6. Definition of Supply Chain
Management
6
• Supply chain management (SCM) is the structuring and
coordination of relationships and activities across firms to deliver
value in an information and technology intensive global environment
• Supply chain management is the management of flows between and
among supply chain stages to maximize total supply chain
profitability – Chopra & Meindl
• Supply chain management is a set of approaches used to efficiently
integrate suppliers, manufacturers, warehouses, and customers so
that merchandise 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 –
Simchi-Levi et al.

7. Terminology
• (Business) Logistics
• Physical distribution
• Transportation
• Supply chain management
• Operations Management
• Operations Research
7

8. 8
Logistics (CLM)
Logistics is the process of planning, implementing and
controlling the efficient, cost-effective flow and storage of
raw materials, in-process inventory, finished goods and
related information from the point of origin to the point of
consumption for the purpose of conforming customer
requirements.
Ballou - include services, exclude production processes
Terminology

9. 9
Supply chain management (Chopra and Meindl)
Management of all flows between and among stages in a
supply chain to maximize total profitability
Physical distribution (Apics)
The activities associated with the movement of material,
usually finished goods or service parts, from the
manufacturer to the customer
Operations Research / Management Science
The study of quantitative methods intended to improve
management decision making
Terminology

10. 10
Operations Management (Apics)
The planning, scheduling and control of activities that
transform inputs into finished goods and services
Transportation (adapted from Apics)
The function of planning, scheduling and controlling
activities related to mode, vendor and movement of goods
and people
Terminology

11. Demand forecasting
Purchasing
Requirements planning
Production planning
Manufacturing inventory
Warehousing
Material handling
Packaging
Finished goods inventory
Distribution planning
Order processing
Transportation
Customer service
Strategic planning
Information services
Marketing/sales
Finance
Supply Chain
Management
Supply Chain
Management
Logistics
Purchasing/
Materials
Management
Physical
Distribution
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+
Demand forecasting
Purchasing
Requirements planning
Production planning
Manufacturing inventory
Warehousing
Material handling
Packaging
Finished goods inventory
Distribution planning
Order processing
Transportation
Customer service
Strategic planning
Information services
Marketing/sales
Finance
Supply Chain
Management
Supply Chain
Management
Logistics
Purchasing/
Materials
Management
Physical
Distribution
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+
Evolution of Supply Chain Management
11

12. Relationship of Logistics to Marketing
Product
Price
Promotion
Place-Customer
service levels
Inventory
carrying costs
Lot quantity
costs Order processing
and information
costs
Transport
costs
Warehousing
costs
MarketingLogistics
12

13. 1-13
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
Customer Order
Cycle
Replenishment
Cycle
Manufacturing
Cycle
Procurement
Cycle
Customer
Retailer
Distributor
Manufacturer
Supplier
Procurement,
Manufacturing and
Replenishment cycles
Customer Order
Cycle
Customer Order Arrives
PUSH PROCESSES PULL PROCESSES
• 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)

14. 1-14
Push/Pull View of
Supply Chain Processes
• Pull: execution is initiated in response to a
customer order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes
from pull processes
• The relative proportion of push and pull
processes can have an impact on supply chain
performance

15. 1-15
Share of Logistics cost in the Manufacturing Firm
• Profit 4%
• Logistics Cost 21%
• Marketing Cost 27%
• Manufacturing Cost 48%
Why Supply Chain Management

16. 1-16
• 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
Why Supply Chain Management

17. 1-17
• Compaq estimates it lost $.5 billion to $1
billion in sales in 1995 because laptops
were not available when and where needed
• P&G estimates it saved retail customers $65
million by collaboration resulting in a better
match of supply and demand
Why Supply Chain Management

18. Why Supply Chain Management
• End Customer is the true source of income
• No firm can be best in all the Value added
Activities
• Focus on Core Capabilities to survive
• Create alliance or strategic partnerships with
other winning chain members
18

19. 1-19
The Objective of a Supply Chain
1. 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)

20. 1-20
The Objective of a Supply Chain
2. Supply chain reduces costs
– (information, storage, transportation, components,
assembly, etc.)
3. 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

21. Where is the focus: Future
1. Expanding the supply chain to second and third tier
suppliers and customers
2. Utilization of ICT & Web for further integration
3. Increasing supply chain responsiveness (quick
response, mass customization, JIT, TQM)
4. Greening of Supply Chain (Environment friendliness,
Recycling and Reverse Supply chain)
5. Reducing Supply Chain Cost (Blue ocean strategy)
21

22. 22
SCM Organizations
CLM - Council of Logistics Management (now Council of
Supply chain management)
APICS - American Production Inventory Control Society
(now American Operations Management Society)
POMS – Production Operations Management Society
SOLE - Society of Logistics Engineers
IIE - Institute of Industrial Engineers
INFORMS – The US Society of OR & Management
Science

23. 1-23
Decision Phases of a Supply Chain
• Supply chain strategy or design
• Supply chain planning
• Supply chain operation

24. 1-24
Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and
what processes each stage will perform
• Strategic supply chain decisions
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and
expensive to reverse – must take into account market
uncertainty

25. 1-25
Supply Chain Planning
• Planning decisions:
– Forecasting of demand
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
• Must consider in planning decisions demand uncertainty,
exchange rates, competition over the time horizon

26. 26
Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating policies
are determined. Here the goal is to implement the
operating policies as effectively as possible
– allocate orders to inventory or production,
– set order due dates,
– generate pick lists at a warehouse,
– allocate an order to a particular shipment,
– set delivery schedules,
– place replenishment orders
• Much less uncertainty (short time horizon)

27. Competitiveness
and
Supply Chain Management

28. Porter’s Value Chain
28

29. 29
Competitive Advantage and SCM
Source: Ohmae, K, The Mind of the Strategist,
Penguin Books, 1983
Customer
Needs seeking
benefits at
acceptable prices
Competitor
Assets &
utilization
Company
Assets &
utilization
Cost
differentials
Value
Value
“….A firm gains competitive advantage
by performing these strategically
important activities more cheaply or
better than its competitors.”-------
Porter, M.E., Competitive Advantage,
Free Press, 1985

30. 30
The Two Vectors of Strategic Direction
•The most profitable competitor in any industry sector tends to be the lowest
cost producer or the supplier providing a product with the greatest perceived
differentiated values
To gain competitive advantage over its
rivals, a firm must deliver value to its
customers through performing those
activities more efficiently than its
competitors or by performing the
activities in a unique way that create
greater differentiation.
ValueAdvantage
Cost Advantage
High
High Low
Low

31. Understanding the Supply Chain:
Cost-Responsiveness Efficient Frontier
• Supply chain
responsiveness :ability to
– respond to wide ranges of
quantities demanded
– meet short lead times
– handle a large variety of
products
– build highly innovative products
– meet a very high service level
1-31
High Low
Low
High
Responsiveness
Cost
Efficiency
• There is a cost to achieving responsiveness

32. 1-32
Achieving Strategic Fit
• Strategic fit:
– Consistency between customer priorities of competitive
strategy and supply chain capabilities specified by the
supply chain strategy
– Competitive and supply chain strategies have the same
goals
• A company may fail because of a lack of strategic
fit or because its processes and resources do not
provide the capabilities to execute the desired
strategy

33. 1-33
How is Strategic Fit Achieved?
• Step 1: Understanding the customer and supply
chain uncertainty
• Step 2: Understanding the supply chain
• Step 3: Achieving strategic fit

34. 1-34
Step 1: Understanding the Customer
• Identify the needs of the customer segment being served
• Quantity of product needed in each lot
• Response time customers will tolerate
• Variety of products needed
• Service level required
• Price of the product
• Desired rate of innovation in the product

35. 1-35
Step 1: Understanding the Customer’s Implied
Demand Uncertainty
• Demand uncertainty: uncertainty of customer demand for
a product
• Implied demand uncertainty: resulting uncertainty for
the supply chain given the portion of the demand the
supply chain must handle and attributes the customer
desires
• Implied demand uncertainty also related to customer
needs and product attributes
• First step to strategic fit is to understand customers by
mapping their demand on the implied uncertainty spectrum

36. 1-36
Step 1: Understanding the Customer
• Understanding the Customer
– Lot size
– Response time
– Service level
– Product variety
– Price
– Innovation
Implied
Demand
Uncertainty

37. 2-37
Impact of Customer Needs on Implied
Demand Uncertainty
Customer Need Causes implied demand
uncertainty to increase because …
Range of quantity increases Wider range of quantity implies
greater variance in demand
Lead time decreases Less time to react to orders
Variety of products required
increases
Demand per product becomes more
disaggregated
Number of channels increases Total customer demand is now
disaggregated over more channels
Rate of innovation increases New products tend to have more
uncertain demand
Required service level increases Firm now has to handle unusual
surges in demand

38. 2-38
Step 2: Understanding the Supply Chain
• Two extreme of supply chain is Efficient Supply Chain
and Responsive Supply Chain
• There is a cost to achieving responsiveness
• Supply chain efficiency: cost of making and delivering
the product to the customer
• Increasing responsiveness results in higher costs that
lower efficiency
• Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum

39. 1-39
Comparison of Efficient and Responsive
Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense
of greater cost
Aggressively reduce even if
costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost
modes
Greater reliance on
responsive (fast) modes

40. 1-40
Step 3: Achieving Strategic Fit
• Step is to ensure that what the supply
chain does well is consistent with target
customer’s needs
Integrated
steel mill
Seven
Eleven
Highly
efficient
Highly
responsive
Somewhat
efficient
Somewhat
responsive
Hanes
apparel
Most
automotive
production
Responsiveness Spectrum

41. 2-41
Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Implied
uncertainty
spectrum
Responsive
supply chain
Efficient
supply chain
Certain
demand
Uncertain
demand
Responsiven
ess spectrum Zone of
Strategic Fit
Barilla
Dell

42. 2-42
Step 3: Achieving Strategic Fit
• All functions in the value chain must support the
competitive strategy to achieve strategic fit
• Two extremes: Efficient supply chains (Barilla) and
responsive supply chains (Dell)
• Two key points
– there is no right supply chain strategy independent of
competitive strategy
– there is a right supply chain strategy for a given competitive
strategy

43. Issues affecting strategic fit
1. Multiple products and customer segments
supply chains for each product or not?
2. Product life cycle characteristics of product
supply chain should change over its life (introduction, growth,
mature, out phasing)
3. Competitive strategy changes over time
in economic downtimes people go for a low cost retailer, in
uptimes they go for special products (high end retailer)
43

44. 2-44
Expanding Strategic Scope
• Scope of strategic fit
– The functions and stages within a supply chain that devise
an integrated strategy with a shared objective
– One extreme: each function at each stage develops its
own strategy
– Other extreme: all functions in all stages devise a strategy
jointly
• Five categories:
– Intracompany intraoperation scope
– Intracompany intrafunctional scope
– Intracompany interfunctional scope
– Intercompany interfunctional scope
– Flexible interfunctional scope

45. Expanding strategic scope
•Intracompany intra-operation scope
miminize local cost view (per operation, e.g. warehouse)
•Intracompany intra-functional scope
minimize functional cost view (over operations e.g.
warehousing and transportation)
•Intracompany inter-functional scope
maximize company profit view (over functions: marketing and
distribution)
•Intercompany inter-functional scope
maximize supply chain surplus view (over companies)
45

46. 46
Expanding strategic scope
Customer Service
Purchasing
Material
Control
Production Sales Distribution
Materials
management
Manufacturing
management
Distribution
Purchasing
Internal Supply
Chain
Suppliers
Distribution
Manufacturing
management
Materials
management
Material flow
Stage one: baseline
Stage Two: functional integration
Stage Three: internal integration
Stage Four: external integration