Supply Chain Management

Supply Chain Management
By
Ramya U K
Mohammad Shadab
Jayeeta Bhattacharya
Shweta Vijaykumar
Prashant Sharma
Akshat Srivastav
Mehul Jain
Harsimran Kaur

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Contents
Introduction to Supply Chain Management .................................................................................................3
Need of Supply Chain Management .............................................................................................................5
Evolution.......................................................................................................................................................6
SCOR Model ..................................................................................................................................................8
SCOR spans: ..............................................................................................................................................8
Scope of SCOR...........................................................................................................................................9
Porter’s Value Chain....................................................................................................................................11
Industry Strategies......................................................................................................................................13
Total quality management..........................................................................................................................15
Six Sigma .....................................................................................................................................................15
DMAIC.....................................................................................................................................................16
DMADV or DFSS ......................................................................................................................................16
Just in time (JIT) ..........................................................................................................................................17
Lean Management......................................................................................................................................17
Key Challenges of Applied Innovation ........................................................................................................18
Key Benefits ................................................................................................................................................19
Inventory.....................................................................................................................................................20
Types of inventory ..................................................................................................................................20
Introduction to Inventory Management in SAP......................................................................................20
Organizational Structure.........................................................................................................................20
Goods Movements..................................................................................................................................21
Transportation ............................................................................................................................................22
Modes of Transportation........................................................................................................................22
Transportation Management..................................................................................................................24
Facilities ......................................................................................................................................................25
Key Facilities decisions:...........................................................................................................................25
Factors influencing Facilities decisions:..................................................................................................25
A framework for facilities /Network Design ...........................................................................................26
Role of Information Technology in SCM .....................................................................................................27
Procurement...............................................................................................................................................29

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Procurement process in SAP MM (Materials Management)..................................................................30

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Introduction to Supply Chain Management
A supply chain is the composite of business processes, people and organization, technology,
and physical infrastructure which transform raw materials into intermediate & finished
goods/services which are offered & distributed to the consumer.
In any manufacturing company, material flow can be basically classified into three phases.
 Flow of raw material from suppliers into the manufacturing facility.
 Flow of material within the manufacturing facility as they are processed.
 Flow of finished goods from the manufacturing facility to the end customers.
SCM is the integration of all the activities in the supply chain to achieve a sustainable
competitive advantage. Supply Chain can be broadly classified of comprising of three networks
– Supplier, Firm and Distribution.
Basically a supply chain is:
 A set of approaches used to efficiently integrate Suppliers, Manufacturers,
Contract Manufacturers, OEMs
 Distribution centers Warehouses, Transporters
 Customers
 So that the product/service is produced and distributed
 In the right quantities and condition to the right locations
 And at the right time
 System-wide costs are minimized and Service level requirements are satisfied.
Customers, Producers and Suppliers can be interconnected in the Supply chain as follows:

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Supply chain management (SCM) is the process of - planning, implementing and controlling the
operations of the supply chain with the purpose to satisfy customer requirements as efficiently
as possible. It begins and ends with the customer. SCM spans all movement and storage of raw
materials, work-in-process inventory, and finished goods from point-of-origin to point-of-
consumption.
Hence organizations must be involved in the management of management of suppliers who
provide direct and indirect material inputs, must increase the manufacturing competitiveness
and must effectively manage the network of distribution systems responsible for delivery of the
product to end customers.
Logistics, also called as Physical distribution, focuses on the physical movement and storage of
goods and materials. Logistics is that part of the supply chain process 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. Typical
issues in logistics are evaluation of various transportation options, packaging options, inventory
management for different channels, develop and manage networks of warehouses when
needed, and manage the physical flow of materials into and out of the organization. Therefore,
logistics is a subset in the broader scope of SCM.
The term “Supply Chain Management” was coined by consultant Keith
Oliver, of strategy consulting firm Booz Allen Hamilton in 1982.

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Need of Supply Chain Management
Global optimization is difficult because supply chains need to be designed for, and operated in,
uncertain environments, thus creating enormous risks to the organization. A variety of factors,
like the ones mentioned below contribute to it.
1. Matching supply and demand is a major challenge. This difficulty stems from the fact
that months before demand is realized, manufacturers have to commit themselves to
specific production levels. These advance commitments imply huge financial and supply
risks.
2. Inventory and back-order levels fluctuate considerably across the supply chain, even
when customer demand for specific products does not vary greatly.
3. Forecasting doesn’t solve the problem. Indeed, the first principle of forecasting is that
“forecasts are always wrong.” Thus, it is impossible to predict the precise demand for a
specific item, even with the most advanced forecasting techniques.
4. Demand is not the only source of uncertainty. System variations over time are also an
important consideration. Even when demand is known precisely (e.g., because of
contractual agreements), the planning process needs to account for demand and cost
parameters varying over time due to the impact of seasonal fluctuations, trends,
advertising and promotions, competitors’ pricing strategies, and so forth. Delivery lead
times, manufacturing yields, transportation times, and component availability also can
have significant supply chain impact. These time-varying demand and cost parameters
make it difficult to determine the most effective supply chain strategy, the one that
minimizes system-wide costs and conforms to customer requirements.
5. Recent trends such as lean manufacturing, outsourcing, and offshoring that focus on
cost reduction increase risks significantly. Similarly, outsourcing and offshoring imply
that the supply chains are more geographically diverse and, as a result, natural and
man-made disasters can have a tremendous impact too.
6. The supply chain is a dynamic system that evolves over time. Indeed, not only do
customer demand and supplier capabilities change over time, but supply chain
relationships also evolve over time.

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Evolution
In the 1980s, companies discovered new manufacturing technologies and strategies that
allowed them to reduce costs and better compete in different markets. Strategies such as just-
in-time manufacturing, kanban, lean manufacturing, total quality management, and others
became very popular, and vast amounts of resources were invested in implementing these
strategies. In the last few years, however, it has become clear that many companies have
reduced manufacturing costs as much as is practically possible. Many of these companies are
discovering that effective supply chain management is the next step they need to take in order
to increase profit and market share.
The huge pressure during the 90s to reduce costs and increase profits pushed many industrial
manufacturers towards outsourcing. Forms considered outsourcing everything from the
procurement function to production and manufacturing. Indeed, in the mid-90s there was a
significant increase in purchasing volume as a percentage of the typical firm’s total sales.
Finally, in the late 90s, the Internet and the related e-business models led to expectations that
many supply chain problems would be solved merely by using new technologies and business
models. E-business strategies were supposed to reduce cost, increase service level, and
increase flexibility and, of course, increase profits, albeit sometime in the future. In reality,
these expectations frequently were not met, as many e-businesses failed. In many cases, the
downfall of some of the highest-profile Internet businesses can be attributed to their logistics
strategies. In many cases, the Internet introduced new channels and helped to enable the
direct-to-consumer business model. These new channels required many companies to learn
new skills, and added complexity to existing supply chains.
The landscape has changed in recent years. Industry recognized that trends, including
outsourcing, offshoring, lean manufacturing, and just-in-time, that focus on reducing
manufacturing and supply chain costs significantly increase the level of risk in the supply chain.
As a result, over the past several years, progressive firms have started to focus on strategies
that find the right balance between cost reduction and risk management. A number of
approaches have been applied by industry to manage risk in their supply chains:
• Building redundancy into the supply chain so that if one portion fails, for example, a fire at a
warehouse or a closed port, the supply chain can still satisfy demand.
• Using information to better sense and respond to disruptive events.
• Incorporating flexibility into supply contracts to better match supply and demand.
• Improving supply chain processes by including risk assessment measures.

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Of course, many of these approaches rely heavily on technology. Indeed, the implementation of
ERP systems, motivated in many companies by year 2000 concerns, as well as new technology
such as tools for supplier performance assessments, have created opportunities to improve
supply chain resiliency and responsiveness. Similarly, advanced inventory planning systems are
now used to better position inventory in the supply chain, and to help ﬁrms better understand
the impact of product design alternatives on supply chain costs and risks, thus facilitating the
integration of the development chain and the supply chain.

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SCOR Model
The Supply Chain Operations Reference-model (SCOR) is a process reference model that has
been developed and endorsed by the Supply Chain Council as the cross-industry standard
diagnostic tool for supply chain management. SCOR enables users to address, improve and
communicate supply chain management practices within and between all interested parties.
While much of the underlying content of the model has been used by practitioners for many
years, the SCOR model provides a unique framework that links business process, metrics, best
practices and technology features into a unified structure to support communication among
supply chain partners and to improve the effectiveness of supply chain management and
related supply chain improvement activities.
SCOR is a management tool. It is a process reference model for supply chain management,
spanning from the supplier's supplier to the customer's customer. The SCOR-model has been
developed to describe the business activities associated with all phases of satisfying a
customer's demand. By describing supply chains using process building blocks, the Model can
be used to describe supply chains that are very simple or very complex using a common set of
definitions. As a result, disparate industries can be linked to describe the depth and breadth of
virtually any supply chain.
SCOR spans:
 All customer interactions, from order entry through paid invoice
 All product (physical material and service) transactions, from the supplier’s supplier to
the customer’s customer, including equipment, supplies, spare parts, bulk product,
software, etc.
 All market interactions, from the understanding of aggregate demand to the fulfillment
of each order.

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Scope of SCOR
SCOR is based on five distinct management processes:
1. Plan: Demand/Supply planning and management
a. Balance resources with requirements and establish/communicate plans for the
whole supply chain, including Return, and the execution processes of Source,
Make, and Deliver.
b. Management of business rules, supply chain performance, data collection,
inventory, capital assets, transportation, planning configuration, regulatory
requirements and compliance, and supply chain risk.
c. Align the supply chain unit plan with the financial plan.
2. Source: Sourcing stocked, make-to-order, and engineer-to-order product
a. Schedule deliveries; receive, verify, and transfer product; and authorize supplier
payments.
b. Identify and select supply sources when not predetermined, as for engineer-to-
order product.
c. Manage business rules, assess supplier performance, and maintain data.
d. Manage inventory, capital assets, incoming product, supplier network,
import/export requirements, supplier agreements, and supply chain source risk.
3. Make: Make-to-stock, make-to-order, and engineer-to-order production execution
a. Schedule production activities, issue product, produce and test, package, stage
product, and release product to deliver. With the addition of Green to SCOR,
there are now processes specifically for Waste Disposal in MAKE.
b. Finalize engineering for engineer-to-order product.
c. Manage rules, performance, data, in-process products (WIP), equipment and
facilities, transportation, production network, regulatory compliance for
production, and supply chain make risk.
4. Deliver: Order, Warehouse, Transportation, and Installation Management for Stocked,
Make-to-Order, and Engineer-to-Order Product
a. All order management steps from processing customer inquiries and quotes to
routing shipments and selecting carriers.
b. Warehouse management from receiving and picking product to load and ship
product.
c. Receive and verify product at customer site and install, if necessary.
d. Invoicing customer.
e. Manage Deliver business rules, performance, information, finished product
inventories, capital assets, transportation, product life cycle, import/export
requirements, and supply chain deliver risk.

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5. Return: Return of Raw Materials and Receipt of Returns of Finished Goods
a. All Return Defective Product steps from source – identify product condition,
disposition product, request product return authorization, schedule product
shipment, and return defective product – and deliver – authorized product
return, schedule return receipt, receive product, and transfer defective product.
b. All Return Maintenance, Repair, and Overhaul product steps from source –
identify product condition, disposition product, request product return
authorization, schedule product shipment, and return MRO product – and
deliver – authorize product return, schedule return receipt, receive product, and
transfer MRO product.
c. All Return Excess Product steps from source – identify product condition,
disposition product, request product return authorization, schedule product
shipment, and return excess product – and deliver – authorize product return,
schedule return receipt, receive product, and transfer excess product.
d. Manage Return business rules, performance, data collection, return inventory,
capital assets, transportation, network configuration, regulatory requirements
and compliance, and supply chain return risk.

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Porter’s Value Chain
The term ‘Value Chain’ was used by Michael Porter in his book "Competitive Advantage:
Creating and Sustaining superior Performance" (1985). The value chain analysis describes the
activities the organization performs and links them to the organizations competitive position.
Value chain analysis describes the activities within and around an organization, and relates
them to an analysis of the competitive strength of the organization. Therefore, it evaluates
which value each particular activity adds to the organizations products or services. This idea
was built upon the insight that an organization is more than a random compilation of
machinery, equipment, people and money. Only if these things are arranged into systems and
systematic activates it will become possible to produce something for which customers are
willing to pay a price. Porter argues that the ability to perform particular activities and to
manage the linkages between these activities is a source of competitive advantage.
Porter distinguishes between primary activities and support activities. Primary activities are
directly concerned with the creation or delivery of a product or service. They can be grouped
into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and
service. Each of these primary activities is linked to support activities which help to improve
their effectiveness or efficiency. There are four main areas of support activities: procurement,
technology development (including R&D), human resource management, and infrastructure
(systems for planning, finance, quality, information management etc.).
The basic model of Porter’s Value Chain is as follows:
Fig. 2 Porter’s Value Chain

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The term margin implies that organizations realize a profit margin that depends on their ability
to manage the linkages between all activities in the value chain. In other words, the
organization is able to deliver a product / service for which the customer is willing to pay more
than the sum of the costs of all activities in the value chain.
The linkages between activities are crucial for corporate success. The linkages are flows of
information, goods and services, as well as systems and processes for adjusting activities. Their
importance is best illustrated with some simple examples: Only if the Marketing & Sales
function delivers sales forecasts for the next period to all other departments in time and in
reliable accuracy, procurement will be able to order the necessary material for the correct date.
And only if procurement does a good job and forwards order information to inbound logistics,
only than operations will be able to schedule production in a way that guarantees the delivery
of products in a timely and effective manner – as pre-determined by marketing. So linkages are
about seamless cooperation and information flow between the value chain activities.

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Industry Strategies
From the supplier’s perspective, delivery lead time is the time from receipt of an order to the
delivery of the product. From the customer’s perspective it may also include time for order
preparation and transmittal. Customers want delivery lead time to be as short as possible, and
manufacturing must design a strategy to achieve this. There are four basic strategies: engineer-
to-order, make-to-order, assemble-toorder, and make-to-stock. Customer involvement in the
product design, delivery lead time, and inventory state are influenced by each strategy.
Engineer-to-order : It means that the customer’s specifications require unique engineering
design or significant customization. Usually the customer is highly involved in the product
design. Inventory will not normally be purchased until needed by manufacturing. Delivery lead
time is long because it includes not only purchase lead time but design lead time as well.Benefit
of this strategy is it enables response to specific customer requirements.
Make to order : It means that the manufacturer does not start to make the product until a
customer’s order is received. The final product is usually made from standard items but may
include custom-designed components as well. Delivery lead time is reduced because there is
little design time required and inventory is held as raw material.Benefit of this strategy is it
enables customization with low inventory levels and high service levels.

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Assemble to order : It means that the product is made from standard components that the
manufacturer can inventory and assemble according to a customer order. Delivery lead time is
reduced further because there is no design time needed and inventory is held ready for
assembly. Customer involvement in the design of the product is limited to selecting the
component part options needed. Benefit of this startegy is it enables wide range of product
offerings with simplified planning.
Make to stock : It means that the supplier manufactures the goods and sells from finished
goods inventory. Delivery lead time is shortest. The customer has little direct involvement in
the product design.Benefit of this strategy is it enables in meeting customers demand quickly.

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Total quality management
TQM is an integrated organizational effort designed to improve quality at every level. Total
Quality Management (TQM) is a comprehensive and structured approach to organizational
management that seeks to improve the quality of products and services through ongoing
refinements in response to continuous feedback. TQM requirements may be defined separately
for a particular organization or may be in adherence to established standards, such as the
International Organization for Standardization's ISO 9000 series. TQM can be applied to any
type of organization; it originated in the manufacturing sector and has since been adapted for
use in almost every type of organization imaginable, including schools, highway maintenance,
hotel management, and churches. As a current focus of e-business, TQM is based on quality
management from the customer's point of view.
It refers to management methods used to enhance quality and productivity in business
organizations. TQM is a comprehensive management approach that works horizontally across
an organization, involving all departments and employees and extending backward and forward
to include both suppliers and clients/customers
Six Sigma
Six Sigma is a set of tools and strategies for process improvement originally developed by
Motorola in 1985. Six Sigma became well known after Jack Welch made it a central focus of his
business strategy at General Electric in 1995, and today it is used in different sectors of
industry.
Six Sigma seeks to improve the quality of process outputs by identifying and removing the
causes of defects (errors) and minimizing variability in manufacturing and business processes. It
uses a set of quality management methods, including statistical methods, and creates a special
infrastructure of people within the organization
The term Six Sigma originated from terminology associated with manufacturing, specifically
terms associated with statistical modeling of manufacturing processes. The maturity of a
manufacturing process can be described by a sigma rating indicating its yield or the percentage
of defect-free products it creates. A six sigma process is one in which 99.99966% of the
products manufactured are statistically expected to be free of defects (3.4 defects per million).
Motorola set a goal of "six sigma" for all of its manufacturing operations, and this goal became
a byword for the management and engineering practices used to achieve it.
Six Sigma projects follow two project methodologies inspired by Deming's Plan-Do-Check-Act
Cycle.

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 DMAIC is used for projects aimed at improving an existing business process
 DMADV is used for projects aimed at creating new product or process designs
DMAIC
The DMAIC project methodology has five phases:
 Define the problem, the voice of the customer, and the project goals, specifically.
 Measure key aspects of the current process and collect relevant data.
 Analyze the data to investigate and verify cause-and-effect relationships. Determine
what the relationships are, and attempt to ensure that all factors have been considered.
Seek out root cause of the defect under investigation.
 Improve or optimize the current process based upon data analysis using techniques such
as design of experiments, poka yoke or mistake proofing, and standard work to create a
new, future state process. Set up pilot runs to establish process capability.
 Control the future state process to ensure that any deviations from target are corrected
before they result in defects. Implement control systems such as statistical process
control, production boards, visual workplaces, and continuously monitor the process.
DMADV or DFSS
The DMADV project methodology, known as DFSS ("Design For Six Sigma"), features five
phases:
 Define design goals that are consistent with customer demands and the enterprise
strategy.
 Measure and identify CTQs (characteristics that are Critical To Quality), product
capabilities, production process capability, and risks.
 Analyze to develop and design alternatives
 Design an improved alternative, best suited per analysis in the previous step
 Verify the design, set up pilot runs, implement the production process and hand it over
to the process owner(s).

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Just in time (JIT)
Just in time (JIT) is a production strategy that strives to improve a business return on
investment by reducing in-process inventory and associated carrying costs. To meet JIT
objectives, the process relies on signals or Kanban (between different points in the process,
which tell production when to make the next part. Kanban are usually 'tickets' but can be
simple visual signals, such as the presence or absence of a part on a shelf. Implemented
correctly, JIT focuses on continuous improvement and can improve a manufacturing
organization's return on investment, quality, and efficiency. To achieve continuous
improvement key areas of focus could be flow, employee involvement and quality.
JIT inventory systems expose hidden cost of keeping inventory, and are therefore not a simple
solution for a company to adopt. The company must follow an array of new methods to
manage the consequences of the change. The ideas in this way of working come from many
different disciplines including statistics, industrial engineering, production management, and
behavioral science
Inventory is seen as incurring costs, or waste, instead of adding and storing value, contrary to
traditional accounting. This does not mean to say JIT is implemented without an awareness that
removing inventory exposes pre-existing manufacturing issues. This way of working encourages
businesses to eliminate inventory that does not compensate for manufacturing process issues,
and to constantly improve those processes to require less inventory. Secondly, allowing any
stock habituates management to stock keeping. Management may be tempted to keep stock to
hide production problems. These problems include backups at work centers, machine
reliability, process variability, lack of flexibility of employees and equipment, and inadequate
capacity. In short, the Just-in-Time inventory system focus is having “the right material, at the
right time, at the right place, and in the exact amount”, without the safety net of inventory.
Lean Management
Lean is all about customer focus. "Lean", is a production practice that considers the expenditure
of resources for any goal other than the creation of value for the end customer to be wasteful,
and thus a target for elimination. Working from the perspective of the customer who consumes
a product or service, "value" is defined as any action or process that a customer would be
willing to pay for. Value is defined by the customer and we develop and maintain processes to
provide this value. Processes are run by people. Only support and proper leadership and
guidance you can drive your people to continuously improve the processes that add value to
the customer. The management system that helps you to achieve this is a Lean Management
system. Lean Management system uses various tools to connect the purpose (Providing value
to customer) to the process and people. Some of the lean management tools which are
commonly used are Leader standard work, visual control boards, and daily accountability.

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Key Challenges of Applied Innovation
• Dealing with uncertain environments – matching supply and demand
o Raw materials shortages, internal and supplier parts shortages and productivity
inefficiencies
o Larger than anticipated inventories on the shelves of hospitals
o Unanticipated disasters
• Shorter product life cycles of high-technology products
o Less opportunity to accumulate historical data on customer demand
o Wide choice of competing products makes it difficult to predict demand
• Need for technology / Integration and Managing Tech complexity
o If you don’t do it, your competitor will
o Major buyers such as Wal-Mart demand a level of “supply chain maturity” of its
suppliers
• Forecasts are never right
o Very unlikely that actual demand will exactly equal forecast demand
o The longer the forecast horizon, the worse the forecast. A forecast for a year
from now will never be as accurate as a forecast for 3 months from now
• Inventory- Striking the fine balance
• Supply Chain Complexity
• Changing Customer preferences
• Change Management
• Changing environmental factors (legal, social, etc.)

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Key Benefits
Typical direct benefits realized by SCM-
• Release Imprisoned Capacity for Revenue Growth
• Reduce Supply Chain Operating Costs
• Reduce Supply Chain Inventory (pull instead of push)
Long Term benefits realized include
• Ability to Manage Complexity
• Ability to Manage Relationship
• Ability to Manage Change
Value
Enhancement
Cash
Liberation
Cost
Reduction
Manage
Complexity
Manage
Change
Manage
Relationship

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Inventory
Types of inventory
 Raw material
 Work in process
 Finished goods
The cost of work in process and finished goods includes the cost of raw materials, direct labour,
and an allocated portion of manufacturing overhead.
Introduction to Inventory Management in SAP
Inventory management is the process of efficiently monitoring the flow of products into and
out of an existing inventory in the warehouse. This process involves controlling the receipt of
products in order to prevent the inventory from becoming too high where items are stored at
an unnecessary cost , or too low where it can cause a stock-out and production could be halted
due to lack of raw materials. In SAP, the inventory management functionality revolves around
the movement of materials in and out of the storage facility and the physical count of those
items at regular intervals.
Material is procured from external or internal sources on the basis of the requirements
determined by Material Requirements Planning. The delivery is entered in Inventory
Management as a goods receipt. The material is stored (and managed under Inventory
Management) until it is delivered to customers (Sales & Distribution), or is used for internal
purposes (for example, for production).
During all transactions, Inventory Management accesses both master data (such as material
master data) and transaction data (such as purchasing documents) shared by all Logistics
components.
Organizational Structure
In the SAP system each storage facility is part of an organizational structure created in the
system. For inventory management there are two organizational levels which are required to
be created; the plant, and the storage location.
 Plant - This is a physical location in the organization where some processes take place.
Sometimes these processes involve stored material, sometimes maintenance or sometimes

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production. For inventory management, a plant will be created to represent a location that
receives stores, and issues materials.
 Storage Location - This describes an designated area within a plant. A storage location can
be a site where inventory is held. The physical location can be a physical room, a row of
shelves, a racking system, a refrigerated cabinet, a trailer or a space in the plant that is
identified by painted lines on the shop floor. The inventory can be materials that are used in
the production process, finished goods or maintenance items. The storage location is the
lowest inventory level in the inventory management function.
Goods Movements
There are a number of goods movements in the SAP system, and they can be either inbound
from suppliers or the production department, outbound to customers, a transfer of stock from
another plants within the company, or an internal movements within the same plant.
 Goods Receipt - This process can be either inbound from a supplier or can be from a
company's own production process. A goods receipt can be performed so that the materials
are immediately available for use, or they can be placed in a quality inspection hold so that
the quality department can perform tests on the items to ensure that they are within
specifications before releasing them to stock. Sometimes the goods can be placed in a
blocked stock state where the company does not accept financial liability for the materials
as they were not ordered, or incorrect. In that case the material is not available for use.
 Goods Issue - The items in the warehouse can either be used in the production process or
sold to a customer. In either scenario the items are issued to a production order or sales
order which causes the stock level at the plant to be reduced. In some instances material can
be issued to scrap if it is deemed unusable by the quality department, past its shelf life, or
damaged.
 Internal Movements - Material in the plant can be moved from one storage location to
another before it is used in production or delivered to a customer. There is a goods
movement so that the material is moved from the main storage area to a staging location
close to where the production or delivery area is located. Sometimes the material is moved
to another plant if they need the material sooner. In that instance there is a plant to plant
transfer of materials. One other internal movement is the transfer posting, where a material
is logically changed within the system. For example, a material that has been received as
material requiring quality inspection can be changed to material that is available for use, by
performing a transfer posting.

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Transportation
Transportation is Movement of Resources/Products/Services to fulfill customer need.
Transportation Management caters to optimization of transportation cost while maximizing
service.
Modes of Transportation
1. Road - Flexible in routing & time schedules, efficient for short-hauls of high value goods
2. Rail - cost-effective for shipping bulk products, piggyback
3. Air - High cost, ideal when speed is needed or to ship high-value, low-bulk items
4. Water - Low cost for shipping bulky, low-value goods, slowest form
5. Pipeline - Ship petroleum, natural gas, and chemicals from sources to markets

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Facilities
Facilities is one of the important drivers of Supply chain Management.It include all
locations/nodes/resources in the supply chain to create or store inventory to fulfill the
customer need.
Key Facilities decisions:
1. Facility role
2. Facility location
3. Capacity allocation
4. Market and supply allocation
Factors influencing Facilities decisions:
1. Strategic
2. Technological
3. Macroeconomic
4. Political
5. Infrastructure
6. Competitive
7. Logistics and facility costs

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A framework for facilities /Network Design
PRODUCTION METHODS
Skill needs, response
time
PHASE II
Regional Facility
Configuration
PHASE I
Supply Chain Strategy
PHASE III
Desirable Sites
COMPETITIVE
ENVIRONMENT
PRODUCTION TECHNO
LOGIES Cost, Scale/Scope
impact, support
FACTOR COSTS Labor,
materials, site specific
GLOBAL COMPETITION
PHASE IV
Location Choices
COMPETITIVE
STRATEGY
INTERNAL CONSTRAINTS
Capital, growth strategy,
existing network,
partnerships
TARIFFS AND TAX
INCENTIVES
REGIONAL DEMAND Size,
growth, homogeneity,
local specifications
POLITICAL, EXCHANGE
RATE AND DEMAND RISK
AVAILABLE
INFRASTRUCTURE
LOGISTICS COSTS
Transport, inventory,
coordination

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Role of Information Technology in SCM
Information is the driver that serves as the “glue” to create a coordinated supply chain.
Information must have the following characteristics to be useful:
o Accurate
o Accessible in a timely manner
o The right kind
o Provides supply chain visibility
Information technology (IT)
o Hardware and software used throughout the supply chain to gather and analyze
information
o Captures and delivers information needed to make good decisions
Information provides the basis for supply chain management decisions:
o Inventory - (demand patterns, carrying costs, stock-out costs, ordering costs)
o Transportation - (costs, customer locations, shipment sizes)
o Facility (location, capacity, schedules of a facility; need information about trade-
offs between flexibility and efficiency, demand, exchange rates, taxes, etc.)
o Sourcing – (information on product margins, prices, quality, lead times help in
sourcing)
o Pricing and revenue management - (to set pricing policies, need information on
demand, lead times, availability)
Use of information technology (IT) is considered a prerequisite for the effective control of
today’s complex supply chains. the use of IT for SCM purposes can be divided into 1)
transaction processing, 2) supply chain planning and collaboration, and 3) order tracking and
delivery coordination.

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Software and applications of IT in SCM range from different uses and scenarios ranging from
procurement, logistics, payment, tracking, vendor management etc. Some vendors: SAP,
Oracle, JDA, Ariba, etc. Key challenges: Integration, Customization, Enhancements, Change
management. New trends include automation, RFID techniques, GPS & remote monitoring,
barcodes, QR, EDI etc.

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Procurement
Procurement is the process of obtaining or buying goods and services for the purpose of either storing
for further use in production or direct consumption. The process includes preparation and processing of
a demand as well as the end receipt and approval of payment. Procurement is an integral part of the
Supply Chain of any organization.
Procurement process can be represented as:
1. Request / Indent – A purchase request or indent or Purchase requisition can be raised by either
an employee, by the production department, against a sales order or against Materials
Requirement Planning input. It may need approval before it goes further for processing.
2. Determination of Source of Supply (Vendor Selection) – If the materials are available in the
stock, then the Purchase requisition is fulfilled by the stock. If not, then the materials have to be
procured externally. This involves sending Request for Quotations (RFQ) to vendors. Sometimes,
e-tendering and auctioning is also used to solicit bids. Once quotations are received from the
potential vendors, the best one is chosen on the basis of certain parameters like Price, Payment
terms, Incoterms, Delivery date, Technical specification, etc. Negotiation may follow. Finally the
Purchase order or contract is awarded to L1 vendor. A Purchase order or Contract or Scheduling
agreement is then created and sent out to the vendors.

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3. Order processing (Purchase Order) – PO contains data like material/ service, quantity, price,
plant, currency, Delivery date and address, etc. After approval of the PO from concerned
authority depending upon the value or quantity of the material, it is sent to the concerned
vendor for processing.
4. Goods Receipt – Once the vendor gets the PO, the goods are delivered along with a delivery
note. The shipment goes through quality check and verification of quantity. Once cleared, the
delivery note is signed and sent back to the vendor and the goods are updated in the inventory.
5. Invoice verification and payment processing – The goods are received at the Ship To location
while the supplier invoice is received at the Bill To location which is usually the Finance office.
The invoice consists of P.O. ref., material, quantity, terms of payment, amount per item (cost
breakup) bank information Tax amount, rate, etc. Quantity mentioned in the invoice is checked
against Goods Receipt while the Price is checked against the PO. In case of variance, subsequent
debit and credit notes are received to adjust the Vendor account. Once done, the invoice gets
paid by the Accounts Payable team.
Procurement process in SAP MM (Materials Management)
Procurement process in SAP is a functionality of MM module. Like any other module of SAP,
Organization structure needs to be pre-defined in the MM module to carry out the procurement
transactions in the system. The following is the Organization structure of MM module:
MM identifies procurement as two types. They are:
 Procure to Stock (Direct Materials) – In this case, the warehouse stock level is increased by
entering goods receipt and reduced by entering goods issue. With each goods movement, the
stock and consumption accounts are updated in FI (Financial Accounting).
 Procure to Consumption – In this case, no warehouse stock is created when goods receipt is
entered (and the stock value is not increased) but the consumption statistics (and the
consumption accounts in the accounting department) are updated directly.
The procurement process in MM can be represented as below:

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The procurement process in MM is exactly similar to the Industry Procurement process. However, the
Purchase requisition is mostly done on the basis of MRP (Materials Requirement Planning). RFQ,
Quotation, PO and Goods Receipt are created and sent/received electronically. The final payment
processing is done in the FI module.

Supply Chain Management

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