SCM Basics

1. Supply Chain Management [SCM] 1
SCM-LN-060213
Understanding the Supply Chain Management
• Concept of Supply Chain Management
– Define Supply
– Define Supply Chain
– Define Supply Chain Management
This can best be done by discussing the general
Operating process of organizations with examples
from day to day activities.

2. Operation of an Organization
The
Transformation
Process
Outputs
Inputs
[Transformed
Resources]
1. Materials
2. Information
3. Customers
1. Facilities
2. Energy &
Utilities
3. Technology
4. Staff
Inputs
[Transforming
Resources] A general Input – Transformation Process–
Output Operations model
Products
Services
Customers
Government
Regulations etc.
Environment
External
Internal
Random Fluctuations
Late Deliveries
Staff Turnover
Power / Equipment failure

3. Supply Chain Management [SCM] 2
Process of buying / purchasing Products
Raw material
Supplier
Component
Supplier
Computer
Manufacturer
Distributor
Show Room
[Retailer]
Customer
Computer
Raw material
Supplier
Soap
Manufacturer
Distributor
Supermarket
[Retailer]
Customer
Toilet Soap
Crude Oil
Supplier
Refinery
[Manufacturer]
Petrol/Diesel Pump
[Retailer]
Customer
Fuel

4. Supply Chain Management [SCM] 3
Process of buying / purchasing Services
Raw material
Supplier
Component
Supplier
Vehicle
Manufacturer
Spares
Distributor
Service Centre
[Retailer]
Customer
Vehicle Repair
Raw material
Supplier
Pest control products
Manufacturer
Pest control products
Distributor
Maintenance
Company
[Retailer]
Customer
Pest Control
Water
[Nature]
Generating Station
[Producer]
Distribution Company
[Retailer]
Home
Customer
Electricity
Fuel
Supplier
Commercial
Customer
Industrial
Customer

5. Supply Chain Management [SCM] 4
Supply
The Customer expects that there will be supply of
Products / Services whenever the need arises.
-Definition of Supply [APICS Dictionary 11th edition]
1] The quantity of goods available for use
2] The actual or planned replenishment of product
or component. The replenishment quantities are created
in response to demand for the product or component or in
anticipation of such a demand.

6. What is a Supply Chain?
Customer wants
detergent and goes
to Jewel
Jewel
Supermarket
Jewel or third
party DC
P&G or other
manufacturer
Plastic
Producer
Chemical
manufacturer
(e.g. Oil Company)
Tenneco
Packaging
Paper
Manufacturer
Timber
Industry
Chemical
manufacturer
(e.g. Oil Company)

7. Supply Chain Management [SCM] 5
Supply Chain
The buying process begins with customer order and ends when the
satisfied customer pays for the product / service. It has the following typical
entities / stages:
•Customers
•Retailers
•Wholesalers / Distributors
•Transporters
•Manufacturers / Producers
•Component / Raw material Suppliers
These entities are connected to each other along a chain. Hence the name
Supply Chain system.

8. Objectives of Organizations
To meet the needs of various customers and stakeholders.
To maximize the overall value generated.
Value generated = Worthiness of product – Effort the supply chain expends.
Value is correlated with supply chain profitability.
Value = Revenue from customer – Overall cost across the supply chain.
Organizations have to acquire many of the materials, equipment, facilities,
and supplies from other organizations and or individuals. Thus the
performance of an organization depends not only on its own performance
but on the performance of other organizations which supply the resources.
This makes it clear that an organization cannot exist in isolation.
To be successful, organizations have to be interdependent. Cooperation
among firms is a must.
Supply chain success should be measured in terms of supply chain
profitability and not in terms of profit at an individual stage.

9. Supply Chain Management [SCM] 6
Supply Chain Basic
Supply Chain Model
1. Flow of physical materials and services from suppliers through
intermediate entities to customers
2. Flow of Cash from customer through intermediate entities to supplier
3. Flow of Information back and forth along the chain
4. Reverse flow of products returned for replacement, repairs, recycling, or
disposal
Supplier Producer Customer
Primary Product Flow Primary Product Flow
Primary Cash Flow
Information Flow
Return of Product
Supplier – Producer – Customer are connected by Product, Information & Payment Flows
Return of Product

10. Supply Chain Management [SCM] 7
Supply Chain
Organizations:
•Supplier – materials / energy / services / components
•Producer – finished products / services
•Retailer – receives finished products and delivers to
customers
Flows that connect the entities:
•Physical materials / services
•Cash from customer
•Information – back and forth
•Reverse flow of products – repair / recycling / disposal /
replacement

11. Supply Chain Management [SCM] 8
Definition of Supply Chain
The global network used to deliver products and
services from raw materials to end customers through
an engineered flow of Information, Physical Distribution
and Cash. [APICS Dictionary 11th edition]
•SC involves directly or indirectly, everyone and everything
required to deliver products and services from raw materials to end
customers
•SC includes Customers, Retailers, Wholesalers / Distributors,
Transporters, Manufacturers / Producers, Component / Raw material
Suppliers
•SC can be viewed as processes – marketing data analysis, invoicing,
shipping, order processing cutting across entities
•Outside stakeholders – government, public at large, trade associations,
universities, competitors etc.

12. Supply Chain Management [SCM] 9
Supply Chain Management
The design, planning, execution, control
and monitoring of supply chain activities
with the objective of creating net value,
building a competitive infrastructure,
leveraging world wide logistics,
synchronizing supply with demand and
measuring performance globally.
[APICS dictionary 11th edition]

13. Some more definitions of SCM
Oliver and Webber (1982) – SCM covers the flow of goods from supplier through
manufacturing and distribution channels to end user.
Jones and Riley (1987) – SCM techniques deal with the planning and control of total materials
flow from suppliers to through end users.
Ellram (1991) – An integrative approach to dealing with the planning and control of the
materials flow from suppliers to end users.
Christopher (1992) – SCM is the management of a network of organizations that are involved,
through upstream and downstream linkages, in the different processes and activities that
produce value in the form of products and services in the hands of the ultimate customer.
Ayers (2000) – SCM is the design, maintenance and operation of supply chain processes for
satisfaction of end users.
Sunil Chopra and Peter Meindl (2001) – SCM involves the management of flows between and
among stages in a supply chain to maximize total profitability.

14. Supply Chain Management [SCM] 10
A generalized SC Model
Manufacturer
Distributor Retailer Customer
Distributor Retailer Customer
Retailer Customer
Retailer Customer
Supplier
Tier 1
Supplier
Tier 2
Supplier
Tier 1
Supplier
Tier 2
Raw Materials
Components
Distribution Tier 1
Distribution Tier 2

15. Supply Chain Management [SCM] 10A
Types of Supply Chain
1 – Horizontal (lateral) integration
The stages of SC [Physical Supply, Manufacturing & Physical] are
carried out by different organizations – discussed earlier.
2 – Vertical Integration
Bringing the SC inside one organization
Ford motor company pursued this strategy for their famous model
T - car.
What Ford practised. Later divested.
Now horizontal integration
is the favoured approach.
Ownership
Management
Marketing / Sales
Finance
Show Room
Distribution
Plant
Component Production
Raw material Extraction
Ford Customer

16. Supply Chain Management [SCM] 11
Evolution of Supply Chain Management
Stage 1 – Multiple Dysfunction
Purchasing Marketing / Sales
Production Control
Logistics Distribution
Supplier
Supplier
Supplier
Customer
Customer
Customer
Materials / Service Payments
Lacks clear internal definitions and goals – No external links other than transactional ones

17. Supply Chain Management [SCM] 12
Evolution of Supply Chain Management
Stage 2 – Semi functional Enterprise
Materials / Service Payments
Improving efficiency, effectiveness, quality etc within functional areas – No overlap / consulting in
decision making from one department to another – Department wise Maximising
Purchasing Logistics
Production
Control
Marketing /
Sales
Distribution
Supplier
Supplier
Customer
Customer
Information

18. Supply Chain Management [SCM] 13
Evolution of Supply Chain Management
Stage 3 – Integrated Enterprise
Materials / Service Payments
Breaks down silo walls and brings functional areas together in processes such as Sales &
Operations Planning (S&OP), CPFR – Company wide processes rather than individual functions
– late 1980s to early 1990s. MRP(1950s) – MRPII(1960s) – ERP(1990s).
Purchasing Logistics
Production
Control
Marketing /
Sales
Distribution
Supplier
Supplier
Customer
Customer
ERP

19. Supply Chain Management [SCM] 13A
Why Process Integration is needed?
To make maximum profit a company must have the following objectives:
- Provide best customer service - Provide lowest production costs
- Provide lowest inventory investment - Provide lowest distribution costs
These objectives create conflict among marketing, production & finance departments:
Function Objective Implication
Marketing - High revenue
- High Product Availability
High
Customer Service
Low
Production - Low Production Cost
- High Level Production
- Long Production Run
Many
Production Disruption
Few
Finance - Low Investment and Cost
- Fewer Fixed Costs
- Low Inventories
High
Inventories
Low

20. Supply Chain Management [SCM] 14
Evolution of Supply Chain Management
Stage 4 – Extended Enterprise
Materials / Service Payments
Integration of internal network with selected SCM partners’ internal network to improve efficiency,
quality of products / services.
Suppliers’
Suppliers
Suppliers
Internal
Chain
Customers
Customers’
Customers
Networked Information Flow

21. 5.2. The Objectives of a Supply Chain
• 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)

22. The Objective of a Supply Chain
• Example: Dell receives $2000 from a customer
for a computer (revenue)
• Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Difference between $2000 and the sum of all of
these costs is the supply chain profit
• 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

23. Supply Chain Management [SCM] 17
Creating Value through Supply Chain Management
The primary purpose for the existence of any SCM is to satisfy customer needs, in
the process generating profits for itself. Maximise the overall value generated.
Value generated = what the product/service worth to the customer – the effort SC
expends in fulfilling the customer needs. Correlated with SC Profitability (SCP).
SCP = Revenue generated – Overall cost across SC
Value depends on the product’s utility to the customer. Types of utility:
•Form Utility - Operation
•Place Utility - Logistics
•Time Utility - Logistics
•Possession Utility - Sales
During value generation SC has to satisfy all the stakeholders – Customer, Investor,
Employee, Public at large, Government etc.

24. Supply Chain Management [SCM] 18
Creating Value through Supply Chain Management
Financial Value
• Cost Reduction may be self defeating
• Gains must be equitably distributed
Customer Value
• Quality
•Affordability
•Availability
•Service
Social value
•Socially Desired and useful product / service
•Avoiding or reducing negative environmental side effects of activities such
as extraction, processing and construction

25. The Objective of a Supply Chain
• Sources of supply chain revenue: the customer
• Sources of supply chain cost: flows of
information, products, or funds between stages
of the supply chain
• Supply chain management is the
management of flows between and among
supply chain stages to maximize total supply
chain profitability

26. Supply Chain Management [SCM] 19
Importance / Benefits of SCM
•To achieve economies of scale and scope – Costs
are significant
•To improve business focus and expertise
•Customer Expectations are increasing
•Supply and Distribution Lines are lengthening with
complexity
•Adds Significant Customer value
•Customers Increasingly Want Quick & Customised
Response

27. Supply Chain Management [SCM] 20
Importance / Benefits of SCM
•To achieve economies of scale and scope – Costs are
significant
Internal SC functions lack economies of scale when compared with
the potential capacity of an independent provider of the same product /
service.
Eg: Computer Monitor / Chip / Hard drive
Attractive pricing – volume leverage.
•To improve business focus and expertise
Vertical integration multiplies the complexities of managing
disparate businesses. An independent company that focuses entirely on
a particular business can develop more expertise than an in-house
department
Ford divested their Iron Ore company, Steel Mill etc
Higher Quality, Attractive Pricing or both

28. Supply Chain Management [SCM] 22
Importance / Benefits of SCM
•Customer Expectations are increasing
- Rapid processing of Customer Request
- Quick delivery (shorter Order Cycle Time)
- High degree of Product Availability
- Lower Prices
•Supply and Distribution lines are lengthening with greater
complexity
- Cut costs and expand markets
- Trend towards an integrated world market
- Designing products for world market & producing them wherever
raw material, labour, components, overhead etc are lower
- Political arrangements : European Union, ASEAN, SAARC etc
- Globalization of industries depends on logistic performance and
cvosts

29. Supply Chain Management [SCM] 23
Importance / Benefits of SCM
•Adds significant Customer Value
- A product or service is of no value to the customer, if not available
when required
Goods customers want are not produced where they want to consume
OR goods are not accessible when customers want to consume
Value Through Responsibility
Form Converting raw materials
and components to the
required Form, Fit &
Function
Engineering &
Manufacturing
Time Production scheduling &
moving
Manufacturing & Logistics
Place Moving & making
transportable
Engineering & Logistics
Possession Advertising, Pricing,
Technical Support
Marketing, Finance &
Engineering

30. Supply Chain Management [SCM] 24
Importance / Benefits of SCM
•Customers Increasingly want Quick Customised Response
- Customers expect that products / services can be made available
in shorter times. Guided by Fast Food, ATM, E-Mail etc.
- Improved IS and flexible manufacturing processes have led to
mass customisation
- One Size Fit all philosophy is not appreciated always
- Manufacturers / Suppliers are offering products that meet
individual needs

31. Decision Phases of a Supply Chain
• Supply chain strategy or design
• Supply chain planning
• Supply chain operation

32. 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

33. Supply Chain Planning
• Definition of a set of policies that govern
short-term operations
• Fixed by the supply configuration from
previous phase
• Starts with a forecast of demand in the
coming year

34. Supply Chain Planning
• Planning decisions:
– 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

35. Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating
policies are determined
• 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)

36. 5.3. Process View of Supply Chain Management:
Cyclic View
SC is a sequence of processes and flows that take place within and between different SC
stages and combine to fulfil a customer need for a product / service. These processes are
divided into a series of cycles (cyclic view), each performed at the interface between two
successive stages / entities of SC.
Customer Order
Cycle
Replenishment
Cycle
Manufacturing
Cycle
Procurement
Cycle
Customer Arrival Customer Order Receiving
Customer Order Fulfilment
Customer Order Entry
Retail Order Trigger Retail Order Receiving
Retail Order Fulfilment
Retail Order Entry
Order Arrival from D/R/C Receiving by D/R/C
Manufacturing & Shipping
Production Scheduling
Order from Manufacturer Receiving at Manufacturer
RM / Comp. Mfg & Shipping
Supplier Prodn Scheduling
Cycles Stage/Entity
Customer
Retailer
Distributor
Manufacturer
Supplier

37. Push/Pull View of Supply Chains
Procurement,
Manufacturing and
Replenishment cycles
Customer Order
Cycle
Customer
Order Arrives
PUSH PROCESSES PULL PROCESSES

38. Supply Chain Management [SCM] 24A
Customer Order
Cycle
Repl & Mfrg
Cycle
Procurement
Cycle
PUSH
Process
PULL
Process
LL Bean
Cust Order & Mfrg
Cycle
Procurement
Cycle
PUSH
Process
PULL
Process
DELL
Customer order arrives
Customer order arrives
Process View of a Supply Chain: Push – Pull View

39. Supply Chain Macro Processes in a Firm
SRM ISCM CRM
•Source
•Negotiate
•Buy
•Design Collaboration
•Supply Collaboration
•Strategic planning
•Demand planning
•Supply planning
•Fulfilment
•Field service
•Market
•Sell
•Call centre
•Order
management
Generate demand
Facilitate placement
Track orders
Production planning
Storage planning
Demand-Supply
planning
Supplier selection
Supplier evaluation
New orders
Marketing
Manufacturing
Purchasing

40. 5.4. Supply Chain Drivers
• Drivers of supply chain performance
• A framework for structuring drivers
• Facilities
• Inventory
• Transportation
• Information
• Obstacles to achieving fit

41. Drivers of Supply Chain Performance
• Facilities
– places where inventory is stored, assembled, or fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
• Information
– data and analysis regarding inventory, transportation, facilities
throughout the supply chain
– potentially the biggest driver of supply chain performance

42. A Framework for Structuring Drivers
Efficiency Responsiveness
Facilities Transportation Inventory Information
Supply chain structure
Drivers

43. Supply Chain Decisions: Structuring
Drivers
Strategy
(Design)
Planning
Operation

44. Facilities
• Role in the supply chain
– the “where” of the supply chain
– manufacturing or storage (warehouses)
• Role in the competitive strategy
– economies of scale (efficiency priority)
– larger number of smaller facilities
(responsiveness priority)
• Example 3.1: Toyota and Honda
• Components of facilities decisions

45. Components of Facilities Decisions
• Location
– centralization (efficiency) vs. decentralization
(responsiveness)
– other factors to consider (e.g., proximity to customers)
• Capacity (flexibility versus efficiency)
• Manufacturing methodology (product focused
versus process focused)
• Warehousing methodology (SKU storage, job lot
storage, cross-docking)
• Overall trade-off: Responsiveness versus
efficiency

46. Inventory
• Role in the supply chain
• Role in the competitive strategy
• Components of inventory decisions

47. Inventory: Role in the Supply Chain
• Inventory exists because of a mismatch between
supply and demand
• Source of cost and influence on responsiveness
• Impact on
– material flow time: time elapsed between when material enters
the supply chain to when it exits the supply chain
– throughput
• rate at which sales to end consumers occur
• I = RT (Little’s Law)
• I = inventory; R = throughput; T = flow time
• Example
• Inventory and throughput are “synonymous” in a supply chain

48. Inventory: Role in Competitive
Strategy
• If responsiveness is a strategic
competitive priority, a firm can locate
larger amounts of inventory closer to
customers
• If cost is more important, inventory can be
reduced to make the firm more efficient
• Trade-off
• Example 3.2 – Nordstrom

49. Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between
shipments
– Depends on lot size
• Safety inventory
– inventory held in case demand exceeds expectations
– costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– inventory built up to counter predictable variability in demand
– cost of carrying additional inventory versus cost of flexible
production
• Overall trade-off: Responsiveness versus efficiency
– more inventory: greater responsiveness but greater cost
– less inventory: lower cost but lower responsiveness

50. Transportation
• Role in the supply chain
• Role in the competitive strategy
• Components of transportation decisions

51. Transportation: Role in
the Supply Chain
• Moves the product between stages in the
supply chain
• Impact on responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities

52. Transportation:
Role in the Competitive Strategy
• If responsiveness is a strategic competitive
priority, then faster transportation modes can
provide greater responsiveness to customers
who are willing to pay for it
• Can also use slower transportation modes for
customers whose priority is price (cost)
• Can also consider both inventory and
transportation to find the right balance
• Example 3.3: Laura Ashley

53. Components of
Transportation Decisions
• Mode of transportation:
– air, truck, rail, ship, pipeline, electronic transportation
– vary in cost, speed, size of shipment, flexibility
• Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
• In-house or outsource
• Overall trade-off: Responsiveness versus
efficiency

54. Information
• Role in the supply chain
• Role in the competitive strategy
• Components of information decisions

55. Information: Role in
the Supply Chain
• The connection between the various
stages in the supply chain – allows
coordination between stages
• Crucial to daily operation of each stage in
a supply chain – e.g., production
scheduling, inventory levels

56. Information:
Role in the Competitive Strategy
• Allows supply chain to become more
efficient and more responsive at the same
time (reduces the need for a trade-off)
• Information technology
• What information is most valuable?
• Example 3.4: Andersen Windows
• Example 3.5: Dell

57. Components of Information Decisions
• Push (MRP) versus pull (demand information
transmitted quickly throughout the supply chain)
• Coordination and information sharing
• Forecasting and aggregate planning
• Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
• Overall trade-off: Responsiveness versus efficiency

58. Considerations for
Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability
Transportation Consolidation Speed
Facilities Consolidation /
Dedicated
Proximity /
Flexibility
Information What information is best suited for
each objective

59. Obstacles to Achieving
Strategic Fit
• Increasing variety of products
• Decreasing product life cycles
• Increasingly demanding customers
• Fragmentation of supply chain ownership
• Globalization
• Difficulty executing new strategies

60. Major Obstacles to Achieving Fit
• Multiple owners / incentives in a supply
chain
• Increasing product variety / shrinking life
cycles / customer fragmentation
Increasing implied uncertainty
Local optimization and lack of global fit