IMP_SCM_VTUMODULE1.ppt

Supply Chain Management-
Basics.
Prof. Veerendra Narasalagi
BLDEA’S, V.P.Dr.P.G.Halakatti colege of
Engineering and Technology
Bijapur
Prof.Veerendra.PGHCET

Topics to be covered
 Introduction to Supply Chain
Management :
 Supply Chain – objectives, Importance
 Decision Phases, Process view,
Competitive and supply chain
strategies, achieving strategic fit
 Supply chain drivers, obstacles,
framework
 Facilities, inventory, transportation,
information, sourcing, pricing

Supply Chain- Meaning
 The supply chain encompasses all activities
involved in the transformation of goods from the
raw material stage to the final stage, when the
goods and services reach the end customer.
 Supply chain management involves planning,
design and control of flow of material, information
and finance along the supply chain to deliver
superior value to the end customer in an effective
and efficient manner.

Definition
Mohanty and Deshmukh define supply chain
management as a loop:
 It starts with the customer and ends with the customer.
 Through the loop flow all materials, finished goods,
information and all transactions.
 It requires looking at the business as one continuous,
seamless process.
 This process absorbs distinct functions such as forecasting,
purchasing, manufacturing and distribution, sales and
marketing into a continuous business interaction.

 SCM deals with design, planning, execution,
control and monitoring of supply chain activities
with the objective of creating the value.
 SCM is a system approach to managing the
entire flow of information, materials and
services from raw material supplier through
factories and warehouses to the end customer.

Definition
 Management of material, funds and information flows
both in and between facilities such as vendors,
manufacturing and assembly plants and distribution
centers. – Thomas and Griffin
 The objective of managing the supply is to synchronize
the requirements of the customer with the flow of
materials from suppliers in order to affect a balance
between what are often seen as conflicting goals of high
customer service, low inventory management and low unit
cost. - Stevens

 For a simple product like soap, the HUL supply
chain involves ingredient suppliers, transporters,
the company’s manufacturing plants, carrying
and forwarding agents, wholesalers, distributors
and retailers.
 A supply chain is dynamic and involves the
constant flow of information, product and funds
between different stages.
 Of late, firms have realized that it is not the
firms themselves but their supply chains that vie
with each other in the marketplace.

Objectives of Supply chain
 The objective of every supply chain should be to maximize
the overall value generated. The value a supply chain
generates is the difference between what the final product is
worth to the customer and the costs the supply chain incurs in
filling the customer’s request.
 Supply chain profitability is the difference between the
revenue generated from the customer and the overall cost
across the supply chain. The higher the supply chain
profitability, the more successful is the supply chain.

 Supply chain success should be measured in terms of
supply chain profitability and not in terms of the profits
at an individual stage.
 For any supply chain, there is only one source of
revenue: the customer. All flows of information,
product or funds generate costs within the supply
chain. Thus the appropriate management of these
flows is a key to supply chain success.
 Effective supply chain management involves the
management of supply chain assets and product,
information and fund flows to maximize total supply
chain profitability.

 The small size of Indian retail outlets limits the amount
of inventory they can hold, thus requiring frequent
replenishment.
 The only way for a manufacturer to keep transportation
costs low is to bring full truckloads of product close to
the market and then distribute locally using milk runs
with smaller vehicles.
 The presence of an intermediary who can receive a full
truckload shipment, break bulk, and then make smaller
deliveries to the retailers is crucial if transportation
costs are to be kept low.
 Distributors in India are also able to reduce
transportation costs for outbound delivery to the retailer
by aggregating products across multiple manufacturers
during the delivery runs. Prof.Veerendra.PGHCET

Supply Chain Stages
A typical supply chain may involve a variety of stages. These
supply chain stages include: Customers, Retailers,
Wholesalers/distributors, Manufacturers, Raw material
suppliers.
Each stage in a supply chain is connected through the flow of
products, information, and funds. These flows often occur
in both directions and may be managed by one of the
stages or an intermediary.
Supplier Manufacturer Distributor
Retailer
Customer

Objectives of Supply chain
 Service orientation
 Competitiveness and efficiency
 Minimising work-in-progress
 Improving visibility of demand
 Reduce transportation cost
 Minimising the time
 Rationalize supplier base
 Improving the quality
 Improving the value

Importance of Supply Chain
Decisions
1. Helps in achieving success –
Companies being a leader at using supply chain design,
planning and operation help in achieving success.
2. Effective flow of goods and information –
Companies like Walmart who have invested heavily in
transportation and information infrastructure help in
achieving effective flow of goods and information.
3. Reduces the level of Inventory with the manufacturer –
Dell centralizes manufacturing and inventories in a few
locations and postpones final assembly until orders arrive.
Thus, Dell is able to provide a large variety of PC
configurations while keeping very low levels of inventory.

4. Improved match between supply and demand –
To improve the match between supply and demand, Dell
makes an active effort to steer customers in real time, on
the phone or via the internet, toward PC configurations
that can be built given the components available.
5. Reason for company’s success –
For the Companies like Dell, Toyota etc., the supply
chain design, and its management of product, information
and cash flows play a key role in the company’s success.

Reasons for Growing Importance of Supply
Chain
Firms that do not manage their supply chain will incur huge
inventory costs and eventually end up losing a lot of customers
because the right products are not available at the right place and
time.
Five major trends that have emerged to make supply chain
management a critical success factor in most industries.
1. Proliferation in product lines.
 Companies have realized that more and more product variety is needed
to satisfy the growing range of customer tastes and requirements.
Companies like HUL, in their personal care products, manage, on an
average, 1200 SKU’s.
 Chains like Foodworld manage about 6000 SKU’s. With increasing
product variety, it becomes rather difficult to forecast accurately.
Hence, retailers and other organizations involved in the business are
forced to either maintain greater amount of inventories or lose
customers.

2. Shorter product life cycles
– With increased competition, product life cycles across all industries
are becoming shorter. So a firm like Dell, which has, on an
average, just 7 days of inventory, as compared to the industry
average of 35 days, does not have to worry about product and
component obsolescence. Its competitors with higher inventories
end up writing off huge amounts of stocks every year as obsolete.
3. Higher level of outsourcing
– Firms increasingly focus on their core activities and outsource non-
core activities to other competent players. This trend towards
outsourcing is irreversible but a higher level of outsourcing makes
supply chains more vulnerable, thereby forcing firms to develop
different types of supply chain capabilities within the organization.

4. Shift in power structure in the chain
 In every industry, the entities closer to customers are becoming
more powerful. With increasing competition, a steadily rising
number of products are chasing the same retail shelf space.
 Retail shelf space has not increased at the pace at which product
variety has increased. So there have been case of retailers asking for
slotting allowance when manufacturers introduce new products in
the market place.
 Retailers have realized that they are powerful entities in the chain
and hence expect the manufacturers to be more responsive to their
demands and needs.
4.Globalization of manufacturing
 Over the past decade, tariff levels have come down significantly.
Many companies are restructuring their production facilities to be at
par with global standards.
 Unlike in the past, when firms used to source components, produce
goods and sell them locally, now firms are integrating their supply
chain for the entire world market. This has made managing supply
chains extremely complicated.

5. Costs are significant
6. Supply and distribution lines are lengthening with greater
complexity
7. Supply chain/Logistics add significant value
8. Customer service expectations are increasing
9. Supply chain is important to strategy
10.Customers increasingly want quick customized response

Functions of SCM
 Supply chain management is a cross-functional approach to manage the
movement of raw materials into an organization, certain aspects of the
internal processing of materials into finished goods, and then the
movement of finished goods out of the organization toward the end-
consumer.
 As organizations strive to focus on core competencies and becoming
more flexible, they have reduced their ownership of raw materials
sources and distribution channels.

Supply chain activities can be grouped into strategic, tactical, and
operational levels of activities:
1) Strategic Function
i) Strategic network optimization, including the number, location, and
size of warehouses, centers and facilities. distribution
ii) Strategic partnership with suppliers, distributors, and customers,
creating communication channels for critical information and
operational improvements such as cross docking, direct shipping, and
third party logistics.
iii) Product designs co-ordination, so that new and existing products
can be optimally integrated into thesupply chain, load management.
iv) Information Technology infrastructure, to support supply chain
operations. Where-to-make and what-to-make-or-buy decisions.
vi) Aligning overall organizational strategy with supply strategy.

2) Tactical Function
I) Sourcing contracts and other purchasing decisions.
ii) Production decisions, including contracting, scheduling, and
planning process definition.
iii) Inventory decisions, including quantity, location, and quality of
inventory.
iv) Transportation strategy, including frequency, routes, and
contracting.
v) Benchmarking of all operations against competitors and
implementation of best practices throughoutthe enterprise.
vi) Milestone payments.
vii) Focus on customer demand.

3) Operational Function
i) Daily production and distribution planning, including all nodes in the supply
chain.
ii) Production scheduling for each manufacturing facility in the supply chain
(minute by minute).
iii) Demand planning and forecasting, co-ordinating the demand forecast of all
customers and sharing the forecast with all suppliers.
iv) Sourcing planning, including current inventory and forecast demand, in
collaboration suppliers.
v) Inbound operations, including transportation from suppliers and receiving
inventory
vi) Production operations, including the consumption of materials and flow of
finished goods.
vii) Outbound operations, including all fulfillment activities and transportation to
customers.
viii) Order promising, accounting for all constraints in the supply chain, including
all suppliers, manufacturing facilities, distribution centers, and other
customers.

Components of SCM

Process View
A supply chain is a sequence of processes and flows that take
place within and between different stages and combine to
fill a customer need for a product. There are two different
ways to view the processes performed in a supply chain.
 Cycle View – The processes in a supply chain are divided
into a series of cycles, each performed at the interface
between two successive stages of a supply chain.
 Push/Pull View – Pull processes are initiated in response to
a customer order, whereas push processes are initiated and
performed in anticipation of customer orders.

All supply chain processes can be broken
down into four process cycles:
 Customer order cycle
 Replenishment cycle
 Manufacturing cycle
 Procurement cycle
Each cycle occurs at the interface between
two successive stages of the supply chain.

Supply Chain Process Cycles

Usually at the customer interface and included all the processes directly
involved in receiving and filling a customer order. The customer will usually
initiate the order and start the demand process. The customer order cycle
can be further broken-down into processes such as customer arrival, order
entry, order fulfillment, and order receiving. The processes involved in the
customer order cycle are shown in figure 1.3 and include:
i) Customer arrival
ii) Customer order entry,
iii) Customer order fulfillment,
iv) Customer order receiving.

This will describe the interface between product provider and a first tier
supplier replenishing the product. This cycle is initiated either by an order
from the product provider or, more effectively, by the customer order in the
first cycle. The first tier supplier is then tasked to replenish goods and
services to demand at a minimum cost while providing the necessary
quality and product availability. The cycle includes the processes of order
trigger (either by customer or product and service provider), order entry,
order fulfillment and order receiving.
i) Retail order trigger,
ii) Retail order entry,
iii) Retail order fulfillment,
iv) Retail order receiving.

Manufacturing Cycle: A process between producer of a good/service
provider (a first tier supplier) and the product provider (in some cases
the end consumer can directly interface with the producerr)
The cycle involves all th processes necessary to offer products for the
replenishment cycle.
The cycle will typically involve
1.Order arrival
2.Production scheduling
3.Manufacturing and shipping
Receiving at the distributor, retailer or customer.
(in some cases the end consumer can directly inte

4) Procurement Cycle:
This is the interface between the first tier supplier (or the producer of a
good) and the second tier supplier to that producer.
It includes all the processes necessary to ensure materials or
components are available for the production cycle and the first tier
supplier.
The second tier supplier provides inputs to replenish the production
and delivery cycle.
However, this supplier is operating more precise dependent demand
based upon known quantities of the final finished product or service
(rather than independent demand faced by the product provider and/or
the first tier supplier).
The cycle processes here will be similar to those of the production and
delivery cycle.

Sub processes in Each Supply
Chain Process Cycle
Supplier stage
markets
product
Buyer stage
places order
Supplier stage
receives order
Supplier stage
supplies order
Buyer stage
receives
supply
Buyer returns
reverse flows to
supplier or third
party

 Each cycle starts with the supplier marketing the
product to customers.
 A buyer then places an order that is received by the
supplier.
 The supplier supplies the order, which is received
by the buyer.
 The buyer may return some of the product or other
recycled material to the supplier or a third party.

 Within each cycle, the goal of the buyer is to
ensure product availability and to achieve
economies of scale in ordering.
 The supplier attempts to forecast customer
orders and reduce the cost of receiving the order.
 The supplier then works to fill the order on time
and improve efficiency and accuracy of the
order fulfillment process.
 The buyer then works to reduce the cost of the
receiving process.

Few differences between cycles:
 In the customer order cycle, demand is external
to the supply chain and thus uncertain.
 In all other cycles, order placement is uncertain
but can be projected based on policies followed
by the particular supply chain stage.
 As we move from the customer to the supplier,
the number of individual orders declines and the
size of each order increases.

 The processes in a supply chain are dividing into two categories
depending on whether they are executed in response to a
customer order or in anticipation of customer orders.
 Pull process are initiated by a customer order, whereas push
process are initiated and performed in anticipation of customer
orders.
 In recent years the trend towards more efficient operations has
accelerated as technology transforms consumer choice, and
consumer choice inturn affects corporate strategy.
 The consumer need-based business model is forcing a
fundamental shift from a traditional manufacturing push-based
model (also called build-to-stock) to a pull based model (build-
to-order).

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

Push/Pull View of Supply Chain
Processes
 With pull processes, execution is
initiated in response to a customer
order. With pull processes, execution
is initiated in anticipation of customer
orders.
 At the time of execution of a pull
process, customer demand is known
with certainty, whereas at the time of
execution of a push process, demand
is not known and must be forecast.

1) Pull Concept: A pull process is activated in
response to a confirmed order from a customer.
This includews make to order or a Just-in-Time
(JIT) manufacturing process.
As shown in figure , in a pull process the supplier
does not stock finished products but holds higher
quantity of semi-finished materials and often higher
supply capacity so that order fulfillment can be
achieved rapidly.
The orders arrive at or after the planning cycle as if
bypassing a few steps of the traditional ERP
process. Prof.Veerendra.PGHCET

 A pull process is also associated with Kanban and Lean Thinking or
Lean Manufacturing.
 In essence, a lean manufacturing requires materials to arrive into each
stage of production just when required and no buffer stocks of
inwards or outwards stocks of materials are held.
 The lean approach is also referred to s JIT.
 Pull processes control the flow of resources in the production process
by replacing only what as been consumed.
 Production schedules are based on actual demand and consumption
rather than forecasts.
 With lean manufacturing there is no room for errors in specification,
production or late delivery. Prof.Veerendra.PGHCET

 Pull processes may also be referred to as reactive
processes because they react to customer demand.
 Push processes may also be referred to as speculative
processes because they respond to speculated rather than
actual demand.
Push
Processes
Pull Processes
Push/Pull
Boundary
Customer Order
Arrives Prof.Veerendra.PGHCET

Push Concept

2) Push Concept:
A push process conforms to a conventional supply chain management
system going through typical stages in sequence.
As shown in figure , orders arrive at or after the demand cycle b always
before the planning and procurement cycle and process is activated by a
forecast or demand plan.
Both raw and packaging materials are stored before production and
products are manufactured to stock.
The order fulfillment is achieved from the inventory of finished
products.
In push system, production and distribution are based on forecasts. The
problem is that forecasts are often wrong. Customer or demand push is
usually defined as a business response in anticipation of customer
demand. Prof.Veerendra.PGHCET

Examples of Push and Pull
Processes
 Make to stock Companies like HP – Executes all
processes in the customer order cycle after the
customer arrives. All processes that are part of the
customer order cycle are thus pull processes.
 All processes in the replenishment cycle,
manufacturing and procurement cycle are
performed in anticipation of demand and are thus
push processes.

 Build to order computer manufacturer like Dell – All
processes in the customer order, replenishment
and manufacturing cycle at Dell are classified as
pull processes because they are initiated by
customer arrival.
 Dell, however, does not place component orders in
response to a customer order. Inventory is
replenished in anticipation of customer demand. All
processes in the procurement cycle for Dell are
thus classified as push processes, because they
are in response to a forecast.

Competitive and Supply Chain
Strategies
 A company’s competitive strategy defines, relative
to its competitors, the set of customer needs that it
seeks to satisfy through its products and services.
 For eg. Wal Mart aims to provide high availability of
a variety of products of reasonable quality at low
prices. Most products sold at Wal Mart are
common-place and can be purchased elsewhere.
 What Wal Mart provides is a low price and product
availability.

Contd.
Dell has stressed customization and variety at a reasonable cost, with
customers having to wait approximately one week to get their product.
In contrast, a customer can walk into a computer retailer, be helped by a
salesperson, and leave the same day with HP computer. The amount
of variety and customization available at the retailer, however, is
limited.
In each case, the competitive strategy is defined based on how the
customer prioritizes product cost, delivery time, variety and quality. A
Dell customer, purchasing online, places great emphasis on product
variety and customization. A customer purchasing HP laptop is most
concerned with price, fast response time and help in product selection.

 A firm’s competitive strategy will be defined based
on its customer’s priorities. Competitive strategy
targets one or more customer segments and aims
to provide products and services that satisfy these
customer’s needs.
 To see the relationship between competitive and
supply chain strategies, we start with the value
chain for a typical organization.

The Value Chain in a
Company
Finance, Accounting, Information Technology, Human
Resources
New Product
Development
Marketing
and Sales
Operation
s
Distribution Service

Value Chain
 It begins with new product development, which
creates specifications for the product.
 Marketing and sales generate demand by
publicizing the customer priorities that the
products and services will satisfy.
 Marketing also brings customer input back to
new product development.
 Using new product specifications, operations
transforms inputs to outputs to create the
product.
 Distribution either takes the product to the
customer or brings the customer to the product.
 Service responds to customer requests during
or after the sale. Prof.Veerendra.PGHCET

 A product development strategy specifies the
portfolio of new products that a company will
try to develop. It also dictates whether the
development effort will be made internally or
outsourced.
 A marketing and sales strategy specifies how
the market will be segmented and how the
product will be positioned, priced and
promoted.
 A supply chain strategy determines the
nature of procurement of raw materials,
transportation of materials to and from the
company, manufacture of the product or
operation to provide the service, and
distribution of the product to the customer,
along with any follow-up service and a
specification of whether these processes will
be performed in-house or outsourced.

Achieving Strategic Fit
 Strategic fit means that both the competitive and supply
chain strategies have aligned goals.
 It refers to consistency between the customer priorities
that the competitive strategy hopes to satisfy and the
supply chain capabilities that the supply chain strategy
aims to build.
 A company may fail either because of a lack of strategic
fit or because its overall supply chain design, processes
and resources do not provide the capabilities to support
the desired strategic fit.

 All processes and functions that are part of a company’s value
chain contribute to its success or failure.
 A company’s success or failure is thus closely linked to the
following keys:
 The competitive strategy and all functional strategies must fit
together to form a coordinated overall strategy. Each functional
strategy must support other functional strategies and help a firm
reach its competitive strategy goal.
 The different functions in a company must appropriately
structure their processes and resources to be able to execute these
strategies successfully.
 The design of the overall supply chain and the role of each stage
must be aligned to support the supply chain strategy.

How is Strategic Fit
Achieved?
 A competitive strategy will specify, either
explicitly or implicitly, one or more customer
segments that a company hopes to satisfy.
 To achieve strategic fit, a company must ensure
that its supply chain capabilities support its
ability to satisfy the targeted customer segments.

Three basic steps to achieve strategic fit:

1. Understanding the customer and supply chain
Uncertainty –
First, a company must understand the customer needs
for each targeted segment and the uncertainty the
supply chain faces in satisfying these needs.
These needs help the company define the desired cost
and service requirements.
The supply chain uncertainty helps the company
identify the extent of the unpredictability of demand,
disruption and delay that the supply chain must be
prepared for.

 Demand uncertainty reflects the uncertainty of customer
demand for a product.
 An example of product with low demand uncertainty is
common salt.
 Salt has a very low margin, accurate demand forecasts, low
stockout rates, and virtually no markdowns. It is a product
with highly certain demand.
 On the other end of the spectrum, a new palmtop computer
has high demand uncertainty.
 It will likely have a high margin, very inaccurate demand
forecasts, high stockout rates and large markdowns.

Implied Demand uncertainty is often correlated with other
characteristics of demand, as follows:
 Products with uncertain demand are often less mature and
have less direct competition. As a result margins, tend to be
high.
 Forecasting is more accurate when demand has less
uncertainty.
 Increased implied demand uncertainty leads to increased
difficulty in matching supply with demand.
 Markdowns are high for products with high implied demand
uncertainty because oversupply often results.

There is uncertainty resulting from the capability of the supply chain.
 For eg, when a new component is introduced in the PC industry, the
quality yields of the production process tend to be low and
breakdowns are frequent.
 As a result, companies have difficulty delivering according to a
well-defined schedule, resulting in high supply uncertainty for PC
manufacturers.
 As the production technology matures and yields improve,
companies are able to follow a fixed delivery schedule, resulting in
low supply uncertainty.

The Uncertainty(Demand and
Supply) Spectrum
Predictable supply
and demand
Predictable supply and
uncertain demand or uncertain
supply and predictable
demand or somewhat
uncertain supply and demand
Highly uncertain
supply and
demand
Salt at a
supermarke
t
An existing
automobile
model
A new
communication
device

2. Understanding the Supply Chain Capabilities –
 Creating strategic fit is all about creating a supply chain strategy
that best meets the demand a company has targeted given the
uncertainty it faces.
 Market variables determine six key attributes of any supply
chain structure and they are as follows: 1) Volume:
Quantities demanded by the customer.
1) Volume: Quantities demanded by the customer
2) Time: The customer is willing to wait for fulfillment of the
order.
3) Variety: Determines the number of suppliers.
4) Service Level Required: High, medium, or low product
availability.
5) Price: How sensitive the product is to price changes.
6) Rate of Change, Innovation, and New Product
Development: Customers buying fashion expect ne
products, whereas customers buying standard apparel that
is functional do not.

 Understanding the customer is only the first step to designing strategic fit. Meeting demand is the next
step.
 The question is how responsive is the supply chain to the customer's demand?
 Supply chains have many characteristics but all supply chains have two important attributes-different
cost and service.
 In this respect we can we equate cost with responsiveness rather than a narrower definition of service
level availability. Supply chain responsiveness is a measure of ability to:
• Respond to volume changes in demand
• Respond to wide ranges of quantities demanded.
• Meet short lead times
• Handle a large variety of products
• Build highly innovative products
• Meet a high service level
• Handle supply uncertainty
 Responsiveness, however comes at a cost. For instance, to respond to a wider range of quantities
demanded, capacity must be increased, which increases cost.
 Supply chain efficiency is the inverse of the cost of making and delivering a product to the customer. For
every strategic choice to increase responsiveness, there are additional costs that lower efficiency.

Cost-Responsiveness Efficient
Frontier
Responsivenes
s
High
Low
Cost
Hig
h
Low

The Responsiveness
Spectrum
Highly
efficient
Somewha
t
efficien
t
Somewhat
responsive
Highly
responsiv
e
Integrated steel
mills :
Production
scheduled
weeks in
advance with
little variety
Apparel: A traditional
make-to-stock
manufacturer with
production lead time
of several weeks
Most automotive
production: Delivering a
large variety of products
in a couple of weeks
Reliance
Fresh:
Changing
merchandi
se mix by
location
and time of
day

3. Achieving Strategic Fit –
 The final step is To ensure that the degree of supply chain
responsiveness is consistent with the implied uncertainty.
 The goal is to target high responsiveness for a supply
chain facing high implied uncertainty and efficiency for a
supply chain facing low implied uncertainty.
 For eg. The competitive strategy of Dell targets customers who
value having customized PCs delivered within days.
 Given the vast variety of PCs, the high level of innovation and
rapid delivery, demand from Dell customers is having high
demand uncertainty. Some supply uncertainty also exists,
especially for newly introduced components.
 Building a responsive supply chain, will allow Dell to meet its
customer’s needs.

 On the other hand, salt is a product with relatively stable customer
demand, giving it a low implied demand uncertainty. Supply is also
quite predictable.
 It will be in a much better position if it designs a more efficient
supply chain with a focus on cost reduction.

Achieving Strategic Fit
Implied
uncertainty
spectrum
Responsive
supply chain
Efficient
supply chain
Certain
demand
Uncertain
demand
Responsiven
ess
spectrum

Drivers of Supply chain
Performance
To understand how a company can improve supply chain performance in
terms of responsiveness and efficiency, the logistical and cross functional
drivers of supply chain performance must be examined.
 Facilities –
 Actual physical locations in the supply chain network where product is stored,
assembled or fabricated.
 The two major types of facilities are production sites and storage sites. Decisions
regarding the role, location, capacity and flexibility of facilities have a significant
impact on supply chain’s performance. For instance, an auto parts distributor striving
for responsiveness could have many warehousing facilities located close to customers
even though this practice reduces efficiency.
 Inventory –
 It encompasses all raw materials, work in process and finished goods within a supply
chain.
 Changing inventory policies can dramatically alter the supply chain’s efficiency and
responsiveness.
 A clothing retailer can make itself more responsive by stocking large amounts of
inventory, however, it increases the retailer’s cost, thereby making it less efficient.

 Transportation –
 It entails moving inventory from point to point in the supply chain.
 Transportation can take the form of many combinations of modes and
routes, each with its own performance and characteristics.
 Companies can use faster modes of transportation which increases
responsiveness but also less efficient.
 Information –
 It consists of data and analysis concerning facilities, inventory, costs,
prices and customers throughout the supply chain.
 Information is potentially the biggest driver of performance in the
supply chain because it directly affects each of the other drivers.
 Information presents management with the opportunity to make
supply chains more responsiveness and more efficient.

 Sourcing –
 It is the choice of who will perform a particular supply chain activity such as
production, storage, transportation or the management of information.
 At the strategic level, these decisions determine what functions a firm performs and
what functions the firm outsources.
 Outsourcing the activities to an economic third party will make the supply chain
efficient but at the same time its responsiveness suffer because of the long distance.
 Pricing –
 It determines how much a firm will charge for goods and services that it makes available
in the supply chain.
 Pricing affects the behavior of the buyer of the good or service, thus affecting supply
chain performance.
 Customers who value efficiency will order early and who value responsiveness wait and
order just before they need a product transported.

Framework for Structuring
Drivers
Efficiency Responsiveness
Competitive
Strategy
Supply Chain
Strategy
Supply Chain
Structure
Supply Chain Structure
Facilities Inventory Transportation
Logistical Drivers
Information Sourcing Pricing
Cross-Functional Drivers

 Most companies begin with a competitive strategy and
then decide what their supply chain strategy ought to be.
 The supply chain strategy determines how the supply
chain should perform with respect to efficiency and
responsiveness.
 The supply chain must then use the three logistical and
three cross-functional drivers to reach the performance
level the supply chain strategy dictates and maximize the
supply chain profits.

Framework – Walmart as an example
 Wal Mart’s competitive strategy is to be a reliable, low-cost retailer for a wide
variety of mass-consumption goods. This strategy dictates that the ideal supply
chain will emphasize efficiency but also maintains an adequate level of
responsiveness.
 Pioneered cross-docking, a system in which inventory is not stocked in a
warehouse but rather is shipped to stores from the manufacturer.
 Runs its own fleet of trucks, to keep responsiveness high. Benefits in terms of
reduced inventory and improved product availability justify this cost.
 Makes use of Hub and spoke model, uses centrally located DCs within its
network of stores to decrease the number of facilities and increase efficiency at
each DC.
 Practices EDLP for its products.
 Invested significantly more than its competitors in information technology.
 Identifies efficient sources for each product it sells and feeds them large orders.

Obstacles to achieving
Strategic Fit
 Increasing variety of products –
 Increase in product variety and more customised products complicate the supply chain
by making forecasting much more difficult.
 Increased variety tends to raise uncertainty and increased uncertainty hurts both
efficiency and responsiveness within the supply chain.
 Decreasing Product Life Cycles –
 Makes the job of achieving strategic fit more difficult, as the supply chain must
constantly adapt to manufacture and deliver new products, in addition to coping with
these product’s demand uncertainty.
 Increasingly Demanding Customers –
 Customers are constantly demanding improvements in delivery lead times, cost,
product quality and product performance.
 If they do not receive these improvements, they move on to new suppliers.
 Supply chain must provide more to maintain its business.

 Fragmentation of Supply Chain Ownership –
 The new ownership structure, due to outsourcing many of the noncore functions, has
made managing the supply chain more difficult.
 With the chain broken into many owners, each with its own policies and interests, the
chain is more difficult to coordinate.
 Globalization –
 Adds stress to the chain, because facilities within the chain are farther apart, making
coordination much more difficult.
 Difficulty Executing new Strategies –
 Toyota’s Production System, which is a supply chain strategy, has been widely known
and understood and many other competitors have figured it out.
 The difficulty other firms have had in executing that strategy.

Issues in achieving strategic
fit
 Multiple products and customer segments
 Product life cycle
 Competitive change over time
 Changing customer expectation
 Global issues
 Growing supply chain uncertainty
 Environment and sustainability

IMP_SCM_VTUMODULE1.ppt

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