Supply Chain Management, Basics

Supply Chain Management-
Basics.
Rajendran Ananda Krishnan

https://www.facebook.com/ialwaysthinkprettythings

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
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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.
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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. prettythings

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 https://www.facebook.com/ialwaysthink
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 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. https://www.facebook.com/ialwaysthink
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Order Delivery Lead Time
Order Customer
penetration order
Order delivery lead
point time

Make
Source component Assembly Delivery
s
Supply chain lead time

 A typical firm sources material, manufactures components, assembles the
product and delivers the finished product to the end customer.
 Total time required for the supply chain to carry out all activities from the
beginning to the end is the supply chain lead time.
 Time required for the supply chain to deliver the order to the customer after they
place it is the order delivery lead time.

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Order penetration point based supply
chain typology
Customer
order
Make
Source Assembly Deliver Made to
components
Stock
Customer (FMCG
order Products)
Make Made to
Source Assembly Deliver
components Order
(Equipment
Customer Manufacturer)
order
Make Configure to
Source Assembly Deliver
components Order (Pizza
Manufacturer,
Laptop
Manufacturer)
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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.

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 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
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 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
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Supply Chain Stages
Supplier Manufacturer Distributor

Customer Retailer

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. https://www.facebook.com/ialwaysthink
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Importance of Supply Chain Decisions
 Helps in achieving success – Companies
being a leader at using supply chain design,
planning and operation help in achieving
success.
 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.
 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
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 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.
 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.
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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.
 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.

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 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.

 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.

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 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.

 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.
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Decision Phases in a Supply
Chain
Successful supply chain management
requires many decisions relating to the
flow of information, products and
funds. Each decision should be made
to raise the supply chain surplus.
These decisions fall into three
categories or phases, depending on
the frequency of each decision and
the time frame during which the
decision phase has an impact.
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Supply Chain Strategy or Design – It
decides what the chain’s configuration will
be, how resources will be allocated and
what processes each stage will perform.
Strategic decisions made by companies
include whether to outsource or perform a
supply chain function in-house, the location
and capacities of production and
warehousing facilities, the products to be
manufactured or stored at various locations,
the modes of transportation to be made
available along different shipping legs and
the type of information system to be utilized.
Cisco’s decisions regarding its choice of
supply sources for components, contract
manufacturers for manufacturing and the
location and capacity of its warehouses are
all supply chain design or strategic
decisions.

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2. Supply Chain Planning – The goal
of planning is to maximize the supply
chain surplus that can be generated
over the planning horizon given the
constraints established during the
strategic or design phase. Planning
includes making decisions regarding
which markets will be supplied from
which locations, the subcontracting of
manufacturing, the inventory policies to
be followed and the timing and size of
marketing and price promotions. Dell’s
decisions regarding markets supplied by
a production facility and target
production quantities at each location
are classified as planning decisions.

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Supply Chain Operation – The
goal of supply chain operations is
to handle incoming customer
orders in the best possible manner.
During this phase, firms allocate
inventory or production to
individual orders, set a date that an
order is to be filled, generate pick
lists at a warehouse, allocate an
order to a particular shipping
mode and shipment, set delivery
schedules of trucks and place
replenishment orders.

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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.
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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.

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Supply Chain Process Cycles

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

Buyer stage Buyer stage
places order receives
supply

Supplier stage Supplier stage
receives order supplies order

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 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.

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 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.
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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.
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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.
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 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/Pull
Boundary

Push Pull Processes
Processes

Customer Order https://www.facebook.com/ialwaysthink
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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.

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 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.
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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.
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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.
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 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.

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The Value Chain in a
Company
Finance, Accounting, Information Technology, Human
Resources

New Product Marketing
Development and Sales Operation Distribution Service
s

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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. prettythings

 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.
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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. https://www.facebook.com/ialwaysthink
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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.
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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.

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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
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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. https://www.facebook.com/ialwaysthink
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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.
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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.
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The Uncertainty(Demand and
Supply) Spectrum
Predictable supply and
uncertain demand or uncertain
Predictable supply supply and predictable Highly uncertain
and demand demand or somewhat supply and
uncertain supply and demand demand

Salt at a An existing A new
supermarke automobile communication
t model device

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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.
Supply chain responsiveness includes a supply chain’s ability to
do the following:
• 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.
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Cost-Responsiveness Efficient
Frontier
Responsivenes
s
High

Low
Hig Cost Low
h

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The Responsiveness
Spectrum

Highly Somewha Somewhat Highly
efficient t responsive responsiv
efficien e
t

Integrated steel Apparel: A traditional
Most automotive Reliance
mills : make-to-stock
production: Delivering aFresh:
Production manufacturer with
large variety of products Changing
scheduled production lead time
in a couple of weeks merchandi
weeks in of several weeks
se mix by
advance with location
little variety and time of
day
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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. https://www.facebook.com/ialwaysthink
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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.

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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.

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 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
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 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. https://www.facebook.com/ialwaysthink
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Framework for Structuring
Drivers
Competitive
Strategy

Supply Chain
Strategy

Supply Chain Structure
Supply Chain
Efficiency Structure Responsiveness

Logistical Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross-Functional Drivers
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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.
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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.
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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.
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 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.
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Supply Chain Management, Basics

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