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PART I

An Overview of Supply Chain Management

By

Dr. Syed Zulfiqar Ali Shah

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Advances in Supply Chain Management

Chapter 1: Advances in Supply Chain Management: An Overview

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Road Map of the Course Material

Part 1 An Overview of Supply Chain Management

Part 2 Concepts of Advanced Planning Systems

Part 3 Implementing Advanced Planning Systems

Part 4 Actual APS and Case Studies

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Lec 1 : Learning Objectives

Brief introduction of supply chain management. To discuss the In-House Vertically Integrated structures to

more advanced concept of Outsourcing in Supply Chain Management

Describe the importance and reasons to employ supply chain management.

Describe a brief history and some of the trends of supply chain management.Advances in SCM

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LAYOUT

Definitions In-House Vertically Integrated structures to more

advanced concept of Outsourcing in Supply Chain Management

Importance of Supply Chain Management (SCM) Reasons to Employ SCM Origin of SCM Important Elements of SCM Advances in SCM

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What is a Supply Chain?A supply chain consists of the flow of products and services from:

Raw materials manufacturers Component and intermediate manufacturers Final product manufacturers Wholesalers and distributors Retailers and End customers

The whole process of supply chain is connected by transportation and storage activities, and integrated through information, planning, and integration activities.

Many large firms are moving away from In-House Vertically Integrated structures to Supply Chain Management. In-house location of resource simplifies coordination, fosters synergy, but increases fixed cost. A good example of in house vertical integration is Big Pharma which tended to execute all stages in-house. As fixed cost becomes a burden to Big Pharma outsourcing becomes attractive.  They are moving towards Vertical Disintegration, following the trend in the automotive, IT and aerospace industries. 

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What is a Supply Chain?

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In-House Vertically Integrated structures to more advanced concept of Outsourcing in Supply Chain Management

Old paradigm - Firm gained synergy as a vertically integrated firm encompassing the ownership and coordination of several supply chain activities. Organizational cultures emphasized short-term, company focused performance.

New paradigm - Firm in a supply chain focuses activities in its area of specialization and enters into voluntary and trust-based relationships with supplier and customer firms (outsourcing). Firms can outsource functions such as payroll, information technology, research and development and customer care services. Outsourcing spares the firms the burden of acquiring costly

equipment, machinery or license rights to expensive software products. This allows them to concentrate on the core aspects of their business, enhance efficiency and cut operational costs.

All participants in the supply chain benefit. Outsourcing entails giving out noncore, process-intensive or capital-demanding operations to companies that specialize in providing these services.

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Cont’d…. Boundaries are dynamic and extend from “the firm’s suppliers’

suppliers to its customers’ customers (i.e., second tier suppliers and customers).”

Supply chains now deal with reverse logistics to handle returned products, warranty repairs, and recycling.

Example of Outsourcing Industry

You cannot tie down outsourcing to any particular industry because it is applicable across different sectors. However, it mostly applied in industries that incur huge costs of labor and capital resources. For example, it may be more appropriate to outsource the storage and warehousing functions of your cargo haulage business than to maintain a network of your own stores and warehouses. When it comes to labor costs, outsourcing helps you streamline your work force, as contracting firms remain responsible for the welfare of their own employees. Outsourcing is ideal for industries, such as manufacturing, that require huge work force and capital resources.

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Importance of SCMFirms using supply chain management have discovered value-enhancing and long term benefits. Their Supply Chain Management:

1. Start with key suppliers

2. Move on to other suppliers, customers, and shippers

3. Integrate second tier suppliers and customers (second tier refers to the customer’s customers and the supplier’s suppliers)

Who benefits most? Firms with: Large inventories: Many argue that the focus point (and perhaps the

linchpin) of successful supply chain management is inventories and inventory control. So how do companies manage their large inventories? What factors drive inventory costs? When might it make sense to keep larger inventories? For example, food companies are quicker to pursue inventory reduction strategies.

A common perception and experience is that supply chain management leads to cost savings, largely through reductions in

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Cont’d…. inventory. Inventory costs have fallen by about 60% since 1982, while transportation costs have fallen by 20% (Wilson, 2004). Such cost savings have led many to pursue inventory-reduction strategies in the supply chain. To develop the most effective logistical strategy, a firm must understand the nature of product demand, inventory costs, and supply chain capabilities.

Large number of suppliers: supply chain management helps companies to efficiently manage the number of suppliers. A firm can reduce large number of suppliers and can focus more on the operational level integration so that apart from purchasing costs inventory, administrative efforts can also be reduced.

Complex products: In recent years, effective supply-chain management has emerged as a significant competitive advantage for companies in very different industries (e.g., Chopra and Meindl, 2000). For large multinational companies that manufacture complex products, such as automobiles, machines, or personal computers,

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Cont’d….supply chains are highly complex socioeconomic systems. Similar to the supply chains in manufacturing and other industries, the health care delivery system is so large and complex that it has become impossible for any individual, or even any single organization, to understand all of the details of its operations. Like industrial supply chains, the health care “supply chain” consists of multiple independent agents, such as insurance companies, hospitals, doctors, employers, and regulatory agencies, whose economic structures, and hence objectives, differ and in many cases conflict with each other.

Intense Competition: Managers these days recognize that getting products to customers faster than the competition will improve a company's competitive position. To remain competitive, companies must seek new solutions to important Supply Chain Management issues such as modal analysis, supply chain management, load planning, route planning and distribution network design.

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Cont’d…Why is it so important for companies to get products to their customers quickly? Faster product availability is key to increasing sales, says R. Michael Donovan of Natick, Mass., a management consultant specialising in manufacturing and information systems. "There's a substantial profit advantage for the extra time that you are in the market and your competitor is not," he says. "If you can be there first, you are likely to get more orders and more market share." The ability to deliver a product faster also can make or break a sale. "If two alternative [products] appear to be equal and one is immediately available and the other will be available in a week, which would you choose? Clearly, "Supply Chain Management has an important role to play in moving goods more quickly to their destination.

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Reasons to Employ Supply Chain Management

Cost savings and better coordination of resources are reasons to employ Supply Chain Management

Reduced Bullwhip Effect- the magnified reduction of safety stock costs based on coordinated planning and sharing of information. forecasting, and replenishment activities reduce the Bullwhip Effect and lead to better customer service, lower inventory costs, improved quality, reduced cycle time, better production methods, and other benefits.

Collaborative planning- One of the greatest benefits from long-term supply chain collaboration (and one that consistently delights operationally oriented managers) are the cost savings that result from routinized procedures over the life of the relationship. When buyers and suppliers begin a relationship, there interactions often are fraught with inefficiencies and expensive organizational idiosyncrasies, adding to the cost of doing business in year one. In year two, however, procedures typically become more streamlined.

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Cont’d….The longer the relationship, the more indirect costs—operational and otherwise— are reduced. These cost savings are shared by both buyers and sellers, increasing the benefits to both. They can also be passed on to customers in the form of lower prices, thereby increasing the supply chain’s position in the competitive landscape.

Boosts Customer Service- SCM impacts customer service by making sure the right product assortment and quantity are delivered in a timely fashion. Additionally, those products must be available in the location that customers expect. Customers should also receive quality after-sale customer support.

Improves Bottom Line- SCM has a tremendous impact on the bottom line. Firms value supply chain managers because they decrease the use of large fixed assets such as plants, warehouses and transportation vehicles in the supply chain. Also, cash flow is increased because if delivery of the product can be expedited, profits will also be received quickly.

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Origin of SCM Before the 1950s,

logistics was thought of in military terms. It had to do with procurement, maintenance, and transportation of military facilities, materiel, and personnel. Although a few authors before this time began talking about trading one cost for another, such as transportation costs with inventory costs, and discussed the benefits to the firm of getting the right goods to the right place at the right time, the organization within the typical firm around the activities currently associated with logistics was fragmented. This fragmentation led to conflicts among those responsible for logistics activities with the result that, from the firm's perspective, costs and customer service were sub-optimized. The reasons for this fragmentation were said to be: A lack of understanding of key cost tradeoffs The inertia of traditions and conventions Areas other than logistics were thought to be more important The organization may have been in an evolutionary state

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1950s & 1960s

U.S. manufacturers focused on mass production techniques as their principal cost reduction and productivity improvement strategies. Paul Converse (Converse, 1954), a noted marketing professor, said in 1954 that businesses had been paying a great deal more attention to buying and selling than to physical distribution. In retrospect, research that would play a pivotal role in laying the foundations for physical distribution was a study by Lewis et al. (Lewis et al., 1956). This study for the airline industry asked how it might better compete in hauling freight when its costs were significantly higher than other forms of transportation. The study pointed out that it is necessary to view shipping from a total cost perspective and not from just a transportation cost one. That is, although air freight cost may be high, air freights faster and more reliable service can lead to lower inventory carrying costs on both ends of the shipment. This was an expression of the total cost concept that was to underpin much of writing and teaching to follow in the 1960s.

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1960s-1970s

Introduction of new computer technology lead to development of Materials Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII) to coordinate inventory management and improve internal communication.

The study and practice of physical distribution and logistics also emerged in the 1960s and 1970s. Logistics costs were high. On a national level, it was estimated that logistics cost in the U.S. accounted for 15 percent of the gross national product (Heskett et al., 1973). Similarly, physical distribution costs of other nations were found to be high as well. Physical distribution with its outbound orientation was first to emerge, since it represents about two thirds of logistics costs and it was considered a component of the marketing mix (product, place or physical distribution, promotion, and price) of essential elements.

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Cont…. 1980s & 1990s

Intense global competition led U.S. manufacturers to adopt Supply Chain Management along with Just-In-Time (JIT), Total Quality Management (TQM), and Business Process Reengineering (BPR) practicesIn the 1980s, companies discovered new manufacturing technologies and

strategies that allowed them to reduce costs and better compete in different markets. Strategies such as just-in-time manufacturing, kanban, lean manufacturing, total quality management, and others became very popular, and vast amounts of resources were invested in implementing these strategies. In the last few years, however, it has become clear that many companies have reduced manufacturing costs as much as is practically possible. Many of these companies are discovering that effective supply chain management is the next step they need to take in order to increase profit and market share.

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2000s and Beyond

Given 40 years of background with a broad concept for logistics, what exactly is supply chain management to its proponents? There has been an attempt to distinguish logistics from supply chain management, declaring logistics to be a subset of supply chain management. Recently, the Council of Supply Chain Management Professionals (CSCMP), which is the premier organization of supply chain practitioners, researchers, and academics, has defined supply chain management as:

Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.

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Today Supply Chain Management includes services such as:

• Operational Analysis and Design Materials Handling

• Distribution Strategy

• Operational Improvements, Distribution Management

• Computer Systems

• Warehouse Design Project Management

• Operational Commissioning

• Computer Simulation

• Technical seminars In future, Industrial buyers will rely more on third-party service

providers (3PLs) to improve purchasing and supply management. Wholesalers/retailers will focus on transportation and logistics more & refer to these as quick response, service response logistics, and integrated logistics. The trend toward increased globalization, free trade, and

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outsourcing all contribute to a continued and growing interest in logistics/SCM. According to a McKinsey & Company study,

"by the year 2020, 80% of the goods in the world will be �manufactured in a country different from where they

are consumed compared with 20% now."

There will be a tremendous shift in the movement and consumption of goods, all of which will require ever better management of the associated supply chain processes. There will be a shift in strategy. In the past, the focus of logistics/SCM has been on efficiency. As Peter Drucker (Drucker, 1962) put it, physical distribution is:

"The last frontier of cost economies."

The contemporary view is that SCM is a new frontier for demand generation – a competitive weapon. Both views will be important, but the new emphasis will be on designing and operating the supply chain to

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enhance the revenues of the firm in such a way as to maximize contribution to profit. This view replaces the often-used strategic objective of minimizing supply chain costs, subject to meeting given customer service requirements, and it will elevate SCM in the eyes of top management. A new objective will emerge to capture revenue enhancement effects.

Collaboration and coordination will be the keys to achieving the benefits of supply chain management. When both parties in a supply chain relationship win equally due to their cooperative actions in the supply channel, the benefits are likely to be realized and the relationship remains intact. In too many cases, this does not occur and there is a dilemma that must be resolved.

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Cont….

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Summary of the Lecture

The lecture has proceeded from the very basic definition and origin of supply chain management to the developments in the field over the period of time. Further how advanced trends in the field has added value and made the supply chain more effective. Advances in SCM focus on creating value chain network. The focus of which is to create value for partners on each level of supply chain.