project supply chain management

7/29/2019 Project Supply Chain Management

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5/30/2009

Kiran Afshan, Huma Naz | MBA ITM 13


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Table of Contents

Chapter

Numb

er

Title

P

age

#

1 Organization Portfolio 32 Literature Survey 133 An Introduction to Supply Chain and Supply

Chain Management

26

4 Supply Chain of Pepsi Haidri Beverages 80

5 Ideal Features of a Supply Chain ManagementSoftware

100

6 Supply Chain Management Systems and the

Current Marketplace

129

7 Proposed System for Pepsi Haidri Beverages 1678 Limitations and Future Recommendations 186


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Chapter 1

Organization


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Chapter 1

Organization Portfolio

Haidiri Beverages Private Limited, Pakistan

The Haidiri Beverages Group was set up in 1979 and is Pepsi's sole selling agent for

District Rawalpindi and Islamabad. It is based in the CDA Industrial Triangle, Kahuta

Road, Islamabad. It manages the supply for several wholesalers, retailers, restaurants,

hotels and other such food outlets. In order to achieve the projected sales targets

effectively, the organization ensures a comprehensive strategic alignment with the

overall Pepsi Colas business strategy. Haidiri Beverages primary functions are to

conduct a systematic manufacturing and supply of the product without any tactical

flaws. Backed by a powerful competitive strategy and empowered by some effective

supply chain strategies, the group has been managing an effective supply chain

throughout the region. It has set up a sophisticated manufacturing and storage plant in

Rawalpindi with multiple production units and huge production capacity. Haidiri

Beverages has different management departments dealing with specialized Marketing,

Human Resource, Information Technology and Supply Chain Processes. In this section

we conduct a brief analysis of the basic supply chain management functions of Haidri

beverages.

1.1 History of PepsiCo

PepsiCo is a world leader in convenient snacks, foods and beverages, with revenues of

more than $39 billion and over 185,000 employees. The company consists of PepsiCo

Americas Foods (PAF), PepsiCo Americas Beverages (PAB) and PepsiCo International

(PI). PAF includes Frito-Lay North America, Quaker Foods North America and all Latin

America food and snack businesses, including Sabritas and Gamesa businesses in

Mexico. PAB includes PepsiCo Beverages North America and all Latin American

beverage businesses. PI includes all PepsiCo businesses in the United Kingdom, Europe,

Asia, Middle East and Africa. PepsiCo brands are available in nearly 200 countries and

generate sales at the retail level of more than $98 billion. Some of PepsiCo's brand

names are more than 100-years-old, but the corporation is relatively young. PepsiCo

was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay. Tropicana was


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acquired in 1998 and PepsiCo merged with The Quaker Oats Company, including

Gatorade, in 2001.

PepsiCo offers product choices to meet a broad variety of needs and preference -- from

fun-for-you items to product choices that contribute to healthier lifestyles. PepsiCosmission is: To be the world's premier consumer Products Company focused on

convenient foods and beverages. We seek to produce healthy financial rewards to

investors as we provide opportunities for growth and enrichment to our employees, our

business partners and the communities in which we operate. And in everything we do,

we strive for honesty, fairness and integrity. (www.pepsico.com)

1.2 PepsiCo Headquarters

PepsiCo World Headquarters is located in Purchase, New York. The seven-buildingheadquarters complex was designed by Edward Durrell Stone, one of America's

foremost architects.

1.3 Areas of Operation

Haidri Beverages is one among a number of PepsiCos franchisers all around the

country. Haidri Beverages, solely, have three branches in Pakistan located in

Islamabad/Rawalpindi, Gujranwala and Peshawar. All the franchises in Pakistan have

divided their area of distribution and the domain of each franchiser is restricted to theirarea of operation. Not much of expansion is done since it might violate the domain area

of other franchisers. We will be dealing with the area covered by Haidri Beveravges

Islamabad.

Haidri Beverages deals with distributors residing in Islamabad/Rawalpindi district,

with its boundaries starting from Dina, Mirpur till Attock district.
http://www.pepsico.com/http://www.pepsico.com/http://www.pepsico.com/http://www.pepsico.com/


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1.4 Business Cycle of Pepsi Haidri Beverages

Figure 1 Business Cycle of Haidri Beverages [Source: Haidri Beverages Management]

The business cycle starts from forecasting customer demand for each product of

PepsiCo individually. According to the demand forecasted by the sales and distribution

department, the annual plan is prepared for the running year which is then further

divided into quarterly, monthly, weekly and daily basis and production plan is created.

For the production, the company needs raw materials, these raw materials include the

following:

1. Pepsi Concentrate

2. Sugar

3. Carbonated Water

4. Glass Bottles

5. PET bottles

6. Plastic in Raw Form

7. Packaging material

8. Crates

9. Cans

10. Bottle caps

11. and many others

Much of the raw materials are acquired by local manufacturers. However, cans, Pepsi

concentrate, glass bottles etc. are purchased from manufactures that are:

1. Domestic but at distant location

2. Located in Foreign countries (New York, Dubai)

The purchased raw material is shifted immediately to store (in-house raw material

inventory) from where it is periodically issued to the production department for

processing in order to convert it into final product. As in company policy, the finished

product is immediately shifted to distributors and is stored there. Only safety level

finished product inventory is maintained by the company so as to comply with laws

enforced by Government to keep minimum level safety inventory.


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A Territory Development Manager of the company is designated for each distributor for

monitoring further sales to retailers and consumers. This is a place where the exact

demand and supply ratio is measured and targets are defined. The distributor produces

information of actual sales (supply) to the customer which is an input to the companyas demand forecast which completes the business cycle of Haidri Beverages.

1.5 Organizational Workflow

The workflow of Pepsi Haidri Beverages starts from preparing the annual sales and

procurement strategy. This sales strategy is then divided into quarters, months, weeks

and days. On the basis on monthly sales, a target is defined for each distributor and

they are made aware of that target. The distributors accomplishing this target get

discounts and bonuses. Haidri Beverages doesnt need to contact distributors or

retailers themselves since they have a predefined number of distributors and the

network needs no expansion. Each distributor is responsible for a specific area and the

other distributors are not allowed to enter in this domain.

According to the defined sales strategy, the production plan is prepared for the year

divided further into quarters, months, weeks and days. The daily or weekly production

plan is forwarded to production department. According to the production plan, the

production department makes a production schedule which is done on daily basis. The

production department makes a complete sketch of products to be produced and therequired raw materials and their quantity. These raw materials are requisitioned from

the inventory (store). The inventory control department is divided into two areas: store

management and warehouse management. The store mainly contains the raw material

which is required to produce the product as well as all the other raw materials required

for operations management throughout the organization. The warehouse stores the

finished product only. The organization keeps only the safety inventory in its

warehouse. A daily shipment of product is done to the distributors in order to fulfill

consumer demand.

In order to fulfill the demand of production department, the Purchase department

needs to procure raw material frequently. The suppliers are already chosen by the

company and contracts are given to those suppliers only. The company gives priority to

local suppliers so as to complete its business cycle efficiently and effectively.


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Start

Process 2

Liquidation of SugarStart

Process 2

PEPSI ConcentrateCarbonated FilteringSyrup TankPut Into the Filling

Machine

Filing Process Capping and Coding

Process

Put Bottles in Crates

through Ma chine

Filling of crates with

24 bottles

Unfortunately, there are a number of items that are unavailable in local market and it

has to purchase these items from remote areas. These materials include cans, Pepsi

concentrate, sugar, nitrogen (liquid form), and others.

The purchased items are moved first to the store where the raw material is issued to

concerned department according to the requisition done. The finished product is moved

to warehouse where the shipment department is responsible for loading product to

vehicles for delivery to distributors. A small amount of finished goods inventory is kept

by the company as safety inventory.

The peak season when the demand is highest usually starts from May and continues till

September. During this period, the demand is fulfilled by making longer shifts and

utilizing the production equipment 24 hours a day.

The waste produced during manufacturing process is sold out to concerned parties. The

supply chain designed in this research will therefore follow the Lean Supply Chain

Management strategy.

The cash is collected by the finance department by hand. The company has not opted

for any credit or online credit-card sale as yet.

The manufacturing process is shown in the figure below:


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1.5 Current IT Infrastructure

The company has partially automated its four (4) major business processes:

1. Sales Process

2. Accounting and Finance

3. Human Resource

4. Store and warehouse management

The details of these modules and how they help in the business processes is provided as

under:

1. Sales or Shipment Module

The sales module encapsulates all information regarding distributor data

management, key accounts management, sale (cash inflow) and shipment etc.

The distributor information is captured with regards to the area it is covering in

the local market, the location of the distributor, name, contact numbers, contact

persons etc. Key accounts are those retailers to which the company distributes

the product directly. This happens in the case of fountain fresh Pepsi products

which are delivered to the customer using the post-mix cylinders delivered bycompany owned vehicles. Such customers include KFC, Pizza Hut, Savour Foods

and others. Sales are done on cash payments which are deposited in advance by

the distributor. The products are then shipped the distributor. Usually, the

distributors bring along their own vehicles to load the shipment. At the time of

sale, the data is saved in ERP sales module, the finance data (cash inflow) is

updated and a receipt is generated by the system called sales invoice.

The system keeps track of which distributor purchased what quantity and the

frequency of sales can also be captured. A daily sales report is generated by thesystem which shows the distributor, units of product purchased, date of

purchase, the total amount and other key information. The company defines a

target sale for each distributor at the beginning of month. This target is defined

on the basis of previous sales history of the distributor which is managed by the

Figure 2 Production process of beverages [Source: Pepsi Haidri Beverages Production Department]


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software. The reports generated by the system also provide the user with the

information of what percentage of the target has been achieved by the distributor

as yet. The distributor can be judged on this basis if he will be able o achieve the

set target or not.

The ERP system not only keeps track of the primary sales done to the distributor,

it also captures the secondary sale data provided by Territory Development

Managers (TDMs), the personnel designated by the company to monitor the

distributor sales (at distributor end) and to keep a check that a distributor does

not enter the domain of another distributor. The secondary sales data contains

information regarding distributors sale to retailers which is recorded in units per

day and does not actually contain information as to which retailer the product

was sold.

2. Financial Accounting module

Financial accounting module has a basic and limited functionality. It has two to

three main entry forms regarding insertion/deletion of accounts (chart of

accounts) and transaction entry. Any transaction taking place in the company

will be recorded here. The invoices (payment or receipt) is also created in the

same form. The form contained a category field where the category of

receipt/transaction is defined. The categories can be cash receipt, bank receipt,

payment invoice, sale invoice etc. A notable point is that the transaction is not

made automatically when a sales transaction takes place. This could be rightly so

as the cash payment is received directly from the distributor by the finance

department, but it can create a logical error since the transaction is not done in

correspondence to the sales transaction.

The reports generated the system include trial balance, balance sheet, income

statement and other basic financial statements.

3. Inventory Management

It is also a limited-functionality module which only records how much items are

produced today. This entry is done at the end of the day and still there is

confusion about what actually is inserted in the system since the total

manufactured amount is reduced at the end of the day due to sales transaction


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and the corresponding batch numbers or lot numbers are not recorded in sales

module.

The system still supports the inventory control system since it contains up-to-

date information regarding the finished product available in the warehouse only

and also the store data which contains information of raw materials. The stock-in

and stock-out is also updated whenever requisition is made from the production

department for the raw material used for production.

4. Human Resource Management module

Human Resource Management module has proved to be very handy when it

comes to daily attendance and payroll calculations. The system automatically

generates a bar code when a new employee is added in the HRM module. On the

basis of this bar code, employee gets a printed card. Whenever an employee

comes in or goes out, he scans his card against the bar-code reader placed at the

entry gate of the company and the time-in and timeout of instantly updated by

the system. A monitory report is also flashed on managers screen which is

updated every 5 seconds. This shows a complete list of employees coming in and

going out. The system contains a descriptive employee record and employee

leaves are also managed by the system. It shows how much leaves of which

category (casual leave, paid leave, sick leave etc.) has been acquired by each

employee as yet.

The payroll of employees are calculated automatically including overtimes,

deductions (for late arrivals and extra leaves), bonuses, allowances etc. and a pay

slip is generated by the system.

In order to support the ERP system and network as a whole, the following hardwareconfiguration has been adopted by the MIS department:

Full LAN support, using domain server, switches, boosters and other network

equipment

Internet facility is provided to all users


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1 oracle database server, 1 application server, Linux server (for network

management), and a print server

Requisition for a backup database server has already been placed

The network facilitates almost 50-60 users around the organization

The system, collectively, has proved to be very beneficial for the employees and

managers at Haidri Beverages and the employees seem to be satisfied over the systems

performance. Further enhancements are done at frequent basis in order to facilitate the

companys management and human resource to perform their tasks in a much better

way.


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Chapter 2

Literature Survey


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Chapter 2

Literature Survey

2.1 Article: How should we define SCM?

Author :Sree Hameed

Created on: 11 April 2007

In the early years of SM it is considered to breaking down the walls but now the concept

is change it not breaking down the walls but rearranging the walls. SCM helps to

achieve CEO agenda. Professional organizations try to provide knowledge of SCM.

This figure helps to understand the process of business

Figure 3Business processes in a supply chain [Source: Sree Hameed, 2007]

Through this figure we get overview of business and understand how actually it makes

money. The purpose is to see the bigger picture and creating value to enterprise and not

stuck into conflicts and debates.

2.1.1 Customer (the why)

Customers are those who take the initial step in order to get the product. Company

current and future strategies around which product to build, assets to own, which

market to enter or serve these all things depend on customer needs and requirement.


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2.1.2 Product (the what)

As the product become obsolete more innovation and creativity is required in order to

satisfy customer need. But to meet innovation, profitability requires engineering. There

is a gap between actual and desired and this gap will lead to the profit leaks.

Figure 4 Product leaks [Source: Sree Hameed, 2007]

Profit leaks also provide the opportunity for product and process innovation.

2.1.3 Process (the how)

Seven core processes are design, source, make, move, store, sell and service.

Management takes decision regarding to process. The decision based on three groups

i.e. strategic, tactical, execution.

2.1.4 People/Partner (the who)

Customer demanding better, faster and cheaper which increase the product complexity

and this leads to complexity in supply chain. Companies try to achieve flexibility and

responsiveness. Outsource some process or function to the partners who have more

competencies in specific area. Processes are shared and collaborate and coordinate withpartners. When environment is very dynamic it is very difficult to go alone. Life cycles

of products are shrinking faster as compare to lifecycle of the assets used to produce the

product this will lead the organization where they have very little choice and they are

less adaptive to assets.


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2.2 Article: Supply Chain Management

Author: M. Eric Johnson

SCM is flow of information, funds and material from supplier to producer and then todistributor and ultimately to consumer but it also includes after sale service. SCM

involves the coordination of material and information between firms but inventory

management coordinates with inventories at different locations.

SCM is famous in recent years for a number of reasons. Action taken by one person of

the firm can influence others profitability in the chain. But nowadays firms compete

with other supply chain as a part of supply chain. So as a firm successfully streamlines

its operation, the next step for improvement is coordination with their suppliers and

customers.

In the Italian pasta industry, the demand of consumer was stable throughout the year

however because of trade promotions, volume discounts, long lead times and end of

quarter sales incentives the order seen at the manufacturers are highly

variable(Hammond 1994).So it lead that to a Bull Whip effect.

Some managers are more interested in integration but it is impossible to implement a

system oriented approach without information technology. Supply chain should be

viewed as an integrated system Forrester (1958); Forrester (1961).Change inmanagement theory and technology set the stage of supply chain management. One of

the reasons of change in mgmt theory means the shift of power from manufacturers to

retailers.

Information technology and retail power are the key catalysts in SC. E-business is

playing an important role and is facilitating the virtual supply chain


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Figure 5 Supply Chain Process [Source: M. Eric. Johnson (1999), Supply Chain Management]

2.2.1 Key components of supply chain management

According to the author, there are twelve key components of a supply chain

management system:

1. Location

2. Transportation and Logistics

3. Inventory and forecasting

4. Marketing and channel restructuring

5. Sourcing and supplier management

6. Information and electronic mediated environments7. Product design and new product introduction

8. Service and after sales support

9. Reverse logistics and green issues

10. Outsourcing and strategic alliances


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11. Metrics and incentives

12. Global issues

Location includes both qualitative and quantitative facility location. This includes

models of facility location, geographic information systems (GIS),country differences,taxes and duties, transportation costs associated with certain locations, and government

incentives (Hammond & Kelly (1990)).Transportation and logistics includes all the

issues which are related to the flow of goods through the supply chain including

transportation, warehousing and material handling. Inventory and forecasting includes

traditional inventory and forecasting models. Marketing and restructuring includes the

basic thinking on the on SC structure (Fisher 1997) and it includes the interfaces with

marketing. Bull whip effect has received many attentions in the research literature. But,

increased in consumer demand through the EDI and the internet can decrease the Bullwhip effect. Other initiatives can also mitigate the bullwhip effect. For example, changes

in pricing and trade promotions (Buzzell, Quelch, &Salmon (1990)) and channel

initiatives, such as vendor managed inventory (VMI), coordinated forecasting and

replenishment (CFAR), and continuous replenishment (Fites (1996), Verity (1996),

Waller, Johnson, & Davis (1999)), can significantly reduce demand variance.

Figure 6 Typical VMI impplmentation [Source: M. Eric Jonhson (1999), Supply Chain Management]


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Marketing focuses downstream in the supply chain, whereas sourcing and supply

management focuses on upstream to suppliers. Information and electronic mediated

environments focuses on application of IT to reduce inventory (Woolley (1997) and the

expanding area of e-commerce (Benjamin & Wigand (1997) and Schonfeld (1998)).

The sale and after sale support addresses the critical problem of providing service and

service parts (Cohen and Lee (1990). Reverse logistics and green issues are emerging

dimensions of supply chain management (Marien (1998)).

Figure 7 Product recovery options [Source: M. Eric Johnson (1999), Supply Chain Management]

Outsourcing and strategic alliances sees the SC impact of outsourcing. With the rapid

growth in third party logistics providers, there is a large and expanding group of

technologies and services to be examined. These include fascinating initiatives such as

supplier hubs managed by third parties. Metrics and incentives include organizational

and economic issues. This category includes both measurement within the supply chain

(Meyer (1997)) and industry benchmarking ((1994), (1997)).Final one is global issue

when a company operates in foreign multiple country. When a company operates in

foreign country then tax rate, duties and currency exchange rate and govt. issues

matters a lot.


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2.3 Article: Artificial Intelligence in Supply Chain Management - Theory

and Applications

Author: Hokey Min

2.3.1 Purpose:

The purpose of this article is to promote the AI for improving human decision-making

processes in supply chain management and the organization productivity in various

business areas due to its ability for recognizing business potential and pattern, using

relevant information, and analyses data accurately.

2.3.2 Design/Methodology/Approach:

This paper covers the explanation of the AI based SCM system .Despite its widespreadacceptance as a decision making tool, AI has seen limited application in supply chain

management (SCM). To fully explain the potential benefits of AI for SCM, this paper

explores various sub-fields of AI that are most suitable for solving practical problems

relevant to SCM. This article reviews the past record of success in AI applications to

SCM and identifies the most suitable areas of SCM in which to apply AI.

2.3.3 Findings /Objectives:

The main objectives of this article are to identify the sub-fields of AI that are most

suitable for SCM applications and their usefulness for improving SC efficiency,

analyzing the existing literature dealing with the applications of AI to SCM ,to develop

a taxonomy for the existing AI literature and categories it according to its SCM

application areas, problem scope, and methodology, to identify the potential SCM

application areas that have not been explored and discuss the future trends for AI in

SCM.

2.3.4 Review:

Hokey Min (2009) described about the role of artificial intelligence in supply chain

management system. AI use computers for reasoning, identifying business pattern, use

past experience for forecasting and making decision for present problems. Hockey Min

use existing literature for explaining AI and its applications that are used in many

fields. Although AI is used in many fields of decision making but SCM is not fully used

the benefits of AI. He categorized the existing literature into three classes problem


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scope, methodology and the implementation status. He described the role of AI in sub

units of supply chain like Inventory control and planning, transportation network

design, Purchasing and supply management, Demand planning and forecasting, Order-

picking problems, Customer relationship management and e-synchronized SCM. So itis concluded that AI tools has great potential for solving many strategic issues

involving CRM, outsourcing relationships, strategic alliances among SC partners, SC

coordination, collaborative demand planning, and business-to-business negotiations.

Another finding is that an agent-based system has emerged as one of the most popular

AI tools for tackling various aspects of SC problems. However AI has some limitations

like AI does not have free will and depends on the computer software which may be

programmed incorrectly and AI solutions may not be easy to implement.

2.3.5 Reference:Author: Hokey Min

Affiliation: Management, College of Business Administration, Bowling Green State

University, Bowling Green, OH, USA

Publication Frequency: 6 issues per year

Published in: International Journal of Logistics Research and Applications

First Published on: 24 March 2009

2.4 Article: A Collaborative Supply Chain Management

Part 2 the hybrid KB/gap analysis system for planning stage

The Authors

Zulkifli Mohamed Udin, Faculty of Technology Management, Universitiy Utara Malaysia,

Kedah Darul Aman, Malaysia

Mohammad K. Khan, School of Engineering, Design and Technology, University of Bradford,

Bradford, UK

Mohamed Zairi, School of Management, University of Bradford, Bradford, UK

2.4.1 Purpose The purpose of this paper is to promote the model of knowledge-based

collaborative supply chain management (KBCSCM) system as an alternative strategy

for organizations to resolve the problems in their current supply chain management

(SCM) in the era of collaborative commerce.

2.4.2 Design/methodology/approach This paper covers the explanation of the

KBCSCM system and the utilization of the GAP analysis technique, which is integrated


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in the knowledge-based system (KBS). Through this technique, the current position of

organizations can be identified before implementation of some improvement programs.

2.4.3 Findings This paper has described a hybrid KB/GAP analysis CSCM system for

application in organizations, specifically for manufacturing environment. The valid,practical and consistent solutions that are provided by KBCSCM system would assist

organizations in implementing CSCM as a strategy.

2.4.4 Originality/value This paper describe the use of KB approach in the SCM

environment. A systematic planning of CSCM has not been developed before and the

development of the KBCSCM system is believed to be crucial in order to improve the

competitiveness of the organizations SCM. So that users can be able to easily

understand the position of their organization.

2.4.5 Review

Udin, khan & Zairi describes in this paper the hybrid KB/GAP analysis Collaborative

Supply chain management system for manufacturing organization. Knowledge base

system is the information system application those support organization in decision

making. The use of KBS application in the SCM is mostly use in area of procurement;

purchasing, supplier selection and evaluating supplier performance. The use of

knowledge base approach in SCM and systemic planning and design of CSCM improve

the competitiveness of organization. This paper presents the idea to develop

collaborative supply chain management. This paper promotes CSCM as a strategy and

eliminates disintegration in Supply chain. CSCM based on GAP analysis enable

management to identify firm performance. In this paper the production rule based type

of KBS is used to structure the information that is gathered from literature and from

users. All modules are developed separately and integrated using phase technique.

Trust among parties in SCM, communication, resources sharing, responsibility, profit

and risk sharing, technology, business processes adjustment and other issues are taken

as a basic guideline to develop CSCM system in this paper. This system enables users to

use the knowledge that reside in the system. The GAP analysis technique used in rule

based structure show the organization position.

In this paper the prototype of KBCSCM system for the planning stage has been

developed and tested using artificial data. Three modules of planning are organization

environment perspective module, Collaborative business perceptive module and


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external-internal chain perspective module. In organization environment perceptive

module gather the general information like company background, number of

employees, type of industry, SCM investment activities etc. Purpose of this module is to

identify the current condition of organization and its environment. The purpose ofcollaborative supply chain perspective module is to show current market position and it

has tree sub modules: financial performance, market analysis and product

development. Product development phase measure the interest of suppliers and

customers in product development activities. Internal-external chain perspective

module consist two sub modules internal function strategy and supplier customer

strategy. The function of this module is to understand the current market position based

on internal-external relationship based on some variables such as commitment,

integration, trust development, relationship management, information andcommunication and etc.

Udin Z.M, Khan .M.k & Zairi. M (2006). A collaborative supply chain management. The

hybrid KB/GAP analysis system for planning stage, Business Process Management journal,

Vol. 12, No. 5, 671-687

2.5 Article: The Internet-Enabled Supply Chain: From the First Click

to the Last Mile

Author: Dr. David L. Anderson, Anderson Consulting

Dr. Hau L. Lee, Stanford University

2.5.1 Purpose:

The purpose of this article is to study how the internet has changed the way in which

supply chains are managed, planned and controlled. The authors state that the web

offers the supply chain enormous potential and entirely new methods for streamlined

coordination between business partners, including third and even fourth-party

providers. The authors further state that companies who want to succeed in the new

economy need to enhance communications with their partners and providers.

2.5.2 Review

The internet has provided companies a wide range of opportunities to create value.

Using the internet to connect the supply chain systems to all the other supply chain


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participants becomes the medium through which the essential processes of managing

and synchronizing supply chains are carried out. The reason why the change in supply

chains, by shifting them over to internet, is so certain is, firstly, that the customers are

looking beyond cost as the sole arbiter of value. They demand innovation andpersonalization of not only the products but of the associated velocity of the supply

chain issues exponentially and yet at the same time requires greater flexibility.

How will the Internet-enabled supply chain be different from the traditional supply

chain? The authors believe there are some key areas that distinguish the new Internet-

enabled supply chain from the traditional supply chain. These areas and issues are

discussed by the authors as follows:

2.5.2.1 e-Design Product Innovation on the Web

The authors have identified the following key benefits of an eSCM:-

Shorter time-to-market, enabled by collaborative design

Internet-enabled technology provides real-time linkages between key suppliers,

manufacturers, engineers and marketers

The ability to conduct collaborative design means that companies can iterate

many more design alternatives with suppliers

Product upgrades can also be achieved more effortlessly and in a timely manner,enabling companies to stay ahead of their competition

The revenue and profit impacts are enormous

Enhanced communication and collaborative processes overcome many of the

organization silo issues faced in traditional sequentially oriented design activity

Products can be rolled out faster

The risks of customer needs shifting during development are mitigated

Increased collaboration throughout the design process can minimize product

complexities that later drive supply chain inefficiencies and costs in production,

logistics and service parts.


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Figure 8 E-Design of SCM [Source: D.L. Anderson, 2000]

2.5.2.2 e-Mediaries and Exchanges Using Online Markets to Revolutionize Buying

and Selling

The marketplace, according to the authors, is being reinvented. Companies can now

buy and sell across a wide spectrum of emerging Internet-enabled marketplaces. Like

traditional marketplaces, trading networks may take many forms. In the supplier-

centric model, like W.W. Grainger, sellers provide their catalogs online for all buyers to

access. Global companies like BP Amoco are utilizing the buyer-centric model to display

their needs online and allow vendors to make bids.

The latest development is online marketplaces the business-to-business equivalent of

eBay. These marketplaces are like online bazaars, where anyone can buy or sell all types

of goods and services. Each of these various exchanges provides companies with unique

opportunities to tap into performance and cost benefits unavailable prior to the Internet.

Regardless of the type of marketplace, the benefits are many: lower product acquisition

costs, lower procurement transaction costs, the ability to tap into almost unlimited

supply sources to respond to changing market needs, and a means to profitably dispose

of unused excess inventory.

References:

Anderson D.L., Lee H.L. (2000), Internet-Enabled Supply Chain: From the First Click

to the Last Mile, Acset, vol. 2 [online] Available at:

http://www.ascet.com/documents.asp?d_ID=199


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Chapter 3

An Introduction to

Supply Chain &

Supply ChainMana ement


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Chapter 3

An Introduction to Supply Chain

&

Supply Chain Management

Up till recently, companies did not think in terms of supply chains, but viewed

themselves and their trading partners as independent islands. Sellers at times struggled

to keep up with demand, while buyers purchased goods for which they could pay,

barter or obtain credit. Economic and competitive pressures eventually forced

companies to think in terms of supply chains for the production and delivery of goods.For this reason, the material or physical supply chain was born.

With the advancement of business processes, supply chain gained more and more

importance for each member of business community including manufacturers, retailers,

suppliers, suppliers suppliers and even consumer. Strategies were developed in order

to accelerate product sales and distribution. With the expansion of sales from areas to

cities and cities to countries, the need arose for proper tracking of demand and supply

as well as forecasting of materials, supplies, sales and distribution schemas. After the

emergence of Information Technology and business globalization, the concept of

integrated supply chain management was revolutionized. Information technology

consists of the tools used to gain awareness of information, analyze this information,

and execute on it to increase the performance of the supply chain.

3.1 What Is a Supply Chain?

A supply chain consists of all parties involved, directly or indirectly, in fulfilling a

customer request. The supply chain includes not only the manufacturer and suppliers,

but also transporters, warehouses, retailers and even customers themselves. Within eachorganization, such a manufacturer, the supply chain includes all functions involved in

receiving and fulfilling a customer request. These functions include, but are not limited

to, new product development, marketing, operations, distribution, finance and

customer service.


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Supply chain activities transform natural resources, raw materials and components into

a finished product that is delivered to the end customer. In sophisticated supply chain

systems, used products may re-enter the supply chain at any point where residual value

is recyclable. A typical supply chain begins with ecological and biological regulation ofnatural resources, followed by the human extraction of raw material and includes

several production links, for instance; component construction, assembly and merging

before moving onto several layers of storage facilities of ever decreasing size and ever

more remote geographical locations, and finally reaching the consumer.

Figure 9 Information, Funds, and Product flow in SCM [Source:

http://dspace.mit.edu/bitstream/handle/1721.1/39816/ESD-260JFall2003/OcwWeb/Engineering-Systems-

Division/ESD-260JFall2003/CourseHome/index.htm]

Consider a customer walking into a Wal-Mart store to purchase detergent. The supply

chain begins with the customer and his or her need for detergent. The next stage of this

supply chain is the Wal-Mart retail store that the customer visits. Wal-Mart stocks its

shelves using inventory that may have been supplied from a finished-goods warehouse

or a distributor using trucks supplied by a third party. The distributor in turn is stocked

by the manufacturer (say Proctor & Gamble [P&G] in this case). The P&G

manufacturing plant receives raw material from a variety of suppliers, who may

themselves have been supplied by lower-tier suppliers. For example, packaging

material may come from Tenneco packaging, while Tenneco receives raw material to


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manufacture the packaging from other supplier. This supply chain is illustrated as

follows:-

Figure 10 Wal-Mart SCM Process [Source: Supply Chain Management System by Sunil Chopra &Pete

Meindl]

A supply chain is dynamic and involves the constant flow of information, product and

funds between different stages. In the above example, Wal-Mart provides the product,as well as pricing and availability information, to the customer. The customer transfers

funds to Wal-Mart. Wal-Mart conveys point-of-sales data as well as replenishment

orders to the warehouse or distributor, who transfers the replenishment order via trucks

back to the store. Wal-Mart transfers funds to the distributor after the replenishment.

The distributor also provides pricing information and sends delivery schedule to Wal-

Mart. Wal-Mart may send back packaging material to be recycled. Similar information,

material, and fund flows take place across the entire supply chain.

A typical supply chain may involve a variety of stages. These supply chain stages

include:

Customers

Retailers

Wholesaler/distributors


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Manufacturers

Component/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 ofthe stages or an intermediary. Each stage need not be present in a supply chain. The

appropriate design of supply chain depends on the customers needs and the roles

played by stages involved.

3.2 The Objective of a Supply Chain

The objective of every supply chain should be to maximize the overall value generated.

The value a supply chain generated is the difference between what the final product is

worth to the customer and the costs the supply chain incurs in filling the customersrequest. For most commercial supply chains, value will be strongly correlated with

supply chain profitability (also known as supply chain surplus), the difference between

the revenue generated from the customer and the overall cost across the supply chain.

Supply chain profitability or surplus is the total profit to be shared across all supply

chain stages and intermediaries. 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 profits at an individual stage.

Many of the exchanges encountered in the supply chain will therefore be betweendifferent companies who will seek to maximize their revenue within their sphere of

interest, but may have little or no knowledge or interest in the remaining players in the

supply chain. More recently, the loosely coupled, self-organizing network of businesses

that cooperates to provide product and service offerings has been called the Extended

Enterprise.

3.3 Supply Chain Management (SCM)

Supply Chain Management (SCM) is the management of a network of interconnectedbusinesses involved in the ultimate provision of product and service packages required

by end customers. Supply Chain Management spans all movement and storage of raw

materials, work-in-process inventory, and finished goods from point-of-origin to point-

of-consumption. In other words, SCM is a cross-functional inter-enterprise system that


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uses information technology to help support and manage links between some of a

companys key business processes and those of its suppliers, customers, and business

partners.

Supply chain management has generated much interest in recent years for a number of

reasons. Many managers now realize that actions taken by one member of the chain can

influence the profitability of all others in the chain. Firms are increasingly thinking in

terms of competing as part of a supply chain against other supply chains, rather than a

single firm against other individual firms. Also, as firms successfully streamline their

operations, the next opportunity for improvement is through better coordination with

their suppliers and customers. The cost of poor coordination can be really high. The

figure below illustrates an example of a supply chain network and how closely each

partner is linked to one another in order to fulfill the demand and supply process:-

Figure 11 An example of SCM Process

3.4 Goal of Supply Chain Management


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Goal of SCM is to efficiently manage process bifurcating demand, controlling inventory,

enhancing the network of business relationships a company has with customer,

suppliers, distributors and others, and receiving feedback on the status of every link in

the supply chain. The goal of SCM is to create a fast, efficient, and low cost network ofbusiness relationships, or supply chain, to get a companys products from concept to

market.

Supply Chain Management is one of the most important strategic aspects of any

business enterprise. Decisions must be made about how to coordinate the production of

goods and services, how and where to store inventory, whom to buy materials from,

and how to distribute them in the most cost-effective, timely manner.

3.5 The Bullwhip Effect

In the Italian pasta industry, consumer demand is quite steady throughout the year.

However, because of trade promotions, volume discounts, long lead times, fully-

truckload discounts, and end-of-quarter sales incentives the orders seen at the

manufacturers are highly variable. In fact, the variability increases in moving up the

supply chain from consumer to grocery store to distribution center to central warehouse

to factory, a phenomenon that is often called bullwhip effect.

Figure 12Bullwhip Effect in Supply Chain [Source: http://knowscm.blogspot.com/2008/02/bullwhip-effect-in-

supply-chain.html]

The costs of this variability are high inefficient use of production and warehouse

resources, high transportation costs, high inventory costs, to name a few. Acer Inc.


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sacrificed $20 million in profits by paying $10 million for air freight to keep up with

surging demand, and then paying $10 million more later when that inventory became

obsolete. The bullwhip effect phenomenon has been observed in many different

industries and occurs whenever demand uncertainties and variability becomemagnified at each link in the supply chain. Its one of the most important causes of

inefficiency in a supply chain.

Figure 13 Bullwhip Effect in supply chain [Source: http://knowscm.blogspot.com/2008/02/bullwhip-effect-in-

supply-chain.html]

3.6 Supply Chain Infrastructure

The supply chain involves both internal and external supply chain operations. The

suppliers and customers both are inter-linked to the manufacturing organization. The

internal supply chain involves sequential links of the purchasing, production and

distribution department. The purchases department of a company is directly linked to

the suppliers of that company to purchase materials is raw, semi-finished or finished

form. After these materials are purchased, they are passed on to the production

department to covert this material into finished product. This finished product is

forwarded to distribution department for the distribution of finished goods to retailers

and ultimately, to the customers.

Order Quantity

Manufacturers Orders to

Su lier

Wholesalers

Orders to

Manufacturer

Retailers Orders to

Wholesaler


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Figure 14 Supply Chain Process [Source:

http://en.wikipedia.org/wiki/File:A_company%27s_supply_chain_(en).png]

3.7 Extended Supply Chain

The extended supply chain is a clever way of describing everyone who contributes to a

product. So if you make text books, then your extended supply chain would include the

factories where the books are printed and bound, but also the company that sells you

the paper, the mill where that supplier buys their stock, and so on. It is important to

keep track of what is happening in your extended supply chain because with a supplier

or a suppliers supplier could end up having an impact on you (as the old saying goes, a

chain is only a strong as its weakest link). For example, a fire in a paper mill might

cause the text book manufacturers paper supplier to run out of inventory. If the text

book company knows what is happening in its extended supply chain it can find

another paper vendor.

Consider a typical manufacturer. The supply chain is made up of many interrelated

firms as shown in the figure below. There are part suppliers, component suppliers and

subassembly suppliers. Further up the chain are the suppliers suppliers, finally

reaching raw materials suppliers at the top of the chain. Going downstream, back

through the producing firm, the supply chain continues through the warehousing and

distribution channels, and then through the retail channels, ending with the consumer.


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Raw Material SuppliersRaw Material Suppliers Raw Material Suppliers

Component Suppliers Subassembly Suppliers

Distribution Channels

Manufacturers

Retail ChannelsWarehousing Channels

Part Suppliers

Consumer

Retail Channels

Retail Channels

Figure 15 A Systematic diagram of extended supply chain

The supply chain encompasses all activities associated with the flow and transformation

of goods and services from the raw material stage (at one end of the supply chain)

through to the consumer (at the other end of the chain), including all associated

information flows.

3.8 Basic Components of Supply Chain Management

The following are five basic components of SCM:-


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1. Plan This is the strategic portion of SCM. You need a strategy for managing all

the resources that go toward meeting customer demand for your product or

service. A big piece of planning is developing a set of metrics to monitor the

supply chain so that it is efficient, costs less and delivers high quality and value tocustomers.

2. Source Choose the suppliers that will deliver the goods and services you need to

create your product. Develop a set of pricing, delivery and payment processes

with suppliers and create metrics for monitoring and improving the relationships.

And put together processes for managing the inventory of goods and services you

receive from suppliers, including receiving shipments, verifying them, transferring

them to your manufacturing facilities and authorizing supplier payments.

Figure 16 The Five Components of Supply Chain Process

3. Make This is the manufacturing step. Schedule the activities necessary for

production, testing, packaging and preparation for delivery. As the most metric-

intensive portion of the supply chain, measure quality levels, production output

and worker productivity.

4. Deliver This is the part that many insiders refer to as logistics. Coordinate the

receipt of orders from customers, develop a network of warehouses, pick carriersto get products to customers and set up an invoicing system to receive payments.

5. Return The problem part of the supply chain. Create a network for receiving

defective and excess products back from customers and supporting customers

who have problems with delivered products.


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3.9 SCM Flows

Supply chain management flows can be divided into three main flows:

1. The Product Flow

It includes the movement of goods from a supplier to a customer, as well as any

customer returns or service needs.

2. The Information Flow

It involves transmitting orders and updating the status of delivery.

3. The Finances Flow

It consists of credit terms, payment schedules, and consignment and title ownershiparrangements.

If the goal of SCM is to provide high product availability through efficient and timely

fulfillment of customer demand, then how is the goal accomplished?

Figure 17 A view of different flows in a supply chain [Source: http://www.careersinsupplychain.org/what-is-

scm/flows.asp]


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Obviously, you need effective flows of products from the point of origin to the point of

consumption. But theres more to it. Consider the diagram of the fresh food supply

chain. A two-way flow of information and data between the supply chain participants

creates visibility of demand and fast detection of problems. Both are needed by supplychain managers to make good decisions regarding what to buy, make, and move.

Other flows are also important. In their roles as suppliers, companies have a vested

interest in financial flows. As you can understand, suppliers want to get paid for their

products and services as soon as possible and with minimal hassle. Sometimes, it is also

necessary to move products back through the supply chain for returns, repairs,

recycling, or disposal.

3.10 The Importance of Supply Chain Decisions

There is a close connection between the design and management of supply chain flows

(product, information, and funds) and the success of a supply chain. Wal-Mart, Dell

Computer, and Seven-Eleven Japan are examples of companies that have built their

success on superior design, planning, and operation of their supply chain. In contrast,

the failure of many e-businesses such as Webvan can be attributed in weaknesses in

their supply chain design and planning.

Wal-Mart has been a leader at using supply chain design, planning and operation to

achieve success. From its beginning, the company invested heavily in transportation

and information infrastructure to facilitate the effective flow of goods and information.

Wal-Mart designed its supply chain with clusters of stores around distribution centers

to facilitate frequent replenishment at its retail stores in a cost-effective manner.

Frequent replenishment allows stores to match supply and demand more effectively

than the competition. Wal-Mart has been a leader in sharing information and

collaborating with suppliers to bring down costs and improve product availability. The

results are impressive. In their annual 2004 report, the company reported a net income

of more than $9 billion on revenues of about $250 billion. These are dramatic results fora company that reached annual sales of only $1 billion in 1980. The growth in sales

represents an annual compounded growth rate of 26 percent.


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3.11 Decision Phases in a Supply Chain

Successful supply chain management requires many decisions relating to the flow of

information, product, and funds. Each decision should be made to raise the supply

chain profitability. These decisions fall into three categories of phases, depending on the

frequency of each decision and the time frame during which a decision phase has an

impact. As a result, each category of decisions must consider uncertainty over the

decision horizon.

1. Supply Chain Strategy or Design

During this phase, given the marketing and pricing plans for a product, a

company decides how to structure the supply chain over the next several years.

It decides what the chains 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, and the modes of transportation to be made available along different

shipping legs, and the type of information system to be utilized.

A firm must ensure that the supply chain configuration supports its strategic

objectives and increases supply chain profitability during this phase. For

example, a companys 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.

Supply chain design decisions are typically made for long-term and are very

expensive to alter on short notice. Consequently, when companies made these

decisions, they must take into account the uncertainty in anticipated market

conditions over the next few years.

Decisions made during this phase include:

Strategic network optimization, including the number, location, and size of

warehouses, distribution centers and facilities


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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

logisticsProduct design coordination, so that new and existing products can be

optimally integrated into the supply chain, load management

Information Technology infrastructure, to support supply chain operations.

Where-to-make and what-to-make-or-buy decisions

Aligning overall organizational strategy with supply strategy

Figure 18 Hierarchy of Supply Chain Decisions [Source: http://www.eil.utoronto.ca/profiles/rune/node5.html]

2. Supply Chain Planning

For decisions made during this phase, the time frame considered is a quarter to a

year. Therefore, the supply chains configuration determined in the strategic

phase is fixed. This configuration establishes constraints within which planning

must be done. The goal of planning is to maximize the supply chain profitability

that can be generated over the planning horizon given the constraints establishes

during the strategic or design phase. Companies start the planning phase with a


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forecast for the coming year (or a comparable time frame) of demand in different

markets.

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. Planning establishes parameters within which a supply chain will

function over a specified period of tie.

In the planning phase, companies must include uncertainty in demand, exchange

rates, and competition over this time horizon in their decisions. Given a shorter

time frame and better forecasts than the design phase, companies in the planning

phase try to incorporate any flexibility built into the supply chain in the designphase and exploit it to optimize performance. As a result of the planning phase,

companies define a set of operating policies that govern short-term operations.


Sourcing contracts and other purchasing decisions.

Production decisions, including contracting, scheduling, and planning

process definition.

Inventory decisions, including quantity, location, and quality of inventory.Transportation strategy, including frequency, routes, and contracting.

Benchmarking of all operations against competitors and implementation of

best practices throughout the enterprise.

Milestone payments

Focus on customer demand.

3. Supply Chain Operations

The time horizon here is weekly or daily, and during this phase companies makedecisions regarding customer orders. At the operational level, supply chain

configuration is considered fixed, and planning policies are already defined. 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


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individual customer 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.

Because operational decisions are being made in the short term (minutes, hours,or days), there is a less uncertainty about demand information. given the

constraints established by the configuration and planning policies, the goal

during the operational phase is to exploit the reduction of uncertainty and

optimize performance.


Daily production and distribution planning, including all nodes in the supply

chainProduction scheduling for each manufacturing facility in the supply chain

(minute by minute).

Demand planning and forecasting, coordinating the demand forecast of all

customers and sharing the forecast with all suppliers

Sourcing planning, including current inventory and forecast demand, in

collaboration with all suppliers

Inbound operations, including transportation from suppliers and receiving

inventory

Production operations, including the consumption of materials and flow of

finished goods

Outbound operations, including all fulfillment activities and transportation to

customers

Order promising, accounting for all constraints in the supply chain, including

all suppliers, manufacturing facilities, distribution centers, and other

customers...

The design, planning, and operation of a supply chain have a strong impact on overall

profitability and success. It is fair that a large part of the success of a firm can be

attributed to their effective supply chain design, planning, and operation.

3.12 Process Views of a Supply Chain


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Manufacturing CycleReplenishment CycleProcurement CycleCustomer Order CycleCustomerRetailerDistributorManufacturerSupplier

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 five

different stages which are the participants of a supply chain, that is, customer, retailer,

distributor, manufacturer and supplier. There are two different ways to view theprocesses performed in a supply chain.

1. 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.

Given the five stages of a supply chain, all supply chain processes can be broken

down into the following four process cycles:-

a. Customer order cycle

b. Replenishment cycle

c. Manufacturing cycled. Procurement cycle

Each cycle occurs at the interface between two successive stages of the supply

chain. The five stages thus result in four supply chain process cycles. For

example, when customers shop online at Amazon, they are part of the customer

order cycle with the customer as the buyer and Amazon as the supplier. In

contrast, when Amazon orders books from a distributor to replenish itsinventory, it is part of the replenishment cycle with Amazon as the buyer and

the distributor as the supplier.

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. Reverse flows are managed to reduce cost and meet environmentalobjectives.

A cycle view of the supply chain clearly defines the processes involved and

owners of each process. This view is very useful when considering operational


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decisions because it specifies the roles and responsibilities of each member of the

supply chain and the desired outcome for each process.

2. Push/Pull View

All processes in a supply chain fall into one of the two categories depending upon

the timing of their execution relative to end customer demand. With pull processes,

execution is initiated in response to a customer order. With push processes,

execution is initiated in anticipation of customer orders. Therefore, at the time of

execution of 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 forecasted.

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 (forecasted) rather than actual demand. The

push/pull view is very important when considering strategic decisions relating to

supply chain design.

3.13 Supply Chain Macro Processes in a Firm

All supply chain processes discussed in the two process views can be classified into the

following three macro processes:

1. Customer Relationship Management (CRM): All processes that focus on theinterface between the firm and its customers

2. Internal Supply Chain Management (ISCM): All processes that are internal to

the firm

3. Supplier Relationship Management (SRM): All processes that focus on the

interface between the firm and its suppliers

The three macro processes manage the flow of information, product, and funds

required to generate, receive, and fulfill a customer request.

3.13.1 CRM Macro Process

The CRM macro process aims to generate customer demand and facilitate the

placement and tracking of orders. It includes processes such as marketing, pricing,

sales, order management, and call center management. At an industrial distributor,


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CRM processes include the preparation of catalogs and other marketing materials,

management of the Web site, and management of the call center that takes order and

provides services.

3.13.2 ISCM Macro process

The ISCM macro process aims to fulfill demand generated by the CRM process in a

timely manner and at lowest possible cost. ISCM processes include the planning of

internal production and storage capacity, preparation of demand and supply plans, and

fulfillment of actual orders.

3.13.3 SRM Macro Process

The SRM macro process aim to arrange and manage supply sources for various goods

and services. SRM processes include the evaluation and selection of suppliers,negotiation of supply terms, and communication regarding new products and orders

with suppliers.

All three supply chain macro processes and their component processes are shown in the

figure below:

Figure 19 SCM Macro Processes [Source: Copra S., Meindl P., Supply Chain Management]

Supplier Company Customer


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For a supply chain to be successful, it is crucial that the three macro processes are well

integrated. The organizational structure of the firm has a strong influence on the success

or failure of the integration effort. In many firms, marketing is in charge of the CRM

macro process, manufacturing handles the ISCM macro process, and purchasingoversees the SRM macro process with very little communication among them. It is not

unusual for marketing and manufacturing to have two different forecasts when making

their plans. This lack of integration hurts the supply chains ability to match supply and

demand effectively, leading to dissatisfied customers and high costs. Firms should

structure a supply chain organization that mirrors the macro processes and ensures

good communication and coordination among the owners of processes that interact

with each other.

3.14 Drivers of Supply Chain performance

Success and profitability in a supply chain requires that a companys supply chain

achieve the balance between responsiveness and efficiency that best meets the needs of

the companys competitive strategy. To understand how a company can improve supply

chain performance in terms of responsiveness and efficiency, we must examine the

logistical and cross-functional drivers of supply chain performance: facilities, inventory,

transportation, information, sourcing, and pricing. These drivers interact with eachother

to determine the supply chain performance in terms of responsiveness and efficiency.As a result, the structure of these drivers determines if and how strategic fit is achieved

across the supply chain.

3.14.1 Facilities

Facilities are the actual physical location in the supply chain network where product is

stored, assembled, or fabricated. The two major types of facilities are production sites

and storage sites. Decision regarding the roles, location, capacity and flexibility of

facilities have a significant impact on the supply chain performance. For instance, an

auto parts distributor striving for responsiveness could have many warehousingfacilities located close to customers even though this practice reduces efficiency

alternatively a high efficiency distributor would have fewer warehouses to increase

efficiency despite the fact that this practice will reduce responsiveness.

3.14.2 Inventory


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Inventory encompasses all raw materials, work in process, and finished goods within a

supply chain. Changing inventory policies can dramatically alter the supply chains

efficiency and responsiveness. For example, a clothing retailer can make itself more

responsive by stocking large amounts of inventory and satisfying customer demandfrom stock. A large inventory, however, increases the retailers cost, thereby making it

less efficient. Reducing inventory makes the retailer more efficient but hurts its

responsiveness.

3.14.3 Transportation

Transportation 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 characteristics. Transportation choices have a large impact on

supply chain responsiveness and efficiency. For example, a mail-order catalog company

can use a faster mode of transportation such as FedEx to ship products, thus making its

supply chain more responsive, but also less efficient given the high costs associated

with using FedEx. Or the company can use slower but cheaper ground transportation to

ship the product, making the supply chain efficient but limiting its responsiveness.

3.14.4 InformationInformation consists of data and analysis concerning facilities, inventory, transportation,

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 responsive and more efficient. For example, with information on customer

demand patterns, a pharmaceutical company can produce and stock drugs in

anticipation of customer demand, which makes the supply chain very responsive

because customers will find the drugs they need when they need them. This demandinformation can also make the supply chain more efficient because the pharmaceutical

firm is better able to forecast demand and produce only the required amount.

Information can also make this supply chain more efficient by providing managers with


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shipping options, for instance, that allow them to choose the lowest-cost alternative

while still meeting the necessary service requirements.

3.14.5 Sourcing

Sourcing 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. Sourcing decisions affect both the responsiveness and efficiency of a

supply chain. After Motorola outsourced much of its production to contract

manufacturers in China, it saw its efficiency improve but its responsiveness suffer

because of the long distances. To make-up for the drop in responsiveness, Motorola

started flying in some of its cell phones from China even though its choice increased

transportation cost. Flextronics, an electronics contract manufacturer, is hoping to offer

both responsive and efficient sourcing options to its customers. It is trying to make its

production facilities in United States very responsive while keeping its facilities in low-

cost countries efficient. Flextronics hopes to become an effective source for all customers

using this combination of facilities.

3.14.6 Prices

Pricing determines how much a firm will charge for goods and services that it makes

available in supply chain. Pricing affects the behavior of the buyer of the good orservice, thus affecting supply chain performance. For example, if a transportation

company varies its charges based on the lead time provided by the customers who

value responsiveness will be willing to wait and order just before they need a product

transported. Early orders are less likely if prices do not vary with lead time.

3.15 Framework for Structuring Drivers

The visual framework for supply chain decision making is shown in figure below;

Most companies begin with a competitive strategy and then decide what their supplychain 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 this supply chain strategy dictates and maximize the supply chain profits.


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Although this framework is generally viewed from the top-down, in many instances, a

study of six drivers may indicate the need to change the supply chain and potentially

even the competitive strategy

3.16 Components of Decision in Supply Chain Drivers

3.16.1 Facilities

Decisions regarding facilities are a crucial part of supply chain design. Following are

the components of facilities decisions that companies must analyze.

3.16.1.1 Role

For production facilities, firms must decide whether they will be flexible, dedicated, or a

combination of the two. Flexible capacity can be used for many types of products but isoften less efficient, whereas dedicated capacity can be used for only a limited number of

products but is more efficient. Firms must also decide whether to design a facility with

a product focus or a functional focus. A product-focused facility performs many

different functions (e.g., fabrication and assembly) in producing a single type of

product. A functional-focused facility performs few functions (e.g., only fabrication or

only assembly) on many types of products. A product focus tends to result in more

expertise about a particular type of product at the expense of the functional expertise

that comes from a functional methodology.

For warehouses and DCs, firms must decide whether they will primarily cross-docking

facilities or storage facilities. At cross-docking facilities, inbound trucks from suppliers

are unloaded; the product is broken into smaller lots, and is quickly loaded onto store-

bound trucks. Each store-bound truck carries a variety of products, some from each

inbound truck. For storage facilities, firms must decide on the products to be stored at

each facility.

3.16.1.2 Location

Deciding where a company will locate its facilities constitutes a large part of the desing

of a supply chain. A basic trade-off here is whther to centralize in order to gain

economies of scale or to decentralize to become more responsive by being closer to the

customer. Companies must also consider a host of issues related to the various

characteristics of the local area in which the facility is situated. These include


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macroeconomic factors, quality of workers, cost of workers, cost of facility, availability

of infrastructure, proximity to customers, the location of that firms other facilities, tax

effects, and other strategic factors.

3.16.1.3 Capacity

Companies must also determine a facilitys capacity to perform its intended function(s).

A large amount of excess capacity allows the facility to be very flexible and to respond

to wide swings in the demands placed on it. Excess capacity, however, costs money and

therefore can decrease efficiency. A facility with little excess capacity will likely be more

efficient per unit of product it produces than one with a lot of unused capacity. The

high-utilization facility, however, will have difficulty responding to demand

fluctuations. Therefore, a company must make a trade-off to determine the right

amount of capacity to have at each of its facilities.

3.16.1.4 Facility-Related Metrics

Manager should track the following facility-related metrics that influence supply chain

performance;

Capacity measures the maximum amount a facility can process.

Utilization measures the fractional capacity that is currently being used in

the facility. Utilization affects both the unit cost of processing and

associated delays. Unit costs tend to decline and delays increase withincrease in utilization.

Theoretical flow/ cycle time of production measures the time required to

process a unit if there are absolutely no delays at any stage.

Actual average flow/ cycle time measures the average actual time taken

for all units processed over a specified duration such as a week or month.

The actual flow/ cycle time includes the theoretical time and any delays.

Flow time efficiency is the ratio of the theoretical flow time to the actual

average flow time. Product variety measures the number of products/ product families

processed in a facility. Processing costs and flow times are likely to

increase with product variety.


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Processing/ set up / down/ idle time measures the fraction of time that the

facility was processing unit, being set up to process units, unavailable

because it was down, or idle because it had no units to process.

Production service level measures the fraction of production orderscompleted on time and in full.

3.16.2 Components of Inventory Decisions

The major inventory related decisions that supply chain managers must make to

effectively create more responsive and more efficient supply chains are:

3.16.2.1 Cycle Inventory

Cycle inventory is the average amount of inventory used to satisfy demand between

receipts of supplier shipments. The size of the cycle inventory is a result of the

production, transportation, or purchase of material in large lots. Companies produce or

purchase in large lots to exploit economies of scale in the production, transportation, or

purchasing process. With the increase in lot size, however, also comes an increase in

carrying cost. As an example of a cycle stock decision, consider an online book retailer.

This retailers sales average around 10 truckloads of books a month. The cycle inventory

decisions the retailer must make are how much to order for replenishment and how

often to place these orders. The e-retailer could order to truckloads once each month or

it could one truckload every three days. The basic trade-off supply chain managers face

is the cost of holding larger lots of inventory (when cycle inventory I high) versus the

cost of ordering product frequently (when cycle inventory is low).

3.16.2.2 Safety Inventory

Safety inventory is inventory held in case demand exceeds expectation; it is held to

counter uncertainty. If the world were perfectly predictable, only cycle inventory would

be needed. Because demand is uncertain and may exceed expectations, however,

companies hold safety inventory to satisfy an unexpectedly high demand. Managers

face a key decision when determining how much safety inventory to hold. Choosing

safety inventory involves making a trade-off between the costs of having too much

inventory and the costs of losing sales due to not having enough inventory.

3.16.2.3 Seasonal Inventory


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Seasonal inventory is built up to counter predictable variability in demand. Companies

using seasonal inventory, build up inventory in periods of low demand and store it for

periods of high demand, when they will not have the capacity to produce all that is

demanded. Managers face key decision in determining whether to build seasonalinventory and if they do build it, in deciding how much to build. If a company can

rapidly change the rate of its production system at very low cost, then it may need

seasonal inventory, because the production system can adjust to a period of high

demand without incurring large costs. However, if changing the rate of production is

expensive (for example, when workers must be hired or fired), then a company would

be wise to establish a smooth production rate and build up its inventory during periods

of low demand. Therefore, the basic trade-off supply chain managers face in

determining how much seasonal inventory to build is the cost of carrying the additionalseasonal inventory versus the cost of having more flexible product rate.

3.16.2.4 Level of Product Availability

Level of product availability is the fraction of demand that is served one time from

product held in inventory. A high level of product availability provides a high level or

responsiveness but increase costs because a lot of inventory is held but rarely used. In

contrast, a low level of product availability lowers inventory holding costs but results in

a higher fraction of customers who are not served on time. The basic trade-off when

determining the level of product availability is between the cost of inventory to increaseproduct availability and the loss from not serving customer on time

3.16.2.5 Inventory-Related Metrics

A manager should track the following inventory-relate metrics that influence supply

chain performance:

Average inventory measures the average amount of inventory carried. Average

inventory should be measured in units, days of demand and financial value

Products with more than a specified number of days of inventory identifies

project supply chain management

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