supply chain management -...

CILT/UNLB

Supply Chain Management

We are grateful to the following contributors for their authorship of the material contained in this document. Ben Bvepfepfe MSc FCILT Clive Pidgeon FCILT Chartered Institute of Logistics and Transport (UK), 2007. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Chartered Institute of Logistics and Transport (UK).

CILT (UK) Passenger Transport Coordinators Certificate

- Local Authority Finance Version 1 31 March 2006

The Chartered Institute of Logistics and Transport in the UK

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Introduction to Study Welcome to the study guide for the Supply Chain Elective Unit, which is intended to assist students in successfully completing the Chartered Institute of Logistics and Transport (CILT) Level 5 Professional Diploma in Logistics and Transport.

These icons below represent key activities to be undertaken specific activities have been set to assist learning and references are made to the recommended textbook. Keywords and important information are reinforced, where appropriate. The aims are clearly set out at the beginning of each section and key benchmarks are highlighted as tasks on each of the sections to enable you (the student) to monitor your own progress. Key to icons:

Reading

Case Study

Self-test tasks

Course overview This unit provides the fundamental knowledge that is required by managers in the logistics and supply chain business involved in the flow of materials from source through the production process to the final consumer. This unit explores the concept of supply chain as part of the logistics system and how this approach fits into the companys wider competitive strategy.

The supply chain planning processes are studies in terms of the creation of (a) value to the customers, (b) delivery of sustainable competitive advantage and (c) minimising waste.

The course consists of four modules:

The Supply Chain.

Supply Chain Planning.

Supply Chain Operations

Supply Chain Improvement.

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Essential reading

Key text books

Christopher M, 2005, Logistics and Supply Chain Management Creating Value Adding Networks, 3rd Ed, Financial Times, Prentice Hall

Other Recommended Text Books are:

Harrison A and van Hoek R (2005), Logistics Management and Strategy, 2nd Ed. Prentice Hall. Hines T (2004), Supply Chain Strategies, customer driven and customer focused, 1st Ed., Elsevier. Brewer AM; Button KJ and Hensher DA (Editors), 2001, The Handbook of Logistics and Supply Chain Management, Pergamon Rushton, A. Oxley, J. Baker, P, 2006, Handbook of Logistics and Distribution Management, 3rd Ed, Kogan Page, London Chopra S Meindl (2006) Supply Chain Management, Strategy, Planning, and Operations, Prentice Hall Christopher M and Peck H (2003) Marketing Logistics, 2nd Ed, Butterworth Heinemann Students are advised to read as widely as possible, including trade publications and magazines such as the study guide highlights in the key references and bibliography.

Study techniques: You should manage your time and set realistic targets for each section of the specification. An allowance of 25 hours is usually recommended for each section of the unit. You are advised to work in quiet areas, with minimal distractions. Make clear notes and bullet points where appropriate make use of the highlighted sections and icons within the course manual to guide you to the key information. Refer to the recommended reading as directed. Develop this core information with wider reading.

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Table of Contents Introduction To Study........................................................................................................................ I Course overview ............................................................................................................................... i Essential reading ............................................................................................................................. ii Key text books ................................................................................................................................. ii Other Recommended Text Books are: ............................................................................................ ii Study techniques: ............................................................................................................................ ii Table of Contents.............................................................................................................................iii Abbreviations .................................................................................................................................. vi 1 The Supply Chain...............................................................................................................1 1.1 Learning outcomes............................................................................................................... 1 1.2 Theoretical foundation of Supply Chain Management ......................................................... 1 1.3 Mapping Supply Chain Processes ....................................................................................... 2 Fig. 1.1 Example of a Simplified Supply Chain Map ............................................................ 3 Task 1.1 ...............................................................................................................................4 1.4 Supply Chain Management in its Context ............................................................................ 5 1.5 Institutional definitions.......................................................................................................... 6 1.6 Other Definitions .................................................................................................................. 6 Fig. 1.2 Five Processes in the Supply-Chain Operations Reference (SCOR) Model ......... 8 Task 1.2 ...............................................................................................................................9 1.7 The Structure of Supply Chain .............................................................................................9 Fig. 1.3 An Integrated Supply chain process ..................................................................... 11 1.8 Managing the Supply Chain ............................................................................................... 11 1.9 Supply Chain Network........................................................................................................ 13 Fig. 1.4 Typical Supply Chain Network .............................................................................. 13 Fig. 1.5 A model showing a new saw equipment producer network relationship ............... 15 1.10 Managing the Supply Chain Networks ............................................................................... 16 1.11 Reasons for Slow Growth of Integrated Supply Chain Management................................. 16 Task 1.3 .............................................................................................................................17 1.12 Global Supply Chain .......................................................................................................... 17 Task 1.4 .............................................................................................................................24 1.13 The Relationship of Logistics to Supply Chain Management............................................. 24 1.14 The Relationship of Logistics to Supply Chain ManagementError! Bookmark not defined. Fig. 1.6 The Supply Chain of milk (from cow to customer) ................................................ 26 Task 1.5 .............................................................................................................................27 1.15 Procurement, Logistics and the Supply Chain ................................................................... 27 Fig 1.7 A Cereal Manufacturers Supply Chain .................................................................. 29 Fig 1.8 Relationships in the Supply Chain ......................................................................... 30 1.16 The Value Chain ................................................................................................................ 31 Fig. 1.9 The Value Chain ...................................................................................................32 Fig. 1.10 Relationships in the Value Chain ....................................................................... 34 Task 1.6 .............................................................................................................................35 1.17 Customer Service............................................................................................................... 35 2 Supply Chain Planning ....................................................................................................37 2.1 Learning Objectives: .......................................................................................................... 37 2.2 The Purpose of Planning.................................................................................................... 37 2.3 What does strategic planning involve?...............................................................................39 2.4 The process of strategic planning. ..................................................................................... 40 2.5 Strategic Choice Process................................................................................................... 41 2.6 Supply Chain Management Planning Focus ...................................................................... 42 2.7 Levels in the Planning Process ..........................................................................................43 Fig. 2.1 Strategic Planning Process ................................................................................... 44 Task 2.1 .............................................................................................................................46 2.7 Supply Chain Forecasting .................................................................................................. 46 2.8 Inventory ............................................................................................................................ 47

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Fig. 2.2 Economic order Quantity (EOQ) ........................................................................... 50 2.9 Materials Requirement Planning (MRP1)...........................................................................50 Fig. 2.3 Relationship between MRP11 and MRP1............................................................. 51 Fig. 2.4 Relationship between MRP and DRP ................................................................... 52 Fig. 2.5 Relationship between RDCs and Customers ........................................................ 53 2.10 Demand planning versus Demand management............................................................... 53 Fig. 2.6 Forrester Effect ..................................................................................................... 55 Task 2.2 .............................................................................................................................55 2.11 Vendor Managed Inventory................................................................................................55 Table 2.1 VMI Challenges and Benefits............................................................................. 57 2.12 Outsourcing....................................................................................................................... 59 Table 2.2 Challenges and Benefits for Outsourcing........................................................... 60 Table 2.3 Reasons for Outsourcing. .................................................................................. 61 2.13 Just-in-time philosophy (JIT) to Logistics and Supply Chain.............................................. 62 Fig. 2.7 Traditional and JIT Production Models.................................................................. 63 Task 2.3 .............................................................................................................................67 2.14 Information Technology (IT) in the Supply Chain............................................................... 67 Task 2.4 .............................................................................................................................73 3 Supply Chain Operations ................................................................................................74 3.1 Learning Outcomes............................................................................................................ 74 Fig. 3.1 ...............................................................................................................................75 3.2 Transportation .................................................................................................................... 76 Table 3.1 ............................................................................................................................77 Fig. 3.2 ...............................................................................................................................78 3.3 Warehousing ...................................................................................................................... 79 3.4 Logistics Approach............................................................................................................. 80 Fig 3.3 The Logistics Approach to Operations ................................................................... 81 3.5 Costing Supply Chain activities.......................................................................................... 81 Fig. 3.4 Supply Chain Cost Areas ...................................................................................... 82 Task 3.1 .............................................................................................................................82 Fig. 3.5 Activity Based Costing .......................................................................................... 83 Table 3.2 DPP Calculation ................................................................................................85 Task 3.2 .............................................................................................................................85 Table 3.3.Key Supply Chain cost drivers and design variables ......................................... 89 3.6 Performance management.................................................................................................90 Fig. 3.6 Planning and control cycle .................................................................................... 92 Table 3.4 ............................................................................................................................93 3.7 Cross Functional Performance Models ..............................................................................93 Fig 3.7 The Balanced Scorecard........................................................................................ 95 Task 3.3 .............................................................................................................................97 Table 3.4 What Customer Values ......................................................................................99 Table 3.5 Evaluating performance against Competition ................................................... 99 Task 3.4 ...........................................................................................................................100 3.8 Example of Performance Measures................................................................................. 100 3.9 Benchmarking .................................................................................................................. 100 3.10 Types of Benchmarking ...................................................................................................102 Fig. 3.8 Benchmarking and information gathering ........................................................... 103 Task 3.5 ...........................................................................................................................104 4 Supply Chain Improvement...........................................................................................105 4.1 Learning Outcomes..........................................................................................................105 4.2 Supply Chain Audits......................................................................................................... 106 4.3 Supply Chain Improvement Models ................................................................................. 107 4.4 Lean Thinking in Supply Chains....................................................................................... 108 Task 4.1 ...........................................................................................................................109 Fig. 4.1 Approaches to leanness......................................................................................103 Task 4.2 ...........................................................................................................................111 4.5 Lean Supply ..................................................................................................................... 111

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4.6 Agile Supply Chains ......................................................................................................... 114 Task 4.3 ...........................................................................................................................115 4.7 Supply Chain Mapping ..................................................................................................... 119 Table 4.2 : Comparison between process and supply chain mapping ............................. 121 4.8 The Supply Chain Reference (SCOR) ............................................................................. 121 Fig. 4.1 SCOR Model Supply Chain Council 2001........................................................... 122 4.9 Scott & Westbrook ........................................................................................................... 123 4.10 Supply Chain Mapping Tools ...........................................................................................123 Fig. 4.2 General Process Activity Mapping of Ketchup Production .................................. 124 Fig. 4.2.1 Production Variety Funnel................................................................................ 125 4.11 The Six Sigma Model ....................................................................................................... 126 Fig. 4.3 The Six Sigma DMAIC Process and Key Outputs .............................................. 127 4.12 Information and Supply Chain improvement .................................................................... 129 4.13 Integrated Improvement Strategies.................................................................................. 133 4.14 Benefits of E-supply chain management.......................................................................... 134 Fig. 4.4 e-Procurement Benefits ...................................................................................... 134 Task 4.4 ...........................................................................................................................135 Summary.......................................................................................................................... 136 Bibliography ..................................................................................................................... 137 Journals/Magazines .........................................................................................................138 Websites .......................................................................................................................... 138

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Abbreviations ABC Activity Based Costing

APS Advanced Planning and Scheduling

BSC Balanced Score Card

BOM Bill of Material

BPR Business Process Re-engineering

B2B Business to Business

B2B Business to Customer

CCR Capital Cost Rate

CEO Chief Executive Officer

CILT The Chartered Institute of Logistics and Transport

CLM Council of Logistics Management

CMI Co-Managed Inventory

CNN Cable News Network

CRM Customer Relationship Management

CSF Critical Success Factor

DMAIC Define, Measure, Analyse, Improve, Control

DPP Direct Product Profitability

dpmp defects per million oppotunities

DRP Distribution Requirements Planning

DSS Decision support system

EAN European Article Number

EBQ Economic Batch Quality

ECR Efficient Consumer Response

EDI Electronic Data Interchange

EMEA Europe, Middle East and Africa

EOQ Economic Order Quantity

EPOS Electronic Point Of Supply

ERP Enterprise Resource Planning

EU European Union

EVA Economic Value Added

FMCG Fast Moving Consumer Goods

GDP Gross Domestic Product

ICT Information and Communication Technologies

IMF International Monetary Fund

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IT Information Technology

JIT Just In Time

JITD Just In Time Distribution

KPD Key Performance Drivers

KPI Key Performance Indicator

KPO Key Performance Objectives

LAN Local Area Network

LC Letter of Credit

LERC Lean Enterprise Research Council

MIS Management Information Systems

MPS Master Production Schedule

MRP Material Requirements Planning

MRPII Manufacturing Resource Planning

MRO Materials, Repair and Operation

MTO Make to Order

MTS Make to Stock

NDC National Distribution Centre

OEM Original Equipment Manufacturer

PEST Politics, Economics, Social Trends, Technology

PESTLE Politics, Economics, Social Trends, Technology, Legal Considerations, Ethics

QR Quick Response

R&D Research and Development

RCCP Rough Cut Capacity Planning

RDC Regional Distribution Centre

RFID Radio Frequency Identification

ROCE Return On Capital Employed

ROI Return On Investment

SBU Strategic Business Unit

SCC Supply Chain Council

SCM Supply Chain Management

SCOR Supply Chain Operation Reference

SKU Store Keeping Unit

SPC Systems Process Control

SWIFT Society for Worldwide Interbank Financial Telecommunication

SWOT Strengths, Weaknesses, Opportunities, Threats

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TCC Total Cost Concept

TPM Total Productive Maintenance

TQM Total Quality Management

VMI Vendor Managed Inventory

WAN Wide Area Network

WBS Wine, Beer and Spirits

WIP Work in Progress

WTO World Trade Organisation

The Supply Chain Section 1 Version 2.1 1

1 The Supply Chain This section will discuss the early beginnings of supply chain and

the concepts of supply chain management.

1.1 Learning Outcomes On completion of this element, you should be able to:

Make an outline representation of an organisations supply chain and

make comparisons with similar and dissimilar types of organisation.

Distinguish between the types and directions of the flows in a supply

chain

Assess the main strength and weaknesses of an organisations supply

chain and the extent to which it provides competitive advantage for a

business.

1.2 Theoretical Foundation of Supply Chain Management

Firms can no longer effectively compete in isolation of their suppliers and

other entities in the supply chain. Interest in the concept of supply chain

management has steadily increased since the 1980s, when companies

saw the benefits of collaborative relationships within and beyond their own

organisation. The history of supply chain initiative can be traced to early

beginnings in the textile industry with quick response (QR) program and

later to efficient consumer response (ECR) in the grocery industry. More

recently, companies across many industries have begun to look at the

entire supply chain process.

The phrase Supply Chain Management was first coined in the early

1980s to describe the range of activities co-ordinated by an organisation to

produce and manage supplies. Traditionally, the term referred to an

internal focus bounded by a single organisation and how they sourced and

procured supplies managed their internal inventory and moved goods onto

their customers.

2 The Supply Chain Section 1 Version 2.1

Owing to intense competition in the textile and apparel industry world-

wide, the traditional supply chain resulted in major losses to the industry

due to financing the inventory and lack of the right product in the right

place at the right time. The original focus was therefore extended beyond

the internal management of the chain. Companies started to acknowledge

that the reality in managing supplies meant that supply chains extended

beyond the purchasing organisation and into their suppliers and suppliers

supplier. The contemporary supply chain is a term now commonly used by

logistics professionals, which encompasses every effort involved in

producing and delivering a final product, from the suppliers supply to the

customers customer.

1.3 Mapping Supply Chain Processes The question you must ask yourself is how do I understand, manage and

improve my organisations supply chains? Before supply chain

practitioners can effectively manage and improve their logistics and supply

chain processes, they must understand it. One way to improve

understanding is by developing graphic representations of the

organisational links that make up the supply chain.

Mapping a Supply Chain Serves Several Purposes:

It creates a common understanding of the participants in the supply

chain: the firms, the processes, who perform the various activities

and the results.

It defines the points of linkages and where they integrate.

It provides the baseline against which to measure the impact of

improvement efforts. Ways of identifying areas of improvement:

o Identify the major supply chain players, using a technique called relationship mapping

o Construct a process map that shows all the players and their

major activities.


Fig. 1.1 Example of a simplified Supply Chain map

A traditional supply chain model

Procure, store and/or move materials, products, people, money and information between stages

Supply Chain Relationship Mapping A relationship map is a high-level map that shows the major organisational

entities involved in a supply chain and how they are connected to one

another through physical, informational and monetary flows. For example,

mapping is the first step that a manufacturer might take to identify the

various people, functional areas, and even outside organisations involved

in the activities and processes that deliver orders to the customer. The

overall objective of supply chain relationships mapping is to identify the

pattern of flows between participants.

Besides the apparel and grocery industry initiatives, other early

manufacturers who made efforts to improve their supply chain

performance include: Hewlett-Packard, Whirlpool, Wal-Mart, West Co.,

Becton Dickinson, Baxter, Georgia-Pacific Corp. and automotive Original

Equipment Manufacturer (OEM)

Source and procure inputs

Materials and labour

Transform Marketing and sales

Distribution Customer/ Service


Task 1.1

Identify an organisation of your choice and show diagrammatically its supply chain.

What reasons led to the expansion of supply chain concept beyond the textile industry?

This example shows a simplified relationship map. It can be observed that there are not direct flows of demand forecasts between the automotive Original Equipment Manufacturer (OEM) and the Tier 2 firms. As a result, the Tier 2 firms were completely dependent on the Tier 1 supplier for any information regarding changes in demand at the OEMs assembly plant. This provided a place to begin looking for ways to improve information sharing in the supply chain.

Tier 2

Tier 1 Automotive OEM

Physical and

Information flows

Relationship Map for a cockpit Sourcing at Automotive OEM Source: Bozarth, C. C and Handfield, R.B (2005)

Family 1 supplier

Family 3 Supplier

Assembly plants

Family 2 supplier

Supplier of

cockpits


1.4 Supply Chain Management in its Context Supply chain management as a subject area in the field of management,

since its evolution in the mid-1980s, has not yet been conceptually well

understood due to its multi-disciplinary nature. The view of the few early

proponents of supply chain management is that the subject emerged from

similar terms such as:

Network sourcing

Supply pipeline management

Value chain management

Value stream collaboration

Material and logistics management

Strategic sourcing management

Distribution channel management

Relationship development

Partnership sourcing

Supply network design

Vertical disintegration

Time-based strategy

Customer first

Industry groups have been working together to improve the integrative

processes of the subject and accelerate the benefits available through

successful implementation. The activities, processes and relationships,

which fall under the supply chain label, are central to industrial modernity.

The details of life for all of us are deeply impacted by supply chain

activities. At the global level, the material well-being of people in one part

of the world and the parallel poverty in the other part are closely

intertwined by complex networks of global production and distribution. The

flow of goods through the supply chain is the life-blood of the modern

society. It can be argued therefore, that the developments insupply chain

practice do not spring from nowhere in particular, but arise from a complex

nexus of social developments.


1.5 Institutional Definitions

The American Production and Inventory Control Society (APICS) dictionary describes the

supply chain as:

the processes from the initial raw materials to the ultimate consumption of

the finished product linking across supplier-user companies.

The Supply Chain Council Views the supply chain as:

a term used by logistics professionals that encompasses every effort involved in production and delivering a final product, from the suppliers

supplier to the customers customer. Four basic processes plan, source, make, deliver - broadly define these efforts, which include managing supply and demand, sourcing raw materials and parts, manufacturing and

assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the

customer.

1.6 Other Definitions The following are views of individual supply chain scholars

Jones and Riley (1985) described the supply chain as an integrative approach to dealing with the planning and control of the materials flow from suppliers to end-users.

Christopher (1992) defined the supply chain as: a network of organisations that are involved through upstream and downstream linkages in the different processes and

activities that produced value in the form of products and services in the hands of the

ultimate customers.

New and Payne (1995) described supply chain management as the chain linking each element of the manufacturing and supply process, from raw material through to the end

user, encompassing several organisational boundaries. Its primary focus was the efficient

physical distribution of final products from the manufacturer to the end user in an attempt

to replace inventory with information.


Harland (1996) said supply chain management is managing activities and relationships (1) internally within an organisation, (2) with immediate suppliers, (3) with first and

second-tier suppliers and customers along the supply chain, and (4) with the entire

supply chain.

Hobsons (1997) view of supply chain is more expanded to include recycling and re-use. He said: Supply chain is about organising the entire chain from purchasing the raw

materials through to the point where the end product is used or consumed. It involves

ensuring that the right product is available in the right quantity in the right condition in the

right place at the right time in its widest sense, it includes the disposal and possible

recycling of waste, and even extends to after-sales maintenance and the replacement of

parts.

Lowson et al (1999) viewed the supply as the management of the entire chain of activity from raw material supply to final consumer in order to minimise the time taken to perform

each activity, eliminate waste and offer an optimal response by maximising value.

Adewole (2005) defined supply chain as a group of interdependent companies collaborating together within a network of relationships to manage the movement of

materials, part-finished and finished goods as well as services, including all transactions

and shared information, along a customer-focused value system in order to realise

superior customer benefits at a competitive cost.

You will note that each of the definitions above identifies five key

processes Plan, Source, Make, Deliver, and Return. You will note that the five key processes indicate the role of logistics in the supply chain. Let

us use the Supply-Chain Operation Reference (SCOR) Model to examine these five processes more closely.


Fig. 1.2 Five Processes in the Supply-Chain Operations Reference (SCOR) Model

SCOR Process

Definitions

Plan

Processes that balance aggregate demand and supply to develop a course of action which best meets sourcing, production and delivery requirements

Source

Processes that produce goods and services to meet planned or actual demand

Make

Processes that transform products to a finished state to meet planned or actual demand.

Deliver

Processes that provide finished goods and services to meet planned or actual demand, typically including order management, transportation management, and distribution management.

Return

Processes associated with returning or receiving returned products for any reason. These processes extend into post-delivery customer support.

We can argue that logistics and supply chain management have important

roles to play in sourcing, making, delivery and recall of products. Supply

chain management is the single most important strategy for ensuring

success in an industry that is experiencing intense competitive pressures,

and the most pressing technological investments for facilitating supply

chain superiority involve software associated with the logistical activity of

order fulfilment.

Modern business strategists suggest that company-versus-company

competition will be superseded in the twenty-first century by supply-chain-

versus-supply-chain competition, particularly with companies having single

sourcing relationships. It could however be noted that a more realistic


perspective would be that individual members of a supply chain will

compete based on the relevant capabilities of their supply network, with a

particular emphasis on immediately adjacent suppliers or customers.

Example of supply chain vs. supply chain relationships, where individual companies compete using their relevant capabilities:

Bose Corporation (A manufacturer of stereo equipment) developed a supplier integration program known as JIT, facilitated by Radio Frequency

Identification (RFID) technology. The facility allowed various suppliers to

have in-plant offices at Bose. This helped them to personally interact with

other suppliers and Bose Personnel on a daily basis. The suppliers

employees stationed at Bose have the authority to place purchasing

orders from Bose for their employers goods (rather than having the

purchase orders placed by Bose employees).

Task 1.2

The Supply Chain Operations Reference (SCOR) model examines five key processes of Plan, Source, Make, Deliver and return. Demonstrate in full details how these processes apply to your organisations logistics and supply chain activities. You may use any organisation that you are familiar with.

1.7 The Structure of Supply Chain Organisations historically structured themselves into functions such as

purchasing, production and distribution, marketing and selling. These

functions work together simultaneously and manage the different parts of

the organisation to achieve set goals. As business networks have


developed and become more complex, the boundaries of organisations

have become less detached and somewhat blurred. It can be suggested

that these blurred boundaries have meant that individual organisations are

no longer in competition, but rather supply chains, comprising of

participating organisations are competing against other supply chains.

Organisations involved in a supply chain are linked together through

physical flows of materials and products, information flows and monetary

flows. These flows go both up and down the chain. A simple supply chain

structure will comprise firms that are positioned upstream and whose inputs feed into supply pipeline, whilst those firms who take the finished

product and move them to the final consumer are considered

downstream.

Upstream: A term used to describe

activities or firms that are

positioned earlier in the

supply chain relative to

some other activity or firm

of interest.

Examples of upstream firms:

Cotton growing firms supplying cotton

materials to fabric mills.

Sheep farmer supplying hides and skins

for the production of leather and leather

products

Corn harvesting takes place upstream of

cereal processing, while cereal

processing takes place upstream of

cereal packaging.

Downstream: A term used to describe

activities or firms that are

positioned later in the

supply chain relative to

some other activity or firm

of interest.

Examples of downstream firms:

Garment sewing, wholesale and retail

shops take place downstream the

clothing supply chains.

The Brewery and Wine, Beer and Spirits

(WBS) bars and pubs take place

downstream the WBS supply chains.


Fig. 1.3 An Integrated Supply Chain Process

1.8 Managing the Supply Chain Managing the supply chain has become an issue since the 1990s because

few companies continued to be vertically integrated. Companies have

become more specialised (fig 1.3) and search for suppliers who can

provide low cost, quality materials rather than own their source of supply.

There are three critical paths for supply chain successes for companies:

Upstream

Procurement

Manufacturing

Replenishment

Customer

Consumption

Supplier

sourcing

Manufacturer

Distributor

Retailer

Customer

Consumer-end user

Downstream

Information

Goods flow

Cash flows

Demand signals


First is to manage the entire network of supply to optimise overall

performance. Organisations have realised that whenever a company deals

with another company that performs the next phase of the supply chain,

both stand to benefit from the others success.

The second reason stems from increased national and international

competition. Customers have multiple sources from which to choose to

satisfy their demand. Customers buying habits are constantly changing,

and competitors, wherever they are located in the global village, are

continually adding and deleting products. Increased and constantly

changing demand make sure that the company will have the wrong

inventory. Companies are therefore adopting a new approach to managing

their inventory. Previously, companies distribution strategies focused on

maintaining inventory at various locations throughout the supply chain.

Today, the dynamics of the modern marketplace has made holding

inventory a risky and potentially unprofitable business. It has become

crucial that products are strategically located throughout the distribution

channel for maximum customer accessibility at a minimum cost.

The third critical path is a realisation by companies that maximising

performance of one department or function may lead to less than optimal

performance for the whole company. Companies must look across the

entire value chain in their supply pipeline to gauge the impact of decisions

in any one area, as an error in one link in the supply chain will impact on

all other links in the same chain. For example, purchasing may negotiate a

lower price on a component and receive a favourable purchase price

variance, but the cost to produce the finished product may go up due to

inefficiencies in the plant. This in turn may have a negative impact on price

competition at the retail outlet.

Supply chain management is seen as a technique which can make a

considerable contribution to the economics of business development.

Supply chain management has taken on different meanings in different


industries. The development of increasingly close relationships between

customers and suppliers encompasses approaches including:

Development of long term relationships with suppliers

Greater and earlier involvement of suppliers in product technology

Development of mutual contractual and competence trust

Supplier associations

Benchmarking

Common supplier assessment schemes

1.9 Supply Chain Network The core of logistics and supply chain is hinged on creating and

maintaining a network of relationships both outside as well as inside the

organisation. A network consists of nodes, which represent the business

or actors, such as suppliers, producers, customers and service providers.

The links between the nodes represent relationships. Relationships

between actors are like bridges as they give one actor access to the

resources and competences of another.

Fig. 1.4 Typical Supply Chain Network

Key : S = Supplier P = Plant W = Warehouse M = Market Adapted from Lysons and Farrington (2006)

S

S

S

P

W

W

W

M

M

M


In business settings, network relationships between firms are of

paramount interest. An understanding of the concepts of supply chain

relationships and the specific processes and activities occurring among

the networks of trading partners in the supply pipeline is closely

associated to the nature of business networks. The functions of business

relationships can be characterised to three essential components: actors,

resources and activities.

Primary functions of the relationships corresponding to activities,

resources and actors are efficiency through interlinking activities, which

are mutually based on the self-interest of actors. Activities performed by

two actors, through their relationship, can be adapted to each other so that

their combined efficiency is improved, such as in just-in-time exchange. By

working together, the two actors will learn that by co-operating, they raise

the benefits that each receives.

Secondary functions are caused by the existence of connections between

relationships. This relates to chains of activities involving more than two

firms. Resources developed in this type of relationships are important to

those engaged in the relationship, as they may have implications for

resources of parties engaged in connected relationships. Thus innovations

developed as a result of interaction in several relationships may support

each other. By getting involved in a network, a focal firm may have its

views shaped by, and shape the views of, its partners partners.

It can therefore be said that a network is not a world of individual and

isolated transactions. Rather, it consists of a series of direct and indirect

ties from one actor to a collection of others. It is a closed set of actors

forming the largest set of interconnections possible.

Ford et al defined a network relationship as a companys portfolio of

relationships and the rights and obligations that go with it. Network

structures allow organisations to bring resources together on a long-term


basis to reduce costs. This is why most growing organisations are

increasingly turning to global networks as a means of gaining access to

low-cost overseas inputs. Networks relate to all aspects of the supply

chain, including marketing, logistics and distribution.

Fig. 1.5 A Model Showing a New Saw Equipment Producer Network Relationship.

Source: Anderson et al (1994) Dyadic business relationships within a business network context.

Many researchers within supply chain management subject areas have

claimed that a general paradigm shift is taking place within marketing,

focusing on relationship management instead of managing separate

discrete transactional exchanges with business counterparts.

Supplier of components Small sawmill

Saw Equipment Producers

Other sawmills

Saw Blade producer

Wielding Equipment producer

Saw Steel Producer

Large Sawmill

Focal Relationship


1.10 Managing the Supply Chain Networks Supply chain managers should evaluate, maintain and review the

companys network positions by consolidating some of the elements of

their current positions. For example, a company may choose to maintain

its existing distribution relationships through a wholesaler. Alternatively,

firms may want to create new elements by developing new supply chain

relationships to increase the range of their offerings.

Supply chain managers should carry out an overall assessment of the

companys dealings with the surrounding network in order to determine to

what extent it can influence those in the same network to achieve their

business ends without major hindrance to others in the network. An

example is Marks & Spencer, who insist that its suppliers should produce

to its own design and determine where to source fabrics from, and how

suppliers should deliver.

1.11 Reasons for Slow Growth of Integrated Supply Chain Management

Despite the acceptance of the concept of integrating and managing the

supply chain, growth of integrated supply chain management has been

slow. Reasons for the slow growth include the following:

Lack of guidelines for creating alliances with supply chain partners.

Failure to develop measures for monitoring alliances.

Supply Chain Networks

The ability of a firm to manage its supply chain networks may itself be considered a

core competency. This is certainly the case for Dell Computer Corporation, which

practices what Michael Dell calls virtual integration. While not all organisations are

as dependent on their supply chain partners as Dell is, current industry trends suggest

that more organisations are focusing on developing only a few competencies and

outsourcing everything else. This puts a premium on an organisations ability to select

good partners and coordinate the flow of information and material between partners.


Inability to broaden the supply chain vision beyond procurement or

product distribution to encompass larger business processes.

Inability to integrate the companys internal procedures.

Lack of trust inside and outside a company.

Organisational resistance to the concept.

Lack of buy-in by top managers

Lack of integrated information systems and electronic commerce

linking firms.

Task 1.3

1.12 Global Supply Chain While the supply chains at the domestic level focus on performing value-added services in a relatively controlled environment, global supply chains

combine all the domestic purchasing and supply as well as logistics

requirements when dealing with uncertainties associated with cross border

factors such as distance, language and culture, international regulations,

payment systems and other documentations.

Supply chain managers who operate in the international arena are

required to develop a wide variety of capabilities and expertise to deal with

A logistics and supply chain pipeline is comprised of upstream

and downstream linkages. With an example of a chocolate bar, identify the organisations that might be in the upstream and those that are in the downstream of its supply chain.

Supply-chain-versus-supply-chain competition will soon take over from company-versus-company competition. Discuss this proposition


these factors, as global operations have increased cross border supply

chains cost and complexity.

The estimated supply chain cost for 2000 in industrialised nations

exceeded $2 trillion or 11.7% of combined gross domestic product (GDP).

In the UK alone, the global logistics costs for the same year were

estimated to be $1.05 billion, representing about 12.2% of the UK GDP.

Supply chain complexity arises due to (a) increases in uncertainty as a result of greater distances, longer lead-times and a decrease in market

knowledge, (b) decreases in capability and control due to extensive use of

intermediaries and government interventions such as customs

requirements and trade restrictions.

Logistics and supply chain management professionals must be aware that

in spite of the complexities, globalisation cannot be avoided. Managers

must resolve these concerns and complications that are causing barriers

to borderless logistics and supply chain activities.

Barriers to Global Supply Chain Management We will now take a look at the possible barriers to supply chain operations

as companys trade around the world.

Pricing and currency difficulties International pricing is strongly influenced by exchange rates. Prices may rise due to sudden increased

cost incurred by the supplier while the local retailers will only sell at a price

above the rate of exchange in order to ensure profitability.

Apart from fluctuations in exchange rates and difficult methods of

payment, tariffs are imposed to protect domestic industries by increasing

prices on imported goods. This has the following implications on

international trade:


a) they are additional cost elements that must be considered when

evaluating foreign sources of supply

b) they are political; subject to quick change as government policy

alters.

Entry restrictions - these include legal and physical barriers to restrict market access to overseas importers. Physical barriers - European

practice on local presence requiring market-based manufacturing or

distribution facilities to be established prior to market access. Legal

difficulties what trade restrictions on imports or exports. What trade

restrictions are imposed on new entrants? For example the Japanese

practice where local retailers 'vote' to accept new retailers, particularly

foreign ones.

Barriers arising from poor weather, material-handling equipment, cargo transfer, warehouse facilities, port facilities, dock strikes, poor

communication systems and custom actions.

Differences in global transportation equipment such as vehicle dimensions, capacity, weight, and rail gauge.

Documentation and poor information availability - Little co-ordinated information is available on import and documentation requirements. Terms

of trade regarding bills of lading, certificate of origin, customs entry forms,

shipment cancellations, deliveries and delays information are taking longer

to transmit.

Typical requirements differ by government and even by specific case. In

countries where documentation has to be completed and processed prior

to shipment, goods may be delayed or impounded if the documentation is

not flawless. There is limited information available on market size,

demographics, and competitive trends in the market. Efficient and effective


application of appropriate information and communication technologies

has made most of these problems a thing of the past.

Institutional Infrastructure This results from major differences in how facilitating intermediaries such as banks, insurance firms, legal

counsellors, and transportation carriers operate.

Services that are taken for granted in one country, are administered

differently in another country, e.g. banking or insurance facilities that are

taken seriously in Britain may just be in their infant stage in, say, South

Korea or Indonesia.

For instance, payment procedures take two or three weeks in Eastern

Europe, or Morocco, whereas in the UK it takes less time for payment

receipts to be processed. Such delays significantly complicate order

processing and increase financial and inventory risks.

Forces Driving Global Supply Chain Relationships New relationships development in the supply chain have changed from the

old adversarial, selfish approach, where managers focused on reducing

procurement cost and manufacturing expense within their own enterprise

and ignored the expenses incurred by other chain members when making

product sourcing or manufacturing decisions. There is now a more open

and collaborative approach, with better transportation at lower cost, better

global communication links that enable trading partners to know more

about each other's businesses and co-operate to remove bottlenecks in

the chain through integration of business functions, joint planning and joint

investment for a more efficient and effective supply chain management.

Let us look at the following four factors as they influence and facilitate

international supply chains.


Economic growth - The search for business growth and maximised market opportunities, and the desire for economies of scale and

profitability are fundamental forces driving supply chain managers to

establish new relationships with trading partners around the world. Most

companies now seek global supply chain competition by collaborating with

manufacturers and suppliers in developing countries as a direct means of

increasing revenue and profit. For example, the UK clothing retailers such

as Marks and Spencer, the Arcadia group and other high street retailers

source garments from the Asiatic countries, where cost of production is

lower compared to the UK production.

Consequently firms are more willing to develop alliances with global

suppliers that could provide expertise and quality service at a reasonable

cost for activities such as international freight consolidating and

forwarding, international transportation, cross border documentation,

quality control and facility operations.

Trade liberalisation and the removal of trade restrictions in the movement of capital, materials and intermediate components - Each countrys political borders have traditionally served as a barrier to trade.

Government restrictions and requirements cause supply chain and

logistics problems. New trends in cross border trading have necessitated

the removal of country and regional barriers and facilitate global supply

chain. Countries are entering into trade treaties and agreements that

promote regional trade and protect trading partners from outside

competition. Examples of such agreements are the European Community

(EC 92), the North American Free Trade Agreement (NAFTA) the Group

of Eight (G8), the Multi-Fibre Agreement concluded in Uruguay under the

General Agreement on Tariff and Trade among many others. These

multilateral agreements help global corporations to ship semi-

manufactured products between their own factories or from suppliers to

assembly plants and distribution centres around the world.


Deregulation and the role of International Monetary Fund (IMF) - Many countries of the world tend to embrace the market-based reforms and

integration as proposed by the IMF. Inter-governmental arrangement and

co-operation in trade regulations, procedures in finance, transportation,

and service tend to yield improved global market service while

simultaneously reducing tensions in the supply chains, a net result of

which should favour international trade.

The newly industrialising nations - The emergence of new major trading nations from newly developed (developing) economies in China, South-

East Asia and in Latin America is facilitating further development of global

supply chains.

Increasing Technology - Technology explosion is a major force driving the global market. Global market awareness through powerful information

technology stimulates a convergence of global needs and preferences.

The international consumers are now exposed to foreign products more

than ever before.

Consumers all over the world desire better quality product at minimum

price possible. For example the demand for blue jeans, sportswear and

athletic shoes has increased in Eastern Europe, Asia and Africa.

Computer hardware and software technologies in manufacturing and

communication network such as material requirement planning (MRP 1),

manufacturing resource planning (MRP II), enterprise resource planning

(ERP), electronic data interchange (EDI), E-mail and Internet

technologies, Cable News Network (CNN), radio frequency identification

(RFID), multi-media mobile phones, and other satellite communications

promote a variety of products and stimulate global demands.

Information and communication technologies (ICT) have made easier

international supply chain negotiations and transactions and speed up

activities in the logistics supply pipelines. Prior to the application of


information technology, trade documentations were traditionally hard copy

papers that required extensive time to transfer upstream the supply chain,

and often contained many errors. For example, in the clothing industry, the

performance cycles from order commitment to order receipt of garment in

the UK were 8-12 weeks from Far East Asia, 6-8 weeks from neighbouring

European countries and 4-6 weeks from within the UK. But with the use of

enhanced ICT that speeds up order requirements, communication,

production scheduling, shipment scheduling and custom clearance, the

performance cycles have been drastically reduced to less than half.

Global Supply Chain Strategy Given the barriers and the opportunities inherent in the operation of global

supply chains, practitioners must develop workable strategies for

conducting their businesses.

As a logistics and supply chain professional you will need to:

Identify and develop your organisations core competences that

will give access to the global markets;

Participate in global supply chain networks;

Understand and operate efficient logistics and supply chain

configuration (design) of value-adding activities;

Engage in global supply chain co-ordination and integration of

activities;

Relate to local responsiveness where required;

Participate in efficient, effective and timely information sharing,

assisted by the application of information and communication

technologies


Task 1.4

1.13 The Relationship of Logistics to Supply Chain Management

A number of definitions of supply chain have been given in this section.

Having gained a clear understanding of the supply chain concept, we will

now look at a few definitions of logistics and examine its relationship to

supply chain management.

The Council of Logistics Management (CLM) (1998) defines logistics as:

the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements. Note that this definition includes inbound, outbound, internal and external movements, and return of materials for environmental purposes.

With increased interest in supply chain management, several authors have

discussed the differences between this newer concept, supply chain

management, and logistics. Cooper et al. (1997) stated that a

contemporary understanding of supply chain management is not

appreciably different from the understanding of integrated logistics

management. However these same authors suggested that a broader

understanding of supply chain management was emerging, one that

includes the integration of business processes from end use through

Identify key benefits of global supply chains. What barriers might organisations operating international supply networks encounter in the course of their business across borders?

How much do you agree with the statement that network relationships are one of the key instruments for global competitiveness?


original suppliers that provides products, services, and information that

add value for customers. Supply chain management is not just another

name for logistics, it includes elements that are not typically included in a

definition of logistics, such as information systems integration and

coordination of planning and control activities.

Giunipero and Brand (1996) viewed that in its broadest context supply

chain management is a strategic management tool used to enhance

overall customer satisfaction that is intended to improve a firms

competitiveness and profitability. Johnson and Wood (1996) concluded

that supply chain management is somewhat larger than logistics.

Lummus et al (2001) conducted a survey of manufacturers, retailers and

third party logistics providers in the United States. The table below shows

their conclusions on the relationship of logistics to supply chain

management as described by industry practitioner.

Types of firms How are the areas related?

Manufacturers

Logistics is a subset of the overall supply chain

process. In order to have an efficient chain, logistics processes must be well defined and cost effective.

Logistics works to transport material through the supply chain as cost effectively as possible.

Retailers

Supply chain management and logistics are

intertwined as can be noted from job descriptions. Good communications must exist between the two areas and each must have strong support from the others upper management

Supply chain management has three functions: a) develop strategic logistics capabilities, b) guide the planning and alignment of the retail supply chain, and c) integrate logistics into retail procurement processes.


Third-party logistics

Supply chain involves multiple companies for a

complete process and logistics is the complete applicable portion of the process within the company

1.15 Logistics and Supply Chain: Structure and Tiering

The concepts of logistics and supply chain suggest a series of processes

linked together to form a chain. Let us look at a typical logistics and supply

chain processes for a retail company.

Fig. 1.6 The supply chain of milk (from cow to customer)

Dairy Cooperative Transport Cheese factory Transport National DC

Transport

RetailerTransportRetailDC

Key: Material flow Information flow Logistics

In figure 1.6 above, milk is produced by a dairy cooperative and shipped to

a cheese factory. Once made, the cheese is shipped to the manufacturers


national distribution centre (NDC), where it is stored and matured for nine

months, when it is then be shipped in response to an order from the

retailer. The cheese is transported first to the retailers regional distribution

centre (RDC), from where it is finally transported to the retail store. As the

material flows from upstream suppliers to downstream customers,

information flows from downstream customers to upstream suppliers.

Logistics is clearly involved in the movement of both materials and

information to and from sides of the supply chain. Through a logistical

approach supply chains are able to harmonise the physical and

information flows in an integrated manner and the various trade-offs

obtained.

Task 1.5

1.15 Procurement, Logistics and the Supply Chain We have defined the terms logistics and supply chain in our previous

discussions. Before we engage in the discourse of how procurement,

logistics and supply chains work together, it is important to define the term

procurement.

What is Procurement? Procurement is the process undertaken by the organisational unit which,

either as a function or as part of an integrated supply chain, is responsible

both for procuring supplies of the right quality, quantity, time and price and

Compare and contrast the logistics concept and the concept of supply chain management.

Discuss how supply chain integration can benefit logistics and the firm as whole.


the management of the suppliers, thereby contributing to the competitive

advantage of the enterprise and the achievement of corporate strategy.

Relationship of Procurement to Supply Chain Management? Procurement functions now recognise a need for joint cooperation with

other parties in the supply chain to achieve:

Cost reduction or improvement

Improved material delivery

Shorter cycle time, including product development cycle times

Access to product and process technology

Quality improvement

From a strategic point of view, the procurement mission has been primarily

a support function to other logistics and operations. Purchasing must

therefore be aware of the components and services needed by operations

and logistics as they plan to assemble a product or deliver a service.

Because purchasing is responsible for sourcing the components to

support an operations plans, purchasing managers must work with

schedulers to coordinate the delivery of materials to the production site.

The increasing importance of supply chain management is forcing

organisations to rethink their purchasing and supply chain strategies.

Despite the apparent complexity of managing supply chains, some

organisations are thriving and exploiting their supply chains for competitive

advantage. As companies strive to increase customer value by improving

performance while simultaneously reducing costs, many companies are

turning their attention to purchasing and distribution management the

part of supply chain management that focuses on the management of

inbound goods and services into a firm.


Supply Chain Management in the food production from the farm to the consumer

Simple supply chains pull materials directly from their origin, process

them, package them, and ship them to consumers. A good example of a

simple supply chain involves cereal producers. A cereal company

purchases the grain from a farmer and processes it into cereal. The cereal

company also purchases the paperboard from a paper manufacturer, who

purchases semi-finished label stock to make the labels. The cereal is then

packaged and sent to a distributor, who in turn ships the material to a

grocer, who then sells it to an end customer.

Fig. 1.7 A Cereal Manufacturers Supply Chain

Packaged Packaged Grain Cereal Cereal Cereal

PackagedCereal

Key: Information flows

Materials flows

Adapted from Monczka et al (2002)

Purchasing and Supply Chain Management in the automobile industry

For automobile products, which have multiple products, technologies, and

processes, the supply chain may be somewhat complicated. In the past

decade, relationships between suppliers and assemblers in the global

Processing Facility

Corrugated PaperManufacturer

Lumber Company

Label

Manufacturer

Farmer

Customer

Packaging Distributor Grocery


End custom

ers

automobile industry have changed significantly. Three changes are

noteworthy. The first is supplier development and participation in product

development. The suppliers who formerly worked to assemblers design

have moved towards offering their own design solutions by taking up more

design responsibilities from assemblers. The second is that there has

been a shift from individual components towards the supply of complete

functions such as systems, sub-assemblies and module. This means that

a first-tier supplier becomes responsible both for the assembly of parts into

complete units such as dashboards, seats, and cockpit and for the

management of the second-tier suppliers (See figure 1.8 below). The third

is that assemblers are standardising their platforms across their

constituent companies.

Fig. 1.8 Relationships in the Supply Chain

Upstream Downstream

Second tierFirst tierFirst tierSecond tierSupplier SupplierCustomerCustomer

BUY SIDE INSIDE SELL SIDE

SUPPLY CHAIN MANAGEMENT

These changes have led to significant restructuring in the component

industry. Several trends have been identified. One of them is the

emergence of a reduction in the number of direct suppliers in order to

Focal

firm

Prim

ary manufacturers


maximise the limited time and resources available. Resourcing and tiering

activities are helping the component industry to concentrate in companies

that can design and provide systems and subassemblies across many

different markets. For example new global companies such as Autoliv

MNC have been created through the fusion of smaller companies. Major

component manufacturers have encouraged the development of strategic

alliances in order to deliver more extensive component systems or

develop new products. These changes have had considerable effects in

the emerging markets.

1.16 The Value Chain A value chain is a linked set of value-creating activities beginning with

basic raw materials coming from suppliers, moving on to a series of value-

added activities involved in producing and marketing a product or service,

and ending with distributors getting the final goods into the hands of the

ultimate consumer. The focus of a typical value chain analysis is to

examine the organisation in the context of the overall chain of value-

creating activities. In order to identify a companys core competence and

special capabilities, it is often essential to understand the different

capabilities available within the company.

Porters (1985) value chain separates the internal activities of a firm into a

sequential chain. These activities are classified as primary and supportive

functions. (See fig 1.9) According to the Value Chain analysis, the

companys primary activity is broken down into five different categories:

inbound logistics, operation (work-in-progress), outbound logistics,

marketing and selling and customer service. The value chain represents

the actual manufacturing of a product or delivery of a service that the

company performs. The chain of functions starts with the supply of raw

material and continues on through parts and components production,

manufacturing and assembly, wholesale distribution, and retailing to the

ultimate end user of the product or service.


The supportive functions in a firm are divided into four different categories:

general administration, research and development, human resource

management and procurement. These activities support the above primary

activities creating the fundamental structure and internal infrastructure

needed within the company in order to produce goods and services.

Fig. 1.9 The Value Chain

Source: Adapted from Kotler (1999)

The Primary Activities Inbound logistics: activities concerning receiving, unloading, unpacking, storing, handling and distribution inputs as well as controlling inventories.

Operations: transformation of the inputs into the products that are to be provided. Processes involving manufacturing, assembly, packaging,

maintenance of equipment, designing etc.

Outbound logistics: activities linked to physical distribution of the products to buyers. In retail it includes checkout operations.

Services

Infrastructure - General Management Process

Marketing and sales

Outbound Logistics

Primary Activities

Supportive

Activities

Operations Inbound logistics

Procurement

Human Resources

Research and Development /Technology


Marketing and selling: creating awareness of the product or service in the buyers, persuading them to buy, making the product available in a

number of locations to facilitate purchasing.

Service: after sales customer service including installation, training, repair and spare parts availability.

The Support Activities Procurement: obtaining purchased inputs of all kinds.

Human Resource Management: recruiting, training, developing and organising of personnel.

Research & Development/Technology: basic research and the design and development of both products and processes.

Firm Infrastructure: managerial process and all general management activities such as planning and control, quality management, obtaining and

allocating funds, the work of the legal department and dealing with

governments.

The value chain of most industries can be split into two segments,

upstream and downstream halves. In the petroleum industry such as

Texaco, for example, upstream refers to oil exploitation, drilling, and

moving the crude oil to the refinery, whereas downstream refers to refining

the oil plus the transporting and marketing of gasoline and refined oil to

distributors and gas station retailers.


Fig. 1.10 Relationships in the Value Chain

Value Chains of Suppliers Value Chains of Downstream partners

Overall Costs & Profit Margins

in Supply Chain

Source: Porth (2002), Strategic Management In analysing the value chain of a product, the organisation, usually has an

area of key expertise where its primary activities lie. An organisations

centre of gravity is that part of the chain that is most important to the

company and the point where its greatest expertise and capabilities, its

core competencies, lie.

The systematic examination of the organisations value activities can lead

to a better understanding of the firms strengths and weaknesses. It can

also help to negotiate more favourable prices with suppliers. The value

chain helps to find ways to expedite just-in-time deliveries, inventory costs,

warehousing, shipping and production scheduling costs. It will help to

eliminate cost producing activities by using technology and e-commerce. It

helps to relocate manufacturing activities to geographic areas where they

can be performed more cheaply (economies of scale through outsourcing).

It also helps to implement the use of best practice throughout the

organisation, particularly high cost activities.

Value Chain of Firms


Task 1.6

1.17 Customer Service Markets are increasingly becoming sophisticated with customers and

consumers demanding in a competitive environment that is more volatile

and less predictable (Christopher and Peck 2003).

Todays customer is much more sophisticated than before and this is a

radical change to markets that are now characterised by:-

Sophisticated and experienced customers Perceived equality of product and service functionality Transition from a sellers market to a buyers market Price competition Time compression

Consumers possess knowledge about products and services and

alternatives as a result of exposure to information through various sources

In these circumstances, organisations that will win and survive are those

that can provide goods and service within acceptable lead times, being

able to offer a range and variety of products and services with greater

reliability.

This calls for strategies for long term customer retention by redesigning

customer service objectives.

Customer service encompasses all activities between a supplier and a

buyer including all tangibles and intangibles elements.

With reference to a logistics organisation with which you are familiar, discuss how far the value chain concept is able to explain current and potential sources of competitive advantage.


Components of customer service can be split into three elements. These

are summarised below:

1) Pre-transactional elements

Customer service policy

Accessibility

Organisation structures

System flexibility

2) Transactional elements

Order cycle times

Inventory availability

Order fill rate

Order status information

3) Post-transactional elements

Availability of spares

Call-out time

Product tracing/warranty

Customer complaints, claims

The notion is to create measures and standards that focus on customer

service levels. This area will be discussed further in section three.

Supply Chain Planning Section 2 Version 2.1 37

2 Supply Chain Planning This section will discuss the importance of the strategic planning of

supply chains and the concepts of supply chain management.

2.1 Learning Objectives: Outline how company objectives are translated into a meaningful

supply-chain strategy. Devise tactical plans to meet customer service requirements Analyse the pattern and requirements for inventory in your

organisations supply chain Devise suitable alternative supply chain solutions including

outsourcing potential.

2.2 The Purpose of Planning In discussing the nature and role of supply chain planning, it is important

to look at strategic planning from the generic perspective. To be effective,

a strategic planning system must be goal driven. The setting of objectives

is therefore a key step in the business planning process. Objective setting

can be seen to follow on from the initial stage of analysis and, in particular,

the business audit, which provided the focus. By setting objectives the

planner is attempting to provide the organisation with a sense of direction.

Objective setting also provide a basis for motivation as well as a bench-

mark against which performance and effectiveness can subsequently be

measured. The setting of objectives is thus at the very heart of supply

chain planning and is helpful for developing a good supply chain strategy.

What is Planning? Jackson (1975) viewed the planning as attempts to control the factors

which affect the outcome of decisions. He said to plan is to decide what to

do before doing it. Therefore a methodical approach can be custom built

or ready made according to the nature of the problems involved. Drucker

38 Supply Chain Planning Section 2 Version 2.1

(1959) suggested that planning is a continuous process of making present

entrepreneurial decisions systematically and with best possible knowledge

of their futurity, organising systematically the effort needed to carry out

these decisions against expectations through organised feedback.

Logistics and supply chain practitioners should participate in the process

of systematic planning, both within their own organisation and with their

trading partners. In this process many decisions are required for

successful supply chain management and these decisions can fall into

three main categories or phases. Chopra and Meindl (2006) identified

decisions during the following phases:-

Supply chain strategic or design: - these are decisions relating to how the

structure of the supply chain should be over several years. The

configuration of the chain will influence how resources are allocated; the

location and capacity of the various facilities are all strategic decisions.

Supply chain planning: - decisions in this phase relate to periods shorter

than the above, (say 3 months to a year). These decisions look at

balancing strategic restrictions and constraints with market requirements.

Planning includes decisions on which markets are to be served from which

locations.

Supply chain operations: - here the time horizon is much shorter e.g. daily,

weekly and may relate to individual order satisfaction. At this level supply

chain configuration is considered fixed and planning policies have been

laid down.

What is Strategy? There are various definitions that have been given for strategy but in

general, strategy has been referred to as a long plan of achieving a given

objective. Mintzberg (1997) offers the following highlights in his definition

of strategy: Strategic planning is a complex process, which involves taking

a view of the organisation and of the future that it is likely to encounter,

Supply Chain Planning Section 2 Version 2.1 39

and then attempting to organise the structure and resources of the

organisation accordingly.

Different authorities have defined

supply chain management -...

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