SUPPLY CHAIN MANAGEMENT

INTRIDUCTION TO SUPPLY CHAIN MANAGEMENT

CHAPTER 1

Learning Objectives

After reading this chapter, you should be able to:• Discuss the overview of supply chain management.• Know the objectives of a supply chain and the decision phases in a supply chain.• Discuss the process views of a supply chain.• Describe the nature and scope of supply chain management.• Describe the model of supply chain management.• Describe the “supply chain drivers” and the framework for the same.

1.1 What is a Supply Chain?

In its broadest sense, a supply chain refers to the way that materials flow through different organisations, starting with raw materials and ending with finished products delivered to the ultimate consumer.

A supply chain is a sequence of suppliers, transporters, warehouses, manufacturers, wholesalers/distributors, retail outlets and final customers. Exhibit 1.1a illustrates a typical supply chain for a manufacturing organisation and Exhibit 1.1b illustrates a typical supply chain for a service organisation.

1.2 Importance of Supply Chain Management

• The total time for materials to travels through the entire supply chain can be quite long (say 6 months to one year or more). Since the materials spend so much time waiting in inventory at various stages in the supply chain, there is a great opportunity to reduce the total supply chain cycle time leading to a corresponding reduction in inventory, increased flexibility, reduced costs and better deliveries.

• The goals of supply chain management are to reduce uncertainty and risks in the supply chain, thereby positively affecting inventory levels, cycle time, processes and ultimately end-customer service levels. The focus is on system optimisation.

• The design, planning and operation of a supply chain have a strong impact on overall profitability and success.

• Supply-chain management has become a hot competitive advantage as companies struggle to get the right stuff to the right place at the right time.

• As firms strive to increase their competitiveness via product customisation, high quality, cost reductions and speed-to-market, they place added emphasis on supply chain management.

• Box 1.1 lists various definitions of supply chain management.

Box 1.1 : What is Supply Chain Management?• “Supply chain management is the integration of the various activities

encompassed by the supply chain through improved supply chain relationships to achieve a sustainable competitive advantage”.

• [The supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage (e.g., extraction) through to end users, as well as the associated information flows. Materials and information flow both up and down the supply chain.

• “Supply chain management is a collaborative based strategy to link cross enterprises business operations to achieve a shared vision of market opportunity. It is a comprehensive arrangement that can span from raw material sourcing to end customer purchase”.

— Donald J. Bower sox

• “Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities. It also includes coordination and collaboration with channel partners, intermediaries, third party service providers and customers. In essence SCM integrates supply and demand management within and across companies”.

— Council of Logistics Management, USA.

•“Supply chain management is the process of planning, implementing and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. 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.

What is Integrated Supply Chain Management?

“Integrated supply chain management is a proven business strategy that has gained wide acceptance in recent year due to increasing customer demands for quality, delivery and speed. New and radical ways of communicating, coupled with cost reduction and more interdependent supplier, provider and customer relationships, have contributed to the emergence of an integrated supply chain approach”.

1.3 Overview of Supply Chain Management

How is inventory created? : A basic purpose of supply-chain management is to control inventory by managing the flow of materials.

In a manufacturing firm, raw materials pass through one or more processes, which transform them into various levels of WIP inventory. Final processing of this inventory yields finished goods inventory, which may be held at the firm, the distribution centre, warehouse owned by the manufacturer or wholesaler and at retail locations.

Because materials comprise such a large component of sales revenue, companies can reap large profits with a small percentage reduction in the cost of materials. That is one reason why supply-chain management is becoming a key competitive weapon.

• Materials Management : One area of operations and logistics playing a major role in supply chain management is that of materials management, which is concerned with decisions about purchasing materials and services, inventories, production levels, staffing patterns, schedules and distribution, either directly or indirectly.

• Supply Chains : A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer’s request. It not only includes the manufacturer and suppliers, but also transporters, warehouses, retailers and customers themselves.

A supply chain is dynamic and involves the constant flow of information, product and funds between different stages.

(i) Supply Chain Strategy or Design : The company decides how to structure the supply chain during this phase. The chain’s configuration and the processes each stage will perform are decided. Strategic or long-range decisions made by companies include (i) The location and capacities of production and warehousing facilities, (ii) Products to be manufactured or stored at various locations, (iii) Modes of transportation to be made available along different shipping legs and (iv) Type of information system to be utilised.

(ii) Supply Chain Planning : In this phase, companies define a set of operating policies that govern short-term operations. The configuration of supply chain determined in the previous phase establishes constraints within which planning must be carried out. The planning phase starts with a forecast for the coming year of demand in different markets. Supply chain planning includes decisions regarding the following.

(i) Which market to be served from which locations

(ii) The planned build up of inventories

(iii) The subcontracting of manufacturing

(iv) The replenishment and inventory policies to be followed.

(v) Policies regarding back up locations in case of a stock out and

(vi) The timing and size of marketing promotions

(iii) Supply Chain Operations : During this phase, companies make decisions for the time horizon (weekly or daily) regarding individual customer orders. At this stage. The supply chain configuration is fixed and the planning policies already defined. The supply chain operation

aims at implementing the operating policies in the best possible manner. Various activities involved in this phase are : (i) Allocating individual orders to inventory or production ,(ii) Setting dates for fulfilling orders, (iii) Generating pick lists at a ware house, (iv) Allocating an order to a particular shipping mode or shipment. (v) Getting delivery schedules of trucks and (vi) Placing replenishment orders.

• Process View of a Supply Chain

Two different ways to view the process performed in a supply chain are

1. Cycle view 2. The push-pull view

1.Cycle View : According to this 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.

All supply chain processes can be broken down into the following four process cycles: (a) Customer order cycle ,(b)Replenishment cycl e,(c) Manufacturing cycle and (d) Procurement cycle.Each cycle occurs at the interface between two successive stages of the supply chain. Exhibit 1.2 illustrates the four cycles and five supply chain stages

(i) Customer Order Cycle : This occurs at the customer/retailer interface and include customer arrival, customer order entry, customer order fulfillments and customer order receiving.

(i) Replenishment Cycle : This occurs at the retailer/distributor interface and includes all processes involved in replenishing inventory of the retailer. The processes involved in the replenishment cycle include: Retail order trigger, Retailer order entry, Retail order fulfillment and Retailer order receiving.

(iii) Manufacturing Cycle : This occurs at the distributor/manufacturer interface and includes all processes involved in replenishing distributor (or retailer) inventory. The process involved in the manufacturing cycle include (a) Order arrival from the distributor, retailer or customer (b) Production scheduling, (c) Manufacturing and shipping and (d)Receiving at the distributor, retailer or customer.

(iv) Procurement Cycle : This occurs at the manufacturer/supplier interface and includes all processes necessary to ensure that materials are available for carrying out manufacturing as per the schedule.

The push/pull boundary in a supply chain helps to separate, push processes from pull processes.

Exhibits 1.3 illustrates the push/pull processes for a supply chain of a computer manufacturing company.

Exhibit 1.3: Push/pull Processes for a Personal Computer

Manufacturing Company’s Supply Chain

1.4 Nature and Scope of Supply Chain Management Three important activities involved in supply-chain

management are (i) purchasing, (ii) logistics, (iii) warehousing and expediting.

1. Purchasing Purchasing is responsible for obtaining the materials, parts

and supplies needed to produce a product or provide a service.

Purchasing Interfaces : Purchasing is the link between the organisation and its suppliers. It exchanges information with suppliers and functional areas. Exhibit 1.4 shows the interface of purchasing with other functional areas of the firm.

Exhibit 1.4 : Purchasing Interfaces with Functional Areas of the Firm and with Suppliers

The Purchasing Cycle : The main steps in the purchasing cycle are :

(i) Purchasing receives the requisition

(ii) Purchasing selects a supplier

(iii) Purchasing places the order with the vendor

(iv) Monitoring orders and

(v) Receiving orders.

Box 1.2 lists the key challenges facing purchasing managers today.

• Outsourcing : Outsourcing refers to buying goods or services from outside sources instead of making the goods or providing the services within the firm. The reasons for outsourcing are :

(i) Outside source can provide materials, parts or services better, cheaper or more efficiently (if they are large-scale producers having economy of scale).

(ii) Expertise and knowledge of outside sources.

(iii) A supplier may hold a patent on a necessary part/component.

(iv) To have the advantage of flexibility.

(v) When companies downsize and narrow their focus on core activities.

Box 1.4 lists the top ten reasons for outsourcing.

Factors to be taken into account by a company in deciding whether to outsource are:(i) Cost to do it in-house versus cost to buy, including start-up costs versus cost to outsource.(ii) Stability of demand and possible seasonality.(iii) Quality available from suppliers compared with a firm’s own quality capabilities.(iv) The desires to maintain close control over operations.(v) Idle capacity available within the organisation.(vi) Lead times for each alternative.(vii) Who has patents, expertise and so on.(viii) Stability of technology and(ix) The degree to which the necessary operations are consistent with or in conflict with current operations.