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What is Supply Chain Management?

Introduction
In recent years there has been a growing recognition that the processes whereby we satisfy the customer demand are of critical importance to any organization. These processes are the means hereby products are developed, manufactured and delivered to the customers and through which continuing service needs of the customers are met. The supply chain management is the emerging concept that links the supplier to customer through manufacturing to develop competitiveness in the market. Supply chain management is an approach to controlling the physical flow of products from source to point of use by aligning the capabilities of suppliers, manufacturers, channel partners, and customers. Supply chain management is also a tool to achieve sustainable competitive advantage. It supports both differentiation-based and cost-based strategies. The supply chain management approach contributes to world-class performance by progressing beyond functional excellence and cross functional integration. It focuses on the practices used by the different businesses that together produce the product and service the customer. It integrates the activities of all members of the value-added chain to produce higher levels of performance than can be achieved individually. Supply chain management practices create supply chain integration that yields superior business performance. Supply chain integration utilizes a variety of business practices such as Just-in-time Manufacturing. Quick Response and Continuous Replenishment. The art of supply chain management is to blend appropriate practices in a way that increases productivity and value at all stages of the chain of activities, from source to delivery. Integration of the supply chain raises customer satisfaction. Supply chain integration provides increased value to customers by coordinating activities to reduce costs for all participants and to create value by eliminating duplicate or non-value-added functions. The supply chain approach recognizes that customers evaluate suppliers on more than simply product attributes and availability. Value extends beyond price and includes total cost and service. Innovation can create new markets, quality will permit long-term presence, but differentiation from competition can be achieved only though a capability that increases value to customers and protects margins.

The progress and success of supply chain management should be measured against objectives. Supply chain integration can be evaluated against the objectives of. l Service: Do customers receive what they ordered, when they want it, in the manner they desire? l Cost: Is the net landed cost to the end user optimized with service and time requirements? l Assets: Does inventory exist within the supply chain merely to respect the variability of consumer demand, or to create operational efficiencies? l Time: Is the cycle time from source to delivery limited only by physical constraints? Supply chain integration is practiced in a broad range of industries. While the actual techniques and practices may be tailored to specific issues and business characteristics of supplier, manufacturer, channel partner and customer the benefits of supply chain integration are available to all. Logistics management is essentially an integrative process that seeks to optimize the flows of materials and supplies through the organization and its operations to the customer. It is essentially a planning process and an information based activity Requirements from the market place are translated into production requirements and then into materials requirements through this planning process. It is now being recognized that for the real benefits of the logistics concept to be realized, there is a need to extend the logic of logistic, upstream to suppliers, and downstream to final customers. This is the concept of supply chain management. Supply chain management is a fundamentally different philosophy of business organization and is based upon the idea of partnership in the marketing channel and a high degree of linkage between entities in that channel. Traditional models of business organization were based upon the notion that the interests of individual firms are best served by maximizing their revenues and minimizing their costs. If these goals were achieved by disadvantaging another entity in the channel, then that was the way it was. Under the supply chain management model the goal is to maximize profit through enhanced competitiveness in the final market a competitiveness, which is achieved by a lower cost to serve, achieved in the shortest time-frame possible. Such goals are only attainable if the supply chain as a whole is closely coordinated in

order that total channel inventory is minimized, bottlenecks are eliminated, time-frames compressed and quality problems eliminated. This new model of competition suggests that individual companies compete not as company against company, but rather as supply chain against supply chain. Thus the successful companies will be those whose supply chains are more cost-effect than those of their competitors. What are the basic requirements for successful supply chain management? Figure 1 outlines the critical linkages that connect the market place to the supply chain. The key linkages are between procurement and manufacturing, and between manufacturing and distribution. Each of these three activities, while part of a continuous process, has a number of critical elements.

Procurement
Typically in the past, supply management has been paid scant attention in many companies. Even though the costs of purchases for most businesses are the largest single cost, procurement has not been seen as a strategic task. That view is now changing, as the realization grows that not only are costs dramatically impacted by procurement decisions and procedures, but also that innovation and response-to-market capability are profoundly affected by supplier relationships.
Inventory Flow PROCUREMENT MANUFACTURING DISTRIBUTION Demand Management Quick Response Postponement

Co-makership Requirements planning Schedule co-ordination

Master scheduling JIT Management Flexibility

Information Flow Cash Flow

Figure 1: Supply Chain Linkages

The philosophy of co-makership is based upon the idea of a mutually beneficial relationship between supplier and buyer, instead of the more traditional adversarial stance that is so often encountered, with this partnership approach, companies will identify opportunities for taking costs out of the supply chain instead of simply pushing them upstream 3

or downstream. Paperwork can be eliminated. Problems jointly solved quality improved are information shared. By its very nature comakership will normally involve longer-term relationships, based upon single-sourcing rather than multiple supply points. Rank Xerox in Europe has adopted the co-makership philosophy which has resulted in their supplier base falling from 5,000 to 300. A fundamental feature of this integrated approach to supply chain management is the adoption of some form of materials requirements planning linked to schedule co-ordination. Basically, materials requirement planning (MRP) is a time-phased approach to managing the inbound flow of materials, which potentially has the capability to link the factory to its suppliers. By itself, however, it lacks the connections to the customer in that it is a push system rather than a pull system. More recently there have been a number of developments to the concept, which have enabled a more flexible demand based approach to be adopted. Beyond the idea of requirements planning is something much more foundational, which requires the linking of suppliers production schedules with those of their customers. The aim should be to view your suppliers operations as merely an extension of your own. Companies link systems with all of their suppliers so that hose suppliers have full visibility of the production schedule. By the use of electronic data Interchange (EDI) and open communications, corporations have been able to reduce lead-times, eliminate entries and take costs out of the supply chain.

Manufacturing
The key word in manufacturing in todays environment is flexibility in terms of the ability to produce any variant in any quantity, without significant cost penalty, has to be the goal of all manufacturing strategies. In the past and even still today, much of the thinking in manufacturing was dominated by the search for economies of scale. This type of thinking led to large mega-plants, capable of producing vast quantities of a standard product at incredibly low unit costs of production. It also has led many companies to go for so-called focused factories which produce a limited range of products for global consumption. The downside of this is in effect the possibility of hitting the diseconomies of scale. In other words, the build-up of large inventories of finished product ahead of demand, the inability to respond rapidly to changed customer requirements and the limited variety that can be 4

offered to the customer. Instead of economics of scale, the search is now on for strategies that will reduce total supply chain costs, not just manufacturing costs, and that will offer maximum flexibility against customer requirements. The goal must be the economic batch quantity of one. Meaning that in the ideal world we would make things one at a time against know customer demands. One of the lessons that the Japanese have taught us is that the route to flexibility in manufacturing does not necessarily lie through new technology, e.g. robotics, although that can help. A lot can be achieved instead through focusing upon the time it takes to plan, to schedule, to setup, to change over and to document. These are the classic barriers to flexibility and if they can be removed then manufacturing can respond far more rapidly to customer requirements. In a factory with zero lead-times, total flexibility is achieved with no forecasts and the inventory! Whilst zero lead-times are clearly an impossibility, the Japanese have shown that impressive reductions in such lead-times can be achieved by questioning everything we do and the way in which we do it.

Distribution
The role of distribution in the supply chain management model has extended considerably from the conventional view of the activity as being concerned solely with transport and warehousing. The critical task that underlies successful distribution today is demand management. Demand management is the process of anticipating and fulfilling orders against defined customer service goals. Information is the key to demand management: information from the market-place in the formof medium-term forecasts; information from customers preferably based upon actual usage and consumption information on production schedules and inventory status and information on marketing activities such as promotions that may cause demand to fluctuate away from the norm. Clearly, while forecasting accuracy has always to be sought, it must be recognized than it will only rarely be achieved. Instead the aim should be to reduce our dependence upon the forecast by improved information on demand and by creating systems capable of more rapid response to that demand. This is the principle that underlies the idea of quick response logistics. Quick response logistics has become the aim for many organizations enabling them to achieve the twin strategic goals of cost reduction and 5

service enhancement. In essence, the idea of quick response is based upon a replenishment-driven model of demand management. In other words, as items are consumed or purchased, this information on action is transmitted to the supplier and this immediately triggers a response. Often high speed, smaller consignment quantity deliveries will be made: the trade-off being that any high transport costs will be more than covered by reduced inventory in the pipeline and at either end of it, yet with improved service in terms of responsiveness. Clearly information technology has been a major enabling factor in quick response logistics, linking the point of sale or consumption with the point of supply. A further trend that is visible in distribution is the search for postponement opportunities. The principle of postponement is that the final configuration or form of the product should be delayed until the last possible moment. In this way maximum flexibility is maintained, but inventory minimized. The distribution function takes on a wider role as the provider of the final added value. For example, at Rank Xerox the aim is not to hold any inventory as finished product but only as semi-finished, modular work-in-progress awaiting final configuration once orders are received. Similarly, one of the USAs largest video rental chains, Blockbuster Video, is developing a system where only blank tapes are held in individual stores but when a customer requests a video, this is rapidly copied through an electronic link to a central point. When the video is returned it can be taped over for the next customer, and so on. What is apparent is that distribution in the integrated supply chain has now become an information-based, value-added activity, providing a critical link between the market place and the factory.

Supply Chain Management in Practice


In the automotive industry manufacturers and suppliers integrate component assembly and final assembly to create just-in-time delivery of components. The final assembly plant receives only the components needed for the specific production schedule, in a manner that eliminates buffer inventories, remanding, and extra transportation. The final assembly location transmits the detailed production schedule to suppliers only hours before assembly. The component supplier finalizes assembly according to the models to be produced, then configures the components in sequence, according to the production schedule, so that the components can be delivered directly to the point of use. The flow of product between 6

supplier and manufacturer is integrated to eliminate costs while maintaining service to production. Consumer goods manufacturers and retailers practice supply chain integration to better respond to consumer demand without duplicate investments in finished goods inventory. Leading companies have established programs of continuous replenishment of retailers distribution centers to provide high store service at lower cost. Retailers provide daily sales information as well as store order and distribution center inventory levels to manufacturers, who then determine the proper replenishment quantity to achieve both high service and high inventory turns. In this example of supply chain integration, the manufacturer takes responsibility for ample of supply chain integration, the manufacturer takes responsibility for creating the purchase order quantity. Practitioners report dramatic increases in inventory turns and significant gains in sales. Supply chain integration practices can be tailored to unique industry situations. A leading distributor of hospital supplies offers a program to deliver hospital products directly to the nursing station, bypassing storage and handling in a hospital storeroom. Orders are issued based on nursing station use, and replenished directly from the distributors inventory. Timeliness and accuracy are paramount, yet an entire step in the traditional flow of products is eliminated, reducing operating costs and investment. These examples of supply chain integration, from diverse industries, illustrate the universal applicability of the supply chain management approach to the flow of product from source to delivery to the customer. A focus on the objectives of service, cost, assets and time, when coupled with creative thinking bring forth new approaches to traditional business practice. In the examples cited, responsibility for some processes is transferred between channel partners automotive suppliers configure order in sequence of production, consumer goods manufacturers determine replenishment quantities for retailers distribution centers, and distributors of health care products maintain inventory and a distribution capability for customers. The benefits of these changes are seen not only in elimination of structural costs and improvements in productivity, but in the creation of stronger partnerships enough members of the supply chain. Relationships can shift from an adversarial buyer seller interaction, focused on price, to a relationship of mutual dependency and mutual gain. For in the end, supply chain integration socks to create profitable growth for all members of the chain.

Supply Chain Integration


In todays competitive world, a company cannot survive on its own; it can only thrive with the community and with the co-operation of others. Therefore, supply chain management should deal with the process of co-coordinating the flow of information on the one hand, and the flow of goods on the other across a network of suppliers, manufacturers and distributors. There is uncertainty about demand in the market. Consumer loyalty is at its lowest amidst a flood of products offering great variety, features and prices. Therefore, information should flow back regarding changes in demand patterns to manufacturing changes in demand patterns to manufacturers. This feedback should be timely enough to be able to effect a new production program, that is, to help production planners re-schedule their production runs in accordance with changes in demand. How well a manufacturer is able to switch over and bring a change in production depends upon how fast and accurate the market feedback has been. This would affect the requirements of raw material at the production plant. Therefore, the manufacturer cannot act in isolation. This calls for the co-ordinate efforts of suppliers, manufacturers as well as retailers to establish relationship of peers with them. Therefore, it would not be wrong to say that supply chain management is a philosophy of business organization that is based upon the idea of partnership with the marketing channel, and a high degree of linkage between entities in the channel. When the concept of partnership emerges, it brings with it the concept of working hand in hand with other members of the channel to crush (reduce) and push cost out of the supply chain system. Earlier, each member, be it the supplier or manufacturer or retailer, would give priority to his own interest and seek to fulfill it even at the cost of other members in the channel. However, the concept of partnership has obliterated this. At the retailers end, market requirement is determined, which determines production need, which in turn helps to chalk out the need for materials. Thus supply chain integration acts as a planning process and an information-based activity, which helps to determine market requirement, convert market requirement into production requirements

and production requirements into material requirements thought a welldefined planning process. Supply chain integration calls upon the centers in the channel to join hands to solve problems jointly improve quality of work, reduce costs, reduce lead times, and enhance information sharing. All that would help to reduce the element of uncertainty and increase quality and market acceptance of the product. For instance plant tours could be undertaken with supplies and customers, their suggestions implemented and feedback rewarded. Further, new products could be co-designed with suppliers and customers to achieve economics of scale with parts standardization. It has been noted that McDonald adopts such a strategy. As a routine, McDonald works in close co-operation with all its suppliers, helping them set up operations arranging equipment for them, providing technical inputs and training them to meet its tough standards.

Reduction in Supply Base


The suppliers of raw material and components play a very important role in the Supply Chain.. This is because the production schedule can be run or not to a large extent depends upon the supplier. For timely production of goods an organization needs more reliable suppliers. Reducing on too many suppliers can enhance the reliability and loyalty of suppliers.

SUPPLIERS

CONSOLIDATION AGENT

MANUFACTURER

Therefore, the manufacturer should move towards a single source of supply rather than depend on multiple supply points. It should source raw materials and components from as few points as possible and develop long term relationship based upon trust, mutual dependence and full sincerity with them. Reduction in number of suppliers would promote this. Besides it would also enhance coordination of flow of information and raw material, improve reliability of delivery in terms of time and help reduce costs. Telco, while developing its passenger car 'Indica', did not hesitate to reduce its supplier base to keep the cost low quality high and ensure delivery at short notice. Bharat Forge, Telcos single supplier of forgings, developed crankshaft forging and supplied them in 9

just 22 days (OCT order cycle time was only 22 days). This depicts the benefits derived from maintaining a single source of supply. However, it has been observed that the Indian firms still depend on too many suppliers as compared to international standards. The number of suppliers per firm (mean values) stood at 436. Indian firms have to delve deeply on this issue. Organizations could employ different strategies to manage a large set of suppliers. They could employ a distributor who would collect raw material or components from various suppliers and dispatch them to the manufacturer. The resultant effect would be that the manufacturer would have to tap only a single source for supply. Sundaram Fasteners, the Chennai-based high tensile fasteners and radiator cap manufacturer, has appointed a consolidation agent in Southampton (united Kingdom) to collect all supplies of steel coils and components and then ship them to the company. Also, it distributes its supplies to General Motors 25 locations in North America through a single warehouse located in oxford (Michigan), USA. Such a set up is also found with pizza delivery companies where a variety of products is needed and freshness and delivery time are critical factors.At McDonalds, mutton comes from Hyderabad based A1kabeer, lettuce is flown in from Pune and Ooty everyday, buns from Cremica Industries, Ludhiana, cheese from Dynamix industries, Baramati (Maharashtra). The hubs of the cold chain are distribution centers (one for the North, another for the West) run by Radhakrishna Foodland, and Walkers an Australian logistics firm receive supplies, check quality and dispatch the supplies to the restaurants, process information and co-ordinate the work. The concept of a hub is emerging and gaining acceptance very fast as a distribution hub cuts inventory costs and boosts competitiveness. GE (General Electric) uses Singapore distribution park as a base for all its distribution in Southeast Asia and international airlines use Sharjah as a hub for two-thirds of Indian inbound goods traffic. Further, Liege in Belgium is a major hub for Europe and Memphis in Tennessee, US, is also a hub as 97 per cent of traffic is transit traffic.In India, Nagpur is emerging as a hub for distribution and transport. Fords distribution needs in India have zeroed in on Nagpur as a logistics center mainly because of its locational advantage. 10

Flexible Manufacturing Systems


In the present set-up, a large number and variety of products are competing in the market, be it for consumer products or industrial products. This puts a demand on manufacturers to establish systems that will enable them to provide a broad range of products and also to introduce new products in to their range effortlessly. There for, manufacturers should increasingly develop flexible manufacturing systems which would enable it to respond to customer orders quickly by bringing about a change in production volume and also adding variety without any significant increase in cost. Sundaram Fasteners manufacture 1,800 verities of fasteners and 77 different radiator caps. In high precision products like fasteners, manufacturing demands continuous adjustment in processes standardization. This helps to design products of a great variety to fit in with customers changing requirements. However, this will be of little value if the market demands quick response rather than variety. Here an organization needs to change its strategy. This depends upon what form of flexibility the company needs from its plants. A manufacturer wanting to excel in customising products would need to develop the ability to carry out a large range of jobs in the plant while one that wants to use quick response as its primary competitive weapon would need to focus on building quick changeovers into the manufacturing process. Measurement methods as well as personnel employed. These too must be aligned to provide precisely the form of flexibility that is needed from an overall system.

Information Technology
In todays corporate world, it is not one enterprise competing with another, but one supply chain pitched against another supply chain. This calls for better integration and therefore, better links between the entities in the supply chain. Further, in todays hyper-competitive market, the ability to respond to customers requests with speed and accuracy is vital for success. Therefore, a companys continued success today depends upon its ability to build information architecture to enable it to respond to changing market dynamics. Therefore, high-speed platforms for real-time response have to be erected to provide effective on-line integration with its buyers and suppliers. Implementations of Internet technologies would facilitate internal communication between departments, divisions and also regional locations. Data warehouse approach could be resorted to 11

support decision-making throughout the organization. The need of the hour is an optimum system that would be in a position to provide an enterprise wide link between the production-supply chain. ERP (Enterprise Resource Planning) has emerged in response to this felt need. This could be adopted as an integrated planning and control approach embracing customers, suppliers and enterprise activities in line with the value chain of the enterprise. Many phenomenal changes are taking place in the business environment. The complexities involved in sustaining, surviving and succeeding in such as environment have also increased substantially. Organizations will be able to cope with the turbulent environment and with the complexities of operations only by development of an efficient supply chain system, integration of entities in the supply chain, reduction in supply base, establishment of flexible manufacturing systems and by making extensive use of information technology.

SCM Indian Scenario


With India poised to leap into global competition, there is an urgent need to make Indian business competitive. Supply-chain management (SEM) has emerged as one of the most powerful business improvement tools. World-wide organizations have formed networks for sourcing raw material manufacturing products or creating services storing and distributing the goods and ultimately delivering the products and services to customers. The objective is to encourage product and service-innovation with a view to satisfying the ultimate customer. These organizations see the value of integrating systems and supply chain operations across the full range of component function. Business strategies are getting internationally connected with supply chain and information strategies. Companies are moving towards a total system of supply. They are linked directly to the current demands in the chosen markets, so that efficiency in savings are accrued and shared across the network. Supply-chain has come to become the main artery of all business. As logistic businesses grow almost exponentially firms are throwing their best resources at supply-chain. The practice of supply chain improvement will invariably produce winners and pretenders and this distinction will strongly influence the business organization design and dynamics in future. A few questions need to be answered in order to understand the practice of supply chain in Indian Industries. They are:

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When are the requirements for implementation of a successful SC? What do we stand to gain? Is our managerial talent ready to cope up with this challenge? Are we ready to change?

A study to understand the practice of supply-chain management in Indian Industries found that not many firms were prepared to cope with this challenge. There was an evident gap between firms which understand and implement the concept of forward looking supply-chain management and those that simply follow a trend. Firms, which have succeeded in integrating supply chain practices successfully with the larger corporate strategy have benefited from quick hit gains and increased profits. They have been able to cut supply cost through connected to improvement in the purchasing function. Inventories have been either cut or moved upstream in the supply chain and are housing and transportation costs have usually been reached. Companies have applied information technologies to pain an advantage the companies improvements. Why is this gap between leaders and followers? Why have few companies struggled to achieve similar results? Why have two firms failed to benefit from supply-chain management practices? We found that developed in two critical areas. A lack of trust and sincere effort among necessary participants in the chain and a myopic view focused solely on internal gains. Many of these firms who claim to practice supply-chain management in practice do not have one. Software bought by these firms cannot replace the need to link structures with processes. Key process that come into play include such things as insuring cut sourcing strategic processes, new product development supply-planning and execution, demand planning, logistics and strategic sourcing. There could be a supply-chain only if we know the key linkages between structures and processes. Among the most important one are common information, cross enterprise teams, cross-functional teams, common measures joint planning, and some degree of trust. The successful firms developed not only cross-functional trust but also cross-organizational trust with distributors and suppliers. Many successful companies succeeded in improving cooperation among internal functions and gaining significant operational benefits. Whereas, firms in which the employees were reluctant to work effectively together with other departments inside the firm, it was much easier to point a finger at other departments than to cooperate in making the chain error-free. 13

They considered departmental or functional excellence as more important than business excellence. Some companies pursued the benefit of flexible manufacturing systems and focused on planning and scheduling as two key ingredients that would dramatically reduce inventory fabrication, and conversion costs. Using demand information companies established system that could more efficiently manage the process of acquiring the right raw materials, having the necessary machine time and human resources available, and scheduling output to meet demand without excess stores and inventories. In actual practice most firms give up on sophisticated forecasting techniques and worked off the projected plans, which called for annual focus on volumes regardless of market conditions. Supply-chain systems were then selected and attempts made at implementing delivery to these spurious and often fictitious projections of consumer demand. The result was hodge podge of planning and scheduling that was constantly subjected to manual overrides for meeting actual consumer demand. This was the major reason leaders in the practice of supply-chain focused on linking the demand chain with the supply chain in a holistic manner to achieve cost reductions throughout the entire chain. They achieved substantial savings through more efficient handling, storage and delivery of products in the is supply chain.

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