SCM

Supply Chain Management
SEMESTER - III
SUPPLY CHAIN MANAGEMENT
COURSE MATERIALS
CII Institute of Logistics

Website: www.ciilogistics.co
INDEX
Chapter
Number
TITLE
Page
Number
Overview of Supply Chain Management
SC Integration and Coordination
15
Demand Planning
28
40
Consumer Demand and the Future of the

Supply chain
Purchasing and SCM
Manufacturing in Supply Chain Management
62
70
Inventory Management in Supply Chain

Management
Transportation in Supply chain Management
Warehousing in Supply Chain
85
10
Returns Management
99
11
Overview of Outsourcing
105
12
Measuring SC Performance
114
13
Information Technology and Supply Chain
142

52
80
Chapter 1: Overview of Supply Chain Management
Supply chain consists of all the stages that are required to satisfy the customer request.
It starts with the supplier and passes through the manufacturing, distribution, and retailer
and finally reaches the customer.
Supply chain management (SCM) is the oversight of materials, information, and finances
as they move in a process from supplier to manufacturer to wholesaler to retailer to
consumer.
The following diagram shows the graphical representation of the supply chain that will
expect to satisfy the customer request.
In the supply chain management there are mainly three flows. They are as follows.
Product flow: The movement of goods from a supplier to a customer, through
the manufacturer, distributor, and retailer.
Information flow: It involves transmitting orders and updating the status of
delivery. The information flow is useful for the success of the supply chain
management.
Financial flow: It consists of credit terms, payment schedules, discount
information and consignment and title ownership arrangements.
RM - Supplier
Manufacturers
Distributors
Retailers
Customers

Product / Service Flow

Financial Flow
Information Flow
In the supply chain management the product/ service flows towards the end customer.
While the information flows both the sides. And the financial flows towards the supplier,
that means the customer pays for the product or service receiving.
There are mainly two benefits of Supply chain management. They are as follows:
Achieving high level of customer satisfaction.
Reducing cost, that means achieving the optimum life cycle cost. This
involves minimizing the wastage during reaching the customer.
Some other benefits of SCM are,
Getting continuous feedback from the customer.
Selection of best supplier that will help to reduce the cost.
Reducing the cost to customer through having effective distribution system.
Risk minimization.
In supply chain management we should concentrate on four major areas in order to
achieve the twin benefits of SCM. They are,
1. Supplier Relations Management (SRM)
2. Employee Relations Management (ERM)
3. Customer Relations Management (CRM)
4. Logistics Service Providers (LSP) Relations Management
Supplier Relationship Management (SRM): This will be maintained in order to reduce
the cost of suppliers. This includes,
a. Supplier selection
b. Supplier education/training.
c. Supplier performance rating.
d. Supplier integration
e. Supplier partnership.


f.
Supplier strategic alliances.
g. Life long association

h. Supplier investment on process + quality + technology R&D.
i.
Sharing of benefits.
Employee Relations Management (ERM): This is useful for the reduction of wastage in
the production process. This will ultimately reduce the cost for customer.
As a part of achieving the twin goals of supply chain management through delivering
maximum value to end customer and keeping the costs to optimum level for business
profits+ growth of the
company has to maintain high level relationship with own
employees and best work culture, empowerment and practices for maximum
effectiveness and performance and results. Desired employee traits are
Flexibility in the work of employees.
Higher productivity through skills and training.
Having shared goals.
Effective training programs for the employees.
Allowing them to participation in decision making.
Having good performance measurement program.
Giving rewards to the employees who has high performance.
Feeling of ownership.
Giving continuous improvement suggestions.
Meeting commitments made by company via shared goals +transparent
dealings.
Having transparent in the company.
Customer Relations Management (CRM): This is useful for the achieving of end
customer satisfaction. In order to achieve the customer satisfaction,
Know your customer
Listen to your customer
Know his wants + needs - collect data


Know your competitions strengths and there weakness and try to satisfy
those weakness.
Offer best products and services than your competitors in order to satisfy his
needs and wants and give value to him.
Getting feedback from the customer in order to satisfy more than your
competitors.
Pay attention to special needs.
Avoid non value activities.
Regularly review of satisfaction levels
Retain customers. It is expensive to get new customers rather than retain
existing customers.
Logistics Service Providers (LSP) Relations Management: This is useful for the
reduction of cost during the transportation. Ultimately this will result in the reduction of
cost for the customer. This will also minimizes the risk in transportation for the customer.
Logistics is the efficient movement of raw materials / components from supplies to
manufacturers and movement of finished goods to ware houses, distributors, dealers,
retailers for reaching end customer. Logistics service providers are transporters who will
provide all logistics functions. These are third party in supply chain management to offer
services to both suppliers and manufactures handling all items from raw material to
finished goods reaching the end customer.
Some small logistics companies provide the services with in the country and they will
help to the large logistics companies those will operate in more than one country. The
effective selection logistics providers will result in the reduction of cost in transportation.
Select the distribution centers that close to the customer. Any supply chains success is
closely linked to the appropriate use of transportation. Wal-mart uses cross docking
transportation system, which is process in which product is exchanged between trucks
so that each truck going to a retail store has products from different suppliers. Wal-mart
also uses its transportation system to allow stores to exchange products based on where
shortages and surpluses occur.
In order to achieve the twin benefits of supply chain management the organization
should concentrate on at least four major areas. They include,

Location:
It's important to know where production facilities, stocking points and
sourcing points are located; these determine the paths along which goods will flow. The
organizations should keep the stocking points close to the production location. This will
help to reduce the wastage in the production and also inventory is available with least
time. The organization should also select the sourcing points which are near to the
organization. This helps to reduce the carrying cost.
A basic trade-off here is whether to centralize to gain economies of scale or decentralize
to become more responsive by being closer to the customer. Companies must also
consider the local area in which the facility may be situated.
Production: An organization must decide what products to create at which plants, which
suppliers will service those plants, which plants will supply specific distribution centers,
and, sometimes, how goods will get to the final customer. These decisions have a big
impact on revenue, costs and customer service. Keep the production facilities near to
the supplier. This will help to reduce the carrying cost from the supplier. This will also
helps in reducing the inventory. And also helps to reduce lead time. And the product is
faster to the market.
Inventory: Each link in the supply chain has to keep a certain inventory of raw materials,
parts, subassemblies and other goods on hand as a buffer against uncertainties and
unpredictabilitys. Shutting down an assembly plant because an expected part shipment
didn't arrive is expensive. But inventory costs money too, so it's important to manage
deployment strategies, determine efficient order quantities and reorder points, and set
safety stock levels. Inventory has a direct cost impact in a supply chain and it has a huge
impact on responsiveness. In order to maintain the efficient inventory, the organizations
should accurately determine following element.
Accurate demand forecasting.
Set safety stock level.
Set reorder points.
Determine the lead time.
Determine the level of product availability.


Determine the seasonal inventory.
Inventory also has a significant impact on the material flow time in a supply chain.
Material flow time is the time that elapses between the point at which material enters the
supply chain to the point at which it exits. Another important area where inventory has a
significant impact is throughput, the rate at which sales to the end customer occur. If the
inventory is represented by I, flow time by T, and throughput by R, the three can be
related using Littles law as follows.
= RT
For example, if the flow time of an auto assembly process is 10 hours and the
throughput is 60 units an hour, Littles law tells us that the inventory is 60 * 10 = 600
units. If we are able to reduce inventory to 300 units while holding throughput constant,
we would reduce our flow time to five hours (300/60). In this relation inventory and
through must be in the same relation. The logical conclusion here is that inventory and
flow time are synonymous in a supply chain.
Transportation: How do materials, parts and products get from one link in the supply
chain to the next? Choosing the best way to transport goods often involves trading off
the shipping cost against the indirect cost of inventory. For example, shipping by air is
generally fast and reliable. Shipping by sea or rail will likely be cheaper, especially for
bulky goods and large quantities, but slower and less reliable. So if you ship by sea or
rail, you have to plan further in advance and keep larger inventories than you do if you
ship by air. Transportation has an impact on both responsiveness and efficiency. Faster
transportation allows a supply chain to be more responsive but reduces its efficiency.
The type of transportation a company uses also affects the inventory and facility
locations in the supply chain. Dell, for example uses air transportation from Asia
because doing so allows the company to lower the level of inventory it holds. Clearly,
such a practice increases responsiveness but decreases transportation efficiency
because it is more costly than transporting parts by ship.
Information: Information could be overlooked at major driver in supply chain because it
does not have physical structure. Information flow is the Heart of Supply Chain.

Information servers as the connection between various stages of supply chain allow
them to coordinate their actions and increase the supply chain profitability.
Information also useful for the daily operations in the company. For example, warehouse
management system uses information to give the warehouses inventory visibility. The
company can then use this information to determine whether new orders can be filled.
Helps reduce variability in the supply chain.
Helps improve forecasts
Helps coordination
Better customer service
Reduces lead times
Reduces inventories
Supply chain management decision can be described at various levels of the
organization.
The strategic level - concerned with long term issues such as the number and
location of manufacturing plants and warehouses.
The tactical level - concerned with shorter term decisions such as purchasing
and manufacturing decisions.
The operational level - concerned with day-to-day decisions such as
scheduling and truck load.
Supply chain management is the combination of the enterprise strategies, business
process and information technologies that integrates the suppliers of raw materials or
components, the manufacturers or assemblers of the finished products, and distributors
of the products or services into one cohesive process to include demand forecasting,
materials requisition, order processing, order fulfillment, transportation services,
receiving, invoicing, and payment processing.
While ERP and CRM systems are intended to re-engineer internal business processes
to achieve better resource planning and coordination across departments, SCM systems
are utilized to facilitate the coordination with outside business entities, or in the scope of
extended enterprise. SCM usually refers to the redesign of supply chain processes in


order to achieve streamlining. Only large corporations generally perform it with large
suppliers. B2B exchange can extend Supply Chain Management to all trading partners
regardless of size by providing a central location to integrate information from all supply
chain participants.
Participants in a Supply Chain
Suppliers - They are organizations that provide goods and/or services to a
purchasing organization (a manufacturer or a distributor). It is often used
synonymously with vendors but may also refer to an internal company
resource.
Manufacturers - They are the companies engaged in the original production
and assembly of products, equipment or services. They sometime refer to
companies that purchase such products or services manufactured or
assembled in accordance with company specifications.
Distributors - Those are the external entities that sell for suppliers or
manufacturers directly and often collect all payments from customers and
maintain an inventory of the supplier's or manufacturer's products.
Processes of Supply Chain Management
Demand Planning and Forecasting - Accurate demand forecasting is
considered one of critical success factors in supply chain management.
Supply chain software systems often utilize sophisticated mathematical
models for predicating future demand from historical data. The accuracy of
the demand forecasting is largely dependent on how abnormal data is treated
in the demand forecasting. Demand forecasting is an ongoing process.
Supply chain management systems can generate alerts at the frequencies of
user preference, whether it's on a weekly or monthly basis.
Procurement - This is the process of choosing the suppliers that will deliver
the goods and services you need to manufacture or assembly your products
or to create your services. It involves price negotiation, receiving, and
verifying the shipments. Supply chain management systems can be
integrated with industry-specific B2B exchanges to automate the procurement
processes.

10

Manufacturing and Assembly - Raw components are assembled into final
products
or
raw
materials
are
manufactured
into
finished
goods.
Manufacturing involves the activities of production, testing, packaging and

preparation for delivery.
Distribution - Products or services are delivered to consumers. Distribution
involves warehousing, delivering, invoicing and payment collection.
Managing Returns - Returns and refund are important parts and also the
problem parts of supply chain management. Supply chain management
systems should have infrastructure in place for receiving defective and
excess products back from customers.
A System of Supply Chain Management
SCM is a social or soft system, which has goals, components, processes and boundary.
1. Goals of SCM
To reduce inventory cost,
To increase sales
To improve the coordination and the collaboration with suppliers,
manufacturers and distributors.
2. Components of SCM System - The components of a supply chain system consists
of 1) supply chain software and hardware, 2) supply chain business processes and
3) users of SCM system.
SCM Software and Hardware - The core of an SCM system is SCM software. Supply
chain software is module based application. Each software module automates
business activities of a functional area in the supply chain. UNIX is the most common
operating system for running SCM software
3. Business Processes - Business processes of supply chain includes supply chain
planning, execution and collaboration. and operational control.
4. Users - The users of SCM systems are workers of supply chain participants at all
levels.

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A supply chain management (SCM) software system consists of many modules or
applications. Those applications either supports supply chain planning or supply chain
execution. Supply chain planning includes demand forecasting, inventory simulation,
manufacturing planning and transportation scheduling. Supply chain execution includes
procurement, manufacturing and distribution. While supply chain planning is part of
enterprise strategic planning, supply chain execution is part of managerial and
operational control.

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Demand Forecasting
A critical success factor to supply chain management is accurate demand forecasting.
Supply chain software systems utilize sophisticated mathematical models for predicating
future demand from historical data. The accuracy of the demand forecasting is largely
dependent on how abnormal data is treated in the demand forecasting. Demand
forecasting is an ongoing process. Supply chain management software systems can
generate alerts at the frequencies of your preference on a weekly, or monthly basis.
Inventory Simulation
Inventory simulation estimates appropriate stock levels from historical inventory data.
Items used for special events, road-shows, or kitting are common causes that result
count discrepancies, When a discrepancy occurs or the actual quantity physically
counted doesn't match the stock level in the computer system, inventory specialists need
to reconcile the discrepancy in terms of cycle counting. A cycle counting program can
improve your business processes, and accuracy of estimating inventory levels.
Manufacturing Planning
Manufacturing planning details the coordination of all manufacturing activities. It tries to
achieve the optimal use of raw materials, manufacturing equipment and skilled labors
based on orders placed by individual customers.
Transportation Scheduling
Transportation scheduling optimizes the use of resources in shipping raw materials from
suppliers to manufacturers and in delivering of finished goods from manufacturers to
distributors and customers. Transportation planning module of SCM utilizes linear and/or
non-liner programming from Operations Research to ensure the delivery of materials
and goods at right time, to right place at a minimal cost.
While supply chain planning applications facilitate demand forecasting, inventory
simulation, manufacturing planning and transportation scheduling, supply chain
execution applications automate order processing, manufacturing, distribution and return
function. Supply chain planning is considered a part of enterprise strategic planning.
Supply chain execution is about managerial and operational control. Supply chain
execution is the process of putting supply chain planning into action.

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Order Processing
In supply chain execution, order processing involves order placement, order
confirmation, order fulfillment and order inquiry. Supply chain management software has
build-in capability that allows both workers and trading partners to easily place orders.
Orders are confirmed by email notifications and online confirmation. Users can easily
lookup their order status online.
Production & Assembly
In manufacturing or production phase, raw components are assembled into final
products or raw materials are manufactured into finished goods. Workers perform kitting,
packaging and labeling work for specific products. Manufacturing involves production,
testing, packaging and preparation for delivery.
Distribution
After manufacturing, products or services are needed to be delivered to distributors or to
end consumers. Distribution involves warehousing, delivering, invoicing and payment
collection. Distribution management is integrated with transportation planning and
scheduling.
Returns
Handling return and refund is important part of supply chain execution. Lack of planning
and logistics for processing return/refund have been a common problem in supply chain
execution. Supply chain management systems should have infrastructure in place for
receiving defective and excess products back from customers. In holiday seasons, the
rate of return to sales could hit more than 10% at some retailers and catalog order firms.
Supply chain management (SCM) is the combination of the process and information
technology that integrates the suppliers of raw materials or components, the
manufacturers or assemblers of the finished products, and distributors of the products or
services into one cohesive process to include demand forecasting, materials requisition,
order processing, order fulfillment, transportation services, receiving, invoicing, and
payment processing.

14

Chapter 2: SC Integration and Coordination
Definitions
The Webster's dictionary defines to integrate as: To make into a whole by bringing all
parts together; unify. In an enterprise, integration can simply mean that each unit of the
organization will have access to information relevant to its task and will understand how
its actions will impact other parts of the organization thereby enabling it to choose
alternatives that optimize the organization's goals. The key to integration is coordination.
To coordinate is to manage dependencies among activities so as to achieve coherent
operation of the entire system in question.
General and Multi-Plant Coordination
Much research effort has been put into optimizing the performance of supply chains. The
major part of the early work tends to focus on very limited segments, e.g. only material
procurement, manufacturing, or distribution, and treat these as separate systems.
Though this might lead to improved performance in the segment in question, the
complex interaction among supply chain segments is ignored. Thereby potential gains
from coordination are lost.
The other level of coordination identified, is that on which production decisions are
coordinated among the plants of an internal supply chain. This is referred to as multiplant coordination. The objective of multi-plant coordination is to coordinate the
production plans of several plants in a vertically integrated manufacturing company so
that the overall performance of the company is improved. Still according to Bhatnagar et
al., in order for such coordination to be efficient, the effects of uncertainty of final
demand, uncertainties in production process at each plant, and capacity constraints at
each plant must be taken into consideration.
Introduction
One of the major transformations in the rapidly evolving digital economy occurs in the
supply chains of both traditional and e-commerce companies. Information technology

15

has enabled channel partners to trade goods, share information, and integrate their
processes, thereby reshaping the inter-organizational dynamics and resulting in more
efficient channels. Electronic integration of data and the automation of business
practices has driven costs down and built sales by better satisfying consumer needs.
This chapter describes the development of channel partnership between a manufacturer
and a retailer. Both key players in the chain, found a way to leverage on information
technology by sharing data across their mutual supply chains (Figure 1). Because of the
information partnership, the resulting channel has become more efficient as channel
activities are coordinated better. There are reduced needs for inventories with increased
sales by focusing on selling what the customers want, and it is mutually beneficial.
The power of inter-organizational information systems (IOIS) is well know in the literature
of information systems research. It has proven to be an effective tool for reducing
transaction costs. To understand the impact fully, one has to think about three
progressive degrees of IOIS: transactional, operational, and strategic (Seidmann and
Sundararajan, 1998). The strategic partnership is the most involved, with the greatest
commitments from the partners and requiring the strongest trust.
Figure 1: Role of Information Technology in Supply-Chain Integration

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For example:
There is a strong logic associated with how P&G and Wal-Mart created values for both
through the channel partnership. Yet, as described in this paper, the two companies in
the beginning were both tentative. They essentially stumbled into the idea and then, as
the value started to be discovered, progressively built stronger collaboration as more
benefits were unleashed. The partnership started with the simple desire to improve
business relationships, and was gradually enhanced by sharing information and
knowledge about their respective markets. This sharing in turn enabled more effective
execution of such concepts as category management, continuous replenishment, and
process coordination, which collectively helped make the supply chain more efficient.
Clark and McKenny (1995) detail the development of the supply-chain collaboration and
describe the process in which the channel partnership between the two companies was
built on an incremental basis.
Channel Collaboration and Information Partnership
P&Gs Corporate Reporting System was developed based on the market and
geographic structure used by the 12 product divisions. All sales reports were designed
so P&G could track the amount of product (e.g., laundry detergent) sold in the Western
part of the country, however, they did not have a system capable of reporting total
product sales by customer. A system needed to be developed to track sales by
customers. Once this system was developed tracking sales by customers was possible.
P&Gs shipment data proved helpful in understanding how much business was sold to
Wal-Mart.
Some of the questions Wal-Mart had were:
(1) How much of the product was sold at stores last year?
(2) How many customers bought P&G products?
(3) What was the profitability of these products for both P&G and Wal-Mart?
These were real questions that needed to be answered. The infrastructure that was
needed to link P&Gs data with Wal-Marts data proved to be a critical step in
understanding the consumers needs. Wal-Mart was just coming online with a new data
warehouse that allowed them to track sales of all products in each of their stores. P&G

17

and Wal-Mart jointly developed a data highway that linked P&G data to Wal-Mart data
driving down costs and sharing information to meet the consumers needs.
Retailer
Manufacture
r
Leveraging technology to drive costs out of the supply system is another important
aspect of the information systems function. The delivery of products to the end
consumer involves a series of steps including raw material delivery, conversion to a
finished product, transportation to a distributor or customer distribution center,
transportation to the store and placement on the store shelf. The degree to which all
parties involved can drive costs out of these systems result in corresponding savings
that can be passed on to the consumer in the form of lower product costs.
In order to drive down costs product information is needed to move from the retailer back
through the supply system. As better consumer data flowed back from the retailer to the
raw material supplier, better forecasts could be anticipated and the right material put in
place for finished product manufacturing.
Additional Benefits of Information Sharing

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The role of technology was to link the supply chain by using industry standards
Electronic Data Interchange (EDI) to communicate key business documents. Purchase
orders, invoices, advanced shipment notification, and financial payment are just a few
examples the electronic transmission of EDI. It was critical that EDI not be used to
automate poor business practices. It was imperative that we streamline the business
handoffs then use automation to drive the process.
To understand the value of simplifying the business process then applying technology,
the business situation below provides a concrete example. By 1990, P&Gs business
relationship with Wal-Mart was headed in a positive direction. Joint sales were up,
standard scorecards to track the business, and both companies were proud of the
progress of the partnership. However, there continued to be issues in the area of
accounts payable/receivable.
Figure 5 Customer Table Checking

Category Management
Using the design technology of data sharing allowed Manufacturers and retailers
partnership to make better consumer based decisions. The key decisions made by the
retailers include:
What are you going to buy?
Where are you going to put it (shelf location)?

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How are you going to price it?
When should it be promoted?
Key questions for retailers can be answered by integrating data from three sources:
(1) Manufacturers market data
(2) Retailers internal point-of-sale systems and
(3) Third party market data providers such as Nielsen or IRI.
Figure 6. Category Management

Retailers point of sale (POS) data show the results of consumers choices, thus
providing the actual demand. It provides the platform resulting in information on what is
selling and the selling price. It does not explain why nor does it provide insights into the
market dynamics. In contrast, manufacturers consumer data is helpful to understand
why a product is being purchased. P&G is a research and development company first.
Consumer needs are studied, products are then developed and manufactured to meet
those needs. P&G studies consumer trends and understanding these trends provide
insights that the retailer itself does not have. Finally, third party data providers help
explain the market dynamics of a product. It provides insight into consumer trends and
provides a perspective on growing consumer needs. Should a retailer be pleased with a
10% increase in sales vs. last year on a particular category? If his competition is
indexing at 5% the answer is yes, if the competition is indexing an increase at 18% then

20

the buyer is losing share in a growing category. This information is valuable in
determining the markets key items not carried in their stores. The key is the integration
of these three data sources for making decisions, as shown in Figure 6. An integrated
manufacturer/retailer database should be used to share common data scorecards and
allow for quick analysis by all parties.
Each business application between a manufacturer and a retailer should be agreed upon
early if it is proprietary between the two companies or if it can be shared with other
customers/suppliers. Wal-Mart, for example, now has a strategy to share data with their
vendor partners. A tool has been developed called Retail Link that links Wal-Marts
data with their key vendor partners and carriers. P&G has re-applied their customer
replenishment systems and the Customer Table Checking Tool to other customers. It is
critical for both companies to come to a common point of view on the expansion of these
systems. Ideally, most of the electronic linkages between manufacturers and retailers
will be similar to the EDI standards that are in place today.
Wal-Mart has in its possession customer data that is greater in volume than the
database of Internal Revenue Service (the U.S. Federal Governments tax agency).
When this vast set of data is shared, what is in great need is to use data mining
techniques to develop actionable decision rules. For instance, P&G and Wal-Mart have
shown that simply by eliminating losers from the shelf and add more winners, the two
companies can both be better off. For example, after a study of the sales data, P&G
recommended to Wal-Mark to eliminate 56 items that were not sold well based on WalMarts POS data. What is more, using its market data, P&G also recommended 25
products that were market winners. This simple decision based on data shared among
the two companies increased the sales by 32.5%.
Technology continues to play a role between manufacturers and suppliers. On the
supply side, they have moved from EDI purchase orders and invoices to looking at
Collaborative Planning Forecasting and Replenishment (CPFR). This industry model
provides a platform for the collaboration of a joint forecast between manufacturers and
suppliers that will ultimately drive the replenishment process through the entire supply
chain. This may eventually lead to the elimination of purchase orders and invoices as we
know them today.

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Second, watch for industry standard approaches to share the demand side data similar
to the standards they have in place today for EDI. Developing an industry based
approach for sharing point of sale data, market data, and consumer data for joint
decision making will be a key to success. In addition, driving key third party data
providers such as Nielson and IRI to provide quality data in agreed to Industry standard
hierarchies will lead to better integration between joint buyer/seller workstations. The
Internet will provide the technical platform to exchange information between
manufacturers, retailers and third party data providers.
Figure 7 The Use of Extranet in the Supply Chain

Summary
Looking back over the decades, between manufactures and retailers information
technology has created a common language, driven down costs, and provided an
avenue for increased sales for both. The following for understanding the role that
Information Technology can play in the manufacturer / supplier relationship:

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1) Use Information Technology Resources: Information Technology (IT) resources can
play a big role in the business. IT can provide technology solutions to link suppliers and
retailers. Ensure proper staffing of these resources to drive volume and reduce cost.
2) Teach them the business: Take time to train your IT about the business. The days of
the business ignorant programmers are fading. IT professionals have to know the
business perspectives.
3) Focus on the consumer: Use data and technology to understand better the
consumers needs. When a debate about approaches occur, ask yourself the question
What is right for the consumer, what are her/his needs?. This will help you approach
the problem differently.
4) Data can be information: Retailer data is typically used for quick decision support,
P&G data is used for analytic decision support. When merged, this data create
tremendous gains for both companies. Information Technology can also be used to sift
through large amounts of data and provide exceptions or out of range business
parameters. Using IT to identify key outages such as low sales on a fast moving item,
out of stock on a key sku etc, will provide powerful business solutions for both
companies.
5) Employ Industry standards: Driving towards common methods of communicating
business transactions and data sharing reduces cost for the entire supply chain. Just as
we have standardized logistics such as pallet size, truck dimensions from a supply chain
perspective, automating business transactions will also drive down costs of the
manufacturer/supplier relationship.
6) Commitment to Information Sharing: Sharing point of sales data. Market data, and
consumer data among channel partners for joint decision making is a key to the success
of the integrated supply chains.
Annexure:
Making Supply Chain Intergration A Reality

23
By
Professor B.S. Sahay
Management Development Institute
Gurgaon 122 001
The importance of supply chain in India can be gauged from the fact that logistics cost
is in the range of 10-12% of our GDP. As per the recent CMIE database, over Rs.
1,00,000 crores of total capital is tied up in inventories in industrial sector. This is close
to 22% of aggregate industry sales. This may be attributed to many reasons, like
increasing complexity and uncertainty of supply networks, globalization of businesses,
proliferation of product variety, and shortening of product lifecycles. These are forcing
businesses to realize that it is no longer possible to prosper in isolation. As a result,
Indian organizations are required to look beyond their four walls for collaboration and
coordination with supply chain partners. It is imperative for Indian organizations to
highlight the effects and the benefits of the five key dimensions namely - information
integration, workflow assimilation, technology assimilation, synchronization, and trust
to make supply chain integration a reality in today's business environment.
Information Integration
Information is the enabler of supply chain integration. Information integration refers to
not only sharing of information among supply chain members but also exploiting the
information collectively. This means shared demand information, inventory status,
capacity plans, production schedules, promotion plans, demand forecasts, and
demand schedules. Information integration is critical so as to ensure that the entire
supply chain is driven by true consumer demand. This is the most effective way to
counter the problem of demand information distortion up the supply chain.
Information distortion can arise from partners making use of local information to make
demand forecasts and passing them onto upstream partners; partners making ordering
decisions on local economic factors and constraints; and gaming behaviors that
exaggerate orders when there are perceived uncertainties in supply conditions. These
conditions are amplified from one level to another in a supply chain. The sole way to
counter this is to have total transparency of demand information not just between

24

immediate business partners but across all business partners, that is across the entire
supply chain.
Workflow Coordination
Workflow coordination is the efficiency of order-fulfillment processes for the products in
the supply chain. It is the point at which the product goes from being pushed in
anticipation of customer order, to being pulled by actual demand. Also referred to as
the push pull boundary or the customer order de-coupling point, it is the inflection point
where demand information - the actual customer order - exerts its influence on
manufacturing. After orders are received, the product is pulled by demand - preferably
with the speed and reliability needed to satisfy customer requirements. Streamlining
workflow activities among supply chain partners is not possible without workflow
coordination of a host of activities encompassing procurement, order execution,
engineering change, design optimization, and financial exchanges.
What is important for organizations to achieve excellence is to adopt the logistics and
supply chain model to balance the costs of holding inventories against the need to
serve end-consumers quickly and reliably. Companies need to design the supply chain
that makes the best economic sense for the product in terms of cost, quality, delivery
and flexibility.
Technology Assimilation
The inevitability of business-technology convergence and the enormous opportunity it
offers to the businesses necessitates that the entire supply chain integration be based
on a platform of technology-enabled network solution for sustained future prosperity. It
is important to remember that a chain is only as strong as its weakest link. If one link
lacks the technology to keep pace with the rest of the technology-enabled network, it
escalates the total cost of logistics and supply chain transactions. As a result, the
response process of the entire supply chain will not be competitive. Without a
competitive response process, it will not be possible to meet the requirements of the
target consumer demand function in terms of the form of the product, the place where
the product is required and the time at which the product is required. The result customers become unhappy, business suffers, and all the supply chain partners bear
the brunt to the same degree.

25
Incorporating the technology in the product, the process and the information flow must
enable technology assimilation for sustained success. Supply chains should access
the market through both physical channel and cyber-based channel to serve the needs
of the consumer. Both channels should accentuate e-Commerce features to
distinguish the supply chain in the eyes of the customer.
Synchronization
Time has a negative impact on supply chain management. First, time affects lead-time
on overall inventory levels. Typically, the further the component or finished item from
the end consumer, the longer is the lead-time. The second negative aspect of time is
that it forces lead time to be carried in finished goods inventories. The extra inventory
in the delivery part of the supply chain is driven by longer lead times in earlier part of
the chain and by a forecast error cushion largely created by push-system behaviour.
This systematic asynchronous behaviour deteriorates supply chain performance by
reducing reliability, yield, quality and capability.
The goal of synchronization in supply chain integration is to develop production and
delivery mechanisms and processes that can produce goods to the actual end-user
rate of demand for the smallest time-period manageable. To meet this goal, Indian
supply chain partners must change long established operating processes and
behaviors. To change this mindset and truly synchronize for success companies need
to take action on three fronts - adopt a counterintuitive inventory management
strategy;
take
productive
pull
approach;
and
put
inventory
in
motion.
The Trust Factor

There is no denying of the fact that effective supply chains brings with it a host of
advantages to achieve corporate excellence. Then why aren't more companies
aggressively developing their supply chain capabilities? The problem isn't a lack of
technology. Nor is it a difficulty in understanding the basic concept. Instead, the issue
comes down to a matter of shortage of trust - that quality that allows cooperation and
coordination to take place both within the organization and across the supply chain
partners. As a matter of fact, partnership skills will become major differentiator of

26

supply chain performance. The ability of cohesive integration - based on trust and
felicitated by systems and technology - between supply chain members will become
the greatest source of competitive advantage.
The catch lies in recognizing the fact that while most chains are linear in nature, the
supply chain is assuredly non-linear. It is really a complex network of links and nodes,
which capture the non-linear nature of the supply chain. With each node and link vying
for recognition and resources, trust and cooperation is the big question mark. It is
critical that these supply chain networks be established within an environment of trust.
Trust is essential to the free and open flow of information needed to respond to the
consumer needs at each point of interaction. Without this openness, the network risks
not being fully responsive or not being put at an economic advantage.
Conclusion
Regardless of the relative level of difficulty in building trust, today, achieving supply
chain integration is not a matter of choice. Organizations need to strive to achieve
maximum efficiency of their supply chains by working synergistically. Unity is strength
of which integration and collaboration is the key. To achieve the maximum efficiency of
the entire supply chain, all constituents must view it as an inter-related value added
process in order to satisfy the final consumer, for he is the king!

27
Chapter 3: Demand Forecasting

Need For Demand Forecasting
One of the crucial aspects in which managerial economics differs from pure economic
theory lies in the treatment of risk and uncertainty. Traditional economic theory assumes
a risk-free world of certainty; but the real world business is full of all sorts of risk and
uncertainty. A manager cannot, therefore, afford to ignore risk and uncertainty. The
element of risk is associated with future which is indefinite and uncertain. To cope with
future risk and uncertainty, the manager needs to predict the future event. The likely
future event has to be given form and content in terms of projected course of variables,
i.e. forecasting. Thus, business forecasting is an essential ingredient of corporate
planning. Such forecasting enables the manager to minimize the element of risk and
uncertainty. Demand forecasting is a specific type of business forecasting.
Concepts Of Forecasting
The manager can conceptualize the future in definite terms. If he is concerned with
future event- its order, intensity and duration, he can predict the future. If he is
concerned with the course of future variables- like demand, price or profit, he can project
the future. Thus prediction and projection-both have reference to future; in fact, one
supplements the other. Suppose, it is predicted that there will be inflation (event). To
establish the nature of this event, one needs to consider the projected course of general
price index (variable). Exactly in the same way, the predicted event of business
recession has to be established with reference to the projected course of variables like
sales, inventory etc.
Projection is of two types forward and backward. It is a forward projection of data
variables, which is named forecasting. By contrast, the backward projection of data may
be named back casting, a tool used by the new economic historians. For practical
managers concerned with futurology, what is relevant is forecasting, the forward
projection of data, which supports the prediction of an event.

28

Thus, if a marketing manager fears demand recession, he must establish its basis in
terms of trends in sales data; he can estimate such trends through extrapolation of his
available sales data. This trend estimation is an exercise in forecasting.
Business managers, depending upon their functional area, need various forecasts. They
need to forecast demand, supply, price, profit, costs, investment, and what have you. In
this unit, we are concerned with only demand forecasting. The reason is, the concepts
and techniques of demand forecasting discussed here can be applied anywhere.
The question may arise: Why have we chosen demand forecasting as a model? What is
the use of demand forecasting?
The significance of demand or sales forecasting in the context of business policy
decisions can hardly be overemphasized. Sales constitute the primary source of revenue
for the corporate unit and reduction for sales gives rise to most of the costs incurred by
the fir. Thus sales forecasts are needed for production planning, inventory planning,
profit planning and so on. Production itself requires the support of men, materials,
machines, money and finance, which will have to be arranged. Thus, manpower
planning, replacement or new investment planning, working capital management and
financial planningall depend on sales forecasts. Thus demand forecasting is crucial for
corporate planning.
The survival and growth of a corporate unit has to be planned, and for this sales
forecasting is the most crucial activity. There is no choice between forecasting and noforecasting. The choice exists only with regard to concepts and techniques of forecasting
that we employ. It must be noted that the purpose of forecasting in general is not to
provide an exact future data with perfect precision, the purpose is just to bring out the
range of possibilities concerning the future under a given set of assumptions. In other
words, it is not the actual future but the likely future that we build up through forecasts.
Such forecasts do not eliminate, but only help you to reduce the degree of risk and
uncertainties of the future. Forecasting is a step towards that kind of guesstimation; it is
some sort of an approximation to reality. If the likely state comes close to the actual
state, it means that the forecast is dependable. If you do not, it is meaningless. A sales
forecast is meant to guide business policy decision. Without forecasting, forward
planning by a corporate unit will be directionless.

29
The importance of demand forecasting

Forecasting product demand is crucial to any supplier, manufacturer, or retailer.
Forecasts of future demand will determine the quantities that should be purchased,
produced, and shipped. Demand forecasts are necessary since the basic operations
process, moving from the suppliers' raw materials to finished goods in the customers'
hands, takes time. Most firms cannot simply wait for demand to emerge and then react
to it. Instead, they must anticipate and plan for future demand so that they can react
immediately to customer orders as they occur. In other words, most manufacturers
"make to stock" rather than "make to order" they plan ahead and then deploy
inventories of finished goods into field locations. Thus, once a customer order
materializes, it can be fulfilled immediately since most customers are not willing to wait
the time it would take to actually process their order throughout the supply chain and
make the product based on their order. An order cycle could take weeks or months to go
back through part suppliers and sub-assemblers, through manufacture of the product,
and through to the eventual shipment of the order to the customer.
Firms that offer rapid delivery to their customers will tend to force all competitors in the
market to keep finished good inventories in order to provide fast order cycle times. As a
result, virtually every organization involved needs to manufacture or at least order parts
based on a forecast of future demand. The ability to accurately forecast demand also
affords the firm opportunities to control costs through leveling its production quantities,
rationalizing its transportation, and generally planning for efficient logistics operations.
In general practice, accurate demand forecasts lead to efficient operations and high
levels of customer service, while inaccurate forecasts will inevitably lead to inefficient,
high cost operations and/or poor levels of customer service. In many supply chains, the
most important action we can take to improve the efficiency and effectiveness of the
logistics process is to improve the quality of the demand forecasts.
Forecasting Demand in a Logistics System
Logistics professionals are typically interested in where and when customer demand will
materialize. Consider a retailer selling through five superstores in Boston, New York,

30

Detroit, Miami, and Chicago. It is not sufficient to know that the total demand will be
5,000 units per month, or, say, 1,000 units per month per store, on the average. Rather it
is important to know, for example, how much the Boston store will sell in a specific
month, since specific stores must be supplied with goods at specific times. The
requirement might be to forecast the monthly demand for an item at the Boston
superstore for the first three months of the next year. Using available historical data,
without any further analysis, the best guess of monthly demand in the coming months
would probably be the average monthly sales over the last few years. The analytic
challenge is to come up with a better forecast than this simple average.
Since the logistics system must satisfy specific demand, in other words what is needed,
where and when, accurate forecasts must be generated at the Stock Keeping Unit (SKU)
level, by stocking location, and by time period. Thus, the logistics information system
must often generate thousands of individual forecasts each week. This suggests that
useful forecasting procedures must be fairly "automatic"; that is, the forecasting method
should operate without constant manual intervention
Forecasting is a problem that arises in many economic and managerial contexts, and
hundreds of forecasting procedures have been developed over the years, for many
different purposes, both in and outside of business enterprises. The procedures that we
will discuss have proven to be very applicable to the task of forecasting product demand
in a logistics system. Other techniques, which can be quite useful for other forecasting
problems, have shown themselves to be inappropriate or inadequate to the task of
demand forecasting in logistics systems.
In many large firms, several organizations are involved in generating forecasts. The
marketing department, for example, will generate high-level long-term forecasts of
market demand and market share of product families for planning purposes. Marketing
will also often develop short-term forecasts to help set sales targets or quotas. There is
frequently strong organizational pressure on the logistics group to simply use these
forecasts, rather than generating additional demand forecasts within the logistics
system. After all, the logic seems to go, these marketing forecasts cost money to
develop, and who is in a better position than marketing to assess future demand, and
"shouldnt we all be working with the same game plan anyway?"

31

In practice, however, most firms have found that the planning and operation of an
effective logistics system requires the use of accurate, disaggregated demand forecasts.
The manufacturing organization may need a forecast of total product demand by week,
and the marketing organization may need to know what the demand may be by region of
the country and by quarter. The logistics organization needs to store specific SKUs in
specific warehouses and to ship them on particular days to specific stores. Thus the
logistics system, in contrast, must often generate weekly, or even daily, forecasts at the
SKU level of detail for each of hundreds of individual stocking locations, and in most
firms, these are generated nowhere else.
An important issue for all forecasts is the "horizon;" that is, how far into the future must
the forecast project? As a general rule, the farther into the future we look, the more
clouded our vision becomes -- long range forecasts will be less accurate that short range
forecasts. The answer depends on what the forecast is used for. For planning new
manufacturing facilities, for example, we may need to forecast demand many years into
the future since the facility will serve the firm for many years. On the other hand, these
forecasts can be fairly aggregate since they need not be SKU-specific or broken out by
stockage location. For purposes of operating the logistics system, the forecasting
horizon need be no longer than the cycle time for the product. For example, a given
logistics system might be able to routinely purchase raw materials, ship them to
manufacturing locations, generate finished goods, and then ship the product to our field
locations in, say, ninety days. In this case, forecasts of SKU- level customer demand
which can reach ninety days into the future can tell us everything we need to know to
direct and control the on-going logistics operation.
It is also important to note that the demand forecasts developed within the logistics
system must be generally consistent with planning numbers generated by the production
and marketing organizations. If the production department is planning to manufacture
two million units, while the marketing department expects to sell four million units, and
the logistics forecasts project a total demand of one million units, senior management
must reconcile these very different visions of the future.
The Nature of Customer Demand

32

Most of the procedures in this chapter are intended to deal with the situation where the
demand to be forecasted arises from the actions of the firms customer base. Customers
are assumed to be able to order what, where, and when they desire. The firm may be
able to influence the amount and timing of customer demand by altering the traditional
"marketing mix" variables of product design, pricing, promotion, and distribution. On the
other hand, customers remain free agents who react to a complex, competitive
marketplace by ordering in ways that are often difficult to understand or predict. The
firms lack of prior knowledge about how the customers will order is the heart of the
forecasting problem it makes the actual demand random.
However, in many other situations where inbound flows of raw materials and component
parts must be predicted and controlled, these flows are not rooted in the individual
decisions of many customers, but rather are based on a production schedule. Thus, if
TDY Inc. decides to manufacture 1,000 units of a certain model of personal computer
during the second week of October, the parts requirements for each unit are known.
Given each part suppliers lead-time requirements, the total parts requirement can be
determined through a structured analysis of the product's design and manufacturing
process.
Forecasts of customer demand for the product are not relevant to this analysis. TDY,
Inc., may or may not actually sell the 1,000 computers, but once they have committed to
produce 1,000 units, the inbound logistics system must work towards this production
target. The Material Requirements Planning (MRP) technique is often used to handle
this kind of demand. This demand is described as dependent demand (because it is
dependent on the production requirement), as contrasted with independent demand,
which would arise directly from customer orders or purchases. The MRP technique
creates a deterministic demand schedule for component parts, which the material
manager or the inbound logistics manager must meet. Typically a detailed MRP process
is conducted only for the major components (in this case, motherboards, drives,
keyboards, monitors, and so forth). The demand for other parts, such as connectors and
memory chips, which are used in many different product lines, is often simply estimated
and ordered by using statistical forecasting methods such as those described in this
chapter.
STEPS IN DEMAND FORECASTING

33
Demand or sales forecasting is a scientific exercise. It has to go through a number of

steps. At each step, you have to make critical considerations. Such considerations are
categorically listed below:
1) Nature of forecast: To begin with, you should be clear about the uses of forecast
data- how it is related to forward planning and corporate planning by the firm. Depending
upon its use, you have to choose the type of forecasts: short-run or long-run, active or
passive, conditional or non-conditional etc.
2) Nature of product: The next important consideration is the nature of product for
which you are attempting a demand forecast. You have to examine carefully whether the
product is consumer goods or producer goods, perishable or durable, final or
intermediate demand, new demand or replacement demand type etc. A couple of
examples may illustrate the importance of this factor. The demand for intermediate
goods like basic chemicals is derived from the final demand for finished goods like
detergents. While forecasting the demand for basic chemicals, it becomes essential to
analyse the nature of demand for detergents. Promoting sales through advertising or
price competition is much less important in the case of intermediate goods compared to
final goods. The elasticity of demand for intermediate goods depends on their relative
importance in the price of the final product.
Time factor is a crucial determinant in demand forecasting. Perishable commodities such
as fresh vegetables and fruits can be sold over a limited period of time. Here skilful
demand forecasting is needed to avoid waste. If there are storage facilities, then buyers
can adjust their demand according to availability, price and income. The time taken for
such adjustment varies from product to product. Goods of daily necessities that are
bought more frequently will lead to quicker adjustments. Whereas in case of expensive
equipment which is worn out and replaced after a long period of time, adaptation of
demand will be spread over a longer duration of time.
3) Determinants of demand: Once you have identified the nature of product for which
you are to build a forecast, your next task is to locate clearly the determinants of demand
for the product. Depending on the nature of product and nature of forecasts, different
determinants will assume different degree of importance in different demand functions.
In the preceding unit, you have been exposed to a number of price-income factors or

34

determinants-own price, related price, own income-disposable and discretionary, related
income, advertisement, price expectation etc. In addition, it is important to consider
socio-psychological determinants, specially demographic, sociological and psychological
factors affecting demand. Without considering these factors, long-run demand
forecasting is not possible.
Such factors are particularly important for long-run active forecasts. The size of
population, the age-composition, the location of household unit, the sex-composition-all
these exercise influence on demand in. varying degrees. If more babies are born, more
will be the demand for toys; if more youngsters marry, more will be the demand for
furniture; if more old people survive, more will be the demand for sticks. In the same way
buyers psychology-his need, social status, ego, demonstration effect etc. also effect
demand. While forecasting, you cannot neglect these factors.
4) Analysis of factors &determinants: Identifying the determinants alone would not do,
their analysis is also important for demand forecasting. In an analysis of statistical
demand function, it is customary to classify the explanatory factors into (a) trend factors,
which affect demand over long-run, (b) cyclical factors whose effects on demand are
periodic in nature, (c) seasonal factors, which are a little more certain compared to
cyclical factors, because there is some regularly with regard to their occurrence, and (d)
random factors which create disturbance because they are erratic in nature; their
operation and effects are not very orderly.
An analysis of factors is specially important depending upon whether it is the aggregate
demand in the economy or the industrys demand or the companys demand or the
consumers; demand which is being predicted. Also, for a long-run demand forecast,
trend factors are important; but for a short-run demand forecast, cyclical and seasonal
factors are important.
5) Choice of techniques: This is a very important step. You have to choose a particular
technique from among various techniques of demand forecasting. Subsequently, you will
be exposed to all such techniques, statistical or otherwise. You will find that different
techniques may be appropriate for forecasting demand for different products depending
upon their nature. In some cases, it may be possible to use more than one technique.
However, the choice of technique has to be logical and appropriate; for it is a very critical

35

choice. Much of the accuracy and relevance of the forecast data depends accuracy
required, reference period of the forecast, complexity of the relationship postulated in the
demand function, available time for forecasting exercise, size of cost budget for the
forecast etc.
6) Testing accuracy: This is the final step in demand forecasting. There are various
methods for testing statistical accuracy in a given forecast. Some of them are simple and
inexpensive, others quite complex and difficult. This stating is needed to avoid/reduce
the margin of error and thereby improve its validity for practical decision-making
purpose. Subsequently you will be exposed briefly to some of these methods and their
uses.
What to Look for in a Demand Forecasting System? [by John A. Estep, CFPIM]
Thirty years ago computers were used only by scientists and engineers. Today anyone
can use one. This is largely true of forecasting tools, as well. Todays powerful desktop
computers, with superb graphics and powerful processors, can apply sophisticated
statistical tools to the toughest forecasting problems. Consider the following:
System Vs user Sophistication. You dont need a degree in mechanical engineering to
drive a car with an automatic transmission, and you shouldnt need a degree in statistics
to use forecasting software. That doesnt mean a system should be simple, but it should
be simple to use. Simple systems wont solve the tough forecasting problems
manufacturers face. Sophisticated systems will, but they should insulate the forecaster
from the statistical complexity.
Operating a forecasting system is an analytical task, not a clerical one. Dont expect
clerical personnel to run forecasting software. Users should know their products and
their markets and should be comfortable with numbers.
Integrated Inventory Planning. This is the most critical, and most often lacking,
ingredient. A forecast is not a number, but a range; for example: the forecast for July is
2,000 (most likely) plus 250 (safety stock) to achieve 98% service. Higher service
requires more inventory, lower requires less.
The safety stock should be computed from service target, forecast error, error
distribution, replenishment frequency, and lead time, among other things. It should not

36

be a fixed-time-supply guess, which puts too much inventory in most items, while putting
too little in a few--yielding a frustrating combination of high inventory and low service.
You should be able to specify the service target and compute the inventory required for
each item, or specify the inventory and compute the service it delivers.
Up-to-Date Modeling Logic. Forecast models should account for the level (rate of
demand per period), trend (rate of increase or decrease) and seasonality (periodic
fluctuations around the trend line). Avoid systems without trend models (e.g., moving
averages).
Seasonality poses the greatest problems. Obsolete seasonal models often lack
orthogonality, meaning that some effects are overlooked while others are counted twice,
producing wildly fluctuating and inappropriate forecasts. Base (or seasonal) indices, for
example, confuse trend and seasonal effects (e.g., failing to detect a seasonal decline in
a rising market), and cannot use partial years of history. Instead, look for systems using
Fourier models, which also excel at handling items with low demand.
Selectable Forecast Calendars. With fast computers you dont have to treat all items
alike; instead treat each item appropriately. Fast-moving products are more accurately
forecasted using weekly or biweekly calendars. Slow-moving products do better on
calendars ranging from bimonthly to annual. Forecast monthly only items which need to
be forecasted monthly. This also saves work. Avoid systems which require you to put
different calendars in separate databases.
Accurate Selling Day Adjustment. While many systems understand February has
fewer selling days than August, you want one which also recognizes January may have
more selling days this year than next. A system does this if you are asked to enter the
selling or non-selling days for past and future years. Otherwise the system is applying a
single set of factors to all years. Look for the ability to define your own calendars.
Measuring Errors. New users worry about percentage error, losing sleep over a 40%
error which is covered by $10 of safety stock, yet satisfied with a 10% error that requires
$100,000. To manage forecast error, you need to know the dollar value of the inventory
required to achieve your service objectives. Charting this number documents error
reductions and alerts you to problems.

37

Internally, errors are computed using either a standard deviation or a mean absolute
deviation (MAD). The standard deviation is the proper statistical measure. The MAD was
devised in the 1950s because it doesnt require square roots in its computation, and
early computers took a long time on square roots. Even MADs inventor has declared it
obsolete, but it still appears in some packages.
Separate Forecast Initialization and Revision Processes. Forecast initialization, or
model-fitting, is the process of discovering the most appropriate model for each item.
The revision process tweaks these models to reflect recent experience.
Why not fit new models every period? Most companies products exhibit fundamental
stability most of the time. If a forecast model accurately represents the underlying
demand it will be effective for some time. There are changes, but usually in degree, not
in kind.
The forecast revision process serves two purposes: to make changes in degree, which
keep the model current, and to identify items where the model no longer appears
appropriate. This lets you concentrate on the 10% (typically) of items for which the
market appears to have changed. You can ignore the other 90%. You want to spend
time solving problems, not looking for them. Look for statistical process control (SPC)
techniques to direct your attention and prioritize exceptions so you review the most
important items first.
Watch out for focus type (or other) systems which lack a separate revision process. A
revision process typically reduces forecast errors and inventory about 30% in the year or
two following the model fit.

38

Evaluated Marketing Intelligence. Most systems allow overrides to the forecast, but
not all evaluate how much it helped or hurt. Marketing intelligence feedback reduces
inventory to cover forecast errors and saves time by eliminating a common tendency to
over control.
Graphical Tools. Most people grasp relationships better from pictures than from tables
of numbers. Look for graphic comparisons of forecast alternatives and error tracking, as
well as graphic displays of service/inventory tradeoff and error distribution.
Multi-Level Summarization. Some users need forecasting at plant, warehouse, etc.,
levels. All users need flexible ad hoc summaries. You dont want to restructure your
entire database just to summarize at a new level.
Flexibility. Look for a system which can easily grow with you, because your needs will
change. Flexibility is the key to growth. Look for a user modifiable and extendable
database, not one that already has all the fields you think you need. You should be able
to add or modify fields any time, and use them in reports, summaries, interfaces,
calculations, and screens. Interfaces also should be modifiable by you at any time.
Macros are essential, allowing you to automate your processes, and eliminate keying
errors.
Check the run-time options available in the standard reports. Record selection, calendar,
horizon, break fields, weight fields, scale factor, print formats, and destination (printer,
file, screen) are most useful. While a wide variety of standard reports is important, a
report writer is imperative. How can someone who doesnt know your business decide
what you need?
Flexibility shouldnt require modifying the source code. When you touch the source code,
your system becomes an orphan. You cannot upgrade to a new release without redoing
all your changes, eliminating product improvements. If offered the source code, ask what
essential flexibilities are missing.
While the above list is not all inclusive, it does cover the features most important for your
success. Some of these are under the surface, so ask questions if a topic isnt

39

mentioned in the brochure, and watch out for obsolete technology hiding behind a new
graphical user interface.

40
Chapter 4: Consumer Demand And The Future Of The Supply Chain
Manufacturers and Retailers alike are assessing and utilising ever more sophisticated
techniques to understanding how consumer demand should be anticipated, planned for
and influenced. The design and operation of their supply chains, and the use of timely,
accurate consumer demand information to drive these supply chains is at the top of most
companys agendas. This paper considers the techniques such companies are using to
arrive at an improved understanding of consumer demand; and addresses some of the
most important issues companies should consider when selecting and applying
automated techniques to assist in both predicting and influencing this demand.
The competitive power of prediction
Decades of research and experience in the disciplines of econometrics, investment
decision-making and natural sciences have transformed the ability of companies to
predict and create consumer demand. These approaches have found their way into
commercial software applications used in Demand and Supply Chain Planning - and are
now becoming a major competitive weapon for enterprises across all sectors of industry.
Companies have long understood how significant inventory reductions, coupled with
high and profitable consumer availability provides competitive edge. They also recognise
that using Point of Sale and SKU level data for forecasting provides a more timely and
accurate picture of consumer demand for their supply chain, and is a significant
contributor to improving forecast accuracy and making appropriate and profitable
inventory decisions.
Understanding demand at the consumer level is a major enabler for companies under
pressure to deliver the inventory, availability and profitability improvements demanded of
them.
Predictions by Industry Analysts predictions in the mid 1990s on Demand Planning
trends have proved to be highly accurate. They included:

41

The availability of commercial software applications, which can accurately
forecast all major types of demand.
The use of forecasting approaches that automatically determine the best
mathematical models to be used in predicting demand.
The adoption of causal forecasting by leading edge enterprises.
While many companies have purchased software tools which promise the above, many
have still to realise the full benefit from their investment. Software should not be a
constraint for companies to arrive at highly accurate predictions of consumer demand.
However, many companies are still in the early stages of achieving those levels of
accuracy.
The main reasons for this are:
The forecasting approach of the software application.
The complexity of the real world.
The use and deployment of the software application in the organisation.
It is important to understand the constraints companies are facing and what steps they
can take to remove them.
The future of forecasting: next steps - Which Forecasting Approach should I adopt?
In most statistical approaches there is a trade-off between the complexity of the model
used and the accuracy with which it predicts.
Using Bayesian logic is widely recognised as the most appropriate forecasting approach,
as it selects the combination of available models to achieve the best trade off between
complexity and accuracy. Through out-of-sample testing, this approach usually divides
the available data (eg: Customer POS information) into two groups. The model is then
built using the first group and validated using the second. The errors of the two groups
are compared to ensure that the model is equally accurate in both cases.

42

The Bayesian approach therefore has many advantages over less sophisticated
forecasting approaches. Most importantly, it:

43
Utilises all available statistical techniques so that seasonality, trends, outliers,

intermittent demand, step changes and other patterns inherent in the data can be
checked for and modeled.
Simultaneously checks the significance of other variables which may have influenced the
demand often described as causal factors.
Utilises an out-of-sample approach to trade off model complexity versus accuracy and
minimise over fitting.
Improves the overall run time of the forecast.
A multi-dimensional framework is essential
A company selecting a Demand Planning application for its supply chain environment
using the Bayesian approach is already a step closer to significantly improving its ability
to predict demand with greater accuracy. However, there are other considerations,
relating to how the Bayesian logic is deployed within the software.
Perhaps most important of these is the framework within which it is deployed which
should be multi-dimensional. This becomes critical as companies move towards
forecasting at the SKU level using POS data. Speed of processing and flexibility in
forecasting are key considerations here.
Users throughout the enterprise - and, increasingly, beyond it - must be able to slice and
dice the forecast if they are to plan effectively.
Making it real': modeling the extended enterprise is a critical step
The onus is as much on the company that is purchasing the application as it is on the
software vendor to get this right. Modeling the enterprise and its trading partners - the
extended supply chain - is a critical step in the deployment of the software application.
Consideration must be given to the obvious such as the Product and Location
hierarchies, to sales and distribution channels, but also to key features of these
structures.

44
Attributes of the Product such as colour, dimension, ABC rank and lifecycle phase can
be important ways in which to segment and analyse demand patterns. Location
attributes such as throughput volumes may be a way of segmenting the distribution
network. Critically, these analyses reflect the real way in which a company is organised
and does business. Many of these cut across existing or planned organisational
structures such as Brand or Market - but can be vital in understanding and accurately
predicting demand patterns, which may otherwise be hidden.
Cause and effect: the power to transform a Supply Chain environment
In broadest terms, seasonality, the day of the week or the month can all be considered
as causal factors - and all can have a major effect on demand and supply chains. For
example, demand for ice cream is highly seasonal; demand for a given newspaper will
vary depending on the day of the week.
The real situation is however far more complex. Many other interrelated factors influence
consumer demand - from macro-economic influencers such as lending rates, to the
weather on a particular day, to the price of an item, to whether an item is being
advertised or promoted. These factors will also vary by location, and the effect of each
will vary from product to product. In addition, their impact, whether externally (eg:
weather) or internally produced (eg: price) will usually be overlaid and will interact.
Understanding the relative contribution of each factor to accurately predict demand
individually, collectively and in combination is critical but complex - and has the power to
transform a supply chain environment. Sophisticated Demand Planning applications are
vital to achieving this. Companies using the Bayesian approach in their Demand
Planning can simultaneously introduce any and all variables in their forecasting process,
to arrive at the greatest understanding of the factors influencing demand - and thereby
achieve the most accurate prediction of that demand. They can then use that knowledge
to empower their supply chain, for cost reduction and competitive edge.
Mapping of the causal factors onto the real world model created in the Demand Planning
application and associating them with the correct Product / Location / Channel
combinations is clearly crucial. It is important to evaluate demand-planning processes
throughout the organisation, from Finance through Marketing to Operations, and to

45

identify how causal factors can be used to improve the accuracy of those planning
processes. A corporate advertising campaign may be as important in influencing
demand as consumer lending rates or rainfall. These may not be significant at an
individual SKU level, where a promotional event or price change may be the primary
factor impacting demand - but can be highly significant at the brand or market level.
What is also important is to assess the impact of repeating an historic event in the future.
For example if the price of an item was dropped by 20% a year ago, what would be the
impact of repeating this 6 months from now and is that the right time to do it, or should
it be 4 months (or 8 months) out? Should it be 25% or would a 15% reduction be
sufficient? Is there any other significant event planned at the same time, which may
reinforce or cancel out the effect on demand of a price reduction? Perhaps another
event close by means that a price reduction is unnecessary, and that fund can therefore
be deployed more effectively elsewhere or at another time.
How should I plan to organise and implement?
Identifying, organising, testing, deploying and maintaining causal factors may seem
daunting: but the real world is complex. A greater understanding of that complexity will
improve the accuracy with which demand can be predicted - and drive top and bottom
line benefits accordingly. This does not mean that all the complexity needs to be
understood and modeled at once. What is important is having a structured plan to
improve the sophistication of the model. Start with the quick wins first decide which
area is likely to give you the greatest return.
It may be improving the market level planning and the setting of corporate targets. It may
be the management of trade promotions and promotional calendars to make more
effective use of trade funds and improve the syncronisation of demand and availability.
These decisions will vary from company to company. What is important is to start, and to
continue once you have started. Get the buy-in of all functions involved in the process,
review the factors that are already used in your company - and try them early on.

46

Conclusions and recommendations
Companies should review how they have organised their internal demand planning
activities, and then how they are involving their trading partners in the demand planning
process. In particular they should focus on the following:
Are all of the functions, which influence demand - Marketing, Finance, and
Operations - involved in the process?
Are all of the potential causal factors at the company's disposal - Market Trends,
New
Product
Introductions,
Competitive
influences,
Company
revenue,
profitability and volume targets, Pricing strategies, Promotional and Advertising

activity etc - being considered?
Is real demand (or at least real sales) history being used, or are forecasts based
on order or shipment history?
Does the Demand Planning application provide feedback on the degree to which
a causal factor explains demand? Without this the user is driving blind.
Does the Demand Planning application cater for the modelling of several
coincident causal factors, and can it distinguish between the overall impact and
the contribution each causal makes both individually and in conjunction with
others?
Are causal factors being reviewed on a regular basis to determine whether their
impact is increasing or decreasing? Automatic modelling will take this into
account but it may also be time to look for other causals. Do not be put off by
complexity. Carefully plan the model of your world your organisation, products,
markets and trading partners - and use your demand planning application to
identify the most important factors influencing demand. However, do not try to
model everything at once. A structured and iterative approach to complexity will
still deliver significant and increasing returns. Make good use of your chosen
software vendor. They should have experience in your industry and across a

47

wide range of other markets. They should know which causals to look at first and
where to look for them.
Finally, challenge any accepted wisdom in your company that the factors you have been
using for years are the only ones that count.

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Shifts vs. Movements along a Demand Curve

A change in price results in a movement along a given demand curve.

49

A change in any factor except for a change in price that effects quantity
demanded results in a shift in the demand curve.
Factors that Shift a Demand Curve

Change in consumer incomes: an increase (decrease) in income shifts the
demand curve to the right (left).
Population change: an increase (decrease) in population shifts the demand
curve to the right (left).
Consumer Preferences: if preference for a particular good increases
(decreases), the demand curve will shift to the right (left).
Prices of Related Goods:
Substitutes: are goods that can be consumed in place of one another. If the
price of a substitute increases (decreases), the demand curve for the original
good will shift to the right (left). Example: Pepsi and Coke.
Complements: goods that are normally consumed together, i.e. hamburgers
and French fries. If the price of a complement increases (decreases), the
demand curve for the original good will shift to the left (right).

50

51

Factors that Shift a Supply Curve
Change in cost of inputs: an increase (decrease) in inputs costs shifts the
supply curve to the left (right).
Increase in technology: an increase in technological progress shifts the
supply curve to the right.
Change in size of the industry: if size of an industry grows (shrinks) the
supply curve will shift to the right (left).
Practical Examples from Leading Companies
Examples from three very different industries serve to illustrate the ways in which Causal
Factors are used in all aspects of Demand Planning from predicting market level
demand for agricultural equipment costing $250K to predicting demand at the news
stand for a daily paper.
The first example is taken from the world of discrete manufacturing in this case
complex, highly expensive agricultural equipment. The Demand Planning requirements
of this company is centered on the prediction of market trends and their competitive
positioning. Forecasting the overall shifts in market demand and the demand for
products within those markets was the first step in developing the organisation's demand
plan.
The company had highly qualified and experienced staff in its global marketing function,
specifically focused on market trend analysis. Prior to the introduction of the Demand
Planning application they had already identified the importance of causal factors in their
market analysis, and were using several which they considered to be leading indicators
of demand. These included temperature and rainfall forecasts, influencing harvest yields;
and forecasted changes in the Green Pound rate influencing the buyers sense of
economic well-being. In the early stages of implementing their Demand Planning
solution these factors were built into the model and tested for their predictive impact.
Although they were found to be loosely correlated with demand, the modeling suggested
they were not primary influencing factors.

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They searched for other factors, which would more closely affect demand. This project
coincided with the height of the BSE crisis in Europe and it was suggested that this could
be a significant factor in the prediction of demand.
What was needed was an indicator already being forecasted elsewhere and which could
be tested for its ability to accurately predict demand. It was suggested that Livestock
Future prices, readily available from other agencies should be tested. When tested on
the UK market the correlation was very high far more so than any of the other factors
previously used by the company.
This example also illustrates the importance of periodically reviewing the causal factors
built into the process. As consumer confidence in meat improved and livestock prices
recovered and stabilised, so the predictive ability of this causal would be expected to
wane and other factors would need to be checked.
The second example is taken from the world of publishing, specifically a leading national
newspaper. The Print Media industry is widely recognised as having one of the most
fast-moving supply chain environments. The publisher needed to understand and
organise the highly complex combinations of factors, which influence demand on any
given day. These included seasonality and real world events, neither of which is under
the control of the publisher but which are significant factors affecting demand.
There is however many additional factors which are under the control of the publisher.
To maximise their return on promotional investment, the impact of each of these must
also be understood. Usually several factors influence demand on any given day, and the
impact of these factors individually and collectively must also be understood. Price
reductions must be assessed for their impact on demand. Complex promotional events
are run regularly, such free papers with a coupon for a mobile phone, or money-off
voucher for a vacation. Predicting the impact of the promotion becomes even more
complex as two demands must now be forecasted the mobile phone and how often the
voucher with the phone is used to obtain a copy of the newspaper.
This media group is expecting significant benefits from their ability to forecast demand
more accurately, recognizing the crucial role of selecting and predicting the impact of

53

causal factors. Anticipated benefits include a $1m improvement in profitability, a 25%
reduction in returns and an increase in circulation of up to 35%.
A further, CPG industry example illustrates how a leading global manufacturer is using
causal factors to significantly improve the accuracy with which they predict demand for
their Food and Household cleaning Products. Promotional calendars for price reductions
and consumer coupons have been introduced into their Demand Planning application, to
good effect. The model encompasses 10 promotional and advertising strategies
including In Store coupons, In Store Advertising and Instantly Redeemable coupons.
Therefore the forecasting model now has to take into account significant lags, which may
occur between a promotion and its impact. In addition, it now needs to differentiate the
lagged effect from the other promotions running at the time.
These and other promotions are being modeled across a wide range of brands and
SKUs in up to 20,000 store locations. These examples serve to illustrate the diversity
and complexity of consumer behaviour and the wider environment in which the
consumer exists. Manufacturers and Retailers are trying to understand and influence
consumer behaviour in a repeatable and predictable manner. Improved understanding
ensures that the right investment decisions are made in Promotions, Advertising,
Inventory, Production, Transportation and a myriad of other costs incurred in getting the
product to the consumer and enticing them to purchase it. Central to this understanding
is how each potential influence contributes to the consumers decision to buy, and how
to successfully and accurately account for this when deciding which products to make,
how many to make, where to store and ship them and how, where and when to promote
them. In simple terms, how to bridge the gap between Marketing and Operations using
the most accurate understanding of demand?
This paper concludes with some recommendations about how companies can start to
improve things either through the selection of software to assist in automating these
processes, through getting more from software already purchased and by asking some
simple questions about how they organise their demand management processes.

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Chapter 5: Purchasing and SCM

There are key factors essential to achieving procurement best practices. Leading
companies that have realized best practices use superior supply chain management
strategy and organization to gain competitive advantage.
Introduction
Economic forces and technological advances have combined over the past 20 years to
increase the impact of procurement/supply management on company profitability and
long-term business success. Procurement is now in a position to affect company
profitability faster and more dramatically than any other corporate function.
Companies today are spending more revenue on outside goods and services. Thirty
years ago, the typical manufacturer might have spent 30 percent of company revenue on
outside supplies and services. Today, that number is likely to have doubled for most
manufacturers. Companies have attempted to focus as much as possible on those
activities considered to be "core competencies" - those that are performed at a higher
level internally than externally - while outsourcing other work to outside companies that
are specialists in those fields.
Advances in technology have provided tools that enable thought-leading supply
managers to extract maximum possible value from supply. When deployed strategically,
technological tools - especially the Internet - increase value for all entities in the supply
chain, from raw material supplier to final customer. Advanced information technologies
like the Internet have essentially enabled leading companies to integrate their supply
chains. In the most advanced cases, these supply chains act more like a single unit than
a series of non-aligned entities, which is characteristic of the majority of supply chains.
Leading companies in both manufacturing and service industries have used superior
supply management strategies and procurement practices to gain a competitive edge in
their markets. Examples include: IBM, Honda of America, Toyota, Harley-Davidson, WalMart, Cisco, Chrysler, Motorola, and American Airlines. These companies and others
excelled in at least one area - and usually several areas - of procurement/supply
management, including cost management, strategic sourcing, new product development,

55

supply chain integration, technology development, supplier training/development, and
others.
The companies are all large companies, but small and mid-sized companies also can
develop and employ procurement best practices for competitive gain. The key is to study
how to reap maximum value from supply in a particular industry and specific market
position, formulate a plan to realize that value, and then effectively execute the plan. The
execution stage is the most difficult part, and is where many companies fail for a variety
of reasons.
Developing and achieving procurement best practices is never easy. It consumes a lot of
time, entails breaking down barriers between internal groups, demands a new approach
to suppliers, and requires significant investment in at least a couple of the following
areas: people, training, analysis, measurement, technology, suppliers. In manufacturing
industries, especially those that produce high value-added products, the investment in
suppliers can be large.
The good news is that the payoff for long-term investment in supply management is
usually huge. Some manufacturing companies may spend up to 70 percent of sales
revenues on incoming goods and services, as shown by numerous studies conducted by
the Institute for Supply Management (formerly the National Association of Purchasing
Management, or NAPM), Purchasing magazine, and various consulting firms. The entire
amount of a reduction in dollars spent hits a company's bottom line, compared to 5
percent to 10 percent of increased sales revenue that may hit the bottom line at a typical
manufacturing company.
Unfortunately, if their actions are any indication, far too few companies recognize the
tremendous value inherent in their procurement departments and their supply chains.
The possible reasons for this failure are many, not the least of which are a high rate of
turnover in top management and the pressure on public companies to achieve fast
revenue growth in the short term.
Building Best Practices
A critically important factor to consider when discussing best practices in procurement is
that no two companies are exactly alike, and there is no simple "cookie cutter" approach

56

to best procurement practices. For example, a company that manufactures a basic
commodity product may be best served by employing a supply management strategy
that emphasizes low cost, while a company that makes high-technology products may
want to create a supply strategy that emphasizes technology development and speed to
market. Every company has unique strengths and weaknesses when it comes to supply,
and most companies occupy different positions even when serving the same market. It is
up to management to determine the best supply strategy, which will dictate the best
target areas for development and use of procurement best practices.
It also should be noted that companies cannot always simply copy the strategies and
execution of other companies. Best practices often depend on people, suppliers,
processes, or other business elements that are specific to a certain situation. Companies
that are studying the procurement best practices of other companies should keep this in
mind during their research.
While recognizing the differences that always exist from one company to the next, there
are some factors that are usually or always present when a company successfully
develops and deploys one or more procurement best practices. These factors include:
Active support from top management Companies that develop best practices often
have top executives who recognize the potential value that lies in their supply chains,
and actively support (and fund) supply management efforts. At a minimum, CEOs and
other high-ranking executives must have a full understanding of supply value, good
relations with their peers at strategic supplier companies, and they must provide the
corporate investment needed to develop best practices.
Deep understanding of cost drivers It's a sad fact that most companies aren't even
close to having a good handle on what their actual costs are and what causes them.
Companies that have developed best practices nearly always know in detail all elements
of their cost structures and take actions to drive costs lower all the time. They also
continuously collect and analyze data and other information on the costs of the suppliers
that comprise their supply base.
Cooperative supplier relations Leading companies realize that suppliers offer value
that is not present in their own companies. These companies integrate strategic
suppliers into programs that involve supply, such as new product development, cost

57

reduction, and logistics operations. They also understand that suppliers must achieve
profit margins sufficient for them to meet their own business plans and to invest in new
technologies, facilities, equipment, and talented people.
Culture of continuous improvement Companies that have achieved best practices in
procurement do not stand idle and admire their accomplishments. At all levels, they seek
to learn from others and to continuously advance their practices and processes.
Cross-functional approach To function at an optimum level, supply management
must include not only the procurement group but other corporate functions that can add
value through interacting with suppliers, such as technology, logistics, manufacturing,
operations, distribution, and research and development, to name a few. The use of
cross-functional teams became a common way to involve other departments in supply
management over the past decade, but too many companies deploy teams without first
developing a sound strategy for how these teams will enhance value.
Appreciation of advanced communications technology While technology by itself will
do nothing to improve procurement/supply management operations, intelligent
deployment of advanced technologies within the confines of a superior supply strategy
can reap great value value that not only is untapped, but often is completely invisible
to even trained procurement eyes. Far too many companies view technology use in
procurement as a best practice unto itself. These companies don't truly understand that
technology's value is wasted unless it is part of a sound supply strategy. Technology is a
tool, not a strategy. When technology is not used correctly, it can cause a lot of damage
to supply operations.
Investment in procurement/supply management Leading companies invest in
training and development programs for their own personnel and often for suppliers. They
also invest in communications and other technology. These factors should not be viewed
as elements that will automatically lead to the development of best practices in
procurement/supply management. But one would be hard-pressed to find a company
that has achieved best practice that does not exhibit all of these traits.
Perhaps the most important factor in maximizing supply value is active support from top
management. Support does not necessarily mean involvement of the chief executive in
day-to-day operations. A valid case could be made that the CEO should not be involved

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in day-to-day supply management; however, it is critically important that the CEO and
the executive management team:
1. Understand the potential value of supply to company success
2. Recruit and/or develop the best available supply management talent
3. Provide the necessary funding for supply management, even (or especially) in tough
business climates
4. Show internal personnel at all levels that they are fully committed to excellence in
supply management
5. Interact with their counterparts at key supplier organizations on a regular basis
Without top management support, no company is able to develop and execute best
practices in procurement. But with sufficient top management support and subsequent
investment in procurement/ supply management operations, the other necessary
elements for success often are created as a result.
Other Factors that Effect Best Practices in Procurement
Critically important to best practices in procurement is the development and use of
systems and methodologies to measure performance of suppliers, systems, and
employees.
Performance
measurement
goes
hand-in-hand
with
continuous
improvement. It is astonishing that many companies simply do not measure the

performance of suppliers or the performance of internal groups that interface with
suppliers, yet they claim to operate supply programs that are based on continuous
improvement. Without a formal, consistent system of measurement, you can't know if
you've improved.
Perhaps equally astounding is that many or most companies know few details of their
overall spend, which, approaches 70 percent of sales revenues in some manufacturing
industries. Far too many large companies have not analyzed their spend across
business units, divisions, or facilities. Spending practices of the typical company also do
not make full use of buying leverage, supplier expertise, or numerous economies of
scale that result from coordinating the spend across the corporation. Companies that
achieve best practices in procurement have in-depth knowledge of how they spend their
money, usually on a global basis.

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Related to knowing a company's spend is the structure of the procurement/supply
management organization. All too often analysts and industry media tout either a
centralized or decentralized procurement structure as "the answer" for a company's
supply needs, with centralized structures deemed appropriate for companies that
provide commodity products or services, and decentralized structures for technology and
high value-added products and services. But, the reality is much more complex. There
really is no single answer to how a company's procurement operation should be
structured. Each situation demands its own analysis, because each situation is different,
even within the same company. In practice most companies that have achieved one or
more best practices in procurement use both structures, depending on the details of
different business situations. But common elements are a strong procurement/supply
management group and a position on the strategic business team for the head of
procurement.

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Supplier Relations: Cornerstone of Best Practices

Historically, the procurement function was viewed as a low-level, back-office operation
that existed solely to beat up suppliers for lower prices. "Three bids and a cloud of dust"
is an expression used by many veteran procurement professionals to describe this
traditional approach to supplier relations. The traditional approach to suppliers was
price-based, confrontational, surface-level, short-term, and extremely short-sighted.
Today, innovative supply managers realize that, once they have selected the best
suppliers, mutual cooperation can pay big dividends for both customer and supplier.
While all companies want to pay the lowest possible purchase price for goods and
services, leading companies have realized that purchase price is only one element of
total cost, and that it's critically important to establish continuous improvement programs
with strategic suppliers.
Key to this process is selecting the right suppliers. The importance of supplier selection
and supplier relations to long-term success cannot be overstated. Once the best supplier
group is formed, innovative companies have used various methods to spread
intelligence through their supply base. A good example is Harley-Davidson Motor Co.,
which for several years has used "supplier councils" to effectively cross-pollinate supply
intelligence through the company's supply base. These councils meet several times a
year, coordinated by Harley's purchasing group, and discuss key strategic initiatives.
Council members often criticize Harley's practices and critique new processes or
technologies, all in an effort to produce the best possible solutions for all companies
involved, including suppliers.
Some suppliers share detailed cost information with Harley, something that is
unthinkable to most suppliers. Harley-Davidson's use of supplier councils to share
intelligence is an example of a best procurement practice.
Best Practice: Cost Management
Managing and reducing the entire spectrum of costs associated with running a business
is one of the most important if not the most important job of an industrial
procurement organization. Unfortunately, far too many organizations confuse total cost

61

reduction with purchase price reduction; there is a world of difference. Purchase price is
the amount of money paid for a product or service. Total cost is the sum of all money
spent to perform a specific action or series of actions, and includes purchase price plus
the costs of all other activities needed to perform the action or series of actions. In many
cases, purchase price is only a small fraction of total cost.
Companies that have achieved a best practice in cost management not only measure
and see clearly all costs involved with producing and delivering a product or service,
they also help their suppliers do the same. They realize that suppliers will not make the
long-term effort to seek out waste and reduce costs if they have little or nothing to gain.
Companies that achieve a best practice in cost reduction usually work closely with
suppliers to closely examine all processes involved at both companies, and then attempt
to reduce those costs. Some companies share savings with suppliers, thereby creating a
very strong incentive to reduce costs.
Companies that have achieved a best practice in cost management in recent years
include Honda of America, IBM, and Chrysler at least prior to the merger with
DaimlerBenz. Perhaps the program that best exemplifies how to manage costs is the
SCORE program that was pioneered by Chrysler several years ago under the direction
of renowned procurement leader Thomas Stallkamp, who currently serves as CEO of
MSX International, an engineering firm in Michigan.
Much has been discussed about SCORE - the program's name is an acronym for
"supplier cost reduction effort." At the heart of SCORE was the sharing of savings with a
supplier when that supplier identified an area where costs could be reduced and
proposed a method to realize that savings. The program took at least a couple of years
to gain momentum, but when it did, enormous cost savings resulted. SCORE led to
Chrysler being the most profitable car maker in the world at the time.
Keys to the success of SCORE were some of the foundations discussed earlier: Support
from top management, use of technology, supplier involvement, and a cross-functional
approach. SCORE became a company-wide process of continuous cost reduction, and
the typical objection that suppliers have to cost-reduction initiatives - that it degrades
their profit margins - was stood on its head. SCORE actually increased suppliers'
margins because they shared savings with their customer. Suppliers also could use

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techniques and knowledge revealed through SCORE in their interactions with customers
other than Chrysler, furthering bolstering their businesses.
Chrysler's SCORE program has been widely accepted as a best practice in cost
management/cost reduction, but the vast majority of companies have not been willing to
accept SCORE's key elements sharing savings with suppliers, and company-wide
implementation of the program.
Key Performance Indicators
Unlike best practices in many other business disciplines, it's difficult and actually
misleading to specify a key performance indicator for any of the various
procurement/supply management activities. Each company has a unique supply
situation, and the optimum supply strategy will result from an intensive and continuous
study of their particular situation, and by developing a long-term strategy that will
maximize strengths while minimizing weaknesses. Although there is a danger in seeking
and relying on KPIs as a guide to developing procurement best practices, there are
some examples of what leading companies have done in specific areas of supply
management, especially cost management.
Dave Nelson, the current chairman of the board of directors of the Institute for Supply
Management, is perhaps most qualified to quantify what can be achieved in cost
management. Nelson says that the majority of manufacturing companies can remove
about 25 percent of the cost for procured parts and related services over a six-year
period. This is achieved by continuously examining processes to removing redundancies
and other inefficiencies, and by showing suppliers how they can remove costs from their
own processes. This reduction in costs is not achieved overnight; most successful cost
reduction programs are loaded heavily on the back end. Major cost savings aren't
realized until well into the program, because it takes time to ferret out waste and
eliminate it. However, it also should be noted that such cost savings are not a one-time
occurrence, such as buying a commodity at a low price because of market conditions.
The wasted cost that is eliminated in such efforts is eliminated forever, and companies
benefit every following year from a reduced cost base.
Reference

63
For detailed examples of best practices in procurement: The Purchasing Machine, How
the Top Ten Companies Use Best Practices to Manage Their Supply Chains, coauthored by Nelson, Patricia E. Moody, and Jonathan Stegner, published by The Free
Press, 2001.

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Chapter 6: Manufacturing in Supply Chain Management
Consumers are becoming more demanding than ever, wanting cheaper, more
customised products and better service. Competition in the manufacturing marketplace
has never been more aggressive. Tough challenges and rapid changes must be faced
by manufacturing organisations simply to remain competitive. Solutions, practices,
technologies and business processes have to develop fast, squeezing greater efficiency
out of the supply chain.
Efficient Manufacturing Supply Chain solutions have become the differentiator between
success and failure. They must be implemented in order to optimise everyday process
industry activities, enabling more intelligent and economical decisions with efficient
planning processes. Improved supply chain velocity, enhanced visibility across the whole
of the supply chain and more opportune, accurate information flows can be seen as a
result.
ORIGIN OF SUPPLY CHAIN MANAGEMENT
SCM is a concept that has originated and flourished in the manufacturing industry. The
first signs of SCM were perceptible in the JIT delivery system as part of the Toyota
Production System (Shingo 1988). This system aimed to regulate supplies to the Toyota
motor factory just in the right - small - amount, just on the right time. The main goal was
to decrease inventory drastically, and to regulate the suppliers interaction with the
production line more effectively.
After its emergence in the Japanese automotive industry as part of a production system,
the conceptual evolution of SCM has resulted in an autonomous status of the concept in
industrial management theory, and a distinct subject of scientific research, as discussed
in literature on SCM (e.g., Bechtel and Yayaram 1997, Cooper et al. 1997). Along with
original SCM approaches, other management concepts (e.g., value chain, extended
enterprise) have been influencing the conceptual evolution towards the present
understanding of SCM.

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In a way, the concept of SCM represents a logical continuation of previous management
developments (Van der Veen and Robben 1997). Although largely dominated by
logistics, the contemporary concept of SCM encompasses more than just logistics
(Cooper et al. 1997).
Actually, SCM is combining particular features from concepts including Total Quality
Management (TQM), Business Process Redesign (BPR) and JIT (Van der Veen and
Robben 1997).
CONCEPT OF SUPPLY CHAIN MANAGEMENT
The supply chain has been defined as the network of organizations that are involved,
through upstream and downstream linkages, in the different processes and activities that
produce value in the form of products and services in the hands of the ultimate
customer
(Christopher 1992).
SCM looks across the entire supply chain (Figure 1), rather than just at the next entity or
level, and aims to increase transparency and alignment of the supply chains
coordination and configuration, regardless of functional or corporate boundaries (Cooper
and Ellram 1993).

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According to some authors (e.g., Cooper and Ellram 1993), the shift from traditional
ways of managing the supply chain towards SCM includes various elements (Table 1).
The traditional way of managing (Table 1) is essentially based on a conversion (or
transformation) view on production, whereas SCM is based on a flow view of production.
The conversion view suggests that each stage of production is controlled independently,
whereas the flow view focuses on the control of the total flow of production (Koskela
1992).
METHODOLOGY OF SUPPLY CHAIN MANAGEMENT

In the literature on SCM, many supply chain methods have been proposed. Most
methods address logistical issues of the supply chain, e.g., quality rates, inventory, leadtime and production cost.
The methods of pipeline mapping (Scott and Westbrook 1991), supply chain modeling
(Davis 1993) and logistics performance measurement (Lehtonen 1995) analyze stock
levels across the supply chain. The LOGI method (Luhtala et al. 1994, Jahnukainen et
al. 1995) studies time buffers and controllability problems of the delivery process. Supply
chain costing (La Londe and Pohlen 1996) focuses on cost buildup along the supply
chain. Integral methods like value stream mapping (Hines and Rich 1997, Jones et al.
1997) and process performance measurement (De Toni and Tonchia 1996) offer a
toolbox to analyze various issues including lead time and quality defects.
Table 1: Characteristic differences between traditional ways of managing the supply
chain and present SCM (Cooper and Ellram 1993)

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Besides assessing and improving the supply chain, other elements are essential to the
methodology of SCM. A generic methodology of SCM can be deduced combining and
generalizing the commonalities of different SCM methods. In a way, the SCM
methodology bears resemblance to the Deming Cycle (Figure 2). Generically, the
methodology of SCM consists of four main elements: (1) Supply chain assessment, (2)
Supply chain redesign, (3) Supply chain control, and (4) Continuous supply chain
Figure 2: Generic SCM methodology compared to the Deming Cycle

The first step is to assess the current process across the supply chain in order to detect
actual waste and problems. The issue here is to find the causality between the waste
and problems, and locate their root causes. Once the causality is understood, and
having found out about the root causes, the next step is to redesign the supply chain in
order to introduce structural resolution of the problems. This includes redistribution of
roles, tasks and responsibilities among the actors in the supply chain, and a review of
procedures.
The next step is to control the supply chain according to its new configuration. An
important part of the control is the installation of a monitoring mechanism to continuously
assess how the supply chain operates. This includes systems to measure and estimate
waste across the supply chain process, and feedback systems to discuss and evaluate
underlying problems. The objective is to continuously identify new opportunities, and find
new initiatives to develop the supply chain. In fact, this continuous improvement implies
the ongoing evaluation of the supply chain process, and the recurring deployment of the
previous three steps: assessment, redesign and control (Figure 2).

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JUST-IN-TIME (JIT) MANUFACTURING
A strategy for inventory management in which raw materials and components are
delivered from the vendor or supplier immediately before they are needed in the
manufacturing process.
JUST IN TIME (JIT) concept was originally introduced in the TOYOTA production
system for the purpose of eliminating waste, during 1950s and 1960's. JIT aims at
regulating flow process. According to this system, materials, parts, components are
produced and delivered just before they are needed and in the required quantity. In
addition, time and cost required to change from the production of one part to another is
reduced, thus cutting set up costs and promoting the production in small lots . This
system is help to minimise inventory. Reduction in inventory prevents wastage of space
for storing and also reduces inventory-carrying cost. Cutting down over production waste
of machine hours, man-hours and material handling time were also reduced.
Kiichiro Toyoda, the Father of Japanese Automobile Industry was the one who
conceived the idea of JIT. He was, in fact inspired by Henry Fords book Today and
Tomorrow wherein he had written an exclusive chapter entitled Learning from waste.
Even before construction of the new plant at Koromo began, Kiichiro had formulated a
clear mental picture of the type of production he wanted to set up. A very detailed
manual describing exactly what he had in mind was also kept ready. Instead of a lot
production system, a flow-type production system was envisaged. The basic idea was to
produce the needed quantity of the required parts each day. Slips were passed around
indicating the number of parts that had to be made or processed that day.
The operating method of the above system is called KANBAN. Kanban is nothing but a
flag or a piece of paper which contains all relevant information, part number, description,
process area used, time of delivery, quantity available, quantity delivered, production
quantity etc. This is used within the plant in operation area i.e. from stores to previous
production area to the supply area and outside the plant with vendors.

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Unless the existing systems are challenged, improvements cannot come. Management
wanting to adopt Kanban or JIT system should be prepared to change:
The present mindset
The existing management system and
The way they manage people
Another aspect is that the production has to switch over to Pull System from Push
System as explained below
PUSH SYSTEM
In this system, production quantity is based on the demand and stock in hand. The
components are made in step-by-step approach in a sequential manner using the time
standards for each operation.
PULL SYSTEM
In this method, the required quantity is withdrawn by the final process centre from the
previous process work centre and in turn that process work centre withdraws the
required quantity from its previous centre and so on. Thus this procedure works in
reverse order. This is like walking into the supermarket and trying what we want, when
we want and how much we want.
Another significant aspect is that apart from flow type process even the layout of
machines may also undergo change. Example is as follows:

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OLD SYSTEM
NEW SYSTEM
Cluster of Lathe Machines
It was Kiichiro Toyodas rich imagination of JIT that stimulated Taichi Ohno, to think
about it seriously and put it into practice. He was responsible for the successful
implementation of JIT

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Chapter 7: Inventory Management in Supply Chain Management.

Introduction
The term Inventory is often linked with manufacturing industries. Today the focus is on
retailers and their distribution services. Inventory aims to reduce costs and
simultaneously improve service. Thus the need to reduce costs as against improving
service becomes the key issue and the role played by successful inventory management
is becoming more apparent.
Role of Inventory
"Inventory is critical to supply chain management because it directly impacts both cost
and service," John J. Neale, Optiant, Inc., and Brian T. Tomlin, University of North
Carolina. Certain amount of inventory is inevitably required somewhere in the chain to
provide adequate service to the end customer, as demand is mostly uncertain and it
takes time to produce and transport product. Inventory typically generates an
incremental cost of 20 to 40 cent per year for the company. Increasing supply chain
inventories typically increases customer service and consequently revenue, but it comes
at a higher cost.
What is Inventory Management?
Inventory Management is part of Supply Chain Management. Inventory Management is
the systems and processes of maintaining the appropriate level of stock in a warehouse.
The activities of inventory management involves in identifying inventory requirements,
setting targets, providing replenishment techniques and options, monitoring item usages,
reconciling the inventory balances, and reporting inventory status.
Importance of Inventory
Management of inventory is a powerful driver of financial performance. Improper
management of inventory leads to slow growth and pressure on profitability. Thus
companies aim at improving the efficiency of inventory cycle. This helps the firm from

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locking up of capital, which can be invested elsewhere and improve financial
performance and create competitive advantage in delivering goods at lower prices.
Inventory Planning and Demand Forecasting
A key to inventory planning is accurate demand forecasting. Software systems utilizing
sophisticated mathematical models are can predicate future demand from historical
usage data. The accuracy of the demand forecasting is largely dependent on how
unusual usage is treated in the demand forecasting. It is imperative that historical usage
be corrected for any unusual activities. Demand forecasting is an ongoing process. The
frequencies of forecasting depend on the length of acquiring inventory items. Some
businesses may run forecast monthly, while others may need weekly forecasting.
Inventory management software systems can alert inventory owners at the frequencies
of their preference, whether it's on a weekly, or monthly basis.
Inventory Monitoring and Balance Reconciliation
Inventory Monitoring involves activities of monitoring arrival, use, shipment and
disposition of inventory items to ensure the accuracy of inventory management. Items
used for special events, road shows, or kitting are common causes that result count
discrepancies, When a discrepancy occurs or the actual quantity physically counted
doesn't match the stock level in the computer system, inventory specialists need to
reconcile the discrepancy in terms of cycle counting. A cycle counting program can
improve your business processes, ensuring the correct recording of material movement,
proper stocking of inventory items and accurate order fulfillment.
Inventory Reporting
Various reports are indispensable for inventory management. Reports can come in
canned/static or ad-hoc forms. Static reports provide periodical summary of inventory
items and usages. Ad-hoc reports allow users to look at inventory in criteria they prefer by SKU, product category, product type, or item owners.
Once your website has secured an order, you have to fulfill it. The fulfillment of digital
goods, such content or software, are usually handled online. But the delivery of physical
goods is handled in a "brick-and-mortar" world.

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Fulfillment services involve receiving, inventorying, warehousing, delivery, recordkeeping and customer inquiries. You have options to outsource part of or all of fulfillment
services to a third part. Fulfillment options includes 'Do It Yourself', 'Use Suppliers for
Fulfillment', 'Drop Ship from Distributors', or 'Use a Fulfillment Company'. The fulfillment
option you use depends on types of goods, volumes of orders and the dependence of
fulfillment process on other business processes.
The quality of fulfillment service directly impacts customer satisfaction or return of
customers to your website. Use of fulfillment software or other information technology
can streamline ecommerce fulfillment operation.
Warehousing Physical goods are stored in storage. Valuable items are usually stored in
secure storage. While fulfillment companies have their warehouse and distribution
centers, small businesses can store goods in their garages or basements.
Inventory Management The activities of inventory management involves in identifying
inventory requirements, setting targets, providing replenishment techniques and options,
monitoring item usages, reconciling the inventory balances, and reporting inventory
status.
Order Processing & Shipping Goods are delivered to customers in various shipping
methods, ground, overnight, and etc. Customers specify shipping methods when they
place their orders and the fulfillment company usually can adjust the shipping methods
of the delivery. To ensure smooth operations, ordering process is customized to fit
unique business needs of each client.
Some pitfalls in Inventory Management
Pitfall 1. No Supply Chain Metrics:
In a supply chain with multiple sites, each site will often have its fairly autonomous
management team. The objectives of the various teams may differ, and even be
conflicting. Inventory may for example be reduced at a Site A of a supply chain, and
thereby, seen from a local perspective, the performance is enhanced. But the inventory
decrease may also decrease Site A's flexibility. Because Site A now responds more
slowly to changes, Site B, which is Site A's customer will have to increase its inventory
(of Site A parts) in order to maintain its flexibility and level of customer service. The lack

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of supply chain metrics has prevented managers at Site A to see that their local
improvements has not lead to improved overall performance of the supply chain. The
objective of supply chain metrics is to give the basis for evaluations of the performance
of the whole supply chain as one system.

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Pitfall 2. Inadequate Definition of Customer Service:
Too few and in-concise metrics for customer service. The evaluation of performance
becomes difficult, and certain aspects of customer service may be overlooked.
Pitfall 3. Inaccurate Delivery Status Data:
Customers are not correctly informed of delivery dates of orders and of late deliveries.
Companies can often not readily retrieve the information needed to do so.
Pitfall 4. Inefficient Information Systems:
Databases at different operation sites that describe system environment, inventories,
backlog, future production plans, and so on are often not linked. Information must be
retrieved manually, and this can be a long process. Planning cycles may therefore be
long, using highly uncertain demand forecasts. The wrong products are made, and
inventories and backlogs grow.
Pitfall 5. Ignoring the Impact of Uncertainties:
Too often supply chains do not track uncertainties such as suppliers' delivery times, the
quality of incoming materials, manufacturing process time, transit times, and so on. This
leads to non-optimal stocking levels. In some cases uncertainties are properly tracked,
but there is no follow-up.
Pitfall 6. Simplistic Inventory Stocking Policies:
Stocking policies are often not linked to knowledge of the uncertainties mentioned
above. Stocking policies are often based on the quantity usage of the items stocked.
This says nothing about the uncertainty associated with the usage. Analysis show that
stocking levels could be greatly reduced by transferring stocking policies from being
quantity based to being uncertainty based.
Pitfall 7. Organizational Barriers:
Entities in a supply chain may belong to different organizations within the same
company. The organizations will independently measure the performance of the entities.
While each entity is occupied with achieving local goals (much like in pitfall 1), important
synergies may be lost.
Pitfall 8. Incomplete Supply Chain:

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Supply chain managers are often focussed only on the internal supply chain. Going
beyond the internal supply chain by including external suppliers and customers often
exposes new opportunities for improving internal operations.
Inventory management in the SCM Outsourcing:
Each stage in the supply chain management has certain inventory because of mismatch
between supply and demand. This inventory spread throughout the supply chain from
raw materials to work in process to finished goods that supplier, manufacturers,
distributors and retailers hold.
There are mainly two advantages by having inventory on hand in the supply chain.
To increase the demand that can be satisfied.
To reduce the cost by exploiting any economies of scale.
This inventory has an impact on the material flow time in a supply chain management.
Material flow time is the time that elapses between the point at which material enters the
supply chain to the point at which it exits. Another important area where inventory has a
significant impact is throughput, the rate at which sales to the end customer occur. If the
inventory is represented by I, flow time by T, and throughput by R, the three can be
related using Littles law as follows.
For example, if the flow time of an auto assembly process is 10 hours and the
throughput is 60 units an hour, Littles law tells us that the inventory is 60 * 10 = 600
units. If we are able to reduce inventory to 300 units while holding throughput constant,
we would reduce our flow time to five hours (300/60). In this relation inventory and
through must be in the same relation. The logical conclusion here is that inventory and
flow time are synonymous in a supply chain.
= RT
Role in the competitive strategy

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If a firms competitive strategy requires a very high level of responsiveness, a company

can use inventory to achieve this responsiveness by locating large amounts of inventory
close to the customer. If the demand needs to be satisfied immediately, the firm requires
the inventory on hand.
If the firms competitive strategy depends on low-cost strategy, the firm can reduce the
cost through centralized stocking.
Components of inventory decisions:
The managers must make inventory decisions to create more responsive and more
efficient supply chain effectively. The following are some decisions relating to inventory.
Cycle inventory. It is the average amount inventory used to satisfy demand
between receipts of supplier shipments.
Safety inventory. It is held just in case demand exceeds expectation. It is held
to counter uncertainty.
Seasonal inventory. It is held to meet the demand for a specific season, and
the seasonal inventory may differ from product to product in each industry
segment based on its demand and consumption pattern.
Effective inventory management allows a distributor to meet or exceed his (or her)
customers expectations of product availability with the amount of each item that will
maximize the distributors net profits."
Cost for holding Inventories
An inventoy managers job is to balance the conflicting cost and the pressures of
determining the appropriate level of
inventory. The reason behind keeping the
inventories low is that firms must pay interest on the investment made on inventories.
Inventory holding ( or carrying ) cost is a variable cost on items such as storage and
handling, taxes, insurance, interest on capital and shrinkage cost. The annual cost to
maintain one unit in inventory typically ranges from 20 to 40 percent of its value.

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Illustration:
If a firms holding cost is 30 percent. If the average value of total inventory is 20 percent
of sales, the average annual cost to hold inventory is 6 percent {0.03(0.20)} of total
sales.
This cost is significant in terns of gross profit margins, which often are less than 10
percent.
The various costs are broadly classified as follows:
Interest or Oppurtunities Cost Inorder to finance inventory, a company may
obtain a loan or forgo an oppurtunity of an investment promising an attractive
return. Interest or oppurutnity cost whichever is higher is the largest
component of holding cost.
Storage and Handling Costs This cost is incurred when a firm rents out
space. There also is an oppurtunity cost, as the firm can utilize the storage
space productively in some other way.
Taxes, Insurance and Shrinkage When inventories are high, the insurance on
the assets (ie. Inventories) also increases.
Shrinkage takes place in three forms.
Pilferage or theft of inventory by customers or employees.
Obsolesence occurs when inventory cannot be used or sold to the full value
due to change in model, engineering modifications or low demand.
Deterioration through physical spoilagge or damage results in lost value.
Reasons for Carrying Inventories
Carrying Inventory can be classified under four heads

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Cycle Inventory
Safety Stock Inventory
Anticipation Inventory and
Pipeline Inventory
Cycle Inventory Raw materials, components, parts are required for production. This is
cycle plays a crucial role in keeping the production cycle continuous. The work in
progress inventory is a major part of production related inventory. Determing how
frequently to order and in what quantity is called Lot sizing.
Safety Stock Inventory Inorder to avoid customer service problems and the hidden costs
of unavailable components, companies hold safety stock. This gives a cushion against
uncertainities in demand, lead time, and supply therefore ensuring that operations arent
disrupted.
Illustration:
Suppose the average lead time from a supplier is three weeks but a firm orders five
weeks in advance just to be safe. This policy creates safety stock equal to a two weeks
supply (5-3).
Anticipation Inventory This term refers to the inventory that is used to absorb uneven
rates of demand or supply that businesses face. Manufacturers of air conditioners, for
example, experience 90 percent of their annual demand during just three months of a
year. Hence anticipation inventory helps in evening out the volatility in demand and
supply. A company may stock up on certain items if its supplier threatened with a strike
or have severe capacity limitations.
Pipeline Inventory Inventory moving from point to point in the materials flow system is
called pipeline inventory. Materials move from suppliers to a plant, from one operation to
the next in the plant, from the plant to a distribution center or customer, and from
distribution center to a retailer. Pipeline inventory consist of
orders that have been
placed but not yet received. Therefore stocking locations, improving materials handling
and delays in distribution should be overcomed.

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Conclusion
Thus inventory management decisions involve trade-offs among the conflicting
objectives of low inventory, high resource utlization and good customer service. For
making supply chain leaner, firms are using selective control techniques like EOQ, ABC,
etc. and inventory control models like MRP, DRP, JIT, AITS. Therefore, inventory should
be held only when the benefits of holding it exceeds the cost of carrying the inventory.

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Chapter 8: Transportation In Supply Chain Management.
The mode choice aspects of these decisions are the more strategic ones. These are
closely linked to the inventory decisions, since the best choice of mode is often found by
trading-off the cost of using the particular mode of transport with the indirect cost of
inventory associated with that mode. While air shipments may be fast, reliable, and
warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may
be much cheaper, but they necessitate holding relatively large amounts of inventory to
buffer against the inherent uncertainty associated with them. Therefore customer service
levels, and geographic location play vital roles in such decisions. Since transportation is
more than 30 percent of the logistics costs, operating efficiently makes good economic
sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and
scheduling of equipment are key in effective management of the firm's transport
strategy.
Transportation moves the product between different stages in supply chain.
Transportation has a large impact on both responsiveness and efficiency. If the firms
competitive strategy depends on high level of responsiveness, the companies uses
faster transportations such as air transportation, internet etc. if firms competitive
strategy targets customers whose main decision criterion is, price then the company can
use transportation to lower the cost of the product at the expense of responsiveness.
Components of transportation decision:
Mode of transportation .it is the manner in which product is moved from one location in
supply chain network to another. Companies have the following basic modes of
transportation.
Air. The most expensive mode but also very fast.
Truck. A relatively quick and inexpensive mode with high levels of flexibility.
Rail. An inexpensive mode used for large quantities.
Ship. Inexpensive and slowest mode.
Pipeline. Used primarily to transport oil and gas.

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Electronic transportation. Transport goods such music, software etc.
electronically via the Internet.
Route and network selection
Route is the path along which a product is shipped, and a network is the collection of
locations and routes along which a product can be shipped. Companies make some
routing decision at the supply chains designs stage, and make others on a daily basis.
In-house or Outsource. Traditionally, much of the transportation function has been
performed in-house. Today, however much of transportation and even entire logistics
systems is outsourcing.
Any supply chains success is closely linked to the appropriate use of transportation.
Wal-mart uses cross docking, a process in which product is exchanged between trucks
so that each truck is going to a retail store has products from different suppliers. Walmart also uses its transportation system to allow stores to exchange products based on
where shortages and surplus occurs.
Transportation is a crucial link between the various stages of the supply chain. With the
growth of global trade the transportation infrastructure and the IT tools are contributing
towards improving the transportation efficiencies for lower supply chain costs. Consider
the case of India, which uses maritime transportation for more than 95% of the exports
and imports. The port infrastructure in terms of container handling, road and rail linkages
influence the performance of the supply chain. The PC manufacturer Dell uses an
extensive transportation network for movement of products from suppliers to the
assembly plants located all over the world and then dispatches from each plant to the
individual customers.
Transportation contributes to the overall economic activity and provides opportunity for
growth under competitive conditions. The more efficient the transportation the lower the
transaction costs for the companies operating in the economy
It supports greater reach and availability for the products in the market place

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The wider the product distribution and reach greater the role for transportation and more
the number of opportunities for companies to exploit the economies of scale
Transportation is a significant cost influencer and has more than 25% of the share in the
total logistics costs. This can influence the price of the end products.
The transportation activity should not be considered in isolation, but in conjunction with
the other supply chain activities and it is more than physical delivery. There is a need to
deploy and support the transportation planning process with IT tools and techniques.
Next we look at factors which affect the transportation decisions in a Supply Chain. The
factors can be looked at from the view point of a transporter or a shipper (company using
/contracting the transporter). For the shipper the factors influencing decisions of
transportation are:
Transportation Cost: This is calculated as the total cost paid to the transporters for
inbound and outbound transportation. Inbound transportation refers to the cost incurred
for the movement of raw material and other inputs for manufacturing and outbound
transportation refers to the movement of finished products to the customer. The
transportation costs vary based on the transporter offered price for movement of goods.
These costs can be considered to be purely variable costs if the shipper does not own
the transportation resources.
Inventory cost: These costs are towards holding inventory in various stages
of the supply chain. For transportation decisions these are considered as
fixed for short term transportation and variable when considering the design
of the total distribution network.
Facility cost: These are the costs for maintaining the various facilities
factories, warehouses etc; and these are considered as fixed for making
transportation decisions.
Processing cost: These are the costs associated with loading, unloading and
handling of goods. These are considered as variable costs for transportation
decisions. For some transportation modes like through container, these can
be quite significant.

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A shipper should consider all the above costs while making transportation decisions,
since these impact the overall cost of the supply chain and the product and the service
level offered to the customer. Within these there is scope for making trade-offs where
necessary based on the overall supply chain strategy focus on cost or responsiveness.

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For a transporter the factors that are considered while making decisions are:
Vehicle related costs: These are the costs towards the purchase or lease of a
vehicle. These costs are considered fixed for the short term and taking into
account whether the vehicle is operating or not and for the medium or long
term these costs are considered as variable. For strategic and long term
purpose the vehicle related costs depend on the number of vehicles owned.
Fixed operating expenses: These are the costs associated with maintaining
transportation assets like insurance, taxes, labour etc; If the vehicle operators
are paid irrespective of the trips made then they would fall within this
category.
Operations related expenses: This is the cost incurred towards labour, fuel,
which are independent of the quantity transported. These depend on the
duration of the trip and independent of the quantity carried.
Quantity related costs: Under this category are the costs in loading, unloading
and handling. A small portion of the fuel cost also depends on the quantity
carried.
Overhead costs: These costs are incurred for planning, coordination,
scheduling and any investment in IT tools and applications.

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Chapter 9: Warehousing in Supply Chain

Across the supply chains, warehousing is an important element of activity in the
distribution of goods, from raw materials and work in progress through to finished
products .It is integral part to the supply chain network within which it operates and as
such its roles and objectives should synchronize with the objectives of the supply chain.
It is not a Stand-alone element of activity and it must not be a weak link in the whole
supply chain network.
Warehousing refers to the activities involving storage of goods on a large-scale in a
systematic and orderly manner and making them available conveniently when needed.
In other words, warehousing means holding or preserving goods in huge quantities from
the time of their purchase or production till their actual use or sale.
Warehousing is one of the important auxiliaries to trade. It creates time utility by bridging
the time gap between production and consumption of goods.
The recent trends and pressures on supply chain / logistics-forever increasing customer
service levels, inventory optimisation, time compression and cost minimization have
inevitably changed the structure of supply chains and the location and working of
warehouses within the supply chains network.
Certainly the old concept of warehouses as a facility to store goods has been outdated.
Warehouses perhaps better referred to as distribution centers; exist primarily to facilitate
the movement of materials to the end customer. There are exceptions such as Strategic
stock-holding, but in all commercial applications; effective and more efficient movement
of materials to the customer is the key, even if some inventory has to be held to achieve
this.
Need for Warehousing
Warehousing is necessary due to the following reasons.
(i) Seasonal Production- You know that agricultural commodities are harvested during
certain seasons, but their consumption or use takes place throughout the year.

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Therefore, there is a need for proper storage or warehousing for these commodities,
from where they can be supplied as and when required.
(ii) Seasonal Demand- There are certain goods, which are demanded seasonally, like
woolen garments in winters or umbrellas in the rainy season. The production of these
goods takes place throughout the year to meet the seasonal demand. So there is a need
to store these goods in a warehouse to make them available at the time of need.
(iii) Large-scale Production - In case of manufactured goods, now-a-days production
takes place to meet the existing as well as future demand of the products. Manufacturers
also produce goods in huge quantity to enjoy the benefits of large-scale production,
which is more economical. So the finished products, which are produced on a large
scale, need to be stored properly till they are cleared by sales.
(iv) Quick Supply - Both industrial as well as agricultural goods are produced at some
specific places but consumed throughout the country. Therefore, it is essential to stock
these goods near the place of consumption, so that without making any delay these
goods are made available to the consumers at the time of their need.
(V) Continuous Production- Continuous production of goods in factories requires
adequate supply of raw materials. So there is a need to keep sufficient quantity of stock
of raw material in the warehouse to ensure continuous production.
(vi) Price Stabilization- To maintain a reasonable level of the price of the goods in the
market there is a need to keep sufficient stock in the warehouses. Scarcity in supply of
goods may increase their price in the market. Again, excess production and supply may
also lead to fall in prices of the product by maintaining a balance of supply of goods,
warehousing leads to price stabilization.
Issues affecting Warehousing
Since warehouses, stores and distribution centers have to operate as essential
component elements within supply chains net work, key decisions when setting up such
facilities must be determined by the overall supply chain strategies for service and cost.
The factors that should be considered include the following.

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90
Market and product base stability

Long term market potential for growth and for how the product range may expand will
influence decisions on the size and location of a warehouse facility, including space for
prospective expansion. These considerations will also impact on the perceived need for
potential flexibility, which in turn can influence decisions on the type of warehouse and
the level of technology to be used.
Type of materials to be handled:
Materials handled can include raw materials, WIP, OEM Auto spare parts, packaging
materials and finished goods in a span of material types, sizes, weights, products lives
and other characteristics. The units to be handled can range from individual small items
through carton boxes, special storage containers for liquids, drums, sacks, and
palletized loads. Special requirements for temperature and humidity may also have to be
met in the case of perishables and all of these will impact on the type of warehouses and
technology level.
Warehouse Facility: type, size and location:
The type of operation, the design capacity and size of a warehouse and its location will
all be influenced if not directly determined by its exact role and position in the supply
chain network, and the role, capacity and location of any other facilities in the supply
chain. The customer base, level of inventory, the need for optimization of inventory, time
compression in the supply chain and the overall customer service levels should also be
considered when deciding on type, size and location. A further consideration here is
whether the warehouse facility should be an own-account operation run by the company
or outsourced and run by a 3PL.
Inventory and Inventory Location:
Within a supply chain network there is an issue not only of what materials to stock and in
what quantities, but also in what locations .Options can include distribution centers
devoted to specific markets or parts of the product range distribution centers dedicated

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to serving specific geographic areas, or regional distribution centers that hold for
example the fast moving product lines, with the slower lines held only in a Regional
distribution centre (RDC). The option depends on such factors as customer base,
product range and service levels required.
The options on the level of technology have already been noted, and the range can go
from very basic installations with high manual input and least mechanization to fully
automated and robotic installations.
The decision can be influenced by
Company-wide strategic marketing or employment policies,
Financial considerations,
Ability to achieve specified degree of throughput, and
Required customer service level.
Other factors can include the need for flexible operation to meet important demand
fluctuations such as seasonal variations, and the perceived future stability and growth of
the market and product range. The level of technology adopted in any particular
application should be chosen because it almost nearly matches the given requirements
and objectives. It is not true that automation or similar technologies are accurate in every
case. It is true that good, probably computer-based, communication and information
systems are vital in every application, irrespective of the technology level.
Another issue that has exercised companies in recent days has been the degree of
technology to utilize in warehousing operations. The choice spans from conventional
warehousing racking and shelving with fork-lift or even manual operations through to
fully automated systems with conveyors and automated guided vehicles (AGVs) and
from carousels to robotic applications. The reasons for the choice of a particular
technology level are not always clear cut, and run the gamut of financial, marketing and
other factors, from companys image or flexibility for future change through to personal
perception of the appropriateness of a particular technology to a particular business or
company.
Warehouse Management System (WMS)

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The evolution of warehouse management systems (WMS) is very similar to that of many
other software solutions. Initially a system to control movement and storage of materials
within a warehouse, the role of WMS is expanding to including light manufacturing,
transportation management, order management, and complete accounting systems. To
use the grandfather of operations-related software, MRP, as a comparison, material
requirements planning (MRP) started as a system for planning raw material
requirements in a manufacturing environment. Soon MRP evolved into manufacturing
resource planning (MRPII), which took the basic MRP system and added scheduling and
capacity planning logic. Eventually MRPII evolved into enterprise resource planning
(ERP), incorporating all the MRPII functionality with full financials and customer and
vendor management functionality.
Now, whether WMS evolving into a warehouse-focused ERP system is a good thing or
not is up to debate. What is clear is that the expansion of the overlap in functionality
between Warehouse Management Systems, Enterprise Resource Planning, Distribution
Requirements Planning, Transportation Management Systems, Supply Chain Planning,
Advanced Planning and Scheduling, and Manufacturing Execution Systems will only
increase the level of confusion among companies looking for software solutions for their
operations.
Even though WMS continues to gain added functionality, the initial core functionality of a
WMS has not really changed.
The primary purpose of a WMS is to control the
movement and storage of materials within an operation and process the associated
transactions. Directed picking, directed replenishment, and directed put away are the
key to WMS. The detailed setup and processing within a WMS can vary significantly
from one software vendor to another; however the basic logic will use a combination of
item, location, quantity, unit of measure, and order information to determine where to
stock, where to pick, and in what sequence to perform these operations.
In todays competitive marketplace, the primary focus of many organizations is on
improving customer service. To accomplish this, companies are embarking on a wide
range of process-improvement initiatives. In many cases, increasing customer service
levels involves adding personnel and increasing overall expenditures. Unfortunately,
these additional expenses can erode profitability.

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One proven method for increasing customer service without incurring additional longterm expenses is the implementation of a warehouse management system (WMS). The
WMS concept and technology are not new. These systems have matured into time
tested methods for reducing inventory costs while increasing overall efficiencies.
Implementing WMS technology within an organization already using an ERP system
allows that company to achieve a higher return on their software dollars and provide the
best possible service to their customers
WMS can provide an organization with tangible benefits quickly, improving warehouse
operations and increasing efficiencies without adding headcount. By implementing a
WMS, a company achieves a number of dramatic benefits. They include:
Directed put-away and directed order picking
Warehouse capacity management
Radio Frequency (RF) capability for data capture
Load planning
Cross docking
Picking optimization
ABC stratification
Interleaving of work
Tangible costs
CATEGORY
REAREASONS
N
Inventory reduction of up to 10% (one-time

Inventory visibility and accuracy.
savings).
Reduced inventory carrying costs up to 35% Lower inventory
(industry average).
utilization.
levels;
higher
space
Reduced investment based on cost of money @

Reduced inventory.
8%
Premium shipping costs
Reduced shipping errors.
Personnel handling paper - potential headcount WMS automates the management of order
reduction or resource redeployment*
and priorities, eliminating paper.

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Personnel handling order picking - potential RF based picking productivity increases
headcount reduction or resource redeployment*
efficiencies.
Personnel handling shipping paperwork and
Eliminate preparation work for shipping
confirmation - potential headcount reduction or
documents and ERP ship confirmations.
resource redeployment*
Cycle counting will
inventory requirement.
Eliminate physical inventory
replace
physical
At a bare minimum, a WMS should

Have a flexible location system.
Utilize user-defined parameters to direct warehouse tasks and use live
documents to execute these tasks.
Have some built-in level of integration with data collection devices.
Do You Really Need WMS?
Not every warehouse needs a WMS. Certainly any warehouse could benefit from some
of the functionality but is the benefit great enough to justify the initial and ongoing costs
associated with WMS?
Warehouse Management Systems are big, complex, data
intensive, and applications. They tend to require a lot of initial setup, a lot of system
resources to run, and a lot of ongoing data management to continue to run. Thats right,
you need to "manage" your warehouse "management" system. An often time, large
operations will end up creating a new IS department with the sole responsibility of
managing the WMS.
The Claims
WMS will reduce inventory!
WMS will reduce labor costs!
WMS will increase storage capacity!
WMS will increase customer service!
WMS will increase inventory accuracy!
The Reality

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The implementation of a WMS along with automated data collection will likely give you
increases in accuracy, reduction in labor costs (provided the labor required to maintain
the system is less than the labor saved on the warehouse floor), and a greater ability to
service the customer by reducing cycle times. Expectations of inventory reduction and
increased storage capacity are less likely. While increased accuracy and efficiencies in
the receiving process may reduce the level of safety stock required, the impact of this
reduction will likely be negligible in comparison to overall inventory levels.
The predominant factors that control inventory levels are lot sizing, lead times, and
demand variability. It is unlikely that a WMS will have a significant impact on any of
these factors. And while a WMS certainly provides the tools for more organized storage
which may result in increased storage capacity, this improvement will be relative to just
how sloppy your pre-WMS processes were.
Beyond labor efficiencies, the determining factors in deciding to implement a WMS tend
to be more often associated with the need to do something to service your customers
that your current system does not support (or does not support well) such as first-in-firstout, cross-docking, automated pick replenishment, wave picking, lot tracking, yard
management, automated data collection, automated material handling equipment, etc.
*********************************************
Annexure:
Future-proof warehouse management
By Allen Scott
Vice President, European Operations, Manhattan Associates Inc.
Smart warehouse management systems will play a critical role in helping retailers meet
the future demands of both shareholders and customers.

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Retailers supply chains are becoming more
complex. As retailers deliver services across an
increasing number of channels to maximize
revenue potential, customers in each of those
channels
are
becoming
more
demanding.
Additionally, the supply pipeline in each of those

channels
is
becoming
more
global,
as
international sourcing seeks to exploit cheaper

alternatives and wider choice. At the same time,
order fulfillment involves serving customers from
many more regions and countries.
These paradigm shifts in the way retail businesses are run, where customers are
located, and how consumers behave mean that the role of warehouses everywhere will
change radically.
Forward-thinking retailers of all sizes and varieties have already started to appreciate
how the organization of their logistics is likely to be a major source of future competitive
advantage. They no longer regard the warehouse as a cost center, as many have
traditionally done, or as simply a goods in/goods out facility. Instead, they see the
warehouse as an opportunity to enhance revenue, customer satisfaction, and, ultimately,
shareholder value. Perhaps most important, they have started to recognize that the
software required to manage the warehouse and the wider supply chain needs to
become a great deal more sophisticated to meet the requirements of increasingly
complex supply chains.
In the future, systems that run warehouses will need to become a lot smarter in the way
they manage conventional warehousing processes by applying new technologies such
as radio frequency identification (RFID) and voice recognition. They will also need to
facilitate trading-partner management, supply-chain event management, goods-returns
management, and order management. These all depend on the ability of an enterprise
and its business partners to make availableand deliverinformation in real time to
parties along the supply chain that require that information to make decisions.

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Choosing a WMS
So what should supply-chain and IT directors of retail businesses consider and look for
when selecting a warehouse management system (WMS) that is capable of rising to
these challenges? There are three main considerations.
First, there is no one type of WMS that fits all retailers requirements. Instead, the
selection of a WMS depends on the strategic and tactical objectives of the organization.
In other words, the retailer needs to decide if it wants to improve the bottom line by
reducing operational costs or improve the top line by generating more sales through
better service and/or by targeting multiple sales channels.
Second, in this new era where supply chains now compete with other supply chains, it is
no longer feasible to regard the warehouse as a stand-alone operation. Decisions about
the type of WMS a company will select and how its warehousing operations will be
organized need to be made in the context of the wider supply chain.
Finally, and a point often overlooked, is that the best technology available does not
guarantee success. In fact, other selection criteria such as the upgrade road map and
the vendors vertical sector experience must also be considered.
Functionality meets strategic, tactical objectives
In choosing a vendor there are, broadly, two types of warehouse management systems:
those that handle traditional warehouse movements and those that embrace the
changing role of the warehouse as a multichannel distribution center. The first type will
enable a company to better manage traditional warehousing operations that focus on
serving a single sales channel.
The advantage of the second type is that it meets the diverse and changing needs of
retailers, their suppliers, and their customers. For example, it enables a new breed of
distribution center to handle both bulk and single picking, so that both store and
individual customer orders can be fulfilled. It can also process the entire order, not just
picking. For instance, for individual customer orders received via mail order or the Web,
goods can not only be picked, but they can also be gift wrapped, packed, labeled, and

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shipped. The data collected during the order/fulfillment process that is held in the WMS
can be forwarded to enterprise systems including merchandising, finance, marketing,
and transport management.
There must also be integrated processes and data in place to handle reverse logistics,
particularly in the mail-order and Web shopping arena, where returns can sometimes be
more than 50% of original orders.
Systems that offer advance shipment notice (ASN) processing capability provide multiple
benefits. This functionality enables warehouse managers to better predict future
workloads and helps synchronize cross-docking activities. This means order turnaround
is faster, which improves customer service, and staffing can be optimized, which cuts
costs. Resource planning can be optimized further when systems combine historical
data with current order information to predict workflows.
Warehouse management systems enabled with RFID technology will provide retailers
with a number of key top- and bottom-line improvements. Such solutions will enable
organizations to achieve substantial cost savings through increased visibility and
accuracy of inventory throughout their supply chain, and through the productivity
improvements that will be realized with the elimination of manual scanning. These
systems will enhance revenue by improving customer service with the prevention of outof-stock situations. Arguably of most importance, they will allow retailers to prepare
themselves for compliance with the expected mandatory RFID labeling initiatives of
major European retailers.
Other solution components that a would-be WMS buyer should look for are optimization
tools. For example, intelligent use of space can have a big impact on lowering the cost of
running a warehouse. This kind of functionality should offer strategic pick-line
organization and allow users to set criteriasuch as reduced travel time, family
grouping, and ergonomicsfor optimal product placement and retrieval.
Another important component is a business intelligence capability that will give users
tools to access real-time and historical information graphically on the vital aspects of the
companys fulfillment operation.

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Source-to-consumption execution
Trends indicate that we are moving on from just supply-chain planning and supply-chain
execution toward source-to-consumption supply-chain execution. This is supply-chain
execution performed collaboratively and in real time by supply-chain business partners
involved from initial production to final consumption, allowing supply-chain optimization
to be achieved in real time. In the ASN example, we mentioned how information might
be exchanged between two supply-chain partners to make supply-chain performance
more effective. This is a single piece of information being exchanged, a single step
toward integrating and generating visibility between two partners in a supply chain.
When one considers the number of players involved in some global supply chains
supply chains that might consist of hundreds of suppliers, assemblers, manufacturers,
transport service providers, wholesalers, and retailersand the amount of information
that is exchanged, the potential to improve a supply chains performance and the bottom
and top lines for every member of that supply-chain community is enormous.
A WMS that is integrated into the world around it must be able to facilitate process
integration and trading-partner personalization. It must also be capable of generating
and receiving information that can be selectively passed on to or received from other
supply-chain participants. More importantly, it should facilitate real-time visibility into
supply-chain partners systems. Finally, it must have supply-chain event management
capability. The more complex the supply chain, the greater the challenge. However, the
key is selecting a WMS that can interface seamlessly with disparate systems and
facilitate real-time information exchange.
Selecting the best technology does not guarantee a successful implementation. Other
factors should also be taken into account.
It is important to appreciate that systems today are less customized and more
productized. This is crucial since retailers must focus not only on their current needs, but
also on their future requirements. It is easy to outgrow a customized system, which will
ultimately prove very costly when the time comes to replace the system completely. A

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flexible, upgradable system will enable a company to make vital improvements in the
future at a much lower cost.
In addition, it is most important to select a vendor that will still be in business when it is
time to upgrade. For that reason, customers should check into the companys long-term
financial viability.
To achieve a rapid return on their investment, companies should seek not only
functionality-rich software, but also software that can be implemented rapidly, smoothly,
and with a low level of risk. This means they should be confident that the vendor can
effectively manage the implementation project and the operational changes that go with
it. The best way to research whether a vendor can meet this requirement is to talk to
companies that have already implemented the software; in short, check references.
It is important to realize that some WMS vendors have expertise in only one industry or
horizontal sector. While there may be basic processes common to all industries,
organizations should choose a solution that can handle the particular requirements of
their industry. In this way, the solution is tailored to the organizations needs rather than
the organization having to adapt to the software.
Promises to keep
Finally, the promise from WMS providers in the new world of multichannel commerce
and supply-chain collaboration is easily made, but not always so easily fulfilled. All
vendors have a vision of where they would like to be and use this positioning to impress
their customers and prospects. However, vendors must be confident that they can fulfill
their own ambitions in the short and long term. More and more companies are coming
into the new logistics arena with the promise of multichannel commerce seamlessly
integrated at both process and data levels.

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Chapter 10: Returns Management

Introduction
For years, returned merchandise was generally viewed as a headache for both the seller
and the buyer. But innovative thinking combined with a desire to find a profitable
opportunity has put a lot more focus recently on reverse logistics.
Reverse Logistics is the process of planning, implementing, and controlling the efficient,
cost effective flow of raw materials, in-process inventory, finished goods and related
information from the point of consumption to the point of origin for the purpose of
recapturing value or proper disposal.
As far as managing the returns are concerned companies re-use them, re-sell them,
leave them to a third party or destroy them. But companies are more likely to benefit if
they can also make use of the information that comes back with returned merchandise.
Importance of reverse logistics
Assets utilization (rather we can say re-utilization)
Assets recovery (To capture the value, which otherwise will be lost)
Profit maximization: Cost reduction through recycling
To fulfill the Environmental obligations e.g.: Waste recycling, Hazardous
waste management e.g.: Car batteries disposal.
Customer Relations Management, e.g. after sales service, buy back
guarantee
Application Areas
The list of industries where reverse logistic plays an important role:
Publication houses (40-50% by volume) :To take back the unsold volumes for
reuse.
Beverage industries: To collect reuse the empty bottles eg Coca cola & Pepsi

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Heavy industries: To collect and reuse the waste
Consumer goods industry: To fulfill the commitments of after sale service and
buy back guarantee.
Pharmaceutical industries: To collect the expired formulations and drugs for
environment friendly disposal.
Automobile industries: To fulfill the commitments of after sale service and buy
back guarantee.
Activities involved in Reverse logistics
There are four main reverse logistic processes.
1) Collection
2) Combined inspection / selection /sorting
3) Re-processing or Direct recovery
4) Redistribution.
Collection refers to bringing the products from the customer to a point of recovery. In the
inspection / selection and sorting phase products are being sorted according to the
planned recovery option and within each option, products are sorted according to their
quality state and recovery route.
Reprocessing includes:
Repair - Warranty returns needs repair
Refurbishing - Large installation, building or other civil object are refurbished
after which it is again in a better state.
Remanufacturing/Retrievals - Products are dismantled and their parts are
used in the manufacturing of the same products (remanufacturing) or of
different products (retrieval).
Recycling - In case of recycling, products are processed in order to get the
desired quality after which they are being reused e.g paper pulp and glass.
Incineration - Products are burned and the released energy is captured.

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Direct recovery includes:
Re-use - End-of-use returns often contain valuable components which can be re-used.
Re-sale - Supply chain returns (products in good condition) can be sold at a discount
rate or at a secondary market.
Redistribution - is the process of bringing the recovered goods to the new users.
Design of reverse supply chain network:
In conventional supply chains, logistics network design is commonly recognized as a
strategic issue of prime importance. The location of production facilities, storage
concepts, and transportation strategies are major determinants of supply chain
performance. Reverse logistics should also be taken into account during the design of
the support network such as location and capacity of warehouses, plants, choice of
outsourcing vendors, distribution channel and supporting technology. Returns
information captured should be integrated with forward supply chain information to
achieve optimum planning and reduction of costs. The whole support network can then
be designed in such a way that it can service both the forward and Reverse Logistics
processes efficiently. This is in line with the concept of a closed-loop supply chain
design.
The logistic network structure catering to Reverse Logistics can be divided into two
portions:
a) The Convergent Network
This is the portion of the network accumulates used products from individual sources
and conveys them to some recovery facility. Companies can set up dedicated returned
products collection centers at specific locations or collect the products through retailers
and distributors.
b) The Divergent Network

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A divergent network part links recovery facilities to individual customers purchasing
reusable products. This portion of the network is very much similar to traditional forward
supply chain distribution networks and integration with forward supply chain can be done
here for maximized optimality.
Strategic points in the design of reverse supply chain network:
1) Acquisition/collection of returned/used products
Managing the collection and acquisition of used &/or returned products potentially
accounts for a significant part of the total costs of any closed-loop supply chain. To
design the network for collection a company can install several drop points for customers
to hand in used products, integrate the reverse flow of used products with other
transportation flows or use a direct express mail system to bypass several stages of the
network for fast processing. The type of design depends on different product types and
needs of the customers. Retailers and distributors are often used as the points of
collection.
2) Testing/grading operations
The location of the test and grade operations in the network has an important impact on
the flow of goods. It is only after this stage that individual products can be assigned to an
appropriate recovery option and hence to a geographical destination. It is important to
see a tradeoff between transportation and investment costs at this stage. Testing
collected products early in the channel may minimize total transportation distance since
graded products can directly be sent to the corresponding recovery operation. On the
other hand, expensive test equipment and the need for skilled labor act as drivers for
centralizing the test and grade operations.
3) Reprocessing
The reprocessing generally requires high investments in establishing the network for
reverse logistics. The cost for specialized remanufacturing or recycling equipment
influences the economic viability of reprocessing. Integration of product recovery

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REVERSE LOGISTICS: An Important dimension of SCM operations with the original
manufacturing process can offer economies of scale which involves sharing of locations,
workforce, or even manufacturing lines.

106
4) Redistribution
Redistribution stage resembles a traditional distribution network. In particular, we find the
conventional tradeoff between consolidation and responsiveness in transportation. If
collection and redistribution are combined we can achieve efficiencies in vehicle loading.
Redistribution can also be done along with distribution of new products.
Reverse Logistics Information Systems:
One of the most serious problems that the companies face in execution of a reverse
logistics operation is the dearth of good information systems. To work well, a flexible
reverse logistics information system is required. Reverse logistics is typically a
boundary-spanning process between the companies or business units of the same
company, thus developing systems that have to work across boundaries adds additional
complexity to the problem. Eg: for a retailer, a system that tracks returns at store level is
desirable. The system should create a database at store level so that the retailer can
begin tracking returned product and follow it all the way back through the supply chain.
Information systems should also include detailed information programs about important
reverse logistics measurements, such as return rates, recovery rates, and returns
inventory turnover etc.
For many companies, current information systems do not allow them to monitor the
status of their returns. Additionally, useful tools such as radio frequency (RF) are helpful.
New innovations such as two-dimensional bar codes and radio frequency identification
license plates (RFID) may soon be in use extensively.
Conclusion
Reverse logistics practices vary based on industry and channel position. Industries
where returns are a larger portion of operational cost tend to have better reverse
logistics systems and processes in place. For Reverse Logistics to be successful,
collaboration between the supply chain partners is very important. Technologies like bar-

107

coding and RFID helps in making reverse logistics operations more effective and
responsive.

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Chapter 11: Overview of Outsourcing
It can be described as a process whereby certain management responsibility is

transferred to third party. Though the back office activities in any organization do not
generate revenues directly they are necessary to keep the business running. Thus,
organizations outsource these activities to agencies specializing in providing such
activities; this is known as Business Process Outsourcing.
BPO have a great deal of influence on improving shareholder value by making
companies more competitive and profitable. Organizations only outsource non-core
activities of the organization. These non-core activities are not main functions of the
organizations. But these are necessary for the running of the organization. These noncore activities are called back office activities. These non-core activities are outsourced
to concentrate on core activities.
The core activities are those activities that are main functions of the organization. Some
of the core activities are manufacturing, product design etc. Some of the back office
activities which organizations outsource are,
Data entry
Human resource administration services.
Supply chain management.
Data processing.
General accounting functions.
Data analysis and Data mining.
The core advantages by outsourcing are,
Important being cost advantage.
Better service level and innovations in process.
Some other advantages are,
Improvement on service quality.
Access to outside expertise in several areas, etc.
Risk minimizes.
Allow organization to focus on core functions.

109
Though, the proper balance between functions to be outsourced and to be retained

internally, the business entity can develop a potential to bring in a remarkable level of
streamlining and extra efficiency in its operations. The most promising segment in BPO
which is likely to undergo rapid growth, is Customer relationship Management. Within
this segment, call center outsourcing has the highest potential to grow. Outsourcing is
along-term commitment to another company delivering a service to the outsourcing
company. It amounts to transfer of its internal operations, including perhaps, its existing
staff, to a company supplying the outsourced services. Greater trust is therefore needed
to achieve success in an outsourcing engagement.
Why Outsourcing?
Although outsourcing helps companies to reach markets faster, while staying focused on
core competencies; converting fixed costs to variable and take advantage of a proven,
shared infrastructure available with the vendor. When outsourcing does not deliver its
promise, or when costs are perceived unreasonable, one is prone to conclude that
outsourcing is better. Both insourcing and outsourcing have cost fluctuations, but
invoices from a service supplier make the external costs much more visible and this
makes the outsourcing decision. Nevertheless, outsourcing offers many advantages, a
few of which are discussed hereunder.
Business process outsourcing results in avoidance of fixed costs for it need not have to
maintain the process through peak and slack periods. There are also total cost savings
all through for services at a much a cheaper price than what the procurer could have
incurred himself in carrying out the said services.
Service providing has today become the core competency of certain outfits and if they
are at the cutting edge, they are constantly re-engineering themselves so as to offer their
clients increased efficiency and cost effectiveness, which simply means further costcutting for the procurer.
When a company enters into a contract with the service provider for a particular service,
it gains the advantage of having an access to a wider skill base that it could have

110

otherwise built up, in-house. This access to the skills of the supplying company makes
the operations of the procurer flexible in the sense that it need not recruit and maintain
people endowed with specific skills called for.
Outsourcing clearly defines the roles of procurer and the vendor, and thus ensures strict
monitoring and control of the quality and the associated costs, which is seldom achieved
if done in-house.
Levels of Outsourcing
Transactional Outsourcing: Based on transactions, with no long term contracts and
no bonding between the 3PL and the outsourcing company.
Tactical Outsourcing: Outsourcing on a long term basis with negotiated contacts and
integrated IT systems to facilitate free information flow and create supply chain
visibility.
Strategic Outsourcing: Based on long-term relationships with successful outcomes,
3PL companies become partners in supply chain management and establish
transactional transparency.
3PL Defined and Discussed
More and more organizations worldwide want to develop products for global markets. At
the same time, they need to source material globally to be competitive. One of today's
trends to solve this problem is outsourcing logistics or using third-party logistics (3PL) to
manage complex distribution requirements.
Organizations have developed strategic alliances with 3PL companies all over the world
to manage their logistics operations network. These alliances are also known as logistics
or supply chain outsourcing and contract logistics.
Why Use 3PL?
To Save Time: Outsourcing the Logistics function can free up resources to focus on
core competencies.

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Because Someone Else Can do it Better: Even if you have resources available,
another organization within the supply chain may be able to do it better, simply
because its relative position in the supply chain, supply chain expertise and
economies of scale.
To Share Responsibility: 3PL companies can share responsibility for managing
global supply chains, keeping customers and stores properly stocked, and delivering
the perfect order every time.
To Re-Engineer Distribution Networks: Logistics outsourcing can be a quick way to
re-engineer distribution networks to meet global market demands and gain a
competitive edge.
3PL is Growing!
According to a 2003 Cap Gemini study, North American organizations planned to
outsource 56% of their logistics expenditure by 2006 2008, with Western Europe
planning 81% and Asia-Pacific 60%. The same report revealed that 78% of the
respondents are outsourcing logistics activities in North America; 79% in Western
Europe and 58% in Asia Pacific.
These organizations are outsourcing logistics activities and upgrading relationships with
3PL companies from transactional to tactical and strategic relations. According to a 2005
survey, CEOs of 3PL companies operating in Asia-Pacific expected 17% average
business growth over the upcoming three years.
Achieving Strategic Outsourcing
Unfortunately, only a few 3PL companies achieve strategic status with their customers.
They do it by constantly innovating and maintaining operational integrity. Some use an
open-book costing method to demonstrate their system's transparency.
Third party logistics relationships frequently fail. According to the Warehousing
Education and Research Council (WERC), 55% of logistics outsourcing alliances end
after 3-5 years. According to a 1998 Journal of Commerce survey, 43% of North
American third party logistics users cancelled at least one 3PL contract in 1998.

112

113

How to Implement a Successful Third Party Logistics Project
Have an Outsourcing Strategy: Without it, there will be no clarity about outsourcing
and outcomes. It should be well thought-out and measured against the in-house
solution and capabilities.
Analyze This: A SWOT analysis can help understand the strengths, weaknesses,
opportunities and the threats of outsourcing logistics versus in-house solutions.
Do a Comprehensive Study: Clearly document the advantages, challenges and cost
benefits of outsourcing.
Document Your Processes: To eliminate gaps in understanding and expectations,
develop Standard Operating Procedures for all the processes to be outsourced.
Create a Robust Selection Process: Adopt a scientific selection process. Invite
eligible third party logistics companies for formal presentations on without giving any
requirements. This will you understand their strengths and weaknesses. You can
also hire a third party to help create a short list of service providers.
Document the Expectations: Set down expectations in clear terms and include
current costs. This will help avoid confusion later.
Use a Request for Information (RFI): This tool will help gather information and
measure strengths and weaknesses. Beware of service provider over commitment.
Do Your Homework: Make a site visit. Interview the service provider's existing
customers. Evaluate responsiveness, ability to meet and exceed the expectations,
management team quality, experience, flexibility and other factors important to your
company.
Create Good Legal Documentation: Document what is agreed and what is disagreed
clearly. Address possible friction points and specify remedies.
Define Targets: Create specific performance targets not only to measure
performance but also to initiate corrective action if needed. Explore the possibility of
gain share arrangement for positive performance.
Measure and Review Performance: The measurement system must be efficient and
accurate. Create qualitative measures which focus on effectiveness and quantitative
measures which focus resource efficient utilization. Some Fortune 500 companies
measure performance daily, weekly and monthly and discuss it on a quarterly basis.
Develop an Efficient Costing System: This will help in understanding the costs
involved in outsourcing and help the organisation measure cost efficiency and

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answer the question, "Are we making any money doing this?" Gather detailed data
about the true costs of receiving, storage, pick-n-pack, value-added processing,
special packaging, staging and loading. Avoid "pallet in" and "pallet out" costing and
consider adopting Activity Based Costing to understand variance between projected
costs and actual costs.
Create a Project Implementation Strategy: Create a project plan or road map. Be
clear with the service provider about who does what. Create a project management
team should consisting of stakeholders from both organisations. Review progress vs.
planned milestones periodically to make sure everything is on track.
Nurture the Relationship: Both the parties must nurture the relationship to make
outsourcing successful, creating mutual trust, respect and a sense of integrity.
Third Party and the Logistics Professional
There has been much discussion on what Logistics is and the emerging role and
recognition of the importance of Logistics professionals within organizations.
The rapid growth of the profession has been statistically represented in the growth of
related Logistics associations. Two North American examples are the Council of Supply
Chain Management Professionals (CSCMP) formerly the CLM, and Supply Chain
Logistics Canada (SCL), both of which have grown almost tenfold in the last decade to
almost 10,000 and 1,000 members respectively.
My premise here is that the most desirable future role for these individuals is not within
retail and manufacturing organizations proper, but as key players in Third Party Logistics
(3PL) provider companies where their interest and expertise are perfectly aligned with
the core business of their employer.
There are many reasons for this belief, but the major one is that if a Logistics practitioner
is worth his salt, from the first day in the role he or she begins working themselves out of
a job. I mean this both literally and figuratively. In the literal sense, the complete
Logistics Professional begins by gathering all the pertinent information on the
organization, ie; volumes, modes, costs, company needs and develop an understanding

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of the corporate strategy for alignment purposes. Then the strategizing, modeling and
optimization process begins and once complete, it is time for action.
In mid to large size organizations action represents the development of both the senior
management and peer support as well as the team required to complete the change
process. Obviously other resources and IT systems required to complete the process
must be specified and put into place, and then the leadership skills of the Logistics
Professional are the final ingredients to make it happen.
After these change initiatives then result in the attainment of a "flashpoint" where
dramatic improvements are seen relative to expense/capital/D.C. space reductions and
an increase of value added services and true supply chain activities.
Once the process is completed or well on the way to completion, the Logistics
Professional then encounters only opportunities for incremental change and relatively
minor benefits.
The challenge has been met, achieved, and is then followed by a short period of
recognition. Recognition by the company of the results and effort, but also recognition
that maybe the need for such a high level functioning expert and team is no longer
required on a day to day basis. In fact any Logistics Professional with an active mind
requiring challenge and not satisfied to simply "fill" an office has already realized this on
their own, and is taking the relevant career planning steps.
Traditionally this meant moving to an equivalent or hopefully senior position in another,
hopefully, larger organization and then resuming the climb.
The probability of all of these factors being aligned at the time you need to make this job
move is something akin to a rare planetary alignment, or winning the lottery and
sometimes results in the individual compromising with their career aspirations at least
temporarily.

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Our belief is that it is preferable to make the next career step a more strategic and of
perhaps a career long duration, by moving to a senior role in a relevant third party
Logistics provider should he be seriously considered.
One final note on the benefits of such a move to a Third Party company is the
opportunity for exposure to a variety of industry experience, as most relevant third
parties work in a number of fields, manufacturers, retailers, grocery, general
merchandise, electronics and health and beauty aids.
Regardless of whether you agree or disagree with this analysis and belief, there is an
obvious parallel to the business direction of companies to determine and pursue their
core business. In this case it is recommended that perhaps individual logisticians should
perhaps pursue careers in logistics focused firms.
Reasons to Outsource and the Benefits
ORGANIZATIONALLY DRIVEN REASONS
Enhance effectiveness by focusing on what you do best.
Increase flexibility to meet changing business conditions, demand for
products and services, and technologies.
Transform the organization.
Increase product and service value, customer satisfaction, and shareholder
value.
IMPROVEMENT-DRIVEN REASONS
Improve operating performance (increase quality and productivity, shorten
cycle times, and so on).
Obtain expertise, skills, and technologies that are not otherwise available.
Improve management and control.
Improve risk management.
Acquire innovative ideas.
Improve credibility and image by associating with superior providers.
FINANCIALLY DRIVEN REASONS

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Reduce investments in assets and free up these resources for other
purposes.
Generate cash by transferring assets to the provider.

118
REVENUE-DRIVEN REASONS
Gain market access and business opportunities through the providers
network.
Accelerate expansion by tapping into the providers developed capacity,
processes, and systems.
Expand sales and production capacity during periods when such expansion
cannot be financed.
Commercially exploit existing skills.
COST-DRIVEN REASONS
Reduce costs through superior provider performance and the providers lower
cost structure.
Turn fixed costs into variable costs.
EMPLOYEE-DRIVEN REASONS
Give employees a stronger career path.
Increase commitment and energy in non-core areas.

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Chapter 12: Measuring SC Performance

Many managers apply a simple model to supply chain operation costs. The lower the
cost, the better the supply chain looks. However, even the hard-nosed will admit that
cutting too much "fat" can lead to cutting muscle. Focusing only on costs eats into
profitability, market positioning and competitive advantage.
Effective supply chain management works backwards from customer needs, helping
companies add financial and business value. If supply chain management emanates
from customer needs and integrates all business functions, there must be a way to
measure its success and make key business decisions.
Supply Chain Operations Reference (SCOR) Model
The Supply-Chain Council's SCOR model is a method for benchmarking and measuring
supply chain performance improvements. SCOR is a cross-industry model that contains
standard process definitions, terminology and metrics, matching supply chain processes
against best practices.
The model was designed to help companies learn from others inside and outside their
industry.
SCOR covers customer interactions from order entry through paid invoice, product
transactions and market interactions from understanding demand to fulfilling individual
orders. The model uses a four-level pyramid that defines the steps a company takes to
measure and improve supply chain performance.
SCOR Model Level 0:
Identifies collaboration points and defines a network where consortiums, enterprises,
divisions or corporate functions collaborate.
SCOR Model Level 1: Process-Type Level

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Defines five management processes where the company creates its competitive position
and operations strategy.
Plan: Defining resources and demand, planning inventory, distribution,
production and rough-cut capacity planning.
Source: Acquiring raw materials, qualifying and certifying suppliers,
monitoring quality, negotiating vendor contracts and receiving materials.
Make:
Making
the end
product:
manufacturing,
testing,
packaging,
engineering changes, holding and releasing products.

Deliver: Managing orders and credit, managing the warehouse and
transportation, delivery inventory and quality. Creating databases for
customers, products and prices.
Return: Returning raw materials and finished goods, maintenance, repair and
overhaul.
SCOR Model Level 2: Configuration Level
SCOR defines process categories that may be supply chain components. Organizations
configure operations using these processes, going into detail to uncover inefficiencies
and flatten the chain, doing "what-if" analyses to evaluate the impact of potential
improvements.
SCOR Model Level 3: Process Element Level
Uses information gathered to set supply-chain improvement goals, define process
elements, inputs and outputs, create performance metrics, investigating best practices
and creating systems to support them.
SCOR Model Level 4: Implementation Level
Implementation is company-specific, focusing on putting improvements into action.
SCOR Model Analyzes Processes
The SCOR model is a process reference model that expands to analyze processes
involving cross-functional activity. For instance, the Plan process involves sales,
marketing, manufacturing, finance, logistics and others. It draws attention to process

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gaps rather pointing to specific departments' performance which can help the company
communicate without ambiguity and help measure, manage and refine processes.
The SCOR Model helps companies capture "as-is" processes, define and achieve a
desired "to-be" future state. It also helps the organization quantify operational
performance and set improvement targets based on best practices in similar companies.
Metrics can include a wide variety of performance measures: delivery (in-full, on-time, inspecification), order fulfillment, fill rate (for make-to-stock), lead time or supply-chain
response time, production flexibility, total cost, realized margin, warranty costs, returns
processing costs and more.
A company is not likely to meet best practice norms in all metrics, so the ones a
company picks should reflect its customer needs and market realities, rather than a "doall, be-all" approach.
SCOR Model Gaps
The SCOR model excludes sales and marketing, research and technology development,
product development and some elements of post-delivery customer support. All of these
impact and influence supply chains, and may be included as modelling evolves.
Product development, especially in short life cycle industries such as fashion has always
been collaborative and across companies. This high degree of "product decay" is now
occurring in most other sectors. To create a super-responsive supply chain in this
marketplace,
companies
need
to
adopt
concurrent
engineering
approach,
simultaneously designing a product, its specifications, associated manufacturing

processes and the supply chain. As Level 0 evolves, the SCOR model should start to
address supply chain effectiveness with product development as an integral part.
Process, Not Functional References The SCOR model is a process reference model
rather than a functional reference model.
Thus, it opens out to analysis those processes that involve cross-functional activity - for
instance, the Plan process would involve sales & marketing, manufacturing, finance, and
logistics among others. It can effectively draw attention to the gaps in the process rather
pointing to specific departmental functioning. This in turn can help the company in

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communicating clearly, without ambiguity and help in measuring, managing, and refining
particular process elements.
It helps companies capture the "as-is" state of a process with the objective to achieve
the desired "to-be" future state. It also allows the organisation to quantify the operational
performance, and set improvement targets based on best practices in similar
companies.
The metrics can include a wide variety of performance measures such as delivery
performance (delivery in-full, on-time, in-specification is a comprehensive measure of
this), order fulfilment performance, fill rate (for make-to-stock), order fulfilment lead time
or supply-chain response time, production flexibility, total costs or realised margin,
warranty costs or returns processing costs (for reverse supply chains), cycle time for
cash-to-cash (measure of effective capital deployment), etc.
It is virtually impossible for a company to meet best practice norms in all the metrics.
Therefore, the metrics that a company picks should reflect its customer needs and its
market realities, rather than a "do-all, be-all" approach. Some examples are shown in the
following table.
Gaps in the SCOR Model
SCOR explicitly excludes sales and marketing (demand generation), research and
technology development, product development and some elements of post-delivery
customer support. All of these impact and influence supply chains, and may be brought
into the fold as the modelling evolves.
A major omission in the earlier models, which is now acknowledged in version 5 of the
model, is the collaborative nature of relationships in the supply chain. Companies have
never competed solely on the basis of their own competencies, but have been
dependent on their business partners. Asian (including traditional Indian) management
practices have long been based on nurturing chains of relationships to compete more
effectively. The dependencies between companies have recently been highlighted in
western management for a as well, with statements such as "the future lies in competing
supply chains rather than competing companies".

123

This leads us to one other issue: that of product development. Product development,
especially in short life cycle industries (such as fashion) has always been collaborative
and across companies. The high degree of "product decay" that has been present in
short life cycle industries is now beginning to occur in most other sectors. Computers,
consumer electronics, even automobiles, are getting outmoded faster than ever.

124

In this ever-quicker marketplace, to create a super-responsive supply chain, companies
need to adopt a 3-dimensional concurrent engineering approach. 3-DCE involves
simultaneously
designing
the
product
and
its
specifications,
the
associated
manufacturing processes and the supply chain (including identifying suppliers, the
manufacturing locations, transportation and inventory needs). Traditional approaches
begin with designing the product, and then either designing the supply chain or
designing the manufacturing process - in the bargain, much time is lost in iterations, redesign and re-specification. The 3DCE approach melds the three into a seamless whole.
Possibly with the addition and evolution of Level 0, the SCOR model will move to
address the effectiveness of the supply chain with product development as an integral
part, as I believe it should be. Product development is linked to customer needs, existing
or potential, and if the supply chain is to be measured, the impact of product
development has to be accounted for.
Level 1, the Top or Process-Type Level, defines the various process types and
performance targets at the enterprise or entity level. At this level, the company is
essentially defining its competitive position and operations strategy. This includes its
competitive performance requirements, performance metrics, its supply chain scorecard
and gap analysis, and a project plan.
This level highlights five distinct management processes: Plan, Source, Make, Deliver,
Return. (For reasons why "return" is now being added to the supply chain processes,
please see the chapter on reverse supply chains.)
Plan: This process includes the assessment of supply resources, aggregate and
prioritise demand, plan inventory, distribution requirements, production, material and
rough-cut capacity of all products and all channels, make-or-buy decisions, as well
as product cycles.
Source: Sourcing infrastructure and processes include supplier evaluation,
certification and feedback, quality monitoring, negotiation and vendor contracts, as
well as processes dealing with the receiving of material.

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Make: This concerns production, execution and managing "make" infrastructure,
including manufacturing, testing, packaging, holding and releasing of product are
undertaken here.
Deliver: This comprises order management (including customer interaction from
raising
quotations
through
entering
orders),
warehouse
management
and
transportation management.
This also includes creating and maintaining customer databases, product and price
database, and credit management during the customer interaction, as well as channel
management rules, order management rules and managing delivery inventories and
managing delivery quality.
Level 2, the configuration level, defines 30 core process categories that are possible
components of a supply chain. Organisations can configure their ideal or actual
operations using these processes. Each product may have its own supply chain that
might need to be configured. This level goes into the next layer of detail. For instance,
under the Planning Process, at this level Plan would include Plan supply chain, Plan
source, Make to stock, Deliver make-to-order etc. At this level, as the company breaks
its processes down, it can uncover process inefficiencies and can even move towards
flattening the chain. Level 2 allows a degree of "what-of" analysis and therefore an
evaluation of the impact of potential improvements.
Focusing on the material flow, this level includes the geographical and thread diagram
for the as-is and the to-be process.
Level 3, the Process Element Level, provides the information required for successfully
planning and setting goals for supply-chain improvements. It defines the process
elements and includes inputs and outputs, performance metrics, best practices where
applicable, and system capabilities needed to support best practices. This level
specifically gets into information and workflow analysis, and helps to align performance
levels, practices, and systems. This level leads to the fine-tuning of the company's
operational strategy. At this level and below, the impact of improvements can be
validated.

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Level 4 onwards, the Implementation Levels, are company-specific, and includes the
organisation structure and people needs, the process and the technology. It focuses on
implementation, i.e. putting specific supply-chain improvements into action. These are
not defined within an industry standard model, as implementation would be unique to
each company.
Process, Not Functional References The SCOR model is a process reference model
rather than a functional reference model. Thus, it opens out to analysis those processes
that involve cross-functional activity - for instance, the Plan process would involve sales
& marketing, manufacturing, finance, and logistics among others. It can effectively draw
attention to the gaps in the process rather pointing to specific departmental functioning.
This in turn can help the company in communicating clearly, without ambiguity and help
in measuring, managing, and refining particular process elements. It helps companies
capture the "as-is" state of a process with the objective to achieve the desired "to-be"
future state. It also allows the organisation to quantify the operational performance, and
set improvement targets based on best practices in similar companies.
The metrics can include a wide variety of performance measures such as delivery
performance (delivery in-full, on-time, in-specification is a comprehensive measure of
this), order fulfilment performance, fill rate (for make-to-stock), order fulfilment lead time
or supply-chain response time, production flexibility, total costs or realised margin,
warranty costs or returns processing costs (for reverse supply chains), cycle time for
cash-to-cash (measure of effective capital deployment), etc. It is virtually impossible for a
company to meet best practice norms in all the metrics. Therefore, the metrics that a
company picks should reflect its customer needs and its market realities, rather than a
"do-all, be-all" approach. Some examples are shown in the following table.
Potential Gaps in the SCOR Model Some of the areas that SCOR explicitly excludes
include sales and marketing
(demand generation),
research and technology
development, product development and some elements of post-delivery customer

support. All of these have some impact and influence on supply chains, and may be
brought into the fold as the modelling evolves further. One major omission in the earlier
models, which is now acknowledged in version 5 of the model, is the collaborative nature
of relationships in the supply chain. Companies have never competed solely on the

127

basis of their own competencies, but have been dependent on their business partners.
Asian (including traditional Indian) management practices have long been based on
nurturing chains of relationships to compete more effectively.
The dependencies between companies have recently been highlighted in western
management for a as well, with statements such as "the future lies in competing supply
chains rather than competing companies". The latest version of the SCOR model, thus,
adds a Level 0 where the company identifies the value network and the points of
collaboration along a global value network. SCOR documentation mentions Level 0 as
recognising "the uniqueness of Distributed Heterogeneous Processes that comprise the
network" (although adding that this is "not in scope").
It also makes a further qualification about the network itself, where collaboration takes
place amongst "entities" which may be consortiums, enterprises, divisions or corporate
functions - this is clearly a quantum jump ahead from thinking of business processes as
within the four walls of one company. This leads us to one other issue: that of product
development. Product development, especially in short life cycle industries (such as
fashion) has always been collaborative and across companies. The high degree of
"product decay" that has been present in short life cycle industries is now beginning to
occur in most other sectors. Computers, consumer electronics, even automobiles, are
getting outmoded faster than ever.
In this ever-quicker marketplace, to create a super-responsive supply chain, companies
need to adopt a 3-dimensional concurrent engineering approach. 3-DCE involves
simultaneously
designing
the
product
and
its
specifications,
the
associated
manufacturing processes and the supply chain (including identifying suppliers, the
manufacturing locations, transportation and inventory needs). Traditional approaches
begin with designing the product, and then either designing the supply chain or
designing the manufacturing process - in the bargain, much time is lost in iterations, redesign and re-specification. The 3DCE approach melds the three into a seamless whole.
Possibly with the addition and evolution of Level 0, the SCOR model will move to
address the effectiveness of the supply chain with product development as an integral

128

part, as I believe it should be. Product development is linked to customer needs, existing
or potential, and if the supply chain is to be measured, the impact of product
development has to be accounted for.
The measurement and improvement of supply chains is no easy feat - but selecting a
tool and framework such as SCOR, and diligent application, can bring benefits even
earlier than you could anticipate
A Supply Chain measurement (or metric) such as Inventory Turns, Cycle Time, DPMO
and Fill Rate is used to track Supply Chain performance. Commonly used by
management, Supply Chain Metrics can help you to understand how your company is
operating over a given period of time. Supply Chain Measurements can cover many
areas including Procurement, Production, Distribution, Warehousing,
Inventory,
Transportation and Customer Service. However, a strong performance in one part of the
Supply Chain is not sufficient. Your Supply Chain is only as strong as its weakest link.
The solution is for management to identify the key areas of the Supply Chain that need
to be monitored.
As you view the links to the left, there are a few things to keep in mind:
Tracking your Metrics allows you to view your performance over time and guides you to
optimize your Supply Chain. It allows management to identify problem areas, and to
compare your company to other like companies through like industry benchmarking.
Certain metrics, such as Inventory Turns, have a widely accepted definition. Other
metrics, such as Backorders, may need to be customized for your particular industry or
business model.
Measurements alone are not the solution to your weak areas! The solution lies in the
corrective action that you take to improve the measure. The solution comes from
process improvements.
Measurements should have owners....people or departments that are responsible for
achieving a target on the metric.
Using the correct set of metrics can lead you to the solution to the question: do we have
the right balance between service and cost?

129
But how do you optimize your Supply Chains performance? How can metrics lead to an
improved management of your Supply Chain? How do you calculate Inventory Turns,
Fill Rate or Backorders?
The first step is to understand the meaning of these metrics. It is not enough for
management to simply view these measures, they must also understand the meaning
behind them. The second step is to learn the mechanics behind the measurements.
What drives them...positive & negative?
Although metrics do vary, we give you a general overview of some of the common
Supply Chain Measurements in use today.
Backorder: An unfilled customer order. A backorder is demand (immediate or past due)
against an item whose current stock level is insufficient to satisfy demand.
This calculation can vary. Some companies count items that are not confirmed (not
allocated) and past the Requested Delivery Date (or Requested Ship Date). Other
coanies may also count those items with stock confirmed, but past due.
Backorders may be expressed in "pieces", "SKU's" or in "value". Backorder calculations

are often tracked at a variety of levels. Example: Customer, Division, Total Company
Aged Backorder: Reports on backorders in past-due time buckets based on the
Requested Delivery Date/Requested Ship Date.
Supply Chain Balanced Scorecard
The Supply Chain Balanced Scorecard tracks a limited number of key metrics. These
metrics should be closely aligned to the companies strategic objectives. The
measurements usually cover 4 areas:
Financial - Example: The cost of manufacturing, warehousing, transportation
etc.

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Customer - Example: Order Fill Rate, Backorder Levels, OnTime Delivery
Internal Business - Example: Adherence-To-Plan, Forecast Error
Training:
Example:
In
house
Training
Hours,
APICS
Membership/
Certification.
While the Balanced Scorecard approach was not specifically designed for the Supply
Chain, it does give a good guidance for your core measures. The central idea is to focus
on key metrics that have real meaning to your company. You don't want to get lost in a
sea of numbers that don't really mean anything. The Balance Scorecard approach helps
you to keep your measures aligned with your objectives. These measures should be
tracked over time (usually monthly) with specific targets for each.
Here are just a few of the many Cycle Times you should consider for your Supply Chain.
All of these measures should not only calculate the days (or hours) from the start and
finish, but also between the various steps in between.
Customer Order Promised Cycle Time: The anticipated or agreed upon cycle time of a
Purchase Order. It is gap between the Purchase Order creation date and the RDD
(Requested Delivery Date).
Customer Order Actual Cycle Time: The average time it takes to actually fill a customers
purchase order. This measure can be viewed on an Order or an Order Line level. The
measure starts when the customers order is sent/received/entered. It is measured along
its various steps of the order cycle. Through credit checks, pricing, warehouse picking
and shipping. The measure ends at either the time of shipment or at the time of delivery
to the customer (sometimes tracked by using an EDI #214). This "actual" cycle time
should be compared to the "promised" cycle time.
Manufacturing Cycle Time: Measured from the Firm Planned Order until the final
production is reported. It usually takes into account the original planned production
quantity verses the actual production quantity. Example: X% of the planned quantity
must be completed on a production run or the cycle time should not be considered.

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Inventory Replenishment Cycle Time: Measure of the Manufacturing Cycle Time plus the
time included to deploy the product to the appropriate distribution center.
Cash to Cash Cycle Time: The number of days between paying for Raw Materials and
getting paid for product. Calculated by Inventory Days of Supply plus Days of Sales
Outstanding minus Average Payment Period for Material.
Supply Chain Cycle Time: The total time it would take to satisfy a customer order if all
inventory levels were zero. It is calculated by adding up the longest lead times in each
stage of the cycle.
Defects Per Million Opportunities (DPMO): DPMO is a Six Sigma* calculation used to
indicate the amount of defects in a process per one million opportunities.
To calculate: Total Number of Defects / Total Number of Opportunities for a Defect.
Then multiply the answer by 1 Million.
The challenge here is determining exactly what qualifies as a defect. Some defects can
pass through a quality inspection and have little impact on the end product. Other
defects can result in re-work or scrap.
DPMO is sometimes used instead of Defect per Unit to allow for comparison between
processes with different levels of complexity.
*Six Sigma uses statistical analysis to measure a companies performance by identifying

defects in a manufacturing process. The goal of Six Sigma is to reduce process output
variation to + or - six standard deviations. This results in no more than 3.4 defects per
million opportunities.
Fill Rate: This definitions and calculations can vary greatly. In the broadest sense, Fill
Rate calculates the service level between 2 parties. It is usually a measure of shipping
performance expressed as a percentage.

132

Sample Fill Rate Metrics:
Line Count Fill Rate: The amount of order lines shipped on the initial shipment verses
the amount of lines ordered. This measure may or may not take into consideration the
requested delivery date (see On Time Delivery)
example- ABC Company orders 10 products (one order line each) on its Purchase
Order #1234. The manufacturer ships out 7 line items on March 1 and the remaining 3
items on March 10. The Fill Rate for this Purchase Order is 70%. It is calculated once
the initial shipment takes place.
Calculation: Number of Order Lines Shipped on the Initial Order* / Total Number of
Order Lines Ordered (7/10 = 70%)
SKU Fill Rate: The number of SKU's (Stock Keeping Units) ordered and shipped is taken
into consideration. Above, we consider each Order Line to have an equal value (1 ).
Here, we count the SKU's per Order Line.
Example: If on Line 1, the order was for 30 skus of product "AB" and on line 2, they
ordered 10 skus of item "AC". If Line 1 ships on April 1 and line 2 on April 20, the the
SKU Fill Rate is 75%
Calculation: Number of SKUs Shipped on the Initial Shipment / Total Number of SKUs
Ordered (30/40 = 75%).
Case Fill Rate: The amount of cases shipped on the initial shipment verses the amount
of cases ordered.
Example- ABC Company orders 6 products that total 200 cases, on its Purchase Order
#1235. The manufacturer ships out 140 cases on 3/1/01 and the remaining 60 cases on
3/10/01. The Fill Rate for this Purchase Order is 70%. It is calculated once the initial
shipment takes place. The number of Order Lines is not considered in this calculation.
This Fill Rate measure gives "weight" to the order lines that are shipped out.
Calculation: Number of Cases Shipped on the Initial Order / Total Number of Cases
Ordered . (140/200 = 70%)

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Value Fill Rate: Same as above, except the order line value is used instead of cases.
Calculation: Value of Order Lines Shipped on the Initial Order / Total Value of the Order
($400/$500 = 80%)
What happens if a customer orders 10 products, but then decides to expedite out just
one of them? Should the other 9 products be counted as a Fill Rate "miss"? ( 1 shipped /
10 ordered = 10%). The answer is no. You should factor rushed lines out of your Fill
Rate calculation. This can usually be done by identifying the routing code (as in an SAP
system) or by the carrier (FEDX).
*NOTE: "Shipped on the Initial Order" - This usually refers to the first shipment out of
the primary warehouse. Therefore, if an order line ships out of an alternate shipping
facility and it ships out on/before the first shipment out of the primary warehouse, then it
is considered a + to the Fill Rate.
Inventory Record Accuracy
A common calculation is:
Stratify SKU's: (annual usage X standard cost)
A items= items representing the top 80% of total dollars
B items= items representing the next 15% of dollars
C items= items representing the bottom 5% of dollars

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Cycle count items (usually daily) using a random sample, within the following groupings:
A items = 4 times per year
B items = 2 times per year
C items = 1 time per year
Items considered accurate if the actual on-hand quantity matches the perpetual
inventory quantity, within the following tolerances:
A items = plus or minus 1% quantity variance from perpetual balance
B items = plus or minus 3% quantity variance from perpetual balance
C items = plus or minus 5% quantity variance from perpetual balance
Target should be absolute minimum of 95% for MRP/DRP to function effectively; 99% for
best-in-class
Inventory Turns (Inventory Turnover): The number of times that a companies inventory
cycles or turns over per year. It is one of the most commonly used Supply Chain
Metrics.
Calculation: A frequently used method is to divide the Annual Cost of Sales by the
Average Inventory Level.
Example: Cost of Sales = $36,000,000. Average Inventory = $6,000,000.
$36,000,000 / $6,000,000 = 6 Inventory Turns
OR
Inventory Turns can be a moving number.
Example: Rolling 12 Month Cost of Sales = $16,000,000. Current Inventory =
$4,000,000
$16,000,000 / $4,000,000 = 4 Inventory Turns
Projected Inventory Turns: Divide the "Total Cost of 12 Month Sales Plan" by the "Total
Cost of Goal Inventory"
Example: The Total Cost of 12 Month Sales Plan is $40,000,000. Total Cost of Goal
Inventory = $8,000,000
$40,000,000 / $8,000,000 = 5 Projected Turns

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Although results vary by industry, typical manufacturing companies may have 6
inventory turns per year. High volume/low margin companies (like grocery stores) may
have 12 inventory turns per year or more.
Consult a qualified benchmarking company to help you set your target for your inventory
turns OnTime Shipping Performance is a calculation of the number of Order Lines
shipped on or before the Requested Ship Date verses the total number of Order Lines.
Throughout the following text, I refer to "shipped" ontime. BUT if actual "delivery" data is
available, it may be substituted and compared to the Requested Delivery Date. (such as
with an EDI#214 ).
*OnTime: Shipped on or before the requested ship date (except if the receiving party
does not accept early shipments).
Sample OnTime Metrics:
OnTime Line Count: The amount of order lines shipped OnTime* verses the amount of
lines ordered.
example- ABC Company orders 10 products (one order line each) on its Purchase
Order #1234. The Order has a Requested Ship Date of March 1. The manufacturer
ships out 5 line items on February 28 and 2 items on March 1 and the remaining 3 items
on March 10. The OnTime LineCount for this Purchase Order is 70%. It is calculated
based on the Requested Ship Date OR, if available, substitute actual Delivery Date vs
Requested Delivery Date.
Calculation: Number of Order Lines Shipped on or before the Requested Date / Total
Number of Order Lines Ordered
(7/10 = 70%)
OnTime SKU Count: The number of SKU's (Stock Keeping Units) ordered and shipped
is taken into consideration. Above, we consider each Order Line to have an equal value
(1 ). Here, we count the SKU's per Order Line.

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Example: If on Line 1, the order was for 30 skus of product "AB" and on line 2, they
ordered 10 skus of item "AC". The Requested Ship Date is April 1st. If Line 1 ships on
March 28 and line 2 on April 20, the the SKU Fill Rate is 75%
Calculation: Number of SKUs Shipped OnTime / Total Number of SKUs Ordered (30/40
= 75%).
OnTime Case Count: The amount of cases shipped OnTime verses the amount of cases
ordered.
example- ABC Company orders 6 products that total 200 cases, on its Purchase Order
#1235. The manufacturer ships out 140 cases on 3/1/01 and the remaining 60 cases on
3/10/01. The Requested Ship Date is 3/1. The Case OnTime Rate for this Purchase
Order is 70%. The number of Order Lines is not considered in this calculation. This
OnTime measure gives "weight" to the order
lines that are shipped out.
Calculation: Number of Cases Shipped OnTime / Total Number of Cases Ordered .

(140/200 = 70%)
OnTime Value Rate: Same as above, except the order line value is used instead of
cases.
Calculation: Value of Order Lines Shipped OnTime / Total Value of the Order
($400/$500 = 80%)
Perfect Order Measurement: As with most other Supply Chain Metrics, there are many
variations to this measurement.
The Perfect Order Measure calculates the error-free rate of each stage of a Purchase
Order. This measure should capture every step in the life of an order. It measures the
errors per order line.
But how do you capture errors? Let's look at what happens when an error occurs. Say
for example, your warehouse picks and ships the wrong item. Once the customer

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receives the order and notices the error, they contact the manufacturer and notify them
of the mistake. The manufacturer then enters a credit for the item not shipped and an
invoice for the item shipped in its place. For almost all errors that occur, a corrective
credit is issued. It is through an analysis of these credits that you derive your metric.
Most systems require a "reason code" to be used when entering a credit. Tracking these
reason codes and assigning them to a category allow you to group them for the Perfect
Order Measure.

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Example:
Order Entry Accuracy
: 99.95% Correct (5 errors per 1000 order lines)
Warehouse Pick Accuracy
: 99.2%
Delivered on Time
: 96%
Shipped without Damage
: 99%
Invoiced Correctly
: 99.8%
Therefore, the Perfect Order Measure is 99.95% * 99.2% * 96% * 99% * 99.8% =
94.04%
There may be other fields used such as "The Sales Representative recommending the
correct item" or the "FillRate".
Performance to Promise Dates: When a Distributor places a Purchase Order against a
Manufacturer, he has certain expectations on when he will receive the items ordered.
His original expectation is the OnTime Delivery Metric. However, the manufacturer may
give him a revised estimate as to when they expect to fill the order. The manufacturers
promise is called the "Performance to Promise Date Metric".
Example: ABC Company Orders 2 Products on Purchase Order #1234, with a
Requested Ship Date of June 10.
The first item is in-stock and ships on June 10th..
The second item is on backorder. The manufacturer estimates that the 2nd item will ship
by July
1. The item is manufactured and ships out on June 28.
The Performance to Promise Date is 100% (items ship ontime or early)
*However, if the 2nd item does not ship till July 2nd, then it's late. The Performance to
Promise Date is 50%.
Transportation Metrics:
Freight cost per unit shipped: Calculated by dividing total freight costs by number of units
shipped per period. Useful in businesses where units of measure are standard (e.g.,

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pounds). Can also be calculated by mode (barge, rail,ocean, truckload, less-thantruckload, small package, air freight, intermodal, etc.).
Outbound freight costs as percentage of net sales: Calculated by dividing outbound
freight costs by net sales. Most accounting systems can separate "freight in" and
"freight out." Percentage can vary with sales mix, but is an excellent indicator of the
transportation financial performance.
Inbound freight costs as percentage of purchases. Calculated by dividing inbound
freight costs by purchase dollars. It is important to understand the underlying detail.
The measurement can vary widely, depending on whether raw materials are purchased
on a delivered, prepaid, or collect basis.
Transit time: Measured by the number of days (or hours) from the time a shipment
leaves your facility to the time it arrives at the customer's location. Often measured
against a standard transit time quoted by the carrier for each traffic lane. Unless you are
integrated into your customers' systems, you will have to rely on freight carriers to report
their own performance. This is often an important component of leadtime. Transit times
can vary substantially, based on freight mode and carrier systems.
Claims as % of freight costs: Calculated by dividing total loss and damage claims by
total freight costs. Generally measured in total and for each carrier. A high number
generally indicates packaging problems, or process problems at the carrier.
Freight bill accuracy: Calculated by dividing the number of error-free freight bills by the
total number of freight bills in the period. Errors can include incorrect pricing, incorrect
weights, incomplete information,etc. Generally measured in total and for each carrier.
Accessorials as percent of total freight: Calculated by dividing accessorial and
surcharges by total freight expenditures for the period. Many freight carriers will charge
extra fees for trailer detention/demurrage, re-delivery, fuel increases, and other
expenses or extra services. Often, these are extra costs incurred due to inefficient
processes.

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Percent of truckload capacity utilized: Generally used for shipments over 10,000 lbs.
Calculated by dividing the total pounds shipped by the theoretical maximum. For
example, assume your trucks can hold 40,000 lbs. of product. During the prior month,
there were 675 shipments totaling 22.95MM lbs. The percentage utilization was 85%.
The 15% unused capacity is an opportunity for more efficiency.
Mode selection vs. optimal: This is calculated by dividing the number of shipments sent
via the optimal mode by the total number of shipments for the period. To measure this,
each traffic lane must have a designated optimal mode, based on freight costs and
customer service requirements.
Truck turnaround time: This is calculated by measuring the average time elapsed
between a truck's arrival at your facility and its departure. This is an indicator of the
efficiency of your lot and dock door space, receiving processes, and shipping
processes. This also directly affects freight carrier profits on your business.
Shipment visibility/traceability percent: Calculated by dividing the total number of
shipments via carriers with order tracking systems, by the total number of shipments
sent during a period. This is an indicator of the relative sophistication of your carrier
base, and one measure of the non-price value available from your carrier base.
Number of carriers per mode: Calculated by counting the total number of freight carriers
used in a given period, by mode (ocean, barge, rail, intermodal, truckload, LTL, small
package, etc.). This is an indication of your volume leverage and control over the
transportation function.
On-time pickups: Calculated by dividing the number of pick-ups made on-time (by the
freight carrier) by the total number of shipments in a period. This is an indication of
freight carrier performance, and carriers' affect on your shipping operations and
customer service.
Upside Flexibility: The ability of a manufacturer to meet additional demand requirements.
This is usually compared as a percentage over the original order. This is protection for
the buyer. It allows for the actual demand to be higher than the forecasted quantity.

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Inventory Rationalization: An analysis that categorizes your inventory by various

categories. Examples- Current Inventory levels of A,B,C products
- Inventory turns of A,B,C
- Value of Slow Moving product (those products you may have more than "x" number of
weeks worth)

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Setting Goals for your Supply Chain Metrics:

Once you have an understanding of basic Supply Chain Metrics, focus on a limited
number of measurements that add value. Choose those metrics that will track your
companies true performance. You don't want to get into the trap of "analysis paralysis".
Over-analysis leads to confusion and sometimes conflicting goals. I would recommend
picking 5 - 7 key measures per functional area. These measures are sometimes
referred to as KPI's (Key Performance Indicators).
Once you have identified these metrics, you can then set your goals. This will enable
your organization/department to track it's performance to expectations. But how do you
set these goals? How do you determine what to target? At what point have you achieved
Supply Chain optimization?
Your overall company goals should be considered when setting your Supply Chain
targets. You want to make sure that your Supply Chain goals do not conflict with your
company objective. Targets can reflect how aggressive you want to be in pursuing
change.
Some Guidelines.....
First, make sure you understand exactly what it is your measuring. What drives this
measure? What causes failure? Where do you need improvement? Once you can
answer these questions, you're in a better position to set your goals.
Some companies use a guideline of 10% improvement per year. But, this is a very
general guideline.
Benchmarking: One way to set your goals is Benchmarking. There are various
benchmarking services, that for a fee, will compare your company to other "like"
companies. You submit your answers to a set of questions. Those answers are
averaged in with other companies submissions.
Averages are calculated and World Class levels are set.

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As an example, if the average Fill Rate for your industry is 93% and your performing at a
80% level, then it's obvious you need to set an aggressive goal. However, if the industry
average is 93% and you're at 94%, you may want to target a minimal gain. Your
aggressive efforts should probably be focused in other areas. The caveat here is
defining "like" industries. Make sure the comparison your making is a fair one.
SMART goals :
Specific: Provide enough detail so that there is no question on what is being measured
and no question how the metric is calculated. You should be specific as to the
measurement, goals and responsible people/department.
Measurable: Here is where you use your metric. Make sure you have a reliable system
in place that will accurately measure your performance
Attainable: Will the Supply Chain projects you have scheduled for the year produce
results that will achieve your goal? The person setting the goal and the person
responsible for achieving the goal should agree with the target. If results are unattainable or unrealistic, they will have a de-motivating effect on your employees.
Realistic: Don't plan to do things if you are unlikely to follow through. Better to plan only
a few things and be successful rather than many things and be unsuccessful. Your
Supply Chain goals should be challenging, but realistic in relation to the improvement
projects you have in place.
Time frame: Identify when your targeting to hit your goal.
Example: Your current Fill Rate is 87% and your Supply Chain projects should improve
your measure to 93%. But is the 93% goal for the final month of the year OR is it
averaged out over a specific timeframe?
Supply Chain optimization is difficult to achieve. But with the right metrics in place and
proper goals set, you now know where to focus your improvement projects. You have
just gotten closer to Supply Chain optimization.
Ever get confused by Acronyms? Everyday, more & more seem to be popping up.

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Here are a few Supply Chain Acronyms:

ABC: Activity Based Costing
ABM: Activity Based Management
ANOVA: Analysis of Variance
AOQ: Average Outgoing Quality
APICS: American Production and Inventory Control Society
ASP: Application Service Provider
B2B: Business to Business

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B2C: Business to Consumer
BB: Black Belt
BBC: Black Belt Champion (or Council)
BBS: Business Balanced Scorecard
BEST: Business Excellence through Speed and Teamwork
BOM: Bill of Materials
BTO: Built to Order
C&E: Cause & Effect
CAD: Computer Aided Design
CAM: Computer Aided Manufacturing
CPIM: Certified in Production and Inventory Management
CRM: Customer Relationship Management
CTQ: Critical to Quality
CTR: Cycle Time Reduction
DPMO: Defects Per Million Opportunities
DRP: Disribution Requirements Planning
DRP2: Distribution Resource Planning
DTF: Demand Time Fence
EDI: Electronic Data Interchange
EPR: Economic Profit Realized
FG: Finished Goods
FGI: Finished Goods Inventory
FIFO: First In First Out
FPO: Firm Planned Orders
GAAP: Generally Accepted Accounting Principles
IFO: Income From Operations
ISO: International Standards Organization
IT: Information Technnology
JIT: Just in Time
KPI: Key Performance Indicator
LCL: Less than Carload
LIFO: Last In First Out
LSL: Lower Specification Limit
LTL: Less than Truckload

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MAP: Manufacturing Automation Protocol
MBB: Master Black Belt
MBO: Management by Objective
MDS: Material Dominated Scheduling
MIS: Management Information Systems
MRP: Materials Requirements Planning
MSDS: Material Safety Data Sheet
MTBF: Mean Time Between Failures
MTO : Made to Order
NDC: National Distribution Center
NPV: Net Present Value
OEM: Original Equipment Manufacturer
PAC: Production Activity Control
PDCA: Plan Do Check Act
PPM: Parts Per Million
RDC: Regional Distribution Center
ROA: Return on Assets
ROI: Return on Investment
ROP: Re-Order Point
RPI: Raw Product Inventory (components)
SCOR: Supply Chain Operations Reference model
SD or STD: Standard Deviation
SMART: Specific/Measurable/Ambitious/Realizable/Time-Phased
SPC: Statistical Process Control
USL: Upper Specification Limit
VMI: Vendor Managed Inventory
WIP: Work In Process

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Chapter 13: Information Technology and Supply Chain

INTRODUCTION
Supply chain management involves three flows Material flow, Funds flow and
Information flow. Information is the key to success of a supply chain as it enables
managers to gain visibility of the processes and materials. The managers decisions are
based on the information from all the sources in the supply chain. All the elements of the
supply chain would be isolated without information flow between them.
Information is the most important driver of the supply chain as it integrates and affects all
the other three drivers of the supply chain transportation, facilities and inventory.
Information influences the various phases of the supply chain strategy, planning and
operation. For instance, a company that needs to decide how to structure its supply
chain over the years should collect information from its supply chain and analyse it to
arrive at a suitable structure. Then the decisions that are taken in the strategic phase will
be implemented over a period with a forecast and a plan. Operational decisions are
taken according to the plan on a daily basis. These operational decisions may include
inventory levels, schedules, ordering for supplies etc. Without information the
management will not be able to determine what the customer needs are and when and
in what quantity he needs it. Therefore installing a system for collection, maintenance,
and analysis of information is crucial for a supply chain.
The necessity for information demands a system, which would gather, store, analyse
and display the results of the analysis. A small company manufacturing one or two
products with a few inputs can accommodate a simple manual information system. But
as its business expands and becomes complicated it needs a sophisticated and faster
system to keep pace with the expansion. Information Technology (IT) fills in this
requirement. IT is necessary to bring clarity in the information and provide it at the right
time. IT consists of hardware and software that capture, analyse and provide information
wherever it is needed. Information is the key to supply chain management, as all the
functions would act independently without it. IT was deployed in most of the
organizations for integrating various functions and processes of their own organizations.

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But that does not completely solve the problem of information visibility from every corner.
The information system needs to encompass the elements beyond the company. The
supply chain is defined as a network of organisations; these organizations cannot form
a network unless they are connected by an information system.
The primary objective of supply chain management is to become customer focused; the
customer focus can be achieved by tracking the customers changing needs, demands
and expectations. Information technology takes the company directly to the customer
and has the ability to align all the supply chain activities towards the customer. In todays
world the organisations need to provide velocity, visibility and value to succeed. The
visibility can be brought in adopting IT only.
Considering of the case of Dells supply chain it can be observed that The success of the
supply chain was due to the information systems and flow adopted by the company from
the customer to the supplier. Dell used the Internet to collect orders from its customers
to the company directly, so the company had better demand visibility. The company also
shared this information with his suppliers so that they can forecast better and supply to
the requirements.
The IT tools used in SCM are:
ERP
EDI and E-commerce
CRM
Workflow management
DSS and Knowledge management tools
ROLE OF TECHNOLOGY IN SCM
Before the advent of information technology all the transaction processes relating to
supply chain were paper based. The high lead-time in processes was also due to late
transfer of information, documentation and implementing the information inputs
manually. Though communication technology like the telephones improved connectivity
between two places the significant change came only after IT was implemented in
supply chain management. As discussed already the function of information technology

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is to provide visibility across various segments. There are various technologies to
capture data across the supply chain like RFID, Barcode, etc. The use of these
technologies enabled easy collection of information at necessary points. It enables
tracing and tracking of material.
In supply chain management decisions relating to drivers of supply chain inventory,
transportation and facility are made by analysing information. IT is applied extensively in
all these areas.
In inventory management the inventory levels of upstream and downstream partners can
be determined using IT so that the organization can determine the amount of inventory
that can be stocked to meet customer requirements and determine reorder levels. The
other examples of IT in inventory management are EOQ, storage and indication of data
regarding inventory levels of various components and their details, estimating costs of
inventories, setting inventory policies.
Similarly transportation decisions regarding the mode of transport and optimal routes to
distribute the product to the customer can be designed and tracked on an IT system.
Some examples of such applications in transportation are Decisions regarding
Transportation network design, routing, and shipments. Information of costs, customer
locations, and shipment sizes.
IT can help in determining the locations for facilities like warehouses; production and
distribution centres by collecting and analysing data regarding geographical demand and
the information regarding the external players acting in those locations can be acquired.
There are many other decisions that can be taken using IT for facility decisions like
determining location, capacity and schedules of a facility requires information on the
trade offs between efficiency and flexibility, demand, taxes so on.
THE EFFECT OF IT ON VARIOUS FUNCTIONS IN A SUPPLY CHAIN
IT has revolutionised the way businesses function. We can clearly observe how
organisations have changed the functional processes and how IT has helped them
shape new trends in their businesses processes. We will be looking into functional areas

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of procurement, planning, scheduling, inventory management, logistics and warehouse
management, sales / customer service. The supply chain management evolved over
three phases. The following are the characteristics of the three phases:
Phase I: The focus of management was on functions or departments. They were not
connected and had limited information visibility. These departments worked on
standardised procedures independently whatever may be the situation. They had no coordination and conflicts between departments were common.
Phase II: The departments were consolidated into fewer ones and integration was
brought in the functional departments. The companies became more business process
focused. Integrated forecasting and planning was done in organisations with the help of
all departments. Focus was on efficiency of processes to bring down costs.
Phase III: Unlike the previous phase planning, forecasting and decision making is done
by collaboration with partners. They included contract manufacturers, specific suppliers
and key customers. The decision-making became pre-emptive from a reactive stage.
As we see in all these phases the role of information is clear. The lack of information in
organisations made them to be only reactive to various situations with limited interaction.
This resulted in wastage of resources and many failures. The realisation of importance
of information systems in phase II brought implementation of ERP and database
systems in organisations internally. Only these systems could integrate the functional
departments. But still they lacked the connection with external part of the supply chain.
The surge in use technology for various purposes enabled them to collaborate between
various players in the supply chain. Now with collaborative systems track and trace of
materials, processes and orders is enabled which brought in more visibility to all the
players in the supply chain.
Procurement
The procurement process in an organisation was done by a separate department in
which certain individuals known to have expertise and experience in procurement would
determine suitable materials. This would have been done by a mere physical inspection

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or some standardised procedure. There were no specific suppliers but the onus was on
the least price. The other functional areas had no relation to the purchase and did not
interact with suppliers. The trend changed to having an integrated procurement system
so that the companys total costs are reduced effectively. Using MRP and long term
forecasting techniques the cost was negotiated with suppliers. In the next generation
with the advent of IT the e procurement is done where in online auctions are
conducted and strategic relations are forged with good suppliers by long-term contracts
and relationships. The suppliers are given timely information through a connected
communication system. The nucleus organisation can form new industry designed
market places on the Internet to gain advantage of volumes and visibility of prices.
Planning
The supply and production planning in earlier days was done based on the historical
data. There was not much linkage with business planning and production changed with
varying demands. The adherence to the laid out plan was not possible and they
eventually piled up inventories or faced stock outs. This was mainly due to the lack of
information and techniques to analyse such information. The later stages had integrated
approach using ERP systems, but still they planning were deficient with respect to their
external supply chain.
The present day planning approaches include collaborative planning, forecasting and
replenishment (CPFR). It involves long term commitment to free information sharing for
collaborative planning purposes like Joint business planning
(categories, brands,
assortments, SKUs, key items, etc.) and financials (sales, fill rates, pricing, inventory,
safety stock, gross margin, etc.). The sharing should be on mutual trust and a common
system of communication for collaborative planning needs to be implemented.
There are a few software applications, which support such kind of collaborative, real time
information sharing. For example we can see the kind of software Manugistics provides:
Web-based collaboration:
The web-based collaboration application enables you to share and collaborate with
partners on forecasts, replenishment plans, and promotions in a flexible, easy-to-use

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environment. The collaboration software allows processes to be tailored with each
partner individually to enable varying degrees of information sharing across partners and
to provide the security rules needed to ensure privacy. In addition to facilitating the
sharing and reviewing of information, the collaboration interface also enables users to
drill down and update plans within the application feeding changes back to supply
chain planning, transaction, and execution systems to help ensure timely implementation
of agreed-to plans. And during promotional events, robust promotion management
capabilities enable you to collaborate with partners to help deliver the highest level of
customer service and profitability.
Scheduling
As it was explained earlier the focus was more functional in this case also and this
process was not connected with planning. Scheduling was done to improve asset
utilisation and reduce manufacturing costs. The thought was to keep machines engaged
for maximum amount of time and minimise cost per product. Then the customer service
became important and scheduling was done to serve the customer in the right time. The
organisations formed strong linkages with the supply chain partners and customers. The
information systems are linked to the supply chain partners and ensured that the
scheduling relating to the processes linking both the partners are done collaboratively
with real time information about their processes with the help of information technology.
Inventory management
Every department tried to minimise inventory with them by transferring it to the next level
of the supply chain. Thus the total costs of inventory for the supply chain were high. No
one had enough information to determine the total inventory held in supply chain, there
was no transparency and the update of information in shorter intervals was not possible.
In the next phase the inventory policies were aligned to customer service levels.With
manufacturing philosophies like JIT and KANBAN the inventory levels were viewed as
waste and were reduced gradually. This was done by continuous monitoring of
inventories and material flow at all stages in manufacturing. The ERP and other
information systems played a major role in this. But actually the inventories increased
with other partners in the supply chain.

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Now the techniques followed are collaborative replenishment and vendor managed
inventory. As stated earlier the roadblocks for implementation of these techniques are
eliminated by information technology. Through IT the manufacturer takes the
responsibility to replenish the distributor inventory. The inventories are maintained,
monitored and replenished with the help of an information system. The manufacturer
gains as he can get visibility of the inventory held in the supply chain and has the ability
to control it. He also gets the demand information from this data.
Logistics and ware house management
The concept looking at the logistics as a separate function came in much later. Logistics
was more manual intensive and there was no visibility of the movement of goods. Later
automation was employer in warehouses and logistics operations. This reduced time
spent on these operations and increased efficiency. The need for track and trace was
felt in logistics and now the technologies like the GPS, RFID and other wireless
technologies complement this idea. The Internet has opened up many more possibilities
giving all the players visibility at any point in the world.
Sales/ customer service
Sales and customer service were completely cut off from manufacturing departments.
The service was limited and was only reactive. The complaints or information from
customers was difficult to reach the concerned department and took a lot of time. The
next era recognised this and segmented their customers and determined service levels
and served them in better by allocating resources to serve specific customers. Now the
customer service is more proactive; it reaches the customer through the Internet and
takes continuous feedback from them.
Now we shall see how the software in managing the macro processes in the supply
chain are broadly classified:
Supplier relationship management
Internal supply chain management
Customer relationship management

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Customer relationship management: processes that focus on downstream operations
between the enterprise and its customers
Internal supply chain management: processes that focus on internal operations within
the enterprise
Supplier relationship management: processes that focus on upstream interactions
between enterprise and suppliers
All these processes are integrated on the software building block called transaction
management foundation (TMF), which includes basic ERP systems and other integration
software.
The information technologies can be applied at various levels of progression in a
nucleus organisation for its supply chain activities. If we consider the internal supply
chain optimisation, the IT solutions would involve only point solutions which are specific
to departments or those solutions which help at particular points in the operations. These
solutions usually perform the function of providing information. The information system
may contain a simple intranet just connecting some of the elements in the organisation.
This stage enables the organisation to understand how they can use IT and conduct
simple network activities. Now transiting to the next stage would include connecting
through a website a few of its key customers and suppliers and all its internal activities
so that these players can have a real time view of the inventories, flow of materials,
orders etc. they can recognise some bottlenecks but it will not be a fully connected
system. At this stage they are said to interact within the network formed.
The previous stage would enable them information visibility, this would provide them a
platform to set standards, determine crucial information needed by the partners, set
information security standards and form a team with the partners to identify parameters
to transit to the stage of transaction.
In the transact stage the partners and the nucleus organisation are connected and they
share best practices, have demand management, CRM and other supply chain
techniques. The players in the network can solve their customers problems and interact
with their customers customer.

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After the transact stage the partners actually conduct business on the network, the
networked channel becomes a source of revenues and a channel to provide customer
service.
In todays scenario it is quite common to appreciate the relevance of IT in business and
decision-making. The technology has kept pace with the newer business concepts and
change is the only factor that is constant. Present day managers are gearing themselves
to accept this reality and are devising their own ways of dealing with change.
It is important to bear in mind that information technology needs to be contemporary to
business. As business processes are changing because of changes in the market, one
will also have to look at an overall IT strategy and evaluate options to be competitive. It
is true that one should aspire to be a leader in application of information technology in
business and set path breaking business process, the way Dell or Amazon did. But
business is not just being one bright spot in a cloud! Many others are attempting to
leverage their existing resources and capabilities to stay competitive.
In todays business, the customer is the key driver and the business processes are
woven around the customer. Be it manufacturing, retailing, services including
government or any other economic activity, the focus is on what the customer wants and
value creation. In addition to Customer Relationship Management, supply chain
management, ECR, JIT, VMI, MRP have assumed critical roles in shaping the future of
the business. This article deals with the IT strategy for Supply Chain Management.
The Supply Chain Management assumes greater importance for the following reasons:
Comprehensive nature of management span from sourcing of material to
servicing of goods.
Changing the gamut of operation from modular activity like warehousing,
transportation to logistics management and further to all activities along
supply chain network.
Amount of knowledge flow and business process reconfiguration demanding
new and higher skill sets.

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More importantly, vast application of technology - from physical tracing and tracking to
information technology driven visibility and transparency.
Thus, a supply chain network consists of all players right from the customer to any
vendor who contributes in fulfilling customers demand. It includes various parties who
directly or indirectly enable such a network. Given this situation, application of
information technology highlights the importance of the 3As in achieving seamless
integration along the supply chain. They are accuracy, accessibility and appropriateness
of information.
In decision making, accuracy of information is very vital. One must ideally have cent
percent accurate information whenever it is based on tracking, consolidation and / or
mining from historical transactions. In the absence of this, one could use past patterns
for projecting the future. In either case, a reliable and consistent IT system will play a key
role. Disparate systems will have to be integrated to avoid redundant data creation /
transfer at multiple points.
A second important characteristic is accessibility of information on time and the level in
hierarchy for decision-making. Especially in a multi location, multi level organisation
where there are a number of external players who also constantly interact, this becomes
critical. The type of systems and application deployed adds to the complexity. Security
considerations and a conservative outlook add another dimension to an already complex
situation. To achieve efficient supply chain integration, there is a need to evolve a
system that provides accessibility at the right level.
A third important characteristic related closely to the accessibility is the appropriateness
of information. This relates to structuring and defining the hierarchy of information. There
is a general tendency to create a system that focuses on the capture of a lot of irrelevant
information. To avoid this, any system should be role based and / or process centric to
ensure that only appropriate information get captured, tracked and made amenable for
transactions and decision-making.

157

One possible scenario would be that any or all of the four major constituents in the
supply chain domain - suppliers, manufacturer/service provider, logistics facilitators and
customers - are islands of information. The supply chain process in most cases involves
at least two of these constituents. There could be independent solutions from different
vendors addressing these four constituents, but none integrating closely with the other to
provide a seamless IT solution for the supply chain network.
The ideal situation will require a comprehensive solution addressing all the constituents
and taking care of the above 3As as well. This will require proper planning on IT
investments. The following factors could play an important role.
1. Size of the firm
2. Extent of allocation of investible funds to IT
3. Competitiveness of business and scope for IT being a critical success factor
4. Quality of human resources and its adaptability to changing environment
5. Management commitment
6. Write off practice towards IT investments
Generally large size firms invest on contemporary IT initiatives, as the size brings certain
amount of complexity in operations involving a large number of stakeholders. Such firms
may run on an ERP from a single vendor. This provides some advantage in price
negotiation, ease of implementation and better coordination during post implementation
management. The alternative approach to ERP selection and implementation is the
best-of-breed approach, where a firm purchases the best of modules from different
vendors. In addition to managing multiple vendors, the firm also has to make a critical
assessment and careful selection of the best in each module.
Themistoclecous et al (2001) in their survey on "ERP and application integration:
Exploratory survey" brings the following observation:
"Companies adopt ERP packages for different reasons such as business and technical
reasons. Enterprise systems helped organizations gain business benefits such as
customers and suppliers satisfaction and an increase in overall productivity. Return on
investment is relatively low. It can be said that integration problems affect the ROI due to

158

the fact that many disparate information systems co-exist in the company. .Most of the
problems can be divided into: 1. project delays and costs; 2. conflict with external and
internal entities and 3. conflicts with business strategy. The respondents reported that
an ERP system fulfils only 30-50 per cent of IT requirements"(1).
Certain firms could take the bespoke development route in an attempt to overcome the
above situation. Though such an approach can handle a number of glitches, it could be
a time guzzler and hence expensive. Since current businesses are highly vulnerable to
change, there could be a number of changes in the specification even during the
development phase. It becomes quite a challenge to freeze the requirements. Assuming
that these are effectively managed, there could still be the high costs related to
maintenance and upgrades in the post deployment phase.
The decision to go either with ERP or bespoke development could be driven by the
extent of investible funds available for IT. If the capital investment is focused on other
priorities, then the IT investment may take a back seat. Similarly, the nature of industry
and competitive conditions will also play a major role. Investments in IT for a FMCG
company could be vastly different from that of an engineering company or an agroprocessing firm.
Adaptability of human resources for new systems is another key factor. This is especially
true in large transactions driven business like banking services. Though business
processes have been changing and so the systems, the ability of operating staff to
manage these changes drives deployment of new applications. New generation banks
who could afford to minimize size of work force through adoption of new generation
technology are better poised for contemporary IT investments compared to traditional
banks and banks in transition from traditional to new generation processes. Similarly one
can think of many other industries where such conflicts exist among players.
Management commitment also determines IT investment policy. Though the firms
ecosystem may be favorable for better IT deployment, lack of management commitment
or management bias towards a particular approach may lead to sub optimal IT
deployment. A related factor is IT write-off policy of the firm. If a firm has an aggressive
write-off policy, then it can probably accelerate investments in IT.

159
IT investments for supply chain management could also be evaluated on the above
criteria. The following different application scenario could be possible:
Legacy system in use and SCM module deployed as a supplementary tool
ERP which may enable certain features of supply chain activities, but there is
a need to deploy an aggressive SCM application to achieve competitive
advantage
Creating a new tailor-made system or first generation application
Application deployment at modular activity level like for warehousing,
transportation, demand forecasting, etc.
There are many vendors and solutions integrators with domain expertise who could use
existing products for configuring any such solutions. It is ideal to look for an application
considering the following criteria:
1. Domain expertise
2. Ability to deliver an integrated solution
3. Cost effectiveness
4. Ability to cover and integrate external entities
5. Flexibility to incorporate newer development on a shorter cycle
6. Ability to facilitate smooth migration
To conclude, IT application in SCM domain must bring transparency and visibility across
the chain for achieving efficiency in operations and servicing the customer to the best of
his expectations. No longer business processes are rigid and hence applications must
be adaptable to such vulnerability at least cost and time. All players across the Supply
Chain network, be it a small supplier or a logistics service provider or a customer, must
see value for them instead of the internal organization alone. The future lies in partnering
relationship not only to optimize resources but also capabilities including IT across the
chain. To cite an application, a cycle manufacturer may have to see how it can integrate
the smallest component provider - namely, a brake shoe supplier - and dealer at a rural
center, in order to optimize model production run and retain the customer instead of
losing them to competition. Today all these are possible with available technology if only

160

one adopted the right strategy! One must note that IT is a tool and strategy must drive IT
investments for achieving competitiveness.

161
PRACTICE AREA

162
OBJECTIVE TYPE QUESTION
1. A supply chain includes only the organizations directly involved in supplying

components needed for manufacturing.
True / False
2. The major drivers of supply chain performance are facilities, inventory,
transportation, and information.
True / False
3. The replenishment cycle occurs at the distributor/manufacturer interface.
True / False
4. An e-business can reduce network facility costs by increasing the number of
facilities used.
True / False
5. The bullwhip effect moves a supply chain away from the efficient frontier by
increasing cost and decreasing responsiveness.
True / False
6. Processes that focus on downstream interactions between the enterprise and its
customers are included in
a. Customer Relationship Management (CRM)
b. Internal Supply chain management
c. Supplier Relationship management
d. None of the above
7. The decision phases in a supply chain include
a. Production Scheduling
c. Supply chain operation
b. Customer relationship
d. Supply chain orientation
management

e. All of the above
163

8. Which of the following is not a major driver of supply chain performance?
a. Customers
c. Inventory
b. Facilities
d. Transportation
e. Information
9. Distribution is a key driver of the overall profitability of a firm
a. The addition of distributor only adds cost to supply chain
b. It directly impacts both supply chain costs and customer experience
c. It slows down the responsiveness of the supply chain
d. It cannot be developed as a supply chain strategy
10. Lead time is the gap between
a. When an order is placed and when the order is received
b. When an order is received and when it is put away
c. When an order is received and when it is used
11. The cycle view of a supply chain holds that the processes in a supply chain are
divided into 2 categories depending on whether they are initiated in response to
or in anticipation of customer orders.
True / False
12. The main advantage of a distribution network with local storage is that it can
lower the delivery cost and provide a faster response than other networks.
True / False
13. To extract maximum benefit from e-business, firms should integrate it with their
existing supply chain networks.
True / False
14. Successful supply chain management requires which of the following decision
phases? (Tick the correct option from the choices below)
a. Supply chain
c. Supply chain operation
strategy/design
d. All of the above
b. Supply chain planning

e. a and b only
164

15. The time between when a customer places an order and receives delivery is
a. Response time.
d. Customer experience.
b. Product variety.
e. Order visibility.
c. Product availability.
16. A milk run is a route in which a truck either delivers product from a single supplier
to multiple retailers or goes from multiple suppliers to a single retailer.
True / False
17. A reliable supplier has low variability of lead-time, whereas an unreliable supplier
has high variability.
True / False
18. The selection of suppliers, design of supplier contracts, product design
collaboration, procurement of material, and evaluation of supplier performance
are a part of
a. Procurement.
d. Supplier selection.
b. Sourcing.
e. None of the above
c. Supplier scoring and

assessment.
19. The fundamental supply chain decision(s) involving the trade-off between
transportation and inventory costs is (are)
a. Choice of transportation
d. All of the above
mode.
e. Both a and b
b. Inventory aggregation.
c. Level of customer
responsiveness.
20. E-business enhances traditional business transactions by allowing them to take
place over the Internet where they can often be executed
a. Less efficiently and with a lower level of responsiveness.
b. Less efficiently but with a higher level of responsiveness.
c. More efficiently and with a higher level of responsiveness.
d. More efficiently but with a lower level of responsiveness.

165

e. None of the above
21. Supply chain planning relates to supply chain configuration and has long term
impact lasting several years.
True / False
22. In organizations value chain and supply chain is not one and the same.
True / False
23. If a mismatch exists between what the supply chain does particularly well and the
desired customer needs, restructuring the supply chain only is necessary.
True / False
24. A companys partners in the supply chain may well determine the companys
profitability as the partners are intimately tied to its supply chain.
True / False
25. The major drivers of supply chain performance are inventory, facilities and
transportation only.
True / False
26. Increasing the number of facilities decreases the response time and
transportation cost but increases inventory and facility cost.
True / False
27. The goal of network design is to maximize the supply chains long-term
profitability. This is possible by having a well laid out business strategy.
True / False
28. Cycle Inventory exists in a supply chain because different stages exploit
economics of scale to lower total cost. The costs considered include material
cost, fixed ordering cost and handling cost.
True / False

166

29. Vertical relationships between supplier and customer / buyer are known as
alliance.
True / False
30. If a product has a low value to weight ration, low demand uncertainty or customer
orders are small, inventory aggregation decreases supply chain costs.
True / False
31. The information flow in a proper integration amongst the components of the
logistics is___
a. Suppliers ---procurement---processing---distributioncustomers
b. Suppliers---processing---procurement---distribution---customers
c. Customers---procurement---processing---distributionsuppliers
d. Customersdistributionprocessingprocurement---suppliers
32. The main task of distribution in the supply chain model is the management of
demand.
True / False
33. ----------aligns the capabilities of suppliers, manufacturers, channel partners,
service providers, and customers to develop sustainable competitive advantage:
a. e-business solutions
c. supply chain mapping
b. supply chain
d. Logistics
34. The warehouse receipt is transferable by endorsement.

True / False
35. The average occupancy level of the available storage area in the warehouse
through a period of one year is --a. Occupancy ratio
c. Storage density
b. Warehouse ratio
d. Warehouse occupancy
36. An independent logistics service provider who performs any or all the functions of
logistics to get the clients products to the market is :
a. 2PL service provider

167

b. Third party Service
provider
c. Fourth party service
provider

168
37. Applying concepts of logistics to business conducted via the internet is called as
E-fulfillment.
True / False
38. RFID is an automated identification technology that encodes information in an
array of parallel, rectangular bars and spaces that varies in width.
True / False
39. The document listing the number of pieces, contents, weight and measurement
of each; item in the consignment is
a. Dock receipt
b. Bill of lading
c. Packing list
40. Logistics audit helps in preparing strategic plans to bring efficiency and
effectiveness in to the entire logistical supply chain.
True / False

Website: www.ciilogistics.com
169

PARAGRAPHE TYPE QUESTION
1) Explain the role of the major drivers of the supply chain performance.
2) How E-Business does affects the supply chain activities.
3) What are the three Decision phases in the supply chain? Explain.
4) Discuss the importance of collaboration within a supply chain when performing
aggregate planning.
5) Define supply chain integration process and need for creating an effective
supply chain organization structure. Explain with an illustration.
6) Contemporary supply chain management depends on technology and visibility
of information across the chain. Elucidate with an example.
7) Explain the need for demand planning and three approaches to forecasting.
8) Organizations are increasingly outsourcing supply chain function to 3 PL
service
providers. Analyze the role of 3 PL service providers and the criteria
required for the success of such operations

9) What do you understand by fourth party logistics service providers? Give an
example.
10) How can IT help a business firm strategic alliances and partnerships - (as the
case may be) with its customers, suppliers and others?
Illustrate with
examples.
11) In the global economy, a well developed ability to create and sustain fruitful
collaboration gives companies a significant leg-up Kanter. David Farmer
says that, Much of the history of Commercial transaction in India has been
enacted against backcloth of the Latin tag CAVEAT EMPTOR Buyer
Beware. Please reconcile the statements and suggest eight critical points
necessary for inter-organizational relationships to meet, if they are to be

170

successful. But remember the famous Jurist, V R Krisha Iyer stated that In
India, litigation is immortal and litigators are mortal.
12) What are some industries in which aggregate planning would be particularly
important? What are their characteristics?
13) What are the main differences between the aggregate planning strategies?
14) What modes of transportation are best suited for large, low value shipments?
Why? Discuss key drivers that may be used to tailor transportation. How does
tailoring help?
15) Proper decision on warehousing will enhance the effectiveness of marketing
considerably Explain
16) Discuss different techniques for inventory control with their merits and demerits
17) Explain the need for demand planning and three approaches to forecasting.
18) How do logistics requirements for e-commerce business differ from those of
traditional business?

171
MODEL CASE STUDY

Case 1:
Study the Enclosed case study Titled Family Superstore, and answer all the questions
provided at the end of the case study. Your answers may be supported with any
diagrams, models or algorithms, as may be necessary. Neatness, brevity, and clarity in
the answers will be appreciated and recognized appropriately
FAMILY SUPERSTORE
Family Superstore (FS), a leading shopping mall in Gurgaon, has decided to increase
the size of its store. Currently, FS sells three products. FS has collected the following
data for year 2004.
Product Line
Soft
drinks Fresh Produce Packaged Food
(SD)
(FP)
(PF)
Revenue (Rs)
315,400
850,000
400,000
Cost of goods sold Rs
240,000
600,000
360,000
Cost of bottles returned (Rs)
5,000
No of purchase orders placed
150
300
150
No of deliveries received
125
850
275
Hours of shelf-stocking time
216
2,160
1,080
Item sold
50,000
400,000
125,000
FS also provides the following additional information:

Activity
Description
Total costs (Rs)
A. Bottle returns
Returning of empty bottles
5,000
B. Ordering
Placing of Purchase Orders
62,400
C. Delivery
Physical delivery & receipt of 100,000

items
D. Shelf-stocking
Stocking of merchandise
E. Customer-support
Assistance

provided
172
75,000
to 125,000

customers including checkout

173

Questions:
1. FS currently allocates store support costs (all costs other than the cost of goods
sold) to product lines on the basis of the cost of goods sold of each product line.
Compute the operating income (which is equal to revenue minus all costs) and
operating income as percentage of revenues for each product line.
2. If FS allocates store support costs to product lines using ABC (Activity Based
Costing), compute the operating income and operating income as a percentage
of revenues for each product line after clearly identifying the cost driver for each
support activities (A to E).
3. Comment on your answers to questions 1 and 2 above.
-xCase 2:
Study the enclosed Case Study titled Bright Light India Ltd. and answer all questions
provided at the end of the Case Study. Your answers may be supported with any
diagrams, models or algorithms, as may be necessary. Neatness, brevity and clarity in
the answers will be appreciated and recognized appropriately.
Bright Light India Ltd.
Bright Light India is a leading multinational company in Electrical goods manufacture
operating in 8 businesses with 12 factories. The president of the Lamps Division in India
recently attended a programme for Senior Management on Supply chain Management.
He understood from the programme that measuring and reducing the end-to-end supply
chain cycle time is imperative for survival and gives substantial competitive edge to the
company. He learnt that there are two components of Cycle time. - Horizontal Time
which is the time taken for movement from one place to another and Vertical cycle time
which is the time material stays in one place without movement. Computing both times
have theirs own respective challenges.
On return from the programme, he asked his executive assistant, Mr. Vinod Khosla, a
young MBA from a reputed management school to collect relevant data and assess the

174

total supply chain cycle time for one of their products. The president learnt from his
European counterpart that the total cycle time would exceed 120 days and offers a gold
mine for containing costs and improving customer service. Mr. Vinod Khosla collected
most of the relevant data, which are summarized below.
Companys Supply Chain
Suppliers
Factory
Wholesalers
Retailers
End
consumers
Present Ordering and stocking policies
Factory to Supplier: Order Quantity = Two weeks consumption of RM

o ROL = Two weeks requirement + 25% Safety stock
Wholesalers to Factory: Ordering policy =Monthly ordering
Order quantity each month = Maximum stock level- Stock balance
Maximum stock level = Monthly demand from Retailers + Lead time demand +1
week safety stock
Present ordering and Stocking policies (Continued)
Retailer to Whole saler :Order quantity = 2 weeks demand from consumers
ROL: =Two weeks demand+ 25% safety stock
Manufacturing cycle time = 2 weeks
Transport time from Supplier to Factory, Factory to wholesaler and from

wholesaler to Retailer = one week each.

175

Actual figures based on six months average:
Item
Sales/consumption
Per month ( Rs. Lakhs)
1. At supplier end
45
Inventory Turnover
based on monthly sales
4.0
2 At Factory
RM (Consumption)
80
1.33
WIP (Production value)
120
1.2
FG (Sales value)
160
2.0
3 Whole saler
40
0.6
4. Retailer
25
1.33
Transportation time: Average: 7days Range: 5-10 days

Discussion questions
1. Compute the total supply chain cycle time based on their policies and the actual endto-end cycle time.
2. Estimative the average funds blocked up in the system.
3 Mention the contributory factors for the long actual cycle time and suggestions for
reducing them.
-x-
Case 3:
Study the enclosed Case Study ANAND METAL AND TIN PRODUCTS PVT LTD and
analyze the case, using a fish-bone (cause and effect) diagram and react:
ANAND METAL AND TIN PRODUCTS PVT LTD

Anand Metal and Tin Products Pvt. Ltd. is a large distributing firm dealing in metal and
tin products. It has six regional warehouses for serving adjacent states and six offices in
regions with its headquarters in New Delhi. Six warehouses act as sales outlets, which

176

are autonomous in character. The purchasing and inventory policy is determined by
each Product Manager in consultation with Warehouse Managers in each zone, but the
broad policy directives are given by the General Manager in New Delhi.
Mr. C. L. Anand, Chairman of the company found to his utter dissatisfaction that the
company has not been able to make any profit during the last three years, nor sales
have appreciably increased.
Although its profit-to-sales ratio has been low in
comparison to other competitive firms in the line during the previous years, but during
the last two to three years it has dwindled further even though there are good demands
for metal and tin products in the market.
In an effort to bring about a change in his company, Mr. Anand fired Mr. B N Mishra, the
General Manager of the company who had been holding the position for the last seven
years.
He was replaced by Mr. S P Srivastava with an alluring pay and liberal
perquisites.
On joining the company, Srivastava carefully went through the sales records and
predicted sales increases for several products listed in the Sales Catalogue. In his
estimates, he also convincingly declared increases in sales would turn the table and this
would enable the company to make good profit. He therefore instructed all the regional
Product Managers that they in consultation with the Warehouse Managers should
immediately initiate purchase actions for all items. He outlined the inventory policy as
follows:
An all-out effort should be made to get as much quantity discount as possible on

all purchases in future.
Whenever possible, purchases should be in such lots as to be economical and

optimal.
Stocks in warehouses may rise due to this larger quantity purchases, but
increased carrying cost for higher inventory holdings would be compensated by
an increase in sales and better customer service.
Within a short time, sales picked up and by the year-end it was expected to go beyond
all predictions. But all the warehouses reported huge stocks of unsold inventory. This
superseded all previous records in the company history.

177
Following a rumor that there is an impending strike in the factories of a major metal and
tin products manufacturer in the country, Srivastava urged all the warehouses to
increase stocks further and instructed Product Managers to procure all items from any
available source.
The strike, however, did not materialize owing to a union management settlement and
the Product Managers promptly acting on his advice inflated stocks of the warehouses to
a danger level. At the-end of the year during final accounting it was found that even
though there has been some improvement in the sales, the company has actually
incurred loss.
Do you think Mr. Anand was right in pinning his faith on Srivastava?
Was
Srivastavas action for a policy of inventory built-up right, without studying pros and
cons of the metal and tin products business?
-xCase 4:
Study the enclosed Case Study, titled Newspapers as CRM tools and answer the
Three questions provided at the end.
Your answers may be supported with any diagrams, models or algorithms, as may be
necessary.
Neatness, brevity and clarity in the answers will be appreciated and recognized
appropriately.
British Industry can save USD2.4bn a year
Supply chain relationships hold the key
British manufacturing companies can save USD 2.4bn a year by developing effective
supply chain relationships with customers and suppliers. This is the conclusion of a new
repot, based on research for the institute of logistics, by A.T. Kearney, management
consultants, and Manchester School of Management of UMIST. The report says that

178

collaboration in the supply chain is not being fully exploited in the United Kingdom, with a
cost penalty estimated at 6 percent of purchased material costs each year.
Although 92 percent of manufacturing companies say they have, or intend to have,
supply chain relationships with customers and suppliers, less than a third have bothered
to measure the costs and benefits associated with these initiatives.
As a result, many
companies are unable to develop relationships to the point where they deliver tangible
results rather than rhetoric claiming partnership. The difference between results and
rhetoric can generate savings of up to 6 percent in purchased material costs each year,
according to Steve Young of A.T. Kearney. For a typical USD 100m turnover
manufacturer, this would represent around USD 2m in lost opportunity annually.
The report shows that this failure to measure that pain and gain of closer supply chain
relationships makes it difficult to demonstrate that they have been a success in anything
other than a subjective way, or to identify areas in which the relationships could be
further improved. As a result, few relationships progress beyond the stage of limited cooperation at an operational level.
Development to more advanced levels is also held back by a concern on the part of
suppliers about becoming over-dependent on their major customers, even though they
commonly wish to increase their customers dependence on them. The reluctance of
firms to make themselves too vulnerable to particular customers acts as a constraint on
the relationships that are required to improve interface and share ideas on how to
reduce costs and improve service and quality.
The study found that over three-quarters of the collaborative initiatives studied brought
benefits to other relationships, so that developing the right relationships can be a
powerful driver of change within a company overall, through the transfer of ideas and
learning. This means that the idea of win-win relationships needs to be treated with
some caution.
Some evidently successful projects appeared to entail considerable
imbalances in the distribution of costs and benefits, typically with the supplier paying and
the customer benefits.
Owner, this makes sense where the supplier transfers the
learning and applies it to other areas of the business, or where the level of trust builds
over time to encourage collaboration at a strategic level in areas such as market entry
and product innovation.

179
The evidence suggests that supply chain integration is not being fully exploited. The
links that exist are still fundamentally arms length, with traditional behaviours and them
and us attitudes.
Effective partnerships rise above this to look at the extended
enterprise, from raw material sources through to end customer, from a total business,
rather than a narrow buyer-seller perspective.
This is not achieved overnight. The report characterizes courtship that can ultimately
lead to partnership in four ways:
1. Clear goals endorsed by senior management that reflect significant business
objectives
2. Accurate measurement of costs and benefits allowing prioritization of effort
and demonstration of success
3. Commitment of an appropriate level and quality of resources on both sides to
make real progress quickly.
4. Active learning processes to share best practice information across both
organisations,
thus
leveraging
individual
relationships
and
building
partnerships
Partnerships based on this strong foundation will deliver results rather than rhetoric.
Steve young says: British industry needs to stop flirting with relationships and start
going steady with partners who have the potential to make a difference. Each partner
should expect a degree of nervousness in the other much like marriage, if a=only
because collaboration creates a sense of dependency.
This nervousness should be tolerated until confidence is established. It should be
understood that while the customer may get immediate benefits through substantial cost
savings, the supplier may suffer short-term pain before benefiting form its new
competitive position.
If there are changes in both customers and suppliers operations there is likely to be an
equal distribution of costs and benefits including long-term strategic advantages.
However, where the changes are predominantly made by the supplier, the benefits are
skewed towards the customer and the costs towards the supplier.

180
Source: Institute of logistics Press Release on the publication of Profiting from

partnership, February 1996
Questions:
1. Explain the supply chain system Of the British Industry with the help of a
schematic diagram.
2. What are the strategies recommended/adopted to deliver results?
3. win-win relationships needs to be treated with some caution Explain your
stand.
4. Supply chain relationships hold the key for successes discuss.
----X----

181

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Supply Chain Management

SUPPLY CHAIN MANAGEMENT

CII Institute of Logistics

Supply Chain Management

Overview of Supply Chain Management

SC Integration and Coordination

Consumer Demand and the Future of the

Manufacturing in Supply Chain Management

Inventory Management in Supply Chain

Warehousing in Supply Chain

Information Technology and Supply Chain

CII Institute of Logistics

Supply Chain Management

Chapter 1: Overview of Supply Chain Management

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Product / Service Flow

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Supplier strategic alliances.

g. Life long association

company has to maintain high level relationship with own

CII Institute of Logistics

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Supply Chain Management

It's important to know where production facilities, stocking points and

CII Institute of Logistics

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CII Institute of Logistics

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Supply Chain Management

CII Institute of Logistics

Supply Chain Management

Manufacturing involves the activities of production, testing, packaging and

CII Institute of Logistics

Supply Chain Management

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CII Institute of Logistics

Supply Chain Management

CII Institute of Logistics

Supply Chain Management

CII Institute of Logistics

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Figure 1: Role of Information Technology in Supply-Chain Integration

CII Institute of Logistics

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CII Institute of Logistics

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Figure 5 Customer Table Checking

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Figure 6. Category Management

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Figure 7 The Use of Extranet in the Supply Chain

CII Institute of Logistics