REPORT ON SUPPLY CHAIN

MANAGEMENT
AN INTRODUCTION TO SUPPLY CHAIN
A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products to
customers. Supply chains exist in both service and manufacturing organizations,
although the complexity of the chain may vary greatly from industry to industry and
firm to firm.

Below is an example of a very simple supply chain for a single product, where
raw material is procured from vendors, transformed into finished goods in a single
step, and then transported to distribution centers, and ultimately, customers.
Realistic supply chains have multiple end products with shared components, facilities
and capacities. The flow of materials is not always along an arborescent network,
various modes of transportation may be considered, and the bill of materials for the
end items may be both deep and large.

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing

organizations along the supply chain operated independently. These organizations
have their own objectives and these are often conflicting. Marketing's objective of
high customer service and maximum sales conflict with manufacturing and
distribution goals. Many manufacturing operations are designed to maximize
throughput and lower costs with little consideration for the impact on inventory levels
and distribution capabilities. Purchasing contracts are often negotiated with very little
information beyond historical buying patterns. The result of these factors is that there
is not a single, integrated plan for the organization---there were as many plans as
businesses. Clearly, there is a need for a mechanism through which these different
functions can be integrated together. Supply chain management is a strategy
through which such integration can be achieved.

Supply chain management is typically viewed to lie between fully vertically

integrated firms, where the entire material flow is owned by a single firm, and those
where each channel member operates independently. Therefore coordination
between the various players in the chain is key in its effective management. Supply
chain management is a well-balanced and well-practiced relay team. Such a team is
more competitive when each player knows how to be positioned for the hand-off.
The relationships are the strongest between players who directly pass the baton, but
the entire team needs to make a coordinated effort to win the race.

SUPPLY CHAIN MANAGEMENT

An Evolving Concept
Supply Chain Management (SCM) has emerged as one of the principal areas
on which leading edge companies are focusing to increase market share,
profitability, competitive advantage and shareholder value. While the term "Supply
Chain Management" is widely used, there is not general agreement as to the
definition and scope of the SCM concept. In fact, during the last several decades, the
term itself has evolved from "Distribution" to "Logistics" to "Supply Chain
Management."

WHAT IS SUPPLY CHAIN?

Definitions from well-respected references have varied during the past
decade. For example, Supply Chain Yearbook 2000 described SCM as, "A chain of
processes that facilitates business activities between trading partners, from the
purchase of raw goods and materials for manufacturing to delivery of a finished
product to an end user."

APICS-The Performance Advantage, offered this definition in January 1999:

"The global network used to deliver products and services from raw materials
to end customers through an engineered flow of information, physical
distribution and cash."

This is a little change from the 1997 definition, Logistics Management offered,
describing SCM as, "The delivery of enhanced customer and economic value
through synchronized management of the flow of physical goods and
associated information from sourcing to consumption."

The definition evolution continues as European Logistics Association, in 1995

suggested SCM was, "The organization, planning, control and execution of the
goods flow from development and purchasing through production and
distribution to the final customer in order to satisfy the requirements of the
market at minimum cost and minimum capital use.

SUPPLY CHAIN OBJECTIVE

The objective of the supply chain is to support the flow of goods and materials
from the original supplier through multiple production and logistics operations to the
ultimate consumer. Supply chain management is the planning and control of this flow
to speed time to market, reduce inventory levels, lower overall costs, and, ultimately,
enhance customer service and satisfaction

The time has come when companies can no longer afford to look at their
operations in a vacuum. What they now need is the ability to collect comprehensive,
accurate, and timely information over the entire supply chain. By analyzing this
information, they can better understand how changing conditions affect their
businesses. Making informed business decisions this way helps organizations
accomplish their business goals while also helping them use information for
competitive advantage.

DESIGNING THE SUPPLY CHAIN

 Essentially a company wants a supply chain that not only meets customer’s
needs but also provide an edge against competitor. This requires an organized
approach to designing a supply chain. There is a sequence of four decisions.

Delineate the Role of Distribution with In the

Market
A channel strategy should be designed with in the context o an entire
marketing mix. First the firm’s marketing objectives are viewed. Next the role
assigned to product, price, and promotion are delineated. Each element may have a
distinct role or two may share assignment. A company must decide whether
distribution will be used defensively or intensively. If defensive, a firm will strive
distribution as good as. With an offensive strategy, a firm uses distribution to gain an
advantage over competitors.

Selecting the Type of Channel

Once the distribution’s role in the overall marketing programme has been
agreed on, the most suitable channel for the company’s product is determined. Firms
may rely on existing channel or may use new channel to better serve existing
customers, reaching new customers, and gain an edge on competitors. A firm needs
to decide whether middle man used in the channel and if so which type of
middleman.

Choosing Specific Channel Members

The last decision is the selection of specific firms or “brands” of middleman to
distribute the product. For each type of institution, there are numerous specific
companies from which to choose.

When selecting specific firms to be part of a channel, producer must assess

factors related to market, product, and company as well as middleman. Another key
factor is intensity necessary to serve its target market well. Two additional factors are
whether the middleman sells the market that the manufacturer wants to reach and its
product mix, pricing strategies, promotion and customer service are all compatible
with the producer’s needs.
 THE BASIC LINKS OF SCM
For most of the last century, the supply chain__ a company links to
manufacturers suppliers, distributors, and customer__ was an inflexible series of
events that somehow managed to get products out the door. A paper-heavy
adventure, it often involved questionable inventory forecasts, ironclad manufacturing
plans and hypothetical shipping schedules.

The Internet changed all that. It has transformed this archaic in to some thing
closer to an exact science when we think of the internet enabled supply chain__ wit
its just-in-time delivery, precise the inventory visibility and to-the-minute distribution-
tracking capabilities__ as strategic weapon that can:

 Help companies to avoid costly disasters

 Reap cost cutting and revenue producing benefits

 Slice the cost of holding too much or struggling with too little inventory

That potential so central to the operations of business that while automating a

supply chain requires careful planning and must start with an excellent
understanding of relationship with partner and customer.

When evaluating SCM initiatives it will pay to keep the following basics in mind.

Visibility
• All the players in the supply chain should be able to react to the order.

All the players in the chain simultaneously manage inventory, control manufacturing
schedules and deliver an order on time to a customer.

Architecture
• Supply chain application must link to existing enterprise resource
planning application.

Ideally, there should be single point of visibility for inventory and order
taking. Customer could place and track order with the web interface and
customer service representative would have access to same information
customer see. A database would store and manage orders, and customer would
be able to check inventory and order status in real time any time.

Rethink the Chain

• The customer replaces the product line as the center of supply
chain’s universe.

As today, customer order touches multiple product lines and multiple

channels of distribution. The focus has to be on filling, delivering, and managing
inventory for every order that a customer places. Every order should penetrate to
the same system that manages inventory and connects to the suppliers and
distributors.

Total Involvement
• Customers and others links in the chain have to be ready to handle
web-based technology.

When rolling out s project, company must decide which customer and supplier
use it first. That decision can be based on several factors.

Consider the salesman’s “80/20” rule: 20 percent customers place 80

percent of orders, so companies should consider offering web capability to that
20 percent customer first.

Simplicity is the key: application that are easy to use and connect to will
be most popular with the members of supply chain. Extensible markup language
used in application can provide a lingua franca for all the members of the chain

SUPPLY CHAIN DECISIONS

We classify the decisions for supply chain management into two broad
categories -- strategic and operational. As the term implies, strategic decisions are
made typically over a longer time horizon. These are closely linked to the corporate
strategy (they sometimes {is\ are} the corporate strategy), and guide supply chain
policies from a design perspective. On the other hand, operational decisions are
short term, and focus on activities over a day-to-day basis. The effort in these type of
decisions is to effectively and efficiently manage the product flow in the
"strategically" planned supply chain.

There are four major decision areas in supply chain management: 1)

location, 2) production, 3) inventory, and 4) transportation (distribution), and there
are both strategic and operational elements in each of these decision areas.

Location Decisions
The geographic placement of production facilities, stocking points, and
sourcing points is the natural first step in creating a supply chain. The location of
facilities involves a commitment of resources to a long-term plan. Once the size,
number, and location of these are determined, so are the possible paths by which
the product flows through to the final customer. These decisions are of great
significance to a firm since they represent the basic strategy for accessing customer
markets, and will have a considerable impact on revenue, cost, and level of service.
These decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content, distribution
costs, production limitations, etc. Although location decisions are primarily strategic,
they also have implications on an operational level.

Production Decisions
The strategic decisions include what products to produce, and which plants to
produce them in, allocation of suppliers to plants, plants to DC's, and DC's to
customer markets. As before, these decisions have a big impact on the revenues,
costs and customer service levels of the firm. These decisions assume the existence
of the facilities, but determine the exact path(s) through which a product flows to and
from these facilities. Another critical issue is the capacity of the manufacturing
facilities--and this largely depends the degree of vertical integration within the firm.
Operational decisions focus on detailed production scheduling. These decisions
include the construction of the master production schedules, scheduling production
on machines, and equipment maintenance. Other considerations include workload
balancing, and quality control measures at a production facility.
 Inventory Decisions
These refer to means by which inventories are managed. Inventories exist at
every stage of the supply chain as either raw materials, semi-finished or finished
goods. They can also be in-process between locations. Their primary purpose to
buffer against any uncertainty that might exist in the supply chain. Since holding of
inventories can cost anywhere between 20 to 40 percent of their value, their efficient
management is critical in supply chain operations. It is strategic in the sense that top
management sets goals. However, most researchers have approached the
management of inventory from an operational perspective. These include
deployment strategies (push versus pull), control policies --- the determination of the
optimal levels of order quantities and reorder points, and setting safety stock levels,
at each stocking location. These levels are critical, since they are primary
determinants of customer service levels.

Transportation Decisions
The mode choice aspect 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.

SUPPLY CHAIN MODELING APPROACHES

Clearly, each of e two levels of decisions require a different perspective. The
strategic decisions are, for the most part, global or "all encompassing" in that they try
to integrate various aspects of the supply chain. Consequently, the models that
describe these decisions are huge, and require a considerable amount of data. Often
due to the enormity of data requirements, and the broad scope of decisions, these
models provide approximate solutions to the decisions they describe. The
operational decisions, meanwhile, address the day to day operation of the supply
chain. Therefore the models that describe them are often very specific in nature. Due
to their narrow perspective, these models often consider great detail and provide
very good, if not optimal, solutions to the operational decisions.

we divide the modeling approaches into three areas --- Network Design,
``Rough Cut" methods, and simulation based methods. The network design
methods, for the most part, provide normative models for the more strategic
decisions. These models typically cover the four major decision areas 1) location, 2)
production, 3) inventory, and 4) transportation (distribution), and focus more on the
design aspect of the supply chain.. These models typically assume a "single site"
(i.e., ignore the network) and add supply chain characteristics to it, such as explicitly
considering the site's relation to the others in the network.

Network Design Methods

As the very name suggests, these methods determine the location of
production, stocking, and sourcing facilities, and paths the product(s) take through
them. Such methods tend to be large scale, and used generally at the inception of
the supply chain. The earliest work in this area, although the term "supply chain" was
not in vogue, was by Geoffrion and Graves [1974]. They introduce a multicommodity
logistics network design model for optimizing annualized finished product flows from
plants to the DC's to the final customers.

Clearly, these network-design based methods add value to the firm in that
they lay down the manufacturing and distribution strategies far into the future. It is
imperative that firms at one time or another make such integrated decisions,
encompassing production, location, inventory, and transportation, and such models
are therefore indispensable.

Rough Cut Methods

 These models typically deal with the more operational or tactical decisions.
Most of the integrative research (from a supply chain context) in the literature seems
to take on an inventory management perspective. In fact, the term "Supply Chain"
first appears in the literature as an inventory management approach. The thrust of
the rough cut models is the development of inventory control policies, considering
several levels or echelons together. These models have come to be known as "multi-
level" or "multi-echelon" inventory control models.

Simulation Methods
Simulation method is a method by which a comprehensive supply chain
model can be analyzed, considering both strategic and operational elements.
However, as with all simulation models, one can only evaluate the effectiveness of a
pre-specified policy rather than develop new ones. It is the traditional question of
"What If?" versus "What's Best?".

SUPPLY CHAIN RE-ENGINEERING

Successful supply chain reengineering requires an understanding of various
disciplines, such as information technology and business process improvement,
together with the ability to mobilize and motivate diverse corporate cultures.
Reengineering is fraught with risk, but by keeping some principles in mind, success is
more likely. In addition, the rewards are potentially enormous.

CONCEPTS AND IMPLEMENTATION

Anyone who has become familiar with the concepts of Supply Chain Management
realizes that (for most organizations) it means significant change to current business
processes, job definitions, organizational structure, business policies and culture in
essence - creating a new business model. And even if the current information
technology (IT) applications support today's business model, it is highly unlikely that
these IT applications will effectively support supply chain business model. The
resulting acquisition and implementation of new information technology will become
the most costly and time-consuming component of implementation.
There are some critical success factors particular to supply chain reengineering,
such as information technology, scope (breadth and focus), mobilizing within multiple
cultures, and building and sustaining momentum.

First we have to decide which comes first the reengineering or the IT

acquisition, especially if the objective is to enable superior business operations and
management. Reengineering creates a new business model, for which the business
requirements are documented and mapped to various technology solutions. The
solution with the best fit is selected, and the overall implementation begins.

But in many cases, we find that the organization has already acquired IT
solution, and is now considering how to reengineer the current business model for
supply chain management.

The solutions range from ignoring the reengineering and just installing IT
application to resetting the "go-live" date. But delay in "go-live" will be offset by the
earlier achievement of higher levels of benefits. The (relative) simplicity of the pure
technology implementation keeps beckoning, and the goal of implementing a
superior new business model is easily forgotten.

Do We Change It All at Once?

The scope of supply chain management is huge; some definitions start
with the integration of customer fulfillment needs through the
optimization of product production and delivery, and incorporating
supply management. Very few of those who have ventured down this
path have succeeded, although many have declared victory. The
problems are that it is just too big, the breadth of change and
resistance frequently overcomes any project team (see Figure).

How to Change
The solution is to partition and prioritize. Think big, but implement in small
steps. Achieve early victories to sustain momentum. Use early delivery of benefits to
help fund additional costs. Even this is still a challenge, because the company will
have to live with some business units working in business model while others are still
in the old. The incongruities are troublesome at times, but still offer less risk than
doing it all at once.

What To Reengineer?
As the company looks for ways to partition and prioritize, the tendency is to
approach it from an organizational perspective. Because most companies operate,
manage and reward from an organizational perspective, it feels natural to develop a
plan sequencing the reengineering of various organizations (e.g. customer service,
logistics, purchasing). It is easy to identify the responsible managers, as well as point
the finger at the change targets.

Most business processes have many hand-offs, associated manual control

systems, many non-value steps, huge cycle times and high levels of cost. In a
nutshell, it is the process that is not managed. So when the reengineering efforts
focus on organizational activities, they fail to address the opportunities for improving
the performance of the overall business process. This may result in higher
organizational performance, but may be of little benefit to the customer and the
company.

The solution is construct a business model of the company's key business

processes. Describe the processes in verbs and nouns (so that no one will confuse
them with organizations). For clarity, any process that is depicted must be described
by the 5 to 9 sub-processes that it comprises. Use a structured analysis concept of
having multiple levels of processes. If the top level is the enterprise/company, then
the second level is the 5 to 9 major business processes that the enterprise does, and
for each of those processes, describe the 5 to 9 processes that comprise it. Now we
have identified 25 to 81 key business processes, and they can be mapped to
business strategies to determine which business processes need superior or
improved performance. The outline of a plan, based on reengineering business
processes, begins to emerge and it has focused on identifying and prioritizing
business processes for reengineering (see Figure).

Supply Chain Business Model

Mobilizing Multiple Cultures

 Typically, supply chain management reengineering involves external
customers and/or suppliers. If it doesn't, it is just an internal project masquerading as
supply chain reengineering.

A huge challenge exists the integration of the customers and suppliers into
the reengineering project. Issues include:

• Working with different engrained cultures based on past relationships

• Establishing trust in how benefits will be realized
• Coordinating resources across multiple companies
• Determining project leaders and resources
• Sharing funding
• Fearing loss of competitive information

The goal is to get the right people together to address these issues early and
develop a strong project charter so that the project team can be effective. Failure
may doom from the beginning, and this failure won't be discovered until considerable
time and money have been wasted.

There are no easy answers here, but there is an approach that works. We can take
the business model (from above), and identify the external and internal customers
and suppliers for the business processes being reengineered. Within those
segments, we can identify those who are most important to us both today and in the
future. Using the desired project outcomes, we can usually get a coordinated
meeting of the external representatives (probably one company at a time). Here is
where many lose the opportunity usually by having a fairly fixed desired outcome
and even to the point of having identified some potential changes. The difficulty is
that all the ownership is on one side, and there is frequently neither partnership nor
agreement. Further progress is seriously impaired.

But if the agenda is approached without preconception, and with a clear goal,
then we have a pretty good first cut at a team-based project charter. The details can
be worked out, and the partnership created to get off to the right start. The key point
is to develop a charter that all key stakeholders have ownership of, and provide
clarification as to what is being addressed, for what objectives, in what way, with
what resources, and to what schedule. Consider the charter to be a contract
between management and the project team, and remember a weak, vague contract
inevitably results in a weak or failed project.

Building Momentum
A critical success factor will become creating and sustaining momentum for
the project. It will be months before it is complete, and many of the participants still
have their normal job to do. The easiest and fastest place to start is the "as-is"
assessment. The techniques are easy to use; the data relatively fast to acquire; and
within two months we should have a pretty good picture of how the process works
today and what its performance measures are. It's likely that most of the process
measures did not exist and the data for them probably had to be created.

What should emerge through the walk-throughs of what was documented is

the identification of fast track opportunities small changes that can be quickly
implemented with little or no cost. These opportunities may or may not have
significant tangible benefits; they represent the beginning of real change. They
demonstrate that change will happen and begins to differentiate this project from
others that produced no results. Project momentum builds. Additionally, the ease in
which the fast tracks are implemented provides significant insight as to the barriers
that can be expected during the implementation of major change (see Figure 4).

Sustaining Momentum

Sustaining Momentum

We have reached the point where we generate the major redesign ideas. There are
many techniques here they generally revolve around structured workshops with
team members and employees from the process areas. A key tactic is to increase
the number of people involved, by having many participate in workshops of short
duration (8-24 hours). By having more people involved, we ultimately have more
people committed to its implementation. At this stage treat all ideas as good ideas
(most are), with the emphasis on getting hundreds of ideas out on the table. Some of
the workshops can create different external scenarios such as globalization,
economic downturn and new competition so that the team can be building change
idea scenarios for economic conditions different from today. Special techniques need
to be used to get the participants to think outside of the current process and job.

When the workshops are over, the team returns to assessing each idea,
adopting the good ones, and then creating a conceptual view of how process works,
and subsequently defining jobs, organization, management systems, business
polices and technology requirements.

INTEGRATING THE SUPPLY CHAIN

Information Integration
The concept of integrating information lies at the heart of most organizations'
efforts to improve business processes. Modern ERP systems are designed to
accomplish this and to provide organizations with a system for planning, controlling,
and monitoring an organization's business processes. ERP systems achieve high
levels of integration by using a standard mechanism for communications, developing
a common understanding of what the shared data represents, and establishing a set
of rules for accessing data.

Dealing With Complexity Beyond The

Enterprise
Similar to ERP solutions, supply chain solutions also must integrate
information consistently. Unlike ERP systems, supply chain systems must cope with
the complexity of integrating information from any number of disparate information
systems anywhere along the supply chain. If you look at the methods an ERP
system uses to integrate operations, you will find some that are applicable to supply
chains and others that are not.

For example, ERP systems within a single company use a database as the
basis of communications within the organization; individual applications access data
via any of a number of standard networking protocols.
 In addition to a standard means of communications, businesses must agree
on what the shared data represents and on rules governing its access, including
authorization procedures. The only way to reach this common ground is by adopting
a common set of standards.

Enabling Integrated Decision Making

SAP will continue to champion open standards in an effort to integrate
business processes across the supply chain. In the process, SAP will deliver the
highest levels of data integration available in supply chain software that, in turn, will
enable integrated decision making.

Integrated Decision
The demand for high-performance supply chain solutions to manage and
integrate data from a wide variety of systems is just the beginning. These solutions
also must combine powerful decision-making capabilities with the ability to enact
change within an organization's business processes. Just as ERP systems integrate
data within the organization, supply chain solutions must integrate decisions within
the extended enterprise.

Real-Time Decision Support

The need for real-time decision support is complicated by the fact that this
support cannot be applied to just one or a few links in the supply chain. High-
performance supply chain solutions must monitor all the elements of the chain,
making critical decisions and continuously affecting process change.

For years, companies have employed powerful computers to analyze

business process data and provide decision support. This analysis occurred on an
as-needed basis and changes were frequently enacted with little understanding of
the effect on other functional areas of the business.
 Something as simple as a company's decision to launch a marketing
campaign can produce a flurry of orders for a product and a series of disruptions
across the entire product supply chain. These disruptions may begin with
procurement's inability to secure parts and end with customer dissatisfaction with
delivery.

The Complete Supply chain Picture

The second step is to combine the core transaction system along with all of
its business intelligence with real-time information handling and decision making.
This added functionality will help you combine business data with information from
the extended enterprise to paint a more timely and accurate picture of the entire
supply chain. Only then can you make informed decisions that will cut the time to
market, reduce inventory, lower costs, and improve customer satisfaction.

Executive Excellence with the

Enterprise
Execution excellence is the capability of an organization to implement and
execute its business processes in such a way as to maximize business benefits.

The business applications driving this effort must be capable of processing

extremely high volumes of information. They must be open, robust, highly flexible,
easily configured and managed, and they must ensure a high level of data integrity
throughout the organization.
SAP R/3 System
The SAP™ R/3™ System, SAP's enterprise resource planning (ERP)
software, is the world's most popular standard business software for client/server
computing. R/3 delivers total solutions that span the organization, incorporating
business functions such as sales and materials planning, production planning,
warehouse management, financial accounting, and personnel management into an
integrated workflow of business SAP is committed to delivering solutions that
automate critical supply chain processes in ways that improve performance and
provide a distinct competitive edge.

SAP is committed to delivering solutions that automate critical supply chain

processes in ways that improve performance and provide a distinct competitive
edge. SAP solutions deliver robust functionality, a high degree of configurability, and
real-time data integration so you can leverage the power of information to your fullest
advantage.

R/3 in the Supply Chain Today

Achieving execution excellence and extending the enterprise were natural
milestones in the R/3 System's movement toward a total integrated supply chain
solution. Further, R/3 Release 3.1 leverages the optimized business data in the
Business Information Warehouse along with powerful messaging capabilities to
provide the real-time decision support required to perform effective supply chain
management. Today, powerful third-party programs using memory-resident
analytical engines have taken advantage of R/3 messaging and extended its
capabilities to include supply chain functionality. These tools — which range from
supply planning, plant scheduling, and demand planning to logistics — communicate
directly with R/3 and help you make timely decisions to optimize supply chain
performance.

R/3 in the Supply Chain Tomarrow

 SAP continues to focus its development efforts on more robust supply chain
functionality in R/3. Just as SAP has responded to customers' requests for increased
functionality and performance from their R/3 systems, SAP will work to deliver the
supply chain management and optimization solutions its customers are seeking.

In the coming months, you will see comprehensive supply chain functionality
built into new R/3 releases and made available as add-ons to existing R/3 versions.
These solutions will feature powerful new computing techniques and will represent a
dramatic improvement over supply chain solutions currently available in the market
today.

SCM FOR SMALL DISTRIBUTORS

 Supply chain management is really about relationship management -
and that applies to distributors of all sizes.

Industrial distribution is a relationship business. That’s a common statement,

but one that couldn’t be more true when it comes to the concept of “supply chain
management.”
As distributors of all sizes look to take costs out of the channel, experts
should begin by taking a good, hard look at their business relationships. Are they
buying the right products from the right suppliers? In turn, are they managing their
prices, costs and margins effectively? Are they selling to the right customers? Are
they using information from both suppliers and customers to manage and control
inventory levels?

In its most basic form, supply chain management is all about taking costs out
of the channel. And that’s something distributors of all sizes can get involved in.

Supply Chain Management can be broken down into four primary tenets:
inventory management, supplier management, customer management, and financial
management.

Inventory Management
 One of the first steps to taking costs out of the channel — for any size
distributor — is getting a handle on inventory costs. And that’s where technology can
help. Inventory management software systems can help distributors track demand
history and forecast future demand on an item-by-item basis. This will help optimize
inventory levels, reduce stock-outs and identify slow movers.

Keeping inventories as low as possible — while also maintaining an acceptable “in

stock” level — can help reduce the amount of working capital tied up in inventory and
free up cash for more strategic use.

Warehouse management systems are also effective. Even the most basic
warehouse management software packages can give distributors the information
they need to slim down inventory levels and identify slow-moving and obsolete stock.

Bar coding systems can also help distributors better manage inventory and
run their warehouses more profitably. Such technologies are more affordable than
some small distributors may realize.

“The expansion of technology and the increase of competitive providers have

combined to push costs down and the interest of selling to ‘small’ distributors up
across the industry,”

Supplier Management
Inventory and warehouse management programs can help with supplier
management, but distributors can take other steps in that direction, as well.
Distributors should use activity based costing techniques to “quantify the total
cost of doing business with each of their suppliers and with their supply base
on the whole.” Distributors can do that by tracking costs by product line and
supplier to identify where they are making and losing money. That information
should be used to “fire” the worst suppliers and re-negotiate prices with good,
but unprofitable suppliers, he says.

To achieve customer goals, the distributor must first control his own costs.
Suppliers can help in that objective by providing the distributor with “solutions” —
which could be as basic as offering EDI or electronic funds transfer to streamline
administrative operations.

“That allows to cut out those inefficient business transactions in business, so we can
lower costs. “Anything you’re doing to actively manage the relationships, both with
your suppliers and your end-user customers, is supply chain management.”

Customer Management
There are a number of ways to manage customer relationships. For one,
activity based costing techniques can help identify profitable and unprofitable
customers. A relatively new concept called “Customer Relationship Management”
can also help. Distributors can use CRM to track customers’ purchasing needs and
buying patterns in an effort to “develop and refine marketing and sales approaches
to targeted customer groups,” says Skinner. In its most basic form, CRM can be
achieved by using historical sales order data to analyze how individual and groups of
customers buy. Order management software packages allow access to sales history
and are available from many software providers.

Small distributors can take advantage of other technologies, as well. One

thing they can do, is link their computer system to their best customers’ systems —
without going through the Internet. This allows the customer direct access to the
distributor’s inventory.

Financial Management
 Cash flow is the life and death of distribution

With that in mind, distributors need effective and advanced accounting

systems. It’s important to have a system that tracks pricing, rebates, contracts,
discounts, and receivables and payables, for example. Many software companies
offer systems with those capabilities, specifically designed for distributors. Skinner
notes that such tools are becoming increasingly available and more affordable.
Limited human resources is one of the major hurdles for small distributors. With
fewer people to get the job done, outsourcing non-core business function —
collections and receivables.

While outsourcing is catching on, many small distributors still feel like they
have to do everything themselves. They equate outsourcing with giving up control
over certain parts of their business. Those fears can be alleviated by finding the right
outsource partner — a specialist the distributor can trust. Another way to tackle the
outsourcing issue is to hire intermittent help-consultants who can help achieve short-
term business goals. For example, distributors can hire someone to do a business
analysis and recommend areas for improvement

Technology and Beyond

 There are many more affordable technology options out there than
smaller distributors realize

Most packages can be purchased individually or as integrated systems to

cover all four-business functions inventory, supplier, customer, and financial
management. We also notes that the Internet has overshadowed the advances in
business management software —and their increasing affordability —.

“E-commerce mania has kicked up a lot of dust, especially in the information

technology space. “In the meantime, the evolution of basic business IT systems has
been ignored by the press and by many business leaders. When the dust settles,
distributors will be pleasantly surprised by the advances in business management
software that have been both enabled by and overshadowed by the Internet.”

Technology is just a tool, “Use technology to make things efficient, but never forget
people to make things effective,”

DISTRIBUTION AND THE SUPPLY CHAIN

Traditionally, distributors have been slow to react to technological change. In
a survey conducted by Industrial Distribution nine yrs ago, only 68% of the distributor
respondents said they were computerized. But distributors appear to be changing
their views on technology. Today, 80% of the respondents to a survey for this article
say they have Web sites and 46% of those distributors have actually sold products
from those sites.

Clearly, the Internet is changing the way distributors sell products. It is

allowing distributors, manufacturers, and customers to exchange information for
forecasting and replenishing products on a just-in-time basis. The Internet also has
the capability to be the infrastructure that all of the partners in the channel can use to
share real-time information.

THE INTERNET: THREAT OR OPPORTUNITY?

When manufacturers began establishing their own Web sites, many industry
watchers predicted the demise of distributors, as buyers would source products
directly.

The vast majority (93%) of distributors told, that they now view the Internet as
more of an opportunity for them rather than a threat to their businesses.

Here are just some of the reasons industrial distributors now view the Internet
as an opportunity.

“The Internet allows us better business exposure, to develop better leads

and allows us to check inventory from our vendors”...

“We can get instant information over the Internet that helps us forecast
demand from our customers through the chain and on to our vendors”...

“The Internet gives us more exposure and our customers’ easier access”...

“This is allowing us to reach new markets and customers and give them
more information about our products and services.”

The Internet, indeed, allows distributors to promote information about their

new products, schedule deliveries, conduct online transfers of funds, collaborate with
their supply chain partners, drive productivity, and improve customer service.
 Many distributors are using the Internet as a sales tool, bringing greater
exposure for their company and allowing them to exchange information throughout
the supply chain.

The information/Internet explosion is changing the channel, as customers

seek ways to reduce their costs of procuring product. But true cost savings can only
occur when all parties in the supply chain are linked via data communication. And
that means that distributors, their key manufacturers and customers must trust one
another so much that they are willing to exchange the necessary information to
ensure a seamless delivery of products to the end user/customer.

 Information supplied from a survey of more than 900 distributors in Industrial

Distribution’s 54th Annual of Survey Operations.

THE INFORMATION SYSTEMS & SUPPLY CHAIN

MANAGEMENT
Over the past fifteen years, the development of computer technology and its
application to modern-day business problems has revolutionized the process of
management decision-making. Initially computers were applied in the financial and
accounting sectors but now their impact is felt in nearly every area of the business
organization. This includes the physical distribution function; though it is true to say
that computer development has progressed rather more slowly in this area than in
many others. It is to be hoped that as the supply chain functions receives increasing
attention from top management there will be a corresponding increase in the
strategic applications of the computer to solving distribution problems.

The Changing Pattern of Distribution

The computer is becoming a fact for modern distribution management; it is
necessary to take account of the main changes that have taken place in the
pattern of distribution.

Firstly, there has been a tremendous increase in the volume of consumer’s

goods distributed. Not only has the volume increased, however, but also so has the
range of merchandise offered and the rate at which it is replaced. New materials,
new products and new sources of supply are being developed continuously and in
some trades a proportion as high as 75 per cent of the merchandise now on display
was not on display fifteen years ago.

Secondly, distributive organizations themselves have been growing rapidly in

size. In the UK six retail companies are responsible over 20 per cent of the market;
in Sweden four organizations account for 70 per cent of the retail grocery trade and
Switzerland two controls over 50 per cent. This trend has developed more in some
western European countries than in others but now it is accelerating everywhere.
The number of very large distributive organizations has doubled over the past fifteen
years.

Thirdly, while the volume of goods being distributed has increased and the
organizations themselves have grown in size, there has been a net decline in the
number of wholesale firms and the number of retail outlets. With more goods being
distributed by fewer shops, inevitably there has been a significant increase in the
size of the average retail outlet.

Fourthly, there have been significant changes in the method of selling. Self-
service as a selling technique has grown rapidly.

Fifthly, technological changes in the field of transport and materials handling

carry implications for the distributive trades. These include the development of new
warehouses and new methods of materials handling, the relocation of retail units
outside city centers, the development of air freighting and the realization of through
the transport movement based on containerization, roll-on/roll-off ferry services, the
freightliner and piggyback train network, cellular ships and inland clearance depots.

The Consequent Need for Computers in

Distribution Planning
One of the main consequences of these changes for the distributor is that he
now needs information of a type, in a form and at a frequency, which is completely
new. The computer is particularly important in this respect because of its ability to
deal with thousands of detail in an orderly and systematic manner.

With the increase in the number of different products and the continual
appearance of new lines and replacement products for obsolescent ones, the
distributor, if he is avoid either over-stocking or serious gaps in his product mix,
needs to have access to a continuous flow of up-to-date information to help his
decision making. He needs stock information on what is moving and what is not; by
supplier and by product group.

Equally, with the growth in size of distributive firms, more and more decisions
have to be taken automatically rather than on the basis of a series of individual
judgments coupled with entrepreneurial flair. Analytic techniques are now available
to allow those automatic decisions to be made but this implies that the flow of
information is already there.

However the information system actually develops, it is certain that the

computer will play an increasingly important part in it. Also the distribution manager,
will, in the future, be expected to acquire a deeper understanding of the machine’s
power and flexibility in dealing with management problems.

The familiar accounting routines were the first application to be developed

and the main objective was the limited one of the reducing administrative overheads
by replacing clerical effort. As a result, in most of these large organizations, the
familiar payroll and sales and purchase ledger systems have been operating
successfully for many years.

The next development in the evolution of computer applications was aimed at

improving some aspect of customer services in order to improve the firm’s
competitive position and increase the market penetration of the firm’s products.
Typical objectives were speedier and more reliable delivery services, a faster
process for dealing with customer inquire and the placing of orders. Attention
therefore started to be paid to designing systems for order processing, inventory
control and delivery load planning, all of which had an impact on the physical
distribution function.
 The information generated by these second stage developments led directly
to the third evolutionary stage; the provision of improved decision-making at both
strategic and tactical levels through the building of sophisticated analytical models.
This process of model building involving mathematical and statistical methods
requires the service of properly qualified staff experienced in the use of Operational
Research (OR) techniques.

Key Factors in Making Effective Use of

Computers
Firstly, senior management must have an appreciation of what computer can
do for the business. They must be able to approve new computer applications,
monitor their implementation and review them later for effectiveness and efficiency.

Secondly, it is also vital that the next level of line management acquires an
appreciation of the computer in its day-to-day operational role. They will be heavily
involved either as a provider for data input or as a user of output or both.

Thirdly, it must be recognized that computer system evolve over a period of

years in simple, discrete steps and that they are most effective where there are large
volumes of data to be processed or where there is a need for a faster information
response.

Fourthly, the firm must take the decision on whether to buy, rent or lease its
own computer or use the services of a computer bureau. The use of a computer
bureau is often an attractive proposition for the medium or small-sized firm which
does not have the financial resources or technical expertise required for the
purchase and efficient use of its own machine.

Fifthly, if the company decides to obtain its own computer, a decision must be
taken as to what hardware facilities to use. There are developing in range and
capability at an increasing rate and any decision taken must be made with a careful
eye on any possible future developments in the computer field.
Computer Application Packages and Supply
Chain Techniques
Applications packages are computer programs that have been designed and
written in standardized way for applications, which are common to many users. They
are ‘ready-made’ programs that often involve the use of sophisticated analytical
models. Any computer user can therefore exploit this simply by thinking carefully
about the nature of his own, say, distribution problem and then by reading the
accompanying manual to see how the package can help him to solve it.

Packages are often obtained from the manufacturer of the computer being
used as they form part of the computer’s program support services. Packages are
also available from computer bureaux and software houses and the source to select
will depend upon the availability of the type of package required, how effectively
each package produces the desired results and the relative costs.

Application packages cover a wide field including programs for commercial,

scientific, mathematical and technical use. Some packages have been designed
specially for the physical distribution function. One such package is the vehicle-
scheduling package, which has suffered a chequered history of success. Early
attempts to solve the problem took an over-simplified approach and were
consequently somewhat remote from the practical considerations of the route
planner and the drivers.

The two main trends can be discerned in the development of analytical

techniques in physical distribution and the corresponding design of application
packages. Firstly, more joint thinking is taking place between the user and the
designer of the model. The OR management scientist is becoming more responsive
to the statement of the practically-minded distribution manager and conversely the
manager is coming to accept the model-builder as a person who genuinely has
something to offer in his search to solve his increasingly complex distribution
problem.
 Secondly, many of the models that were developed for planning purposes
only are now being assimilated into the ongoing operational management of the
organization. The impact of the analytical techniques is starting to be felt, therefore,
at all level of management as its become more widely recognized that the practical
application of these techniques cam result in significant cost savings for the
company.

SUCCESSFUL SUPPLY CHAIN MANAGEMENT

Required Steps
Integrating information is the first step in supply chain management. You
must then analyze this information to determine which actions to take within the
context of automated business processes. Furthermore, to be most effective this
information should automatically trigger a corresponding product transition. The tight
coupling of execution and decision-making is an essential ingredient to effective
supply chain management.

Today's information technologies remove communication barriers, enabling

an improved flow of information among all members of the supply chain. Early
adopters of these technologies have intensified the competitive marketplace in which
all businesses must now operate.

 The most successful companies realize they need a step-by-step approach to

chart a business's course toward high-performance supply chain
management. Those steps include:

 Achieving execution excellence by fully automating and optimizing business

practices

 Extending the enterprise to embrace all members of the supply chain

 Integrating business systems with those of customers, suppliers, and partners

to create a common information foundation

 Deploying real-time decision support to increase responsiveness

  Investing in re-educating and re-orienting employees, vendors, and other
members of the supply chain on the practices needed to optimize business
processes

 Making a company-wide commitment to creating and managing a more

complex organization capable of tackling global business issues

PARTNERSHIP TO IMPROVE SUPPLY CHAIN

 Processes to solidify and streamline supplier-customer relationships can
result in mutually beneficial commercial success.

Close work can result into highly competitive supply chain while failing to
collaborate results in the distortion of information as it moves through a supply chain,
which, in turn, can lead to costly inefficiencies? Which is called “Bullwhip Effect”
which results in excess inventories, slow response, and lost profits? Through the
more open, frequent and accurate exchange of information typical of a long-term
supply-chain partnership, companies can eliminate many of these problems and
ensure ongoing improvement.

These partnerships yield major benefits: increased market share, inventory

reductions, improved delivery service, improved quality and shorter product
development cycle.

For Partnership
More partnerships that are modest lead to rapid improvements in
logistics facillated by candid information exchange and better
coordination. Given the effort involved in crating and sustaining
partnerships, clearly a firm must focus on the trading partners it
considers most important in the long run. This type of partnership
differs from a strategic alliance or project-based partnership in which
two firms may work toward a common goal but later dissolve the
association after achieving the goal.

Characteristics of Successful Partnerships

 Free exchange of information (e.g., sharing cost and demand data) and
coordinated decision making reduce the inefficiencies inherent in less collaborative
relationships. Mutual trust is crucial to reassuring firms that information shared with a
partner will not be used against them. Longer-term commitment to the partnership
encourages parties to invest in further improvement of the joint supply chain to
mutual advantage.

Exit & Voice relationship; firms and suppliers co-operate to resolve problem rather
than abandoning their partnership and over come obstacles.

Logistics Success is defined as the degree to which the overall supply chain
is improved, regardless of how costs and benefits are allocated. Commercial
Success depends on the degree to which trading with the partner in question
becomes more profitable, whether by getting a share of the logistics improvements
or by obtaining better trading terms. A supplier investing substantial effort in a joint
supply-chain improvement project with a customer will almost certainly be aiming for
more than potential logistics improvements; the suppliers wants to solidify its
relationship with the customer to gain a larger market share or reduce price
pressure. We can say that sacrificing some short-term logistics success may be
worth achieving commercial benefits later.