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Supply Chain Management:

An Overview
Premendra kumar Sahu
Asst. Professor

Some Definitions
Supply Chain Management encompasses every effort
involved in producing and delivering a final product
or service, from the suppliers supplier to the
customers customer. Supply Chain Management
includes managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry and
order management, distribution across all channels,
and delivery to the customer.
The Supply Chain Council, U.S.A.

Sources:
plants
vendors
ports

Regional
Warehouses
:
stocking
points

Field
Warehouses
:
stocking
points

Customers,
demand
centers
sinks

Supply

Inventory &
warehousin
g
costs

Production/
Transportati
Transportati
purchase
on
on
costs
costs
Inventory & costs
warehousin
g
costs

Flows in a supply chain


Information
Product
Funds

Customer

Some More Definitions


Supply Chain Management deals with the management of
materials, information, and financial flows in a network
consisting of suppliers, manufacturers, distributors and
customers.
Stanford Supply Chain Forum
Logistics involves managing the flow of items,
information, cash and ideas through the coordination of
supply chain processes and through the strategic
addition of place, period and pattern values.
MIT Center for Transportation and Logistics

Some More Definitions


Supply Chain Management is primarily concerned with the efficient
integration of suppliers, factories, warehouses and stores so that
merchandise is produced and distributed in the right quantities, to
the right locations and at the right time, and so as to minimize total
system cost subject to satisfying service requirements.
Simchi-Levi
Call it distribution or logistics or supply chain management. By
whatever name, it is the sinuous, gritty, and cumbersome process by
which companies move, materials, parts, and products to
customers.
Fortune
(1994)

Key Observations
Integrated activity:
* Among functions such as logistics, manufacturing, distribution,
design/engineering, marketing, finance,etc.
* Multiple organizations,i.e., suppliers, customers& 3 PL providers
* Coordination of conflicting goals, metrics, etc.

Responsible for multiple flows:


* Information (orders, status, contracts)
* Physical (finished goods, raw material, w.i.p.)
* Financial (payment, credits, etc.)

Key Observations (continued)


Most analysis involves trade-offs
* Across

different entities
* Across metrics: Cost, Service, Time, Risk, etc.

Each interface in the supply chain represents


Movement of goods
* Information flows
* Transfer of title
* Purchase and sale
*

Philosophy of SCM
The entire supply chain is a single, integrated
entity.
The cost, quality and delivery requirements of
the customer are objectives shared by every
company in the chain.
Inventory is the last resort for resolving supply
and demand imbalances.

Evolution of SCM
Stage 1: Vendor Purchase
Production - Distribution Retailer
Stage 2: Materials Management Logistics Management
Stage 3: Supply Chain Management

Why is SCM Important?


Strategic Advantage It Can Drive Strategy
* Manufacturing is becoming more efficient
* SCM offers opportunity for differentiation (Dell) or
cost reduction (Wal-Mart or Big Bazaar)

Globalization It Covers The World


* Requires greater coordination of production and
distribution
* Increased risk of supply chain interruption
* Increases need for robust and flexible supply chains

Why is SCM Important?


(continued)
At the company level, supply chain management
impacts
* COST For many products, 20% to 40% of
total product costs are controllable
logistics
costs.
* SERVICE For many products, performance
factors such as inventory availability
and
speed of delivery are critical to
customer
satisfaction.

Conflicting Objectives in the


Supply Chain
1. Purchasing
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
2. Manufacturing
Long run production
High quality
High productivity
Low production cost

Conflicting Objectives in the


Supply Chain
3. Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices

Decision Phases in
a Supply Chain
Supply chain strategy or design
Supply chain planning
Supply chain operation

Process view of a supply chain


Cycle view
Push/pull view

Cycle View of Supply Chains


Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor
Manufacturing Cycle

Manufacturer
Procurement Cycle

Supplier

Customer order cycle

Customer arrival
Customer order entry
Customer order fulfillment
Customer order receiving

Replenishment cycle

Retail order trigger


Retail order entry
Retail order fulfillment
Retail order receiving

Manufacturing cycle
Order arrival from the
distributor, retailer, or customer
Production scheduling
Manufacturing and shipping
Receiving at the distributor,
retailer, or customer

Push/Pull View of
Supply Chains
Pull processes: execution is
initiated in response to a
customer order
Push processes: execution is
initiated in anticipation of
customer orders

Push/Pull View of Supply


Chains
Customer Order
Procurement,
Manufacturing and
Replenishment cycles

PUSH PROCESSES

Cycle

PULL PROCESSES

Customer
Order Arrives

SUPPLY CHAIN DESIGN:


Three Components
1.
Insourcing/OutSourcing
(The Make/Buy or Vertical Integration Decision)
2.
Partner Selection
(Choice of suppliers and partners for the chain)
3.
The Contractual Relationship
(Arm's length, joint venture, long-term contract,
strategic alliance, equity participation, etc.)

Supply chain objective


Maximize overall value generated
Value strongly correlated to supply chain
profitability the difference between the revenue
generated from the customer and the overall cost
across the supply chain
Example: A customer purchasing a computer
from Dell pays $ 700 (the revenue)
Dell and other stages of the supply chain incur cost
to convey information, produce the components,
store them, transport them, transfer funds, etc.

Examples of Supply Chains

Dell / Compaq
Toyota / GM / Ford
Milk Distribution System of NDDB
Merry-Go-Round System of NTPC
Dabbawalas of Mumbai
Amazon / Borders / Barnes and Noble

Three Types of Integration


of the Supply Chain
Geographical Integration
*From local to world-wide logistics

Functional Integration
* From Function-dominated logistics to
Flow-dominated logistics

Inter-Firm Integration
* From a Sector-based Logistics to Inter-sector Logistics

Supply Chain Integration is Difficult


for two main reasons
Different facilities in the supply chain may
have different, conflicting objectives
* For instance, the suppliers are in direct conflict with
the manufacturers desire for flexibility.

The supply chain is a dynamic system


that evolves over time
* Not only do demand and supplier capabilities change
over time, but supply chain relationships also evolve
over time.

Complexities Involved in
Supply Chain Management
The supply chain is a complex network of
facilities and organizations with different,
conflicting objectives
Matching supply and demand is a major
challenge
System variations over time are also an important
consideration
Many supply chain problems are new and there is
no clear understanding of all the issues involved

Supply Chain:
The Complexity
National Semiconductors:
Production:
Produces chips in six different locations: four in the US,
one in Britain and one in Israel
Chips are shipped to seven assembly locations in
Southeast Asia.
Distribution
The final product is shipped to hundreds of facilities all
over the world
20,000 different routes
12 different airlines are involved
95% of the products are delivered within 45 days
5% are delivered within 90 days.

Supply Chain Challenges


Achieving Global Optimization
Conflicting Objectives
Complex network of facilities
System Variations over time

Sequential Optimization vs.


Global Optimization

Sequential Optimization
Procurement
Planning

Manufacturing
Planning

Distribution
Planning

Demand
Planning

Global Optimization
Supply Contracts/Collaboration/Information Systems and DSS

Procurement
Planning

Manufacturing
Planning

Source: Duncan McFarlane

Distribution
Planning

Demand
Planning

Supply Chain Challenges


Achieving Global Optimization
Conflicting Objectives
Complex network of facilities
System Variations over time

Managing Uncertainty
Matching Supply and Demand
Demand is not the only source of uncertainty

Managing Uncertainty
1. Point forecasts are invariably wrong

Plan for forecast range use flexible


contracts to go up/down.
2. Aggregate forecasts are more accurate

Aggregate the forecast


postponement/risk pooling

Managing Uncertainty (contd)


3. Longer term forecasts are less accurate

Shorten forecasting horizons multiple


orders; early detection
4. In many cases, somebody else knows
what is going to happen

Collaborate

Whats New in SCM?


Global competition
Shorter product life cycle
New, low-cost distribution channels
More powerful well-informed customers
Internet and E-Business strategies

Levels of implied demand


uncertainty
Detergent
Long lead time steel

Price

High Fashion
Emergency steel

Customer Need
Responsiveness

Low

High

Implied Demand Uncertainty

Understanding the Supply Chain: CostResponsiveness Efficient Frontier


Responsiveness
High

Low
High

Low

Cost

Responsive
supply chain

Achieving Strategic Fit

of i t
e
F
n
Zo egic
t
a
r
St

Responsivenes
s spectrum

Efficient
supply chain
Certain
demand

Implied
uncertainty
spectrum

Uncertain
demand

Key Concepts
Design, operate, and control the physical and
information flows as though the channel were
one seamless corporate entity.
Let the activities (and costs) migrate across
corporate boundaries to where they make the
most sense.
Rely on the benefits of channel integration to
replace the benefits of open market forces.
Share the risks and the rewards between players.

New Concepts
Push-Pull strategies
Direct-to-Consumer
Strategic alliances
Manufacturing postponement
Dynamic Pricing
E-Procurement

Lead Time

Dealing with Product Variety:


Mass Customization
Long
Short

Mass
Customization
n
o
i
t
High
Low
a
z
i
m
o
t
s
u
C
Low

Co
st

High

Fragmentation of Markets
and Product Variety
Are the requirements of all market segments
served identical?
Are the characteristics of all products identical?
Can a single supply chain structure be used for
all products / customers? No! A single supply
chain will fail different customers on efficiency
or responsiveness or both.

Modeling for SCM


Forecasting Models

- These models allow prediction of demand based on past data or


other parameters that are independently available. They enable
better planning, given the lead-time necessary for response.

Location Models
- These models identify the optimal location of facilities such as
plants and warehouses, considering the inbound and outbound
transportation costs as well as the fixed and variable costs of
operation at the locations under consideration. These are usually
formulated as Mixed Integer Programming Models.

Modeling for SCM (contd)


Distribution Network Design Models
- These models are usually comprehensive in nature, deciding
between two, three and even four stages of distribution
network, location of warehouses and break-bulk points, and
sometimes even the transportation.

Allocation Models
- These models help in optimally allocating commodities from
sources to destinations in a multi-source, multi-destination
environment. The costs considered for optimisation are
production costs and warehousing costs. The constraints
considered can be due to demand, capacity, route restrictions,
etc.

Modeling for SCM (contd)


Inventory Models
- Inventory plays a major role in SCM.
- Inventory can be of various types such as:
- Batching and shipment inventories
- Buffer stocks to take care of uncertainties
- Pipeline inventory ( primary and secondary
transportation )
These models minimize the total relevant cost, based on tradeoffs among, inter alia, inventory carrying cost, ordering cost,
stock-out cost, transportation cost, taxes & duties, etc.

Modeling for SCM (contd)


Routing Models
- These models allow optimal routing on a

transportation network from a given source to a


destination. The models used are the Shortest
Path Problem, the Traveling Salesman Problem and
the Vehicle Routing Problem. Decision
Support
Systems that interactively use the expertise of the
decision maker by providing graphical support
through a map (i.e., using a Geographical
Information System ) are also very useful in such
decisions.

Modeling for SCM (contd)


Scheduling Models
- These models enable allocation of resources to
particular activities. Depending on the criteria of
interest and the number of resources, the models
are of aid in evaluating appropriate rules for allocation.

Alternative Analysis
- This model simply proposes the identification of alternatives,
criteria for decision making and analysis of the alternatives
across the criteria to arrive at the best choice. Formal
approaches such as simulation and analytic hierarchy process
could be used in assessing the implications of the criteria.