Introduction to Supply Chain

Management

Dr. Rachna Gangwar

TAPMI School of Business, Jaipur
 The Immediate Supply Chain for an
Individual Firm

Transportation Transportation Customers

Warehousing

Information
flows
Factory

Transportation

Vendors/plants/ports
Warehousing Transportation
 What is a Supply Chain?
C1

C2

C3

C4

C5

C6

VENDOR INBOUND INTERFACILITY DISTRIBUTION OUTBOUND

PLANTS CUSTOMERS
TRANSPORTATION TRANSPORTATION CENTERS TRANSPORTATION
 Managing Flows in A Supply Chain

• Material Flow
• Information Flow
• Financial Flow
Historical Evolution of the Supply Chain

• First Revolution: (Ford Motor Co. 1910–1920)

 Single product, that is, no product variety
 Vertical integration
• Second Revolution: (Toyota Motor Co. 1960–1970)
 Wide Variety
 Long-term relationship with suppliers
• Third Revolution: (Dell Computers 1995–Current)
 Customized products
 Medium-term relationship with suppliers
 Suppliers have to maintain technology and cost
leadership
 Channels of Distribution
A channel of distribution or trade channel is defined as the
path or route along which goods move from producers or
manufacturers to ultimate consumers or industrial users.
 The Logistics/SC Mission
• Getting the right goods or services to the
right place, at the right time, and in the
desired condition at the lowest cost and
highest return on investment.
 Supply Chain Management
• SCM is the integration of all activities
associated with the flow and transformation
of goods from raw materials through to end
user, as well as information flows, through
improved supply chain relationships, to
achieve a sustainable competitive advantage.

Handfield and Nichols

 Logistics Management
• Logistics is the process of planning,
implementing and controlling the efficient,
cost-effective flow and storage of raw
materials, in-process inventory, finished goods
and related information from the point of
origin to point of consumption for the purpose
of conforming to customer requirements.

Council of Logistics Management

Evolution of Supply Chain Management
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging

Finished goods inventory Supply Chain

Physical Supply Chain
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance
 Critical Customer Service Loop

Customer order processing (and

transmittal)

Transportation
Customers

Inventory
or supply source
 Scope of the Supply Chain for Most
Firms
Business logistics

Physical supply Physical distribution

(Materials management)

Sources of Plants/
Customers
supply operations
Inbound Logistics Outbound Logistics
•Transportation •Transportation
•Inventory maintenance •Inventory maintenance
•Order processing •Order processing
•Acquisition •Product scheduling
•Protective packaging •Protective packaging
•Warehousing •Warehousing
•Materials handling •Materials handling
•Information maintenance •Information maintenance

Focus firm’s internal supply chain

 The Supply Chain is Multi-Enterprise

Focal Firm

Suppliers Customers

Supplier’s Customers/
suppliers End users

Acquire Convert Distribute

Product and information flow

Supply Chains are analyzed from the perspective of the firm which provide identity
to the product in terms of brand. These are focal firms.
Reality of SC Scope
 The Logistics Strategy Triangle
Inventory Strategy
 Forecasting
 Storage fundamentals Transport Strategy
 Inventory decisions  Transport fundamentals
 Purchasing and supply  Transport decisions
scheduling decisions
Customer
 Storage decisions
service goals
 The product
 Logistics service
 Information sys.

Location Strategy
 Location decisions
 The network planning process
 Logistics Costs
• Direct (transportation and handling)
• Indirect (inventory, losses within a system)
• Hidden (costs borne by other systems like
infrastructure wear and tear, safety, pollution,
distortions due to side payments, losses
outside a system)
• Opportunity (foregone sales transactions)
 Current State of Affairs in India
• A journey on NH 6 – erstwhile commercial
capital Kolkata to present commercial capital
Mumbai.
• This journey takes a look at the state of affairs
today.
A 9-MT Lorry
Crew of 2
Carrying General goods
Vehicle Documents:
RC/Permit/FC
Material Documents:
Invoice
Cash for Enroute Exp
 DAY 1

Traffic Jam on the

Mumbai Road / City
Exit Point:
Departure at 10
Finally exits at 4 am PM after “No
Entry” hours

Loaded at 2
pm at
Taratala
 DAY 2 -3

Day 3 :
Day 3 : Joins “Q” at Border at 5
Reaches JH-OR am
Border at 9 am. 2 hours for clearance of Day 2 :
2 hours for Documents. Reaches WB-JH border at 6
clearance again pm.
Halts ( No night clearance at
Day 3 : Border)
Night Halt at Keonjhar. Covered : 180 Kms
Next section unsafe at
Night (Deogarh)
Covered : 200 Kms

Day 2 :
Exit from Kolkata
at 4 am
 Day 5 : DAY 4 -5
Starts into CH
at 5 am

Day 4 :
Reaches CH-MH Border
Crosses at Night. Halts.
Covered : 350 Kms

Day 4 :
Start at 5
am from
Keonjhar.

Day 4 :
Reaches OR-CH border at 5
pm. Joins “Q”. Crosses
border by 9 pm. Halts.
Covered : 260 Kms
 DAY 6
Day 6 :
Reaches Nagpur at 8 am.
Takes 2 hours to cross
Naka.
Day 6 :
Reaches Akola.
Halts for the night
Covered : 400 Kms

Day 6 :
Starts at 5 pm
 DAY 7-8

Day 8 :
Reaches at Customer.
Unloads by evening.
Contacts broker for
load for the next day

Day 7 : Day 7 :
Reaches Mumbai at Leaves at 5 am
Night. Calls Octroi
Agent. Whole night for
processing
 JOURNEY SUMMARY

Location State Type Min. Time

Chichra WB-JH State Border 180
• Total Journey Time : 8 Days Jamsola JH-OR State Border + Toll Tax 180
Sohela OR-CH State Border + Toll Tax 180
• Total Distance : 2150 Kms Chichola CH-MH State Border + Toll Tax 180
Mumbai MH Octroi 120
• Avg. Kms / Hour : 11 Kms/ Hr Total for State Borders 840

• (US – 43 Kms / hr , China - 37 Kms / hr) State Locations Type Min. Time
WB 3 Toll Tax + RTO 120
• Min Check Post/ Toll : 1940 min ̴ 32 hrs. JH 1 Toll Tax 20
OR 6 Toll Tax + RTO 240
CH 4 Toll Tax + RTO 120
MH 12 Toll Tax + RTO 600
Total 26 1100

Total 1940
 Indian Logistics Industry
• The annual logistics cost in India is estimated to
be 14% of the GDP while in developed countries,
it is 7-8%
• Almost 99% is accounted for by the unorganized
sector (such as owners of less than 5 trucks,
affiliated to a broker or a transport company,
small warehouse operators, customs brokers,
freight forwarders, etc.)
• Slightly more than 1%, is by the organized sector.
 Indian Logistics Industry
• Challenges: poor logistics infrastructure and
complex taxation structures
• Export disadvantages and higher inventories.
Caused by higher lead times due to lower speed
of transport, number of check points,
turnaround time at ports etc.
• Low inventory turnover ratio (sales/inventory)
India Developed Countries
Grocery Stores Inventory 45 days 11-22 days
Average Truck Speed 250 km/day 600 km/day
Turnaround Time at Ports 4.5 days 2 days
 Logistics Costs for the US Economy
Nominal Values
Organized Sector US: 1990 US: 2001 US: 2002

Transportation 50% 60% 63%

Inventory 20%
Warehousing
24% 40% 37%
Packaging
Losses 6%
Total Cost 11.4% 9.5% 8.7%
Logistics Cost 659 957 910
($ billion)

GDP ($ billion) 5,800 10,080 10,470

Source: CASS Information Systems, 2002

Performance of the Indian Manufacturing
Industry*

Data Source: PROWESS, CMIE

Sector-wise Industry Performance of Indian
Firms*

Data Source: PROWESS, CMIE

Supply Chain Challenges for the Indian FMCG
Sector
• Managing Availability in the Complex Distribution Set up
• Working with Smaller Pack Sizes
• Entry of National Players in the Traditional Fresh Products
Sector
• Dealing with a Complex Taxation Structure
• Dealing with Counterfeit Goods
• Opportunistic Games Played by the Distribution Channel
• Poor Infrastructure
• Emergence of Third-party Logistics Provider
• Emergence of Modern Retail Chains
The Marico Supply Chain
 Supply Chain Performance Measures: Cost
Versus Service

• Cost
• Service
– Order delivery lead time
– Responsiveness
– Delivery reliability
– Product variety
 Supply Chain Performance Measures
Cost of service

Low High
Service Level
 Managing Supply Chains Efficiently

Inefficient Practices

.
Existing Position
Cost

Low High
Service Level
Enhancing Supply Chain Performance
Enhancing Supply Chain Performance

 Supply Chain Integration

 Toyota, Ford Motor Company (1910-1920),
 Supply Chain Optimisation
 Use of Quantitative models in supply chain design and
operations
 Supply Chain Reconfiguration
 Dell
 Supply Chain Typology

• Order Penetration Point/ Decoupling Point

– Make to Stock
– Make to Order
– Configure to Order
• Supply Chain Focus
– Efficiency
– Responsiveness
Supply Chain Typology: Order Penetration
Point/ Decoupling Point
Push-Pull Boundary of Supply Chains
 Supply Chain Responsiveness
• Responsiveness captures the firm’s ability to
handle the uncertainly of market demand
• Functional products are those that satisfy the
basic needs of customers: Grocery
• Innovative products are those that try to
satisfy a broad range of customers’ wants:
fashion and technology products
Match Supply Chain Design with Product
Category
 Functional Versus Innovative Products:
Differences in Demand
Aspects of demand Functional (predictable Innovative (Unpredictable
Demand) Demand)

Product Life cycle More than 2 years 3 months to 1 year

Contribution margin ( % of 5% to 20% 20% to 60%
sales price)

Product variety Low ( 10 to 20 variants per High ( often thousands of

category) variants per category)

Likely forecast error 5% to 20% 40% to 100%

Average stock-out rate 1% to 2% 10% to 40%
End-of-season mark 0% 10% to 30%
markdown
Examples of Well Run Supply
Chains
 Asian Paints

Customer Optical Retailer blends Choice of colour

specifies reader chemical and delivered to
colour suggests base paint to 15-20 min wait customer
mix obtain colour

Minimal inventory in its supply chain

Eg 10 base colors with 50 shades each will result in

about 500 full form Stock keeping units (SKUs)

Postponement strategy/delayed differentiation

 Postponement Strategy
• Postponement is a deliberate action to delay
final manufacturing or distribution of a
product until receipt of a customer order
 The Dabbawallas
• Started in 1890s
• 5000 dabbawalas, 150000 deliveries daily
• Reverse logistics
• Each lunch box is assigned a code
• Using Mumbai rail and bus transport
• Lunch box change hands 3-4 times before
reaching its final destination
• Activities involving multiple splits and mergers
(cross docking)
 The Dabbawallas

• Error rate is just one in 16 million deliveries

• Awarded six sigma certificate in 2001
 Cross Docking
• A practice in the logistics of unloading
materials from an incoming semi-trailer truck
or railroad car and loading these materials
directly into outbound trucks, trailers, or rail
cars, with little or no storage in between
 Benetton
• Italian clothing manufacturer
• Used to follow the traditional way of making
hosiery: dye the yarn (fixing the colour) and
then knit the fabric (fixing the style)
• Buildup of unwanted inventory due to lack of
clarity on color trends

Knitting (single color) Dyeing the fabric

Benetton
 ZARA
• Spanish clothing manufacturer/retailer
• Vertically integrated business model (design,
just-in-time production, marketing and sales)
• Gives flexibility to respond to fashion trends
• Acquires fabric only in four colors and delays
dyeing and printing operations until the last
stage of production
 Dell Computers
• Mass customization

Customer Dell computers does

orders (online) assembling as per the
order

Express parcel
delivery

Customer (computer
obtained at low price)
Two days
 Dell Computers
• Maintains very low inventories, with suppliers
delivering components to the assembly
operations on a just in time basis
• Constant communication with US based
shipping partners
• Chartered 18 747 aircrafts from UPS, NW
airlines during port strike in 2002 in US
 Cement Industry
Traditional flow

Factory
Raw
mater
ial Grinding Blending Bagging
Fa
sourci
ng

Closed wagons

Customer Market
 Cement Industry
Raw
mater Clinker being Open wagons also
ial made
sourci
ng

Grinding the
Blending
material

Customer Bagging

Market
 SCM for Bicycle Company
• It started from a factory that sourced raw materials, made
components, assembled bicycles, warehousing, and delivery
to dealer.
• And changed to sourcing, kitting, warehousing, delivery to
dealer, and assembly

Dealer
Kitting Warehousing
(assembling)
• Questions??
 Push, Pull, Push-Pull Systems
• Push and Pull traditional categories of
manufacturing operations
• More recent hybrid strategy of combining the
two, Push-Pull systems
 Push-Based Supply Chains
• Production and distribution decisions based on long-
term forecasts.

• Manufacturer demand forecasts based on orders

received from the retailer’s warehouses.

• Longer reaction time to changing marketplace

 Pull-Based Supply Chains
• Production and distribution demand driven
– Coordinated with true customer demand rather than
forecast demand
– firm does not hold any inventory and only responds to
specific orders.
• Intuitively attractive:
– Reduced lead times through the ability to better anticipate
incoming orders from the retailers.
– Reduced inventory since inventory levels increase with
lead times
– Less variability in the system
– Decreased inventory at the manufacturer due to the
reduction in variability.
Implementation of Pull-Based Systems
• Often difficult to implement
– when lead times are long
• impractical to react to demand information.
– more difficult to take advantage of economies of scale
• Advantages and disadvantages of push and pull
supply chains:
– new supply chain strategy that takes the best of both.
– Push–pull supply chain strategy
 Push-Pull Strategy
• Some stages of the supply chain operated in a
push-based manner
– typically the initial stages
• Remaining stages employ a pull-based
strategy.
• Interface between the push-based stages and
the pull-based stages is the push–pull
boundary.
 Demand Forecasting
• Moving average
• Exponential smoothing
• Linear regression
The Beer Game
Delay Delay Delay Delay

Factory Distributor Wholesaler Retailer

 Outgoing Incoming Wholesaler
order order

Delay Distributor Delay

Incoming Outgoing
Factory
delivery delivery
 The Beer Game
• Inventory cost: Items in stock cost $ 0,50 per
week in holding costs.
• Backorder cost: If an incoming order cannot
be (fully) fulfilled, items are outstanding and
have to be put on “backorder” to be fulfilled
in the following week(s). Each item on
backorder costs $ 1,00 per week.
 The Beer Game
• At every stage, you will be
– Receiving delivery from upstream stage
– Receiving order from downstream stage
– Placing your order to upstream stage

• Ordering time is one week and deliveries are

“on the road” for 2 weeks (lead time)
 Some General Rules
• No communication is allowed between supply
chain groups, supply chain groups must not talk
to each other at any time!
– Especially the customer demand is only known to the
retailer.
• If stock is available, an order has to be fulfilled.
• Every order has to be fulfilled, either in the
current week (if enough stock is available) or in
one of the next weeks (items go on backorder).
• Either the inventory or the backorder, one of
them is always zero (0)!
 The Goal

Your goal is to minimize your

cost!

All the Best!!!

 The Beer Game
• Information
• Lead time
• Coordination
• Demand variability
 Bullwhip Effect
• It refers to the effect that the amount of
periodical orders amplifies as one moves
upstream in the supply chain towards the
production end.
• The bullwhip effect is a well-known symptom
of coordination problems in (traditional)
supply chains.
 Bullwhip Effect
• As a consequence of the bullwhip effect a range
of inefficiencies occur throughout the supply
chain:
• high (safety) stock levels
• poor customer service levels
• poor capacity utilisation
• aggravated problems with demand forecasting
• ultimately high cost and low levels of inter-firm
trust
 Bullwhip Effect
• The term was first coined around 1990 when
Procter&Gamble perceived erratic and
amplified order patters in its supply chain for
baby diapers. The effect is also known by the
names whiplash or whipsaw effect.
 Barilla SpA
• Large Italian food company. Major product is
pasta
• Introduced just in time distribution (JITD) to
combat a number of operational inefficiencies
and cost penalties due to variation in demand
• Much of it was due to distributors artificially
inflating the customer demand
• Bullwhip effect
 Bullwhip Effect
• Increase in demand variability as we move
upstream in the supply chain
 NDDB/GCMMF
• Began with milk procurement and processing
• Forward integrated the chain to include
distribution, value added products, and
retailing
• Backward integrated into animal husbandry,
animal feed, and packaging
 The National Dairy Development
Board (NDDB)
Cash payment to farmers
for milk received the
previous day

R&D to increase
yield NDDB Milk distribution

Profit shared among

members of Co-operative
 NDDB/GCMMF
Cash payment next day
Voluntary supply of milk by cattle

Fat content
Milk collection based
quality
owners

centre at NDDB check

Milk
distribution
in open
market
 NDDB/GCMMF
• Procured 87.19 lakh kg in a day during 2008-
09
• The milk unions are paying Rs 15 crore in cash
to farmer members everyday against milk
procurement
• GCMMF has member unions in 13 districts
with a network spread across 13,759 villages
and nearly 28 lakh farmer members
 Relationship of Logistics to Marketing
Product

Promotion
Price

Place-Customer
service levels

Inventory Transport
Logistics

carrying costs costs

Lot quantity Warehousing

costs Order processing costs
and information
costs
Relationship of Logistics to Production
• Coordinates through scheduling and strategy—
make-to-order or make-to-stock
• An integral part of the supply chain
• Affects total response time for customers
• Shares activities such as inventory planning
• Costs are in trade off
• Production lot quantities affect inventory levels and
transportation efficiency
• Production response affects transportation costs and
customer service
• Production and warehouse location are interrelated
 Relationship of Logistics to Marketing
and Production
LOGISTICS
Sample
activities: MARKETING
PRODUCTION/ Transport Interface Sample
OPERATIONS  Inventory
Interface activities: activities:
Sample activities:  Order  Customer
 Quality control activities:  Promotion
 Product processing service  Market
 Detailed production
scheduling
scheduling  Materials standards research
 Plant  Pricing  Product
 Equipment maint . handling
location  Packaging
 Capacity planning mix
 Purchasing  Retail  Sales force
 Work measurement
location management
& standards

Production-
logistics Marketing-
interface logistics
interface

Internal Supply Chain

Sectoral Share in GDP