UNIT – I

INTRODUCTION

1.1 SUPPLY CHAIN

Introduction:
A supply chain is a network of all parties involved, either directly or indirectly, in
fulfilling a customer request.
Supply Chain spans all movement and storage of raw materials, work-in-process
inventory, and finished goods from point of origin to point of consumption.
1.2 FUNDAMENTAL:
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.

Supplier Manufacturer Distributor Retailer Customer

Consider a customer visiting Spencers to purchase detergent. The supply chain

begins with the customer and his need for a detergent. The next stage of this supply chain
is the retail store that the customer visits. Spencers stocks its shelves using inventory that
may have been supplied from a finished-goods warehouse that Spencers manages or from
a distributor using trucks supplied by a third party. The distributor in turn is stocked by
the manufacturer. The manufacturing plant receives raw material from a variety of
suppliers who may themselves have been supplied by lower tier suppliers. For example,
packaging material may come from a packaging while that company receives raw
materials to manufacture the packaging from other suppliers.
A supply chain is dynamic and involves the constant flow of information, product,
and funds between different stages. In the above example, Spencers provides the product,
as well as pricing and availability information, to the customer. The customer transfers
funds to Spencer. Spencer conveys point-of-sales data as well as replenishment order to
the distributor. Spencers transfers funds to the distributor after the replenishment. The
distributor also provides pricing information and sends delivery schedules to Spencers.
Similar information, material, and fund flows take place across the entire supply chain.

Hence, The customer is an integral part of the supply chain. The primary purpose
from the existence of any supply chain is to satisfy customer needs, in the process
generating profits for itself. Supply chain activities begin with a customer order and end
when a satisfied customer has paid for his or her purchase.The term supply chain
conjures up images of product or supply moving from suppliers to manufacturers to
distributors to retailers to customers along a chain. It is important to visualize
information, funds, and product flows along both directions of this chain. The term
supply chain may also imply that only one player is involved at each stage. In reality, a
manufacturer may receive material from several suppliers and then supply several
distributors. Thus, most supply chains are actually networks. It may be more accurate to
use the term supply network or supply web to describe the structure of most supply

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 chains. the complexity of the chain may vary greatly from industry to industry and firm to
firm.

A typical supply chain may involve a variety of stages. The supply chain stages
includes
  Customers
 Retailers
 Wholesalers/Distributors
 Manufacturers
 Component or raw material Suppliers
Supply chains exist in both service and manufacturing organizations but each
stage need not be presented in a supply chain. The appropriate design of the supply chain
will depend on both the customer‟s needs and the roles of the stages involved.

Supply chain definition:

The supply chain (SC) encompasses all activities associated with the flow and
transformation of goods from the raw material stage (extraction), through to the end user,
as well as the associated information flows. Materials and information flow both up and
down the supply chain.
Supply chain management (SCM) is the integration of these activities, through
improved supply chain relationships, to achieve a sustainable competitive advantage.
“Supply chain management is defined as the systematic, strategic coordination of
the traditional business functions and tactics across these business functions within a
particular company and across business within the supply chain, for the purpose of
improving the long term performance of the individual companies and the supply chain
as a whole” -Menzter et al
“A supply chain is defined as a set of three or more entities (organizations or
individuals) directly involved in the upstream and downstream flows of products,
services, finances, and/or information from a source to a customer”.
Encompassed within this definition, we can identify three degrees of supply chain
complexity: a “direct supply chain,” an “extended supply chain,” and an “ultimate supply
chain.” A direct supply chain consists of a company, a supplier, and a customer involved
in the upstream and/or downstream flows of products, services, finances, and/or
information

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 An extended supply chain includes suppliers of the immediate supplier and
customers of the immediate customer, all involved in the upstream and/or downstream
flows of products, services, finances, and/or information .
An ultimate supply chain includes all the organizations involved in all the
upstream and downstream flows of products, services, finances, and information from the
ultimate supplier to the ultimate customer.

Model of SCM:
Supply chain can be pictured as a pipeline, with below Figure illustrating a view
of the pipeline from the side, showing directional supply chain flows (products, services,
financial resources, the information associated with these flows, and the informational
flows of demand and forecasts). The traditional business functions of marketing, sales,
research and development, forecasting, production, procurement, logistics, information
technology, finance, and customer service manage and accomplish these flows from the
supplier‟s suppliers through the customer‟s customers to ultimately provide value and
satisfy the customer. Figure also shows the critical role of customer value and satisfaction
to achieve competitive advantage and profitability for the individual companies in the
supply chain, and the supply chain as a whole.
To fully examine this definition and model, the role of individual business
functions, and how they are coordinated across functions and across companies, should
be examined. Interfunctional
Coordination includes an examination of the roles of trust, commitment, risk, and
dependence on the viability of internal functional sharing and coordination. Inter-
corporate coordination includes functional shifting within the supply chain, the role of
various types of third party providers, how relationships between companies should be
managed, and the viability of different supply chain structures. Finally, how all these
phenomena vary in different global settings is relevant and, thus, represented in the below
Figure.

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 1.3 EVOLUTION OF SUPPLY CHAIN:

Six major movements in the evolution in SCM

 Creation Era
 Integration Era
 Globalization Era
  Specialization Era 1
 Specialization Era 2
 SCM 2.0
1.3.1 Creation Era:
Creation era, starts (1980s) when the buyer ' supplier understand the benefits that a
cooperative relationship offers. In this period we encounter for the first time the term
supply chain management.
• The term "supply chain management" was first coined by Keith Oliver in 1982.
• The concept of a supply chain in management was of great importance long before, in
the early 20th century, especially with the creation of the assembly line.
• The characteristics of this era of supply chain management include the need for large-
scale changes, re-engineering, downsizing driven by cost reduction programs, and
widespread attention to Japanese management practices.
1.3.2 Integration Era:
• This era of supply chain management studies was highlighted with the development of
electronic data interchange (EDI) systems in the 1960s, and developed through the 1990s
by the introduction of enterprise resource planning (ERP) systems.
• This era has continued to develop into the 21st century with the expansion of Internet-
based collaborative systems.

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• This era of supply chain evolution is characterized by both increasing value added and
cost reductions through integration.
1.3.3 Globalization Era
• The third movement of supply chain management development, the globalization era,
can be characterized by the attention given to global systems of supplier relationships and
the expansion of supply chains beyond national boundaries and into other continents.
Globalization era, starts with the creation of the trade liberalisation policies and the
establishment of institution such as World Trade Organization (WTO) and other
international institutions that deal with global/regional trade policies
1.3.4 Specialization Era 1
• This specialization model creates manufacturing and distribution networks composed of
several individual supply chain specific to producer to end consumer.Supply chain
management works as a service.
1.3.5 Specialization Era 2
• There are many function of this era:

1.3.6 SCM 2.0

• SCM 2.0 is a trend in the use of the WWW, that means to increase creativity,
information sharing and collaboration among users(End Users).
• SCM 2.0 designed to rapidly deliver results with the quickly manage the future change
for continuous flexibility, value and success.

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Ancient Times The Barter System evolved as an answer to the trading requirements. This
was the first supply chain.
300 BC Caesar made trading posts in East Asia to grow his trade. This was the first
retailer supplier relationship. Establishment of the silk route to India.

1151 First known fire and plague insurance offered in Iceland.

1305 House of Taxis operated courier messenger service for the rich European
clients. (A kind of primitive Outsourcing)
1621 Dutch West India Co. formed to trade with America and West Africa.
(A pseudo third party logistics (3PL) by the Dutch Companies.)
1904 Charles S. Rolls became selling agent for cars made by F. Henry Royce.
(The first traces of outsourcing).
1956 Warren Buffet started investment partnership in Omaha with money from
family and friends and he went on to become a billionaire. (An overseas
3PL)

1960-1975 The essence of SCM understood. This first phase is characterized as an

inventory 'push' era that focused primarily on physical distribution of
finished goods.

1975-1990 The earlier approach changed. Companies began migrating from an

inventory push to a customer pull channel as power began to move the
downstream to the customer.

1980 In the last phase, companies realized that the productivity could be
increased significantly by managing relationships, information and material
flow across enterprise borders. This resulted in the present concept of
supply chain management.

1981 IBM outsourced almost all of its activities and built a full computer.
1985 Wal-Mart introduced the concept of Cross Docking and replaced K-Mart as
the leader in retail stores.
1985 Cisco removed itself from the supply chain by providing to the customer
directly from the vendor.
1990 Computer changed the way business is done.
1996 Internet revolutionized the information pathway and the distribution system
of the business.
1998 The concept of e-commerce changed the definition of business itself.
2000 Currently concepts like t-commerce and digital TV are beginning to take
shape.

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1.4 OBJECTIVE OF SUPPLY CHAIN:
1. To maximize the overall value generated or to maximize overall profit
The value a supply chain generates is the difference between what the final
product is worth to the customer and the costs the supply chain incurs in filling the
customer‟s request.
2. To increase the Supply chain profitability or Surplus:
Supply chain profitability is the total profit to be shared across all supply chain
stages. The higher the supply chain profitability, the more successful the supply chain.
Supply chain success should be measured in terms of supply chain profitability and not in
terms of the profits at an individual stage.
3. It act as Sources of revenue and minimize costs:
For any supply chain, there is only one source of revenue - the customer. A
customer paying for the purchase made is the only one providing positive cash flow for
the supply chain. All other cash flows are simply fund exchanges that occur within the
supply chain given that different stages have different owners. When a retailer pays its
supplier, it is taking a portion of the funds the customer provides and passing that money
on to the supplier. All flows of information, product, or funds generate costs within the
supply chain. Thus, the appropriate management of these flows is a key to supply chain
success. Supply chain management involves the management of flows between and
among stages in a supply chain to maximize total supply chain profitability.
4. Enhance Customer Service Expectations
The Internet, just-in-time operating procedures, and continuous replenishment of
inventories have all contributed to customers expecting rapid processing of their requests,
quick delivery, and a high degree of product availability
5. Reduced inventories along the chain
Based on the requirement the inventory holding coast and carrying cost can be
balanced
6. To have Better information sharing among the partners
Due to individual concentration of each SC party information maintenance will be
easy and clear
7. Helps Planning being done in consultation rather than in
isolation It can be both proactive as well as reactive process.
8. Supply chain design, planning and operation decisions play a significant
role in the success or failure of a firm.

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 1.5 THE IMPORTANCE / ROLE OF SCM IN ECONOMY:
1.5.1 Boost Customer Service
 Customers expect the correct product assortment and quantity to be delivered.

 Customers expect products to be available at the right location.

 Right Delivery Time – Customers expect products to be delivered on time

 Right After Sale Support – Customers expect products to be serviced quickly.

1.5.2 Reduce Operating Costs:

Decreases Purchasing Cost
Retailers depend on supply chains to quickly deliver expensive products to avoid
holding costly inventories in stores any longer than necessary.
Decreases Production Cost
Manufacturers depend on supply chains to reliably deliver materials to assembly
plants to avoid material shortages that would shut down production.
Decreases Total Supply Chain Cost

Manufacturers and retailers depend on supply chain managers to design networks that
meet customer service goals at the least total cost. Efficient supply chains enable a firm to
be more competitive in the market place.
1.5.3 Improve Financial Position:
Increases Profit Leverage
Firms value supply chain managers because they help control and reduce supply
chain costs. This can result in dramatic increases in firm profits.
Decreases Fixed Assets
Firms value supply chain managers because they decrease the use of large fixed
assets such as plants, warehouses and transportation vehicles in the supply chain. If
supply chain experts can redesign the network to properly serve U.S. customers from six
warehouses rather than ten, the firm will avoid building four very expensive buildings.
Increases Cash Flow

Firms value supply chain managers because they speed up product flows to
customers. For example, if a firm can make and deliver a product to a customer in 10
days rather than 70 days, it can invoice the customer 60 days sooner.

1.5.4 Ensure Human Survival:

SCM Helps Sustains Human Life
Humans depend on supply chains to deliver basic necessities such as food and
water. Any breakdown of these delivery pipelines quickly threatens human life. For

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example, in 2005, Hurricane Katrina flooded New Orleans, LA leaving the residents
without a way to get food or clean water. As a result, a massive rescue of the inhabitants
had to be made. During the first weekend of the rescue effort, 1.9 million meals and 6.7
million liters of water were delivered.
SCM Improves Human Healthcare
Humans depend on supply chains to deliver medicines and healthcare. During a
medical emergency, supply chain performance can be the difference between life and
death. For example, medical rescue helicopters can save lives by quickly transporting
accident victims to hospitals for emergency medical treatment. In addition, the medicines
and equipment necessary for treatment will be available at the hospital as a result of
excellent supply chain execution
SCM Protects Humans from Climate Extremes
Humans depend on an energy supply chain to deliver electrical energy to homes
and businesses for light, heat, refrigeration and air conditioning. Logistical failure (a
power blackout) can quickly result in a threat to human life. For example, during a
massive East Coast ice storm in January 1998, 80,000 miles of electrical power lines fell
resulting in no electricity for 3,200,000 Montreal, Quebec residents. Due to extreme cold,
30 died and 25% of all Quebec residents left home to seek heated shelter. In addition,
economic costs included $3 billion in lost business, $1 billion in home damage and $1
billion in government expenditures.
1.5.5 Improve Quality of Life:
Foundation for Economic Growth
Societies with a highly developed supply chain infrastructure (modern interstate
highway system, vast railroad network, numerous modern ports and airports) are able to
exchange many goods between businesses and consumers quickly and at low cost. As a
result, the economy grows. In fact, the one thing that most poor nations have in common
is no or a very poorly developed supply chain infrastructure.
Improves Standard of Living
Societies with a highly developed supply chain infrastructure (modern interstate
highway system, vast railroad network, numerous modern ports and airports) are able to
exchange many goods between businesses and consumers quickly and at low cost. As a
result, consumers can afford to buy more products with their income thereby raising the
standard of living in the society. For instance, it is estimated that supply chain costs make
up 20% of a product‟s cost in the U.S. but 40% of a product‟s cost in China. If transport
damage is added in, these costs make up 60% of a product‟s cost in China. The high

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Chinese supply chain cost is a major impediment to improving the standard of living for
Chinese citizens. Consequently, China has embarked on a massive effort to develop its
infrastructure.

Job Creation
Supply chain professionals design and operate all of the supply chains in a society
and manage transportation, warehousing, inventory management, packaging and logistics
information. As a result, there are many jobs in the supply chain field.
Opportunity to Decrease Pollution
Supply chain activities require packaging and product transportation. As a by-
product of these activities, some unwanted environmental pollutants such as cardboard
waste and carbon dioxide fuel emissions are generated. For example, paper and
paperboard accounted for 34% of U.S. landfill waste in 2005. Only 50% of the 84 million
tons of paper and paperboard waste were recycled. Also, carbon dioxide emissions from
transportation accounted for 33% of total U.S. CO2 emissions in 2005. As designers of
the network, supply chain professionals are in a key position to develop more sustainable
processes and methods.
Opportunity to Decrease Energy Use
Supply chain activities involve both human and product transportation. As a by-
product of these activities, scarce energy is depleted. For example, currently
transportation accounts for 30% of world energy use and 95% of global oil consumption.
As designers of the network, supply chain professionals have the role of developing
energy-efficient supply chains that use fewer resources.
Citizens of a country depend on military logistics to defend their way of life from those
who seek to end it. Military logisticians strategically locate aircraft, ships, tanks, missiles
and other weapons in positions that provide maximum security to soldiers and other
citizens. Also, superior logistics performance yields military victory. For example, the B-
2 Stealth Bomber is able to deliver bombs to target without being detected by enemy
radar.
Protects Delivery of Necessities
Citizens of a country depend on supply chain managers to design and operate
food, medicine and water supply chains that protect products from tampering.
Sophisticated packaging techniques, state of the art surveillance cameras, global
positioning systems and RFID inventory tracking are some of the methods used to deter
terrorists from accessing these vital logistics systems.

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 Benefits of Supply Chain:
 Lower costs
 Improved quality
 Higher profit margins
  Creation of better facilities for manufacturing, product design research.
 Better customer service
 Efficient manufacturing
 Better trust among the partners leading to win-win

1.6 DECISION PHASES IN A SUPPLY CHAIN:

Successful supply chain management requires many decisions relating to the flow
of information, product, and funds. These decisions fall into three categories or phases,
depending on the frequency of each decision and the time frame over which a decision
phase has an impact.
1.6.1 Supply Chain Strategy or Design
A company decides how to structure/design the supply chain over the next several
years. The company decides about the configuration of the supply chain, the resource
allocation among the stages and the processes to be performed by each stage.
Strategic Decisions include:
 Outsourcing decision
 Location and Capacities of Production
  Warehousing Facilities
 Modes of transportation
 Type of information system
The design decisions are made for a long term and are very expensive to modify
and hence when companies make these decisions, they must take into account
uncertainty in anticipated market conditions over the next few years
1.6.2 Supply Chain Planning
Time frame is a quarter to one year. Therefore, the supply chain‟s configuration
determined in the strategic phase is fixed. The configuration establishes constraints
within which planning must be done. Planning establishes parameters within which a
supply chain will function over a specified period of time. Companies start the planning
phase with a forecast for the coming year of demand in different markets. Planning
includes decisions regarding

 Which Market will be supplied from which location

 Subcontracting of manufacturing
 Inventory policies
 Timing and size of marketing
 Price promotions
Given a shorter time horizon and better forecasts than the design phase, companies in the
planning phase try to incorporate any flexibility built into the supply chain in the design

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 phase and exploit it to optimize performance. As a result of the planning phase,
companies define a set of operating policies that govern short-term operations.

1.6.3 Supply Chain Operation

The time horizon here is weekly or daily, and during this phase companies make
decisions regarding individual customer orders. Goal is to handle incoming customer
orders in the best possible manner. This phase includes the following decisions
 Allocation of inventory or production to individual orders
 Setting a date that an order is to be filled
 Generating pick lists at a warehouse
  Allocation of order to a particular shipping mode and shipment
 Setting delivery schedules of trucks
 Placement of replenishment orders
Given the constraints established by the configuration and the planning policies, the
goal during the operation phase is to exploit the reduction of uncertainty and optimize
performance

1.7 PROCESS VIEWS OF A SUPPLY CHAIN:

A supply chain is a sequence of processes and flows that take place within and
between different stages and combine to fill a customer need for a product. There are two
different ways to view the processes performed in a supply chain – Cycle view and
Push/Pull view
Customer
Customer
Order Cycle Pull

Retailer
Replenishment
Cycle

Distributor

Manufacturing
Cycle
Push
Manufacturer
Procurement
Cycle
Supplier

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1.7.1. Cycle View of Supply Chain Processes:
The processes in a supply chain are divided into a series of cycles, each
performed at the interface between two successive stages of a supply chain.
A cycle view of the supply chain clearly defines the processes involved and the
owners of each process. This view is very useful when considering operational decisions
because it specifies the roles and responsibilities of each member of the supply chain and
the desired outcome for each process.

Customer
Customer Order

Retailer
Replenishment

Distributor

Manufacturing

Manufacturer
Procurement
Supplier
Supply Chain processes can be broken down into the following four process cycles.

o Customer order cycle

o Replenishment cycle
o Manufacturing cycle
o Procurement cycle

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Goals at each stage
• Buyer
– Ensure availability if the product
– Achieve economies of scale in ordering
– Reduce the cost of receiving the order
• Supplier
– Forecast customer orders
– Ensure On time delivery
– Reduce cost of receiving an order
– Improve efficiency and accuracy of order fulfillment

Important differences between cycles:

1. Demand: In the customer order cycle, the demand is uncertain. But in other
cycles, the demand can be predicted from the previous stages. Eg. The supplier
determines his demand from the manufacturers production schedule.
2. Scale of an order - Number and Size of the order. As we move from the
customer end to the supplier end, the number of the orders decreases while the size of
each order increases.
Each cycle consists of six sub-processes.

Supplier Stage markets

product

Buyer Stage places order

Supplier Stage receives

order

Supplier Stage supplies

order

Buyer Stage receives supply

Buyer returns reverse flows

to supplier or third party

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 1.7.1.1 Customer Order Cycle(Customer Chain)
The customer order cycle occurs at the customer/retailer interface and includes all
processes directly involved in receiving and filling the customer‟s order.
The customer initiates this cycle at a retailer site and the cycle primarily involves
filling customer demand. The retailer‟s interaction with the customer starts when the
customer arrives or contact is initiated and ends when the customer receives the order.
The processes involved in the customer order cycle include:
 Customer arrival
 Customer order entry
  Customer order fulfillment
 Customer order receiving

1.7.1.1.1 Customer Arrival

The term customer arrival refers to the customer‟s arrival at the location where he
has access to the products and makes a purchase decision. The starting point for any
supply chain is the arrival of a customer. Customer arrival can occur when
 The customer walks into a supermarket to make a purchase
 The customer calls a mail order telemarketing center
 The customer uses the Web or an electronic link

The goal is to facilitate the contact between the customer and the appropriate
product so that the customer‟s arrival turns into a customer order.
 At a supermarket, facilitating a customer order may involve managing customer
 flows and product displays.
 At a telemarketing center, it may mean ensuring that customers do not have to
wait on hold for too long. It may also mean having systems in place so that sales
 representatives can answer customer queries in a way that turns calls into orders.
 At a Web site, a key stem may be search capabilities with tools such as
personalization that allow customers to quickly locate and view products that may
interest them.
The objective of the customer arrival process is to maximize the conversion of
customer arrivals to customer orders.

1.7.1.1.2 Customer Order Entry

The term customer order entry refers to customers informing the retailer what
products they want to purchase and the retailer allocating products to customers.
 At a supermarket, order entry may take the form of customers loading all items
 that they intend to purchase onto their carts.
 At a telemarketing center or Web site, order entry may involve customers
informing the retailer of the items and quantities they selected.
The objective of the customer order entry process is to ensure that the order entry
is quick, accurate, and communicated to all other supply chain processes that are affected
by it.

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 1.7.1.1.3. Customer Order Fulfillment
During the process, the customer‟s order is filled and sent to the customer.
  At a supermarket, the customer performs this process.
 At a telemarketing center or Web site, this process generally includes picking the
order from inventory, packaging it, and delivering it to the customer.
All inventories will need to be updated, which may result in the initiation of the
replenishment cycle
The objective of the customer order fulfillment process is to get the correct orders
to customers by the promised due dates at the lowest possible cost.

1.7.1.1.4. Customer Order Receiving

During this process, the customer receives the order and takes ownership.
Records of this receipt may be updated and payment completed.
  At a supermarket, receiving occurs at the checkout counter.
 For a telemarketing center or Web site, receiving occurs when the product is
delivered to the customer.

1.7.1.2 Replenishment Cycle:

The replenishment cycle occurs at the retailer/distributor interface and includes all
processes involved in replenishing retailer inventory. It is initiated when a retailer places
an order to replenish inventories to meet future demand.
The replenishment cycle is similar to the customer order cycle except that the
retailer is now the customer.
The objective of the replenishment cycle is to replenish inventories at the retailer
at minimum cost while providing high product availability. The processes involved in the
replenishment cycle include:

 Retail order trigger

 Retail order entry
 Retail order fulfilment
 Retail order receiving

1.7.1.2.1 Retail Order Trigger.

As the retailer fills customer demand, inventory is depleted and must be
replenished to meet future demand. A key activity the retailer performs during the
replenishment cycle is to formulate replenishment or ordering policy that triggers an
order from the previous stage.
The objective when setting replenishment order triggers is to maximize
profitability by ensuring economies of scale and balancing product availability and the
cost of holding inventory. The outcome of the retail order trigger process is the
generation of a replenishment order that is ready to be passed on to the distributor or
Manufacturer

1.7.1.2.2. Retail Order Entry

This process is similar to customer order entry at the retailer. The only difference
is that the retailer is placing the order that is conveyed to the distributor. This may be

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 done electronically or by some other medium. Inventory or production is then allocated to
the retail order.
The objective of the retail order entry process is that an order be entered
accurately and conveyed quickly to all supply chain processes affected by the order.

1.7.1.2.3. Retail Order Receiving

Once the replenishment order arrives at a retailer, the retailer must receive it
physically and update all inventory records.
This process involves
 Product flow from the distributor to the retailer
 Information updates at the retailer and
 Flow of funds from the retailer to the distributor
The objective of the retail order receiving process is to update inventories and
displays quickly and accurately at the lowest possible cost.

1.7.1.3. Manufacturing Cycle(Manufacturer Chain)

The manufacturing cycle typically occurs at the distributor/manufacturer (or
retailer/manufacturer) interface and includes all processes involved in replenishing
distributor (or retailer) inventory.
The manufacturing cycle is triggered by
 Customer orders or
  Replenishment orders from a retailer or distributor or
 Forecast of customer demand and current product availability in the
manufacturer‟s finished-goods warehouse

 Order arrival from the finished-goods warehouse, distributor, retailer, or

 customer
 Production scheduling
 Manufacturing and shipping
 Receiving at the distributor, retailer, or customer
1.7.1.3.1 Order Arrival
During this process, a finished-goods warehouse or distributor sets a
replenishment order trigger based on the forecast of future demand and current product
inventories. The resulting order is then conveyed to the manufacturer. In some cases the
customer or retailer may be ordering directly from the manufacturer. In other cases a
manufacturer may be producing to stock a finished-products warehouse. In the latter
situation, the order is triggered based on product availability and a forecast of future
demand. This process is similar to the retail order trigger process in the replenishment
cycle.
1.7.1.3.2 Production Scheduling
This process is similar to the order entry process in the replenishment cycle where
inventory is allocated to an order. During the production scheduling process, orders (or
forecasted orders) are allocated to a production plan.

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 The objective of the production scheduling process is to maximize the proportion
of order filled on time while keeping costs down.
1.7.1.3.3 Manufacturing and Shipping
This process is equivalent to the order fulfillment process described in the
replenishment cycle. During the manufacturing phase of the process, the manufacturer
produces to the production schedule. During the shipping phase of this process, the
product is shipped to the customer, retailer, distributor, or finished-product warehouse.
The objective of the manufacturing and shipping process is to create and ship the
product by the promised due date while meeting quality requirements and keeping costs
down.
1.7.1.3.4 Receiving
In this process, the product is received at the distributor, finished-goods
warehouse, retailer, or customer and inventory records are updated. Other processes
related to storage and fund transfers also take place.

1.7.1.4 Procurement Cycle (Supplier Chain)

The procurement cycle occurs at the manufacturer/supplier interface and includes
all processes necessary to ensure that materials are available for manufacturing to occur
according to schedule.
During the procurement cycle, the manufacturer order components from suppliers
that replenish the component inventories. The relationship is quite similar to that between
a distributor and manufacturer with one significant difference – In case of
retailer/distributor, product orders are triggered by uncertain customer demand, while
component orders can be determined precisely from the manufacturers production
schedule. Thus it is important that suppliers be linked to the manufacturer„s production
schedule.
In practice, there may be several tiers of suppliers, each producing a component
for the next tier. A similar cycle would then flow back from one stage to the next.
1.7.2. Push/Pull View:
The processes are divided into two categories depending on whether they are
executed in response to a customer order or in anticipation of customer orders. Pull View
of Supply Chain Processes:
o Execution is initiated in response to customer order.
o May also be referred to as reactive processes because they react to customer
demand.
o Pull processes operate in an environment in which customer demand is
known. Push View of Supply Chain Processes:
o Execution is initiated in anticipation of customer orders.
o May also be referred to as speculative processes because they respond tospeculated
demand rather than actual demand.
o Push processes operate in an uncertain environment in which customer demand
isnot yet known.

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 Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PULL

Customer
Order Arrives

Situation 1:
Make – To – Stock:
o All processes in the customer order cycle are executed after the customer order
arrives.
o Therefore, all processes that are part of customer order cycle are pull processes. o
Order is fulfilled from product in inventory that is built up in anticipation of
customer orders.
o The next process is replenishment of the shelves.
o The goal of replenishment cycle is to ensure product availability when a
customerorder arrives.
o Therefore, all processes in the replenishment cycle, manufacturing cycle
andprocurement cycle are pull processes.
Situation 2:
Build – To – Order:

o Here, the arrival of a customer order triggers production of the product.

o The manufacturing cycle thus becomes the part of the customer order fulfillment
process in the customer order cycle.
o Therefore, all processes in the customer order cycle and manufacturing cycle are
push processes.
o However, the procurement of raw material can‟t happen after the customer places
an order.
o Therefore, all processes in the procurement cycle are pull processes as they are in
response to a forecast.

BA5030-Supply chain Management 19

 Thus, a push/pull view of the supply chain is very useful when considering
strategic decisions relating to a supply chain design.

The goal is to identify an appropriate push/pull boundary such that the supply
chain can match supply and demand effectively.

1.8 SUPPLY CHAIN MACRO PROCESSES IN A FIRM:

Within a firm, all supply chain activities belong to one of the three macro processes given
below. The three macro processes manage the flow of information, product and funds
required to generate, receive and fulfill a customer request.
1. Customer Relationship Management
2. Internal Supply Chain Management
3. Supplier Relationship Management
Integration among the three macro processes is crucial for successful supply chain
management.
Customer Relationship Management:
o All processes that focus on the interface between the firm and its customers.
o The CRM macro process aims to generate customer demand and facilitate the
placement and tracking of orders.

BA5030-Supply chain Management 20

 Internal Supply Chain Management:
o All processes those are internal to the firm.
o The ISCM macro process aims to fulfill demand generated by the CRM process in
a timely manner and at the lowest possible cost.
Supplier Relationship Management:
o All processes that focus on the interface between the firm and its suppliers.
o The SRM macro process aims to arrange for and manage supply sources for
various goods and services.

1.8 SUPPLY CHAIN STRATEGY

1.8.1 Competitive Strategy:

A company‟s competitive strategy is the set of customer needs that it seeks to satisfy
through its products and services, relative to its competitors.
Wal-Mart‟s Competitive Strategy – High availability of a variety of products of
reasonable quality at low prices.
The given below are few of the functional strategies that form part of the competitive
strategy of a company:
o Product Development Strategy
o Marketing and Sales Strategy
o Supply Chain Strategy

Value Chain of a Company:

Finance, Accounting, Information Technology, Human Resources

New Product Marketing Operations Distribution Service

Development and Sales

 The value chain emphasizes the close relationship between the functional
 strategies within a company.
 Each function is crucial if a company is to satisfy customer needs profitably.
  The various functional strategies cannot be formulated in isolation.
 They are closely intertwined and must fit and support each other if a company is
to succeed.

Strategic Fit: It means that both the competitive and supply chain strategies have aligned
goals.

It refers to consistency between the customer priorities that the competitive

hopes to satisfy and the strategysupply chain capabilities that the supply chain strategy
build. aims to

BA5030-Supply chain Management 21

 1.8.2 Achieving Strategic Fit:
Step 1: Understanding the Customer and Supply Chain Uncertainty
Understanding Customers

o The quantity of the Product needed in each lot – Eg. A customer might buy 1 lt of
Ghee during a festival while he‟ll be buying 100 gms during the remaining part of
the year.
o The response time that customers are willing to tolerate – Eg. If a tap is broken a
customer will need the necessary items at an acceptable quality to repair it
immediately.
o The variety of products needed – Eg. A customer entering a restaurant expects
different varieties of food.
o The service level required – Eg. A customer visits a departmental store expecting
the availability of branded products.
o The price of the product – Eg. A customer purchasing a product in an emergency
situation is price insensitive as against a customer who can postpone the purchase
o The desired rate of innovation in the product – Eg. Customers land up in an
apparel store looking for a new design every time.

o Demand Uncertainty – is the uncertainty of customer demand for a product

o Implied demand uncertainty – is demand uncertainty due to the portion of demand
that the supply chain is targeting, not the entire demand.
Implied demand uncertainity increases when the
 Range of quantity required increases
 Response time is low
 Variety of products required increases
 Service level increases
  Number of channels through which the product may be acquired increases
 Rate of innovation is high
Uncertainty from the customer and the supply chain can be combined and mapped on the
implied uncertainty spectrum.

1.8.3 The Implied Uncertainty Spectrum:

Predictable Predictable supply Highly Uncertain

supply and and uncertain demand supply and
demand (or) uncertain supply demand
And predictable demand
(or) somewhat uncertain
demand and supply

Salt at a Supermarket An existing automobile AnewCommunication

Model Device

BA5030-Supply chain Management 22

 Step 2: Understanding the Supply Chain Capabilities
 Like customer needs, supply chains have many different characteristics that
influence their responsiveness and efficiency
Supply Chain Responsiveness: It includes the supply chain‟s ability to do the following:
 Respond to wide range of quantities demanded
 Meet short term lead times
  Handle a large variety of products
 Build highly innovative products
 Meet a high service level
 Handle supply uncertainty
The more of these abilities a supply chain has, the more responsive it is.
Supply Chain Efficiency: It is the inverse of the cost of making and delivering a product
to the customer. Increase in cost lowers efficiency.

1.8.4 Cost – Responsiveness Efficient Frontier:

Responsiveness

High

Low

Low Cost High

For a given level of high responsiveness, the cost can not go beyond the lowest point as
shown in the above graph.

1.8.5 The Responsive Spectrum:

Highly Somewhat Somewhat Highly

Efficient Efficient Responsive Responsive

Any integrated A traditional Most Automotive Reliance Fresh

Plant make – to stock production
Manufacturing

BA5030-Supply chain Management 23

Step 3: Achieving Strategic Fit: This step aims to match the degree of responsiveness of
the supply chain with the implied uncertainty from demand and supply. To face a high
level of uncertainty a highly responsive supply chain has to be building while a efficient
(cost effective) supply chain would be enough to handle low level of uncertainty. The
supply chain design and the functional strategies within the firm must support the supply
chain‟s level of responsiveness.

1.9 COMPARISON OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS

Bases Efficient Responsive

Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow
postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense Aggressively reduce even if
of greater cost costs are significant

Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost Greater reliance on
Modes responsive (fast) modes

1.10 ENABLERS/ DRIVERS OF SUPPLY CHAIN PERFORMANCE

• Facilities
– places where product is stored, assembled, or fabricated
– production sites and storage sites
• Inventory
– raw materials, WIP, finished goods within a supply chain
– inventory policies
• Transportation
– moving inventory from point to point in a supply chain
– combinations of transportation modes and routes
• Information
– data and analysis regarding inventory, transportation, facilities throughout
the supply chain
– potentially the biggest driver of supply chain performance
• Sourcing
– Who is to perform a particular activity
– In house vs Outsourcing
• Pricing
– Amount charged for the product offered in the supply chain

BA5030-Supply chain Management 24

A Framework for Structuring Drivers

Competitive Strategy

Supply Chain Strategy

Supply chain structure

Efficiency Responsiveness

Facilities Inventory Transportation

Information Sourcing Pricing

1.10.1 FACILITIES

1.10.1.1 Role in the supply chain

– the “where” of the supply chain

– manufacturing or storage (warehouses)
1.10.1.2 Role in the competitive strategy
– economies of scale – Product is manufactured or stored at only one location
(efficiency priority)
– larger number of smaller facilities (responsiveness priority)
1.10.1.3 Components of Facilities Decisions:
• Role of the production facility:
– Flexible vs. Dedicated capacity
• Flexible production facilitates production of many types of
products, hence would support high level of responsiveness. less
efficient
• Dedicated– limited no. of products – more efficient
– Product vs. Functional focus
• Product – Different functions to produce one product
• Function – Only few functions to produce many products
• Role of storage facility:
– Storage vs. cross-docking
• Location:
BA5030-Supply chain Management 25
 – centralization (efficiency) vs. decentralization (responsiveness)
– other factors to consider – quality and cost of workers, macroeconomic
factors, availability and cost of infrastructure, proximity to customers)
• Capacity:
– Excess capacity -> flexible utilization -> less efficiency
– High utilization -> difficulty in responding to demand fluctuations
1.10.1.4 Facility related Metrics:
Capacity
Utilization
Production cost per unit
Theoretical flow/cycle time of production
Actual average flow
Flow time efficiency
Product variety
Processing/setup/down/idle time
Quality losses
Average production batch size
Production service level

1.10.2 INVENTORY:

1.10.2.1 Role in the Supply Chain:

Inventory exists because of a mismatch between supply and demand.
o Source of cost and influence on responsiveness
o Impact on material flow time( time elapsed between when material enters the
supply chain to when it exits the supply chain
o Throughput, rate at which sales to end consumers occur
o I = DT (Little‟s Law)
I = inventory; D = throughput; T = flow time
Example:
Inventory and throughput are “synonymous” in a supply chain
Role in Competitive Strategy:
If responsiveness is a strategic competitive priority, a firm can locate larger
amounts of inventory closer to customers
If cost is more important, inventory can be reduced to make the firm more
efficient.

1.10.2.2 Components of Inventory Decisions:

Cycle inventory
Average amount of inventory used to satisfy demand between shipments
Depends on lot size
Safety inventory
inventory held in case demand exceeds expectations
costs of carrying too much inventory versus cost of losing sales
Seasonal inventory
inventory built up to counter predictable variability in demand

BA5030-Supply chain Management 26

 cost of carrying additional inventory versus cost of flexible production
Overall trade-off: Responsiveness versus efficiency

Inventory related metrics:

Cash-to-cash cycle time
Average inventory
Inventory turns
Products with more than a specified number of days of inventory
Average replenishment batch size
Average safety inventory
Seasonal inventory
Fill rate (order/demands met on time)
Fraction of time out of stock (Zero inventory)
Obsolete inventory

1.10.3 TRANSPORTATION:
1.10.3.1 Role in the Supply Chain
Moves the product between stages in the supply chain
Impact on responsiveness and efficiency
Faster transportation allows greater responsiveness but lower efficiency
Also affects inventory and facilities
1.10.3.2 Role in Competitive Stratergy:
Allows a firm to adjust the location of its facilities and inventory to find the
right balance between responsiveness and efficiency
1.10.3.3 Components of Transportation Decisions:
Mode of transportation: air, truck, rail, ship, pipeline, electronic transportation
vary in cost, speed, size of shipment, flexibility, Route and network selection
Route: path along which a product is shipped Network: collection of locations
and routes
In-house or outsource
1.10.3.4 transportation related Metrics:
 Average inbound transportation cost
 Average income shipment size
 Average inbound transportation cost per shipment
 Average outbound transportation cost
  Average outbound shipment size
 Average outbound transportation cost per shipment
 Fraction transported by mode
Overall trade-off: Responsiveness versus efficiency
The cost of transporting a given product (efficiency) and the speed with
which that product is transported (responsiveness)
Using fast modes of transport raises responsiveness and transportation cost but
lowers the inventory holding cost

BA5030-Supply chain Management 27

 1.10.4 SOURCING:
Set of business processes required to purchase goods and services in a supply
chain
  
Supplier selection, single vs. multiple suppliers, contract negotiation

  they affect the level of efficiency and
Sourcing decisions are crucial because
responsiveness in a supply chain
  
In-house vs. outsource decisions- improving efficiency and responsiveness
 
1.10.4.1 Role in SC:
  
Set of business processes required to purchase goods and services in a supply chain
 
Supplier selection, single vs. multiple suppliers, contract negotiation

1.10.4.2 Role in the Competitive Strategy:


 they affect the level of efficiency and
Sourcing decisions are crucial because
responsiveness in a supply chain
  
In-house vs. outsource decisions- improving efficiency and responsiveness
1.10.4.3 Components of Sourcing Decisions:
 o In-house versus outsource decisions
o Supplier evaluation and selection
 o Procurement process
 o Overall trade-off: Increase the supply chain profits
1.10.4.4 Sourcing related metrics:
 Days payable outstanding 
Average purchase price 
Range of purchase price 
 Average purchase quantity
 Fraction of on time deliveries 
 Supply quality
 Supply lead time 
Supplier reliability

1.10.5 INFORMATION:
The connection between the various stages in the supply chain – allows coordination
between stages
o Crucial to daily operation of each stage in a supply chain – e.g., production
scheduling, inventory levels
oAllows supply chain to become more efficient and more responsive at the same time
(reduces the need for a trade-off)
1.10.5.1 Components of
Information: Decisions:
Push (MRP) versus pull (demand information transmitted quickly throughout the supply
chain)
 Coordination and information sharing
  Forecasting and aggregate planning
 Enabling technologies–EDI–Internet–ERP systems–Supply Chain Management
software–RFID

BA5030-Supply chain Management 28

  Overall trade-off: Responsiveness versus efficiency

1.10.5.2 Information-related metrics :

 Forecast horizon
 Frequency update
  Forecast error
 Seasonal factors
 Variance from plan
 Ratio of demand variability to order variability

1.10.6 PRICING:
Pricing determines the amount to charge customers in a supply chain
Pricing strategies can be used to match demand and supply
1.10.6.1 Role in Competitive Strategy:
Firms can utilize optimal pricing strategies to improve efficiency
and responsiveness
Low price and low product availability; vary prices by response times Example :
Amazon.com
1.10.6.2 Components of Pricing Decisions:
 Pricing and economies of scale
 Everyday low pricing versus high-low pricing
  Fixed price versus menu pricing
 Overall trade-off: Increase the firm profits
1.10.6.3 Pricing related metrics:
 Profit margin.
 Days sales outstanding
 Incremental fixed cost per unit
 Incremental variable cost per unit
  Average sales price
 Average order size
 Range of sale price
 Range of periodic sales

BA5030-Supply chain Management 29