Supply chain Management (18ME653)

Module 1
Syllabus:
Introduction: Supply Chain – Fundamentals –Evolution- Role in Economy -
Importance - Decision Phases – Supplier Manufacturer-Customer chain. -
Enablers/ Drivers of Supply Chain Performance. Supply Chain strategy -
Supply Chain Performance Measures.

INTRODUCTION

What is Supply Chain Management?

A supply chain consists of all parties involved, directly or indirectly, in

fulfilling a customer request. The supply chain includes not only the
manufacturer and suppliers, but also transporters, warehouses, retailers,
and even customers themselves. Within each organization, such as a
manufacturer, the supply chain includes all functions involved in receiving
and filling a customer request. These functions include, but are not limited
to, new product development, marketing, operations, distribution, finance,
and customer service.

The supply chain encompasses all activities involved in the transformation of

goods from the raw material stage to the final stage, when the goods and
services reach the end customer. Supply chain management involves
planning, design and control of flow of material, information and finance
along the supply chain to deliver superior value to the end customer in an
effective and efficient manner.

Supply Chain Fundamentals

Supply chain management, as we understand it today, represents the
confluence of at least three main streams of knowledge and practical
experience of the business world, spanning almost 60 years. The fusion of
these streams into one powerful movement, supply chain management,
which is sweeping across the present-day industrial world has been brought
about by intense competition characteristic of contemporary markets. It is,
therefore, appropriate that a discussion on supply chain management is
preceded by a brief understanding of contributing disciplines. The supply

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chain is how a company turns raw materials into finished goods and services
for the customer. It starts with the harvesting of the raw material. The
commodity could be crops, animals, timber, gold, or other natural resources.
The commodity then goes to the manufacturer. That's when it becomes a
finished product. There can be several steps in this process and they can
involve locations in several different countries. The finished product goes to
one of three places: a wholesaler, a retailer, or directly to the consumer.

These streams include business processes and managerial practices, which

have evolved somewhat unconnectedly, if not entirely independently, in the
fields of operations management, industrial engineering, and physical
distribution. In the course of their development, these processes and
practices have absorbed several allied and subsidiary functions as well as
activities, and adopted various successful business innovations.

The three principal streams are:

 Sourcing, procurement, and supply management

 Materials management
 Logistics and distribution

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THE OBJECTIVE OF A SUPPLY CHAIN

The objective of every supply chain should be to maximize the overall value
generated. The value (also known as supply chain surplus) a supply chain
generates is the difference between what the value of the final product is to
the customer and the costs the supply chain incurs in filling the customer’s
request.
Supply Chain Surplus = Customer Value – Supply Chain Cost

 The value of the final product may vary for each customer and can be
estimated by the maximum amount the customer is willing to pay for it.
 The difference between the value of the product and its price remains with
the customer as consumer surplus.
 The rest of the supply chain surplus becomes supply chain profitability,
the difference between the revenue generated from the customer and the
overall cost across the supply chain.
 Supply chain profitability is the difference between the revenue generated
from the customer and the overall cost across the supply chain.
 Supply chain profitability is the total profit to be shared across all supply
chain stages and intermediaries.
 The higher the supply chain profitability, the more successful is the
supply chain.
 Supply chain success is measured in terms of supply chain profitability
and not in termsof the profits at an individual stage
 Revenue is from customer – positive cash flow
 All other cash flows are simply fund exchanges that occur within the
supply chain given that different stages have different owners
 All flows of information, product or funds generates costs within the
supply chain.
 Supply chain management involves the management of flows between and
among stages in a supply chain to maximize total supply chain profitability.

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Evolution
The evolution of supply chain management has been a gradual process. Over
the last century, there have been three major revolutions in the field of
supply chain management and we examine each of them in the context of
the broader evolution in the economic and technological environment.
Consider the following statement made by the chief executive of an
automobile firm:

Our aim is always to arrange the material and machinery and to simplify the
operations so that practically no orders are necessary. Our finished
inventory is in transit. So is most of our raw material inventory. Our
production cycle is about eighty-one hours from the mine to the finished
machine (automobile) in the freight car.

It is clear from this statement that this firm had a well-integrated supply
chain in place that allowed it to minimize cost and maximize asset
productivity. Most people, including students and business executives, are
surprised to learn that the company that achieved this, did so almost a
century ago. Indeed, this statement came not in the 1960s or 1970s. Rather,
Henry Ford achieved this fine balance in the 1910s with the Ford Motor
Company. Clearly, this achievement set the standard for all managers the
world over.

If such a well-integrated and efficient supply chain was achieved a century

ago, then the obvious question is why are managers still worrying about it
and, more pertinently, why are you reading this book? Before we look for the
answer to this question let us take a look at the evolution of supply chain
management over the past century and try to understand of the key
dimensions over which supply chains have evolved over the past century.

There have been three major revolutions along this journey, and we examine
each of them in the context of the broader evolution in the economic
environment.

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1. The First Revolution (1910–1920): Vertical Integrated

Firms Offering Low Variety of Products.

The first major revolution was staged by the Ford Motor Company where they
had managed to build a tightly integrated chain. The Ford Motor Company
owned every part of the chain - right from the timber to the rails. Through its
tightly integrated chain, it could manage the journey from the iron ore mine
to the finished automobile in 81 hours.
However, as the famous saying goes, the Ford supply chain would offer any
color, as long as it was black; and any model, as long as it was Model T. Ford
innovated and managed to build a highly efficient, but inflexible supply
chain that could not handle a wide product variety and was not sustainable
in the long run.

General Motors, on the other hand, understood the demands of the market
place and offered a wider variety in terms of automobile models and colors.
Ford’s supply chain required a long time for set-up changes and,
consequently, it had to work with a very high inventory in the chain.

Till the second supply chain revolution, all the automobile firms in Detroit
were integrated firms. Even traditional firms in India, like Hindustan Motors,
were highly integrated firms where the bulk of the manufacturing was done
in- house.

2. The Second Revolution (1960–1970): Tightly Integrated

Supply Chains Offering Wide Variety of Products.

Towards the end of the first revolution, the manufacturing industry saw
many changes, including a trend towards a wide product variety. To deal
with these changes, firms had to restructure their supply chains to be
flexible and efficient. The supply chains were required to deal with a wider
product variety without holding too much inventory. The Toyota Motor
Company successfully addressed all these concerns, thereby ushering in the
second revolution.

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The Toyota Motor Company came up with ideas that allowed the final
assembly and manufacturing of key components to be done in-house. The
bulk of the components were sourced from a large number of suppliers who
were part of the keiretsu system. Keiretsu refers to a set of companies with
interlocking business relationships and shareholdings.

The Toyota Motor Company had long-term relationships with all the
suppliers. These suppliers were located very close to the Toyota assembly
plants. Consequently, set-up times, which traditionally used to take a couple
of hours, were reduced to a couple of minutes.

This combination of low set-up times and long-term relationships with

suppliers was the key feature that propelled the second revolution - and it
was a long journey from the rigidly integrated Ford supply chain. The
principles followed by Toyota are more popularly known as lean production
systems.

3. The Third Revolution (1995–2020): Virtually Integrated

Global Supply Networks Offering Customized Products and
Services.

Technology, especially information technology, which is evolving faster than

enterprises can find applications for some of the innovations, is the fuel for
the third revolution in supply chain.

It will probably take at least couple of years before we can fully understand
the IT-enabled model that has emerged and begin to apply it to all industries.
However, we have enough information to get a reasonably good
understanding of the contours of the third revolution.

We can understand the key characteristics of the third revolution using the
example of Dell computers (Customized product), Apple Inc.(Revolutionized
used experience) and Bharti Airtel(strategic outsourcing and partnerships
with global partners for these core activities).

The first is a product company, the second combines product and service,
and third is a pure service organization. In each of these organizations, we
can see different aspects of the third revolution.

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Role in Economy

The growth of global supply chains has changed the distribution of incomes
across countries. Participation in these supply chains, initiated by the
successful completion of low value-added manufacturing tasks, contributed
to industrialization and high rates of economic growth in several Asian
developing economies.

Manufacturing managers decide where to locate the company based on the

costs of production. That's led to a lot of jobs outsourcing in technology to
India and China. Many call - centers have outsourced to India and the
Philippines.

Natural disasters are becoming an increasing threat that can disrupt any
part of the supply chain. The United Nations Refugee Agency reported their
frequency has doubled in the last 20 years due to global warming. The
impact on local productivity can last decades after an event.
If a disaster is bad enough, it can slow global growth. In 2011, Japan's
earthquake and the resultant tsunami created the most damage to the
world's supply of automobiles, electronics, and semiconductor equipment.
The wings, landing gears, and other major airline parts are also made in
Japan, so the quake disrupted the production of Boeing's 787 Dreamliner.
U.S. gross domestic product slowed in 2011 as 22 Japanese auto part
plants suspended production.

Efficient management of the supply chain can reduce costs, maximize

customer value, and maximize competitive advantage. It entails effective
coordination and control of linked sectors, departments, systems, and
organizations.

IMPORTANCE

There is a close connection between the design and management of supply

chain flows (product, information, and funds) and the success of a supply
chain. Walmart, Amazon, and Seven - Eleven Japan are examples of
companies that have built their success on superior design, planning, and
operation of their supply chain. In contrast, the failure of many online

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businesses, such as Webvan, can be attributed to weaknesses in their

supply chain design and planning.

In the past, customers were not very demanding and competition was not
really intense. As a result, firms could afford to ignore issues pertaining to
the supply chain. Today, firms that do not manage their supply chain will
incur huge inventory costs and eventually end up losing a lot of customers
because the right products are not available at the right place and time. The
following are the five major trends that have emerged to make supply chain
management a critical success factor in most industries.

a) Proliferation in product lines: Companies have realized that more and

more product variety is needed to satisfy the growing range of customer
tastes and requirements. This is evident from the fact that every time a
customer walks into a neighborhood store, he or she is bound to discover a
couple of items on the shelf that he or she had not seen during his or her
last visit and that he or she has more varieties to choose from now.

b) Shorter product life cycles: With increased competition, product life

cycles across all industries are becoming shorter. For example , technology
leaders like Apple works with a life cycle as short as 6 months.
Higher level of outsourcing: Firms increasingly focus on their core
activities and outsource non-core activities to other competent players.
Michael Dell, the CEO of Dell Computers, had mentioned that if his company
was vertically integrated, it would need five times as many employees and
would suffer from a drag effect.

c) Shift in power structure in the chain: In every industry, the entities

closer to customers are becoming more powerful. With increasing
competition, a steadily rising number of products are chasing the same retail
shelf space. Retail shelf space has not increased at the pace at which
product variety has increased. So there have been cases of retailers asking
for slotting allowance when manufacturers introduce new products in the
market place.

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d) Globalization of manufacturing: Over the past decade, tariff levels

have come down significantly. Many companies are restructuring their
production facilities to be at par with global standards. Unlike in the past,
when firms use to source components, produce goods and sell them locally,
now firms are integrating their supply chain for the entire world market.

The rise and subsequent fall of the bookstore chain “Borders” illustrates how
a failure to adapt its supply chain to a changing environment and customer
expectations hurt its performance. Dell Computer is another example of a
company that had to revise its supply chain design in response to changing
technology and customer needs.

Walmart has been a leader at using supply chain design, planning, and
operation to achieve success. From its beginning, the company invested
heavily in transportation and information infrastructure to facilitate the
effective flow of goods and information. Walmart designed its supply chain
with clusters of stores around distribution centers to facilitate frequent
replenishment at its retail stores in a cost-effective manner. Frequent
replenishment allows stores to match supply and demand more effectively
than the competition. Walmart has been a leader in sharing information and
collaborating with suppliers to bring down costs and improve product
availability. The results are impressive. In its 2013 annual report, the
company reported a net income of about $17 billion on revenues of about
$469 billion. These are dramatic results for a company that reached annual
sales of only $1 billion in 1980. The growth in sales represents an annual
compounded growth rate of more than 20 percent. Seven-Eleven Japan is
another example of a company that has used excellent supply chain design,
planning, and operation to drive growth and profitability. It has used a very
responsive replenishment system along with an outstanding information
system to ensure that products are available when and where customers
need them. Its responsiveness allows it to change the merchandising mix at
each store by time of day to precisely match customer demand. As a result,
the company has grown from sales of 1 billion yen in 1974 to almost 1.9
trillion yen in 2013, with profits in 2013 totaling 222 billion yen.

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The failure of many online businesses, such as Webvan and Kozmo, can be
attributed to their inability to design appropriate supply chains or manage
supply chain flows effectively. Webvan designed a supply chain with large
warehouses in several major cities in the United States, from which groceries
were delivered to customers’ homes. This supply chain design could not
compete with traditional supermarket supply chains in terms of cost.
Traditional supermarket chains bring product to a supermarket close to the
consumer using full truckloads, resulting in very low transportation costs.
They turn their inventory relatively quickly and let the customer perform
most of the picking activity in the store. In contrast, Webvan turned its
inventory marginally faster than supermarkets but incurred much higher
transportation costs for home delivery, as well as high labor costs to pick
customer orders. The result was a company that folded in 2001, within two
years of a very successful initial public offering. Dell is another example of a
company that enjoyed tremendous success based on its supply chain design,
planning, and operation but then had to adapt its supply chain in response
to shifts in technology and customer expectations. Between 1993 and 2006,
Dell experienced unprecedented growth of both revenue and profits by
structuring a supply chain that provided customers with customized PCs
quickly and at reasonable cost. By 2006, Dell had a net income of more than
$3.5 billion on revenues of just over $56 billion. This success was based on
two key supply chain features that supported rapid, low-cost customization.
The first was Dell’s decision to sell directly to the end customer, bypassing
distributors and retailers. The second key aspect of Dell’s supply chain was
the centralization of manufacturing and inventories in a few locations where
final assembly was postponed until the customer order arrived. As a result,
Dell was able to provide a large variety of PC configurations while keeping
low levels of component inventories.

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Decision Phases

Successful supply chain management requires many decisions relating to

the flow of information, product, and funds. Each decision should be made
to raise the supply chain surplus. These decisions fall into three categories
or phases, depending on the frequency of each decision and the time frame
during which a decision phase has an impact. As a result, each category of
decisions must consider uncertainty over the decision horizon.

1. Supply chain strategy or design: During this phase, a company

decides how to structure the supply chain over the next several years. It
decides what the chain’s configuration will be, how resources will be
allocated, and what processes each stage will perform. Strategic decisions
made by companies include whether to outsource or perform a supply chain
function in-house, the location and capacities of production and
warehousing facilities, the products to be manufactured or stored at various
locations, the modes of transportation to be made available along different
shipping legs, and the type of information system to be used. Pepsi Co Inc.’s
decision in 2009 to purchase two of its largest bottlers is a supply chain
design or strategic decision.

A firm must ensure that the supply chain configuration supports its strategic
objectives and increases the supply chain surplus during this phase. As the
PepsiCo CEO announced in a news release on August 4, “while the existing
model has served the system very well, the fully integrated beverage business
will enable us to bring innovative products and packages to market faster,
streamline our manufacturing and distribution systems and react more
quickly to changes in the marketplace.” Supply chain design decisions are
typically made for the long term (a matter of years) and are expensive to alter
on short notice. Consequently, when companies make these decisions, they
must take into account uncertainty in anticipated market conditions over the
following few years.

Strategic Changes are also underway in the Indian Generic Drugs industry
where the division between the Chronic Therapy and Acute Therapy range of
drugs is becoming sharper with more and more firms migrating from the

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later to the former. This is a strategic shift to avail higher profit margins
rather than operating in a highly competitive environment in the Acute
Therapy range where low-price leadership strategy seems to operate. Sun
Pharma, Doctor Reddy’s Laboratories Limited, Cipla, and Lupin have chosen
to concentrate on the chronic Therapy Range dealing in limited number of
drugs with high profit margins. This shift supports the belief that Low Price
Leadership Strategy has its limitations and cannot be sustained over
prolonged periods.

2. Supply chain planning: For decisions made during this phase, the time
frame considered is from a quarter to a year. Therefore, the supply chain’s
configuration determined in the strategic phase is fixed. This configuration
establishes constraints within which planning must be done. The goal of
planning is to maximize the supply chain surplus that can be generated over
the planning horizon given the constraints established during the strategic or
design phase.

Companies start the planning phase with a forecast for the coming year (or a
comparable time frame) of demand and other factors, such as costs and
prices in different markets. Planning includes making decisions regarding
which markets will be supplied from which locations, the subcontracting of
manufacturing, the inventory policies to be followed, and the timing and size
of marketing and price promotions.

For example, steel giant Arcelor-Mittal’s decisions regarding markets

supplied by a production facility and target production quantities at each
location are classified as planning decisions. In the planning phase,
companies must include uncertainty in demand, exchange rates, and
competition over this time horizon in their decisions.

Given a shorter time frame and better forecasts than in the design phase,
companies in the planning phase try to incorporate any flexibility built into
the supply chain in the design 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.

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3. Supply chain operation: The time horizon here is weekly or daily.

During this phase, companies make decisions regarding individual customer
orders. At the operational level, supply chain configuration is considered
fixed and planning policies are already defined. The goal of supply chain
operations is to handle incoming customer orders in the best possible
manner.

During this phase, firms allocate inventory or production to individual

orders, set a date by which an order is to be filled, generate pick lists at a
warehouse, allocate an order to a particular shipping mode and shipment,
set delivery schedules of trucks, and place replenishment orders. Because
operational decisions are being made in the short term (minutes, hours, or
days), there is less uncertainty about demand information.

Given the constraints established by the configuration and planning policies,

the goal during the operation phase is to exploit the reduction of uncertainty
and optimize performance. The design, planning, and operation of a supply
chain have a strong impact on overall profitability and success. It is fair to
state that a large part of the success of firms such as Walmart and Seven-
Eleven Japan can be attributed to their effective supply chain design,
planning, and operation.

Supplier - Manufacturer - Customer chain

In its simplest form, a supply chain is composed of a company and the

suppliers and customers of that company. This is the basic group of
participants that creates a simple supply chain. Extended supply chains
contain three additional types of participants.

First there is the supplier’s supplier or the ultimate supplier at the beginning
of an extended supply chain. Then there is the customer’s customer or
ultimate customer at the end of an extended supply chain.

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Finally, there is a whole category of companies who are service providers to

other companies in the supply chain. These are companies who supply
services in logistics, finance, marketing, and information technology.

In any given supply chain, there is some combination of companies who

perform different functions. There are companies that are producers,
companies that are distributors or wholesalers, companies that are
retailers, and companies or individuals that are the customers who are the
final consumers of a product. Supporting these four kinds of companies
there are other companies that are service providers providing a range of
needed services. In this post we’ll look at the four main participants in every
supply chain.

1. Producers: Producers or manufacturers are organizations that make a

product. This includes companies that are producers of raw materials and
companies that are producers of finished goods. Producers of raw
materials are organizations that mine for minerals, drill for oil and gas,
and cut timber. It also includes organizations that farm the land, raise
animals, or catch seafood. Producers of finished goods use the raw
materials and sub-assemblies made by other producers to create their
products.

2. Distributors: Distributors are companies that take inventory in bulk from

producers and deliver a bundle of related product lines to customers.
Distributors are also known as wholesalers. They typically sell to other
businesses and they sell products in larger quantities that an individual
consumer would usually buy. Distributors buffer the producers from
fluctuations in product demand by stocking inventory and doing much of
the sales work to find and service customers. For the customer,
distributors fulfill the “Time and Place” function – they deliver products
when and where the customer wants them.
 A distributor is typically an organization that takes ownership of
significant inventories of products that they buy from producers and sell
to consumers. In addition to product promotion and sales, other functions
the distributor performs are ones such as inventory management,
warehouse operations and product transportation as well as customer

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support and post sales service.

 A distributor can also be an organization that only brokers a product
between the producer and the customer and never takes ownership of that
product. This kind of distributor performs mainly the functions of product
promotion and sales. In both these cases, as the needs of customers evolve
and the range of available products changes, the distributor is the agent
that continually tracks customer needs and matches them with products
available.

3. Retailers: Retailers stock inventory and sell in smaller quantities to the

general public. This organization also closely tracks the preferences and
demands of the customers that it sells to. It advertises to its customers and
often uses some combination of price, product selection, service, and
convenience as the primary draw to attract customers for the products it
sells. Discount department stores attract customers using price and wide
product selection. Upscale specialty stores offer a unique line of products
and high levels of service. Fast food restaurants use convenience and low
prices as their draw.
4. Customers: Customers or consumers are any organization that purchase
and use a product. A customer organization may be an organization that
purchases a product in order to incorporate it into another product that
they in turn sell to other customers. Or a customer may be the final end
user of a product who buys the product in order to consume it.

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Enablers/ Drivers of Supply Chain Performance

The drivers of Supply chain performance are as follows:

1. Facilities are the actual physical locations in the supply chain network
where product is stored, assembled, or fabricated. The two major types of
facilities are production sites and storage sites. Decisions regarding the
role, location, capacity, and flexibility of facilities have a significant impact
on the supply chain’s performance. For example, in 2009, Amazon
increased the number of warehousing facilities (observe increase in
Property, plant and equipment, in Table 3-1) located close to customers to
improve its responsiveness. In contrast, Blockbuster tried to improve its
efficiency in 2010 by shutting down many facilities even though it reduced
responsiveness. Facility costs show up under property, plant and
equipment, if facilities are owned by the firm or under selling, general, and
administrative if they are leased.

2. Inventory encompasses all raw materials, work in process, and finished

goods within a supply chain. The inventory belonging to a firm is reported
under assets. Changing inventory policies can dramatically alter the
supply chain’s efficiency and responsiveness. For example, W.W. Grainger
makes itself responsive by stocking large amounts of inventory and
satisfying customer demand from stock even though the high inventory
levels reduce efficiency. Such a practice makes sense for Grainger because
its products hold their value for a long time. A strategy using high
inventory levels can be dangerous in the fashion apparel business where
inventory loses value relatively quickly with changing seasons and trends.
Rather than hold high levels of inventory, Spanish apparel retailer Zara
has worked hard to shorten new product and replenishment lead times. As
a result, the company is very responsive but carries low levels of inventory.
Zara thus provides responsiveness at low cost.

3. Transportation entails moving inventory from point to point in the supply

chain. Transportation can take the form of many combinations of modes
and routes, each with its own performance characteristics. Transportation
choices have a large impact on supply chain responsiveness and efficiency.

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For example, a mail-order catalog company can use a faster mode of

transportation such as FedEx to ship products, thus making its supply
chain more responsive, but also less efficient given the high costs
associated with using FedEx. McMaster-Carr and W.W. Grainger, however,
have structured their supply chain to provide next-day service to most of
their customers using ground transportation. They are providing a high
level of responsiveness at lower cost. Outbound transportation costs of
shipping to the customer are typically included in selling, general, and
administrative expense, while inbound transportation costs are typically
included in the cost of goods sold.

4. Information consists of data and analysis concerning facilities, inventory,

transportation, costs, prices, and customers throughout the supply chain.
Information is potentially the biggest driver of performance in the supply
chain because it directly affects each of the other drivers. Information
presents management with the opportunity to make supply chains more
responsive and more efficient. For example, Seven-Eleven Japan has used
information to better match supply and demand while achieving
production and distribution economies. The result is a high level of
responsiveness to customer demand while production and replenishment
costs are lowered. Information technology–related expenses are typically
included under either operating expense (typically under selling, general,
and administrative expense) or assets. For example, in2009, Amazon
included $1.24 billion in technology expense under operating expense and
another $551 million under fixed assets to be depreciated.

5. Sourcing is the choice of who will perform a particular supply chain

activity such as production, storage, transportation, or the management of
information. At the strategic level, these decisions determine what
functions a firm performs and what functions the firm out sources.
Sourcing decisions affect both the responsiveness and efficiency of a
supply chain. After Motorola outsourced much of its production to
contract manufacturers in China, it saw its efficiency improve but its
responsiveness suffer because of the long distances. To make up for the
drop in responsiveness, Motorola started flying in some of its cell phones

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from China even though this choice increased transportation cost.

Flextronics, an electronics contract manufacturer, is hoping to offer both
responsive and efficient sourcing options to its customers. It is trying to
make its production facilities in high-cost locations very responsive while
keeping its facilities in low-cost countries efficient. Flextronics hopes to
become an effective source for all customers using this combination of
facilities. Sourcing costs show up in the cost of goods sold, and monies
owed to suppliers are recorded under accounts payable.

6. Pricing determines how much a firm will charge for the goods and services
that it makes available in the supply chain. Pricing affects the behavior of
the buyer of the good or service, thus affecting supply chain performance.
For example, if a transportation company varies its charges based on the
lead time provided by the customers, it is likely that customers who value
efficiency will order early and customers who value responsiveness will be
willing to wait and order just before they need a product transported.
Differential pricing provides responsiveness to customers that value it and
low cost to customers that do not value responsiveness as much. Any
change in pricing impacts revenues directly but could also affect costs
based on the impact of this change on the other drivers.

Supply chain strategy

Supply chain strategy will have a major impact on creating value for a
company and its supply chain partners. An effective supply chain strategy
may be formulated to meet the needs of the market and integrate them with
technology to generate the highest level of customer satisfaction while
delivering the highest value to the share-holders. Supply chain strategy is
based on:
a) Collaboration strategy

b) Demand flow strategy

c) Customer service strategy

d) Technology integration strategy

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a) Collaboration Strategy: Opportunities for collaboration among business

partners will vary depending upon the organization’s perspective role in
the supply chain. The three main types of collaboration are as follows:

i. M anufacturer - Supplier Collaboration: By collaborating with

suppliers, manufacturers will derive benefits in activities such as product
development, order fulfillment and capacity planning.

ii. M anufacturer - Customer Collaboration: The opportunities of

collaboration between manufacturers and customers are focused on
demand planning and inventory replenishment. This approach ensures
that the customer requirements are met efficiently.

iii. Collaboration with Third Party and Fourth Party Logistics

Providers: The collaboration of companies with 3rd party logistics
providers focuses on jointly planning logistics activities. It also gives the
company the added advantage of better packaging. The 4th party logistics
organization is one of the intermediate stages along the logistics spectrum
that combine the benefits of outsourcing and insourcing.

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b) Demand Flow Strategy: Traditionally, in supply chain management,

the key focus and scope has been in managing flow of goods from suppliers
through the manufacturing and distribution chain to the customer. The key
in demand management is the continuous flow of demand information from
customer and end users through distribution and manufacturing to
suppliers. Customers can never be totally predictable but then a good
demand flow strategy enables the company to simplify their supply chain
operations.

c) Customer Service Strategy: Customer satisfaction level is directly

proportional to the service provided by the company. Formulating a customer
service strategy involves addressing 3 steps, namely:

i. Customer Segmentation: A company has to decide on the segment it

wants to target for a particular commodity. It can decide not to have a
homogenous market which is unacceptable.

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ii. Cost to Serve: It is important to obtain an impartial assessment of

whether the things that the customers want are feasible for the company. It
is also important to determine the kind of support needed from the
suppliers or other parties in the supply chain. Finally, it is required to
project the cost of the support system and its feasibility of execution.

iii. Revenue M anagement: Determination of the appropriate response to the

identified needs and expectations of each customer segment must be
completed. In short, the response which maximizes the firm's profitability
and growth should be determined.

d) Technology Integration Strategy: Developments in IT enabled the

integration of business information systems, both horizontally and vertically.
A number of IT-based supply chain information management tools are now
available to provide intelligent decision support and execution management.
The main SCM approach today deals with the integration of all the elements
of a customer service focused organization, as shown in Figure.

ACHIEVING STRATEGIC FIT

Strategic fit requires that both the competitive and supply chain strategies of
a company have aligned goals. It refers to consistency between the customer
priorities that the competitive strategy hopes to satisfy and the supply
chain capabilities that the supply chain strategy aims to build. For a
company to achieve strategic fit, it must accomplish the following:

a. The competitive strategy and all functional strategies must fit together to
form a coordinated overall strategy. Each functional strategy must support
other functional strategies and help a firm reach its competitive strategy
goal.

b. The different functions in a company must appropriately structure their

processes and resources to be able to execute these strategies successfully.

c. The design of the overall supply chain and the role of each stage must be
aligned to support the supply chain strategy.

A company may fail either because of a lack of strategic fit or because its
overall supply chain design, processes, and resources do not provide the

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capabilities to support the desired strategic fit. Consider, for example, a

situation in which marketing is publicizing a company’s ability to provide a
large variety of products quickly; simultaneously, distribution is targeting
the lowest-cost means of transportation. In this situation, it is likely that
distribution will delay orders so it can get better transportation economies by
grouping orders together or using inexpensive but slow modes of
transportation. This action conflicts with marketing’s stated goal of providing
variety quickly. Similarly, consider a scenario in which a retailer has
decided to provide a high level of variety while carrying low levels of inventory
but has selected suppliers and carriers based on their low price and not their
responsiveness. In this case, the retailer is likely to end up with unhappy
customers because of poor product availability.

To elaborate on strategic fit, let us consider the evolution of Dell and its
supply chain between 1993 and the present. Between 1993 and 2006, Dell’s
competitive strategy was to provide a large variety of customizable products
at a reasonable price. Given the focus on customization, Dell’s supply chain
was designed to be very responsive. Assembly facilities owned by Dell were
designed to be flexible and to easily handle the wide variety of configurations
requested by customers. A facility that focused on low cost and efficiency by
producing large volumes of the same configuration would not have been
appropriate in this setting.

Supply Chain Performance Measures.

An exhaustive list of supply chain performance measures is observed here

along with its’ significant impact of supply chain performance on business
performance using benchmarking data and also the methodology for linking
the two.

Among various sets of supply chain performance measures discussed in the

literature, we focus on a set of performance measures that have been most
widely accepted in the industry. The Supply-Chain Council is an
independent, non-profit, global corporation interested in getting the industry
to standardize supply chain terms so that meaningful supply chain
benchmarking can be carried out.

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It has developed the Supply Chain Operations Reference (SCOR) model as

the industry standard for supply chain management. Several supply chain
software vendors have adopted the SCOR performance measures in their
performance management module. SCOR recognizes six major processes:
Plan, Source, Make, Delivery, Return, and Enable.

As per the SCOR model, supply chain performance measures fall under the
following five broad categories:

i. Cost

ii. Assets (Asset Management Efficiency)

iii. Reliability
iv. Responsiveness
v. Agility
Further, the SCOR model develops 10 performance measures as shown in
the figure. The Supply-Chain Council refers to measures related to costs and
assets as internal-facing measures, while reliability, responsiveness, and
agility are termed as customer-facing measures.

Typically, a firm offers a bundle consisting of price, delivery and flexibility to

its customers. Price, in competitive markets, is dictated by the market place.
Thus, only delivery- and response-related measures are termed as customer-

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facing measures. The performance measures related to assets and costs

affect the profitability of the firm and are, thus, termed as internal-facing
measures. The use of standard measures allows firms to carry out
meaningful benchmarking studies. Benchmarking studies carried out by the
Supply-Chain Council have shown that there are significant differences in
performance across firms in various industries.

SCOR measures, however, do not capture measures related to product

variety. So, to that extent, performance measures under the SCOR model do
not seem to be comprehensive. While relating the SCOR model to the cost
versus customer service trade-off framework, we combine costs- and assets-
related measures.
Supply chain benchmarking using frameworks like SCOR is difficult to
implement in countries in Asia where data availability is a big problem.
Alternatively, one may like to focus on fewer but important metrics like cost
and assets utilization data, for which data are available in financial
statements of listed companies.

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