Supply Chain Management-

Module -1 (Syllabus heads)

• - Supply Chain
• - Objectives
• - Importance
• - Decision phases
• - Process view
• - Competitive and supply chain Strategies
• - Achieving Strategic Fit
• - Supply chain drivers-
 Syllabus heads (…. Continued)
• - Obstacles
• - Frame Work
• - Facilities
• - Inventory
• -Transportation
• - Information
• - sourcing
• - Pricing
 SC - Simple definition
 All activities involved in the transformation of
goods from the RM stage to FP stage, when
the goods and services reach the end
customer.
 Involves planning, design and control of
‘Flow of material , Information and Finance’.
 To deliver superior value to end customers.
 SC Concept –
Stages of Detergent Supply Chain

Paper
Timber Tenneco
Manufa
Co Packaging
cturer

Wall
Wall Mart Customer
P& G
Mart Stores

Transporter

Chemical Plastic
Mfr Mfr
 Supply Chain Stages
Supply Chain Stages include:

• Customers Funds/Information

• Retailers

• Wholesalers/ Distributers

• Manufacturers

• Suppliers

Products
 Source of Revenue and Cost

• Only one source of Revenue for all – Customer

• All other cash flows - Fund exchange in SC
• Effective SCM involves Mgt of assets, Product,
Information and funds – in order to maximize
total SC profitability.
Value added 1.Supply, 2.Production & 3. Delivery

Simplified SC:
Delivery of a supplier Value: Quality, Flexibility
Innovation & Value Flow to Customer

Supplier’s Customer’s
Supplier Manufacturer Customer
Supplier Customer

1 2 3

Demands for low pricing, high Quality: Customer-Supplier

Integration across responsive and flexible SC
 What Flows? Who stocks?
• Flow of Products , Information & funds
• Customer’s need and the role played by each stage of SC
• In - direct supply( Del), Customer order initiates
manufacture
• Intermediate stage, Retailer builds stock (LL Bean)
• Wholesaler, Distributor fills Retailer stocks
 Objectives

• To maximize the overall value generated

• Value of SC = What the final product is worth to customer &
the SC cost in filling customers request
• To look for source of revenue and cost- Only Customer
• Flow of Information, product and Funds
• Appropriate management of these flows- is the key to
success of SC
• Management of assets and 3 flows ( P.I.F) to result in SC
total profitability
 SC Surplus and Distributors
• SC decisions Vs Impact on SC surplus
• SC structure of fast moving consumer items in
US and India
• US distributers play small role, where as
opposite in India
 Aggregating and consolidating
• Retailing is consolidated in US. Large chains buy sufficient
‘Scale’ from manufacturers. No room to distributer.
• Millions of small retail outlets prevail in India
• These outlets limit their inventories, requires frequent
replenishments
• These replenishments equal(=) weekly grocery shopping for a
family in US
• One truck load delivery- local distribution by small vans
• Transportation cost to be low
• When the retailing in India, begins to consolidate-the role of
distributers will diminish
Importance of Supply Chain Decisions

 Successful SCs built by:

- Wal- Mart (Invest in Transport. Information)
- Dell Computer ( Direct supply)
- Seven Eleven Japan ( Functional Fit)
 Failure of e- businesses – Web van
- Quaker Oates acquired Snapple
(1994),but failed
Reason for Success/ Failure:
SC design and Planning, Operation of SC
 Success stories of SC
• Wal-mart -1980 – Annual Sales $1 Billion
2004 – Annual Sales -$250 Billion
• Income – 9 Billion – Annual compounded Growth
Rate 26%
• Dell Computer- World’s largest PC mfr
• 2004 – Income of $ 2.6 Billion, Sales $41B
• Dell by passes Distributors, sells directly to
customers
• Strength-Understanding customers needs, &
Developing better fore casts
 Wal-mart Operations
• Investment on Transportation and Information
• Clusters of stores around distribution centers to facilitate
• Frequent replenishment
• Sharing Information with suppliers- Product availability and
low cost, achieved
• Sales:
– 1 billion in 1980, 250 billion in 2004, Revenue 9 billion
– Compounded growth rate 26%
 Dell’s Operations
• Dell Centralized Manufacturing and Inventories
• Large varieties of PC configurations – with low
Inventory – 5 days stock – Cash conversion cycle –
minus 36 days ie, Dell ran biz on others M
• New products – reach customer fast
– Intel’s new chip-reaches customer immediate,no Inv’
• Price drop, no much impact
– Sony’s monitors, NIL Inventory for Dell
• Transporter operates from suppliers premises
– Transporter co, picks up from Dells Austin, Texas plants
and monitors from Sony’s factory in Mexico
 Dell’s Operations
• Dell, became world’s largest PC manufacturer
• Close interaction with customer, understands needs
• Centralization of manufacturing and Inventory
• Postponing final assembly, on receipt of Order
• Large variety of PCs, with less than 5 days Inventory
 Web Vans Failure in SC Design
• Web van and Kozmo’s inability to design
appropriate NW
• Large W/Hs in several cities of US. Groceries
stored and delivered to customers by local
trucks.(more transp. cost)
• Traditional Supermarkets, by full truck loads,
made available all items to customers. (more
carrying cost)
• In 2001, Web van folded with in 2.5 years
 Synergizing 2 distribution Systems
• 1994 Quaker Oats purchased Snapple, bottled
and Natured drinks such as Tea- functioned in
North East and West coast-Us
• Quaker had already manufacturing set-up for
sport drink -‘Gatorade’ in South and Southwest
of USA- most successful.
• Major motivation of merger – potential synergy
between 2 distribution systems
• Causes: 1. manufacturing 2. Customer type
 Two SCs Synergy – Reason for failure

• Gatroda was manufactured by Quaker Oats’s

own plant, where as Snapple’s beverage, by
contract- outside plants.
• Quaker Oaks sold thro’: Supermarkets &
Grocery stores, Snapple’s beverage by
Restaurants and retailers
• After 28 months, Sold to Triarc companies at
$300 USD ( purchase price @ $1700 @17.5%)
–Reason: Inability to synergize
 Decision Phases in SC
• 1. Design:
– How to structure SC next few years?
– How resources will be allocated?
– Out source or In house?
• 2. SC Planning:
– Time frame – Quarter to one year.
– Goal is to maximize Sc surplus.
– Demand in different markets?
– Which market to be supplied from which location?
– Make or buy?
– Inventory? Timing? Size of Market? Price and Promotions?
 Decision Phases in SC – (contd)
• SC Operation:
– Configuration is fixed, policies are defined.
– Incoming orders, to be handled with at most care
– Allocate stock, or plan production against
individual orders, set delivery schedule of trucks
and place replenishment orders.
– Design, planning and operation of SC have strong
impact on overall profitability& success
 Process Views of SC
• Sequence of processes and flows take place
between different stages.
• 1. Cycle view: Processes are divided into series
of cycles, each performed in 2 successive
stages of SC
• 2. Push / Pull View:
– a. Whether the order is executed against response
to ‘Customer Order’ or ‘ against anticipation of
customer order’
 Cycle View
3 4
2 4. Customer Order Cycle 5 5. Customer
1 6

4
3 1
3. Replenishment Cycle 5
4.Retailer
2
1
6
3 5. Stages
4
2 2. Manufacturing cycle 5 3. Distributer
1 6
3 4
2 1. Procurement 2. Manufacturer
5
Cycle
1 6

4. Cycles 1. Supplier
 Stages of SC Varies
Each cycle occurs at the interface between
2 successive stages of SC

5 Stages results in 4 SC Process Cycles

Grocery SC: Customer -Retailer -

Distributer – Manufacturer
- ( 4 Stages)

Dell : Manufacture- -Customer - ( 2 Stages )

 Sub Processes in Each SC
Each Cycle consists of 6 Processes
1. Supplier offers the product to Customer

2. Buyer places the Order

3. Supplier receives the Order 1 2 3

4. Supplier supplies the materials

5. Buyer receives the Materials

6. Return of recycled materials 6 5 4

 Goals of Buyers and sellers in Sub Process

• Buyer • Seller
• Economies of scale in • Ensures Product
Ordering availability
• To reduce the cost of • Forecast demand
receiving • Order fulfillment
• Arranging reverse flow process
– returning defects, • Cost of transport &
recycling materials delivery
 Differences between Cycles
• In Customer Order • In other cycles. Order
Cycle, demand is placement is uncertain –
external- uncertain forecasted
• Scale of an Order: • Order Quantity-gradually
Customer requirement, multiplies from user to
meager dealer, dealer to
compared to other SC distributor, distributor to
members manufacturer
A cycle view of SC defines processes and the owners
of each. Specifies roles and responsibilities each
member and desired outcome for each process.
 Push and Pull View of the SC
• Push / Pull Boundrey

• Push Process Pull Process

P1 P2 P3 K K1 N-1 N

Customer order Arrives

 Push and Pull View of SC Process
1. Pull Process 2. Push Process
• Execution is initiated in • Execution is in anticipation
response to customer order of customer order
• Customer demand is known • Customer demand is not
with certainty known, and must be
forecasted
• Reactive process, because • Speculative process, they
they react to customers respond to forecast rather
demand than actual demand
• Operates, when demand is • Operates, demand is
known unknown
• No inventory, No concern on • Constrained by Inventory &
Capacity utilization Capacity decision

A boundary line separates ‘ Pull and Push’ processes.

 L. L. Bean’s Supply Chain
customer
• L.L.Bean’s SC
Pull Process Customer order
Customer Order cycle Cycle

Customer Order Arrives L.L.Bean

Replenishment
and Mfg Cycle

Push Process Manufacturer

Procurement,
Manufacturing, Procurement
Replenishment Cycle
Cycles

Supplier
 L.L. Bean’s -‘make to stock’
• L.L Beans executes all processes before customer
order arrives (customer order cycle)
• Order fulfillment takes place, from built
inventory ( Replenishment cycle)
• Goal of replenishment cycle is ‘ensure
availability, when customer order arrives’
• The same principle follows in Manufacturing
cycle, procurement circle etc,.
 Dell’s build to Order
customer
Dell’s SC
Pull Process
Customer Order
Manufacturing, cycle Customer order
& Manufacturing
Cycle Dell
Customer Order Arrives

Procurement
Cycle
Push Process
Procurement,
Cycles
 Dell’s Build-to-Order
• Dell supplies computers directly to customers
• Demand is filled from production( not fm stk)
• Order recd- mfg cycle is part of customer order
cycle.
• Only 2 cycles work:
– 1. customer order cycle & Mfg cycle
– 2. Procurement Cycle
All processes are PULL process
Goal is ,to identify the appropriate Push/Pull boundary,
such away that demand & supply match effectively
 Adjusting Push /Pull Boundary
 Usage in SC Strategic decisions: (Case)
 Until 1990, Processes of paint manufacture was done in
large factories
 Stages: Base mfr –color mixing – can transportation –
packing (Push process)
 Uncertainty in matching ‘supply & demand’
 After 1990, SC restructured – Mixing at outlet stores, after
customers placing orders(Pull)
 Color mixing was pushed from Push to Pull
 Key Point

• In response to customer order = Pull

• In anticipation of customer order = Push

• Advantages:
– 1. customers get their ‘specific shades’
– 2. paint inventories, got reduced-across SC
 3 SC Macro Processes
• 1. Customer Relationship Management-CRM
– Processes interfacing between Firm & customers
• 2. Internal Supply Chain Management- ISCM
– Processes with in the firm- Internal customer
• 3. Supplier Relationship Management-SRM
– Processes interfacing between Firm & suppliers

Managing flow of information, product and funds required to

generate, receive & fulfill customer request.
 Supply Chain Macro Process
Supplier Firm Customer

SRM ISCM CRM

 Source  Strategic Planning Market

Negotiate Demand Planning Price
Buy Supply Planning Sell
Design Collaboration Fulfillment Call Center
Supply Collaboration Field Service Order Management
 Supply Chain Macro Process
• CRM Process includes Marketing, Pricing, Sales,
Order Management, Web site and call center
management.
• ISCM aims to fulfill demand generated by CRM,
timely and at low cost. Production-storage –
demand/supply plans, fulfillment of actual orders.
• SRM Macro process aims, Sourcing of goods &
Services. Evaluation of suppliers, negotiating terms,
communication on new products to suppliers
 KEY Point

 CRM- In charge -Marketing,

 ISCM-In charge -Manufacturing
 SRM- In charge -Purchase

With in a firm, all SC activities belong to one of

the 3 (CRM ,ISCM, & SRM). Integration is
important, for SC success
 Examples of Supply Chain
• 1. Gateway – ‘Direct Sales’ Manufacturer
– 1985- No retail point – First Online sale Co.-1990- Aggressive strategy
of opening retail stores
– 1999 - 3 plants in US, 1 in Ireland, 1 in Malaysia. 2002,retail stores
became 280- No finished stock inventory- for customer deciding
right configuration- PCs made to order
– 1990 share price $80-dropped to $4 in 2004 - 3 plants & all retail out
lets closed – Sold thro’ retailers like Best buy & Circuit city.
2. Zara: Spain’s largest apparel manufacturing and retailer
3. w. w. Grainger and Mc Master Carr: MRO suppliers
4. Amazon com: e- Business
 Competitive and SC Strategies
• Company’s competitive strategy – relative to its competitors –
‘customer needs’, get satisfied through products and services
• Wal-mart’ aim to provide availability of products , more
varieties, at lower cost to customers
• McMaster sells MRO (Maintenance- Repair- Operations)
products.(400,000 products, thro catalogue and a web site)
• McMaster does not compete on low price. Wal-Mart
competitive strategy is different from McMaster’s.
• Mc Master’s=emphasis on product variety & response time
• Wal-Mart=greater emphasis on Cost
 Competitive Strategy-based on Customer’s
Priority
Dell – Build to order Gateway – thro’ retailer
• e Machine PC, Direct • E Machine PC, thro retailers
• Customization , limited
• Customization, Plenty • Same day
• Delivery, One week • Price, same day delivery
• Product Variety and response
• Mc Master Carr (MRO) • Wal-Mart
• Product Variety and response • Cost

Competitive Strategy is based on how customer prioritizes

Product , Delivery time, Variety and Quality .
 The Value Chain in a Company

The Relationship between Competitiveness and SC Strategies:

New Product Development – Specification of Product

 Marketing & Sales create ‘Demand’ Core
Operations Dept produces with Spec, and market feed back Function
Distributor brings ‘market and Product’ together
 Finance, Accounting, Information Technology, Human Resources = Support
Function
 All functions develop its own Strategies individually, Which operates WELL?
 Integration of Functions
(In-house Or Out-source)’
• Product development Strategy = specifies the portfolio of
new product development.
– Manufacturing= In house Or Out-Sourcing?
– Marketing Strategy= Segmentation + Positioning
– SC Strategy determines = RM Procurement + Transportation +
Manufacture of Products +Distribution + Service
– After Integration= Process within the Co + processes of each
SC entity
 Value Chain specification
• Cisco’s SC: Component mfr + assembly - to be out-sourced.
• What Cisco focuses?
• What Operations, distribution, service functions are to be in-house
or outsourced?
• ‘Supplier Strategy, Operations Strategy, Logistics Strategy’
• Cisco SC: Use contract manufacturer
• Dell SC: to sell directly
• Gateway : thro’ retailers
• Amazon: To build w/h stock( p-A) and distributor stock (p-B)
(different products)
• Toyota: To have production facility at each market
• Seven Hills: Excellent Fit among different strategies
 Achieving Strategic Fit
• SC strategy and Competitive Strategy must ‘fit together’
• Strategic fit means SC Strategy and Competitive strategy have aligned
goals.
• All processes and functions, are the part of value chain, contribute for
the success or failure of SC. They do not operate in isolation. There are 3
Keys:
– 1. Competitive Strategy and Functional Strategy must fit together to form a
coordinated Overall Strategy. One helps the other.
– 2. Functions to structure their ‘ processes and resources’ to execute strategies.
– 3. Design of overall SC and the role of each stage must be aligned to support Sc
strategy
 How is Strategic fit achieved?
( 3 Steps )
• 1. Understanding the customer and SC uncertainty
• 2. Understanding the Sc capabilities
• 3. Achieving Strategic Fit1.
• 1. Understanding the customer and SC uncertainty:
– Quantity of Product needed in each lot
– Response time that customers are willing to tolerate
– Variety of Products needed
– Service level required
– Price of the Product
– Desired rate of Innovation in the product
 Implied Demand Uncertainty
• Implied Demand Uncertainty: A portion of the
Demand, that the SC is targeting- (not the entire
demand)
• Firm A: supplying only emergency Orders
( will face higher implied demand uncertainty)
• Firm B: supplying same product, with long lead
time ( Can supply evenly )
 Competitive Strategy & SC Strategy

• 1. First step in achieving ‘Strategic Fit’ between

competitive strategy and SC strategies is to
understand customer and supply chain uncertainty.
• Uncertainty from customer and SC can be mapped on the
implied uncertainty spectrum
• 2. Second step is to understand the SC and map on
the responsiveness spectrum
 2. Understanding SC Capability and Efficiency

• SC Responsiveness:
– 1. Respond to wide range of quantity demanded
– 2. Meet short lead times
– 3. Handle large variety of products
– 4. Build highly innovative products
– 5. Meet high service level
– 6. Handle supply uncertainty
SC Efficiency:
1. Increase in Cost, lower efficiency (1 to 5 - increase cost)
 3. Achieving Strategic Fit
Responsive SC

o f F it
one egic
Responsiveness Z rat
spectrum St

Efficient SC
Certain Implied uncertainty Uncertain demand
demand Spectrum
 Different Roles of Implied Uncertainty for SC Responsiveness

Supplier absorbs least Mfr absorbs less Retailer absorbs most

Implied uncertainty- Implied uncertainty- implied Uncertainty-
Very Efficient Somewhat Efficient Very Responsive
Supplier Manufacturer Retailer SC-1

Extent of Implied Uncertainty for the Supply Chain

Supplier Manufacturer Retailer SC - 2

Supplier absorbs less Mfr absorbs most Retailer absorbs least
Implied uncertainty- implied Uncertainty- Implied uncertainty-
Some what Efficient Very Responsive Very Efficient
 Fit between Competitive and
Functional Strategy
Competitive Strategy

SC Strategy
Manufacturing
 Inventory
Lead Time
Product development Purchasing Marketing and Sales
Strategy Transportation Strategy

Information Technology Strategy

Finance Strategy

Human Resource Strategy

Sl Strategy Efficient Supply Chain Responsive Supply Chain
No.
1 Primary Goal Supply demand at the lowest Respond quickly to demand
cost
2 Design Maximum performance @ a Product differentiation @ high
Strategy minimum Product cost cost
3 Pricing Lower margin – price , prime High margin, price is not prime
Strategy customer driver customer driver
4 Mfg Strategy Lower cost thro high Maintain spare capacity, for
utilization demand/ supply uncertainty
5 Inventory Minimum Inventory to lower Maintain buffer inventory to
cost deal with demand/ supply
uncertainty
6 Lead time Reduce, but not @ the Reduce aggressively, at any
strategy expense of cost cost
7 Supplier Select based on cost & quality Select based on speed,
Strategy flexibility, reliability and quality
 Supply Chain Drivers
Responsiveness To be balanced Efficiency

Functional strategy To be balanced Competitive Strategy

To achieve these 2, we need to understand ‘ Logistical and Cross

functional drivers’.
1. Facilities
2. Inventories
3. Transportation
4. Information
5. Sourcing
6. Pricing
Supply Chain Decision – Making Frame Work

Competitive Strategy

Supply Chain Strategy

Efficiency Supply Chain Structure Responsiveness

Logistic Drivers

Facilities Inventory Transportation

Information Sourcing Pricing

Cross functional Drivers