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Unit 1 Ome752 Supply Chain Management
Unit 1 Ome752 Supply Chain Management
OUTCOME:
The student would understand the framework and scope of supply chain networks and
functions.
TEXTBOOK:
1. Sunil Chopra, Peter Meindl and Kalra, “Supply Chain Management, Strategy, Planning, and
Operation”, Pearson Education, 2010.
REFERENCES:
1. Jeremy F.Shapiro, “Modeling the Supply Chain”, Thomson Duxbury, 2002.
2. Srinivasan G.S, “Quantitative models in Operations and Supply Chain Management, PHI, 2010
3. David J.Bloomberg , Stephen Lemay and Joe B.Hanna, “Logistics”, PHI 2002.
4. James B.Ayers, “Handbook of Supply Chain Management”, St.Lucle press, 2000.
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UNIT I - INTRODUCTION
From the point of view of an enterprise, the scope of supply chain management is usually
bounded on the supply side by your supplier's suppliers and on the customer side by your
customer's customers. The logistics plays an important role between sources of demand and
sources of supply
As freight volume grows and transportation becomes more complicated, the need for robust
logistics management increases. Logistics management is a primary factor in the success of any
company’s operations and has a direct impact on its bottom line. Additionally, meeting customer
demand and providing superior service is one of the goals of good logistics management.
1. Increase revenue
2. Improve operating cost structure
3. Reduce overall transportation costs
4. Improve customer service
Many companies look to third-party logistics providers (3PL’s) for help as this simple concept can
often become very complex and not so easy to execute. 3PL’s have the expertise and advanced
technology to cut costs and improve processes much more efficiently than companies can in-
house.
Material management is concerned with the acquisition and storage of raw materials, parts, and
supplies. To elaborate, material management supports the complete cycle of material flow—from
the purchase and internal control of production materials, to the planning and control of work-in-
process, to the warehousing, shipping, and distribution of finished products (Johnson and Malucci,
1999). On the other hand, physical distribution encompasses all outbound logistics activities
related to providing customer service. These activities include order receipt and processing,
inventory deployment, storage and handling, outbound transportation, consolidation, pricing,
promotional support, returned product handling, and life-cycle support (Bowersox and Closs,
1996).
Combining the activities of material management and physical distribution, a supply chain does
not merely represent a linear chain of one-on-one business relationships, but a web of multiple
business networks and relationships. Along a supply chain, there may be multiple stakeholders,
composed of various suppliers, manufacturers, distributors, third-party logistics providers,
retailers, and customers. For example, a supply chain for typical automobile seats linking
suppliers, manufacturers, third-party logistics providers, and customers is graphically illustrated
in Figure 1.2. As shown in this figure, the supply chain begins with customers such as Ford,
General Motors, and Fiat-Chrysler, who need to use automobile seats as critical parts of their
manufactured cars. At the next upstream stage of the supply chain, the car manufacturer often
purchases automobile seats from the original equipment manufacturer (OEM). This OEM needs to
acquire the parts and components of the automobile seats, including brackets, foam, fabric, and
fasteners from tier-one suppliers fabricating those parts and components. Because these parts and
components are made of metals, screws, bolts, plastics, and textiles, the tier-one suppliers should
acquire some simple parts and raw materials from tier-two suppliers, who should obtains such
parts and materials from tier-three suppliers such steel and yarn producers. These tier-three
suppliers, in turn, obtain their sources of materials from ore mining and cotton plants at the
furthest upstream of the supply chain. In case logistics activities involving the movement,
handling, storage, and packaging of these materials, parts, components, and finished goods are
outsourced from third-party logistics providers, the complexity of the supply chain network will be
increased due to the possibility of both forward and reverse flow of products. As illustrated by this
example, the typical supply chain cannot be explained by a linear linkage among the supply chain
members.
Figure 1.2. The supply chain network for automobile seats
In a nutshell, the concept of supply chain management has evolved around a customer-focused
corporate vision, which drives changes throughout a firm’s internal and external linkages and then
captures the synergy of interfunctional, interorganizational integration and coordination. Herein,
integration does not entail merger/acquisition or equity of the ownership of other organizations.
The successful integration of the entire supply chain process can bring about a number of bottom-
line benefits (Schlegel, 1999):
Financial benefits can be accrued from successful supply chain integration. For instance, thanks to
streamlined supply chain integration, Dell’s personal computer (PC) market share in the U.S. grew
from 2.7% in 1995 to 24.1% in 2014 (Gartner, 2014). Similarly, Walmart, which happens to be
another supply chain leader, enjoyed the rapid growth of its market share from 6.8% in 1992 to
17.1% in 2004 before declining to 11.4% in 2013 (Foster, 2006; Statistica, 2014). Despite these
benefits of supply chain integration, firms engaged in this effort must be aware of the various
challenges because of the unprecedented number and diversity of products and services available
to customers in the era of mass customization. This variety will make it more difficult for a firm to
predict customer needs and requirements. Therefore, the consequence of making forecasting errors
will be more serious than ever before. Unfortunately, in a stretched supply chain with complex
layers of suppliers and distributors, the severity of forecasting errors could be far beyond the level
of compromise. Hardest hit by such forecasting errors are often upstream suppliers with little
resources whose visibility of true demand is blindsided by distorted information passed by their
immediate customers (e.g., manufacturers) and other downstream customers (e.g., distributors and
retailers). This phenomenon was often explained by the so-called “bullwhip” effect.
The bullwhip effect is generally referred to as an inverse ripple effect of forecasting errors
throughout the supply chain that leads to amplified supply and demand misalignment, where
orders (perceived demand) to the upstream supply chain member tend to exaggerate the true
patterns of end-customer demand because each chain member’s view of true demand can be
blocked by its immediate downstream supply chain member (Min, 2000; Lee et al., 1997a). The
common symptoms of the bullwhip effect include delayed new product development, constant
shortages and backorders, frequent order cancellations and returns, excessive pipeline inventory,
erratic production scheduling, expedited shipments, and chronic overcapacity problems (Min,
2000; Lee et al., 1997b). The failure to mitigate or eliminate the bullwhip effect can disrupt the
firm’s revenue driver and adversely affect the firm’s bottom line. According to Hendricks and
Singhal (2005), supply chain disruptions led to:
Significant reduction in stock returns relative to their benchmarks (e.g., 33% to 40%
reduction over a three-year period)
Increased share price volatility (e.g., 13.5% increase in share price volatility one year after
supply chain disruptions)
Decline in profitability (e.g., 107% drop in annual operating income, 7% decline in annual
sales growth, and 11% annual total cost increase)
Debilitating firm performances (e.g., at least two consecutive years of lower performances
after supply chain disruptions)
Similarly, another worldwide survey of 602 financial executives conducted by FM Global and
Harris Interactive indicates that supply chain disruptions are the biggest threat to a firm’s revenue
drivers (Yang and Gonzalez, 2006). Considering the enormous impact of supply chain disruptions
on a firm’s financial status, today’s firms are increasingly pressured to manage their supply chain
right. Thus, supply chain management has become the forefront of the firms’ competitive strategy.
The discipline of supply chain management, however, is still undergoing an evolutionary process.
Table 1.1 summarizes the changes in the philosophy, focus, and performance metrics of supply
chain management, from the earlier stages to the current era (see Martin and Towill, 2000).
capacity
Now, it is not recommended to analyze the should-cost for every item. There are many instances
where conservative strategic sourcing techniques tend to work better. But in the instances where
the application of strategic sourcing is not applicable, the should-cost analysis supplies a valuable
tool that drives minimizing of cost and regular progress efforts of the supplier.
Supplier Survey
The third step is developing a supplier analysis for both incumbent and potential substitute
suppliers. This analysis assists in examining the skills and abilities of a supplier. In the
meanwhile, data collected from incumbent suppliers is used for verifying spend information that
suppliers have from their sales systems.
The survey team considers the above-mentioned areas for gathering information. The areas are as
follows −
Feasibility
Capability
Maturity
Capacity
The analysis is done to examine the potential and skills of the market to satisfy the customer
demands. This analysis helps in the examination done at the initial stage to find out if the
proposed project is feasible and can be delivered by the identified supply base.
This analysis also supplies an initial caution of the customer demands to the market and enables
suppliers to think about how they would react to and fulfill the demand. Here the motto is to
motivate the appropriate suppliers with the right structural layout to respond to the demands.
Building the Strategy
The fourth step comprises constructing the sourcing strategy. The merger of the first three steps
supports the necessary elements for the sourcing strategy. For every region or category, the
strategy depends on answering the questions given below.
How willing is the marketplace to oppose the supplier?
How supportive are the clients of a firm for testing incumbent supplier relationships?
What are the substitutes to the competitive assessment?
Generally, these substitutes are opted when a purchasing firm has little leverage over its supply
base. They will depend on the belief that the suppliers will share the profits of a new strategy.
Thus, we say that the sourcing strategy is an accumulation of all the drivers thus far mentioned.
RFx Request
Mostly, the competitive approach is applied in general cases. In this approach, a request for
proposal or bid needs to be prepared (e.g., RFP, RFQ, eRFQ, ITT) for most spend classifications
or groups.
This defines and clarifies all the needs for all prequalified suppliers. The request should comprise
product or service specifications, delivery and service requirements, assessment criteria, pricing
structure and financial terms and conditions.
In the fifth stage, an interaction plan needs to be executed to allure maximum supplier interest. It
must be ensured that each and every supplier is aware that they are competing on a level playing
field. After sending the RFP to all suppliers, it is to be confirmed that they are given enough time
to respond. In order to motivate greater response, follow-up messages should also be sent.
Selection
This step is all about selecting and negotiating with suppliers. The sourcing team is advised to
apply its assessment constraints to the responses generated by the suppliers.
If information across the limitation of RFP response is required, it can be simply asked for. If
done correctly, the settlement process is conducted first with a larger set of suppliers and then
shortlisted to a few finalists. If the sourcing team utilizes an electronic negotiation tool, large
number of suppliers can sustain in the process for longer duration, giving more wide suppliers a
better opportunity at winning the enterprise.
Communicaction With New Suppliers
After informing the winning supplier(s), they should be invited to take part in executing
recommendations. The execution plans vary according to the scale of switches the supplier
makes.
For obligatory purposes, a communication plan will be set up, including any modification in
specifications and improvements in delivery, service or pricing models. These tend to be
communicated to users as well.
As we know, the company gains immensely from this entire process of creating a communication
plan, making some modifications according to the customer demand and further forwarding this
to the customer. It’s essential that this process should be acknowledged by both the company and
the supplier.
For new suppliers, we need to construct a communication plan that copes with the alteration from
old to new at every point in the process engaged by the spend category. The sections that have an
impact of this change are the department, finance and customer service.
In addition, the risk antennae will be particularly sensitive during this period. It is essential to
gauge closely the new supplier’s performance during the first weeks of performance.
Another essential task is to grasp the intellectual capital of the sourcing team, which has been
developed within the seven-step process, so that it can be used the next time that category is
sourced.
Supply Chain Drivers and Obstacles.The performance of a supply chain (responsiveness and
efficiency) is determined by decisions in the areas of inventory, transportation, facilities and
information. Hence these four areas are identified as drivers of supply chain performance.
Inventory: It consists of all raw material, work in process, and finished goods within a supply
chain.
Transportation: It involves moving inventory from one point in the supply chain to another point.
Facilities: A facility is a place where inventory is stored, manufactured or assembled. Hence
facilities can be categorised into production facilities and storage facilities.
Information: It consists of data and results of analysis regarding inventory, transportation,
facilities, customer orders, customers, and funds.
Inventory
Inventory is maintained in the supply chain because of mismatches between supply and demand.
Types of inventory based on reasons for keeping them:
Cycle inventory: This results due to producing or buying larger lots to minimize acquisition costs
related to processing each purchase order or production order.
Safety Inventory: It is held to counter against uncertainty or variability of demand.
Seasonal Inventory: It is inventory maintained to satisfy higher demands in a period compared to
production capacity. It arises due to the decision to service predicted variability in demand through
extra production during slack period or low demand periods.
Increasing inventory gives higher responsiveness but results in higher inventory carrying cost.
Transportation
Number of decisions have to be taken in designing a supply chain regarding transportation.
Decisions
Mode of Transportation
Six basic modes exist
Air
Truck (Road)
Rail
Ship
Pipeline
Electronic transportation (the newest mode for music, documents etc)
Information
Information does not have a physical presence. It is likely to be overlooked. But it deeply affects
every part of supply chain. Information is the connection between various stages in a supply chain
and allows them to coordinate actions and increase the maximum supply chain profitability. It is
also essential in daily operations. The stocks available in warehouses must have visibility so that
when a customer wants an item, it can be delivered to him.
Decisions related to Information
The customers becoming increasingly demanding. Today's customers are demanding faster
fulfillment, better quality, and better performing products for the same price that they are paying
today.
The supply chain is getting fragmented. At one time vertical integration was the order of the day.
But the present trend is to concentrate on core competence and outsource more activities. Thus the
supply chain is more fragmented now.
Globalization is creating global supply chains and hence physical distance is increasing between a
company and its suppliers and a company and its customers.While creating a strategy is difficult,
executing it is much more difficult. Many companies understand Toyota Production System now,
but still find it difficult to implement and operate.